Clarifying the Single Issuer Exemption for Broker-Dealers

By Lauren Jackson, John I. Sanders, and Lauren Henderson

On September 20th, the SEC released a proposed rule amending Rule 17a-5 of the Securities Exchange Act of 1934, as amended (“Exchange Act”).[1] Under Rule 17a-5(d)(1)(i)(C) of the Exchange Act, broker-dealers registered with the SEC generally must file an annual report that includes financial reports audited by an independent public accountant registered with the Public Company Accounting Oversight Board.[2] However, the SEC may exempt certain broker-dealers from the audit requirement where it determines an exemption is consistent with investor protection and public interest.[3] Under the proposed Rule 17a-5, the audit requirement would not apply where a broker-dealer’s business is “limited to acting as broker (agent) for a single issuer in soliciting subscriptions for securities of that issuer…” (emphasis added).[4] The SEC believes the exemption is appropriate because, under these circumstances, the issuer can likely access and evaluate a great deal of financial information about the broker-dealer.[5] In fact, the broker-dealer is usually an affiliate of the issuer. Therefore, an audit by an independent public accountant does not provide a “meaningful benefit” to the issuer or investors.[6] We agree and believe the proposed rule will be particularly helpful to private funds and their investment advisers, some of which have created broker-dealers for the express purpose of selling fund shares. The deadline for submitting comments on the proposed rule is October 29th. If you are interested in submitting a comment or have any questions on the effect of the proposed rule, please feel free to contact us. Lauren Jackson is counsel and John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office. [1] SEC, Proposed Rule: Amendment to Single Issuer Exemption for Broker-Dealers, Release No. 34-84225 (Sept. 2018), available at [2] 17 C.F.R. 240.17a-5(d)(1)(i)(C). [3] Exchange Act §17(e)(1)(C). [4] SEC, supra note 1 [5] Id. [6] Id.

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