Senators introduce bill to ease audit requirements for small brokerages

New bill contains revisions aimed at generating more bipartisan support than previous legislation

Oct 30, 2019 @ 4:33 pm

By Mark Schoeff Jr.

A bipartisan group of senators introduced legislation Wednesday that would ease annual audit requirements for small brokerages.

The bill, the Small Business Audit Correction Act, would exempt small, privately held broker-dealers that do not hold client funds from having to hire an audit firm registered with the Public Company Accounting Oversight Board.

Under the legislation, small brokerages in good standing with securities regulators could resume having their annual audits conducted by firms that follow generally accepted auditing standards created by the American Institute of Certified Public Accountants.

The Dodd-Frank financial reform law requires all broker-dealers to hire a PCAOB-approved audit firm. Many small brokers say a PCAOB audit significantly increases their regulatory costs.

"Requiring our small non-custodial broker-dealers to get the same audits required of public companies only results in higher costs and fewer small firms, and all because of a provision that wasn't even supposed to be aimed at non-custodial firms," Sen. Tom Cotton, R-Ark. and the bill's author, said in a statement. "This bill will return audit requirements to the former standard, one appropriate for these kinds of firms and which will allow our small broker-dealers to expand and help create more jobs."

The original co-sponsors of the bill are Sens. Thom Tillis, R-N.C.; Doug Jones, D-Ala.; and Krysten Sinema, D-Ariz.

The House Financial Services Committee approved similar legislation last year, but it failed to get a vote on the House floor. No action was taken in the Senate. The measure died when the previous Congress adjourned last year.

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Many Democrats on the House panel opposed the bill last year. The new version has been revised to address some of their concerns, according to Paige Pierce, executive vice president at Larimer Capital and the leading advocate for the bill.

For instance, the current bill has added a criteria to determine whether a firm is small. In addition to having fewer than 151 registered representatives, it must meet revenue thresholds established by the Small Business Administration.

The measure prevents brokers who are affiliated with an investment advisory firm that custodies assets from qualifying for audit relief. It also prohibits high-frequency trading firms from using the audit exemption.

"There's no chance we can be protecting the noncustodial B-D who is up to no good with customer assets on the IA side," Ms. Pierce said.

A new bill has not yet been introduced in the House, where the Democrats now hold the majority. Ms. Pierce hopes the revisions included in the new bill will garner more Democratic support.

"I think it is stronger. It is a better bill," she said. "That was the result of the collaboration; the willingness to sit down and talk — and both sides hearing one another."

It's not clear when the Senate Banking Committee might hold a hearing on the bill. Even if it clears the panel, the legislative calendar will become more and more restricted as next year's election nears.

But Ms. Pierce, a small-firm representative on the board of the Financial Industry Regulatory Authority Inc., is undaunted.

"I'm encouraged by the progress we've made and by the hard work by everyone," she said. "I'm very optimistic."


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