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Broker-Dealers to Face Tougher Custody Rules

broker compliance attorney New YorkThe SEC recently adopted significant changes to the broker-dealer reporting rules.  The SEC proposed the changes to Rule 17a-5, Reports to be made by Certain Brokers and Dealers, in 2011 and released the final rule on July 30.

“These rules will strengthen the audit requirements for broker-dealers and enhance our oversight of the way they maintain custody of their customers’ assets,” said Mary Jo White, Chair of the SEC.

Key elements of the new rules are:

  • Effective December 31, 2013, all broker-dealers must file a new unaudited quarterly form (Form Custody) providing information related to their custodial practices.  The form will provide information on whether a broker-dealer maintains custody, and if so, how the assets are maintained. The form is due within 17 business days of the calendar quarter end. The initial filing deadline is January 27, 2014.
  • Effective June 1, 2014, all broker-dealers will be required to prepare and file either an annual audited compliance report or exemption report that includes financial statements, corresponding footnotes and supplemental information related to certain financial responsibility rules (FRRs).  Broker-dealers that did not claim exemption from Rule 15c3-1 in the most recent fiscal year must prepare a compliance report, and internal control over compliance, with FRRs, such as the net capital, customer protection and account statement rules.
  • An independent registered public accountant needs to examine the compliance report or review the claim of exemption and issue a report.   The audits must follow PCAOB standards.
  • The SEC and designated examining authorities will have access to the independent registered public accountants and the audit documentation for any broker-dealer that clears transactions and carries customer accounts.
  • Certain broker-dealers will be able to use the new reports to satisfy their investment adviser custody rule requirements.

All broker-dealers will be impacted by the rule amendments for both periodic and annual reporting.  Broker-dealers that must file compliance reports will have to start assessing their internal controls over compliance with FRRs. Broker-dealers should also familiarize themselves with the new Form Custody and start discussing the annual reporting amendments with their auditors.

As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle.

Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz.  She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.