SEC FLASH REPORT. June 28, 2011

Transcription

1 SEC FLASH REPORT The Securities and Exchange Cmmissin Issues Prpsal t Strengthen Audits and Reprting f Brker-Dealers t Prtect Custmer Assets and Requests Cmments June 28, 2011 On June 15, 2011, the U.S. Securities and Exchange Cmmissin (SEC) issued prpsed rules designed t increase regulatry versight f brker-dealers custdy f custmer assets. The prpsed amendments t the brker-dealer financial reprting rules are intended t strengthen the audits f brker-dealers as well as the SEC s versight f the way brker-dealers handle their custmers securities and cash. The SEC s prpsal builds upn rules adpted in 2009 that strengthened the prtectins prvided t investrs wh give custdy f their assets t investment advisers. The cmment perid n the prpsed amendments is pen until August 26, The SEC s prpsal emphasizes several pints. The first area f amendments wuld strengthen versight f brker-dealer custdy practices by requiring certain brker-dealers (i.e., thse that maintain custdy f custmer assets r clear transactins fr themselves r ther firms) t allw SEC staff and the relevant designated examining authrity (regulatrs) t review wrking papers f the public accunting firm that audits the brker-dealer s financial statements and discuss any findings with the accunting firm. This prtin f the amendments is limited in scpe t assisting the regulatrs with their examinatins f brker-dealers and is nt intended t psitin them t review the independent auditr s wrk, which is the respnsibility f the Public Cmpany Accunting Oversight Bard (PCAOB). The secnd set f prpsed amendments requires each brker-dealer t file a Cmpliance Reprt declaring it has implemented sund internal cntrls t cmply with SEC Rules 15c3-1 Net Capital Cmputatin, 15c3-3 Custmer Prtectin Reserves and Custdy f Securities, and 17a-13 Accunt Statement Rule (cllectively, the Financial Respnsibility Rules). These amendments als require the independent auditr t file a Cmpliance Examinatin Reprt stating that it has examined the assertins made by the brker-dealer in its Cmpliance Reprt. The third area f amendments wuld increase reprting f brker-dealers custdy f custmer cash and securities practices thrugh the filing f a new Frm Custdy n a quarterly basis. This quarterly filing wuld elicit infrmatin abut the custdy practices f the brker-dealer that will be used as a starting pint fr examinatins by regulatrs. The Ddd-Frank Act authrizes the PCAOB t inspect public accunting firms that audit brkerdealers and enfrce adherence t applicable audit standards. It is imprtant t nte that this prpsal prvides the fundatin fr the PCAOB t establish new brker-dealer audit standards. Differences in standards frm generally accepted auditing standards (GAAS) include dcumentatin standards and the requirement fr an Engagement Quality Review. Accunting

2 firms wuld be required t prvide pinins n the brker-dealer s cmpliance and internal cntrl ver cmpliance with key regulatry requirements cvering the entire fiscal year and nt just at year-end. The discussin belw utlines the SEC s prpsal in greater detail. Annual Reprting Amendments The prpsal wuld require the brker-dealer t file a new Cmpliance Reprt and the related filing f a Cmpliance Examinatin Reprt issued by the brker-dealer s independent accunting firm. This prpsal satisfies bth SEC Rule 17a-5, Reprts t Be Made by Certain Brkers and Dealers, and the Investment Advisers Custdy Rule with the preparatin f ne reprt. The three types f reprts cvered by the SEC prpsal are discussed further belw: (1) Cmpliance Reprt This reprt must include an assertin that the brker-dealer s system f internal cntrls prvides reasnable assurance that any instances f material nncmpliance with the Financial Respnsibility Rules will be prevented r detected timely. The reprt wuld include three assertins with respect t the Financial Respnsibility Rules: Cmpliance with all material respects f the Financial Respnsibility Rules as f the end f the brker-dealer s fiscal year Whether infrmatin used t assert cmpliance with the Financial Respnsibility Rules was derived frm the bks and recrds f the brkerdealer Whether internal cntrl ver cmpliance with the Financial Respnsibility Rules was effective during the mst recent fiscal year and that there was n material weakness in such internal cntrls during the fiscal year In additin, if there is a material weakness in internal cntrls r any instances f material nn-cmpliance with the Financial Respnsibility Rules, the weakness r nncmpliance must be described in the Cmpliance Reprt. This reprting requirement addresses nly the afrementined Financial Respnsibility Rules and des nt extend further t the general financial reprting requirements f brker-dealers. Als, the prpsed rule is intended t fcus nly n the brker-dealer s custdial respnsibilities t its custmers. The term, material nn-cmpliance, wuld replace the current term, material inadequacy, in Rule 17a-5. Material nn-cmpliance is defined as a failure t cmply with the Financial Respnsibility Rules in all material respects. The term, material weakness, is defined as a deficiency r cmbinatin f deficiencies in internal cntrl such that there is a reasnable pssibility that material nn-cmpliance will nt be prevented r detected in a timely manner. This definitin is similar in wrding t the definitin f material weakness in financial reprting cntrls. The prpsed rules state that a deficiency in internal cntrl exists when the brkerdealer s nrmal peratins wuld nt prevent r detect the event in a timely manner. The prpsal states that there is a reasnable pssibility f an event ccurring if it is either prbable r reasnably pssible. An event is prbable if it is likely t ccur, Prtiviti 2

3 and reasnably pssible if the chance f ccurrence is mre than remte, but less than likely. T address the questin f hw t assess materiality, the prpsed rules suggest several cnsideratins: With respect t instances f material nn-cmpliance: Nature f the cmpliance requirement, e.g., it may nt be quantifiable in mnetary terms Nature and frequency f nn-cmpliance events Qualitative cnsideratins, e.g., needs and expectatins f the reprt users T illustrate, material nn-cmpliance includes, but is nt limited t, failure t maintain the required minimum amunt f net capital and failure t maintain the minimum depsit requirement in a special reserve bank accunt fr the exclusive benefit f custmers under SEC Rule 15c3-3. With respect t a material weakness in internal cntrl: Whether it is reasnably pssible that the cntrl deficiency r deficiencies culd result in material nn-cmpliance The SEC pints ut that it is pssible t have a material cntrl deficiency even where n material nn-cmpliance event has ccurred. In additin, the cmmissin asserts in its prpsal that an instance f nn-cmpliance that the brker-dealer has determined des nt cnstitute material nn-cmpliance may nnetheless be indicative f a cntrl deficiency that cnstitutes a material weakness. This evaluatin wuld require the brker-dealer t cnsider nt nly the specifically identified instance f nncmpliance, but als any additinal pssible effect that the cntrl deficiency r deficiencies culd have n cmpliance. The SEC states that the brker-dealer may nt assert effective internal cntrl if ne r mre material weaknesses exist regarding internal cntrls ver cmpliance with the Financial Respnsibility Rules. (2) Exemptin Reprt Under the current prpsal, brker-dealer firms that d nt carry custmer accunts r clear transactins, i.e., intrducing r crrespndent brkers, can file an Exemptin Reprt. This reprt wuld assert the brker-dealer s exemptin frm the requirements f Rule 15c3-3. (3) Cmpliance Examinatin Reprt This reprt wuld be issued by the brker-dealer s independent public accunting firm t describe the results f its examinatin f the assertins made by the brker-dealer in the Cmpliance r Exemptin Reprt. Frm Custdy Amendments The prpsal prvides the regulatrs with specific and detailed infrmatin n the surces f custmers being carried n the bks f the brker-dealer and the lcatins where thse custmers assets are maintained. Surce f custmers Fr example, ther brker-dealers n a fully disclsed basis r an mnibus basis Lcatins where thse custmers assets are kept fr example, U.S. depsitry, freign depsitry and issuer transfer agents Prtiviti 3

4 The prpsed Frm Custdy uses multiple questins and charts t request infrmatin in nine categries, as fllws: (1) Accunts Intrduced n a Fully Disclsed Basis These questins are designed s that the brker-dealer can infrm the regulatr whether the brker-dealer (a) intrduces its custmers t ther brker-dealers in whle r in part and n a fully disclsed basis, and (b) identifies the names f such carrying brker-dealers. (2) Accunts Intrduced n an Omnibus Basis Similar t (1) except that this item fcuses n mnibus accunts. (3) Carrying Brker-Dealers This item prvides infrmatin n whether the brker-dealer hlds custmer and nncustmer accunts n its wn bks and recrds. This item requires detailed infrmatin n where these accunts assets (cash and securities) are maintained and the frequency f recnciling the firm s recrds with the custdians recrds. This item requires infrmatin n the types and value f securities being held examples include U.S. and freign equities and U.S. and freign structured debt. On the cash side, infrmatin is required as t whether mney is swept t a mney market accunt r held in a reserve accunt. (4) Carrying fr Other Brker-Dealers This item disclses whether the brker-dealer acts as a clearing r carrying brker n behalf f ther brker-dealer firms. (5) Trade Cnfirmatins This item prvides infrmatin n the distributin f trade cnfirmatins t the brker-dealer s custmers. This will infrm the regulatr if the brkerdealer r a third-party service prvider fulfills the requirement. (6) Accunt Statements This item requests infrmatin n whether the brker-dealer r anther (clearing) brker-dealer sends accunt statements t the custmers. This will help the regulatr understand the brker-dealer s relatinships and target its examinatins. Fr example, the regulatr culd request custmer statements and custdial recrds and perfrm its wn recnciliatins. (7) Electrnic Access t Accunt Infrmatin This item prvides infrmatin n the custmer s ability t access accunt recrds electrnically. (8) Brker-Dealers Registered as Investment Advisers This item discusses the brkerdealer s applicability and capacity as a dually registered Brker-Dealer/Investment Adviser. (9) Brker-Dealers Affiliated with Investment-Advisers This item discusses whether the brker-dealer is affiliated with a separate Investment Adviser entity and in what capacity it is related t that entity. Summary In summary, this prpsal ffers three sets f amendments intended t strengthen the audits and reprting f brker-dealers t increase the fcus n their custdy activities and prtect custmer assets. In the cmmissin s press release, SEC Chairman Mary Schapir stated: When investrs hand their assets ver t a brker-dealer, they trust that their brker-dealer will hld and invest the assets as directed. T prtect investrs and help maintain cnfidence in the market, we must take strng steps t help safeguard the assets held by brker-dealers. Prtiviti 4

5 Abut Prtiviti Prtiviti ( is a glbal business cnsulting and internal audit firm cmpsed f experts specializing in risk, advisry and transactin services. The firm helps slve prblems in finance and transactins, peratins, technlgy, litigatin, gvernance, risk, and cmpliance. Prtiviti s highly trained, results-riented prfessinals prvide a unique perspective n a wide range f critical business issues fr clients in the Americas, Asia-Pacific, Eurpe and the Middle East. Prtiviti has mre than 60 lcatins wrldwide and is a whlly wned subsidiary f Rbert Half Internatinal Inc. (NYSE symbl: RHI). Funded in 1948, Rbert Half Internatinal is a member f the S&P 500 index. Cntacts Carl Beaumier Cry Gundersn Executive Vice President Managing Directr Glbal Leader Financial Services Practice U.S. Financial Services Practice Leader carl.beaumier@prtiviti.cm cry.gundersn@prtiviti.cm 2011 Prtiviti Inc. An Equal Opprtunity Emplyer. Prtiviti is nt licensed r registered as a public accunting firm and des nt issue pinins n financial statements r ffer attestatin services.