Chapter 2 - Recordkeeping, financial requirements, and reporting Flashcards
Rule 17a-3 & 17a-4
SEC Rule 17a-3 sets forth the requirements for a broker-dealer reporting, timing, and content.
Records include:
- blotters
- general ledger
- customer accounts
- subsidiary records
- securities position book
- order tickets
- confirmation & notices
- monthly trial balances
- employment actions
Rule 17a-4 Sets the retention requirements for these records.
Records to maintain for 3 years
Records to maintain for 3 years
- retail communication
- institutional communications
- all changes to the text and content of the firm’s website
- order tickets
- confirmations
- option records
- FOCUS reports
- monthly trial balances
- subsidiary ledgers
- Long and short securities differences
- Compliance and policy & procedure manuals
- U4, U5, Fingerprints, and employment applications for terminated employees
Records to maintain for 6 years
Records to maintain for 6 years
- Blotters
- general ledgers
- customer ledgers
- customer account records
- stock records/position records
Records to maintain for life of the firm
S.P.A.M.
- S - stock certificate records
- P - partnership records
- A - articles of incorporation
- M - minutes of the meetings of board
- Form BD
Other Record retention requirements
- 18 months: exception reports from clearing firms
- 4 years: written customer complaints under FINRA rules
- 6 years: written customer complaints under MSRB rules
- 5 years: suspicious activity report (SAR) >$5,000
- 5 years: Information collected to verify customer identity
- 5 years: currency transaction reports (CTR form 112)
General securities broker-dealers minimum Net Capital
General securities broker dealers caring customer accounts have a financial responsibility or minimum net capital of $250,000.
Minimum net capital for broker dealers who generally do not carry customer accounts
Broker dealers who generally do not carry customer accounts have a financial responsibility or minimum net capital of $50,000. These are known as fully disclosed or introducing broker dealers.
Minimum Net Capital for market makers in over the counter (OTC) securities
Greater of the following:
$100,000, up to a maximum of $1,000,000
— or —
$2500 for each security it makes a market in with a bid price more than five dollars, and $1000 for each security with a bid price of $5 dollars or less.
Aggregate indebtedness
Money owed to customers, customer related deaths, accounts, and taxes payable. Other debt incurred by the broker dealer is not included. In order for a broker dealer to remain in business, the ratio of aggregate indebtedness to net capital cannot exceed:
- 8:1 for firms in their first year of business
- 15:1 for firms older than one year
Rule 17f-1
Outlines the requirements for reporting an inquiry with respect to missing, lost, counterfeit, or stolen securities.
Form X-17a-5
The fundamental reporting form used by broker-dealers to report financial conditions to the regulatory agencies. Also known as the FOCUS report, it is filed electronically and has the following parts:
- Part I - summary of key financial ratios and numbers that is filed monthly within 10 business days after the end of the month.
- Part II - balance sheet, income statement, and net capital computation that is filed quarterly within 17 business days from the end of each calendar quarter.
- Part II-A: less comprehensive version than Part II that is filed quarterly.
- Supplemental statement of income (SSOI)
Early warning rule
The early warning rule is intended to give the SEC early notice of impending financial difficulty of a broker dealer by requiring any broker dealer subject to rule 15c-3-1 to notify the SEC and the examining authority of the broker-dealer within 24 hours.
Fidelity bonds
FINRA member firms are required to obtain a fidelity bond that covers the firms officers and employees. The purpose of the fidelity bond is to protect the firms customers from fraudulent acts, loss of securities, check forgery, insecurities forgery. The fidelity bond does not cover broker dealer bankruptcy or losses incurred as a result of errors or omissions. The minimum required fidelity bond coverage is 120% of the firms net capital.
Blotter
All transactions, receipts, disbursements. Must be prepared no later than following business day (T+1).
General ledger
Assets, liabilities income, expenses. Must be prepared monthly (10 business days)
Capital required to qualify
Capital required to qualify >$250,000
Allowable vs non-allowable assets
What can be liquidated quickly vs not quickly.
Total Assets - Non-allowable Assets = Tentative Net Capital
Haircut
A haircut is a deduction taken from the market value of securities in inventory for the purpose of determining net capital. It is taken to allow for volatility. Haircut deductions are 15% of net long or short positions.
Additional Haircut Rules
Short & long securities difference
Exemptions from SIC
Customer protection rule
- Small broker-dealers less than $1 million owed to customers and AI:NC <8:1 may calculate monthly
- (credit items - debti items) x 105% = amount to be deposited into special reserve account
- Most broker-dealers calculate weekly
- Deposit 100% by 10 AM (48 hours after calculation)
FOCUS reports
All firms are required to file an annual audited FOCUS
Required notifications
FINRA financial requirements
Subordinated loan & Secured Demand Note
A satisfactory subordinated loan can be used for any general purpose.
Test point: if a subordinated loan exceeds 70% of total on 91st day the firm is in capital violation and effectively shut down.
Secured demand note:
- lender pledges stock
- must be freely transferable
- for a stated amount and interest rate
- dividends are owed to lender (good test point)
- 30% haircut
Temporary subordinated loan
Fidelity bond coverage
