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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rule Amendments Regarding Broker-Dealer Reports


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

June 15, 2011
Washington, D.C.

Thank you, Chairman Schapiro.

The recommendation before us is to propose rule amendments regarding broker-dealer annual reporting, audit documentation, and custody-related disclosures on a new Form Custody.

I support the recommendation before us this morning. As always, I look forward to considering the comments we will receive. I am especially interested in comments that address the following, which are indicative of certain hesitancies that I have with the proposal:

  1. As compared to a broker-dealer’s current practices, what is the incremental compliance cost and burden for broker-dealers to comply with the new reporting requirements, including the new Compliance Report, Examination Report (and corresponding compliance examination), and Exemption Report? In particular, to what extent, if any, might the proposed amendments disproportionately impact smaller broker-dealers?

    I encourage commenters to explain in some detail how the rule changes, if adopted, might impact the administration and operation of broker-dealers and the activities in which they engage.

  2. Does the proposed compliance date afford parties adequate time to comply with the new requirements?

  3. Should the scope and purpose of the audit documentation requirements be more focused to emphasize a more targeted set of regulatory priorities? For example, should the audit documentation requirements be limited to the purpose of allowing the Commission to verify assets more efficiently? As it stands, the release contemplates few limits on the SEC’s ability to seek information, other than that any request for information must be in connection with the Commission’s examination of a broker-dealer that clears transactions or carries customer accounts (a “clearing broker-dealer”).

  4. Regarding the proposed access to audit documentation amendments, the proposing release explains, “[T]he Commission is proposing that each clearing broker-dealer be required to consent to permitting its independent public accountant to make available to Commission and [designated examining authority] examination staff the audit documentation associated with its annual audit reports required under Rule 17a-5 and to discuss findings relating to the audit reports with Commission and [designated examining authority] examination staff.” The rule proposal, however, does not itself impose obligations on an accountant concerning making its audit documentation available or regarding discussing the accountant’s audit report with the Commission or any designated examining authority; the accountant retains at least some measure of discretion in these regards.

    Additionally, the release states, “The Commission is notproposing that the Commission or [designating examining authority] staff would use any audit documentation they may request, or discuss findings related to the audit reports, for purposes of examining independent public accountants; the PCAOB carries out that function.”

    Notwithstanding that the audit documentation requirements, as drafted in the proposal, are circumscribed, I do have concern about how these rule amendments might be implemented in practice, if adopted. Specifically, I am concerned that the audit documentation requirements could, over time, morph into a mechanism by which the SEC finds itself effectively inspecting accountants.

    Given this backdrop, I hope commenters will address how, if at all, the proposed audit documentation amendments might influence the relationship between broker-dealers and their independent public accountants. For example, might certain communications between broker-dealers and their accountants be chilled? To what extent might the cost broker-dealers incur when engaging an accountant increase because of the rule change? Might certain accounting firms decide no longer to audit certain broker-dealers?

Let me conclude by joining my colleagues in thanking the many members of the staff who have worked diligently on this rulemaking.



Modified: 06/15/2011