SEC Votes to Amend Broker-Dealer Financial Responsibility Rules

By unanimous decision, the Securities and Exchange Commission has agreed to amendments to the Securities Exchange Act or 1934’s rules regarding customer protection, net capital, notification, and record books for broker-dealers. The regulator is seeking to enhance protections for investors and prevent business practices that are not sound.

Under The Act, broker-dealers have to satisfy certain financial requirements so that customers are protected in the event of the firm’s financial failure. The Act offers safeguards so that customer funds and securities being held by a broker are protected.

The Customer Protections Rule
Also referred to as Rule 15c3-3, the Customer Protections Rule doesn’t let broker-dealers use customer cash and securities to fund their own business. The rule mandates that customers’ cash and securities be kept separate. Significant revisions include: mandating that broker-dealers keep up customer securities and funds so there is a new segregated reserve fund designated for broker-dealer account holders, putting restrictions on cash bank accounts to keep up a reserve for protecting customer cash under the rule (not including cash deposits at bank affiliates; also placing limits on cash at non-affiliated banks to a figure no larger than 15% of the equity capital of the bank), and establishing customer notice, disclosure, and affirmative consent requirements for new accounts for programs where client cash in a securities account gets “swept” to a bank deposit product or a money market.

Books and Records Rules
Rules 17a-3 and 17a-4 obligate broker-dealers to keep up and specific business records to help the firm account for activities, which also helps securities regulators when they are checking for compliance. The main change to the rule: Large broker-dealers will have to document credit, market, and liquidity risk management controls.

The Net Capital Rule
Also know as Rule 15c3-1, this rule ensures that a brokerage firm always has for every dollar of liability over a dollar of assets that are highly liquid. Key changes include making a broker-dealer adjust its net worth when determining net capital by having them include liabilities that are third party assumed if the firm cannot show that the party can pay the liabilities, requiring that they subtract the excess of any deductible amount above the amount allowed by SRO rules allow from net capital, and clarifying that any brokerage firm that becomes “insolvent” has to stop conducting securities business.

The Notification Rule
Rule 17a-11 mandates that a broker-dealer notify securities regulators when certain events happen, such as its net capital fall under the required minimum. The major amendment to this rule is new notice requirements for when a broker-dealer’s securities lending and repurchase activities go behind a certain threshold. A brokerage firm also will have the option of reporting repurchase and stock loan activities to its DEA monthly.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities law firm that represents broker fraud investors throughout the US.

SEC Adopts Amendments to Financial Responsibility Rules for Broker-Dealers, SEC, July 31, 2013

Securities and Exchange Act of 1934

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