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The SEC proposes rule amendments to the broker-dealer customer protection rule

On July 12, 2023, the Securities and Exchange Commission (the SEC) announced proposed amendments to the Customer Protection Rule, also known as Rule 15c3-3, to require certain broker-dealers to increase the frequency of their computations of the net cash they owe to customers and other broker-dealers, also known as PAB account holders.

Rule 15c3-3 seeks to protect a customer or PAB account holder’s cash and securities held at a broker-dealer. This rule requires broker-dealers that maintain custody of customer securities and cash (“carrying broker-dealers”) to maintain a special reserve bank account that must hold cash and/or qualified securities in an amount determined by the computation of the net cash owed to the carrying broker-dealer’s customers. Currently, Rule 15c3-3 requires carrying broker-dealers to perform the customer reserve computation and make any required deposits into the customer reserve bank account on a weekly basis.

The proposal would result in the following:

  • Require carrying broker-dealers with average total credits, or the amount of cash owed to customers and PAB account holders, equal to or greater than $250 million to increase the frequency of their customer and PAB reserve computations from weekly to daily, as of the close of the previous business day. Average total credits are defined as the arithmetic mean of the sum of total credits reported in a carrying broker-dealer’s customer and PAB reserve computations in its 12 most recently filed month-end FOCUS Reports.
  • Require carrying broker-dealers to make deposits into special reserve accounts no later than one hour after the opening of banking business on the following business day.
  • Require that a carrying broker-dealer comply with the daily computation requirement for the customer and PAB reserve bank accounts no later than six months after having exceeded the $250 million threshold. This is intended to give the carrying broker-dealer time to implement system and staffing changes necessary to perform the daily computation.
  • If a carrying broker-dealer’s average total credits subsequently fall below the $250 million threshold, the proposed amendments would require the carrying broker-dealer to continue performing daily customer reserve and PAB computations and provide written notification to its designated examining authority of its election to perform weekly computations. The carrying broker-dealer would be required to provide such written notification 60 days prior to reverting back to weekly computations.
Baker Tilly’s assessment

Rule 15c3-3 is designed to protect a broker-dealer’s customers and to ensure that if a broker-dealer encounters financial difficulties, its customers’ cash and securities will be readily available to be returned to those customers. The increase in frequency of the customer and PAB reserve computations will provide greater confidence that these requirements are being met throughout the year.  

The most significant impact of the proposal on carrying broker-dealers that meet the $250 million threshold would be ensuring that internal systems and processes are evaluated and enhanced to ensure that they can comply and complete the daily computations. Additionally, carrying broker-dealers should ensure that they have appropriate personnel to prepare and review the daily computations. Auditors of these carrying broker-dealers may also need to increase the number of sample selections for the customer reserve and PAB computations as they perform procedures over the carrying broker-dealers annual Compliance Report. 

For additional information, please see the full press release SEC Press Release 2023-130.

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