The Securities and Exchange Commission (SEC) published a Final Rule earlier last week amending certain annual reporting, audit, and notification requirements for broker-dealers in the broker-dealer reporting rule (Rule 17a-5) and the broker-dealer notification rule (Rule 17a-11). These amendments were enacted using the additional authority provided to the Public Company Accounting Oversight Board (PCAOB) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The PCAOB is empowered to establish standards with regard to audits of broker-dealer reports filed with the SEC, and, thus, the PCAOB is in a position to exercise its standard-setting authority over audits of broker-dealers registered with the SEC. The primary impetus for the amendments apparently was the series of high-profile cases involving fraudulent conduct by investment advisers and broker-dealers, such as the Bernie Madoff and Stanford International Bank scandals. Furthermore, this action may be in part a response to findings by the PCAOB last summer of consistent problems with the work done by auditors of broker-dealers.
The Final Rule will increase the reporting requirements of broker-dealers, and expose them—and their auditing firms—to greater scrutiny. Broker-dealers (BDs) must file annual reports with the SEC that consist of a financial report along with either (1) a compliance report, or (2) an exemption report. In addition, all BDs must file reports prepared by independent public accountants that cover the internally-prepared reports. Such accountants must be registered with the PCAOB and the review must be consistent with PCAOB standards (as opposed to generally accepted auditing standards (GAAS)).
In addition, the Final Rule requires accountants to immediately notify the BDs of any noncompliance issues that arise during the course of preparing the accountants’ reports. If an accountant finds any material weakness in the BD’s internal compliance controls, the accountant must notify the BD, and the BD may in turn have to file notice with the SEC and the BD’s designated examining authority (DEA).
The other significant component of the Final Rule is the requirement that a BD that clears transactions or carries customer accounts must allow the SEC or DEA examiners to review the background materials supporting the reports as provided by the BD’s independent public accountant. The BD must permit the accountant to discuss findings related to its reports with examiners when requested in connection with a regulatory examination of the BD. Finally, the Rule’s amendments also include new form filing requirements and new technical amendments. More detail on the Final Rule is provided in our client alert.