Nasdaq PHLX FAQS Books and Records Requirements

Who is required to file annual audited financial statements?

Broker dealers are required to file Annual Audited Financial Statements pursuant to Exchange Act Rule 17a-5(d). Audits shall be filed with the Exchange no more than 60 days of a broker dealers' fiscal year end. (Refer to Options Regulatory Alert #2014 - 40 - Electronic Submission of Annual Audit Reports)

The rule contains an annual audit filing exemption for a broker dealer that is a member of a national securities exchange, has transacted a business in securities solely with or for other members of a national securities exchange, and has not carried any margin account, credit balance or security for any person who is defined as a "customer" in paragraph (c)(4) of Rule 17a-5. For additional guidance on this exemption please see memos below or contact the Exchange.

Annual Audit Memos:

• 12/07/04- Annual Audit Requirement: Designation of Accountant under 17a-5(f)(2)
• 08/15/03- Broker-Dealer Financial Statement Requirements under Section 17 of the Exchange Act
• 02/01/02 - Annual Audit Requirement: Exchange Act Rule 17a-5(d)
• 11/30/01 - Annual Audit Requirement: Exchange Act Rule 17a-5(d)

What rules are broker-dealers required to abide by regarding its books and records?

Broker Dealers are required to maintain all books and records as required under Securities Exchange Act Rules 17a-3 and 17a-4.

What are the capital requirements and corresponding capital rules for PHLX designated member firms?

Broker dealers that maintain a JBO Agreement must maintain minimum aggregate account equity of $1,000,000. If the account equity falls below $1,000,000, the firm must meet the call for additional equity within five business days. In addition, each JBO participant must employ or have access to a qualified Series 27 principal.

Pursuant to Securities Exchange Act Rule 17a-11, if a firm falls below 120% of its capital requirement and/or its books and records, notification must be sent to the Securities and Exchange Commission in Washington, D.C. and Philadelphia, PA (or the firm's regional SEC office), as well as to the firm's Designated Examination Authority (DEA). (Refer to Options Regulatory Alert #2015 - 41 - Electronic Submission of Financial Notifications and Subordination Agreements)

All assets and liabilities of a broker dealer must be maintained in the broker dealers' name. Members and member organizations are reminded not to place assets (or title accounts) in the name of individuals if they wish those assets to be counted as assets of the firm.

All broker dealers are required to use accrual accounting and thus accrue for all payables of the broker dealer. This includes PHLX bills, other exchange or clearing firm bills, and all other bills and liabilities incurred by a broker dealer. Comparing firm assets to liabilities on a daily basis will assist members in evaluating their net worth, as well as general compliance with net capital or net liquid asset requirements.

Broker dealers that operate solely as market makers, or registered options traders may be exempt from Securities Exchange Act Rule 15c3-1 pursuant to subsection (b)(1). Broker dealers eligible for the (b)(1) exemption are subject to the financial requirements of PHLX Rule 703, or similar rules of their Designated Examining Authority. Member firms relying on a (b)(1) exemption must be aware that when they engage in 11 or more non-specialist, non-marker maker, or non-floor broker securities transactions (investment or proprietary transactions other than legitimate erred trades), during a calendar year, will lose the exemption and become subject to Securities Exchange Act Rule 15c3-1(a)(2)(iii) and a $100,000 minimum net capital requirement.

If my firm has a change in its business operation, whom do I notify?

Any firm that changes its business operation must provide written notification to the Exchange at least 10 business days prior to the change pursuant to PHLX General 9, Section 59.

What are my firm's regulatory responsibilities regarding the maintenance of my clearance account and related margin requirements?

Broker Dealers designated to the Exchange for regulatory responsibility must:

• Notify the Exchange of all clearing arrangements and any change in clearing arrangements.
• Provide the Exchange with all letters of guarantee for the market makers and all error account agreements for the floor brokers.

All non-specialist and non market maker activity must be carried in a customer account at the clearing firm. Please note; if you are not a specialist or market maker for a security that you hold in your trading, market making or proprietary account the position is subject to customer margin requirements.

For specific information on margin requirements please refer to Regulation T and PHLX Options 6C.

Is my firm subject to an examination by the PHLX?

Pursuant to Exchange Act Rules 17d-1 and 15b2-2, all firms becoming members of the PHLX, for which the PHLX is the designated examining authority, are subject to an examination during the first six months of operations. Additionally, examinations will be conducted on a recurring basis at a frequency determined by the Exchange. Further, a cause examination will be conducted when deemed appropriate. Cause examinations, when warranted, may be conducted of any PHLX member or member organization.

What are the financial reporting requirements for my firm and when are the reports due?

Pursuant to Exchange Act Rule 17a-5 and PHLX Options 6D, the due dates for filing financial reports for 2023 are as follows:

Firms required to file annual audited financial statements are reminded of the requirement to file with both FINRA and the Securities & Exchange Commission within 60 days of the fiscal year end. Firms with a year end of December 31, 2022 should submit filings no later than March 1, 2023.

Registered Options Trading firms are required to file a quarterly FOCUS IIA Short Report for the periods ending March 31, June 30, September 30 and December 31 via FINRA's eFOCUS system.

All other broker dealers designated to the PHLX for regulatory responsibility are required to file monthly FOCUS IIA Reports via FINRA's eFOCUS system.

All financial filings are due no later than the 17th business day of the following month.

Requests for extensions are required prior to the due date and should be submitted in writing to your assigned FINRA Regulatory Coordinator.

Who is required to be fingerprinted and what records must my firm maintain?

Pursuant to Exchange Act Rule 17f-2 and PHLX Rule 623, every member of a national securities exchange shall require its partners, directors, officers and employees to be fingerprinted. All fingerprints shall be submitted to the Attorney General of the United States or its designee. (i.e., the Federal Bureau of Investigations) Broker dealers must retain evidence that the fingerprints have been taken and submitted for each individual. Securities Exchange Act Rule 17f-2 allows for certain exemptions from fingerprinting but those exemptions are limited.

What is an Insider Trading Form F-13 and who is required to complete this form?

Broker dealers new to the PHLX, for which the PHLX is the designated examining authority, must submit their written supervisory procedures related to, and required by, the Insider Trading and Securities Fraud Enforcement Act of 1988 to the Exchange for approval pursuant to PHLX General 9, Section 21.

Written supervisory procedures shall address compliance with the following Exchange requirements:

• Each new employee of the organization shall be furnished with a copy of the most current version of the Exchange's "Notice of Insider Trading" (Notice), or a document substantially similar to the Notice approved by the DEA for use in this connection. Within ten business days from the first date of employment with the unit, each new employee must sign and return the Notice to the employer. By his signature on the Notice, the employee attests to having carefully read the Notice and agrees to appropriately supply the employer firm with all trading accounts for which such person maintains a beneficial interest, including all personal and household accounts of the employee. Also, by his signature on the Notice, each new employee ensures that delivery of all related account statements will be made directly from the firm(s) maintaining the account to the employer.
• Each organization must complete the Exchange's "ITSFEA Accounts List", comprising all accounts submitted in connection with paragraph (1) above and all proprietary accounts of the unit. Updates to the list must be made within one month of any change and each completed version of the list must be maintained for no less than three years by the organization.
• Each month a supervisory person of the organization is required to make a reasonable review of all activities from the account statements of those accounts reflected on the ITSFEA Accounts List with a view toward identifying the possible misuse of material non-public information. A report must be made promptly to the Exchange's Market Surveillance Department in the event that any such unusual profits are so identified.

Firms are reminded that a failure to comply with PHLX General 9, Section 21 may result in the issuance of an Exchange Minor Rule Plan Violation and will be applied according to the established sanction schedule.

What are the requirements for my firm to become a new PHLX designated member firm?

Please refer to the New Member Applicant Checklist on the Nasdaq Membership page for a detailed list of required documents to be submitted for review.

What are the requirements to become registered as an off-floor trader?

The Firm must submit the Form U4 electronically via FINRA's Web CRD System. In addition, the fingerprint card must also be submitted to Web CRD.

The trader must have passed the Securities Industry Essentials and Series 57 examinations.

Termination:

• The Firm must submit the Form U5 electronically via Web CRD.

Is my firm required to become a member of SIPC and what is the annual fee?

Pursuant to SIPC Act of 1970 Section 78ccc (a)(2), all registered broker-dealers must become members of the Securities Investor Protection Corporation (“SIPC”). Beginning April 1, 2009, all PHLX DEA Member Firms are required to file SIPC-6 and SIPC-7T Forms and the corresponding payment, which is .0025 of the Member Firm’s net operating revenue as computed on both SIPC-6 and SIPC-7T Forms. SIPC-6 Form and assessment payment is due no later than 30 days after the end of the first six months of the fiscal year; SIPC-7T Form and assessment payment is due no later than 60 days after the end of the fiscal year, or after membership termination. The SIPC Forms and assessments should be forwarded to the main office of SIPC in Washington, D.C. For more details, please refer to www.sipc.org.

Is my firm required to maintain written supervisory procedures?

Pursuant to PHLX General 9, Section 20, each member, member organization, participant, or participant organization shall establish, maintain, and enforce written supervisory procedures, and a system for applying such procedures, to supervise the types of business(es) in which the member, member organization, participant, participant organization engages in and to supervise the activities of all registered representatives, employees, and associated persons, The written supervisory procedures and the system for applying such procedures shall reasonably be expected to prevent and detect, insofar as practicable, violations of the applicable securities laws and regulations, including the by-laws and rules of the Exchange.

The written supervisory procedures shall set forth the supervisory system established by the member, member organization, participant, or participant organization and shall include the name, title, registration status, and location of all supervisory personnel required by this rule, the dates of which supervisory designations were or are effective, and the responsibilities of supervisory personnel as these relate to the types of business(es) the member, member organization, participant, or participant organization engages in, and securities laws and regulations, including the by-laws and rules of the Exchange.

A copy of the written supervisory procedures shall be kept and maintained at each location where supervisory activities are conducted on behalf of the member, member organization, participant, or participant organization. Each member, member organization, participant, or participant organization shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in supervisory personnel or supervisory procedures. Each member, member organization, participant, or participant organization shall be responsible for communicating such changes throughout its organization within a reasonable time.

NOTE: This is Not Inclusive of All Rules and Regulations or the Requirements in Total of All Regulations. This Reminder List is Designed Only as a Means to Highlight Certain Rules and Policies, and Not as an All-Inclusive Guide.

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