1 The Securities Industry .01-.144
Broker-Dealers .04-.25
Discount Brokers .08
Investment Bankers .09-.14
Government Securities Dealers .15
Designated Market Maker .16
Clearing Brokers .17
Carrying Brokers .18
Prime Brokers .19
Swap Dealers .20-.21
Introducing Brokers .22
Brokers’ Brokers .23
Bank-Owned Brokers (Section 4k4(e) and Section 20 Brokers) .24
Independent Broker-Dealers .25
The Financial Markets .26-.48
Exchange Market .29-.34
OTC Market .35-.39
Third Market .40
Alternative Trading Venues .41-.48
Clearing Organizations and Depositories .49-.55
Transfer Agents .56-.59
Regulatory Overview .60-.63
Business Activities .64-.144
Brokerage .64-.72
Firm Trading .73-.109
Investment Banking .110-.117
Financing .118-.130
Other Activities .131-.144
2 Broker-Dealer Functions, Books, and Records .01-.176
Introduction .01-.18
Overview .01-.03
Original Entry Journals .04-.06
General Ledger .07
Stock Record .08-.12
Regulatory Recordkeeping Requirements .13-.15
Trade Date and Settlement Date .16-.18
Trade Execution .19-.60
Customer Trades .19-.48
Proprietary Trades .49-.60
Clearance and Settlement .61-.90
Overview .61-.65
Comparison .66-.70
Settlement .71-.87
Bookkeeping .88-.90
Specialized Clearance Activities .91-.118
Mortgage-Backed Securities .91-.95
Government Securities .96-.98
Repos and Reverse Repos .99-.100
Derivative Securities .101-.103
Commodity Futures and Options on Futures .104-.108
Forward Transactions .109
Municipal Securities .110-.111
International Securities .112
Options on Securities .113-.118
Reconciliation and Balancing .119-.122
Custody .123-.134
Possession or Control .124-.128
Securities Transfer .129-.134
Dividends, Interest, and Reorganization .135-.148
Dividends and Interest .135-.143
Reorganization .144-.148
Collateralized Financing .149-.163
Stock Loan and Stock Borrow .149-.153
Bank Loan Financing .154-.157
Reverse Repos and Repos .158-.163
Regulatory Considerations .164-.171
Tax Information Reporting for Certain Customer Transactions .172-.175
Illustrative Stock Record Entries .176
3 Regulatory Considerations .01-.188
Applicable Rules .05-.10
Interpretations of Rules .09-.10
Explanation of Significant SEC Financial Responsibility Rules .11-.125
SEC Rule 15c3-3, "Customer Protection—Reserves and Custody of Securities" .11-.40
SEC Rule 15c3-1, "Net Capital Requirements for Brokers or Dealers" .41-.60
SEC Rule 15c3-1(e), "Notice Provisions Relating to the Limitations on the Withdrawal of Equity Capital" .61-.65
SEC Rule 17a-13, "Quarterly Security Counts to Be Made by Certain Exchange Members, Brokers, and Dealers" .66-.70
SEC Rule 17a-3, "Records to Be Made by Certain Exchange Members, Brokers, and Dealers" .71
SEC Rule 17a-4, "Records to Be Preserved by Certain Exchange Members, Brokers, and Dealers" .72
Regulation T and Maintenance Margin .73-.79
Account Statement Rule(s) .80-.81
SEC Rules and CFTC Regulations Governing Customer Margin for Transactions in Security Futures .82
SEC Rules 17h-1T and 17h-2T .83-.86
SEC Rule 17Ad-17, "Lost Securityholders and Unresponsive Payees" .87-.92
SEC Rule 17Ad-22, "Clearing Agency Standards" .93-.94
SEC Rule 17-248—Subpart C, "Regulation S-ID: Identity Theft Red Flags" .95
SEC Rule 506 of Regulation D and SEC Rule 144A .96-.97
SEC Rule 15c3-5, "Risk Management Controls for Brokers or Dealers with Market Access" .98-.101
SEC Rule 17a-5, "Reports to Be Made by Certain Brokers and Dealers" .102-.122
Anti-money Laundering Regulations .123-.125
Reporting Requirements .126-.151
Consolidation of Subsidiaries .132-.134
Form Custody .135
Other Periodic Reporting .136
The Annual Audited Financial Report .137-.151
Filings Concurrent With the Annual Audited Financial Report .152-.161
Compliance or Exemption Report Required by SEC Rule 17a-5 .152-.154
Report to State Regulatory Agencies .155
Financial Statements to Be Furnished to Customers of Securities Broker-Dealers .156-.161
Other Reports .162-.171
Reports on Securities Investor Protection Corporation Assessment .162-.164
Reports on Agreed-Upon Procedures for Distributions .165
PCAOB Accounting Support Fee .166-.171
Additional Requirements for Registered Investment Advisers .172-.180
Rules Applicable to Broker-Dealers in Commodities and U.S. Government Securities .181-.183
Commodities Brokers .182
Government Securities Broker-Dealers .183
OTC Derivatives Dealers .184-.185
Swap Dealers and Swaps Marketplace Participants .186
Annual Compliance Certification .187-.188
4 Internal Control .01-.69
Introduction .01-.06
The Control Environment .07-.09
Risk Assessment .10-.18
Control Activities .19-.22
Information and Communication .23-.29
Information and Communication Control Activities .26-.29
Monitoring Activities .30-.35
Broker-Dealer Control and Monitoring Activities .36-.61
Sales and Compliance .40-.43
Clearance .44-.45
Securities Settlement .46-.47
Custody .48-.49
Dividends, Interest, and Reorganization .50-.51
To-Be-Announced Securities .52
Principal Transactions .53-.55
OTC Derivative Transactions .56
Commissions .57
Collateralized Financings .58-.60
Period End Financial Reporting .61
SEC Requirements for Management’s Report on Internal Control Over Financial Reporting for Issuers .62-.69
Annual Reporting Requirements for Issuers .66
Quarterly Reporting Requirements for Issuers .67-.69
5 Accounting Standards .01-.127
Accounting Model .02-.40
Definition of Fair Value .06-.08
Application of Fair Value Measurement to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity .09-.11
Valuation Techniques .12-.14
Inputs to Valuation Techniques .15-.16
Application to Financial Assets and Financial Liabilities With Offsetting Positions in Market Risks or Counterparty Credit Risk .17-.19
Inputs Based on Bid and Ask Prices .20
Present Value Techniques .21-.24
The Fair Value Hierarchy .25-.28
Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) .29-.32
Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased .33-.37
Fair Value Option .38-.40
Additional Fair Value Considerations .41-.54
Financial Instruments Listed on a Recognized Exchange .41-.45
Financial Instruments Not Listed on a Recognized Exchange but Having a Readily Available Market Price .46-.48
Financial Instruments Not Having a Readily Available Market Price .49-.54
Trade-Date Versus Settlement-Date Accounting .55-.68
Proprietary and Principal Transactions .58-.65
Agency Transactions .66-.68
Statement of Financial Condition Considerations .69-.112
Due From, and Due to, Other Broker-Dealers and Clearing Entities .69-.70
Transfers of Financial Assets .71-.85
Exchange Memberships Owned or Contributed .86
Suspense Accounts .87
Derivatives .88-.97
Conditional Transactions .98
Leveraged Buyouts and Bridge Loans .99
Asset Securitizations .100-.103
Variable Interest Entities .104
Soft-Dollar Arrangements .105-.109
Mandatorily Redeemable Instruments .110-.112
Statement of Income or Loss Considerations .113-.124
Underwriting Revenues and Expenses .113-.117
Distribution Costs .118-.119
Interest, Dividends, and Rebates .120-.123
Costs Associated With Exit or Disposal Activities .124
Revenue Recognition: Application of FASB ASC 606 .125-.127
Brokers, Dealers, and Futures Commission Merchants and the Definition of a Public Business Entity .125-.127
6 Financial Statement Presentation and Classification .01-.169
Introduction .01-.12
Financial Statements .13-.31
Statement of Financial Condition .13-.15
Statements of Income, Comprehensive Income or Operations .16-.20
Statement of Cash Flows .21-.22
Statement of Changes in Ownership Equity .23-.24
Statement of Changes in Subordinated Borrowings .25
Consolidation of Subsidiaries .26-.28
Going Concern .29-.31
Supplementary Schedules .32-.39
Computation of Net Capital Pursuant to SEC Rule 15c3-1 .34
Computations for Determination of Reserve Requirements Pursuant to SEC Rule 15c3-3 .35-.36
Information Relating to Possession or Control Requirements Under SEC Rule 15c3-3 .37-.38
Schedules of Segregation Requirements and Funds in Segregation for Customers’ Trading Pursuant to the Commodity Exchange Act .39
Statement of Financial Condition Account Descriptions .40-.97
Cash and Securities Segregated Under Federal and Other Regulations .41
Memberships in Exchanges .42-.46
Securities Sold Under Agreements to Repurchase and Securities Purchased Under Agreements to Resell .47-.53
Securities Borrowed and Securities Loaned .54-.60
Securities Received as Collateral and Obligation to Return Securities Received as Collateral .61-.63
Receivables From and Payables to Broker-Dealers, Clearing Organizations, and Others .64-.72
Receivables From and Payables to Customers .73-.76
Deferred Dealer Concessions .77
Securities Owned and Securities Sold, Not Yet Purchased .78-.85
Other Borrowed Funds .86-.88
Subordinated Borrowings .89-.93
Commitments and Guarantees .94-.96
Equity .97
Statement of Income or Operations Account Descriptions .98-.126
Commission Income and Related Expense .99-.103
Interest Income and Interest Expense .104-.105
Dividend Income and Dividend Expense .106
Principal Transactions (Trading Gains and Losses) .107
Investment Banking Fees and Expenses .108-.113
Asset Management and Investment Advisory Income .114-.115
Distribution Fees .116-.117
Floor Brokerage, Exchange Fee, and Clearance Expenses .118-.120
Occupancy and Equipment Expenses .121
Employee Compensation and Benefits Expenses .122-.124
Technology and Communications Expense .125
Management and Allocated Corporate Overhead Expense .126
Disclosures .127-.165
Fair Value Disclosures .127-.130
Disclosures Related to Transfers of Financial Assets Accounted for as Sales .131-.132
Disclosures Related to Transfers of Financial Assets Accounted for as Secured Borrowings .133
Disclosures of Certain Significant Risks and Uncertainties and Contingencies .134-.144
Derivative Instruments Disclosures .145-.148
Guarantee Disclosures .149-.150
Related Party Disclosures .151-.156
Subsequent Events Disclosures .157-.159
Balance Sheet Offsetting Disclosures .160-.165
Financial Statements and Schedules .166-.169
Appendix
A Information Sources
B Illustrative Example of Compliance Report Required by SEC Rule 17a-5
C Illustrative Example of Exemption Report Required by SEC Rule 17a-5
D The New Leases Standard: FASB ASC 842
E Accounting for Financial Instruments
F Schedule of Changes Made to the Text From the Previous Edition
Glossary
Index of Pronouncements and Other Technical Guidance
Subject Index
