The Securities and Exchange Commission (SEC) plays a critical role in regulating and monitoring the activities of market participants, such as dealers and government securities dealers, in order to maintain the integrity and stability of the securities markets. Recently, the SEC has proposed Rules 3a5-4 and 3a44-2 aimed at further clarifying the definitions of “dealers” and “government securities dealers” under the Exchange Act.
As the financial landscape continues to evolve, it is essential for you, as a market participant, to stay informed about regulatory developments and adapt your operations accordingly. Below you’ll find key aspects of the proposed SEC Dealer Rules and learn how our firm can empower you to navigate these changes successfully.
By understanding the implications and ensuring your company’s compliance, you’ll be well-positioned to seize opportunities for growth in the evolving securities markets.
SEC Dealer Definition And Rule
Overview of the SEC Dealer Proposal
The new rules further clarify the definitions of “dealers” and “government securities dealers” under the Exchange Act. These rules aim to ensure that entities engaged in activities similar to traditional dealers are subject to appropriate regulatory oversight.
SEC Dealer Definition Under the New Rule
Under the proposed rules, a “dealer” is defined as an entity that engages in the buying and selling of securities as part of its regular business. The rules set forth qualitative standards to identify entities that play dealer-like roles in the markets, particularly those acting as liquidity providers.
Key Aspects of the SEC Dealer Rule
The SEC Dealer Rule comprises several components, including:
- Qualitative standards for identifying dealer-like activities
- A quantitative standard for determining when a person buying and selling government securities is considered a dealer
- Exemptions for certain entities, such as those with total assets less than $50 million and registered investment companies under the Investment Company Act of 1940
Understanding these aspects of the SEC Dealer Rule will help you assess your compliance obligations and evaluate the potential impact on your business operations.
Who the SEC Dealer Rule Applies To:
The SEC Dealer Rule primarily targets entities engaged in activities similar to traditional dealers, such as market making and high-frequency trading firms. However, other entities may also be affected, depending on their trading activities and roles in the securities markets.
- Market Making Firms: Market making firms, which provide liquidity and facilitate transactions by quoting both buy and sell prices for securities, are directly impacted by the proposed rules. These firms are likely to be classified as dealers under the new definition, as they engage in buying and selling securities as part of their regular business activities.
- High-Frequency Trading Firms: High-frequency trading firms use powerful computer systems and sophisticated algorithms to execute a large number of trades at extremely fast speeds. Given their significant role in providing liquidity to the markets, these firms may also be classified as dealers under the proposed rules.
- Other Entities Affected by the Rule: Other entities that engage in dealer-like activities or buy and sell securities as part of their regular business operations may also be affected by the SEC Dealer Rule. This includes proprietary trading firms and certain hedge funds that actively trade securities.
Assessing The Impact On Hedge Funds’ Capital
As a market participant, it’s essential to evaluate your activities and determine if they align with the proposed SEC Dealer Rules. This internal assessment can help you ensure compliance with registration requirements and regulatory obligations, ultimately protecting your business operations, and fostering growth and success in the securities markets.
Exemptions from the SEC Dealer Rule
Although the SEC Dealer Rule is intended to encompass a wide range of market participants, certain entities and activities are exempt from its provisions.
Types of Entities or Activities Exempt from the Rule
The proposed rules provide exemptions for specific types of entities or activities, including:
- Entities with total assets less than $50 million
- Registered investment companies under the Investment Company Act of 1940
- Activities conducted by entities that do not meet the qualitative and quantitative standards defined in Rules 3a5-4 and 3a44-2
Criteria for Exemptions
To be exempt from the SEC Dealer Rule, entities must confirm that their activities don’t meet the specified criteria for classification as a dealer or government securities dealer. For instance, entities with total assets below $50 million or registered investment companies may be exempt.
Carefully reviewing the exemption criteria and evaluating your business activities is crucial to determine if your entity is exempt from registration requirements and regulatory obligations. Consider seeking professional guidance to ensure a thorough assessment and minimize potential non-compliance risks.
Court Challenges To The SEC Dealer Rule
The SEC Dealer Rule has faced legal challenges from various industry participants who argue that the SEC has overstepped its authority or created ambiguity with the new rule.
Overview of Legal Challenges to the Rule
Several industry groups, including hedge funds and private equity firms, have filed lawsuits in federal court, arguing that the SEC Dealer Rule:
- Exceeds the SEC’s authority under the Exchange Act
- Creates ambiguity and conflicts with established securities laws
- Is arbitrary and capricious in its application
Implications of Potential Court Outcomes
The outcome of these court challenges could have significant implications for the SEC Dealer Rule and affected entities, including:
- A ruling in favor of the SEC would uphold the rule, requiring entities meeting the dealer. definition to comply with registration requirements and regulatory obligations.
- A ruling against the SEC could lead to the rule being struck down, amended, or sent back to the SEC for further clarification.
It is essential to monitor these court proceedings and assess the potential impact on your business, as the outcome could significantly influence the regulatory landscape for dealers and government securities dealers. Seeking professional guidance can help you stay informed of these developments and adapt your compliance strategies accordingly.
Impacts of Avoiding The SEC Dealer Rule
While some entities may consider avoiding the SEC Dealer Rule to evade registration requirements and regulatory obligations, it is crucial to understand the potential consequences, risks, and ethical considerations associated with non-compliance.
Consequences of Non-Compliance
Non-compliance with the SEC Dealer Rule can result in severe consequences, including:
- Substantial fines and penalties imposed by the SEC or other regulatory authorities
- Reputational damage, leading to a loss of clients and business opportunities
- Potential legal liabilities stemming from violations of securities laws
Risks Associated with Avoiding the SEC Dealer Rule
By avoiding the SEC Dealer Rule, entities expose themselves to various risks, such as:
- Increased scrutiny from regulatory authorities and potential enforcement actions
- Heightened risk of legal disputes and litigation from counter parties or investors
- Difficulties in attracting new clients or investors due to concerns about compliance and integrity
Ethical Considerations
Beyond the legal and financial implications, avoiding the SEC Dealer Rule raises ethical concerns about transparency, fairness, and maintaining the integrity of the securities markets. Market participants have a responsibility to uphold ethical standards and promote confidence in the financial system.
In light of these potential impacts, it is essential for entities to carefully evaluate their obligations under the SEC Dealer Rule and seek professional guidance to ensure compliance. By doing so, you can protect your business from potential risks, foster trust among stakeholders, and contribute to the overall stability of the securities markets.
Broker-Dealer Compliance: Complex and Essential
The regulatory requirements for broker-dealers are complex and ever-evolving. Compliance with these regulations is essential to maintain good standing, protect investors, and avoid penalties. Navigating the intricacies of broker-dealer registration and ongoing compliance can be daunting, particularly for those unfamiliar with the process.
Failing to comply with SEC regulations can have serious consequences, including fines, reputational damage, and even legal liabilities. Given the complexity and importance of regulatory compliance, it is crucial for broker-dealers to seek expert guidance from experienced professionals who can help ensure they meet all their compliance obligations.
By enlisting the assistance of a knowledgeable firm, broker-dealers can focus on their core business activities while leaving the intricacies of regulatory compliance in the hands of trusted experts. This can provide peace of mind and allow firms to operate confidently in the securities markets.
How ACI Can Help You Understand And Comply With The SEC Dealer Rule
ACI offers comprehensive support to help you navigate the complexities of the SEC Dealer Rule, especially as it relates to financial reporting and net capital compliance. With years of experience in regulatory accounting, ACI understands the important relationship between these two areas in the broker dealer community, ensuring you receive high-quality care tailored to your needs.
ACI partners with leading compliance consulting firms, allowing you to benefit from the best expertise across both the compliance and accounting spectrums.
Reach out today for a confidential conversation about your broker-dealer regulatory needs.
Legacy & Leadership: ACI’s Next Chapter Begins
/in News/by Jay GettenbergAfter more than 40 years of leadership by the Gettenberg family, ACI is happy to announce that Ilina Stamova, Christopher Meyers and Elizabeth Attanasio, current members of our senior financial reporting and FinOp team, have been promoted as partners at ACI.
At ACI, our roots as a family-owned organization have always run deep. This transition into an expanded partnership structure has been forged from within our ranks and marks a transformative moment for our company. The commitment to investing in our team has never been greater. Seeing three of our long-standing and well deserving senior staff become the first non-family partners at ACI is an exciting moment for us all. It is a critical stepping stone in our growth and provides us with expanded capabilities to separate ourselves as the preeminent leader in the FinOp outsourcing industry in years to come.
As an organization, ACI has never been stronger. Our sustained growth over the past decade, along with our deep aspirations to explore new business opportunities and partnerships, makes this the right time to diversify our approach. By solidifying our commitment to our senior team, and their commitment to ACI, we are collectively poised for amplified growth in 2025 and beyond.
It is an exciting time to be a part of the ACI family.
Please join me in welcoming Ilina, Chris and Liz as formal partners at ACI as of January 1, 2025. Their tireless commitment to results, client satisfaction and excellence are what made this new partnership a winning idea from the start.
Jay Gettenberg, Chief Executive Officer
SEC’s New Dealer Rule: A Paradigm Shift in Securities Market Regulation
/in Regulatory Updates/by Jay GettenbergThe Securities and Exchange Commission (SEC) plays a critical role in regulating and monitoring the activities of market participants, such as dealers and government securities dealers, in order to maintain the integrity and stability of the securities markets. Recently, the SEC has proposed Rules 3a5-4 and 3a44-2 aimed at further clarifying the definitions of “dealers” and “government securities dealers” under the Exchange Act.
As the financial landscape continues to evolve, it is essential for you, as a market participant, to stay informed about regulatory developments and adapt your operations accordingly. Below you’ll find key aspects of the proposed SEC Dealer Rules and learn how our firm can empower you to navigate these changes successfully.
By understanding the implications and ensuring your company’s compliance, you’ll be well-positioned to seize opportunities for growth in the evolving securities markets.
SEC Dealer Definition And Rule
Overview of the SEC Dealer Proposal
The new rules further clarify the definitions of “dealers” and “government securities dealers” under the Exchange Act. These rules aim to ensure that entities engaged in activities similar to traditional dealers are subject to appropriate regulatory oversight.
SEC Dealer Definition Under the New Rule
Under the proposed rules, a “dealer” is defined as an entity that engages in the buying and selling of securities as part of its regular business. The rules set forth qualitative standards to identify entities that play dealer-like roles in the markets, particularly those acting as liquidity providers.
Key Aspects of the SEC Dealer Rule
The SEC Dealer Rule comprises several components, including:
Understanding these aspects of the SEC Dealer Rule will help you assess your compliance obligations and evaluate the potential impact on your business operations.
Who the SEC Dealer Rule Applies To:
The SEC Dealer Rule primarily targets entities engaged in activities similar to traditional dealers, such as market making and high-frequency trading firms. However, other entities may also be affected, depending on their trading activities and roles in the securities markets.
Assessing The Impact On Hedge Funds’ Capital
As a market participant, it’s essential to evaluate your activities and determine if they align with the proposed SEC Dealer Rules. This internal assessment can help you ensure compliance with registration requirements and regulatory obligations, ultimately protecting your business operations, and fostering growth and success in the securities markets.
Exemptions from the SEC Dealer Rule
Although the SEC Dealer Rule is intended to encompass a wide range of market participants, certain entities and activities are exempt from its provisions.
Types of Entities or Activities Exempt from the Rule
The proposed rules provide exemptions for specific types of entities or activities, including:
Criteria for Exemptions
To be exempt from the SEC Dealer Rule, entities must confirm that their activities don’t meet the specified criteria for classification as a dealer or government securities dealer. For instance, entities with total assets below $50 million or registered investment companies may be exempt.
Carefully reviewing the exemption criteria and evaluating your business activities is crucial to determine if your entity is exempt from registration requirements and regulatory obligations. Consider seeking professional guidance to ensure a thorough assessment and minimize potential non-compliance risks.
Court Challenges To The SEC Dealer Rule
The SEC Dealer Rule has faced legal challenges from various industry participants who argue that the SEC has overstepped its authority or created ambiguity with the new rule.
Overview of Legal Challenges to the Rule
Several industry groups, including hedge funds and private equity firms, have filed lawsuits in federal court, arguing that the SEC Dealer Rule:
Implications of Potential Court Outcomes
The outcome of these court challenges could have significant implications for the SEC Dealer Rule and affected entities, including:
It is essential to monitor these court proceedings and assess the potential impact on your business, as the outcome could significantly influence the regulatory landscape for dealers and government securities dealers. Seeking professional guidance can help you stay informed of these developments and adapt your compliance strategies accordingly.
Impacts of Avoiding The SEC Dealer Rule
While some entities may consider avoiding the SEC Dealer Rule to evade registration requirements and regulatory obligations, it is crucial to understand the potential consequences, risks, and ethical considerations associated with non-compliance.
Consequences of Non-Compliance
Non-compliance with the SEC Dealer Rule can result in severe consequences, including:
Risks Associated with Avoiding the SEC Dealer Rule
By avoiding the SEC Dealer Rule, entities expose themselves to various risks, such as:
Ethical Considerations
Beyond the legal and financial implications, avoiding the SEC Dealer Rule raises ethical concerns about transparency, fairness, and maintaining the integrity of the securities markets. Market participants have a responsibility to uphold ethical standards and promote confidence in the financial system.
In light of these potential impacts, it is essential for entities to carefully evaluate their obligations under the SEC Dealer Rule and seek professional guidance to ensure compliance. By doing so, you can protect your business from potential risks, foster trust among stakeholders, and contribute to the overall stability of the securities markets.
Broker-Dealer Compliance: Complex and Essential
The regulatory requirements for broker-dealers are complex and ever-evolving. Compliance with these regulations is essential to maintain good standing, protect investors, and avoid penalties. Navigating the intricacies of broker-dealer registration and ongoing compliance can be daunting, particularly for those unfamiliar with the process.
Failing to comply with SEC regulations can have serious consequences, including fines, reputational damage, and even legal liabilities. Given the complexity and importance of regulatory compliance, it is crucial for broker-dealers to seek expert guidance from experienced professionals who can help ensure they meet all their compliance obligations.
By enlisting the assistance of a knowledgeable firm, broker-dealers can focus on their core business activities while leaving the intricacies of regulatory compliance in the hands of trusted experts. This can provide peace of mind and allow firms to operate confidently in the securities markets.
How ACI Can Help You Understand And Comply With The SEC Dealer Rule
ACI offers comprehensive support to help you navigate the complexities of the SEC Dealer Rule, especially as it relates to financial reporting and net capital compliance. With years of experience in regulatory accounting, ACI understands the important relationship between these two areas in the broker dealer community, ensuring you receive high-quality care tailored to your needs.
ACI partners with leading compliance consulting firms, allowing you to benefit from the best expertise across both the compliance and accounting spectrums.
Reach out today for a confidential conversation about your broker-dealer regulatory needs.
FinOp Registration, Eligibility & Requirements
/in Informational/by Jay GettenbergIs a designated in-house FinOp or a FinOp consultant better for your team?
Most industry experts are aware of FINRA’s requirements for every broker dealer to register a licensed Financial and Operations Principal (FinOP). The FinOp qualification is obtained by passing one of two examinations, the Series 27 or the Series 28. Both industry exams are sponsored by FINRA, as the Self-Regulatory Organization (SRO) that oversees entities engaging in transaction-based securities activities and reports directly to the Securities and Exchange Commission (SEC).
When it comes to FinOp qualification exams, there are two options:
The Series 27 exam is the broader FinOp examination, which permits a license holder to register at a broker dealer of any size and complexity.
The Series 28 exam is effectively a FinOp “light” examination. It is a qualifying exam that permits an individual to oversee the financial books and records only for a more limited-purpose broker dealer, known as an “introducing firm.”
It’s important to note that 90% or more of all broker dealers are introducing firms not carrying firms, so in most instances either qualifying examination would suffice.
Introducing Firms
Non-carrying firms, those who do not hold customer funds or clear customer trades, are known as introducing firms. These types of securities firms generally have net capital requirements of $5,000, $50,000 or $100,000. They are permitted to register a Series 27 or a Series 28 licensed FinOp to oversee securities transactions that generally do not put customers at risk or involve customer protection obligations.
Carrying Firms
Carrying or clearing firms are held to a higher regulatory standard and are required to maintain a net capital requirement of at least $250,000. The FinOps at these firms must possess the Series 27 license. They cannot register utilizing the Series 28 license, due to the heightened obligations of customer protection under FINRA Rule 15c3-3.
Additionally effective as of October 1, 2018, all carrying firms are required to designate two registered FinOps that fill two distinctly separate roles within a larger and more complex entity. These roles are the Principal Financial Officer (PFO) and the Principal Operations Officer (POO). The responsibilities of these two individuals should be clearly defined within a member firm’s Written Supervisory Procedures (WSPs).
With the PFO responsible for:
The POO responsible for:
It should be noted that with regard to either license, the registered FinOp (PFO or POO) is expected by FINRA to have either one year of direct or two years of indirect experience in a similar role (in addition to the requisite exam) to be properly qualified to fill the respective supervisory positions. This is particularly important during the New Member Application (NMA) process, when a firm is applying for membership and must list the names and qualifications of their intended supervisors post-regulatory approval.
If a firm submits an application for membership whereby the named principals do not have such experience, it is common, and expected, for the FINRA Membership Application Division (MAP) to reject this individual from serving in such a role. FINRA will generally require the applicant to either find a properly qualified replacement FinOp or they may allow the firm to engage an outside consultant to support the FinOp. This is to help ensure that the firm does not fail to fulfill their post-approval regulatory duties.
One additional consideration
In consideration of a designated FinOp, it is also extremely important to consider the disciplinary history of the individual filling this role. While having regulatory (Form U4) disclosures is not an outright disqualification for serving in these supervisory roles, FINRA does, and should, look at historical infractions as a consideration in the capabilities of any given FinOp to perform his or her duties.
Certainly not all disclosures are equal.
For example, a personal lien is not equivalent to a fraud or customer protection violation. But any regulatory disclosure can impact the overall risk profile of an applying or an existing member firm. This may alter FINRA’s review and diligence for cycle examinations as well as the general overall regulatory oversight of the member firm on an ongoing basis. This often results in lost time and increased cost, both of which could have otherwise been avoided.
If your firm is exploring regulatory membership or a change in your registered FinOp, please reach out to us at info@acisecure.com. We would welcome the opportunity to discuss serving as your registered FinOp and/or supporting your internally designated FinOp.
Authored by Jay Gettenberg, FinOp, CPA, Managing Partner, ACI
What is a FinOp?
/in Informational/by Jay GettenbergWhat is a Financial & Operations Principal (FinOp)?
The Financial and Operational Principal (FinOp) is a role required by FINRA Rule 1200 Series (previously by NASD Rule 1022). The FinOp obtains qualification by passing the Series 27 or Series 28 examination. Upon registration, the FinOp becomes personally liable for the maintenance of the broker dealer’s books and records, the accuracy of the financial statements, compliance with applicable net capital rules, and the timely submission of all financial regulatory reports.
FinOp Responsibilities
A Series 27 licensed FinOp requires full knowledge of the practices in these categories:
A FinOp is responsible for the facilitation of the following duties:
While the FinOp’s responsibilities are very well defined by FINRA Rules and the subsequent FinOp related FINRA notices, it is critical that the FinOp obtain industry experience to successfully apply the rules based upon industry best practices. A fully qualified FinOp will thoroughly understand the broker dealer’s business, its operations, and the reporting needs of its management.
Why outsource the FinOp role?
While large broker dealers may employ an extensive accounting back-office, the majority of FINRA member firms are limited in scope. Despite their size restrictions, limited-purpose broker dealers are not afforded any leniency in complying with industry-wide licensing and regulatory requirements. The result is these member firms cannot employ qualified professionals at a reasonable cost. FINRA has acknowledged this and has accepted the utilization of the outsourced FinOp as an industry standard. Firms who elect to outsource the FinOp role should select highly qualified and experienced personnel who they can employ on a part-time basis to ensure they maintain books and file reports according to the regulatory requirements.
Contact ACI for more information on using our outsourced FinOp services.