Julia Chirkova
By Mark Schoeff Jr.
CQ-Roll Call
(TNS)
WASHINGTON – A bipartisan effort to ease regulatory burdens on small financial firms is gaining momentum in Congress, spearheaded by Arkansas lawmakers who argue that current audit requirements, enacted in the wake of major financial scandals, are disproportionately impacting smaller, privately held investment brokers. House Financial Services Chairman French Hill, R-Ark., and Senator Tom Cotton, R-Ark., are co-leading the legislative push, aiming to exempt these smaller entities from costly audits mandated by the Public Company Accounting Oversight Board (PCAOB).
The proposed legislation seeks to address a long-standing grievance among a segment of the financial services industry: that the audit requirements, originally designed for large public corporations, are an undue financial strain on small, privately held broker-dealers. Proponents of the bill contend that these firms, vital conduits to capital markets for Main Street businesses, are struggling to survive under a regulatory framework that treats them similarly to much larger, publicly traded entities.
The roots of the current audit regime can be traced back to the early 2000s. In response to the widespread accounting fraud exposed by the Enron and WorldCom scandals, Congress passed the Sarbanes-Oxley Act of 2002. This landmark legislation fundamentally reshaped corporate governance and auditing standards. A key component was the creation of the PCAOB, an independent non-profit organization tasked with overseeing the audits of public companies to protect investors. Sarbanes-Oxley mandated stricter, more complex audits conducted by firms registered with the PCAOB.
The reach of these stringent audit requirements was further expanded following the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted to prevent a recurrence of the Great Recession-era banking collapse, broadened the scope of the Sarbanes-Oxley audit rule to encompass all broker-dealers registered with the Securities and Exchange Commission (SEC), regardless of whether they were publicly traded or privately held. This expansion was partly a reaction to the staggering $65 billion investor fraud orchestrated by Bernard Madoff, which highlighted significant lapses in oversight and auditing practices.
However, for many small, privately held broker-dealers, the implementation of these enhanced audit requirements has presented a significant financial challenge. These firms have consistently argued that PCAOB audits are substantially more expensive than the audits they previously underwent under generally accepted auditing standards. The cost of these audits, often running into tens of thousands of dollars annually, represents a substantial portion of their operating expenses, particularly for firms with limited revenue streams.
The Burden of Compliance: A Threat to Small Businesses
The legislation championed by Hill and Cotton aims to provide relief by absolving eligible small broker-dealers from the obligation to engage an audit firm registered with the PCAOB for their annual financial statement inspections, regulatory compliance reviews, and capital assessments. This exemption would apply to firms that meet specific criteria: fewer than 150 employees and no client asset custody.
A compelling example of the burden faced by these firms is Lieblong & Associates, a four-person shop based in Little Rock, Arkansas. This firm was among the first to bring the issue to Senator Cotton’s attention in 2017. The owner reported that annual compliance costs, largely driven by PCAOB audit requirements, amounted to approximately $40,000. For a small operation, this is a considerable financial outlay, diverting resources that could otherwise be invested in growth or client services.
The sentiment among these smaller firms is widespread. In a 2018 letter to Senate Banking Committee leaders, approximately 300 small broker-dealers expressed their struggles. They articulated that "the legislative and regulatory burden for small businesses in our industry is substantial and small firms are struggling to survive." The letter further highlighted the perceived inequity: "Currently, a 3-person, non-public small business is held to the same standards as Merrill Lynch; this is not right, fair or reasonable." This sentiment underscores the core argument of the bill’s proponents: the need for regulatory proportionality.
The current legislative push by the Arkansas lawmakers is a continuation of efforts that began in 2018. While the measure saw some progress, including a successful markup in the House Financial Services Committee that year, it has faced considerable headwinds in gaining broader traction. Senator Cotton and Representative Hill have indicated that they continue to hear from small broker-dealers in their home state who are "fed up with accounting fees," according to a senior Senate aide. This persistent feedback loop has fueled their renewed commitment to advancing the legislation.
Chairman Hill’s personal experience in the financial industry provides him with a unique perspective on these issues. Before entering Congress, he founded and managed Delta Trust & Banking Corp., a community bank and broker-dealer, which he sold in 2014 after winning his congressional seat. This background likely informs his advocacy for regulations that are tailored to the size and risk profile of financial institutions.
The latest iteration of the House bill was introduced by Hill on September 17th, with Senator Cotton expected to introduce the companion Senate bill shortly thereafter. This coordinated effort signals a renewed focus on addressing the concerns of small investment brokers.
Hill has been a consistent voice for regulatory relief for community banks, advocating for oversight that is "tailored" to their specific needs rather than imposing the same stringent regulations applied to larger institutions. He views the current situation for small, privately held broker-dealers as a parallel issue. "Small, privately held broker-dealers deserve that same attention," Hill stated. "These firms serve as a gateway to the capital markets for Main Street businesses, yet they remain burdened by costly, one-size-fits-all audit requirements."
Senator Cotton echoed this sentiment, framing the issue as one of fairness and economic opportunity. He asserted that regulators "wrote this rule for Wall Street and then applied it to small firms on Main Street." The bill, in his view, would "ensure investment firms in Arkansas are no longer punished for their size and are instead given the chance to grow and succeed in a friendlier business environment."
Navigating Political Headwinds and Investor Protection Concerns
Despite the renewed legislative push, the immediate prospects for the bill remain uncertain. A significant challenge is the lack of Democratic co-sponsors, a critical factor for bipartisan legislation to advance, especially in a potentially divided Congress. Furthermore, the upcoming lame-duck session after the November elections is unlikely to provide a fertile ground for significant legislative action, according to the Senate aide.
The political landscape could shift dramatically if the House flips to Democratic control in November. In such a scenario, opponents of the measure would be positioned to regain a majority on the House Financial Services Committee, potentially hindering the bill’s progress.
The bill’s history in the House Financial Services Committee reveals the partisan divide on this issue. When it was considered in 2018, only four Democrats joined all the committee’s Republicans in supporting it. Two of those Democratic co-sponsors are no longer serving in Congress. Among the remaining House members who have supported the bill are Representatives Vicente Gonzalez, D-Texas, a consistent co-sponsor, and Jim Himes, D-Conn., whose district has a significant financial industry presence.
Conversely, Ranking Member Maxine Waters, D-Calif., along with other committee Democrats and investor advocates, have historically opposed the bill. Their primary concern is that relaxing audit standards could undermine investor protections, particularly in light of the catastrophic losses incurred by investors in the Madoff Ponzi scheme. In the committee report accompanying the 2018 bill, Democrats argued that the measure "would exempt some of the worst-performing auditors in our capital markets from federal scrutiny." They also noted that approximately 80% of firms would fall below the employment threshold for the audit exemption and that non-custodial firms frequently face audit deficiencies.
Organizations like the Consumer Federation of America and Americans for Financial Reform have also voiced concerns, asserting that the bill lacks adequate investor protections. They have further argued that the legislation is unnecessary, suggesting that the PCAOB already possesses the authority to tailor audit requirements based on firm size. This perspective suggests that the core issue may not be the existence of rules, but their application and enforcement.
The debate over this legislation highlights a fundamental tension between fostering a favorable business environment for small enterprises and ensuring robust investor protection. Proponents argue for a tiered regulatory approach that recognizes the differing scales and risks of financial firms, while opponents emphasize the importance of consistent, high audit standards to prevent fraud and safeguard investors, regardless of a firm’s size. The path forward for this bill will likely depend on its ability to bridge this divide and garner broader bipartisan support, or on the evolving political dynamics in Washington.
