Reminders, My Friend, Are Blowin' In The Wind

Having survived a wind storm and a semi-annual procedures update process that nearly killed me (the update, not the wind storm), I am resurfacing to provide a few reminders:


1. R.I.P. Webcasts: After March 31 you will no longer be able to view Webcasts on FINRA's website. All of the prior content is included in other offerings, such as Video E-Learning or plain-old E-Learning courses. But, well, you have to pay for those. Webcasts were free. All's fair in love, war, and a crappy economy.


2. TRACE: Agency Debt Securities became TRACE eligible on March 1, as did certain primary market transactions (those that qualify as list or fixed price offering or takedown transactions). See Notice 09-57.


3. New Capital Compliance Rule: As of February 8, the new financial responsibility rules became effective (FINRA Rules 4110, etc.). Many of the restrictive rules apply to "carrying or clearing firms"--but look at the footnote in the rule and you'll see that they also apply to firms with "k2i" accounts--you know, the account you have set up so you can receive checks from customers for mutual fund and other purchases? This new rule requires, for instance, that your firm must obtain prior written approval before withdrawing any capital that exceeds10 percent of the firm’s excess net capital in any rolling 35-calendar-day period. This includes withdrawals of profits, routine dividends and similar distributions. Wow. For small business owners who take profits this way, this rule seems extremely onerous. See Notice 09-71.
       As for the answers to these extremely logical questions: 1) "To whom do firms request approval?" and 2) "How long does FINRA have to grant approval?", well, the answers were not easy to find... in summary: 1) Eventually there will be an electronic request process on Gateway, but for now fax or email your District Office, and 2) In your communication to the District, inform them that you will be making the distribution in x days in the absence of a response from them. In the published Response to Comments on these rules, it states,"[...] requests for withdrawals can be handled in a routine manner and that decisions typically would be issued in approximately three business days": how's that for clarity?! 
     [Allow me for a moment to express frustration with FINRA for making a Rule effective without having a mechanism in place for allowing firms to comply with the Rule--and for not providing this basic, administrative information to all firms in an easily accessible, publicly-available place (like the Notice??), rather than burying (half of) it in filing documents not regularly visited by most compliance staff. And what-up with making pleasant, good-intentioned, helpful folks like moi feel wrong for asking presumably easy questions and expecting to get answers? What's wrong with regulators saying, "I don't know" or "We're still working on that" or "Three days, but sorry, we didn't put that in the Notice"? ... ugh. P.S. I'm thankful to Estee Dorfman Foster (CPA/outsourced FINOP) for her assistance in finding answers.]


4. Variable Annuity Rules: As of February 8, the formerly-delayed parts of FINRA Rule 2330 became effective. Principals now have 7 days to review recommended v/a purchases and exchanges. There are changes to customer funds rules, too--because if you held a customer's check during that 7 days, you would have otherwise broken SEC customer funds rules. Check out Notice 10-05 for fresh guidance on these changes.


5. AML Madness: FINRA released its updated AML Small Firms Template in January... it is full of wonderfully--wait, not wonderfully, but rather, dreadfully--legalistic text changes that would drive any technical writer crazy. I'm proud to say my template is still better than theirs. You should look at your AML program and FINRA's updated template to assess the time it will take to make corresponding changes; then you should drown your sorrows in a stiff drink (or call me!).  See here for a link to the template in Word format. Oh and remember that as of January 1, you may no longer have someone in your small firm conduct annual independent testing if that person has a conflict of interest (you used to be able to rely on a loophole--it is gone). For this rule change, see Notice 09-60.


6. 3012/3130--Testing & Verification:  For most of you, it's that time of year again--in fact, this is the 5th time you have to follow these rules since inception! This should be easy by now...You have to test and verify your supervisory system. And write a report. And write another report about the process of writing the report. And sign a certification. And put the whole shebang in a file drawer and hope no-one ever asks for it (...but they will). Remember, your reports and certifications are due w/in 12 months of last year's. It's not a calendar year requirement--it's every 12 months by the anniversary. Here is a link to regulatory information on supervisory controls.

7. Short Sales Rule Change: Mary over at SEC approved a change to Reg. SHO, affectionately called the "alternative uptick rule" that restricts short selling in stocks that have dropped 10% in price in one day. Effective Date: May 10, 2010; Compliance Date: November 10, 2010. See link to Reg SHO change for 334 pages of bedtime reading. I'm getting sleepy just thinking about it.


8. TARP Warrants: How do we describe these nouvelles choses? Warrants (that's what they're called)? Options (they're priced like options)? Corporate securities (they're issued by corp's)? Government securities (they were issued to Uncle Sam--is he backing them in the secondary market)? Ask 4 people and you'll get 4 different answers (ask me and you'll get a frustrated shrug of confusion and disgust). Stay tuned for the answer.

FINRA has released its March 1 examination priorities. Review it and weep. You have work to do.


Your Moment of Optimism: 17 days till Spring!

What Do the Numbers 3012 and 3013 Mean to You?

For those into numerology, perhaps those numbers portend happiness, prosperity, or love. For you in the securities compliance business, you know otherwise. They mean WORK.

This is a reminder for those of you who first complied in about February or March 2006--and again last Feb. or March--with the 'testing and verification' requirement under FINRA Rule 3012 . You are required to test and verify every 12 months; that is, by the anniversary of your last test date. Since the testing and verification process takes longer than 5 minutes, or even a few hours, you may want to start the process now, or least prepare your strategy.

Remember your goal:
To verify that your firm has in place processes to:
(a) establish, maintain and review policies and procedures reasonably designed to achieve compliance with applicable NASD/FINRA rules, MSRB rules and federal securities laws and regulations;
(b) modify such policies and procedures as business, regulatory and legislative changes and events dictate; and
(c) test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with NASD/FINRArules, MSRB rules and federal securities laws and regulations .

Here is an example of the steps you might take to meet that goal:
1. Take an inventory of the securities rules and regulations that are relevant to the firm’s business, including identification of new or changed requirements applicable to existing or new lines of business;
2. Review the firm’s supervisory procedures and control system procedures that are designed to address the rules and regulations, as well as additional, internal policies;
3. Perform testing of adherence to the firm’s compliance, supervisory, and supervisory controls procedures using a risk-based approach;
4. Identify and detail the gaps perceived in meeting required procedures.
5. Devise a reasonable plan for addressing the perceived gaps.

Note the term 'risk-based'--it's important. You don't have to test every single procedure every year. You can prioritize and stagger your reviews according to product risks, customer profiles, new business areas and perceived weaknesses (i.e., from earlier office inspection or FINRA exam results).

You'll want to put the results your process in writing and present it to the top business officer of your firm. This meeting between you (CCO) and the top dog (CEO, for instance) is required. If you and the top officer are one and the same, may I suggest a mirror to aid in the communication?

Your top business officer will sign the 3013 Certification after reading the report and judging for him/herself that your firm does indeed have the necessary processes in place. S/He doesn't have to like the state of compliance, but s/he does have to acknowledge the existence of the firm's processes.

And remember, you don't submit the 3012 report or the 3013 certification to FINRA or SEC. You put them in labelled files and hope the examiner is happy with them in your next cycle exam. He or she probably will be: word has it examiners are not being overly fussy about compliance in small firms, but they do want to see good faith efforts.