Broker-Dealer Update: Recent SEC Amendments and PCAOB Audit Findings

Broker-dealers operate in a highly regulated environment, which frequently changes. Below are highlights of some key broker-dealer amendments recently adopted by the SEC as well as PCAOB audit findings.

SEC Amendments

The recent Securities and Exchange Commission amendments relate to the net capital rule, the customer protection rule, the books and records rules, and the notification rules applicable to broker-dealers under the Securities Exchange Act of 1934. Below are some of the areas affected by these new amendments:

  • Proprietary accounts of broker-dealers
  • Banks where special reserve deposits may be held
  • Allocation of customers’ fully paid and excess margin securities to short positions
  • Importation of Rule 15c3-2 requirements into rule 15c3-3 and treatment of free credit balances
  • Proprietary accounts under the Commodity Exchange Act
  • Expansion of the definition of qualified securities to include certain money market funds
  • Holding future positions in a securities portfolio margin account
  • Amendments with respect to securities lending/borrowing and repurchase/reverse repurchase transactions
  • Documentation of risk management procedures
  • Amendments to the net capital rule
    • Expense sharing agreements
    • Short term capital contributions
    • Fidelity bonding requirements
    • Broker-dealer solvency requirements
    • Temporary restrictions on capital withdrawals
    • Technical amendments

These amendments will take effect on October 21, 2013. Please review this list for anything that would be applicable to your company.

For more details on the above topics, please click here.

PCAOB Audit Findings

The PCAOB was established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. In connection with the passing of Dodd-Frank, the PCAOB also oversees the audits of broker-dealers (including non-public broker-dealers) and compliance reports filed pursuant to federal securities laws to help promote investor protection.

The PCAOB recently released its report on the inspection results of broker-dealer audits- audits in which a CPA firm provides an audit opinion on the broker-dealer’s financial statements and related reports. There were deficiencies noted in 95 percent of the audits selected for inspection. The most frequently-noted deficiencies were related to:

  • Audit procedures related to the computations of customer reserve and net capital requirements, and
  • Audit procedures related to financial statement areas, including procedures regarding tests of revenue, related parties, and the risk of material misstatement due to fraud.

For more details about the inspection process and results, click here.

We recommend that all broker-dealers and their auditors consider their own policies & procedures in light of the PCOAB’s findings. At Kreischer Miller, we assess our audit process on an ongoing basis and will continue to do so with the PCAOB’s findings in mind. This may result in increased audit testing or new audit tests in certain circumstances.

The SEC and PCAOB have set a rigorous pace for regulating broker-dealers and their auditors.  Please don’t hesitate to reach out to us with any questions or comments.

We will be happy to provide further information relating to this subject.  For more information, contact Frank L. Varanavage, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at or 215.441.4600.

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