Exam Alert: SEC changes broker-dealer financial responsibility rules

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include changes to the customer protection rule, net capital rule, books and records rules, and notification rule. Continue reading

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include the following changes:

Customer Protection Rule (Rule 15c-3-3)

-Carrying broker-deals that maintain customer securities and funds will be required to maintain a new segregated reserve account for broker-dealer accounts.

-The reserve requirement to protect customer cash will exclude cash deposits at affiliated banks and limit cash held at non-affiliated banks to no more than 15% of the bank’s equity capital.

-The rule will require disclosure, notice, and affirmative consent from the customer when their cash is “swept” to a money market or bank deposit product.

Net Capital Rule (Rule 15c3-1)

-The rule will require a broker-dealer to include liabilities assumed by a third party in the broker-dealer’s net worth if the third party is reliant on the broker-dealer to pay the liabilities.

-The rule will require a broker-dealer to count as a liability any contributed capital that may be withdrawn by an investor. Contributed capital that is withdrawn within a year of contribution must also be treated as a liability, unless the broker-dealer receives written permission for the withdrawal from its designated examining authority.

-Broker-dealers will be required to deduct from net capital the excess of any deductible amount over the amount permitted by SRO rules.

-Insolvent broker-dealers will be required to cease conducting a securities business.

Books and Records Rules (Rules 17a-3 and 17a-4)

-Large broker-dealers will be required to document their risk management controls.

Notification Rule (Rule 17a-11)

-The rule will establish new notification requirements for when a broker-dealer’s repurchase and securities lending activities exceed a certain threshold. Alternatively, a broker-dealer may instead report such activity monthly to its designated examining authority.

 

Source: SEC Release 2013-140: SEC Adopts Amendments to Financial Responsibility Rules for Broker-Dealers

 

This alert applies to the Series 24, Series 26, Series 7, Series 99, Series 82, Series 79, and Series 55.

Exam Alert: FINRA revises inspection rule

Effective February 25, 2013, FINRA will modify its rule that covers its ability to request information and inspect books and records. Continue reading

Effective February 25, 2013, FINRA will modify its rule that covers its ability to request information and inspect books and records. The rule will:

-specify that FINRA may inspect and copy information that is in a person’s “possession, custody, or control” if the person is subject to FINRA’s jurisdiction

-identify that books and records are subject the rule if they relate to a broker-dealer’s business or to a person’s association with a member

-describe how FINRA will contact unregistered associated persons at either a business or home address

-permit FINRA to provide an inspection request to a person’s attorney, assuming the person is being represented by the attorney in responding to the request

Source: Regulatory Notice 13-06: SEC Approves Amendments to Rule 8210

This alert applies to the Series 6, Series 7, Series 24, Series 26, Series 62, Series 79, and Series 82.

Exam Alert: NASAA identifies compliance violations, best practices

A NASAA report outlines the most common broker-dealer violations and offers best practices in ten areas to help broker-dealers avoid mistakes. Continue reading

A NASAA report outlines the most common broker-dealer violations and offers best practices in ten areas to help broker-dealers avoid mistakes.

 

The most common areas of violations involved books and records, supervision, and sales practices.  Less common were violations related to licensing and registration, and the most uncommon type of violations were those related to operations.  The top five violation types were as follows: “failure to follow written supervisory policies and procedures, suitability, correspondence/e-mail, maintenance of customer account information, and internal audits.”

 

NASAA identified best practices in ten areas – summaries of those practices follow.

-Suitability: Know your customer, know your products.

-Staffing and Expertise: Make sure there is enough staff with appropriate training/experience for the size of the firm and the scope of business activities.  Also, have and enforce written supervisory procedures.

-Exception Reports: Introducing brokers must get exception reports from clearing brokers and deal with any red flags that come up.

-Branch Office Audits: Have a good, well-documented audit program with unannounced visits.

-Selling Away: Monitor agents selling away.  If an agent applies to sell away and gets denied, make sure they don’t do so anyway.

-Outside Business Activity: Outside business requests must be approved before the activity occurs and must be reported on the agent’s U4.

-Advertisements: Ads must be fair and approved by the broker-dealer and/or FINRA.  Seminars must be approved by the broker-dealer.

-Correspondence: Keep copies of outside communications on record.

-Customer Complaints: Investigate and respond appropriately to any complaint.  Update the U4 of involved agents if necessary.

-Working with Seniors: Develop practices for working with elderly customers.

 

Source: Coordinated Examinations Identify Top BD Compliance Violations

This alert applies to the Series 24, Series 26, Series 7, Series 65, and Series 66.

Exam Alert: FINRA amends short-interest reporting rule

Effective November 30, 2012, FINRA has amended its short-interest reporting rule. The change eliminates three exceptions to the rule for stabilizing activity, domestic arbitrage, and international arbitrage, and codifies/clarifies other provisions. Continue reading

Effective November 30, 2012, FINRA has amended its short-interest reporting rule.  The rule requires that member firms maintain records of short positions in non-restricted equity securities in customer and firm accounts and report the information to FINRA.

The change eliminates three exceptions to the rule for stabilizing activity, domestic arbitrage, and international arbitrage.  Exceptions still remain for certain other situations.

The change also codifies that short positions must be reported for each account on a gross basis (as opposed to a net basis).  The change clarifies that firms are only required to report short sales that have settled or that have reached their settlement date.

Source: FINRA Regulatory Notice 12-38

This alert applies to the Series 24.

Exam Alert: SEC and CFTC define “swap,” “security-based swap,” and “mixed swap”

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above. The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps. Continue reading

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above.  The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps.

 

The CFTC regulates swaps, the SEC regulates security-based swaps, and both agencies regulate mixed swaps.  The CFTC regulates security-based swap agreements, but the SEC has antifraud authority over those products.

 

Products that are not swaps or security-based swaps include:

-insurance that falls under 1) the grandfather provision, 2) the product safe harbor, or 3) the enumerated product safe harbor

-security forwards

-consumer transactions

-commercial transactions

 

Products that are considered swaps include:

-Title VII instruments on interest rates and other monetary rates

-Title VII instruments on rates or yields of U.S. Treasuries and certain other exempt securities

-Title VII instruments on futures (other than futures on foreign government debt securities)

-broad-based index credit default swaps that require cash settlement or auction settlement

 

Products that are considered security-based swaps include:

-Title VII instruments on yields of a non-exempt debt security, loan, or narrow-based security index

-Total Return Swaps on a single security, loan, or narrow-based security index

-Title VII instruments on security futures

 

Products that are considered mixed swaps include:

-Total Return Swaps that include interest-rate optionality or a non-securities component

-broad-based index credit default swaps that require mandatory physical settlement

 

Products that may be swaps or security-based swaps:

-Title VII instruments based on futures contracts on certain foreign government debt securities

-index credit default swaps

-foreign exchange forwards

-foreign exchange swaps

-foreign currency options (other than foreign currency options traded on a national securities exchange)

-non-deliverable forward contracts involving foreign exchange

-currency and cross-currency swaps

-forward rate agreements

-contracts for differences

-certain combinations and permutations of (or options on) swaps and security-based swaps

 

Market participants may request a determination from the SEC and the CFTC of whether a product is a swap, a security-based swap, or a mixed swap.

 

Sources:

SEC Approves Rules and Interpretations on Key Terms for Regulating Derivatives (SEC Release 2012-130)

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (Federal Register publication)

 

This alert applies to the Series 62, Series 79, Series 99, Series 7, Series 66, and Series 65.

FINRA Alert: New rules for social media and personal device use for business purposes

Since FINRA first released rules regarding these issues back in 2010, many in the finance industry have raised questions and concerns over their abilities Continue reading

Since FINRA first released rules regarding these issues back in 2010, many in the finance industry have raised questions and concerns over their abilities to comply with these rules while keeping up with explosion of social media.  Last week, FINRA responded to these concerns by releasing several guidelines clarifying rules surrounding use of social media websites and personal devices for business purposes.  For example, some of the guidelines included the following:

  • If an individual posts a statement on Twitter on behalf of the firm, that will likely constitute an interactive statement and not require prior approval by a firm’s registered principal.  However, if that statement is then posted on a blog, becoming a static statement (and therefore an advertisement), prior approval is necessary.
  • Whether a statement is interactive or static, recordkeeping rules still apply.  This means that individuals and/or firms may not use social media sites or devices that automatically delete any posts.
  • Individuals may respond to third-party business-related posts on their personal social media site without violating FINRA guidelines.  However, responses must conform to firms’ individual policies regarding these types of posts.
  • As long as firms are able to keep records and supervise activity, individuals may use their own personal devices (e.g. a smart phone or a tablet) to conduct business and access business applications.  Something to keep in mind when using a personal device to conduct business: firms are allowed to supervise all communications made on personal devices, including personal communications, if the device is ever used for business purposes.

These are just a sampling of issues the recent FINRA Regulatory Notice addressed.  Please click here to review the full notice.

Exam Alert: SEC approves consolidated FINRA rules on books and records

The SEC has approved a new set of FINRA Rules governing books and records. These rules will be effective December 5, 2011. The rules state that records Continue reading

The SEC has approved a new set of FINRA Rules governing books and records.  These rules will be effective December 5, 2011.  The rules state that records for which no retention period is given under FINRA or Securities Exchange Act rules must be kept for six years.  Firms must now record the name of the agent(s), if any, responsible for an account.  Relevant to the Series 6, 7, 62, 24 and 26. Additional changes can be found here: http://www.finra.org/Industry/Regulation/Notices/2011/P123549.

Exam Alert: FINRA members prohibited from keeping assets at certain non-member institutions

On February 1, 2011, FINRA Rule 4160, Verification of Assets, was put into effect. This rule states that if the following conditions are true: Continue reading

On February 1, 2011, FINRA Rule 4160, Verification of Assets, was put into effect.  This rule states that if the following conditions are true:

1. A member keeps assets or records at a non-member institution,

2. FINRA has asked the non-member institution to verify what assets or records are being kept for the member, and

3. The non-member fails to promptly provide verification,

Then FINRA will notify the member that they are prohibited from keeping assets and records with the non-member.

http://www.finra.org/Industry/Regulation/Notices/2010/P122526