Books and Records
Requirements
for Broker Dealers
1
Examination Authority
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The cornerstone of any examination is formed
by reviewing the firm’s books and records as
well as the firm’s supervisory procedures.
States’ statutes and regulations provide them
with the authority to examine and request the
production of the firm’s books and records.
The requirement to create and/or maintain
books and records can be found in SEC Rules
17a-3 and 17a-4 and NASD Conduct Rule 3110.
2
Examination Authority
• 17a-3 identifies records that B/Ds must create
and keep current as they relate to the
individual B/D’s business.
• 17a-4 identifies records that must be
maintained and preserved.
• Most records must be maintained for three to
six years.
• The two most recent years must be maintained
in an easily accessible area pursuant to 17a4(a). Generally, these records are maintained
on site.
3
SEC Rules 17a-3 and 17a-4

On May 2, 2003, the first substantive
amendments to these rules in over 30
years became effective.
The purpose of these amendments was to
provide regulators with ready access to
records, thereby allowing regulators to
conduct more efficient and effective sales
practice examinations.
4
SEC Rules 17a-3 and 17a-4
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The amendments to Rule 17a-3 include
requirements to:
• Create records relating to associated persons (17a3(a)(12));
• Collect certain account information and verify that
information with customers periodically (17a3(a)(17)(i)(A));
• Create a record of customer complaints (17a3(a)(18)(i));
• Create a record indicating compliance with advertising
rules (17a-3(a)(20));
• Identify the person responsible for policies and
procedures (17a-3(a)(22)) and designate a person who
can explain the B/D’s records (17a-3(a)(21));
• Revise information required on order tickets (17a3(a)(6) and (a)(7)).
5
SEC Rules 17a-3 and 17a-4
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The rules require the maintenance of both
“home” and “local” office records. Prior to
this time there were no “local” (or branch)
office record requirements pursuant to the
provisions of the National Securities
Markets Improvement Act of 1996
(NSMIA).
B/Ds are required to produce records at
offices within the state. Agreement of time
for extensive request……
6
SEC Rules 17a-3 and 17a-4
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“Local” office is defined as any location,
other than the home office, where one or
more associated persons (registered
representatives) regularly conduct the
business of handling funds or securities or
effecting any transaction in or inducing or
attempting to induce the purchase or sale
of any security by any means (17a3(h)(1)).
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SEC Rules 17a-3 and 17a-4
• There are certain exemptions to the
locations including some private
residences and bank broker dealer
circuit riders. SEC Rule 17a-4(I).
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SEC Rules 17a-3 and 17a-4
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Local office records must be
maintained at the local office or be
promptly delivered to local offices.
• The term ‘promptly’ is not specifically
defined and is left up to negotiation
between the firm and examiners.
However, if records are on site they
should be provided immediately for
inspection. Discuss 24 hour timeframe….
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Record Maintenance
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17a-4
Records are not required to be maintained in
any particular form, as long as they are
sufficient to provide an audit trail.
Record maintenance may include paper,
electronic, optical image (disk), micrographic
media a/k/a microfilm/fiche, etc.
• Optical image uses WORM technology (Write Once,
Read Many)
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Electronic records must be print or copy
capable.
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Examinations
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Each brokerage firm is required to
maintain certain books and records at its
home office.
However, most of your examinations will
involve a review of the operations of a
firm’s branch or local office.
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Required Broker Dealer
Books and Records
So, what records are
brokerage firms
required to maintain?
12
Required Broker Dealer
Books and Records
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Written Supervisory Procedures
• These procedures instruct the agent and the
manager how to carry out their day to day actions
and activities.
• This document will help the examiner understand
how the firm conducts its business.
• Written supervisory procedures must be
maintained for a period of three years after the
termination of each manual, update, modification
and revision. SEC Rule 17a-4(e)(7)
13
Exception Reports
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SEC Rule 17a-4(e)(8)
• The rule does not require the creation of
exception reports as part of a
supervisory program. However, if the
firm creates the report (for supervisory
or operational purposes) the report
must be maintained for 18 months.
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If the report is maintained electronically, the
firm must be able to reproduce the report.
14
Regulatory Mandated Reports/
Internal Audit Reports
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Regulatory settlements may require firms
to contract with independent consultants
to conduct internal audits. These
independent consultant reports are
required to be maintained and provided to
regulators, if requested. SEC Rule 17a-4
(e)(6).
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Regulator Mandated Reports/
Internal Audit Reports
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Internal (branch) audits not mandated by
settlements are not required pursuant to
this rule. However, firms are required to
conduct internal audits in order to comply
with supervisory requirements.
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Required Broker Dealer
Books and Records
Customer Complaints- SEC Rule 17a-3(a)(18)
• Each firm is required to maintain a record of all
complaints filed against its agents.
• If possible, examiners should review the allegations
contained in each complaint, regardless of the state
the client was from, to determine if there is a pattern
of abuse and the firm’s response to the complaint.
• In lieu of the customer complaint being maintained at
the branch or local office, the firm may maintain a
complaint log.
 The log should include complainant’s name,
address, account number, date received, registered
rep’s name, description of complaint and resolution.
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Required Broker Dealer
Books and Records
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Associated Person Records
• These are, essentially, agents’ personnel files. They contain
registration, disciplinary, and continuing education material.
They will also contain the records of individuals that are no
longer with the firm for at least three years after the
associated persons termination. (Form U-4 Registration /
Form U-5 Termination Notice)
• Firms must maintain:
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Copies of all compensation and other agreements with
associated persons. These records include employment
agreements, independent contractor, and franchise
agreements. SEC Rule 17a-3(a)(19)(ii)
Employment application; i.e., Form U-4 (FINRA letter
approved by SEC), CRD number and record identifying
internal identification record. (Jane Doe, CRD Number
12345, Rep. No. 155) SEC Rule 17a-3(a)(12).
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Required Broker Dealer
Books and Records
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Customer Correspondence
• The firm is required to maintain any
“customized” correspondence between an
agent and his clients relating to a firm’s
securities business, regardless of form (ex.
paper, fax, e-mail). Firm sales literature and
pre-approved form letters will not appear in
this file.
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Required Broker Dealer
Books and Records
• The correspondence does not have to be contained in a
centralized location. Some firms have a centralized
correspondence file, while others file the correspondence
in the appropriate client’s account file. Either is
acceptable.
• NASD Conduct Rule 3010 requires that each dealer
establish procedures whereby a representative sample
of e-mails be reviewed by management. (NASD Notice
to Members 98-11) Most firms have adopted review
parameters of 10% to 25%.
• All correspondence, written or electronic, must evidence
approval by a principal or manager. SEC Rule 17a4(b)(4).
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Required Broker Dealer
Books and Records
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Advertising and Sales Literature
• Each item of advertising or sales literature
must be approved by the firm prior to its
use.
• In certain instances, FINRA approval is
required within 10 days of first use.
• Advertising is defined as material published
or designed for use in a newspaper,
magazine, or other periodical; a radio,
television, telephone or video recording; a
sign, billboard or other public media.
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Required Broker Dealer
Books and Records
• Sales literature is any written or
electronic communication made
available to customers or the public.
(e.g., circulars, research reports, form
letters, scripts, seminar texts or
published articles.)
• All advertising and sales literature must
be true, accurate, and presented fairly.
• All advertising and sales material must
evidence approval by a principal or
manager. SEC Rule 17a-4(b)(4).
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Required Broker Dealer
Books and Records
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Record of Compliance
• Requires the firm to demonstrate, either
by the record itself or a separate record,
that they have adopted policies and
procedures reasonably designed to
establish compliance with rules relative
to marketing materials, advertising,
electronic communications sales
literature, sales scripts and any other
form of communication, etc. SEC Rule
17a-3(a)(20)
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Required Broker Dealer
Books and Records
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Customer Account Record/File
• The customer file generally contains a
customer’s new account record (form),
which captures the client’s financial and tax
status and their investment objectives, and
all other documents used to open the
account. (i.e., margin agreement, options
agreement, discretionary trading authority,
limited power of attorney, etc.) The form
must be approved or accepted by a principal
of the B/D.
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Required Broker Dealer
Books and Records
• SEC Rule 17a-3 (a)(17) requires for every
natural person maintaining an account for which
a suitability determination is to be made
pursuant to SRO suitability rules, the firm must
maintain new account information and update at
least once every three years. Upon opening or
updating an account, the firm, within 30 days,
must provide the account information, new
account card or like facsimile to the customer.
The firm must also provide to each customer a
“plain English” definition(s) of the firm’s
investment objectives, time horizon and risk
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tolerance.
Required Broker Dealer
Books and Records
• Finally, the firm must provide the customer,
presumably on the new account (or like
facsimile) or customer statement, the name(s)
and address(es) and phone number, of where
to direct customer complaints (17a-3(a)(18)).
• If customers of the office have indicated
inaccuracies on their account information, the
examiner should discuss with the manager the
means by which the firm has addressed the
customers’ concerns.
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Required Broker Dealer
Books and Records
• If after the account is established the agent
becomes aware of the need to update the
account information the agent should update
the account record to reflect the changes. The
firm must then provide the customer with the
information via a negative consent letter
instructing them to review the changes and, if
inaccurate return the corrected information to
the Compliance Department.
• Additionally, the firm must provide the
customer with copies of agreements, including
margin, arbitration, option, discretionary, etc.
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Required Broker Dealer
Books and Records
• Special attention should be paid to the
registered representatives for which inaccurate
client information (income, net worth,
investment objectives) or repetitive problems
are prevalent.
• As stated in Rule 17a-3(a)(17)(i)(B)(1), B/Ds
must create a record indicating that the B/D
furnished customers with a copy or like
facsimile of their new account/update
information.
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Required Broker Dealer
Books and Records
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Commission Statements or Commission
Runs
• An examiner can determine the commissions being paid
to specific agents from specific client accounts.
• An examiner can observe the differences in the
commission payout structure along a firm’s product line.
• An examiner can determine whether a manager spends
most of his/her time managing as opposed to selling.
• Rule 17a-3(a)(19)(i) requires a BD to make a record
listing each associated persons purchase and sale of a
security attributable to that associated person, allowing
regulators to quickly identify compensation trends.
 Records must include:
• Amount of compensation including monetary
(commissions, concessions, overrides) and nonmonetary (sales incentives, gifts, trips) compensation.29
Required Broker Dealer
Books and Records
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Purchase and Sales Blotter
• A blotter is another name for a list or log. In this
case, it is a list of the purchases and sales during a
particular time period.
• The P&S blotter will list the date, customer’s name,
account number, name and amount of securities, unit
and aggregate purchase or sale price, and name of
person from whom purchased or sold. Additional
information may be on the blotter which may be of
use such as time of execution, the client’s state of
residence, whether the trade has been canceled and
rebilled and date of entry for the trade.
• Most blotters are stored electronically and will be
printed at an examiner’s request.
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Required Broker Dealer
Books and Records
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Order Tickets (17a-3(a)(6) and (a)(7))
• Created by the agent. This is often an
electronic record.
• Sets forth the terms and conditions of the
order.
• Examiners can determine whether the trades
were solicited by the agent.
• By reviewing the time stamps, an examiner
can determine when the orders were received.
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Required Broker Dealer
Books and Records
• If the order is taken by an individual other
than the associated person assigned to the
account, the firm must note the associated
person’s name/Rep. No., on the ticket or an
alternative document. SEC Rule 17a-3(a)(6).
• Rule 17a-3 and 17a-4 excludes from the
definition of associated persons anyone whose
functions are solely clerical or ministerial in
nature.
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Required Broker Dealer
Books and Records
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An associated person includes any partner,
officer, director or branch manager of a broker
dealer (any person occupying a similar status or
performing similar functions), any person directly
or indirectly, controlled by, or under common
control with a broker dealer, or any employee of a
broker dealer. This includes order-takers. The
term associated person includes any independent
contractor, consultant, franchisee, or other
person providing services to a broker dealer
equivalent to those services provided by the
persons specifically referenced in the statute.
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Required Broker Dealer
Books and Records
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Trade Confirmations
• They are “receipts” that are mailed to the
customer after each executed trade
• By reviewing trade confirmations, an examiner
can determine whether the firm sold the
position from its own inventory or whether it
acquired the security from the market. (You
may also want to ask for the B/D’s trade
blotter to review.)
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Commissions will indicate the position was acquired
from the market.
Markups will indicate the position was sold from the
firm’s inventory.
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Required Broker Dealer
Books and Records
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Cash Receipts and Disbursements Blotter
• With this log or list the examiner can
determine whether customer funds are being
promptly transmitted to the clearing firm.
• An examiner can ensure that customer checks
are made payable to the clearing firm. If the
checks are made to the BD and not the
clearing firm, check to see if correspondence is
being sent to the customer to correct this
problem.
• Examiners should check this blotter against
the monthly customer account statements to
ensure accuracy.
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Required Broker Dealer
Books and Records
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Securities Received and Delivered Blotter
• An examiner can determine the stock
certificates that have been deposited into
accounts at the firm.
• An examiner can ascertain whether any
delivered shares were restricted.
• An examiner should be attentive to suspicious
deliveries of large blocks of a thinly traded
security.
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Required Broker Dealer
Books and Records
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Customer Account Statements
• An examiner is able to review every
transaction in a customer’s account.
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An examiner will review transactions to determine
whether the activity in the customers’ accounts are
appropriate in light of the clients’ risk tolerance,
financial situation, and investment objectives.
• May be maintained in the customer’s file.
• May be in an electronic format.
• Copies of the customers’ monthly or quarterly
account statements may be found in the
customer files.
• NASAA/SIFMA has issued a brochure to the
public providing guidance on understanding 37
account statements (NASAA Website).
Required Broker Dealer
Books and Records
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Bank Records
• Bank Statements
An examiner should review:
 The firm’s bank statement(s) to verify the amounts
of deposits and checks.
 The firm’s reconciliation of bank statements with
their checkbook, the object being to verify current
cash position as of the financial statement date.
• Cancelled Checks
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An examiner should inspect a representative
sample of cancelled checks for double
endorsements. Double endorsements may indicate
the presence of forgery and/or theft of customer
funds.
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Required Broker Dealer
Books and Records
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General Ledger
• Reflects all asset, liability, income, expense
and capital accounts of a firm. Used to
prepare the trial balance, balance sheets and
other statements of financial condition.
• Should be current and maintained
chronologically by account.
• An examiner should compare entries in the
general ledger with other subsidiary records
having “money” balances to ensure the
accuracy in posting from these records.
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Required Broker Dealer
Books and Records
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Trial Balance
• A statement of open debit and credit money
balances of all general ledger accounts.
• Acts as a check to ensure the accuracy of the
general ledger accounts and also keeps firms
informed of their current capital position.
• An examiner should compare the trial
balance against every account in the general
ledger to ensure the trial balance is accurate.
• Must be maintained on a current basis and
prepared at least monthly.
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Required Broker Dealer
Books and Records
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Audited Financial Statements
• Must be prepared in accordance with
United States GAAP.
• If an examiner suspects a problem, the
following steps may be useful in
pursuing the matter:

First, and foremost, collect all of the firm’s
financial statements on file and compare
them. Concentrate on areas that appear to
be significantly different from the previous
years’ statements.
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Required Broker Dealer
Books and Records
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Points to consider:
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Are the footnotes clear?
Are there extraordinary items?
Is the opening equity balance in the Equity section
equal to the closing balance of the Equity section on
the previous year’s statement? They should be
identical.
Is the information on each year’s statement
presented uniformly?
Are the same amortization and depreciation methods
used from year to year?
• After collecting the financial statement, the
information needs to be verified.
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Ask questions about the entry.
Collect documentation to confirm the numbers.
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Required Broker Dealer
Books and Records
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The Financial Accounting Standards Board
has an internet site that may assist you.
www.fasb.org
If you discover an accountant engaging in
inappropriate activity, consider contacting
your state’s accounting regulator.
Obtain original documents, invoices,
account balances, deeds, bank records
and reconstruct the item(s) in question.
Be cognizant of a change in auditing firms
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Review of Broker Dealer Books
and Records
• It may become necessary to engage a
CPA as an expert witness to assist you.
• Check to see if your state allows for the
hiring of a CPA to be an expert witness.
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Recap of Local Office Records:
Rule 17a-3(g)
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This subsection of the rule identifies
the records that are required to be
maintained or produced at a local
office upon the request of a
securities regulatory authority:
17a-3(a)(1) Sales Blotter
17a-3(a)(6) Customer Order Tickets
17a-3(a)(7) Proprietary Order Tickets
17a-3(a)(12) Customer/Employee Listing
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Recap of Local Office Records:
Rule 17a-3(g)
17a-3(a)(17)
Customer Account Information
17a-3(a)(18)(i) Customer Complaint Records
17a-3(a)(19)
Associated Person
Compensation Records/
Agreements
17a-3(a)(20)
Record of Compliance
17a-3(a)(21)
Identification of Records
Management Person
17a-3(a)(22)
Identification of Principal
Responsible for Compliance
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