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SEC Footnote 74 deals with Alternative for Broker-Dealers Who Don’t Hold Customer Funds. The SEC issued Footnote 74 in July 2020, providing a much-needed substitute exclusively for firms engaging in a capital elevating activities (often Capital Acquisition Brokers). The guidance of SEC Footnote 74 refers to such broker-dealers as Non-Covered Firms. Non-Covered Firms who only capture in Non-Covered Firm activities are no longer characterized as cleared under Rule 15c3-3(k) and thus no longer subject to Rule 15c3-3 requirements, stated to this footnote. Any broker-dealer that defines itself as a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to change its FINRA membership agreement to devise this change.
Footnote 74 Details
On July 1, 2020, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were issued guidance on the characterization of US registered broker-dealers under Securities Exchange Act Rule 15c3-3. In the past year, the Financial Industry Regulatory Authority (FINRA) required that all broker-dealers claim an exemption under Rule 15c3-3(k) in their membership agreements even though their business activities did not require the exemption under rule 15c3-3.
It might include broker-dealers who:
The guidance of July refers to such broker-dealers as Non-Covered Firms. The guidance states that Non-Covered Firms who only capture in Non-Covered Firm activities are no longer characterized as excepted under Rule 15c3-3(k) and thus no longer subject to any Rule 15c3-3 requirements. Accordingly, such broker-dealers (BD) cannot claim the exemption under the rule 15c3-3 in their FINRA membership agreements, FOCUS report filings, and annual exemption reports as essential under the provisions of Exchange Act Rule 17a-5.
Any broker-dealer who determines a Non-Covered Firm engaging in Non-Covered Firm activities can ask FINRA to amend its FINRA membership agreement to consider this change. The broker-dealer shall state in this instance that it is not required to comply with Rule 15c3-3 because of the guidance of SEC outlined in the circumstances specified in SEC footnote 74 to Exchange Act. Such broker-dealers generally include:
The guidance of footnote 74 also states that broker-dealers who engage in business activities that are eligible within the paragraph (k) exemption will continue to be exempt. Thus, these BD (broker-dealers) has not required to change their FINRA membership agreement unless they at some point prevent their business activities to those of a Non-Covered Firm.
Non-Covered Firms shall have to file annual exemption reports and periodic FOCUS reports differently. Firms that no need to claim an exemption concerning Non-Covered Firm activities should relate their business activities in their exemption reports and also state that, during the reporting period, they:
Also, a Non-Covered Firm shall no longer disclose in its FOCUS report that Non-Covered Firm is claiming an exemption from Rule 15c3-3 concerning Non-Covered Firm activities.
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