Bernie Madoff was the inspiration for new revisions to SEC Rule 17a-5, unanimously proposed by the Commission.  As proposed, audits of broker-dealer will be strengthened, and the SEC will have greater oversight for how broker-dealers handle customers' securities and cash.  Today's SEC proposal builds upon rules adopted in December 2009 that strengthened the protections provided to investors who turn their assets over to investment advisers.

“When investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed.  To protect investors and help maintain confidence in the market, we must take strong steps to help safeguard the assets held by broker-dealers."   - - SEC Chairman Mary Schapiro.

Proposed Changes.   Annual audits of broker-dealers will be strengthened by requiring an increased focus on the custody activities.  While current rules require broker-dealers to protect and account for customer assets, the proposed rule amendments would mandate an audit of the controls that the broker-dealer has put in place.

The proposal also would strengthen oversight of broker-dealer custody practices by requiring firms that maintain custody of customer assets or self-clear transactions to allow SEC staff and the relevant DEA (designated examining authority) to review work papers of the public accounting firm that audits the broker-dealer and discuss any findings with the accounting firm.  All broker-dealers would also be required to quarterly file a proposed new form that would elicit information about the custody practices of the firm, to be used as a starting point for regulator exams

There will be a 60-day comment period.   For additional information, go to:   [SEC PR 11-128, 6/15/11]  and  [SEC Proposed Rule Release 34-64676, 6/15]