Enhancement of Broker-Dealer Regulatory Reporting Requirements

Since 2009, when the Securities Exchange Commission (SEC) began reviewing rules related to broker-dealers and safekeeping of investor assets, the industry has been subject to increased regulatory scrutiny. In 2010, this scrutiny was further enhanced by issuance of the Dodd-Frank Act. For the past three years, the SEC and the Public Company Accounting Oversight Board (PCAOB) have been working together to enhance the oversight of broker-dealer reporting and audit requirements.

During 2013, the SEC amended Rule 17a-5 to require that audits of broker-dealers be performed in accordance with PCAOB standards rather than American Institute of Certified Public Accountants’ (AICPA) rules. In March 2014, the SEC adopted additional amendments that will enhance the audit, reporting and notification requirements for broker-dealer audits.

Beginning June 1, 2014, broker-dealers will be required to include additional reports in their audited financial statements. For broker-dealers that carry customer assets (carrying broker-dealers), they will be required to prepare a compliance report for inclusion in their annual audited financial statements. In the compliance report, the carrying broker-dealer will need to make assertions regarding its establishment, maintenance and non-compliance of internal control systems over financial responsibility. The independent auditor would then need to examine and report on the carrying broker-dealer’s assertions. For broker-dealers that do not carry customer assets (introducing broker-dealers) and claim an exemption from SEC Rule 15c3-3, they will be required to prepare an exemption report for inclusion in their annual audited financial statements. In this report, the introducing broker-dealer will be required to assertions and statements regarding its compliance and or exceptions with the exemption provisions of SEC Rule 15c3-3. The independent auditor would then need to review and report on the introducing broker-dealer’s assertions.

While there are a few other amendments included in this SEC Release No. 34-70073, at the end of the day, it results in additional requirements on the part of the broker-dealer and its independent PCAOB registered auditor. While it’s still early in 2014, it’s not too early for broker-dealers to begin discussing these requirements with their auditors.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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