Common Findings Related to Books and Records Tuesday, May … · 2018-05-14 · Common Findings Related to Books and Records Tuesday, May 22 11:15 a.m. – 12:15 p.m. During this

© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Common Findings Related to Books and Records Tuesday, May 22 11:15 a.m. – 12:15 p.m. During this session, FINRA staff and industry panelists discuss common books and records findings of broker-dealers and related retention requirements, and offer effective practices to mitigate issues. Moderator: Thomas Nelli Senior Vice President and Regional Director, Sales Practice FINRA South Region Panelists: Afshin Atabaki Associate General Counsel FINRA Office of General Counsel, Regulatory Practice & Policy Paige Pierce Management Consultant Larimer Capital Corporation Stephen Youhn Chief Compliance Officer ProEquities, Inc.


Common Findings Related to Books and Records Panelist Bios: Moderator: Thomas Nelli was recently named Senior Vice President and South Region Director in FINRA’s Boca Raton District Office. Prior to joining FINRA, Mr. Nelli was a Managing Director Deputy Chief Compliance officer in Morgan Stanley Wealth Management Compliance. In this role, Mr. Nelli headed the Investment Products and Services, Advisory, Research Equity, Futures and Options and Fixed Income Compliance Groups. He joined the Morgan Stanley Compliance Department in 1986. During his 31 years with the firm, he has covered almost every aspect of retail brokerage compliance, including Branch Examinations, Surveillance, Policies and Procedures, Futures, Employee Trading, Registration and has served as the firm’s Compliance Registered Options Principal and chair of the Heightened Supervision Committee. Additionally, he participates in various industry panels. Mr. Nelli graduated from Brooklyn College with a BS in Psychology in 1985. Panelists: Afshin Atabaki is Associate General Counsel in FINRA’s Office of General Counsel, Regulatory Practice and Policy. In this capacity, he renders legal advice and support to FINRA management and staff in connection with regulatory initiatives, as well as develops and interprets FINRA rules. His areas of regulatory expertise include recordkeeping requirements. Mr. Atabaki graduated Phi Beta Kappa, cum laude, from the University of Maryland, College Park, with a B.A. in History and received his law degree from Cleveland-Marshall College of Law. Paige W. Pierce is a leader of leaders who has made a difference across industries by helping influencers focus first on their employees, fall in love with their customers, and see their landscape in ways no one else can. She’s played principal roles in multiple startups, guiding a number of them to profitable exits, and realized equal success turning around underperforming organizations and helping growing concerns figure out “What’s next?” As president of PSP consulting (2017 to present), Ms. Pierce has helped businesses based in the UK and Australia overcome obstacles with their US operations and assisted US-based clients in navigating regulatory and compliance challenges. Her clients’ industries have spanned financial services (where she is a subject matter expert), manufacturing, and tourism. Nowhere is Ms. Pierce’s ability to navigate changing markets more apparent than with her tenure at RW Smith & Associates, a Fixed Income Interdealer Broker (IDB). A Founding Principal of the firm, she returned to the family-owned business as a consultant in 2001, positively resolving a critical regulatory issue and revamping compliance in the wake of the 2001 recession and the regulatory repercussions of the Arthur Andersen scandal. As President & CEO of RW Smith (2005 to 2017), and in previous leadership roles (2001 to 2004), Ms. Pierce responded to downward margin pressures and unfavorable regulatory environments by leading the evolution of both the firm’s business model and the regulators’ view of IDBs and small firms. Internally, she resolved market and cash flow challenges by twice negotiating the sale of the firm, once to a venture capitalist and later in parts to complementary businesses. She also revamped product offerings to increase top-line sales 600%. On the regulatory and legislative front, Ms. Pierce spent the better part of 20 years advocating on behalf of IDBs and small firms with purpose and passion, working to advance regulatory and legislative understanding of these important segments of financial services and the challenges they face. As an advocate for small businesses, Ms. Pierce has been invited to the Federal Reserve, offices of Congressional representatives, the Securities and Exchange Commission, and important policy discussions. She was the first IDB representative in many FINRA groups, including the National Adjudicatory Council, Fixed Income Committee, and Small Firm Advisory Board, the latter as elected Chair in 2017. Ms. Pierce also organized previously siloed firms, contributing actively to professional organizations and co-founding the BMA/SIFMA Municipal Securities Broker’s Broker Committee, the Municipal Bond Information Service Company, and the Bond Dealers of America Small Firm Division. Ms. Pierce was the CFO, Operating Officer, and a Founding Principal of Agincourt, Ltd. (1994 to 2000), a Bermuda-based broker/dealer focused on creating structured products for the fixed income institutional market. She spearheaded the creation of strategy, financial controls, and systems overseeing Bermuda-, UK-, and US-based activities for this Bermuda-based broker/dealer, ultimately engineering a successful exit. An early career in banking and finance formed the foundation of Ms. Pierce’s lead-from-the-front style. Her approach led to repeated promotions and upward recruitment. Representative accomplishments include the recapture of millions of dollars for two of LaSalle Bank’s


operating units, the transformation of one of their cost centers into a profit center, and success in PaineWebber’s fast-paced, high-stakes Municipal Trading Division. Passionate about professional development for herself, her colleagues, and her team, Ms. Pierce is a longtime member and leader within the Young President’s Organization. She is currently Co-Chair of the London Business School YPO Executive Education Presidents’ Program. A graduate herself, as Co-Chair she took the lead in redesigning the intensive 5-year course to incorporate themes of innovation, strategy in uncertain times, organic vs architected growth, “futurist” visioneering and managing across the generations (and borders). Ms. Pierce is an Honorary Commander and Falcon with the 388th FW out of Hill Air Force Base in Utah, supporting the airmen/women who serve our great country. Steve Youhn joined ProEquities as CCO in 2016 with more than 20 years of industry experience. Before ProEquities, he worked with The Vanguard Group where he was responsible for the broker/dealer compliance program. Mr. Youhn also served as CCO for Lincoln Financial Network’s broker/dealers (Lincoln Financial Advisors Corporation and Lincoln Financial Securities Corporation) and M Financial Group’s broker/dealer unit, M Holdings Securities. Before transitioning to compliance, Mr. Youhn served as Senior Counsel in the Chicago Board Options Exchange’s legal department and the United States Securities and Exchange Commission’s Division of Market Regulation. Mr. Youhn has a JD from Stetson University College of Law, a MBA from The University of Florida, and a Bachelor of Science from the University of South Florida. He holds the Series 7, 24, and 63 licenses.

2018 FINRA Annual ConferenceMay 21 – 23, 2018 • Washington, DC

Common Findings Related to Books

and Records

FINRA Annual Conference | © 2018 FINRA. All rights reserved.

Moderator

Thomas Nelli, Senior Vice President and Regional Director, Sales Practice, FINRA South Region

Panelists

Afshin Atabaki, Associate General Counsel, FINRA Office of General Counsel, Regulatory Practice & Policy

Paige Pierce, Management Consultant, Larimer Capital Corporation

Stephen Youhn, Chief Compliance Officer, ProEquities, Inc.

Panelists

1


Order Tickets

Electronic Communications

Account Records

Net Capital and FOCUS Reports

Altered or Inaccurate Records

Electronic Storage Media

Transmittal of Funds Records

Agenda

2


Mismarked as unsolicited

Failed to retain (e.g., cancelled orders)

Failed to create

Missing or incorrect discretionary authority notation

Missing or incorrect time stamps

Misidentified associated person

Retention Period: Three years

Order Tickets

3


Failed to retain email and IM (e.g., Bloomberg, other business-

related communications)

Printing emails or forwarding emails to compliance department

based on “honor” system

Permissible use of outside communications (e.g., emails, texts

and websites) without retention

Use of Social Media for business purposes



4


Altering required customer information

Failure to capture and retain requisite information

Inaccurately reflected (concealed) the beneficial owner

Failure to send records (within 30 days of account opening,

change of address and change of investment objectives and 36

month post-account opening)

Failure to retain (margin and discretion documents)

Retention Period: Three and six years (Varies)

Account Records

5


Cash versus accrual

Accruing and recording liabilities

Consolidated financials with parent

Booking expenses and liabilities pursuant to an Expense

Sharing Agreement

Recording haircuts


Net Capital / FOCUS Reports

6


Forged documents

Falsified expense reports

Back dating documents submitted to FINRA

False statements on internal compliance questionnaire

Pre-signed, blank forms

Certification of supervisory reviews not conducted

Inaccurate and incomplete records


7


Failure to notify FINRA

Use of media not WORM compliant

Loss of electronic records

Non-compliant email systems and retention issues

Failure to retain a third party


8


Transmitting wire orders without verification

Forged customer name on wire orders

Falsified LOA

Fictitious reasons for customer order

Signature guarantees without witnessing or obtaining required

documentation

Retention Period: Six years


9


Order Tickets

SEA Rule 17a-3(a)(6) and FINRA Rule 4515


SEA Rule 17a-4(b)(4) and FINRA Rule 3110.09

Account Records

SEA Rule 17a-3(a)(9), SEA Rule 17a-3(a)(17) and SEA Rule 17a-

4(c)

Rule References

10



SEA Rules 17a-3(a)(11), 17a-4(b)(5) and 17a-4(b)(8)


SEA Rule 17a-4(j) and FINRA Rule 8210


SEA Rule 17a-4(f)

Rule References

11



FINRA Rule 3110(c)(2)(B)

Rule References

12

© 2018 Financial Industry Regulatory Authority, Inc. All rights reserved.

FINRA FAQ Regarding Transmittals of Funds or Securities (Available at: http://www.finra.org/industry/faq-supervision-faq)

Q. What must a firm do to demonstrate compliance with FINRA Rule 3110(c)(2)’s requirement to have a means or method to document customer confirmation, notification or follow-up for transmittals of funds or securities from customers to third parties, to outside entities and to locations other than the customer’s primary residence, and between customers and registered representatives? A. Rule 3110(c) does not prescribe how customers should be notified of these transmittals, but the rule does require “a means or method of customer confirmation, notification, or follow-up that can be documented.” Accordingly, customer contact to confirm or follow-up to fulfill this requirement must be memorialized and retained for review. Factors to be considered with respect to the documentation of customer contact would include:

The date of notification; The means or method of contact (e.g., telephone number, email address, etc.); Identification of the account(s) in question; Whether there was a response from the customer; and, if so, a brief summary of

the customer’s response and any follow-up action taken. In the case of electronic transactions made by the customer or a customer’s legal representative or agent (e.g., a registered investment adviser or agent acting pursuant to legal written authorization) via secure electronic means that are subject solely to the customer’s control, it would be sufficient under Rule 3110(c) for the system itself, as part of its functions, to generate an electronic notification to the customer evidencing the completed transaction. Whatever the means or method of customer notification used, an informed determination must be made that any persons responsible for following up with a customer be independent of the customer’s registered representative and be subject to appropriate supervision. In addition, Rule 3110(c)(2)(B) permits firms to use reasonable risk-based criteria to determine the authenticity of the transmittal instructions.

http://www.finra.org/industry/faq-supervision-faq

2018 FINRA Annual Conference

Common Findings Related to Books and Records- Rule Reference Guide


Order Tickets

SEA Rule 17a-3(a)(6): Terms and conditions; modifications or cancellations; account identification; associated person identification or electronic order notation; discretionary authority notation; time of receipt, entry, execution or cancellation; and execution price. See also FINRA Rule 4515. Retention Period: Three years


SEA Rule 17a-4(b)(4): Originals of all communications received and copies of all communications

sent (and any approvals thereof) by the broker-dealer (including inter-office memoranda and

communications) relating to its business as such, including all communications that are subject

to rules of a self-regulatory organization of which the broker-dealer is a member regarding

communications with the public. FINRA Rule 3110.09: Correspondence and internal

communications of associated persons relating to the member's investment banking or

securities business, including the preparer s and reviewer s names (for outgoing

correspondence). Retention Period: Three years

Account Records

SEA Rule 17a-3(a)(9): A record for each cash and margin account indicating, among other things, the name and address of the beneficial owner of such account, and in the case of a margin account, the signature of such owner. Retention Period: Three years. SEA Rule 17a-3(a)(17): A record for each natural person customer, which includes: customer or owner s name; tax identification number; address; telephone number; date of birth; employment status (including occupation and whether customer is an associated person of a broker-dealer); annual income; net worth (excluding primary residence); account s investment objectives; signature of the associated person responsible for the account (if any); and principal approval. The broker-dealer must furnish the customer a copy of the required account record information within 30 days of the opening of the account and thereafter at least every 36 months. The broker-dealer also must notify the customer of a name or address change or a change in investment objectives within 30 days. For discretionary accounts, the broker-dealer must keep a record of the dated signature of each customer granting discretionary authority and the dated signature of each natural person to whom discretionary authority is granted. See also FINRA Rules 4512 and 3110(c)(2)(C). Retention Period: Six years. SEA Rule 17a-4(c): An account card or record that relates to the terms and conditions with respect to the opening and maintenance of a customer account. Retention Period: Six years.

2018 FINRA Annual Conference

Common Findings Related to Books and Records- Rule Reference Guide



SEA Rules 17a-3(a)(11), 17a-4(b)(5) and 17a-4(b)(8): Trial balances, computations of aggregate

indebtedness and net capital (and working papers), financial statements, branch office

reconciliations and internal audit working papers, relating to the broker-dealer s business as

such. Records that contain the information supporting the amounts included in FOCUS reports

and annual audited financial statements. Retention Period: Three years


SEA Rule 17a-4(j): Firms must furnish promptly to the SEC legible, true, complete and current

copies of required records, or any other records of the firm subject to examination that are

requested. See also FINRA Rule 8210.


SEA Rule 17a-4(f): Electronic storage media requirements include: (1) notifying FINRA; (2)

providing a representation that the electronic storage media meet specified conditions,

including, among other conditions, that the electronic storage media preserve records

exclusively in a non-rewritable, non-erasable format, referred to as Write-Once, Read-Many or

WORM format; (3) making available a retrieval facility; (4) providing facsimile enlargements; (5)

retaining a duplicate copy of the records; (6) creating indexes; (7) maintaining an audit system;

(8) preserving the information needed to access records and indexes; and (9) identifying a third

party that can provide access to the records.


FINRA Rule 3110(c)(2)(B): Members policies and procedures regarding transmittals of funds

(e.g., wires) or securities from customers to third party accounts, from customer accounts to

outside entities (e.g., banks), from customer accounts to locations other than a customer's

primary residence (e.g., alternate address), and between customers and registered

representatives must include a means or method of customer confirmation, notification or

follow-up that can be documented. Retention Period: Six years

COMPLIANCE AREA ITEM Daily Weekly Monthly Quarterly Annually As Needed

General Administration

Form Filings Form BD (principal signature/date on updated/amended Form BD to evidence review and approval. Maintain in firm file.)

Form U4

Form U4: Updates/amendments to U4 reviewed and signed by registered individual + maintained in ee file

Form U4: Rep signs a new Pre-Arb Agreement that is then maintained in ee file every time a firm updates/amends the rep’s U4

Form U5: Filed within 30 days; copy placed in ee file

Form U5: Copy mailed to former employee (evidence the mailing and place in ee file)

Fingerprint Cards: Digital preferred, if hard copy do not send duplicates (firm will be charged per card submitted)

Designated Principal for supervision of form filings

Designation of Executive Rep (ensure e-mail address is current at all times)

Updates to Firm Contact System (review annually, at a minimum)

Payment of Regulatory Fees

MSRB: G-40 Updates

Business Continuity Plan

Business Continuity Plan Content of Plan

Include BCP/DR Call Tree (be sure to update with new hires throughout the year)

Approval of Plan

Testing of Plan

Personnel

Hiring

Create New Hire Checklist

Obtain signature from potential hire authorizing firm to conduct a background investigation

Investigation of Background (financial, criminal, qualifications, etc.)

Obtain authorizing signature from potential hire for firm to conduct a CRD review (Gateway review of prior U5, etc.)

Reference Check (prior employers); evidence this process

Screening for SD persons hired in clerical or ministerial positions

Create Job Offer Letter

Determine IT permissions, inform IT personnel

Determine qualifications of Supervisory Personnel; Assign Supervisor and update Supervisory Org Chart (and firm org chart)

Municipal securities personnel, including representatives, principals and apprentices

Registration of Trading Personnel

All associated persons are properly registered

Records for Associated Persons

IT: Assign electronic mail address to new hire

IT: Add new ee to email archiving system

+ email review rotation

IT: Add new ee to Cybersecurity Checklist

Continuing Education

Regulatory Element Monitor Reg Element Notices

Supervision of Inactive Associated Persons

Firm Element Needs Analysis (annually)

Written Plan (annually)

Monitor Firm Element Completion

Supervision of Associated Persons who do not complete Firm Element

Annual Compliance Meeting

Attendance Records - Ensure All Associated Persons attend

Annual Attestations Completed and Returned

Firm Supervision and Oversight

Employee Supervision Gifts and Gratuities

Non-Cash Compensation

Outside Business Activities

Private Securities Transactions

Accounts with Other BDs

Sharing in Customer Accounts

Borrowing and Lending between associated persons and customers

General Supervision Supervision of Outsourcing Arrangements

Heightened Supervision

Supervision of Statutorily Disqualified Individuals

Use of Exception Reports and other Reports

CEO/CCO Annual Certification (Rule 3010)

Limited Size and Resources Exception (Rule 3012) – Notify FINRA

Review of Accounts and Correspondence

Correspondence Review Incoming

Outgoing

Faxes

Electronic Communications (emails, Ims, etc

Taping Rule Compliance

Account Reviews Review of Employee Transactions

Opening Accounts and transactions with persons associated with other BDs

Transaction involving FINRA Employees

Supervision of Municipal Securities Transactions (including 529 Plans)

Branch Supervision

Designation of Offices of Supervisory Jurisdiction (OSJs)

Branch Office Inspections

Activities on the Premises of a Financial Institution

Documentation regarding limited size and resources exemption

Conflicts opf Interest with respect to inspections of branch and non-branch locations

Supervision of Branch Offices - Options Business

Insider Trading

Monitoring for Insider Trading

Periodically reviewing employee and firm trading

Criteria for investigating suspect trades

Require employees to sign attestation

Update employees on new or revised insider

trading rules and regulations.

Definition of Material, Non-Public information, Insiders and other relevant terms

Policies and procedures on access to or utilization of material, non-public information

Tools and methods for inhibiting or monitoring transactions in restricted securities.

Procedures to detect transactions in restricted/control securities (Watch Lists, etc)

Securities Transactions for personal and family- related accounts

Chinese Wall Procedures

Method for determining whether firm trading should be restricted

Determining and identifying activities that are restricted while security is on list

Monitoring Associated Persons' trading of restricted securities

Time period covered and frequency of review

Recording details of associated persons' trade in restricted security

Creation and maintenance of documentation to evidence supervisory reviews

Anti-Money Laundering Program

AML Policies and Procedures Designate AML Contact Person

Written AML Compliance Program approved in writing by Senior Management

Establish and implement policies and procedures to detect and cause the reporting of suspicious transactions

Bank Secrecy Act policies and procedures

Independent testing of AML Compliance Program (annually)

On-going training of firm personnel

Customer Identification Program and verification of customers' identity

Determine whether customer appears on any list of known terrorists or terrorist organizations such as those listed on OFAC web site, as well as those on the list of embargoed countries/regions on the OFAC List

Responding to information requests from FinCEN concerning money laundering or terrorist financing, including how the firm will protect the security and confidentiality of the information requests

Sharing information with other financial institutions, if applicable (including requirement to provide annual sharing agreement to FinCEN)

Opening Correspondent Accounts

If firm does not open or maintain correspondent accounts for foreign banks, it must have internal controls implemented to detect any attempt to open such an account

If firm opens or maintains correspondent accounts for foreign banks:

Identify US agent for service of legal process

Identify owners of foreign banks

Provide information to federal law enforcement officers

Terminate correspondent relationship w/in 10 days of notice by the Treasury or AG that the firm failed to comply with summons or contested a summons

Due Diligence review for correspondent accounts of foreign financial institutions

Determine the identity of the nominal and beneficial account holder and the source of funds deposited into "private banking accounts" and to conduct enhanced scrutiny of accounts of a senior foreign political figure

If the firm does not open or maintain private banking accounts for non-US persons, have internal controls in place designed to detect any attempt to open such an account

Freeze accounts and prohibit transactions with persons who are suspected of terrorist activities pursuant to Executive Order #13224 that was issued through OFAC

If the firm prohibits the receipt of currency, procedures and internal controls to detect its receipt

Filing Currency Transaction Reports: Identify cash transactions for filing CTRs; Filing of CTRs; Verify the identity of customers for filing CTRs

Filing reports of international Transportation of Currency or Monetary Instruments

Filing reports of Foreign Bank and Financial Accounts

Obtaining all required information regarding the transmittal/retransmittal of wire transfers that includes the transmitter and recipient of funds

Verifying the identity of customers in connection with wire transfers

Procedures to detect and report suspicious transactions by filing Suspicious Activity Reports (SAR-SF)

Recordkeeping requirements (Currently a 5 year requirement)

Communications with the Public

Advertising and Sales Literature (including email and web sites)

Cold Calling/Telemarketing Scripts

Institutional Sales Literature and Correspondence

Speaking Engagements; Scripts; Outlines; Media Participation; Chat Rooms

Sales Materials for Municipal Fund Securities; 529 Plans

Options Communications with the Public

Sales Literature Review

Disclosures to Customers

Customer Disclosure and Written Acknowledgment (Business on the premises of a financial institution)

Communications related to SIPC coverage

Material Event & Customer Complaint Reporting

Regulation SP requirement to provide initial, annual & revised privacy policy notice; description of how and when distributed to customers; administrative, technical & physical safeguard of information; testing of firewalls

Investor Educations

Mortgage-Backed Securities: risk disclosure

CMOs: risk disclosure

Delivery of OptionsDisclosure documents

10b-9 Disclosures

Designated Securities/Penny Stock Disclosures

Payment for Order Flow - Policies, Procedures and Disclosures to Customers

Disclosures for bank-affiliated broker-dealers; Not FDIC Insured; Price fluctuations, etc.

Disclosure in connection with new issues of municipal securities

Municipal securities, disclosures by issuer

Mark-up/Mark-down disclosures (confirmations, etc.)

General Supervision Prohibition against guarantees

Conduct and fair dealing; Fraud

Customer Information Controls

New Account Review and Approval

Verification of customer's background and financial information for options; maintenance of background information

Review/approval of new options accounts

Suitability

General Suitability

Conflicts of Interest

Hold Recommendations

Discretionary Accounts

Designated Securities/Penny Stocks

Direct Participation Programs - Review of subscription agreements

Identification of Sophisticated Municipal Market Professionals (SMMPs)

Minimum denomination amounts

Hedge Fund due diligence reviews

Due Diligence (public/private) review of

prospective offerings and files

Powers of attorney/authority to act as agent on behalf of account/third party

Short sale recommendations

Suitability of solicited online transactions

Fees Charged to Customers

Fair pricing, commissions, fees charged to customers, markups (remember each of these stands alone for regulatory purposes, but are also reviewed in aggregate per client – two different reviews)

Transaction Review and Handling Customer Complaints

Complaints Reporting of Customer Complaints

Records of Written Customer Complaints

Options Complaints

Trade Review Unauthorized trading

Churning

Front Running

Excessive commissions/fees

Best Execution / Fair Pricing

Other transaction issues

Financial Reporting

FinOp Responsibilities FinOp's duties and responsibilities

FinOps registered with multiple firms

Notification of replacement of accountant (SEA Rule 17a-5(f)(3))

File annual audited financials + compliance or exemption report

Filing of FOCUS and Related Forms Financial Reporting/Backup

Net Capital Computation

FOCUS II Report

Custody Report

SSOI Report

Inventory Report

OBS Report

FOCUS I

Handling of Customer Funds and Securities

Customer Protection Reserve Computation

Quarterly Box Count

Safekeeping and Segregation of Customer Securities

Handling of Funds and Securities

Error Procedures for handling customer funds received by fully-disclosed firms

Handling customer funds in general

Handling customer securities

Prohibition against improper use of customer funds and securities

Escrow Account Maintenance

Transmissions or maintenance of payments received in connection with underwritings

Proper investment of escrow funds

Receipt of cash

Receipt and reporting of cash or cash equivalents

Capital and Credit Regulation

Buy-In Procedures

Sell-Out Procedures

Short Sale Close-Out Procedures

Parking of securities for net capital

parking of securities for manipulation

Repurchases/reverse repurchase transactions

Bonds borrowed and loaned transactions

Uniform Practice - Municipal Securities

Disclosure of firm balance sheets upon customer request

Margin

Margin requirements

Netting positions of accounts that are related or accounts under common control; Letter of authorization regarding guarantees/cross guarantees

Joint back office arrangements

Recordkeeping

Maintenance of Books and Records Main Office

Branch Offices

36 Month Update of Customer Account Information

Order Tickets/Order Ticket Procedures (Time stamping)

Confirmations

Instant Messaging and Electronic Communications

Municipal Books and Records to be created and preserved

Internal Controls

Account Transfers

Customer Account Transfers Contracts (ACATS)

Verification of customer signature to transfer account, change address, etc.

Branch Office Controls

Review of order entry and account access centers and customer account access at branch offices

Controls over branch office administrative and back-office functions

Clearing Firm Monitoring of Correspondents

Clearing Agreements (e.g. clearing firm forwarding complaints to introducing firms, etc.)


Approval of account name or designation changes for orders

Risk Mitigation Trading Limits

Systems and Operations Controls

Signature guarantee requirements and proper execution

Information security measures (e.g., securing equipment, preventing entry of unauthorized orders, controls on system entitlements, limits on password sharing, administrative procedures to change passwords, audit trail for tracking changes in entitlements

Direct Participation Programs (Real Estate Syndicates; Oil & Gas Interests

Suitability Determinations and Reviews Disclosure

Review of Subscription Agreements

General Supervisory Obligations Rollups

Organization and Offering Expenses

Review and determination of Fair and Reasonable DPP Expenses

Documentation for Evidencing Review

Secondary Market Trading Secondary Trading of DPP Shares

Trade Reporting of DPP Transactions

Fixed Income Securities

Municipal Securities Proper Registrations Maintained by Employees to Conduct Municipal Business

Municipal Advisor Activities

Disclosures in Connection with Primary Offerings

Underwriting and transaction assessments payable to MSRB

Solicitation of municipal securities business

Primary offering prices

CUSIP numbers, New Issue and Market Information Requirements

Delivery of Investor Brochure

Delivery of investor brochure upon receipt of complaint/customer complaint brochure

Political Contributions

Documentation of Political Contributions by Municipal Market Professionals

Two Year Lookback for new MMPs

Filing of Form G37

Trade Reporting

Reporting of sales and purchases of municipal securities transactions

Municipal Securities Business

Use of ownership information obtained in Fiduciary or Agency Capacity

Customer suitability and fair pricing

TRACE

Participation, trade reporting, dissemination of information

Review of Report Cards

Investment Company Products

Mutual Funds

Sales Charges - Investment Company Products

Prospectus Delivery

Market Timing and late trading activities

Redemption procedures (Dealers only)

Selling dividends - limitations on disclosures

Fees charged to customers

Review of Customer Accounts

Breakpoints, Letters of Intent, Rights of Accumulation

Switching

Execution of investment company portfolio transactions; compensation, commissions, reciprocal activity

Options

Supervision

Maintenance of records - central log, index or file for options complaints

Supervision of Options Accounts

Adjustments to options contracts

Transaction Processing Allocation Procedures

Uncovered short option contracts

Position Limits/Exercise Limits

Reporting options positions

Position Limits Reporting Procedures

Cash and Margin Treatment for Certain Types of Options

Research

General Supervision

Research Analysts; Restrictions and Disclosure Obligations

Research Reports

Quiet Periods

Fixed Income Research

Underwriting and Private Placements

Private Placements Regulation A

Regulation D, Rules 501-506

Types of Offerings

Best Efforts and Private Placement (including procedures for contingent offerings)

PIPES - Private Investments in Public Equities (including monitoring for impermissible trading in PIPE issuers

Self Underwriting

Intrastate Offerings

Rule 144 Stock

Crypto + Tokens (securities)

Firm Commitment Charges

Communications with the public about variable life insurance and variable annuities

Material Events Material Event Disclosures

Securities Registration Registration of Public Offerings

Misrepresentation as to registration

Syndicate Management

Restricted Period (Underwriting Activity Report

Filings required by Corporate Finance Department

Regulation M - Rules 101-105

Non Cash Compensation

Disclosure of affiliation with issuer or interest in distribution

Variable Products

General Supervision


Sales of Variable Products

Variable Annuities Sub Accounts

Fees

Riders

Suitability

Twisting (trading among mutual funds, insurance products and variable products)

1035 Exchanges

Replacements

Multiple Contract Sales

Trading and Trading Operations

Supervision

Designation of Principal(s) responsible for overall supervisory system and procedures

Designation of Principal(s) responsible for supervision of the trading area

Designation as an Office of Supervisory Jurisdiction (OSJ) of each location at which the order execution or market making functions are conducted

Designation of Principal(s) in each OSJ location at which order execution or market making occurs

Procedures to ensure personnel are properly registered as required by SRO Rules

Procedures to help ensure a reasonable effort is made to determine supervisory personnel are qualified by virtue of experience or training to execute assigned responsibilities

Order Handling

Order Routing

If the firm routes orders to another market center - procedures to ensure compliance and to review for compliance with the Disclosure of Order Routing Information Rule

Market Making

If the firm makes markets in covered securities - procedures to ensure compliance and to review for compliance with the Limit Order Display and Quote Dissemination Rules

For firms that make markets OTC in any exchange-traded security, but are not registered as market makers - procedures to monitor member's trading activity to determine whether it had traded over 1% of the quarterly volume of any exchange-traded security, thereby making the security a "subject security" and the member a "responsible broker-dealer that is required to communicate its beset bid, offer and size for each subject security to a national securities exchange or association.

NMS Stocks

If the firm is an exchange or OTC market maker in NMS securities - procedures to ensure quotations are not communicated to vendors for display on a terminal, unless the security if a subject security with respect to the market maker

If the firm is a market cent4r in NMS stocks - procedures to ensure compliance and review for compliance with the Disclosure of Order Execution Information Rule

Limit Orders

If the firm accepts limit orders - procedures to ensure compliance and to review for compliance with the Limit Order Protection Rules

Market Orders

If the firm accepts Market Orders - procedures to ensure compliance and to review for compliance with the Market Order Protection Rules

Best Execution

Procedures to ensure compliance and to review for compliance with the requirement to execute customer orders and orders for the customers of another broker-dealer at a price as favorable as possible under prevailing market conditions including:

Executing customer orders as principal

Execution of customer orders as principal after acquiring securities to fill the

customer's order (i.e., riskless principal trading)

Execution of customer orders as agent

Execution of customer block-sized orders, "not- held" orders and customer orders with special pricing terms/conditions (e.g., VWAP, MOO, MDC, Capped)

If firm concurrently handles multiple orders subject to time/price trading discretion (e.g., "not held", "working", VWAP, etc.) establishing a process to ensure best execution obligations are met with respect to all orders and that shares are allocated to concurrently open orders in a fair and non-discriminatory manner

Execution of orders routed to and executed by other parties, based on order-by-order routing decisions made by the firm (a/k/a Regular and Rigorous Reviews

Policies and procedures against adjusted trading

Reallocation of trades/Allocation methodology and procedures

If the firm trades OTC equity securities - procedures to ensure compliance and to review for compliance with the requirements to ascertain the best interdealer market by obtaining and documenting quotations (a/k/a "3-Quote Rule"

Anti-Intimidation/Coordination

Procedures to prevent and detect the occurrence of prohibited trading practices including: i) the coordination of quotes, trades, or trade reports with another member through "price/size convention", ii) requesting another member to alter or maintain a price or quote, iii) display of quotes in order to orchestrate artificial price movements, iv) the display of quotes with no intention of trading at the quoted prices, v) display of quotes in order to help another member execute trades, vi) delay of trade reports for the benefit of the member or another party, vii) engaging in any other activity, which improperly benefits the member or other members at the expense of customers

Procedures to prevent and detect the occurrence of prohibited conduct including threatening, coercion, or intimidation to improperly influence another person or member including:

i. Refusals to honor firm quote obligations or to trade with other members, especially in a selective/ discriminatory fashion

ii. Executing orders in a manner intended to harass or annoy another member

iii. Reporting harassment an instances in which threats or attempts at coercion have been received

iv. Educating personnel as to what

constitutes improper conduct

Trade Reporting

If the firm reports trades through a TRF, procedures to ensure compliance and review for compliance with requirements to report trade accurately and timely

If the firm reports trades through ADF/TRACS, procedures to ensure and review for compliance with requirements to report trades accurately and timely

Procedures to ensure and review for compliance with TRF and/or ADF/TRACS requirements regarding:

1) The proper use of trade modifiers (e.g., .PRP, .SLD, .T, .W, etc.) when required, and refraining from use when not required.

2) Reporting Riskless Principal Trades

3) Accepting trades reported by another member (or entering a matching trade) in a timely manner

If another member or third-party reports trades on the firm's behalf (under an AGU, A2, QSR, or otherwise), procedures to ensure trades have been accurately reported on the member's behalf.

Sale Transactions

Procedures to ensure and review for compliance with requirements to (i) properly determine whether a sale is long or short, and (ii) mark the member's order records accordingly as "long," "short," or "short exempt."

If the firm will utilize aggregation of units, procedures to ensure the member's organization plan qualifies for independent trading unit aggregation, that each unit engages only in its specified trading strategies and that trading units do not coordinate strategies with each other.

Procedures to ensure and review for compliance with requirements to locate (or arrange to borrow) securities being sold prior to execution

Procedures to ensure and review for compliance with requirements to refrain from accepting short sale order for threshold securities in which the member has aged fails unless the member borrows the securities being sold prior to execution

If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and proprietary sale transactions


If the firm accepts, displays, and/or executes short sales in NMS securities other than on an exchange, procedures to ensure and review for compliance with the prohibitions on executing non-exempt short sales on a down tick if the price of the security decreases by 10% or more from the prior day's closing price

Other Trading Rules

Procedures to ensure and review for compliance with the prohibitions on trading or quoting during a trading halt in Nasdaq-listed, exchange-listed, or OTC equity security

Procedures to ensure and review for compliance with the requirements for the member to honor its quotes, refrain from "backing away" from its quotes and adequately staffing its trading desk

Procedures to help ensure and review for compliance with requirements related to locked and crossed markets, including:

If the member is an ADF participant, properly responding to "trade or move directed orders" during pre-opening trading

If the member enters quotes in ADF, refraining from entering a quote that would lock or cross an existing quote

If the firm enters quotes for OTC Equity securities in multiple real-time quotation systems, procedures to ensure and review for compliance with requirement to maintain identical quotes for a security in each system

If the firm will use FINRA systems, procedures to ensure and review for compliance with requirements to maintain the physical security of equipment to prevent the improper use of, or unauthorized entry of information into FINRA systems

Soft Dollar Accounts and Trading

If the firm provides "soft dollar" credits to customers, procedures to ensure and review for compliance with requirements related to this activity including:

(1) Preparing records that reflect which trades were executed by the member pursuant to agreements with customers to generate soft dollar credits

(2) Monitoring trades for which soft dollar credits are accrued to determine whether they were within the SEC-established safe harbor for agency transactions and riskless principal transactions reported as such in accordance with FINRA trade reporting rules

(3) If/When operating outside the SEC- established safe harbor, undertaking reasonable affirmative steps to verify that the member is operating in compliance with all applicable securities rules and regulations, and is not aiding or abetting violations by others

(4) Preparing records that reflect the cost/value of research or other services provided to customers that reduce/eliminate accrued soft dollar credits

(5) Monitoring research or services provided to ensure the items are within the SEC- established safe harbor

(6) Annual review of research analyst compensation

Order Audit Trail System (OATS)

Procedures to ensure and review for compliance with the requirement to synchronize the member's clock daily, prior to the open, and to monitor for intraday drift

Procedures to ensure and review for compliance with the requirement that reported OATS data is accurately and timely, whether reported by the firm or by a third party on the member's behalf

Procedures to review, correct, and re-submit data initially rejected by OATS

Procedures to ensure information reported to OATS is consistent with information submitted to a TRF and/or the ADF/TRACS

Procedures to ensure reported routed order identification numbers are consistent with the numbers received from the sending member

Other Rules

Procedures to ensure and review for compliance with the prohibitions on the improper sharing of material, non-public information (including information about pending orders) between the member's trading desk(s)

Procedures to ensure and review for compliance with the requirement to accurately prepare and maintain required books and records pertaining to the trading area(s)

Procedures to ensure and review for compliance with the prohibitions against accepting payment or other consideration, directly or indirectly, from an issuer, affiliate, or promoter thereof

Use of Multiple Market Participant Identifiers (MPIDs)

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with use of each MPID in accordance with (i) the representations made when requesting supplemental MPIDs, and (ii) the requirements/ limitations related to the use of supplemental MPIDs

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with limiting access of each MPID's user(s) to their own order/trading information and ensuring that order/trading information is not improperly shared between multiple MPID user(s)

If the firm proposes to use multiple MPIDs, procedures to ensure the member has incorporated activity conducted under all MPIDs into its supervisory system and procedures as needed (including but not limited to trade reporting, OATS, record keeping, Reg SHO, Reg NMS, and best execution obligations, based upon the activity for which the additional MPIDs are used

ATSs and ECNs

Procedures to ensure and review for compliance with the requirements to file Form ATS-R on a quarterly basis

Procedures to ensure and review for compliance with the requirement to protect subscribers' confidential trading information including, a) limiting information access to ATS employees responsible for operating the ATS or for compliance with applicable rules, and b) implementing standards to control ATS employees trading for their own accounts

Procedures to ensure and review for compliance with the prohibition on charging inconsistent fees

Procedures to monitor trading volume and determine whether the ATS has surpassed the "5% threshold" that would require it to comply with Reg ATS order display, execution access, and fair access requirements

Procedures to monitor trading volume and determine whether the ATS has surpassed the "20% threshold" that would require it to comply with the Reg ATS requirements for capacity, integrity, and security of automated system

If the firm proposes to be a "Reporting ECN" (as defined in FINRA Rule 7210A) that reports trades to a TRF, procedures to ensure and review for compliance with TRF reporting requirements in FINRA Rules 7230A and 7230B, 7230C, and 7330

If the ATS enters quotes in FINRA's ADF, procedures to ensure and review for compliance with the requirement to execute orders in excess of the ECN's displayed quote size, when displaying a quote based on a reserved size order

Policies and procedures pursuant to which the firm will review and approve applicants seeking to subscribe to the ATS

COMPLIANCE AREA ITEM TESTING NOTES DEFICIENCY STATUS STEP 1 CREATE A COMPLIANCE CALENDAR

FOR THE YEAR

General Administration

Form Filings Form BD (principal signature/date on updated/amended Form BD to evidence review and approval. Maintain in firm file.)

Form U4

Form U4: Updates/amendments to U4 reviewed and signed by registered individual + maintained in ee file

Form U4: Rep signs a new Pre-Arb Agreement that is then maintained in ee file every time a firm updates/amends the rep’s U4

Form U5: Filed within 30 days; copy placed in ee file

Form U5: Copy mailed to former employee (evidence the mailing and place in ee file)

Fingerprint Cards: Digital preferred, if hard copy do not send duplicates (firm will be charged per card submitted)

Designated Principal for supervision of form filings

Designation of Executive Rep (ensure e-mail address is current at all times)

Updates to Firm Contact System (review annually, at a minimum)

Payment of Regulatory Fees

MSRB: G-40 Updates

Business Continuity Plan

Business Continuity Plan Content of Plan

Include BCP/DR Call Tree (be sure to update with new hires throughout the year)

Approval of Plan

Testing of Plan

Personnel

Hiring

Create New Hire Checklist

Obtain signature from potential hire authorizing firm to conduct a background investigation

Investigation of Background (financial, criminal, qualifications, etc.)

Obtain authorizing signature from potential hire for firm to conduct a CRD review (Gateway review of prior U5, etc.)

Reference Check (prior employers); evidence this process

Screening for SD persons hired in clerical or ministerial positions

Create Job Offer Letter

Determine IT permissions, inform IT personnel

Determine qualifications of Supervisory Personnel; Assign Supervisor and update Supervisory Org Chart (and firm org chart)

Municipal securities personnel, including representatives, principals and apprentices

Registration of Trading Personnel

All associated persons are properly registered

Records for Associated Persons

IT: Assign electronic mail address to new hire

IT: Add new ee to email archiving system + email review rotation

IT: Add new ee to Cybersecurity Checklist

Continuing Education

Regulatory Element Monitor Reg Element Notices

Supervision of Inactive Associated Persons

Firm Element Needs Analysis (annually)

Written Plan (annually)

Monitor Firm Element Completion

Supervision of Associated Persons who do not complete Firm Element

Annual Compliance Meeting

Attendance Records - Ensure All Associated Persons attend

Annual Attestations Completed and Returned

Firm Supervision and Oversight

Employee Supervision Gifts and Gratuities

Non-Cash Compensation



Accounts with Other BDs

Sharing in Customer Accounts

Borrowing and Lending between associated persons and customers

General Supervision

Supervision of Outsourcing Arrangements

Heightened Supervision

Supervision of Statutorily Disqualified Individuals

Use of Exception Reports and other Reports

CEO/CCO Annual Certification (Rule 3010)

Limited Size and Resources Exception (Rule 3012) – Notify FINRA

Review of Accounts and Correspondence

Correspondence Review Incoming

Outgoing

Faxes

Electronic Communications (emails, Ims, etc

Taping Rule Compliance

Account Reviews Review of Employee Transactions

Opening Accounts and transactions with persons associated with other BDs

Transaction involving FINRA Employees

Supervision of Municipal Securities Transactions (including 529 Plans)

Branch Supervision

Designation of Offices of Supervisory Jurisdiction (OSJs)

Branch Office Inspections

Activities on the Premises of a Financial Institution

Documentation regarding limited size and resources exemption

Conflicts of Interest with respect to inspections of branch and non-branch locations

Supervision of Branch Offices - Options Business

Insider Trading

Monitoring for Insider Trading

Periodically reviewing employee and firm trading

Criteria for investigating suspect trades

Require employees to sign attestation

Update employees on new or revised insider trading rules and regulations.

Definition of Material, Non-Public information, Insiders and other relevant terms

Policies and procedures on access to or utilization of material, non-public information

Tools and methods for inhibiting or monitoring transactions in restricted securities.

Procedures to detect transactions in restricted/control securities (Watch Lists, etc)

Securities Transactions for personal and family-related accounts

Chinese Wall Procedures

Method for determining whether firm trading should be restricted

Determining and identifying activities that are restricted while security is on list

Monitoring Associated Persons' trading of restricted securities

Time period covered and frequency of review

Recording details of associated persons' trade in restricted security

Creation and maintenance of documentation to evidence supervisory reviews

Anti-Money Laundering Program

AML Policies and Procedures Designate AML Contact Person

Written AML Compliance Program approved in writing by Senior Management

Establish and implement policies and procedures to detect and cause the reporting of suspicious transactions

Bank Secrecy Act policies and procedures

Independent testing of AML Compliance Program (annually)

On-going training of firm personnel

Customer Identification Program and verification of customers' identity

Determine whether customer appears on any list of known terrorists or terrorist organizations such as those listed on OFAC web site, as well as those on the list of embargoed countries/regions on the OFAC List

Responding to information requests from FinCEN concerning money laundering or terrorist financing, including how the firm will protect the security and confidentiality of the information requests

Sharing information with other financial institutions, if applicable (including requirement to provide annual sharing agreement to FinCEN)

Opening Correspondent Accounts

If firm does not open or maintain correspondent accounts for foreign banks, it must have internal controls implemented to detect any attempt to open such an account

If firm opens or maintains correspondent accounts for foreign banks:

Identify US agent for service of legal process

Identify owners of foreign banks

Provide information to federal law enforcement officers

Terminate correspondent relationship w/in 10 days of notice by the Treasury or AG that the firm failed to comply with summons or contested a summons

Due Diligence review for correspondent accounts of foreign financial institutions

Determine the identity of the nominal and beneficial account holder and the source of funds deposited into "private banking accounts" and to conduct enhanced scrutiny of accounts of a senior foreign political figure

If the firm does not open or maintain private banking accounts for non-US persons, have internal controls in place designed to detect any attempt to open such an account

Freeze accounts and prohibit transactions with persons who are suspected of terrorist activities pursuant to Executive Order #13224 that was issued through OFAC

If the firm prohibits the receipt of currency, procedures and internal controls to detect its receipt

Filing Currency Transaction Reports: Identify cash transactions for filing CTRs; Filing of CTRs; Verify the identity of customers for filing CTRs

Filing reports of international Transportation of Currency or Monetary Instruments

Filing reports of Foreign Bank and Financial Accounts

Obtaining all required information regarding the transmittal/retransmittal of wire transfers that includes the transmitter and recipient of funds

Verifying the identity of customers in connection with wire transfers

Procedures to detect and report suspicious transactions by filing Suspicious Activity Reports (SAR-SF)

Recordkeeping requirements (Currently a 5 year requirement)

EVIDENCE EVERYTHING

Communications with the Public

Advertising and Sales Literature (including email and web sites)

Cold Calling/Telemarketing Scripts

Institutional Sales Literature and Correspondence

Speaking Engagements; Scripts; Outlines; Media Participation; Chat Rooms

Sales Materials for Municipal Fund Securities; 529 Plans

Options Communications with the Public

Sales Literature Review

Disclosures to Customers

Customer Disclosure and Written Acknowledgment (Business on the premises of a financial institution)

Communications related to SIPC coverage

Material Event & Customer Complaint Reporting

Regulation SP requirement to provide initial, annual & revised privacy policy notice; description of how and when distributed to customers; administrative, technical & physical safeguard of information; testing of firewalls

Investor Educations

Mortgage-Backed Securities: risk disclosure

CMOs: risk disclosure

Delivery of Options Disclosure documents

10b-9 Disclosures

Designated Securities/Penny Stock Disclosures

Payment for Order Flow - Policies, Procedures and Disclosures to Customers

Disclosures for bank-affiliated broker- dealers; Not FDIC Insured; Price fluctuations, etc.

Disclosure in connection with new issues of municipal securities

Municipal securities, disclosures by issuer

Mark-up/Mark-down disclosures (confirmations, etc.)

General Supervision Prohibition against guarantees

Conduct and fair dealing; Fraud


New Account Review and Approval

Verification of customer's background and financial information for options; maintenance of background information

Review/approval of new options accounts

Suitability

General Suitability

Conflicts of Interest

Hold Recommendations

Discretionary Accounts

Designated Securities/Penny Stocks

Direct Participation Programs - Review of subscription agreements

Identification of Sophisticated Municipal Market Professionals (SMMPs)

Minimum denomination amounts

Hedge Fund due diligence reviews

Due Diligence (public/private) review of prospective offerings and files

Powers of attorney/authority to act as agent on behalf of account/third party

Short sale recommendations

Suitability of solicited online transactions

Fees Charged to Customers

Fair pricing, commissions, fees charged to customers, markups (remember each of these stands alone for regulatory purposes, but are also reviewed in aggregate per client – two different reviews)

Transaction Review and Handling Customer Complaints

Complaints Reporting of Customer Complaints

Records of Written Customer Complaints

Options Complaints

Trade Review Unauthorized trading

Churning

Front Running

Excessive commissions/fees

Best Execution / Fair Pricing

Other transaction issues

Financial Reporting

FinOp Responsibilities FinOp's duties and responsibilities

FinOps registered with multiple firms

Notification of replacement of accountant (SEA Rule 17a-5(f)(3))

File annual audited financials + compliance or exemption report

Filing of FOCUS and Related Forms

Financial Reporting/Backup

Net Capital Computation

FOCUS II Report

Custody Report

SSOI Report

Inventory Report

OBS Report

FOCUS I

Handling of Customer Funds and Securities

Customer Protection Reserve Computation

Quarterly Box Count

Safekeeping and Segregation of Customer Securities

Handling of Funds and Securities

Error Procedures for handling customer funds received by fully- disclosed firms

Handling customer funds in general

Handling customer securities

Prohibition against improper use of customer funds and securities

Escrow Account Maintenance

Transmissions or maintenance of payments received in connection with underwritings

Proper investment of escrow funds

Receipt of cash

Receipt and reporting of cash or cash equivalents

Capital and Credit Regulation

Buy-In Procedures

Sell-Out Procedures

Short Sale Close-Out Procedures

Parking of securities for net capital

Parking of securities for manipulation

Repurchases/reverse repurchase transactions

Bonds borrowed and loaned transactions

Uniform Practice - Municipal Securities

Disclosure of firm balance sheets upon customer request

Margin

Margin requirements

Netting positions of accounts that are related or accounts under common control; Letter of authorization regarding guarantees/cross guarantees

Joint back office arrangements

Recordkeeping

Maintenance of Books and Records

Main Office

Branch Offices

36 Month Update of Customer Account Information

Order Tickets/Order Ticket Procedures (Time Stamping)

Confirmations

Instant Messaging and Electronic Communications

Municipal Books and Records to be created and preserved

Internal Controls

Account Transfers

Customer Account Transfers Contracts (ACATS)

Verification of customer signature to transfer account, change address, etc.

Branch Office Controls

Review of order entry and account access centers and customer account access at branch offices

Controls over branch office administrative and back-office functions

Clearing Firm Monitoring of Correspondents

Clearing Agreements (e.g. clearing firm forwarding complaints to introducing firms, etc.)


Approval of account name or designation changes for orders

Risk Mitigation Trading Limits

Systems and Operations Controls

Signature guarantee requirements and proper execution

Information security measures (e.g., securing equipment, preventing entry of unauthorized orders, controls on system entitlements, limits on password sharing, administrative procedures to change passwords, audit trail for tracking changes in entitlements

Cybersecurity Checklist (keep current!)

Direct Participation Programs (Real Estate Syndicates; Oil & Gas Interests

Suitability Determinations and Reviews

Disclosure

Review of Subscription Agreements

General Supervisory Obligations Rollups

Organization and Offering Expenses

Review and determination of Fair and Reasonable DPP Expenses

Documentation for Evidencing Review

Secondary Market Trading Secondary Trading of DPP Shares

Trade Reporting of DPP Transactions

Fixed Income Securities

Municipal Securities Proper Registrations Maintained by Employees to Conduct Municipal Business

Municipal Advisor Activities + Documentation

Disclosures in Connection with Primary Offerings

Underwriting and transaction assessments payable to MSRB

Solicitation of municipal securities business

Primary offering prices

CUSIP numbers, New Issue and Market Information Requirements

Delivery of Investor Brochure

Delivery of investor brochure upon receipt of complaint/customer complaint brochure

Political Contributions

Documentation of Political Contributions by Municipal Market Professionals

Two Year Lookback for new MMPs

Filing of Form G37

Trade Reporting

Reporting of sales and purchases of municipal securities transactions

Municipal Securities Business

Use of ownership information obtained in Fiduciary or Agency Capacity

Customer suitability and fair pricing

TRACE

Participation, trade reporting, dissemination of information

Review of Report Cards

Investment Company Products

Mutual Funds

Sales Charges - Investment Company Products

Prospectus Delivery

Market Timing and late trading activities

Redemption procedures (Dealers only)

Selling dividends - limitations on disclosures

Fees charged to customers

Review of Customer Accounts

Breakpoints, Letters of Intent, Rights of Accumulation

Switching

Execution of investment company portfolio transactions; compensation, commissions, reciprocal activity

Options

Supervision

Maintenance of records - central log, index or file for options complaints

Supervision of Options Accounts

Adjustments to options contracts

Transaction Processing Allocation Procedures

Uncovered short option contracts

Position Limits/Exercise Limits

Reporting options positions

Position Limits Reporting Procedures

Cash and Margin Treatment for Certain Types of Options

Research

General Supervision

Research Analysts; Restrictions and Disclosure Obligations

Research Reports

Quiet Periods

Fixed Income Research

Underwriting and Private Placements

Private Placements Regulation A

Regulation D, Rules 501-506

Types of Offerings

Best Efforts and Private Placement (including procedures for contingent offerings)

PIPES - Private Investments in Public Equities (including monitoring for impermissible trading in PIPE issuers

Self Underwriting

Intrastate Offerings

Rule 144 Stock

Crypto + Tokens (securities)

Firm Commitment Charges

Communications with the public about variable life insurance and variable

annuities

Material Events Material Event Disclosures

Securities Registration Registration of Public Offerings

Misrepresentation as to registration

Syndicate Management

Restricted Period (Underwriting Activity Report

Filings required by Corporate Finance Department

Regulation M - Rules 101-105

Non Cash Compensation

Disclosure of affiliation with issuer or interest in distribution

Variable Products

General Supervision


Sales of Variable Products

Variable Annuities Sub Accounts

Fees

Riders

Suitability

Twisting (trading among mutual funds, insurance products and variable products)

1035 Exchanges

Replacements

Multiple Contract Sales

Trading and Trading Operations

Supervision

Designation of Principal(s) responsible for overall supervisory system and procedures

Designation of Principal(s) responsible for supervision of the trading area

Designation as an Office of Supervisory Jurisdiction (OSJ) of each location at which the order execution or market making functions are conducted

Designation of Principal(s) in each OSJ location at which order execution or market making occurs

Procedures to ensure personnel are properly registered as required by SRO Rules

Procedures to help ensure a reasonable effort is made to determine supervisory personnel are qualified by virtue of experience or training to execute assigned responsibilities

Order Handling

Order Routing

If the firm routes orders to another market center - procedures to ensure compliance and to review for compliance with the Disclosure of Order Routing Information Rule

Market Making

If the firm makes markets in covered securities - procedures to ensure compliance and to review for compliance with the Limit Order Display and Quote Dissemination Rules

For firms that make markets OTC in any exchange-traded security, but are not registered as market makers - procedures to monitor member's trading activity to determine whether it had traded over 1% of the quarterly volume of any exchange-traded security, thereby making the security a "subject security" and the member a "responsible broker-dealer that is required to communicate its beset bid, offer and size for each subject security to a national securities exchange or association.

NMS Stocks

If the firm is an exchange or OTC market maker in NMS securities - procedures to ensure quotations are not communicated to vendors for display on a terminal, unless the security if a subject security with respect to the market maker

If the firm is a market cent4r in NMS stocks - procedures to ensure compliance and review for compliance with the Disclosure of Order Execution Information Rule

Limit Orders

If the firm accepts limit orders - procedures to ensure compliance and to review for compliance with the Limit Order Protection Rules

Market Orders

If the firm accepts Market Orders - procedures to ensure compliance and to review for compliance with the Market Order Protection Rules

Best Execution

Procedures to ensure compliance and to review for compliance with the requirement to execute customer orders and orders for the customers of another broker-dealer at a price as favorable as possible under prevailing market conditions including:

Executing customer orders as principal

Execution of customer orders as principal after acquiring securities to fill the customer's order (i.e., riskless principal trading)

Execution of customer orders as agent

Execution of customer block-sized orders, "not-held" orders and customer orders with special pricing terms/conditions (e.g., VWAP, MOO, MDC, Capped)

If firm concurrently handles multiple orders subject to time/price trading discretion (e.g., "not held", "working", VWAP, etc.) establishing a process to ensure best execution obligations are met with respect to all orders and that shares are allocated to concurrently open orders in a fair and non-discriminatory manner

Execution of orders routed to and executed by other parties, based on order-by-order routing decisions made by the firm (a/k/a Regular and Rigorous Reviews)

Policies and procedures against adjusted trading

Reallocation of trades/Allocation methodology and procedures

If the firm trades OTC equity securities - procedures to ensure compliance and to review for compliance with the requirements to ascertain the best interdealer market by obtaining and documenting quotations (a/k/a "3- Quote Rule"

Anti-Intimidation/Coordination

Procedures to prevent and detect the occurrence of prohibited trading practices including: i) the coordination of quotes, trades, or trade reports with another member through "price/size convention", ii) requesting another member to alter or maintain a price or quote, iii) display of quotes in order to orchestrate artificial price movements, iv) the display of quotes with no intention of trading at the quoted prices, v) display of quotes in order to help another member execute trades, vi) delay of trade reports for the benefit of the member or another party, vii) engaging in any other activity, which improperly benefits the member or other members at the expense of customers

Procedures to prevent and detect the occurrence of prohibited conduct including threatening, coercion, or intimidation to improperly influence another person or member including:

i. Refusals to honor firm quote obligations or to trade with other members, especially in a selective/ discriminatory fashion

ii. Executing orders in a manner intended to harass or annoy another member

iii. Reporting harassment in instances in which threats or attempts at coercion have been received

iv. Educating personnel as to what constitutes improper conduct

Trade Reporting

If the firm reports trades through a TRF, procedures to ensure compliance and review for compliance with requirements to report trade accurately and timely

If the firm reports trades through ADF/TRACS, procedures to ensure and review for compliance with requirements to report trades accurately and timely

Procedures to ensure and review for compliance with TRF and/or ADF/TRACS requirements regarding:

1) The proper use of trade modifiers (e.g., .PRP, .SLD, .T, .W, etc.) when required, and refraining from use when not required.

2) Reporting Riskless Principal Trades

3) Accepting trades reported by another member (or entering a matching trade) in a timely manner

If another member or third-party reports trades on the firm's behalf (under an AGU, A2, QSR, or otherwise), procedures to ensure trades have been accurately reported on the member's behalf.

Sale Transactions

Procedures to ensure and review for compliance with requirements to (i) properly determine whether a sale is long or short, and (ii) mark the member's order records accordingly, as "long," "short," or "short exempt."

If the firm will utilize aggregation of units, procedures to ensure the member's organization plan qualifies for independent trading unit aggregation, that each unit engages only in its specified trading strategies and that trading units do not coordinate strategies with each other.

Procedures to ensure and review for compliance with requirements to locate (or arrange to borrow) securities being sold prior to execution

Procedures to ensure and review for compliance with requirements to refrain from accepting short sale order for threshold securities in which the member has aged fails unless the member borrows the securities being sold prior to execution

If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and

proprietary sale transactions


If the firm accepts, displays, and/or executes short sales in NMS securities other than on an exchange, procedures to ensure and review for compliance with the prohibitions on executing non-exempt short sales on a down tick if the price of the security decreases by 10% or more from the prior day's closing price

Other Trading Rules

Procedures to ensure and review for compliance with the prohibitions on trading or quoting during a trading halt in Nasdaq-listed, exchange-listed, or OTC equity security

Procedures to ensure and review for compliance with the requirements for the member to honor its quotes, refrain from "backing away" from its quotes and adequately staffing its trading desk

Procedures to help ensure and review for compliance with requirements related to locked and crossed markets, including:

If the member is an ADF participant, properly responding to "trade or move directed orders" during pre-opening trading

If the member enters quotes in ADF, refraining from entering a quote that would lock or cross an existing quote

If the firm enters quotes for OTC Equity securities in multiple real-time quotation systems, procedures to ensure and review for compliance with requirement to maintain identical quotes for a security in each system

If the firm will use FINRA systems, procedures to ensure and review for compliance with requirements to maintain the physical security of equipment to prevent the improper use of, or unauthorized entry of information into FINRA systems

Soft Dollar Accounts and Trading

If the firm provides "soft dollar" credits to customers, procedures to ensure and review for compliance with requirements related to this activity including:

(1) Preparing records that reflect which trades were executed by the member pursuant to agreements with customers to generate soft dollar credits

(2) Monitoring trades for which soft dollar credits are accrued to determine whether they were within the SEC-established safe harbor for agency transactions and riskless principal transactions reported as such in accordance with FINRA trade reporting rules

(3) If/When operating outside the SEC- established safe harbor, undertaking reasonable affirmative steps to verify that the member is operating in compliance with all applicable securities rules and regulations, and is not aiding or abetting violations by others

(4) Preparing records that reflect the cost/value of research or other services provided to customers that reduce/eliminate accrued soft dollar credits

(5) Monitoring research or services provided to ensure the items are within the SEC- established safe harbor

(6) Annual review of research analyst compensation

Order Audit Trail System (OATS)

Procedures to ensure and review for compliance with the requirement to synchronize the member's clock daily, prior to the open, and to monitor for intraday drift

Procedures to ensure and review for compliance with the requirement that reported OATS data is accurately and timely, whether reported by the firm or by a third party on the member's behalf

Procedures to review, correct, and re-submit data initially rejected by OATS

Procedures to ensure information reported to OATS is consistent with information submitted to a TRF and/or the ADF/TRACS

Procedures to ensure reported routed order identification numbers are consistent with the numbers received from the sending member

Other Rules

Procedures to ensure and review for compliance with the prohibitions on the improper sharing of material, non-public information (including information about pending orders) between the member's trading desk(s)

Procedures to ensure and review for compliance with the requirement to accurately prepare and maintain required books and records pertaining to the trading area(s)

Procedures to ensure and review for compliance with the prohibitions against accepting payment or other consideration, directly or indirectly, from an issuer, affiliate, or promoter thereof

Use of Multiple Market Participant Identifiers (MPIDs)

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with use of each MPID in accordance with (i) the representations made when requesting supplemental MPIDs, and (ii) the requirements/ limitations related to the use of supplemental MPIDs

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with limiting access of each MPID's user(s) to their own order/trading information and ensuring that order/trading information is not improperly shared between multiple MPID user(s)

If the firm proposes to use multiple MPIDs, procedures to ensure the member has incorporated activity conducted under all MPIDs into its supervisory system and procedures as needed (including but not limited to trade reporting, OATS, record keeping, Reg SHO, Reg NMS, and best execution obligations, based upon the activity for which the additional MPIDs are used

ATSs and ECNs

Procedures to ensure and review for compliance with the requirements to file Form ATS-R on a quarterly basis

Procedures to ensure and review for compliance with the requirement to protect subscribers' confidential trading information including, a) limiting information access to ATS employees responsible for operating the ATS or for compliance with applicable rules, and b) implementing standards to control ATS employees trading for their own accounts

Procedures to ensure and review for compliance with the prohibition on charging inconsistent fees

Procedures to monitor trading volume and determine whether the ATS has surpassed the "5% threshold" that would require it to comply with Reg ATS order display, execution access, and fair access requirements

Procedures to monitor trading volume and determine whether the ATS has surpassed the "20% threshold" that would require it to comply with the Reg ATS requirements for capacity, integrity, and security of automated system

If the firm proposes to be a "Reporting ECN" (as defined in FINRA Rule 7210A) that reports trades to a TRF, procedures to ensure and review for compliance with TRF reporting requirements in FINRA Rules 7230A and 7230B, 7230C, and 7330

If the ATS enters quotes in FINRA's ADF, procedures to ensure and review for compliance with the requirement to execute orders in excess of the ECN's displayed quote size, when displaying a quote based on a reserved size order

Policies and procedures pursuant to which the firm will review and approve applicants seeking to subscribe to the ATS

Sample - New Hire Checklist

Check off each item below when documentation is in the file or task has been completed.

DOH:

Employee Name (new hire)

________________________

CRD #

Principal Reviewer (Sign and Date when all items have been completed.)

Pre-Hire (assigned to: _________________)

Sent Rcvd

CRD Pre-Hire Authorization Form / Review

Background Investigation Authorization Form / Review

Employee Information Form Enter Employee Information into Employee Database

Compliance (assigned to: ___________________)

Sent Rcvd

Outside Brokerage Accounts



Fixed Income Trading In Personal Accounts Policy

Insider Trading Memorandum and Policy

Gifts & Gratuities and Expense Reporting Policies

Technology Use Policies

BIG - Fingerprint (website link for ee to schedule their appt.)

U4 Review and signature for new filing Pre-dispute Arbitration Acknowledgment

Human Resources (assigned to: _________________)

Sent Rcvd

Job Offer Letter (fully executed)

Confidentiality and Employment Agreement (fully executed)

Employee Manual delivered and acknowledgement received

Insurance Plan Summaries delivered to new hire (enrollment or waiver received by H/R: medical, dental/vision) 401(k) Plan Summary and Enrollment Forms

Trading Related (assigned to: __________________)

Sent Rcvd

Trading Policies & Procedures Manual given and acknowledgement received New Accounts Manual given and acknowledgement received

Accounting-Related Tasks (assigned to: ______________)

Sent Rcvd

W-4 I-9 = Employee Ineligibility Verification

Direct Deposit paperwork completed and returned (for payroll)

New Hire Checklist Check off each item below when documentation is in the file or task has been completed.

Information Technology (assigned to: _________________)

Completed

Order and install computer system and two monitors (standard) Order phone, if necessary

Order and set up Bloomberg (add user name to master file)

Install VPN on new hire workstation (add user name to master file)

Email set-up (add user name to master file for email archiving/review)

Add new hire to intra-company email distribution lists

Set new hire up on trading platform (add user name to master file)

Send system report access authorization level information to IT

Add new hire to disaster recovery website

________________ Add new hire/equipment to Cybersecurity Worksheet/Program

Website – (assigned to: _______________)

Completed

Contact Marketing Department to write new employee bio Make appointment for employee to have photo taken for website

Add employee to website (photo, bio/contact info, link to BrokerCheck)

Post press release to the website, if applicable

Accounting (assigned to: ________________)

Completed

Set up new hire in expense reporting system

Compliance (assigned to: _____________________)

Completed

Review prior U5 filing (evidence review) Assign new hire to a principal and office, add to Supervisory Org Chart

Other (assigned to: __________________)

Completed:

Add new hire to BCP/DR Call Tree Set-up email address on email archiving system

Set up new hire at Clearing Company (Rep # / Branch Assignment)

Add new hire to the Employee Listing (internal doc containing info on all ee’s)

Add new hire to Org Chart

Order business cards

Send internal request forms to new hire (ex: new account forms, PTO/Vacation)

Set up Office Access for new hire: office key, building pass, etc. (if applicable)

Other (assigned to: _________________________)

Completed:

Account Assignment package, signed off and shared with team/company

Announce new hire (internal announcement)

Publish press release to BusinessWire, if applicable

Documents

Common Findings Related to Books and Records Tuesday, May … · 2018-05-14 · Common Findings Related to Books and Records Tuesday, May 22 11:15 a.m. – 12:15 p.m. During this