Speech by SEC Commissioner:
Protecting Investors and Their Assets
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
June 15, 2011
Today’s proposal is designed to significantly enhance the objective oversight of broker-dealer compliance with the applicable financial responsibility rules.1 In particular, today’s proposal enhances oversight of broker-dealers’ custody practices. I view today’s proposal as a necessary companion rule to the rules adopted a year and half ago that addressed the custodial practices at registered investment advisers.
While I supported the adoption of those rules, I noted at the time that those rules did not cover the vast majority of investor assets. And, even though we adopted those rules in the aftermath of the Madoff Ponzi scheme, the rules would not have prevented much of the harm that Madoff did. That’s because, for decades, his firm was registered solely as a broker-dealer, not as an investment adviser.
Broker-dealers hold custody of far more investor assets than investment advisers do. In fact, our staff estimates that the customer securities positions held by just the four largest broker-dealers total several trillion dollars. Today’s proposal will make long-overdue improvements to the oversight of broker-dealer custody.
I support the proposal today, but I am particularly interested to hear from commenters whether the objective to strengthen broker-dealer custodial requirements has been fully achieved. After all, investors must have comfort that assets for which they receive confirmations are assets that exist and are securely held. To have it be otherwise, would be disastrous and unacceptable.
In closing, I want to thank all of our staff for their efforts in crafting the proposal before us today. And, in particular, I want to commend the way you have coordinated efforts among the different offices and divisions that have responsibility for the oversight of broker-dealers to put forward this recommendation to the Commission.
1 The “financial responsibility rules” for broker-dealers are Exchange Act Rule 15c3-1, which governs net capital requirements for broker-dealers; Exchange Act Rule 15c3-3, which sets the requirements for custody of securities and for a special reserve account to protect investor funds; Exchange Act Rule 17a-13, which requires periodic counts of all securities held by a broker-dealer; and the rules of self-regulatory organizations requiring that broker-dealers provide quarterly account statements to customers.