SEC Proposes to Add Customer Protection Exams to BD Annual Audits
The SEC has proposed changes to the broker-dealer auditing rules that would require the annual audit to include a review of a BD’s compliance with certain customer protection rules. If a BD maintains custody of customer assets, the annual audit required by Rule 17a-5 would include an examination of compliance with the net capital rule (15c3-1), the customer protection rule (15c3-3), the quarterly security count rule (17a-3), and the account statement rule as well as the controls in place for complying with these rules. If a BD does not have custody, the audit must include a review to ascertain that the BD does not, in fact, have custody. The proposal would also allow SEC access to auditor work papers and require quarterly filings concerning custody activities. The SEC indicates that it is trying to modernize the customer protection rules and make them consistent with the Advisers Act compliance rule.
OUR TAKE: We don’t know whether custody exams would protect customers any more than all of the current rules in place that govern BD financial operations. One net effect, however, is that audit expenses will go up.