A divided Securities and Exchange Commission adopted new rules to strengthen oversight of broker-dealers’ custody of customer assets.
The regulations amend the SEC’s broker-dealer reporting rule Securities and Exchange Act of 1934 Rule 17a-5, requiring firms to file new quarterly reports — Form Custody — containing information as to if and how they maintain custody of their customers’ cash and securities. See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539740621#.UfmIFmljuSo. The amendments also require the firms — whether they have custody or not — to allow examiners from the SEC and relevant SROs to review their audit work papers, if the documents are requested in writing for purposes of a broker-dealer examination. The firms further must allow their accountants to discuss their findings with the SEC or SRO staff. Broker-dealers must start filing the quarterly reports with the SEC by the end of 2013.
The new rules also come with annual reporting requirements. Broker-dealers that have custody of customer assets annually must file “compliance reports” with the SEC to verify that they are complying with capital requirements, protecting customer assets, and sending periodic account statements to their customers. Firms that do not hold customer assets annually must file “exemption reports” with the SEC. The new reports must be examined in accordance with Public Company Accounting Oversight Board standards. Moreover, broker-dealers that are Securities Investor Protection Corporation members must file annual reports with SIPC to allow the organization to better monitor industry trends and firms. The first annual reports to SIPC are due by the end of the year. The effective date for the other annual reporting requirements is June 1, 2014.
The SEC also finalized rule amendments that would strengthen its broker-dealer financial responsibility rules regarding net capital, customer protection, and books and records. See www.sec.gov/News/PressRelease/Detail/PressRelease/1370539739257#.UfmIe2ljuSo. The amendments will require broker-dealers that maintain customer securities and funds to maintain a new segregated reserve account when the account holder is a broker-dealer. The rules also restrict cash bank deposits pursuant to Exchange Act Rule 15c3-3 to maintain a reserve to protect customer cash; and establish customer disclosure, notice, and affirmative consent requirements for new customer accounts in programs where the customer’s cash in a securities account is placed in a money market or bank deposit product. Finally, all of the rules become effective 60 days after publication in the Federal Register.
In short, broker-dealers are paying for the sins of the Ponzi scammers.