Accounting of the broker-dealer
industry: a consultant’s view
John Stacey, Chairman and CEO, Global Sourcing Advisory Group, takes a look at recent events and changes
A broker-dealer is a company or other
organisation that trades securities for its
own account or on behalf of its customers.
When executing trade orders on behalf of
a customer, the institution is said to be acting
as a broker. When executing trades for
its own account, the institution is said to be
acting as a “dealer”.
Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm’s holdings.
Although many broker-dealers are “independent” firms solely involved in brokerdealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment firms.
United States
In the US, broker-dealers are regulated by the Securities and Exchange Commission (SEC). Another regulatory authority is further delegated to the industry called Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Many states also regulate broker-dealers under separate state securities laws, called “Blue sky laws”.
The US defines “Broker” as “any person engaged in the business of effecting transactions in securities for the account of others,” and “Dealer” as “any person engaged in the business of buying and selling securities for his/her own account, through a broker or otherwise.”
Under either definition, the person must be performing these functions as a business: if conducting similar transactions on a private basis, they are considered a trader and subject to different requirements.
United Kingdom
UK securities law uses the term intermediary to refer to businesses involved in the purchase and sale of securities for the account of others. The Financial Services Authority (FSA) authorises and regulates companies engaging in such activity as “regulated activities” under the Financial Services and Markets Act 2000.
Recent Events
Securities and Exchange Commission (SEC)
SEC investigations of broker/dealers were recently announced in order to ensure that hidden manipulation, illegal naked short selling, or illegitimate trading tactics do not drive market behaviour and undermine confidence. The SEC has undertaken a sweeping investigation into market manipulation of financial institutions focused on broker-dealers and institutional investors with significant trading activity in financial issuers and with positions in default swaps.
Financial Industry Regulatory Authority (FINRA)
NYSE Regulation and FINRA will also be conducting separate investigations, in co-ordination with the SEC, by making on-site visits to various broker-dealers to address any concerns about recent shortselling activities.
Public Company Accounting Oversight Board (PCAOB)
Financial statements of non-public brokerdealers for fiscal years ending after Dec 31 2008 must be certified by a public accounting firm registered with the PCAOB. The SEC issued a rule in 2003, and extended through 2006, waiving the requirement that required privately-held brokerage firms to have their audits completed by firms registered with the PCAOB. That latest extension expired at the end of 2008 and the SEC did not issue an additional extension.
The waiver allowed broker-dealers to submit financials certified by an independent public accountant, as opposed to a registered public accounting firm. The SEC determined that waiving the rule was “consistent with the public interest and the protection of investors.”
The SEC’s rule and its subsequent waivers permitted the firm of Friehling & Horowitz to continue to audit Bernard L Madoff Investment Securities without registering with the PCAOB. While SOX requires auditors for non-public broker-dealers to register with the PCAOB, unless the auditor actually audits a publicly traded company, the audits are not subject to PCAOB inspection, nor can they be used as the basis for disciplinary action by the PCAOB.
Curent Assesment
Now, almost 18 months into the current economic crisis, and with sweeping legislative changes underway, the international broker-dealer community is under scrutiny more than ever before.
For more information, contact:
John Stacey, Chairman & CEO
Global Sourcing Advisory Group
Tel (US office): +1 (212) 672 1890
(UK office): +44 (0) 20 8133 5400
E-mail: john.stacey@gsadvisory.com
Website: www.gsadvisory.com
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