Updated Guidance Issued on Exemption Reporting

By Jeff Harpel

Wave brown handicraft weave texture bamboo surface

Recently, the SEC and FINRA issued Frequently Asked Questions (FAQs) concerning the exemptive provisions of SEC Rule 15c3-3 and reporting under SEC Rule 17a-5 for monthly and quarterly Focus reports, annual Exemption reports and for updating membership agreements.

Who is Affected?

The FAQs relate to Non-Covered firms, broker-dealers that do not:

  • meet any of the exemptive provisions of paragraph (k) of SEC Rule 15c3-3
  • 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 SEA Rule 15c2-4
  • carry accounts of or for customers
  • carry PAB accounts (as defined in Rule 15c3-3)

Non-Covered Firms will no longer be eligible to claim this exemption. However, though not exempt from Rule 15c3-3, a Non-Covered Firm is not required to make the daily possession or control determination because the requirement applies only to broker-dealers that carry accounts of or for customers (see SEC FAQ 18). In practice, a Non-Covered Firm will continue to operate as it always has. There will be impacts on the Exemption Report, Focus Report and Membership Agreement.

Exemption Report

A Non-Covered Firm would be covered by footnote 74 in FAQ 8 of the July 30, 2013 Amendments to the Broker Dealer Financial Reporting Rule.  Instead of filing a Compliance Report, a Non-Covered Firm may file an Exemption report. A Non-Covered Firm that limits its business activities exclusively to one or more of the following would be eligible to file an exemption report:

  • proprietary trading;
  • effecting securities transactions via subscriptions;
  • receiving transaction-based compensation for identifying potential merger and acquisition opportunities for clients, referring securities transactions to other broker-dealers, or providing technology or platform services;
  • participating in distributions of securities (other than firm commitment underwritings) in accordance with the requirements of paragraphs (a) or (b)(2) of Rule 15c2-4; or,
  • engaging solely in activities permitted for capital acquisition brokers (“CAB”) as defined in FINRA’s CAB rules and approved for membership in FINRA as a CAB.

A Non-Covered Firm that does not claim an exemption under paragraph (k) of Rule 15c3-3 should include in the exemption report a description of all the firm’s business activities and a statement that during the reporting period the firm (1) did 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 Rule 15c2-4; (2) did not carry accounts of or for customers; and (3) did not carry PAB accounts (as defined in Rule 15c3-3).

A non-carrying broker-dealer having multiple business activities with customers should identify each basis for the exemption in its exemption report (see SEC FAQ 12). 

Focus Report

If a broker-dealer, including a Non-Covered Firm, does not meet any of the exemptive provisions of paragraph (k) of Rule 15c3-3, the broker-dealer should leave items 4550, 4560, 4570 and 4580 blank on the Focus Report (see SEC FAQ 8.1).

A broker-dealer that relies on multiple exemptions should indicate on its FOCUS Report each exemption provision in paragraph (k)(2) of Rule 15c3-3 it is relying on to claim an exemption from the rule (see SEC FAQ 12.1).

When filing its FOCUS Report through the eFOCUS system a Non-Covered Firm that does not indicate it is claiming an exemption from Rule 15c3-3 may enter a memo to Item 4560 that states: “The firm has no possession or control obligations under SEA Rule 15c3-3(b) or reserve deposit obligations under SEA Rule 15c3-3(e) because its business is limited to [list activities.” (see FINRA FAQ 3).

Membership Agreement

If a firm’s membership agreement states that the firm is exempt from SEC Rule 15c3-3 under one or more of the exemptions available under paragraph (k) of that rule, but the firm’s activities do not fit within those exemptions, the firm should notify its assigned FINRA Risk Monitoring Analyst that it believes that the SEC Rule 15c3-3(k) exemption or exemptions noted in its FINRA membership agreement do not accurately reflect its current business activities. Any request to change the firm’s membership agreement must be made in writing by the firm and submitted via Firm Gateway. A correction of the exemption noted in a firm’s membership agreement would generally be processed as a membership agreement change, provided no changes to the firm’s approved business activities have occurred (see FINRA FAQ 1).

FINRA will not charge a fee to update a firm’s membership agreement if the firm is only updating the exemption status and there are no changes to the firm’s business.

What Firms Should Be Doing Now:

All firms should review their current business activities, membership agreements and Exemption and Focus Reporting to ensure they are consistent with the newly issued guidance.  It is also a good practice to consult with your Firm’s FINRA Risk Analyst and independent accountant who will be reviewing the Exemption Report.

For more information about financial reporting and how Oyster Consulting can help your firm ensure continuous Net Capital compliance, proper preparation and maintenance of financial records, and accurate and timely submission of various financial reports, contact us and one of our Relationship Managers will be happy to help you.

About The Author
Photo of Jeff Harpel

Jeff Harpel

Jeff Harpel has over 30 years of expertise in accounting, finance, and auditing in the securities industry. Jeff’s FINOP and operations experience includes a comprehensive understanding of securities financial and operations requirements, dealing with regulatory examiners and a thorough command of internal controls, financial systems, and merger conversion activities.