The Securities and Exchange Commission’s Division of Trading and Markets has issued frequently asked questions (FAQ) concerning the amendments adopted on July 30, 2013, to Rule 17a-5 (Broker-Dealer Reporting Rule) of the Securities Exchange Act of 1934 (Exchange Act).
Among other things, under the amendments to the Broker-Dealer Reporting Rule:
- A broker-dealer that did not claim an exemption from Rule 15c3-3 of the Exchange Act throughout the broker-dealer’s fiscal year must file with the SEC annually a compliance report and an exemption report.
- A broker-dealer must also file together with the compliance or exemption reports, as applicable, a report prepared by the broker-dealer’s independent public accountant based on an examination of the compliance or exemption report. The examination and review, as well as the audit of the financial statements, must be conducted in accordance with standards of the Public Company Accounting Oversight Board.
- A broker-dealer that clears transactions or carries customer accounts must allow the SEC, or the broker-dealer’s examining authority, to review the documentation associated with certain reports of its independent public accountant and allow the accountant to discuss the findings relating to its reports upon request.
- The SEC adopted Form Custody, a new form that a broker-dealer must file with its examining authority that elicits information about the broker-dealer’s practices with respect to, among other things, the custody of securities and funds of customers and non-customers.
- A broker-dealer must verify its compliance with capital requirements and internal controls.
The FAQ includes, among other things, the following clarifications regarding the amendments to the Broker-Dealer Reporting Rule:
- A broker-dealer with a fiscal year beginning prior to June 1, 2014 need not certify compliance with the rules for the period before the beginning of that fiscal year.
- The independent public accountant’s report based on an examination of the compliance report can be used to satisfy the internal control reporting requirement under Rule 206(4)-2 of the Investment Advisers Act of 1940 (Custody Rule), but the accountant’s report cannot be used to satisfy the Custody Rule’s independent verification requirement or any other requirement of the Custody Rule.
- A broker-dealer that does not hold customer funds or securities may file an exemption report (and corresponding accountant’s report based on a review of the exemption report) rather than a compliance report (and corresponding accountant’s report based on an examination of the compliance report) if the broker-dealer does not claim an exemption from Rule 15c3-3 of the Exchange Act and its business activities are limited to one or more of the following: (1) proprietary trading; (2) effecting securities transactions via subscriptions; and (3) receiving transaction-based compensation for identifying potential merger and acquisition opportunities for clients, referring securities transactions to other broker-dealers, or providing technology or platform services.
The FAQ also includes additional guidance regarding the filing of Form Custody.
Click here to read the SEC’s FAQ.