On September 20th, the SEC released a proposed rule amending Rule 17a-5 of the Securities Exchange Act of 1934, as amended (“Exchange Act”).[1] Under Rule 17a-5(d)(1)(i)(C) of the Exchange Act, broker-dealers registered with the SEC generally must file an annual report that includes financial reports audited by an independent public accountant registered with the Public Company Accounting Oversight Board.[2] However, the SEC may exempt certain broker-dealers from the audit requirement where it determines an exemption is consistent with investor protection and public interest.[3]
Under the proposed Rule 17a-5, the audit requirement would not apply where a broker-dealer’s business is “limited to acting as broker (agent) for a single issuer in soliciting subscriptions for securities of that issuer…” (emphasis added).[4] The SEC believes the exemption is appropriate because, under these circumstances, the issuer can likely access and evaluate a great deal of financial information about the broker-dealer.[5] In fact, the broker-dealer is usually an affiliate of the issuer. Therefore, an audit by an independent public accountant does not provide a “meaningful benefit” to the issuer or investors.[6]
We agree and believe the proposed rule will be particularly helpful to private funds and their investment advisers, some of which have created broker-dealers for the express purpose of selling fund shares.
The deadline for submitting comments on the proposed rule is October 29th. If you are interested in submitting a comment or have any questions on the effect of the proposed rule, please feel free to contact us.
[1] SEC, Proposed Rule: Amendment to Single Issuer Exemption for Broker-Dealers, Release No. 34-84225 (Sept. 2018), available at https://www.sec.gov/rules/proposed/2018/34-84225.pdf.
[2] 17 C.F.R. 240.17a-5(d)(1)(i)(C).
[3] Exchange Act §17(e)(1)(C).
[4] SEC, supra note 1
[5] Id.
[6] Id.
