Compliance and Exemption Reports Under the SEC’s Amended Broker-Dealer Rules
On July 30, 2013, the Securities and Exchange Commission (the “Commission”) amended certain annual reporting, audit and notification requirements applicable to broker-dealers. Under the new rules, broker-dealers will be required to file annual reports consisting of a financial report and one of two new reports with the Commission: either a compliance report or an exemption report. These reports are required to be audited under PCAOB standards which are in effect for fiscal years ending on or after June 1, 2014.
Compliance and exemption reports must contain certain statements and provide certain information relating to the Financial Responsibility Rules as well as applicable designated examining authority (DEA) rules that require carrying broker-dealers to periodically send account statements to customers.
The broker-dealer’s independent public accountant will prepare a report based on an examination of statements made in the compliance report or a review of statements made in the exemption report. A broker-dealer that did not claim an exemption from Rule 15c3-3 throughout the most recent fiscal year (generally a carrying broker-dealer) must file the compliance report. A broker-dealer that did claim it was exempt from Rule 15c3-3 or did not claim an exemption but had not held customer securities or funds at any time during the year (generally, a non-carrying broker-dealer) must file the exemption report. The accountant’s report on internal control (commonly referred to as the “material inadequacy report”) is no longer required to be included.
The compliance report is required to contain:
- Statements as to the establishment of internal control over compliance with the financial responsibility rules and as to whether such controls were effective during the most recent fiscal year and as of the end of the most recent fiscal year.
- Such statements are to include whether the broker-dealer was in compliance with Rule 15c3-1 (Net Capital Rule) and Rule 15c3-3(e) (Customer Protection Rule).
- A description of each identified material weakness in the internal control over compliance during the most recent fiscal year and any instance of non-compliance with Rule 15c3-1 or Rule 15c3-3(e) as of the end of the most recent fiscal year.
- A material weakness is defined as a deficiency or combination of deficiencies in the broker-dealer’s internal control over compliance such that there is a reasonable possibility that non-compliance with Rule 15c3-1 or rule 15c3-3-(e) will not be prevented or detected on a timely basis.
The exemption report is required to contain:
- Statements made to the best knowledge and belief of the broker-dealer that:
- (1) identify the provisions in Rule 15c3-3(k) under which the broker-dealer claimed an exemption from Rule 15c3-3, and,
- (2) the broker-dealer met the identified exemption provisions throughout the most recent fiscal year without exception or that it met the identified exemption provisions except as described in the exemption report.
- If applicable, a statement that identifies each exception during the most recent fiscal year including the nature of each exception and the approximate dates on which the exception existed.