Published on Jun 7th, 2024 |

SEC RELEASES

Introduction

The SEC released a Risk Alert on June 5th, 2024, explaining their examination processes on Broker Dealers.

The Risk Alert discusses how they choose Broker Dealers to examine, the risk assessment process, and the documentation that may be requested.

Examination Risks and Scope

  • Area of Consideration for an Examination to Occur
    • Prior examination history.
    • Disciplinary history of associated individuals or affiliates.
    • Tips, complaints, or referrals.
    • Length of time since previous examination.
    • Customer base of the Firm.
    • Products and services offered.
    • Indications the Firm is experiencing financial stress.
    • News or media reports that would impact the Firm.
    • Information filed with the SEC or an SRO.
    • If the Firm holds customer cash and securities.
  • The Scope of the Examination depends on multiple factors including:
    • Firm business model.
    • Associated risks.
    • The reason for the Division’s examination.
    • If a similar investigation has already been conducted by an SRO.
  • Documents Requested may vary but typically include
    • Organizational Information
      • Organizational structure, affiliations, and control persons.
      • Remote offices and branch locations.
      • Firm employees.
      • Committees (e.g., responsibilities, members, meeting frequency, meeting minutes).
    • Business Operations
      • Description of the Firm’s business, including any recent significant changes.
      • Clearing agreements.
      • Website domain addresses used by the Firm and by associated persons.
      • Compensation arrangements for associated persons, including bonus and non-cash compensation.
    • Financial Information
      • Annual audited report(s).
      • Income statement(s).
      • General ledger(s).
      • Profit and loss statement(s).
      • Expense and revenue sharing agreements.
    • Legal and Disciplinary
      • Pending and settled litigation, arbitration, or Administrative Proceeding involving the firm or any supervised person.
      • Inquiries, complaints, investigations, or subpoenas from any regulatory authority received by the Firm.
      • List of all associated persons who have been subject to special or heightened supervision or terminated for cause.
    • Books and Records, and Compliance Oversight Process
      • Written supervisory and compliance policies and procedures.
      • Oversight Processes (e.g., compliance reviews, surveillance, and/or supervisory reviews).
      • Customer complaints and correspondence and the process for monitoring such communications, including electronic communication.
      • Written guidance and training provided to employees and any documentation of attendance.
    • Branch Office Oversight
      • List of branch offices, including “doing business as” names.
      • Description of the Firm’s process to perform branch office inspections.
      • Any Profit and Loss statement by branch.
      • List of registered personnel within selected branches and their compensation earned.
      • List of associated persons’ outside business activities.
    • Information Processing, Reporting, and Protection
      • Safeguards for the protection of customer records and information.
      • Electronic access controls.
      • Business continuity plan.
      • Cybersecurity incidents or breaches (e.g., incident description, impact, and remediation).
    • Sales Practices, Regulation Best Interest, and Form CRS
      • List of products sold.
      • Customer fee schedule.
      • Written policies and procedures for Regulation Best Interest and Form CRS compliance.
      • Customer account list.
      • Purchase and Sales Blotter.
      • List of offerings or private placements facilitated or sold by the firm.
      •  Form CRS and Regulation Best Interest Disclosures.
      • Surveillance and Monitoring Reports.
      • Any Conflicts inventory.
    • AML
      • List of current or ongoing external investigations and/or inquiries by regulatory entities into any AML related functions.
      • List of any committees that regularly discuss topics/issues relating to compliance with AML requirements.
      • AML written supervisory policies and procedures.
      • List of customer accounts with risk rankings and date of onboard and most recent know-your-customer review.
      • Surveillance, monitoring, and management reports.
      • Most recent reviews performed over the Firm’s know-your-customer, transaction monitoring, and suspicious activity reporting handling areas.
    • Net Capital and Customer Protection
      • FOCUS reports.
      • Trial balance and balance sheets.
      • Net capital computation, including all supporting workpapers.
      • List of all bank accounts and customer checks.
      • Payables and receivables.
      • Changes in ownership equity.
      • Cash disbursement journal.
      • 15c3-3 Customer and PAB10 reserve computations and workpapers.
      • Reserve bank account statements and no-lien letters.
      • Allocations for customer and PAB reserve computation.
      • Concentration reports used for customer margin debit balances.

Vigilant's Conclusion

Vigilant’s Conclusion

It is evident that there are many considerations the Division makes when selecting a Broker Dealer to examine, and that the volume of documentation requested could be significant.

For this reason, it is vital that Firms are well-prepared for any examinations that could occur.

Vigilant provides comprehensive Mock SEC/FINRA Exams to Firms that would like to have their compliance program evaluated and if there are any findings, it helps them get that identified and provide an opportunity to remediate it before an Examinations occurs, not after the fact.

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