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 Proposed Broker-Dealer Funding Rules 

DATE Dec. 14, 2010 
SPEAKER(S): Daniel L. Goelzer, Acting Chairman 
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC 

The primary purpose of the proposed amendments to the funding rules that are before the Board for consideration today is to create a framework for obtaining the resources necessary to support the costs of Board oversight of the auditors of securities brokers and dealers.

When Congress created the Public Company Accounting Oversight Board in 2002, it gave the Board responsibility to oversee the auditors of U.S. public companies and provided that the Board's work would be funded by those public companies, in proportion to each issuer's market capitalization. This summer, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress expanded the Board's responsibilities to include the auditors of all SEC-registered securities brokers and dealers. Building on the 2002 approach to Board self-funding, Dodd-Frank provides that the Board is to equitably allocate its resource needs between public companies and broker-dealers. Broker-dealers are required to contribute to their industry's share of Board funding in proportion to net capital.

Broker-dealer net capital is highly concentrated. As I noted in my statement this morning regarding the interim broker-dealer inspection program, only 33 firms have net capital in excess of $1 billion, and those firms hold approximately 80 percent of the net capital of the entire broker-dealer industry. The great majority of brokerage firms are very small. Under any allocation methodology that is based on a firm's share of total industry net capital, several thousand broker-dealers would pay nothing simply because of the Board's practice of rounding fee allocations to the nearest $100.

Under the proposed funding rules, only broker-dealers that have tentative net capital in excess of $5 million would be allocated a share of the Board's accounting support fee. Of the 5,000 or so SEC-registered broker-dealers, about 640 firms currently exceed the $5 million threshold. The Board has estimated that, in 2011, about 7.1 percent of its budget, or about $15 million, will be devoted to the oversight of broker-dealer auditors. As a result, under the proposed rule, in 2011, brokerage firm support fees would range from a low of $400 to a high of about $1.2 million. Roughly 100 of the 640 firms would pay $500 or less, while three would pay over $1 million.

A secondary purpose of the proposed funding rule amendments is to revise the rules related public company support fees. While the proposals include several technical changes, the aspect of those revisions that will have the greatest practical effect is the proposed increase in the market capitalization threshold. Under the current rules, all public companies that have market capitalizations of at least $25 million must contribute to funding the Board's issuer auditor oversight work. The proposal before the Board today would increase that threshold to $75 million — the same as the SEC threshold for accelerated filer status. As a result, about 1,100 issuers with market capitalizations between $25 million and $75 million market will no longer be subject to a support fee allocation. Granting this relief to these small public companies will have only a negligible impact on the support fee payments of larger issuers, since public companies with market capitalizations below $75 million currently pay, as a group, only about 0.4 percent of the Board's total accounting support fee.

The proposed revisions would also increase the market capitalization, or net asset value, threshold from $250 million to $500 million for investment companies. That would have reducing to zero the fee allocation of about 1,480 investment companies.

I believe that the proposed broker-dealer funding rules, and the changes to the public company funding rules, are fully consistent with Congress's objective of requiring that public companies and broker-dealers provide the resources for Board oversight of their auditors. The proposals would accomplish that goal without burdening smaller public companies, smaller broker-dealers, and smaller investment companies. I support the proposed funding rule changes.

*   *   *

These amendments were a joint effort of the Office of the General Counsel and the Office of Finance. I want to thank Bob Burns, Associate General Counsel, Nina Mojiri-Azad, Assistant General Counsel, and Annie Braswell, Accounting Supervisor, for their work on this project.

 

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