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Related Practices
Broker-Dealer/Registered
Investment Adviser
SEC Proposes Additional Compliance Requirements for Broker-
Dealers Offices
Alert
Atlanta
June 23, 2011
Baton Rouge
The Securities and Exchange Commission (SEC) recently proposed to enhance the financial
Birmingham
reporting and oversight rules related to broker-dealers. The proposed amendments would
Chattanooga
strengthen audit requirements and give regulators access to auditors and audit working
papers, particularly for broker-dealers that either clear transactions or carry customer Huntsville
accounts. The changes are part of the SEC's response to recent securities frauds such as the Jackson
Madoff Ponzi scheme and are intended to restore faith in investment advisers who maintain
Johnson City (Tri-Cities)
custody of their customers' securities and cash. The amended rules would complement the
Knoxville
interim program the Public Company Accounting Oversight Board (PCAOB) recently
implemented to inspect auditors of broker-dealers. London
Macon
Audit Requirements
Mandeville
Memphis
On June 15, 2011, the SEC issued proposed amendments to Rule 17a-5 under the Securities
Exchange Act of 1934, which governs the financial reporting of broker-dealers. Currently, Memphis (East)
broker-dealers must file an annual report with the SEC and the Financial Industry Regulatory Montgomery
Authority (FINRA) that contains audited financial statements. Under the proposal, broker-
Nashville
dealers that maintain custody of customer cash and securities would be required to undergo
New Orleans
an annual examination by a registered public accounting firm in regard to the broker-dealers'
compliance, and internal control over compliance, with existing Exchange Act rules related to Washington
the custody of customer assets. The independent public accountant would also be required to
notify the SEC of any material non-compliance discovered during the audit.
Under the amended rule, a broker-dealer that does not maintain custody of customer
securities and cash would be required to undergo a review by an independent public
accountant of its assertion that it is not subject to segregation requirements.
Oversight of Broker-Dealer Custody Practices
Currently, broker-dealers are subject to routine inspections and examinations by SEC and
FINRA staff. The proposed amendment would require a broker-dealer that clears transactions
or carries customer accounts to permit its independent public accountant to make available to
examiners the audit documentation associated with its annual audit reports and discuss its
findings with the examiners.
The amendment also requires broker-dealers to file a report with the SEC and FINRA that
contains information about whether, and if so, how, it maintains custody of customer securities
and cash. The proposed new form would be filed on a quarterly basis along with the broker-
http://www.bakerdonelson.com/sec-proposes-additional-compliance-requirements-for-brok... 9/16/2011

2. Baker, Donelson, Bearman, Caldwell & Berkowitz, PC | News & Events | Publications | J... Page 2 of 2
dealer's FOCUS Report (Financial and Operational Combined Uniform Single Report).
The SEC will accept comments on the proposed amendments for 60 days after publication in
the Federal Register.
Broker-dealers should review the policies and controls they have in place to ensure
compliance with rules related to the protection of customer assets. Additionally, broker-
dealers, especially those that maintain custody of customer cash and securities, should begin
coordinating with their auditors to prepare for the potential for heightened examination if these
rules are adopted as proposed. Finally, broker-dealers should expect audit costs to increase
along with the increased scrutiny if these rules are adopted as proposed.
If you have questions about the proposed amendments, please contact your Baker Donelson
attorney or a member of our Broker-Dealer/Registered Investment Adviser Industry Service
Team.
Atlanta, Georgia
Scott N. Sherman 404.443.6706 ssherman@bakerdonelson.com
Gary A. Barnes 404.221.6509 gbarnes@bakerdonelson.com
Howard S. Hirsch 404.443.6703 hhirsch@bakerdonelson.com
Erin E. Reeves 404.443.6712 ereeves@bakerdonelson.com
Memphis, Tennessee
Jackie Prester 901.577.8114 jprester@bakerdonelson.com
Mark D. Griffin 901.577.2221 mgriffin@bakerdonelson.com
John M. Haire 901.577.8249 thaire@bakerdonelson.com
Lori H. Patterson 901.577.8241 lpatterson@bakerdonelson.com
Nashville, Tennessee
Tonya M. Grindon 615.726.5607 tgrindon@bakerdonelson.com
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http://www.bakerdonelson.com/sec-proposes-additional-compliance-requirements-for-brok... 9/16/2011