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| November, 2003 | The
Monthly Newspaper of the NYSSCPA |
Vol.
6, No. 11 |
New Developments Affect Brokers and Dealers in Securities
By John Cavallone and David Grumer
Authors’ Note: In our article “Sarbanes-Oxley: The Act’s Impact on Brokers and Dealers,” which appeared on page 10 of the August 2003 Trusted Professional, we described two new developments that affect auditors of brokers and dealers in securities: the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission’s interpretation letter concerning expense sharing agreements. The following article expounds upon those developments and includes some information previously published. As of this writing, more developments were expected.
Sarbanes-Oxley Act
Registration. The deadline for registration of auditors of broker-dealers that are not issuers (nonpublic broker-dealers) has been extended. Nonpublic broker-dealers that file with the Securities and Exchange Commission and send to their customers documents and information required by Section 17(e) need not be audited by a registered public accounting firm until Jan. 1, 2005. (See SEC release no. 34-48281, dated Aug. 4, 2003, for further details.)
Partner rotation and compensation. For brokers and dealers or investment advisors who are not issuers as defined by the Act, the auditors would not be subject to the rotation requirements or the compensation requirements of the SEC’s independence rules. However, since the prohibition on nonaudit services applies to all audit clients, those provisions would apply to auditors on behalf of nonissuer brokers and dealers or investment advisors. (See Office of the Chief Accountant: Application of the January 2003 Rules on Auditor Independence, Frequently Asked Questions, item no. 35 for further details.)
Proposed rule concerning inspections. In the case of registered firms that do not engage in public company auditing, the Public Company Accounting Oversight Board proposes that it shall not subject such firms to a regular inspection until they actually become involved in the business of participating in or issuing audit reports for a U.S. public company. The PCAOB would, however, conduct special inspections to address issues that come to the board’s attention. (PCAOB Release No. 2003-13, dated July 28, 2003.)
Expense Sharing Agreements
In our August 2003 article, we referred to the SEC’s letter dated July 11, 2003, offering guidance on expense sharing arrangements. The SEC’s letter had been issued too close to the time of our submission to offer comments. The Commission lists nine points of record keeping responsibilities and net capital issues to address those circumstances in which a third party assumes certain liabilities of a broker-dealer. Here are two examples of warning signs:
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Third parties that are thinly capitalized and dependent on the broker-dealer for their funds in order to meet their assumed obligations.
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Broker-dealers that record contributions and charges from third parties to reflect services that are provided by unregistered personnel if such personnel would ordinarily have been required to register with the SEC via the broker-dealer.
The National Association of Securities Dealers has indicated that it will publish guidance on expense sharing agreements in the near future. In addition, these agreements will be a topic of the upcoming technical session presented by the NYSSCPA Stock Brokerage Committee, to be held Dec. 3, 2003. Check the FAE website for registration details at www.nysscpa.org/continuingeducationa.htm.
John Cavallone, a partner with Rothstein, Kass & Company, P.C., can be reached at 212-490-7700, ext 2316. David Grumer, a partner with Kaufmann, Gallucci & Grumer, LLP, can be reached at 212-269-0572. Both are members of the NYSSCPA’s Stock Brokerage Committee.
