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.