SEC Formalizes Relief for Certain Captive Broker-Dealers by Adopting Single Issuer Exemption

The Securities and Exchange Commission has announced the adoption of an amendment, as proposed, to the “single issuer exemption” for broker-dealers provided by Rule 17a-5 under the Securities Exchange Act of 1934. The amendment, meant to clarify the existing exemption, will become effective on August 13, 2019. The amended exemption provides that “a broker-dealer that acts as broker (agent) for a single issuer in soliciting subscriptions” is “not required to engage an independent public accountant to certify the broker-dealer’s annual reports.”

As background, Section 17 of the Exchange Act generally requires a registered broker-dealer to file an annual financial report (Annual Report) with the SEC. Pursuant to Rule 17a-5 under the Exchange Act, a broker-dealer also is required to file a compliance report or an exemption report.2 These reports must be accompanied by Annual Reports prepared by a qualified and independent public accountant that is registered with the Public Company Accounting Oversight Board (PCAOB).3 The Annual Reports are used to certify the reliability of the information filed by the broker-dealer. That information is employed “to monitor the financial and operational condition of the broker-dealer” as well as the broker-dealer’s “compliance with the Commission’s broker-dealer financial responsibility rules.”

Broker-dealers are not required to file an Annual Report if the broker-dealer satisfies the “Single Issuer Exemption” set forth in the Rule.4 The SEC’s amendment to the Rule clarifies that the exemption is available only for broker-dealers that act as a broker for a single issuer. In the Adopting Release, the SEC explained that the revised Single Issuer Exemption aligns with the purpose of the Rule, because where the broker-dealer acts as the broker (agent) for a single entity, the issuer is in a “privileged position to access sufficient information about the financial condition and operations of its agent – the broker-dealer affiliate – to make an informed decision about continuing to use the broker-dealer to effect transactions in its securities.”

The broker-dealer does not need to be affiliated with the issuer to utilize the exemption, although the SEC expressed skepticism in the Adopting Release that there would be a situation when a broker-dealer would act as agent for only one unaffiliated issuer. According to the 2018 Annual Report filings, only four of the approximately 4,000 registered broker-dealers utilized the Single Issuer Exemption, and all four of them were affiliated. The Adopting Release makes clear that if an unaffiliated broker-dealer were to utilize the Single Issuer Exemption, the SEC believes that the issuer’s semi-special relationship as the sole issuer would provide sufficient access to information for the issuer to make an informed decision about its relationship with the unaffiliated broker-dealer.

The SEC emphasized that the exemption does not include broker-dealers that service more than a single issuer, because multiple issuers would not enjoy the “privileged position” of a single issuer, which is able “to access sufficient information about the financial condition and operations of the broker-dealer to make an informed decision” about the broker dealer. Additionally, the SEC clarified in the Adopting Release that the Single Issuer Exemption is an exemption from having to file a report prepared by an independent public accountant that is registered with the PCAOB, not an exemption from the requirement that accountants register with the PCAOB. The requirement that the accountant register with the PCAOB is covered separately in the Exchange Act5 and in paragraph (h) of Rule 17a-5.

Footnotes

_{1) Amendment to Single Issuer Exemption for Broker-Dealers, Exchange Act Release No. 34-86073 (June 14, 2019) (Adopting Release). 
2) Paragraphs (d)(1)(i)(B)(1) and (2) of Rule 17a-5.
3) Paragraph (d)(1)(i)(C) of Rule 17a-5.
4) Paragraph (e)(1)(i)(A) of Rule 17a-5.
5) Section 17(e)(1)(A) of the Exchange Act.}