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Article

SEC proposes amendments to the customer protection rule

July 26, 2023 · Authored by Alan Hartmann

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  • Asset Management

The SEC proposed amendments to Rule 15c3-3, the Customer Protection Rule, on July 12, 2023. The amendments require certain broker-dealers to increase the frequency with which they compute net cash owed to customers and other broker-dealers — known as proprietary securities accounts of a broker-dealer (PAB account holders) — from weekly to daily.

The public comment period will remain open for 60 days following publication of the proposal release on the SEC website or 30 days following publication of the proposal release in the Federal Register, whichever period is longer.

Proposed rule changes explained

Rule 15c-3 provides protection to customer funds and securities by requiring carrying broker-dealers, broker-dealers that have custody of customer cash and securities, to segregate their business activities from customer and PAB funds and by preventing carrying broker-dealers from using customer assets to finance any part of their business.

This allows customer securities and cash to be readily available for distribution to customers in the event of a liquidation. Carrying broker-dealers are required to have a special reserve account for the exclusive benefit of customers (EBOC) or the customer reserve bank account, or a PAB reserve account at a bank to hold cash and qualified securities as determined by the 15c3-3 computation.

SEC Chair Gary Gensler commented that given the speed, scale, and volume of today’s market activity, customers would benefit if broker-dealers carrying large credit balances made daily reserve account calculations and deposits.

Issues with the current rule

Currently, the rule requires carrying broker-dealers to perform the computation weekly as of the close of the last business day of the week and to make the required deposit by 10:00 a.m. of the second business day following the as of date of the computation.

Activity after the customer and PAB reserve computation date can result in a broker-dealer having large amounts of additional deposits that aren’t accounted for until the next reserve computation and don’t get reserved for until the next deposit into the customer and PAB reserve bank accounts.

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Alan Hartmann

Principal

Related sections

  • Asset Management

This can lead to a mismatch between the net of cash owed to customers and PAB account holders and the amount currently on deposit in the reserve bank accounts. The proposed daily computations would shorten the period during which this mismatch between the net amount owed to customers and PAB account holders and the amount on deposit exists. This will help reduce the risk of large shortfalls in the amounts available in the customer and PAB reserve bank accounts to make them whole if the broker-dealer fails.

The proposal would require broker-dealers with average total credits — the amount of cash they owe customers and PAB account holders — equal to or greater than $250 million for the average of the previous twelve months to calculate amounts required to be deposited in the customer and PAB reserve bank accounts daily, as of the close of the previous business day.

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