An accountant with a New York accounting firm that handles smaller broker-dealers is warning advisors who work at such firms that if their employer is a clearing organization, they should pay attention to how well it is planning for a continuation of business under new rule changes being mulled by the Securities and Exchange Commission.
And if their organization is thinking of getting out of the clearing business and becoming a so-called introducing firm, advisors there should make sure management is carefully planning now to ensure the transition is a smooth one.
“A small broker-dealer with under $50 million in revenues who is planning to remain a clearing organization may well need to bring on new compliance people to meet the proposed new reporting requirements of the Securities Exchange Act,” said David Grumer, a partner at the mid-sized accounting firm Citrin Cooperman, in an interview with On Wall Street.
Grumer adds, “If the broker-dealer decided to get out of the clearing business, they will need to locate a clearing organization to work with that will be compatible with them and they need to take time to transfer their accounts smoothly. A company can lose a lot of accounts if it handles something like this badly.”
Grumer and his colleagues have written to the SEC urging the commission cut some slack to smaller broker-dealers.
Noting that the proposed changes to Rule 17a-5 of the Securities Exchange Act of 1934 involve significant increased record-keeping and report filing by broker-dealers as well as provision of ready access to clearing documents and other records to independent accountants, he said the current Dec. 15 deadline for new rules could be a serious burden for smaller firms.
In a comment letter to the commission, Citrin Cooperman wrote:
“Some brokers may have to strengthen their staffing. Others businesses may choose to discontinue serving their customers as carrying brokers. Instead, they may choose to serve their customers as introducing brokers. Making these changes cannot be done quickly,” the comment letter noted.
“We believe that the effective date for the Annual Reporting Requirements should be for fiscal years ending one year after the publication of the final rule (along with examples of best practices),” it continued. “We believe that there are a number of small broker-dealers should consider whether their business structure should be changed in order to successfully prepare for the audit of internal control under the revised 17a-5.”