Skip to content

Summary of FINRA Regulatory Notice 23-21

On December 22, 2023, FINRA issued a regulatory notice reminding member firms of net capital, recordkeeping, and financial reporting requirements in connection with revenue recognition practices. 

FINRA monitored its member firms and noticed that some firms were not complying with the following rules: 

  • SEA Rule 15c3-1
  • SEA Rule 17a-3
  • SEA Rule 17a-5

These rules involve the misapplication of ASC 606 — the Financial Accounting Standards Board’s Accounting Standard Codification 606, Revenue from Contracts with Customers. 

SEA Rule 15c3-1 specifies that firms use US GAAP to compute their net worth, which requires firms to recognize their revenue from contracts with customers when required by ASC 606. ASC 606 states that if the firm receives consideration before satisfying the performance element of the contract, then the consideration is not revenue — it is a liability. Therefore, firms should not recognize revenue until they complete their obligations. Furthermore, firms should be able to substantiate when they meet those performance obligations. 

FINRA noted that many firms were using non-refundable fee clauses in their contracts. However, payment of a non-refundable fee as consideration is still a liability until the firm complies with its contractual obligations. Doing so can lead to overstated revenues and understated liabilities or non-allowable assets. 

The violations of SEA Rule 17a-3 and SEA Rule 17a-5 were related to the SEA Rule 15c3-1 violations. Rule 17a-3 requires a firm to keep current records regarding their ledgers of assets and liabilities. Incorrectly labeling a deposit as an asset rather than a liability before the completion of a firm’s obligations would necessarily violate those rules. Rule 17a-5 requires that firms file FOCUS and annual reports that are consistent with applicable requirements, which, again, they cannot do if they have mislabeled consideration as an asset prior to completion of their contractual obligations. 

To correct these issues, FINRA suggests that member firms follow the ASC 606 revenue recognition processes and correctly label deposits and considerations as liabilities until the completion of contractual obligations. Furthermore, they should keep adequate documentation that allows them to prove when they completed those obligations, allowing them to reclassify that consideration. 

Quadrant Regulatory Group has financial experts that can ensure your financial records are accurate and reported properly to regulators. 

Back To Top