Interim Inspection Rules for Auditors of Brokers and Dealers


I would like to join my fellow Board members in thanking the staff for their thoughtful efforts in developing today's recommendation. The rules we are adopting today will enable the Board to commence in a timely fashion its oversight over the auditors of brokers and dealers. At the same time, the interim inspection program will allow time for new rules and standards relating to broker dealer audits to evolve and for the Board to consider an appropriate scope and approach for its permanent broker-dealer auditor oversight program. Moreover, the rules will close the regulatory gap that remained after the Sarbanes-Oxley Act required the auditors of brokers and dealers to register with the Board but before the Dodd-Frank Act gave the PCAOB oversight authority over these auditors.

I also support the recommended approach to providing transparency over the Board's interim oversight activities by issuing annual summary reports, rather than publishing individual, firm-specific inspection reports. This approach strikes an appropriate balance: It gives investors and the public insight into the Board's activities and observations during the interim inspection program while allowing the Board and the auditors of brokers and dealers to focus during this transitional period on adapting to a changing framework rather than on the nuances of drafting and responding to public inspection reports.

Including Auditors of Introducing Broker-Dealers in the Interim Inspection Program:

Several of the comments received by the Board addressed the question of whether or not the Board's interim inspection program should include inspections of the auditors of introducing brokers and dealers that do not maintain customer cash and securities. Commenters who oppose the inclusion of introducing brokers in the Board's interim inspection program argued that the risk to investors presented by introducing broker-dealers is low, while the regulatory burden stemming from PCAOB inspections of these auditors is high. Supporters of the rule being considered today believe that the risks are substantial enough to justify PCAOB oversight over the auditors of broker dealers. Similar arguments were made when Congress considered the scope of the broker dealer oversight provisions in the Dodd-Frank Act. Congress ultimately decided to give the Board the responsibility of determining an appropriate scope for its broker-dealer auditor inspection program. While the risks presented to investors by the activities of introducing brokers and dealers may be lower than those presented by carrying or clearing brokers and dealers, risks do exist. Auditors have a role to play in providing assurances that those risks are minimized, including confirming that theses brokers and dealers are not exceeding the scope of permissible activities. In order for the Board to appropriately balance the risks presented by introducing brokers and dealers against the effectiveness and costs of PCAOB oversight, the Board must gain a full understanding of the role played by the auditors of all brokers and dealers in addressing the potential risks to investors.

I agree that the best way for the Board to gather the relevant information is to inspect, for a time, the auditors of all classes of brokers and dealers. Nevertheless, I want to emphasize, as others have today, that the Board is mindful of the concerns expressed about the potential regulatory burden associated with PCAOB oversight. We have not yet made any judgments about the appropriate scope of a permanent inspection program. The Board intends to include in the interim inspection program a sufficient number and variety of firms to permit the Board to gather the necessary information, while avoiding unreasonable costs for brokers and dealers, their auditors, and, ultimately, investors. We also will continue to consult with the SEC, FINRA, and others who share the Board's investor protection mandate, in order to consider the role of auditor regulation against the backdrop of direct regulation over brokers and dealers.

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