United States

Pending proposed rules and regulations impacting the alternative investment industry


There are several proposed regulatory and accounting rules that will have a significant impact on the alternative investment and brokerage sectors of the financial services industry. The following is a brief summary of these proposed rules:

SEC propose amendments to Rule 17a-5

The SEC has proposed significant amendments to the broker-dealer financial reporting rule under the Securities Exchange Act of 1934 – Rule 17a-5. The amendments:

  1. Facilitate the ability of the Public Company Accounting Oversight Board (PCAOB) to implement oversight of independent public accountants of broker-dealers
  2. Require broker-dealers that clear securities transactions or carry customer accounts (as defined) to allow the SEC to have access to independent public accountants to discuss audit findings and review related audit documentation
  3. Require broker-dealers that carry customer accounts to file a new Form Custody
  4. Include other significant changes to SEC Rule 17a-5 regarding audit requirements and financial reporting

The PCAOB oversight of broker-dealers has already begun as it has initiated the inspection of public accountants under a temporary inspection program. Based on recent developments and discussions with the SEC, we believe that items B and C above will be adopted and effective in 2012. As to item D, the SEC has commented that they acknowledge that both broker-dealers and their accountants would require a significant amount of time to implement these proposed changes to SEC Rule 17a-5 (documentation, systems, assessment, training, etc.). Accordingly, either the rules will be adopted very quickly and become effective in 2012 or be deferred until 2013.

PCAOB proposed rules

The PCAOB has proposed three rules which will have a significant impact on auditors of broker-dealers:

  1. New attestation standards for examination and review engagements, which parallel the proposed changes to SEC Rule 17a-5
  2. A new standard for auditing the supplemental information accompanying broker-dealer audited financial statements
  3. Proposed updates to its existing rules to include audits and auditors of broker-dealers subjecting to the same rules and oversight of auditors of public issuers.

The most significant impact of these rules would be that audits of broker-dealers would be subject to PCAOB audit standards rather than AICPA generally accepted audit standards. Another important proposed change would be that auditors would be prohibited from providing any tax service to any person who performs a “financial reporting oversight role” at an audit client.

The final PCAOB rules require SEC approval and the current thought is that they would not be adopted until SEC Rule 17a-5 is finalized and effective. We cannot predict whether the PCAOB rules will be effective in 2012, even if the SEC adopts its rules in 2012, mindful of such timing.

FASB proposed Accounting Standards Updates (ASUs)

There are three proposed ASUs that will impact the financial services industry, as follows:

  • Investment companies. This proposed Update amends the definition of and provides guidance as to whether an entity is an investment company. In addition, the Update proposes changes to consolidation requirements for certain entities and amends financial statement presentations and disclosures.
  • Investment property entities. This proposed Update would require an entity that meets the suggested criteria to be an entity to measure its investment properties at fair value.
  • Consolidation. This proposed Update would rescind the indefinite deferral in ASU 2010-10 and will require all entities to perform qualitative and quantitative assessments to determine whether consolidation is appropriate.

The public comment period for each of these ASUs has passed. As soon as these become final, we will provide guidance as to their impact, implementation and timing. Stay tuned.

By John T. Hague, partner, national financial services industry leader, RSM US LLP, 312.634.3354.


In This Issue

Pending proposed rules and regulations impacting the alternative investment industry

NFA proposes new requirements regarding customer assets

SEC and CFTC adopt Private Fund Adviser reporting requirements