The SEC recently amended the net capital rule, customer protection rule, and recordkeeping and reporting rules applicable to registered broker-dealers. Effective October 21, 2013, SEC-registered broker-dealers must comply with these amended financial responsibility rules, including:

  • Customer Protection Rule (Rule 15c3-3)
  • Net Capital Rule (Rule 15c3-1)
  • Books and Records Rule (Rule 17a-3)
  • Notification Rule (Rule 17a-11)

Customer Protection Rule

The SEC amended Rule 15c3-3, commonly known as the "customer protection rule," which is the principal SEC rule requiring segregation of customer assets. Rule 15c3-3 is intended to (i) protect a customer's funds that are held by its broker-dealer and (ii) prohibit broker-dealers from using customer funds inappropriately. The amendments to Rule 15c3-3 codify existing SEC guidance (the "PAIB letter"), pursuant to which a broker-dealer is not required to take a capital deduction for funds held with another brokerdealer (commonly called the "carrying broker"), provided that the carrying broker maintains such funds in a special, segregated account. The amendments require carrying broker-dealers to: (i) perform a separate reserve computation for the proprietary accounts of other brokers ("PAB Accounts") in addition to the customer reserve computation currently required by the Rule; (ii) establish and fund a separate reserve bank account for the benefit of PAB Account holders; and (iii) obtain and maintain physical possession or control of non-margin securities carried for PAB Accounts. Under the revised Rule, a carrying broker may use PAB Account securities for its own purposes, provided that it informs the PAB Account holder that it intends to do so and provides the PAB Account holder with the opportunity to object to such use. If the carrying broker complies with these requirements, the PAB Account holder will not be required to deduct the value of the PAB Account from its net capital under the net capital rule. The SEC also amended Rule 15c3-3 to state that customer and PAB Accounts may not be held at certain institutions, including a bank affiliated by the broker-dealer holding the PAB Account.

Net Capital Rule

The SEC amended Rule 15c3-1, the "net capital rule," which governs regulatory capital requirements for SEC-registered brokerdealers. The amended Rule clarifies that broker-dealers providing securities lending and borrowing settlement services are deemed to be acting in a principal capacity for purposes of the net capital rule, and are therefore subject to capital deductions in respect of such provisions. However, a broker-dealer can avoid these deductions under certain circumstances enumerated by the Rule. As amended, the Rule will require that a broker-dealer take into account in its computation of regulatory net capital liabilities that are assumed by a third party, including an affiliated third party, if the broker-dealer cannot demonstrate that the third party has enough independent resources to pay the liabilities.

Books and Records Rule

The SEC amended Rule 17a-3 to require broker-dealers over a certain size to make and keep current records showing: "the credit, market, and liquidity risk management controls established and maintained by the broker-dealer to assist it in analyzing and managing the risks associated with its business activities."

Notification Rule

The SEC amended Rule 17a-11 to insert a new provision requiring a broker-dealer to notify the SEC if the total amount of money payable (as a principal liability) against all securities loaned or subject to a repurchase agreement, or the total contract value of all securities borrowed or subject to a reverse repurchase agreement, exceeds 2,500% of tentative net capital. Importantly, government securities (including Treasuries) are excluded from this calculation.