SEC Publishes Two Final Rules Regarding Broker-Dealers (Fed. Reg.) (with Lofchie Comment)

The SEC published two final rule releases involving broker-dealer regulation in the Federal Register. The first final rule release adopts certain broker-dealer annual reporting, audit, and notification requirements. The second final rule release amends financial responsibility, capital, and custody rules for broker-dealers outlined in the Exchange Act. The first release is summarized below; the second release wassummarized in our news report of July 31.

The release relating to reporting is intended to increase the internal procedural requirements and external checks around a broker-dealer's compliance with its requirements regarding capital computations and its proper segregation of customer assets. Among the new requirements are the following:

• A broker-dealer that is not exempt from Rule 15c3-3 would be required to file an annual compliance report regarding its compliance with the rules relating to capital (Rule 15c3-1), custody (Rule 15c3-3) and securities counts (Rule 17a-13), as well as its proper transmission of period statements to customers (NASD Rule 2340). This annual compliance report must include a statement as to whether the broker-dealer's controls with respect to the relevant rules were "effective" or there has been a "material weakness."
• A broker-dealer that is subject to Rule 15c3-3 would be required to file a report regarding the basis of its exemption. (Note that there are a good number of small firms that technically are not exempt from Rule 15c3-3, but do not in fact carry customer funds; these firms would be required to file a compliance report as set out in the first bullet.)
• Regardless of whether a broker-dealer files a compliance report or an exemption report, it would be required also to file an examination report, prepared by its independent public accountants, which contains the accountants' assessment of the broker-dealer's report. This report must be made in compliance with the standards of the Public Company Accounting Oversight Board.
• Broker-dealers would be required to permit (i.e., require) their accountants to provide to the SEC and to the primary SRO in charge of the relevant broker-dealer all of the accountants' audit documentation for the firm.
• Broker-dealers will be required to file a Form Custody with their primary SRO every calendar quarter. The first filing would have to be made in January 2014.
• Broker-dealers must file their annual reports with SIPC.

These two rule releases should be read in conjunction with FINRA's recent rule filing relating to, among other topics, securities lending and rehypothecation, also linked below.

Lofchie Comment: On the one hand, this is one or two more sets of burdens put on broker-dealers at a time when they are struggling with all of the other new regulations. On the other, these requirements actually deal with genuine compliance concerns that pertain very much to the overall safety of the system, so there should be at least the satisfaction of firms' knowing they are trying to obey rules that will have some beneficial effect on the system (unlike much of Dodd-Frank). In that regard, I note that numerous firms that will be required to devote materially more effort to reviewing their back-office compliance in order to be able to attest that they have effective controls in place as to the relevant rules. Firms would be well advised to start their review and documentation of ongoing compliance procedures immediately, as any necessary fixes are likely to involve technological and operational changes that will take some time to implement.

See: 78 FR 51910; 78 FR 51824.See also: SEC Amends Capital and Custody Rules for Broker-Dealers (with Lofchie Comment) (July 31, 2013); FINRA Files Proposed Rule Changes Relating to Securities Borrowing/Lending and Rehypothecation (with Lofchie Comment).