With respect to the latest issue, the SEC amended its rules on net capital and financial liability of brokers and dealers in 2013 to address third-party liability for brokerage drug dealers` debts and expenses. In particular, the Commission`s amendments to Rule 15c3-1 of the stock exchange law involved the requirement for ”a broker to adjust its net assets in the calculation of net capital by incorporating all liabilities borne by a third party if the broker is unable to prove that the third party has the resources to pay the debts regardless of the broker`s income and assets.” 1 The Commission`s main concern was that the third party, independent of the broker-trader, did not have sufficient resources to assume such debts or charges in order to distort the broker`s actual financial situation2. These supporting documents may include the last financial statements, tax returns or administrative documents of the third party. 03-63 sets out a number of fundamental principles in the development of cost-allocation agreements: with regard to net capital issues, 03-63, that expenses and commitments incurred by third parties must be debts to the broker-dealer for net capital purposes, unless the current focus on the securities ponzi schemes implemented by dealers and their related companies has enabled the SEC to to reorient itself to auditing and analyzing cost allocation relationships. In recent times, member companies that use cost-sharing agreements have been subject to enhanced scrutiny during the FINRA cycle reviews, resulting in most cost-sharing agreements and the allocation process being found to be deficient by FINRA, regardless of the adequacy results in previous round evaluations. As the acceptance of intercompany cost-sharing agreements appears to be changing by FINRA, we recommend that companies take immediate steps to verify both the compliance of their cost-sharing agreements with the SEC guidelines and the process and methodology used to determine the basic monthly allocation, so that the 2010 allocations are set before the start of the new fiscal year. In addition, you should be aware that in the event of a substantial change to the agreement, a copy of the revised agreement must be forwarded to your FINRA district office or you will submit your company to additional regulatory review. Cost-sharing agreements between brokers and third parties are a hot topic for FINRA and the SEC. Businesses and their FINOP should fully understand the guidelines provided in the communication to members 03-63. In October 2003, FINRA (then NASD) issued guidelines on cost-sharing agreements for its member companies in Communication to Members (”””” 03-63. The main driver behind 03-63 was the regulators` concern that brokers are not properly accounting for expenses and liabilities in their financial statements, a concern that still exists today.
Under Rule 17a-3 (a) (a) (a) and (a) (a) (2) of the Securities Exchange Act of 1934, 03-63 requires a broker ”to establish a data set reflecting the expenses and responsibilities associated with its activities, regardless of whether a third party has agreed to bear the costs or liability.” 03-63 also indicates that these third-party charges or debts must be recorded in the broker`s and trader`s records regardless of the accounting treatment or the impact on the company`s net capital. This January 4, 2010 agreement between Cherry Financial Partners, Ltd. (FP) and Cherry Investment Advisors, Ltd., (RIA) lists the cost-sharing agreement between the two parties mentioned above and the cherry Agency, Ltd. (Agency) fee agreement. Nicole: So when it comes to cost-sharing agreements, I think it`s really important to make sure it`s written down.