Odds and Ends and Others

A few notes to share.

ODD: I have heard that FINRA is issuing deficiency letters to firms that have outside FINOPs if the FINOP is listed as a ‘control person’ on Form BD and if the Form BD doesn’t list every other client firm of that outside FINOP as an affiliate of the firm. So if you're using an outside FINOP, check your Form BD. If he or she is listed as a 'control person' on Schedule A, then under this interpretation, all of his or her other BD clients for whom he or she acts as FINOP must be disclosed as affiliates on Question 10A.

The reasoning (if there is any) would be that all of the entities are under common control by virtue of the outsourced FINOP being a control person of those entities. Obviously, this would unnecessarily and confusingly link completely unrelated firms.

So, the best thing to do is to file a BD amendment, removing your outsourced FINOP as a control person from Schedule A. (Of course, if that person meets the other criteria for being listed on Schedule A--through ownership, for instance--then you'll have to keep him/her listed...but that doesn't seem likely for truly outsourced FINOPs.)

END: The exemption for non-public B-D's from using a PCAOB-registered accounting firm for annual audits is now gone. It expired December 31, 2008. Your 2008 financial statements may be audited by your non-PCAOB firm, but next year is a different matter. You'll have to replace your accounting firm or make sure it got its PCAOB registration before committing to use them for next year's audit. FINRA says it's talking directly to those few firms who have January or February fiscal year-ends.

You may want to work on this before the months evaporate and you find yourself without a registered accounting firm next year. Remember that if you change your accountant you must notify SEC by December 10. Put this on you calendar!

OTHER: FINRA Notice 09-10 describes a change in their treatment of "market letters," which are now a subset of "correspondence" instead of "sales literature." As sales literature, they required pre-approval by a qualified principal--even if sent to institutional investors. Now they are treated like other correspondence and institutional sales material, and their approval requirements will depend on whom they're being sent to and how many are sent within 30 days. You should look to your existing procedures on correspondence and institutional sales material to know which approval processes to follow.

I like this distinction, because it clearly defines those communications not meeting the definition of "research report" that might have otherwise been confused with research reports. For instance, market letters are communications that discuss broad-based indices, include commentaries on economic, political or market conditions, include technical analyses of sectors, indices, or industries, statistical summaries of multiple companies' financial data, including listings of current ratings, present recommendations for increasing or decreasing holdings in particular industries or sectors, or include notices of ratings or price target changes (with certain disclosures).

OTHER: I hear that FINRA will be requiring all firms to update Forms U4 for all representatives, in order to provide answers on some new DRP questions. This will be quite a job for big firms. Stay tuned on this, as no doubt we'll all see a public announcement of the requirement. I'll be helping my clients to manage this process--you will want to make sure you appoint someone to handle it, so you that you avoid reporting deficiencies.

That's it for now. Peace out.

Shame on Who?

I have a "Yes We Can Opener" to commemorate Obama's presidency. I got it at Stupid.com. I'm not ashamed to share that with you (or it with you--c'mon over!). But Mr. Obama is ashamed: of you!

Yes, he's a little upset about the Wall Street bonuses paid for 2008. Well, even though this topic is of no value to you and will not broaden your understanding of current and changing compliance obligations, I feel like talking about it. It's my blog: I'll cry if I want to.

Is the car factory worker to blame for the auto industry's failure? Is the farmhand at fault for the effect of subsidies on our crop market inefficiencies? No. Then why are our brokers blamed for this big financial crisis we're in? Every work day last year these folks got to work by 7:30 or 8:00 a.m. , dressed quite well, by the way, and worked until an hour or two after market closing. They did what was expected of them from on-high: they bought, sold and bartered their way through the day so as to make their bosses happy. They invented or used flashy software tools, trading algorithms and order management systems in order to efficiently get the job done. They did it with skill and enthusiasm...not because they wanted to take down the free market system, but because they wanted to get paid. In their (your) world, they get paid at year-end. They all know it's coming, so they live accordingly. I would do the same. But now comes the end of the world as we know it, and some of us decide to blame the baby in addition to the bath water. What were these legions of Wall Street workers supposed to do? Fall on their superiors' swords? Not expect to get paid for a year's worth of toil and trauma? I don't think so. Yes, they can now all adjust their expectations for 2009: the gig's up. And yes, senior management--the guys/ladies who made the decisions that directly fed our slots-like odds of failure--they should go without their '08 bonuses. They can put their gold in pre-paid envelopes and walk to the post office. Responsibility for this mess falls on those at the top.

Wait, if you're conjuring WWII images, don't. Soldiers know slaughter is wrong; most brokers don't have the tools or knowledge necessary to morally object to their crimes. Or didn't. Now they do. This transition to less fun, less money and great social responsibility will be tough for brokers. I wish you well. And I wish Obama a stronger will to avoid rhetoric.

If you stop by to use my Yes We Can opener, we'll be drinking Iron City. (The Steelers six pack is in the house.)