Division of Trading and Markets
Office of the Chief Accountant:
PCAOB Registration of Auditors of Non-Public Broker-Dealers Frequently Asked Questions
The answers to these frequently asked questions represent the views of the staffs of the Division of Trading and Markets and the Office of the Chief Accountant (“the staff”) of the U.S. Securities and Exchange Commission (the “Commission”). They are not rules, regulations or statements of the Commission. Further, the Commission has neither approved nor disapproved them.
Note: Prior to the enactment of the Sarbanes-Oxley Act of 2002 (the “Act”),1 Section 17(e)(1)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”) required registered broker-dealers to file annually with the Commission a balance sheet and income statement certified by an independent public accountant.2 The Act established the Public Company Accounting Oversight Board (the “PCAOB” or the “Board”),3 and amended Section 17(e) of the Exchange Act by replacing the words “an independent public accountant” with the words “a registered public accounting firm.”4 “Registered public accounting firm” is defined in Section 2(a)(12) of the Act as “a public accounting firm registered with the Board.”
While the Act established a deadline for registration with the Board of auditors of financial statements of “issuers,” as that term is defined in Section 2(a)(7) of the Act, it did not provide a deadline for registration of auditors of broker-dealers that are not issuers (“non-public broker-dealers”).5
Beginning in August 2003, the Commission issued a series of orders granting temporary exemptions to non-public broker-dealers from the obligation to file financial statements under Section 17(e) of the Exchange Act that have been audited by a registered public accounting firm. The latest order, issued on December 12, 2006, extended the exemption to cover financial statements for fiscal years ending before January 1, 2009 (Exchange Act Release No. 54920, http://www.sec.gov/rules/other/2006/34-54920.pdf).
As a result of the expiration of the exemption, the audits required under Exchange Act Section 17(e) for fiscal years ending after December 31, 2008 must be performed by an accounting firm that is registered with the PCAOB.
Since the expiration of the exemption, the staff has received various questions regarding the impact of the expiration of the exemption on audits and auditors of non-public broker dealers. The following answers to these questions are the staff’s response to these inquiries. Additional questions should be directed to the Commission’s Division of Trading and Markets, Office of Interpretation and Guidance, at 202-551-5777 (email@example.com) or Amy Hargrett in the Commission’s Office of the Chief Accountant (firstname.lastname@example.org) at 202-551-5300. Information regarding these matters is also available on the websites of the PCAOB (see the PCAOB’s Board Statement on the PCAOB Registration Process For Auditors of Non-Public Broker-Dealers at http://www.pcaob.org/News_and_Events/News/2009/01-07.aspx.) and the Financial Industry Regulatory Authority (see the January 8, 2009 Information Notice, Public Company Accounting Oversight Board Registration Relief Expired December 31, 2008 at http://www.finra.org/Industry/Regulation/Notices/2009/P117689.).
Q: How does a public accounting firm register with the Board?
A: Information on how to register with the PCAOB and answers to frequently asked questions regarding registration are available on the PCAOB’s website at www.pcaobus.org/Registration.
Q: Must an auditor of a non-public broker-dealer be registered with the Board as of the date of the financial statements, as of the date of the auditor’s report, or as of the date the financial statements are filed with the Commission?
A: The auditor of a non-public broker-dealer must be registered with the PCAOB as of the date of the auditor’s report. Auditors are encouraged to begin the registration process with the PCAOB as soon as practicable. Non-public broker dealers are encouraged to contact the Commission’s Division of Trading and Markets to discuss individual circumstances if necessary.
Q: Are all broker-dealers now considered to be issuers under the Act ?
A: No. Section 2(a)(7) of the Act defines the term “issuer” as “an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under section 12 of that Act (15 U.S.C. 781), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.” If a broker-dealer is not an issuer as defined in the Act, it would not be subject to the provisions of the Act that apply only to issuers.
Q: As a result of their registration with the PCAOB, are auditors of non-public broker-dealers now subject to different independence requirements than applied before the expiration of the exemption?
A: No. Auditors of non-public broker-dealers must continue to comply with Exchange Act Rule 17a-5(f)(3), which states that the auditor “shall be independent in accordance with the provisions of §210.2-01(b) and (c) of this chapter.” As noted previously by the staff, however, auditors of non-public broker-dealers are not subject to the partner rotation requirements or compensation requirements of §210.201(c).6
Q: As a result of the expiration of the exemption and registration with the PCAOB, have the audit reporting requirements changed? Under what auditing standards are audits of non-public broker dealers to be conducted, and to what auditing standards should the audit opinion of a non-public broker-dealer refer?
A: Neither the expiration of the exemption nor registration with the PCAOB has changed the audit requirements set forth in Exchange Act Rule 17a-5(g), which provides that audits of broker-dealers be made “in accordance with generally accepted auditing standards.” The Commission has not modified or amended this requirement.7
The audit opinion for a non-public broker-dealer should state that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.
Q: Is the “Material Inadequacy Statement” required by Exchange Act Rule 17a-5(g)(1) still applicable (“The scope of the audit and review of the accounting system, the internal control and procedures for safeguarding securities shall be sufficient to provide reasonable assurance that any material inadequacies existing at the date of the examination…would be disclosed.”)?
A: Yes. The Commission has not modified or amended any of its rules governing audits of registered broker-dealers in light of the Sarbanes-Oxley Act’s amendment to Exchange Act Section 17(e) or the expiration of the exemption.
1 Public Law 107-204.
2 Section 17(e)(1)(B) requires registered broker-dealers to send their certified balance sheet to their customers annually.
3 Section 101 of the Act.
4 Section 205(c)(2) of the Act.
5 Section 102 of the Act.
6 See Office of the Chief Accountant: Application of the Commission’s Rules on Auditor Independence Frequently Asked Questions at http://www.sec.gov/info/accountants/ocafaqaudind121304.htm#P178_50985.
7 In Release No. 33-8422 (http://www.sec.gov/rules/interp/33-8422.htm), the Commission provided interpretive guidance that references in Commission rules and staff guidance and in the federal securities laws to generally accepted auditing standards or to specific standards under generally accepted auditing standards, as they relate to issuers, should be understood to mean the standards of the PCAOB, plus any applicable rules of the Commission. The Commission noted in that release, however, that the guidance did not apply to audits of non-public broker-dealers.