Limited Purpose Broker Dealer Operations and Compliance

As a limited purpose broker-dealer, you're required to operate in a very specific way to avoid being classified as a full-service broker-dealer. This means you can only engage in certain activities, such as executing trades for a single issuer or facilitating private placements.

To comply with regulations, you must maintain a separate accounting system and segregate your assets from those of your parent company. This helps prevent commingling of funds and ensures you're not engaging in any prohibited activities.

Limited purpose broker-dealers are also subject to specific net capital requirements, which are lower than those for full-service broker-dealers. However, you must still maintain a minimum net capital of $25,000 to remain in compliance.

You'll also need to file Form BD with the SEC, which requires detailed information about your business operations and financials. This form is a crucial part of your registration process and must be updated regularly to reflect any changes in your business.

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A limited purpose broker-dealer is a firm that can rely on a No-Action Statement from the SEC.

This type of firm has its business limited to dealing with digital asset securities, or DAS, and does not engage in traditional securities activities.

A broker-dealer relying on the No-Action Statement would not be able to accept a non-security digital asset, such as a stablecoin, as a means of payment for DAS.

The exclusion of broker-dealers who engage in traditional securities activities from the No-Action Statement reflects the SEC's concern over how such a firm would be resolved under SIPA.

A broker-dealer relying on the No-Action Statement would be permitted to hold proprietary positions in traditional securities solely for meeting the firm's minimum net capital requirements or hedging the risks of its proprietary positions in traditional securities and DAS.

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To be a limited purpose broker dealer, you'll need to meet certain regulatory requirements, which can be a bit daunting.

The minimum net capital for a broker-dealer is $5,000 to $100,000.

Each year, FINRA members, including limited purpose broker dealers, must submit a range of filings, such as audited financial reports and annual reviews, by specific deadlines.

Limitation to Special Purpose Broker-Dealers is a key consideration in understanding the regulatory requirements for digital asset securities.

A broker-dealer who deals in traditional securities is excluded from relying on the No-Action Statement, which means they cannot accept non-security digital assets as a means of payment for Digital Asset Securities (DAS).

This exclusion is likely due to concerns over how such a broker-dealer would be resolved under the Securities Investor Protection Act (SIPA) in the event of insolvency.

Broker-dealers with material pre-existing activity in traditional securities may need to continue relying on workarounds like the Three-Step Process.

A broker-dealer relying on the No-Action Statement is permitted to hold proprietary positions in traditional securities for specific purposes, such as meeting minimum net capital requirements or hedging risks.

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As a broker-dealer, you're no doubt aware of the importance of meeting regulatory filing deadlines. Each year, FINRA members are tasked with submitting a range of filings, including audited financial reports.

Tracking these obligations can be challenging due to the volume and varying requirements of each report. FINRA members must submit annual reviews and other regulatory submissions on time.

Understanding these deadlines is key to ensuring that filings are accurate and submitted on time.

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A limited purpose broker dealer's financial operations are a crucial aspect of its business. A Series 27 licensed FinOp, or Financial Operations professional, is responsible for ensuring the accuracy and compliance of these operations.

The FinOp's duties include the facilitation of FOCUS Reports, Net Capital Computations, and Financial Statement Preparation, among others. These duties are outlined by FINRA Rules and subsequent notices.

A fully qualified FinOp will understand the broker dealer's business, its operations, and the reporting needs of its management. This requires industry experience and knowledge of industry best practices, in addition to the rules and regulations.

Some key responsibilities of a FinOp include:

With PFO responsible, you can expect to see them handling a range of financial tasks that are crucial to your organization's operations.

The PFO is responsible for ensuring that financial reporting is done in accordance with Generally Accepted Accounting Principles (GAAP).

This means that they'll be preparing financial statements and reports that accurately reflect your company's financial position and performance.

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The PFO is also in charge of net capital computations, which is a critical aspect of financial management.

Net capital computations involve calculating the total value of your company's assets and liabilities to determine its net capital.

Here are some key areas where the PFO is responsible:

A Financial Operations (FinOp) is responsible for ensuring the accuracy and compliance of a broker dealer's financial records. This includes maintaining accurate books and records, as well as financial regulatory reporting.

A FinOp must have full knowledge of practices in categories such as customer protection and net capital compliance. This is a critical aspect of their role.

Some of the key duties of a FinOp include facilitating FOCUS reports, net capital computations, and financial statement preparation. They are also responsible for supplementing schedules of income (SSOI) and form custody.

A FinOp's responsibilities are well-defined by FINRA rules and notices. However, industry experience is also essential for successfully applying these rules based on industry best practices.

Here are some of the specific duties a FinOp is responsible for:

Outsourcing the FinOp role can be a cost-effective solution for limited-purpose broker dealers who cannot afford to employ qualified professionals in-house.

Many FINRA member firms have limited scope and cannot employ qualified professionals at a reasonable cost.

FINRA has acknowledged the industry standard of outsourcing the FinOp role and accepts its utilization.

Firms who elect to outsource the FinOp role should select highly qualified and experienced personnel.

These personnel can be employed on a part-time basis to ensure the firm maintains books and files reports according to regulatory requirements.

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A limited purpose broker dealer must have a written plan for decision making that outlines its procedures for making investment decisions.

This plan should be reviewed and updated regularly to ensure it remains relevant and effective.

Limited purpose broker dealers must also have a chief compliance officer who is responsible for overseeing the firm's compliance with regulatory requirements and making decisions related to investment activities.

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The chief compliance officer must have the authority to stop any investment activity that is not in compliance with regulatory requirements.

Limited purpose broker dealers must also have a written code of ethics that outlines the firm's commitment to ethical decision making and compliance with regulatory requirements.

The code of ethics should be reviewed and updated regularly to ensure it remains relevant and effective.