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The Regs They Are A-Changin': What Broker-Dealers Can Expect from New Industry Regulations


Broker-Dealer RegulationsAs the financial services industry continues down the path of change in the wake of the Dodd-Frank legislation, those operating in the complex broker-dealer segment are getting accustomed to new regulations and the continuous development of new initiatives by those within the firm charged with governance and regulatory oversight.

Many of these initiatives are still pending ultimate approval and ratification, although the expectation is that movement will occur in the near future. This industry update summarizes some of the key initiatives, their status and the impact on the profession.

PCAOB Activity

Interim Inspection Program

The Public Company Accounting Oversight Board’s (“PCAOB”) interim inspection program for registered public accounting firms’ audits of broker-dealers commenced in August 2011.  An initial report, published by the PCAOB in August 2012, revealed the observations from inspections of portions of 23 audits from 10 different firms (no audits of public issuers), and noted deficiencies in all of the audits inspected. These findings, coupled with the additional scrutiny, will require that the deficiencies be evaluated by registered public accounting firms that issue reports for SEC-registered brokers and dealers to ensure that appropriate action is taken. The PCAOB will use insights gained from this interim program to structure the scope and objectives of the permanent program.

Auditing and Attestation Standards

On July 12, 2011, the PCAOB issued for public comment a set of proposed auditing and attestation standards for audit engagements of broker-dealers:

  • Proposed Attestation Standards – i) Examination Engagements Regarding Compliance Reports of Brokers and Dealers; and ii) Review Engagements Regarding Exemption Reports of Brokers and Dealers
  • Proposed Auditing Standard – Auditing Supplemental Information Accompanying Audited Financial Statements

Neither of the standards above has yet to be ratified (see SEC Proposed Rule 17a-5 following).

Regulatory Updates

FINRA Regulatory Notice 13-02 – Proposed Rule on Recruitment Compensation Practices:

FINRA has requested comment on a proposed rule that would require disclosure of conflicts of interest relating to recruitment compensation practices. Specifically, securities firms often will offer enhanced compensation packages to induce registered representatives to move from one firm to another. These compensation arrangements are not currently disclosed to customers when the customers are asked to transfer their accounts to the registered representative’s new firm which, in certain cases, could be construed as a conflict of interest. The comment period expires March 5, 2013.

FINRA Rules 2210 and 2212 through 2216 (collectively, the Communications Rules) – Effective Date of February 4, 2013:

The SEC approved FINRA’s proposed rule change to adopt certain existing NASD rules/materials and to delete certain provisions of NYSE rules/materials. Rule change results in the following communication categories: 1) Institutional Communication, 2) Retail Communication, and 3) Correspondence.

FINRA Rule 4524 – Supplemental FOCUS Information:

The implementation date is February 28, 2012. The due date of the initial Supplemental Statement of Income (SSOI), covering the quarter ended September 30, 2012, was October 26, 2012. This rule requires firms to file certain additional financial or operational schedules or reports to supplement the SEC FOCUS Reports.  The supplementary schedules are structured to capture more specific information from the Statement of Income (Loss) pages of the FOCUS.

SEC Uniform Fiduciary Standard of Conduct for Broker-Dealers and Investment Advisors:

In January 2011, the SEC submitted to Congress a staff study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers, as was required under the Dodd-Frank Act. Adoption and implementation is pending.

SEC Proposed Rule 17a-5:

In June 2011, the SEC issued a proposed rule to amend Securities Exchange Act Rule 17a-5. The proposed rule provides, among other things, that a broker-dealer’s annual report include a compliance report examined by an auditor (carrying broker-dealers) or an exemption report reviewed by an auditor (non-carrying broker-dealers). The SEC proposed Rule 17a-5 requires the examination or review of the compliance report to be conducted in accordance with the standards of the PCAOB. Adoption and implementation is pending.

FINRA Examination Priorities

FINRA has instituted a market examination process and developed a program that correlates risk analysis and better understanding of critical areas of member firms.

In FINRA’s 2013 Regulatory and Examination Priorities Letter dated January 11, 2013, the top exam priorities were highlighted and made up of the following:

Business Conduct and Sales Practice Priorities

  • Suitability and Complex Products
    • Business Development Companies
    • Leveraged Loan Products
    • Commercial Mortgage-Backed Securities
    • High-Yield Debt Instruments
    • Structured Products
    • Exchange-Traded Funds and Notes
    • Non-Traded REITs
    • Closed-End Funds
    • Municipal Securities
    • Variable Annuities
  • Cyber-Security and Data Integrity
  • Microcap Fraud
  • Private Placement Securities
  • Anti-Money Laundering
  • Automated Investment Advice
  • Branch Office Supervision
  • Insider Trading

Financial and Operational Priorities

  • Guarantees and Contingencies
  • Margin Lending Practices
  • Leverage and Liquidity

Market Regulation Priorities

  • Algorithmic Trading
  • High-Frequency Trading Abuses
  • Alternative Trading Systems
  • Options Origin Codes
  • Large Options Position Reporting
  • Fixed Income

As communicated in the Priorities Letter, FINRA encourages broker-dealers to use the information in the letter to enhance their supervisory and compliance programs to mitigate risk and better protect investors.

As with all regulatory pronouncements and issuance of new or amended legislation, it is imperative that broker-dealers and public accounting firms monitor the activities of the governing bodies which primarily include the SEC, FINRA, and the PCAOB, all of which have agendas spurred by market events and the implementation of the Dodd-Frank Act. As a leader in service offerings to broker-dealers and other financial service providers in regulated industries, Brown Smith Wallace is committed to staying current with these and other regulatory issues as they surface. Additionally, our dedicated financial service team understands the industry and provides quality support, timely delivery, all at an attractive pricing point.

For more information on these and other broker-dealer developments, and to explore how Brown Smith Wallace can assist you and your team with regulatory matters, please contact Lincoln K. Gray, CPA, at 314.983.1235,


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