Circular D4/EB/1 Regarding the Examination of the Securities Balance of Brokerage Companies as of March 31, 2000

BANKING AND FINANCIAL COMMISSION
Prudential supervision of investment firms
99 Louise Avenue, B-1050 Brussels telephone +32(2)535.22.11 - fax +32(2)535.23.08 Brussels, March 17, 2000.

CIRCULAR D4/EB/1 TO THE AUDITORS
OF BROKERAGE COMPANIES

Madam,
Sir,

As you know, the value of financial instruments held by brokerage companies for their clients generally represents an amount much higher than that of cash deposits or other balance sheet or off-balance sheet items. Nevertheless, the treatment of the securities deposit activity occupies a minor place in the annual and consolidated accounts that brokerage companies have established so far in accordance with the provisions of common law.

This is why the Banking and Financial Commission imposes on brokerage companies a periodic reporting on the status of their rights and obligations in financial instruments, taking the form of a securities balance. This securities balance must be established in accordance with the basic rules of double-entry bookkeeping, as set out in Circular 91/7 of December 18, 1991.

Given the importance of the "securities" items in the activity of brokerage companies and considering that the custody of these securities constitutes a significant source of risk, the Commission has deemed that a thorough examination of the securities balance of all brokerage companies is necessary.

Accordingly, it requests that you, in application of Article 101 of the Law of April 6, 1995 (mandates entrusted to approved auditors) or in application of Article 167 of the same Law and Article 55 of the Law of December 4, 1990 (mandates still subject to the transitional regime), prepare a special report with the following content and characteristics:

1) a description of the brokerage company's policy regarding the activity of depositing financial instruments (custody versus delivery; rental or making available of safe deposit boxes; custody in own vaults versus with third-party depositaries; involvement of delegated agents in securities operations (transit, deposit); tariff structure, security (access to the vault, physical controls, transport and insurance);

2) a description and assessment of the organization put in place by the company for each of the aspects listed in point 1), to the extent that they apply. The description and assessment will focus in particular on the accounting system used, the personnel assigned, contractual supervision, internal control, internal and external audit (including their planning and budgets). The auditor must, in his report, highlight significant and unresolved problems encountered during his controls;

3) a certification of the securities balance as of March 31, 2000, which the auditor will confirm as complete and accurate, and that it was established in accordance with the basic rules referred to in Circular 91/7 of December 18, 1991, particularly paragraphs 1 to 7 of the annex. If applicable, the auditor will mention important events subsequent to this date relevant to his confirmation;

4) a description of the methodology on which the auditor bases his assessment and certification, including how control results were achieved. The Commission wishes in any case to know what circularizations were performed and what their results were. If certain items of the securities balance were not subject to circularization or were subject only to partial circularization, the auditor will mention the date of the last complete review of the relevant item and any alternative controls that were performed. The brokerage company's storage locations (vaults, agencies, delegated agents, transit locations) must, however, be subject to a complete inventory.

The Commission would like to receive your report by May 31, 2000 at the latest.
A copy of this circular is sent to the brokerage companies.
My services remain, of course, at your disposal for any further information you may wish to obtain.
Please accept, Madam, Sir, the expression of my distinguished sentiments.

The President,
J.-L. DUPLAT