Receive our daily newsletter

SEC Reminds Broker-Dealers of Obligations under Customer Protection Rule

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

The SEC Division of Trading and Markets (the "Division") staff reminded broker-dealers operating programs in which they borrow securities from their customers of their obligations under SEA Rule 15c3-3 ("Customer protection-reserves and custody of securities").

As previously covered, the Division issued a no-action letter in October that indicated that some broker-dealers were operating fully-paid borrow programs that violated Rule 15c3-3 because of the manner in which collateral posted by the broker-dealer was held. In the same letter, the staff indicated that it would not recommend enforcement action against any such broker-dealer if the relevant fully-paid borrow program was in existence at the time of the letter and is otherwise in compliance with Rule 15c3-3, and where any noncompliance relating to collateral delivery is addressed by April 22, 2021. (Two of the SEC Commissioners objected to the nature of the no-action letter.)

The new staff statement provided no further relief and stated that firms "should be mindful of the importance of complying with the requirements of Rule 15c3-3 and ensuring that retail investor funds receive the full protections afforded under the Securities Investor Protection Act." The letter also urged broker-dealers to reach out to the staff with questions.

Commentary

The October staff letter raised more questions than it answered. This statement asks no questions and gives no answers.

As previously discussed, there are good reasons for the SEC to be concerned about potential violations of Rule 15c3-3. There is no question that the October letter was an unusual statement from the staff (although not necessarily imprudent). Given the particular circumstances - i.e., the SEC recognizing violations and the then-minority leadership (now including the acting Chair) stating its views on the importance of the rule - it is unfortunate that the SEC could not come up with clearer guidance for broker-dealers seeking to comply with the rule.

Email me about this

Related Articles

Premium Content

Available only to Cabinet Premium subscribers.

 

Tags

Regulated Entities: 
Body of Law: 
Jurisdiction: 
Organization: