Broker-Dealer Update

Broker-Dealer Update The views expressed by the presenters do not necessarily represent the views, positions, or opinions of the AICPA or the presente...
Author: Marcus Perkins
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Broker-Dealer Update The views expressed by the presenters do not necessarily represent the views, positions, or opinions of the AICPA or the presenter’s respective organization. These materials, and the oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant-client or attorney-client relationship.

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Administrative Notes We encourage you to submit your technical questions – please limit your questions to the content of today’s program You can submit your questions at any time during this Web event by clicking on the “Q & A” tab on the lower right-hand side of your screen

You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab

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Learning Objectives After completing this course, you should be able to: • Understand the Securities and Exchange Commission (SEC) amendments to Rules 17a-5 and 17a-11 under the Securities and Exchange Act of 1934 issued in July 2013. • Understand the PCAOB standards for broker-dealer audits and auditing supplemental information.

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Continuing Professional Education There will be random attendance pop-up markers during the event To obtain CPE, you must click “OK” on 75% of the participation pop-up markers

If you are not receiving CPE for this event, ignore the pop-up markers

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Presenters Chris Donovan, Deloitte & Touche LLP

Paul Nockels, McGladrey LLP Irina Portnoy, AICPA (moderator)

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Agenda Broker-Dealer Reports • •

The Compliance Report The Exemption Report

Filing Annual Reports Notification of Non-Compliance or Material Weaknesses Access to Accountant and Audit Documentation Form Custody Independent Public Accountant’s Responsibility

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Broker-Dealer Reports

Overview What the reports are designed to do: • Give the SEC, FINRA and SIPC more detail about a broker-dealer’s handling of customer funds and securities • SEC stated that it represents “a first stop in the effort to enhance custody protections, with consideration of additional enhancements of the rules governing custody of customer assets by broker-dealers to follow.”

Why: • Madoff • Other Ponzi schemes • Sloppy recordkeeping/weak internal controls for safeguarding investor assets

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New Reports Compliance Report • Carrying firms • Clearing firms

Exemption Report • (k)(1) – Limited business (mutual funds and/or variable annuities only) • (k)(2)(i) – Special account for the exclusive benefit of customers • (k)(2)(ii) – Customer transactions are cleared through another broker-dealer on a fully disclosed basis • (k)(3) – special exemption by the SEC

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Compliance Report Applies to: • Broker-dealers that do not claim an exemption from SEC Rule 15c3-3 (the Customer Protection Rule) throughout the most recent fiscal year

Filed with: • The broker-dealer’s annual audited financial report

Provided to • SEC, FINRA or DEA • SIPC, if the broker-dealer is a SIPC member

Effective date: • For fiscal years ending on or after June 1, 2014

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Compliance Report - Statements The Compliance Report includes five (5) specific statements 1. 2. 3. 4.

5.

The broker-dealer has established and maintained Internal Control Over Compliance Internal Control Over Compliance was effective as of the during the fiscal year Internal Control Over Compliance was effective as of the end of the fiscal year Broker-dealer was in compliance with Rule 15c3-1 (the Net Capital Rule) and Rule 15c3-3(e) (the Customer Reserve Requirement of the Customer Protection Rule) as of the end of the fiscal year The information in #4 was derived from the books and records of the broker-dealer

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Compliance Report – Descriptions The Compliance Report also includes two (2) descriptions, if applicable 1) Each identified material weakness in the Internal Control Over Compliance during and as of the end of the fiscal year 2) Any instances of non-compliance with the Net Capital and the Customer Reserve Requirement of the Customer Protection Rules as of the end of the fiscal year

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Compliance Report – Definitions Internal Control Over Compliance • Internal controls that have the objective of providing the brokerdealer with reasonable assurance that non-compliance with the financial responsibility rules will be prevented or detected on a timely basis

Material Weakness • A deficiency, or a combination of deficiencies, in the brokerdealer’s Internal Control Over Compliance such - that there is a reasonable possibility that non-compliance with the Net Capital and the Customer Reserve Requirement of the Customer Protection Rules will not be prevented or detected on a timely basis or - that non-compliance to a material extent with Rule 15c3-3, except for paragraph (e), or any Account Statement Rule will not be prevented or detected on a timely basis Learning Center

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Compliance Report – Changes from Proposed Rules The final rules reflect two (2) changes from the proposal: 1) Elimination of the concept of material non-compliance and compliance in all material respects 2) A narrowing of these statements and requirements from compliance with all of the financial responsibility rules to compliance the Net Capital and the Customer Reserve Requirement of the Customer Protection Rules

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Exemption Report The Exemption Report includes three (3) statements made to the “best knowledge and belief” of the broker-dealer 1) Identified the exemption claimed under Rule 15c3-3(k) 2) Met the identified exemption provision of Rule 15c3-3(k) during the fiscal year without exception or exceptions are described in the Exemption Report 3) If applicable, identification of exception during the fiscal year (include nature and approximate date(s))

The Exemption Report must cover the most recent fiscal year Learning Center

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Filing Annual Reports

Filing Annual Reports Amended Rule 17a-5(d)(5) to replace the term “annual audit report” with “annual reports”

Annual reports include 1) Financial report 2) Compliance or Exemption report 3) Reports prepared by an independent public accountant covering 1 and 2

Time for filing annual reports: 60 calendar days after the fiscal year end

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Who Gets Annual Reports? Current requirement: Annual Audited Reports are filed with • • • •

SEC HQ SEC Regional office FINRA/DEA SROs of which the broker-dealer is a member

New requirement: Annual Reports are filed with • SIPC, if the broker-dealer is a member • No longer required to file with SROs that are not the broker-dealer’s DEA, if the SRO waives the requirement

Effective Date: December 31, 2013 Learning Center

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Filing Annual Reports with SIPC Broker-dealers must also file their annual reports with SIPC

Inclusion of the annual reports is intended to assist SIPC in monitoring the financial strength of brokerdealers and assessing the adequacy of the SIPC fund

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Notification

Notification of Non-Compliance or Material Weakness The notification provisions for broker-dealers (Rule 17a-11) have not changed • Replaced “material inadequacies” with “material weakness”

Broker-dealer must provide a copy of the notification to the accountant within one business day If the accountant does not receive or agree with the statements in the notice, the accountant must provide a report to the Commission and DEA on the aspects of the notification of the broker-dealer with which the accountant does not agree within one business day If the accountant determines in connection with the audit of a carrying broker-dealer’s annual reports that any material weakness (as defined in paragraph (d)(3)(iii) of Rule 17a-5) exists, the accountant must immediately notify the brokerdealer’s CFO of the nature of the material weakness

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Access to Accountant and Audit Documentation

Access to Accountant and Audit Documentation SEC amended Rule 17a-5 to require that each clearing broker-dealer agrees to allow SEC and its DEA examination staff • •

to review the audit documentation associated with its annual audit reports allow its independent public accountant to discuss findings relating to the audit reports with the SEC and DEA

Access to information and discussions with a clearing broker-dealer’s independent public accountant would enhance the efficiency and effectiveness of Commission and DEA examinations This requirement is limited to clearing broker-dealers, which generally have more complex business operations than non-carrying firms Request to a broker-dealer’s independent public accountant for the accountant to discuss audit findings or for access to audit documentation must be made in writing

SEC anticipates that it will accord confidential treatment to such documents to the extent permitted by law

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Form Custody

Form Custody Effective Date: December 31, 2013 All broker-dealers must file this form with their DEAs within 17 business days after the end of each calendar quarter (even if a broker-dealer has no customer or non-customer accounts)

Goal – designed to elicit information concerning whether a broker-dealer maintains custody of customer/non-customer assets and, if so, how Questions on the form that can’t be answered because the broker-dealer does not engage in a particular activity can be ignored Learning Center

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Form Custody – There are nine (9) items designed to elicit information about a broker-dealer’s custodial activities: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Accounts Introduced on a Fully Disclosed Basis Accounts Introduced on a Omnibus Basis Carrying Broker-Dealers Carrying for Other Broker-Dealers Trade Confirmations Account Statements Electronic Access to Account Information Broker-Dealers Registered as Investment Advisers Broker-Dealers Affiliated with Investment Advisers

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Independent Public Accountant’s Responsibility

Independence Follow SEC independence rules (Regulation S-X) • Auditors cannot provide - Bookkeeping or other services related to accounting records or financial statements preparation - Financial information systems design and implementation - Management functions or human resources • Certain Regulation S-X rules do not apply - Partner rotation - Audit committee pre-approval • Review of the exemption report or perform an examination of the compliance report - The exemption and compliance reports MUST BE prepared by the broker-dealer PCAOB independence rules pending (stay tuned) Learning Center

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Engagement of the Accountant Current Requirements, applicable to audits of year ends through May 31, 2014 • Audits of broker dealers reports filed with SEC made in accordance with generally accepted auditing standards (GAAS) • Report on Internal Control Report prepared by the accountant

New Rules, applicable to audits of year ends on and after June 1, 2014 • Audits and attestation of broker dealers reports filed with SEC will be made in accordance with PCAOB standards • Auditor’s Report on Internal Control previously required by SEC Rule 17a-5(g)(1) is replaced by the auditor’s Examination Report or Review Report, as appropriate • The PCAOB is working to finalize the permanent inspection program of audits of broker-dealers. The interim inspection program is anticipated to continue through 2014. Learning Center

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PCAOB Standards SEC amended Rule 17a-5 to state that examination of Compliance Reports and review of Exemption Reports will be in accordance with PCAOB Standards PCAOB in 2011: • Proposed Auditing Standard on Auditing Supplemental Information Accompanying Audited Financial Statements and Related Amendments to PCAOB Standards • Proposed Standards for Attestation Engagements Related to Broker and Dealer Compliance or Exemption Reports

These standards are to align attestation standards more closely with the auditor’s responsibility under the amendments to Rule 17a-5

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PCAOB Standards (continued) On October 10, 2013, the PCAOB adopted the Attestation Standards and Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements • Effective for fiscal years ending on or after June 1, 2014 (subject to SEC approval)

PCAOB also proposed an update to certain rules to conform to the Dodd-Frank amendments to the Sarbanes-Oxley Act, which includes • Rules requiring that registered firms comply with the PCAOB standards • Ethics and independence requirements • These are pending final approval

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PCAOB – Attestation Standards Two attestation standards that cover the auditor’s examination regarding compliance reports and the auditor’s review regarding exemption reports of broker-dealers were adopted • Examination Standard: Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers • Review Standard: Attestation Standard No. 2, Review Engagements Regarding Exemption Reports of Brokers and Dealers

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PCAOB – Examination Standard Provides requirements for the auditor that include the following: • Obtaining sufficient appropriate evidence to opine on the Compliance Report • Focusing on matters that are most important to the auditor’s conclusion regarding the statements of the broker-dealer • Consideration of fraud risk, including the risk of misappropriation of customer assets • Coordination of the examination engagement with the audit of the financial statements and audit procedures performed on supplemental information • Description of how to report on an examination engagement, in connection with the requirements of SEC Rule 17a-5 Learning Center

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PCAOB – Review Standard Requires the auditor to obtain moderate assurance about the following statements in the exemption report: • A statement that identifies the exemptive provisions claimed by the broker-dealer • A statement that the broker-dealer 1) Met the identified exemption provisions throughout the fiscal year without exception OR 2) Met the identified exemption provisions throughout the fiscal year, except as described in exemption report 3) If applicable, identification of each exception with descriptions (nature and approximate date(s))

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PCAOB – Supplemental Information Auditing Standard No. 17, Auditing Supplemental Information Accompanying Auditing Financial Statements • A new standard • Establishes the auditor's responsibilities when performing audit procedures and reporting on supplemental information that accompanies the audited financial statements of broker-dealers and others • Intended to give the SEC and other users greater confidence in the quality and consistency of supplemental information

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PCAOB – Supplemental Information (continued) Requirement of the auditor: • To determine that the supplemental information reconciles to the underlying accounting and other records or to the financial statements • To test the completeness and accuracy of the supplemental information • To evaluate whether or not the supplemental information, including form and content, complies with the relevant regulatory requirements

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PCAOB – Supplemental Information (continued) Supplemental Information means: • Supporting schedules required to be filed pursuant to Rule 17a-5 • Supplemental information - Required to be presented pursuant to the rules and regulations of a regulatory authority - Covered by an auditor’s report on that information related to financial statements that are audited in accordance with PCAOB standards • Information that is - Ancillary to the audited financial statements; - Derived from the company’s accounting books and records; and - Covered by an auditor’s report on that information related to financial statements that are audited in accordance with PCAOB standards

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How do I get my CPE certificate? Simply follow these steps: 1. 2.

Log on to CPA2Biz.com Click on “My Account” at the top of the page and enter your CPA2Biz/AICPA username and password 3. Click on “My Web Events” tab 4. Click on “AICPA Learning Center Transcripts and Certificates” link (a new window or tab will open) 5. On the AICPA Learning Center, click on “My Transcript” in the left-hand menu 6. Locate your completed course and click on “Go” to retrieve your certificate. Note: It may take up to 24 hours for your certificate to be placed into your account. If you need assistance with locating your certificate, please contact the AICPA Service Center at 888.777.7077 or [email protected].

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Brokers and Dealers in Securities Guidance Available in eBook, online, and print formats:  Brokers and Dealers in Securities Audit and Accounting Guide

 Financial Institutions Industry Developments: Including Depository and Lending Institutions and Brokers and Dealers in Securities Audit Risk Alert

cpa2biz.com I 888.777.7077

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