In a split vote last week, the SEC adopted new rules designed to increase protections for customers who invest money and securities with broker-dealers. Recent rulemaking and statements made by the SEC have highlighted the fact that broker-dealer regulation is becoming a growing area of SEC interest. In connection with last Wednesday’s vote, SEC Chair Mary Jo White stated that “[i]nvestors need to feel confident that their money is safe when it’s being held by their broker-dealers… [and] these rules will strengthen the audit requirements for broker-dealers and enhance [the SEC’s] oversight of the way they maintain custody over their customer’s needs.”
The new rules amend the broker-dealer reporting and notification rules codified in Section 17 and Rules 17a-5 and 17a-11 of the Exchange Act. Currently, a broker-dealer is required to file an annual report with the SEC and the SRO designated to examine that broker-dealer. The report must contain audited financial statements conducted by an independent public accountant registered with the PCAOB. Under the new requirements, a broker must file a quarterly report telling the SEC whether and how it maintains control over its client’s funds. The new rules also require that the broker-dealer let the SEC review the work-papers of the accountant, if requested.
SEC Commissioners Daniel Gallagher and Troy Paredes were the two dissenters in the 3-2 vote and made a joint statement expressing their concern that the “final rule could chill important discussions between a broker-dealer and its auditors” as well as “compromise any privileges that cover communications between a broker-dealer and its auditor[.]”
In a separate unanimous vote, the SEC adopted amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers. These amendments were designed to enhance the SEC’s ability to monitor and prevent unsound business practices.
The Commission’s on-going focus on broker-dealers may be the first sign that the SEC is finally taking steps towards establishing a fiduciary standard for broker-dealers. Dodd-Frank authorized the SEC to impose a fiduciary standard on broker-dealers but to date the SEC has only taken an investigative approach. However, it’s looking more and more likely that a uniform standard is on the horizon under Chair White’s oversight.