[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Notices]
[Pages 68911-68944]
[FR Doc No: 2013-27344]

Vol. 78

Friday,

No. 221

November 15, 2013

Part II

 Securities and Exchange Commission

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Public Company Accounting Oversight Board; Notice of Filing of Proposed
Rules on Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers, Attestation Standard No. 2,
Review Engagements Regarding Exemption Reports of Brokers and Dealers,
and Related Amendments to PCAOB Standards; Notice

Federal Register / Vol. 78 , No. 221 / Friday, November 15, 2013 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70842; File No. PCAOB-2013-01]

Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on Attestation Standard No. 1, Examination Engagements
Regarding Compliance Reports of Brokers and Dealers, Attestation
Standard No. 2, Review Engagements Regarding Exemption Reports of
Brokers and Dealers, and Related Amendments to PCAOB Standards

November 8, 2013.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Sarbanes-Oxley Act''), notice is hereby given that on October 30,
2013, the Public Company Accounting Oversight Board (the ``Board'' or
the ``PCAOB'') filed with the Securities and Exchange Commission (the
``Commission'' or the ``SEC'') the proposed rules described in items I
and II below, which items have been prepared by the Board. The
Commission is publishing this notice to solicit comments on the
proposed rules from interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

    On October 10, 2013, the Board adopted Attestation Standard No. 1,
Examination Engagements Regarding Compliance Reports of Brokers and
Dealers, Attestation Standard No. 2, Review Engagements Regarding
Exemption Reports of Brokers and Dealers, and related amendments to
PCAOB standards (collectively, the ``proposed rules''). The text of the
proposed rules is set out below.

Attestation Standard No. 1

Examination Engagements Regarding Compliance Reports of Brokers and
Dealers
Introduction
    1. This standard establishes requirements that apply when an
auditor is engaged to perform an examination \1\ of certain statements
made by a broker \2\ or dealer \3\ in a compliance report (``compliance
report'') prepared pursuant to Securities and Exchange Act of 1934
(``Exchange Act'') Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') of
the U.S. Securities and Exchange Commission (``SEC'').\4\
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    \1\ See paragraphs (d)(1)(i)(C) and (g)(2)(i) of SEC Rule 17a-5,
which require that certain brokers or dealers file with the SEC a
report prepared by an independent accountant based on an examination
of the compliance report, if the broker or dealer is required to
file a compliance report with the SEC.
    \2\ According to PCAOB Rule 1001(b)(iii), the term ``broker''
means a broker (as defined in Section 3(a)(4) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \3\ According to PCAOB Rule 1001(d)(iii), the term ``dealer''
means a dealer (as defined in Section 3(a)(5) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \4\ See paragraph (g)(2)(i) of SEC Rule 17a-5.
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    2. SEC Rule 17a-5 requires a broker's or dealer's compliance report
to include the following statements (hereinafter referred to as
``assertions'') by the broker or dealer as to whether: \5\
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    \5\ The scope of the auditor's examination does not encompass
the statement required by paragraph (d)(3)(i)(A)(1) of SEC Rule 17a-
5, which is a statement as to whether the broker or dealer has
established and maintained Internal Control Over Compliance as that
term is defined in paragraph (d)(3)(ii) of SEC Rule 17a-5. See
paragraphs (d)(3) and (g)(2)(i) of SEC Rule 17a-5.
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    a. The Internal Control Over Compliance \6\ of the broker or dealer
was effective during the most recent fiscal year;
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    \6\ Terms defined in Appendix A, Definitions, are set in
boldface type the first time they appear. The definitions of the
terms in Appendix A are consistent with paragraphs (d)(3)(ii) and
(iii) of SEC Rule 17a-5.
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    b. The Internal Control Over Compliance of the broker or dealer was
effective as of the end of the most recent fiscal year; \7\
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    \7\ See paragraph (d)(3)(iii) of SEC Rule 17a-5, which provides
that ``a broker or dealer is not permitted to conclude that its
Internal Control Over Compliance was effective during the most
recent fiscal year if there were one or more material weaknesses in
its Internal Control Over Compliance during the most recent fiscal
year. The broker or dealer is not permitted to conclude that its
Internal Control Over Compliance was effective as of the end of the
most recent fiscal year if there were one or more material
weaknesses in its Internal Control Over Compliance as of the end of
the most recent fiscal year.''
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    c. The broker or dealer was in compliance with 17 CFR 240.15c3-1
(the ``net capital rule'') and 240. 15c3-3(e) (the ``reserve
requirements rule'') as of the end of the most recent fiscal year; and
    d. The information the broker or dealer used to state whether it
was in compliance with the net capital rule and the reserve
requirements rule was derived from the books and records of the broker
or dealer.
Objective
    3. When performing an examination of the assertions made by a
broker or dealer in a compliance report (an ``examination
engagement''), the auditor's objective is to express an opinion
regarding whether the assertions made by the broker or dealer in its
compliance report are fairly stated, in all material respects.
    4. To express an opinion on the assertions made by a broker or
dealer in a compliance report, the auditor must plan and perform the
examination engagement to obtain appropriate evidence that is
sufficient \8\ to obtain reasonable assurance \9\ about whether (1) one
or more Material Weaknesses existed during the most recent fiscal year
specified in the broker's or dealer's assertion; (2) one or more
Material Weaknesses existed as of the end of the most recent fiscal
year specified in the broker's or dealer's assertion; and (3) one or
more instances of non-compliance with the net capital rule or the
reserve requirements rule existed as of the end of the most recent
fiscal year specified in the broker's or dealer's assertion.
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    \8\ See the description of ``sufficiency'' and
``appropriateness'' in Auditing Standard No. 15, Audit Evidence.
    \9\ Although not absolute assurance, reasonable assurance is a
high level of assurance.

    Note: Because the broker's or dealer's assertions include
assertions regarding Internal Control Over Compliance and its
compliance with both the net capital rule and the reserve
requirements rule, the auditor's examination should evaluate (a) the
effectiveness of Internal Control Over Compliance with each
financial responsibility rule \10\ during, and as of the end of, the
most recent fiscal year, and (b) compliance with the net capital
rule and with the reserve requirements rule as of the end of the
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most recent fiscal year.

    \10\ The term ``financial responsibility rules'' refers to: 17
CFR 240.15c3-1 (``SEC Rule 15c3-1'' or the ``net capital rule''); 17
CFR 240.15c3-3 (``SEC Rule 15c3-3''); 17 CFR 240.17a-13 (``SEC Rule
17a-13''); and any rule of the designated examining authority
(``DEA'') of the broker or dealer that requires account statements
to be sent to the customers of the broker or dealer. The financial
responsibility rules are the same as the rules cited in paragraph
(d)(3)(ii) of SEC Rule 17a-5.

    Note: The auditor is not required to express an opinion on the
process the broker or dealer used to arrive at the conclusions
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stated in the broker's or dealer's assertions.

    5. The auditor also must plan and perform the examination
engagement to obtain appropriate evidence that is sufficient to obtain
reasonable assurance to support the auditor's opinion regarding whether
the assertion by the broker or dealer that the information used to
assert compliance with the net

capital rule and the reserve requirements rule was derived from the
books and records of the broker or dealer, is fairly stated, in all
material respects.
Performing the Examination Engagement
General Requirements
    6. An auditor who performs an examination engagement pursuant to
this standard must:
    a. Have adequate technical proficiency in attestation engagements;
    b. Obtain an understanding of the financial responsibility rules
and other rules and regulations that are relevant to the broker's or
dealer's assertions;
    c. Determine the auditor's compliance with independence and ethics
requirements; and
    d. Exercise due professional care, which includes application of
professional skepticism, in planning and performing the examination and
the preparation of the report.

    Note:  Due professional care imposes a responsibility on each
engagement team member to comply with this standard. The exercise of
due professional care requires critical review at every level of
supervision of the work done and the judgment exercised by those
assisting in the engagement, including preparing the report.\11\

    \11\ The auditor's responsibility to exercise due professional
care is consistent with the description in paragraphs .40-.41 of AT
sec. 101, Attest Engagements.

    Note:  Auditing Standard No. 3, Audit Documentation, establishes
the documentation requirements for examination engagements performed
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pursuant to this standard.

    7. The engagement partner is responsible for the examination
engagement and performance of the examination procedures. Accordingly,
the engagement partner is responsible for proper planning of the
examination engagement, proper supervision of the work of engagement
team members, and compliance with the requirements of this standard.
The engagement partner may seek assistance from appropriate engagement
team members in fulfilling these responsibilities.

    Note:  For purposes of this standard, the term ``engagement
partner'' means the member of the engagement team with primary
responsibility for the examination engagement.

    Note:  Proper planning includes establishing an overall strategy
for the examination engagement and developing a plan for the
engagement, which includes, in particular, the nature, timing, and
extent of procedures necessary to obtain reasonable assurance.
Proper supervision includes supervising the work of engagement team
members so that the work is performed as directed and supports the
conclusions reached.

Relationship Between the Examination Engagement and the Audit of the
Financial Statements and the Audit Procedures Performed on Supplemental
Information
    8. The examination engagement should be coordinated with the audit
of the financial statements and the audit procedures performed on
supplemental information of the broker or dealer.\12\ In planning and
performing procedures for, and evaluating the results of the procedures
performed in, the examination engagement, the auditor should take into
account relevant evidence from the audit of the financial statements
and the audit procedures performed on the supplemental information.
However, the objectives of the financial statement audit and the
examination engagement are not the same, so the auditor must plan and
perform the work to meet the objectives of both engagements.
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    \12\ Under the definition of supplemental information included
in Auditing Standard No. 17, Auditing Supplemental Information
Accompanying Audited Financial Statements, supplemental information
includes the supporting schedules described in paragraph (d)(2) of
SEC Rule 17a-5, which are required to be filed with the SEC, DEA,
and the Securities Investor Protection Corporation (``SIPC'') by
brokers and dealers. Such supporting schedules include a Computation
of Net Capital Under SEC Rule 15c3-1, a Computation for
Determination of the Reserve Requirements Under Exhibit A of SEC
Rule 15c3-3, and Information Relating to Possession or Control
Requirements Under SEC Rule 15c3-3.
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Planning the Examination Engagement
    9. The auditor should plan the examination engagement to perform
procedures that are sufficient to provide a reasonable basis for
determining whether the broker's or dealer's assertions are fairly
stated, in all material respects. In planning the examination
engagement, the auditor should:
    a. Evaluate the nature of instances of non-compliance with the
financial responsibility rules and Deficiencies in Internal Control
Over Compliance identified during previous examination engagements;
    b. Obtain an understanding of the broker's or dealer's processes,
including relevant controls, regarding compliance with the financial
responsibility rule; \13\

    \13\ Appendix B of this standard discusses considerations for
brokers and dealers with multiple divisions or branches.

    Note: The nature, timing, and extent of procedures that are
necessary to obtain an understanding of the broker's or dealer's
processes, including relevant controls, regarding compliance with
the financial responsibility rules depend on the size and complexity
of the broker or dealer; the auditor's existing knowledge of the
broker's or dealer's processes and controls; the degree to which the
broker's or dealer's compliance depends on the completeness and
accuracy of the broker's or dealer's internally generated data; the
nature and extent of changes in systems and operations, if any; and
the nature of the broker's or dealer's documentation of its
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processes and controls.

    Note:  Obtaining an understanding of the broker's or dealer's
processes, including relevant controls, includes evaluating the
design of controls that are relevant to the examination and
determining whether the controls have been implemented.

    c. Obtain an understanding of instances of non-compliance with the
financial responsibility rules and Deficiencies in Internal Control
Over Compliance identified by management during the most recent fiscal
year;
    d. Assess the risks associated with related parties,\14\ including
related parties that are investment advisors or entities with which the
broker or dealer has a custodial or clearing relationship, that are
relevant to compliance and controls over compliance;
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    \14\ The auditor should look to the definition in the applicable
financial reporting framework with respect to the term ``related
parties.''
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    e. Obtain an understanding of management's competence regarding the
relevant rules and regulations;
    f. Read the Financial and Operational Combined Uniform Single
Reports (``FOCUS Reports'') \15\ filed by the broker or dealer and
obtain an understanding of the reasons for resubmissions, if any;
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    \15\ The FOCUS Reports are: Form X-17A-5 Schedule I; Form X-17A-
5 Part II; Form X-17A-5 Part IIa; Form X-17A-5 Part IIb; and Form X-
17A-5 Part III.
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    g. Read reports of internal auditors, others who perform an
equivalent function, compliance functions, and other auditors that are
relevant to the broker's or dealer's assertions;
    h. Inquire of management, and, if applicable, other individuals at
the broker or dealer who have relevant knowledge regarding regulatory
examinations and correspondence between the SEC or the broker's or
dealer's DEA and the broker or dealer that are relevant to the broker's
or dealer's assertions;
    i. Read correspondence and notifications regarding non-compliance
that the broker or dealer has sent to or received from the SEC or the
broker's or dealer's DEA that are relevant to the broker's or dealer's
assertions, and, when necessary in the circumstances,

make inquiries of the regulatory agencies; and
    j. Obtain an understanding of the nature and frequency of customer
complaints that are relevant to compliance with the financial
responsibility rules.
    10. In addition, in planning the examination engagement, the
auditor should assess the risk of fraud, including the risk of
misappropriation of customer assets, relevant to compliance with the
net capital rule and the reserve requirements rule and the
effectiveness of the broker's or dealer's Internal Control Over
Compliance.
Testing Controls Over Compliance
    11. The auditor must test those controls that are important to the
auditor's conclusion about whether the broker or dealer maintained
effective Internal Control Over Compliance for each financial
responsibility rule during the fiscal year and as of the end of the
fiscal year. The auditor must obtain evidence that the controls over
compliance selected for testing are designed effectively and operated
effectively during the fiscal year and as of the fiscal year end.
    12. For each control selected for testing, the evidence necessary
to persuade the auditor that the control is effective depends upon the
risk associated with the control. The risk associated with a control
consists of the risk that the control might not be effective and, if
not effective, the risk that a Material Weakness would result. As the
risk associated with the control being tested increases, the
persuasiveness of the evidence that the auditor should obtain also
increases.

    Note:  Although the auditor must obtain evidence about the
effectiveness of the selected controls for each financial
responsibility rule, the auditor is not responsible for obtaining
sufficient evidence to support an opinion about the effectiveness of
each individual control.

    13. Factors that affect the risk associated with a control include:
     The nature of the financial responsibility rule;
     The risk associated with non-compliance with the financial
responsibility rule and the significance of potential non-compliance;
     Changes in the broker's or dealer's policies or procedures
or personnel that might adversely affect control design or operating
effectiveness;
     The broker's or dealer's history of instances of non-
compliance with the financial responsibility rule that the control is
intended to prevent or detect;
     The existence and effectiveness of controls that monitor
other controls;
     The risk of management override of controls over
compliance;
     The nature of the control and the frequency with which it
operates;
     The degree to which the control relies on the
effectiveness of other controls (e.g., the control environment or
information technology general controls);
     The competence of the personnel who perform the control or
monitor its performance and whether there have been changes in key
personnel who perform the control or monitor its performance;
     The extent of use of part-time personnel to perform
controls over compliance;
     Whether the control relies on performance by an individual
or is automated (i.e., an automated control would generally be expected
to be lower risk if relevant information technology general controls
are effective); and
     The complexity of the control and the significance of the
judgments made in connection with its operation.
Testing Design Effectiveness
    14. The auditor should test the design effectiveness of the
selected controls by determining whether the broker's or dealer's
controls, if they are operating as prescribed by persons possessing the
necessary authority and competence to perform the control effectively,
can effectively prevent or detect instances of non-compliance with the
financial responsibility rules on a timely basis.

    Note:  If a broker or dealer makes changes to its policies and
procedures or key personnel during the fiscal year, the auditor
should obtain evidence regarding the design effectiveness of the
selected controls before and after the change.

    15. Procedures the auditor performs to obtain evidence about design
effectiveness include inquiry of appropriate personnel, observation of
the broker's or dealer's operations, and inspection of relevant
documentation. Walkthroughs that include these procedures ordinarily
are sufficient to evaluate design effectiveness.
Testing Operating Effectiveness
    16. The auditor should test the operating effectiveness of the
selected controls by determining whether each selected control is
operating as designed and whether the person performing the control
possesses the necessary authority and competence to perform the control
effectively.

    Note: The auditor should obtain evidence regarding the operating
effectiveness of the selected controls throughout the entire year
and as of the end of the fiscal year.

    17. Procedures the auditor performs to test operating effectiveness
include a mix of inquiry of appropriate personnel, observation of the
broker's or dealer's operations, inspection of relevant documentation,
and re-performance of the control.
    18. The evidence provided by the auditor's tests of the
effectiveness of controls depends upon the mix of the nature, timing,
and extent of the auditor's procedures. Further, for an individual
control, different combinations of the nature, timing, and extent of
testing might provide sufficient evidence in relation to the risk
associated with the control.

    Note:  Generally, a conclusion that a control is not operating
effectively can be supported by less evidence than is necessary to
support a conclusion that a control is operating effectively.

Using Evidence Obtained in Past Examination Engagements
    19. The auditor should obtain evidence during the current fiscal
year about the design and operating effectiveness of controls selected
for testing. If controls selected for testing in the current year were
tested in past examination engagements, and if the auditor plans to use
evidence about the effectiveness of those controls that was obtained in
prior years, the auditor should take into account the factors discussed
in paragraph 13 and the following factors to determine the evidence
needed during the current fiscal year examination:
     The nature, timing, and extent of procedures performed in
previous examination engagements;
     The results of the previous years' testing of the control;
and
     Changes in the control or the process in which the control
operates since the previous examination engagement.

Using Tests of Controls That Are Modified During the Year

20. A broker or dealer might implement changes to controls over
compliance to make them more effective or efficient or to address
control deficiencies. The auditor should obtain an understanding of the
reason for the change and obtain evidence regarding the design and
operating effectiveness of the new and superseded controls. The nature,
timing, and extent of the testing of new and superseded controls depend
on the evidence needed to support the auditor's conclusions about the
effectiveness of Internal Control Over Compliance during and as of the
end of the fiscal year.

Performing Compliance Tests

    21. The auditor must perform procedures (``compliance tests'') that
are sufficient to support the auditor's conclusions regarding whether
the broker or dealer was in compliance with the net capital rule and
reserve requirements rule as of the end of its most recent fiscal year.
This includes performing the following procedures on the schedules \16\
the broker or dealer used to determine compliance with the net capital
rule and the reserve requirements rule as of its fiscal year end:
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    \16\ The term ``schedules'' used in this paragraph refers to the
computations of the broker or dealer, in whatever form, that are
performed to determine the broker's or dealer's compliance with the
net capital rule and the reserve requirements rule.
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    a. Evaluate whether the amounts in the schedules were determined in
accordance with the net capital rule or reserve requirements rule, as
applicable;
    b. Test the accuracy and completeness of the information in the
schedules;
    c. Determine whether the broker or dealer maintained the required
level of net capital in accordance with the net capital rule;
    d. Determine whether the broker or dealer maintained a special
reserve bank account for the exclusive benefit of customers and
deposited funds in at least the required amount in accordance with the
reserve requirements rule;
    e. Determine whether the information in the schedules was derived
from the books and records of the broker or dealer; and
    f. Determine whether the broker or dealer made the notifications,
if any, required by the net capital rule and reserve requirements rule
as of the end of the most recent fiscal year.

    Note:  Procedures performed as part of the audit of the
financial statements and audit procedures performed on supplemental
information also might provide evidence regarding the broker's or
dealer's compliance with the net capital rule and the reserve
requirements rule.

    22. The auditor should plan and perform compliance tests that are
responsive to the risks, including fraud risks, associated with non-
compliance with the net capital rule and the reserve requirements rule.
As the risk associated with non-compliance with the net capital rule or
the reserve requirements rule increases, the persuasiveness of the
evidence that the auditor should obtain from compliance tests also
increases. The evidence provided by the auditor's compliance tests
depends upon the mix of the nature, timing, and extent of those
procedures. Inquiry alone does not provide sufficient appropriate
evidence to support the auditor's conclusions about the broker's or
dealer's compliance with the net capital rule or the reserve
requirements rule.
    23. In conjunction with performing the compliance tests pursuant to
paragraphs 21 and 22, the auditor must perform procedures to obtain
evidence about the existence of customer funds or securities held for
customers.

    Note:  Examples of procedures that provide evidence about the
existence of customer assets include: (1) Counting customer
securities or observing and testing the broker's or dealer's
procedures for physical inspection and (2) confirming customer
security positions directly with depositories and clearing
organizations. Procedures performed in the audit of the financial
statements and the audit procedures performed on supplemental
information to test the existence of assets held for customers also
may provide evidence that is relevant to the requirement in this
paragraph.

Effect of Tests of Internal Controls on Compliance Tests
    24. The auditor should take into account the results of the
auditor's tests of controls over compliance with the net capital rule
and the reserve requirements rule in determining the necessary nature,
timing, and extent of compliance tests. If the test results indicate
that the controls are effective, less evidence is needed from
compliance tests. If the test results indicate that the controls are
ineffective, the auditor should revise the planned compliance tests as
necessary to obtain more persuasive evidence regarding compliance.
Evaluating the Results of the Examination Procedures
    25. In forming an opinion on whether the assertions made by the
broker or dealer in the compliance report are fairly stated, in all
material respects, the auditor should evaluate all evidence obtained,
regardless of whether the evidence corroborates or contradicts the
broker's or dealer's assertions.
    26. The auditor should evaluate:
    a. Identified instances of non-compliance with the net capital rule
and the reserve requirements rule to determine whether any instance of
non-compliance existed as of the end of the most recent fiscal year;
    b. Identified instances in which the information used to assert
compliance with the net capital rule or the reserve requirements rule
was not derived from the broker's or dealer's books and records to
determine whether they are material, individually or in combination;
and
    c. Identified Deficiencies in Internal Control Over Compliance to
determine whether the deficiencies, individually or in combination, are
Material Weaknesses.

    Note:  A Material Weakness can exist even when no instances of
non-compliance exist. However, instances of non-compliance might
indicate the existence of one or more Deficiencies in Internal
Control Over Compliance.

    Note:  The auditor cannot assume that an identified instance of
non-compliance or an identified Deficiency in Internal Control Over
Compliance is an isolated occurrence. The auditor should evaluate
the effect of any instance of non-compliance or identified control
deficiency on the auditor's assessment of the risks associated with
controls and non-compliance.

    Note: The auditor also should evaluate the effect on the audit
of the financial statements and audit procedures performed on
supplemental information of any non-compliance, Material Weaknesses,
or instances in which the information used to assert compliance with
the net capital rule or reserve requirements rule was not derived,
in all material respects, from the broker's or dealer's books and
records.

    27. The auditor should evaluate whether he or she has obtained
sufficient appropriate evidence to support the conclusions to be
presented in the examination report taking into account the risks
associated with controls and non-compliance, the results of the
examination procedures performed, and the appropriateness (i.e., the
relevance and reliability) of the evidence obtained.
    28. If the auditor has not obtained sufficient appropriate evidence
about an assertion or has substantial doubt about an assertion, the
auditor should perform procedures to obtain further evidence to address
the matter.
    29. If the auditor is unable to obtain sufficient appropriate
evidence about an assertion, the auditor should express a disclaimer of
opinion.\17\
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    \17\ See Appendix C of this standard, ``Examination Report
Modifications,'' which describes the situations in which the auditor
should modify his or her examination report and the specific
modifications to be made to the auditor's examination report. The
requirement in paragraph 29 does not preclude the auditor from
withdrawing from the examination engagement.
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Subsequent Events
    30. For the period from the end of the period specified in the
broker's or dealer's assertions to the date of the auditor's
examination report (the ``subsequent period''), the auditor should
perform procedures to identify subsequent events relevant to the
auditor's conclusions about the assertions made by the broker or dealer
in the compliance report. Such

procedures should include, but are not limited to:
    a. Reading relevant reports of internal auditors, others who
perform an equivalent function, compliance functions, and other
auditors, and correspondence that the broker or dealer has sent to or
received from the SEC or the broker's or dealer's DEA during the
subsequent period that is relevant to the broker's or dealer's
assertions; and
    b. Evaluating information obtained through other engagements
performed by the auditor for the broker or dealer, including subsequent
events procedures performed in the audit of the financial statements
and the audit procedures performed on supplemental information.
    31. The auditor should evaluate the results of the procedures
described in the previous paragraph to determine whether the results
corroborate or contradict the broker's or dealer's assertions.
Obtaining a Representation Letter
    32. The auditor should obtain written representations from
management of the broker or dealer:
    a. Acknowledging management's responsibility for establishing and
maintaining a system of internal control with the objective of
providing the broker or dealer with reasonable assurance that any
instances of non-compliance with the financial responsibility rules
will be prevented or detected on a timely basis;
    b. Stating the broker's or dealer's assertions included in the
compliance report are the responsibility of management;
    c. Stating that management has made available to the auditor all
records and other information relevant to the broker's or dealer's
assertions, including all known matters contradicting the assertions,
and all communications from regulatory agencies, internal auditors,
others who perform an equivalent function, compliance functions, and
other auditors, that are relevant to the broker's or dealer's
assertions, received through the date of the auditor's report; and
    d. Stating whether there were, subsequent to the period addressed
in the broker's or dealer's assertions, any known events or other
factors that might significantly affect the broker's or dealer's
assertions.
    33. The failure to obtain written representations from management,
including management's refusal to furnish them, constitutes a
limitation on the scope of the engagement, as described in Appendix C
of this standard.
Communication Requirements
    34. The auditor should communicate to management all identified
Deficiencies in Internal Control Over Compliance.
    35. The auditor should communicate to management and the audit
committee \18\ identified instances of non-compliance with the
financial responsibility rules, identified Material Weaknesses, and
identified instances in which information used to determine compliance
with the net capital rule or the reserve requirements rule was not
derived, in all material respects, from the broker's or dealer's books
and records.
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    \18\ For purposes of this standard, the term ``audit committee''
has the same definition as that in Auditing Standard No. 16,
Communications with Audit Committees.

    Note:  The auditor also must comply with the requirements of
paragraph (h) of SEC Rule 17a-5, which contains notification
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requirements that apply to auditors of brokers and dealers.

Reporting on the Examination Engagement
    36. The auditor's examination report must include the following
elements, modified as necessary in the circumstances and manner
discussed in Appendix C:
    a. A title that includes the word independent;
    b. An identification of the compliance report and the broker's or
dealer's assertions regarding the effectiveness of Internal Control
Over Compliance during the fiscal year and as of the fiscal year end,
compliance with the net capital rule and the reserve requirements rule
as of the fiscal year end, and whether the information used to assert
compliance with those rules was derived from the broker's or dealer's
books and records;
    c. A statement that management of the broker or dealer is
responsible for establishing and maintaining a system of internal
control that has the objective of providing the broker or dealer with
reasonable assurance that any instances of non-compliance with the
financial responsibility rules will be prevented or detected on a
timely basis;
    d. A statement that the auditor's responsibility is to express an
opinion on the broker's or dealer's assertions based on his or her
examination;
    e. A statement that the examination was conducted in accordance
with the standards of the Public Company Accounting Oversight Board
(United States);
    f. A statement that the standards of the Public Company Accounting
Oversight Board require that the auditor plan and perform the
examination engagement to obtain reasonable assurance about whether the
broker's or dealer's Internal Control Over Compliance was effective
during and as of the end of the most recent fiscal year, whether the
broker or dealer complied with the net capital rule and the reserve
requirements rule as of the end of the most recent fiscal year, and
whether the information used to assert compliance with the net capital
rule and the reserve requirements rule was derived from the books and
records of the broker or dealer;
    g. A statement that an examination engagement includes evaluating
the design and operating effectiveness of Internal Control Over
Compliance; testing and evaluating the broker's or dealer's compliance
with the net capital rule and the reserve requirements rule;
determining whether the information used to assert compliance with the
net capital rule and reserve requirements rule was derived from the
broker's or dealer's books and records; and performing such other
procedures as the auditor considered necessary in the circumstances;
    h. A statement that the auditor believes the examination provides a
reasonable basis for his or her opinion;\19\
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    \19\ When management has made an interpretation of the financial
responsibility rules and the auditor has determined that it is
necessary to emphasize this interpretation in the auditor's report,
the auditor may include a paragraph stating the description and the
source of the interpretation made directly following the scope
paragraph.
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    i. The auditor's opinion on whether the assertions made by the
broker or dealer in the compliance report are fairly stated, in all
material respects;
    j. The manual signature of the auditor's firm;
    k. The city and state (or city and country, in the case of non-U.S.
auditors) from which the auditor's examination report has been issued;
and
    l. The date of the examination report.
    37. The following example examination report expressing an
unqualified opinion on the assertions made by a broker or dealer in a
compliance report illustrates the report elements described in this
section.

Report of Independent Registered Public Accounting Firm

[Introductory Paragraph]

    We have examined W Broker's statements, included in the
accompanying [title of the compliance report], that (1) W Broker's
internal control over compliance was effective during the most
recent fiscal year ended [date]; (2) W Broker's internal control
over compliance was effective as of [date]; (3) W Broker was in
compliance with 17 CFR

240.15c3-1 and 240.15c3-3(e) as of [date]; and (4) the information
used to state that W Broker was in compliance with 17 CFR 240.15c3-1
and 240.15c3-3(e) was derived from W Broker's books and records. W
Broker's management is responsible for establishing and maintaining
a system of internal control over compliance that has the objective
of providing W Broker with reasonable assurance that non-compliance
with 17 CFR 240.15c3-1, 17 CFR 240.15c3-3, 17 CFR 240.17a-13, or
Rule [fill in name/number] of [fill in DEA] that requires account
statements to be sent to the customers of W Broker will be prevented
or detected on a timely basis. Our responsibility is to express an
opinion on W Broker's statements based on our examination.

[Scope Paragraph]

    We conducted our examination in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the examination to obtain
reasonable assurance about whether W Broker's internal control over
compliance was effective as of and during the most recent fiscal
year ended [date]; W Broker complied with 17 CFR 240.15c3-1 and
240.15c3-3(e) as of [date]; and the information used to assert
compliance with 17 CFR 240.15c3-1 and 240.15c3-3(e) as of [date] was
derived from W Broker's books and records. Our examination includes
testing and evaluating the design and operating effectiveness of
internal control over compliance, testing and evaluating W Broker's
compliance with 17 CFR 240.15c3-1 and 240.15c3-3(e), determining
whether the information used to assert compliance with 240.15c3-1
and 240.15c3-3(e) was derived from W Broker's books and records, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable
basis for our opinion.

[Opinion Paragraph]

    In our opinion, W Broker's statements referred to above are
fairly stated, in all material respects.

[Signature]

[City and State or Country]

[Date]

Examination Report Date

    38. The auditor should date the examination report no earlier than
the date on which the auditor obtains sufficient appropriate evidence
to support his or her opinion.

    Note:  Because of the coordination between the examination
engagement, the audit of the financial statements and the audit
procedures performed on supplemental information, the date of the
examination report should not be earlier than the date of the
auditor's report on the financial statements and supplemental
information.

Appendix A--Definitions

    A1. For purposes of this standard, the terms listed below are
defined as follows:
    A2. Deficiency in Internal Control Over Compliance--A Deficiency in
Internal Control Over Compliance exists when the design or operation of
a control does not allow the management or employees of the broker or
dealer, in the normal course of performing their assigned functions, to
prevent or detect on a timely basis non-compliance with 17 CFR
240.15c3-1, 240.15c3-3, 240.17a-13 or any rule of the designated
examining authority of the broker or dealer that requires account
statements to be sent to the customers of the broker or dealer.\20\
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    \20\ The definition of ``Deficiencies in Internal Control Over
Compliance'' is consistent with the same term in paragraph
(d)(3)(iii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    A3. Internal Control Over Compliance--Internal controls that have
the objective of providing the broker or dealer with reasonable
assurance that non-compliance with 17 CFR 240.15c3-1, 240.15c3-3,
240.17a-13, or any rule of the designated examining authority of the
broker or dealer that requires account statements to be sent to the
customers of the broker or dealer, will be prevented or detected on a
timely basis.\21\
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    \21\ The definition of ``Internal Control Over Compliance'' is
consistent with the same term in paragraph (d)(3)(ii) of SEC Rule
17a-5.
---------------------------------------------------------------------------

    A4. Material Weakness--A Material Weakness is a deficiency, or a
combination of deficiencies, in Internal Control Over Compliance such
that there is a reasonable possibility that non-compliance with 17 CFR
240.15c3-1 or 17 CFR 240.15c3-3(e) will not be prevented or detected on
a timely basis or that non-compliance to a material extent with 17 CFR
240.15c3-3, except for paragraph (e), 17 CFR 240.17a-13, or any rule of
the designated examining authority of the broker or dealer that
requires account statements to be sent to the customers of the broker
or dealer will not be prevented or detected on a timely basis.\22\
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    \22\ The definition of a ``Material Weakness'' is consistent
with the same term in paragraph (d)(3)(iii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Appendix B--Considerations for Brokers and Dealers With Multiple
Divisions or Branches

    B1. When the broker or dealer has multiple divisions or branches,
the auditor should determine the extent to which he or she should
perform examination procedures at selected divisions or branches to
obtain sufficient appropriate evidence to support the conclusions
expressed in the auditor's examination report. This includes
determining the divisions or branches at which to perform examination
procedures, as well as the nature, timing, and extent of the procedures
to be performed at those individual divisions or branches. In
determining the extent of the examination procedures to be performed,
the auditor should take into account:
    a. The degree to which the financial responsibility rules relate to
activities at the division or branch level;
    b. The nature and significance of the related assets, transactions,
or activities at the division or branch to the financial responsibility
rules;
    c. The degree of centralization of records or information
processing relevant to the financial responsibility rules; and
    d. The degree and effectiveness of management supervision and
monitoring of the relevant activities of the division or branch.

Appendix C--Examination Report Modifications

    C1. The auditor should modify his or her examination report if any
of the following conditions exist:
    a. There is non-compliance with the net capital rule or the reserve
requirements rule as of the end of the most recent fiscal year, one or
more Material Weaknesses in Internal Control Over Compliance during or
as of the end of the most recent fiscal year, or the information used
to assert compliance with the net capital rule or the reserve
requirements rule was not derived, in all material respects, from the
books and records of the broker or dealer (paragraphs C2-C3).
    b. There is a restriction on the scope of the examination
engagement (paragraphs C4-C8).
    c. There is information other than the assertions and descriptions
required under paragraph (d)(3)(i) of SEC Rule 17a-5 contained in the
compliance report (paragraphs C9-C10).

Non-Compliance, Material Weakness, or Instance in Which Information
Used To Assert Compliance Was Not Derived From the Broker's or Dealer's
Books and Records

    C2. If (1) one or more instances of non-compliance with the net
capital rule or the reserve requirements rule exist as of the end of
the fiscal year; (2) one or more Material Weaknesses in Internal
Control Over Compliance exist during or as of the end of the fiscal
year; or (3) the information used to assert compliance with the net
capital rule or

the reserve requirements rule was not derived, in all material
respects, from the books and records of the broker or dealer, the
auditor must express an adverse opinion directly on the subject matter
of the respective assertions, rather than on the assertions themselves,
unless there is a restriction on the scope of the examination
engagement.

    Note:  The requirement in this paragraph to express an adverse
opinion applies regardless of whether the non-compliance, Material
Weakness, or other matters preventing the unqualified opinion were
identified by management or by the auditor.

    C3. When expressing such an adverse opinion, the auditor's
examination report should include, as applicable:
    a. A statement that non-compliance with the net capital rule or the
reserve requirements rule has been identified and an identification of
each instance of non-compliance described in the broker's or dealer's
compliance report as of the end of the most recent fiscal year.
    b. A statement that one or more Material Weaknesses in Internal
Control Over Compliance have been identified during the fiscal year and
an identification of each Material Weakness described in the compliance
report.
    c. A statement that one or more Material Weaknesses in Internal
Control Over Compliance have been identified as of the end of the
fiscal year and an identification of each Material Weakness described
in the compliance report.
    d. A statement that one or more instances in which the information
used to assert compliance with the net capital rule or the reserve
requirements rule was not derived, in all material respects, from the
broker's or dealer's books and records have been identified.

    Note:  If a description of all identified instances of non-
compliance with the net capital rule or the reserve requirements
rule and all identified Material Weaknesses has not been included in
the broker's or dealer's compliance report, the examination report
must be modified to describe those instances of non-compliance or
Material Weaknesses that the auditor has identified but that are not
described in the broker's or dealer's compliance report.\23\

    \23\ Paragraphs (d)(3)(i)(B) and (C) of SEC Rule 17a-5 require
the broker's or dealer's compliance report to contain a description
of each material weakness in Internal Control Over Compliance during
the most recent fiscal year and any instance of non-compliance with
the net capital rule or the reserve requirements rule as of the end
of the most recent fiscal year.
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Scope Limitations

    C4. The auditor can express an opinion on whether the assertions
made by a broker or dealer in a compliance report are fairly stated, in
all material respects, only if the auditor has been able to apply the
procedures necessary in the circumstances. If there are restrictions on
the scope of the examination engagement, the auditor should withdraw
from the engagement or disclaim an opinion. A disclaimer of opinion
should state that the auditor does not express an opinion on the
assertions made by the broker or dealer in the compliance report.
    C5. When disclaiming an opinion because of a scope limitation, the
auditor should state that the scope of the examination engagement was
not sufficient for the auditor to express an opinion and, in a separate
paragraph or paragraphs, the substantive reasons for the disclaimer,
including the procedures that were deemed necessary by the auditor that
have been omitted and the reason for their omission. The auditor should
not identify the procedures that were performed nor include the
statements describing the characteristics of an examination engagement.
    C6. When the auditor plans to disclaim an opinion and the limited
procedures performed by the auditor caused the auditor to conclude
that: (1) One or more instances of non-compliance with the net capital
rule or the reserve requirements rule existed as of the end of the
fiscal year; (2) one or more Material Weaknesses in Internal Control
Over Compliance existed during or as of the end of the most recent
fiscal year; or (3) the information used to assert compliance with the
net capital rule or the reserve requirements rule was not derived, in
all material respects, from the books and records of the broker or
dealer, the auditor's report also must include the matters described in
paragraph C3, as applicable.
    C7. The auditor may issue a report disclaiming an opinion on the
assertions made by a broker or dealer in a compliance report as soon as
the auditor concludes that a scope limitation will prevent the auditor
from obtaining the reasonable assurance necessary to express an
opinion. The auditor is not required to perform any additional work
before issuing a disclaimer when the auditor concludes that he or she
will not be able to obtain sufficient evidence to express an opinion.

    Note:  In this case, in following the direction in paragraph 38
of this standard regarding dating the auditor's examination report,
the report date is the date on which the auditor concludes that he
or she will not be able to obtain sufficient evidence to express an
opinion.

    C8. If the auditor concludes that he or she cannot express an
opinion because of a limitation on the scope of the examination
engagement, the auditor should communicate on a timely basis, in
writing, to management and the audit committee that the examination
engagement cannot be satisfactorily completed.

Other Information in the Compliance Report

    C9. If the compliance report contains other information besides the
statements and descriptions required by SEC Rule 17a-5,\24\ the auditor
should disclaim an opinion on the other information.
---------------------------------------------------------------------------

    \24\ See paragraph (d)(3)(i) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    C10. If the auditor believes that the other information in the
compliance report contains a material misstatement of fact, he or she
should discuss the matter with management of the broker or dealer. If,
after discussing the matter with management, the auditor concludes that
a material misstatement of fact remains, the auditor should notify
management and the audit committee of the auditor's views concerning
the information.\25\
---------------------------------------------------------------------------

    \25\ See also AU sec. 317, Illegal Acts by Clients, which
describes the auditor's responsibilities in a financial statement
audit regarding illegal acts.
---------------------------------------------------------------------------

Attestation Standard No. 2

Review Engagements Regarding Exemption Reports of Brokers and Dealers
Introduction
    1. This standard establishes requirements that apply when an
auditor is engaged to perform a review \26\ of the statements made by a
broker \27\ or dealer \28\ in an exemption report (``exemption
report'') prepared pursuant to Securities and Exchange Act of 1934
(``Exchange Act'') Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') of
the U.S. Securities and Exchange Commission (``SEC'').\29\
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    \26\ See paragraphs (d)(1)(i)(C) and (g)(2)(ii) of SEC Rule 17a-
5, which require that certain brokers or dealers file with the SEC a
report prepared by an independent accountant based on a review of
the statements in the exemption report, if the broker or dealer is
required to file an exemption report with the SEC.
    \27\ According to PCAOB Rule 1001(b)(iii), the term ``broker''
means a broker (as defined in Section 3(a)(4) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \28\ According to PCAOB Rule 1001(d)(iii), the term ``dealer''
means a dealer (as defined in Section 3(a)(5) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \29\ See paragraph (g)(2)(ii) of SEC Rule 17a-5.

---------------------------------------------------------------------------

    2. SEC Rule 17a-5 requires a broker's or dealer's exemption report
to contain the following statements by the broker or dealer:
    a. A statement that identifies the provisions in paragraph (k) of
SEC Rule 15c3-3 \30\ (the ``exemption provisions'') under which the
broker or dealer claimed an exemption from SEC Rule 15c3-3 (the
``identified exemption provisions'');
---------------------------------------------------------------------------

    \30\ See 17 CFR 240.15c3-3 (``SEC Rule 15c3-3'').
---------------------------------------------------------------------------

    b. A statement that the broker or dealer (1) met the identified
exemption provisions throughout the most recent fiscal year without
exception or (2) met the identified exemption provisions throughout the
most recent fiscal year except as described in the exemption report;
and
    c. If applicable, a statement that identifies each exception during
the most recent fiscal year in meeting the identified exemption
provisions (an ``exception'') and that briefly describes the nature of
each exception and the approximate date(s) on which the exception
existed.\31\
---------------------------------------------------------------------------

    \31\ See paragraph (d)(4) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Objective
    3. When performing a review of the statements (hereinafter referred
to as ``assertions'') made by a broker or dealer in an exemption report
(a ``review engagement''), the auditor's objective is to state whether,
based upon the results of the review procedures, the auditor is aware
of any material modifications that should be made to the broker's or
dealer's assertions for the assertions to be fairly stated, in all
material respects.
    4. The auditor must plan and perform the review engagement to
obtain appropriate evidence that is sufficient to obtain moderate
assurance \32\ about whether one or more conditions exist that would
cause one or more of the broker's or dealer's assertions not to be
fairly stated, in all material respects. Such conditions include:
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    \32\ Moderate assurance is obtained by performing with due
professional care the inquiries and other procedures required by
this standard in order to reach a conclusion about whether there is
a need to modify the broker's or dealer's assertions regarding the
exemption provisions for the assertions to be fairly stated, in all
material respects. Further, this standard is consistent with the
concept of moderate assurance as described in paragraph .55 of AT
sec. 101, Attest Engagements.
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    a. The broker's or dealer's assertion that identifies the
provisions in paragraph (k) of SEC Rule 15c3-3 under which the broker
or dealer claimed an exemption for SEC Rule 15c3-3 is inaccurate;
    b. The broker or dealer asserts that it met the identified
exemption provisions in paragraph (k) of SEC Rule 15c3-3 without
exception when the auditor is aware of exceptions in meeting the
exemption provisions; or
    c. The broker's or dealer's assertion that identifies and describes
each exception during the most recent fiscal year in meeting the
identified exemption provisions in paragraph (k) of SEC Rule 15c3-3 is
inaccurate or incomplete.
Performing the Review Engagement
General Requirements
    5. An auditor who performs a review engagement must:
    a. Have adequate technical proficiency in attestation engagements;
    b. Obtain an understanding of the exemption conditions and other
rules and regulations that are relevant to the broker's or dealer's
assertions;
    c. Determine the auditor's compliance with independence and ethics
requirements; and
    d. Exercise due professional care, which includes application of
professional skepticism, in planning and performing the review and
preparation of the report.

    Note:  Due professional care imposes a responsibility on each
engagement team member to comply with this standard. The exercise of
due professional care requires critical review at every level of
supervision of the work done and the judgment exercised by those
assisting in the engagement, including preparing the report.\33\

    \33\ The auditor's responsibility to exercise due professional
care is consistent with the description in paragraphs .40-.41 of AT
sec. 101.

    Note:  Auditing Standard No. 3, Audit Documentation, establishes
the documentation requirements for review engagements performed
---------------------------------------------------------------------------
pursuant to this standard.

    6. The engagement partner is responsible for the review engagement
and performance of the review procedures. Accordingly, the engagement
partner is responsible for proper planning of the review engagement,
proper supervision of the work of engagement team members, and
compliance with the requirements of this standard. The engagement
partner may seek assistance from appropriate engagement team members in
fulfilling these responsibilities.

    Note:  For purposes of this standard, the term ``engagement
partner'' means the member of the engagement team with primary
responsibility for the review engagement.

    Note:  Proper planning includes determining the nature, timing,
and extent of procedures necessary to obtain moderate assurance.
Proper supervision includes supervising the work of engagement team
members so that the work is performed as directed and supports the
conclusions reached.

Relationship Between the Review Engagement and the Audit of Financial
Statements and the Audit Procedures Performed on Supplemental
Information
    7. The review engagement should be coordinated with the audit of
the financial statements and the audit procedures performed on
supplemental information of the broker or dealer.\34\ In planning and
performing procedures for, and evaluating the results of the procedures
performed in, the review engagement, the auditor should take into
account relevant evidence from the audit of the financial statements
and the procedures performed on the supplemental information. However,
the objectives of the financial statement audit and the review
engagement are not the same, so the auditor must plan and perform the
work to meet the objectives of both engagements.
---------------------------------------------------------------------------

    \34\ Under the definition of supplemental information included
in Auditing Standard No. 17, Auditing Supplemental Information
Accompanying Audited Financial Statements, supplemental information
includes the supporting schedules described in paragraph (d)(2) of
SEC Rule 17a-5, which are required to be filed by brokers and
dealers with the SEC and the broker's and dealer's designated
examining authority (``DEA'') and the Securities Investor Protection
Corporation (``SIPC''). Such supporting schedules consist of, as
applicable, a Computation of Net Capital Under Rule 15c3-1, a
Computation for Determination of the Reserve Requirements under
Exhibit A of SEC Rule 15c3-3, and Information Relating to Possession
or Control Requirements Under SEC Rule 15c3-3.
---------------------------------------------------------------------------

Review Procedures
    8. A review engagement includes the following procedures:
    a. Reading the exemption report to determine the exemption
provisions under which the broker or dealer asserts its exemption and
the identified exceptions to the exemption provisions;
    b. Performing inquiries and other review procedures set forth in
this standard; and
    c. Evaluating whether the evidence indicates that there should be
modifications to the broker's or dealer's assertions based on the
results of the procedures performed.
    9. The nature, timing, and extent of the necessary inquiries and
other review procedures depend on:
    a. The following risk factors:
    (1) The broker's or dealer's history of instances of non-compliance
with the exemption provisions;
    (2) Changes in the broker's or dealer's procedures, controls, or
the environment in which the controls operate since the prior year;
    (3) Changes in the broker's or dealer's operations that are
relevant to

compliance with the exemption provisions;
    (4) Competence of the personnel who are responsible for compliance
with the exemption provisions or who perform important controls over
compliance, and whether there have been changes in those personnel
during the period of the review;
    (5) The risk of fraud, including the risk of misappropriation of
customer assets, relevant to the exemption provisions;
    (6) Potential non-compliance associated with related parties,\35\
including related parties that are investment advisors or entities with
which the broker or dealer has a custodial or clearing relationship;
---------------------------------------------------------------------------

    \35\ The auditor should look to the definition in the applicable
financial reporting framework with respect to the term ``related
parties.''
---------------------------------------------------------------------------

    (7) The degree to which the broker's or dealer's processes that
relate to the exemption provisions are performed, monitored, or
controlled in a centralized or decentralized environment; and
    b. Evidence about the broker's or dealer's compliance with the
exemption provisions or about the effectiveness of controls over
compliance with the exemption provisions obtained from the audit of the
financial statements and the audit procedures performed on supplemental
information.
    10. The auditor should perform procedures to identify exceptions to
the exemption provisions, including the following:
    a. If the broker or dealer identified exceptions to the exemption
provisions during the year under review, the auditor should read the
broker's or dealer's documentation regarding the exceptions to the
exemption provisions and compare it to the information included in the
exemption report.
    b. Inquire of management, and, if applicable, other individuals at
the broker or dealer who have relevant knowledge regarding:
    (1) Whether the broker or dealer was in compliance with the
exemption provisions throughout the year under review or whether
exceptions have been identified.
    (2) Regulatory examinations and correspondence between the SEC or
the broker's or dealer's DEA and the broker or dealer that are relevant
to compliance with the exemption provisions.

    Note: If the broker or dealer has sent or received
correspondence with the SEC or the broker's or dealer's DEA that is
relevant to compliance with the exemption provisions, the auditor
should read such correspondence and, when necessary in the
circumstances, make inquiries of the regulatory agencies.

    (3) Subsequent events through the date of the auditor's review
report that might have a material effect on the broker's or dealer's
assertions.
    c. Inquire of individuals at the broker or dealer who have relevant
knowledge of controls relevant to the broker's or dealer's compliance
with the exemption provisions regarding:
    (1) The controls that are in place to maintain compliance with the
exemption provisions, including the nature of the controls and their
frequency of operation.

    Note:  The auditor should take into account procedures performed
during the audit of the financial statements and the audit
procedures performed on supplemental information in obtaining an
understanding of controls or other activities relevant to the
broker's or dealer's compliance with the exemption provisions.

    (2) Whether the individual is aware of:
    i. Any exceptions to the exemption provisions and, if so, the
nature, frequency, timing, and cause (if known) of the exceptions to
the exemption provisions, during the year under review.
    ii. Any deficiencies in controls over compliance with the exemption
provisions and, if so, the nature, frequency, and cause (if known) of
the control deficiencies during the year under review.
    d. Inquire of individuals who are responsible for monitoring
compliance with the exemption provisions or the controls over
compliance regarding:
    (1) The nature and frequency of the monitoring activities.
    (2) The results of those monitoring activities, including the
nature, frequency, timing, and cause (if known) of any exceptions to
the exemption provisions or deficiencies in controls over compliance.
    (3) The nature and frequency of customer complaints that are
relevant to the broker's or dealer's compliance with the exemption
provisions.
    e. Read reports of internal auditors, others who perform an
equivalent function, compliance functions, and other auditors that are
relevant to the broker's or dealer's compliance with the exemption
provisions.
    f. Read regulatory filings of the broker or dealer that are
relevant to the broker's or dealer's compliance with the exemption
provisions.
    g. Evaluate whether the evidence obtained and the results of the
procedures performed in the audit of the financial statements and the
audit procedures performed on supplemental information corroborate or
contradict the broker's or dealer's assertions regarding compliance
with the exemption provisions.

    Note:  Examples of procedures performed during the audit of the
financial statements that might provide evidence relevant to the
broker's or dealer's compliance with the exemption provisions
include: (i) Testing related to customer trades; (ii) testing of
specially designated cash accounts; (iii) testing investment
inventory or transactions related to the broker's or dealer's
trading for its own account; and (iv) reading the clearing agreement
in connection with testing trade fee or commission revenue or
expenses.

    h. Perform other procedures as necessary in the circumstances to
obtain moderate assurance regarding whether a material modification
should be made to the broker's or dealer's assertions for the
assertions to be fairly stated, in all material respects.
Evaluating the Results of the Review Procedures
    11. The auditor should evaluate whether information has come to the
auditor's attention that causes the auditor to believe that one or more
of the broker's or dealer's assertions are not fairly stated, in all
material respects.\36\ If a broker's or dealer's assertion is not
fairly stated, in all material respects, the auditor should:
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    \36\ See paragraph 4 of this standard, which provides examples
of conditions that would cause one or more of the broker's or
dealer's assertions not to be fairly stated, in all material
respects.
---------------------------------------------------------------------------

    a. Modify the review report, as discussed in paragraph 19 of this
standard; and
    b. Evaluate the effect of the matter on the audit of the financial
statements and the audit procedures performed on supplemental
information.
    12. If information coming to the auditor's attention indicates that
one or more exceptions to the exemption provisions occurred during the
year under review or might exist at year-end, other than exceptions
disclosed in the exemption report, that might cause one or more of the
broker's or dealer's assertions not to be fairly stated, in all
material respects, or if the auditor has substantial doubt about one or
more of the broker's or dealer's assertions, the auditor should perform
additional procedures as necessary to address the matter.
Obtaining a Representation Letter
    13. The auditor should obtain written representations from
management of the broker or dealer:
    a. Acknowledging management's responsibility for compliance with
the identified exemption provisions throughout the fiscal year;

    b. Stating the broker's or dealer's assertions and that they are
the responsibility of management;
    c. Stating that management has made available to the auditor all
records and other information relevant to the broker's or dealer's
assertions, including all communications from regulatory agencies,
internal auditors, others who perform an equivalent function,
compliance functions, and other auditors concerning possible exceptions
to the exemption provisions, received through the date of the auditor's
review report; and
    d. Stating whether there were, subsequent to the period addressed
in the broker's or dealer's assertions, any known events or other
factors that might significantly affect the broker's or dealer's
compliance with the identified exemption provisions.
    14. The failure to obtain written representations from management,
including management's refusal to furnish them, constitutes a
limitation on the scope of the review engagement as described in
paragraph 20 of this standard.
Communication Requirements
    15. The auditor should communicate to management and to the audit
committee \37\ any exceptions to the exemption provisions identified by
the auditor and information that causes the broker's or dealer's
assertions about the exemption provisions not to be fairly stated, in
all material respects.
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    \37\ For purposes of this standard, the term ``audit committee''
has the same definition as that in Auditing Standard No. 16,
Communications with Audit Committees.

    Note: The auditor must also comply with the requirements of
paragraph (h) of SEC Rule 17a-5, which contains notification
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requirements that apply to auditors of brokers and dealers.

Reporting on the Review Engagement
    16. The auditor's review report must include the following
elements, modified as necessary in the circumstances and manner
discussed in paragraphs 19-20:
    a. A title that includes the word independent;
    b. An identification of the exemption report and the broker's or
dealer's assertions;
    c. A statement that management of the broker or dealer is
responsible for compliance with the identified exemption provisions
throughout the fiscal year and for its assertions;
    d. A statement that the review was conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United
States) and, accordingly, included inquiries and other required
procedures to obtain evidence about the broker's or dealer's compliance
with the exemption provisions;
    e. A statement that a review is substantially less in scope than an
examination, the objective of which is the expression of an opinion on
management's assertions, and accordingly, no such opinion is expressed;
    f. A statement about whether the auditor is aware of any material
modifications that should be made to the assertions for them to be
fairly stated, in all material respects;
    g. The manual signature of the auditor's firm;
    h. The city and state (or city and country, in the case of non-U.S.
auditors) from which the auditor's review report has been issued; and
    i. The date of the review report.
    17. The following example report illustrates the report elements
described in this section.

Report of Independent Registered Public Accounting Firm

[Introductory paragraph--no exceptions to the exemption provisions
included in the broker's or dealer's assertion]

    We have reviewed management's statements, included in the
accompanying [title of the exemption report], in which (1) Z Broker
identified the following provisions of 17 CFR 15c3-3(k) under which
Z Broker claimed an exemption from 17 CFR 240.15c3-3: ([fill in
which exemption provision--(1), (2)(i), (2)(ii), or (3)]) (the
``exemption provisions'') and (2) Z Broker stated that Z Broker met
the identified exemption provisions throughout the most recent
fiscal year without exception. Z Broker's management is responsible
for compliance with the exemption provisions and its statements.

[Introductory paragraph--exceptions to the exemption provisions
included in the broker's or dealer's assertion]

    We have reviewed management's statements, included in the
accompanying [title of the exemption report], in which (1) Z Broker
identified the following provisions of 17 CFR 15c3-3(k) under which
Z Broker claimed an exemption from 17 CFR 240.15c3-3: ([fill in
which exemption provision--(1), (2)(i), (2)(ii), or (3)]) (the
``exemption provisions'') and (2) Z Broker stated that Z Broker met
the identified exemption provisions throughout the most recent
fiscal year except as described in its exemption report. Z Broker's
management is responsible for compliance with the exemption
provisions and its statements.

[Scope paragraph]

    Our review was conducted in accordance with the standards of the
Public Company Accounting Oversight Board (United States) and,
accordingly, included inquiries and other required procedures to
obtain evidence about Z Broker's compliance with the exemption
provisions. A review is substantially less in scope than an
examination, the objective of which is the expression of an opinion
on management's statements. Accordingly, we do not express such an
opinion.

[Review results paragraph]

    Based on our review, we are not aware of any material
modifications that should be made to management's statements
referred to above for them to be fairly stated, in all material
respects, based on the provisions set forth in paragraph (k)([fill-
in which exemption provision--(1), (2)(i), (2)(ii), or (3)]) of Rule
15c3-3 under the Securities Exchange Act of 1934.

[Signature]

[City and State or Country]

[Date]

Review Report Date

    18. The auditor should date the review report no earlier than the
date on which the auditor has completed his or her review procedures.

    Note: Because of the coordination between the review engagement
and the audit of the financial statements and the audit procedures
performed on supplemental information, the date of the review report
should not be earlier than the date of the auditor's report on the
financial statements and supplemental information.

Modifications of the Report

    19. If one or more of the broker's or dealer's assertions are not
fairly stated, in all material respects, the auditor must modify the
review report to describe the reasons the assertions are not fairly
stated, in all material respects. If a broker's or dealer's assertion
is not fairly stated, in all material respects, because of one or more
omitted exceptions, the auditor's review report should disclose each
omitted exception.
    20. Scope Limitations. If the auditor cannot perform the procedures
required by this standard or other procedures that the auditor deems
necessary in the circumstances, the review is incomplete because of the
scope limitation. An incomplete review is not a sufficient basis for
stating a conclusion regarding the broker's or dealer's assertions. In
those circumstances, the auditor should withdraw from the engagement or
should modify the review report to:
    a. Describe the scope limitation and any review procedures deemed
necessary by the auditor that have been omitted and the reason for
their omission;
    b. State that the auditor does not express any form of assurance on
the broker's or dealer's assertions; and, if applicable,

    c. Describe any circumstances that cause one or more of the
broker's or dealer's assertions not to be fairly stated, in all
material respects.

Amendments to PCAOB Standards

Auditing Standards
Auditing Standard No. 3, ``Audit Documentation''
    Auditing Standard No. 3, ``Audit Documentation,'' as amended, is
amended as follows:
    a. The following is added at the end of footnote 2 in paragraph 6:
In an engagement conducted pursuant to Attestation Standard No. 1,
Examination Engagements Regarding Compliance Reports of Brokers and
Dealers, or Attestation Standard No. 2, Review Engagements Regarding
Exemption Reports of Brokers and Dealers, the relevant assertions are
the assertions expressed by management or the responsible party
regarding the subject matter of the attestation engagement. The
documentation requirements in this standard regarding assertions apply
to the aspects of the subject matter to which the assertions relate.
    b. The following note is added at the end of paragraph 12:

    Note: In an engagement conducted pursuant to Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports
of Brokers and Dealers, or Attestation Standard No. 2, Review
Engagements Regarding Exemption Reports of Brokers and Dealers,
significant findings or issues include, when applicable: (a) The
assessment of, and the responses to, risks requiring special
consideration by the auditor; (b) significant matters involving
systems, processes, and controls to ensure the appropriateness of
the subject matter and management's related assertions; and (c) the
evaluation of identified instances of nonconformity with the
evaluation criteria (e.g., errors, instances of non-compliance, or
control deficiencies).

    c. The following note is added as the second note to paragraph 13:

    Note: When conducting an attestation engagement pursuant to
Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers, or Attestation Standard
No. 2, Review Engagements Regarding Exemption Reports of Brokers and
Dealers, the auditor may include the documentation of significant
findings or issues related to the attestation engagement in the
engagement completion document prepared in connection with the audit
of the financial statements.

Auditing Standard No. 7, ``Engagement Quality Review''
    Auditing Standard No. 7, ``Engagement Quality Review,'' is amended
as follows:
    a. Paragraph 1 is replaced with:
    An engagement quality review and concurring approval of issuance
are required for the following engagements conducted pursuant to the
standards of the Public Company Accounting Oversight Board (``PCAOB''):
(a) An audit engagement; (b) a review interim financial information;
and (c) an attestation engagement performed pursuant to Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports of
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers.
    b. Paragraph 18A. is added:
    Engagement Quality Review for an Attestation Engagement Performed
Pursuant to Attestation Standard No. 1, Examination Engagements
Regarding Compliance Reports of Brokers and Dealers, or Attestation
Standard No. 2, Review Engagements Regarding Exemption Reports of
Brokers and Dealers
    In an attestation engagement performed pursuant to Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports of
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers, the engagement
quality reviewer should evaluate the significant judgments made by the
engagement team and the related conclusions reached in forming the
overall conclusion on the attestation engagement and in preparing the
engagement report. To evaluate such judgments and conclusions, the
engagement quality reviewer should, taking into account the procedures
performed in the engagement quality review of the financial statement
audit, (1) hold discussions with the engagement partner and other
members of the engagement team, (2) read the engagement report and the
document containing management's assertions, and (3) review the
engagement completion document and other relevant documentation.
    c. Paragraph 18B. is added:
    In an attestation engagement performed pursuant to Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports of
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers, the engagement
quality reviewer may provide concurring approval of issuance only if,
after performing with due professional care the review required by this
standard, he or she is not aware of a significant engagement
deficiency.
    d. The following note is added after paragraph 18B.:

    Note: A significant engagement deficiency in an attestation
engagement performed pursuant to Attestation Standard No. 1,
Examination Engagements Regarding Compliance Reports of Brokers and
Dealers, or Attestation Standard No. 2, Review Engagements Regarding
Exemption Reports of Brokers and Dealers, exists when (1) the
engagement team failed to perform attestation procedures necessary
in the circumstances of the engagement, (2) the engagement team
reached an inappropriate overall conclusion on the subject matter of
the engagement, (3) the engagement report is not appropriate in the
circumstances, or (4) the firm is not independent of its client.

    e. Paragraph 18C. is added:
    In an attestation engagement performed pursuant to Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports of
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers, the firm may grant
permission to the client to use the engagement report only after the
engagement quality reviewer provides concurring approval of issuance.
Auditing Standard No. 16, ``Communications With Audit Committees''
    Auditing Standard No. 16, ``Communications with Audit Committees,''
is amended as follows:
    a. The following bullets are inserted after the third bullet in
Appendix B:
     Attestation Standard No. 1, Examination Engagements
Regarding Compliance Reports of Brokers and Dealers, paragraphs 34 and
35.
     Attestation Standard No. 2, Review Engagements Regarding
Exemption Reports of Brokers and Dealers, paragraph 15.
Attestation Standards
AT Sec. 101, ``Attestation Engagements''
    AT sec. 101, ``Attestation Engagements,'' as amended, is amended as
follows:
    a. The following is added at the end of paragraph .04:
    g. Engagements in which a practitioner is engaged to perform an
examination of certain statements of a broker or dealer in a compliance
report that is prepared pursuant to SEC Rule 17a-5. Such engagements
must be conducted pursuant to Attestation Standard No. 1, Examination
Engagements Regarding Compliance Reports of Brokers and Dealers.
    h. Engagements in which a practitioner is engaged to perform a

review of statements of a broker or dealer in an exemption report that
is prepared pursuant to SEC Rule 17a-5. Such engagements must be
conducted pursuant to Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers.
AT Sec. 601, ``Compliance Attestation''
    AT sec. 601, ``Compliance Attestation,'' is amended as follows:
    a. Within paragraph .02, subparagraph e. is replaced with:
    Apply to examination engagements of brokers and dealers covered by
Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers.
    b. Footnote 2 to paragraph .02.e. is deleted.
    c. The last sentence of paragraph .06 is deleted.
    d. Paragraph .07 is replaced with:
    When a practitioner is engaged to perform a review of statements
made by a broker or dealer in an exemption report that is prepared
pursuant to SEC Rule 17a-5, the practitioner must conduct the review
engagement pursuant to Attestation Standard No. 2, Review Engagements
Regarding Exemption Reports of Brokers and Dealers.

II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules

    In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed any comments it received on the proposed rules. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements. In
addition, since the attestation standards will apply solely in
connection with audits of registered brokers and dealers pursuant to
the Rule 17a-5 under the Securities Exchange Act of 1934, the Board
defers to the SEC, pursuant to Section 103(a)(3)(c) of the Sarbanes-
Oxley Act, on the applicability of Attestation Standards No. 1 and No.
2 to audits of emerging growth companies (``EGCs''), as that term is
defined in Section 3(a)(80) of the Securities Exchange Act of 1934. The
Board's economic analysis is set forth in section C.

A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules

(a) Purpose
    Section 103 of the Sarbanes-Oxley Act directs the Board, by rule,
to establish, among other things, ``auditing and related attestation
standards . . . to be used by registered public accounting firm in the
preparation and issuance of audit reports, as required by th[e]
[Sarbanes-Oxley] Act or the rules of the Commission, or as may be
necessary or appropriate in the public interest or for the protection
of investors.'' In 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act amended the Sarbanes-Oxley Act to give the Board
oversight authority with respect to audits of brokers and dealers that
are registered with the Commission. On July 30, 2013, the SEC adopted
amendments to Rule 17a-5 \38\ under the Securities Exchange Act of 1934
(``Exchange Act'') to strengthen and clarify broker and dealer annual
financial reporting requirements and also facilitate the ability of the
PCAOB to implement the oversight of independent public accountants of
brokers \39\ and dealers \40\ provided by Section 982 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank
Act'').\41\
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    \38\ See Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') and
SEC Exchange Act Release No. 34-70073, Broker-Dealer Reports (July
30, 2013), 78 Federal Register 51910 (August 21, 2013) (``SEC
Release''), available at http://www.sec.gov/rules/final/2013/34-70073.pdf.
    \39\ According to PCAOB Rule 1001(b)(iii), the term ``broker''
means a broker (as defined in Section 3(a)(4) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that Act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \40\ According to PCAOB Rule 1001(d)(iii), the term ``dealer''
means a dealer (as defined in Section 3(a)(5) of the Exchange Act)
that is required to file a balance sheet, income statement, or other
financial statement under Section 17(e)(1)(A) of that Act, where
such balance sheet, income statement, or financial statement is
required to be certified by a registered public accounting firm.
    \41\ Public Law 111-203, 124 Stat. 1376 (2010).
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    The Board is adopting two attestation standards, Examination
Engagements Regarding Compliance Reports of Brokers and Dealers (the
``examination standard'') and Review Engagements Regarding Exemption
Reports of Brokers and Dealers (the ``review standard'') (collectively,
the ``attestation standards''). These attestation standards will apply
to examination engagements regarding compliance reports of brokers and
dealers (``examination engagements'') and review engagements regarding
exemption reports of brokers and dealers (``review engagements''),
pursuant to requirements contained in SEC Rule 17a-5.\42\ Pursuant to
SEC Rule 17a-5, the audits of brokers and dealers, including the
attestation engagements, are required to be performed under PCAOB
standards.\43\ Before these amendments to SEC Rule 17a-5, audits of
brokers and dealers were required to be performed under generally
accepted auditing standards (``GAAS'') established by the American
Institute of Certified Public Accountants (``AICPA''). The attestation
standards will be effective, subject to approval by the SEC, for
examination engagements and review engagements for fiscal years ending
on or after June 1, 2014. This effective date would coincide with the
effective date for the corresponding amendments to SEC Rule 17a-5.
---------------------------------------------------------------------------

    \42\ See paragraphs (g)(2)(i) and (ii) of SEC Rule 17a-5.
    \43\ See paragraph (g) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Background
    Sections 17(a) and (e) of the Exchange Act and SEC Rule 17a-5
together generally require a broker or dealer to, among other things,
file an annual report \44\ with the SEC and the broker's or dealer's
designated examining authority (``DEA'').\45\ SEC Rule 17a-5 requires
the annual report to contain, among other things:
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    \44\ Paragraph (d) of SEC Rule 17a-5 contains general
requirements for annual reports to be filed by SEC-registered
brokers and dealers. Paragraphs (d)(1)(iii) and (iv) of SEC Rule
17a-5 provide certain limited exceptions to the requirement to file
an annual report.
    \45\ Under SEC Rule 17d-1, 17 CFR 240.17d-1, a registered broker
or dealer that is a member of more than one securities self-
regulatory organization may be assigned a ``designated examining
authority'' or ``DEA'' that is responsible for examining the broker
or dealer for compliance with SEC financial responsibility rules. An
example of a securities self-regulatory organization that is a
designated examining authority is the Financial Industry Regulatory
Authority.
---------------------------------------------------------------------------

    a. A financial report consisting of audited financial statements
and supporting schedules;\46\ and
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    \46\ See paragraph (d)(2) of SEC Rule 17a-5. Auditing Standard
No. 17, Auditing Supplemental Information Accompanying Audited
Financial Statements (PCAOB Release No. 2013-008) (October 10,
2013), applies to the audit procedures performed and the audit
report on supporting schedules.
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    b. A compliance report or an exemption report.\47\
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    \47\ See paragraphs (d)(3) and (4) of SEC Rule 17a-5.
Attestation Standard No. 1 applies to an examination of certain
statements made by the broker or dealer in the compliance report.
Attestation Standard No. 2 applies to a review of the statements
made by the broker or dealer in the exemption report.
---------------------------------------------------------------------------

    The requirements for the compliance report and the exemption report
are new requirements that are the result of the Commission's amendments
to SEC Rule

17a-5. According to the SEC, these reports contain information
regarding broker and dealer compliance with key SEC financial
responsibility rules \48\ that enhance the ability of the SEC to
oversee the financial responsibility practices of registered brokers
and dealers and, in particular, the safekeeping of customer assets.
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    \48\ The SEC Release used the term ``financial responsibility
rules'' to refer to: 17 CFR 240.15c3-1 (``SEC Rule 15c3-1'' or the
``net capital rule''); 17 CFR 240.15c3-3 (``SEC Rule 15c3-3''); 17
CFR 240.17a-13 (``SEC Rule 17a-13''); and any rule of the DEA of the
broker or dealer that requires account statements to be sent to the
customers of the broker or dealer (an ``account statement rule'').
See the SEC Release at 8-9. The terms ``financial responsibility
rules'' and ``account statement rule'' have the same meaning in
these standards as they have in the SEC Release.
---------------------------------------------------------------------------

    Generally, SEC Rule 17a-5 provides that brokers or dealers that did
not claim an exemption from SEC Rule 15c3-3 throughout the most recent
fiscal year must prepare and file the compliance report. A broker or
dealer must prepare and file the exemption report if the broker or
dealer did claim that it was exempt from SEC Rule 15c3-3 throughout the
most recent fiscal year.
    Brokers and dealers also must generally file reports prepared by a
PCAOB-registered independent public accountant covering the financial
report and the compliance report or exemption report, as
applicable.\49\
---------------------------------------------------------------------------

    \49\ See paragraph (d)(1)(i)(C) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    The auditor's examination report or review report would replace the
prior requirement in SEC Rule 17a-5 that the auditor report on material
inadequacies identified in the broker's or dealer's accounting system,
internal accounting controls, procedures of the broker or dealer for
safeguarding securities, and certain practices and procedures related
to customer protection and securities.
Considerations in Adopting the Attestation Standards
    The Board is adopting the attestation standards to establish
requirements aligned with the auditor's responsibilities under SEC Rule
17a-5.\50\ Specifically, the attestation standards establish
requirements for examining certain statements in a broker's or dealer's
compliance report and reviewing a broker's or dealer's statements in an
exemption report. The Board is also adopting related amendments to
certain PCAOB standards, including amendments regarding documentation
and amendments to require engagement quality reviews of the examination
and the review engagements.\51\
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    \50\ See paragraphs (g) and (h) of SEC Rule 17a-5.
    \51\ In addition, on February 28, 2012, the Board proposed to
update certain of its rules to conform to the Dodd-Frank Act
amendments to the Sarbanes-Oxley Act of 2002. See Proposed
Amendments to Conform the Board's Rules and Forms to the Dodd-Frank
Act and Make Certain Updates and Clarifications, PCAOB Release No.
2012-002 (February 28, 2012). Among other things, these proposed
amendments would amend the Board's rules to require that registered
firms comply with the Board's interim standards in broker or dealer
engagements. See proposed amendments to Rule 1001(a)(v), Rule
1001(a)(vi), Rule 3200T, and Rule 3300T, Rule 3400T, Rule 3500T, and
Rule 3600T. The Board expects to act on these proposed amendments in
a separate rulemaking in the near future.
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    The attestation standards for the examination and review
engagements represent stand-alone standards that are based on existing
concepts and principles in the existing attestation standards but are
tailored for the specific requirements under SEC Rule 17a-5.\52\
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    \52\ The requirements in the examination standard are generally
consistent with the requirements of AT sec. 101, Attest Engagements,
and AT sec. 601, Compliance Attestation. Similarly, the requirements
in the review standard are generally consistent with AT sec. 101.
However, when an auditor performs an engagement pursuant to the
examination standard or a review pursuant to the review standard, AT
sec. 101 and AT sec. 601 would not apply.
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    In general, both standards set forth a framework of specific
procedures that are required for auditors to opine or conclude on a
broker's or dealer's statements--referred to in the standards as
``assertions'' \53\--in compliance reports and exemption reports
required by SEC Rule 17a-5, respectively.\54\
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    \53\ These standards use the term ``assertion'' to refer to the
broker's or dealer's individual statements that are covered by the
examination and review. In the examination standard, the term
``assertion'' also distinguishes the portion of the statements in
the broker's or dealer's compliance report that are covered by the
examination.
    \54\ See paragraphs (i)(3)(iii)(A) and (B) of SEC Rule 17a-5 for
the specific requirement for an opinion or conclusion to be
expressed in the auditor's report.
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    Furthermore, both of the attestation standards emphasize
coordination between the examination engagement or review engagement,
the audit of the broker's or dealer's financial statements and audit
procedures performed on the supporting schedules (referred to as
``supplemental information''). This emphasis on coordination, when
properly executed, can promote overall audit effectiveness and avoid
redundancy in the work performed. For example, auditors can take into
account, when appropriate, evidence obtained while planning and
performing the audit of the financial statements and the audit
procedures performed on supplemental information in planning and
performing the attestation engagement.
    This emphasis on coordination is also a key aspect of Auditing
Standard No. 17, Auditing Supplemental Information Accompanying Audited
Financial Statements (the ``auditing standard''),\55\ which the Board
is separately adopting. Auditing Standard No. 17 will apply when the
auditor of the financial statements is engaged to perform audit
procedures and report on supplemental information accompanying audited
financial statements in accordance with PCAOB standards, including
supporting schedules prepared pursuant to SEC Rule 17a-5.\56\ The
auditing standard also includes requirements for the procedures on the
supplemental information to be planned and performed in conjunction
with the audit of the financial statements, and for the audits of
brokers and dealers to be coordinated with the attestation engagements
related to compliance or exemption reports.\57\
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    \55\ See Auditing Standard No. 17, Auditing Supplemental
Information Accompanying Audited Financial Statements, PCAOB Release
No. 2013-008 (October 10, 2013).
    \56\ See paragraph (d)(2) of SEC Rule 17a-5.
    \57\ See the note to paragraph 3.c. of Auditing Standard No. 17.
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    In the Board's view, the attestation standards further the public
interest and promote investor protection because they are tailored to
the corresponding requirements of SEC Rule 17a-5, which are designed to
provide safeguards with respect to broker and dealer custody of
customer securities and funds. For example, the specific requirements
in the examination standard for evaluating Internal Control Over
Compliance \58\ can help auditors to identify deficiencies in a
broker's or dealer's internal controls for safeguarding customer
securities and funds or maintaining necessary capital or reserves.
Similarly, the specific requirements in the review standard should
focus auditors on whether the broker or dealer appropriately meets the
exemption provisions in paragraph (k) of SEC Rule 15c3-3.
---------------------------------------------------------------------------

    \58\ Consistent with SEC Rule 17a-5, the examination standard
defines ``Internal Control Over Compliance'' as ``internal controls
that have the objective of providing the broker or dealer with
reasonable assurance that non-compliance with the [financial
responsibility rules], will be prevented or detected on a timely
basis.'' See paragraph (d)(3)(ii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    Also, the SEC Release states that SEC enforcement actions alleging
fraudulent conduct by brokers and dealers highlight the need for
enhancements to the rules governing broker and dealer custody of
customer assets, including increased focus on compliance and internal
compliance controls by brokers and dealers and their auditors.\59\ The
attestation standards include requirements related to the auditor's

consideration of fraud risks, including the risk of misappropriation of
customer assets. The new standard includes requirements for testing
controls of the broker or dealer for safeguarding customer assets and
funds and for performing procedures to obtain evidence about the
existence of customer funds and securities held for customers.
---------------------------------------------------------------------------

    \59\ See the SEC Release at 206-207.
---------------------------------------------------------------------------

    Furthermore, PCAOB inspections staff in their inspections of broker
and dealer audits have identified auditing deficiencies in 57 of 60
audits that were conducted under GAAS and the prior SEC Rule 17a-5.\60\
The attestation standards--tailored for the new audit and reporting
requirements under SEC Rule 17a-5--establish an approach specific to
examining compliance reports and reviewing exemption reports that
should provide greater clarity as to the procedures that should be used
and facilitate consistent compliance for auditors of SEC registered
brokers and dealers.
---------------------------------------------------------------------------

    \60\ See Second Report on the Progress of the Interim Inspection
Program Related to Audits of Brokers and Dealers, PCAOB Release No.
2013-006 (August 19, 2013) at 6.
---------------------------------------------------------------------------

    The financial responsibility rules serve an important investor
protection function by requiring brokers and dealers to maintain
minimum levels of net capital and take steps to safeguard customer
securities and cash.\61\ As described in the SEC Release, the new
requirements for engagement of accountants should result in higher
levels of compliance with the financial responsibility rules by
increasing the focus of carrying brokers and dealers and their
independent public accountants on specific statements made in
compliance reports and increasing the focus of non-carrying brokers and
dealers and their independent public accountants regarding whether the
broker or dealer meets applicable exemption provisions.\62\ Moreover,
in the Board's view, the involvement of auditors, under the attestation
standards and PCAOB oversight, should enhance the quality of the
compliance information provided to the SEC and used in its regulatory
oversight, which is important to the protection of investors who
entrust their cash and securities with brokers and dealers.
---------------------------------------------------------------------------

    \61\ See the SEC Release at 255.
    \62\ See the SEC Release at 238.
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(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the
Sarbanes-Oxley Act.

B. Board's Statement on Burden on Competition

    Not applicable.

C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others

    The Board released the proposed rule amendment for public comment
in PCAOB Release 2011-004 (July 12, 2011). The Board received eleven
written comment letters. The Board has carefully considered all
comments received. The Board's response to the comments it received and
the changes made to the rules in response to the comments received are
discussed below.
Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers
    As discussed more fully below, the examination standard has been
designed specifically for an auditor's examination of certain
statements made by a broker or dealer in a compliance report required
by SEC Rule 17a-5. As a result of amendments to SEC Rule 17a-5, certain
brokers and dealers (e.g., those that maintain custody of customer
funds) must file a compliance report with the Commission making
statements regarding compliance with and controls over certain
financial responsibility rules.\63\ Specifically, SEC Rule 17a-5 also
requires the broker or dealer to engage an independent public
accountant registered with the PCAOB to examine, and independently
report on, certain statements made by the broker or dealer in the
compliance report.\64\
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    \63\ The examination standard and the SEC Release use the term
``financial responsibility rules'' to refer to 17 CFR 240.15c3-1
(``SEC Rule 15c3-1'' or the ``net capital rule''); 17 CFR 240.15c3-3
(``SEC Rule 15c3-3''); and 17 CFR 240.17a-13 (``SEC Rule 17a-13'');
and any rule of the designated examining authority (``DEA'') of the
broker or dealer that requires account statements to be sent to the
customers of the broker or dealer (an ``account statement rule'').
See the SEC Release at 8-9.
    \64\ See paragraph (g)(2)(i) of SEC Rule 17a-5.
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    According to the Commission, the amendments to SEC Rule 17a-5
strengthen audit requirements for brokers and dealers as well as
provide additional safeguards with respect to brokers' and dealers'
custody of customers' assets.\65\ Previously, audits of brokers and
dealers were subject to generally accepted auditing standards
(``GAAS'') established by the American Institute of Certified Public
Accountants (``AICPA''). The examination standard the Board is adopting
has been designed to align with the requirements of SEC Rule 17a-5. The
examination standard includes specific procedures for auditors
performing examinations of certain statements required in a compliance
report prepared by brokers and dealers as required under SEC Rule 17a-
5. In the Board's view, this approach is consistent with the objectives
of SEC oversight and is warranted in view of the importance of brokers'
and dealers' compliance with the financial responsibility rules and to
the protection of investors. In developing the standard, the Board has
emphasized coordination with the financial statement audit and audit
procedures performed on supplemental information. This approach should
enhance overall audit effectiveness and also help avoid unnecessary
duplication of work.
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    \65\ See generally the SEC Release at 206-209.
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    The following discussion provides background regarding the
attestation standards, including significant comments received on the
proposed standards and changes made to the standards.
SEC Rule 17a-5 and Related Changes
    SEC Rule 17a-5 requires a broker's or dealer's compliance report to
include the following statements by the broker or dealer as to whether:
\66\
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    \66\ See paragraph (d)(3)(i)(A) of SEC Rule 17a-5. SEC Rule 17a-
5 also requires the compliance report to contain a statement as to
whether the broker or dealer has established and maintained Internal
Control Over Compliance. However, the auditor is not required by SEC
Rule 17a-5 to examine and report on that statement.
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    a. The Internal Control Over Compliance of the broker or dealer was
effective during the most recent fiscal year;
    b. The Internal Control Over Compliance of the broker or dealer was
effective as of the end of the most recent fiscal year;
    c. The broker or dealer was in compliance with the net capital rule
and 17 CFR 240.15c3-3(e) (the ``reserve requirements rule'') as of the
end of the most recent fiscal year; and
    d. The information the broker or dealer used to state whether it
was in compliance with the net capital rule and the reserve
requirements rule was derived from the books and records of the broker
or dealer.
    As noted above, SEC Rule 17a-5 also requires the broker or dealer
to engage an independent public accountant registered with the PCAOB to
examine, and independently report on, certain statements made by a
broker or dealer in the compliance report. Neither the SEC Rule nor the
examination standard require the auditor to opine on the broker's or
dealer's process for arriving at the conclusions in the statements

made in the compliance report.\67\ Thus, the auditor need not opine on
the evaluation procedures that a broker or dealer may have performed in
order make the statements in the compliance report.
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    \67\ See the SEC Release at 38 and the second note to paragraph
5 of the examination standard.
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    As amended by the Commission, SEC Rule 17a-5 includes modifications
from the SEC's proposed amendments,\68\ including changes that are
reflected in the examination standard. Amendments made to SEC Rule 17a-
5 included narrowing the scope of the compliance assertion; \69\
eliminating the concepts of ``material non-compliance'' and
``compliance in all material respects;'' and requiring the auditor to
opine on Internal Control Over Compliance as of the end of the fiscal
year, as well as during the fiscal year.\70\
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    \68\ See SEC Exchange Act Release No. 34-64676, Broker-Dealer
Reports (June 15, 2011), 76 Federal Register 37572 (June 27, 2011)
(``SEC Proposing Release'').
    \69\ These standards use the term ``assertion'' to refer to the
broker's or dealer's statements that are covered by the examination
and review. In the examination standard, the term ``assertion'' also
distinguishes the portion of the statements in the broker's or
dealer's compliance report that are covered by the examination.
    \70\ See paragraph (d)(3)(ii) of SEC Rule 17a-5, which states
that the term ``Internal Control Over Compliance'' means internal
controls that have the objective of providing the broker or dealer
with reasonable assurance that non-compliance with Sec. Sec.
240.15c3-1, 240.15c3-3, 240.17a-13, or any rule of the designated
examining authority of the broker or dealer that requires account
statements to be sent to the customers of the broker or dealer will
be prevented or detected on a timely basis.
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    The Commission's narrowing of the scope of the compliance assertion
and changes to the evaluation of Internal Control Over Compliance
affected the scope of the examination procedures required to be
performed by the auditor and the auditor's report, and therefore
resulted in conforming changes to the final examination standard. These
and other modifications to the examination standard are discussed
further below.
Changes to the Examination Standard To Align With SEC Rule 17a-5
    The proposed examination standard was designed specifically for the
examination of the compliance report required by the proposed
amendments to SEC Rule 17a-5. As noted earlier, the examination
standard reflects conforming changes based on the Commission's revision
of its amendments to SEC Rule 17a-5 in the following areas: Narrowing
the scope of the compliance assertion; eliminating the concepts of
``material non-compliance'' and ``compliance in all material
respects;'' and requiring the auditor to opine on Internal Control Over
Compliance as of the end of the fiscal year, as well as during the
fiscal year.
Changes to the Scope of the Compliance Assertion
    The SEC's Adopting Release states:

    [T]he final rule [SEC Rule 17a-5] requires a statement as to
whether the broker-dealer was in compliance with Rule 15c3-1 and
paragraph (e) of Rule 15c3-3 as of the end of the most recent fiscal
year and, if applicable, a description of any instances of non-
compliance with these rules as of the fiscal year end. This is a
modification from the proposed assertion that the broker-dealer is
in compliance with the financial responsibility rules in all
material respects and proposed description of any material non-
compliance with the financial responsibility rules. Thus, the final
rule reflects two changes from the proposal: (1) Elimination of the
concepts of ``material non-compliance'' and ``compliance in all
material respects'' for the purposes of reporting in the compliance
report; and (2) a narrowing of these statements and requirements
from compliance with all of the financial responsibility rules to
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3.\71\
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    \71\ See the SEC Release at 32.

    The narrowing of the scope of the broker's or dealer's assertion to
include only compliance with the net capital rule and reserve
requirements rule resulted in several changes to the performance and
reporting requirements in the examination standard. As the final rule
limits the broker's or dealer's assertion regarding compliance to SEC
Rule 15c3-1 and paragraph (e) of SEC Rule 15c3-3, the examination
standard requires tests of compliance tailored to compliance with the
net capital rule and the reserve requirements rule.
    Because the broker's or dealer's assertion relates to compliance
with the net capital rule rather than compliance ``in all material
respects,'' the concept of material non-compliance has been removed
from the provisions of the examination standard regarding testing
compliance. Also, the auditor cannot opine that a broker's or dealer's
assertion that it is in compliance with the net capital rule and
reserve requirements rule is fairly stated, in all material respects,
if one or more instances of non-compliance with either the net capital
rule or reserve requirements rule exist as of the end of the most
recent fiscal year.
Materiality Considerations
    As discussed previously, the SEC's elimination of the concepts of
``material non-compliance'' and ``compliance in all material respects''
from the provisions of SEC Rule 17a-5 related to asserting compliance
has been carried over to the examination standard, which no longer
refers to ``material non-compliance'' or the ``risk of material non-
compliance.'' However, most of the procedures set forth in the proposal
for assessing the risks of material non-compliance have been retained
in paragraph 9 of the examination standard as planning procedures
because they remain relevant for determining the necessary nature,
timing, and extent of procedures to be performed in the examination.
    Also, consistent with SEC Rule 17a-5, the examination standard
retains the concept of a Material Weakness in Internal Control Over
Compliance, and the requirements regarding performing procedures to
determine whether Material Weaknesses exist in Internal Control Over
Compliance.
    The concept of materiality also remains relevant when evaluating
whether the information the broker or dealer used to assert compliance
with the net capital rule and reserve requirements rule is derived from
the broker's or dealer's books and records, is fairly stated, in all
material respects.
    The Board received a number of comments on the proposed examination
standard that are no longer applicable given the narrowing of the scope
of the compliance assertion. These comments included requests for
additional guidance related to the determination of material non-
compliance and requests for specific examples regarding the
consideration of qualitative and quantitative factors in the context of
each of the rules included in the compliance assertion, as well as
matters within each of those rules that the PCAOB considers to be most
significant to compliance.
Evaluating Internal Control Over Compliance During the Fiscal Year and
as of the End of the Fiscal Year
    The SEC Release states that SEC Rule 17a-5 requires that the
compliance report contain, among other things, statements as to whether
(1) the broker or dealer has established and maintained Internal
Control Over Compliance, (2) the Internal Control Over Compliance of
the broker or dealer was effective during the most recent fiscal year,
and (3) the Internal Control Over Compliance of the broker or dealer
was effective as of the end of the most recent fiscal year.\72\
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    \72\ See the SEC Release at 29-30.
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    To align with SEC Rule 17a-5, the examination standard requires the
auditor to express an opinion regarding whether the specified
assertions made

by the broker or dealer in its compliance report are fairly stated, in
all material respects, including whether the broker's or dealer's
Internal Control Over Compliance was effective during and as of the end
of the most recent fiscal year. This change from the proposed SEC Rule
17a-5 resulted in conforming changes to the examination standard
relating to the requirements for testing controls and the scope of the
examination report. For example, the examination standard addresses the
effect of changes in controls on the auditor's testing.
    Further, Appendix A to the examination standard defines certain
terms used in the examination standard, including ``Internal Control
Over Compliance,'' ``Deficiency in Internal Control Over Compliance,''
and ``Material Weakness.'' The definitions of these terms in the
examination standard are consistent with the definitions of these terms
in SEC Rule 17a-5.
Performing the Examination Engagement (Paragraphs 6--33 of Attestation
Standard No. 1) General Requirements (Paragraphs 6--7 of Attestation
Standard No. 1)
    The examination standard retains the general requirements as
proposed. These requirements are consistent with AT sec. 101, Attest
Engagements. Briefly, paragraph 6 of the examination standard sets
forth general requirements for an auditor performing an engagement
pursuant to the examination standard. Paragraph 6 requires that an
auditor: Have adequate technical proficiency in attestation
engagements; obtain an understanding of the financial responsibility
rules and other rules and regulations that are relevant to the broker's
or dealer's assertions; determine the auditor's compliance with
independence and ethics requirements; \73\ and exercise due
professional care.
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    \73\ Determining the auditor's compliance with independence and
ethics requirements includes determining that the auditor complied
with relevant requirements of the PCAOB and the SEC. Paragraph
(f)(1) of SEC Rule 17a-5 requires the auditor to be independent in
accordance with 17 CFR 210.2-01.
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    Some commenters stated that the general requirements in the
examination engagement were sufficiently clear as proposed. One
commenter recommended that the examination standard specify the level
of understanding of the financial responsibility rules that auditors
are expected to have. The commenter also recommended deleting the
reference to ``other rules and regulations that are relevant to the
broker's or dealer's assertions,'' asserting that the requirement is
too broad to allow auditors to identify suitable criteria and express
an opinion on management's assertion. Additionally, that commenter
recommended that the examination standard specify how the auditor's
understanding of the financial responsibility rules should be
documented.
    The requirement for the auditor to obtain an understanding of the
financial responsibility rules is similar to an existing requirement in
AT sec. 101, which includes a requirement for the engagement to be
performed by an auditor ``having adequate knowledge of the subject
matter.'' \74\ In addition, understanding the requirements in other
rules and regulations is important to enable the auditor to form
conclusions on the broker's or dealer's assertions, as well as aiding
the auditor's own compliance with the requirements in the examination
standard and SEC Rule 17a-5. For example, paragraph (h) of SEC Rule
17a-5 requires a broker or dealer to provide notification to the
Commission and other securities regulators when the auditor notifies
the broker or dealer that the auditor has determined that the broker or
dealer is not in compliance with SEC Rule 15c3-1 as required by SEC
Rule 17a-11, Notification Provisions for Brokers and Dealers. In
addition to the financial responsibility rules, it is of course
important that the auditor understands the requirements of SEC Rule
17a-5, including the notification requirements when an instance of non-
compliance is identified. As such, the requirement was retained