More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Securities and Exchange Commission announced Wednesday that it has adopted rules and amendments to its broker-dealer custody rules that are designed to “substantially increase” protections for investors who turned their money and securities over to BDs registered with the agency.
The new rules, approved by a 3-2 commission vote, require broker-dealers to file reports with the commission that the agency says should “result in higher levels of compliance with the SEC’s financial responsibility rules.”
The SEC also adopted amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers. The amendments were approved by a unanimous vote.
Both measures were adopted by “seriatim votes,” according to an SEC spokesman. No open SEC meeting was held.
SEC Chairwoman Mary Jo White said the “rules will provide important additional safeguards for customer assets held by broker-dealers,” and “will strengthen the audit requirements for broker-dealers and enhance our oversight of the way they maintain custody of their customers’ assets.”
Broker-dealers are required to begin filing new quarterly reports–called Form Custody–with the SEC and annual reports with Securities Investor Protection Corp. by the end of 2013.
The requirement for broker-dealers to file annual reports with the SEC will become effective on June 1, 2014.
As the SEC explains, currently Section 17 of the Exchange Act and Rule 17a-5 together require a broker-dealer to file an annual report with the SEC and the SRO designated to examine that broker-dealer. The report must contain audited financial statements conducted by an independent public accountant registered with the PCAOB.
Under the new rule amendments:
- A broker-dealer that has custody of the customers’ assets must file a “compliance report” with the SEC to verify they are adhering to broker-dealer capital requirements, protecting customer assets they hold, and periodically sending account statements to customers. The broker-dealer also must engage a PCAOB-registered independent public accountant to prepare a report based on an examination of certain statements in the broker-dealer’s compliance report.
- A broker-dealer that does not have custody of its customers’ assets must file an “exemption report” with the commission citing its exemption from requirements applicable to carrying broker-dealers. The broker-dealer also must engage a PCAOB-registered independent public accountant to prepare a report based on a review of certain statements in the broker-dealer’s exemption report.
The examination or review of the new reports as well as the examination of the financial statements must be conducted in accordance with PCAOB standards.
The SEC says that the amendments to the broker-dealer financial responsibility rules are “designed to better protect a broker-dealer’s customers and enhance the SEC’s ability to monitor and prevent unsound business practices.”
The rule amendments, the SEC says, are also designed to enhance broker-dealer examinations in two ways:
- First, the amendments require a broker-dealer to file a new quarterly report–called Form Custody–that contains information about whether and how it maintains custody of its customers’ securities and cash. The reports will establish a custody profile for the broker-dealer that examiners can use as a starting point to focus their custody examinations.
- Second, the amendments require broker–dealers–regardless of whether they have custody of their clients’ assets–to agree to allow SEC or SRO staff to review the work papers of the independent public accountant if it’s requested in writing for purposes of an examination of the broker-dealer. They must allow the accountant to discuss its findings with the examiners.
“Investors need to feel confident that their money is safe when it’s being held by their broker-dealers,” White said. “These measures will significantly bolster the protections that our rules already offer.”