SEC Proposes More Broker-Dealer Scrutiny After Madoff

The U.S. Securities and Exchange Commission proposed expanding scrutiny of how brokerages handle trillions of dollars in client assets in a measure that reflects the enduring regulatory impact of Bernard Madoff’s Ponzi scheme.

SEC commissioners voted 5-0 today to seek comment on a rule that would increase disclosures required of broker-dealers who hold investor funds, building on a 2009 rule for investment advisers. The measure would require enhanced audits of 300 brokers with custody of client assets and quarterly disclosures from all 5,000 registered firms on how they handle funds.

“While current rules require broker-dealers to protect and account for customer assets, today’s proposal would mandate an audit of the controls that the broker-dealer has put in place to ensure compliance with those rules,” SEC Chairman Mary Schapiro said before commissioners voted at a meeting in Washington.

The rule -- subject to a 60-day comment period -- would require that a broker-dealer’s internal controls be checked by a registered public accounting firm and would let regulators examine audits. Brokerages would have to tell the SEC whether they have access to client money and how access is controlled.

“Broker-dealers hold custody of far more investor assets than investment advisers do,” Commissioner Luis Aguilar said before the vote. “In fact, our staff estimates that the customer securities positions held by just the four largest broker-dealers total several trillion dollars.”

Existing law requires broker-dealers to be audited each year by a firm registered with the Public Company Accounting Oversight Board. The PCAOB, which is required by the Dodd-Frank Act to start inspecting the audits, established an interim program for the reviews yesterday. Today’s SEC proposal would expand what the audit watchdog sees in those examinations.

The SEC’s 2009 effort to look more deeply at investment advisers’ custodial practices was a response to Madoff, who is serving a 150-year prison term after pleading guilty to defrauding clients out of billions of dollars.

The earlier rule “would not have prevented much of the harm that Madoff did,” Aguilar said. “That’s because, for decades, his firm was registered solely as a broker-dealer, not as an investment adviser.”

(Corrects the length of Madoff’s sentence in seventh paragraph of story published June 15.)
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