The SEC Division of Trading and Markets (the "Division") issued a warning letter, in the form of "no-action relief," to broker-dealers operating programs in which they borrow fully paid margin securities from their customers ("fully paid lending programs" or "FPL programs"). The letter states that some of the FPL programs violate broker-dealer customer protection rule Rule 15c3-3 ("Customer protection-reserves and custody of securities").
As described in the letter, Rule 15c3-3 requires broker-dealers to provide collateral to securities lenders in such a way that "compel[s] the firm to turn over the collateral physically to the lender." The Division staff explained that some broker-dealers operating FPL programs have deposited the collateral into a lender's securities account at the broker-dealer or into an omnibus account in the name of the broker-dealer, meaning the securities lender cannot access the collateral without the broker-dealer and the broker-dealer has operational ability over the collateral.
The Division advised that it will not recommend action if the broker-dealer (i) is operating an FPL program that predates the no-action letter and (ii) remains compliant with all other aspects of paragraph (b)(3) of Rule 15c3-3, but may take action if the firm has not come into compliance by changing its collateral delivery procedures by April 22, 2021.
Following the issuance of the letter, SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw issued a joint statement asserting that (i) it was inappropriate for the SEC to deal with this issue through no-action relief, rather than through action by the SEC, and (ii) the arrangements had put securities lenders at risk in the event of a failure of the broker-dealers. Ms. Lee and Ms. Crenshaw also referred to the 1982 release in which the relevant provision of Rule 15c3-3 had been adopted. See Net Capital Requirements for Brokers and Dealers, 47 FR 21759 (May 20, 1982). That release states that the SEC "[r]equires the physical possession of the collateral be transferred to the lender or to his appointed agent." Ms. Lee and Ms. Crenshaw assert that the relevant arrangement may put retail customers at risk in the event of the failure of a broker-dealer, if the Securities Investor Protection Corporation ("SIPC") were to determine that it had the power to take the collateral for the benefit of other creditors of the broker-dealer.
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