PCAOB Announces $1 Million Settlement with PricewaterhouseCoopers for Violations in its Examination and Audit of Merrill Lynch’s Compliance with the SEC Customer Protection Rule
The Public Company Accounting Oversight Board today announced that it censured and imposed a $1 million civil penalty against PricewaterhouseCoopers LLP for violations in its examination and audit of Merrill Lynch, Pierce, Fenner & Smith, Incorporated's compliance with the Securities and Exchange Commission's Customer Protection Rule in fiscal year 2014.
"An auditor's attention to a broker's compliance with the SEC's Customer Protection Rule provides critical assurance that the business is protecting customer securities from liens by creditors of the broker," said James R. Doty, PCAOB Chairman. "PwC failed to fulfill its obligations during a period when Merrill Lynch exposed billions of dollars of customer assets to claims of its creditors."
The SEC's Customer Protection Rule requires a broker-dealer to hold certain customer securities in lien-free segregated accounts to protect them from creditor claims should the broker's business fail. Merrill Lynch reported that it had complied with the rule in fiscal year 2014 and that its internal control over compliance with the rule was effective.
The Board found that, in February 2015, PwC issued audit and examination reports without obtaining sufficient evidence about Merrill's compliance assertions, as required by PCAOB auditing and attestation standards.
In June 2016, the SEC found that for several years, including fiscal year 2014, Merrill Lynch held tens of billions of dollars of its customers' fully paid and excess margin securities in accounts that were subject to liens by third parties, in violation of the Customer Protection Rule.
"Investors should not have to worry that their brokers' auditors are failing to perform appropriate work in examining the safeguards around their funds," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations. "Today's order demonstrates the enforcement division's commitment to using its authority to police and sanction those who place investors at risk."
PwC consented to the Board's order without admitting or denying the findings in the order.
The investigation that uncovered PwC's violations and resulted in the settlement announced today originated with information obtained from the SEC. PCAOB enforcement staff members Thomas McCann, John Abell, and Arnold Ramos conducted the investigation, which was supervised by William Ryan and Marion Koenigs. The PCAOB appreciates the assistance of the SEC, particularly the staff of its New York regional office and Washington headquarters.
The PCAOB oversees auditors' compliance with the Sarbanes-Oxley Act, federal securities laws, professional standards, and PCAOB and Securities and Exchange Commission rules. Further information about the PCAOB Division of Enforcement and Investigations is available on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may use the PCAOB Tip & Referral Center.