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Article
Publication date: 25 November 2013

Elliott Curzon and Jeanette Wingler

The purpose of this paper is to summarize the SEC's recent approval of amendments to its net capital, customer protection, books and records, notification and reporting…

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Abstract

Purpose

The purpose of this paper is to summarize the SEC's recent approval of amendments to its net capital, customer protection, books and records, notification and reporting requirements for broker-dealers, in an effort to enhance financial responsibility and investor asset safekeeping obligations.

Design/methodology/approach

The paper summarizes new requirements for broker-dealers relating to custody, reporting, and Rules 15c3-3 (customer protection rule), 15c3-1 (net capital rule), 17a-3 and 17a-4 (books and records rules) and 17a-11 (notification rule) under the Securities Exchange Act of 1934; explains that several of the amendments approved codify long-standing SEC staff interpretations of the rules and accounting standards that govern these requirements; clarifies whether the requirements apply to broker-dealers that carry customer accounts on their books (commonly referred to as “carrying brokers”) and/or to limited-purpose broker-dealers that do not carry customer accounts on their books.

Findings

Although certain of the amendments codify long-standing SEC staff interpretations of the rules and accounting standards, broker-dealers will be subject to additional legal and regulatory requirements resulting from the amendments commencing in October 2013.

Practical implications

Broker-dealers should begin to consider whether changes to operations, policies and procedures, and reporting obligations will be required as a result of the amendments.

Originality/value

The paper provides practical explanation by experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 14 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 28 June 2013

Edward Eisert, Tony Katz, Giovanni Carotenuto and Melanie F. Ball

The purpose of this paper is to summarize the significant responses of the staff of the SEC to 16 frequently asked questions (FAQs) which supplement prior guidance on Rule…

Abstract

Purpose

The purpose of this paper is to summarize the significant responses of the staff of the SEC to 16 frequently asked questions (FAQs) which supplement prior guidance on Rule 15a‐6 under the Securities Exchange Act of 1934.

Design/methodology/approach

The paper lists Rule 15a‐6 activities, refers to prior guidance on the rule, and summarizes the following issues, among others, covered in the FAQs: transactions between a foreign brokerdealer and a person temporarily in the USA, distribution by a foreign brokerdealer of research reports to major US institutional investors, activities of foreign brokerdealers taken with unaffiliated registered brokerdealers, boundaries to the definition of “solicitation” by a foreign brokerdealer of a US investor, and minimum net capital requirements for a registered brokerdealer in a chaperoning arrangement with a foreign brokerdealer.

Findings

This guidance does not break new ground and may be supplemented in the future. An amendment of Rule 15a‐6 is still necessary to address its fundamental limitations.

Originality/value

The paper provides practical explanation by experienced financial services lawyers.

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Article
Publication date: 5 September 2016

Andrew Blake, Robert Robinson, Alex Rovira and Charles Sommers

To alert financial market participants to rules jointly proposed by the US Securities and Exchange Commission (SEC) and US Federal Deposit Insurance Corporation (FDIC…

Abstract

Purpose

To alert financial market participants to rules jointly proposed by the US Securities and Exchange Commission (SEC) and US Federal Deposit Insurance Corporation (FDIC) regarding orderly liquidation of certain large broker-dealers as mandated in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

Design/methodology/approach

Explains how typical broker-dealer liquidations are generally effected, the alternative of determining a broker-dealer to be a “covered broker-dealer” to be liquidated through an orderly liquidation proceeding under Title II of Dodd-Frank, the appointment of the FDIC as receiver and Securities Investor Protection Corporation (SIPC) as trustee, the requirement for the SIPC to file a protective decree with a federal district court, the possible use of “bridge broker-dealers” to facilitate an orderly liquidation, the FDIC’s procedures for settling claims of customers and other creditors against covered broker-dealers, and additional proposed provisions for administrative expenses and unsecured claims.

Findings

Counterparties of broker-dealers that could be subject to an orderly liquidation proceeding should evaluate the proposal and consider whether, if adopted, the rules would require any changes to credit risk or other internal procedures. Large broker-dealers that could be the subject of such an orderly liquidation proceeding should do the same. Although the formal comment period has closed regarding the proposal, market participants that did not submit comments but who still wish to influence final rule making should still consider submitting written comments to the SEC and FDIC or otherwise advocating before them.

Originality/value

Practical guidance from experienced securities and financial services lawyers.

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Article
Publication date: 1 April 2003

Lawrence Cohen

In the Spring 2003 issue of this Journal, I addressed the regulatory uncertainty surrounding the treatment of brokerdealers’ expense‐sharing arrangements. As pointed out…

Abstract

In the Spring 2003 issue of this Journal, I addressed the regulatory uncertainty surrounding the treatment of brokerdealers’ expense‐sharing arrangements. As pointed out in that article, in 2002 the National Association of Securities Dealers, Inc. (NASD) conducted a comprehensive “sweep” examination of member‐firms’ financial reporting procedures, with special attention to the treatment of expenses and liabilities. The results of the sweep confirmed that many brokerdealers, particularly small firms, relied on parents and affiliates to pay for part or all of their expenses. The results of this regulatory audit raised the NASD’s concern that many brokerdealers failed to adhere to the financial responsibility rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In large part, this was due to an inherent conflict between the general accounting standards governing the recording of expenses and liabilities and the requirements imposed on brokerdealers to accrue and book expenses and liabilities under the Exchange Act’s financial reporting rules. Following the sweep, the NASD wrote to certain member firms that did not appear to be following the financial responsibility rules. These letters asked the firms to explain their failure to report expenses that were paid, or subject to payment by, affiliated parties and to justify their procedures on expense and liability reporting. Some brokerdealers responded that it was not possible to coordinate the accounting of expense‐sharing arrangements with the reporting requirements set forth under the Exchange Act’s rules.

Details

Journal of Investment Compliance, vol. 4 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 April 2005

Elizabeth C. Green

The aim of this article is to provide a description of the rule proposals and other events that preceded the SEC's adoption of the 2005 Final Rule, a summary of the terms…

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Abstract

Purpose

The aim of this article is to provide a description of the rule proposals and other events that preceded the SEC's adoption of the 2005 Final Rule, a summary of the terms of the 2005 Final Rule, and a brief update regarding the status of the 2005 Final Rule.

Design/methodology/approach

Describes the SEC's 1999 proposed rule, “Certain Broker Dealers Deemed Not to Be Investment Advisers,” questions that led to that proposed rule, commentary on that proposed rule regarding advisory activities for which brokerdealers receive special compensation, commentary regarding differences between the regulation of brokerdealers and the regulation of investment advisers, commentary regarding investors' understanding of the differences between brokerdealers and investment advisers, the five‐year period without a formal rule, the 2005 Proposed Rule, the 2005 Final Rule, and concerns that remain after issuance of the 2005 Final Rule.

Findings

The Chairman of the SEC directed the SEC staff to investigate and report within 90 days on ways in which the policy issues raised by the 2005 Final Rule could be addressed. In addition to the investigation of issues raised by the 2005 Final Rule by the SEC staff, and although the 2005 Final Rule was adopted, to some extent, in response to the lawsuit filed against the SEC by the Financial Planning Association (the “FPA”) in July 2004, the FPA filed a new lawsuit against the SEC on April 28, 2005.

Originality/value

A useful summary of the background and remaining issues related to the SEC's 2005 Final Rule on application of the Adviser's Act to brokerdealers offering certain non‐traditional brokerage programs.

Details

Journal of Investment Compliance, vol. 6 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 April 2004

Robert N Sobol

A pooled income fund (PIF) is one of the methods created under the 1969 Tax Reform Act whereby a taxpayer may make a tax‐deductible remainder gift to a charitable…

Abstract

A pooled income fund (PIF) is one of the methods created under the 1969 Tax Reform Act whereby a taxpayer may make a tax‐deductible remainder gift to a charitable organization. The fund, established by a charitable organization to receive irrevocable gifts from at least two donors, pays current income to the individual beneficiaries for life, but at the termination of each income interest, the allocable principal must revert permanently to the charitable organization. In recent years, a number of PIFs have been offered to the public by charitable organizations through brokerdealers or related entities. There are numerous securities‐law issues implicated by the sales of these PIFs, including: (i) whether brokerdealers may solicit donations to such funds and receive compensation for their solicitations; (ii) the effect of the brokerdealers’ solicitation and receipt of compensation have on securities registration for the PIF or units offered therein under the Securities Act of 1933, the Securities Exchange Act of 1934, or the Investment Company Act of 1940; (iii) whether staff and persons affiliated with the sponsoring charity, including parties assisting them in the marketing of such pooled income funds, also should be permitted to solicit donations; (iv) whether such charities or persons, or parties assisting them in the marketing of such pooled income funds, then should be required to register as brokerdealers; (v) what securities licenses may be required of the aforementioned parties; and (vi) whether there are ways to design the manner in which third parties other than broker dealers are compensated to resolve any potential issues arising from answers to the previous questions. This article first sets forth the applicable law involved in the analysis and then attempts to answer each of the issues presented above.

Details

Journal of Investment Compliance, vol. 5 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 April 2003

Betty Santangelo and Margaret Jacobs

The anti‐money‐laundering provisions of the USA Patriot Act of 2001 (the “Patriot Act”) continue to cause a profound transformation in the way the United States investment…

Abstract

The anti‐money‐laundering provisions of the USA Patriot Act of 2001 (the “Patriot Act”) continue to cause a profound transformation in the way the United States investment industry conducts its business. Over the past year under the authority of the Patriot Act, which amended the Bank Secrecy Act (“BSA”), the United States Department of Treasury (“Treasury”) and the relevant federal regulators have issued rules requiring a broad range of compliance mechanisms, including: the establishment of anti‐money‐laundering (“AML”) programs; the filing of suspicious activity reports; the prohibition against providing financial services to foreign shell banks (i.e., banks without physical locations); the maintenance of records with respect to accounts for foreign banks; and the sharing of transactional information among financial institutions and between financial institutions and law enforcement.

Details

Journal of Investment Compliance, vol. 4 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 2 May 2017

Melissa Beck Mitchum and Bob Xiong

To explain the Customer Protection Rule Initiative announced by the Securities and Exchange Commission (SEC) and offer practical guidance for complying with Rule 15c3-3…

Abstract

Purpose

To explain the Customer Protection Rule Initiative announced by the Securities and Exchange Commission (SEC) and offer practical guidance for complying with Rule 15c3-3 under the Securities Exchange Act of 1934.

Design/methodology/approach

This article discusses Rule 15c3-3 under the Securities Exchange Act of 1934, related interpretative guidance, and the Customer Protection Rule Initiative announced in June 2016 by the SEC.

Findings

This article concludes that broker-dealers should take advantage of the Customer Protection Rule Initiative’s self-reporting mechanism and use this time to review their current account arrangements with banks, existing internal policies and procedures, and account documentation.

Originality/value

This article contains valuable information about the SEC’s Customer Protection Rule Initiative and practical compliance guidance from experienced securities lawyers.

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Article
Publication date: 1 March 2005

Rizvana Zumeeruddin

In June of 2004, the Securities and Exchange Commission (“the SEC”) voted to publish Proposed Regulation B (“Regulation B”), which will implement provisions of the…

Abstract

In June of 2004, the Securities and Exchange Commission (“the SEC”) voted to publish Proposed Regulation B (“Regulation B”), which will implement provisions of the Gramm‐Leach‐Blily Act of 1999 (“GLBA”) that identify activities which banks may engage in without registering as brokers or dealers under The Securities and Exchange Act of 1934 (“The Exchange Act”); effectively governing the manner in which banks, savings associations and savings banks effect securities transactions. By enacting the GLBA, Congress repealed most of the remaining vestiges of the ownership restrictions that prevented banks, securities and insurance firms from combining, thereby allowing them to adopt the universal banking model through the creation of financial conglomerates known as “financial holding companies.” Proposed Regulation B (“Regulation B”) supercedes the SEC's final interim rules issued in May of 2001 with respect to banking and brokering activities. In general, banks and their regulators have found Regulation B to be far more acceptable than the final interim rules of 2001. On a practical level, Regulation B results in considerably more work for banks. This article will examine the existing law as it pertains to banks engaging in brokerdealer activities and highlight the key provisions of Regulation B.

Details

Humanomics, vol. 21 no. 3
Type: Research Article
ISSN: 0828-8666

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Article
Publication date: 20 March 2007

Soo J. Yim and Christie Farris Öberg

This paper seeks to explain amendments to NASD Rule 2320(a), commonly known as the “best execution rule”, approved by the Securities and Exchange Commission on August 21, 2006.

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Abstract

Purpose

This paper seeks to explain amendments to NASD Rule 2320(a), commonly known as the “best execution rule”, approved by the Securities and Exchange Commission on August 21, 2006.

Design/methodology/approach

Explains the scope of the best execution obligation, as amended; outlines factors relevant to a best execution determination; and suggests questions brokerdealers should consider as they review their best execution policies and procedures in light of the amendments.

Findings

Most significantly, the amendments make the rule applicable to “any transaction for or with a customer or a customer of another brokerdealer”, thus imposing the duty of best execution on a member that executes a customer order received from another brokerdealer. The NASD also has reiterated that debt transactions are subject to the rule. In addition, the rule amendments update certain language and add new Interpretive Material regarding certain aspects of the rule.

Originality/value

A useful interpretation of recent amendments to the best execution rule.

Details

Journal of Investment Compliance, vol. 8 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

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