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From Securities Regulation Daily,August 27, 2013

SEC issues small entity compliance guide on broker-dealer reports

By Jacquelyn Lumb

The SEC has issued a small entity compliance guide to explain the recently amended broker-dealer requirements with respect to reporting, audits and notifications. The amendments require the filing of a new compliance report or exemption report and include new reports prepared by independent public accountants with respect to the annual financial reports and the compliance or exemption reports.

New compliance and exemption reports. Broker-dealers must prepare and file with the SEC a financial report and a compliance report if the firm did not claim an exemption from Exchange Act Rule 15c3-3 throughout the most recent fiscal year. The broker-dealer would file an exemption report if it claimed that it was exempt from Rule 15c3-3 throughout the most recent fiscal year.

The compliance report will include statements about the broker-dealer’s compliance with Rules 15c3-1 and 15c3-3(e), about its internal control over compliance with those rules, and about its compliance with Exchange Act Rule 17a-13 and the applicable rules of its designated examining authority with respect to sending account statements to customers.

The compliance report will also include descriptions of any material weaknesses in the internal control over compliance and any instances of non-compliance with Rules 15c3-1 and 15c3-3(e). The exemption report will include statements about the claimed exemptions from Rule 15c3-3. The broker-dealer must describe any exceptions to its claimed exemptions, the nature of each exception, and the approximate dates on which the exceptions occurred.

New SIPC filing requirement. Under the amendments, broker-dealers that are members of the Securities Investor Protection Corporation must file a copy of their annual reports with the SIPC, effective December 31, 2013.

New audit requirements. Broker-dealers are no longer required to file with the SEC a material inadequacy report prepared by their independent public accountants. They must engage an independent public accountant to prepare reports based on the examination of the financial report and either an examination of certain statements in the compliance report or a review of the exemption report. The examinations and reviews must be conducted in accordance with standards of the PCAOB.

If the independent public accountant determines that a broker-dealer is not in compliance with any of the financial responsibility rules, it must immediately notify the broker-dealer’s chief financial officer. The broker-dealer must then provide notice in accordance with Rules 15c3-1, 15c3-3 or 17a-11 as applicable, and must provide a copy of the notification to the accountant.

If the independent public accountant identifies a material weakness in the internal control over compliance, it must immediately notify the broker-dealer’s chief financial officer. The broker-dealer must provide notice under Rule 17a-11 and provide a copy of the notification to the accountant.

The broker-dealer must provide a copy of the notice sent to the SEC to the accountant within one business day. If the accountant does not receive the notice or if it does not agree with the statements in the notice, it is required to provide a report to the SEC and the designated examining authority within one business day. The report would describe the instances of non-compliance that required the filing of the notice. If a notice is filed but the accountant does not agree with the broker-dealer’s statements, the accountant would provide details about its disagreement.

If the accountant’s report on the compliance report identifies any material weaknesses, the broker-dealer must include a statement in the financial information that is sent to its customers. The statement must advise that a copy of the accountant’s report is available for customers’ inspection at the SEC’s principal office and at the regional office in which the broker-dealer has its principal place of business.

A carrying or clearing broker-dealer must represent in its notice designating its independent public accountant that, if requested in writing for the purpose of examining the broker-dealer, it agrees to allow the SEC and the designated examining authority to review the audit documentation associated with its annual audit reports. The broker-dealer also must agree to allow the accountant to discuss its findings with the examination staff.

New Form Custody. All broker-dealers are required to file new Form Custody with their quarterly FOCUS reports. Form Custody provides information about whether the broker-dealer maintains custody of customer and non-customer assets and, if so, how the assets are maintained. The effective date for the filing of Form Custody is December 31, 2013. The effective date for the requirements relating to annual reports is June 1, 2014.

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