The SEC recently provided non-carrying broker dealers with an alternative option as to how they can maintain their exemptive status under SEC Rule 15c-3-3.
ACI Managing Partner, Jay Gettenberg, has worked closely with the Public Company Accounting Oversight Board (PCAOB) and FINRA in recent years to address the practical reality that there are FINRA member firms who do not hold customer funds, yet do not technically qualify under any of the four exemptions listed on the X-17A-5 Focus Report. These firms historically have been electing the k(2)(i) exemption, which effectively was the least incorrect option.
To address the situation, the SEC issued Footnote 74 in July, providing a much needed alternative, specifically for firms engaging in capital raising activities (often Capital Acquisition Brokers). The guidance refers to such broker-dealers as “Non-Covered Firms.” Non-Covered Firms that solely engage in Non-Covered Firm activities are no longer characterized as exempt under Rule 15c3-3(k), and thus no longer subject to any Rule 15c3-3 requirements, according to the footnote. Any broker-dealer that determines itself to be a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to amend its FINRA membership agreement to reflect this change.
Proposed Amendment
Mr. Gettenberg, while calling the new guidance “a great step by the SEC,” stills hopes additional clarity can be provided. He said one step could be to amend the Focus Report to include SEC Footnote 74 as one of the exemption boxes that can be checked by member firms in the preparation and submission of their regulatory filings. As currently proposed, the expectation is that these firms will claim no exemption, but still be exempt. It would make sense to provide a formal box for the Footnote 74 exemption, so firms can formally state their exemption on these mandatory submissions.
Advocating a Simpler Solution
Mr. Gettenberg continues to advocate for a simpler solution for the implementation and use of this rule. He has proposed to the FINRA Small Firm Advisory Committee and various other regulatory committees that firms should be allowed to simply select “exempt” or “non-exempt,” without needing to specify the reason for which an exemption is applicable. This would particularly make sense if the SEC is going to offer firms an exemption option that is not listed in the current exemption section of the filings. He believes that restating a common-sense approach to regulation will be the basis for effective change in the future.
ACI and Mr. Gettenberg appreciate the work the SEC and FINRA have done to help firms handle this situation and hope progress on the issue will continue.
Footnote 74 Details
On July 1, 2020, the SEC and FINRA issued guidance on the characterization of U.S. registered broker-dealers under Securities Exchange Act Rule 15c3-3. In the past, FINRA required all broker-dealers to claim an exemption under Rule 15c3-3, as provided in paragraph (k), in their membership agreements even when their business activities did not require the exemption.
This might include broker-dealers who:
- Don’t carry accounts of or for customers
- Don’t receive customer funds or securities, or self-clear customer transactions through a separate account
- Don’t receive or hold funds or securities for customers, either directly or indirectly, or otherwise owe such funds and securities to customers
- Don’t carry proprietary accounts of other broker-dealers
The July guidance refers to such broker-dealers as “Non-Covered Firms.” The guidance states that Non-Covered Firms that solely engage in Non-Covered Firm activities are no longer characterized as exempt under Rule 15c3-3(k), and thus no longer subject to any Rule 15c3-3 requirements. Such broker-dealers no longer can claim the exemption from the rule in their FINRA membership agreements, FOCUS report filings, and annual exemption reports as required under the provisions of Exchange Act Rule 17a-5.
Any broker-dealer who determines it is a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to amend its FINRA membership agreement to reflect this change. The broker-dealer should state in this request that it is not required to comply with Rule 15c3-3 by reason of the SEC’s guidance set forth in circumstances described in footnote 74 to Exchange Act Release No. 34-70073 (July 30, 2013). Such broker-dealers generally include:
- Private placement agents that effect securities transactions on a best efforts or subscription basis (not on a firm commitment basis) and don’t receive or hold customer funds or securities
- Merger and acquisition advisory firms that refer securities transactions to other broker-dealers
- Broker-dealers that provide technology or platform services and do not receive or hold customer funds or securities
The guidance also states that broker-dealers who engage in business activities that fit within the paragraph (k) exemption will continue to be exempt. These broker-dealers are not required to change their FINRA membership agreement unless they at some point restrict their business activities to those of a Non-Covered Firm.
Going forward, Non-Covered Firms will have to file annual exemption reports and periodic FOCUS reports differently. Firms that no longer need to claim a Rule 15c3-3 exemption with respect to Non-Covered Firm activities should describe their business activities in their exemption reports and also state that, during the reporting period, they:
- Didn’t directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers other than money or other considerations received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Exchange Act Rule 15c2-4
- Didn’t carry accounts of or for customers
- Didn’t carry broker-dealer proprietary accounts as defined in Exchange Act Rule 15c3-3
Also, a Non-Covered Firm should no longer indicate in its FOCUS report that it is claiming an exemption from Rule 15c3-3 with respect to Non-Covered Firm activities. Specifically, Items 4550, 4560, 4570 and 4580, Part II or Part IIA, under “Exemptive Provision under Rule 15c3-3” should be left blank.
ACI will provide updates on our Resources page as we continue to work with the SEC and FINRA to simplify FOCUS report filings
New FAQ Clarifies FINOP Site Visit Requirements
/in Regulatory Updates/by Shannon SandersonFINRA just clarified a question that has been a thorn in the side for many outsourced FINOPs and their broker-dealer clients for many years: Are FINOPs required to make on-site inspections of their clients’ records to fulfill their regulatory duties? The short answer: No.
FINRA examiners had been using a 2006 Notice to Members to effectively attempt to obligate FINOPS to go onsite on a periodic basis. While this Notice to Members was not technically a rule, FINRA seemed to insist that FINOPS needed to be physically onsite to oversee the regulatory activities of the firms at which they were registered, irrespective of the securities activities or risk profile of the member firm. Examinations occasionally have even tried to cite firms if the FINOP could not demonstrate an annual onsite visit.
In reality, many outsourced FINOPS service small, limited purpose broker-dealers, who do not hold customer funds nor pose any inherent risk to the investing public. Access to the books and records, bank statements and vendor invoices, and supplementing FINOP reviews with financial statement approvals by internal, full-time, supervisory principals, generally has been sufficient to ensure controls are in place and accurate reporting is not compromised.
In a new FAQ, FINRA has made clear that FINOPs is not required to conduct an on-site visit “if the FINOP can fulfil his or her obligations through other means.”
Advocating for FINOPs and their clients
ACI Managing Partner, Jay Gettenberg, as a member of FINRA’s Small Firm Advisory Committee (SFAC) has long been an advocate for FINRA to make clear that on-site inspections were not necessary. The travel restrictions due to COVID-19 added urgency to the need for FINRA to act.
“The fact is, over the last six months FINOPs have done their jobs remotely, without the industry crumbling,” Gettenberg said. “It’s important that FINRA recognize this and amend their guidance to mirror the new reality. If FINRA and SEC claim that they can continue cycle examinations remotely, then the argument should hold true for FINOPs being able to perform their supervisory responsibilities in the same manner.”
The new guidance provides relief to FINOPS to make risk-based assessments into how to perform their duties most effectively, Gettenberg said. He plans to continue to advocate for changes that will help FINOPs and their clients fulfill their compliance duties as the economy emerges from the lockdown.
Answering the On-Site Inspections FAQ
Here is the full wording of the FAQ:
I am registered as a Financial and Operations Principal (FINOP) for several firms and conduct my work off-site. Do I need to conduct an on-site inspection of the firms’ books and records as part of fulfilling my FINOP obligations?
All FINOPs, regardless of whether they work part-time, work off site or hold multiple registrations are responsible for fulfilling the duties outlined in FINRA Rule 1220(a)(4)(A). FINRA has previously provided guidance to member firms to help them assist their FINOPs in fulfilling the obligations specified in Rule 1220(a)(4)(A). See Notice to Members 06-23 (May 2006). The guidance, which includes a provision regarding on-site visits, should not be viewed as requirements (i.e., a FINOP is not required to conduct an on-site visit if the FINOP can fulfill his or her obligations through other means). A member firm’s written supervisory procedures, however, may impose additional requirements for FINOPs, such as an on-site visit to review a location’s books and records. In addition, nothing in this guidance relieves a firm from the obligation to conduct periodic office inspections in accordance with the requirements of Rule 3110(c).
ACI will provide updates on our Resources page as we continue to work with the SEC and FINRA on matters that affect FINOPS and our clients.
SEC Footnote 74 Provides Alternative for Broker-Dealers Who Don’t Hold Customer Funds
/in Regulatory Updates/by Shannon SandersonThe SEC recently provided non-carrying broker dealers with an alternative option as to how they can maintain their exemptive status under SEC Rule 15c-3-3.
ACI Managing Partner, Jay Gettenberg, has worked closely with the Public Company Accounting Oversight Board (PCAOB) and FINRA in recent years to address the practical reality that there are FINRA member firms who do not hold customer funds, yet do not technically qualify under any of the four exemptions listed on the X-17A-5 Focus Report. These firms historically have been electing the k(2)(i) exemption, which effectively was the least incorrect option.
To address the situation, the SEC issued Footnote 74 in July, providing a much needed alternative, specifically for firms engaging in capital raising activities (often Capital Acquisition Brokers). The guidance refers to such broker-dealers as “Non-Covered Firms.” Non-Covered Firms that solely engage in Non-Covered Firm activities are no longer characterized as exempt under Rule 15c3-3(k), and thus no longer subject to any Rule 15c3-3 requirements, according to the footnote. Any broker-dealer that determines itself to be a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to amend its FINRA membership agreement to reflect this change.
Proposed Amendment
Mr. Gettenberg, while calling the new guidance “a great step by the SEC,” stills hopes additional clarity can be provided. He said one step could be to amend the Focus Report to include SEC Footnote 74 as one of the exemption boxes that can be checked by member firms in the preparation and submission of their regulatory filings. As currently proposed, the expectation is that these firms will claim no exemption, but still be exempt. It would make sense to provide a formal box for the Footnote 74 exemption, so firms can formally state their exemption on these mandatory submissions.
Advocating a Simpler Solution
Mr. Gettenberg continues to advocate for a simpler solution for the implementation and use of this rule. He has proposed to the FINRA Small Firm Advisory Committee and various other regulatory committees that firms should be allowed to simply select “exempt” or “non-exempt,” without needing to specify the reason for which an exemption is applicable. This would particularly make sense if the SEC is going to offer firms an exemption option that is not listed in the current exemption section of the filings. He believes that restating a common-sense approach to regulation will be the basis for effective change in the future.
ACI and Mr. Gettenberg appreciate the work the SEC and FINRA have done to help firms handle this situation and hope progress on the issue will continue.
Footnote 74 Details
On July 1, 2020, the SEC and FINRA issued guidance on the characterization of U.S. registered broker-dealers under Securities Exchange Act Rule 15c3-3. In the past, FINRA required all broker-dealers to claim an exemption under Rule 15c3-3, as provided in paragraph (k), in their membership agreements even when their business activities did not require the exemption.
This might include broker-dealers who:
The July guidance refers to such broker-dealers as “Non-Covered Firms.” The guidance states that Non-Covered Firms that solely engage in Non-Covered Firm activities are no longer characterized as exempt under Rule 15c3-3(k), and thus no longer subject to any Rule 15c3-3 requirements. Such broker-dealers no longer can claim the exemption from the rule in their FINRA membership agreements, FOCUS report filings, and annual exemption reports as required under the provisions of Exchange Act Rule 17a-5.
Any broker-dealer who determines it is a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to amend its FINRA membership agreement to reflect this change. The broker-dealer should state in this request that it is not required to comply with Rule 15c3-3 by reason of the SEC’s guidance set forth in circumstances described in footnote 74 to Exchange Act Release No. 34-70073 (July 30, 2013). Such broker-dealers generally include:
The guidance also states that broker-dealers who engage in business activities that fit within the paragraph (k) exemption will continue to be exempt. These broker-dealers are not required to change their FINRA membership agreement unless they at some point restrict their business activities to those of a Non-Covered Firm.
Going forward, Non-Covered Firms will have to file annual exemption reports and periodic FOCUS reports differently. Firms that no longer need to claim a Rule 15c3-3 exemption with respect to Non-Covered Firm activities should describe their business activities in their exemption reports and also state that, during the reporting period, they:
Also, a Non-Covered Firm should no longer indicate in its FOCUS report that it is claiming an exemption from Rule 15c3-3 with respect to Non-Covered Firm activities. Specifically, Items 4550, 4560, 4570 and 4580, Part II or Part IIA, under “Exemptive Provision under Rule 15c3-3” should be left blank.
ACI will provide updates on our Resources page as we continue to work with the SEC and FINRA to simplify FOCUS report filings
ACI’s Jay Gettenberg to Appear on July 30, 2020 “Accounting and Auditing in COVID Times” Teleconference
/in News/by Shannon SandersonACI Managing Partner, Jay Gettenberg, will participate in a broker-dealer tech session teleconference on July 30, 2020 to discuss the regulatory accounting and auditing issues that arose from the coronavirus pandemic.
The six-person “Accounting and Auditing in COVID Times” panel, sponsored by the Foundation for Accounting Education, will examine how the pandemic affected industry practices, including financial statement reporting and auditing disclosures, goodwill impairment, PPP and loan forgiveness, regulatory communications, FINRA oversight, and more. The discussion is designed to provide both FinOps and auditors with recent updates that will assist broker-dealers with the preparation and audit of their books and records, specifically related to COVID and SBA loans.
ACI will will share practical lessons learned while helping over 50 broker-dealer clients navigate the SBA-backed Paycheck Protection Program (PPP), including how to ensure a borrower meets the loan forgiveness requirements. ACI has worked over the recent months to both secure PPP loans and to maximize the benefits of PPP loan forgiveness for dozens of FINRA member firms. ACI’s clients are on track to formally complete all SBA loan forgiveness forms over the coming months, enabling them to be free and clear of the PPP process.
Other topics the panel may address include tax implications for single-member LLCs, effective dates of new standards and their impact on broker-dealers and the latest news from the SEC, FINRA and the PCAOB.
The two-hour teleconference will start at 10 a.m. EST on July 30. Attendees can receive one Auditing (NYSED) and one Accounting (NYSED) CPE credit. For more details and to register, click here: https://cpe.nysscpa.org/product/31905
Focused on Safety, ACI Pushes Office Return to September
/in News/by Shannon SandersonLike many of you, ACI has been weighing when to return to the office as New York City approaches Phase 3. Our original plan was to implement a partial return on July 6th. After discussing amongst our staff and weighing the consequences, we have decided to hold off until at least September.
While eager to get back to our office, we believe health and safety must to come first. Our ability to effectively meet client obligations remotely has afforded us the ability to maintain a work-from-home environment.
The past few months have presented challenges that were unexpected and unprecedented for many businesses. Everyone at ACI has been impressed by the determination our clients have shown in meeting those challenges. Whether navigating the SBA’s Paycheck Protection Program or managing human resources, our clients have demonstrated their resourcefulness and ingenuity, which has enabled them to persevere through the lockdown. We are grateful to be part of these efforts.
In July, we will welcome two new ACI hires. We have added a senior operations role to help support our growing number of carrying/clearing firm clients, who need not only a Principal Financial Officer (PFO) with a Series 27 license, but are now also required to have a Professional Operations Officer (POO) to comply with regulatory obligations. We have also hired an additional bookkeeper, who will both create support during the COVID pandemic, as well as provide us with expanded coverage for new client onboarding throughout the remainder of 2020.