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SEC Proposes Ways to Strengthen Audits and Reporting of Broker-Dealers

Published on: 11 Jun 2011

On June 15, the SEC unanimously proposed amendments to the broker-dealer financial reporting rule under the Securities Exchange Act of 1934. As stated in the SEC’s press release on the proposal, the objective of the proposed amendments is to “strengthen the audits of broker-dealers [and] the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash.” The proposal builds on the SEC’s December 2009 rules that enhanced the protections for investors who invest their assets with investment advisers.

The proposal contains three sets of amendments. The first set would “update the existing requirements of Exchange Act Rule 17a-5, facilitate the ability of the [PCAOB] to implement oversight of independent public accountants of broker-dealers as required by the [Dodd-Frank Act], and eliminate potentially redundant requirements for certain broker-dealers affiliated with, or dually-registered as, investment advisers.” The second set would require broker-dealers that either self-clear transactions or maintain custody of customer assets to allow the SEC and designated examining authorities (DEAs) to (1) discuss findings related to the broker-dealers’ annual audits with independent auditors and (2) review related audit documentation. The third set would require broker-dealers to file a new “Form Custody” on a quarterly basis, which would enhance the ability of the SEC and the DEA to oversee broker-dealers’ custody practices.

In addition, the proposals would require, among other things:

  • An increased audit focus on the broker-dealers’ custody activities and an audit for the broker-dealers’ custody controls.
  • Independent public accountants to notify the SEC “within one business day if the accountant determines that an instance of ‘material non-compliance’ exists with respect to any of the Financial Responsibility Rules during the course of the examination.”

The proposed requirements would be effective for fiscal years ending on or after December 15, 2011. Comments on the proposal are due 60 days after its publication in the Federal Register.

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