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Series 2024 > Series 24: Chapter 3 Financial Responsibilty > Flashcards

Series 24: Chapter 3 Financial Responsibilty Flashcards

1
Q

Net Capital Rule

The Uniform Net Capital Rule
SEC Act of 1934

A
  • The Uniform sets forth financial requirements that BDs must meet.
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2
Q

Net Capital Rule

Provisions of the Net Capital Rule

A
  • Dollar Capital Requirements
  • Net Capital
  • Aggregate Indebtedness
  • Maximum Ratios of AI/NC
  • Subordinated loan rules
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3
Q

Net Capital Rule

Net Dollar Capital Requirments

A
  • Mimimum dollar requirements for net capital to be maintained by the BD (liquidity to meet liabilities)
  • Requirements differ depending on the busines of the BD
    Clearing BD: $250K
    Fully disclosed BD that receives securities: $50K
    Fully disclosed BD that does not receive securities - $5K
    Direct Participation Program BD - $5K
    Mergers and Acquisitions - $5K
    Clearing Prime Broker - $1.5MM
    Executing Broker - $1MM
    Market Maker - $100K
    Mutual Fund / Variable Annuity that takes wire orders: $25K
    Mutual Fund / Variable Annuity take subcriptions - $5K
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4
Q

Net Capital Rule

Clearing Broker Dealer

A
  • A BD that carries out customer accounts and who accepts funds and securities from customers.
  • Also called general securities broker dealers
  • send out trade confirmations and statements as required to customers
  • net capital requirement: $250K
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5
Q

Net Capital Rule

What is the net capital requirement for a Clearing Broker Dealer

A

$250,000

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6
Q

Net Capital Rule

Fully Disclosed Broker Dealer that Receives Securities

A
  • does not carry customer accounts and does not hold customer funds or securities
  • It enters into a clearing agreemnt with a cleraing firm and discloses that to its customers
  • also called introducing borker dealer
  • trades are effected by the clearing firm, payments are made to the clearing firm and securities are held by the clearing firm
  • May only particiapte in firm commitement underwritings as a selling group (not syndicate member)
  • can effect occaisonal trades in their own account or through antoehr BD. 10 or fewer per year
    they also may effect securities trades as a bd on a national exchagne for the account of another BD.
  • Net capital requirement: $50,000
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7
Q

Net Capital Rule

What is the net capital requirement for a fully disclosed broker dealer that receives securities?

A

$50,000

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8
Q

Net Capital Rule

Fully disclosed broker dealers may participate in firm commitement underwritings as a:

A

selling group member only.

may not participate as a syndicate member.

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9
Q

Net Capital Rule

Fully Disclosed Broker Dealers and trades in their own accounts

A
  • they may effect occaisional trades in their own accounts or through another BD
  • fewer than 10 trades per year
  • may also effect trades a broker on a national exchagne for the account of another broker
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10
Q

Net Capital Rule

Fully Disclosed Broker Dealer who does not receive securities

A
  • the do not receive funds or securities
  • if a customer sends funds / securities to this BD they must be refused or forward to the clearing firm for deposit in the customers account.
  • the firm must have a procedure in place to notify the customer that future delivers must be sent to the clearing firm
  • cannot join firm commitement underwritings
  • can join best effort underwritings
  • not permitted to effect an occaisional transacation for their own account
  • Net capital requirement: $5K
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11
Q

Net Capital Rule

Waht is the net capital requirement for a fully disclosed BD that does not accept secuities

A

$5,000

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12
Q

Net Capital Rule

Direct Participation Program BD

A
  • firm that solely sells limited partnerships (DPPs)
  • act as introductory agents
  • the firm is paid by the GP if the LP (investor) is accepted into the partnership
  • Net capital requirement: $5K
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13
Q

Net Capital Rule

What is the net capital requirement for a Directi Partnership Program BD

A

$5,000

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14
Q

Net Capital Rule

Mergers and Aquisitions BD

A
  • advise companies on how to struture their securities offerings to get the best price
  • have no customers and are paid in full by the company
  • net capital requirement - $5K
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15
Q

Net Capital Rule

What are the levels of Net Capital Requirements?

A
  • $1.5MM Clearing Prime Broker
  • $1MM Executing Broker
  • $100K Market Maker
  • $250K Clearing BD
  • $50K Introductory BD - Receives Securities
  • $5K Introductory BD - Does Not Receive Securities
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16
Q

Net Capital Rule

What is the ability of a Clearing BD to participate in underwritings?

A
  • Can participate in all of them
  • Firm Commitment Syndicate Member: Yes
  • Firm Commitment Selling Group Member: Yes
  • Best Efforts Syndicate Member: Yes
  • Best Efforts Selling Group Member Yes
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17
Q

Net Capital Rule

What is the ability of an Introductory BD that Receives Securities to participate in underwritings?

A
  • Firm Commitment Syndicate Member: No
  • Firm Commitment Selling Group Member: Yes
  • Best Efforts Syndicate Member: Yes
  • Best Efforts Selling Group Member Yes
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18
Q

Net Capital Rule

What is the ability of an Introductory BD that Does Not Receive Securities to participate in underwritings?

A
  • Firm Commitment Syndicate Member: No
  • Firm Commitment Selling Group Member: No
  • Best Efforts Syndicate Member: Yes
  • Best Efforts Selling Group Member Yes
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19
Q

Net Capital Rule

Clearing Agreement

A
  • agreement between introductory firm and the clearing agent
  • Specifies the responsiblities of each party
  • May specifiy that all trades form the introducing BD go to the clearing agent or it might allow for some trades to go to other firms with those trades being reported to the clearing broker.
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20
Q

Net Capital Rule

When would an introductory BD want to clear through multiple clearing agents?

A
  • Called ‘giving up’ clearing arrangement
  • when it wants the flexiblity to direct a trade to a market maker it feels is best qualified to handle the transaction
  • used extensively by hedge fund BDs who direct their portfolio trades to different executing brokers in return for research, recommendations, and other such services
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21
Q

Net Capital Rule

Giving Up Clearing Arrangement

A
  • when a clearing arrangement allows an introducing BD to execute away from the clearing broker
  • The introducing BD gives up the name of the clearing borker to each firm with which it enters orders
  • The clearing borker is where the “prime brokerage account” is being maintained byt he introducing firm.
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22
Q

Net Capital Rule

Prime Brokerage

A
  • Any numer of executing brokers can handle parts of a trade
  • the entire trade will be cleared and settled by the prime broker
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23
Q

Net Capital Rule

Primer Brokerage:

Give-Up

A
  • the executing BD provides the clearing number of the prime broker when reporting the trade for comparison and clearance.
  • the executing broker gives up the name of the clearing prime broker whne the trade is being reported.
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24
Q

Net Capital Rule

Prime Brokerage

Step-Out

A
  • the executing broker provides the clearing number of the prime broker after the trade is reported comparison and clearance
  • the executing broker “steps out of the reported trade for companiron and clearing pursposes.
  • Used to move a reported trade from teh account of the executing member to the clearing member
  • a movement of position only
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25
Q

Net Capital Rule

What is the net capital requirement for a clearing prime broker ?

A

$1.5 MM

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26
Q

Prime Brokerage

A
  • a bundled group of services that investment banks and other fin institutions offer to hedge funds and other investment clients
  • includes:
    - securities lending
    - leveraged trade execution
    - cash management
  • must notify FINRA that they are acting as a prime broker
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27
Q

Net Capital Rule

What is the Min Net Capital Requirement for an Executing Broker

A

$1MM

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28
Q

Net Capital Rule

Clearing Firm requirements regarding reporting?

A
  • FINRA requires that the clearing firm provide a list of all the reports it can generate based upon the activities of the introducing firm within the clearing agreement
  • an updated list of reports shoudl be provided to the introducing firm annually by July 1st to the CEO and CCO of the introdutory BD.
  • these reports help the introducing firm supervise customer accounts and monitor transactions
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29
Q

Net Capital Rule

What is the minimum net capital requirement for a Market Maker?

A

$100K

Max is $1MM

  • the actual Net Capital requirements depend on the number of securities in which a market is made
    • min $100K
    • $1K for each bid at $5 or less
    • $2.5K fo each bid over $5
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30
Q

Net Capital Rule

Market Maker

A
  • make markets in Nasdaq, OTC markets, and OTC Pink issues
  • do not carry cusotmer accounts
  • Net Capital requirements depend on the number of securities in which a market is made
    • min $100K
    • max $1MM
    • $1K for each bid at $5 or less
    • $2.5K fo each bid over $5
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31
Q

Net Capital Rule

Mutual Fund and Variable Annuity Dealers

A
  • Firms dealing solely in Investment Company shares.
  • place all orders through the sponsor and make out all checks to the sponsor
  • do not carry customer accounts nor funds
  • Net Capital Requirements:
    – Take wire orders: $25K
    – Take subscriptions: $5K
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32
Q

Net Capital Rule

Net Capital =

A

Net Worth
+ Suborindated Loans
___________________________________
total available capital
- Non allowable assets
____________________________________
tentative net capital
- haircuts on allowable assets
____________________________________
Net Capital

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33
Q

Net Capital Rule

Allowable Assets

A
  • Cash
  • Cash in reserve account
  • Customer Debit Balances
  • Fails to Deliver (subject to haircut if aged)
  • Notes Receivable (if fully secured)
  • Inventory (subject to haircut)
  • stock borrowed
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34
Q

Net Capital Rule

Non-allowable assets

A
  • Exchange membership
  • Real estate
  • prepaid expenses
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35
Q

Net Capital Rule

Haircuts on Allowable Assets

A
  • reduction in allowable assets
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36
Q

Net Capital Rule

What is the haircut for fails to deliver and securities inventory?

A

Mark to market
15% haircut

Note: applies to aged fails to deliver (4 bus days after settlement date)

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37
Q

Net Capital Rule

What are the two assets subject to haircuts?

A
  • Fails to deliver (aged)
  • Securities inventory
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38
Q

Net Capital Rule

Full List of Haircuts

A
  • Asset haircuts: (fails to deliver, securities inventory)
  • Limited trading market haircut
  • non-marketale haircut
  • undue concentration
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39
Q

Net Capital Rule

Active Trading Market

A

3 other market makers in addition to the firm in question

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40
Q

Net Capital Rule

Limited Trading Market

A
  • One or two market makers aside from the firm in question
  • 40% haircut
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41
Q

Net Capital Rule

Non-Marketable Haircut

A
  • No other market makers
  • 100% haircut
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42
Q

Net Capital Rule

What is Undue Concentration Haircut

A
  • Limit of up to 10% of tenative net capital in one security position
  • If exceeded additional 15% haircut on the excess concentration amount
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43
Q

Aggregated Indebtedness

Aggregate Indebtedness

A
  • Firms debt level
  • amount the BD would need to pay out if liquidated

= all liabilites which are unsecured and all customer related liabilites

  • maximum raitio of aggregate indebitness / net capital
    • First Year of Operations: 8:1
    • Years 2+: 15:1
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44
Q

Aggregated Indebtedness

What is categories are included in Aggregated Indebtedness

A
  • Account Payable
  • Customer Credit Balances
  • Fails to Receive - customer acct
  • Fails to Receive - Firm account sold/no long position
  • Stock Loaned
  • Bank Loans - customer collateral
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45
Q

Aggregated Indebtedness

What is not included in Aggregated Indebetness?

A
  • Fails to Receive - Firm Account / not sold
  • Subordinated loans
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46
Q

Aggregated Indebtedness

Subordinated Loans

A
  • not Aggregated Indebtedness
  • Loans where the lendor contributes debt capital to a BD.
  • loan is repaid ONLY if there are sufficient funds at liquidation.
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47
Q

Aggregated Indebtedness

Bank Loans Customer Collateral

A
  • included in AI
  • bank loans to the BD using customer margin securitites as collateral.
48
Q

Aggregated Indebtedness

What reduces the AI amount

A
  • funds on deposit in special reserve bank accounts
49
Q

Aggregated Indebtedness

Special Reserve Bank Account

A
  • cash is set aside in this account to pay customer claims
  • This reduces the AI amount
50
Q

Subordinated Loans

Subordinated Loan
Requirements

A
  • Minimum term of 1 Year
  • the agreement must state that the lendor subordinates its debt to all other lenders and that the fund are at risk
  • negative for the lender
  • made by persons affiliated with the firm (i..e. ML borrowing from BoA)
    *
51
Q

Subordinated Loans

Secured Demand Note

A
    • the lender gives marginable securites to the BD
  • BD places securites in street name and repledges them to a bank loan
  • set by Reg U bank will loan 70% of the value
  • excess collatoral can be removed (i.e. value of securities goes up)
  • additional collatoral may be needed if the value of the securities goes down
52
Q

Subordinated Loans

For a secured demand note how much can the bank loan to the BD?

A

70% of the value of the securities

53
Q

Subordinated Loans

What happens if the haircutted collateral for a subornated loan falls below the face amount of the note?

A
  • the lender and FINRA must be notified, in writing (electronic notice) immeidatley
  • the lender must produce extra collateral by 12:00 noon the next day
  • if the BD does not provide the extra collatoral the bank can sell the securities to pay down the loan balance
54
Q

Subordinated Loans

Rights of a BD regarding collatoral

A
  • theh collateral that is given to the BD by the lender in a subordinated agreement can take the form of cash for marketable securities
  • The BD can deposit cash and use it as it wishes
  • the BD can use the securiities to pledge them to another bank for a loan or lend them to another BD
55
Q

Subordinated Loans

Rights of a lendor regarding collateral

A
  • Lender ratins dividend rights
  • Lender does not retain voting rights
  • The lender can substitute collateral with cash or marketable securities of equal loan value at any time.
  • the lender of the share is no longer hte owner of recrod the BD transferres the securities to street name.
    *dividends are paid to the BD and sent to the lender
  • The BD is sent the proxy issue however they are not obligated to sen the proxy to the lender. Voting rights stay wiht the BD.
56
Q

Subordinated Loans

What happes to the dividend and voting rights for collatoral?

A
  • Lender retains dividend rights
  • BD retains voting rights
57
Q

Subordinated Loans

Debt / Equity Ratio limit

A

*ratio of subordinated debt to toal available capital

  • debt/equity ratio cannot exceed 70% for over 90 days

Total available capital = net worth + subordinated loans

Deb/Equity Ratio = subordinated loans/ total aval capital

58
Q

Subordinated Loans

When is a loan treated like equity?

A

When the loan:
- is provided by owner
- has an original duration of at least 3 years
- has 1 year to maturity

59
Q

Subordinated Loans

When can a firm not repay subordinated loans?

A
  • if the paydown results in the AI/NC ratio going above 12:1 repayment is suspended and cannot be made.
60
Q

Subordinated Loans

when can firms not prepay subordinated loans?

A
  • If the AI/NC falls below 10:1
  • if the paydown would result in net capital falling below 120% of the min requirement
61
Q

Subordinated Loans

When can equity capital not be withdrawn?

A
  • if the withdrawal would cause AI/NC to exceed 10:1
  • if net capital falls below 120% of the min requirement
62
Q

Subordinated Loans

what happens when subordinated loans are repaid?

A
  • available capital is reduced
  • net capital falls
  • AI/NC increases
63
Q

Subordinated Loans

What is required for prepayment of subordinated loans?

A
  • The BD must get prior approval of FINRA to prepay a subordinated loan
  • Not required for principal repayments at maturity
64
Q

Subordinated Loans

SEC and Capital Withdrawal

A
  • SEC has the right ot restrict any proposed equity capital withdrawal, for 20 business days
65
Q
A
66
Q
A
67
Q

Subordinated Loans

Temorary Subordinated Loans

A
  • used for unusual short term capital needs (e.g. when a firm commitment underwriting is signed)
  • “Temp” loan
  • The BD has an “open contractual commitmnet
  • Considered to be the same as owning the secuirty (haircut by 15% for listed securities)
68
Q

Subordinated Loans

what are the requirements / rules regarding temp loans?

A
  • max 3 per year
  • max duration 45 days
  • AI/NC ratio cannot exceed 10:1
  • Net capital must exceed 120% of the min requirement
69
Q

Filing requirements for subordinated loan agreements:

A
  • must be filed with FINRA and the SEC to count as “capital”
  • FINRA has a standardized subordinated loan agreement that firms can use
  • Standard agreement: must be filed with FINRA and SEC 10 business days in advance of their effective date
  • Non-standard agreemnt: must be filed with FINRA30 days in advance of its effective date and filed with SEC 10 business days in advance of the effective date
70
Q

Alternative Net Capital Requirements

Alternative Net Capital Requirements

A
  • Allows BDs to use an alternative method of computing net capital.

* *Alternative: a BD keeps a min dollar capital of at least $250K or 2% of the debit items included in the Customer Reserve Formula

  • If this is used there at not AI tests for the firm
  • method often used by large retail frims with excess capital to avoid technical violations of AI/NC ratio restrictions.
71
Q

SEC Capital Rules for Qualified Market Makers

SEC Rule 3b-8

A
  • defines different types of market makers for the purposes of market maker borrowing from a bank using securities as collateral under Reg U.
  • Sets net capital requirements for market
72
Q

SEC Capital Rules for Qualified Market Makers

Qualified OTC Market Maker

A
  • a dearler in the OTC margin securities that publishes regular bid-ask quotes and can effect transactions in reasonable amounts
  • Min Net capital of the lesser of:
    • $250K, or
    • $25K plus $5K for each securiity in excess of 5 in which the firm makes a market
73
Q

SEC Capital Rules for Qualified Market Makers

Qualified Third Market Maker

A
  • a dealer in any stock registered on a national exchange that publishes regular bid-ask quotes and can effect transactions at reasonable amounts.
  • Min Net Capital of lesser of :
    • $500K or
    • $100K plus $20K for each security in excess of 5 in which the firm makes a market
74
Q

SEC Capital Rules for Qualified Market Makers

Qualified Block Positioner

A
  • a broker or dealer who engages in the activity of purchasing or selling short a block of stock with a makret value of $200K or more in a single transation to facilitate a sale of puchase by a customer
  • must detrmine the trade could not have been executed on better terms somewhere else
  • Must sell the shares comprising the block as rapidly as possible
  • Min net capital requirement $1MM
75
Q

Reporting and Record Keeping Rules

Rule 17a-5

A
  • Places a number of reporting requirements on BDs
  • BDs are required to prepare FOCUS financial reports (Financial and operational combined uniform single report
  • must be filed with the firms “DEA” - designated Examinging Authority (FINRA) and with the SEC
76
Q

Reporting and Record Keeping Rules

FOCUS reports

A
  • Financial and Operational Combined Uniform Single Report
  • Must be filed with FINRA and SEC
77
Q

Reporting and Record Keeping Rules

Focus Report:
Clearing Broker Dealer

A
  • Must file FOCUS part II by the 17th business day after each month and each quarter end.
  • detailed financial statement of the firm
  • schedules of financial and operational info
  • Must be filed electronically
78
Q

Reporting and Record Keeping Rules

FOCUS reports:
Non Clearing BD

A
  • Files the FOCUS IIA by the 17th business day after quarter end
  • abbreviated FOCUS II filing

If the BD effects more than 10 trades per year in its prop accounts they must file an additional monthly FOCUS IIA

79
Q

Reporting and Record Keeping Rules

FOCUS Reports:
Non Clearing BD that effects more than 10 trades per year out of its proprietary trading account

A
  • must file additional monthly FOCUS IIA reports in addition the quarterly report
  • min net capital requiremetn of $100K
80
Q

Reporting and Record Keeping Rules

Requirements for Preperation of the FOCUS report

A
  • prepared form the BDs latest trial balance
  • BD trial balances must be prepared wihtin 10 bus days of each month to be considered current (SEC rule)
81
Q

Reporting and Record Keeping Rules

Who must sign off on the FOCUS reports

A
  • CEO of BD (series 24)
  • CFO of BD (series 27)
  • COO of BD (series 27)

note: in a small firm one person may hold more than one role

82
Q

Reporting and Record Keeping Rules

Form Custody

A
  • filed Quarterly Report with the FOCUS report
  • Required from all BDs
  • Provides info on:
    - whether or not a firm maintains custoday of customer and non-customer accounts
    - if so how and where the assets are maintained
    -
83
Q

Reporting and Record Keeping Rules

Extension requests for reporting

A
  • a written request must be made to the FINRA District Office no later than 3 business days prior to the due date
  • extensions are granted for things outside of a members control (i.e. tech issue, contractor delay)
84
Q

Reporting and Record Keeping Rules

Supplemental FOCUS report

A
  • FINRA rule 4524 requires each firm to file supplemental financal or operational schedules as dictated by FINRA
  • e.g. SSOI (Supplemental Statement of Income)
85
Q

Reporting and Record Keeping Rules

SSOI Threshold

A
  • SSOI is rttequired for any line item that is greater than $5K or 5% of a firm’s total revenue or expense category
86
Q

Reporting and Record Keeping Rules

SSOI for Private Placements

A
  • additional detail for firms that derive more than 10% of their total revenue from participation in private placements
  • must complete an “operational page” – includes more detail on each unregistered offering
  • Must be filed within 20 business days after quarter end
    (FOCUS is filed 17 days after quarter end)
87
Q

Reporting and Record Keeping Rules

Supplemental Inventory Schedule
(SIS)

A
  • provides more detail on the firm’s long and short inventory positions
  • not required for firms with:
    - no inventory; or
    - net capital requirements less than $100K (not market makers); or
    - that only have an inventory position in money market mutual funds
  • Must be filed within 20 business days after quarter end
    (FOCUS is filed 17 days after quarter end)
88
Q

Reporting and Record Keeping Rules

Annual Audit

A
  • All BDs must submit to an annual audit by a certified public accountant
  • SEC must be notified of the accountant by Dec 10th
  • Includes audits of FOCUS reports - must e performed under the standards set by the PCAOB
89
Q

Reporting and Record Keeping Rules

PCAOB

A
  • Public Company Accounting Oversight Board
  • Oversees audits of BDs
  • includes audits of compliance reports (FOCUS)
90
Q

Reporting and Record Keeping Rules

Accountant Notification

A

SEC must be notified annually by Dec 10th of the name of the accountant who will perform the audit

91
Q

Reporting and Record Keeping Rules

When does the audited FOCUS need to be filed?

A
  • must file a certified FOCUS II or IIA with the DEA and SEC no later than 60 calendar days after year end.
92
Q

Reporting and Record Keeping Rules

Exention for Annual Audited Focus Filing

A
  • must be filed with DEA and SEC no later than 60 calendar days after year end

e.g. if fiscal year end is dec 31, filiing is no later than March 1 of the following year

  • *EXTENSION: if there is an undue hardsship the firm can request an extension from FINRA DEA to not later than 90 calendar days from financial statements
93
Q

Reporting and Record Keeping Rules

Notficiation of Change in Accountant

A
  • FINRA and SEC must be notified if the accountant resigns, is terminated or if a new accountant is hired
  • notification within 15 business days
  • done electronically
    - FINRA: principal office Rockvile, MD
    - SEC: SEC regional office & principal office (DC)
  • notice must be provided to the former accountant
  • change would likely take place wihtin the 60 notification window.
94
Q

Reporting and Record Keeping Rules

What should be included in the accountant change notification?

A
  • date of notification of termination
  • details of any problems during the 24 months preceeding termination realted to accounting, audit, or compliance
  • whether issues were resovled
  • response from former accountant (they are obligated to respond)
95
Q

Reporting and Record Keeping Rules

Customer Reporting of Financial Condition

A

Annually:
* Each clearing BD must report to its clients:
- their financial condition as dislcosed in the audited FOCUS II/IIA
- an audited balnace sheet
- audited computed amount of Net Capital
* Must be provided no later than 105 days from the firm’s fiscal year end.

note: for a firm with a fiscal year end of dec 31, it must be filed by april 15th

Semi annually
* must provide unaudited balance sheet and unaudited computated net capital no later than 65 days after its mid year point

NOTE: fully disclosed BD ($50K, $25K, or $5K net capital minimums) are NOT subject to this disclosure rule

96
Q

Reporting and Record Keeping Rules

Definition of customer for disclosure purposes

A

Includes:
* any person that has cash or securities in custory of the firm
* anyone who has effected a securities transaction thorugh the firm in the month before or after the balance sheet issued

Does not include:
* partners or subordinated lenders to the firm

NOTE: fully disclosed BD ($50K, $25K, or $5K net capital minimums) are NOT subject to this disclosure rule

97
Q

Reporting and Record Keeping Rules

Required Reporting Due Dates

A
  • December 10th Notify DEA/SEC who the auditor will be for the upcoming year
  • 60 days from close of fiscal year end: File FOCUS II or IIA with DEA/SEC
  • 90 Days from year end: File audited FOCUS II/IIA on extension request
  • 105 Days from year end: Send customers a copy of audited balance sheet and computed net capital (clearing firms only)
98
Q

Reporting and Record Keeping Rules

Change of Fiscal Year Notification

A
  • requires prompt notice to FINRA
  • must include detailed reason for change
99
Q

Reporting and Record Keeping Rules

Annual Compliance Report or
Exemption Report

A
  • In addition to the annual FOCUS report:
  • Filed 60 days after the close of the fiscal year
  • Every Clearing BD must file an annual compliance report
  • Non Clearing BD must file Exemption Report
100
Q

Reporting and Record Keeping Rules

Annual Compliance Report

A
  • *Clearing BDs must file annually
  • Covers internal controls over compliance with:
    - net capital rule
    - comsumer protection rule
    - securities count rule, and
    - Customer account statement rules
101
Q

Reporting and Record Keeping Rules

what must be included in the annual compliance report?

A

The compliance report must state:
- the BD maintained internal conrol over compliance
- internal control over compliance was effective during the most recent fiscal year
- BD was in compliance with Rule 15c3-1 and the Special Reserve provisions of 15c3-3
- information used to determine complaince was derived from the firm’s books and records

if applicable:
- describe idenfitied material weaknesses in teh firm’s internal controls over complaince with the financial responsibiltiy rules
-

102
Q

Reporting and Record Keeping Rules

Annual Exemption Report

A
  • Required to be filed by non-clearing BDs (that claim an exemption from Rule 15c3-3)
  • States which exemption they are claiming (K1,K2, K2ii)
  • must be revewed by the firms independent accountant and any material exceptions shoudl be noted
103
Q

Reporting and Record Keeping Rules

Accountant Report of Material Non-Compliance

A
  • if the independent accountant finds material non-complaince then it must:

notify the SEC and FINRA directly within 1 business day, by facsimile, or email followed by first class mail to the SECs Director of Compliance Inspections and Examinations

  • Notice is triggered when it is identified, NOT at the completion of the examination
104
Q

Reporting and Record Keeping Rules

When must a FOCUS report be filed if a firm’s membership is terminated?

A
  • FOCUS II or IIA must be field with FINRA and the SEC within 2 Business Days
105
Q

Reporting and Record Keeping Rules

Rule 17a-11

A

deals witih Violations and Early Warning Reporting

106
Q

Reporting and Record Keeping Rules

Rule 17a-11
Violation Reporting

A

Requires reporting to FINRA and SEC if a firm:
* violates the net capital rule
* is getting close to violating the net capital rule
* is experiencing operational problems

107
Q

Reporting and Record Keeping Rules

Rule 17a-11
Emergency Reports

A

Firms must:
- file electronic notice to SEC and FINRA DEA
- and cease operations until corrected

IF

  • Net capital is below min
  • excess AI/NC ratio (if it exceeds 8:1 in first year or 15:1 after year 1)
  • Net capital fall below 2% of debtis in the Reserve Formula under the alternative method
  • Debt/equity ratio exceeds 70% for more than 90 days

After notice FINRA will request principals do to the DEA office to show how it will get back to capital complaince .

108
Q

Reporting and Record Keeping Rules

Rule 17a-11
Early Warnings Report

A
  • If the firm is gettting close to non compliance it must report that to FINRA DEA and SEC
  • Early Warnings:
    • Net capital belwo 120% of minimum
    • AI/NC ratio > 12:1 Or
    • Alternate N/C < 5% of Debits
    • repo or reverse repo balances > 25 times tentative net capital
  • The firm must file electronic notie to the FINRA DEA and SEC within 24 hours of this occurance
109
Q

Reporting and Record Keeping Rules

Rule 17a11
Operational Problem Reports

A
  • BDs must report operational problems if:
  • there is material inadequacy in the firm’s accounting systems
  • reords are not current
  • In this case the firm must:
    • file electronic notice to DEA and SEC within 24 hours for inadequcies and same day for records not current.
    • file a report on corretions within 48 hours
110
Q

Reporting and Record Keeping Rules

Rule 17a-3 and Rule 17a-4
Required Records

A
  • 17a-3: details what records must be kept
  • 17a-4 deals with retention
111
Q

Required Records

Rule 17a-3 / 17a-4
What reords need to be maintained for the life of the firm?

A
  • Articles of incorporation or partnership agreement
  • Minutes of baord meetings or partnership meetings
  • the last two years must be redily available for audit
112
Q

Required Records

Rule 17a-3 / 17a-4
What reords need to be maintained for 6 years?

A
  • General ledger
  • purchase and sales blotters (P&S
  • Cash Reciepts and disbursement blotters
  • customer account records (statements)
  • stock records
  • Securities Investors Protection Coporation Assessment Records (SIPC annual assessments)
  • last 2 years must be readily accessible for audit
113
Q

Required Records

Definition of “Current” for 6 year records

A
  • General ledger: posted no later than 10 business days after month end
  • Blotters: posted no later than a business day after the even
    • securities sale/purchase: business day after Trade date
    • cash: the day after received / paid
    • security delivery: busienss day after settlement date
  • Customer Accounts: posted no later than settlement date
  • Stock Record: posted no later than the business day after settlement
114
Q

Required Records

Rule 17a-3 / 17a-4
What reords need to be maintained for 3 years?

A
  • anything not covered by 6 year or life of the firm requirements

Includes BUT NOT LIMITED TO:
* copies of order tickets
* trial balances
* confims
* correspondence
* bank account records
* fail to receive blotters
* fail to deliver blotters
* u-4 forms (3 years after employement is terminated)

*2 YEARS MUST BE READILY AVAILABLE

115
Q

Required Records

A

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