The SEC proposed to amend the Customer Protection Rule to require certain broker-dealers to increase the frequency of specified account computations and deposits. Under the proposed amendments, carrying broker-dealers with average total credits owed to customers of at least $250 million would need to daily calculate amounts owed and make any necessary deposits, up from the current weekly interval (Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule, Release No. 34-97877, July 12, 2023).
The proposal aims to reduce the risk of customer losses if a brokerage firm fails. The proposal also seeks to better protect the SIPC Fund if a large broker-dealer fails.
“Given the speed, scale, and volume of today’s market activity, I believe customers would benefit if broker-dealers carrying large credit balances made daily reserve account calculations and deposits,” said SEC Chair Gary Gensler.
Current requirements. Under current Rule 15c3-3, a carrying broker-dealer must:
- Maintain a reserve of funds or qualified securities in an account at a bank that is at least equal in value to the net cash owed to customers;
- Calculate on a weekly basis the net cash owed to customers, and make a deposit into the customer reserve bank account if the amount required to be on deposit is greater than the amount currently on deposit.
These mismatches can arise when carrying broker-dealers receive large cash inflows in between weekly customer and PAB reserve computations and associated deposits.
The SEC is concerned there is a risk that if a carrying broker-dealer fails financially, it may not be able to return all of the securities and cash owed to the customers and PAB account holders.
Proposed change. The proposal is intended to reduce mismatch risk by shortening the time between required computations and deposits.
Specifically, the proposal would require carrying broker-dealers with average total credits equal to or greater than $250 million to:
- Make the relevant computations daily, as of the close of the previous business day;
- Make deposits no later than one hour after the opening of banking business on the following business day.
If a carrying broker-dealer’s average total credits fall below the $250 million threshold, it would have to notify in writing its designated examining authority of its election to perform weekly computations, 60 days prior to reverting to weekly computations. In the meantime, it would need to continue performing daily computations.
Commissioner statements. All commissioners supported the underlying rationale of protecting customers through more frequent account calculations and deposits.
“I am pleased to support this proposal because, if adopted, it would help protect customers in the event that a broker-dealer fails,” said Gensler.
Commissioner Caroline Crenshaw said the proposal was a “common-sense” change that should help strengthen an important customer safeguard. Crenshaw said she hoped that commenters would provide input on scope, including whether the requirement should apply to all broker-dealers.
Commissioner Jaime Lizárraga praised the proposal’s anticipated protective effect for the SIPC Fund. Lizárraga noted that with a target amount of $5 billion for the SIPC Fund, a failure of a carrying broker-dealer with a large shortfall could potentially deplete the SIPC Fund. In 2022, certain broker-dealers were required to make additional deposits ranging between $1.6 billion to over $6 billion to replenish their reserve accounts, said Lizárraga.
“Recent failures in the banking sector brought into sharper focus the need to review vulnerabilities in the existing customer asset protection framework for broker-dealers,” said Lizárraga.
Commissioner Hester Peirce supported the proposal but said she hoped commenters would help determine if the $250 million threshold is set at the appropriate level. Peirce also asked about time allowed for compliance and why the SEC was not reopening comment on a Treasury clearing proposal.
Commissioner Mark Uyeda said the compiled data provided a “valuable starting point for the comment process” particularly relating to the $250 million threshold.
This is Release No. 34-97877.