Broker-Dealers: The New Frontier For SEC Enforcement

In a split vote last week, the SEC adopted new rules designed to increase protections for customers who invest money and securities with broker-dealers. Recent rulemaking and statements made by the SEC have highlighted that fact that broker-dealer regulation is becoming a growing area of SEC interest. In connection with last Wednesday’s vote, SEC Chair Mary Jo White stated that “[i]nvestors need to feel confident that their money is safe when it’s being held by their broker-dealers… [and] these rules will strengthen the audit requirements for broker-dealers and enhance [the SEC’s] oversight of the way they maintain custody over their customer’s needs.”

The new rules amend the broker-dealer reporting and notification rules codified in Section 17 and Rules 17a-5 and 17a-11 of the Exchange Act. Currently, a broker-dealer is required to file an annual report with the SEC and the SRO designated to examine that broker-dealer. The report must contain audited financial statements conducted by an independent public accountant registered with the PCAOB. Under the new requirements, a broker must file a quarterly report telling the SEC whether and how it maintains control over its client’s funds. The new rules also require that the broker-dealer let the SEC review the work-papers of the accountant, if requested.

SEC Commissioners Daniel Gallagher and Troy Paredes were the two dissenters in the 3-2 vote and made a joint statement expressing their concern that the “final rule could chill important discussions between a broker-dealer and its auditors” as well as “compromise any privileges that cover communications between a broker-dealer and its auditor[.]”

In a separate unanimous vote, the SEC adopted amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers. These amendments were designed to enhance the SEC’s ability to monitor and prevent unsound business practices.

The Commission’s on-going focus on broker-dealers may be the first sign that the SEC is finally taking steps towards establishing a fiduciary standard for broker-dealers. Dodd-Frank authorized the SEC to impose a fiduciary standard on broker-dealers but to date the SEC has only taken an investigative approach. However, it’s looking more and more likely that a uniform standard is on the horizon under Chair White’s oversight.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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