Reporting and Recordkeeping Rules Flashcards
What is SEC Rule 17a-5
Broker-dealers are required to prepare financial reports known as FOCUS reports. Financial and Operational Combined Uniform Single report
These reports are required to be filed with the firms DEA - Designated Examining Authority (FINRA & SEC)
Clearing firms:
What FOCUS report do they file?
When is it filed?
Who is it signed by?
OBS stands for?
What info does it provide for FINRA?
When is it filed?
Clearing broker-dealer files FOCUS II by the 17th business day after month end and quarter end
- Detailed F/S from the firm with detailed schedules of financial and operational info.
- FOCUS report must be signed by the CEO, CFO, COO
OBS - Off Balance Sheet (quarterly) - OBS items including derivatives. Allows FINRA to determine impact of OBS activities on net capital, liquidity, leverage and ability to fulfil customer protection obligations.
Non- Clearing firms (5k & 50k): What FOCUS report do they file?
When is it filed?
Who is it filed to?
Non-clearing B/D files FOCUS IIA by the 17th business day after quarter end
Abbreviated FOCUS II filing.
This requirement is expanded if a non-clearing firm effects more than 10 trades/year out of its proprietary account.
FOCUS report must be signed by the CEO, CFO, COO
All broker-dealers are required to submit these quarterly forms (3)
Form custody (quarterly) - provides information on whether a firm maintains custody of customer or non-customer assets and how/where the assets are maintained.
SSOI (quarterly) - Supplemental Statement of Income - to assess the level of risk assumed by member firms. Supplies additional details on revenue and expense items that are not on FOCUS
SIS (quarterly) - Supplemental Inventory schedule -
Gives more info on the firms long and short inventory positions
No required for
1. firms that do not carry inventory
2. Firms with a net capital requirement less than 100k (market makers must file)
3. firms that only have an inventory position in market mutual funds
Process for extension request
written request to FINRA district office no later than 3 business days prior to the due date.
Only for delays outside the control of the member such as technical difficulties, contractor delays, auditor delays.
SSOI threshold
Only required for a line items that is greater than 5k or 5% of the firms total revenue or expenses in that category.
Firms that have more than 10% of revenue derived from participation in private placements and other unregistered offerings must report additional detail.
When do SSOI and SIS need to be filed
Filed with FINRA within 20 business days after quarter end
What information does a SLS provide
Supplemental liquidity schedule
Tells the FINRA whether the broker-dealer’s assets are liquid enough to promptly make cash payments to customers and creditors.
In what 2 situations must a SLS be filed
- The broker-dealer is a carrying firm with at least 25Mil in free credit balances.
- The broker-dealer has at least 1bil in debt from any or all of the following:
a. Repurchase agreements
b. Bank loans
c. borrowed securities
When must a SLS be filed
If required, filed within 24 hours of month end
What does SLS report stand for
Supplemental Liquidity Schedule
What does FOCUS report stand for
Financial and Operational Combined Unified Single Report
What does SSOI report stand for
Supplemental Statement of Income
What does SIS report stand for
Supplemental Inventory Schedule
What does DEA stand for
Designated Examining Authority
SLS disclosures include (5)
(Supplemental Liquidity Schedule)
- Repurchase agreements and reverse purchase agreements
- Securities borrowed or loaned
- Collateral in customer’ margin accounts
- Bank loans, including lines or credit that have not been used
- Deposits the broker-dealer has made with clearing houses
OBS Supplemental FOCUS report on gross exposures provides what information
requires BD’s to report their gross exposures in various financing transactions. reverse repos, repos and other transactions under GAAP that have been netted need to be unmasked
Also TBA (to be announced) securities, underwriting/financing commitments and the firms gross amount of derivative transactions
When must the OBS be filed
within 22 business days after calendar quarter end
If the aggregate of all gross amounts of OBS items is less than 10% of the firms excess net capital on the last day of the reporting period the firm does not need to file.
Who has to file form 17-H
- BDs that operate within a holding company (typically a sub of a bank) with at least 250k of net capital
- Large BDs with at least 20mil of net capital that do not operate within a holding company
How often is 17-H filed
Filed with SEC within 60 calendar days of each fiscal quarter end
What does form 17-H report
Discloses material information on MAPs (Material Associated Persons) whose activities could negatively impact the business either financially or operationally
Define MAP
Material Associated persons - affiliated entity such as a parent company, holding company, subsidiary
Annual Audit requirements
All Bds must submit an certified annual audit report to FINRA and SEC that must be performed under standards set by PCAOB
What is PCAOB
Public Company Accounting Oversight Board
Annual Notification of Accountant SEC requirements
SEC must be notified by December 10th of the name of the accountant who will perform that years audit.
Clearing firm must sign a statement, giving SEC and FINRA access to the reports filed and authorizing the public accountant to discuss with regulators.
FOCUS annual audit requirements
ALL BD must file an audited FOCUS II or IIA to FINRA and SEC no later than 60 calendar days after fiscal YE
Extension for annual audited FOCUS
If filing by 60 calendar days after fiscal YE would cause undue hardship, the firm can request an extension from FINRA no later than 3 business days from due date.
Max extension - 90 days from the date of Financial Statements
Only for delays outside of control - technical difficulties, contractor or auditor delays
Change in Accountant reporting requirements
15 business days to FINRA and SEC
FINRA - electronically made
SEC - both SEC regional office and principal Washington DC office
Change in accountant notice includes
- Date of notification of termination
-details of any problems during the 24 months preceding termination and whether they were resolved or not
-Must include letter from former accountant stating whether they agree or not
SSOi for private placements - what is required of firms that derive more than 10% of their total revenue from participation in private placements or other unregistered offerings
The firms must complete an operational page that gives more detail on each unregistered offering.
Clearing firm requirement to send customers financials
Each clearing firm must report its financial condition as disclosed in the FOCUS II to its customers.
Customers must be sent an audited B/S and computed amount of NC not later than 105 days from the firm’s fiscal year end
Firms must also send semi-annual unaudited B/S and computed NC to customers no later than 65 days after its mid-year point.
Definition of a customer for customer disclosure purposes
Any person that has cash or securities in custody of the firm.
Anyone who has effected a securities transaction through the firm in the month before or after the B/S is issued
Does not include partners or subordinate lenders
What must a firm do if it changes it’s fiscal year end
it must file a detailed reason with FINRA
What are additional annual reports that are required for clearing and non-clearing firms
Clearing firms: Annual compliance report
Non-clearing firms: Exemption report
what does the Annual compliance report cover?
internal controls over compliance with net capital rule (15c3-1)
customer protection rule (15c3-3
securities count rule 17a-13
What does the annual compliance report for clearing BD’s state? (5)
the BD maintained internal control over compliance
Internal control over compliance was effective during and as of the end of the most recent year
BD was in compliance with rule 15c3-1 at the end of the most recent FY
information used to determine compliance was derived from the firm’s books and records
If applicable: must describe each identified material weakness in internal controls
What does the annual exemption report for non-clearing BD’s state
States which exemption the firm is asserting (K1, K2i, K2ii)
External auditors must review assertion and provide opinion
When is the compliance report, examination report + external auditor’s opinion due
same time as the FOCUS II or IIA which is 60 calendar days after year end date
What must the external auditor do if it finds any material non-compliance
It must
Notify SEC and FINRA within one business day by fax or email
Follow-up of first class mail to SEC’s Director of compliance Inspections and examinations
What happens when a firm ceases to be a member in good standing
It must file a FOCUS II or IIA, as appropriate, with SEC and FINRA within 2 business days
What are the conditions in which a firm will be in violation (4)
- Deficient NC: NC is below the required minimum
- Excess AI/NC ratio: Ratio exceeds 8:1 in the first year, 15:1 thereafter
- Alternate NC<2% of debits: in the reserve formula
- Excess debt/equity ratio: D/E ratio exceeds 70% for over 90 days
What is rule 17a-11
Violation and early warning reporting
Requires reporting to FINRA and SEC if a firm:
Violates the NC rule
Is getting close to violating the NC rule
Is experiencing operational problems
What is required of the firm if it is violation (2)
Send electronic notice the same day to FINRA and SEC
Cease business operations until violation is corrected
Early warning reporting is triggered when (4)
Net capital falls below 120% of minimum required
AI/NC > 12:1 after 1st year
Alternate N/C < 5% of debits in reserve formula
Repo or reverse repo balances > 25 times tentative NC - relating to borrowed and loaned non-government securities
If at any time the firm finds it’s within early warning it must:
Give electronic notice to FINRA and SEC within 24 hours
Provide any information FINRA or SEC deems necessary
When does a firm need to provide operational problem reports (2)
If there is a material inadequacy in the accounting system
The books and records are not current
If at any time the firm finds it has operational issues it must:
Give electronic notice within 24 hours for material inadequacies
Give electronic notice same day if records are not current
File a report within 48 hours on how the problem will be corrected
What is rule 17f-1
Reporting of lost or stolen securities
Requires that every BD check with central files to ensure that every security it handles is not reported as lost or stolen (with exceptions)
Who maintains the central files for lost or stolen securities
Securities information center (SIC)
“Designee of SEC” for purposes of exam
What are the exceptions of rule 17f-1 (6)
- A BD does not have to inquire about the securities it handles if the securities received come from:
- directly from issuer
- Federal reserve bank or branch
- directly from another firm that is required to inquire
- a customer of the firm, where the securities
a. are registered in the name of the customer
b. were previously sold to the customer as verified by internal records - Amount of 10k or less
When are required inquires for lost or stolen securities due (2)
By the end of the 5 business day after the securities certificate comes into the firm’s possession
Reporting institutions are required to report to SIC if securities are suspect3ed to be lost or stolen
If securities are suspected to be lost or stolen what actions are required by the firm (2)
Report to SIC and transfer agent within 1 day
Notify FBI promptly
What must a firm do if a security is missing
Where no criminal activity is suspected, report the missing securities to
SIC, transfer agent within 1 business day after 2 days missing
What happens when a security is missing when delivered from one firm to another firm through clearing firm (lost in transit)
It is the responsibility of the receiving firm to report the loss
Receiving firm must request the certificate number from clearing agency
Agency must delivery certificate numbers within 2 business days
Receiving firm must report the loss within 1 business day of getting the certificate numbers
What is the action that is taken if reported lost/stolen securities are found
Everyone must be informed within 1 business day
What is the action needed if securities are found missing due to a securities count
They are not reportable until 10 business days without reconciling the difference
When making a lost/stolen securities report, what is the information required (10)
- Issuer name, type of securities and series
- Issue date, maturity date
- Denomination
- interest rate
- Certificate number
- Name in which registered
- Distinguishing characteristics if counterfeit
- CUSIP number - Committee on uniform security identification procedures
- FINS number - financial industry numbering system
- Type of loss
What is rule 17a-3
States which records must be kept by a BD
What is rule 17a-4
Details the retention periods for records that need to be kept
(those kept for life and those kept for 6 years or 3 years)
Which records need to be kept for life (2)
Articles of incorporation of partnership agreement
Minutes of board meetings or partnership meetings
Which records need to be kept for 6 years
- purchase and sales blotters (P&S)
- Cash receipts and disbursement blotters
- Stock received and deliver blotters
- General ledger
- Customer account records
- Stock record
- SIPC assessment records
What does blotter refer to
daily transaction records
What does it mean to keep the books current
blotters (transactions) are posted no later than the business day after the event. ex: cash received, securities delivered.
General ledger must be posted no later than 10 business days after month end
Customer accounts must be posted no later than settlement date
Stock record no later than 1 business day after settlement
Which records need to be kept for 3 years
Everything that is not kept for 6 years. Examples are:
Copies of order memoranda (order tickets)
trial balances
Customer confirmations
correspondence
bank account records
Special reserve bank account computations
Risk assessment records - required for BD with at least 1mil in aggregate credit items in the special reserve computation OR at least 20mil of NC
Subsidiary records such as:
fail to receive and deliver blotters
Interest and dividend blotters
Securities in transfer
Stock or monies borrowed and loaned
Long and Short securities differences
Other:
U-4 forms
Fingerprints
All written communications received and sent
Checks and bank statements
Bills payable and receivable
Written agreements
All supporting records and schedules to FOCUS reports
What is required for subsidiary records to be considered current
Long and Short securities differences posted within 7 business days of discovery (when first haircut is required)
All other records must be posted no later than 2 business days after the event
What happens if SEC does not specify a retention period for a record
Then it defaults to 6 years under FINRA’s default retention period
How long do firms have to keep customer complaints
4 years
What is required for any wire transfers over 3k that are sent outside of the United states
Federal law
following info:
Name and address of sender
Payment amount
Date wire sent
Recipient’s bank and account number
Recipient’s name and address
Any other identifying info
What is the record retention for introducing firms?
None - introducing firms are not required to keep any transaction records. These are kept by the clearing firm
Electronic records requirements (4)
Electronic storage media must:
- Be preserved in a non-rewritable, non-erasable format
- Verify automatically the quality and accuracy of the storage media recording process
- serialize, index, and catalog the original and duplicate units of storage media with time date for the required period of retention
- be able to download indexes and records to any storage medium as required by the SEC or FINRA
Anti-money laundering rules (AML) (4)
New clients must be checked against the SDN list: Specially designated nationals and blocked persons list with the OFAC
Any transactions that raise a red flag must be checked against this list and blocked if applicable
Reports of blocked transactions must be made to OFAC within 10 days by fax
Annual comprehensive report on blocked property must be sent to OFAC on Sept 30th
What does OFAC stand for
The Office of Foreign Assets Control
Patriot Act requires firms and financial institutions to: (3)
- Establish written anti-money laundering programs
- provide ongoing training to all employees in procedures to detect and prevent money laundering
- Report suspicious transactions and activity
Under the patriot act, which customers require a higher level of scrutiny (3)
Whose home country is not a member of FAFT (financial action task force)
Who reside, incorporated, or operate in countries with bank secrecy laws
Who operate cash-intensive businesses
Suspicious Activity reports (SARs)
BDs are required to file SARs with FinCEN (Financial crime enforcement network) within 30 days
If BD believes that an urgent report is required, then rule states FinCEN must be called immediately.
FINRA’s process rules for AML (anti-money laundering) (4)
Firms need to:
- Establish and implement policies and procedures to detect and report suspicious transactions
- provide annual independent testing for compliance
- designate a person responsible for implementing and monitoring operations and internal controls
- Provide ongoing training of appropriate personnel
What are the rules for the designated person overseeing AML (anti-money laundering) program (4)
- Name, phone, email must be provided to FINRA
- Does not have to be licensed as a principal
- If information changes update within 30 days
- Info must be reviewed annually and updated within 17 business days of year end.
Money laundering customer indicators at account opening (6)
Having an unusual concern with the firm’s compliance with government reporting
Being reluctant to revel information about business activities
furnishing unusual or suspect identification or documents
wishing to engage in transactions that lack business sense or are inconsistent with the customers investment strategy
acting as agent for another entity but is evasive or reluctant about providing information about that entity
Having difficulty describing their business or lacking general knowledge of their industry
Money Laundering customer indicators related to activity (10)
- attempting to make frequent or large deposits of cash
- engaging in cash transactions under the 10k reporting limit
- Engaging in multiple transfers of funds or wires to countries that are considered non-cooperative by FATF and FinCEN
- Engaging in sudden and unexplained extensive wire activity
- Making a funds deposit followed by an immediate request that the funds be transferred to another party without a business purpose
- Making a funds deposit for a purchase of long-term investment, followed by a request to liquidate the position and transfer the proceeds out of the account
- having multiple accounts under single or multiple names with a large number of inter-account transfers for no business reason
- engaging in excessive JE’s between accounts without business purpose
- depositing bearer bonds followed by immediate request for disbursement of funds
- Exhibiting a lack of concern for risk, commissions, and other transaction costs
For money laundering acts related to activities, firms should monitor accounts for (3)
Wire transfer activity
Deposits of cash aggregating in excess of 100k
deposits of cash, cashiers cheque, money orders, travelers cheques
What are rules 17h-1t and 17h-2t and who do they apply to
Risk assessment reporting
Temporary rules that keep getting extended.
Only clearing firms and large non-clearing BD’s
Large non-clearing BD = 20mil or more of NC
When does the risk assessment report need to be filed for clearing firms and large BD’s
Must be filed quarterly, within 60 days of QE.
Annual compilation must be filed within 105 days of YE.
Signed by the CRO - chief risk officer
What does the Risk Assessment report include (10)
- Organizational chart of holding company structure
- Identification of materially associated persons (MAP’s)
- Risk mgmt policies
- Material legal proceedings
- Consolidated F/S’s for both BD and holding company parent
- Aggregated securities and commodities positions
- financial instruments with off-balance sheet risk
- bridge loans and extensions of credit
- Commercial paper issued by BD and other debt instruments maturing in 1 year
- Real estate investment and mortgage loan activity
How does a clearing firm handle customer deposits or withdraws of more than 10,000
The department of treasury requires them to be reported to FinCEN on form CTR (currency transaction report) within 15 calendar days
Records must be retained for 5 years
What are “structure” transactions and how does a clearing firm handle them
attempting to stay under the 10k limit with multiple transactions
Any cash transactions that accumulate to more than 10k within a 2 week period must be reported to FinCEN
Records must be retained for 5 years
What does rule 17a-10 dictate
requires BDs to file an annual statement of income and loss within 17 business days after the close of each calendar year with the SEC.
What is rule 17f-2
Fingerprinting requirement
exempt from the requirement are persons that are not involved in the sale of securities, or do not regularity have access to keeping, handling, or processing of securities, monies, or the original books and records of the firm.
Individuals that do not have direct supervisory responsibility over these functions do not have to be fingerprinted
How many times can a firm submit illegible fingerprints
3 times, the 4th is not allowed
Cannot be smudged, or have indistinct lines.
By having 3 rejected submissions of an individual, any distinguishing characteristics should not be identifiable.
