Skip to content
US Securities and Exchange Commission

SEC Plans to Propose Scaled Approach for Broker-Dealer Reporting and Audit Requirements by September

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

The SEC is not waiting for Congress to scale back annual reporting and audit requirements for certain broker-dealers.

Lawmakers have introduced a bill that would exempt smaller brokers from certain reporting requirements but have yet to vote on it. But the commission is planning to issue by September 2020 proposed amendments to “certain broker-dealer annual reporting, audit, and notification requirements that could differentiate the requirements according to different classes of broker-dealers,” according to the most recent rulemaking agenda.

The SEC in July 2013 adopted the reporting requirements for broker-dealers as a response to the Madoff Ponzi scheme in Release No. 34-70073, Broker-Dealer Reports. It amended Rule 17a-5 of the Securities Exchange Act of 1934, which requires brokerage firms to file annual reports with the SEC and the Financial Industry Regulatory Authority (FINRA). The amendments were meant to lessen the likelihood that a broker could manipulate client assets in the same manner as Bernard Madoff.

As a result of Release No. 34-70073, the report has to contain audited financial statements conducted by a public accountant registered with the PCAOB.

A broker who has custody of customer assets must file a “compliance report” with the SEC to verify that it is sticking to capital rules, protecting customer assets, and periodically sending account statements to customers. Those brokers that do not have custody of customers’ assets must file an “exemption report” with the SEC. (See Release No. 34-70073 Aligns Broker-Dealer Reporting with PCAOB Supervision in the August 1, 2013, edition of Accounting & Compliance Alert.)

The planned proposal reflects SEC Chairman Jay Clayton’s priorities. He believes one-size-fits all rules unfairly impose greater burdens on smaller firms. Moreover, he has sought to cut back requirements as part of business-friendly approach to regulation under President Donald Trump’s direction.

During a discussion of a bill that would exempt small, private non-custodial broker dealers from the reporting and audit requirements, Clayton told lawmakers in June 2018 that he would consider such a measure. Brokerage firms have to have less than 150 brokers to gain the exemption. The bill was reintroduced in October 2019.

“I like the criteria that you cited in terms of who we’re talking about, and we actually raised this issue with the PCAOB to get their views,” Clayton said at the hearing in 2018. “This is an area where we should question whether this is a necessary step, particularly in light of the criteria that you cite.”

The SEC oversees the PCAOB, which is currently working on a proposal to set up a permanent inspection program for audits of broker-dealers. And the board may also be considering exemptions for certain smaller brokers.

In a September 2019 speech, SEC Chief Accountant Sagar Teotia said he also believes that requirements should be commensurate with the risks that regulation seeks to lessen.

“Said differently, I would expect the PCAOB to consider scalability and accordingly that the same answer may not apply to every broker and dealer as the risks may differ based on certain types of brokers and dealers,” Teotia said. “Of course, as the Board evaluates any potential changes to its program with respect to auditors of brokers and dealers, OCA will advise the Commission, in consultation with other SEC staff, on the need for potential changes to the Commission’s regulations in order to harmonize the two regulatory regimes,”

The PCAOB gained the authority to inspect auditors of broker-dealers in Section 982 of the Dodd-Frank Act. And the board has been inspecting them under a temporary program. Since then, the board has been working on a rule proposal for a permanent program. Sec. 982 of PL111-203

Dodd-Frank left the scope of the inspection program and the frequency of inspections to the PCAOB’s discretion. The audit regulator is also free to differentiate among categories of broker-dealers and whether to exempt some auditors from inspections.

If the SEC and the PCAOB proposed scaled-approach to their respective rules, financial reform advocates are likely to oppose it they believe it will put investors at risk.


This article originally appeared in the January 10, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!

More answers