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Change on the Horizon: What Broker-Dealers and Investment Advisors Can Expect


FASB and the IASB published Exposure Drafts outlining proposed changes to the accounting for leases.

Broker-Dealer and Investment Advisory Industry Update—August 2013

Although not an all-inclusive summary of the regulations, rules and releases affecting the broker-dealer and investment advisory industries, the following is a general update relative to some of the more recent pertinent activity.


The SEC continues to evaluate the proposed amendments to Exchange Act Rule 17a-5 which are intended to:   1) strengthen audit requirements and 2) strengthen oversight of broker-dealer custody practices. Status is “pending”.

The SEC continues its assessment of a uniform fiduciary standard of conduct pursuant to Section 913 of the Dodd-Frank Act. On March 1, 2013, in an effort to facilitate this assessment, the SEC issued a request to the financial services industry and the public for comment and data. Status is “pending”.

Supplemental Schedule for Derivatives and Other Off-Balance Sheet Items (FINRA Regulatory Notice 13-10) – Recently approved by the SEC and applies to reporting by carrying or clearing firms. Initial schedule as of June 30, 2013 is to be filed on or before July 31, 2013. The schedule covers underwriting and other financing commitments, off-balance sheet financing transactions, non-regular way settlement transactions, and interest in and exposure to variable interest entities.

Proposed Supplemental Schedule for Inventory Positions (FINRA Regulatory Notice 13-05) – In proposed stage and the comment period expired on February 25, 2013. If passed, it would require more detailed information about inventory positions held by the broker-dealer and would be required for all broker-dealers except those who: 1) hold inventory consisting only of U.S. Treasury securities or money market mutual funds, or 2) file FOCUS report Part II CSE. This may be required as early as the fourth quarter of 2013.

PCAOB Activity – In July 2011, the PCAOB proposed two attestation standards related to the auditor’s examination of compliance reports and review of exemption reports of broker-dealers. These standards remain in “pending” status and the PCAOB is awaiting SEC adoption of its proposed amendments to the broker-dealer financial reporting rule under Exchange Act Rule 17a-5.


Lease Accounting – In May 2013, the FASB and the IASB published Exposure Drafts outlining proposed changes to the accounting for leases. The intent of the changes proposed is to address concern that many lease obligations are not recorded on the balance sheet and that certain economics are not captured and represented under current accounting requirements. These changes are anticipated to significantly impact balance sheets in general as well as net capital reporting by broker-dealers. Comments on the latest exposure draft are due September 13, 2013.

Revenue Recognition – The FASB and IASB will issue a single standard for revenue recognition with the release expected in the second half of 2013. With the general U.S. GAAP and IFRS “convergence” theme, the standard will apply to all industries and transactions and will eliminate the transaction and industry specific revenue recognition guidance and practices under current U.S. GAAP. This guidance and corresponding practices will be replaced with a principle based approach which is more consistent with IFRS methodology. The tentative effective date for public entities for annual and interim reporting is for periods beginning after December 15, 2016. The tentative effective date for nonpublic entities for annual and interim reporting is for periods beginning after December 15, 2017.


The SEC’s Office of Compliance Inspections and Examinations issued a National Exam Program Risk Alert in March 2013. The alert cited “widespread and varied non-compliance with elements of the custody rule” (Rule 206(4)-2 under the Investment Advisers Act of 1940, as amended) and went on to identify some of the deficiencies noted. These deficiencies were grouped into the following four categories:

  • Failure by advisors to recognize that they have custody (as defined under the custody rule)
  • Failure to comply with “surprise exam” requirements
  • Failure to comply with “qualified custodian” requirements
  • Failure to comply with the audit approach for pooled investment vehicles

As with all regulatory pronouncements and issuance of new or amended legislation, it is imperative that broker-dealers, investment advisors, 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, investment advisors, and other financial service institutions in regulated industries, Brown Smith Wallace’s financial services team 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 and timely delivery, all at an attractive pricing point.

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


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