SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants

The Securities and Exchange Commission’s efforts to revive a 2007 proposal, which would amend the rules under the 1934 Securities Exchange Act related to customer protection, net capital, notification, and books and records for broker-dealers, has some market participants upset. The proposal, which seeks to deal with areas of concern related to broker-dealer financial requirements and update the financial responsibility rules of these firms, was recently opened up again for comment by the SEC for a 30-day period through June 8, 2012 in the wake of the regulatory developments and economic events that have developed since 2007 and due to the public’s continued interest.

However, as our securities fraud law firm just mentioned, not everyone is welcoming this move with open arms. Earlier this month, BOK Financial Corp. (BOKF) wrote a letter to the SEC arguing that the proposal doesn’t factor in certain significant changes that have taken place since 2007 and that “key justifications” for specific proposed modifications appear to be based more on that time period rather than “current conditions.” Also voicing its disapproval was the National Investment Banking Association, which noted that the proposal fails to include numerical values or statistics that represent the present atmosphere. NIBA also pointed to the “unprecedented changes” that have followed since the proposal was introduced five years ago.

J.P. Morgan Trading Services is also not pleased with the SEC’s decision to revise this 2007 proposal. It is calling on the Commission to use other prudential rules that it believes would do a better job. Meantime, the Securities Industry and Financial Markets Association is warning that certain of the proposed requirements might up the financial osts for industry participants.

The proposal mandates that broker-dealers with the proprietary accounts of other broker-dealers maintain reserve funds to deal with claims stemming from these accounts. It also would prevent broker-dealers from including as part of these funds cash that was placed at affiliated banks, as well as some of the cash that was deposited in banks that are not affiliated.

That said, there are those that support this proposal. In a letter to the SEC, the Public Investors Arbitration Bar Association said that it believes the proposed measures would “marginally increase” broker-dealers’ financial stability while decreasing the risk of public investors that succeed in FINRA arbitration proceedings not being able to collect the damages that they are awarded through these proceedings. PIABA even believes that the proposal should additionally require that all broker-dealers have errors and omissions insurance to cover client claims to make sure that these financial firms are able to pay these arbitration awards.

Some Voice Concern at SEC Bid to Revive 2007 B-D Financial Responsibility Proposal, BNA/Bloomberg, June 18, 2012

Comments on Amendments to Financial Responsibility Rules for Broker-Dealers, SEC

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