Broker Dealer Auditing: Mastering New SEC and PCAOB Rules and - PowerPoint PPT Presentation

Broker Dealer Auditing: Mastering New SEC and PCAOB Rules and Standards Complying with Changed Regulatory Framework for Conducting Audits and Attesting to Internal Controls TUES DAY, MAY 27, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection and phone line (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). S trafford accepts American Express, Visa, MasterCard, Discover . • Respond to verification codes presented throughout the seminar . If you have not printed out the “ Official Record of Attendance” , please print it now. (see “ Handouts” tab in “ Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form . • Complete and submit the “ Official Record of Attendance for Continuing Education Credits,” which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. • To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations : -Call S trafford Customer S ervice 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 (“ star” zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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Continuing Education Credits FOR LIVE EVENT ONLY Attendees must listen throughout the program, including the Q & A session, in order to qualify for full continuing education credits. S trafford is required to monitor attendance. Record verification codes presented throughout the seminar . If you have not printed out the “ Official Record of Attendance,” please print it now (see “ Handouts” tab in “ Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Broker Dealer Auditing: Mastering New SEC and PCAOB Rules and Standards May 27, 2014 John Hague, McGladrey Kevin Breard, Breard & Associates John.Hague@ mcgladrey.com kbreard@ baicpa.com 5

Today’s Program Overview S lide 8– S lide 12 [Kevin Breard] S lide 13 – S lide 32 Exemption Reports [Kevin Breard] S lide 33 – S lide 38 Compliance Reports [John Hague] Independent Public Accountant's Responsibility S lide 39 – S lide 50 [John Hague] S lide 51 – S lide 57 Best Practices [Kevin Breard] S lide 58 – S lide 59 Access to Accountant and Audit Documentation [John Hague] 6

Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE S PEAKERS ’ FIRMS TO BE US ED, AND CANNOT BE US ED, BY A CLIENT OR ANY OTHER PERS ON OR ENTITY FOR THE PURPOS E OF (i) AVOIDING PENALTIES THAT MA Y BE IMPOS ED ON ANY TAXP A YER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER P ARTY ANY MATTERS ADDRES SED HEREIN. Y ou (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subj ect to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7

Kevin Breard, Breard & Associates OVERVIEW 8

9 Overview • How may broker/ dealers are registered with the SEC as of December 31, 2011?* • A. 4,700 • B. 5,500 • C. 6,500 • D. 8,900 ▫ *Based on FOCUS reports filed for December 31, 2011

10 Overview • How many of the 4,700 SEC registered firms are carrying broker/ dealers? A. 900 B. 700 C. 300

11 Overview Source: Federal Registers/ Vol. 78 No. 162/ Wednesday, August 21, 2013 Rules and Regulations

12 Overview Source: PCAOB Release No 2013-006 August 19, 2013

Kevin Breard, Breard & Associates EXEMPTION REPORTS 13

14 New S EC report “Form Custody” for Broker/ Dealers • Who Applies to all B/ Ds 4 th quarter 2013 • When 17 th business day after quarter • Due • Filed With FOCUS DEA • Have to audit? No

15 Form Custody

16 • Beginning December 31, 2013, what entity will require a copy of your audited financial statements? A. Affordable Care Act Insurance Exchange (Online) B. Vatican (Rome, Italy) C. United Nations (New York, NY) D. Securities Investor Protections Corporation (Washington, DC)

17 New S EC Rule Issued August 2013 • Net capital rules • Rule 15c3-1 ▫ Requirement to deduct from net worth certain liabilities or expenses assumed by third parties ▫ New paragraph (c)(2)(i)(F) ▫ If B/ D shifts (offloads) expenses/ liabilities to a third party that lacks the resources to pay, then B/ D must take a charge to net capital 1/ 4

18 Final Hot Topics • Expense sharing agreement ▫ Parent – sub (B/ D) ▫ Reasonable allocation • All expenses on books to run B/ D? • Parent’s books ▫ Not audited ▫ Not made available to FINRA ▫ Solvent/ liquid/ creditworthy ▫ Regulator frustration

19 New S EC Rule August 2013 • Requirement to subtract from net worth certain non-permanent capital contributions. ▫ (c) (2)(i)(G)(2) ▫ Capital contribution with intent of withdrawal within a year ▫ Then must be subtracted from net capital. 2/ 4

20 New S EC Rule August 2013 • Amendment to 15c3-1 Restricting Withdrawal of Capital. ▫ 15c3-1(e)(3)(i) and 15c3-1(e)(3)(i)(A) and (B) ▫ Restrictions on withdrawal of capital ▫ Old rule 30% limit of excess capital ▫ New rule prohibits withdrawal of any excess capital ▫ Applies to withdrawal, advances, loans 3/ 4

21 New S EC Rule August 2013 • Broker/ dealers Solvency Requirements ▫ Amends (a) of 15c3-1 ▫ Broker/ dealers cease conducting business if insolvent ▫ If insolvent, notices to SEC, DEA, CFTC 4/ 4

22 New Rules Effective June 1, 2014 Carrying B/ D Non-carrying B/ D • Exemption report. • Compliance report addresses compliance with 15c3-1, 15c3-3 Did claim exempt • Report material weakness under 15c3-3 internal control over compliance • Report any instances of non- compliance

23 Review Rule 15c3-3 Exemptive Provision • (k)1: Limited business (mutual fund and/ or variable annuities) • (k)(2)(1): “Special account” for the exclusive benefit for customers maintained • (k)(2)(ii): All customer transactions cleared through another broker/ dealer on a fully disclosed basis • (k)(3): Exemption by order of the SEC

24 Two new PCAOB attestation standards 1. Examination Engagements Regarding Compliance Reports of Brokers and Dealers “ Com pliance Report” 2. Review engagements Regarding Exemption Reports of Brokers and Dealers “ Exem ption Report”

25 Internal Control Report

26 PCAOB Attestation S tandard #2 • Review Engagements Regarding Exemption Reports for Broker/ Dealers ▫ “Exempt Report” ▫ Applies to majority of FINRA members ▫ Fully disclosed; no customers; nickel broker/ dealer