SEC to Broker-Dealers: More Oversight, Fewer Madoffs?

The Securities and Exchange Commission (SEC) published a Final Rule 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. This action also follows 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)).

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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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