SEC Order Provides Additional Time to Implement Certain Amendments to the Financial Responsibility Rules for Broker-Dealers

by Goodwin

On July 30, 2013, the SEC voted to adopt amendments to certain broker-dealer financial responsibility rules, as reported in the August 13, 2013 Financial Services Alert.  Those amendments became effective on October 21, 2013.  On October 17, 2013, the SEC issued an order (Release No. 34-70701) granting a temporary exemption from certain of those amendments until March 3, 2014 (the “Order”).

In advance of the October 21 effective date, industry representatives advised the SEC staff that some broker-dealers had determined that they would be unable to complete by that date the significant operational and systems changes necessary to comply with certain of the final rule amendments.  For example, carrying broker-dealers, which maintain custody of customer securities and cash, have said that they are unable to comply before the effective date with the requirements of Rule 15c3-3(e)(5).  That provision places restrictions on a carrying broker‑dealer’s ability to use cash bank deposits to meet the reserve deposit requirements for customer accounts or proprietary securities accounts of broker-dealers (PAB accounts) by excluding cash deposits held at an affiliated bank and limiting cash held at non-affiliated banks to an amount not greater than 15% of the bank’s equity capital, as reported by the bank in its most recent Call Report.  Carrying broker-dealers advised the SEC that opening new reserve accounts and making appropriate systems changes by the October 21 effective date would be a challenge in part because it is necessary to negotiate new reserve account agreements and obtain acknowledgment letters required by Rule 15c3-3(f) from the new banks.

The Order provides a temporary exemption until March 3, 2014 for compliance with the amendments to the following:

  • Rule 15c3-1(c)(2)(iv)(E)(2).  This paragraph provides that a broker-dealer need not deduct cash and securities held in a securities account at a carrying broker-dealer except where the account has been subordinated to the claims of creditors of the carrying broker-dealer.
  • Rule 15c3-3, except paragraph (j)(1).  The amendments to Rule 15c3-3 include revisions to the definitions of “fully paid securities,” “margin securities,” “bank,” “free credit balances” and “other credit balances,” new definitions for “PAB account” and “Sweep Program,” and the addition of paragraph (e) relating to special reserve accounts for the exclusive benefit of customers and PAB accounts.  New paragraph (j)(1) is excepted from the exemption because it incorporates requirements from Rule 15c3-2 relating to customers’ free credit balances that are already in effect.  Rule 15c3-2 was eliminated by the amendments.
  • Rule 15c3-3a.  This is Exhibit A to Rule 15c3-3 and contains the formula for determination of customer and PAB account reserve requirements of brokers and dealers.
  • Rule 17a-3.  This rule was amended to add paragraph (a)(23), requiring broker-dealers to make records documenting the credit, market and liquidity risk management controls established and maintained by the broker-dealer to assist it in analyzing and managing the risks associated with its business activities.
  • Rule 17a-4. This rule was amended to add paragraph (e)(9), requiring that records made pursuant to Rule 17a-3(a)(23) be maintained until three years after the termination of the use of the risk management controls documented in the records.

The SEC did not grant a temporary exemption from the other amendments to the financial responsibility rules, which became effective on October 21.  Those include amendments to Rule 15c3-1 other than paragraph (c)(2)(iv)(E)(2), new paragraph (j)(1) of Rule 15c3-3, and the new requirements of Rule 17a-11 (Notification Provisions for Brokers and Dealers) relating to net capital computations.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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