In an increasingly rare unanimous vote, on July 12, 2023, the SEC approved a proposal that would require daily 15c3-3 calculations and lockup for carrying broker-dealers with customer credits over $250 million. Comments are due 30 days after Federal Register publication or September 11, 2023, whichever is later.
Rule 15c3-3 protects customer funds and securities by forbidding broker-dealers from using customer assets to buy securities for their own account. Rule 15c3-3 requires a broker-dealer that maintains custody of customer securities and cash (carrying broker-dealer) to take two primary steps to safeguard customer assets:
- Maintain physical possession or control over customers’ fully paid securities.
- Maintain a reserve of fund or qualified securities at least equal in value to the net cash owed to customers. The reserve is calculated by a prescribed formula in Rule 15c3-3a. This calculation and required deposits are currently generally required on a weekly basis.
Carrying broker-dealers also perform a similar weekly computation and deposit for the net cash a carrying broker-dealer owes to other broker-dealers whose accounts the broker-dealer carries, known as PAB account holders, i.e., proprietary securities account of a broker-dealer.
The steps ensure that if the broker-dealer fails, the securities and cash should be readily available to be returned to the customers or PAB account holders.
Under the proposal, carrying broker-dealers with average total credits equal to or greater than $250 million would be required to make daily computations, as of the close of the previous business day. Required deposits must be made no later than one hour after the opening of banking business on the following business day.
The proposal defines “average total credits” as the arithmetic mean of the sum of total credits reported in a carrying broker-dealer’s customer and PAB reserve computations in its 12 most recently filed month-end financial and operational reports, known as FOCUS reports. “Average total credits” is a 12-month rolling average—the sum of the total credits reported in the customer and PAB reserve computations for each of the 12 most recently filed month-end FOCUS reports divided by 12.
The proposal provides a ramp-up period for a carrying broker-dealer to make the systems and staffing changes necessary to perform a daily computation after it exceeds the $250 million threshold. A carrying broker-dealer must comply with the daily computation requirement no later than six months after exceeding the $250 million threshold.
If the average total credits subsequently fall below the $250 million threshold, the carrying broker-dealer would continue to perform daily calculations for at least 60 days and must provide notification to its designated examining authority prior to reverting to weekly computations.
Currently, the 11 largest broker-dealers have elected to perform daily 15c3-3 calculations. The proposal estimates that an additional 52 carrying broker-dealers would be subject to daily calculations and approximately 100 carrying broker-dealers would continue to be subject to weekly computations.
Carrying Broker-Dealers by Size of Average Total Credits, 2022
Reserve Formula Computation Frequency, 2022
The proposal would allow the option to perform a customer or PAB reserve computation more frequently than weekly or monthly.
Reserve Requirements for Security-Based Swaps (SBSs)
In 2019, the SEC adopted customer segregation requirements for broker-dealers and security-based swap dealers (SBSDs) for customer money, securities, and property related to SBSs based on the Rule 15c3-3. Broker-dealers—including broker-dealers registered as SBSDs—are required to perform a separate weekly SBS customer reserve computation and have a separate SBS customer reserve account that must hold the net amount of cash owed to SBS customers. The SEC is requesting feedback if the SBS customer reserve computation and deposit requirements also should be daily rather than weekly.
FORVIS will continue to follow this developing situation. Regulatory advisors at FORVIS have in-depth experience with both global regulations and supervisory expectations to help your organization respond and drive value through enhanced resiliency. We can help broker-dealers with financial and non-financial regulatory reporting. For more information, please reach out to one of our professionals or use the Contact Us form below.