The Securities and Exchange Commission has announced the Customer Protection Rule Initiative (Initiative), under which broker-dealers that have failed to comply with the SEC’s Customer Protection Rule (SEC Rule 15c3-3) may self-report to the SEC in exchange for potentially favorable settlement terms.
In conjunction with the Initiative, the SEC will be conducting a risk-based sweep of certain broker-dealers for the purpose of assessing their compliance with the Customer Protection Rule. As a result, the SEC may seek more information or schedule an examination of any such firms. Broker-dealers that have already been contacted by the SEC regarding possible past or continuing noncompliance with the Customer Protection Rule, but against which no enforcement action has yet been taken, may still be eligible for the Initiative.
To participate in the Initiative, a broker-dealer must self-report certain information by November 1, including, the provision of the Customer Protection Rule implicated, the period of noncompliance, the amount of customer cash or securities implicated and any remedial efforts. Broker-dealers must also fulfill the self-reporting requirements under the Securities Exchange Act of 1934.
If the SEC’s Division of Enforcement decides to recommend enforcement action for any violation reported under the Initiative, it will recommend that the SEC accept a settlement pursuant to which the broker-dealer consents to the institution of a cease-and-desist proceeding. Such recommendation will note that the broker-dealer violated the Customer Protection Rule, but that it neither admits or denies the findings of the Division of Enforcement, that the broker dealer will undertake to establish appropriate policies and procedures, cooperate with subsequent investigations and, if needed, retain a consultant, and that the broker-dealer will pay disgorgement of any ill-gotten gains and penalties.
The SEC has noted that the Initiative will provide meaningful cooperation credit, including in the form of reduced penalties. However, the SEC has given no assurance that individuals associated with those entities will be offered similar terms if they have engaged in violations of federal securities laws.
More information on the Initiative is available here.