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Broker-Dealers: Let’s Talk Turkey – Don’t Get “Carved” Up By Year End Requirements

Broker-Dealers: Let’s Talk Turkey – Don’t Get “Carved” Up By Year End Requirements

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November 14, 2017

As we approach the Thanksgiving Holiday, the end of 2017 will be here before we know it! As former Chief Compliance Officers, CRC completely understands year-end pressures for FINRA registered broker-dealers and the need/importance of executing and completing mandatory annual Compliance requirements.

Over the last several years, we’ve helped many Broker-Dealers complete each of the discrete tasks identified below. Additionally, we have helped many broker-dealers through their cycle exams in 2017 and have a very clear understanding of FINRA’s hot-button items, which continue to include Cyber-Security, Outside Business Activities, and Business Resiliency.

Increasingly, more and more firms are turning to external third parties to conduct year-end reviews. It eliminates the appearance and perception of potential conflicts of interest – as firm’s remove the individuals that are responsible for the execution of the programs throughout the year from the actual testing being done – creating a truly independent review of the state of play within an organization.

Based on the above, CRC provides our clients with a cost-effective approach to execute any / all of the requirements below. We remove the “pricing barrier” – by providing “modular” approaches that enable our clients to truly benefit from our significant knowledge base and expertise.

• FINRA 3120 / 3130 Annual Testing of Supervisory Controls / CEO Certification

Annually, FINRA member broker-dealers are required to test and verify the adequacy of their supervisory program, and the CEOs are required to certify their awareness of the program’s state.

As part of the annual review, firms should identify and discuss the impact of “hot topic” industry issues on their respective organizations. For instance, Outside Business Activity/Private Securities Transactions is an area that firms’ should consider assessing as part of their 2017 Annual Testing Program.

In 2017, we continue to see FINRA focus on firms’ obligations concerning their registered representatives’ outside business activities and private securities transactions. Firms must evaluate and test internal procedures to review registered persons’ written notifications of proposed outside business activities, including firms’ consideration of whether the proposed outside business activities may compromise a registered person’s responsibilities to the firm’s clients or be viewed as part of the firm’s business. FINRA is also focused on firms’ procedures for handling associated persons’ notifications of proposed private securities transactions and firms’ ongoing supervision over associated persons’ approved private securities transactions for compensation.

The annual review may offer a practical way for firms’ to assess this discrete risk – as part of their overall assessment of the state of compliance and supervision within their respective organizations.

• SEC Rule 17a-5 – Annual Compliance Report

SEC Rule 17a-5 requires broker-dealers that did not claim exemption from Rule 15c3-3 throughout the most recent fiscal year to prepare and file an annual report on compliance, and internal control over compliance, with certain financial responsibility rules (“FRRs”), specifically the Net Capital Rule (Rule 15c3-1), Customer Protection Rule (Rule 15c3-3), Quarterly Security Count Rule (Rule 17a-13), and Account Statement Rules.

The compliance report must include statements as to whether:

  1. The broker-dealer has established and maintained internal control over compliance
  2. The internal control over compliance of the broker-dealer was effective during the most recent fiscal year
  3. The internal control over compliance of the broker-dealer was effective as of the end of the most recent fiscal year
  4. The broker-dealer was in compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 as of the end of the most recent fiscal year
  5. The information the broker-dealer used to state whether it was in compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 was derived from the books and records of the broker-dealer

Impacted Broker-Dealers will also be required to engage their independent registered public accountant to examine the broker-dealer’s statements (2) through (5), above, in its compliance report.
Following PCAOB standards, the independent registered public accountant would issue a report based on that examination.

• Independent Anti-Money Laundering (“AML”) Test / Review:

Every broker-dealer is required to perform an annual review of their Anti-Money Laundering Compliance Program (“AMLCP”). This review must be undertaken by a qualified individual that has a strong working knowledge of the Bank Secrecy Act (“BSA”).

The review can be performed by an outside consultant or someone employed by the firm. However, it cannot be performed by the Anti-Money Laundering Compliance Officer (“AMLCO”) or someone that reports to the AMLCO.

As an FYI – FINRA allows firms that do not have any customers/customer accounts to perform this review once every two years.

• Written Supervisory Procedures (“WSPs”) Review

As part of its responsibilities under FINRA Rule 3012, a Firm must ensure that all business areas and new regulatory requirements are sufficiently addressed in its annual review of WSPs.

• Continuing Education

All FINRA member firms must complete their Firm and Regulatory Element Continuing Education obligations by year-end.

• Branch Office Reviews

FINRA member firms must perform inspections of all offices of supervisory jurisdiction (“OSJs”) and branch offices that supervise one or more non-branch locations on an annual basis. Each branch office that does not supervise non-branch locations must be inspected at least once every three years.

• Annual Compliance Meeting

All FINRA member firms are required to complete an annual compliance meeting (“ACM”). Although all registered representatives and principals are required to be present, an interactive internet-based “ACM on Demand” approach is acceptable in most circumstances.

• Registrations and Renewals

Broker-Dealers have until December 18th, 2017 to pay their Preliminary Renewal Account. Failure to pay by the deadline may endanger a firm’s ability to do business in jurisdictions in which it has previously done business. Although there are a number of ways to pay, firms need to ensure that there are sufficient funds in their CRD Daily Account.


An independent review conducted by longstanding industry professionals, reconciling your current “state of compliance” is the most effective way to ascertain your program’s status and ensure your firm continues to meet its ongoing regulatory requirements. A great deal of regulatory intelligence is required to demonstrate an organization’s understanding of its regulatory obligations (both existing and newly enacted).

At CRC, we strive to do more than perform a “check the box” review – we strive to partner. Our team of former Chief Compliance Officers (“CCOs”) and Regulators not only provide key insights into what is required of your firm but assist your firm by executing seamlessly, helping to build a stronger program- one that your management team and regulators can have confidence in.

Please contact us for help on any of the items identified above / or for a full review/assessment of your broker-dealer’s compliance and supervisory system.
Let CRC help you turn your risk into reward.



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