More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission (SEC) on Wednesday unanimously proposed amendments to its broker-dealer financial reporting rule in a move the agency said would strengthen "the audits of broker-dealers as well as the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash."
The SEC’s proposal builds upon rules adopted in December 2009 that strengthened the protections provided to investors who turn their assets over to investment advisors.
The proposal is out for a 60-day comment period.
“When investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed,” said SEC Chairman Mary Schapiro (left), in comments at the open meeting. “To protect investors and help maintain confidence in the market, we must take strong steps to help safeguard the assets held by broker-dealers.”
The SEC says that the proposal is intended “to strengthen the annual audits of broker-dealers by requiring an increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, the proposed rule amendments would mandate an audit of the controls that the broker-dealer has put in place.”
Douglas Cohen, counsel in the investment management practice at the law firm Lowenstein Sandler, says that “while no reasonable person would argue against protecting client assets, it is unclear how the SEC’s proposed changes will actually improve existing custody requirements.” What is clear, he says, “is that affected broker-dealers will yet again be subjected to increased oversight and expense.”
In addition, the SEC says its proposal “would strengthen oversight of broker-dealer custody practices by requiring broker-dealers that maintain custody of customer assets or self-clear transactions to allow SEC staff and the relevant designated examining authority to review work papers of the public accounting firm that audits the broker-dealer and discuss any findings with the accounting firm.”
The proposed amendments also would “require all broker-dealers to quarterly file a proposed new form that would elicit information about the custody practices of the broker-dealer to be used as a starting point for examinations by regulators,” according to the SEC.