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ACA Broker-Dealer Newsletter
DECEMBER 2013
“Minor violations that are overlooked or ignored can feed bigger ones, and,
perhaps more importantly, can foster a culture where laws are increasingly
treated as toothless guidelines. And so, I believe it is important to pursue even
the smallest infractions.”
– Mary Jo White, Chairman, SEC; Securities Enforcement Forum, October 9, 2013
Broker-Dealer Compliance Reminders
As 2013 quickly comes to a close, it is important for brokerdealers to keep upcoming regulatory deadlines in mind.
Here are some important ones to mark on your compliance
calendars.
• FINRA Renewal Program – Broker-dealers should
now be reviewing their firm, registered representative,
and branch office registrations for accuracy. Note that
firms can submit post-dated Forms U5, Forms BDW,
and Form BR amendments. All post-dated forms must
be dated December 31, 2013.
• Continuing Education (“CE”) Firm Element (FINRA
Rule 1250(b)) – Each broker-dealer must prepare a
written CE training analysis and plan for its covered
registered persons. The plan must be reviewed annually
at a minimum to ensure its appropriateness for the
member’s size, organizational structure, and scope of
business activities, as well as regulatory developments
and the performance of covered registered persons in
the CE Regulatory Element.
• Annual Compliance Meeting (NASD Rule 3010(a)
(7)) – Broker-dealers must conduct an annual meeting
or interview with all of their registered representatives
and principals each year. In addition, they must maintain evidence of attendance for these individuals.
• FINRA Entitlement Certifications – Each year,
FINRA identifies a 30-day period during which the
Super Account Administrators of the broker-dealer
must certify their current users’ access.
• FINRA Contact System (“FCS”) Update (NASD
Rule 1160) – Firms must verify their FCS (CONTINUED)
INSIDE THIS ISSUE
Broker-Dealer Compliance Reminders �� 1
Municipal Advisor Registration Requirements �� 3
In Case You Missed It �� 6
ACA Events �� 7
Regulatory Notices, Updates, and Rule Changes �� 7
Important Dates�� 8
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contact information no later than 17 business days after
the end of each calendar year.
• Supplemental Statement of Income (“SSOI”)
(FINRA Rule 4524) – Each firm must file an SSOI
within 20 business days of the end of each calendar
quarter, which falls three days after the FOCUS report
due date. The required filing date for the quarter ending
December 31, 2013 will be January 30, 2014.
• Annual Audit (Exchange Act Rule 17a-5) – FINRA
member firms must file an Annual Audited Report no
later than 60 calendar days after their fiscal year end
date.
• Annual Privacy Notice (Regulation S-P and
Regulation S-AM) – Each firm subject to
Regulation S-P must distribute privacy notifications to
its customers and consumers when accounts are opened
and annually thereafter. Firms that share information
with an affiliate for marketing purposes must distribute
opt-out notices to prospects and customers.
• Fidelity Bond Review (FINRA Rule 4360) – Firms
must review the adequacy of their fidelity bond coverage
each year as of the anniversary date of the issuance of
the bond.
• Direct Market Access (Exchange Act Rule 15c3-5) –
Broker-dealers that provide customers with direct market
access or have direct market access must review their
market access business activity annually. Each firm’s
Chief Executive Officer (or an equivalent officer) must
also certify that the firm’s risk management controls and
supervisory procedures comply with Rule 15c3-5.
• Branch Office Inspections (FINRA Rule 3010(c)
(1)) – Broker-dealers must maintain an office location
inspection schedule as part of their books-and-records
requirements. The inspection schedule should be
reviewed for accuracy and the completion of scheduled
inspections annually at a minimum.
• Outsourcing Arrangements (NASD Rule 3010 & RN
11-14) – As part of their supervisory procedures, firms
must conduct due diligence for current and prospective third-party service providers. These reviews can be
DECEMBER 2013
evaluated as part of the annual NASD Rule 3012 supervisory control system testing.
• Annual Compliance Reviews (NASD Rules 3010(c)
and 3012(a)(1)) – Once per year, FINRA member
broker-dealers must conduct a compliance review
of their business activities and test their supervisory
controls. In addition, they must prepare an annual
report for the board of directors and/or audit committee
detailing the results of this review and testing. They
must also complete the CEO certification and CEO/
CCO meeting described below.
−− CEO Certification (FINRA Rule 3130) – Brokerdealer CEOs must certify each year that their firms
have processes in place to establish, maintain, review,
test, and modify written compliance policies and
written supervisory procedures reasonably designed
to achieve compliance with applicable rules and
laws. This certification must be completed on or
prior to the anniversary date of the previous year’s
certification. The regulatory expectation is that the
certification’s execution date will fall within 45 days of
submitting the annual report to management.
−− CEO/CCO Annual Meeting – Rule 3130 also
requires broker-dealer CEOs and CCOs to meet at
least once each year to (i) discuss and review the matters set out in the annual compliance review report
and CEO certification, (ii) discuss and review their
firm’s compliance efforts as of the date of such meetings, and (iii) identify and address significant compliance problems and plans for emerging business areas.
These meetings should be documented as part of the
broker-dealer’s books and records.
• Anti-Money
Laundering Independent Testing
(FINRA Rule 3310(c)) – Anti-money laundering
programs must provide for annual (on a calendar-year
basis) independent testing unless the member does not
execute transactions for customers or otherwise hold
customer accounts or act as an introducing broker with
respect to customer accounts (i.e., the member engages
solely in proprietary trading or conducts (CONTINUED)
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business only with other broker-dealers). Firms that do
not require annual testing must complete independent
testing every two years.
DECEMBER 2013
If you have questions or would like more information on
these requirements, please follow the links provided above
and/or contact your ACA consultant or Dee Stafford.
Municipal Advisor Registration Requirements
The final municipal advisor registration requirements
adopted by the U.S. Securities and Exchange Commission
(“SEC” or “Commission”) and outlined in SEC Rule
Release No. 34-70462 (“Release”) seek to clarify the
circumstances under which broker-dealers have to register
as municipal advisors. Broker-dealers want clear guidelines
on the types of “advice” that would require registration
as a municipal advisor. The SEC has provided
further guidance on such advice but chose not to include a
“bright-line” definition. Instead, it adopted Exchange Act
Rule 15Ba1-1(d)(1)(ii) (“Rule”), which explains that such
advice does not include, among other things, the
or the issuance of municipal securities, including with respect to the structure, timing, terms,
and other similar matters concerning such financial products or issues, based on all the facts and
circumstances.
The last part of this statement deserves attention because
it indicates the SEC believes advice that requires registration can be construed broadly and that certain activities
may be deemed to be such advice depending on individual
facts and circumstances.
(CONTINUED)
provision of general information that does not
involve a recommendation regarding municipal
financial products or the issuance of municipal securities, including with respect to the structure, timing,
terms, and other similar matters concerning such
financial products or issues.
The Release also notes that educational materials would
not constitute advice for purposes of the Rule, provided
the materials contain general information only.
•
•
•
The SEC makes clear, on the other hand, that the Rule does
not exclude information that involves a recommendation
for municipal financial products or municipal securities
issuances. As the Release states, such advice includes
a recommendation that is particularized to the
specific needs, objectives, or circumstances
[emphasis added] of a municipal entity or obligated
person with respect to municipal financial products
•
•
Supervisory Control Testing
AML Independent Testing
Compliance Program Review
Compliance Calendar Gap Analysis
Trading Review
For more information: Dee Stafford,
[email protected]
acacompliancegroup.com
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As an aid to broker-dealers, the Release includes several definitions critical to identifying whether municipal
advisor registration is required. These include definitions
of a “municipal entity,” an “obligated person,” “municipal
financial products,” and “municipal derivatives.”
The Release discusses municipal securities issuances as
well, which holds particular relevance for broker-dealers
acting as underwriters of municipal securities. Indeed, of
the statutory exclusions from the municipal advisor definition, the one most watched for by broker-dealers was the
underwriter exclusion. As the Release states,
if a broker, dealer, or municipal securities dealer is
serving as an underwriter of a particular issuance
of municipal securities, the underwriter exclusion
would include advice provided by that underwriter
within the scope of underwriting and would generally include advice with respect to the structure,
timing, terms, and other similar matters concerning
that issuance of municipal securities.
The Release points out that, in order for a broker-dealer
to fall within the underwriter exclusion with respect to
a municipal securities issuance, the underwriting must
involve a particular transaction—for example, a contractual engagement to serve as underwriter on a specific
planned transaction for such an issuance. In contrast, a
relationship where a municipal entity engages a brokerdealer to serve as underwriter for an open-ended period
or an engagement that does not specify the broker-dealer’s
assignment to serve as underwriter on one or more particular planned transactions would not fall under the underwriter exclusion. The Release does point out, however, that
in such cases broker-dealers may be able to rely on other
exemptions, such as those for responses to Requests for
Proposals (“RFPs”) and Requests for Quotations (“RFQs”).
In addition to this guidance, the Release provides helpful
examples of what falls within or outside the underwriter
DECEMBER 2013
exclusion. Specifically, the SEC considers the following
activities, identified by commenters, to be within the scope
of the underwriting exclusion:
• Providing advice regarding the structure, timing, terms,
and other similar matters concerning a particular municipal securities issuance (except as otherwise defined in the
Release as being outside the scope of an underwriting)
• Preparing rating strategies and presentations related to
the issuance being underwritten
• Helping prepare and assisting with investor “road shows”
and investor discussions related to the issuance being
underwritten
• Providing advice regarding retail order periods and institutional marketing if the municipal entity has decided
to engage in a negotiated sale
• Assisting with preparation of preliminary and final
official statements for municipal securities
• Assisting with closing a municipal securities issuance,
including participating in negotiations and discussions
regarding the documents, certificates, and opinions
needed for the closing
• Coordinating on obtaining CUSIP numbers and registering the municipal securities issuance with the bookentry-only system of the Depository Trust Company
• Preparing post-sale reports for municipal securities
• Structuring the escrow cash flow requirements necessary
to terminate and refund a municipal securities issuance
provided that the recommendation and brokerage of
particular municipal escrow investment is outside the
underwriting exclusion’s scope
In contrast, the Commission considers the following
activities, also identified by commenters, to be outside the
scope of the underwriting exclusion:
• Providing advice on investment strategies
• Providing advice on municipal derivatives (including
derivative valuation services)
• Providing advice on the sales method (competitive or
negotiated) a municipal entity should use for a municipal securities issuance
(CONTINUED)
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•
•
•
•
•
•
•
•
•
Providing advice on whether a governing body of a
municipal entity or obligated person should approve or
authorize a municipal securities issuance
Providing advice on a bond election campaign
Providing advice not specific to a particular municipal
securities issuance on which a person serves as underwriter and that involves analysis or strategic services
with respect to overall financing options, debt capacity
constraints, debt portfolio impacts, analysis of effects of
debt, or expenditures under various economic assumptions or with respect to other impacts of funding or
financing capital projects or working capital
Assisting issuers with competitive sales activities,
including bid verifications, true interest cost (TIC)
calculations and reconciliations, verifications of bidding
platform calculations, and preparation of sales notices
Preparing financial feasibility analyses with respect to
new projects
Assisting with budget planning and analyses and budget
implementation issues with respect to debt issuance and
collateral budgetary impacts
Providing advice on an overall rating strategy not related
to a particular municipal securities issuance on which
a person serves as an underwriter, including providing
advice and taking action on behalf of a municipal entity
or obligated person between financing transactions
Providing advice on overall financial controls not related
to a particular municipal securities issuance on which a
person serves as an underwriter
Providing advice regarding the terms of RFPs or RFQs
for selecting underwriters or other professionals for
project financing and advice on reviewing responses to
such requests, including matters regarding the compensation of such underwriters or other professionals
A common question asked by commenters was whether
post-offering work performed by an underwriter would
qualify for the underwriter exclusion. The SEC’s response
is that this would be considered a municipal advisory
activity unless it involved a request for information or
DECEMBER 2013
services that would have been provided as part of the
underwriting or was required for an underwriter to fulfill
its regulatory obligations. When an issuance has closed
and the underwriting period has terminated, on the other
hand, a broker-dealer cannot be considered to be acting
as an underwriter with respect to a municipal securities
issuance.
While the statutory exemption involving municipal
securities underwriting activities is a key area for brokerdealers to understand, it is not the only one they should
scrutinize. For example, the definition of municipal advisor in Exchange Act Section 15B(e)(4) includes persons
who undertake solicitations of municipal entities or obligated persons on behalf of specified persons. Numerous
broker-dealers engage in solicitation activities, and as a
result, solicitors should review the definition of “solicitation of a municipal entity or obligated person.” Note that
there are certain exclusions in this area. For instance,
a broker-dealer soliciting on its own behalf or that of an
affiliate would generally not fall under this definition.
In general, however, any third-party solicitor that seeks
business on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser from a
municipal entity must register as a municipal advisor.
The Release also provides guidance on the following
broker-dealer activities with regard to the municipal
advisor definition:
• Acting as a placement agent for a pooled investment
vehicle that is not a municipal entity (e.g., a hedge fund)
and that “solicits” a municipal entity to invest in the
fund does not meet the statutory definition of municipal
advisor.
• Acting as a private placement agent offering securities
of a municipal entity or obligated person would generally not be considered a municipal advisory activity if
the facts and circumstances indicate that this activity
is within the scope of the underwriting of a particular
municipal securities issuance.
(CONTINUED)
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•
Acting as a dealer-manager for a tender offer or an
exchange offer would generally not be considered a
municipal advisory activity.
In addition, a remarketing agent acting only in its capacity
as a remarketing agent would generally not be considered a
municipal advisor. (If the remarketing constitutes a primary
offering, then the remarketing agent would need to determine if an exemption or exclusion from registration applies
to its activities.)
Finally, the Release emphasizes that a broker-dealer that
effects a transaction that it has not recommended will not
be considered a municipal advisor with respect to such
activity. Note, however, that the Release states that the
sale of a security to a municipal entity or obligated person
DECEMBER 2013
would constitute a municipal advisory activity if
• the monies used to purchase the security are proceeds of
municipal securities, and
• in executing the transaction, the broker-dealer also recommended the investment or otherwise offered advice
to the municipal entity or obligated person about which
securities to purchase or sell.
In summary, we urge broker-dealers to review the Release
in detail and then assess whether any current activities
require municipal advisor registration. They should also
note that Exchange Act Rules 15Ba1-1 through 15Ba18, Rule 15Bc4-1, and Forms MA, MA-I, MA-W, and
MA-NR become effective 60 days after publication in the
Federal Register and that the effective dates for compliance,
which begin on July 1, 2014, will be staggered.
In Case You Missed It…
Changes to Financial Reporting
As noted in our September 2013 ACA Broker-Dealer
newsletter, on July 31, 2013, the SEC adopted amendments
to Rule 17a-5, “Reports to be Made by Certain Brokers
and Dealers,” under the Exchange Act. The amendments
focus on additional reporting on custody of customer funds
and securities. On the same day, the Commission also
announced revisions to several financial responsibility
rules. While the majority of those changes affect carrying
broker-dealers, several apply to all broker-dealers.
The Rule 17a-5 amendments added three new major
requirements:
• Compliance Report: Broker-dealers with custody of
customer funds or securities must verify annually that
they safeguard those funds and securities and comply
with net capital and statement delivery requirements.
These compliance reports must be examined by an independent certified public accountant (“CPA”) registered
with the Public Company Accounting Oversight Board
(“PCAOB”). The reports will be due for the fiscal year
ending June 2014 and thereafter.
• Exemption Report: Broker-dealers that do not have
custody of customer assets and operate under an exemption from Exchange Act Rule 15c3-3 during the full
fiscal year must prepare an annual report reaffirming
their compliance with the applicable exemption. These
annual reports must also be examined by an independent, PCAOB-registered CPA. The reports will first be
filed for fiscal years ending June 2014 and thereafter.
• Form Custody: Under the amendments, all brokerdealers must file a Form Custody each quarter within
17 business days of the quarter’s end with their designated examining authority (e.g., FINRA). In the new
form, firms must respond to nine questions regarding
custody of customer funds and securities. The first Form
Custody filing is for the fourth quarter of 2013, which
means the form will be due by January 27, 2014.
(CONTINUED)
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Broker-dealers should also note the following Rule 17a-5
reporting amendments:
• Firms must now submit annual audits to the Securities
Investor Protection Corporation (“SIPC”) in addition
to the SEC and FINRA. This requirement takes effect
with the audits for the fiscal year ending December 31,
2013.
• All broker-dealers must update the designation of
accountant information required by Exchange Act Rule
17a-5(f)(2).
• All broker-dealers must allow the SEC or another
self-regulatory organization such as FINRA to review
independent CPA work papers upon written request for
examination purposes.
DECEMBER 2013
•
The Compliance Report may satisfy the written internal
control report requirement of Rule 206(4)-2 under the
Investment Advisers Act of 1940 and must be prepared
by an accountant subject to PCAOB inspection.
As yet, FINRA has not indicated which of the above
filings must be submitted via its Firm Gateway system.
Broker-dealers should monitor FINRA announcements,
update their written supervisory procedures to address the
new filing requirements, and mark their calendars for the
deadlines.
ACA Events
Broker-Dealer Roundtables
ACA’s 2014 Compliance Conferences
Miami, FL – February 11, 2014
St. Louis, MO – March 11, 2014
Boston, MA – April 30, 2014
New York, NY – May 13, 2014
Denver, CO – May 22, 2014
Chicago, IL – June 24, 2014
Orlando, FL – March 26-28, 2014
San Diego, CA – October 8-10, 2014
FINRA Conferences
Fixed Income Conference
March 11, 2014
Annual Conference
May 19-21, 2014 • Washington, DC
Regulatory Notices, Updates, and Rule Changes
FINRA
November 2013
13-40 SEC Approves Amendments to Discovery Guide
Used in Customer Arbitration Proceedings to Address
Electronic Discovery, Product Cases and Affirmations;
Effective Date: December 2, 2013
13-39 SEC Approves Amendments to FINRA Rule 2360
(Options) and FINRA Rule 4210 (Margin Requirements)
in Connection With Over-the-Counter Options Cleared
by the OCC; Effective Date: November 7, 2013
13-38 FINRA and ISG Extend Effective Date for Certain
Electronic Blue Sheet Data Elements; Effective Date:
May 1, 2014
(CONTINUED)
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13-37 Broker-Dealer, Investment Adviser Firm, Agent and
Investment Adviser Representative, and Branch Renewals
for 2014; Payment Deadline: December 13, 2013
DECEMBER 2013
MSRB Rules G-11, G-8 and G-32 to Include Provisions
Specifically Tailored for Retail Order Periods
August 2013
October 2013
13-36 FINRA Revises the Investment Company and
Variable Contracts Products Representative (Series 6)
Examination Program; Implementation Date: December
16, 2013
13-35 SEC Approves Amendments to TRACE Rules
and Dissemination Protocols to Disseminate Rule 144A
Transactions in TRACE-Eligible Securities and Related
Fees; Effective Date: June 30, 2014
13-34 FINRA Requests Comment on Proposed Funding
Portal Rules and Related Forms; Comment Period
Expires: February 3, 2014
13-33 Securities Industry/Regulatory Council on
Continuing Education Issues Firm Element Advisory
Update
13-32 SEC Approves Amendments to FINRA Rule
9217 to Include Additional Rule Violations Eligible for
Disposition under FINRA’s Minor Rule Violation Plan;
Effective Date: September 26, 2013
September 2013
13-31 FINRA Highlights Examination Approaches,
Common Findings and Effective Practices for Complying
With its Suitability Rule
13-30 SEC Approves Amendments to Customer
Arbitration Code to Simplify Panel Selection in Cases
With Three Arbitrators
MSRB 2013-19 Request for Comment on Proposed Rule
Change to Consolidate Registration Requirements
FINCEN
11/18/2013 Treasury International Capital Data for
September
11/14/2013 Treasury Designates Cartel Security Boss
and His Company
11/08/2013 Treasury Department Announces $49.3
Million in Proceeds from Pricing of
Auctions of Preferred Stock of Seven
Financial Institutions
11/06/2013 Report to the Secretary of the Treasury
from the Treasury Borrowing Advisory
Committee of the Securities Industry and
Financial Markets Association
11/06/2013 Treasury Assistant Secretary for Financial
Markets Matthew Rutherford November
2013 Quarterly Refunding Statement
11/04/2013 Treasury Announces Marketable Borrowing
Estimates
11/04/2013 Treasury Department Announces Auctions
for Preferred Stock of Seven Financial
Institutions
10/31/2013 Treasury Announces Intent to Sell Preferred
Stock
MSRB
September 2013
MSRB 2013- 20 SEC Approves Amendments to
10/31/2013 Report on U.S. Portfolio Holdings of Foreign
Securities at End-Year 2012
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DECEMBER 2013
Important Dates
2013 Annual Audit Filings
SSOI Filings
Fiscal Year
End Due Date
Quarter Ending
Due Date
October 31, 2013 November 30, 2013
December 31, 2013
December 30, 2013
January 29, 2014
March 1, 2014
December 31, 2013
January 30, 2014
2013 Quarterly FOCUS Part II/IIA Filings
Quarter Ending
Due Date
December 31, 2013
January 27, 2014
2013 Monthly/Fifth FOCUS Part II/IIA Filings
Period Ending
Due Date
November 30, 2013 December 24, 2013
Annual Schedule I Filings
Period
Due Date
2013 January 27, 2014
2013 4530/Customer Complaint Filings
Quarter Ending
Due Date
Fourth Quarter 2013
January 15, 2014
2013 Short Interest Reporting Deadlines
Settlement Date
Due Date
Exchange Receipt Date
November 29
December 13
December 31
December 3 – 6 p.m.
December 17 – 6 p.m.
January 3 – 6 p.m.
December 10
December 24
January 10
ACA Compliance Group’s Broker-Dealer Services Division provides broker-dealers
with regulatory compliance expertise designed to satisfy the needs of any type of firm.
ACA’s services include development of compliance programs, trading reviews,
supervisory control and anti-money laundering testing, assistance with written
supervisory procedures, initial and continuing help with membership applications,
and customized regulatory and compliance consulting.
Please contact Dee Stafford at 310-322-8840 or [email protected] for information on the
initial and ongoing assistance ACA can provide with regard to meeting compliance requirements consistently.
ACA Compliance Group Broker – Dealer Services
589 8th Avenue, 22nd Floor
New York, NY 10018
www.acacompliancegroup.com
Nothing herein should be construed as legal advice or as a legal opinion for any particular situation. ACA makes no representations
about the accuracy of the information contained herein or its appropriateness for any given situation.
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