SIPC Clarifies SIPC-7 AUP Report Materiality Thresholds

In under a minute

• The Securities Investor Protection Corp. (SIPC) recently updated its Member FAQs to clarify how broker-dealers may apply materiality when performing certain comparison procedures required under SIPC Rule 600 for SIPC-7 Agreed-Upon Procedures (AUP) Reports.¹
• While the guidance reflects SIPC’s views and is not binding on the Securities and Exchange Commission (SEC), it provides helpful direction that might be relevant for both in-process and future SIPC AUP engagements.

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What SIPC clarified

The updated FAQ addresses whether immaterial differences always must be reported as exceptions in SIPC-7 AUP reports. SIPC’s response introduces specific dollar thresholds under which differences will not be treated as violations of Rule 600, provided certain conditions are met.

Comparisons under Rules 600(b)(3)(ii) and (iii)

For procedures comparing annual report revenue and adjustment amounts to the Form SIPC-7, SIPC stated it will not treat a difference of $25 or less as a violation if the difference is not reported as an exception, as long as these conditions are met:

• The SIPC member and the independent public accountant agree to the materiality limit as part of the engagement letter.
• The agreed-upon materiality limit is described in the AUP report.

Comparisons under Rules 600(b)(3)(i), (iv), and (v)

For other specified procedures under Rule 600, SIPC indicated it will not treat a difference of $1 or less as a violation, provided the same two previously identified conditions are satisfied.

Crowe observation: This clarification provides practical flexibility, but it also reinforces the importance of thoughtful planning and clear communication at the outset of an SIPC AUP engagement.

In practice, broker-dealers might wish to revisit the language in their AUP engagement letters with their independent public accountants prior to execution to confirm that any agreed-upon exception thresholds are clearly articulated. Broker-dealers also should review related reporting templates to verify that any exception thresholds reflected in the AUP report are consistent with the executed engagement letter and are applied consistently in practice. This approach might help limit the reporting of inconsequential exceptions while remaining aligned with SIPC’s expectations and the underlying intent of Rule 600.

As with all SIPC guidance, broker-dealers should remain mindful that the FAQ reflects SIPC’s view and does not replace or override applicable SEC requirements or the exercise of professional judgment.

Looking ahead

Although limited in scope, this update offers helpful clarity in an area that historically has generated frustrations related to having to report trivial exceptions questions during SIPC-7 AUP engagements. Broker-dealers involved in SIPC reporting might find it useful to evaluate whether their current approaches appropriately reflect this guidance, particularly as they plan for upcoming reporting cycles.

As regulatory expectations for broker-dealers continue to evolve, staying current on targeted clarifications such as this one can help firms better align their reporting processes with regulatory intent while avoiding unnecessary complexity.

¹ The full FAQ update is available on SIPC’s website and should be reviewed in its entirety for complete context.