On April 9, 2007, the NASD issued Notice to Members NTM-07-16.   The information contained in the Notice is not new but provides answers to some frequently asked questions regarding financial and operational matter. The following highlights some of the key components of this Notice:

• Firms must be in compliance with the Net Capital rule at all times (not just when the calculation is performed) and must be able to demonstrate compliance to an examiner upon request even though moment-by-moment computations are not required.

• Your firm must deduct the amount of an adverse judgment in arbitration from its net capital when the award is made even though the appeal process has not been exhausted.

• When your firm contributes and distributes capital, it must record such in their general ledger and properly reported on FOCUS II or IIA Reports, as required.  Records supporting the source and purpose of the activity should be readily available.  All agreements between firms and their capital investors should be in writing.

• Firms that invest in mutual funds (excluding money market funds) for their own accounts need to track each sale and purchase; even it is an exchange within the same fund family to determine if the trading activity makes them a “dealer” under the Net Capital Rule.  Firms that exceed 10 trades per calendar year would be subject to a $100,000 net capital requirement.

• Cancellations, errors and corrections are generally not counted as trades for the 10-transaction per calendar year limitation. However, firms that purposely hold and trade positions in their error account in hopes of circumventing the dealer requirement may be required to maintain $100,000 in net capital.

• If a firm proposes a settlement in a NASD disciplinary action, it is required to report the liability and corresponding expense when the offer is accepted by the NASD’s Office of Disciplinary Affairs.

• Firms reserving breakpoint money that has not yet been claimed may or may not be able to take that money back into its own account.  Prior to removing this liability, a firm must determine, to the satisfaction of those responsible for the financial management of the firm and their outside auditors, that such a reduction is accurate based on the firm’s business and operating practices.

• If your firm needs to request an extension of time to file your FOCUS report or your annual audit report, your request must be received   by your local NASD office no later than three days prior to the due date of the filing.  As a reminder, exceptions will only be granted for events that are beyond the control of the firm.  Late filings are subject to a $100 a day penalty for up to 10 business days and could also subject the firm to disciplinary actions as well.

• Hard copies of the firm’s complete annual financial audit, including the applicable oaths and affirmations page,  must be filed as follows:
• 1 copy - NASD Systems Support Department in Rockville, MD. 
• 2 copies - SEC in Washington, DC, and
• 1 copy – the applicable SEC Regional office. 

The audit needs to be received at the SEC and NASD offices on or before the 60th day following the firm’s year end. 

For additional requirements that may be specific to your line(s) of business, we encourage you to review NTM 07-16 If you have questions, please feel free to contact Regulatory Compliance at 603-434-3594 and ask for Anne (ext. 16) or Danielle (ext. 23).