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 Proposed Temporary Rule to Establish an Interim Inspection Program of Brokers and Dealers

DATE Dec. 14, 2010
SPEAKER(S): Steven B. Harris, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

Thank you, Mr. Chairman.

I support both items we will vote on this morning — the proposed temporary rule for an interim program of inspections of broker-dealer audits and the proposed allocation of the Board's accounting support fee among issuers, brokers and dealers.

PROPOSED TEMPORARY RULE FOR AN INTERIM PROGRAM OF INSPECTION RELATED TO AUDITS OF BROKERS AND DEALERS

With respect to the temporary rule for an interim program of inspections, the rule would allow the Board to start inspections of firms' work on broker-dealer audits, but would also defer deciding the more complex questions about the scope of a permanent program until the Board has more information, including information gathered through the interim program.

Let me focus on one such complex question that involves, specifically, the treatment of introducing broker-dealers and whether they should be exempted from inspection and regulation, as some are suggesting.

I believe this proposed temporary rule is a responsible reflection of the legislative history underlying Section 982 of the Dodd-Frank Act dealing with broker-dealers. While there was considerable debate surrounding the provision, Section 982 ultimately provided for no such outright exemption from PCAOB oversight, at this time.

Initially, in the House of Representatives, the Ranking Member of the House Financial Services Subcommittee on Capital Markets, Congressman Scott Garrett, offered an amendment to exempt the auditors of introducing broker-dealers from the bill's new requirements. However, the amendment was rejected during the Committee markup by a vote of 43-26. A compromise provision, sponsored by Subcommittee Chairman Paul Kanjorski and Congressman Garrett was then reached and passed by the full House as part of Chairman Barney Frank's Managers' Amendment.

During the House deliberations, both the Securities and Exchange Commission ("SEC") and the Securities Investor Protection Corporation ("SIPC") weighed in against a statutory exemption in separate letters to the Congress.

At the time, the SEC's Chief Accountant noted that "[f]ailing to provide PCAOB authority over auditors of all broker-dealers would perpetuate two sets of auditing standards, which would provide no clarity to investors as to the level of audit that is being performed at each broker-dealer." And, SIPC noted that, since 1995, the agency had liquidated 52 introducing brokers at a cost of more than $137 million.

In the Senate, the bill as introduced and passed did not mandate any broker-dealer exemptions. The Senate Committee Report simply included language from SIPC saying, "…the PCAOB's new oversight authority should apply to audits of all registered brokers and dealers and not only those that perform a clearing function or carry customer accounts."

Ultimately, the compromise that passed in the House was offered by Reps. Garrett and Kanjorski during the Conference Committee proceedings and was agreed to by both the House and Senate conferees. The agreed upon statutory outcome in effect delegates to the Board the decision, by rule and with Commission approval, whether to exempt auditors of certain categories of broker-dealers from the Board's inspection program.

I believe the proposed temporary rule we are considering today would allow the Board the necessary time to gather and assess the relevant information needed to adequately determine if any exemption is appropriate and in the best interest of investors.

The proposing release provides the details of the scope, focus and duration of the interim program including how the Board intends to report on the results of its interim program.

While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm's audit work.

The proposed rule also makes clear that the Board will be mindful of the potential costs and regulatory burdens that might be imposed on different categories of registered public accounting firms and classes of brokers and dealers.

Before I close, I would like to join you, Mr. Chairman, in thanking the staff for their efforts and thorough analysis in developing the proposed rules before us today. In particular, I would like to thank Michael Stevenson, Bob Burns and Nina Mojiri-Azad from the General Counsel's Office and Annie Braswell from the Finance Office.

 

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