SDDco Perspective Newsletter

September 2020

Dear SDDco Clients and Colleagues: Our SDDco Perspective includes industry news, guidance, regulatory rule updates, deadlines, and other timely matters impacting brokers, advisors, fintech firms, taxpayers, investors, and their service professionals. The SDDco Perspective is made available on our website monthly at http://sddco.com/resources-newsletter.

Broker-Dealer Exemption Reporting & Membership Agreement Updating

Robert Fortino
Managing Partner

Robert Fortino

Newly defined Non-Covered Firms have a unique opportunity to update their FINRA membership agreement to clarify that they meet the Non-Covered Firms definition under footnote 74.  The update to the membership agreements is recommended for these firms.

The SEC recently published FAQ’s, dated July 1, 2020, which clarifies member firms’ exempt reporting requirements.  These new clarifications to the 2013 rule are specifically related to footnote 74 of the 2013 rule. The new FAQ’s (numbers 8, 8.1, 12, 12.1 and 12.2) address member firms that do not meet a specific exemption requirement of paragraph (k) of SEA Rule 15c3-3.  Specifically, FAQ 8 states:

“A broker-dealer that does not meet any of the exemption conditions of paragraph (k) of Rule 15c3-3 (i.e., paragraph (k)(1), (k)(2)(i) or (k)(2)(ii)), but also (1) does not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers, other than money or other consideration received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Exchange Act Rule 15c2-4 (“Rule 15c2-4”); (2) does not carry accounts of or for customers; and (3) does not carry PAB accounts (as defined in Rule 15c3-3) (“Non-Covered Firm”) would be covered by footnote 74...”

Federal Register – SEC Release No. 34-70073
FAQ - Broker-Dealer Financial Reporting Rule

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Small Firm Gets a Costly Reminder That AML Procedures Need To Be Followed

Gary Fox
Director, Business Development

Gary Fox

A routine examination has resulted in a $50,000 fine for a small broker-dealer, stemming from failures in its AML program. FINRA found that the firm failed to detect red flags of suspicious activity in four related accounts. These red flags included: common ownership of multiple accounts without an apparent business purpose for multiple accounts; one account owner with significant disciplinary history related to securities fraud; potentially manipulative trading activity, unusual transfer activity between related accounts that was inconsistent with expected activity in such accounts and without an apparent business purpose; and unexplained third-party wire transfers that were inconsistent with expected account activity. By failing to detect these red flags, investigate them, and report the activities as required, the firm violated FINRA Rules 3310(a) and 2010.

The firm had written AML procedures that required the firm to monitor for red flags of potentially suspicious activity. Those red flags included the following, which were triggered by activity in the four accounts and which the firm failed to identify or investigate:

  • Customer has a questionable background or one that differs from expectations or business activities;
  • Customer with no discernable reason for using the firm's service;
  • Customer has opened multiple accounts with the same beneficial owners or controlling parties for no apparent business reason;
  • Wire activity that is unexplained, repetitive, unusually large or shows unusual patterns or with no apparent business purpose; and
  • Unusual transfers of funds or journal entries among accounts without any apparent business purpose.

Read the complete FINRA Acceptance, Waiver and Consent

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The Small Firm Dilemma:

Your AML Test cannot be conducted by persons who perform the functions being tested or those who supervise that activity; for example, the AML compliance officer or members of your AML compliance team.

The Solution:

  • SDDco conducts independent AML reviews to determine, among other things, if your procedures address regulatory requirements.
  • Testing professionals at SDDco are Certified AML Specialists (CAMS) and members of the Association of Certified Anti-Money Laundering Specialists (ACAMS).
  • Our solution fulfills FINRA’s independent test requirements for Broker-Dealers.
  • We also support the AML obligations of Registered Investment Advisors.

FINRA vs. FINNRA: Imposter FINRA Website Puts Member Firms on Alert

Michelle Abramowitz
Marketing Manager

Michelle Abramowitz

FINRA released Regulatory Notice 20-27, warning that there is a fake website posing as FINRA. The imposter website is titled, ​f​i​n​n​r​a​.​o​r​g, which subtly includes an extra “n” in the domain name, intended to trick site visitors. This imposter website is particularly concerning because it links to an illegitimate registration site and opens member firms up to the possibility of receiving phishing e-mails containing malware. At SDDco, we offer robust cybersecurity services to protect our clients from cyberattacks.

FINRA Alert - Regulatory Notice 20-27

To learn more about how SDDco can help strengthen your firm’s cybersecurity program, click here.

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SEC Highlights COVID-19 Compliance Issues

Ross Marlin
Associate Director

Ross Marlin

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert on August 12, 2020 outlining its recommendations to broker-dealers and investment advisers on operational, technological and commercial challenges resulting from the COVID-19 pandemic.  OCIE’s recommendations fell into the following areas: (1) protection of investor assets; (2) supervision of personnel; (3) fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) protection of sensitive information.

SEC Risk Alert - COVID-19 Compliance Risks and Considerations

To learn more about how SDDco can help strengthen your firm’s compliance program, click here.

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FINRA Caters to Members Conducting Virtual Client Meetings

Casey Muller
Director of Legal & Internal Compliance

Casey Muller

This pandemic has presented many challenges for businesses. One in particular is the lack of face-to-face meetings, which has hampered sales efforts, such as entertaining clients or promoting professional services. Broker-dealers, however, have received some good news on the subject. A recent FINRA notice has made it a little bit easier for associated persons to entertain their customers. Per FINRA, food and beverage purchased for a customer’s consumption during a virtual business event, such as a Zoom or video conference meeting, may be expensed as a business entertainment cost and, thus, exempt from the $100 gift limit (FINRA Rule 3220).

Investment News - FINRA Eases the Rules
FAQ – FINRA Rule 3220

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U.S. Closes Audit Loophole for Chinese Companies Listed on U.S. Exchanges

Bryon Lyons
CEO, Independent Brokerage Solutions LLC

Bryon Lyons

In a speech on August 13, 2020 at the Federal Reserve Board and Federal Reserve Bank of San Francisco's Innovation Office Hours, San Francisco, California (via webcast), Governor Lael Brainard discussed the Federal Reserve’s commitment to the pursuit of innovation and how technological advances can help the Federal Reserve carry out its core missions, and how innovations are changing the ways that banks, payments, and financial markets operate. Especially in light of the recent COVID-19 crisis, he noted that this crisis has been a “dramatic reminder of the importance of a resilient and trusted payments infrastructure” that can provide to American households “immediate and trusted access to funds.” For this and various other compelling reasons, the Fed has been focused for the past few years on the development of its own Central Bank Digital Currency (CBDC) or Digital Dollar.

In a parallel press release, the Federal Reserve announced on August 13, 2020 a multi-year collaboration with the Digital Currency Initiative run by the Massachusetts Institute of Technology (MIT) to design, develop, and test a CBDC that meets “the design requirements of a U.S. based central bank digital currency.”

Brainard cautioned, “[t]hese efforts are intended to ensure that we fully understand the potential as well as the associated risks and possible unintended consequences that new technologies present in the payments arena.” There are still many considerations to work out, including government policy and the legal process to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to a CBDC, whether a CBDC would have legal tender status, and how best to modify the current regulatory framework.

The Federal Reserve – Speech by Lael Brainard on Digital Currencies
Securities.io - U.S. Fed – MIT to Collaborate on Central Bank Digital Currency
Forbes - The Fed and Digital Currencies - What’s Possible?
Bank for International Settlements Report-  Central Bank Digital Currencies (CBDCs)
BIS - The Rise of Central Bank Digital Currencies
The Federal Reserve – The Future of Retail Payments in the U.S.
The Federal Reserve Announces Collaboration with MIT

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SDDco SERVICE OF THE MONTH:

FINOP REPORTING AND
SUPERVISORY SERVICES

Why do I need a FinOp?

Every broker-dealer must have a FINRA Series 27 Financial and Operations Principal (FinOp). The FinOp oversees financial books and records, monitors your firm’s adherence to industry net capital rules and related regulations, and files all regulatory reports. The SDDco Group provides outsourced solutions tailored to your broker-dealer’s needs.

Why outsource the FinOp role?

Efficiency: you will gain a principal with significant experience for a fraction of the cost of hiring a full-time person. SDDco provides degreed accountants with significant relevant industry experience and a team of CPAs supporting your FinOp’s efforts.

Why an SDDco FinOp?

Choosing an SDDco solution gives you access to the full resources of a professional CPA firm delivering outsourced FinOp services for over 35 years. We provide compliance, accounting, tax, and customized consulting services to the financial industry. We have the expertise developed from working with new and established broker-dealers, investment advisors, and other financial industry participants, both foreign and domestic, big and small.

Learn More by Downloading Our FINOP, PFO, POO Services Brochure

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FINOP, PFO, POO Services Brochure

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SDDco Group makes this general information available for educational purposes only, the contents of which were not originated from SDDco. SDDco is not affiliated with any of the publishing persons or entities of the articles herein. The information provided should not be construed as legal advice. This email may constitute an advertisement under U.S. law.

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