Due to FINRA Rule 4524
FINRA Rule 4524
Despite concerns of membership, the Financial Industry Regulatory Authority (FINRA) has laid down yet another mine field for compliance professionals. With the approval of FINRA Rule 4524 (the Rule), starting September 30, 2012, FINRA member firms will now be required to file a Supplemental Statement of Income (SSOI) quarterly, within 20 business of the end of the calendar quarter using the eFOCUS system.
The filing of the SSOI is in addition to the FOCUS II or IIA that is currently required to be filed by every member firm, and was originally intended to provide FINRA with greater detail regarding a firm’s revenue and expenses by supplementing the Statement of Income (Loss) page of the FOCUS IIA Report. However, to address FINRA’s current focus on private placements and the sale of unregistered offerings, FINRA expanded the scope of the SSOI. Clearly, the new 28 page form (including instructions) will provide FINRA with additional financial and operational information, but it is unclear how the additional burden on member firms will translate into greater protection to investors, as compared to just providing FINRA with more information that is not processed. One hope is that the additional information will lower the amount of time spent by FINOP’s on the phone with FINRA, explaining variations in income and expense categories that are reported quarterly on their FOCUS IIA Report.
Pursuant to the Rule, member firms will be required to supplement financial information for designated sections of the FOCUS Report where the income or expense item is greater than $5,000 or 5 percent of the firm’s total revenue or total expense for the reporting period. Examples of some additional information required on the revenue side include commissions (broken up by equities, ETFs and closed end funds; foreign exchange; foreign sovereign debt); revenues from the sale of insurance based products; gain or loss on derivative trading desks; interest, rebate, or dividend income and other fees earned during the period, including investment banking fees, fees from affiliated entities, 12b1 fees and revenues from research. Examples of some additional information which will be required on the expense side of the income statement include; commission expense, clearance and custodial expenses (including floor brokerage, amounts paid to exchanges, ECNs and ATSs, clearance fees paid to broker-dealers, commissions paid to other broker-dealers, 12b1 fees, etc.); expenses paid on behalf of affiliates; interest and dividend expenses, including bank loans, customer balances, securities loaned transactions; fees paid to third party providers; and general administrative, regulatory and miscellaneous expenses, including specifically finder’s fees, technology, research, promotional, travel and entertainment, and professional.
While all FINRA member firms are impacted by the requirement for greater detail regarding their financial reporting, firms who are primarily focused on private placements and or investment banking activities will be most impacted by the information requirements of the Operational Page. Pursuant to the Rule, firms that derive more than 10% of their revenue during a reporting period from these business activities will be required to complete the Operational Page of the SSOI. The Operational Page tracks substantial additional information regarding the sale of private placements and unregistered offerings. To this end, the Operational Page requires specific information for each offering, including: name of offering; the filer number if a Form D has been filed; industry group; federal exemption claimed (e.g. Rule 504, 505); type of securities offered (e.g. equity, debt); minimum investment; total dollars sold during the reported period; total number of customers sold to in the reporting period; and amount of revenue earned during the reporting period.
For more information on the SSOI and its instructions, see FINRA Regulatory Notice 12-11.
While FINRA is giving member firms three days more than the FOCUS or FOCUS IIA to obtain and compile the required information, and file the SSOI, the information requested is extensive and will need to be readily available by September 30, 2012. It is recommended that you consider taking the following action in the near future:
- Review the SSOI in its entirety to determine the points of information that are required, and where such information is obtainable:
- With respect to the accounting information, review your chart of accounts for income and expense items, and determine if additional accounts should be implemented so as to simplify the capture of the relevant information. For example, private placement and investment banking revenue should be separated by category, so that it can be quickly ascertained as to whether the Operational Page will need to be completed
- For firms that meet the minimum reporting threshold with respect to private placement and non-registered offerings, FINOPs will need to coordinate with the private placement and or investment banking groups to assure that the information regarding those transactions is captured and reported by the 20th business day on the Operational Page.
- We would recommend a close review of the various categories, as a few categories appear to have other purposes. For example, by putting a number in the expense category “Finders Fee”, it would appear that the firm would have self reported a violation of FINRA rules, and would be subject to sanctions based on that admission.
- Member firms should update their Written Supervisory Procedures to address FINRA Rule 4524, including the designation of who should be responsible for obtaining the required information, compiling the report, filing same and responding to FINRA informational requests regarding same.
- With respect to the implementation of the revised Written Supervisory Procedures, ascertain that all of the staff with responsibility for capturing information is aware of the process, and the importance of timely filings. As with the FOCUS Reports, late filings will result in escalating sanctions.
We hope that this information has been helpful to you. Should you have any additional questions or concerns, please feel free to contact Daniel E. LeGaye or Michael Schaps by e-mail or phone, at 281-367-2454, or consult with your legal counsel or compliance consultant.
This legal update has been provided to you courtesy of The LeGaye Law Firm, P.C., 2002 Timberloch Drive, Suite 200, The Woodlands, Texas 77380. Visit our web site at www.legayelaw.com. The information contained herein is not, nor is it intended to be legal advice or establish or further an attorney-client relationship. All facts and matters reflected in this information should be independently verified and should not be taken as a substitute for individualized legal advice. You should consult an attorney for individual advice regarding your own situation. Not Board Certified by Texas Board of Legal Specialization. Michael Schaps is not an attorney.