Rule2024-31178
Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 13, 2025
Effective
March 14, 2025
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to the broker-dealer customer protection rule to require certain broker-dealers to perform their reserve computations for accounts of customers and proprietary accounts of broker-dealers and make any required deposits into their reserve bank accounts daily rather than weekly. The Commission also is adopting amendments to the broker-dealer net capital rule and customer protection rule to permit certain broker-dealers that perform a daily reserve computation for accounts of customers to reduce aggregate debit items (i.e., customer- related receivables) by 2% rather than 3% as part of the computation. Finally, the Commission is adopting technical amendments to the Financial and Operational Combined Uniform Single Report ("FOCUS Report") to conform it to the amendments with respect to the lowering of the debit reduction from 3% to 2%.
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[Federal Register Volume 90, Number 7 (Monday, January 13, 2025)]
[Rules and Regulations]
[Pages 2790-2839]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-31178]
[[Page 2789]]
Vol. 90
Monday,
No. 7
January 13, 2025
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Daily Computation of Customer and Broker-Dealer Reserve Requirements
Under the Broker-Dealer Customer Protection Rule; Final Rule
Federal Register / Vol. 90 , No. 7 / Monday, January 13, 2025 / Rules
and Regulations
[[Page 2790]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-102022; File No. S7-11-23]
RIN 3235-AN28
Daily Computation of Customer and Broker-Dealer Reserve
Requirements Under the Broker-Dealer Customer Protection Rule
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to the broker-dealer customer protection rule to
require certain broker-dealers to perform their reserve computations
for accounts of customers and proprietary accounts of broker-dealers
and make any required deposits into their reserve bank accounts daily
rather than weekly. The Commission also is adopting amendments to the
broker-dealer net capital rule and customer protection rule to permit
certain broker-dealers that perform a daily reserve computation for
accounts of customers to reduce aggregate debit items (i.e., customer-
related receivables) by 2% rather than 3% as part of the computation.
Finally, the Commission is adopting technical amendments to the
Financial and Operational Combined Uniform Single Report (``FOCUS
Report'') to conform it to the amendments with respect to the lowering
of the debit reduction from 3% to 2%.
DATES:
Effective date: March 14, 2025.
Compliance date: The compliance date is discussed in section III.
of this release.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director; Thomas K. McGowan, Associate Director; Randall W. Roy, Deputy
Associate Director; Raymond Lombardo, Assistant Director; Sheila Dombal
Swartz, Senior Special Counsel; or Abraham Jacob, Special Counsel, at
(202) 551-5500, Office of Broker-Dealer Finances, Division of Trading
and Markets; Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is amending:
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Commission reference CFR citation (17 CFR)
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Rule 15c3-1............................... 17 CFR 240.15c3-1.
Rule 15c3-3............................... 17 CFR 240.15c3-3.
Form X-17A-5 Part II...................... 17 CFR 249.617.
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Table of Contents
I. Introduction
A. The Need For Daily Reserve Computations
B. Overview of the Final Amendments
C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations
1. Overview of Rule 15c3-3
2. Overview of Broker-Dealer Liquidations and SIPA
II. Discussion of Comments and Final Amendments
A. Requirement To Perform a Daily Computation
1. Proposal
2. Comments Received and Final Amendments
B. Compliance With Daily Reserve Computation After Exceeding
$500 Million Threshold
1. Proposal
2. Comments Received and Final Amendments
C. Reducing the Aggregate Debit Reduction From 3% to 2%
1. Amendments to Rules 15c3-1 and 15c3-3
2. Conforming Amendments to the FOCUS Report
D. Voluntary Customer and PAB Reserve Computations
E. Other Comments
1. Sweep Programs and Other ``Cash in Motion'' or ``Transitory''
Credits''
2. Requests for Interpretations and Clarifications
F. Reserve Account Requirements for Security-Based Swaps
III. Compliance Date
IV. Economic Analysis
A. Introduction
B. Baseline
1. Regulatory Baseline
2. Affected Broker-Dealers
3. Debit Reduction in the Customer Reserve Computation for
Certain Broker-Dealers
C. Economic Effects of the Final Amendments
1. Benefits
2. Costs
3. Other Compliance Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Over-Funding of the Customer and PAB Reserve Bank Accounts
2. A Threshold Based on a Different Metric
3. Daily Computation Requirement for All Carrying Broker-Dealers
4. A Higher or Lower Threshold for Daily Computation
5. Calculation Based on the Maximum Value Over the Past Year
6. Daily Computation if an Average Required Deposit Exceeds a
Threshold
7. Daily Computation Requirement Based on Average Total Credits
per Number of Customer and PAB Accounts
8. Daily Computation Based on Average Total Credits From the
Most Recent Calendar Year
9. Reduction of the Aggregate Debit Items Charge From 3% to 1%
10. Exemption for Cash in Motion
V. Paperwork Reduction Act
A. Summary of Collections of Information Under the Final
Amendments
B. Use of the Information
C. Respondents
1. Recordkeeping Requirements
2. Notification Requirement To Revert to Weekly Computations
3. Notification Requirement To Voluntarily Perform Daily
Customer Reserve Computation With 2% Debit Reduction
D. Total Annual Burden Estimate
1. Recordkeeping Requirements
2. Notification Requirement To Revert to Weekly Computations
3. Notification Requirement To Voluntarily Perform Daily
Customer Reserve Computation With 2% Debit Reduction
4. Summary of the Burden Revisions
E. Collections of Information Are Mandatory
F. Confidentiality of Response to Collections of Information
G. Retention Period for Recordkeeping Requirements
VI. Regulatory Flexibiliy Act Certification
VII. Other Matters
Statutory Authority
I. Introduction
A. The Need For Daily Reserve Computations
Section 15(c)(3)(A) of the Securities Exchange Act of 1934
(``Exchange Act'') provides, in pertinent part, that no broker-dealer
shall make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce or
attempt to induce the purchase or sale of, any security (with
exceptions for certain securities) in contravention of such rules and
regulations as the Commission shall prescribe as necessary or
appropriate in the public interest or for the protection of investors
to provide safeguards with respect to the financial responsibility and
related practices of broker-dealers including, but not limited to, the
acceptance of custody and use of customers' securities and the carrying
and use of customers' deposits or credit balances.\1\ The statute
further
[[Page 2791]]
provides, in pertinent part, that the rules and regulations shall
require the maintenance of reserves with respect to customers' deposits
or credit balances.\2\
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\1\ 15 U.S.C. 78o(c)(3)(A). The amendments to section 15(c)(3)
of the Exchange Act granting this rulemaking authority were adopted
in section 7(d) of the Securities Investor Protection Act of 1970
(``SIPA''). Public Law 91-598, 7(d), Dec. 30, 1970, 84 Stat. 1563.
Rule 15c3-3 was promulgated in the aftermath of the securities
industry ``paper work crisis'' of 1967-1970. See Commission, Study
of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc.
No. 231, 92d Cong., 1st Sess. 6 (1971) (``During the 1967-70 period
of severe operational and financial problems, many firms, primarily
because of inadequate and inefficient recordkeeping and segregation
systems and procedures, and the infrequent counting of securities in
their possession, mishandled and misused customers' funds and
securities. . . . Firms used customers' free credit and other credit
balances in their daily activities.'') Id. at 43.
\2\ 15 U.S.C. 78o(c)(3)(A).
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Pursuant to this statutory directive, the Commission adopted the
customer protection rule (``Rule 15c3-3'') in 1972.\3\ This rule
requires broker-dealers that hold customer cash and securities
(``carrying broker-dealers'') to treat these assets in a manner that
facilitates their prompt return to the customers if the broker-dealer
fails financially.\4\ The goal of the rule is to place a carrying
broker-dealer in a position where it is able to wind down in an orderly
self-liquidation without the need of financial assistance provided by
the Securities Investor Protection Corporation (``SIPC'') through a
formal proceeding under SIPA.\5\
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\3\ See Broker-Dealers; Maintenance of Certain Basic Reserves,
Exchange Act Release No. 9856 (Nov. 17, 1972) [37 FR 25224 (Nov. 29,
1972)] (``Rule 15c3-3 Adopting Release'').
\4\ See section I.C.1. of this release (discussing Rule 15c3-3).
\5\ See Financial Responsibility Rules for Broker-Dealers; Final
Rule, Exchange Act Release No. 70072 (July 30, 2013) [78 FR 51824,
51869 (Aug. 21, 2013)] (``Financial Responsibility Rules for Broker-
Dealers''); See also section I.C.2. of this release (discussing
broker-dealer liquidations and SIPA).
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In order to facilitate an orderly self-liquidation, Rule 15c3-3
requires a carrying broker-dealer to compute the net amount of cash
owed to customers under a formula in the rule (``customer reserve
computation'').\6\ Generally, carrying broker-dealers must perform
their customer reserve computation and make any required deposits in a
special reserve account at a bank (``customer reserve bank account'')
weekly.\7\ This weekly cadence has been in effect since 1973.\8\ The
rule also addresses how a carrying broker-dealer must treat proprietary
securities and cash it holds for other broker-dealers, known as
proprietary accounts of broker-dealers (``PAB accounts'').\9\ While
broker-dealers are not treated as customers under preexisting Rule
15c3-3, the rule requires a carrying broker-dealer to perform a PAB
reserve computation and make any required deposits into its PAB reserve
bank account weekly, similar to the requirements for the customer
reserve computation and customer reserve bank account.\10\
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\6\ The net amount of cash owed to customers is generally the
amount the total cash owed to customers (e.g., cash balances in
securities accounts) (referred to as ``credits'') exceeds the total
amount of cash customers owe the carrying broker-dealer (e.g.,
margin loans to customers) (referred to as ``debits''). 17 CFR
240.15c3-3a (``Rule 15c3-3a'').
\7\ Preexisting Rule 15c3-3 also permits carrying broker-dealers
to perform the customer reserve computation more frequently than
weekly (e.g., daily) and, in certain limited circumstances, monthly.
See paragraph (e)(3) of Rule 15c3-3.
\8\ See Rule 15c3-3 Adopting Release, 37 FR at 25226. While Rule
15c3-3 was adopted in 1972, the effective date for the rule was
January 15, 1973. Id.
\9\ The term PAB account means a proprietary securities account
of a broker-dealer (which includes a foreign broker-dealer, or a
foreign bank acting as a broker-dealer) other than a delivery-
versus-payment account or a receipt-versus-payment account. The term
does not include an account that has been subordinated to the claims
of creditors of the carrying broker-dealer. See paragraph (a)(16) of
Rule 15c3-3. For example, a broker-dealer that is not a carrying
broker-dealer (e.g., a broker-dealer that introduces its customer
accounts to a carrying broker-dealer (``introducing broker-
dealer'')) may hold its proprietary securities and cash at a
carrying broker-dealer. In this case, the securities account of the
introducing broker-dealer held at the carrying broker-dealer would
be a PAB account and the introducing broker-dealer would be a PAB
account holder of the carrying broker-dealer. See Daily Computation
of Customer and Broker-Dealer Reserve Requirements under the Broker-
Dealer Customer Protection Rule, Exchange Act Release No. 97877
(July 12, 2023) [88 FR 45836, 45837 (July 18, 2023)] (``Proposing
Release'').
\10\ See section I.C.1. of this release (discussing Rule 15c3-
3).
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Since the adoption of Rule 15c3-3 in 1972, investor--including
retail investor--participation in the U.S. securities markets has grown
dramatically, which has led to a correspondingly dramatic increase in
the amount of cash carrying broker-dealers hold for customers.\11\ Cash
owed to customers and PAB account holders may include proceeds received
from sales of securities, cash customers and PAB account holders
deposit for the purpose of purchasing securities, and monthly or
quarterly dividends received on behalf of customers and PAB account
holders.\12\ Carrying broker-dealers may receive large cash inflows on
behalf of their customers and PAB account holders during the week
(e.g., month-end or quarter-end interest and dividend payments) and
days prior to the next required weekly reserve computations and
deposits into the reserve bank accounts.\13\ This can lead to
situations where--for a period of days--the net amount of cash owed to
customers and PAB account holders is greater than the amounts held in
the carrying broker-dealer's combined customer and PAB reserve bank
accounts.\14\ This creates a ``mismatch'' or difference between the net
cash owed to customers and PAB accounts holders and the amounts held in
the carrying broker-dealer's combined customer and PAB reserve bank
accounts. Moreover, because of the dramatic increase in cash held by
carrying broker-dealers since 1972, the amount of the mismatch between
cash owed and cash reserved can be much larger than the Commission
contemplated when it adopted the requirement to perform a weekly
reserve computation. The potential for much larger mismatches today (as
compared to 1972) poses a risk that if the carrying broker-dealer fails
financially it may not be able to promptly return all cash and
securities owed to customers and PAB account holders in an orderly
self-liquidation and, instead, will need to be liquidated in a SIPA
proceeding.
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\11\ Broker-dealers file monthly or quarterly financial and
operational information using the FOCUS Report. Based on FOCUS
Report data as of December 31, 2023, carrying broker-dealers, in
aggregate, reported approximately $1.1 trillion in total customer
and PAB credits. See section IV.B.2. of this release (discussing
affected broker-dealers in the baseline). Of that amount,
approximately $965 billion constituted total credits for customer
accounts (the remaining balance was total credits for PAB accounts).
Further, carrying broker-dealers reported approximately $319 billion
in customer free credit balances. By comparison, free credit
balances at year-end 1970 totaled $2 billion for all broker-dealers
that were NYSE members and carried public customer accounts. See
Study of Unsafe and Unsound Practices of Brokers and Dealers at 51.
Free credit balances are generally liabilities of a broker-dealer to
customers which are subject to immediate cash payment to customers
on demand, whether resulting from sales of securities, dividends,
interest, deposits or otherwise, subject to certain exclusions. See
paragraph (a)(8) of Rule 15c3-3.
\12\ See Proposing Release, 88 FR at 45842.
\13\ See id.
\14\ See id.
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The potential size of the mismatch risk impacting carrying broker-
dealers today can be demonstrated through the size of the deposits they
are required to make into their reserve bank accounts. For example,
during the 2023 calendar year, the largest required additional deposits
into the customer reserve bank accounts of all carrying broker-dealers
ranged from approximately $2.3 billion to over $10 billion.\15\ During
the 2023 calendar year, the largest required additional deposits into
their PAB reserve bank accounts ranged from approximately $345 million
to almost $4.0 billion.\16\ Furthermore, during the
[[Page 2792]]
2023 calendar year, the top ten additional required deposits to the
customer reserve bank accounts for the 20 carrying broker-dealers with
the lowest average total credits (of the 49 carrying broker-dealers
estimated to be subject to the final amendments),\17\ ranged from
approximately $74.3 million to over $600 million.\18\ Moreover, the
largest potential mismatches today occur at carrying broker-dealers
that reported the greatest amount of total credits for their customers
and PAB account holders (i.e., amounts that exceed the final $500
million threshold discussed below).\19\ In 2023, in the aggregate, the
average mismatch for customer reserve bank accounts was 15.7% for
carrying broker-dealers above the $500 million threshold.\20\ It was
6.4% for carrying broker-dealers below the threshold.\21\
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\15\ This data is based on the 25 largest additional deposit
requirements reported in the monthly FOCUS Reports filed during the
2023 calendar year.
\16\ This data is based on the 25 largest additional deposit
requirements reported in the monthly FOCUS Reports filed during the
2023 calendar year. The largest additional deposit requirements were
made by carrying broker-dealers that also had the 25 largest credit
balances based on 2023 FOCUS Report data. A total of nine carrying
broker-dealers made the 25 largest additional deposit requirements
into the customer reserve bank accounts. Six of the 25 largest
additional deposits into the customer reserve bank accounts were
made by three carrying broker-dealers that voluntarily perform a
daily reserve computation. The mean of these additional deposit
requirements was $4.2 billion, and the median was $3.6 billion. With
respect to the largest deposits into the PAB reserve bank accounts,
a total of six carrying broker-dealers made the 25 largest
additional deposit requirements. Twenty-one of the 25 largest
additional deposits into the PAB reserve bank accounts were made by
four carrying broker-dealers that voluntarily perform a daily
reserve computation. The mean of these additional deposit
requirements was approximately $1.3 billion, and the median was
approximately $1.1 billion. In addition to large deposit
requirements, the customer and PAB reserve computations also
permitted some carrying broker-dealers to make large withdrawals
from both their customer and PAB reserve bank accounts during the
2023 calendar year. For example, during the 2023 calendar year, the
25 largest withdrawals from customer reserve bank accounts ranged
from approximately $1.2 billion to $4.8 billion, and the 25 largest
withdrawals from PAB reserve bank accounts ranged from $170 million
to $2.6 billion.
\17\ See section IV.B.2. in this release (discussing scope of
affected entities in the economic baseline).
\18\ This data is based on the largest additional deposit
requirements reported in the monthly FOCUS Reports filed during the
2023 calendar year for carrying broker-dealers above the $500
million threshold.
\19\ See section II.A. of this release (describing the final
$500 million threshold).
\20\ See section IV.B.2. of this release (discussing average
mismatches). The aggregated average mismatch of 15.7% is calculated
as an average of the average mismatches for all carrying broker-
dealers that met the $500 million threshold. The same was done for
carrying broker-dealers below the $500 million threshold.
\21\ See section IV.B.2. of this release (discussing average
mismatches).
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These large deposit requirements and mismatch percentages indicate
that there may be times when the net amount of cash owed to customers
and PAB account holders is substantially greater than the amounts on
deposit in the customer and PAB reserve bank accounts.\22\ Large
mismatches may lead to correspondingly large shortfalls in the amounts
available in the customer and PAB reserve bank accounts, which, in the
event of a failure of a carrying broker-dealer, may result in the
delayed reimbursement of customer securities and cash, and the
potential that customers' claims may not be satisfied in full.\23\ In
the case of a large shortfall, the cash and securities owed to
customers or PAB account holders may be tied up in liquidation
proceedings and these customers or PAB account holders would have to
wait to receive their cash and securities until the broker-dealer
liquidation is carried out under SIPA, which may take a significant
amount of time.\24\ This potential delay in obtaining access to their
securities and cash also could cause customers to rapidly withdraw cash
from a carrying broker-dealer during times of market turmoil, putting
further stress on the carrying broker-dealer and the securities markets
more generally, as well as potentially triggering or accelerating the
failure of a carrying broker-dealer.
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\22\ See Proposing Release, 88 FR at 45843.
\23\ See id. at 45842.
\24\ How quickly claims are satisfied in a SIPA liquidation
depends on the complexity of the liquidation and the condition of
the carrying broker-dealer's records. See How The Claims Process
Works, available at <a href="https://www.sipc.org/cases-and-claims/how-the-claims-process-works">https://www.sipc.org/cases-and-claims/how-the-claims-process-works</a>; see also Proposing Release, 88 FR at 45848;
section IV.A. of this release (discussing potential risks that an
intra-week mismatch introduces); section IV.C. (discussing economic
effects of the final amendments).
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Further, in a SIPA liquidation, SIPC may be required to advance
money from the SIPC Fund \25\ to the extent the fund of customer
property was insufficient to make customers--but not to PAB account
holders--whole through the pro rata distribution.\26\ In particular, if
the mismatch or difference between the net amount a carrying broker-
dealer owes its customers and PAB account holders and the combined
amounts in the customer and PAB reserve accounts was sufficiently
large, customers' claims may not be satisfied in full.\27\ In this
case, the trustee would need to use the SIPC Fund to satisfy customers'
claims to make them whole. This risk may be exacerbated for carrying
broker-dealers experiencing large aggregate intra-week mismatches.\28\
As a result, the SIPC Fund may be at a higher risk of depletion.\29\
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\25\ See section I.C.2. of this release (discussing the SIPC
Fund).
\26\ See Proposing Release, 88 FR at 45842. The amount that can
be advanced to each customer is capped at $500,000 (of which
$250,000 can be used to cover cash claims). Broker-dealers with
securities accounts at a failed broker-dealer--as SIPA customers--
have the right to a pro rata share of customer property in a SIPA
liquidation, but they are not entitled to advances from the SIPC
Fund. See section I.C.2. of this release (providing an overview of
broker-dealer liquidations and SIPA).
\27\ See Proposing Release, 88 FR at 45842.
\28\ See Proposing Release, 88 FR at 45848. See also section
IV.A. of this release (discussing potential risks that an intra-week
mismatch introduces).
\29\ See section IV.A. of this release (discussing potential
risks that an intra-week mismatch introduces).
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To address these risks, the Commission is amending Rule 15c3-3 to
require carrying broker-dealers that owe large amounts of cash to
customers and PAB account holders (i.e., have large total credits),
measured by both their customer and PAB reserve computations for the
previous 12 month ends (i.e., a rolling 12-month average), to perform
those computations and make any required deposits into their respective
reserve bank accounts daily rather than weekly.\30\ The final
amendments--by requiring daily rather than weekly reserve
computations--will more quickly apply the protective measures of the
Rule 15c3-3 reserve requirements to cash of customers and PAB account
holders that is newly deposited into the carrying broker-dealer. This
will reduce the risk--caused by the dramatic increase in cash carrying
broker-dealers hold--that if the carrying broker-dealer fails
financially, it may be unable to promptly return cash and securities to
customers and PAB account holders through an orderly self-liquidation.
It also reduces the risk that the SIPC Fund may be depleted.\31\
Further, a daily computation--as compared with a weekly computation--
will more dynamically match the net amount of cash owed to customers
and PAB account holders with the amount on deposit in the carrying
broker-dealer's customer and PAB reserve bank accounts (i.e., daily
changes in the net cash owed to customers and PAB account holders will
be accounted for more quickly in the reserve computations). While Rule
15c3-3 currently permits a carrying broker-dealer to elect to perform
its customer and PAB reserve computations more frequently than
weekly,\32\ a practical effect of a daily computation requirement will
permit carrying broker-dealers to withdraw excess cash or qualified
securities more quickly from the reserve bank account, which will
improve their liquidity.\33\
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\30\ See section II.A. of this release (discussing the final
$500 million threshold, which is a modification from the proposed
$250 million threshold); See also Proposing Release, 88 FR at 45843-
45 (discussing proposed $250 million threshold).
\31\ See Proposing Release, 88 FR 45842-43, 45848.
\32\ See paragraph (e)(3)(iv) of Rule 15c3-3.
\33\ See supra note 16 (citing data related to the 25 largest
withdrawals from customer and PAB reserve bank accounts for the
calendar year 2023).
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In sum, the daily reserve computations--by protecting customer and
PAB cash more quickly than is the
[[Page 2793]]
case with weekly computations--will make the financial system safer by:
(1) increasing the likelihood that a failing carrying broker-dealer can
self-liquidate (meaning customers and PAB account holders do not
temporarily lose access to their cash and securities); (2) lowering the
risk that the SIPC Fund may be depleted by having to address a large
shortfall in customer cash held by a failed carrying broker-dealer; and
(3) increasing the liquidity of carrying broker-dealers performing the
daily customer and PAB reserve computations thereby positioning them to
better address potential financial shocks.
B. Overview of the Final Amendments
The Commission proposed the requirement to perform daily customer
and PAB reserve computations on July 12, 2023.\34\ The Commission
received comments from a variety of persons, including broker-dealers,
retail investors, industry associations, and other market
participants.\35\ As discussed in detail below, the Commission has
modified the final amendments in response to comments. For example,
while the Commission is retaining the overall structure of the
proposal, the Commission has raised the threshold from $250 million to
$500 million. The Commission also is reducing the 3% aggregate debit
items charge (``3% debit reduction'') that certain carrying broker-
dealers must take in performing a customer reserve computation to 2%
(``2% debit reduction'') if they perform a daily customer reserve
computation.\36\
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\34\ See Proposing Release.
\35\ Comment letters on the Proposing Release are available at
<a href="https://www.sec.gov/comments/s7-11-23/s71123.htm">https://www.sec.gov/comments/s7-11-23/s71123.htm</a>.
\36\ See section II.C. of this release (describing this
modification in more detail).
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The final amendments are summarized below.
Daily Computation--Under the final amendments, a carrying broker-
dealer that has average total credits that are equal to or greater than
$500 million (``$500 Million Threshold'') must perform the customer
and/or PAB reserve computations daily, rather than weekly as is
required under preexisting Rule 15c3-3.\37\ As proposed and under the
final amendments, a carrying broker-dealer must perform the customer
and PAB reserve computations, as applicable, as of the close of the
previous business day, and any required deposits must be made no later
than one hour after the opening of banking business on the second
following business day.\38\
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\37\ See paragraph (e)(3)(i)(A)(1) of Rule 15c3-3, as amended.
\38\ See id.
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Definition of Average Total Credits--As proposed and under the
final amendments, ``average total credits'' means the arithmetic mean
of the sum of total credits in the customer reserve computation and the
PAB reserve computation reported in the carrying broker-dealer's 12
most recently filed month-end FOCUS Reports.\39\ This means the average
total credits are a 12-month rolling average, as the carrying broker-
dealer must add up the sum of the total credits reported in the
customer and PAB reserve computations in each of the 12 most recently
filed month-end FOCUS Reports and divide that amount by 12 to calculate
the arithmetic mean of the total credits.
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\39\ See id.
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Six-Month Compliance Period after Exceeding $500 Million
Threshold--Under the final amendments, a carrying broker-dealer must
comply with the requirement to perform a customer and PAB reserve
computation daily no later than six months after its average total
credits equal or exceed the $500 Million Threshold.\40\
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\40\ See id.
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60-day Written DEA Notification to Revert to Weekly Computation--
Under the final amendments, in the event that a carrying broker-
dealer's 12-month rolling average of total credits subsequently falls
below the $500 Million Threshold, it must continue to perform customer
and PAB reserve computations daily until it provides written
notification to its designated examining authority (``DEA'') of its
election to perform weekly computations. The amendments require the
carrying broker-dealer to provide this written notification 60 days
prior to reverting to weekly computations.\41\
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\41\ See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as amended.
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Lowering the 3% Debit Reduction to 2% for Carrying Broker Dealers
that Perform a Daily Customer Reserve Computation--As discussed in more
detail below, the minimum net capital requirement for broker-dealers is
the greater of a fixed-dollar amount specified in Rule 15c3-1 and an
amount determined by applying one of two financial ratios: the 15-to-1
aggregate indebtedness to net capital ratio (``basic method'') or the
2% of aggregate debit items ratio (``alternative method'').\42\ A
carrying broker-dealer using the alternative method must reduce
aggregate debit items by 3% when performing its customer reserve
computation under Rule 15c3-3. This can increase the amount the
carrying broker-dealer must lock up in its customer reserve bank
account.
---------------------------------------------------------------------------
\42\ See section I.C.1. of this release (describing these
provisions of the Rule 15c3-1 in more detail).
---------------------------------------------------------------------------
Under the final amendments, the Commission has modified Rule 15c3-1
to permit carrying broker-dealers that use the alternative method and
are above the $500 Million Threshold (i.e., that perform a daily
customer reserve computation) to reduce their aggregate debit items by
2% rather than 3%.\43\ Further, carrying broker-dealers that use the
alternative method and are below the $500 Million Threshold may
voluntarily perform a daily customer reserve computation under Rule
15c3-3 and, in so doing, apply the 2% debit reduction in lieu of the 3%
debit reduction if they notify their DEA at least 30-days prior to
beginning the daily customer reserve computation. Under the final
amendments, carrying broker-dealers voluntarily performing a daily
reserve computation and applying the 2% debit reduction must receive
prior approval from their DEA to revert to a weekly customer reserve
computation.\44\ If they revert to performing a weekly customer reserve
computation, they also must revert to applying a 3% debit reduction.
Finally, under the final amendments, the Commission is adopting
technical amendments to the FOCUS Report to conform it to the
amendments with respect to the lowering of the debit reduction from 3%
to 2%.
---------------------------------------------------------------------------
\43\ See paragraph (a)(1)(ii)(A) of Rule 15c3-1, as amended and
paragraph (e)(3)(v) of Rule 15c3-3, as amended.
\44\ See paragraph (e)(3)(v) of Rule 15c3-3, as amended.
---------------------------------------------------------------------------
Compliance Date--Generally, carrying broker-dealers that exceed the
$500 Million Threshold using each of the 12 filed month-end FOCUS
Reports from July 31, 2024, through June 30, 2025, must perform
customer and PAB reserve computations daily beginning no later than
December 31, 2025 (i.e., six months after June 30, 2025).\45\ On or
after the effective date of the final amendments, a carrying broker-
dealer may voluntarily perform a daily customer reserve computation and
apply the 2% debit reduction, provided it notifies its DEA in writing
at least 30 calendar days prior to beginning the daily customer reserve
computation that applies the 2% debit reduction.\46\
---------------------------------------------------------------------------
\45\ See section III. of this release (discussing the compliance
date).
\46\ See id.
---------------------------------------------------------------------------
Reserve Account Requirements for Security-Based Swaps--The
Commission is not adopting any changes to the reserve account
requirements for security-based swaps.
[[Page 2794]]
C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations
1. Overview of Rule 15c3-3
Rule 15c3-3 is designed to give specific protection to customer
funds and securities, in effect forbidding broker-dealers from using
customer assets to finance any part of their businesses unrelated to
servicing securities customers. For example, a broker-dealer is
``virtually'' precluded from using customer funds to buy securities for
its own account.\47\ To meet this objective, Rule 15c3-3 requires a
carrying broker-dealer to take two primary steps to safeguard these
assets, as described in this section below. The steps are designed to
protect customers by segregating their securities and cash from the
carrying broker-dealer's proprietary business activities. The final
amendments address the second step. If the carrying broker-dealer fails
financially, the customer securities and cash should be readily
available to be returned to the customers, which facilitates an orderly
self-liquidation. However, if the failed carrying broker-dealer is
liquidated under SIPA, the customer securities and cash should be
isolated and readily identifiable as ``customer property'' and,
consequently, available to be distributed to customers ahead of other
creditors.\48\
---------------------------------------------------------------------------
\47\ See Net Capital Requirements for Brokers and Dealers,
Exchange Act Release No. 21651 (Jan. 11, 1985) [50 FR 2690, 2690
(Jan. 18, 1985)]. See also Broker-Dealers; Maintenance of Certain
Basic Reserves, Exchange Act Release No. 9856 (Nov. 17, 1972) [37 FR
25224, 25224 (Nov. 29, 1972)]; Proposing Release, 88 FR at 45837.
\48\ See section I.C.2. of this release (discussing broker-
dealer liquidations under SIPA).
---------------------------------------------------------------------------
The first step required by Rule 15c3-3 is that a carrying broker-
dealer must maintain physical possession or control over customers'
fully paid and excess margin securities.\49\ Control means the carrying
broker-dealer must hold these securities in one of several locations
specified in Rule 15c3-3 and free of liens or any other interest that a
third-party could exercise to secure an obligation of the carrying
broker-dealer.\50\ Permissible locations include a clearing corporation
and a ``bank,'' as defined in section 3(a)(6) of the Exchange Act.\51\
---------------------------------------------------------------------------
\49\ See paragraph (b) of Rule 15c3-3; Proposing Release, 88 FR
at 45838.
\50\ See paragraph (c) of Rule 15c3-3. A carrying broker-dealer
does not treat customer securities as its own assets. Rather, the
carrying broker-dealer holds them in a custodial capacity, and the
possession and control requirement is designed to ensure that the
carrying broker-dealer treats them in a manner that allows for their
prompt return.
\51\ See id. In 2020, the Commission issued a statement
describing its position that, for a period of five years, special
purpose broker-dealers operating under the circumstances set forth
in the statement will not be subject to a Commission enforcement
action on the basis that the broker-dealer deems itself to have
obtained and maintained physical possession or control of customer
fully paid and excess margin ``digital asset securities'' for
purposes of Rule 15c3-3. See Commission Statement on Custody of
Digital Asset Securities by Special Purpose Broker-Dealers, Exchange
Act Release No. 90788 (Dec. 23, 2020), 86 FR 11627 (Feb. 21, 2021).
While the final amendments apply to all carrying broker-dealers,
including special purpose broker-dealers, the amendments do not
alter the current possession and control requirements of Rule 15c3-3
for any broker-dealer. See also Division of Trading and Markets,
Commission and Office of General Counsel, FINRA, Joint Staff
Statement on Broker-Dealer Custody of Digital Asset Securities (July
8, 2019), available at <a href="https://www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-asset-securities">https://www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-asset-securities</a>.
The 2019 staff statement represents the views of the staff. It is
not a rule, regulation, or statement of the Commission. Furthermore,
the Commission has neither approved nor disapproved its content.
This staff statement, like all staff statements, has no legal force
or effect: it does not alter or amend applicable law; and it creates
no new or additional obligations for any person.
---------------------------------------------------------------------------
The second step is that Rule 15c3-3 requires carrying broker-
dealers to have a customer reserve bank account that must hold cash
and/or qualified securities (e.g., U.S. Treasury securities) in an
amount determined by a computation of the net cash owed to the carrying
broker-dealer's customers pursuant to a formula set forth in Exchange
Act Rule 15c3-3a, the customer reserve computation.\52\ Preexisting
Rule 15c3-3 requires carrying broker-dealers to perform the customer
reserve computation as of the close of the last business day of the
week and make any required deposits into the customer reserve bank
account weekly. Rule 15c3-3 also permits carrying broker-dealers to
perform the customer reserve computation more frequently than weekly
(e.g., daily),\53\ and, in certain limited circumstances, to perform a
monthly computation.\54\
---------------------------------------------------------------------------
\52\ See Rule 15c3-3a.
\53\ See paragraph (e)(3)(iv) of Rule 15c3-3.
\54\ See paragraph (e)(3)(i) of Rule 15c3-3.
---------------------------------------------------------------------------
Under the customer reserve computation, the carrying broker-dealer
adds up customer credit items and then subtracts from that amount
customer debit items.\55\ The credit items include credit balances in
customer securities accounts (i.e., cash owed to customers) and funds
obtained through the use of customer securities (e.g., a loan from a
bank collateralized with customer margin securities).\56\ The debit
items include money owed by customers (e.g., from margin lending),
securities borrowed by the carrying broker-dealer to effectuate
customer short sales, and margin required and on deposit with certain
clearing agencies as a consequence of customer securities
transactions.\57\ If credit items exceed debit items, the net amount
must be on deposit in the customer reserve bank account in the form of
cash and/or qualified securities.\58\ The carrying broker-dealer must
make a deposit into the customer reserve bank account by 10 a.m. of the
second business day following the ``as of'' date of the new computation
if the computation shows the amount required to be on deposit in the
customer reserve bank account is greater than the amount currently on
deposit in the account.\59\ Conversely, if the computation shows the
amount required to be on deposit in the customer reserve bank account
is less than the amount currently on deposit in the account, the
carrying broker-dealer can withdraw the difference.\60\ A carrying
broker-dealer also must make and maintain a record of each
computation.\61\
---------------------------------------------------------------------------
\55\ See Rule 15c3-3a.
\56\ See Rule 15c3-3a, Items 1-9; Proposing Release, 88 FR at
45838.
\57\ See Rule 15c3-3a, Items 10-15.
\58\ See paragraph (e) of Rule 15c3-3.
\59\ See paragraph (e)(3)(i) of Rule 15c3-3. For example, a
carrying broker-dealer would perform the customer reserve
computation on Monday as of the close of business on the previous
Friday and generally be required to make the necessary deposit no
later than 10 a.m. Tuesday. See Proposing Release, 88 FR at 45839.
\60\ See paragraph (e) of Rule 15c3-3.
\61\ See paragraph (e)(3)(v) of Rule 15c3-3. Each record must be
preserved in accordance with Rule 17a-4. Id. See also Proposing
Release, 88 FR at 45839. As a result of the final amendments,
paragraph (e)(3)(v) is being re-designated as paragraph (e)(3)(vi).
---------------------------------------------------------------------------
The customer reserve computation permits the carrying broker-dealer
to offset customer credit items only with customer debit items.\62\
This means the carrying broker-dealer can use customer cash to
facilitate customer transactions such as financing customer margin
loans and borrowing securities to make deliveries of securities
customers have sold short. For example, if a carrying broker-dealer
holds $100 for customer A, the carrying broker-dealer can use that $100
to finance a security purchase of customer B (i.e., make a margin loan
to customer B). The $100 the carrying broker-dealer owes customer A is
a credit in the customer reserve computation and the $100 customer B
owes the carrying broker-dealer is a debit in the computation.
Therefore, under the customer reserve computation there would be no
requirement to maintain cash and/or qualified securities in the
customer reserve bank account. However, if the carrying broker-dealer
did not use the $100 held in customer A's account for this purpose,
there would be no offsetting
[[Page 2795]]
debit and, consequently, the carrying broker-dealer would need to have
on deposit in the customer reserve bank account cash and/or qualified
securities in an amount at least equal to $100.\63\
---------------------------------------------------------------------------
\62\ See paragraph (e)(2) of Rule 15c3-3; Rule 15c3-3a.
\63\ See Proposing Release 88 FR at 45839, n.22.
---------------------------------------------------------------------------
Rule 15c3-3 also addresses how a carrying broker-dealer must treat
proprietary securities and cash it holds for other broker-dealers,
known as PAB accounts. While broker-dealers are not treated as
customers of the carrying broker-dealer under Rule 15c3-3,\64\ the rule
requires the carrying broker-dealer to have a PAB reserve bank
account.\65\ The PAB reserve bank account must hold cash and/or
qualified securities in an amount determined by the PAB reserve
computation. Under preexisting Rule 15c3-3, carrying broker-dealers are
generally required to perform the PAB reserve computation and make any
required deposits into the PAB reserve bank account weekly, similar to
the requirements for the customer reserve computation.\66\ Finally,
consistent with the requirements for the customer reserve computation,
the PAB reserve computation permits the carrying broker-dealer to
offset PAB credit items only with PAB debit items.\67\
---------------------------------------------------------------------------
\64\ See paragraph (a)(1) of Rule 15c3-3. The definition of
``customer'' in SIPA, however, is broader than the definition in
Rule 15c3-3 in that the SIPA definition includes broker-dealers that
have proprietary accounts at the carrying broker-dealer. As
discussed in section I.C.2. of this release, broker-dealers--as
customers under SIPA--have the right to a pro rata share of customer
property in a SIPA liquidation. See 15 U.S.C. 78lll(2).
\65\ See paragraph (e)(1) of Rule 15c3-3. Carrying broker-
dealers also must obtain and maintain physical possession or control
of securities carried for a PAB account holder unless the carrying
broker-dealer has provided written notice to the PAB account holder
that it may use those securities in the ordinary course of its
securities business and has provided opportunity for the PAB account
holder to object to such use. See paragraph (b)(5) of Rule 15c3-3.
See Financial Responsibility Rules for Broker-Dealers, 78 FR at
51827-31 (adopting a PAB reserve computation and possession and
control requirements for securities held in PAB accounts under Rule
15c3-3).
\66\ See paragraph (e)(3) of Rule 15c3-3; Proposing Release, 88
FR at 45839-40.
\67\ See paragraph (e)(2) of Rule 15c3-3.
---------------------------------------------------------------------------
2. Overview of Broker-Dealer Liquidations and SIPA
SIPA \68\ affords certain protections against loss to customers
resulting from a broker-dealer failure through the establishment of
SIPC and the SIPC Fund.\69\ SIPC oversees the liquidation of SIPC-
member broker-dealers that fail financially and where customer assets
the broker-dealer holds (i.e., cash or securities) are missing from
customers' securities accounts (i.e., broker-dealers that cannot return
these assets through a self-liquidation).\70\
---------------------------------------------------------------------------
\68\ See 15 U.S.C. 78aaa et seq.
\69\ See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
\70\ With some limited exceptions set forth in SIPA, all
registered broker-dealers are SIPC members. 15 U.S.C. 78ccc(a)(2).
SIPC is a non-profit member organization created in 1970 under SIPA.
15 U.S.C. 78ccc(a); Proposing Release, 88 FR at 45840.
---------------------------------------------------------------------------
In a SIPA liquidation of a broker-dealer, SIPC and a court-
appointed trustee work to return customers' cash and securities as
quickly as possible. Customers under SIPA, including broker-dealers
with securities accounts at the failed broker-dealer (``SIPA
customers''), generally are entitled to certain protections, including
the right to share pro rata with other SIPA customers in the customer
property held by the carrying broker-dealer by way of a priority claim
on the customer property compared to general unsecured creditors of the
carrying broker-dealer.\71\
---------------------------------------------------------------------------
\71\ See 15 U.S.C. 78fff-2(c) and 15 U.S.C. 78fff-3(a). SIPA
liquidations generally involve customer claims and the claims of
general unsecured creditors. Customer claims are satisfied out of
the customer estate, while general unsecured claims are paid from
the general estate (any remaining assets). To the extent a
customer's claims are not fully satisfied through advances from the
SIPC Fund and the customer's share of the customer estate, a
customer will be eligible to receive a distribution as a general
creditor if there are any general estate assets. See 15 U.S.C.
78fff2(c)(1).
---------------------------------------------------------------------------
SIPA protections also include the ability for a SIPA customer--
other than a SIPA customer that is a broker-dealer (i.e., a PAB account
holder)--to receive an advance from the SIPC Fund of up to $500,000 (of
which $250,000 can be used to cover cash claims), if the amount of
customer property is insufficient to satisfy the customer's claim for
securities and/or cash.\72\ The SIPC Fund largely is financed through
assessments paid to SIPC by its broker-dealer members.\73\ The SIPC
Fund is used to pay SIPC's expenses, the administrative costs of a SIPA
liquidation to the extent the carrying broker-dealer's estate is
insufficient to cover those costs, and--as stated above in this
section--to pay advances to SIPA customers whose claims cannot be fully
satisfied by the estate of a failed carrying broker-dealer.\74\ The
SIPC Fund--which consists of cash and U.S. Government securities--
totaled approximately $4.47 billion as of December 31, 2023.\75\
Finally, the schedule for calculation of the annual assessment for SIPC
members is governed under the SIPC Bylaws and generally depends on the
level of SIPC's unrestricted net assets.\76\ The current assessment
rate (effective January 1, 2024) is 0.15% of net operating
revenues.\77\ A summary of the possible level of SIPC assessments is as
follows:
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78fff-3.
\73\ 15 U.S.C. 78ddd(c) and (d); Proposing Release, 88 FR at
45841. The SIPC Fund is also financed through interest on U.S.
Government securities held in the SIPC Fund. See 2023 SIPC Annual
Report at 4, available at <a href="https://www.sipc.org/media/annual-reports/2023-annual-report.pdf">https://www.sipc.org/media/annual-reports/2023-annual-report.pdf</a>.
\74\ In the event that the SIPC Fund is or may reasonably appear
to be insufficient for the purposes of SIPA, the Commission is
authorized to lend SIPC up to $2.5 billion, which the Commission, in
turn, would borrow from the U.S. Treasury. 15 U.S.C. 78ddd(g) and
(h). The Commission has not borrowed funds under the authority in
SIPA since the legislation was enacted in 1970. See 2023 SIPC Annual
Report at 3; Proposing Release, 88 FR at 45841, n.49. In 2023, no
liquidations under SIPA were initiated. Over the last ten-year
period, the annual average of new cases was 0.2. Since the inception
of SIPC, liquidation proceedings under SIPA were commenced for 330
SIPC-member broker-dealers. These 330 members represent less than 1%
of the approximately 40,000 broker-dealers that have been SIPC
members during the past fifty-three years. In addition, during that
timeframe, cash and securities distributed for accounts of customers
totaled approximately $142.5 billion. Of that amount, approximately
$141.6 billion came from debtors' estates and $915.7 million came
from the SIPC Fund. Currently, SIPC has 3,297 members. See SIPC 2023
Annual Report at 8.
\75\ See 2023 SIPC Annual Report at 10. The target level of the
SIPC Fund is set out in SIPC's Bylaws and has increased from an
initial target of $150 million in 1970, to the current target of
$5.0 billion as measured in unrestricted net assets. See Article 6
(Assessments) of SIPC Bylaws; The SIPC Fund, available at <a href="https://www.sipc.org/about-sipc/the-sipc-fund">https://www.sipc.org/about-sipc/the-sipc-fund</a>; 2023 SIPC Annual Report at 3.
\76\ See Article 6 (Assessments) of SIPC Bylaws. SIPC's
unrestricted net assets are SIPC's total assets (including the SIPC
Fund) less liabilities, which include estimated costs to complete
ongoing SIPA liquidations. See 2023 SIPC Annual Report at 20. See
also 15 U.S.C. 78ddd(c) and (d); Proposing Release, 88 FR at 45841.
\77\ See Assessment Rate, available at <a href="https://www.sipc.org/for-members/assessment-rate">https://www.sipc.org/for-members/assessment-rate</a>. The amount of each SIPC member's assessment
for the member's fiscal year is the product of the assessment rate
established by SIPC for that fiscal year and either the member's
gross revenues or net operating revenues from the securities
business. See section 6(a)(1) of SIPC's Bylaws; Proposing Release,
88 FR at 45841.
[[Page 2796]]
Table 1--SIPC Assessment Schedule
------------------------------------------------------------------------
Unrestricted net assets/SIPC Fund
balance Annual assessment rate
------------------------------------------------------------------------
Unrestricted net assets $2.5-<$5 0.15% of net operating
billion (and reasonably likely to revenues.
remain less than $5 billion but not
less than $2.5 billion).
SIPC Fund balance of $150 million-- 0.25% of net operating
unrestricted net assets of <$2.5 revenues.
billion.
SIPC Fund balance $100 million-<$150 Determined by SIPC, but not
million. less than 0.25% of gross
revenues.
SIPC Fund balance below $100 million... Determined by SIPC, but not
less than 0.5% of gross
revenues.
Unrestricted net assets >=$5 billion SIPC may not more than once in
(and reasonably likely to remain >$5 any four-year period, increase
billion (after review of study * and or decrease the assessment
consultation with Commission and rate by up to, but not more
SROs)). than, 25% of the assessment
rate in effect at that time.
------------------------------------------------------------------------
* When unrestricted net assets total $5 billion, SIPC will commission a
study every four years to examine the adequacy of SIPC's unrestricted
net asset balance and the SIPC Fund and the appropriate assessment
rate. See section 6(a)(1)(C) and (D) of SIPC's Bylaws.
II. Discussion of Comments and Final Amendments
A. Requirement To Perform a Daily Computation
1. Proposal
The Commission proposed amendments to Rule 15c3-3 that would
require carrying broker-dealers with large amounts of total credits to
perform the customer and PAB reserve computations daily rather than
weekly.\78\ More specifically, the amendments would add paragraph
(e)(3)(i)(B) to Rule 15c3-3.\79\ This paragraph would provide that a
carrying broker-dealer with average total credits that are equal to or
greater than $250 million (``$250 Million Threshold'') must make the
computation necessary to determine the amounts required to be deposited
in the customer and PAB reserve bank accounts daily as of the close of
the previous business day.\80\ The paragraph would further provide that
the deposit so computed must be made no later than one hour after the
opening of banking business on the second following business day.\81\
For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission
proposed to define average total credits as the arithmetic mean of the
sum of total credits in the customer reserve computation and PAB
reserve computation reported in the twelve most recently filed month-
end FOCUS Reports.\82\ Based on regulatory filings for the period of
January 2022 through December 2022, the $250 Million Threshold would
have applied the proposed daily computation requirement to
approximately 63 carrying broker-dealers.\83\ These broker-dealers
included 11 carrying broker-dealers that already voluntarily performed
the customer reserve computation daily.\84\
---------------------------------------------------------------------------
\78\ See section I.A. of this release (discussing the need for
daily reserve computations); Proposing Release, 88 FR at 45843.
\79\ See paragraph (e)(3)(i)(B) to Rule 15c3-3, as proposed to
be amended. In addition, the Commission proposed the following
conforming amendments to paragraph (e)(3)(i) of Rule 15c3-3: (1)
paragraph (e)(3)(i) would be re-lettered paragraph (e)(3)(i)(A); and
(2) the text in paragraph (e)(3)(i) regarding monthly computations
would be set forth in new paragraph (e)(3)(i)(C). Further, the
phrase ``[e]xcept as provided in paragraphs (e)(3)(i)(B)(1) and (C)
of this section'' would be added to the beginning of paragraph
(e)(3)(i)(A) of Rule 15c3-3, as proposed to be amended, to clarify
that the weekly computation requirement in paragraph (e)(3)(i)(A)
applies unless the carrying broker-dealer is subject to the daily
computation requirement of paragraph (e)(3)(i)(B)(1) or meets the
conditions of paragraph (e)(3)(i)(C) to perform a monthly
computation. See Proposing Release, 88 FR at 45843, n.74. The
Commission did not receive comments on these proposed conforming
amendments and is adopting them as proposed.
\80\ The text of paragraph (e)(3)(i)(B) of Rule 15c3-3--as
proposed to be amended--was modelled closely on the preexisting text
of paragraph (e)(3)(i) of Rule 15c3-3. See Proposing Release 88 FR
at 45843, n.75.
\81\ For example, a carrying broker-dealer performing the
computation on Tuesday--as of the close of business on Monday--would
be required to make the deposit on Wednesday, assuming all three
days are business days. On Wednesday, the carrying broker-dealer
would perform the computation as of the close of business Tuesday
and be required to make the deposit on Thursday (assuming Thursday
is a business day). See Proposing Release 88 FR at 45844.
\82\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed
to be amended. This would mean the carrying broker-dealer would add
up the sum of the total credits reported in the customer and PAB
reserve computations in each of the twelve most recently filed
month-end FOCUS Reports and divide that amount by 12 to calculate
the arithmetic mean of the total credits. See Proposing Release, 88
FR at 45844, n.76.
\83\ See Proposing Release, 88 FR at 45844, n.79.
\84\ See Proposing Release, 88 FR at 45844, n.80.
---------------------------------------------------------------------------
2. Comments Received and Final Amendments
Many commenters supported the overall proposal.\85\ Commenters
stated that the proposal would help protect customers, and address
potential risks in a more timely and proactive manner, which safeguards
investors and market participants, as well as strengthens the overall
resilience of the financial markets.\86\ One commenter, however, stated
that the preexisting weekly reserve requirements have proven effective
for the industry and not resulted in any problems.\87\
---------------------------------------------------------------------------
\85\ See, e.g., Letter from Joshua Beattie, FriendshipWorks
(July 20, 2023); Roger Cryer (Aug. 16, 2023); Ethan Jenni (Aug. 20,
2023); Ruth Earle (Aug. 20, 2023); Jesse Tutti (Aug. 20, 2023);
Nathan Saint (Aug. 20, 2023); Chris Edmondson (Aug. 20, 2023); and
Janice Schrader (Aug. 21, 2023).
\86\ See Letter from Joseph (Sept. 8, 2023); Golden DOGE (Sept.
9, 2023).
\87\ See Letter from Christopher A. Iacovella President & CEO,
American Securities Association (Sept. 11, 2023) (``ASA Letter'') at
4.
---------------------------------------------------------------------------
The Commission agrees with commenters that the amendments to
require daily customer and PAB reserve computations will protect
customer and PAB cash more quickly than is the case with weekly
computations. While the preexisting weekly customer and PAB reserve
requirements have generally been effective,\88\ the observed large
deposit requirements, and differences or ``mismatches'' between the net
amount of cash a carrying broker-dealer owes its customers and PAB
account holders and the amounts on deposit in the customer and PAB
reserve bank accounts, indicate that a daily reserve computation
requirement enhances the preexisting rule.\89\
---------------------------------------------------------------------------
\88\ See section II.C.2. of this release (discussing broker-
dealer liquidations and SIPA).
\89\ See section I.A. of this release (discussing the need for
daily reserve computations); section IV.B.2. of this release
(discussing average mismatches).
---------------------------------------------------------------------------
As discussed in section I.A. of this release, a daily reserve
computation requirement will make the financial system safer by: (1)
increasing the likelihood that a failing carrying broker-dealer can
self-liquidate (meaning customers and PAB account holders do not
temporarily lose access to their cash and securities); (2) lowering the
risk that the SIPC Fund may be depleted by having to address a large
shortfall in customer cash held by a failed carrying broker-dealer; and
(3) increasing the liquidity of carrying broker-dealers performing the
daily customer and PAB reserve computations thereby positioning them to
better address potential financial shocks.
[[Page 2797]]
Regarding the proposed $250 Million Threshold, one commenter
suggested modifying the proposal to include a second test that would
need to be met to trigger the requirement to perform daily reserve
computations.\90\ In particular, the commenter recommended requiring a
carrying broker-dealer to perform daily computations if it exceeds the
proposed $250 Million Threshold and has average net credits of $10
million or more because some carrying broker-dealers that meet the
proposed $250 Million Threshold do not present a material risk as they
do not carry a large excess of credits over debits. This commenter also
stated that a number of carrying broker-dealers rarely have an excess
of credits over debits because of the nature of their activities, and
the customer protection benefit of a daily computation requirement for
these carrying broker-dealers is minimal, and should be weighed against
the significant costs of the proposal, which are not commensurate with
the risk profiles they present.\91\ Another commenter stated the
Commission should adopt a threshold using risk or liquidity factors
because they are better predictors of a failing carrying broker-dealer
than a fixed threshold based on size.\92\ The commenter stated that
this threshold classification would avoid penalizing carrying broker-
dealers with strong balance sheets that exceed a fixed threshold.\93\
One commenter stated that the Commission should define the threshold as
a formula that it could adjust periodically without further rulemaking,
because the proposed threshold is based on a narrow set of FOCUS
reports and could become outdated as a result of material changes.\94\
---------------------------------------------------------------------------
\90\ See Letter from Kevin Zambrowicz, Deputy General Counsel
(Institutional) & Managing Partner, SIFMA (Sept. 11, 2023) (``SIFMA
Letter) at 6-7.
\91\ See id.
\92\ See ASA Letter at 5.
\93\ See id. The commenter did not identify specific risk or
liquidity factors that the Commission could use for this purpose but
suggested that the Commission could consider the liquidity factors
in a FINRA concept release for a potential FINRA liquidity risk
management rule. Id.
\94\ See Letter from Andrew Hartnett, NASAA President and Deputy
Commissioner, Iowa Insurance Division (Sept. 11, 2023) (``NASAA
Letter'') at 2-3. The commenter stated that this alternative would
ensure that the Commission reevaluates, and refreshes (as necessary)
the proposal's systemic risk mitigation aims and ease the
Commission's future burdens given the significant effort required to
engage in rulemaking. Id. at 3.
---------------------------------------------------------------------------
Some commenters suggested eliminating the proposed $250 Million
Threshold so that all carrying broker-dealers would be required to
perform daily customer and PAB reserve computations.\95\ One of these
commenters stated that the mismatch risk applies equally to both large
and small carrying broker-dealers, and, as such, the Commission should
apply the requirement to all carrying broker-dealers so that customers
are not left vulnerable simply because they hold their securities
accounts at smaller broker-dealers.\96\ The commenter also stated that
this modification would eliminate the need for carrying broker-dealers
to monitor their average total credits over a 12-month period to
determine whether or not they meet the $250 Million Threshold.\97\
---------------------------------------------------------------------------
\95\ See Letter from Stephen W. Hall, Legal Director and
Securities Specialist, Better Markets, Inc. (Sept. 11, 2023)
(``Better Markets Letter'') at 8; Cory (Sept. 19, 2023) (``Cory
Letter''). Another commenter stated that it is possible that a
threshold based on a narrow set of FOCUS Reports could become stale
if the data changes materially and that one remedy would be to
require all carrying broker-dealers to compute reserve requirements
daily. The commenter, however, recognized the Commission's implicit
concern that extending the requirement to all carrying broker-
dealers might be unnecessarily burdensome, and stated that there is
a potential consensus to support a reasonable ``balanced
demarcation'' [between carrying broker-dealers with large amounts of
total credits relative to smaller carrying broker dealers]. See
NASAA Letter at 2.
\96\ See Better Markets Letter at 8.
\97\ See id at 8-9.
---------------------------------------------------------------------------
The final amendments modify the proposal by raising the $250
Million Threshold to $500 million. This threshold is designed to
provide a balanced demarcation between carrying broker-dealers with
large amounts of total credits relative to smaller carrying broker-
dealers (with lower average total credits). The former are more likely
to have larger mismatches in any given year, and are better positioned
to absorb the increased costs resulting from performing daily reserve
computations.\98\ For example, when proposed, the threshold was
estimated to apply the daily reserve computations requirement to 63 of
the 187 total broker-dealers subject to the customer and PAB reserve
requirements of Rule 15c3-3.\99\ Further, at proposal, the mismatch
risk was calculated as a carrying broker-dealer's deposit divided by
its reserve account balance from any month. The average of these
mismatches for each carrying broker-dealer during 2022 was computed to
determine the average mismatches.\100\ For example, in 2022, on the
aggregate level, the average mismatch across the 187 carrying broker-
dealers for customer reserve accounts was 11.2% for carrying broker-
dealers above the proposed $250 Million Threshold.\101\ It was 6.1% for
carrying broker-dealers below the proposed $250 Million Threshold.
---------------------------------------------------------------------------
\98\ See section IV.B.2. of this release (discussing the number
of affected broker-dealers as part of the baseline for the economic
analysis of the final amendments).
\99\ See Proposing Release, 88 FR at 45849-50. Included in the
187 carrying broker-dealers were 25 carrying broker-dealers that
reported zero customer or PAB credits in 2022.
\100\ See id. at 45852.
\101\ See Proposing Release, 88 FR at 45852 (table 4 depicting
broker-dealer deposits and withdrawals as a share of the reserve
account balance). In this release, the aggregated average mismatch
of 11.2% is calculated as an average of the average mismatches for
all carrying broker-dealers that met the proposed $250 Million
Threshold in 2022. A mismatch is calculated as a carrying broker-
dealer's deposit (FOCUS Report Line 4520) divided by its reserve
account balance from any month (Line 4530). The average of these
mismatches for each broker-dealer is computed to determine the
``average mismatches.'' The same was done for carrying broker-
dealers below the proposed $250 Million Threshold in 2022. Using a
$500 Million Threshold, based on 2022 data, on the aggregate level,
the average mismatch across the 187 carrying broker-dealers for
customer reserve accounts was 11.9% for carrying broker-dealers
above the $500 Million Threshold, and 6.1% for carrying broker-
dealers below the $500 Million Threshold.
---------------------------------------------------------------------------
The threshold is being raised to $500 Million to further narrow the
scope of the final amendments to carrying broker-dealers whose average
mismatches are larger as compared to carrying broker-dealers that are
below the threshold.\102\ In particular, the $500 Million Threshold is
estimated to apply the daily computation requirement to 49 of the 191
carrying broker-dealers subject to the customer and PAB reserve
requirements of Rule 15c3-3.\103\ Nine of these 49 carrying broker-
dealers already voluntarily perform daily customer and PAB reserve
computations.\104\ Moreover, it is estimated that these 49 carrying
broker-dealers--in the aggregate--account for 99.3% of the total
credits of all 191 carrying broker-dealers subject to the
requirement.\105\ Further, the average mismatches were generally higher
for carrying broker-dealers above the $500 Million Threshold as
compared to carrying broker-dealers below the threshold.\106\ For
example, the average mismatch across the 191 carrying broker-dealers
for customer reserve bank accounts is 15.7% for carrying broker-dealers
above the $500 Million Threshold.\107\ It is 6.4% for carrying broker-
dealers below the threshold.
---------------------------------------------------------------------------
\102\ See section IV.B.2. of this release.
\103\ Included in the 191 carrying broker-dealers were 29
carrying broker-dealers that reported zero customer or PAB credits
in 2023. See section IV.B.2. of this release.
\104\ Based on FOCUS Report data for December 31, 2023.
\105\ See id.
\106\ See section IV.B.2. of this release, table 5--Broker-
Dealer Deposits and Withdrawals as a Share of Reserve Account
Balance, 2023.
\107\ See section IV.B.2. of this release.
---------------------------------------------------------------------------
These data indicate that the $500 Million Threshold will apply to
carrying
[[Page 2798]]
broker-dealers that hold the bulk of total credits in the industry and
to the carrying broker-dealers that tend to have the larger mismatches
as measured by the average of reserve deposits required for the
carrying broker-dealer relative to the average balance in its reserve
accounts. In this way, the $500 Million Threshold seeks to reasonably
balance the enhancements to customer protection under Rule 15c3-3
through reductions in the mismatch risk, with the potential increases
in compliance costs and staffing that may be necessary to perform a
daily reserve computation. The $500 Million Threshold is a
straightforward way to narrow the scope of the final rule to carrying
broke/r-dealers that tend to have larger mismatches. For example, this
modification will exclude an additional 12 carrying broker-dealers from
the scope of the final rule.\108\ For these reasons, the Commission is
not modifying the final $500 Million Threshold to include the second
test a commenter suggested (i.e., having average net credits of $10
million or more) or to use risk or liquidity factors, as a different
commenter suggested. These suggested modifications would narrow the
application of the rule in a way that would exclude some carrying
broker-dealers from the daily reserve computation requirement that have
the potential for large mismatch risks.
---------------------------------------------------------------------------
\108\ This estimate is based on FOCUS Report data for calendar
year 2023.
---------------------------------------------------------------------------
Further, the final $500 Million Threshold--because it is based on
total customer and PAB credits (as opposed to a net amount of
credits)--will apply the daily reserve computations requirement to
carrying broker-dealers that tend to have large obligations to
customers (e.g., through receiving large infusions of customer cash,
holding cash balances in customers' securities accounts, or using
customer margin securities). Using a net credit amount, in addition to
the $500 Million Threshold would exclude 10 of the 49 carrying broker-
dealers that would be subject to the daily reserve requirement based on
FOCUS Report data for calendar year 2023.\109\ At the time of the
weekly computation, however, a carrying broker-dealer may have
substantial debits to offset the credits and, therefore, have a
relatively small amount of excess credits in comparison to its total
credits. This could cause the carrying broker-dealer to stay under the
threshold notwithstanding the fact that it typically has large amounts
of total credits, and large intra-week mismatches.\110\ Consequently, a
net credit amount may not indicate that a carrying broker-dealer is at
a lower risk of large intra-week mismatches because it does not account
for large fluctuations in the net cash owed to customers and PAB
account holders between reserve computations. The final amendments are
designed to reduce the mismatch risk for carrying broker-dealers with
large amounts of total credits (who are more likely to have larger
mismatches) by protecting customer and PAB cash more quickly than is
the case with weekly computations. This will increase the likelihood
that a failing carrying broker-dealer can self-liquidate (meaning
customers and PAB account holders do not temporarily lose access to
their cash and securities).
---------------------------------------------------------------------------
\109\ See section IV.E.2. of this release (discussing
alternative thresholds based on different metrics).
\110\ Based on FOCUS Report data for calendar year 2023, at
least one carrying broker-dealer that would be excluded from the
scope of the rule using a net credit amount in addition to a $500
Million Threshold had two of the top 100 largest deposits in
customer reserve bank accounts in 2023. Further, four of the top 25
PAB reserve bank account deposits in calendar year 2023 were made by
two carrying broker-dealers that would be excluded using the net
credit amount in addition to the $500 Million Threshold.
---------------------------------------------------------------------------
Finally, the $500 Million Threshold also is designed as a
straightforward way for a carrying broker-dealer to determine whether
it is subject to the requirement to perform daily customer and PAB
reserve computations. As such, it will be simple for carrying broker-
dealers and the Commission or Commission staff to calculate and monitor
because it is a fixed-threshold and the data for the calculation is
derived from FOCUS Reports.\111\ Setting formula-based thresholds that
incorporate dynamic risk or liquidity factors would make the rule
requirements less predictable and more complex to monitor because of
their variability. Moreover, carrying broker-dealers in compliance with
the net capital rule typically have strong balance sheets because the
rule imposes a net liquid assets test that is designed to promote
liquidity within broker-dealers.\112\ During times of market stress,
however, carrying broker-dealers may experience fluctuations in their
capital if customers and/or PAB account holders rapidly withdraw cash
and securities from their accounts to reduce their exposure to the
carrying broker-dealer and the securities markets more generally.\113\
Consequently, a formula-based threshold that incorporates dynamic risk
or liquidity factors would exclude carrying broker-dealers that are
more likely to experience larger mismatches, including carrying broker-
dealers with large amounts of credits that have strong balance
sheets.\114\ A fixed threshold also is consistent with other thresholds
and ratios in the Commission's broker-dealer financial responsibility
rules, which use fixed-dollar amounts or predetermined ratios that do
not contain formulas for future adjustments.\115\ Finally, the $500
Million Threshold will incorporate any month-to-month material changes
because it uses a 12-month rolling average (as compared to basing the
calculation on a single filing or date).\116\ For these reasons, the
Commission is not adopting a formula-based threshold that incorporates
dynamic risk or liquidity factors, or a threshold that can be adjusted
without rulemaking as some commenters suggested.
---------------------------------------------------------------------------
\111\ A uniform threshold also is less costly to monitor because
it does not change. See the Economic Analysis in section IV. of this
release (discussing the economic effects of the final amendments).
\112\ See Rule 15c3-1. The net capital rule also requires that a
carrying broker-dealer must not otherwise be insolvent as defined in
the net capital rule. See paragraph (a)(16) of Rule 15c3-1 (defining
the term insolvent).
\113\ See section IV.D. of this release (discussing capital
losses that could arise in times of market stress); section I.A. of
this release (discussing the need for daily reserve computations).
\114\ See paragraph (a)(16) of Rule 15c3-1 (defining the term
insolvent).
\115\ See Rules 15c3-1 and 15c3-3.
\116\ See NASAA Letter at 2; see also Letter from Josephine
Wang, President and CEO, SIPC (Sept. 11, 2023) (``SIPC Letter'') at
2 (supporting the rolling 12-month average).
---------------------------------------------------------------------------
By adopting a $500 Million Threshold, the final rule does not apply
the daily reserve computation requirement to all carrying broker-
dealers, as a commenter suggested.\117\ This suggested modification
would apply the requirement to carrying broker-dealers that do not have
the potential for large mismatch risks and that are less able to bear
the costs of--and devote the resources necessary for--performing daily
reserve computations because of their size or limited customer or PAB
account carrying activity. Applying the daily reserve computation to
all carrying broker-dealers would impose compliance costs on an
additional 113 carrying broker-dealers with relatively less customer
and PAB account activity.\118\ Thus, it would
[[Page 2799]]
subject them to increased compliance costs while they do not have the
potential for large mismatches.\119\ However, carrying broker-dealers
below the $500 Million Threshold may choose to voluntarily perform a
daily customer reserve computation in order to apply the 2% debit
reduction in lieu of the 3% reduction.\120\ In this way, the investor
protection benefits of performing a daily computation may be expanded
beyond the carrying broker-dealers that will be required to perform a
daily computation, but in a way that does not impose undue costs on
smaller carrying broker-dealers. For example, smaller carrying broker-
dealers can analyze whether it is advantageous from a cost perspective
to realize the liquidity benefits that result from performing a daily
customer reserve computation and applying a 2% debit reduction in lieu
of a 3% debit reduction.
---------------------------------------------------------------------------
\117\ The commenter also stated that applying the daily reserve
computation requirement to all carrying broker-dealers would
eliminate the need to monitor average total credits over a 12-month
period. See Better Markets Letter at 8. As discussed above in this
section, the $500 Million Threshold is a fairly simple calculation
that relies on numbers carrying broker-dealers already report on the
FOCUS Report. Consequently, it will not be difficult for carrying
broker-dealers to determine whether they have triggered the daily
reserve computation requirement.
\118\ See section IV.E.3. of this release (discussing applying
the daily reserve requirement to all carrying broker-dealers as a
reasonable alternative).
\119\ See id.
\120\ See section II.C. of this release (describing the 2% debit
reduction).
---------------------------------------------------------------------------
In addition to addressing the proposed $250 Million Threshold, some
commenters suggested modifying the proposal in a way that would make
the reserve computations a hybrid of the daily and weekly approaches
where carrying broker-dealers would compute certain items in the
reserve formula daily and others weekly. For example, two commenters
\121\ suggested that a more cost efficient and effective alternative to
prevent a deficit of customer property in a SIPA liquidation (for
carrying broker-dealers primarily conducting a DVP/RVP business) \122\
would be to continue weekly computations with a daily calculation of
free credit balances.\123\ Another commenter acknowledged that while
certain carrying broker-dealers should perform a daily reserve
computation, the Commission should permit other carrying broker-dealers
to perform a weekly reserve computation, and a simplified intra-week
reserve computation of only material balances (while excluding cash
balances moved to external sweep programs).\124\
---------------------------------------------------------------------------
\121\ See SIFMA Letter at 10-11; Letter from Erik Soderberg,
Head of Regulatory Affairs, Americas, Deutsche Bank Securities, Inc.
(Sept. 11, 2023) (``Deutsche Bank Letter'') at 1-2. These commenters
stated that inflows of customer cash to customer accounts for
interest and dividends represent the vast bulk of any net equity
that a carrying broker-dealer would owe its customers if such a
carrying broker-dealer were subject to a liquidation. See SIFMA
Letter at 10; see also Deutsche Bank Letter at 2.
\122\ DVP/RVP means a delivery-versus-payment or receipt-versus-
payment. This generally refers to an arrangement whereby payment for
securities purchased is made to the selling customer's agent or
delivery of securities sold is made to the buying customer's agent
in exchange for payment at time of settlement, usually in the form
of cash. This settlement method generally guarantees the transfer of
securities only happens after payment has been made. Carrying
broker-dealers whose primary business is DVP/RVP transactions also
may have limited carrying business (including for affiliates)
including margin accounts. See SIFMA Letter at 10.
\123\ See SIFMA Letter at 10; Deutsche Bank Letter at 1-2. These
commenters suggested that these carrying broker-dealers be permitted
to calculate free credit balances daily as of the previous business
day, identify whether such balances are greater than the free credit
balances reflected in their most recent reserve computation, and, on
the same day, either: (1) sweep any excess into a sweep program; or
(2) deposit any increase into their customer reserve bank accounts.
Id.
\124\ See ASA Letter at 5; Letter from ASA (Jan. 19, 2024)
(``ASA Letter 2'') at 2; Letter from ASA (Oct. 2, 2024) (``ASA
Letter 3''). The commenter stated that this computation would
achieve a similar purpose as the daily customer and PAB reserve
computations requirement and provide relief for carrying broker-
dealers from having to develop infrastructure and hire regulatory
staff to perform a customer and PAB reserve computation daily. See
ASA Letter at 5.
---------------------------------------------------------------------------
The final amendments retain the daily customer and PAB reserve
computation requirement, as proposed. The hybrid approaches commenters
suggested would not provide the same level of customer protection
afforded by complete daily customer and PAB reserve computations
because these hybrid approaches do not include all debits and
credits.\125\ As discussed above in section I.C.1. of this release,
preexisting Rule 15c3-3 is designed to protect customers by segregating
their securities and cash from the carrying broker-dealer's proprietary
business activities. This is accomplished through the customer and PAB
reserve computations that must include all funds which have customer
assets as their source, and ensures that the net amount of cash owed to
customers and PAB account holders that is not deployed for customer or
PAB account holder securities transactions is deposited in the customer
and PAB reserve bank accounts.\126\ Performing only a modified or
hybrid customer or PAB reserve computation increases the risk of a
large mismatch for carrying broker-dealers with large amounts of
credits that exceed the $500 Million Threshold because they would not
be accounting for all credit items when performing daily reserve
computations under these alternatives.\127\ This, in turn, would
increase the risk that a carrying broker-dealer may be unable to
promptly return cash and securities to customer and PAB account holders
in the event the carrying broker-dealer fails financially.
---------------------------------------------------------------------------
\125\ In this regard, in adopting the original customer reserve
requirements of Rule 15c3-3 in 1972, the Commission stated that
``[it] has taken a broad view of the Congressional mandate by
requiring that the reserve account include all funds which have as
their source customer assets.'' See Rule 15c3-3 Adopting Release, 37
FR at 25224.
\126\ See 1972 15c3-3 Adopting Release, 37 FR at 25224 (One of
the goals of Rule 15c3-3 is to ``insure that customers' funds held
by a broker-dealer (both free credit balances and deposits which may
be restricted as to withdrawal) and the cash which is realized
through the lending, hypothecation and other permissible uses of
customers' securities are deployed in safe areas of the broker-
dealer's business related to servicing his customers, or to the
extent that the funds are not deployed in these limited areas, that
they be deposited in a reserve bank account.''). Id.
\127\ See section I.A. of this release (describing the need for
daily reserve computations).
---------------------------------------------------------------------------
Further, limiting the daily computation to the amount of free
credit balances and including any increase in only free credit balances
in a sweep program or a separate special reserve bank account,\128\ or
an intra-week computation of only certain credit items would not
account for possible material changes in other credit items not
accounted for daily that could substantially affect the customer or PAB
reserve computation and any required deposit. Finally, the hybrid
computations commenters suggested would introduce an additional level
of complexity to the computation that could tax the resources of
carrying broker-dealers while not achieving the full risk-reducing
benefits of a complete daily reserve computation.\129\
---------------------------------------------------------------------------
\128\ See section II.E.1. of this release (discussing sweep
programs and cash in motion and other transitory credits); section
IV.E.10. (discussing exemption for cash in motion as a reasonable
alternative).
\129\ See section I.A. of this release (describing the need for
daily reserve computations).
---------------------------------------------------------------------------
Another commenter stated that the Commission should adopt a
separate $250 million threshold requirement for the customer and PAB
reserve computations, to allow carrying broker-dealers to focus their
resources on the reserve computation that merits the most attention,
rather than one that presents minimal risk to the carrying broker-
dealer or the financial system as a whole.\130\ This commenter also
suggested as another alternative that the Commission permit a carrying
broker-dealer that exceeds the proposed $250 Million Threshold to
perform an optional weekly computation for either its customer or PAB
accounts where credits in that particular computation fall below a
certain level (e.g., $50
[[Page 2800]]
million).\131\ Another commenter stated that for carrying broker-
dealers performing both the customer and PAB reserve computations, the
Commission should not require daily PAB reserve computations in order
to protect customer reserves while mitigating stress on carrying
broker-dealers' resources.\132\
---------------------------------------------------------------------------
\130\ See Marshall Ollia, Chief Financial Officer, Raymond James
& Associates, Inc. (Sept. 11, 2023) (``Raymond James Letter'') at 2-
3. This commenter stated that its total customer credits would
exceed $250 million but its PAB credit balances are significantly
below the threshold. The commenter further stated that in practice
it does not see large inflows or outflows of broker-dealer credit
items in PAB accounts and so the carrying broker-dealer does not
experience a mismatch in timing of those items. Id.
\131\ See Raymond James Letter at 3. This commenter stated, for
example, where a carrying broker-dealer has $2.0 billion in customer
credits, but only $45 million in PAB credits, then it would perform
a customer reserve computation daily for the customer reserve bank
account and have the option of performing PAB reserve computations
weekly for the PAB reserve bank account. Id.
\132\ See ASA Letter at 4.
---------------------------------------------------------------------------
The final amendments do not take these approaches commenters
suggested to bifurcate the frequency of the customer and PAB reserve
computations. Both the securities accounts of customers and PAB account
holders would be affected if a carrying broker-dealer experiences a
large intra-week mismatch in either its customer or PAB reserve bank
accounts. This mismatch risk increases the risk to both the carrying
broker-dealer's customers and PAB account holders that if the carrying
broker-dealer fails financially, the customers and PAB account holders
may experience a delay in receiving their cash and securities or be
subject to a disorderly liquidation. Requiring that a carrying broker-
dealer that exceeds the $500 Million Threshold perform a daily customer
and PAB reserve computation reduces the mismatch risk in each of these
accounts and more dynamically matches the net cash owed to PAB account
holders with the amount on deposit in the customer and PAB reserve bank
accounts. This requirement will reduce mismatch risk, and benefit both
customer and PAB account holders if a carrying broker-dealer fails
financially by ensuring their cash and securities are promptly returned
to them.
In addition, in the event of a SIPA liquidation of a failed
carrying broker-dealer, both customers and PAB account holders would be
part of the customer estate which would include both the customer and
PAB reserve bank accounts to the extent needed to satisfy customers'
claims. Further, because PAB account holders--as broker-dealers--are
not entitled to advances from the SIPC Fund, their claims for
securities and cash would be at a greater risk of not being satisfied
in full (as compared to non-broker-dealer customers). This could expose
the PAB account holder to financial stress and increased risk of
liquidation.\133\ Therefore, because a large mismatch in the customer
or PAB reserve bank account will affect both customers and PAB account
holders in a SIPA liquidation, the final rules require a carrying
broker-dealer to perform a daily customer and PAB reserve computation
if it meets or exceeds the $500 Million Threshold.
---------------------------------------------------------------------------
\133\ See Proposing Release, 88 FR at 45842.
---------------------------------------------------------------------------
Finally, a daily requirement for both the customer and PAB reserve
computations also will promote consistency by requiring that a carrying
broker-dealer perform the customer and PAB reserve computations with
the same frequency.\134\ While Rule 15c3-3 currently permits a carrying
broker-dealer to elect to perform its customer and PAB reserve
computations more frequently than weekly,\135\ a practical effect of
requiring a uniform standard that a carrying broker-dealer perform both
the customer and PAB reserve computations daily will be to permit the
carrying broker-dealer to withdraw excess funds more quickly from
either the customer or PAB reserve bank account (as compared to a
weekly reserve computation). This consistency will increase liquidity
for carrying broker-dealers and position them to better address
potential financial shocks.\136\
---------------------------------------------------------------------------
\134\ Based on FOCUS Report data for December 31, 2023, all nine
of the carrying broker-dealers above the $500 Million Threshold that
voluntarily perform daily reserve computations currently perform
daily customer and PAB reserve computations.
\135\ See paragraph (e)(3)(iv) of Rule 15c3-3.
\136\ See section I.A. of this release (discussing the need for
daily reserve computations).
---------------------------------------------------------------------------
For the reasons discussed above in this section, the Commission has
not modified the final amendments to establish the alternative
thresholds or hybrid computations commenters suggested. However, to the
extent that carrying broker-dealers incur costs to transition to a
daily reserve computation, the modification of the final amendments to
permit a 2% debit reduction in performing the customer reserve
computation will provide them additional liquidity.\137\ This
modification will reduce costs from the proposal for carrying broker-
dealers without compromising the enhancements to customer protection
that the final $500 Million Threshold is designed to provide (and
without adopting any of the alternative thresholds or hybrid
computations commenters suggested).
---------------------------------------------------------------------------
\137\ See section II.C. of this release (describing the 2% debit
reduction) and the Economic Analysis in section IV. of this release
(discussing the costs and benefits of the rule).
---------------------------------------------------------------------------
Several commenters stated that carrying broker-dealers should
perform reserve computations in real time or commented on the
technological advances in the securities markets.\138\ One commenter
stated that technical prerequisites for such complex computational
operations are already in place and should not be burdensome to
carrying broker-dealers.\139\ Another commenter stated that the
Commission should not entertain any carrying broker-dealer's objections
that the proposal would be ineffective or burdensome to implement since
the entirety of their services should now be automated.\140\ Commenters
also stated that the proposal is a necessary reform given technological
advances and pace of today's financial markets.\141\
---------------------------------------------------------------------------
\138\ See Letter from Greg Linder (Aug. 20, 2023) (``Linder
Letter''); Andrew O'Donnell (July 30, 2023) (``O'Donnell Letter'')
and Alex MacCartney (July 21, 2023); Joao F. Santos (July 28, 2023)
(``Santos Letter''); Eddie Klas (July 18, 2023); Adam Whitehurst
(July 12, 2023) (``Whitehurst Letter''); Cory Letter.
\139\ See Santos Letter. This commenter suggested that carrying
broker-dealers be required to electronically publish whether reserve
requirements have been met or breached. Id.
\140\ See Whitehurst Letter; Anonymous Letter (Aug. 21, 2023).
\141\ See Whitehurst Letter; Cory Letter.
---------------------------------------------------------------------------
Although there have been technological advances to automate and
streamline the customer and PAB reserve computations to enable carrying
broker-dealers to perform a computation daily, there are still portions
of the customer and PAB reserve computations that employees must
perform manually (such as performing reconciliations or researching
items in suspense accounts in order to properly credit the correct
customer securities account), or required data inputs that a carrying
broker-dealer may be unable to obtain in real time (such as data from a
third party service provider). These manual items and unavailability of
certain data in real time make it impractical to require carrying
broker-dealers to perform a customer or PAB reserve computation in real
time. Moreover, adjusting amounts deposited in the customer and PAB
reserve bank accounts in real time would be impractical.
B. Compliance With Daily Reserve Computation After Exceeding $500
Million Threshold
1. Proposal
The Commission proposed to require that a carrying broker-dealer
comply with performing a customer and PAB reserve computation daily no
later than six months after having average total credits that are equal
to or greater than $250 million. The purpose of the six-month
compliance period in the
[[Page 2801]]
proposed rule text was to provide time for a carrying broker-dealer to
prepare to perform a customer and PAB reserve computation daily after
it exceeds the proposed $250 Million Threshold.\142\ The Commission
stated that a carrying broker-dealer in this situation may need to add
resources in order to perform the computations, including hiring or
assigning additional staff to perform the daily computations.\143\
---------------------------------------------------------------------------
\142\ See Proposing Release, 88 FR at 45844.
\143\ See id.
---------------------------------------------------------------------------
Once a carrying broker-dealer begins to perform customer and PAB
reserve computations daily (because it exceeded the $250 Million
Threshold), the Commission proposed to require the carrying broker-
dealer to continue performing customer and PAB reserve computations
daily for at least 60 days after it falls below the $250 Million
Threshold. More specifically, under the proposal, a carrying broker-
dealer could elect to perform computations weekly by notifying its DEA
in writing at least 60 calendar days before reverting to a weekly
computation.\144\ If a carrying broker-dealer that provided the 60-day
notice under the proposal reverts to a weekly rather than daily
customer and PAB reserve computation and subsequently exceeds the
proposed $250 Million Threshold once again, the proposed rule would
require the carrying broker-dealer to comply with the daily computation
requirement no later than six months after having average total credits
equal to or greater than $250 million.\145\ This would be the same
process as when a carrying broker-dealer exceeded the proposed $250
Million Threshold for the first time.
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\144\ See Proposing Release, 88 FR at 45844-45.
\145\ See Proposing Release, 88 FR at 45845.
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2. Comments Received and Final Amendments
The Commission sought comment on the proposed compliance period for
beginning to perform customer and PAB reserve computations daily after
a carrying broker-dealers exceeds the proposed $250 Million
Threshold.\146\ As discussed below in this section, the Commission
received several comments regarding the proposed compliance period.
---------------------------------------------------------------------------
\146\ See id. at 45845-46.
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One commenter suggested the Commission group carrying broker-
dealers by size and select a transition period for compliance
appropriate for carrying broker-dealers in each group to accelerate the
transition to performing a customer and PAB reserve computation
daily.\147\ This commenter stated that six months may be longer than
many large and sophisticated carrying broker-dealers need to complete
the transition to a daily reserve computation after exceeding the
proposed $250 Million Threshold.\148\ Another commenter stated that the
Commission should shorten the proposed six-month compliance period to
three-months for a carrying broker-dealer to make the systems and
staffing changes necessary to perform a daily computation after it
exceeds the proposed $250 Million Threshold.\149\ Finally, one
commenter requested that the calculations for customer and PAB reserve
computations be bifurcated, with the proposed $250 Million Threshold
applied separately for the customer and PAB reserve computations, and
that the six month compliance period apply when the particular type of
average total credits (customer or PAB) crosses the proposed $250
Million Threshold.\150\
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\147\ See SIPC Letter at 1. The commenter did not suggest any
specific groupings or time periods. Id.
\148\ See SIPC Letter at 1.
\149\ See Letter from Brad D. (Sept. 9, 2023).
\150\ See Raymond James Letter at 3. As discussed in section
II.A.2. of this release, the Commission is adopting a single
threshold, the $500 Million Threshold, for the customer and PAB
reserve computations. As a result, a single compliance period once a
carrying broker-dealer has exceeded the $500 Million Threshold is
appropriate.
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As discussed in section II.A. of this release, the Commission is
adopting a $500 Million Threshold as part of the final amendments. The
six-month timeframe accounts for the fact that carrying broker-dealers
of different sizes may need more or less time to comply with a
requirement to perform the customer and PAB reserve computations daily.
The six-month timeframe, accordingly, provides a straightforward and
uniform compliance period for carrying broker-dealers to meet if they
exceed the $500 Million Threshold and must begin performing the
customer and PAB reserve computations daily. A uniform compliance
period also will be easier for the Commission, Commission staff and a
carrying broker-dealer's DEA to monitor for compliance because the same
requirement will apply to all carrying broker-dealers. As such, the
Commission is not modifying the final rule to provide for different
compliance timeframes based on the size of a carrying broker-dealer, as
commenters suggested.
A six-month compliance period also helps to ensure a carrying
broker-dealer that exceeds the $500 Million Threshold begins to perform
a daily customer and PAB reserve computation within a reasonable period
of time. In light of the enhancements to customer protection a daily
reserve computation provides, it is important that carrying broker-
dealers transition to a daily reserve computation as soon as
practicable after exceeding the $500 Million Threshold. Shortening the
compliance period to three-months, however, may not give carrying
broker-dealers sufficient time to transition to a daily customer and
PAB reserve computation, given the need to add resources in order to
perform the computations, including hiring or assigning additional
staff, upgrading systems, and making other operational changes. A six-
month compliance period reasonably balances the importance of
transitioning to a daily customer and PAB reserve computation soon
after exceeding the $500 Million Threshold to enhance customer
protection requirements, with the time period a carrying broker-dealer
needs to make the changes required to comply with the rule. Therefore,
the Commission is not modifying the final rule to provide for a three-
month compliance period as a commenter suggested.
One commenter stated that the proposal would allow a carrying
broker-dealer that is required to perform daily computations to revert
to a weekly computation 60 days after notifying its DEA, but if it
exceeds the proposed $250 Million Threshold, it would not be required
to return to performing a customer and PAB reserve computation daily
for six months.\151\ The commenter stated that while the Commission
assumes it may be infrequent that a carrying broker-dealer that reverts
to weekly computations after falling below the proposed $250 Million
Threshold re-crosses it shortly after because of increased customer
activity, if such circumstances were to occur the carrying broker-
dealer at issue would present the risk that the Commission is trying to
address in the proposal for a period of six months.\152\ Consequently,
this commenter suggested that the Commission revise the rule so that a
carrying broker-dealer that falls below the proposed $250 Million
Threshold would enter a probationary period of six months during which
time it would be required to immediately return to performing the
customer and PAB reserve computations daily if its total credits re-
crossed the threshold.\153\
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\151\ See NASAA Letter at 3.
\152\ See id.
\153\ See id. at 3-4.
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Another commenter suggested that the Commission provide a
transition of not more than 30 days for a carrying broker-dealer that
performs a customer and PAB reserve computation daily, reverts to a
weekly computation because it falls below the proposed $250 Million
[[Page 2802]]
Threshold, and then subsequently exceeds the proposed $250 Million
Threshold and must perform a daily computation. This commenter stated
that a carrying broker-dealer that formerly performed customer and PAB
reserve computations daily is unlikely to require six months to
reinstate procedures previously in effect.\154\
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\154\ See SIPC Letter at 2.
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In response to the comments that the Commission require a carrying
broker-dealer to immediately return to performing a customer and PAB
reserve computation daily if it exceeds the threshold for a second
time, or only be permitted a three-month compliance period, the
compliance period is designed to provide sufficient time for a carrying
broker-dealer to prepare to perform a customer and PAB reserve
computation daily after it exceeds the threshold. A carrying broker-
dealer performing the customer and PAB reserve computations weekly
which recrosses the $500 Million Threshold for a second or subsequent
time will likely continue to need time to prepare to perform the
customer and PAB reserve computations daily, because the carrying
broker-dealer may have re-allocated resources when it reverted to a
weekly computation. A return to performing a customer and PAB reserve
computation daily likely means a carrying broker-dealer will require
time to enhance its current operational resources in order to increase
the frequency of the customer and PAB reserve computations once more.
It also may be the case that a carrying broker-dealer may exceed the
$500 Million Threshold for a second or subsequent time after a
substantial period of time has passed. Finally, although a carrying
broker-dealer may re-cross the $500 Million Threshold shortly after
falling below it, and not yet have re-allocated resources required to
perform a daily computation, consistent standards will be applied to
all carrying broker-dealers that exceed the $500 Million Threshold
after a long or short period of time as they will have the same risk
profile. Therefore, a six-month compliance period is appropriate in
this case.
Some carrying broker-dealers' average total credits may hover
around the $500 Million Threshold from time to time. This will likely
be an infrequent occurrence since there will only be a few carrying
broker-dealers at any given time whose average total credits remain
close to the $500 Million Threshold.\155\ These carrying broker-dealers
may choose to monitor and manage their average total credits to remain
below the $500 Million Threshold or voluntarily perform the customer
and PAB reserve computations daily to realize the beneficial impact on
liquidity management resulting from the ability to make more frequent
withdrawals from the customer and PAB reserve bank accounts.\156\
Carrying broker-dealers that voluntarily perform the customer reserve
computation daily also may apply the 2% debit reduction to the
computation.\157\ These alternatives will assist carrying broker-
dealers in complying with the requirement to perform a customer and PAB
reserve computation daily if they exceed the $500 Million Threshold.
---------------------------------------------------------------------------
\155\ For example, based on FOCUS Report data for the 2023
calendar year, there were three carrying broker-dealers with average
total credits that were between $450 million and $500 million, and
one carrying broker-dealer with average total credits between $500
million and $600 million.
\156\ See paragraph (e)(3)(iv) of Rule 15c3-3.
\157\ See paragraph (e)(3)(v) of Rule 15c3-3, as amended.
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After review of the comments, the Commission is adopting the six-
month compliance period after a carrying broker-dealer exceeds the $500
Million Threshold, and the 60-day written notice requirement to revert
to a daily computation.\158\ Therefore, under the amendments, a
carrying broker-dealer must begin to perform a customer and PAB reserve
computation daily no later than six months after its average total
credits equal or exceed the $500 Million Threshold. This means, for
example, that a carrying broker-dealer which exceeds the $500 Million
Threshold for 12 filed monthly FOCUS Reports for a particular calendar
year (i.e., FOCUS Reports filed for January through December in a
calendar year), must begin performing a customer and PAB reserve
computation daily no later than June 30th of the next calendar year.
Finally, this amendment provides time for a carrying broker-dealer to
prepare to perform a customer and PAB reserve computation daily after
it exceeds the $500 Million Threshold. This preparation may involve
adding resources to perform the computations, including, among other
things, hiring extra staff, assigning additional staff, and updating or
enhancing technology and software.
---------------------------------------------------------------------------
\158\ See paragraph (e)(3)(i)(B)(1) and (2) of Rule 15c3-3, as
amended.
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C. Reducing the Aggregate Debit Reduction From 3% to 2%
1. Amendments to Rules 15c3-1 and 15c3-3
Under existing requirements, carrying broker-dealers--as part of
the customer reserve computation--must reduce the value of debits items
(i.e., customer-related receivables) in the customer reserve
computation by either 1% (for debit balances in customers' cash and
margin accounts) or 3% (for aggregate debit items which includes all
debit items).\159\ Whether a carrying broker-dealer must apply the 1%
or 3% debit reduction depends on how it calculates its minimum net
capital requirement under Rule 15c3-1. Rule 15c3-1 requires that
broker-dealers maintain a minimum level of net capital (meaning highly
liquid capital) at all times.\160\ The minimum net capital requirement
for broker-dealers is the greater of a fixed-dollar amount specified in
the rule and an amount determined by applying one of two financial
ratios: the 15-to-1 aggregate indebtedness to net capital ratio (basic
method) or the 2% of aggregate debit items ratio (alternative
method).\161\ Carrying broker-dealers electing the alternative method
must maintain minimum net capital of the greater of $250,000 or 2% of
their aggregate debit items included in the customer reserve
computation.\162\ In addition, a broker-dealer that uses the
alternative method must provide the Commission with an ``early
warning'' notice when the amount of its net capital falls below 5% of
aggregate debit items.\163\ Most carrying broker-dealers use the
alternative method, including the 49 carrying broker-dealers that
[[Page 2803]]
exceeded the $500 Million Threshold for calendar year 2023.\164\
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\159\ See Note E(3) to Rule 15c3-3a (requiring the 1% debit
reduction); paragraph (a)(1)(ii)(A) of Rule 15c3-1 (requiring the 3%
debit reduction). The PAB reserve computation does not require
either the 3% or the 1% debit reduction. See Rule 15c3-3a, Notes
Regarding the PAB Computation, Note 4 (providing that Note E(3) to
Rule 15c3-3a--which imposes the 1% debit reduction--does not apply
to the PAB reserve computation); paragraph (a)(1)(ii)(A) of Rule
15c3-1 (imposing the 3% debit reduction in lieu of the 1% debit
reduction of Note E(3) of Rule 15c3-3a for carrying broker-dealers
using the alternative method).
\160\ See Rule 15c3-1.
\161\ See paragraphs (a)(1)(i) and (ii) of Rule 15c3-1.
\162\ See paragraphs (a)(1)(i) and (a)(2)(i) of Rule 15c3-1.
Aggregate debit items in the customer reserve computation (FOCUS
Line 4470) is total debit items before the 3% debit reduction. The
Commission adopted the alternative method as part of the
Commission's continuing efforts to structure its rules to provide
adequate protection for customers' assets while recognizing the
industry's need for flexibility in efficiently allocating capital
resources. See Net Capital Requirements for Brokers and Dealers;
Amended Rules, Exchange Act Release No. 18417 (Jan. 13, 1982) [47 FR
3512, 3513 (Jan. 25, 1982)].
\163\ See 17 CFR 240.17a-11(b)(2). This 5% of aggregate debits
``early warning'' threshold acts as a de facto minimum net capital
requirement for broker-dealers using the alternative method since
they seek to maintain sufficient levels of net capital to avoid the
necessity of providing this regulatory notice.
\164\ Based on FOCUS Report data as of December 31, 2023, using
the 3% aggregate debit item (Line 4471) and/or 2% aggregate debit
items in computation of minimum regulatory capital requirements
(Line 3870). Most broker-dealers that use the basic method to
compute net capital are smaller broker-dealers that are not carrying
broker-dealers, and generally have minimum net capital requirements
that are less than the $250,000 required to use the alternative
method. See also section IV.B.2. of this release (discussing the
scope of affected broker-dealers).
---------------------------------------------------------------------------
Under Rule 15c3-1, a carrying broker-dealer using the alternative
method must reduce aggregate debit items (i.e., the total of all debit
items in the customer reserve computation) by 3% when performing its
customer reserve computation under Rule 15c3-3.\165\ Conversely, Note
E(3) to the customer reserve computation under Rule 15c3-3a requires a
carrying broker-dealer using the basic method to reduce by 1% the total
debit balances in customer cash and margin accounts (i.e., margin loan
balances customers owe the carrying broker-dealer).\166\ Both of these
provisions can increase the amount that must be on deposit (locked up)
in the customer reserve bank account; however, the 3% debit reduction
can result in an even larger increase in the deposit requirement.\167\
This is because the reduction is larger (3% compared to 1%) and is
applied to the total amount of debit items while the 1% debit reduction
applies to a single category of debit items: customer margin loan
balances.
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\165\ See paragraph (a)(1)(ii)(A) of Rule 15c3-1.
\166\ See Rule 15c3-3a, Item 10 (debit balances in customers'
cash and margin accounts excluding unsecured accounts and accounts
doubtful of collection).
\167\ See Financial Responsibility Rules for Broker-Dealers, 78
FR at 51858.
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The Commission is lowering the 3% debit reduction to 2% in response
to comments that a reduction as large as 3% would no longer be
necessary if the requirement to perform a daily reserve computation is
adopted.\168\ This modification to the proposal is designed to
recalibrate how Rule 15c3-3 addresses the risk that the amount on
deposit in the customer reserve bank account is less than the net
amount of cash owed to customers in light of the new requirement to
perform daily customer and PAB reserve computations. As a commenter
stated, ``[u]nder a daily computation, the value of debit items and the
amounts owing to customers on any given day are accounted for in the
next day's computation and the difference is protected via the
following day's deposit into the Special Reserve Bank Accounts'' and
therefore ``[t]he amount of assets in the Special Reserve Bank Accounts
would . . . more quickly reflect the amounts owing to customers on any
given day and the value of debit items, thereby reducing the need for
any cushion [(i.e., the 3% debit reduction)] to account for a potential
mismatch.'' \169\ Similarly, another commenter stated that when the
Commission adopted the 3% debit reduction in 1975 the purpose was to
provide, in the event of a liquidation, an additional cushion of
secured debit items which will be available to satisfy customers with
whom the carrying broker-dealer effects transactions.\170\ This
commenter stated that a shift to a daily customer reserve computation
enabled by technological advancements since 1975 will result in a more
precise and up-to-date computation, thereby mitigating the risk that
the 3% debit reduction addresses in the customer reserve
computation.\171\ The commenter went on to state that ``a 1% deduction
in line with that applied to other broker-dealers seems appropriate for
firms that calculate net capital under the alternative method.'' \172\
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\168\ See SIFMA Letter at 5; Raymond James Letter at 2; ASA
Letter at 5; ASA Letter 2; ASA Letter 3.
\169\ See SIFMA Letter at 6.
\170\ See Raymond James Letter at 2.
\171\ See id.
\172\ See id.
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Commenters suggested eliminating the 3% debit reduction that
applies to carrying broker-dealers using the alternative method. This
would then subject these carrying broker-dealers to the 1% debit
reduction that applies to carrying broker-dealers using the basic
method. For the reasons discussed below, the Commission is not taking
this approach and instead is lowering the 3% debit reduction to 2%.
In order to understand the Commission's rationale for recalibrating
Rule 15c3-3 in this manner, it is necessary to discuss the origins and
purpose of the 3% debit reduction and its connection to Rule 15c3-1.
Rule 15c3-3--when it was adopted in 1972--required carrying broker-
dealers to reduce the value of debit balances in cash and margin
accounts by 1% when performing the customer reserve computation.\173\
Debit balances in cash and margin accounts was one of three categories
of debit balances included in the customer reserve computation at that
time (i.e., the 1% debit reduction did not apply to the total value of
debits in the customer reserve computation).\174\ In 1972, the
Commission also proposed significant revisions to Rule 15c3-1 (the
broker-dealer net capital rule).\175\ The original rule prohibited a
broker-dealer from having aggregate indebtedness that exceeded 2000% of
its net capital, exclusive of exchange memberships and fixed assets (a
20-to-1 requirement).\176\ Moreover, the rule did not apply to broker-
dealers that were members of a securities exchange on the premise that
these broker-dealers were subject to capital requirements promulgated
by their respective exchanges. The 1972 proposed amendments--among
other things--would apply Rule 15c3-1 to all broker-dealers (i.e., a
uniform net capital rule) and change the minimum net capital
requirement to the greater of a fixed-dollar amount and a ratio amount:
the 15-to-1 aggregate indebtedness to net capital ratio (i.e., the
basic method). Thus, as originally proposed in 1972, the amendments to
Rule 15c3-1 did not include the alternative method of computing minimum
net capital.
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\173\ See Rule 15c3-3 Adopting Release, 37 FR at 25229.
\174\ See id. In 1972, there were three categories of debit
items in the customer reserve computation: Items 10, 11, and 12. Id.
Item 10 was where the carrying broker-dealer recorded the value of
debit balances in cash and margin accounts. Id. Today, there are six
categories of debit items in the customer reserve computation: Items
10, 11, 12, 13, 14, and 15. See Rule 15c3-3a. Item 10 continues to
be where the carrying broker-dealer records the value of debit
balances in cash and margin accounts. Id.
\175\ See Net Capital Rule-Proposed Uniform and Comprehensive
Regulation, Exchange Act Release No. 9891 (Dec. 5, 1972) [38 FR 56
(Jan. 3, 1973)].
\176\ Net Capital Requirements for Brokers and Dealers; Amended
Rules, 47 FR at 3512.
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While the 1972 amendments to Rule 15c3-1 were still pending, the
Commission proposed further amendments to the rule as well as
corresponding amendments to Rule 15c3-3. They included a 1974 proposal
to add the alternative method of calculating minimum net capital.\177\
The proposed alternative method would require a carrying broker-dealer
to maintain a minimum level of net capital equal to the greater of
$100,000 or 4% of aggregate debit balances includable in the customer
reserve computation.\178\ At that time, the Commission acknowledged
that the alternative method could result in lower minimum net capital
requirements as compared with the basic method.\179\ Given this
[[Page 2804]]
impact, the Commission proposed a number of more stringent requirements
for carrying broker-dealers using the alternative method, including
that they would need to apply the 3% debit reduction in lieu of the
existing 1% debit reduction in Rule 15c3-3.\180\ In proposing the 3%
debit reduction, the Commission explained that the proposed debit
reduction would require a 100% reserve for customer funds not available
for use by the broker-dealer, and an additional 3% commitment of the
broker-dealer's own liquid capital in the form of cash or qualified
securities as an additional reserve and to insure the broker-dealer's
ability to finance its customer-related receivables.\181\
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\177\ See Alternative Net Capital Requirement for Certain
Brokers and Dealers, Exchange Act Release No. 11094 (Nov. 11, 1974)
[39 FR 41540 (Nov. 29, 1974)].
\178\ Id. at 41541-42.
\179\ Id. at 41540. (``The Commission has determined to publish
for comment a new concept to measure the capital adequacy of broker-
dealers which would eliminate in part restraints presently imposed
by the net capital ratio and aggregate indebtedness concepts which
have served as the primary source of protection of customers and
other broker-dealers for over 30 years. As a result of the numerous
changes that have occurred in the securities industry over the last
five years, the evolving future structure of the securities markets
and the future needs of the nation's corporate issuers to raise both
equity and debt capital, it is important at this time to develop new
approaches to the financial responsibility and capital adequacy of
broker-dealers for both the protection of customers and to maintain
sound and viable primary and secondary capital markets.'').
\180\ Id. at 41542.
\181\ Id. The Commission further explained that such additional
reserves will be available to provide self-regulatory organizations
and others with additional assets for the satisfaction of customer
cash claims and to redeem customers' securities which have been
hypothecated or otherwise encumbered when necessary for the orderly
winding up of the business of any broker-dealer. Id.
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The Commission adopted the proposed amendments to Rules 15c3-1 and
15c3-3 in 1975.\182\ They included the alternative method for
calculating the minimum net capital requirement and the requirement
that carrying broker-dealers using the alternative method apply the 3%
debit reduction.\183\ In this regard, the Commission explained ``that
the objectives of the [alternative method] can only be achieved by
further strengthening the custodial requirements and Reserve Formula
safeguards developed for the protection of customer assets established
by [Rule 15c3-3]'' and therefore the alternative method ``requires
aggregate debit items in the Reserve Formula to be reduced by 3% rather
than the 1% reduction of certain debit items which now exists.'' \184\
The Commission stated that this ``reduction of debit items will thus
provide, in the event of a liquidation, an additional cushion of
secured debit items which will be available to satisfy customers with
whom the broker or dealer effects transactions.'' \185\
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\182\ See Adoption of Uniform Net Capital Rule and an
Alternative Net Capital Requirement for Certain Brokers and Dealer,
Exchange Act Release No. 11497 (June. 26, 1975) [40 FR 29795 (July
16, 1975)].
\183\ In 1982, the Commission modified the alternative method to
reduce the ratio from 4% of aggregate debit items to 2% of aggregate
debit items. See Net Capital Requirements for Brokers and Dealers;
Amended Rules.
\184\ See Adoption of Uniform Net Capital Rule and an
Alternative Net Capital Requirement for Certain Brokers and Dealers,
40 FR at 29798.
\185\ Id.
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Thus, the 3% debit reduction is designed to compensate for the
potential lower minimum net capital requirement resulting from carrying
broker-dealers electing the alternative method in lieu of the basic
method. Consequently, the Commission lowered the capital requirements
and strengthened the customer reserve computation requirements for
carrying broker-dealers using the alternative method. In particular,
the 3% debit reduction decreases the amount of debits that offset
credits in the customer reserve computation and, thereby, can increase
the amounts carrying broker-dealers must lock up in their customer
reserve bank accounts. The 3% debit reduction applies to aggregate
debit items in the customer reserve computation under Rule 15c3-3
(i.e., all debit items in the customer reserve computation). Carrying
broker-dealers that use the basic method to compute their minimum net
capital requirement must reduce certain debits (i.e., not all debits)
by 1%. This results in a lower reduction and a correspondingly smaller
potential increase in the amount carrying broker-dealers applying the
1% debit reduction must lock up in their customer reserve bank
accounts.
For these reasons, the Commission is not eliminating the 3% debit
reduction as commenters suggested because doing so would subject
carrying broker-dealers using the alternative method to the same 1%
debit reduction that applies to carrying broker-dealers using the basic
method.\186\ As discussed above in this section, the 3% debit reduction
is designed to compensate for how the alternative method can result in
a lower minimum net capital requirement than the basic method. In
addition, as stated in this section above, the 49 carrying broker-
dealers that exceeded the $500 Million Threshold for calendar year 2023
use the alternative method for net capital purposes. The Commission
also estimates that these 49 carrying broker-dealers, based on FOCUS
Report data for January 2023 through December 2023, held 99.3% of
aggregate total credits of all carrying broker-dealers.\187\ Therefore,
carrying broker-dealers using the alternative method for net capital
hold the bulk of customer credits (i.e., amounts the carrying broker-
dealer owes customers) as compared to carrying broker-dealers using the
basic method.
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\186\ See sections IV.B.3. and C.1. of this release (discussing
the 2% debit reduction).
\187\ See section IV.B.2. of this release (discussing scope of
affected carrying broker-dealers). In comparison, there were 3,461
broker-dealers registered with the Commission on December 31, 2023.
---------------------------------------------------------------------------
However, the new requirement to perform daily customer reserve
computations significantly strengthens the customer protection measures
of Rule 15c3-3. In particular, performing a daily customer reserve
computation reduces the risk that the net amount of cash owed to
customers will be substantially greater than the amount on deposit in a
carrying broker-dealer's customer reserve bank account.\188\ A daily
computation requirement allows for cash owed to customers from a
particular day to be included in that day's customer reserve
computation, computed the next business day and any required deposits
made the following business day. Therefore, under a daily customer
reserve computation, the amount on deposit in the customer reserve bank
account will more quickly reflect the net amount of cash the carrying
broker-dealer owes its customers. Performing a daily customer reserve
computation also will reduce the maximum time between required deposits
into a customer reserve bank account to two business days. In contrast,
under a weekly customer reserve computation, a carrying broker-dealer
performs the customer reserve computation on Monday, using numbers as
of the close of business on Friday, and makes any required deposits in
its customer reserve bank account on Tuesday (typically) of each week.
Therefore, the next deposit requirement under a weekly customer reserve
computation will be the Tuesday of the following week.
---------------------------------------------------------------------------
\188\ See table 5, panel C in section IV. of this release.
---------------------------------------------------------------------------
These enhancements to the customer protection measures of Rule
15c3-3 warrant a corresponding adjustment to the 3% debit reduction in
order to avoid overcompensating for the differences between the
alternative and basic method. Consequently, the Commission is lowering
the 3% debit reduction to 2% for carrying broker-dealers that use the
alternative method if they perform a daily customer reserve
computation.\189\
[[Page 2805]]
Lowering the debit reduction to 2% is designed to adjust this risk-
reducing measure in response to the customer protection enhancements of
the new daily customer reserve computation requirements while
maintaining a debit reduction amount (2% as compared to 1%) that will
continue to compensate for the differences between the alternative and
basic methods of calculating minimum net capital requirements.
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\189\ The 2% debit reduction also is consistent with the
incremental increase in the frequency of the customer reserve
computation for carrying broker-dealers that perform a monthly
customer reserve computation and carrying broker-dealers that elect
to compute net capital under the alternative method and perform a
customer reserve computation weekly or daily under the amendments.
Monthly customer reserve computations require a 5% buffer above the
carrying broker-dealer's deposit requirement, while carrying broker-
dealers electing the alternative method for net capital are required
to use a 3% ``buffer'' for weekly customer reserve computations and
a 2% ``buffer'' for daily customer reserve computations. See
paragraph (e)(3)(i)(A) of Rule 15c3-3 and paragraph (a)(1)(ii)(A) of
Rule 15c3-1, as amended.
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In order to implement this change, the Commission is amending
paragraph (a)(1)(ii)(A) of Rule 15c3-1 to provide that a carrying
broker-dealer that is required to perform a daily customer reserve
computation under paragraph (e) of Rule 15c3-3 may reduce aggregate
debit items in such computation by 2% (rather than 3%).\190\ Carrying
broker-dealers that elect the alternative method for calculating their
minimum net capital requirement and perform their customer reserve
computation weekly must continue to apply the preexisting 3% debit
reduction. Further, this amendment to Rule 15c3-1 applies only to a
carrying broker-dealer's customer reserve computation. It does not
amend or change the minimum net capital requirements for carrying
broker-dealers under Rule 15c3-1 irrespective of whether they use the
basic or alternative methods. Consequently, carrying broker-dealers
electing the alternative method must continue to maintain the greater
of $250,000 or 2% of aggregate debit items under Rule 15c3-1 and they
remain subject to an early warning notification requirement under Rule
17a-11 if their net capital falls below 5% of aggregate debit
items.\191\
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\190\ See paragraph (a)(1)(ii)(A) of Rule 15c3-1, as amended. In
order to implement this change, the following phrase is being added
to the end of the current rule text in paragraph (a)(1)(ii)(A):
``provided, however, that, if a broker or dealer is required to make
the computation required by Sec. 240.15c3-3(e) and set forth in
Exhibit A, Sec. 240.15c3-3a, on a daily basis, the broker or dealer
may reduce aggregate debit items in such computation by 2%.''
\191\ See paragraph (a)(1)(ii) of Rule 15c3-1; paragraph (b)(2)
of Rule 17a-11.
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In addition, the Commission is modifying paragraph (e)(3) of Rule
15c3-3 to add a new paragraph (e)(3)(v) to permit a carrying broker-
dealer that voluntarily performs the customer reserve computation daily
under preexisting paragraph (e)(3)(iv) of Rule 15c3-1 to reduce its
aggregate debit items by 2%, if the carrying broker-dealer notifies its
DEA, in writing, of its election at least 30 calendar days before
beginning such computation.\192\ The new paragraph also provides that
if a carrying broker-dealer has notified its DEA of this election, the
carrying broker-dealer must continue to compute the customer reserve
computation daily unless a change is approved by its DEA.\193\ This
amendment is being made in Rule 15c3-3 (as compared to Rule 15c3-1
where the 3% and 2% debit reduction provisions are located) because it
relates to a carrying broker-dealer voluntarily performing a daily
customer reserve computation. Therefore, to maintain consistency with
existing rule text, this new paragraph follows paragraph (e)(3)(iv) of
Rule 15c3-3, which permits carrying broker-dealers to voluntarily
perform reserve computations more frequently than required under the
rule.\194\ The notice requirement to voluntarily begin the daily
customer reserve computations with the 2% debit reduction will assist
the DEA in monitoring the carrying broker-dealer. For example, upon
receiving the notice, the DEA can contact the carrying broker-dealer to
inquire about its plan for transitioning to a daily customer reserve
computation and about any changes to its systems and processes for
performing the daily computation and for applying the lower 2% debit
reduction (in lieu of the 3% debit reduction). The approval requirement
to revert to performing a weekly customer reserve computation is
designed to ensure that a carrying broker-dealer performs a daily
customer reserve requirement consistently rather than constantly
switching between daily and weekly reserve computations depending on
which approach is more advantageous on a given day. This will prevent a
carrying broker-dealer from performing a daily customer reserve
computation on an ad hoc basis solely to reduce an excess of credits
over debits in the customer reserve computation and thereby minimize
deposit requirements in the customer reserve bank account.
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\192\ See paragraph (e)(3)(v) of Rule 15c3-3, as amended.
\193\ Id.
\194\ See paragraph (e)(3)(iv) of Rule 15c3-3, as amended.
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Commenters stated that lowering the 3% debit reduction will
increase the liquidity of carrying broker-dealers because it will
reduce the extra buffer of broker-dealer capital that must be deposited
into the customer reserve bank account. For example, a commenter stated
that the new requirement to perform a customer reserve computation
daily would reduce the need for any cushion to account for a mismatch
and, consequently, would increase liquidity and lower costs for
customer financing by allowing carrying broker-dealers to use assets
that would otherwise be locked up (in their customer reserve bank
account).\195\ This commenter further stated that the increased
liquidity resulting from lowering the amount of the 3% debit reduction
could be redeployed by carrying broker-dealers to provide customers
with more financing at a lower cost, which benefits customers and
carrying broker-dealers.\196\ This commenter also stated that carrying
broker-dealers would use this additional liquidity to pay the costs
associated with transitioning from weekly to daily reserve
computations, potentially allowing carrying broker-dealers to make the
transition more efficiently and at a lower relative cost.\197\ Another
commenter stated that this modification would provide financial relief
to carrying broker-dealers.\198\
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\195\ See SIFMA Letter at 6. This commenter stated one member
carrying broker-dealer estimated that eliminating the 3% debit
reduction in favor of the 1% debit reduction would free up $3
billion in liquidity. Id. Another commenter stated that this
potential change would, on average, amount to approximately $50
million in liquid assets each week. See Raymond James Letter at 2.
Lowering the 3% debit reduction to 2% will result in additional
liquidity for carrying broker-dealers performing a daily customer
reserve computation.
\196\ See SIFMA Letter at 6.
\197\ See SIFMA Letter at 6.
\198\ See ASA Letter at 5.
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Decreasing the debit reduction from 3% to 2% will provide extra
liquidity to carrying broker-dealers, as commenters suggested.
Enhancing the liquidity of carrying broker-dealers will position them
to better withstand financial shocks and thereby lower the risk that
such a shock causes the carrying broker-dealer to fail financially
(which in turn will benefit the carrying broker-dealer's customers,
counterparties, and creditors). Further, carrying broker-dealers will
be able to use this extra liquidity to pay the initial and ongoing
compliance costs to transition from weekly to daily reserve
computations. They also may use the extra liquidity to address
situations where they must make large additional deposits into the
customer or PAB reserve bank accounts to account for large infusions of
customer or PAB account holder cash that is intended to be swept out of
the broker-dealer but gets accounted for in the reserve computations
before it can be swept.\199\
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\199\ See section II.E.1. of this release (describing sweep
programs and other transitory credits).
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[[Page 2806]]
2. Conforming Amendments to the FOCUS Report
The Commission is adopting amendments to the Part II of the FOCUS
Report to conform the reporting obligations with the final amendment
lowering the debit reduction from 3% to 2% for carrying broker-dealers
that use the alternative method and perform daily customer and PAB
reserve computations.\200\ Currently, in the Computation for
Determination of Customer Reserve Requirements in Part II of the FOCUS
Report, the form includes a line for a carrying broker-dealer that uses
the alternative method for computing net capital to report the 3% debit
reduction. The amendments to the FOCUS Report add a line to report the
2% debit reduction in lieu of reporting the 3% debit reduction. The
existing line to report the 3% deduction is being retained for carrying
broker-dealers that are below the $500 Million Threshold and that do
not voluntarily perform daily customer and PAB reserve computations.
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\200\ In addition to amending the FOCUS Report Part II as part
of the final amendments, the Commission is updating the FOCUS Report
on the Commission's website that highlights the fields that
security-based swap dealers and major security-based swap
participants relying on a Commission substituted compliance order
(``Covered Entities'') must complete pursuant to the Amended and
Restated Order Specifying the Manner and Format of Filing Unaudited
Financial and Operational Information by Security-Based Swap Dealers
and Major Security-Based Swap Participants that are not U.S. Persons
and are Relying on Substituted Compliance Determinations with
Respect to Rule 18a-7, Exchange Act Release No. 101932 (Dec. 16,
2024). However, these amendments do not result in any changes to the
number of fields in the FOCUS Report that Covered Entities must
complete.
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Further, the Commission is amending the line for reporting ``Total
Debits'' in the Computation for Determination of Customer Reserve
Requirements in Part II of the FOCUS Report to reflect that Total
Debits equals ``Aggregate Debit Items'' less the 3% or 2% debit
reduction, as applicable. The Commission also is adding an additional
line under ``Frequency of Computation'' to require that a carrying
broker-dealer check one of two new boxes to indicate whether it is
using the 2% debit reduction or 3% debit reduction. Finally, the
Commission is amending the footnote to the Computation for
Determination of Customer Reserve Requirements in the FOCUS Report Part
II to add a reference to paragraph (e)(3)(v) of Rule 15c3-3.
D. Voluntary Customer and PAB Reserve Computations
The Commission proposed to amend paragraph (e)(3)(iv) of Rule 15c3-
3, which permits interim reserve computations to be performed between
the days that the weekly or permitted monthly computations must be
performed.\201\ In particular, preexisting paragraph (e)(3)(iv) of Rule
15c3-3 provided that computations in addition to the computations
required in paragraph (e)(3) (i.e., the weekly and permitted monthly
computations) may be made as of the close of any business day, and the
deposits so computed must be made no later than one hour after the
opening of banking business on the second following business day.\202\
The amendment to paragraph (e)(3)(iv) provides that computations--other
than those made under paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as
amended (i.e., the daily computations)--may be made as of the close of
any business day.\203\ This amendment specifies that the option to
perform a customer or PAB reserve computation more frequently than
weekly or monthly (as applicable) remains available to carrying broker-
dealers that must make such computations weekly or monthly. Carrying
broker-dealers voluntarily performing daily customer and PAB reserve
computations have used this option.\204\
---------------------------------------------------------------------------
\201\ See Proposing Release, 88 FR at 45845.
\202\ 17 CFR 240.15c3-3(e)(3)(iv); Proposing Release, 88 FR at
45845.
\203\ This proposed amendment would insert the phrase ``other
than computations made under paragraph (e)(3)(i)(B)(1) of this
section,'' following the words ``this paragraph (e)(3),'' in
preexisting paragraph (e)(3)(iv) of Rule 15c3-3. See Proposing
Release, 88 FR at 45845. The Commission did not receive any comments
on this amendment and is adopting it as proposed.
\204\ See Proposing Release, 88 FR at 45845.
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A commenter stated that the proposal permits carrying broker-
dealers that perform weekly reserve computations to continue to make
voluntary, interim computations but does not expressly require approval
from the carrying broker-dealer's DEA.\205\ The commenter stated that
the Commission should make this approval a requirement in the final
rule, as well as require approval from the DEA for the carrying broker-
dealer to cease performing the interim computation.\206\ The commenter
stated these changes would help guard against a carrying broker-dealer
performing interim reserve computations opportunistically to minimize
required reserve account deposits.\207\
---------------------------------------------------------------------------
\205\ See SIPC Letter at 2.
\206\ See id.
\207\ See id.
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The final amendments do not include this modification, as it would
impose new requirements on carrying broker-dealers that elect to
perform an interim reserve computation. Further, carrying broker-
dealers that utilize this provision to perform an interim reserve
computation will remain subject to the 3% debit reduction. In addition,
the Commission estimates that, based on data for January 2023 through
December 2023, 49 carrying broker-dealers, which held 99.3% of
aggregated total credits of all carrying broker-dealers, will exceed
the $500 Million Threshold and will be required to perform a daily
customer and PAB reserve computation.\208\ Because these carrying
broker-dealers will perform daily customer and PAB computations under
the final amendments, they will not perform interim reserve
computations. Given that these carrying broker-dealers hold nearly all
of the total credits of all carrying broker-dealers, an amendment to
the rule as the commenter suggested is not merited given the relatively
smaller amounts required to be on deposit for the remaining carrying
broker-dealers.\209\ For these reasons, the Commission is not adopting
the commenter's suggested modification and is adopting the amendment as
proposed.\210\
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\208\ See section IV.B.2. of this release (discussing affected
broker-dealers in the baseline).
\209\ A carrying broker-dealer that is under the $500 Million
Threshold may nonetheless elect to perform a daily customer reserve
computation in order to apply the 2% debit reduction in lieu of the
3% reduction. A carrying broker-dealer making this election will be
subject to the DEA notification requirements of paragraph (e)(3)(v)
of Rule 15c3-3, as amended.
\210\ See paragraph (e)(3)(iv) of Rule15c3-3, as amended.
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E. Other Comments
The Commission received other comments related to the proposal that
cover technical questions about how the final amendments will operate,
as well as requests for clarification and interpretations on specific
issues related to performing a customer and PAB reserve computation
daily.
1. Sweep Programs and Other ``Cash in Motion'' or ``Transitory''
Credits''
The Commission received two comments regarding sweep programs \211\
[[Page 2807]]
and performing daily customer and PAB reserve computations.\212\ One
commenter stated that a daily reserve computation would not benefit
customers of carrying broker-dealers with widely-used sweep
programs.\213\ This commenter stated that sweep programs contribute to
protecting customer assets and already address the mismatch risk the
proposal seeks to remedy by regularly moving customer cash off a
carrying broker-dealer's balance sheet.\214\ In addition, this
commenter stated that if a carrying broker-dealer receives customer
cash after the daily sweep cutoff time, it is generally swept early the
next business day and, as such, will be protected sooner than including
such cash in a daily reserve computation.\215\
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\211\ A sweep program is a service provided by a carrying
broker-dealer where it offers to its customer the option to
automatically transfer free credit balances in the securities
account of the customer to either a money market fund or an account
at a bank whose deposits are insured by the Federal Deposit
Insurance Corporation (``FDIC''). See paragraph (a)(17) of Rule
15c3-3. The sweep program requirements for customer accounts are set
forth in paragraph (j)(2)(ii) of Rule 15c3-3. Broker-dealers are not
customers under Rule 15c3-3. Therefore, PAB account holders are not
subject to the sweep program requirements under the rule with
respect to their free credit balances. See paragraph (a)(1) of Rule
15c3-3. Nonetheless, PAB account holders may elect to have their
free credit balances included in a sweep program. See Proposing
Release, 88 FR at 45842, n.58.
\212\ See ASA Letter at 2; SIFMA Letter at 7; ASA Letter 3.
\213\ See ASA Letter at 2.
\214\ See id.
\215\ See id.
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This commenter also stated that there are potential benefits to
more frequent customer and PAB reserve computations but raised concerns
about potential impacts on liquidity, particularly in cases where a
free credit balance is ``transitory'' or is ``cash in motion,'' \216\
such as cash that the carrying broker-dealer needs the next day to fund
an Automated Clearing House transfer or a wire request received after
banking cutoff times.\217\ This commenter stated that carrying broker-
dealers may need to use their own funds to account for transitory funds
and that this may result in only large carrying broker-dealers (with
substantial liquidity) being able to service ultra-high net worth
clients with large transitory credits.\218\ The commenter stated that
this would disadvantage smaller carrying broker-dealers who would be
unable to compete for certain types of clients or transactions.\219\
Another commenter stated that the proposed daily computation
requirement would impose substantial unintended costs on carrying
broker-dealers that regularly deposit inflows of customer cash into
reserve bank accounts or transfer them into a sweep account.\220\ For
these carrying broker-dealers, the commenter stated that a daily
computation could require them to segregate large portions of funds
that are already protected by virtue of the sweep/deposit.\221\
Commenters stated that, although this issue exists with the preexisting
weekly computations under Rule 15c3-3, this risk is exacerbated under a
daily computation because carrying broker- dealers will no longer have
a week to resolve any issues, which creates uncertainty, as the amount
of cash tied up would vary each day.\222\
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\216\ See ASA Letter at 2. The commenter stated that for
purposes of the comment, transitory means free credits that are: (1)
included in the computation; (2) will be needed to fund a known
activity the first following day; and (3) will be included in the
deposit due the morning of the second following day (despite the
fact that the free credits have already been used for another client
directed purpose). Id. The commenter also referred to these
transitory credits as ``cash in motion.'' See ASA Letter 2 at 1.
\217\ See ASA Letter at 2.
\218\ See ASA Letter 3 at 1.
\219\ Id.
\220\ See SIFMA Letter at 7. For example, that commenter stated
that if a carrying broker-dealer receives $100 million shortly
before market close on Monday, that $100 million will be
incorporated into the customer reserve computation for Monday. Even
if the carrying broker-dealer sweeps the funds into a sweep program
first thing Tuesday morning as part of its normal operations, the
commenter stated that it would still need to deposit $100 million
into its customer reserve bank account on Wednesday morning, since
the relevant computation would be as of close of business on Monday.
The commenter stated that this would effectively require carrying
broker-dealer to use its own $100 million, thereby tying up
liquidity for no corresponding benefit. Id.
\221\ See SIFMA Letter at 7. The commenter did not provide data
regarding the specific amounts of cash each day that is not swept to
a carrying broker-dealer's sweep program because the carrying
broker-dealer received it after the sweep cut-off time.
\222\ See SIFMA Letter at 7; ASA Letter at 3; ASA Letter 2 at 1;
ASA Letter 3 at 3.
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One commenter stated that Commission staff has previously
recognized this issue under existing staff no-action positions where
carrying broker-dealers in certain circumstances have withdrawn funds
from the special reserve bank account or deposited funds into separate
special reserve bank accounts that are promptly swept or are otherwise
used to meet specific customer instructions.\223\ This commenter
further stated that if funds the carrying broker-dealer receives from
or for customers are swept on a same or next day basis into a sweep
program or into a customer reserve bank account, they are protected
against loss and there is no reason for including these amounts in a
reserve computation.\224\ Accordingly, the commenter suggested that the
Commission simplify the staff no-action positions and permit a carrying
broker-dealer to exclude from the customer and PAB reserve computations
any funds that the carrying broker-dealer has swept or deposited
promptly upon receipt.\225\
---------------------------------------------------------------------------
\223\ See SIFMA Letter at 7. The commenter stated that these
staff no-action positions have a number of provisions that are
challenging for carrying broker-dealers to meet (e.g., requiring
that funds received per transaction or with respect to a particular
customer equal at least 25% of the total credits of the carrying
broker-dealer's most recent reserve computation). Id. See also
Letter from Michael A. Macchiaroli, Assistant Director, Commission
to Mr. Salvatore Pallante, Vice President, NYSE (Apr. 25, 1990)
(``NYSE Letter'')(stating that the staff will not recommend
enforcement action to the Commission if a carrying broker-dealer
withdraws funds from the special reserve bank account without a
computation under paragraph (g) of Rule 15c3-3 to fulfill certain
specific customer transactions where such transaction represents 25%
or more of the total credits in the carrying broker-dealer's most
recent reserve account computation, and where the customer funds
received are deposited into a separate reserve bank account) and
FINRA Interpretations of Financial and Operational Rules, 15c3-3(g)/
05, available at <a href="http://www.finra.org">www.finra.org</a>; Letter from Aase A. Berling, Staff
Accountant, Division of Market Regulation, Commission to James A.
Francis, Vice President, The Ohio Company (Mar. 21, 1985) (``Ohio
Company Letter'')(stating that the staff will not recommend
enforcement action to the Commission if a carrying broker-dealer
makes a withdrawal from the special reserve bank account without
performing a computation in order to obtain sufficient cash to
effect the purchase of money market fund shares for customers, and
deposits such funds into a separate reserve bank account to purchase
money market fund shares) and FINRA Interpretations of Financial and
Operational Rules 15c3-3(g)/021, available at <a href="http://www.finra.org">www.finra.org</a>. Staff
statements (including those cited herein) represent views of the
Commission staff and are not a rule, regulation, or statement of the
Commission. The Commission has neither approved nor disapproved of
these staff statements, and, like all staff statements, they have no
legal force or effect, do not alter or amend applicable law, and
create no new or additional obligations for any person.
\224\ See SIFMA Letter at 7.
\225\ See id.
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Another commenter stated that the Commission should permit cash
held for a customer that is intended to be swept not be treated as a
credit in the customer reserve computation. The commenter stated that
this suggestion is analogous to a current interpretation under Rule
15c3-3a that states, if a carrying broker-dealer pre-funds a redemption
of money market shares but still carries the shares long in the
customer's account, it cannot treat the pre-funding as a debit in the
reserve computation. The commenter stated that cash held for a customer
that is intended to be swept should not be treated as a credit in the
reserve computation just as pre-funded money market fund redemptions
are not treated as debits in the computation.\226\
---------------------------------------------------------------------------
\226\ See ASA Letter 3 at 3.
---------------------------------------------------------------------------
For the reasons discussed below, the final amendments do not
exclude cash that is intended to be swept or is otherwise
``transitory'' or in ``motion'' from the customer and PAB reserve
computations. However, the final amendments lowering the debit
reduction from 3% to 2% in the customer reserve computations mitigate
concerns commenters raised about how a daily reserve requirement could
require carrying broker-dealers to use their own capital to fund
reserve account deposit requirements that relate
[[Page 2808]]
to cash that will be swept or otherwise deployed the next day. In
particular, a carrying broker-dealer can use the additional liquidity
available to it through the lower 2% debit reduction to meet a required
reserve deposit that results from a situation where cash is not swept
or otherwise deployed quickly enough to avoid its inclusion in the
customer or PAB reserve computations. Further, in response to the
comment that smaller carrying broker-dealers may be disadvantaged in
servicing customers with large transitory credits as compared to larger
carrying broker-dealers with more liquidity, smaller carrying broker-
dealers (as measured in terms of average total credits) also can use
this additional liquidity to provide services to all types of
customers, including ultra-high net worth individuals with large
transitory credits.\227\ In addition, raising the threshold to $500
Million will exclude an additional cohort of smaller carrying broker-
dealers--relative to the carrying broker-dealers subject to the
requirement--from the scope of the final amendments as compared to the
proposal. These smaller carrying broker-dealers (as measured in terms
of average total credits) may continue to perform weekly customer and
PAB reserve computations and will have a week to resolve any issues
related to transitory credits.\228\ Lowering the debit reduction from
3% to 2% and increasing the threshold from $250 million to $500 million
will address--in part--concerns about transitory credits by either
providing excess liquidity to account for these credits or excluding a
larger number of relatively smaller carrying broker-dealers from the
need to address these credits on a daily basis.
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\227\ In addition, with respect to accounts of high net worth
individuals, the staff has issued no-action positions regarding
smaller carrying broker-dealers that receive substantial deposits
from individual customers for a current specific purpose. See, e.g.,
NYSE Letter.
\228\ See section II.A.2. of this release (discussing the $500
Million Threshold).
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Transferring cash in a customer or PAB account to an FDIC-insured
bank as part of a sweep program protects customers' and PAB account
holders' cash in that it is no longer on the carrying broker-dealer's
balance sheet. Other cash that has been redeployed such as cash used to
purchase securities also is no longer included on a carrying broker-
dealer's balance sheet.\229\ However, this does not mean that it would
be appropriate to permit a carrying broker-dealer performing daily
customer and PAB reserve computations to exclude cash of customer and
PAB account holders (including cash received after the daily cutoff
time for a sweep program and other ``transitory credits'') from its
customer and PAB reserve computations because the intent is to sweep
the cash out of the accounts or otherwise deploy it before the next
deposit into the customer and PAB reserve accounts is due. Uninvested
cash (such as cash received after a sweep cut-off time) held for
customers and PAB account holders remains in the customer's or PAB
account holder's securities account and on a carrying broker-dealer's
balance sheet. A carrying broker-dealer must include this cash in its
customer or PAB reserve computation for that particular business day
because the carrying broker-dealer owes that cash to its customer and
PAB account holders, and it will not receive FDIC protection until it
is swept the next business day.
---------------------------------------------------------------------------
\229\ Customer securities are protected under the possession and
control requirements under paragraphs (b) and (c) of Rule 15c3-3.
See section I.C.1. of this release (discussing the possession and
control requirements of Rule 15c3-3).
---------------------------------------------------------------------------
As discussed in section I.C.1. of this release, preexisting Rule
15c3-3 is designed to protect customers by segregating their securities
and cash from the carrying broker-dealer's proprietary business
activities. This is accomplished through the customer and PAB reserve
computations. If a carrying broker-dealer excludes customer and PAB
cash that is included in its books and records from its reserve
computation, it increases the risk that--if the carrying broker-dealer
fails--the cash and securities may not be readily available to be
returned to customers and PAB account holders. This, in turn, would
increase the risk that a carrying broker-dealer may be unable to
promptly return cash and securities to customer and PAB account holders
in the event the carrying broker-dealer fails financially. This risk is
exacerbated for PAB account holders, as they are not entitled to
advances from the SIPC Fund.
In response to the comment that the Commission should permit cash
held for a customer that is intended to be swept not be treated as a
credit in the customer reserve computation, a carrying broker-dealer
cannot include this debit in the reserve computation because the
receivable is from the money market fund and not the customer. In other
words, the carrying broker-dealer cannot treat the pre-funding like a
margin loan collateralized by the money market shares carried in the
account. Margin loans are debits in the reserve computation, but they
are loans to the customers to purchase the securities and the customer
owes the money to the carrying broker-dealer. In the case of cash
intended to be swept, however, the carrying broker-dealer holds the
cash for the customer, which is a credit item in the reserve
computation. This cash is a customer payable (i.e., customer credit)
until it is swept and is no longer on the carrying broker-dealer's
books and records. A carrying broker-dealer must include such customer
credits in its customer reserve computation.
In response to comments that the issue related to cash in motion or
transitory credits will be exacerbated under a daily computation
requirement because a carrying broker-dealer will no longer have a week
to resolve issues under a daily computation requirement because credit
amounts vary each day,\230\ the scenario of having to account for cash
that the carrying broker-dealer no longer holds also can occur under
the preexisting weekly reserve computation requirement. For example,
customer cash deposited at the carrying broker-dealer on Friday after
the time when it can be swept to a money market fund or bank must be
accounted for in the customer reserve computation performed the
following Monday (using numbers as of the close of business Friday)
and, to the extent it creates a deposit requirement, the required
deposit must be made by 10 a.m. on Tuesday even though by that time the
customer cash has been swept to the money market fund or bank.
Moreover, unless the carrying broker-dealer performs an intra-week
reserve computation, the cash must remain in the customer reserve bank
account until the following Tuesday. A daily reserve computation
requirement will shorten the time that the cash must be held in the
customer reserve bank account.
---------------------------------------------------------------------------
\230\ See SIFMA Letter at 7; ASA Letter at 2; ASA Letter 2 at 1.
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While a daily reserve computation requirement will shorten the time
that a carrying broker-dealer must hold cash in the customer reserve
bank account, the Commission recognizes that a carrying broker-dealer
performing a daily reserve computation will need to manage its sweep
cash and other transitory credits daily rather than weekly. This
increase in frequency in performing the customer and PAB reserve
computations will not exacerbate the issue related to sweep-related
cash and transitory credits as daily cash fluctuations may become more
predictable over time, but it will require the carrying broker-dealer
to manage this cash more quickly and efficiently, as compared to a
weekly computation. This increase in efficiency, however, as a result
of a daily reserve computation requirement
[[Page 2809]]
will allow a carrying broker-dealer to withdraw funds more quickly from
its customer reserve bank account, as compared to a weekly reserve
computation, which will improve its liquidity.\231\
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\231\ See section I.A. of this release (discussing the need for
daily reserve computations and ability of carrying broker-dealers to
be able to withdraw excess cash or qualified securities more quickly
from the reserve bank account under a daily reserve computation
requirement, which will improve their liquidity); section IV.D. of
this release (discussing increase in operational efficiency for
carrying broker-dealers as a result of the amendments allowing for
the more efficient management of funds); section IV.E.10. of this
release (discussing exemptions for cash in motion as a reasonable
alternative, including the costs).
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Further, while the amount of credits related to cash that is not
swept in a particular business day or other ``cash in motion'' would
vary each day under a daily reserve computation requirement, the same
is true for all customer credits and debits in the customer and PAB
reserve computations. Therefore, a carrying broker-dealer must maintain
sufficient capital or access to funding to make any required deposit
into its customer or PAB reserve bank account, including any increased
deposit requirements related to ``transitory credits'' or ``cash in
motion,'' including when cash is not swept soon enough. This ensures
that broker-dealers maintain sufficient access to capital and funding
to support the volume of customer and PAB account holder business that
they are carrying.
While lowering the debit reduction to 2% and raising of the
threshold to $500 million mitigates concerns commenters raised
regarding issues related to cash sweeps and other transitory credits,
the Commission recognizes that carrying broker-dealers performing a
daily reserve computation may sometimes experience liquidity issues
with respect to unusual or large inflows of customer cash received late
in the day that is intended to be transferred to a sweep program under
paragraph (j)(2)(ii) under Rule 15c3-3. If the unusual or large inflow
of cash is swept out of the broker-dealer on the day the computation is
performed, it nonetheless will be accounted for in the computation and
may result in an increased deposit requirement. This issue merits
further consideration. However, any potential solution must not
diminish customer protection and be practical. Further, attempting to
develop an appropriate solution would be a complex undertaking and
could affect a range of carrying broker-dealers depending on their
business model, the types of accounts the carrying broker-dealer
services, and the products offered in the carrying broker-dealer's
sweep program. The Commission would need to assess many factors, for
example, the amount of cash that would be considered large or unusual
(i.e., not routine) on a particular business day, the size of cash
inflows that typically may be received by the broker-dealer on the
business days following a large or unusual cash inflow, the types of
customer accounts or firm business models affected by unusual or large
cash inflows (e.g., retail or institutional accounts), and the
practices of carrying broker-dealers currently performing daily
computations. For these reasons, the Commission is not excluding
credits arising from unusual or large inflows of cash from a carrying
broker-dealer's daily reserve computation at this time. The Commission
encourages market participants to engage with Commission staff
regarding their particular facts and circumstances on this issue.
Finally, a commenter stated that if a carrying broker-dealer must
use its own funds to make a required deposit because customer
transitory credits are no longer available, it could result in
commingling of carrying broker-dealer and customer assets and/or
constitute a misuse of the special reserve account.\232\ In response,
the commenter appears to have misunderstood the requirements of Rule
15c3-3. Carrying broker-dealers may deposit their own cash and/or
qualified securities in a customer or PAB reserve bank account to meet
any minimum deposit requirements under Rule 15c3-3 or as an additional
buffer above the minimum deposit amount. These deposits to the customer
and PAB reserve bank accounts comply with the requirements of Rule
15c3-3.\233\
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\232\ See ASA Letter at 4.
\233\ Customer cash is a balance sheet item of the carrying
broker-dealer (i.e., the amount of cash received from a customer
increases the amount of the carrying broker-dealer's assets and
creates a corresponding liability to the customer). The customer
reserve computation is designed to isolate these carrying broker-
dealer assets so that an amount equal to the net liabilities to
customers is held as a reserve in the form of cash or U.S.
Government securities. The requirement to maintain this reserve is
designed to effectively prevent the carrying broker-dealer from
using customer funds for proprietary business activities such as
investing in securities. The goal is to put the carrying broker-
dealer in a position to be able to readily meet its cash obligations
to customers by requiring the carrying broker-dealer to make
deposits of cash and/or U.S. Government securities into the customer
reserve bank account in the amount of the net cash owed to
customers. See Proposing Release, 88 FR at 45838, n.17.
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2. Requests for Interpretations and Clarifications
A commenter stated that the Commission should allow carrying
broker-dealers to notify their DEA if they will be unable to perform a
customer or PAB reserve computation or make a required deposit on a
specific day due to exigent circumstances.\234\ The commenter stated
that carrying broker-dealers occasionally face unexpected circumstances
that could make it difficult or impossible to perform their reserve
computation (or part of the computation) on a specific day, or to make
the required deposit into the special reserve bank account.\235\ For
example, the commenter stated that an unexpected market close (which
could result from a systems outage or a natural disaster) could
temporarily prevent personnel from accessing systems necessary to make
the reserve computation; a bank may be unable to accept deposits due to
a systems outage; or the failure of a third-party system may make it
impossible for a carrying broker-dealer to access data necessary to
compute some element of the reserve computation.\236\ The commenter
further stated these events actually occur and provided an example of a
significant processing issue that a large financial market utility had
in 2023 that affected the ability of carrying broker-dealers to
accurately calculate their end-of-day balances.\237\ The commenter
stated that the problems such exigent circumstances cause often cannot
be resolved in a day, and because these events are beyond the carrying
broker-dealer's control, the Commission should not penalize a carrying
broker-dealer for its inability to perform the reserve computation or
make a required deposit on a particular day because of them.\238\
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\234\ See SIFMA Letter at 8-9.
\235\ See SIFMA Letter at 8.
\236\ See SIFMA Letter at 8.
\237\ See id.
\238\ See id.
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More specifically, in order to address situations where there is an
exigent circumstance, the commenter stated that the Commission should
allow carrying broker-dealers to notify their DEA within 24 hours
(including an explanation) if they will be unable to perform a customer
or PAB reserve computation or make a required deposit on a specific day
due to exigent circumstances.\239\ The explanation
[[Page 2810]]
would describe the circumstances and why it prevents the carrying
broker-dealer from performing the reserve computation or making the
deposit. The commenter also stated that if the carrying broker-dealer
cannot perform the computation, the Commission should permit it to use
to the prior day's figures to perform the computation, and suggested
that the Commission should require carrying broker-dealers to
subsequently notify their DEA of the steps taken to remedy the
deficiency.\240\
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\239\ See SIFMA Letter at 8-9. Paragraph (i) of Rule 15c3-3
currently provides that if a carrying broker-dealer fails to make a
deposit in its customer or PAB reserve bank account, as required by
Rule 15c3-3, the carrying broker-dealer must immediately notify the
Commission and its DEA. Notification requirements for broker-dealers
generally range from immediate, promptly (but within 24 hours),
within 24 hours, and within 48 hours. See, e.g., paragraphs (f),
(d)(1), (b), (d)(2) of Rule 17a-11, respectively. Given the
importance of the customer protection requirements of Rule 15c3-3, a
24-hour notification requirement pertaining to the failure to make a
required deposit would be inappropriate. Consequently, the final
amendments do not modify the immediate notification requirement of
paragraph (i) of Rule 15c3-3.
\240\ See SIFMA Letter at 9.
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The Commission recognizes that there may be exigent circumstances
beyond the control of the carrying broker-dealer that could interfere
with its ability to perform its customer or PAB reserve computation or
make a required deposit into the customer or PAB reserve bank
accounts.\241\ For example, exigent circumstances beyond the control of
the carrying broker-dealer may include, among other things, a natural
disaster; the failure of a third-party data provider's system that
affects the carrying broker-dealer's ability to access data necessary
to compute the customer or PAB reserve computation, or part of the
computation; or where a carrying broker-dealer cannot make a required
deposit at a specific bank because the bank cannot accept deposits due
to a systemwide outage. The Commission expects that these exigent
circumstances would be rare. The Commission further recognizes that
performing a daily computation--as compared to a weekly computation--
increases the potential that exigent circumstances could interfere with
the operations necessary to comply with the computation and deposit
requirements of Rule 15c3-3, given the greater frequency of the
necessary computations and deposits. Moreover, this interference--in
certain circumstances--could occur even though the carrying broker-
dealer has established and maintained effective internal controls over
compliance.\242\
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\241\ The Commission has previously provided exemptive relief
and other relief and guidance for circumstances that have affected
market participants, including carrying broker-dealers, for events
such as the COVID-19 pandemic and for Hurricane Sandy in 2012. See,
e.g., Commission, Coronavirus (COVID-19) Response, available at:
<a href="https://www.sec.gov/sec-coronavirus-covid-19-response">https://www.sec.gov/sec-coronavirus-covid-19-response</a> (Commission
statement summarizing the operational initiatives, market-focused
actions, guidance and targeted assistance and relief, investor
protection efforts and other work of the Commission in response to
the effects of COVID-19). See also Letter from Michael A.
Macchiaroli, Associate Director, Division of Trading and Markets,
Commission to Ira Hammerman, General Counsel, SIFMA (Dec. 21, 2012)
(staff no-action position about regulatory issues under Rules 15c3-1
and 15c3-3 related to the lack of access to the physical securities
located at the vault of the Depository Trust & Clearing Corporation
due to Hurricane Sandy), available at <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/2012/sifma-122112-15c3.pdf">https://www.sec.gov/divisions/marketreg/mr-noaction/2012/sifma-122112-15c3.pdf</a>.
\242\ See 17 CFR 240.17a-5(d)(3). This rule requires a carrying
broker-dealer to include a compliance report in its annual reports
filed with the Commission and a report of an independent public
accountant covering the compliance report. The compliance report
must include, among other statements, statements that the carrying
broker-dealer has established and maintained ``Internal Control Over
Compliance'' as that term is defined in the rule and that the
Internal Control Over Compliance was effective during the most
recent fiscal year and as of the end of the fiscal year. See 17 CFR
240.17a-5(d)(3)(i). The rule defines ``Internal Control Over
Compliance'' in pertinent part as controls that have the objective
of providing the broker-dealer with reasonable assurance that non-
compliance with Rule 15c3-3 will be prevented or detected on a
timely basis. See 17 CFR 240.17a-5(d)(3)(i). Failure to perform a
customer or PAB reserve computation due to exigent circumstances
beyond the control of the carrying broker-dealer would not
necessarily constitute a material weakness for purposes of the
compliance report. See 17 CFR 240.17a-5(d)(3)(iii) (stating that a
broker-dealer is not permitted to conclude that its Internal Control
Over Compliance was effective during the most recent fiscal year if
there were one or more material weaknesses in its Internal Control
Over Compliance during the most recent fiscal year).
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If the exigent circumstances interfere with the carrying broker-
dealer's ability to perform the reserve computation, the firm is
encouraged to notify its DEA of the situation, explain how the exigent
circumstances are interfering with its ability to perform the customer
or PAB reserve computation,\243\ and describe any steps it is taking to
address the situation such as using the prior day's figures to perform
the computation, depositing an additional buffer into the customer or
PAB reserve account, or opening a reserve account at an alternative
bank.
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\243\ As noted above, the carrying broker dealer must
immediately notify the Commission and its DEA if it fails to make a
required deposit into its customer or PAB reserve accounts. See
paragraph (i) of Rule 15c3-3.
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Commenters also stated that the Commission should not require
carrying broker-dealers to perform a computation (or make it optional)
on certain days on which markets are closed or close early because it
is not practical to perform a computation on these days.\244\ In
particular, one commenter stated that exchanges and financial market
utilities often close early on the business day before a major holiday,
and that this makes it difficult to receive on a timely basis certain
information needed to perform the reserve computation, as exchanges and
financial market utilities may not update the systems and data needed
to conduct the computation.\245\ This commenter suggested that the
Commission should treat New Year's Eve, the Friday before Memorial Day,
the Wednesday before Thanksgiving, the Friday after Thanksgiving, and
Christmas Eve as non-business days for purposes of the customer and PAB
reserve computations.\246\ Commenters also suggested that the
Commission also should not treat days on which either exchanges or
banks, but not both, are open, or where exchanges or banks close early,
as non-business days for purposes of the reserve computations
(including Veterans Day, Columbus Day, and Good Friday).\247\ One
commenter stated that this flexibility could improve operational
efficiency and mitigate the burden on carrying broker-dealers during
unusual market conditions.\248\ Another commenter stated that it has
found that customers enjoy the same holidays and half-days, reducing
the number of customer transactions and, thus, any fluctuations in
required minimum account balances are likely to be within acceptable
ranges.\249\
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\244\ See SIFMA Letter at 9; ASA Letter at 4; Raymond James
Letter at 4-5.
\245\ See SIFMA Letter at 9.
\246\ See SIFMA Letter at 9.
\247\ See SIFMA Letter at 9-10; Raymond James Letter at 4-5. One
commenter stated that the Commission staff has previously recognized
that carrying broker-dealers should not be required to make deposits
and certain transfers in connection with the special reserve bank
account on certain days where exchanges are open but banks are
closed, as carrying broker-dealers may be unable to actually process
or make such deposits or transfers. See SIFMA Letter at 9.
\248\ See ASA Letter at 4.
\249\ See Raymond James Letter at 5.
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The Commission recognizes there may be days where it is more
challenging for a carrying broker-dealer to perform a customer or PAB
reserve computation due to staffing issues related to holidays or when
banks or exchanges are closed or close early. Performing a daily
computation--as compared to a weekly computation--means that the work
necessary to perform the daily computations will need to be performed
on these days. Carrying broker-dealers should contact the Commission or
Commission staff, as well as their DEA, if they anticipate that
performing the reserve computations or making the required deposits
will be challenging for these or other reasons. The Commission or
Commission staff will evaluate these requests and may provide exemptive
or other relief as appropriate. For example, the Commission or
Commission staff could consider that in some circumstances many
employees of a carrying broker-dealer may not be working certain days
before major holidays, and as such, carrying broker-dealers may need an
[[Page 2811]]
additional day to complete their customer and PAB reserve computations
and deposits.\250\ Finally, when a deposit requirement falls on a day
that banks are closed, the carrying broker-dealer should make the
deposit by 10 a.m. of the next business day that the banks are open.
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\250\ See, e.g., FINRA Regulatory Notice 18-41 (Dec. 17, 2018)
(notifying FINRA members of an optional one-day extension for
customer and PAB reserve computations and required deposits around
the December 2018 month-end holidays). Similar extensions were
announced in 2007 and 2012. Id. See also FINRA Interpretations of
Financial and Operational Rules, 15c3-3(e)(3)/021, Reserve Deposits
Focusing Around Bank Holidays.
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F. Reserve Account Requirements for Security-Based Swaps
The Commission sought comment in the proposal on whether carrying
broker-dealers should perform the security-based swap customer reserve
computation daily (rather than weekly).\251\ One commenter stated that
the Commission should not change the reserve account requirements for
SBSDs.\252\ The commenter stated that it is unnecessary to make any
changes because as the Proposing Release stated that almost all
carrying broker-dealers that have security-based swap credits already
take those credits into account and stand-alone SBSDs generally operate
under an exemption from reserve computation requirements under 17 CFR
240.18a-4(f) (``Rule 18a-4(f)''). Therefore, the commenter stated
requiring a daily computation for security-based swap activity would
have virtually no benefit.\253\
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\251\ See Proposing Release, 88 FR at 45847. In 2019, the
Commission adopted customer segregation requirements for broker-
dealers and security-based swap dealers (``SBSDs'') with respect to
customer money, securities, and property related to security-based
swaps. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major-Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019) [84 FR
43872, 43930-43 (Aug. 22, 2019)] (``SBS Segregation Adopting
Release'').
\252\ See SIFMA Letter at 11-12.
\253\ See SIFMA Letter at 11. This commenter also stated the
Commission previously proposed a daily reserve computation
requirement for security-based swap activity and did not adopt the
proposed approach. The commenter stated that there is no need for
the Commission to revisit this conclusion. Id. at 11-12.
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The Commission agrees with the commenter that amending Rule 15c3-3
to require a broker-dealer (including a broker-dealer (other than an
OTC derivatives dealer) also registered as an SBSD) to perform a
security-based swap customer reserve computation daily would have
virtually no impact because the credits related to security-based swap
activity for security-based swap customers generally are being included
in the customer reserve computation.\254\ The Commission also agrees
with the commenter that there would be virtually no benefit to
requiring stand-alone SBSDs to perform a reserve computation daily
since all of them operate under the exemption under Rule 18a-4(f).\255\
Therefore, the Commission is not adopting a daily reserve requirement
for the security-based swap customer reserve computation under Rule
15c3-3 or 17 CFR 240.18a-4 as part of the final amendments.
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\254\ This is based on FOCUS Report data for calendar year 2023.
The Commission notes that staff has stated its views in Question 1
of Responses to Frequently Asked Questions Regarding Financial
Responsibility Requirements as Applied to Security-Based Swap
Activities of Broker-Dealers and Security-Based Swap Dealers (Oct.
8, 2021), available at <a href="https://www.sec.gov/tm/faqs-financial-responsibility-req-applied-sbs">https://www.sec.gov/tm/faqs-financial-responsibility-req-applied-sbs</a> (``SBS FAQ 1''). Based on FOCUS data
for December 31, 2023, no broker-dealer reported Total Credits
greater than $0 (Line 12089) in its security-based swap customer
reserve computation.
\255\ These SBSDs are not SIPC members.
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III. Compliance Date
In the Proposing Release, the Commission sought input from
commenters on the appropriate compliance date or implementation
schedule for the proposed amendments. Specifically, the Commission
requested comment regarding various aspects of the proposal that would
impact a carrying broker-dealer's ability to comply with the new
amendments, including the amount of time a carrying broker-dealer would
need to comply with the requirement to perform a customer and PAB
reserve computation daily, whether there are any technological or
operational issues that should be considered, or whether a staggered
compliance date depending on the size of the average total credits
would be appropriate, among other things.\256\
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\256\ See Proposing Release, 88 FR at 46846-45847.
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The Commission received a few comments relating to the compliance
date.\257\ Stating that there are complexities associated with moving
from weekly to daily customer and PAB reserve computations, commenters
requested various time periods for implementation of the daily customer
and PAB reserve computation requirements. These commenters suggested
computing the 12-month rolling average starting one year after
publication of the final rule,\258\ a compliance timeline of at least
18 months from the final rule,\259\ as well as implementation dates of
no earlier than January 2025 and mid- to late-2025.\260\ One commenter
stated that carrying broker-dealers do not need an additional
compliance period beyond the six months prescribed in the proposed rule
after a carrying broker-dealer exceeds the proposed $250 Million
Threshold.\261\ Commenters stated the proposal would require
significant time, experience, and expense to implement, would present
significant operational challenges, and that the transition to a daily
computation would require significant time to find, hire and train new
staff to conduct the computation as well as complete the extensive
systems and operations changes.\262\ One commenter also stated that
third party data providers, such as service bureaus, would need to be
able to provide carrying broker-dealers with more timely information
than is currently available.\263\
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\257\ SIFMA Letter at 12; Raymond James Letter at 4; ASA Letter
at 5-6; ASA Letter 2 at 1; Letter from ASA (Oct. 3, 2024) (``ASA
Letter 4'').
\258\ See SIFMA Letter at 12.
\259\ See ASA Letter 4 at 1.
\260\ See Raymond James Letter at 4; ASA Letter at 6; ASA Letter
2 at 1.
\261\ See SIPC Letter at 2.
\262\ See SIFMA Letter at 12; Raymond James Letter at 3-4; ASA
Letter at 6; ASA Letter 2 at 1.
\263\ See SIFMA Letter at 12.
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Commenters also suggested that the Commission consider the
cumulative burdens of implementing the amendments and other regulatory
obligations with potentially overlapping compliance dates.\264\
Specifically, one commenter stated that the same carrying broker-
dealers who will be required to move to a daily computation are also
managing multiple other regulatory requirements.\265\ The commenter
further stated that unless the Commission provides adequate time to
manage the new regulatory requirements together, carrying broker-
dealers will face an unmanageable clash of compliance requirements all
converging at the same time.\266\ Commenters also stated that many
finance, operations, and information technology employees of carrying
broker-dealers needed to create and test new programs and systems,
among other requirements, are also involved in the implementation of
other large-scale, complex initiatives
[[Page 2812]]
mandated by other new regulations.\267\ Commenters stated that these
initiatives call on the same personnel, technology, and monetary
resources to implement them properly.\268\
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\264\ See, e.g., ASA Letter 2 at 1; SIFMA Letter at 12; Raymond
James Letter at 4; ASA Letter at 6.
\265\ ASA Letter at 6.
\266\ See id. In determining compliance dates, the Commission
considers the benefits of the rules as well as the costs of delayed
compliance dates, and potential overlapping compliance dates. For
the reasons discussed throughout the release, to the extent that
there are costs from overlapping compliance dates, the benefits of
the rule justify the costs. See infra sections IV.B.1. and D. in the
Economic Analysis for a discussion of the interaction of the final
rule with certain other Commission rules.
\267\ See SIFMA Letter at 12; Raymond James Letter at 4; ASA
Letter at 6. New requirements or regulations commenters highlighted
included T+1 initiatives, amendments to FINRA Rule 4210 about margin
requirements for covered agency transactions, and compliance with
requirements of the national Consolidated Audit Trail or ``CAT.''
\268\ See SIFMA Letter at 12; see also Raymond James Letter at
4.
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After consideration of the comments, the
[…truncated; see source link]Indexed from Federal Register on January 13, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.