The Securities and exchange commission's proposed changes to broker-dealer financial reporting regulations could have a major impact on auditing firms that service broker-dealers.

On June 15, 2011, the SEC proposed amendments to Rule 17a-5, also known as the "broker-dealer financial reporting rule." The proposed amendments were posted to the Federal Register on June 27, 2011.

The amendments focused on three key areas: changes to the annual reporting requirements; an unaudited quarterly report related to custody; and SEC access to auditors and audit documentation. The spirit of the amendments is to make the audit and compliance rules related to broker-dealers more consistent with current accounting and auditing standards, as well as the provisions of the Dodd-Frank Act.



The requirements of broker-dealers to file an annual report consisting of audited financial statements and supporting schedules remains unchanged. However, the amendments require additional reports to be filed. Carrying broker-dealers would be required to file a management report asserting compliance with specified rules and related internal controls, as well as a report from their auditors that addresses those assertions.

Broker-dealers that do not carry customer funds or securities would be required to file a management report asserting exemption from the requirements of Rule 15c3-3, along with a report from the auditors that addresses this assertion. Further, audits of broker-dealers would be required to be performed in accordance with the standards of the Public Company Accounting Oversight Board, rather than U.S. generally accepted auditing standards. This proposed amendment also places an additional responsibility on the auditor to report any material instances of non-compliance with the Financial Responsibility Rules to the SEC within one business day of the determination. Currently, the burden of reporting remains with the broker-dealer.

These amendments, if approved in their current form, are scheduled to be effective for fiscal years ending on or after Dec. 15, 2011.



The commission is proposing the creation of a new "Form Custody" to be filed in conjunction with a broker-dealer's quarterly Focus Report. The form is designed to help regulators identify potential abuses related to customer assets. It is intended to provide regulators with better information on the broker-dealer's custodial activities and enable them to identify potential inconsistencies or red flags in a more timely fashion, at which time a more focused examination of the broker-dealer could be initiated.



This proposed amendment specifically relates to broker-dealers that clear transactions or carry customer accounts. It would require that such broker-dealers consent to permitting their independent public accountant to make available to the SEC and the examination staff of the broker-dealer's designated examining authority the audit documentation associated with its annual audit reports required under Rule 17a-5, and to discuss findings relating to the reports with them.

The purpose of this is to enable the SEC and the DEA to more quickly identify areas of higher risk to help them perform more targeted and effective examinations of the broker-dealer. Clearing brokers have been specifically targeted (and introducing brokers specifically excluded) because of the inherent complexities in their business models.

It is clear that these amendments will have a significant impact on broker-dealers and accounting firms currently auditing broker-dealers. With the additional regulatory and reporting requirements, and the audit documentation burden required under PCAOB auditing standards, the status of this proposed amendment should be followed closely so auditors can be prepared.

A complete copy of the proposed amendments to Rule 17a-5 is available on the SEC's Web site,


Brian Wallace, CPA, is a partner in the New Brunswick, N.J., office of WithumSmith+Brown, and is the brokerdealer team leader in the firm's Financial Services Group. Reach him at (732) 828- 1614 or

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