Brokers who hold investors’ assets will have to file quarterly reports attesting to compliance with measures to protect customer money and securities under rules adopted by the U.S. Securities and Exchange Commission.
The measures, approved by commissioners today in a 3-2 private vote, are an outgrowth of the regulator’s response to Bernard Madoff’s long-running Ponzi scheme. They were opposed by the SEC’s two Republican members.
“These rules will provide important additional safeguards for customer assets,” SEC Chairman Mary Jo White said in a statement. “These rules will strengthen the audit requirements for broker-dealers and enhance our oversight of the way they maintain custody.”
Brokers are required under the rules to file quarterly reports starting later this year stating whether and how they maintain customer securities and cash. They also will have to file annual compliance reports beginning in June verifying adherence with financial-responsibility rules such as net capital requirements.
The annual compliance reports will be reviewed by independent public accountants, and the SEC can review auditors’ work papers as part of examinations of brokers. The reports will be used to assist the agency’s examiners when they evaluate compliance with SEC rules.
The rules will help “ensure that investor assets are safely held,” SEC Commissioner Luis A. Aguilar said in a statement.
Commissioners Daniel M. Gallagher and Troy A. Paredes, who voted against the measures, said in a statement they worried that they don’t “explicitly limit” the SEC’s authority to demand access to the auditor’s work papers.
Bernard Madoff, who maintained custody of customer assets in his New York brokerage, is serving a 150-year prison sentence after being convicted of conducting what prosecutors said was the biggest Ponzi scheme in U.S. history. Liquidators of his companies have sued banks, feeder funds, and Madoff’s employees to recover some of the $17 billion lost by victims.
Lori Richards, a principal with PricewaterhouseCoopers LLP’s financial services regulatory practice who previously directed the SEC’s Office of Compliance Inspections and Examinations, said the rules include a new requirement for brokers to better document their risk management controls.
“Taken together, it seems clear that the SEC wants brokers to better protect clients’ assets and to reduce risk of failure, and to gain a better handle on those brokers that present risk,” Richards said by e-mail.
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