© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 1
Common Findings Related to Books and Records Tuesday, May 22 11:15 a.m. – 12:15 p.m. During this session, FINRA staff and industry panelists discuss common books and records findings of broker-dealers and related retention requirements, and offer effective practices to mitigate issues. Moderator: Thomas Nelli Senior Vice President and Regional Director, Sales Practice FINRA South Region Panelists: Afshin Atabaki Associate General Counsel FINRA Office of General Counsel, Regulatory Practice & Policy Paige Pierce Management Consultant Larimer Capital Corporation Stephen Youhn Chief Compliance Officer ProEquities, Inc.
© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 2
Common Findings Related to Books and Records Panelist Bios: Moderator: Thomas Nelli was recently named Senior Vice President and South Region Director in FINRA’s Boca Raton District Office. Prior to joining FINRA, Mr. Nelli was a Managing Director Deputy Chief Compliance officer in Morgan Stanley Wealth Management Compliance. In this role, Mr. Nelli headed the Investment Products and Services, Advisory, Research Equity, Futures and Options and Fixed Income Compliance Groups. He joined the Morgan Stanley Compliance Department in 1986. During his 31 years with the firm, he has covered almost every aspect of retail brokerage compliance, including Branch Examinations, Surveillance, Policies and Procedures, Futures, Employee Trading, Registration and has served as the firm’s Compliance Registered Options Principal and chair of the Heightened Supervision Committee. Additionally, he participates in various industry panels. Mr. Nelli graduated from Brooklyn College with a BS in Psychology in 1985. Panelists: Afshin Atabaki is Associate General Counsel in FINRA’s Office of General Counsel, Regulatory Practice and Policy. In this capacity, he renders legal advice and support to FINRA management and staff in connection with regulatory initiatives, as well as develops and interprets FINRA rules. His areas of regulatory expertise include recordkeeping requirements. Mr. Atabaki graduated Phi Beta Kappa, cum laude, from the University of Maryland, College Park, with a B.A. in History and received his law degree from Cleveland-Marshall College of Law. Paige W. Pierce is a leader of leaders who has made a difference across industries by helping influencers focus first on their employees, fall in love with their customers, and see their landscape in ways no one else can. She’s played principal roles in multiple startups, guiding a number of them to profitable exits, and realized equal success turning around underperforming organizations and helping growing concerns figure out “What’s next?” As president of PSP consulting (2017 to present), Ms. Pierce has helped businesses based in the UK and Australia overcome obstacles with their US operations and assisted US-based clients in navigating regulatory and compliance challenges. Her clients’ industries have spanned financial services (where she is a subject matter expert), manufacturing, and tourism. Nowhere is Ms. Pierce’s ability to navigate changing markets more apparent than with her tenure at RW Smith & Associates, a Fixed Income Interdealer Broker (IDB). A Founding Principal of the firm, she returned to the family-owned business as a consultant in 2001, positively resolving a critical regulatory issue and revamping compliance in the wake of the 2001 recession and the regulatory repercussions of the Arthur Andersen scandal. As President & CEO of RW Smith (2005 to 2017), and in previous leadership roles (2001 to 2004), Ms. Pierce responded to downward margin pressures and unfavorable regulatory environments by leading the evolution of both the firm’s business model and the regulators’ view of IDBs and small firms. Internally, she resolved market and cash flow challenges by twice negotiating the sale of the firm, once to a venture capitalist and later in parts to complementary businesses. She also revamped product offerings to increase top-line sales 600%. On the regulatory and legislative front, Ms. Pierce spent the better part of 20 years advocating on behalf of IDBs and small firms with purpose and passion, working to advance regulatory and legislative understanding of these important segments of financial services and the challenges they face. As an advocate for small businesses, Ms. Pierce has been invited to the Federal Reserve, offices of Congressional representatives, the Securities and Exchange Commission, and important policy discussions. She was the first IDB representative in many FINRA groups, including the National Adjudicatory Council, Fixed Income Committee, and Small Firm Advisory Board, the latter as elected Chair in 2017. Ms. Pierce also organized previously siloed firms, contributing actively to professional organizations and co-founding the BMA/SIFMA Municipal Securities Broker’s Broker Committee, the Municipal Bond Information Service Company, and the Bond Dealers of America Small Firm Division. Ms. Pierce was the CFO, Operating Officer, and a Founding Principal of Agincourt, Ltd. (1994 to 2000), a Bermuda-based broker/dealer focused on creating structured products for the fixed income institutional market. She spearheaded the creation of strategy, financial controls, and systems overseeing Bermuda-, UK-, and US-based activities for this Bermuda-based broker/dealer, ultimately engineering a successful exit. An early career in banking and finance formed the foundation of Ms. Pierce’s lead-from-the-front style. Her approach led to repeated promotions and upward recruitment. Representative accomplishments include the recapture of millions of dollars for two of LaSalle Bank’s
© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 3
operating units, the transformation of one of their cost centers into a profit center, and success in PaineWebber’s fast-paced, high-stakes Municipal Trading Division. Passionate about professional development for herself, her colleagues, and her team, Ms. Pierce is a longtime member and leader within the Young President’s Organization. She is currently Co-Chair of the London Business School YPO Executive Education Presidents’ Program. A graduate herself, as Co-Chair she took the lead in redesigning the intensive 5-year course to incorporate themes of innovation, strategy in uncertain times, organic vs architected growth, “futurist” visioneering and managing across the generations (and borders). Ms. Pierce is an Honorary Commander and Falcon with the 388th FW out of Hill Air Force Base in Utah, supporting the airmen/women who serve our great country. Steve Youhn joined ProEquities as CCO in 2016 with more than 20 years of industry experience. Before ProEquities, he worked with The Vanguard Group where he was responsible for the broker/dealer compliance program. Mr. Youhn also served as CCO for Lincoln Financial Network’s broker/dealers (Lincoln Financial Advisors Corporation and Lincoln Financial Securities Corporation) and M Financial Group’s broker/dealer unit, M Holdings Securities. Before transitioning to compliance, Mr. Youhn served as Senior Counsel in the Chicago Board Options Exchange’s legal department and the United States Securities and Exchange Commission’s Division of Market Regulation. Mr. Youhn has a JD from Stetson University College of Law, a MBA from The University of Florida, and a Bachelor of Science from the University of South Florida. He holds the Series 7, 24, and 63 licenses.
2018 FINRA Annual ConferenceMay 21 – 23, 2018 • Washington, DC
Common Findings Related to Books
and Records
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Moderator
Thomas Nelli, Senior Vice President and Regional Director, Sales Practice, FINRA South Region
Panelists
Afshin Atabaki, Associate General Counsel, FINRA Office of General Counsel, Regulatory Practice & Policy
Paige Pierce, Management Consultant, Larimer Capital Corporation
Stephen Youhn, Chief Compliance Officer, ProEquities, Inc.
Panelists
1
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Order Tickets
Electronic Communications
Account Records
Net Capital and FOCUS Reports
Altered or Inaccurate Records
Electronic Storage Media
Transmittal of Funds Records
Agenda
2
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Mismarked as unsolicited
Failed to retain (e.g., cancelled orders)
Failed to create
Missing or incorrect discretionary authority notation
Missing or incorrect time stamps
Misidentified associated person
Retention Period: Three years
Order Tickets
3
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Failed to retain email and IM (e.g., Bloomberg, other business-
related communications)
Printing emails or forwarding emails to compliance department
based on “honor” system
Permissible use of outside communications (e.g., emails, texts
and websites) without retention
Use of Social Media for business purposes
Retention Period: Three years
Electronic Communications
4
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Altering required customer information
Failure to capture and retain requisite information
Inaccurately reflected (concealed) the beneficial owner
Failure to send records (within 30 days of account opening,
change of address and change of investment objectives and 36
month post-account opening)
Failure to retain (margin and discretion documents)
Retention Period: Three and six years (Varies)
Account Records
5
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Cash versus accrual
Accruing and recording liabilities
Consolidated financials with parent
Booking expenses and liabilities pursuant to an Expense
Sharing Agreement
Recording haircuts
Retention Period: Three years
Net Capital / FOCUS Reports
6
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Forged documents
Falsified expense reports
Back dating documents submitted to FINRA
False statements on internal compliance questionnaire
Pre-signed, blank forms
Certification of supervisory reviews not conducted
Inaccurate and incomplete records
Altered or Inaccurate Records
7
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Failure to notify FINRA
Use of media not WORM compliant
Loss of electronic records
Non-compliant email systems and retention issues
Failure to retain a third party
Electronic Storage Media
8
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Transmitting wire orders without verification
Forged customer name on wire orders
Falsified LOA
Fictitious reasons for customer order
Signature guarantees without witnessing or obtaining required
documentation
Retention Period: Six years
Transmittal of Funds Records
9
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Order Tickets
SEA Rule 17a-3(a)(6) and FINRA Rule 4515
Electronic Communications
SEA Rule 17a-4(b)(4) and FINRA Rule 3110.09
Account Records
SEA Rule 17a-3(a)(9), SEA Rule 17a-3(a)(17) and SEA Rule 17a-
4(c)
Rule References
10
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Net Capital and FOCUS Reports
SEA Rules 17a-3(a)(11), 17a-4(b)(5) and 17a-4(b)(8)
Altered or Inaccurate Records
SEA Rule 17a-4(j) and FINRA Rule 8210
Electronic Storage Media
SEA Rule 17a-4(f)
Rule References
11
FINRA Annual Conference | © 2018 FINRA. All rights reserved.
Transmittal of Funds Records
FINRA Rule 3110(c)(2)(B)
Rule References
12
© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved.
FINRA FAQ Regarding Transmittals of Funds or Securities (Available at: http://www.finra.org/industry/faq-supervision-faq)
Q. What must a firm do to demonstrate compliance with FINRA Rule 3110(c)(2)’s requirement to have a means or method to document customer confirmation, notification or follow-up for transmittals of funds or securities from customers to third parties, to outside entities and to locations other than the customer’s primary residence, and between customers and registered representatives? A. Rule 3110(c) does not prescribe how customers should be notified of these transmittals, but the rule does require “a means or method of customer confirmation, notification, or follow-up that can be documented.” Accordingly, customer contact to confirm or follow-up to fulfill this requirement must be memorialized and retained for review. Factors to be considered with respect to the documentation of customer contact would include:
The date of notification; The means or method of contact (e.g., telephone number, email address, etc.); Identification of the account(s) in question; Whether there was a response from the customer; and, if so, a brief summary of
the customer’s response and any follow-up action taken. In the case of electronic transactions made by the customer or a customer’s legal representative or agent (e.g., a registered investment adviser or agent acting pursuant to legal written authorization) via secure electronic means that are subject solely to the customer’s control, it would be sufficient under Rule 3110(c) for the system itself, as part of its functions, to generate an electronic notification to the customer evidencing the completed transaction. Whatever the means or method of customer notification used, an informed determination must be made that any persons responsible for following up with a customer be independent of the customer’s registered representative and be subject to appropriate supervision. In addition, Rule 3110(c)(2)(B) permits firms to use reasonable risk-based criteria to determine the authenticity of the transmittal instructions.
2018 FINRA Annual Conference
Common Findings Related to Books and Records- Rule Reference Guide
© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 1
Order Tickets
SEA Rule 17a-3(a)(6): Terms and conditions; modifications or cancellations; account identification; associated person identification or electronic order notation; discretionary authority notation; time of receipt, entry, execution or cancellation; and execution price. See also FINRA Rule 4515. Retention Period: Three years
Electronic Communications
SEA Rule 17a-4(b)(4): Originals of all communications received and copies of all communications
sent (and any approvals thereof) by the broker-dealer (including inter-office memoranda and
communications) relating to its business as such, including all communications that are subject
to rules of a self-regulatory organization of which the broker-dealer is a member regarding
communications with the public. FINRA Rule 3110.09: Correspondence and internal
communications of associated persons relating to the member's investment banking or
securities business, including the preparer s and reviewer s names (for outgoing
correspondence). Retention Period: Three years
Account Records
SEA Rule 17a-3(a)(9): A record for each cash and margin account indicating, among other things, the name and address of the beneficial owner of such account, and in the case of a margin account, the signature of such owner. Retention Period: Three years. SEA Rule 17a-3(a)(17): A record for each natural person customer, which includes: customer or owner s name; tax identification number; address; telephone number; date of birth; employment status (including occupation and whether customer is an associated person of a broker-dealer); annual income; net worth (excluding primary residence); account s investment objectives; signature of the associated person responsible for the account (if any); and principal approval. The broker-dealer must furnish the customer a copy of the required account record information within 30 days of the opening of the account and thereafter at least every 36 months. The broker-dealer also must notify the customer of a name or address change or a change in investment objectives within 30 days. For discretionary accounts, the broker-dealer must keep a record of the dated signature of each customer granting discretionary authority and the dated signature of each natural person to whom discretionary authority is granted. See also FINRA Rules 4512 and 3110(c)(2)(C). Retention Period: Six years. SEA Rule 17a-4(c): An account card or record that relates to the terms and conditions with respect to the opening and maintenance of a customer account. Retention Period: Six years.
2018 FINRA Annual Conference
Common Findings Related to Books and Records- Rule Reference Guide
© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 2
Net Capital and FOCUS Reports
SEA Rules 17a-3(a)(11), 17a-4(b)(5) and 17a-4(b)(8): Trial balances, computations of aggregate
indebtedness and net capital (and working papers), financial statements, branch office
reconciliations and internal audit working papers, relating to the broker-dealer s business as
such. Records that contain the information supporting the amounts included in FOCUS reports
and annual audited financial statements. Retention Period: Three years
Altered or Inaccurate Records
SEA Rule 17a-4(j): Firms must furnish promptly to the SEC legible, true, complete and current
copies of required records, or any other records of the firm subject to examination that are
requested. See also FINRA Rule 8210.
Electronic Storage Media
SEA Rule 17a-4(f): Electronic storage media requirements include: (1) notifying FINRA; (2)
providing a representation that the electronic storage media meet specified conditions,
including, among other conditions, that the electronic storage media preserve records
exclusively in a non-rewritable, non-erasable format, referred to as Write-Once, Read-Many or
WORM format; (3) making available a retrieval facility; (4) providing facsimile enlargements; (5)
retaining a duplicate copy of the records; (6) creating indexes; (7) maintaining an audit system;
(8) preserving the information needed to access records and indexes; and (9) identifying a third
party that can provide access to the records.
Transmittal of Funds Records
FINRA Rule 3110(c)(2)(B): Members policies and procedures regarding transmittals of funds
(e.g., wires) or securities from customers to third party accounts, from customer accounts to
outside entities (e.g., banks), from customer accounts to locations other than a customer's
primary residence (e.g., alternate address), and between customers and registered
representatives must include a means or method of customer confirmation, notification or
follow-up that can be documented. Retention Period: Six years
COMPLIANCE AREA ITEM Daily Weekly Monthly Quarterly Annually As Needed
General Administration
Form Filings Form BD (principal signature/date on updated/amended Form BD to evidence review and approval. Maintain in firm file.)
Form U4
Form U4: Updates/amendments to U4 reviewed and signed by registered individual + maintained in ee file
Form U4: Rep signs a new Pre-Arb Agreement that is then maintained in ee file every time a firm updates/amends the rep’s U4
Form U5: Filed within 30 days; copy placed in ee file
Form U5: Copy mailed to former employee (evidence the mailing and place in ee file)
Fingerprint Cards: Digital preferred, if hard copy do not send duplicates (firm will be charged per card submitted)
Designated Principal for supervision of form filings
Designation of Executive Rep (ensure e-mail address is current at all times)
Updates to Firm Contact System (review annually, at a minimum)
Payment of Regulatory Fees
MSRB: G-40 Updates
Business Continuity Plan
Business Continuity Plan Content of Plan
Include BCP/DR Call Tree (be sure to update with new hires throughout the year)
Approval of Plan
Testing of Plan
Personnel
Hiring
Create New Hire Checklist
Obtain signature from potential hire authorizing firm to conduct a background investigation
Investigation of Background (financial, criminal, qualifications, etc.)
Obtain authorizing signature from potential hire for firm to conduct a CRD review (Gateway review of prior U5, etc.)
Reference Check (prior employers); evidence this process
Screening for SD persons hired in clerical or ministerial positions
Create Job Offer Letter
Determine IT permissions, inform IT personnel
Determine qualifications of Supervisory Personnel; Assign Supervisor and update Supervisory Org Chart (and firm org chart)
Municipal securities personnel, including representatives, principals and apprentices
Registration of Trading Personnel
All associated persons are properly registered
Records for Associated Persons
IT: Assign electronic mail address to new hire
IT: Add new ee to email archiving system
+ email review rotation
IT: Add new ee to Cybersecurity Checklist
Continuing Education
Regulatory Element Monitor Reg Element Notices
Supervision of Inactive Associated Persons
Firm Element Needs Analysis (annually)
Written Plan (annually)
Monitor Firm Element Completion
Supervision of Associated Persons who do not complete Firm Element
Annual Compliance Meeting
Attendance Records - Ensure All Associated Persons attend
Annual Attestations Completed and Returned
Firm Supervision and Oversight
Employee Supervision Gifts and Gratuities
Non-Cash Compensation
Outside Business Activities
Private Securities Transactions
Accounts with Other BDs
Sharing in Customer Accounts
Borrowing and Lending between associated persons and customers
General Supervision Supervision of Outsourcing Arrangements
Heightened Supervision
Supervision of Statutorily Disqualified Individuals
Use of Exception Reports and other Reports
CEO/CCO Annual Certification (Rule 3010)
Limited Size and Resources Exception (Rule 3012) – Notify FINRA
Review of Accounts and Correspondence
Correspondence Review Incoming
Outgoing
Faxes
Electronic Communications (emails, Ims, etc
Taping Rule Compliance
Account Reviews Review of Employee Transactions
Opening Accounts and transactions with persons associated with other BDs
Transaction involving FINRA Employees
Supervision of Municipal Securities Transactions (including 529 Plans)
Branch Supervision
Designation of Offices of Supervisory Jurisdiction (OSJs)
Branch Office Inspections
Activities on the Premises of a Financial Institution
Documentation regarding limited size and resources exemption
Conflicts opf Interest with respect to inspections of branch and non-branch locations
Supervision of Branch Offices - Options Business
Insider Trading
Monitoring for Insider Trading
Periodically reviewing employee and firm trading
Criteria for investigating suspect trades
Require employees to sign attestation
Update employees on new or revised insider
trading rules and regulations.
Definition of Material, Non-Public information, Insiders and other relevant terms
Policies and procedures on access to or utilization of material, non-public information
Tools and methods for inhibiting or monitoring transactions in restricted securities.
Procedures to detect transactions in restricted/control securities (Watch Lists, etc)
Securities Transactions for personal and family- related accounts
Chinese Wall Procedures
Method for determining whether firm trading should be restricted
Determining and identifying activities that are restricted while security is on list
Monitoring Associated Persons' trading of restricted securities
Time period covered and frequency of review
Recording details of associated persons' trade in restricted security
Creation and maintenance of documentation to evidence supervisory reviews
Anti-Money Laundering Program
AML Policies and Procedures Designate AML Contact Person
Written AML Compliance Program approved in writing by Senior Management
Establish and implement policies and procedures to detect and cause the reporting of suspicious transactions
Bank Secrecy Act policies and procedures
Independent testing of AML Compliance Program (annually)
On-going training of firm personnel
Customer Identification Program and verification of customers' identity
Determine whether customer appears on any list of known terrorists or terrorist organizations such as those listed on OFAC web site, as well as those on the list of embargoed countries/regions on the OFAC List
Responding to information requests from FinCEN concerning money laundering or terrorist financing, including how the firm will protect the security and confidentiality of the information requests
Sharing information with other financial institutions, if applicable (including requirement to provide annual sharing agreement to FinCEN)
Opening Correspondent Accounts
If firm does not open or maintain correspondent accounts for foreign banks, it must have internal controls implemented to detect any attempt to open such an account
If firm opens or maintains correspondent accounts for foreign banks:
Identify US agent for service of legal process
Identify owners of foreign banks
Provide information to federal law enforcement officers
Terminate correspondent relationship w/in 10 days of notice by the Treasury or AG that the firm failed to comply with summons or contested a summons
Due Diligence review for correspondent accounts of foreign financial institutions
Determine the identity of the nominal and beneficial account holder and the source of funds deposited into "private banking accounts" and to conduct enhanced scrutiny of accounts of a senior foreign political figure
If the firm does not open or maintain private banking accounts for non-US persons, have internal controls in place designed to detect any attempt to open such an account
Freeze accounts and prohibit transactions with persons who are suspected of terrorist activities pursuant to Executive Order #13224 that was issued through OFAC
If the firm prohibits the receipt of currency, procedures and internal controls to detect its receipt
Filing Currency Transaction Reports: Identify cash transactions for filing CTRs; Filing of CTRs; Verify the identity of customers for filing CTRs
Filing reports of international Transportation of Currency or Monetary Instruments
Filing reports of Foreign Bank and Financial Accounts
Obtaining all required information regarding the transmittal/retransmittal of wire transfers that includes the transmitter and recipient of funds
Verifying the identity of customers in connection with wire transfers
Procedures to detect and report suspicious transactions by filing Suspicious Activity Reports (SAR-SF)
Recordkeeping requirements (Currently a 5 year requirement)
Communications with the Public
Advertising and Sales Literature (including email and web sites)
Cold Calling/Telemarketing Scripts
Institutional Sales Literature and Correspondence
Speaking Engagements; Scripts; Outlines; Media Participation; Chat Rooms
Sales Materials for Municipal Fund Securities; 529 Plans
Options Communications with the Public
Sales Literature Review
Disclosures to Customers
Customer Disclosure and Written Acknowledgment (Business on the premises of a financial institution)
Communications related to SIPC coverage
Material Event & Customer Complaint Reporting
Regulation SP requirement to provide initial, annual & revised privacy policy notice; description of how and when distributed to customers; administrative, technical & physical safeguard of information; testing of firewalls
Investor Educations
Mortgage-Backed Securities: risk disclosure
CMOs: risk disclosure
Delivery of OptionsDisclosure documents
10b-9 Disclosures
Designated Securities/Penny Stock Disclosures
Payment for Order Flow - Policies, Procedures and Disclosures to Customers
Disclosures for bank-affiliated broker-dealers; Not FDIC Insured; Price fluctuations, etc.
Disclosure in connection with new issues of municipal securities
Municipal securities, disclosures by issuer
Mark-up/Mark-down disclosures (confirmations, etc.)
General Supervision Prohibition against guarantees
Conduct and fair dealing; Fraud
Customer Information Controls
New Account Review and Approval
Verification of customer's background and financial information for options; maintenance of background information
Review/approval of new options accounts
Suitability
General Suitability
Conflicts of Interest
Hold Recommendations
Discretionary Accounts
Designated Securities/Penny Stocks
Direct Participation Programs - Review of subscription agreements
Identification of Sophisticated Municipal Market Professionals (SMMPs)
Minimum denomination amounts
Hedge Fund due diligence reviews
Due Diligence (public/private) review of
prospective offerings and files
Powers of attorney/authority to act as agent on behalf of account/third party
Short sale recommendations
Suitability of solicited online transactions
Fees Charged to Customers
Fair pricing, commissions, fees charged to customers, markups (remember each of these stands alone for regulatory purposes, but are also reviewed in aggregate per client – two different reviews)
Transaction Review and Handling Customer Complaints
Complaints Reporting of Customer Complaints
Records of Written Customer Complaints
Options Complaints
Trade Review Unauthorized trading
Churning
Front Running
Excessive commissions/fees
Best Execution / Fair Pricing
Other transaction issues
Financial Reporting
FinOp Responsibilities FinOp's duties and responsibilities
FinOps registered with multiple firms
Notification of replacement of accountant (SEA Rule 17a-5(f)(3))
File annual audited financials + compliance or exemption report
Filing of FOCUS and Related Forms Financial Reporting/Backup
Net Capital Computation
FOCUS II Report
Custody Report
SSOI Report
Inventory Report
OBS Report
FOCUS I
Handling of Customer Funds and Securities
Customer Protection Reserve Computation
Quarterly Box Count
Safekeeping and Segregation of Customer Securities
Handling of Funds and Securities
Error Procedures for handling customer funds received by fully-disclosed firms
Handling customer funds in general
Handling customer securities
Prohibition against improper use of customer funds and securities
Escrow Account Maintenance
Transmissions or maintenance of payments received in connection with underwritings
Proper investment of escrow funds
Receipt of cash
Receipt and reporting of cash or cash equivalents
Capital and Credit Regulation
Buy-In Procedures
Sell-Out Procedures
Short Sale Close-Out Procedures
Parking of securities for net capital
parking of securities for manipulation
Repurchases/reverse repurchase transactions
Bonds borrowed and loaned transactions
Uniform Practice - Municipal Securities
Disclosure of firm balance sheets upon customer request
Margin
Margin requirements
Netting positions of accounts that are related or accounts under common control; Letter of authorization regarding guarantees/cross guarantees
Joint back office arrangements
Recordkeeping
Maintenance of Books and Records Main Office
Branch Offices
36 Month Update of Customer Account Information
Order Tickets/Order Ticket Procedures (Time stamping)
Confirmations
Instant Messaging and Electronic Communications
Municipal Books and Records to be created and preserved
Internal Controls
Account Transfers
Customer Account Transfers Contracts (ACATS)
Verification of customer signature to transfer account, change address, etc.
Branch Office Controls
Review of order entry and account access centers and customer account access at branch offices
Controls over branch office administrative and back-office functions
Clearing Firm Monitoring of Correspondents
Clearing Agreements (e.g. clearing firm forwarding complaints to introducing firms, etc.)
Customer Information Controls
Approval of account name or designation changes for orders
Risk Mitigation Trading Limits
Systems and Operations Controls
Signature guarantee requirements and proper execution
Information security measures (e.g., securing equipment, preventing entry of unauthorized orders, controls on system entitlements, limits on password sharing, administrative procedures to change passwords, audit trail for tracking changes in entitlements
Direct Participation Programs (Real Estate Syndicates; Oil & Gas Interests
Suitability Determinations and Reviews Disclosure
Review of Subscription Agreements
General Supervisory Obligations Rollups
Organization and Offering Expenses
Review and determination of Fair and Reasonable DPP Expenses
Documentation for Evidencing Review
Secondary Market Trading Secondary Trading of DPP Shares
Trade Reporting of DPP Transactions
Fixed Income Securities
Municipal Securities Proper Registrations Maintained by Employees to Conduct Municipal Business
Municipal Advisor Activities
Disclosures in Connection with Primary Offerings
Underwriting and transaction assessments payable to MSRB
Solicitation of municipal securities business
Primary offering prices
CUSIP numbers, New Issue and Market Information Requirements
Delivery of Investor Brochure
Delivery of investor brochure upon receipt of complaint/customer complaint brochure
Political Contributions
Documentation of Political Contributions by Municipal Market Professionals
Two Year Lookback for new MMPs
Filing of Form G37
Trade Reporting
Reporting of sales and purchases of municipal securities transactions
Municipal Securities Business
Use of ownership information obtained in Fiduciary or Agency Capacity
Customer suitability and fair pricing
TRACE
Participation, trade reporting, dissemination of information
Review of Report Cards
Investment Company Products
Mutual Funds
Sales Charges - Investment Company Products
Prospectus Delivery
Market Timing and late trading activities
Redemption procedures (Dealers only)
Selling dividends - limitations on disclosures
Fees charged to customers
Review of Customer Accounts
Breakpoints, Letters of Intent, Rights of Accumulation
Switching
Execution of investment company portfolio transactions; compensation, commissions, reciprocal activity
Options
Supervision
Maintenance of records - central log, index or file for options complaints
Supervision of Options Accounts
Adjustments to options contracts
Transaction Processing Allocation Procedures
Uncovered short option contracts
Position Limits/Exercise Limits
Reporting options positions
Position Limits Reporting Procedures
Cash and Margin Treatment for Certain Types of Options
Research
General Supervision
Research Analysts; Restrictions and Disclosure Obligations
Research Reports
Quiet Periods
Fixed Income Research
Underwriting and Private Placements
Private Placements Regulation A
Regulation D, Rules 501-506
Types of Offerings
Best Efforts and Private Placement (including procedures for contingent offerings)
PIPES - Private Investments in Public Equities (including monitoring for impermissible trading in PIPE issuers
Self Underwriting
Intrastate Offerings
Rule 144 Stock
Crypto + Tokens (securities)
Firm Commitment Charges
Communications with the public about variable life insurance and variable annuities
Material Events Material Event Disclosures
Securities Registration Registration of Public Offerings
Misrepresentation as to registration
Syndicate Management
Restricted Period (Underwriting Activity Report
Filings required by Corporate Finance Department
Regulation M - Rules 101-105
Non Cash Compensation
Disclosure of affiliation with issuer or interest in distribution
Variable Products
General Supervision
Communications with the public about variable life insurance and variable annuities
Sales of Variable Products
Variable Annuities Sub Accounts
Fees
Riders
Suitability
Twisting (trading among mutual funds, insurance products and variable products)
1035 Exchanges
Replacements
Multiple Contract Sales
Trading and Trading Operations
Supervision
Designation of Principal(s) responsible for overall supervisory system and procedures
Designation of Principal(s) responsible for supervision of the trading area
Designation as an Office of Supervisory Jurisdiction (OSJ) of each location at which the order execution or market making functions are conducted
Designation of Principal(s) in each OSJ location at which order execution or market making occurs
Procedures to ensure personnel are properly registered as required by SRO Rules
Procedures to help ensure a reasonable effort is made to determine supervisory personnel are qualified by virtue of experience or training to execute assigned responsibilities
Order Handling
Order Routing
If the firm routes orders to another market center - procedures to ensure compliance and to review for compliance with the Disclosure of Order Routing Information Rule
Market Making
If the firm makes markets in covered securities - procedures to ensure compliance and to review for compliance with the Limit Order Display and Quote Dissemination Rules
For firms that make markets OTC in any exchange-traded security, but are not registered as market makers - procedures to monitor member's trading activity to determine whether it had traded over 1% of the quarterly volume of any exchange-traded security, thereby making the security a "subject security" and the member a "responsible broker-dealer that is required to communicate its beset bid, offer and size for each subject security to a national securities exchange or association.
NMS Stocks
If the firm is an exchange or OTC market maker in NMS securities - procedures to ensure quotations are not communicated to vendors for display on a terminal, unless the security if a subject security with respect to the market maker
If the firm is a market cent4r in NMS stocks - procedures to ensure compliance and review for compliance with the Disclosure of Order Execution Information Rule
Limit Orders
If the firm accepts limit orders - procedures to ensure compliance and to review for compliance with the Limit Order Protection Rules
Market Orders
If the firm accepts Market Orders - procedures to ensure compliance and to review for compliance with the Market Order Protection Rules
Best Execution
Procedures to ensure compliance and to review for compliance with the requirement to execute customer orders and orders for the customers of another broker-dealer at a price as favorable as possible under prevailing market conditions including:
Executing customer orders as principal
Execution of customer orders as principal after acquiring securities to fill the
customer's order (i.e., riskless principal trading)
Execution of customer orders as agent
Execution of customer block-sized orders, "not- held" orders and customer orders with special pricing terms/conditions (e.g., VWAP, MOO, MDC, Capped)
If firm concurrently handles multiple orders subject to time/price trading discretion (e.g., "not held", "working", VWAP, etc.) establishing a process to ensure best execution obligations are met with respect to all orders and that shares are allocated to concurrently open orders in a fair and non-discriminatory manner
Execution of orders routed to and executed by other parties, based on order-by-order routing decisions made by the firm (a/k/a Regular and Rigorous Reviews
Policies and procedures against adjusted trading
Reallocation of trades/Allocation methodology and procedures
If the firm trades OTC equity securities - procedures to ensure compliance and to review for compliance with the requirements to ascertain the best interdealer market by obtaining and documenting quotations (a/k/a "3-Quote Rule"
Anti-Intimidation/Coordination
Procedures to prevent and detect the occurrence of prohibited trading practices including: i) the coordination of quotes, trades, or trade reports with another member through "price/size convention", ii) requesting another member to alter or maintain a price or quote, iii) display of quotes in order to orchestrate artificial price movements, iv) the display of quotes with no intention of trading at the quoted prices, v) display of quotes in order to help another member execute trades, vi) delay of trade reports for the benefit of the member or another party, vii) engaging in any other activity, which improperly benefits the member or other members at the expense of customers
Procedures to prevent and detect the occurrence of prohibited conduct including threatening, coercion, or intimidation to improperly influence another person or member including:
i. Refusals to honor firm quote obligations or to trade with other members, especially in a selective/ discriminatory fashion
ii. Executing orders in a manner intended to harass or annoy another member
iii. Reporting harassment an instances in which threats or attempts at coercion have been received
iv. Educating personnel as to what
constitutes improper conduct
Trade Reporting
If the firm reports trades through a TRF, procedures to ensure compliance and review for compliance with requirements to report trade accurately and timely
If the firm reports trades through ADF/TRACS, procedures to ensure and review for compliance with requirements to report trades accurately and timely
Procedures to ensure and review for compliance with TRF and/or ADF/TRACS requirements regarding:
1) The proper use of trade modifiers (e.g., .PRP, .SLD, .T, .W, etc.) when required, and refraining from use when not required.
2) Reporting Riskless Principal Trades
3) Accepting trades reported by another member (or entering a matching trade) in a timely manner
If another member or third-party reports trades on the firm's behalf (under an AGU, A2, QSR, or otherwise), procedures to ensure trades have been accurately reported on the member's behalf.
Sale Transactions
Procedures to ensure and review for compliance with requirements to (i) properly determine whether a sale is long or short, and (ii) mark the member's order records accordingly as "long," "short," or "short exempt."
If the firm will utilize aggregation of units, procedures to ensure the member's organization plan qualifies for independent trading unit aggregation, that each unit engages only in its specified trading strategies and that trading units do not coordinate strategies with each other.
Procedures to ensure and review for compliance with requirements to locate (or arrange to borrow) securities being sold prior to execution
Procedures to ensure and review for compliance with requirements to refrain from accepting short sale order for threshold securities in which the member has aged fails unless the member borrows the securities being sold prior to execution
If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and proprietary sale transactions
If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and proprietary sale transactions
If the firm accepts, displays, and/or executes short sales in NMS securities other than on an exchange, procedures to ensure and review for compliance with the prohibitions on executing non-exempt short sales on a down tick if the price of the security decreases by 10% or more from the prior day's closing price
Other Trading Rules
Procedures to ensure and review for compliance with the prohibitions on trading or quoting during a trading halt in Nasdaq-listed, exchange-listed, or OTC equity security
Procedures to ensure and review for compliance with the requirements for the member to honor its quotes, refrain from "backing away" from its quotes and adequately staffing its trading desk
Procedures to help ensure and review for compliance with requirements related to locked and crossed markets, including:
If the member is an ADF participant, properly responding to "trade or move directed orders" during pre-opening trading
If the member enters quotes in ADF, refraining from entering a quote that would lock or cross an existing quote
If the firm enters quotes for OTC Equity securities in multiple real-time quotation systems, procedures to ensure and review for compliance with requirement to maintain identical quotes for a security in each system
If the firm will use FINRA systems, procedures to ensure and review for compliance with requirements to maintain the physical security of equipment to prevent the improper use of, or unauthorized entry of information into FINRA systems
Soft Dollar Accounts and Trading
If the firm provides "soft dollar" credits to customers, procedures to ensure and review for compliance with requirements related to this activity including:
(1) Preparing records that reflect which trades were executed by the member pursuant to agreements with customers to generate soft dollar credits
(2) Monitoring trades for which soft dollar credits are accrued to determine whether they were within the SEC-established safe harbor for agency transactions and riskless principal transactions reported as such in accordance with FINRA trade reporting rules
(3) If/When operating outside the SEC- established safe harbor, undertaking reasonable affirmative steps to verify that the member is operating in compliance with all applicable securities rules and regulations, and is not aiding or abetting violations by others
(4) Preparing records that reflect the cost/value of research or other services provided to customers that reduce/eliminate accrued soft dollar credits
(5) Monitoring research or services provided to ensure the items are within the SEC- established safe harbor
(6) Annual review of research analyst compensation
Order Audit Trail System (OATS)
Procedures to ensure and review for compliance with the requirement to synchronize the member's clock daily, prior to the open, and to monitor for intraday drift
Procedures to ensure and review for compliance with the requirement that reported OATS data is accurately and timely, whether reported by the firm or by a third party on the member's behalf
Procedures to review, correct, and re-submit data initially rejected by OATS
Procedures to ensure information reported to OATS is consistent with information submitted to a TRF and/or the ADF/TRACS
Procedures to ensure reported routed order identification numbers are consistent with the numbers received from the sending member
Other Rules
Procedures to ensure and review for compliance with the prohibitions on the improper sharing of material, non-public information (including information about pending orders) between the member's trading desk(s)
Procedures to ensure and review for compliance with the requirement to accurately prepare and maintain required books and records pertaining to the trading area(s)
Procedures to ensure and review for compliance with the prohibitions against accepting payment or other consideration, directly or indirectly, from an issuer, affiliate, or promoter thereof
Use of Multiple Market Participant Identifiers (MPIDs)
If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with use of each MPID in accordance with (i) the representations made when requesting supplemental MPIDs, and (ii) the requirements/ limitations related to the use of supplemental MPIDs
If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with limiting access of each MPID's user(s) to their own order/trading information and ensuring that order/trading information is not improperly shared between multiple MPID user(s)
If the firm proposes to use multiple MPIDs, procedures to ensure the member has incorporated activity conducted under all MPIDs into its supervisory system and procedures as needed (including but not limited to trade reporting, OATS, record keeping, Reg SHO, Reg NMS, and best execution obligations, based upon the activity for which the additional MPIDs are used
ATSs and ECNs
Procedures to ensure and review for compliance with the requirements to file Form ATS-R on a quarterly basis
Procedures to ensure and review for compliance with the requirement to protect subscribers' confidential trading information including, a) limiting information access to ATS employees responsible for operating the ATS or for compliance with applicable rules, and b) implementing standards to control ATS employees trading for their own accounts
Procedures to ensure and review for compliance with the prohibition on charging inconsistent fees
Procedures to monitor trading volume and determine whether the ATS has surpassed the "5% threshold" that would require it to comply with Reg ATS order display, execution access, and fair access requirements
Procedures to monitor trading volume and determine whether the ATS has surpassed the "20% threshold" that would require it to comply with the Reg ATS requirements for capacity, integrity, and security of automated system
If the firm proposes to be a "Reporting ECN" (as defined in FINRA Rule 7210A) that reports trades to a TRF, procedures to ensure and review for compliance with TRF reporting requirements in FINRA Rules 7230A and 7230B, 7230C, and 7330
If the ATS enters quotes in FINRA's ADF, procedures to ensure and review for compliance with the requirement to execute orders in excess of the ECN's displayed quote size, when displaying a quote based on a reserved size order
Policies and procedures pursuant to which the firm will review and approve applicants seeking to subscribe to the ATS
COMPLIANCE AREA ITEM TESTING NOTES DEFICIENCY STATUS STEP 1 CREATE A COMPLIANCE CALENDAR
FOR THE YEAR
General Administration
Form Filings Form BD (principal signature/date on updated/amended Form BD to evidence review and approval. Maintain in firm file.)
Form U4
Form U4: Updates/amendments to U4 reviewed and signed by registered individual + maintained in ee file
Form U4: Rep signs a new Pre-Arb Agreement that is then maintained in ee file every time a firm updates/amends the rep’s U4
Form U5: Filed within 30 days; copy placed in ee file
Form U5: Copy mailed to former employee (evidence the mailing and place in ee file)
Fingerprint Cards: Digital preferred, if hard copy do not send duplicates (firm will be charged per card submitted)
Designated Principal for supervision of form filings
Designation of Executive Rep (ensure e-mail address is current at all times)
Updates to Firm Contact System (review annually, at a minimum)
Payment of Regulatory Fees
MSRB: G-40 Updates
Business Continuity Plan
Business Continuity Plan Content of Plan
Include BCP/DR Call Tree (be sure to update with new hires throughout the year)
Approval of Plan
Testing of Plan
Personnel
Hiring
Create New Hire Checklist
Obtain signature from potential hire authorizing firm to conduct a background investigation
Investigation of Background (financial, criminal, qualifications, etc.)
Obtain authorizing signature from potential hire for firm to conduct a CRD review (Gateway review of prior U5, etc.)
Reference Check (prior employers); evidence this process
Screening for SD persons hired in clerical or ministerial positions
Create Job Offer Letter
Determine IT permissions, inform IT personnel
Determine qualifications of Supervisory Personnel; Assign Supervisor and update Supervisory Org Chart (and firm org chart)
Municipal securities personnel, including representatives, principals and apprentices
Registration of Trading Personnel
All associated persons are properly registered
Records for Associated Persons
IT: Assign electronic mail address to new hire
IT: Add new ee to email archiving system + email review rotation
IT: Add new ee to Cybersecurity Checklist
Continuing Education
Regulatory Element Monitor Reg Element Notices
Supervision of Inactive Associated Persons
Firm Element Needs Analysis (annually)
Written Plan (annually)
Monitor Firm Element Completion
Supervision of Associated Persons who do not complete Firm Element
Annual Compliance Meeting
Attendance Records - Ensure All Associated Persons attend
Annual Attestations Completed and Returned
Firm Supervision and Oversight
Employee Supervision Gifts and Gratuities
Non-Cash Compensation
Outside Business Activities
Private Securities Transactions
Accounts with Other BDs
Sharing in Customer Accounts
Borrowing and Lending between associated persons and customers
General Supervision
Supervision of Outsourcing Arrangements
Heightened Supervision
Supervision of Statutorily Disqualified Individuals
Use of Exception Reports and other Reports
CEO/CCO Annual Certification (Rule 3010)
Limited Size and Resources Exception (Rule 3012) – Notify FINRA
Review of Accounts and Correspondence
Correspondence Review Incoming
Outgoing
Faxes
Electronic Communications (emails, Ims, etc
Taping Rule Compliance
Account Reviews Review of Employee Transactions
Opening Accounts and transactions with persons associated with other BDs
Transaction involving FINRA Employees
Supervision of Municipal Securities Transactions (including 529 Plans)
Branch Supervision
Designation of Offices of Supervisory Jurisdiction (OSJs)
Branch Office Inspections
Activities on the Premises of a Financial Institution
Documentation regarding limited size and resources exemption
Conflicts of Interest with respect to inspections of branch and non-branch locations
Supervision of Branch Offices - Options Business
Insider Trading
Monitoring for Insider Trading
Periodically reviewing employee and firm trading
Criteria for investigating suspect trades
Require employees to sign attestation
Update employees on new or revised insider trading rules and regulations.
Definition of Material, Non-Public information, Insiders and other relevant terms
Policies and procedures on access to or utilization of material, non-public information
Tools and methods for inhibiting or monitoring transactions in restricted securities.
Procedures to detect transactions in restricted/control securities (Watch Lists, etc)
Securities Transactions for personal and family-related accounts
Chinese Wall Procedures
Method for determining whether firm trading should be restricted
Determining and identifying activities that are restricted while security is on list
Monitoring Associated Persons' trading of restricted securities
Time period covered and frequency of review
Recording details of associated persons' trade in restricted security
Creation and maintenance of documentation to evidence supervisory reviews
Anti-Money Laundering Program
AML Policies and Procedures Designate AML Contact Person
Written AML Compliance Program approved in writing by Senior Management
Establish and implement policies and procedures to detect and cause the reporting of suspicious transactions
Bank Secrecy Act policies and procedures
Independent testing of AML Compliance Program (annually)
On-going training of firm personnel
Customer Identification Program and verification of customers' identity
Determine whether customer appears on any list of known terrorists or terrorist organizations such as those listed on OFAC web site, as well as those on the list of embargoed countries/regions on the OFAC List
Responding to information requests from FinCEN concerning money laundering or terrorist financing, including how the firm will protect the security and confidentiality of the information requests
Sharing information with other financial institutions, if applicable (including requirement to provide annual sharing agreement to FinCEN)
Opening Correspondent Accounts
If firm does not open or maintain correspondent accounts for foreign banks, it must have internal controls implemented to detect any attempt to open such an account
If firm opens or maintains correspondent accounts for foreign banks:
Identify US agent for service of legal process
Identify owners of foreign banks
Provide information to federal law enforcement officers
Terminate correspondent relationship w/in 10 days of notice by the Treasury or AG that the firm failed to comply with summons or contested a summons
Due Diligence review for correspondent accounts of foreign financial institutions
Determine the identity of the nominal and beneficial account holder and the source of funds deposited into "private banking accounts" and to conduct enhanced scrutiny of accounts of a senior foreign political figure
If the firm does not open or maintain private banking accounts for non-US persons, have internal controls in place designed to detect any attempt to open such an account
Freeze accounts and prohibit transactions with persons who are suspected of terrorist activities pursuant to Executive Order #13224 that was issued through OFAC
If the firm prohibits the receipt of currency, procedures and internal controls to detect its receipt
Filing Currency Transaction Reports: Identify cash transactions for filing CTRs; Filing of CTRs; Verify the identity of customers for filing CTRs
Filing reports of international Transportation of Currency or Monetary Instruments
Filing reports of Foreign Bank and Financial Accounts
Obtaining all required information regarding the transmittal/retransmittal of wire transfers that includes the transmitter and recipient of funds
Verifying the identity of customers in connection with wire transfers
Procedures to detect and report suspicious transactions by filing Suspicious Activity Reports (SAR-SF)
Recordkeeping requirements (Currently a 5 year requirement)
EVIDENCE EVERYTHING
Communications with the Public
Advertising and Sales Literature (including email and web sites)
Cold Calling/Telemarketing Scripts
Institutional Sales Literature and Correspondence
Speaking Engagements; Scripts; Outlines; Media Participation; Chat Rooms
Sales Materials for Municipal Fund Securities; 529 Plans
Options Communications with the Public
Sales Literature Review
Disclosures to Customers
Customer Disclosure and Written Acknowledgment (Business on the premises of a financial institution)
Communications related to SIPC coverage
Material Event & Customer Complaint Reporting
Regulation SP requirement to provide initial, annual & revised privacy policy notice; description of how and when distributed to customers; administrative, technical & physical safeguard of information; testing of firewalls
Investor Educations
Mortgage-Backed Securities: risk disclosure
CMOs: risk disclosure
Delivery of Options Disclosure documents
10b-9 Disclosures
Designated Securities/Penny Stock Disclosures
Payment for Order Flow - Policies, Procedures and Disclosures to Customers
Disclosures for bank-affiliated broker- dealers; Not FDIC Insured; Price fluctuations, etc.
Disclosure in connection with new issues of municipal securities
Municipal securities, disclosures by issuer
Mark-up/Mark-down disclosures (confirmations, etc.)
General Supervision Prohibition against guarantees
Conduct and fair dealing; Fraud
Customer Information Controls
New Account Review and Approval
Verification of customer's background and financial information for options; maintenance of background information
Review/approval of new options accounts
Suitability
General Suitability
Conflicts of Interest
Hold Recommendations
Discretionary Accounts
Designated Securities/Penny Stocks
Direct Participation Programs - Review of subscription agreements
Identification of Sophisticated Municipal Market Professionals (SMMPs)
Minimum denomination amounts
Hedge Fund due diligence reviews
Due Diligence (public/private) review of prospective offerings and files
Powers of attorney/authority to act as agent on behalf of account/third party
Short sale recommendations
Suitability of solicited online transactions
Fees Charged to Customers
Fair pricing, commissions, fees charged to customers, markups (remember each of these stands alone for regulatory purposes, but are also reviewed in aggregate per client – two different reviews)
Transaction Review and Handling Customer Complaints
Complaints Reporting of Customer Complaints
Records of Written Customer Complaints
Options Complaints
Trade Review Unauthorized trading
Churning
Front Running
Excessive commissions/fees
Best Execution / Fair Pricing
Other transaction issues
Financial Reporting
FinOp Responsibilities FinOp's duties and responsibilities
FinOps registered with multiple firms
Notification of replacement of accountant (SEA Rule 17a-5(f)(3))
File annual audited financials + compliance or exemption report
Filing of FOCUS and Related Forms
Financial Reporting/Backup
Net Capital Computation
FOCUS II Report
Custody Report
SSOI Report
Inventory Report
OBS Report
FOCUS I
Handling of Customer Funds and Securities
Customer Protection Reserve Computation
Quarterly Box Count
Safekeeping and Segregation of Customer Securities
Handling of Funds and Securities
Error Procedures for handling customer funds received by fully- disclosed firms
Handling customer funds in general
Handling customer securities
Prohibition against improper use of customer funds and securities
Escrow Account Maintenance
Transmissions or maintenance of payments received in connection with underwritings
Proper investment of escrow funds
Receipt of cash
Receipt and reporting of cash or cash equivalents
Capital and Credit Regulation
Buy-In Procedures
Sell-Out Procedures
Short Sale Close-Out Procedures
Parking of securities for net capital
Parking of securities for manipulation
Repurchases/reverse repurchase transactions
Bonds borrowed and loaned transactions
Uniform Practice - Municipal Securities
Disclosure of firm balance sheets upon customer request
Margin
Margin requirements
Netting positions of accounts that are related or accounts under common control; Letter of authorization regarding guarantees/cross guarantees
Joint back office arrangements
Recordkeeping
Maintenance of Books and Records
Main Office
Branch Offices
36 Month Update of Customer Account Information
Order Tickets/Order Ticket Procedures (Time Stamping)
Confirmations
Instant Messaging and Electronic Communications
Municipal Books and Records to be created and preserved
Internal Controls
Account Transfers
Customer Account Transfers Contracts (ACATS)
Verification of customer signature to transfer account, change address, etc.
Branch Office Controls
Review of order entry and account access centers and customer account access at branch offices
Controls over branch office administrative and back-office functions
Clearing Firm Monitoring of Correspondents
Clearing Agreements (e.g. clearing firm forwarding complaints to introducing firms, etc.)
Customer Information Controls
Approval of account name or designation changes for orders
Risk Mitigation Trading Limits
Systems and Operations Controls
Signature guarantee requirements and proper execution
Information security measures (e.g., securing equipment, preventing entry of unauthorized orders, controls on system entitlements, limits on password sharing, administrative procedures to change passwords, audit trail for tracking changes in entitlements
Cybersecurity Checklist (keep current!)
Direct Participation Programs (Real Estate Syndicates; Oil & Gas Interests
Suitability Determinations and Reviews
Disclosure
Review of Subscription Agreements
General Supervisory Obligations Rollups
Organization and Offering Expenses
Review and determination of Fair and Reasonable DPP Expenses
Documentation for Evidencing Review
Secondary Market Trading Secondary Trading of DPP Shares
Trade Reporting of DPP Transactions
Fixed Income Securities
Municipal Securities Proper Registrations Maintained by Employees to Conduct Municipal Business
Municipal Advisor Activities + Documentation
Disclosures in Connection with Primary Offerings
Underwriting and transaction assessments payable to MSRB
Solicitation of municipal securities business
Primary offering prices
CUSIP numbers, New Issue and Market Information Requirements
Delivery of Investor Brochure
Delivery of investor brochure upon receipt of complaint/customer complaint brochure
Political Contributions
Documentation of Political Contributions by Municipal Market Professionals
Two Year Lookback for new MMPs
Filing of Form G37
Trade Reporting
Reporting of sales and purchases of municipal securities transactions
Municipal Securities Business
Use of ownership information obtained in Fiduciary or Agency Capacity
Customer suitability and fair pricing
TRACE
Participation, trade reporting, dissemination of information
Review of Report Cards
Investment Company Products
Mutual Funds
Sales Charges - Investment Company Products
Prospectus Delivery
Market Timing and late trading activities
Redemption procedures (Dealers only)
Selling dividends - limitations on disclosures
Fees charged to customers
Review of Customer Accounts
Breakpoints, Letters of Intent, Rights of Accumulation
Switching
Execution of investment company portfolio transactions; compensation, commissions, reciprocal activity
Options
Supervision
Maintenance of records - central log, index or file for options complaints
Supervision of Options Accounts
Adjustments to options contracts
Transaction Processing Allocation Procedures
Uncovered short option contracts
Position Limits/Exercise Limits
Reporting options positions
Position Limits Reporting Procedures
Cash and Margin Treatment for Certain Types of Options
Research
General Supervision
Research Analysts; Restrictions and Disclosure Obligations
Research Reports
Quiet Periods
Fixed Income Research
Underwriting and Private Placements
Private Placements Regulation A
Regulation D, Rules 501-506
Types of Offerings
Best Efforts and Private Placement (including procedures for contingent offerings)
PIPES - Private Investments in Public Equities (including monitoring for impermissible trading in PIPE issuers
Self Underwriting
Intrastate Offerings
Rule 144 Stock
Crypto + Tokens (securities)
Firm Commitment Charges
Communications with the public about variable life insurance and variable
annuities
Material Events Material Event Disclosures
Securities Registration Registration of Public Offerings
Misrepresentation as to registration
Syndicate Management
Restricted Period (Underwriting Activity Report
Filings required by Corporate Finance Department
Regulation M - Rules 101-105
Non Cash Compensation
Disclosure of affiliation with issuer or interest in distribution
Variable Products
General Supervision
Communications with the public about variable life insurance and variable annuities
Sales of Variable Products
Variable Annuities Sub Accounts
Fees
Riders
Suitability
Twisting (trading among mutual funds, insurance products and variable products)
1035 Exchanges
Replacements
Multiple Contract Sales
Trading and Trading Operations
Supervision
Designation of Principal(s) responsible for overall supervisory system and procedures
Designation of Principal(s) responsible for supervision of the trading area
Designation as an Office of Supervisory Jurisdiction (OSJ) of each location at which the order execution or market making functions are conducted
Designation of Principal(s) in each OSJ location at which order execution or market making occurs
Procedures to ensure personnel are properly registered as required by SRO Rules
Procedures to help ensure a reasonable effort is made to determine supervisory personnel are qualified by virtue of experience or training to execute assigned responsibilities
Order Handling
Order Routing
If the firm routes orders to another market center - procedures to ensure compliance and to review for compliance with the Disclosure of Order Routing Information Rule
Market Making
If the firm makes markets in covered securities - procedures to ensure compliance and to review for compliance with the Limit Order Display and Quote Dissemination Rules
For firms that make markets OTC in any exchange-traded security, but are not registered as market makers - procedures to monitor member's trading activity to determine whether it had traded over 1% of the quarterly volume of any exchange-traded security, thereby making the security a "subject security" and the member a "responsible broker-dealer that is required to communicate its beset bid, offer and size for each subject security to a national securities exchange or association.
NMS Stocks
If the firm is an exchange or OTC market maker in NMS securities - procedures to ensure quotations are not communicated to vendors for display on a terminal, unless the security if a subject security with respect to the market maker
If the firm is a market cent4r in NMS stocks - procedures to ensure compliance and review for compliance with the Disclosure of Order Execution Information Rule
Limit Orders
If the firm accepts limit orders - procedures to ensure compliance and to review for compliance with the Limit Order Protection Rules
Market Orders
If the firm accepts Market Orders - procedures to ensure compliance and to review for compliance with the Market Order Protection Rules
Best Execution
Procedures to ensure compliance and to review for compliance with the requirement to execute customer orders and orders for the customers of another broker-dealer at a price as favorable as possible under prevailing market conditions including:
Executing customer orders as principal
Execution of customer orders as principal after acquiring securities to fill the customer's order (i.e., riskless principal trading)
Execution of customer orders as agent
Execution of customer block-sized orders, "not-held" orders and customer orders with special pricing terms/conditions (e.g., VWAP, MOO, MDC, Capped)
If firm concurrently handles multiple orders subject to time/price trading discretion (e.g., "not held", "working", VWAP, etc.) establishing a process to ensure best execution obligations are met with respect to all orders and that shares are allocated to concurrently open orders in a fair and non-discriminatory manner
Execution of orders routed to and executed by other parties, based on order-by-order routing decisions made by the firm (a/k/a Regular and Rigorous Reviews)
Policies and procedures against adjusted trading
Reallocation of trades/Allocation methodology and procedures
If the firm trades OTC equity securities - procedures to ensure compliance and to review for compliance with the requirements to ascertain the best interdealer market by obtaining and documenting quotations (a/k/a "3- Quote Rule"
Anti-Intimidation/Coordination
Procedures to prevent and detect the occurrence of prohibited trading practices including: i) the coordination of quotes, trades, or trade reports with another member through "price/size convention", ii) requesting another member to alter or maintain a price or quote, iii) display of quotes in order to orchestrate artificial price movements, iv) the display of quotes with no intention of trading at the quoted prices, v) display of quotes in order to help another member execute trades, vi) delay of trade reports for the benefit of the member or another party, vii) engaging in any other activity, which improperly benefits the member or other members at the expense of customers
Procedures to prevent and detect the occurrence of prohibited conduct including threatening, coercion, or intimidation to improperly influence another person or member including:
i. Refusals to honor firm quote obligations or to trade with other members, especially in a selective/ discriminatory fashion
ii. Executing orders in a manner intended to harass or annoy another member
iii. Reporting harassment in instances in which threats or attempts at coercion have been received
iv. Educating personnel as to what constitutes improper conduct
Trade Reporting
If the firm reports trades through a TRF, procedures to ensure compliance and review for compliance with requirements to report trade accurately and timely
If the firm reports trades through ADF/TRACS, procedures to ensure and review for compliance with requirements to report trades accurately and timely
Procedures to ensure and review for compliance with TRF and/or ADF/TRACS requirements regarding:
1) The proper use of trade modifiers (e.g., .PRP, .SLD, .T, .W, etc.) when required, and refraining from use when not required.
2) Reporting Riskless Principal Trades
3) Accepting trades reported by another member (or entering a matching trade) in a timely manner
If another member or third-party reports trades on the firm's behalf (under an AGU, A2, QSR, or otherwise), procedures to ensure trades have been accurately reported on the member's behalf.
Sale Transactions
Procedures to ensure and review for compliance with requirements to (i) properly determine whether a sale is long or short, and (ii) mark the member's order records accordingly, as "long," "short," or "short exempt."
If the firm will utilize aggregation of units, procedures to ensure the member's organization plan qualifies for independent trading unit aggregation, that each unit engages only in its specified trading strategies and that trading units do not coordinate strategies with each other.
Procedures to ensure and review for compliance with requirements to locate (or arrange to borrow) securities being sold prior to execution
Procedures to ensure and review for compliance with requirements to refrain from accepting short sale order for threshold securities in which the member has aged fails unless the member borrows the securities being sold prior to execution
If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and
proprietary sale transactions
If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and proprietary sale transactions
If the firm accepts, displays, and/or executes short sales in NMS securities other than on an exchange, procedures to ensure and review for compliance with the prohibitions on executing non-exempt short sales on a down tick if the price of the security decreases by 10% or more from the prior day's closing price
Other Trading Rules
Procedures to ensure and review for compliance with the prohibitions on trading or quoting during a trading halt in Nasdaq-listed, exchange-listed, or OTC equity security
Procedures to ensure and review for compliance with the requirements for the member to honor its quotes, refrain from "backing away" from its quotes and adequately staffing its trading desk
Procedures to help ensure and review for compliance with requirements related to locked and crossed markets, including:
If the member is an ADF participant, properly responding to "trade or move directed orders" during pre-opening trading
If the member enters quotes in ADF, refraining from entering a quote that would lock or cross an existing quote
If the firm enters quotes for OTC Equity securities in multiple real-time quotation systems, procedures to ensure and review for compliance with requirement to maintain identical quotes for a security in each system
If the firm will use FINRA systems, procedures to ensure and review for compliance with requirements to maintain the physical security of equipment to prevent the improper use of, or unauthorized entry of information into FINRA systems
Soft Dollar Accounts and Trading
If the firm provides "soft dollar" credits to customers, procedures to ensure and review for compliance with requirements related to this activity including:
(1) Preparing records that reflect which trades were executed by the member pursuant to agreements with customers to generate soft dollar credits
(2) Monitoring trades for which soft dollar credits are accrued to determine whether they were within the SEC-established safe harbor for agency transactions and riskless principal transactions reported as such in accordance with FINRA trade reporting rules
(3) If/When operating outside the SEC- established safe harbor, undertaking reasonable affirmative steps to verify that the member is operating in compliance with all applicable securities rules and regulations, and is not aiding or abetting violations by others
(4) Preparing records that reflect the cost/value of research or other services provided to customers that reduce/eliminate accrued soft dollar credits
(5) Monitoring research or services provided to ensure the items are within the SEC- established safe harbor
(6) Annual review of research analyst compensation
Order Audit Trail System (OATS)
Procedures to ensure and review for compliance with the requirement to synchronize the member's clock daily, prior to the open, and to monitor for intraday drift
Procedures to ensure and review for compliance with the requirement that reported OATS data is accurately and timely, whether reported by the firm or by a third party on the member's behalf
Procedures to review, correct, and re-submit data initially rejected by OATS
Procedures to ensure information reported to OATS is consistent with information submitted to a TRF and/or the ADF/TRACS
Procedures to ensure reported routed order identification numbers are consistent with the numbers received from the sending member
Other Rules
Procedures to ensure and review for compliance with the prohibitions on the improper sharing of material, non-public information (including information about pending orders) between the member's trading desk(s)
Procedures to ensure and review for compliance with the requirement to accurately prepare and maintain required books and records pertaining to the trading area(s)
Procedures to ensure and review for compliance with the prohibitions against accepting payment or other consideration, directly or indirectly, from an issuer, affiliate, or promoter thereof
Use of Multiple Market Participant Identifiers (MPIDs)
If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with use of each MPID in accordance with (i) the representations made when requesting supplemental MPIDs, and (ii) the requirements/ limitations related to the use of supplemental MPIDs
If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with limiting access of each MPID's user(s) to their own order/trading information and ensuring that order/trading information is not improperly shared between multiple MPID user(s)
If the firm proposes to use multiple MPIDs, procedures to ensure the member has incorporated activity conducted under all MPIDs into its supervisory system and procedures as needed (including but not limited to trade reporting, OATS, record keeping, Reg SHO, Reg NMS, and best execution obligations, based upon the activity for which the additional MPIDs are used
ATSs and ECNs
Procedures to ensure and review for compliance with the requirements to file Form ATS-R on a quarterly basis
Procedures to ensure and review for compliance with the requirement to protect subscribers' confidential trading information including, a) limiting information access to ATS employees responsible for operating the ATS or for compliance with applicable rules, and b) implementing standards to control ATS employees trading for their own accounts
Procedures to ensure and review for compliance with the prohibition on charging inconsistent fees
Procedures to monitor trading volume and determine whether the ATS has surpassed the "5% threshold" that would require it to comply with Reg ATS order display, execution access, and fair access requirements
Procedures to monitor trading volume and determine whether the ATS has surpassed the "20% threshold" that would require it to comply with the Reg ATS requirements for capacity, integrity, and security of automated system
If the firm proposes to be a "Reporting ECN" (as defined in FINRA Rule 7210A) that reports trades to a TRF, procedures to ensure and review for compliance with TRF reporting requirements in FINRA Rules 7230A and 7230B, 7230C, and 7330
If the ATS enters quotes in FINRA's ADF, procedures to ensure and review for compliance with the requirement to execute orders in excess of the ECN's displayed quote size, when displaying a quote based on a reserved size order
Policies and procedures pursuant to which the firm will review and approve applicants seeking to subscribe to the ATS
Sample - New Hire Checklist
Check off each item below when documentation is in the file or task has been completed.
DOH:
Employee Name (new hire)
________________________
CRD #
Principal Reviewer (Sign and Date when all items have been completed.)
Pre-Hire (assigned to: _________________)
Sent Rcvd
CRD Pre-Hire Authorization Form / Review
Background Investigation Authorization Form / Review
Employee Information Form Enter Employee Information into Employee Database
Compliance (assigned to: ___________________)
Sent Rcvd
Outside Brokerage Accounts
Private Securities Transactions
Outside Business Activities
Fixed Income Trading In Personal Accounts Policy
Insider Trading Memorandum and Policy
Gifts & Gratuities and Expense Reporting Policies
Technology Use Policies
BIG - Fingerprint (website link for ee to schedule their appt.)
U4 Review and signature for new filing Pre-dispute Arbitration Acknowledgment
Human Resources (assigned to: _________________)
Sent Rcvd
Job Offer Letter (fully executed)
Confidentiality and Employment Agreement (fully executed)
Employee Manual delivered and acknowledgement received
Insurance Plan Summaries delivered to new hire (enrollment or waiver received by H/R: medical, dental/vision) 401(k) Plan Summary and Enrollment Forms
Trading Related (assigned to: __________________)
Sent Rcvd
Trading Policies & Procedures Manual given and acknowledgement received New Accounts Manual given and acknowledgement received
Accounting-Related Tasks (assigned to: ______________)
Sent Rcvd
W-4 I-9 = Employee Ineligibility Verification
Direct Deposit paperwork completed and returned (for payroll)
New Hire Checklist Check off each item below when documentation is in the file or task has been completed.
Information Technology (assigned to: _________________)
Completed
Order and install computer system and two monitors (standard) Order phone, if necessary
Order and set up Bloomberg (add user name to master file)
Install VPN on new hire workstation (add user name to master file)
Email set-up (add user name to master file for email archiving/review)
Add new hire to intra-company email distribution lists
Set new hire up on trading platform (add user name to master file)
Send system report access authorization level information to IT
Add new hire to disaster recovery website
________________ Add new hire/equipment to Cybersecurity Worksheet/Program
Website – (assigned to: _______________)
Completed
Contact Marketing Department to write new employee bio Make appointment for employee to have photo taken for website
Add employee to website (photo, bio/contact info, link to BrokerCheck)
Post press release to the website, if applicable
Accounting (assigned to: ________________)
Completed
Set up new hire in expense reporting system
Compliance (assigned to: _____________________)
Completed
Review prior U5 filing (evidence review) Assign new hire to a principal and office, add to Supervisory Org Chart
Other (assigned to: __________________)
Completed:
Add new hire to BCP/DR Call Tree Set-up email address on email archiving system
Set up new hire at Clearing Company (Rep # / Branch Assignment)
Add new hire to the Employee Listing (internal doc containing info on all ee’s)
Add new hire to Org Chart
Order business cards
Send internal request forms to new hire (ex: new account forms, PTO/Vacation)
Set up Office Access for new hire: office key, building pass, etc. (if applicable)
Other (assigned to: _________________________)
Completed:
Account Assignment package, signed off and shared with team/company
Announce new hire (internal announcement)
Publish press release to BusinessWire, if applicable