SEC Rule 17a-5

One year after reporting rule changes, there is still work to be done

It has been a year since the SEC finalized amendments to Rule 17a-5, which governs the financial statement reporting of brokers and dealers. Although year one implementation challenges have passed, broker-dealers should continue to keep pace with the latest industry developments and continue to refine their approaches.

What they're saying: Reactions from the streets

The new amendments included a new requirement that forces broker-dealers to file either a Compliance Report or an Exemption Report, depending on whether the broker-dealer carries customers' funds or securities-and stronger audit and oversight requirements go along with it. After living with the new rule for a year, many firms have had a number of common experiences:

  • Ambiguity around implementation remains
  • Many firms used this as an opportunity to take a fresh look at Written Supervisory Procedures and reduce "key man risks"
  • Challenges around completeness and accuracy of report
  • Difficulty scoping customer account statement controls
  • Spreadsheet controls identified as key controls
  • Considerations on controls around intercompany balances

What are the most important considerations at this stage?

A few potential themes have been identified in the first round of Compliance Report filings, and all carrying broker-dealers should assess themselves in light of these themes. These themes include:

  • Make sure internal decision-makers know the rule and how their responsibilities relate to it
  • Align the entity's Treasury department with the new requirements
  • Be vigilant about service providers' performance


What are the critical next steps?

Every broker-dealer to whom the rule applies should self-assess in a number of critical areas. Are the right controls in place? Are you confident that all of the people who have a role in compliance understand their roles? Are there sufficient controls and documentation around third-party relationships?

Broker dealers have made it through the first year of compliance with amended Rule 17a-5 but the focus going forward should be on how to make this a sustainable process, including establishment of ongoing monitoring process and solidifying resource requirements.

Moving into year two, broker-dealers should consider performing the following:

  • Take a fresh look at their calculations to achieve compliance
  • Assess feedback from auditors/regulators and the themes identified above and determine if additional action needs to be taken
  • Determine how to make the process sustainable moving forward
  • Determine what function will perform management testing over the controls supporting Rule 17a-5 assertions as well as how this testing will be performed
SEC Rule 17a-5: One year later
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