SEC Final Rule: Broker-Dealer Reports
|FINAL RULE: Approved July 30, 2013. Entered Federal Register August 21, 2013.|
|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
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