Q: Are all broker/dealers required to have a Financial and Operations Principal?
A: Yes. Many years ago the NASD allowed certain firms to be exempt from having a FINOP. However, all exemptions for not having a FINOP registered with any firm have been eliminated.
Q: Is there any rule or regulation that prohibits a broker/dealer from outsourcing FINOP services?
A: No. Any broker/dealer may hire an off-site FINOP. Outsourcing FINOP work not only satisfies regulatory requirements, but often makes more sense for many broker/dealers. The FINOP, however, even if located off-site, is ultimately responsible for the broker/dealer’s books and records. The issue is not whether the FINOP is off-site, but whether adequate controls are in place to ensure accurate books and records and timely financial reporting.
Q: Does my firm need a Series 27 or a Series 28 FINOP?
A: There are two FINRA registrations that allow an individual to act as a Financial and Operations Principal (FINOP), the Series 27 and the Series 28. The Series 27 registration qualifies an individual as a “Limited Principal-Financial and Operations.” The Series 28 registration qualifies an individual as a “Limited Principal-Introducing Broker/Dealer Financial and Operations.”
Most broker/dealers qualify to have a Series 28 registered person act as their FINOP and satisfy all regulatory requirements by doing so. The following types of broker/dealers are required to have a Series 27 registered person act as FINOP:
• Firms that use the Alternative Standard to compute net capital.
• Firms that operate pursuant to the $250,000 minimum net capital requirement of SEC Rule 15c3-1.
• Municipal securities brokers’ brokers.
While a Series 28 FINOP satisfies the requirements for most broker/dealers, a Series 27 FINOP satisfies the requirements for all broker/dealers.
Q: My firm’s FINOP has just resigned. What should I do?
A: The immediate task at hand is to find a replacement for your FINOP. This task can be accomplished in several different ways. The easiest, most cost effective way to solve the problem of replacing your FINOP is to call B/D Consulting Associates, Inc. (BDCA).
BDCA has a full staff of experienced Financial and Operations Principals that can act as your firm’s FINOP on an interim or on a permanent basis. The Financial and Operations Principals at BDCA specialize in the finance and accounting issues encountered specifically by brokerage firms. They have the knowledge and expertise to help guide your firm through today’s complex regulatory environment.
BDCA has staff members with many years of experience on both the retail and regulatory sides of the industry. This allows them to better understand the balance between the retail demands a brokerage firm faces and the regulatory requirements imposed by the various SRO’s and government agencies.
Another alternative to consider when choosing how to replace your FINOP is to appoint someone who is already registered with your firm as the new FINOP. NASD rules permit a firm to change the responsibilities of a registered representative to those that require registration as a principal. Within 90 calendar days following the change in duties that requires registration as a principal, the registered representative must pass the appropriate principal qualification exam.
A final option to consider if the need arises to replace your FINOP is to hire someone outside the firm as a full time, on-site FINOP. However, you should be aware that this is most likely the costliest method of replacing your FINOP.
Q: When is my firm’s annual audit due?
A: Each firm’s independent annual audit is due within 60 days of the end of its fiscal year.
Net Capital
Q: Is my firm’s entire clearing deposit an allowable asset?
A: Only the amount that is required to be on deposit with the clearing firm is an allowable asset. Any amount in a clearing deposit account in excess of the required amount is treated as non-allowable.
It is also imperative for a broker/dealer to have a “Proprietary Accounts of Introducing Broker/Dealers” (PAIB) agreement with its clearing firm. Without a PAIB agreement with its clearing firm, none of a broker/dealer’s assets that are held at its clearing firm are allowable for net capital purposes, including the clearing deposit.
Q: How many transactions may my firm execute in a proprietary account?
A: If your firm conducts more than ten transactions in a calendar year in a proprietary account, it is required to maintain a minimum of $100,000 in net capital.
Q: When does the thirty day period begin to determine if commissions receivable are aged?
A: The thirty day period begins at the end of the calendar month in which the commission is earned.
Q: What level of net capital is required for a firm to participate in a firm commitment underwriting?
A: In general, a firm must operate pursuant to the provisions of the $100,000 minimum net capital category in order to participate in any manner in a firm commitment underwriting. However, a $50,000 broker/dealer may participate in a firm commitment underwriting as long as it does not enter into a commitment to purchase shares related to that underwriting.
Q: How can the amount of aggregate indebtedness my firm carries affect our minimum net capital requirement?
A: The aggregate indebtedness for a broker/dealer may not exceed 1500 percent of its net capital. However, the threshold for aggregate indebtedness for a broker/dealer within its first twelve months of business is even lower, 800 percent of its net capital. If these limits are exceeded, a new minimum net capital requirement is established based on the level of aggregate indebtedness the firm carries..
Q: What should you do if your firm’s net capital falls below 120% of the required minimum?
A: SEC Rule 17a-11 states that any broker/dealer shall send notice within 24 hours to the SEC and its Designated Examining Authority (DEA) if its net capital falls below 120% of the broker/dealer’s required minimum. Notice must be sent to the principal office of the SEC in Washington D.C., the regional or district office of the SEC for the region or district in which the broker/dealer has its principal place of business, the principal office of the broker/dealer’s DEA (Washington D.C. if the DEA is FINRA) and the district office of the broker/dealer’s DEA. Notice must be given or transmitted by telegraphic notice or facsimile transmission.
Q: Does FINRA require a net capital computation every month for new members?
A: If the broker/dealer is a new member, FINRA will require a net capital computation for the first three to six months of membership for the months that a FOCUS Report is not submitted. (The quarterly FOCUS report already includes a net capital computation).
FOCUS Reports
Q: What is a Fifth FOCUS Report?
A: A Fifth FOCUS Report is an additional FOCUS Report that is due from a broker/dealer whose fiscal year end is a date other than the calendar quarter.
Q: What is the difference between a FOCUS Report Part I and a FOCUS Report Part II/IIA?
A: All firms are required to file a FOCUS Report Part II or IIA on a quarterly basis. Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA. The FOCUS Report Part I is filed by any firm that operates pursuant to the $100,000 minimum net capital requirement or higher for months that do not require a Part II/IIA filing.
Q: What is a Schedule I?
A: Schedule I is required to be filed for each member with the FOCUS Report that is filed for the calendar quarter ending December 31 of each year. Schedule I contains various information about a member firm regarding its status and the type of business in which it engages.