Logistics Brief



Current Developments in Financial Services

June 28, 2018

By Charles Pagano

This article will discuss current developments in financial services pertaining to broker-dealers including enacted and proposed legislation.

Significant changes, including to revenue recognition and accounting for lease transactions, are already in place and will affect 2018 accounting and/or auditing for broker-dealers.

News regarding the PCAOB pending permanent inspection program, and proposed legislation regarding exemption from auditing under PCAOB standards, may have a major impact on broker dealers and their auditors.   Industry conferences in May 2018, including the New York State Society of CPAs Stockbrokerage Committee Annual Conference, and FINRA’s Annual Conference have brought further insight.

Revenue Recognition

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers” became effective for fiscal years beginning after December 15, 2017 for public business entities, which include broker-dealers.

In some cases, those broker-dealers who are engaged in advisory, soft dollars and distribution services may have had a material adjustment on January 1, 2018. The 2018 audit year will require auditors to not only audit under ASC Topic 606 for the entire year, but to assess additional management disclosures. For 2018, entities should consider:

  • Documenting any changes to the 5 step process during the current audit year on previous management analysis, and determine if any new revenue streams would require the analysis
  • Documenting the manual and automated controls used in the process in determining the proper accounting treatment
  • Quantifying the effect of the change and reflect in the financial statements
  • Assessing the company’s ability to navigate the change


Effective for fiscal years beginning after December 15, 2018, public business entities, which include broker-dealers under FASB ASC Topic 842, “Leases”, must account for operating leases and finance leases on the balance sheet. The ASC requires the recognition of right of use assets on the balance sheet, which include office and equipment rental and the recognition of the corresponding liability.

The good news is that the SEC has considered the potentially disastrous effects on a broker-dealer and granted relief to broker-dealers. If not for relief, the broker-dealer’s net capital would have decreased to the extent of recognition of the asset.

To the extent the carrying value of the asset is offset by the liability, there will be no effect on net capital, and no aggregate indebtedness treatment (see SEC letter to SIFMA, dated November 8, 2016). However, broker-dealers should perform the following steps to insure a timely transition to the new rule:

  • Analyze leases for   additional disclosures required by the ASC
  • Determine amounts to be recorded
  • Determine if any covenants will be affected

The Public Company Accounting Oversight Board (PCAOB) Permanent Inspection Program

While each annual inspection report continues to refer to the coming permanent inspection program, the date of implementation remains uncertain.   With new PCAOB Chairman William D. Duhnke II replacing former Chairman James Doty and personnel changes in the Board, maybe this year we will see movement in the program.   Since the inception of the inspection program in 2011, 334 inspections of 264 auditing firms have occurred (see PCAOB Release No. 2017-004, August 18, 2017). With approximately 500 audit firms who perform broker-dealer audits, a significant number of firms still have not been inspected.

2018 New York State Society of CPAs Stockbrokerage Committee Annual Conference

This year’s conference with over 170 participants had several highlights. The regulators panel, which included Robert Maday, Deputy Director Broker-Dealer Inspection Program, PCAOB, had several noteworthy comments.

Maday stressed to participants that “The auditor’s risk assessment is fundamental.   Assessments should be supported, and if evidence to the contrary is identified, one needs to resolve it. Low risk assessments need to be supported also.”

Abraham Wons, Risk Manager SIPC noted that there now is a SIPC, FINRA agreement that all SIPC annual filings can be transmitted to FINRA, avoiding duplicate filings.

Kris Dailey, Vice President, Risk Oversight & Operational Regulation Division, FINRA, noted that there has been some discussion on extending the filing requirement on annual audits from sixty to ninety days.

Michael Macchiarioli, Associate Director, Division of Trading and Markets, SEC commented on SEC concerns regarding bitcoin and cryptocurrency transactions.

FINRA Initiatives

At the recent FINRA Annual Conference in Washington on May 21-23, Jay Clayton, Chairman of the SEC, further expressed concern around the cryptocurrency space. Mr. Clayton noted regarding the investment advisor/ broker-dealer alternative, “We don’t want government activity to drive away broker-dealers, and the model of broker-dealers is better for many people”.

Other topics of note to the broker-dealer community:

  • FINRA President and CEO Robert Cook mentioned an initiative led by FINRA’s Small Firms Advisory Group, whereby audits of broker-dealers would revert to auditing under AICPA standards rather than PCAOB (see below).
  • The proposed “Best Interest Rule” which would require firms to act in the best interest of the customer and require broker-dealers to disclose potential conflicts, give reasonable alternatives to any recommendations, and mitigate any conflicts.
  • FINRA is finding significant issues in expense sharing arrangements where not all expenses associated with the broker-dealer operations are being recorded.
  • Broker-dealers need to monitor and supervise off-site FINOPS.
  • Thomas K. McGowan, Associate Director of the Securities and Exchange Commission of the SEC, Division of Trading and Markets, expressed concern for firms who had assets under control of someone not employed by the member firm, particularly those persons out of the country.

Small Business Correction Act Proposed Legislation

In what might be the most impactful development to the broker-dealer audit world, bills with bipartisan support have been introduced in the U.S. House of Representatives and the Senate. The Senate bill entitled The Cotton -Jones Small Business Correction Act of 2018, and the House version, entitled the Hill-Gonzalez Correction Act of 2018, were introduced to both the Senate and House on June 6.

The proposal was spearheaded by FINRA’s Small Firms Advisory Group and led by Paige Pierce, President of PSP Consulting. The bills, as currently proposed, would change the audits of small broker-dealers from audits under PCAOB to AICPA standards. The change would affect a substantial amount of the approximately 3,700 broker dealers.

The proposed legislation would grant certain qualifying broker-dealers, who are in good standing, relief from auditing under PCAOB standards. Those firms who qualify would then be subject to an audit under generally accepted auditing standards (GAAS) promulgated by the AICPA, as was the case prior to June 2014. Good standing as defined in the proposal would include a broker-dealer who

  • Is registered with the Commission, and licensed with FINRA or a national securities exchange
  • Is in compliance with the minimum net capital requirements pursuant to 15c3-1
  • Has not during the previous 10-year period been convicted of a felony under Federal or State law, and was not barred from registering or had not been expelled from registration with the SEC, FINRA, CFTC or any State regulatory agency
  • Does not have more than 150 registered persons
  • Is a non-custody broker-dealer, acts on a fully disclosed basis with a clearing broker-dealer, and does not receive funds or hold securities for customers

If enacted, the proposal can be effective within 60 days, and affect 2018 year end audits.

It will be interesting to see the effect of the accounting treatment on revenue recognition, as non- public business entities are required to follow ASC 606 for physical years beginning after December 15, 2019. Leases under ASC 842 may also be affected, as that effective date for non-public entities is for years beginning after December 15, 2019.

Stay tuned for further developments.


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