1 books and records requirements for broker dealers

11

Books and Records Books and Records RequirementsRequirements

for Broker Dealersfor Broker Dealers

22

Examination AuthorityExamination Authority

The cornerstone of any examination is formed The cornerstone of any examination is formed by reviewing the firm’s books and records as by reviewing the firm’s books and records as well as the firm’s supervisory procedures.well as the firm’s supervisory procedures.

States’ statutes and regulations provide them States’ statutes and regulations provide them with the authority to examine and request the with the authority to examine and request the production of the firm’s books and records.production of the firm’s books and records.

The requirement to create and/or maintain The requirement to create and/or maintain books and records can be found in SEC Rules books and records can be found in SEC Rules 17a-3 and 17a-4 and NASD Conduct Rule 3110.17a-3 and 17a-4 and NASD Conduct Rule 3110.

33

Examination AuthorityExamination Authority

• 17a-3 identifies records that B/Ds must create 17a-3 identifies records that B/Ds must create and keep current as they relate to the and keep current as they relate to the individual B/D’s business.individual B/D’s business.

• 17a-4 identifies records that must be 17a-4 identifies records that must be maintained and preserved.maintained and preserved.

• Most records must be maintained for three to Most records must be maintained for three to six years.six years.

• The two most recent years must be maintained The two most recent years must be maintained in an easily accessible area pursuant to 17a-in an easily accessible area pursuant to 17a-4(a). Generally, these records are maintained 4(a). Generally, these records are maintained on site.on site.

44

SEC Rules 17a-3 and 17a-4SEC Rules 17a-3 and 17a-4

On May 2, 2003, the first substantive On May 2, 2003, the first substantive amendments to these rules in over 30 amendments to these rules in over 30 years became effective.years became effective.

The purpose of these amendments was to The purpose of these amendments was to provide regulators with ready access to provide regulators with ready access to records, thereby allowing regulators to records, thereby allowing regulators to conduct more efficient and effective sales conduct more efficient and effective sales practice examinations.practice examinations.

55


The amendments to Rule 17a-3 include The amendments to Rule 17a-3 include requirements to:requirements to:• Create records relating to associated persons (17a-3(a)Create records relating to associated persons (17a-3(a)

(12));(12));• Collect certain account information and verify that Collect certain account information and verify that

information with customers periodically (17a-3(a)(17)(i)information with customers periodically (17a-3(a)(17)(i)(A));(A));

• Create a record of customer complaints (17a-3(a)(18)Create a record of customer complaints (17a-3(a)(18)(i));(i));

• Create a record indicating compliance with advertising Create a record indicating compliance with advertising rules (17a-3(a)(20));rules (17a-3(a)(20));

• Identify the person responsible for policies and Identify the person responsible for policies and procedures (17a-3(a)(22)) and designate a person who procedures (17a-3(a)(22)) and designate a person who can explain the B/D’s records (17a-3(a)(21));can explain the B/D’s records (17a-3(a)(21));

• Revise information required on order tickets (17a-3(a)(6) Revise information required on order tickets (17a-3(a)(6) and (a)(7)).and (a)(7)).

66


The rules require the maintenance of both The rules require the maintenance of both “home” and “local” office records. Prior to “home” and “local” office records. Prior to this time there were no “local” (or branch) this time there were no “local” (or branch) office record requirements pursuant to the office record requirements pursuant to the provisions of the National Securities provisions of the National Securities Markets Improvement Act of 1996 Markets Improvement Act of 1996 (NSMIA).(NSMIA).

B/Ds are required to produce records at B/Ds are required to produce records at offices within the state. Agreement of time offices within the state. Agreement of time for extensive request……for extensive request……

77


““Local” office is defined as any location, Local” office is defined as any location, other than the home office, where one or other than the home office, where one or more associated persons (registered more associated persons (registered representatives) regularly conduct the representatives) regularly conduct the business of handling funds or securities or business of handling funds or securities or effecting any transaction in or inducing or effecting any transaction in or inducing or attempting to induce the purchase or sale attempting to induce the purchase or sale of any security by any means (17a-3(h)of any security by any means (17a-3(h)(1)).(1)).

88


• There are certain exemptions to the There are certain exemptions to the locations including some private locations including some private residences and bank broker dealer residences and bank broker dealer circuit riders. SEC Rule 17a-4(I).circuit riders. SEC Rule 17a-4(I).

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Local office records must be Local office records must be maintained at the local office or be maintained at the local office or be promptly delivered to local offices.promptly delivered to local offices.• The term ‘promptly’ is not specifically The term ‘promptly’ is not specifically

defined and is left up to negotiation defined and is left up to negotiation between the firm and examiners. between the firm and examiners. However, if records are on site they However, if records are on site they should be provided immediately for should be provided immediately for inspection. Discuss 24 hour inspection. Discuss 24 hour timeframe….timeframe….

1010

Record MaintenanceRecord Maintenance

17a-417a-4 Records are not required to be maintained in Records are not required to be maintained in

any particular form, as long as they are any particular form, as long as they are sufficient to provide an audit trail.sufficient to provide an audit trail.

Record maintenance may include paper, Record maintenance may include paper, electronic, optical image (disk), micrographic electronic, optical image (disk), micrographic media a/k/a microfilm/fiche, etc. media a/k/a microfilm/fiche, etc. • Optical image uses WORM technology (Write Once, Optical image uses WORM technology (Write Once,

Read Many)Read Many) Electronic records must be print or copy Electronic records must be print or copy

capable.capable.

1111

ExaminationsExaminations

Each brokerage firm is required to Each brokerage firm is required to maintain certain books and records at its maintain certain books and records at its home office.home office.

However, most of your examinations will However, most of your examinations will involve a review of the operations of a involve a review of the operations of a firm’s branch or firm’s branch or local officelocal office..

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Required Broker DealerRequired Broker DealerBooks and RecordsBooks and Records

So, what records are brokerage firms

required to maintain?

1313


Written Supervisory ProceduresWritten Supervisory Procedures• These procedures instruct the agent and the These procedures instruct the agent and the

manager how to carry out their day to day actions manager how to carry out their day to day actions and activities.and activities.

• This document will help the examiner understand This document will help the examiner understand how the firm conducts its business.how the firm conducts its business.

• Written supervisory procedures must be maintained Written supervisory procedures must be maintained for a period of three years after the termination of for a period of three years after the termination of each manual, update, modification and revision. each manual, update, modification and revision. SEC Rule 17a-4(e)(7)SEC Rule 17a-4(e)(7)

1414

Exception ReportsException Reports

SEC Rule 17a-4(e)(8)SEC Rule 17a-4(e)(8)• The rule does not require the creation of The rule does not require the creation of

exception reports as part of a exception reports as part of a supervisory program. However, if the supervisory program. However, if the firm creates the report (for supervisory firm creates the report (for supervisory or operational purposes) the report must or operational purposes) the report must be maintained for 18 months. be maintained for 18 months.

If the report is maintained electronically, the If the report is maintained electronically, the firm must be able to reproduce the report.firm must be able to reproduce the report.

1515

Regulatory Mandated Reports/ Regulatory Mandated Reports/ Internal Audit ReportsInternal Audit Reports

Regulatory settlements may require firms Regulatory settlements may require firms to contract with independentto contract with independent consultants consultants to conduct internal audits. These to conduct internal audits. These independent consultant reports are independent consultant reports are required to be maintained and provided to required to be maintained and provided to regulators, if requested. SEC Rule 17a-4 regulators, if requested. SEC Rule 17a-4 (e)(6).(e)(6).

1616

Regulator Mandated Reports/ Regulator Mandated Reports/ Internal Audit ReportsInternal Audit Reports

Internal (branch) audits not mandated by Internal (branch) audits not mandated by settlements are not required pursuant to settlements are not required pursuant to this rule. However, firms are required to this rule. However, firms are required to conduct internal audits in order to comply conduct internal audits in order to comply with supervisory requirements.with supervisory requirements.

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Customer Complaints- SEC RuleCustomer Complaints- SEC Rule 17a-3(a)(18)17a-3(a)(18)• Each firm is required to maintain a record of all Each firm is required to maintain a record of all

complaints filed against its agents.complaints filed against its agents.• If possible, examiners should review the allegations If possible, examiners should review the allegations

contained in each complaint, regardless of the state contained in each complaint, regardless of the state the client was from, to determine if there is a pattern the client was from, to determine if there is a pattern of abuse and the firm’s response to the complaint.of abuse and the firm’s response to the complaint.

• In lieu of the customer complaint being maintained at In lieu of the customer complaint being maintained at the branch or local office, the firm may maintain a the branch or local office, the firm may maintain a complaint log.complaint log.

The log should include complainant’s name, The log should include complainant’s name, address, account number, date received, registered address, account number, date received, registered rep’s name, description of complaint and resolution.rep’s name, description of complaint and resolution.

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Associated Person RecordsAssociated Person Records• These are, essentially, agents’ personnel files. They contain These are, essentially, agents’ personnel files. They contain

registration, disciplinary, and continuing education material. registration, disciplinary, and continuing education material. They will also contain the records of individuals that are no They will also contain the records of individuals that are no longer with the firm for at least three years after the longer with the firm for at least three years after the associated persons termination. (Form U-4 Registration / associated persons termination. (Form U-4 Registration / Form U-5 Termination Notice) Form U-5 Termination Notice)

• Firms must maintain:Firms must maintain: Copies of all compensation and other agreements with Copies of all compensation and other agreements with

associated persons. These records include employment associated persons. These records include employment agreements, independent contractor, and franchise agreements, independent contractor, and franchise agreements. SEC Rule 17a-3(a)(19)(ii)agreements. SEC Rule 17a-3(a)(19)(ii)

Employment application; i.e., Form U-4 (FINRA letter Employment application; i.e., Form U-4 (FINRA letter approved by SEC), CRD number and record identifying approved by SEC), CRD number and record identifying internal identification record. (Jane Doe, CRD Number internal identification record. (Jane Doe, CRD Number 12345, Rep. No. 155) SEC Rule 17a-3(a)(12).12345, Rep. No. 155) SEC Rule 17a-3(a)(12).

1919


Customer CorrespondenceCustomer Correspondence • The firm is required to maintain any The firm is required to maintain any

“customized” correspondence between an “customized” correspondence between an agent and his clients relating to a firm’s agent and his clients relating to a firm’s securities business, regardless of form (ex. securities business, regardless of form (ex. paper, fax, e-mail). Firm sales literature and paper, fax, e-mail). Firm sales literature and pre-approved form letters will not appear in pre-approved form letters will not appear in this file.this file.

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• The correspondence The correspondence does notdoes not have to be contained in a have to be contained in a centralized location. Some firms have a centralized centralized location. Some firms have a centralized correspondence file, while others file the correspondence file, while others file the correspondence in the appropriate client’s account file. correspondence in the appropriate client’s account file. Either is acceptable.Either is acceptable.

• NASD Conduct Rule 3010 requires that each dealer NASD Conduct Rule 3010 requires that each dealer establish procedures whereby a representative sample establish procedures whereby a representative sample of e-mails be reviewed by management. (of e-mails be reviewed by management. (NASDNASD Notice to Notice to Members 98-11Members 98-11) Most firms have adopted review ) Most firms have adopted review parameters of 10% to 25%.parameters of 10% to 25%.

• All correspondence, written or electronic, must evidence All correspondence, written or electronic, must evidence approval by a principal or manager. SEC Rule 17a-4(b)approval by a principal or manager. SEC Rule 17a-4(b)(4).(4).

2121


Advertising and Sales LiteratureAdvertising and Sales Literature• Each item of advertising or sales literature Each item of advertising or sales literature

must be approved by the firm prior to its use.must be approved by the firm prior to its use.• In certain instances, FINRA approval is In certain instances, FINRA approval is

required within 10 days of first use.required within 10 days of first use.• Advertising is defined as material published Advertising is defined as material published

or designed for use in a newspaper, or designed for use in a newspaper, magazine, or other periodical; a radio, magazine, or other periodical; a radio, television, telephone or video recording; a television, telephone or video recording; a sign, billboard or other public media.sign, billboard or other public media.

2222


• Sales literature is any written or Sales literature is any written or electronic communication made electronic communication made available to customers or the public. available to customers or the public. (e.g., circulars, research reports, form (e.g., circulars, research reports, form letters, scripts, seminar texts or letters, scripts, seminar texts or published articles.)published articles.)

• All advertising and sales literature must All advertising and sales literature must be true, accurate, and presented fairly.be true, accurate, and presented fairly.

• All advertising and sales material must All advertising and sales material must evidence approval by a principal or evidence approval by a principal or manager. SEC Rule 17a-4(b)(4).manager. SEC Rule 17a-4(b)(4).

2323


Record of ComplianceRecord of Compliance• Requires the firm to demonstrate, either Requires the firm to demonstrate, either

by the record itself or a separate record, by the record itself or a separate record, that they have adopted policies and that they have adopted policies and procedures reasonably designed to procedures reasonably designed to establish compliance with rules relative establish compliance with rules relative to marketing materials, advertising, to marketing materials, advertising, electronic communications sales electronic communications sales literature, sales scripts and any other literature, sales scripts and any other form of communication, etc. SEC Rule form of communication, etc. SEC Rule 17a-3(a)(20)17a-3(a)(20)

2424


Customer Account Record/FileCustomer Account Record/File • The customer file generally contains a The customer file generally contains a

customer’s new account customer’s new account record record (form), (form), which captures the client’s financial and tax which captures the client’s financial and tax status and their investment objectives, and status and their investment objectives, and all other documents used to open the all other documents used to open the account. (i.e., margin agreement, options account. (i.e., margin agreement, options agreement, discretionary trading authority, agreement, discretionary trading authority, limited power of attorney, etc.) The form limited power of attorney, etc.) The form must be approved or accepted by a principal must be approved or accepted by a principal of the B/D. of the B/D.

2525


• SEC Rule 17a-3 (a)(17) requires for every natural SEC Rule 17a-3 (a)(17) requires for every natural person maintaining an account for which a person maintaining an account for which a suitability determination is to be made pursuant suitability determination is to be made pursuant to SRO suitability rules, the firm must maintain to SRO suitability rules, the firm must maintain new account information and update at least new account information and update at least once every three years. Upon opening or once every three years. Upon opening or updating an account, the firm, within 30 days, updating an account, the firm, within 30 days, must provide the account information, new must provide the account information, new account card or like facsimile to the customer. account card or like facsimile to the customer. The firm must also provide to each customer a The firm must also provide to each customer a “plain English” definition(s) of the firm’s “plain English” definition(s) of the firm’s investment objectives, time horizon and risk investment objectives, time horizon and risk tolerance.tolerance.

2626


• Finally, the firm must provide the customer, Finally, the firm must provide the customer, presumably on the new account (or like presumably on the new account (or like facsimile) or customer statement, the name(s) facsimile) or customer statement, the name(s) and address(es) and phone number, of where and address(es) and phone number, of where to direct customer complaints (17a-3(a)(18)). to direct customer complaints (17a-3(a)(18)).

• If customers of the office have indicated If customers of the office have indicated inaccuracies on their account information, the inaccuracies on their account information, the examiner should discuss with the manager the examiner should discuss with the manager the means by which the firm has addressed the means by which the firm has addressed the customers’ concerns.customers’ concerns.

2727


• If after the account is established the agent If after the account is established the agent becomes aware of the need to update the becomes aware of the need to update the account information the agent should update account information the agent should update the account record to reflect the changes. The the account record to reflect the changes. The firm must then provide the customer with the firm must then provide the customer with the information via a negative consent letter information via a negative consent letter instructing them to review the changes and, if instructing them to review the changes and, if inaccurate return the corrected information to inaccurate return the corrected information to the Compliance Department.the Compliance Department.

• Additionally, the firm must provide the Additionally, the firm must provide the customer with copies of agreements, including customer with copies of agreements, including margin, arbitration, option, discretionary, etc.margin, arbitration, option, discretionary, etc.

2828


• Special attention should be paid to the Special attention should be paid to the registered representatives for which inaccurate registered representatives for which inaccurate client information (income, net worth, client information (income, net worth, investment objectives) or repetitive problems investment objectives) or repetitive problems are prevalent.are prevalent.

• As stated in Rule 17a-3(a)(17)(i)(B)(As stated in Rule 17a-3(a)(17)(i)(B)(11), B/Ds ), B/Ds must create a record indicating that the B/D must create a record indicating that the B/D furnished customers with a copy or like furnished customers with a copy or like facsimile of their new account/update facsimile of their new account/update information.information.

2929


Commission Statements or Commission RunsCommission Statements or Commission Runs• An examiner can determine the commissions being paid to An examiner can determine the commissions being paid to

specific agents from specific client accounts.specific agents from specific client accounts.• An examiner can observe the differences in the commission An examiner can observe the differences in the commission

payout structure along a firm’s product line.payout structure along a firm’s product line.• An examiner can determine whether a manager spends most An examiner can determine whether a manager spends most

of his/her time managing as opposed to selling.of his/her time managing as opposed to selling.• Rule 17a-3(a)(19)(i) requires a BD to make a record listing Rule 17a-3(a)(19)(i) requires a BD to make a record listing

each associated persons purchase and sale of a security each associated persons purchase and sale of a security attributable to that associated person, allowing regulators to attributable to that associated person, allowing regulators to quickly identify compensation trends.quickly identify compensation trends.

Records must include:Records must include:• Amount of compensation including monetary (commissions, Amount of compensation including monetary (commissions,

concessions, overrides) and non-monetary (sales incentives, concessions, overrides) and non-monetary (sales incentives, gifts, trips) compensation.gifts, trips) compensation.

3030


Purchase and Sales BlotterPurchase and Sales Blotter• A blotter is another name for a list or log. In this case, A blotter is another name for a list or log. In this case,

it is a list of the purchases and sales during a it is a list of the purchases and sales during a particular time period.particular time period.

• The P&S blotter will list the date, customer’s name, The P&S blotter will list the date, customer’s name, account number, name and amount of securities, unit account number, name and amount of securities, unit and aggregate purchase or sale price, and name of and aggregate purchase or sale price, and name of person from whom purchased or sold. Additional person from whom purchased or sold. Additional information may be on the blotter which may be of information may be on the blotter which may be of use such as time of execution, the client’s state of use such as time of execution, the client’s state of residence, whether the trade has been canceled and residence, whether the trade has been canceled and rebilled and date of entry for the trade.rebilled and date of entry for the trade.

• Most blotters are stored electronically and will be Most blotters are stored electronically and will be printed at an examiner’s request.printed at an examiner’s request.

3131


Order Tickets (17a-3(a)(6) and (a)(7))Order Tickets (17a-3(a)(6) and (a)(7))• Created by the agent. This is often an Created by the agent. This is often an

electronic record.electronic record.• Sets forth the terms and conditions of the Sets forth the terms and conditions of the

order.order.• Examiners can determine whether the trades Examiners can determine whether the trades

were solicited by the agent.were solicited by the agent.• By reviewing the time stamps, an examiner By reviewing the time stamps, an examiner

can determine when the orders were received.can determine when the orders were received.

3232


• If the order is taken by an individual other than If the order is taken by an individual other than the associated person assigned to the account, the associated person assigned to the account, the firm must note the associated person’s the firm must note the associated person’s name/Rep. No., on the ticket or an alternative name/Rep. No., on the ticket or an alternative document. SEC Rule 17a-3(a)(6).document. SEC Rule 17a-3(a)(6).

• Rule 17a-3 and 17a-4 excludes from the Rule 17a-3 and 17a-4 excludes from the definition of associated persons anyone whose definition of associated persons anyone whose functions are solely clerical or ministerial in functions are solely clerical or ministerial in nature.nature.

3333


An associated person includes any partner, An associated person includes any partner, officer, director or branch manager of a broker officer, director or branch manager of a broker dealer (any person occupying a similar status or dealer (any person occupying a similar status or performing similar functions), any person directly performing similar functions), any person directly or indirectly, controlled by, or under common or indirectly, controlled by, or under common control with a broker dealer, or any employee of a control with a broker dealer, or any employee of a broker dealer. broker dealer. This includes order-takers.This includes order-takers. The The term associated person includes any independent term associated person includes any independent contractor, consultant, franchisee, or other contractor, consultant, franchisee, or other person providing services to a broker dealer person providing services to a broker dealer equivalent to those services provided by the equivalent to those services provided by the persons specifically referenced in the statute.persons specifically referenced in the statute.

3434


Trade ConfirmationsTrade Confirmations• They are “receipts” that are mailed to the They are “receipts” that are mailed to the

customer after each executed tradecustomer after each executed trade• By reviewing trade confirmations, an examiner By reviewing trade confirmations, an examiner

can determine whether the firm sold the can determine whether the firm sold the position from its own inventory or whether it position from its own inventory or whether it acquired the security from the market. (You acquired the security from the market. (You may also want to ask for the B/D’s trade blotter may also want to ask for the B/D’s trade blotter to review.)to review.)

Commissions will indicate the position was acquired Commissions will indicate the position was acquired from the market.from the market.

Markups will indicate the position was sold from the Markups will indicate the position was sold from the firm’s inventory.firm’s inventory.

3535


Cash Receipts and Disbursements BlotterCash Receipts and Disbursements Blotter• With this log or list the examiner can With this log or list the examiner can

determine whether customer funds are being determine whether customer funds are being promptly transmitted to the clearing firm.promptly transmitted to the clearing firm.

• An examiner can ensure that customer checks An examiner can ensure that customer checks are made payable to the clearing firm. If the are made payable to the clearing firm. If the checks are made to the BD and not the checks are made to the BD and not the clearing firm, check to see if correspondence is clearing firm, check to see if correspondence is being sent to the customer to correct this being sent to the customer to correct this problem.problem.

• Examiners should check this blotter against the Examiners should check this blotter against the monthly customer account statements to monthly customer account statements to ensure accuracy.ensure accuracy.

3636


Securities Received and Delivered BlotterSecurities Received and Delivered Blotter• An examiner can determine the stock An examiner can determine the stock

certificates that have been deposited into certificates that have been deposited into accounts at the firm.accounts at the firm.

• An examiner can ascertain whether any An examiner can ascertain whether any delivered shares were restricted.delivered shares were restricted.

• An examiner should be attentive to suspicious An examiner should be attentive to suspicious deliveries of large blocks of a thinly traded deliveries of large blocks of a thinly traded security.security.

3737


Customer Account StatementsCustomer Account Statements• An examiner is able to review every transaction An examiner is able to review every transaction

in a customer’s account.in a customer’s account. An examiner will review transactions to determine An examiner will review transactions to determine

whether the activity in the customers’ accounts are whether the activity in the customers’ accounts are appropriate in light of the clients’ risk tolerance, appropriate in light of the clients’ risk tolerance, financial situation, and investment objectives.financial situation, and investment objectives.

• May be maintained in the customer’s file.May be maintained in the customer’s file.• May be in an electronic format.May be in an electronic format.• Copies of the customers’ monthly or quarterly Copies of the customers’ monthly or quarterly

account statements may be found in the account statements may be found in the customer files.customer files.

• NASAA/SIFMA has issued a brochure to the NASAA/SIFMA has issued a brochure to the public providing guidance on understanding public providing guidance on understanding account statements (NASAA Website).account statements (NASAA Website).

3838


Bank RecordsBank Records• Bank StatementsBank Statements

An examiner should review:An examiner should review: The firm’s bank statement(s) to verify the amounts The firm’s bank statement(s) to verify the amounts

of deposits and checks.of deposits and checks. The firm’s reconciliation of bank statements with The firm’s reconciliation of bank statements with

their checkbook, the object being to verify current their checkbook, the object being to verify current cash position as of the financial statement date.cash position as of the financial statement date.

• Cancelled ChecksCancelled Checks An examiner should inspect a representative An examiner should inspect a representative

sample of cancelled checks for double sample of cancelled checks for double endorsements. Double endorsements may indicate endorsements. Double endorsements may indicate the presence of forgery and/or theft of customer the presence of forgery and/or theft of customer funds.funds.

3939


General LedgerGeneral Ledger• Reflects all asset, liability, income, expense Reflects all asset, liability, income, expense

and capital accounts of a firm. Used to and capital accounts of a firm. Used to prepare the trial balance, balance sheets and prepare the trial balance, balance sheets and other statements of financial condition.other statements of financial condition.

• Should be current and maintained Should be current and maintained chronologically by account.chronologically by account.

• An examiner should compare entries in the An examiner should compare entries in the general ledger with other subsidiary records general ledger with other subsidiary records having “money” balances to ensure the having “money” balances to ensure the accuracy in posting from these records.accuracy in posting from these records.

4040


Trial BalanceTrial Balance• A statement of open debit and credit money A statement of open debit and credit money

balances of all general ledger accounts.balances of all general ledger accounts.• Acts as a check to ensure the accuracy of the Acts as a check to ensure the accuracy of the

general ledger accounts and also keeps firms general ledger accounts and also keeps firms informed of their current capital position.informed of their current capital position.

• An examiner should compare the trial An examiner should compare the trial balance against every account in the general balance against every account in the general ledger to ensure the trial balance is accurate.ledger to ensure the trial balance is accurate.

• Must be maintained on a current basis and Must be maintained on a current basis and prepared at least monthly.prepared at least monthly.

4141


Audited Financial StatementsAudited Financial Statements• Must be prepared in accordance with Must be prepared in accordance with

United States GAAP.United States GAAP.• If an examiner suspects a problem, the If an examiner suspects a problem, the

following steps may be useful in following steps may be useful in pursuing the matter:pursuing the matter:

First, and foremostFirst, and foremost, collect all of the firm’s , collect all of the firm’s financial statements on file and compare financial statements on file and compare them. Concentrate on areas that appear to them. Concentrate on areas that appear to be significantly different from the previous be significantly different from the previous years’ statements.years’ statements.

4242


Points to consider:Points to consider: Are the footnotes clear?Are the footnotes clear? Are there extraordinary items?Are there extraordinary items? Is the opening equity balance in the Equity section Is the opening equity balance in the Equity section

equal to the closing balance of the Equity section on equal to the closing balance of the Equity section on the previous year’s statement? They should be the previous year’s statement? They should be identical.identical.

Is the information on each year’s statement Is the information on each year’s statement presented uniformly?presented uniformly?

Are the same amortization and depreciation methods Are the same amortization and depreciation methods used from year to year?used from year to year?

• After collecting the financial statement, the After collecting the financial statement, the information needs to be verified.information needs to be verified.

Ask questions about the entry.Ask questions about the entry. Collect documentation to confirm the numbers.Collect documentation to confirm the numbers.

4343


The Financial Accounting Standards Board The Financial Accounting Standards Board has an internet site that may assist you.has an internet site that may assist you.

www.fasb.owww.fasb.orgrg If you discover an accountant engaging in If you discover an accountant engaging in

inappropriate activity, consider contacting inappropriate activity, consider contacting your state’s accounting regulator. your state’s accounting regulator.

Obtain original documents, invoices, Obtain original documents, invoices, account balances, deeds, bank records account balances, deeds, bank records and reconstruct the item(s) in question.and reconstruct the item(s) in question.

Be cognizant of a change in auditing firmsBe cognizant of a change in auditing firms

4444

Review of Broker Dealer Books Review of Broker Dealer Books and Recordsand Records

• It may become necessary to engage a It may become necessary to engage a CPA as an expert witness to assist you.CPA as an expert witness to assist you.

• Check to see if your state allows for the Check to see if your state allows for the hiring of a CPA to be an expert witness.hiring of a CPA to be an expert witness.

4545

Recap of Local Office Records: Recap of Local Office Records: Rule 17a-3(g)Rule 17a-3(g)

This subsection of the rule identifies This subsection of the rule identifies the records that are required to be the records that are required to be maintained or produced at a local maintained or produced at a local office upon the request of a office upon the request of a securities regulatory authority:securities regulatory authority:17a-3(a)(1)17a-3(a)(1) Sales BlotterSales Blotter17a-3(a)(6)17a-3(a)(6) Customer Order TicketsCustomer Order Tickets17a-3(a)(7)17a-3(a)(7) Proprietary Order TicketsProprietary Order Tickets17a-3(a)(12) Customer/Employee Listing17a-3(a)(12) Customer/Employee Listing

4646

Recap of Local Office Records: Recap of Local Office Records: Rule 17a-3(g)Rule 17a-3(g)

17a-3(a)(17)17a-3(a)(17) Customer Account InformationCustomer Account Information

17a-3(a)(18)(i)17a-3(a)(18)(i) Customer Complaint RecordsCustomer Complaint Records

17a-3(a)(19)17a-3(a)(19) Associated Person Associated Person Compensation Records/ Compensation Records/ AgreementsAgreements

17a-3(a)(20)17a-3(a)(20) Record of ComplianceRecord of Compliance

17a-3(a)(21)17a-3(a)(21) Identification of Records Identification of Records Management PersonManagement Person

17a-3(a)(22)17a-3(a)(22) Identification of Principal Identification of Principal Responsible for Compliance Responsible for Compliance

1 books and records requirements for broker dealers

Documents

bds records

records requirements

3a12create records

sec rules

firms books

advertising rules

firms supervisory procedures

examination authority