• SEC Adopts Revisions to Broker-Dealer Financial Responsibility Rules
  • August 17, 2013 | Author: J. Andrew Gipson
  • Law Firm: Jones Walker LLP - Jackson Office
  • In 2007, the Securities and Exchange Commission ("SEC") proposed certain amendments to the customer protection, net capital, books and records, and notification rules for broker-dealers promulgated under the Securities Exchange Act of 1934 ("Exchange Act"). Following an original comment period which had expired, the SEC reopened the proposals for comments in 2012. On July 30, 2013, the Securities and Exchange Commission adopted final amendments to the rules which will become effective 60 days following publication in the Federal Register.

    Rule 15c3-3 under the Exchange Act was amended to require "carrying broker-dealers" that maintain customer securities and funds to maintain a new segregated reserve account for account holders which are also broker-dealers. Additionally, the new rules will restrict cash bank deposits for purposes of the requirement to maintain a reserve under Rule 15c3-3 by: 1) excluding the amount of any cash on deposit in an affiliated bank of the broker-dealer from being used to meet the reserve requirements and 2) limiting cash held at non-affiliated banks to an amount no greater than 15 percent of the bank's equity capital, as reported by the bank in its most recent call report. Affirmative consent requirements will apply for all new accounts where customer cash in a securities account will be "swept" to a money market or bank deposit product. Additionally, both new and existing accounts will be subject to new sweep program customer disclosure and notice requirements which must be provided by broker-dealers.

    The net capital rules applicable to broker-dealers were also amended to require adjustments to a broker-dealer's net worth when calculating net capital by including any liabilities that are assumed by a third party if the broker-dealer cannot demonstrate that the third party has the independent resources to pay the liabilities. Additionally, any capital that is contributed under an agreement giving the investor the option to withdraw it must be treated as a liability, as well as any capital contribution actually withdrawn within a year of its contribution, subject to certain exceptions. Broker-dealers which become insolvent as defined in the rules must cease conducting any securities business and provide notice of the insolvency to regulators.

    Other changes were adopted including amendments to the books and records requirements and notification when a broker-dealer's repurchase and securities lending activities exceed a certain amount.