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Accounting Guide: Brokers and Dealers in Securities 2019




Accounting Guide: Brokers and Dealers in Securities 2019


ISBN: 978-1-948-30667-6 October 2019 464 Pages

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It is critical to understand the complexities of the specialized accounting and regulatory requirements needed for the broker-dealer industry. This comprehensive guide has been designed to be beneficial for a wide range of professionals within the broker-dealer industry. Updates to this edition are to conform the content to current accounting standards and regulatory requirements. The updates include:

  • SEC Release No. 34-86073, Amendment to Single Issuer Exemption for Broker-Dealers;  
  • ASU No. 2018-09, Codification Improvements; and,
  • SEC Release Nos. 33-10532; 34-83875; IC-33203, Disclosure Update and Simplification.

In addition, this edition features a new example disclosure note for revenue from contracts with customers, which has been added to the guide's illustrative financial statements and footnote disclosures.

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


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


Index of Pronouncements and Other Technical Guidance

Subject Index