Study guide
As the FINOP of an introducing broker-dealer, you own the firm's regulatory financial reporting: the quarterly FOCUS report, the annual audit, SIPC assessments, and the notifications that must go out the moment something goes wrong. This chapter walks through what gets filed, when it is due, and who must be told when the numbers slip.
The FOCUS Report: Part IIA and Its Deadlines
FOCUS stands for Financial and Operational Combined Uniform Single report, formally Form X-17A-5, and it is the core unaudited filing required by SEA Rule 17a-5(a). Which part a firm files depends on what the firm does. Carrying and clearing firms, the focus of the Series 27, file Part II. An introducing firm that neither clears transactions nor carries customer accounts files the shorter Part IIA. Part IIA is due within 17 business days after the end of each calendar quarter, and if the firm's fiscal year ends on a date that is not a calendar quarter end, an additional Part IIA is due within 17 business days after that fiscal year end. The report is filed electronically through FINRA and contains a statement of financial condition, an income statement, a net capital computation, and supporting schedules. Because introducing firms claim an exemption from the customer protection rule, Part IIA omits the reserve formula computation that carrying firms must complete. Suppose Meridian Securities, a fully disclosed introducing firm, has a quarter ending March 31. Its FINOP counts 17 business days, skipping weekends and holidays, to find the due date. Filing late, or filing a report the FINOP knows is inaccurate, is a serious violation, and the FINOP's signature certifies the report. A firm can request an extension from its designated examining authority, but the expectation is that the books close on time every quarter.
Annual Audited Financials and the Exemption Report
Under SEA Rule 17a-5(d), every broker-dealer must file an annual report within 60 calendar days after its fiscal year end. The annual report has three pieces: audited financial statements, certain supporting schedules, and either a compliance report or an exemption report. This distinction is a favorite exam topic because it separates the Series 28 world from the Series 27 world. A carrying firm files a compliance report stating that its internal control over compliance with the financial responsibility rules is effective, and its accountant examines that assertion. An introducing firm that claims an exemption under SEA Rule 15c3-3(k) instead files an exemption report, identifying the exemption provision it relied on, stating that it met the exemption throughout the year without exception or disclosing any exceptions, and the accountant performs a review, a lower level of scrutiny than an examination. The annual report is filed with the SEC and the firm's designated examining authority, and a copy goes to SIPC if the firm is a member. The audited statement of financial condition must also be made available to customers. If a firm wants to change its fiscal year end, it must notify its designated examining authority, because the change resets the audit cycle and FOCUS calendar. Missing the 60-day deadline requires an extension request filed before the due date, not after.
The Independent Accountant and SIPC Assessments
The annual audit must be performed by an independent public accountant registered with the Public Company Accounting Oversight Board, the PCAOB, and the audit must follow PCAOB standards. Independence is defined by SEC rules: the accountant cannot keep the firm's books, serve as an officer, or have financial interests in the client. The firm must file a statement designating its accountant, and the engagement must be in place by a specified date, generally no later than December 1 of the year of the audit for calendar-year firms. If the accountant resigns or is dismissed, or a new accountant is engaged, the broker-dealer must notify the SEC and its designated examining authority within 15 business days, including whether there were disagreements with the former accountant on accounting or disclosure matters in the prior two years. Separately, member firms support the Securities Investor Protection Corporation through assessments on net operating revenues. The SIPC-6 is the general assessment payment form filed for the first half of the fiscal year, due within 30 days after the period ends, and the SIPC-7 is the general assessment reconciliation for the full year, due within 60 days after fiscal year end. The FINOP reconciles the assessment to the firm's revenue records, and the independent accountant's procedures cover the SIPC annual filing. Imagine Harbor Point Brokerage dismisses its auditor in October: the FINOP must handle the notice, engage a replacement promptly, and still hit the 60-day annual report deadline.
When Things Go Wrong: 17a-11 Notices, FINRA 4110 and 4120
SEA Rule 17a-11 is the tripwire rule. If a firm's net capital falls below its required minimum, it must give same-day notice to the SEC and its designated examining authority. The rule also establishes early warning thresholds that trigger notice before an actual deficiency: aggregate indebtedness exceeding 1,200 percent of net capital, which is the 12-to-1 level, or net capital falling below 120 percent of the firm's minimum dollar requirement. A firm in early warning must file notice promptly and can expect increased FOCUS filing frequency and examiner attention. If the firm's books and records are not current, it must give same-day notice and, within 48 hours, file a report describing the steps being taken to correct the situation. FINRA layers its own rules on top. Rule 4110 gives FINRA authority to require a member to suspend business or restrict withdrawals when capital is impaired, to demand more frequent filings, and to require prior approval for subordinated loans and certain withdrawals. Rule 4120 requires notice and can impose business curtailment when a firm approaches capital trouble, restricting expansion or requiring reduction of business. SEA Rule 15c3-1(e) adds equity withdrawal notice requirements: advance notice to regulators is required two business days before any withdrawal exceeding 30 percent of excess net capital, and notice within two business days after a withdrawal exceeding 20 percent. Consider Ridgeline Capital Group, whose net capital of 5,800 dollars sits just above a 5,000 dollar minimum: it is already below 120 percent of the minimum, so early warning notice is required even though no deficiency exists.
Ledgers, Suspense Accounts, Expense Sharing and Disclosure
Regulatory reporting is only as good as the accounting beneath it, so the exam tests GAAP fundamentals. The general ledger is the firm's master record of assets, liabilities, income, expense and capital accounts, and the trial balance proves that total debits equal total credits at a point in time. Broker-dealers must prepare trial balances and net capital computations at least monthly. FINRA Rule 4523 requires firms to designate an associated person responsible for each general ledger account and to maintain suspense accounts properly: a suspense account temporarily holds unidentified or disputed items, such as an unmatched wire, and each item must be researched and cleared promptly, with records of the disposition. Aged suspense items become non-allowable for net capital and attract examiner scrutiny. Many introducing firms rely on a parent or affiliate to pay rent, salaries or technology costs. That is permitted only under a written expense-sharing agreement that identifies each expense, allocates it reasonably, and is reflected on the firm's books; the firm must record the expense and a corresponding liability or capital contribution even if the affiliate pays it, so the FOCUS report shows the true cost of the business. Rules 17h-1T and 17h-2T require certain broker-dealers in holding company structures to maintain and report information about material associated persons whose activities could affect the firm, the SEC's risk assessment regime, though smaller firms below the size thresholds are exempt. Finally, FINRA Rule 2261 requires a member to make the information in its most recent balance sheet available to any bona fide regular customer upon request; a request must be in writing only when it comes from another member.
Key terms
- FOCUS Report (Form X-17A-5)
- — The unaudited financial and operational report broker-dealers file under SEA Rule 17a-5; introducing firms file Part IIA quarterly, while carrying and clearing firms file Part II.
- Part IIA
- — The FOCUS report version for firms that neither clear nor carry customer accounts, due within 17 business days after each calendar quarter end.
- Exemption report
- — The annual report component in which an introducing firm identifies the 15c3-3(k) exemption it relied on and asserts it met the exemption throughout the year; reviewed, not examined, by the accountant.
- Compliance report
- — The annual assertion filed by carrying firms about the effectiveness of internal control over compliance with the financial responsibility rules; a Series 27 counterpart to the exemption report.
- PCAOB-registered accountant
- — The independent public accountant, registered with the Public Company Accounting Oversight Board, who must audit the broker-dealer's annual financial statements under PCAOB standards.
- SIPC-6 and SIPC-7
- — SIPC general assessment filings: the SIPC-6 covers the first half of the fiscal year and is due 30 days after that period; the SIPC-7 reconciles the full-year assessment and is due 60 days after fiscal year end.
- SEA Rule 17a-11
- — The notification rule requiring same-day notice of a net capital deficiency, notice at early warning levels, and notice plus a 48-hour follow-up report when books and records are not current.
- Early warning
- — Thresholds short of an actual deficiency that trigger regulatory notice, including aggregate indebtedness above 1,200 percent of net capital or net capital below 120 percent of the minimum dollar requirement.
- FINRA Rule 4110
- — FINRA's capital compliance rule authorizing restrictions on business, required approvals for subordinated loans and withdrawals, and heightened filing requirements for members with financial difficulties.
- Suspense account
- — A general ledger account that temporarily holds unidentified or disputed items; FINRA Rule 4523 requires prompt research, clearance and documentation of each item.
- Expense-sharing agreement
- — A written agreement under which an affiliate pays a broker-dealer's expenses; the firm must still record the expenses and related liabilities on its own books.
- FINRA Rule 2261
- — The rule requiring a member to make its most recent balance sheet information available to any bona fide regular customer upon request; only requests from other members must be in writing.
Exam tips
- Memorize the deadline pairs: FOCUS Part IIA is due 17 business days after quarter end, while the annual audited report is due 60 calendar days after fiscal year end. Watch for questions that swap business days and calendar days.
- Know which report goes with which firm: introducing firms file Part IIA and an exemption report; carrying firms file Part II and a compliance report. Any answer pairing an introducing firm with a reserve formula or compliance report is wrong.
- For 17a-11, tie the trigger to the response: deficiency means same-day notice; 12-to-1 aggregate indebtedness or net capital below 120 percent of the minimum means early warning notice; books not current means same-day notice plus a report within 48 hours on corrective steps.
- Accountant changes require notice to the SEC and the designated examining authority within 15 business days, including any disagreements with the former accountant.
- Remember that expenses paid by a parent under an expense-sharing agreement must still appear on the broker-dealer's own books; hiding costs at an affiliate overstates net capital and is a classic exam trap.