SEC strengthens broker-dealer audit requirements

BY KEN TYSIAC
August 1, 2013

The SEC on Wednesday approved rule amendments that strengthen audit requirements for broker-dealers.

The amendments are intended to increase protections for investors whose money and securities are turned over to SEC-registered broker-dealers. The final rules are available on the SEC’s website.

Under previous rules, broker-dealers are required to file annual reports with the SEC and the self-regulatory organization (SRO) designated to examine that broker-dealer that contain financial statements audited by a PCAOB-registered independent public accountant. The new rule amendments require:

  • Broker-dealers that have custody of customers’ assets to file a “compliance report” with the SEC to verify that they are complying with broker-dealer capital requirements, protecting customer assets, and sending periodic statements to customers.
  • Broker-dealers that do not have custody of customers’ assets to file an “exemption report” with the SEC citing their exemption from requirements for carrying broker-dealers.


In both cases, the broker-dealer is required to engage a PCAOB-registered independent public accountant. The accountant would prepare a report based on an examination of certain statements in the compliance report, or a report based on a review of certain statements in the exemption report, depending on whether the broker-dealer has custody of customers’ assets.

The examination or review of the newly required reports—and the examination of the broker-dealer’s financial statements—must be conducted according to PCAOB standards. The accountant’s report based on an examination of the compliance report will satisfy the annual internal control audit report requirement for investment advisers.

Requiring reports under PCAOB standards is a significant change for auditors because broker-dealer reports have been prepared under generally accepted auditing standards (GAAS), according to Vince Alvarez, CPA/CITP, an auditor with Breard & Associates in Los Angeles. The firm is registered with the PCAOB, but Alvarez said firm staff members will need training on PCAOB standards as a result of the rule amendments.

“Just converting to PCAOB standards is going to be the toughest part of this,” Alvarez said. “… It’s not a surprise. Anybody who has been doing broker-dealer audits has seen this coming for the past couple of years.”

Broker-dealers registered with the Securities Investor Protection Corporation (SIPC) also are required to file an annual report with the SIPC.

In addition, the amendments require a broker-dealer to file a new quarterly Form Custody report containing information about whether and how custody of customers’ securities and cash is maintained. The objective of these reports is to establish a custody profile for broker-dealers that can be used as a starting point by SEC and SRO staff conducting routine inspections and examinations of broker-dealers.

The amendments also require broker-dealers to allow SEC or SRO staff to review the work papers of the independent public accountant, if requested in writing, for purposes of an examination of the broker-dealer. Broker-dealers are required to allow the accountant to discuss findings with the examiners. This amendment applies to broker-dealers regardless of whether they have custody of their clients’ assets.

The amendments regarding the Form Custody report and the requirement to file annual reports with the SIPC take effect Dec. 31. The effective date for the requirements relating to broker-dealer annual reports is June 1, 2014.

“These rules will provide important additional safeguards for customer assets held by broker-dealers,” SEC Chairman Mary Jo White said in a news release.

The commission also amended financial responsibility rules for broker-dealers. The net capital, customer protection, books and records, and notification rules all were changed with the intent of protecting broker-dealer customers and strengthening the SEC’s monitoring ability.

The financial responsibility rule amendments take effect 60 days after their publication in the Federal Register.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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