Proposal would exempt small broker-dealers from costly audit rules
A legislative proposal from Rep. French Hill and Sen. Tom Cotton would exempt small, privately held broker-dealers from certain audit requirements imposed by the Sarbanes-Oxley Act. The bill applies to firms with fewer than 150 employees that do not hold client assets, potentially saving them tens of thousands of dollars in annual compliance costs. The measure stems from a 2017 complaint by a four-person Arkansas firm.
The audit requirement stems from the 2002 Sarbanes-Oxley Act, which created the PCAOB. The 2010 Dodd-Frank Act extended these audits to all SEC-registered broker-dealers, prompted by Madoff's $65 billion fraud. Small firms argue these audits are pricier, with Lieblong & Associates reporting roughly $40,000 in annual compliance costs. A 2018 letter from about 300 small broker-dealers supported relief, noting a three-person firm faces the same standard as Merrill Lynch.
The proposal has a long history, first introduced in 2018 and passing a House Financial Services markup that year, but it stalled. Hill reintroduced the House version on September 17, with Cotton set to file the Senate companion. Hill, who founded and ran Delta Trust & Banking Corp. before selling it in 2014, has also pursued other bills this year to tailor community bank regulations to their size and risk.
This proposal could ease a significant financial burden for small broker-dealers, potentially allowing them to remain viable and continue serving local clients. However, it may also reduce the rigor of financial oversight, which could increase the risk of undetected fraud or mismanagement, particularly given the history of the Madoff scandal. The measure may also set a precedent for size-based regulatory exemptions, influencing how other financial rules are applied to small firms.