SEC Proposes Rule to Broaden Scope of Broker-Dealer Audits

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.