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SEC Proposes Stricter Standards for Securities Brokerages

Source: WSJ - Jessica Holzer

Posted on 16 Jun 2011

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Aimed at making it easier for regulators to catch brokerage firms that are misusing customer assets, the Securities and Exchange Commission (SEC) voted unanimously to issue draft proposals on Wednesday that would impose more-stringent standards for accounting firms' audits of brokerage-firm practices for holding customer cash and securities. They also would force brokerages to share auditor work with regulators conducting inspections.

The proposals follow rules the SEC adopted in late 2009 to strengthen protections for customers whose money is held by investment advisers. If adopted, they would apply largely to the roughly 300 brokerages that hold clients' assets. A 60-day public-comment period and a second vote by the commission are required before the rules are made final.

"The fact is that when investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed," SEC Chairman Mary Schapiro said in remarks at the open meeting. "But when a broker-dealer violates that trust and misuses the assets, that broker not only harms the investor but also erodes confidence in the financial system."

After Mr. Madoff's $50 billion fraud was uncovered in late 2008, SEC examiners sharpened their focus on brokerage firms' practices for holding customer cash and securities. Current rules already require brokerages to segregate customer assets from their proprietary funds and to maintain certain levels of liquid assets to honor customer redemptions. They also must comply with an annual audit by a public accounting firm and verify each quarter that the amount of securities they are holding matches amounts given in their records.

Wednesday's proposals would expand the annual audit by requiring auditors of brokerages that hold client assets to verify whether the firms are adhering to the segregation and other rules meant to protect customer assets. Auditors also would have to review brokerages' controls for complying with the rules. And broker firms would have to let regulators talk to their auditor and view accountants' work on the audit in order to assist in regulatory exams.

Meanwhile, brokerages that don't hold client assets would have to provide an accounting firm's verification that they aren't subject to the segregation requirements. All brokerages would be forced to file to the SEC each quarter a new form saying whether they hold customer cash and securities and detailing their practices for holding these assets.