FINRA Notice 16-05

Summary

January, 2016

This Notice provides firms with information regarding a no-action letter1 issued by the staff of the Division of Trading and Markets of the Securities and Exchange Commission (the SEC staff) regarding electronic filing of the annual and supplemental reports required under SEA Rules 17a-5 and 17a-12.

See the attached pdf, for the full text:

pdf FINRA_Notice_16-05.pdf

Accounting & FinOp Services FAQ

Below are the answers to the questions most frequently asked by ACI’s new, existing, and prospective clients:

  1. What type of experience will ACI bring to my firm?
    ACI has over 30 years of experience in providing high quality bookkeeping, accounting and regulatory consulting to the financial services industry. Our consulting staff includes FinOps and Certified Public Accountants. Amongst our staff we hold the Series 7, 15, 24, 27, 28, 63, 79, and 99 licenses.
  2. How does ACI stay current on FINRA rules and regulations?
    ACI consultants regularly attend industry conferences to gain first-hand knowledge about changes in the regulatory landscape. We utilize this information in practice to ensure our clients are protected from regulatory scrutiny.
  3. What is the benefit of outsourcing accounting services?
    The greatest value provided by outsourcing accounting services is the ability to engage a team of well-trained professionals while incurring only a fraction of the cost of hiring a full-time employee.
  4. How does ACI price its accounting services?
    The most definitive measure in determining our pricing structure is the transactional volume incurred each month. Our fees are not based upon size or profitability of the clients we service.
  5. Can ACI service financial services clients not located in New York?
    Yes! While ACI is based in Manhattan’s financial district, there is no geographical limitation to the accounting services we can provide to our clients. Electronic communication has allowed us to offer remote clients with the same quality of service that is provided to regional firms. We are able to gather documents directly from the third party providers and can also provide remote online access so clients can constantly view the financial activities of their respective firms.
  6. Does ACI fulfill FINRA’s licensing requirements?
    Yes! ACI will provide each client with a Series 27 licensed accountant to act in the capacity of Financial & Operations Principal. The FinOp will be responsible for overseeing the firm’s financial operations and will sign the FOCUS Report as validation of the accuracy of the information provided to FINRA.
  7. How do auditors conduct their audits when ACI prepares the books and records?
    ACI’s headquarters serve as the location of the financial books and records for our clients. Our accountants are very familiar with the financial well-being and net capital and can therefore provide the assistance required to conduct the audit in the most timely and efficient manner.
  8. How does FINRA conduct its financial examination?
    Much as is the case with year-end audits, FINRA relies on ACI’s access to financial information to help facilitate their examinations. ACI will relieve much of the examination burden away from the client, thereby allowing the firm to focus on core competencies. By providing the regulators with necessary documentation and insight, ACI is able to shorten the length of the examination and limit the likelihood of financial findings and regulatory fines.
  9. Does ACI conduct year-end audits?
    No. ACI is prohibited from providing year-end audits for independence reasons. The year-end audit is conducted with the purpose of providing independent third party verification of the accuracy of the broker dealer’s books and records. As the preparer of books and records, ACI is not considered independent because we would be reviewing our own work product.
  10. Who has access to my books and records?
    Only ACI employees, engaged auditors, and the clients themselves will have access to internal accounting information. Client books and records contain confidential information and are treated in that manner.  All files are password protected and backed up nightly to comply with SEC/FINRA guidelines for business continuity plans.

 


Give us a call at 212-668-8700, or reach out via our contact form to learn more.

Financial Accounting & FinOp Glossary

ACI has prepared this alphabetical list of definitions for the most commonly used terms in Financial Accounting.

401k Plan – A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual retirement accounts

Accounts Payable – Represents an entity’s obligation to pay off debt to its creditors

Accounts Receivable – Fees owed by customers to an entity in exchange for goods or services that have been delivered or used, but not yet paid for

Accrual Basis – An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur

Adjusted Gross Income – Gross income less certain allowable deductions such as self-employed medical insurance, alimony, and certain retirement plan contributions (subject to limitations)

Agency Execution – The completion of a buy or sell order for a security. The execution of an order happens when it is completely filled, not when it is placed by the investor. When the investor places the trade, it goes to a broker, who then determines the best way for it to be executed

Aggregate Indebtedness – Aggregate indebtedness (AI) is composed of the firm’s unsecured liabilities and also customer related liabilities. AI has a direct correlation to the firm’s minimum net capital requirement

Allowable Assets – Firm’s assets that are readily available or convertible into cash

Annual Audit – Broker dealers that do business with public customers must file an annual audit by an independent certified public accountant within 60 calendar days after its fiscal year end

Anti-Money Laundering (AML) – Laws, procedures and regulations designed to stop the practice of generating revenue from illegal activity

Asset – An item of economic value that can be found on a company’s balance sheet; could be tangible, intangible, current or long term, prepaid or deferred;

Assets Under Management (AUM) – The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked at as a measure of success against the competition and consists of growth/decline due to both capital appreciation/losses and new money inflow/outflow

Balance Sheet – A financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time

Bank Reconciliation – A report that compares the bank balance as per the company’s accounting records with the balance stated in the bank statement

Broker Dealer – A person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction. The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages, because most of them act as both agents and principals. A brokerage acts as a broker (or agent) when it executes orders on behalf of clients, whereas it acts as a dealer (or principal) when it trades for its own account

Buy Side – The side of Wall Street comprising the investing institutions such as mutual funds, pension funds and insurance firms that tend to buy large portions of securities for money-management purposes

C Corporation – A type of business legal structure. C Corporations are considered separate entities from their owners. Income is taxed on the corporate level and is taxed again when it is distributed to owners

Capital Gain – An increase in the value of a capital asset. Capital gains could be realized or unrealized, short or long term

Capital Loss – Decrease in the capital asset value compared to an asset’s purchase price.

Cash Basis – An accounting method that recognizes revenues and expenses at the time cash is physically collected or disbursed

Central Registration Depository (CRD) – The central licensing and registration system for the U.S. securities industry and its regulators. It contains the registration records of registered broker-dealers and the qualification, employment, and disclosure histories of active registered individuals

Chief Compliance Officer (CCO) – Compliance personnel who overseas and manages compliance within an organization. His/her primary role is to ensure that the firm complies with applicable regulatory requirements and internal policies and procedures

Chief Financial Officer (CFO) – Financial personnel who oversees the financial activities of a company. The CFO’s duties include financial planning and monitoring of cash flow. He/she analyzes the company’s financial strengths and weaknesses and suggests plans for improvement

Clearing Firm – Most broker dealers have a clearing or “carrying” firm relationships. The firm not only handles the BD’s orders to buy and sell securities, but it also maintains custody of the securities and other assets (like any cash in the BD’s account)

Commission Sharing – Form of revenue sharing arrangement between broker dealers

Deferred Revenue – Advance payments or unearned revenue, recorded on the recipient’s balance sheet as a liability, until the services have been rendered or products have been delivered. Deferred revenue is a liability because it refers to revenue that has not yet been earned, but represents products or services that are owed to the customer. As the product or service is delivered over time, it is recognized as revenue on the income statement

Depreciation – A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes

Dividend Income – A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders

Electronic Filing (E-Filing) – The process of submitting regulatory reports via an electronic system created by FINRA

Equity – A stock or any other security representing an ownership interest

Expense – The economic costs that a business incurs through its operations to earn revenue

FICA (Federal Insurance Contributions Act) – Federal tax imposed on employer and employee (in order to fund Social Security and Medicare.)

Financial and Operations Principal (FinOp) –A Financial Principal is the individual involved in the preparation and maintenance of financial reporting for a registered Broker Dealer. All FinOps must be registered with a Broker Dealer and must hold Series 27/28 license, which they can obtain by successfully passing a FINRA examination . FinOps are responsible for the accuracy and final approval of financial reports such as Financial and Operations Combined Uniform Single Report (FOCUS Report). They are also responsible for ensuring that firms are in compliance with FINRA Net Capital, record keeping and customer protection rules and regulation

FINRA – Financial Industry Regulatory Authority is an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry

Fiscal Year – A period that a company uses for accounting purposes. The fiscal year may or may not be the same as a calendar year. For tax purposes, companies may choose to be calendar-year taxpayers or fiscal-year taxpayers

FOCUS Report (Form X-17a-5) – All broker dealers are required to file Financial Operations Combined Uniform Report (Focus Report) with FINRA and SEC on either a monthly or quarterly basis. The Focus Report serves as the final product of a broker dealer’s financial activities over a period of time designated by FINRA. It provides detailed information about the firm’s financial status. FOCUS Reports must be e-filed with FINRA by the 17th business day of the month

Form 1017 – Uniform Application for change in ownership, control or business operations by a registered broker-dealer

Form 1040 – U.S. individual federal income tax return filed with the IRS

Form 1065 – A tax document used to report the profits, losses and deductions of a partnership. Schedule K-1 is a part of Form 1065, and is prepared for each individual partner. The document identifies the percentage share of profit and loss assigned to each partner, both at the beginning of the reporting period and at the end

Form 1099 – A tax document which is used to report various types of income other than wages, salaries and tips. Usually this form is used to report compensation to independent contractors

Form 1120 – A tax document used to report the profits and losses of a C corporation

Form 1120S – The tax return used to report the profits and losses of an S corporation; it is an S corporation’s tax return. Schedule K-1 is a part of Form 1120S. It is prepared for each individual shareholder and identifies the percentage of ownership for each shareholder as well as the reportable income and expenses passed through to each shareholder during the year

Form Custody – A form broker dealers are required to submit to FINRA indicating their procedures regarding the receipt of customer funds and/or securities

Form U-4 – Uniform Application for Securities Industry Registration

Form U-5 – Uniform Termination Notice for Securities Industry Registration

Form W-2 – Federal Tax Form issued by the employer stating the yearly salary of an individual

Form W-4 – A Federal tax Form provided by individuals to their employer so proper taxes are withheld from their pay

General Ledger – A company’s primary accounting record. The general ledger details the transactional activity of the firm and acts as support for the financial statements

Generally Accepted Accounting Principles (GAAP) – The common set of accounting principles, standards and procedures imposed on companies when they prepare financial statements

Gross Revenue – The amount of money that a company earns during a specific period. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income

Haircut – The percentage by which an asset’s market value is reduced for the purpose of calculating capital requirement, margin and collateral levels

Income Statement – A financial statement that measures the financial performance of a company for a specific period of time. Also known as Profit and Loss Statement

Income Tax – Government tax imposed on taxpayers (individuals or corporations)

Institutional Investor – An organization that trades securities in large quantities

Intangible Asset – An asset that is not physical in nature such as goodwill, brand recognition and trademarks

Interest Income – Reported on the firm’s profit and loss statement, represents interest earned such as interest on cash held in a savings account

Investment Banking – A specific division of banking related to the creation of capital for other companies

Liability – A company’s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services

Limited Liability Company – A corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of a LLC is a feature of partnerships

Margin – Borrowed money that is used to purchase securities. This practice is referred to as “buying on margin”

Market Making – An action whereby a dealer stands by ready, willing and able to buy or sell a particular security at the quoted bid and ask price

Net Capital – Net Capital is the “liquid net worth” of a broker dealer. It is computed by adjusting the equity of the broker dealer by any subordinated liabilities, non-allowable assets, or capital haircuts

Net Capital Requirement – The Net Capital Rule sets minimum dollar requirements for broker dealers’ net capital depending on the type of business in which the broker dealer is engaged

Net Income – A company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over a period of time

New Member Application – The application submitted to FINRA for acceptance as a broker dealer member firm

Non-Allowable Asset – An asset that is not readily convertible into cash. For net capital purposes, it reduces the firm’s net worth. Such assets could be accounts receivable that are not collected within 30 day period

Parent Entity – A company that controls other companies through ownership and influential amount of voting stock. Typically larger firms that have control over one or more small business subsidiaries

Payroll Taxes – Government tax imposed on employers and employees, usually calculated based on the individuals’ compensation

Prepaid Expense – An asset of the firm on its balance sheet as a result of making a payment for goods and/or services to be received in the future

Proprietary Trading – When a firm trades for direct gain or loss instead of commission dollars. Essentially, the firm has decided to profit from the market rather than from commissions from processing trades

Registered Investment Advisor – An advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission (SEC) or state securities authorities. A Registered Investment Advisor is defined by The Investment Advisers Act of 1940 as a “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.” An investment advisor has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients’ best interests

Registered Representative – A person who works for a broker dealer, is licensed by the Securities and Exchange Commission (SEC) and acts as an account executive for clients trading investment products such as stocks, bonds and mutual funds

Retail Brokerage – The service of providing brokerage to customers who are retail individual investors rather than institutional investors

Retail Investor – An individual who buys and sells securities for their personal account rather than an organization

S Corporation – A legal entity under Subchapter S of the Internal Revenue Code. Any profits or losses earned by the corporation are not taxed at the corporate level, but at the level of the shareholders.

SEC – Securities and Exchange Commission is the governmental body that holds primary responsibility for enforcing the federal securities laws and regulating the securities industry

Secured Demand Note – Under this arrangement, the lender gives marginable securities to the Broker Dealer. The broker dealer can use these securities (subject to haircut rules) to enhance the firm’s net capital

Securities and Exchange Commission (SEC) – A government commission created by Congress to regulate the securities markets and protect investors. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets

Securities Investor Protection Corporation (SIPC) – A nonprofit corporation created by an act of Congress to protect the clients of brokerage firms that are forced into bankruptcy. Members to the SIPC include all brokers and dealers registered under the Securities Exchange Act of 1934, all members of securities exchanges and most NASD members. Payments to SIPC are computed and owed semi-annually by all broker dealer member firms

Security – A financial instrument that represents the ownership of a publicly traded corporation

Sell Side – The part of the financial industry involved with the creation, promotion, analysis and sale of securities. Sell-side individuals and firms work to create and service stock products that will be made available to the buy side of the financial industry. The sell side of Wall Street includes investment bankers who serve as intermediaries between issuers of securities and the investing public, analysts who perform stock research and make ratings, and the market makers who provide liquidity in the market

Series 7 – A general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) that entitles the holder to sell all types of securities products with the exception of commodities and futures

Series 24 – A compliance securities license entitling the holder to supervise and manage branch activities. Before taking the Series 24 exam, an individual must possess the Series 7 license

Series 27 – A securities license entitling the holder to become a chief financial officer for a FINRA member firm. The Series 27 exam is a FINRA exam designed to challenge the test taker’s knowledge of issues related to CFO responsibilities, such as statutory rules surrounding broker-dealer responsibilities, and items covered under the Securities Investor Protection Act of 1970

Series 63 – A securities license entitling the holder to solicit orders for any type of security in a particular state. Securities agents must acquire the Series 63 license, in addition to a Series 7 or Series 6 license, in order to sell securities. To obtain a Series 63 license, the applicant must pass an exam to demonstrate knowledge of state securities acts and related rules and regulations, as well as knowledge of ethical practices and fiduciary obligations

Soft Dollar – An arrangement where brokerage firms are paid for their services through commission revenue, as opposed to normal direct payments such as cash (hard dollar fees)

Sole Proprietorship – A sole proprietor is someone who owns an unincorporated business individually. A sole member of a limited liability company (single-member LLC) is not considered a sole proprietor

Standard Deduction – The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status

State Taxes – Tax levied on income at the state level

Subordinated Loan – Under this arrangement, the lender gives cash to the broker dealer. The dealer agrees to pay interest and to repay principal at maturity. Generally subordinated loans are made by persons affiliated with the firm. The broker dealer would enter into this arrangement generally in order to boost their net capital

Subsidiary Entity – A company which is more than 50% controlled by another company, usually referred to as a parent or holding company

Supplemental Schedule of Income (SSOI) – A quarterly regulatory filing requirement for broker dealers, whereby they submit enhanced detail of their revenues and expenses to FINRA

Tax Exempt – To be free from, or not subject to, taxation by taxing authorities

Tentative Net Capital – Net capital of a broker dealer before considering haircuts on securities held

Trial Balance – A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company’s bookkeeping system are mathematically correct

Undue Concentration – An additional haircut on net capital applied to high risk positions held by a broker dealer

 


Give us a call at 212-668-8700, or reach out via our contact form to learn more.

FinOp Industry Links

For your reference, ACI has assembled list of useful Financial Accounting, FinOp, and Regulatory Compliance Industry Resources from around the web.

Accounting

AICPA – American Institute of Certified Public Accountants

FASB – Financial Accounting Standards Board

NYSSCPA – New York State Society of Certified Public Accountants

Financial Services Associations & Forums

AIMA – Alternative Investment Management Association

FIA – Futures Industry Association

FIF – Financial Information Forum

HFA – Hedge Fund Association

NSCP – National Society of Compliance Professionals

SIFMA – Securities Industry and Financial Markets Association

Market Exchanges

BATS – BATS Exchange

CME – Chicago Mercantile Exhange

Direct Edge – Direct Edge Exchange

IEX – IEX Exchange

NASDAQ – National Association of Securities Dealers Automated Quotations

NYSE – The New York Stock Exchange

NYSE ARCA – ARCA Exchange

Regulatory Compliance

CFPB – Consumer Financial Protection Bureau

CFTC – Commodity Futures Trading Commission

EDGAR  – Electronig Data Gathering for SEC Filings

FINRA – The Financial Industry Regulatory Authority

FSOC – Federal Stability Oversight Council

FTC – Federal Trade Commission

NFA – National Futures Association

SEC – U.S. Securities and Exchange Commission

SIPC – Securities Investor Protection Corporation

Tax

IRS – Internal Revenue Service

 


Give us a call at 212-668-8700, or reach out via our contact form to learn more.