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Annual Reporting Requirements for Broker-Dealers

Feb 2, 2015

On July 1, 2014, certain amendments to Rule 17a-5(d) (the “Rule”) of the SEC went into effect.  These amendments had a significant impact on the annual reporting requirements applicable to broker-dealers.  Set forth below is a summary of the annual reporting requirements of the amended Rule.

What must the annual report filing contain?

A financial report consisting of:

  1. Financial statements
    1. Statement of financial condition
    2. Statement of income
    3. Statement of changes in stockholders or partners or sole proprietor’s equity
    4. Statement of liabilities subordinated to claims of general creditors (if applicable)
  2. Supporting schedules
    1. Computation of Net Capital under SEC rule 15c3-1
    2. Computation for Determination of the Reserve Requirements under SEC rule 15c3-3 (if applicable)
    3. Information Relating to the Possession or Control Requirements under SEC rule 15c3-3 (if applicable)

The financial statements and supporting schedules must be prepared in accordance with U.S. GAAP and must be in a format that is consistent with the statements contained in Part II or Part IIA of Form X-17A-5 (the “FOCUS report”)

If supporting schedules b.i. or b.ii. above are materially different from the corresponding computation in the most recent FOCUS report filed by the broker-dealer, a reconciliation, including appropriate explanations, is required.  If no material differences exist, a statement so indicating must be included in the financial report.

Either a compliance report or an exemption report

  1. If the broker-dealer did not claim it was exempt from SEC rule 15c3-3 through the most recent fiscal year: 
    1. File a compliance report executed by the person who makes the oath or affirmation
  2. If the broker-dealer did claim that it was exempt from SEC rule 15c3-3 throughout the most recent fiscal year:
    1. File an exemption report executed by the person who makes the oath or affirmation.
  3. If the broker-dealer has not held customer securities or funds during the fiscal year, but does not fit into one of the exemptive provisions of SEC rule 15c3-3:
    1. The broker-dealer may file an exemption report if it does not claim an exemption from SEC rule 15c3-3 and its business activities are limited to one or more of the following:  (1) proprietary trading; (2) effecting securities transactions via subscriptions; and (3) receiving transaction-based compensation for identifying potential merger and acquisition opportunities for clients referring securities transactions to other broker-dealers, or providing technology or platform services.

The requirement to file either a compliance or exemption report is effective for fiscal years ending on or after June 1, 2014.  A broker-dealer is not required to submit statements in its compliance or exemption report covering the period prior to June 1, 2014 if its fiscal year begins prior to that date. However, in such cases a broker-dealer may still elect to have its statements cover the entire fiscal year.

The Compliance or Exemption report has replaced the Independent auditor’s report on Internal Control (commonly referred to as the “MI letter”) previously required under the rule prior to the amendment. However, broker-dealers who are also subject to regulation by the Commodity Futures Trading Commission will need to file an independent auditor’s report on internal control for the current year in addition to the compliance or exemption report.

Sample reports (provided by the AICPA and FINRA) may be found here:

Exemption Report:

Compliance Report:

Independent public accountant’s report covering:

  1. an audit of the financial report, including supplemental information (see 1.b.), and 
  2. an examination of the statements included in the compliance report or a review of the statements included in the exemption report.

The independent public accountant must be registered with the Public Company Accounting Oversight Board (“PCAOB”) and the engagements referred to above must be conducted under PCAOB standards.

Supplemental report on the Securities Investor Protection Corporation (“SIPC”) annual general assessment reconciliation which is to include the independent public accountant’s report on applying agreed upon procedures based on the performance of certain procedures enumerated in SEC rule 17a-5(e).

Notarized oath or affirmation which must state that, to the best knowledge and belief of the person making the oath or affirmation:

  1. The financial report is true and correct; and 
  2. Neither the broker-dealer, nor any partner, officer, director or equivalent person, as the case may be, has any proprietary interest in any account classified solely as that of a customer as defined under the Rule.
    If the broker-dealer is a sole proprietorship, the oath or affirmation must be made by the proprietor; if a partnership, by a general partner; if a corporation, by a duly authorized officer or if a limited liability company or limited liability partnership, by the chief executive officer, chief financial officer, manager or managing member.

Regarding confidential treatment, the annual reports filed under the Rule are not confidential, except that, if the statement of financial condition is bound separately from the balance of the annual reports and each page of the balance of the annual reports is stamped “confidential,” then the balance of the annual reports shall be deemed confidential to the extent permitted by law. 

When and where annual reports must be filed

  1. The annual reports, including the SIPC report must be filed within 60 calendar days after the end of the fiscal year of the broker-dealer.  Broker-dealers that have a fiscal year-end of December 31, 2014 will be required to file no later than Monday, March 2, 2015. Broker-dealers that are unable to meet the filing deadline due to exceptional circumstances may request an extension of time from their designated examining authority.  If the Financial Industry Regulatory Authority (“FINRA”) is the designated examining authority, the request must be made in writing and received no later than three business days prior to the due date of the report.
  2. The annual reports (including the SIPC report) must be filed at:
    1. the SEC’s principal office in Washington, DC;
    2. the SEC regional office in which the broker-dealer has its principal place of business;  
    3. the principal office of the broker-dealer’s  designated examining authority (for FINRA submit electronically in PDF format through the Firm Gateway annual audit electronic submission interface); and 
    4. the principal office of SIPC.

Filing Addresses

SEC headquarters:  100 F Street  N.E., Washington D.C.  20549

SEC Regional offices:

SIPC:  805  15th Street, N.W. Suite 800, Washington  D.C. 20005-2215

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