Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Proposals to Amend Rule 17a-5
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
June 15, 2011
Good morning. This is an open meeting of the United States Securities and Exchange Commission on June 15, 2011.
Today, we will consider a proposal that is designed to strengthen the audits that broker-dealers must undergo, and enhance the ability of regulators to oversee the ways in which broker-dealers maintain custody of their customers’ assets.
This proposal builds upon the rules we adopted two years ago that strengthened the protections provided to investors who turn their assets over to investment advisers.
As with the investment adviser rules, the proposal under consideration today grew out of the Madoff Ponzi scheme and other frauds in which investor assets were misappropriated.
The fact is that when investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed. But when a broker-dealer violates that trust and misuses the assets, that broker not only harms the investor but also erodes confidence broadly in the financial system. This in turn undermines the ability of legitimate businesses to raise capital.
To protect investors and help maintain confidence in the market, I believe we must take strong steps to help safeguard the assets held by broker-dealers.
Strengthening Broker-Dealer Audits
The proposals under consideration would strengthen the annual audits of broker-dealers by requiring those audits to have increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, today’s proposal would mandate an audit of the controls that the broker-dealer has put in place to ensure compliance with those rules.
While not directly mandated by the Dodd-Frank Act, today’s proposals would facilitate the PCAOB’s new responsibility established by that Act to oversee the registered public accounting firms that audit broker-dealers.
Strengthening Oversight of Broker-Dealer Custody
Additionally, the proposals would strengthen oversight of broker-dealer custody practices. First, the proposals would require broker-dealers that maintain custody of customer assets – or that self-clear transactions – to allow staff of the Commission and the relevant designated examining authority (DEA) to review work papers of the public accounting firm that audits the broker-dealer and to discuss any findings with the accounting firm. The goal would be to enhance the Commission’s or DEA’s examination of the broker-dealer by building on the work performed by the accounting firm, particularly in the area of verifying the custody of customer assets.
Second, the proposed amendments would require all broker-dealers to file, on a quarterly basis, a proposed new form that would elicit information about the custody practices of the broker-dealer. This would create a profile of the broker-dealer’s custody practices to be used as a starting point for examinations by regulators.
I strongly encourage public comment on the proposals to assist the Commission in formulating sound rules and regulations. I look forward to reviewing the public comment.
Before I turn to Robert Cook and John Ramsay, I would like to thank them and other Commission staff including Mike Macchiaroli, Tom McGowan, Nathaniel Stankard, Randall Roy, Rose Wells, and Mark Attar from the Division of Trading and Markets for the long hours and hard work they have devoted to preparing the recommendations before us.
Additionally, I would like to thank Brian Croteau, Jeffrey Minton, and John Offenbacher from the Office of the Chief Accountant and Norm Champ, Julius Leiman-Carbia, and Robert Sollazo from the Office of Compliance Inspections and Examinations for their valuable assistance in developing these proposals.
I also appreciate the contributions from Meredith Mitchell, David Blass, Paula Jenson, Cynthia Ginsberg, Janice Mitnick, and Lynn Taylor from the Office of the General Counsel; Jennifer Marietta-Westberg, Tiago Requeijo, and Chuck Dale from the Division of Risk, Strategy, and Financial Innovation; and Dan Kahl, Jaime Eichen, and Brian Johnson from the Division of Investment Management.
I’d also like to thank my fellow Commissioners and their staff for their work on this proposal.
Now I will ask Robert and John to provide us with additional details about the Division’s recommendations.