U.S securities brokers would be more closely scrutinized by accountants and be subject to stricter rules for how they handle their customers’ assets under a plan proposed by federal regulators Wednesday.
The proposal by the Securities and Exchange Commission is meant to improve oversight of broker-dealers in the wake of Bernard Madoff’s massive Ponzi scheme. It is not one of the nearly 100 new rules required under the Dodd-Frank Wall Street overhaul law, and instead is meant to serve as a companion piece of regulation adopted in late 2009 that tightened custody rules for investment advisers and subjected some of them to surprise audits.
Madoff’s investment advisory business was registered with the SEC. He was also registered as a broker-dealer and subject to oversight by the SEC and industry-funded watchdog the Financial Industry Regulatory Authority.
Wednesday’s proposed rule aims to better protect customer assets, particularly in cases where brokers have custody of them.
Under the plan, brokerages with custody of their customers’ funds would need to undergo an annual examination by a registered accounting firm to ensure they are in compliance with already-existing customer protection and net capital rules on the books.
If a broker does not have custody of customer assets, the rule would still require these firms to have a review performed by a public independent accountant.
In addition to heightened auditing rules for brokers, Wednesday’s proposal would also subject brokerages to additional oversight by SEC and self-regulatory examiners.
For brokers who maintain custody of customer funds, examiners would be allowed to gain access to paperwork from the firm’s public accountant.
In addition, brokers would need to report to the SEC on a quarterly basis about how they maintain custody of their customers’ cash and securities.
In a fact sheet, the SEC said it estimates that of the 5,000 brokerages registered with the agency, about 300 of them have custody of their customers’ assets.
In prepared remarks, SEC Commissioner Luis Aguilar said the proposal would make “long overdue improvements” to the rules, noting that “broker-dealers hold custody of far more investor assets than investment advisers do.”
(Reporting by Sarah N. Lynch, editing by Dave Zimmerman)
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