The Securities and Exchange Commission today approved more-stringent rules surrounding broker-dealers' custody of client assets.
Under the new requirements, a broker must file a quarterly report, called Form Custody, telling the SEC whether and how it maintains control of its clients' funds.
Currently, a broker has to file an annual report about client assets over which it has custody. That document must include audited financial statements from an independent public accountant registered with the Public Company Accounting Oversight Board.
The new SEC rules require that the broker allow the SEC or the
Financial Industry Regulatory Authority Inc. to review the work papers of the accountant, if requested.
In addition, if a broker maintains custody, it will now have to file a compliance report with the SEC to show that it is meeting capital requirements, protecting customer assets and sending account statements to customers. Brokers that don't have custody must file an exemption report.
Brokers must file the quarterly reports beginning at the end of the year. The annual report requirement is effective June 1, 2014.
“Investors need to feel confident that their money is safe when it's being held by their broker-dealers,” SEC Chairman Mary Jo White said in a statement. “These rules will strengthen the audit requirements for broker-dealers and enhance our oversight of the way they maintain custody of their customers' assets.”
The regulations were approved by a 3-2 vote, with SEC Commissioners Daniel Gallagher and Troy Paredes dissenting, saying the new rules give the SEC too much latitude in obtaining audit documents.
“The final rule could chill important discussions between a broker-dealer and its auditor,” the two commissioners said in a joint statement. “In addition, the rule could compromise any privileges that cover communications between a broker-dealer and its auditor, or between a broker-dealer and its attorney, depending on the documents that are produced. In our view, the commission's decision to adopt a final rule that places such privileges at risk sets a problematic precedent.”
In a separate, unanimous vote today, the SEC approved rule changes that bolster net capital, customer protection, books and records and notification requirements. These changes will go into effect 60 days after they're published in the Federal Register.
Among them are a restriction on cash deposits that count toward capital reserves and a requirement to get client consent before “sweeping” cash in an account into a money market fund or bank deposit. In addition, a broker must now document market, credit, liquidity and risk management controls.
The
SEC has been strengthening custody rules in the wake of the $60 billion Ponzi scheme perpetrated by Bernard Madoff, who maintained control of his clients' funds.
