SEC adopts amendment to single issuer exemption for broker-dealers

By Rodney F. Tonkovic, J.D.

The SEC has adopted an amendment to clarify an exemption for broker-dealers from a reporting rule. The amendment fixes an inadvertent error in Rule 17a-5(e) to provide that a broker-dealer would not be required to engage an independent public accountant to certify the broker-dealer’s annual reports if, among other things, the securities business of the broker-dealer has been limited to acting as broker (agent) for a single issuer in soliciting subscriptions for securities of that issuer (Amendment to Single Issuer Exemption for Broker-Dealers, Release No. 34-86073, June 10, 2019).

Inadvertent error. Most registered broker-dealers must file an annual financial report and either a compliance or exemption report. Under Rule 17a-5, broker-dealers are requires to include with their annual reports an independent public accountant's report covering the financial report and, as applicable, the compliance or exemption report. There is an exemption under Rule 17a-5(e)(1)(i)(A) for broker-dealers whose securities business is limited to acting as a broker for "the issuer" and several other conditions are met.

The rule release notes, however, that the language "the issuer" is the result of an inadvertent error introduced in 1977. While the Commission clarified in a later release that it meant "an issuer," the error was reintroduced in a 2013 amendment. In September 2018 the Commission proposed an amendment to correct the error, and the amendment was adopted as proposed.

Single issuer exemption. The amendment to Rule 17a-5(e)(1)(i)(A) clarifies that the exemption applies to a broker-dealer whose securities business has been limited to acting as broker (agent) for a single issuer in soliciting subscriptions for securities of that issuer. In sum, a broker or dealer would not be required to engage an independent public accountant to provide the required reports if:

• the securities business of the broker or dealer has been limited to acting as broker for a single issuer in soliciting subscriptions for securities of that issuer;
• the broker has promptly transmitted to the issuer all funds and promptly delivered to the subscriber all securities received in connection with the transaction; and 
• the broker has not otherwise held funds or securities for or owed money or securities to customers. 

The Commission noted in the release that it does not believe that an expansion of the exemption to include broker-dealers that provide broker-dealer services for more than a single would be appropriate. The broker-dealers to which this exemption applies are typically affiliates of the issuer, and, as an agent, the broker-dealer can legally bind the issuer. So, requiring that an independent public accountant audit this information would not provide a meaningful benefit to the issuer, and the risk of harm to the issuer is mitigated by its ability to access information about its agent, the Commission explained.

The release is No. 34-86073.