SEC Proposes to Require Broker-Dealers to Calculate Cash Custody Daily
Commentary by Steven Lofchie
The SEC proposed amendments to Exchange Act Rule 15c3-3 ("Customer protection-reserves and custody of securities") to require broker-dealers that carry over $250 million of customer credit to perform their cash reserve account calculations daily and top up their reserve accounts balances. The current requirement is weekly, although some firms already perform daily calculations.
The SEC proposed amending rule 15c3-3 to provide that a carrying broker-dealer with average total credits equal to or more than $250 million must make the required computations and deposits "daily as of the close of the previous business day." The amendment would also stipulate that the required deposit must be made "no later than one hour after the opening of banking business on the second following business day." Should a broker-dealer’s total credits fall below the $250 million threshold, the SEC proposed that the broker-dealer provide written notification to its examining authority of its intent to perform weekly computation.
The SEC stated that the proposed daily computation would reduce risks caused by instances where the net amount of cash owed to customers and PAB account holders is "substantially greater" in the broker-dealer’s special reserve accounts. The SEC also stated that mismatches of funds can cause "large shortfalls" in the amounts available to customers and PAB account holders in the event that the carrying broker-dealer fails financially.
Comments on the proposed amendments must be submitted by the later of 30 days after the date of publication in the Federal Register or September 11, 2023.
SEC Commissioner Statements
- SEC Chair Gary Gensler. Mr. Gensler stated that the proposed amendments would address the "speed, scale, and volume of today’s market activity," and would benefit customers by requiring broker-dealers carrying large credit balances to make daily reserve account calculations and deposits.
- SEC Commissioner Jaime Lizárraga. Mr. Lizárraga said the proposed amendments would address the "potential mismatch" in funds owed and funds held in a broker-dealer’s reserve account pointing to the "significant downside" if customer claims cannot be satisfied in full. He stated that the failure of a carrying broker-dealer with a large shortfall could deplete the Securities Investor Protection Corporation ("SIPC") in order to make investors whole.
- SEC Commissioner Hester M. Peirce. Ms. Peirce supported the proposed amendments for protecting not just broker-dealers’ customers but the SIPC fund. Ms. Peirce asked for input on (i) the compliance timeline for broker-dealers to implement the new calculation cadence for their special reserve accounts and (ii) potential interactions with a previous SEC proposal regarding Treasury clearing (see previous coverage).
- SEC Commissioner Caroline A. Crenshaw. Ms. Crenshaw called the proposed amendments a "common sense change" and requested feedback on whether the amendments should be extended to apply to all broker-dealers rather than exclusively to those that meet the $250 million threshold.
Commentary
It is generally good business practice for firms to do a daily Rule 15c3-3 calculation because, as the SEC points out, it ensures that the amount of cash that a broker-dealer locks up is consistent with the amount of cash that it receives from customers. While the SEC worries about too little cash being locked up, it is equally the case that broker-dealers benefit from being able to withdraw cash from the reserve account when their customer balances are declining.
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