SEC Issues No-Action Relief on Rule 15c3-3, Provides Extended Time for Broker-Segregated Deposits at U.S. Branches of Foreign Banks
The SEC issued a no-action letter stating that it will not take action against broker-dealers holding cash in a reserve account at a non-affiliated U.S. branch of a foreign bank in determining whether it maintains the minimum deposits required under new paragraph (e) of Exchange Act Rule 15c3-3 ("Customer Protection - Reserves and Custody of Securities").
On July 30, 2013, the SEC adopted amendments to the broker-dealer financial responsibility rules, including new paragraph (e)(5) to Rule 15c3-3, which places limitations on banks where a broker-dealer can deposit cash to meet its customer or PAB account reserve requirements. More specifically, for purposes of determining whether a broker-dealer maintains the minimum cash deposits required, paragraph (e)(5) excludes arrangements in which cash is deposited (i) with an affiliated bank or (ii) with a non-affiliated bank, to the extent that the amount of the deposit exceeds 15 percent of the bank's equity capital, as reported by the bank in its most recent Call Report. The final rules became effective on October 21, 2013, but the SEC issued an exemptive order providing broker-dealers a temporary exemption from certain amendments, including paragraph (e)(5), until March 3, 2014.
According to the no-action letter, which was addressed to FINRA, some commenters expressed concern about the requirement to use a Call Report to determine a bank's equity capital "because there is no equity capital line item in Call Reports filed by U.S. branches of foreign banks." Therefore, according to commenters, the Call Report provision in the rule would potentially prohibit a broker-dealer from utilizing a U.S. branch of a foreign bank to hold deposits of cash to meet its reserve requirements. Additionally, subsequent to the publication of the final rules, the SEC received exemptive requests from foreign banks on behalf of broker-dealers that currently maintain reserve accounts at the foreign bank's U.S. branch.
Therefore, according to the no-action letter, in order to provide time to review and evaluate the requests, as well as consider the issues presented by commenters, the Division of Trading and Markets will not recommend enforcement action to the SEC if a broker-dealer includes cash held in a reserve account at a non-affiliated U.S. branch of a foreign bank in determining whether it maintains the minimum deposits required under paragraph (e) of Rule 15c3-3, provided that the conditions listed in the letter are satisfied.
See: SEC No-Action Letter. Related news: SEC Extends Compliance Date for Certain Broker-Dealer Financial Responsibility Rule Amendments (October 17, 2013); SEC Publishes Two Final Rules Regarding Broker-Dealers (Fed. Reg.) (with Lofchie Comment) (August 21, 2013).