Proposed Standards for Attestation Engagements Related to Broker and Dealer Compliance or Exemption Reports

The Board's proposed new standards are designed to address the SEC's proposed requirements that brokers and dealers file with their annual financial reports certain supporting schedules required by the current SEC Rule 17a-5 as well as one of two new reports — either a compliance report or an exemption report.

The SEC proposed its new requirements to amend SEC Rule 17a-5 on June 15, and the SEC's comment period is open until August 26. The public will thus be able to evaluate the SEC's proposed rule and the PCAOB's proposed standards at the same time.

The Proposed Standard on Examining Compliance Reports

The SEC's proposed compliance report would require broker-dealers to report on their compliance in certain areas, such as the broker-dealer's internal control over compliance with specific SEC rules related to net capital requirements, customer protection, reserves and custody of securities, quarterly security counts, as well as compliance with rules of the entity's designated examining authority on sending account statements to customers.

The PCAOB's proposed attestation standard would establish requirements for examining these proposed compliance reports. The proposed standard is risk-based. It would require auditors to use judgment to identify and focus on matters that are most important to the customer-protection objectives of engagements. The proposed standard is also designed to provide for examinations that are scaled to the size and complexity of the broker's or dealer's business. And it would require coordination with the financial statement audit in order to eliminate duplication of procedures and promote appropriate use of evidence obtained.

The Proposed Standard on Reviews of Exemption Reports

The SEC has also proposed a new exemption report, for brokers and dealers that do not hold customer funds or securities and meet the conditions for exemption from the SEC's Rule 15c3-3 on Customer Protection — Reserves and Custody of Securities. The SEC has proposed requiring a broker-dealer filing an exemption report to undergo a review by an independent public accountant of the assertions of the broker-dealer in that report.

Many so-called introducing brokers are small operations. The PCAOB's proposed standard for performing reviews of the SEC's proposed exemption reports is intended to take the size and complexity of the broker into account. The extent of inquiries to make and materials to review would naturally be less for a small, uncomplicated broker. I should stress these would not be audits, and the SEC has not proposed requiring audits. But similar to the compliance examinations, the auditor would take advantage of evidence obtained in the financial statement audit to identify risks without duplicating effort.

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