The Office proposes to replace current financial reporting rules 69W-300.002 and 69W-600.015 and current net capital rule 69W-600.016 with new consolidated net capital/financial reporting rules 69W-600.0151 and 69W-600.0161 for dealers/issuer-...

 

DEPARTMENT OF FINANCIAL SERVICES

Securities

RULE NOS.:RULE TITLES:

69W-600.0151Net Capital and Financial Reporting Requirements for Dealers and Issuer/Dealers

69W-600.0161Net Capital and Financial Reporting Requirements for Investment Advisers

PURPOSE AND EFFECT: The Office proposes to replace current financial reporting Rules 69W-300.002 and 69W-600.015 and current net capital Rule 69W-600.016 with new consolidated net capital/financial reporting Rules 69W-600.0151 and 69W-600.0161 for dealers/issuer-dealers and investment advisers, respectively. The purpose and effect of these changes are to remove outdated requirements, implement clearer requirements as to financial reporting and calculation of net capital, and improve rule organization by consolidating rules on the same subject while creating separate rules by registration type.

SUMMARY: The proposed new rules amend definitions and requirements, consolidate provisions previously contained in various rules, and separate requirements into different rules for dealers and investment advisers.

SUMMARY OF STATEMENT OF ESTIMATED REGULATORY COSTS AND LEGISLATIVE RATIFICATION: The Agency has determined that this will not have an adverse impact on small business or likely increase directly or indirectly regulatory costs in excess of $200,000 in the aggregate within one year after the implementation of the rule. A SERC has not been prepared by the Agency.

The Agency has determined that the proposed rule is not expected to require legislative ratification based on the statement of estimated regulatory costs or if no SERC is required, the information expressly relied upon and described herein: The Agency expressly relies on an analysis of potential economic impact conducted by persons with subject matter knowledge of this rule.

Any person who wishes to provide information regarding a statement of estimated regulatory costs, or provide a proposal for a lower cost regulatory alternative must do so in writing within 21 days of this notice.

RULEMAKING AUTHORITY: 517.03(1), 517.12(9), 517.121(2) FS

LAW IMPLEMENTED: 517.12(9), 517.121(2) FS

IF REQUESTED WITHIN 21 DAYS OF THE DATE OF THIS NOTICE, A HEARING WILL BE SCHEDULED AND ANNOUNCED IN THE FAR.

THE PERSON TO BE CONTACTED REGARDING THE PROPOSED RULE IS: John Kim, [e-mail], [phone]

 

THE FULL TEXT OF THE PROPOSED RULE IS:

 

69W-600.0151 Net Capital and Financial Reporting Requirements for Dealers and Issuer/Dealers.

(1) For purposes of this rule:

(a) “Audited financial statements” means financial statements that must be:

1. Examined in accordance with United States generally accepted auditing standards and prepared in conformity with generally accepted accounting principles;

2. Audited by a certified public accountant that meets the standards of independence described in Rule 2-01(b) and (c) of Regulation S-X (17 C.F.R. §210.2-01(b) and (c)), which is incorporated by reference in Rule 69W-200.002, F.A.C.; and

3. Accompanied by an opinion of the accountant with respect to the financial statements, and by a note stating the principles used to prepare it, the basis of included securities, and any other explanations required for clarity.

(b) “Net capital,” for purposes of subsection (3) of this rule, means assets minus liabilities, as determined by United States generally accepted accounting principles. The Office of Financial Regulation (Office) may require a current appraisal be submitted in order to establish the worth of any asset.

(c) “Unaudited financial statements,” means financial statements prepared in accordance with United States generally accepted accounting principles and which must include:

1. A Statement of Financial Condition or Balance Sheet;

2. A Statement of Income;

3. An oath or affirmation that such statement or report is true and correct to the best knowledge, information, and belief of the person making such oath or affirmation. Such oath or affirmation shall be made before a person authorized to administer such oath or affirmation, and shall be made by a duly authorized representative of the entity for whom the financial statements were prepared; and

4. When specifically requested by the Office, a Statement of Changes in Financial Position, Statement of Changes in Stockholder’s/Partner’s/Proprietor’s Equity, and a Statement of Changes in Liabilities Subordinated to Claims of General Creditors.

(2) Net capital requirements for dealers.  All dealer applicants and registrants shall meet and at all times maintain the net capital and ratio requirements as prescribed by United States Securities and Exchange Commission (SEC) Rule 15c3-1 including any appendices thereto (17 C.F.R. § 240.15c3-1, 240.15c3-1a, 240.15c3-1b, 240.15c3-1c, and 240.15c3-1d, 240.15c3-1e, 240.15c3-1f, and 204.15c3-1g), computed in accordance with said rule.  The foregoing are incorporated by reference in Rule 69W-200.002, F.A.C.

(a) All reporting requirements as specified in 17 C.F.R. § 240.17a-11, which is incorporated by reference in Rule 69W-200.002, F.A.C., when such regulation is referred in SEC Rule 15c3-1 shall be applicable with the exception that such reports and notifications required by said rule shall be forwarded to the Office as well as the other regulatory agencies specified, if applicable.

(b) All references to 17 C.F.R. § 240.17a-3 and 17 C.F.R. § 240.17a-4, in the foregoing and subsequent provisions of Office of Financial Regulation or SEC Rules as incorporated by the Office, shall be read as to mean Rule 69W-600.014, F.A.C. The foregoing SEC Rules are incorporated by reference in Rule 69W-200.002, F.A.C.

(3) Net capital requirements for issuer-dealers.

(a) Every issuer/dealer registered or required to be registered pursuant to Section 517.12, F.S., except those described in subsection (3)(b) of this rule,  shall maintain net capital of least $5,000.

(b) An issuer who elects to offer or sell its own securities pursuant to Section 517.051(9), F.S., is required to be registered pursuant to Section 517.12(2), F.S., and shall maintain net capital of:

1. $5,000 when the securities of the issuer which are to be offered and sold are not in excess of $250,000.

2. $25,000 when the securities of the issuer which are to be offered and sold are in excess of $250,000.

(4) Financial reporting requirements for dealers.

(a) Requirement for dealer applicants. Every dealer applicant, unless exempted under subsection (4)(c) of this rule, shall file with the Office:

1. A completed SEC Form X-17A-5 Part IIA (FOCUS Report) [version date], which is hereby incorporated by reference and accessible at http://www.flrules.org/_____ or http://www.flofr.com/_______, or

2. Financial statements as of a date within ninety (90) days prior to the date of filing for registration.  Dealer applicants may file unaudited financial statements provided that the dealer applicants shall also file audited financial statements as of said applicant’s most recent fiscal year end. Those dealer applicants which have been in operation for a period of time less than twelve (12) months, and for whom audited financial statements have not been prepared or are not available, may file unaudited financial statements provided the applicant is effectively registered with the SEC or Financial Industry Regulatory Authority, and such financial statements are as of a date within thirty (30) days prior to the date of filing for registration.

(b) Requirement for dealers. Every dealer registered or required to be registered pursuant to Section 517.12, F.S., shall annually file with the Office of Financial Regulation audited financial statements as of the end of the dealer’s fiscal year within ninety (90) days after the conclusion of said fiscal year, unless exempted under subsection (4)(c) of this rule.

(c) The financial statements and reports required by subsection (4)(a) and (4)(b) of this rule are not required to be filed with the Office by a dealer applicant or registrant, if the dealer registrant is a current member of a securities association registered pursuant to section 15A of the Securities Exchange Act of 1934 (15 U.S.C. § 78o-3) and such association requires financial reports to be filed with it.

(d) Financial statements and reports prepared and filed in accordance with the provisions of SEC Rule 17a-5 (17 C.F.R. § 240.17a-5), which is incorporated by reference in Rule 69W-200.002, F.A.C., shall be deemed to be in compliance with and fulfill the requirements of subsections (4)(a) through (4)(d) of this rule.

(5) Financial reporting requirements for issuer-dealers.

(a) Requirements for issuer-dealer applicants. Every issuer-dealer applicant shall file with the Office:

1. Financial statements as described in subsection (5)(b) of this rule, as of a date within ninety (90) days prior to the date of filing for registration;

2. Written notice of designation of an independent certified public accountant, which notice shall include name, address and telephone number of the accountant so designated;

3. Written notice of fiscal year end or audit date of such issuer-dealer; and

4. Disclosure of any contingent, civil or criminal liabilities of such issuer-dealer.

(b) Issuer-dealer applicants may file unaudited financial statements provided that the issuer-dealer applicants shall also file audited financial statements as of said applicant’s most recent fiscal year end, except:

1. This subsection (5)(b) does not apply to issuer-dealer applicants who concurrently submit an application for registration of securities pursuant to Section 517.081, F.S. and who are required to file audited financial statements under that section.

2. Issuer-dealer applicants who will offer or sell their own securities pursuant to Section 517.051(9), F.S. shall only file unaudited financial statements.

(c) Requirements for issuer-dealers. An issuer-dealer shall annually file with the Office audited financial statements as of the end of the issuer-dealer’s fiscal year within ninety (90) days after the conclusion of said fiscal year, except issuer-dealer applicants offering or selling its own securities pursuant to Section 517.051(9), F.S. may file unaudited financial statements within ninety (90) days after the conclusion of the end of their fiscal year.

(6) Registration as a dealer or issuer-dealer may be denied, revoked, or suspended if financial statements reflect:

1. Net capital less than required under this rule; or

2. An audit opinion qualified as to the scope of the audit, the entity’s ability to continue on a going-concern basis, or other material qualifications; or

3. An adverse audit opinion or a disclaimer of opinion.

Rulemaking Authority 517.03(1), 517.12(9), 517.121(2) FS. Law Implemented 517.12(9), 517.121(2) FS. History–New              .

 

69W-600.0161 Net Capital and Financial Reporting Requirements for Investment Advisers.

(1) Net capital requirements for investment advisers. The net capital of an investment adviser applicant or registrant under Section 517.12, F.S., shall be maintained at a level required by this rule.

(a) An investment adviser registered or required to be registered with the Office of Financial Regulation (Office) who has custody of client funds or securities shall maintain minimum net capital of $25,000 except:

1. An investment adviser having custody solely due to direct fee deduction shall be required to comply with the net capital requirements of subsection (1)(b) of this rule.

2. An investment adviser having custody solely due to advising pooled investment vehicles and complying with the terms described under Rule 69W-600.0132(3)(d), F.A.C., shall be required to comply with the net capital requirements of subsection (1)(b) of this rule.

3. An investment adviser having custody solely because the investment adviser, associated person of the investment adviser, or employee, director, or owner of the investment adviser is the trustee for a trust, and where the investment adviser acts as the investment adviser to that trust and complies with the terms described under Rule 69W-600.0132(3)(e), F.A.C., shall be required to comply with the net capital requirements of subsection (1)(b) of this rule.

4. An investment adviser having custody solely because the investment adviser, associated person of the investment adviser, or employee, director or owner of the investment adviser is the trustee for a beneficial trust and complies with the terms described under Rule 69W-600.0132(3)(f), F.A.C., shall be required to comply with the net capital requirements of subsection (1)(b) of this rule.

(b) An investment adviser registered or required to be registered with the Office who does not have custody of client funds or securities, or who is described in subsections (1)(a)1. through 4. above, shall maintain minimum net capital of $2,500.

(c) For purposes of this rule, the term “net capital,” shall mean assets minus liabilities, as determined by United States generally accepted accounting principles. The Office may require a current appraisal be submitted in order to establish the worth of any asset.

(2) Financial reporting requirements for investment advisers.

(a) Every registered investment adviser who requires payment of advisory fees six months or more in advance and in excess of $500 per client, or who has custody of client funds or securities except those who have custody solely due to direct fee deduction or who meet the requirements of Rule 69W-600.0132 (3)(d), (3)(e) or (3)(f), F.A.C., shall annually file with the Office audited financial statements as of the end of the investment adviser’s fiscal year within 90 days following the end of the fiscal year. Audited financial statements filed pursuant to this rule must be:

1. Examined in accordance with generally accepted auditing standards and prepared in conformity with United States generally accepted accounting principles;

2. Audited by a certified public accountant that meets the standards of independence described in Rule 2-01(b) and (c) of Regulation S-X (17 C.F.R. §210.2-01(b) and (c)), which is incorporated by reference in Rule 69W-200.002, F.A.C.; and

3. Accompanied by an opinion of the accountant with respect to the financial statements, and by a note stating the principles used to prepare it, the basis of included securities, and any other explanations required for clarity.

(b) Every registered investment adviser who does not have custody of client funds or securities, or those who have custody solely due to direct fee deduction or who meet the requirements of Rule 69W-600.0132 (3)(d), (3)(e), or (3)(f), F.A.C., shall annually file with the Office unaudited financial statements as of the end of the investment adviser’s fiscal year within 90 days following the end of the fiscal year. Unaudited financial statements filed pursuant to this rule must be prepared in accordance with United States generally accepted accounting principles and must include:

1. A Statement of Financial Condition or Balance Sheet;

2. A Statement of Income; and

3. An oath or affirmation that such statement or report is true and correct to the best knowledge, information, and belief of the person making such oath or affirmation. Such oath or affirmation shall be made before a person authorized to administer such oath or affirmation, and shall be made by a duly authorized representative of the entity for whom the financial statements were prepared.

4. The Office may also specifically request an investment adviser to include a Statement of Changes in Financial Position, Statement of Changes in Stockholder’s/Partner’s/Proprietor’s Equity, and a Statement of Changes in Liabilities Subordinated to Claims of General Creditors.

(c) This rule shall not apply to an investment adviser also registered as a dealer with the Office if the dealer registrant is a current member of a securities association registered pursuant to section 15A of the Securities Exchange Act of 1934 (15 U.S.C. § 78o-3), which is incorporated by reference in Rule 69W-200.002, F.A.C., and such association requires financial reports to be filed with it.

(d) Registration as an investment adviser may be denied, revoked, or suspended if financial statements reflect:

1. Net capital less than required under this rule; or

2. An audit opinion qualified as to the scope of the audit, the entity’s ability to continue on a going-concern basis, or other material qualifications; or

3. An adverse audit opinion or a disclaimer of opinion.

(3) For purposes of this rule, “custody” is defined in Rule 69W-600.0132(1)(a), F.A.C.

Rulemaking Authority 517.03(1), 517.12(9), 517.121(2) FS. Law Implemented 517.12(9), 517.121(2) FS. History–New              .

 

NAME OF PERSON ORIGINATING PROPOSED RULE: Pamela Epting, Director, Division of Securities

NAME OF AGENCY HEAD WHO APPROVED THE PROPOSED RULE: Financial Services Commission

DATE PROPOSED RULE APPROVED BY AGENCY HEAD: January 13, 2015

DATE NOTICE OF PROPOSED RULE DEVELOPMENT PUBLISHED IN FAR: November 24, 2014