The SEC last week released a proposal that would strengthen the financial audit standards for broker-dealers under Exchange Act Rule 17a-5, hedge fund regulatory expert FrontLine Compliance reported yesterday.
The goal is to increase the audit standards for those brokers that have custody of client funds and securities, similar to the enhanced custodial audit provisions for registered investment advisers that became effective last year.
Although the primary focus of the proposed changes to Rule 17a-5 is on carrying brokers or clearing firms, the proposal includes provisions for non-carrying brokers as well. New annual reporting requirements are required for all broker-dealers.
A brief summary of the new proposed requirements are:
- New Compliance Report for carrying brokers that is prepared by a PCAOB registered auditor that shows compliance with Rule 15c3-1 and Rule 15c3-3
- New Exemption Report for non-carrying brokers that shows why the firm is exempt from Rule 15c3-3
- Under the proposal, the SEC would have access to any independent auditor reports and associated documents directly from the auditor and will use them before and during SEC examinations and inquiries of registered firms; and
- New Form Custody must be submitted annually as part of the broker’s Rule 17a-5 filing.
The SEC is proposing to make the new annual reporting requirements effective for firms with fiscal years ending after December 31, 2011 and is considering a transition period through September 15, 2012. The SEC is currently taking comment letters on this proposal which is likely to result in a large response from both broker-dealers and accountants.
View SEC release on proposed rule (142 page pdf)