RegAlert2003-07-11
Added · Updated
SEC Division of Trading and Markets no-action letter: Recording Certain Broker-Dealer Expenses and Liabilities
Broker-dealers must record each expense incurred relating to their business and any corresponding liability on their books and records, regardless of whether a third party has agreed to assume the expense or liability. If such expenses are not recorded on reports filed with the Commission or a designated examining authority, the corresponding liability is considered a liability of the broker-dealer for net capital purposes unless specific conditions regarding written agreements and third-party resources are met. Withdrawals of equity capital by a third party within three months before or one year after incurring an assumed expense are presumed to be repayments of that expense unless books and records reflect a liability. Broker-dealers must maintain written expense-sharing agreements and notify their designated examining authority if they enter into such agreements without recording the expenses on required reports.
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July 11, 2003
Ms. Elaine Michitsch
Member Firm Regulation
New York Stock Exchange, Inc.
20 Broad Street
New York, New York 10005
Ms. Susan Demando
Director, Financial Operations
NASD Regulation, Inc.
1735 K Street, NW
Washington, D.C. 20006-1500
Re: Recording Certain Broker-Dealer Expenses and Liabilities Dear Ms. Michitsch and Ms. Demando:
You have requested guidance from the Division of Market Regulation (“Division”) of the U.S. Securities and Exchange Commission (“Commission”) concerning the application of the financial responsibility rules1 when a third party, which may include a parent, holding company, or affiliate of a broker-dealer, agrees to assume responsibility for payment of the broker-dealer’s expenses.2 You are concerned that some broker-dealers are using these expense-sharing agreements as a basis for not recording expenses and liabilities on the broker-dealer’s books and records. In that instance, the books and records of the broker-dealer may not accurately reflect its performance and financial condition, artificially inflating its profitability, causing it to appear to be in capital compliance when it is not, and possibly disguising fraudulent activity. Further, you need access to sufficient records to verify that the broker-dealer is in compliance with the financial responsibility rules. Under the financial responsibility rules, broker-dealers are required to prepare certain financial statements in accordance with generally accepted accounting principles (“GAAP”). A broker-dealer is also required to make and keep current certain books and
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