SEC Final Rule: Broker-Dealer Reports

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Gavel.png FINAL RULE: Approved July 30, 2013. Entered Federal Register August 21, 2013.
Dodd-Frank Timeline, Broker-Dealer Reports, SEC
Proposal Date Final Rule Issue Effective Date, SIPC Reports Effective Date, SEC Reports
June 27, 2011 August 21, 2013 December 31, 2013 June 1, 2014

On July 30, 2013 the SEC issued its final rule that increase protections for investors who turn their money and securities over to broker-dealers registered with the SEC. The rule entered the Federal Register on August 21, 2013. Broker-dealers are required to begin filing new quarterly reports with the SEC and annual reports with SIPC by the end of 2013. The requirement for broker-dealers to file annual reports with the SEC is effective June 1, 2014.

The rule passed by a vote of 3-2, with Commissioners Gallagher and Paredes voting against, as they believed the rule would give the SEC too much latitude in obtaining audit documents.<ref>In split vote, SEC beefs up broker-dealer custody rules. InvestmentNews. Retrieved on August 23, 2013.</ref>


Broker-dealers who maintain custody of a customer's securities and cash must abide by the following rules under the Securities Exchange Act of 1934:

  • The Net Capital Rule (Rule 15c3-1): This SEC rule requires a broker-dealer to maintain more than a dollar of highly liquid assets for each dollar of liabilities. If the broker-dealer fails, this rule helps to ensure that there are sufficient liquid assets to pay all liabilities to customers.
  • The Customer Protection Rule (Rule 15c3-3): This SEC rule requires a broker-dealer to segregate customer securities and cash from the firm’s proprietary business activities. If the broker-dealer fails, these customer assets should be readily available to be returned to customers.
  • The Quarterly Security Count Rule (Rule 17a-13): This SEC rule requires a broker-dealer on a quarterly basis to count, examine, and verify the securities it actually holds for customers and for itself — and compare that with the amounts of such securities it should be holding as indicated by its records. This process includes verifying the actual amount of securities located at sub-custodians such as the Depository Trust and Clearing Corporation, or DTCC. If there are differences between the actual amounts held and the amounts that should be held, the broker-dealer must take capital charges until the differences are resolved.
  • The Account Statement Rule: This SRO rule requires a broker-dealer to send a statement — at least quarterly — to each customer reflecting the customer’s securities and cash positions held at the broker-dealer, as well as the activity in the account."

On June 15, 2011, the SEC introduced a proposal to strengthen the audits of broker-dealers and monitor the way broker-dealers handle their customers’ securities and cash.<ref>SEC Proposes Ways to Strengthen Audits and Reporting of Broker-Dealers to Protect Customer Assets. SEC. Retrieved on June 15, 2011.</ref> The proposed rule was designed to strengthen audits of broker-dealers who may or may not maintain custody of customers' securities and cash, and would create new requirements for broker-dealers falling under both categories, including quarterly reports used by examiners to create custody profiles for these advisers.

Key Points of the Final Rule[edit]

Strengthening Audit Requirements:

Under the rule amendments:

  • A broker-dealer that has custody of the customers’ assets must file a “compliance report” with the SEC to verify they are adhering to broker-dealer capital requirements, protecting customer assets they hold, and periodically sending account statements to customers. The broker-dealer also must engage a PCAOB-registered independent public accountant to prepare a report based on an examination of certain statements in the broker-dealer’s compliance report.
  • A broker-dealer that does not have custody of its customers’ assets must file an “exemption report” with the Commission citing its exemption from requirements applicable to carrying broker-dealers. The broker-dealer also must engage a PCAOB-registered independent public accountant to prepare a report based on a review of certain statements in the broker-dealer’s exemption report.

The examination or review of the new reports as well as the examination of the financial statements must be conducted in accordance with PCAOB standards.

  • A broker-dealer that is a member of SIPC also must file its annual reports with SIPC, so that SIPC can better monitor industry trends and enhance its knowledge of particular firms.

Strengthening Oversight of Broker-Dealer Custody Practices

Under the rule amendments:

  • Broker-dealers will be required to file a new quarterly report (called Form Custody) that contains information about whether and how it maintains custody of its customers’ securities and cash. The reports will establish a custody profile for the broker-dealer that examiners can use as a starting point to focus their custody examinations.
  • Broker-dealers will be required – regardless of whether they have custody of their clients’ assets – to agree to allow SEC or SRO staff to review the work papers of the independent public accountant if it’s requested in writing for purposes of an examination of the broker-dealer. They must allow the accountant to discuss its findings with the examiners.

Note: An sample new Form Custody can be found on page 51995 of the Federal Register document below.

Related Document: Final Rule as it Appeared in the Federal Register[edit]


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