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SEC Staff Guidance on the Broker-Dealer Financial Responsibility Rules

March 13, 2014

Last week, the SEC’s Division of Trading and Markets issued guidance on the new financial responsibility rules for broker-dealers published by the agency in July 2013.

The new rules amended the net capital, customer protection, books and records, and notification rules for broker-dealers. The amendments were designed to better protect the customers of broker-dealers and enhance the Commission’s ability to monitor and prevent unsound business practices.

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The staff guidance notes that the following rule amendments were effective March 3, 2014:

  • Amendments to Rule 15c3-3, with the exception of new paragraph (j)(1);
  • Amendments to Rule 15c3-3a;
  • Amendments to Rule 17a-3;
  • Amendments to Rule 17a-4; and
  • The amendment to paragraph (c)(2)(iv)(E)(2) of Rule 15c3-1.

All the remaining amendments were effective on October 21, 2013. (Question 1).

The guidance affirms the staff’s July 11, 2003 letter relating to third party expense sharing agreements. It reiterates the letter’s nine points concerning the application of the financial responsibility rules when a third party assumes responsibility for payment of the broker-dealer’s expenses.  (Question 2).

The guidance also addresses:

  • Where special reserve deposits may be held – Rule 15c3-3(e)(5) (Question 3);
  • The allocation of customers’ fully paid and excess margin securities to short positions – Rule 15c3-3(d)(4) (Questions 4 and 5);
  • Proprietary accounts of broker-dealers – Rule 15c3-3(b)(5) (Questions 6, 7, and 8);
  • The treatment of free credit balances outside a sweep program -Rule 15c3-3(j)(2)(i) (Questions 9 and 10);
  • Sweep programs – Rule 15c3-3(j)(2)(ii)(A)(2) and Rule 15c3-3(j)(2)(ii)(B)(2) (Questions 11, 12, and 13);
  • Bulk transfers (Questions 14, 15, and 16); and
  • Amendments to Rule 17a-11 – notification requirements for when a broker-dealer’s repurchase and securities lending activities exceed a certain threshold. (Question 17)
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