Broker-Dealer Compliance To Do List for 2021 ACA Foreside

The annual statements generally must be certified by an independent public accountant. In addition, broker-dealers must notify the SEC and the appropriate SRO12 regarding net capital, recordkeeping, and other operational problems, and in some cases file reports regarding those problems, within certain time periods. Before it begins doing business, a broker-dealer must become a member of an SRO. If a broker-dealer restricts its transactions to the national securities exchanges of which it is a member and meets certain other conditions, it may be required only to be a member of those exchanges. If a broker-dealer effects securities transactions other than on a national securities exchange of which it is a member, however, including any over-the-counter business, it must become a member of FINRA, unless it qualifies for the exemption in Rule 15b9-1. FINRA’s webpage at provides detailed information on the FINRA membership process.

Regulation NMS also updates and streamlines the existing Exchange Act rules governing the national market system previously adopted under Section 11A of the Exchange Act, and consolidates them into a single regulation. The „Market Data Rules“ update the requirements for consolidating, distributing, and displaying market information. In addition, amendments to the joint industry plans for disseminating market information modify the formulas for allocating plan revenues among the self-regulatory organizations and broaden participation in plan governance. Section 11 of the Act requires a broker-dealer to disclose in writing, at or before the completion of each transaction with a customer, whether the broker-dealer is acting in the capacity of broker or dealer with regard to the transaction. Broker-dealers, like other securities market participants, must comply with the general „antifraud“ provisions of the federal securities laws.

  • The independent testing must be conducted by a person with working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations.
  • The offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security.
  • The Alternative Method measures liquid assets against obligations owed to the firm by customers.
  • In addition to counseling, our team plays significant advisory roles in major transactions, US Securities and Exchange Commission and Financial Industry Regulator Authority examinations, and enforcement defense and litigation matters.
  • Many firms sell boilerplate procedures or only provide them in an uneditable format.
  • Below are some of the areas firms should consider in conducting this gap analysis.
  • We can parachute in expertise to fulfill the CCO role or provide support to relieve you of more tactical compliance tasks and functions.

Threshold questions firms should ask and issues they should consider include the following. Rule 3110 requires the verification process be completed within 30 days of a broker’s Uniform Application for Securities Industry Registration or Transfer being filed. If possible, FINRA encourages what is compliance for brokers firms to complete the new background check rule prior to the U4 filing. We are experts at conducting the mandatory search of “reasonable available public records” and if necessary, more in-depth searches depending on the applicant’s job function, responsibilities or position at the firm.

Risk Assessments and Annual Reviews

Broker-dealers that are exchange specialists or Nasdaq market makers must comply with particular rules regarding publishing quotes and handling customer orders. These two types of broker-dealers have special functions in the securities markets, particularly because they trade for their own accounts while also handling orders for customers. These rules, which include the „Quote Rule“ and the „Limit Order Display Rule,“ increase the information that is publicly available concerning the prices at which investors may buy and sell exchange-listed and Nasdaq National Market System securities. The second gating issue is scoping all the touchpoints with “retail customers” or “retail investors” . These lines of business may include areas that historically have not been considered retail-facing business lines, given that the SEC’s definitions of “retail customer” and “retail investor” include persons who may be “institutional investors” under FINRA rules.

Building a broker-dealer compliance program

Under this rule, broker-dealers must maintain minimum net capital levels based upon the type of securities activities they conduct and based on certain financial ratios. For example, broker-dealers that clear and carry customer accounts generally must maintain net capital equal to the greater of $250,000 or two percent of aggregate debit items. Broker-dealers that do not clear and carry customer accounts can operate with lower levels of net capital.

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Failure to file SARs can result in significant civil and criminal penalties. Moreover, in recent years, the government has stepped up its enforcement of firms – including broker-dealers – that fail to timely file SARs, with FinCEN, the SEC and U.S. Department of Justice leveling civil and criminal charges against a number of firms, assessing tens of millions of dollars in civil and criminal penalties, and entering into deferred prosecution agreements. Our broker-dealer team provides sophisticated counsel to market participants seeking broker-dealer regulatory and compliance guidance.

Broker-dealers, including foreign broker-dealers registered with the Commission and unregistered broker-dealers in the United States, must comply with Regulation S-P, even if their consumers are non-U.S. Broker-dealers must notify customers purchasing securities on credit about the credit terms and the status of their accounts. A broker-dealer must establish procedures for disclosing this information before it extends credit to a customer for the purchase of securities. A broker-dealer must give the customer this information at the time the account is opened, and must also provide credit customers with account statements at least quarterly. To apply for registration, you must file one executed copy of Form BD through the Central Registration Depository („CRD“), which is operated by FINRA. (The only exception is for banks registering as municipal securities dealers, which file Form MSD directly with the SEC and with their appropriate banking regulator.) Form BD contains additional filing instructions.

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In addition to funding, compliance leaders should have an open communication channel with the firm’s leadership to provide regular updates. If a compliance leader believes there is a cultural issue to be changed, they should be empowered to investigate and take action as needed. This preventative action may incur a temporary cost but should be weighed against the longer-term risk of non-compliance and regulatory action.

Additionally, we will quickly respond to any request from FINRA for additional information or clarification of material submitted. Prepare and submit the Form ADV Part IA, Part IB, Part II, Schedule A, Schedule B, Schedule C, Schedule D and Schedule F that is customized to your firm’s unique business model. With multiple regulatory frameworks and thousands of separate requirements to track, manual investigations are no longer sufficient to ensure compliance.

And, with non-compliance penalties routinely hitting millions of dollars, failing to meet requirements isn’t an option. Broker-dealers that fail to comply with Rule 15c3-3 can face huge fines. In 2016, investing giant Merrill Lynch was fined $415 million for breaching several requirements of the Securities Exchange Act, including 15c3-3. Fines to small and medium-sized firms are less astronomical but still reach multi-million dollar figures. As you’d expect, the calculation required to comply with Rule 15c3-3 is far from simple.

The Countdown Is On! Building a Reg BI Compliance Program as Deadlines Loom

The result of all these different regulations is a spider’s web of requirements that broker-dealers must adhere to strictly. Our team reviews and tests broker-dealer compliance programs in accordance with FINRA Rules 3110 and 3120 requirements. We understand that the size and nature of a broker-dealer can vary widely, from market maker, to Funding Portal (FP-BD), to upcoming Capital Acquisition Broker .

A comprehensive solution uses data and software to ensure compliance teams are ahead of regulators and ready for examinations. ComplySci reduces the amount of time data gathering by as much as 60%, allowing you to respond to changing regulations with confidence and agility. 3 Section 9 prohibits particular manipulative practices regarding securities registered on a national securities exchange. Section 10 is a broad „catch-all“ provision that prohibits the use of „any manipulative or deceptive device or contrivance“ in connection with the purchase or sale of any security. Section 15 prohibits broker-dealers from effecting transactions in, or inducing the purchase or sale of, any security by means of „any manipulative, deceptive or other fraudulent device,“ and Section 15 prohibits a broker-dealer from making fictitious quotes. In addition to Commission rules, analyst conduct is governed by SRO rules, such as NASD Rule 2711 and NYSE Rule 472.

The purchaser must also demonstrate that they have the experience, appropriate number of supervisors, policies and procedures, books and records and the operational bandwidth to engage in the proposed business. Under this standard, a “Shell” or an inactive BD would not be able to conduct business until the application is approved because the new business would be materially different from the BD’s existing business. Having a seasoned Financial and Operations Principal is essential to running a compliant broker dealer. Our staff is comprised of Series 27/28 licensed professionals with decades of financial and regulatory experience. Our consultants can register as your FinOp or file your FOCUS and SSOI filings on your firm’s behalf. We are proud of our staff’s accuracy and wealth of accounting and regulatory knowledge.

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Inventory all products that may be recommended to retail investors/customers, including the relevant payment/revenue to brokers and to the firm from each product. The maximum amount of time an NMA or a CMA is permitted to take is 180 days from when an application is submitted. FINRA will then send the applicant a letter requesting additional documentation or information. Once the applicant receives FINRA’s response, they in turn have 30 days to respond.

Building a broker-dealer compliance program

The broker-dealer must also make periodic computations to determine how much money it is holding that is either customer money or obtained from the use of customer securities. If this amount exceeds the amount that it is owed by customers or by other broker-dealers relating to customer transactions, the broker-dealer must deposit the excess into a special reserve bank account for the exclusive benefit of customers. This rule thus prevents a broker-dealer from using customer funds to finance its business. Broker-dealers that limit their activity to government or municipal securities require specialized registration. Those that limit their activity to government securities do not have to register as „general-purpose“ broker-dealers under Section 15 of the Act. General-purpose broker-dealers that conduct a government securities business, however, must note this activity on their Form BD.


This type of regtech asset is vital to BSA compliance in the wake of FinCEN’s recent UBO ruling. And most recently in June, the SEC issued the first-ever fine against a BD for failing to file suspicious activity reports 6 related to the high-volume liquidation of microcap securities. The SECond Opinions Blog will continue to monitor the agency’s activity in this space and provide further updates. If you need any additional information on this topic – or anything related to SEC enforcement – please contact the authors or another member of Holland & Knight’s Securities Enforcement Defense or Broker-Dealer Regulation and Compliance Teams. For its part, the SEC’s Division of Enforcement is authorized to, and regularly does, make use of SARs in its investigations, albeit with limitations on their use. However, SARs cannot be shown to witnesses during an SEC interview or testimony, marked as exhibits, or disclosed outside of the investigation.

During our review, we work closely with clients to tailor our in-depth testing to each firm’s business model. Our customized approach identifies potential gaps in your firm’s AML program and provides practical solutions to address them. We have the regulatory expertise to assist with the initial broker-dealer FINRA and/or state application filings, CRD filings and preparation of compliance and supervisory procedures. In addition, our team can assist existing broker-dealers with a Change in Membership application with FINRA.

Bates takes a holistic approach to the registration process by first working with your firm to design, create and implement the BD’s supervisory program prior to completing registration. FINRA will expect the firm is meeting all the regulatory requirements upon approval. The Exchange Act requires that any Broker-Dealer (“BD”) effecting securities transactions by means of interstate commerce be registered. BDs are subject to regulation by the SEC, FINRA and any other Self-Regulatory Organization (“SRO”) in addition to the states where they do business.

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These processes should be inventoried and mapped to the component obligations of Reg BI. Prepare the FINRA Entitlement applications for the IARD/Web CRD accounts, which are required to file an application to register as an investment adviser and investment adviser representative. Enacted in 1972, SEC Rule 15c3-3 aims to protect client accounts at securities brokerage firms, including broker-dealers. The rule determines how much cash and securities a broker-dealer must hold on behalf of clients in separate, protected accounts. This ensures clients can withdraw most of their holdings on-demand, even if a broker-dealer becomes insolvent. These regulations cover various functions, including trading activity, anti-money laundering and anti-fraud, customer protection, and managing conflicts of interest.

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