Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule, 45836-45863 [2023-15200]
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
Nonetheless, neither the Commission nor
our registrants should be complacent. I
reiterate this statement in the preamble:
‘‘[T]he Commission also reminds [swap
dealers] and FCMs that their RMPs may
require periodic updates to reflect and keep
pace with technological innovations that
have developed or evolved since the
Commission first promulgated the RMP
Regulations.’’ The benefit of a principlesbased regulatory framework is that it can
more quickly anticipate and adapt to changes
in risk profiles or the operating environment.
I believe our rules must be broad and flexible
enough to be forward-looking and evergreen,
because it is simply not possible to prescribe
every last requirement for the unknown
future. Accordingly, swap dealers and FCMs
must be vigilant and address new and
emerging risks in their RMPs through various
risk stripes as appropriate—whether from
changing market conditions, technological
developments, geopolitical concerns, or any
other event.
I welcome input from commenters to
inform the Commission and the staff
regarding the application of the RMP Rules
to swap dealers and FCMs, especially those
entities that are part of a banking
organization, and to describe in a detailed
manner the policies, procedures, processes,
systems, controls, testing, and audits that are
part of an RMP, and associated governance
requirements. In this way, it will be more
clearly apparent to the Commission and staff
that the vast majority of swap dealers and
FCMs are part of enterprise-wide risk
management programs that the industry
spends billions of dollars on each year, with
thousands of personnel across the three lines
of defense. In addition, the CFTC’s stringent
RMP governance provisions ensure
management accountability and
responsibility, and the RMP Rules prescribe
various requirements for swap dealers to
address market risk, credit risk, liquidity risk,
foreign currency risk, legal risk, operational
risk, and settlement risk,4 and for FCMs to
address market risk, credit risk, liquidity risk,
foreign currency risk, legal risk, operational
risk, settlement risk, segregation risk,
technological risk, and capital risk.5
Of course, financial institutions can still
have lapses in risk management and
weaknesses in their control environment.
This is evident in the high-profile news
stories of the past few years. But the
appropriate response is for regulators,
including the CFTC and National Futures
Association (NFA), to increase focus and
resources on compliance examinations to
ensure that swap dealers and FCMs are
complying with the rules we already have—
not piling on more rules that ultimately do
not enhance sound risk management and
governance, and further dilute limited
resources, time, and attention.6 In instances
of especially egregious or prolonged
deficiencies, material weakness, or
4 17
CFR 23.600(c)(1).
CFR 1.11(e)(1)(i).
6 See Opening Statement of Commissioner
Caroline D. Pham before the CFTC Technology
Advisory Committee, March 22, 2023, available at
https://www.cftc.gov/PressRoom/
SpeechesTestimony/phamstatement032223.
5 17
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misconduct by management, then
enforcement actions may be appropriate, and
the Commission should not shy away from
this step.
[FR Doc. 2023–15056 Filed 7–17–23; 8:45 am]
BILLING CODE 6351–01–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–97877; File No. S7–11–23]
RIN 3235–AN28
Daily Computation of Customer and
Broker-Dealer Reserve Requirements
Under the Broker-Dealer Customer
Protection Rule
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) proposes
to amend the broker-dealer customer
protection rule to require certain brokerdealers to perform their customer and
broker-dealer reserve computations and
make any required deposits into their
reserve bank accounts daily rather than
weekly. The Commission also is seeking
comment on whether similar daily
reserve computation requirements
should apply to broker-dealers and
security-based swap dealers with
respect to their security-based swap
customers.
SUMMARY:
Comments should be received on
or before September 11, 2023.
ADDRESSES: Comments may be
submitted by any of the following
methods:
DATES:
Comments are also available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the
Commission’s Public Reference Room.
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on our website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
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;
Timothy C. Fox, Branch Chief; 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 proposing amendments
to:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
11–23 on the subject line.
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–11–23. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method of submission. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov/rules/proposed.shtml).
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Commission
reference
CFR
citation (17 CFR)
Rule 15c3–3 ..............
17 CFR 240.15c3–3.
Table of Contents
I. Background
A. Introduction
B. Current Requirements of Rule 15c3–3
and Its Relation to SIPA
1. Rule 15c3–3—Customer Accounts
2. Rule 15c3–3—Proprietary Accounts of
Broker-Dealers
3. Broker-Dealer Liquidations and SIPA
C. The Risk of a Mismatch in Funds Owed
and Funds Reserved Under Rule 15c3–3
II. Proposed Amendments
A. Proposed Amendments to Rule 15c3–3
B. Request for Comment
III. Request for Comment—Reserve Account
Requirements for Security-Based Swaps
A. Discussion
B. Request for Comment
IV. Economic Analysis
A. Introduction
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B. Baseline
1. Regulatory Baseline
2. Affected Broker-Dealers
C. Benefits and Costs of the Proposed
Amendments
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
F. Request for Comment
V. Paperwork Reduction Act
A. Summary of Collections of Information
Under the Proposed Rule Amendments
B. Proposed Use of the Information
C. Respondents
1. Recordkeeping Requirements
2. Notification Requirement
D. Total Annual Burden Estimate
1. Recordkeeping Requirements
2. Notification Requirement
3. Summary of the Proposed Burden
Revisions
E. Collections of Information are
Mandatory
F. Confidentiality of Response to
Collections of Information
G. Retention Period for Recordkeeping
Requirements
H. Request for Comment
VI. Small Business Regulatory Enforcement
Fairness Act
VII. Regulatory Flexibility Act Certification
Statutory Authority
I. Background
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A. Introduction
Pursuant to section 15(c)(3)(A) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’),1 the Commission is
proposing to amend the broker-dealer
customer protection rule.2 As discussed
in more detail below,3 the rule requires
broker-dealers that maintain custody of
customer securities and cash (‘‘carrying
broker-dealers’’) to have a special
reserve account at a bank that must hold
cash and/or qualified securities in an
amount determined by a computation of
the net cash owed to the broker-dealer’s
customers. Generally, carrying brokerdealers are required to perform the
customer reserve computation and make
any required deposits into the customer
1 15
U.S.C. 78o(c)(3)(A).
CFR 240.15c3–3.
3 See sections I.B.1. and I.B.2. of this release.
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reserve bank account weekly. Rule
15c3–3 also permits carrying brokerdealers to perform the customer reserve
computation more frequently than
weekly (e.g., daily), and, in certain
limited circumstances, to perform a
monthly computation. Rule 15c3–3 also
addresses the manner in which a
carrying broker-dealer holds proprietary
securities and cash in accounts of other
broker-dealers, known as PAB accounts.
‘‘PAB account’’ generally means a
proprietary securities account of a
broker-dealer.4 For example, a brokerdealer that is not a carrying brokerdealer (e.g., an introducing brokerdealer) may hold its proprietary cash
and securities at a carrying brokerdealer. 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.
While broker-dealers are not treated as
customers under Rule 15c3–3, the rule
requires a carrying broker-dealer to have
a separate special reserve account at a
bank for PAB account holders; such
special reserve bank account must hold
cash and/or qualified securities in an
amount determined by a computation of
the net cash owed to PAB account
holders. Generally, carrying brokerdealers are 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
bank account.
The proposed amendments would
require carrying broker-dealers that had
large amounts of cash owed to customer
and PAB accounts holders (i.e., large
total credits), measured by both their
customer and PAB reserve computations
for the previous twelve month ends (i.e.,
a rolling twelve month average), to
perform those computations and make
any required deposits into their
respective customer and PAB reserve
bank accounts daily (rather than
weekly). Cash owed to customers and
PAB account holders may include cash
proceeds received from sales of
securities, cash deposited by customers
and PAB account holders for the
purposes of purchasing securities, and
monthly or quarterly dividends received
on behalf of customers and PAB account
4 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 deliveryversus-payment account or a receipt-versuspayment account. 17 CFR 240.15c3–3(a)(16). The
term does not include an account that has been
subordinated to the claims of creditors of the
carrying broker-dealer. Id.
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45837
holders. These carrying broker-dealers—
because they have owed large amounts
of cash to their customers and PAB
account holders—can incur large
deposit requirements from time to time.
This can lead to situations where—for a
period of days—the net amount of cash
owed to customers and PAB account
holders is substantially greater than the
amounts held in their combined
customer and PAB reserve bank
accounts. The proposed daily
computation would shorten the period
during which this mismatch between
the net amount owed and the amount on
deposit exists. The objective of the
proposal is to reduce the risk caused by
this mismatch for carrying brokerdealers where the difference between
the net amount owed and the amount on
deposit potentially is substantial. Large
mismatches can lead to correspondingly
large shortfalls in the amounts available
in the customer and PAB reserve bank
accounts to make customers and PAB
account holders whole if the carrying
broker-dealer fails financially. As
explained below, these potential
shortfalls could lead to large-scale harm
(e.g., delayed satisfaction of customer or
PAB account holder claims for
securities and cash) or substantial losses
(the inability to satisfy those claims in
full) if a carrying broker-dealer with a
large mismatch is liquidated in a formal
proceeding under the Securities Investor
Protection Act of 1970 (‘‘SIPA’’).5
B. Current Requirements of Rule 15c3–
3 and Its Relation to SIPA
1. Rule 15c3–3—Customer Accounts
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.6 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. If the
carrying broker-dealer fails financially,
the customer securities and cash should
5 See
15 U.S.C. 78aaa et seq.
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).
6 See
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
be readily available to be returned to the
customers. In addition, 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.7
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.8 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 could be
exercised by a third-party to secure an
obligation of the carrying broker-dealer.9
Permissible locations include a clearing
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7 At
a high level, in such a liquidation, SIPA
would provide for the appointment of a trustee who
is required to return customer name securities to
customers of the debtor (15 U.S.C. 78fff–2(c)(2)),
distribute the fund of ‘‘customer property’’ ratably
to customers (15 U.S.C. 78fff–2(b)), and obtain cash
advances from the Securities Investor Protection
Corporation (‘‘SIPC’’) from the fund administered
by SIPC (‘‘SIPC Fund’’) to satisfy remaining
customer net equity claims, to the extent provided
by SIPA (15 U.S.C. 78fff–2(b) and 3(a)). Customer
property is defined as ‘‘cash and securities (except
customer name securities delivered to the customer)
at any time received, acquired, or held by or for the
account of a debtor from or for the securities
accounts of a customer, and the proceeds of any
such property transferred by the debtor, including
property unlawfully converted.’’ 15 U.S.C. 7lll(4).
See also section I.B.3. of this release (discussing
broker-dealer liquidations under SIPA in more
detail).
8 See 17 CFR 240.15c3–3(d). The term ‘‘fully paid
securities’’ means all securities carried for the
account of a customer in a cash account as defined
in Regulation T promulgated by the Board of
Governors of the Federal Reserve System (12 CFR
220.1 et seq.) (‘‘Regulation T’’), as well as securities
carried for the account of a customer in a margin
account or any special account under Regulation T
that have no loan value for margin purposes, and
all margin equity securities in such accounts if they
are fully paid: provided, however, that the term
fully paid securities does not apply to any securities
purchased in transactions for which the customer
has not made full payment. 17 CFR 240.15c3–
3(a)(3). The term ‘‘margin securities’’ means those
securities carried for the account of a customer in
a margin account as defined in section 4 of
Regulation T (12 CFR 220.4), as well as securities
carried in any other account (such accounts referred
to as ‘‘margin accounts’’) other than the securities
referred to in paragraph (a)(3) of Rule 15c3–3 (i.e.,
fully paid securities). 17 CFR 240.15c3–3(a)(4). The
term ‘‘excess margin securities’’ means those
securities referred to in paragraph (a)(4) of Rule
15c3–3 (i.e., margin securities) carried for the
account of a customer having a market value in
excess of 140% of the total of the debit balances in
the customer’s account or accounts encompassed by
paragraph (a)(4) of Rule 15c3–3, which the brokerdealer identifies as not constituting margin
securities. 17 CFR 240.15c3–3(a)(5).
9 See 17 CFR 240.15c3–3(c). A carrying brokerdealer 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.
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corporation and a ‘‘bank,’’ as defined in
section 3(a)(6) of the Exchange Act.10
The second step is that 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.11 The account must be titled
‘‘Special Reserve Bank Account for the
Exclusive Benefit of Customers’’
(‘‘customer reserve bank account’’).12
The amount of net cash owed to
customers is computed weekly as of the
close of the last business day of the
week pursuant to a formula set forth in
Exchange Act Rule 15c3–3a (‘‘Rule
15c3–3a’’) (‘‘customer reserve
computation’’).13 Under the customer
reserve computation, the carrying
10 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 crypto 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 proposed amendments would apply to all
carrying broker-dealers, including special purpose
broker-dealers, the amendments would 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
(Jul. 8, 2019), available at https://www.sec.gov/
news/public-statement/joint-staff-statement-brokerdealer-custody-digital-asset-securities. 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.
11 17 CFR 240.15c3–3(e). The term ‘‘qualified
security’’ is defined in Rule 15c3–3 to mean a
security issued by the United States or a security
in respect of which the principal and interest are
guaranteed by the United States (collectively, ‘‘U.S.
Government securities’’ for purposes of this
release). See 17 CFR 240.15c3–3(a)(6).
12 See 17 CFR 240.15c3–3(e)(1). The purpose of
giving the account this title is to alert the bank and
creditors of the carrying broker-dealer that this
reserve fund is to be used to meet the carrying
broker-dealer’s obligations to customers (and not
the carrying broker-dealer’s obligations to general
creditors) in the event the carrying broker-dealer is
liquidated in a formal proceeding.
13 See 17 CFR 240.15c3–3a. Some carrying brokerdealers choose to perform a daily computation. See
17 CFR 240.15c3–3(e)(3)(iv). Further, the rule
permits carrying broker-dealers in certain limited
circumstances to perform a monthly computation.
These circumstances include: (1) the broker-dealer
must have aggregate indebtedness not exceeding
800 percent of net capital; (2) the broker-dealer
carries aggregate customer funds, as computed at
the last required computation, not exceeding
$1,000,000; and (3) the broker-dealer must deposit
in its customer reserve bank account not less than
105% of the amount computed under the customer
reserve formula. See 17 CFR 240.15c3–3(e)(3)(i).
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broker-dealer adds up customer credit
items and then subtracts from that
amount customer debit items.14 The
credit items include credit balances in
customer 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).15 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.16 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.17 The carrying
14 See
17 CFR 240.15c3–3a.
17 CFR 240.15c3–3a, Items 1–9. Credits in
the customer reserve computation include—among
other credits—free credit balances and other credit
balances in customers’ securities accounts, monies
borrowed collateralized by securities carried for the
accounts of customers, and monies payable against
customers’ securities loaned. See 17 CFR 240.15c3–
3a, Items 1–3, respectively. Carrying broker-dealers
are permitted to use customer margin securities to,
for example, obtain bank loans to finance the funds
used to lend to customers to purchase the
securities. The amount of the bank loan is a credit
in the customer reserve computation—which is
accounted for in Item 2—because this is the amount
that the carrying broker-dealer would need to pay
the bank to retrieve the securities. Similarly,
carrying broker-dealers may use customer margin
securities to make stock loans to other brokerdealers in which the lending broker-dealer typically
receives cash in return. The amount payable to the
other broker-dealer on the stock loan is a credit in
the customer reserve computation—which is
accounted for in Item 3—because this is the amount
the broker-dealer would need to pay the other
broker-dealer to retrieve the securities. See also
Recordkeeping and Reporting Requirements for
Security-Based Swap Dealers, Major Security-Based
Swap Participants and Broker-Dealers; Final Rule,
Exchange Act Release No. 87005 (Sept. 19, 2019),
84 FR 68550, 68690 (Dec. 16, 2019) (containing
FOCUS Report Part II—Computation for
Determination of Customer Reserve Requirements).
16 See 17 CFR 240.15c3–3a, Items 10–14. See also
Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the BrokerDealer Customer Protection Rule With Respect to
U.S. Treasury Securities; Proposed Rule, Exchange
Act Release No. 95763 (Sept. 14, 2022), 87 FR 64610
(Oct. 25, 2022) (proposing a new Item 15 in Rule
15c3–3a to permit margin required and on deposit
at a covered clearing agency for U.S. Treasury
securities to be included as a debit item in the
customer and PAB reserve computations, subject to
certain conditions). The Commission encourages
commenters to review the U.S. Treasury security
clearing proposal to determine whether it might
affect their comments on this proposing release.
17 17 CFR 240.15c3–3(e). 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
15 See
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ddrumheller on DSK120RN23PROD with PROPOSALS1
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.18 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.19 A
carrying broker-dealer also is required to
make and maintain a record of each
computation.20
The customer reserve computation
permits the carrying broker-dealer to
offset customer credit items only with
customer debit items.21 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.22 The broker-dealer margin
rules require securities customers to
maintain a minimum level of equity in
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.
18 For carrying broker-dealers performing a
weekly customer reserve computation as of the
close of the last business day of the week, the
deposit so computed must be made no later than
one hour after the opening of banking business on
the second following business day. See 17 CFR
240.15c3–3(e)(3)(i). For example, a carrying brokerdealer 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.
19 See 17 CFR 240.15c3–3(e).
20 See 17 CFR 240.15c3–3(e)(3)(v). Each record
must be preserved in accordance with Rule 17a–4.
Id.
21 See 17 CFR 240.15c3–3(e)(2); 17 CFR 240.15c3–
3a.
22 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 formula and the $100
customer B owes the carrying broker-dealer is a
debit in the formula. Therefore, under the customer
reserve computation there would be no requirement
to maintain cash and/or U.S. Government 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 debit and, consequently, the
carrying broker-dealer would need to have on
deposit in the customer reserve bank account cash
and/or U.S. Government securities in an amount at
least equal to $100.
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their securities accounts (i.e., the
customer’s ownership interest in the
account, computed by adding the
current market value of long securities
and the amount of any credit balance
and subtracting the current market value
of all short securities and the amount of
any debit balance).23 In other words, the
cash and the market value of the
customer’s securities in the account
must be sufficiently larger than the sum
of the cash borrowed by the customer
and market value of the securities sold
short by the customer. In addition to
protecting the carrying broker-dealer
from the consequences of a customer
default, this equity serves to overcollateralize customers’ obligations to
the broker-dealer. This buffer protects
the customers whose cash was used to
facilitate the carrying broker-dealer’s
financing of securities transactions of
other customers (i.e., margin loans and
short sales). For example, if the carrying
broker-dealer fails, the customer
debits—because they generally are overcollateralized—should be attractive
assets for another broker-dealer to
purchase or, if not purchased by another
broker-dealer, they should be able to be
liquidated to a net positive equity.24 The
23 Broker-dealers are subject to margin
requirements in Regulation T, in rules promulgated
by the broker-dealer self-regulatory organizations
(‘‘SRO’’) (see, e.g., FINRA Rules 4210–4240 and
Cboe Exchange, Inc. Rules 10.1–10.12), and with
respect to security futures, in rules jointly
promulgated by the Commission and the
Commodity Futures Trading Commission (17 CFR
242.400–406). Broker-dealers also may establish
their own margin requirements, so long as they are
as restrictive as regulatory margin requirements.
These requirements are often referred to as ‘‘house’’
margin requirements. See, e.g., FINRA Rule 4210(d)
(requiring broker-dealers to establish procedures to
formulate their own margin requirements). See also
FINRA Rule 4210(a)(5) (defining the term ‘‘equity’’
for purposes of FINRA margin requirements).
24 The attractiveness of the over-collateralized
debits facilitates the bulk transfer of customer
accounts from a failing or failed carrying brokerdealer to another broker-dealer. Regulation T, SRO
margin rules, and a broker-dealer’s house margin
rules help to ensure the customer maintains a
minimum level of equity in their account, i.e., that
the debit is over-collateralized. For example, if a
customer purchases a listed equity security, they
can borrow up to 50% of the purchase price from
the broker-dealer using the purchased security as
collateral for the loan. This is known as initial
margin. After a customer buys securities on margin,
SRO margin rules require the customer to maintain
a minimum amount of equity in their securities
margin account. This is known as maintenance
margin. SRO margin rules require a customer to
maintain at least 25% of the total market value of
the margin securities in their account. For example,
if a customer purchases $16,000 of listed equity
securities, the customer can borrow $8,000 from the
broker-dealer and pay $8,000 in cash. If the market
value of the listed equity securities falls to $12,000,
the equity in the securities margin account would
total $4,000 ($12,000¥$8,000 = $4,000) and the
broker-dealer’s loan to the customer would be overcollateralized by $4,000. The customer would be in
compliance with the 25% SRO maintenance margin
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45839
proceeds of the debits sale or
liquidation can be used to repay the
customer cash used to finance customer
obligations. This cash plus the cash
and/or qualified securities held in the
customer reserve bank account should
equal or exceed the total amount of
customer credit items as of the customer
reserve computation date (e.g., as of the
close of business on Friday).25 However,
as discussed below, activity subsequent
to the customer reserve computation
date can result in the carrying brokerdealer having large amounts of
additional credit items that do not get
accounted for until the next customer
reserve computation and do not get
reserved for until the next deposit into
the customer reserve bank account.26
This can lead to a mismatch between
the net amount of cash owed to
customers and the amount currently on
deposit in the customer reserve bank
account.
2. Rule 15c3–3—Proprietary Accounts
of Broker-Dealers
Carrying broker-dealers also may
carry accounts that hold proprietary
securities and cash of other brokerdealers, known as PAB accounts.27
Broker-dealers are not within the
definition of ‘‘customer’’ for purposes of
Rule 15c3–3.28 The definition of
‘‘customer’’ in SIPA, however, is
broader than the definition in Rule
15c3–3 in that the SIPA definition
includes broker-dealers.29 As discussed
in more detail below, broker-dealers—as
customers under SIPA—have the right
to a pro rata share of customer property
in a SIPA liquidation.30
requirement of $3,000 as well (25% of $12,000 =
$3,000). See 12 CFR 220.12(a) and FINRA Rule
4210(c)(1).
25 See Net Capital Requirements for BrokerDealers; Amended Rules, Exchange Act Release No.
18417 (Jan. 13, 1982), 47 FR 3512, 3513 (Jan. 25,
1982). The alternative method is founded on the
concept that if the debit items in the reserve
formula can be liquidated at or near their contract
value, these assets, along with any cash required to
be on deposit under the customer protection rule,
will be sufficient to satisfy all customers-related
liabilities (which are represented as credit items in
the reserve formula).
26 See section I.C. of this release (explaining the
implications of a weekly computation).
27 17 CFR 240.15c3–1(a)(16).
28 17 CFR 240.15c3–3(a)(1) (The term customer
shall mean any person from whom or on whose
behalf a broker or dealer has received or acquired
or holds funds or securities for the account of that
person. The term shall not include a broker or
dealer, a municipal securities dealer, or a
government securities broker or government
securities dealer.). Id.
29 See 15 U.S.C. 78lll(2).
30 See section I.B.3. of this release (discussing
broker-dealer liquidations under SIPA in more
detail). While broker-dealers as ‘‘customers’’ under
SIPA have a right to a pro rata share of customer
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Because broker-dealers are entitled to
a pro rata share of customer property,
Rules 15c3–3 and 15c3–3a require
carrying broker-dealers to: (1) perform a
separate reserve computation for PAB
accounts in addition to the customer
reserve computation described above
(‘‘PAB reserve computation); 31 (2)
establish and fund a separate bank
account titled ‘‘Special Reserve Bank
Account for Brokers and Dealers’’ (‘‘PAB
reserve bank account’’); and (3) obtain
and maintain physical possession or
control of non-margin 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.32 These requirements provide
similar protections to the securities and
cash a carrying broker-dealer maintains
for PAB account holders as are provided
for the securities and cash the brokerdealer maintains for customers. The
objective in applying these similar
protections is to reduce the risk that, in
the event a carrying broker-dealer is
liquidated under SIPA, the claims of
SIPA customers (i.e., customers and
PAB account holders) will exceed the
amount of customer property available
and, thereby, expose the SIPC Fund and
potentially SIPA customers to losses.33
In addition, if the customer property is
insufficient to fully satisfy all SIPA
customer claims and losses are incurred,
the PAB account holders could be
placed in financial distress. This could
cause adverse impacts to the securities
markets beyond those resulting from the
failure of the carrying broker-dealer,
given that the PAB account holders—as
broker-dealers—provide services to
property in a SIPA liquidation, they are not entitled
to receive an advance from the SIPC Fund. See 15
U.S.C. 78fff–3(a). See infra section I.B.3. of this
release (discussing advances from the SIPC Fund as
a customer protection for certain customers in a
SIPA liquidation).
31 See supra section I.B.1. of this release
(discussing Rule 15c3–3 and customer accounts).
32 17 CFR 240.15c3–3(b)(5) and (e). See also
Financial Responsibility Rules for Broker-Dealers;
Final Rule, Exchange Act Release No. 70072 (July
30, 2013), 78 FR 51824, 51827–31 (Aug. 21, 2013)
(adopting a PAB reserve computation and
possession and control requirements for securities
held in PAB accounts under Rule 15c3–3)
(‘‘Financial Responsibility Rules for BrokerDealers’’).
33 See Financial Responsibility Rules for BrokerDealers, 78 FR at 51827–28.
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investors and others who participate in
those markets.34
Similar to the customer reserve
computation, the amount of net cash
owed to PAB account holders is
computed weekly as of the close of the
last business day of the week pursuant
to the formula set forth in Rule 15c3–
3a.35 Specifically, carrying brokerdealers perform the PAB reserve
computation using the formula in Rule
15c3–3a—which is used to perform the
customer reserve computation—with
modifications that tailor the
computation to PAB (i.e., broker-dealer)
accounts as compared with customer
accounts.36 If credit items exceed debit
items, the net amount owed to PAB
account holders must be on deposit in
the PAB reserve bank account in the
form of cash and/or qualified securities.
The carrying broker-dealer must make a
deposit into the PAB reserve bank
account if the computation shows an
increase in the reserve requirement.37 If
the computation shows a decrease in the
reserve requirement, the carrying
broker-dealer may withdraw the
difference. 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.38
34 Id.
35 See Rule 15c3–3a. Some carrying brokerdealers choose to perform the PAB reserve
computation daily. See 17 CFR 240.15c3–3(e)(3)(iv).
Further, Rule 15c3–3 permits certain carrying
broker-dealers to perform the PAB reserve
computation monthly if they do not carry customer
accounts or conduct a proprietary trading business.
See 17 CFR 240.15c3–3(e)(3)(iii).
36 See 17 CFR 240.15c3–3a, Notes Regarding the
PAB Reserve Bank Account Computation. For
example, Note 1 states that broker-dealers should
use the customer reserve formula for the purposes
of computing the PAB reserve formula, except that
references to ‘‘accounts,’’ ‘‘customer accounts,’’ or
‘‘customers’’ will be treated as references to PAB
accounts. Further, Note 2 provides that any credit
(including a credit applied to reduce a debit) that
is included in customer reserve formula may not be
included as a credit in PAB reserve formula. Id.
37 For carrying broker-dealers performing the PAB
reserve computation weekly, as of the close of the
last business day of the week, the deposit so
computed must be made no later than one hour
after the opening of banking business on the second
following business day. See 17 CFR 240.15c3–
3(e)(3)(i). Carrying broker-dealers also may satisfy a
PAB reserve bank account deposit requirement with
excess debits from the customer reserve
computation from the same date. However, a
deposit requirement from the customer reserve
computation may not be satisfied with excess debits
from the PAB reserve computation. See 17 CFR
240.15c3–3(e)(4).
38 See 17 CFR 240.15c3–3(e)(2); 17 CFR 240.15c3–
3a.
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3. Broker-Dealer Liquidations and SIPA
SIPA became law in 1970 with the
purpose of affording certain protections
against loss to customers resulting from
broker-dealer failure and, in doing so,
promote investor confidence in the
nation’s securities markets.39 SIPA
established SIPC and directed SIPC to
establish the SIPC Fund.40 The
protections afforded by SIPA are
designed to work as a ‘‘back stop’’ to the
broker-dealer net capital rule,41 which
requires broker-dealers to maintain net
liquid assets in excess of all liabilities
to customers and other creditors, and
Rule 15c3–3. SIPC oversees the
liquidation of SIPC-member brokerdealers 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).42 For
example, cash and securities may be
missing from customers’ securities
accounts in cases of unauthorized
trading or embezzlement. The
Commission has authority to oversee
SIPC, including to conduct inspections
of SIPC and to approve or disapprove
changes to SIPC’s bylaws and rules.43
In a SIPA liquidation of a brokerdealer, SIPC and a court-appointed
trustee work to return customers’ cash
and securities as quickly as possible.
Customers under SIPA (‘‘SIPA
customers’’) generally are entitled to a
number of protections. These
protections include the right to share
pro rata with other SIPA customers in
the customer property held by the
broker-dealer.44 Broker-dealers with
securities accounts at the failed brokerdealer—as SIPA customers—have the
right to a pro rata share of the customer
property in a SIPA liquidation.45
39 See 2022 SIPC Annual Report at 4, available at
https://www.sipc.org/media/annual-reports/2022annual-report.pdf.
40 See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
41 17 CFR 240.15c3–1.
42 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).
43 15 U.S.C. 78ggg(c) and 78ccc(e).
44 See 15 U.S.C. 78fff–2(c).
45 See 15 U.S.C. 78fff–2(c) and 15 U.S.C. 78fff–
3(a).
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Consequently, when a carrying brokerdealer is liquidated in a SIPA
proceeding, each customer (including a
SIPA customer that is a broker-dealer)
has a priority claim on the customer
property compared to general unsecured
creditors of the carrying broker-dealer.46
The SIPA protections also include the
ability for a SIPA customer—other than
a SIPA customer that is a brokerdealer—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.47
The SIPC Fund largely is financed
through assessments paid to SIPC by its
broker-dealer members.48 The SIPC
Fund is used to pay SIPC’s expenses,
the administrative costs of a SIPA
liquidation to the extent the brokerdealer’s estate is insufficient to cover
those costs, and—as noted above—to
pay advances to SIPA customers whose
claims cannot be fully satisfied by the
estate of a failed carrying broker-
45841
dealer.49 The SIPC Fund—which
consists of cash and U.S. Government
securities—totaled approximately $4.05
billion as of December 31, 2022.50 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.51 The current
assessment rate is 0.15 percent of net
operating revenues.52 A summary of the
possible level of SIPC assessments is as
follows:
TABLE 1—SIPC ASSESSMENT SCHEDULE
Unrestricted net assets/SIPC Fund balance
Annual assessment rate
Unrestricted net assets $2.5–<$5 billion (and reasonably likely to remain less than $5 billion but not less than $2.5 billion).
SIPC Fund balance of $150 million—unrestricted net assets of <$2.5
billion.
SIPC Fund balance $100 million–<$150 million ......................................
SIPC Fund balance below $100 million ...................................................
Unrestricted net assets ≥$5 billion (and reasonably likely to remain >$5
billion (after review of study 1 and consultation with Commission and
SROs)).
0.15% of net operating revenues.
0.25% of net operating revenues.
Determined by SIPC, but not less than 0.25% of gross revenues.
Determined by SIPC, but not less than 0.5% of gross revenues.
SIPC may not more than once in any four-year period, increase or decrease the assessment rate by up to, but not more than, 25% of the
assessment rate in effect at that time.
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1 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.
In addition to the Commission’s
requirements under Rule 15c3–3, if
either the Commission or any SRO, such
as FINRA, is aware of facts which lead
it to believe that any broker-dealer
subject to its regulation is in or is
approaching financial difficulty, it must
immediately notify SIPC, and, if such
notification is by an SRO, the
Commission.53 In a case when an SRO
notifies SIPC about a broker-dealer, and
that broker-dealer has taken steps to
either reduce or liquidate its business,
either voluntarily or at the direction of
the SRO, the SRO may render such
assistance or oversight to such brokerdealer as it considers appropriate to
protect the interests of customers of
such broker-dealer.54 However, any
actions the SRO takes do not prevent or
act as a bar from SIPC from taking an
action as well.55 If SIPC finds that a
broker-dealer has failed, or is in danger
of not meeting its obligations to
customers, SIPC can initiate steps to
begin a customer protection proceeding.
For example, SIPC may, upon notice to
its broker-dealer member, file an
application for a protective decree with
any court that has jurisdiction (i.e., a
Federal District Court), whether or not
the broker-dealer consents.56 In
addition, no member of SIPC that has
customers may enter into bankruptcy,
insolvency, or a receivership without
approval from SIPC, except as provided
C. The Risk of a Mismatch in Funds
Owed and Funds Reserved Under Rule
15c3–3
Carrying broker-dealers receive
customer- and PAB-related cash inflows
in connection with various securities
transactions, including cash proceeds
received from sales of securities, cash
deposited by customers and PAB
account holders for the purposes of
purchasing securities, and monthly or
quarterly dividends received on behalf
of customers and PAB account holders.
Cash credited to customers and PAB
account holders often is quickly reinvested by the customer or PAB
46 As discussed above in section I.B.2. of this
release, this is why Rules 15c3–3 and 15c3–3a
require carrying broker-dealers to perform a PAB
reserve computation for PAB account holders. 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 to the extent that there are any general
estate assets. See 15 U.S.C. 78fff–2(c)(1).
47 15 U.S.C. 78fff–3.
48 15 U.S.C. 78ddd(c) and (d). The SIPC Fund is
also financed through interest on U.S. Government
securities held in the SIPC Fund. See 2022 SIPC
Annual Report at 4.
49 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.
50 Currently, the objective is to build the SIPC
Fund to a level of $5 billion. See 2022 SIPC Annual
Report at 3, 10. Between 1970 and 2022, SIPC has
facilitated the return of cash and securities for
accounts of customers of failed broker-dealers
totaling approximately $142 billion. Of that
amount, approximately $141.2 billion came from
broker-dealer estates and $917 million came from
trustee advances from the SIPC Fund. Id. at 8.
Further, of the approximately 770,400 customer
claims from completed, or substantially completed,
cases that were satisfied between 1970 and 2022,
only 355 claims were for cash and securities valued
greater than the limits of protection afforded by
SIPA. Id. at 9.
51 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 2022 SIPC Annual Report at 20.
See also 15 U.S.C. 78ddd(c) and (d) and 2022 SIPC
Annual Report at 21.
52 See Assessment Rate, available at https://
www.sipc.org/for-members/assessment-rate. 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.
53 See 15 U.S.C. 78eee(a)(1).
54 See 15 U.S.C. 78eee(a)(2).
55 Id.
56 See 15 U.S.C. 78eee(a)(3)(A). See also 15 U.S.C.
78eee(b)(1) (detailing court proceedings).
57 See 15 U.S.C. 78eee(a)(3)(B).
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account holder in securities such as
money market mutual funds or
securities held by the customer or PAB
account holder that are subject to
dividend re-investment plans. This cash
also may be swept out of the customer’s
or PAB account holder’s securities
account at the carrying broker-dealer to
a bank or money market mutual fund as
part of a program in which customers’
and PAB account holders’ free credit
balances are automatically invested in
the mutual fund or bank deposit
product on the prior authorization of the
customer or PAB account holder
(‘‘sweep program’’).58 When customers
and PAB account holders use their free
credit balances to invest in securities or
bank deposit products, the amount of
cash held by a carrying broker-dealer for
them is reduced and, therefore, the
amount that needs to be deposited into
the customer or PAB reserve bank
account also is reduced.
Carrying broker-dealers, however,
may receive large cash inflows that are
not deployed for or on behalf of the
customers or PAB account holders prior
to the next required customer and PAB
reserve computations and deposits into
the customer and PAB reserve bank
accounts. In this situation, the value of
the cash and/or qualified securities in
the customer and PAB reserve bank
accounts may not equal the net cash
owed to customers and PAB account
holders for a period of time. For
example, assume a carrying brokerdealer performs its customer and PAB
reserve computations weekly as
required under Rule 15c3–3 (i.e., it has
not elected to perform a daily
computation or meet the conditions in
the rule to perform a monthly
computation). Typically, the carrying
broker-dealer would perform the
customer and PAB reserve computations
on Monday using credit and debit
amounts as of the close of business on
the previous Friday. If the Monday
computation showed a deposit
requirement, the carrying broker-dealer
would need to make that deposit by 10
a.m. the following business day, which
typically would be Tuesday. In this
example, cash inflows received by the
carrying broker-dealer on Monday
through Friday would not be accounted
for until the carrying broker-dealer
58 See 17 CFR 240.15c3–3(j)(2)(ii) (setting forth
requirements under Rule 15c3–3 for this type of a
program for customer accounts). 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 17 CFR 15c3–
3(a)(1). Nonetheless, PAB account holders may elect
to have their free credit balances included in a
sweep program.
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performs the next customer and PAB
reserve computations on the Monday of
the following week and would not be
reserved for until the carrying brokerdealer makes the required deposits into
the customer and PAB reserve bank
accounts no later than 10 a.m. on
Tuesday of the following week.
Consequently, for a number of days, the
net amount of cash owed to customers
and PAB account holders could be
greater than the amounts deposited into
the customer and PAB reserve bank
accounts.59
This mismatch poses a risk to the
carrying broker-dealer’s customers and
PAB account holders that the carrying
broker-dealer could fail financially and
be unable to return all the securities and
cash owed to the customers and PAB
account holders. In this situation, the
carrying broker-dealer would be
liquidated under SIPA, and SIPC would
be required to advance money from the
SIPC Fund—but not to PAB account
holders—to the extent the fund of
customer property was insufficient to
make customers whole through the pro
rata distribution. As discussed above,
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).60 Therefore, if the
59 To further illustrate this risk, assume on
Monday of Week 1 a carrying broker-dealer
performs a customer reserve computation that
shows as of close-of-business on Friday of the
previous week the broker-dealer had total credits of
$30 billion and total debits of $25 billion and,
therefore, had excess credits over debits of $5
billion. Assume further, the carrying broker-dealer
had $4.8 billion of cash and qualified securities on
deposit in its customer reserve bank account. Under
Rule 15c3–3, the carrying broker dealer would need
to deposit $200 million into its customer reserve
bank account no later than 10 a.m. on Tuesday of
Week 1. Assume further that the carrying brokerdealer receives $3 billion of cash inflows on
Monday of Week 1 but does not facilitate any
customer transactions during Week 1 that generate
additional debits and the customers do not deploy
the $3 billion to purchase securities or into a sweep
program. In this scenario, the $3 billion of cash
inflows on Monday of Week 1 would not get
accounted for in the customer reserve formula until
the carrying broker-dealer performs the customer
reserve computation on Monday of Week 2.
Assuming all else stays the same, the Week 2
customer reserve computation would result in a
deposit requirement of $3 billion, which would
need to be made no later than 10 a.m. on the
Tuesday of Week 2. This means the net amount of
cash owed to customers was $8 billion and the
amount on deposit in the customer reserve bank
account was $4.8 billion on Monday through 10
a.m. on Tuesday of Week 1 and $5 billion from 10
a.m. on Tuesday of Week 1 through 10 a.m. on
Tuesday of Week 2. Consequently, the difference
between the net amount of cash owed to customers
and the amount on deposit in the customer reserve
bank account was $3.2 billion for Monday of Week
1 through 10 a.m. on Tuesday of Week 1 and $3
billion from 10 a.m. on Tuesday of Week 1 through
10 a.m. on Tuesday of Week 2.
60 See section I.B.3. of this release (discussing
broker-dealer liquidations under SIPA in more
detail).
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mismatch was sufficiently large,
customers’ claims may not be satisfied
in full. 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 greater risk of not
being satisfied in full. This could expose
the PAB account holder to financial
stress and increased risk of
liquidation.61
As of the end of 2022, 162 carrying
broker-dealers reported total credits in
their customer reserve computation of
greater than $0.62 These carrying brokerdealers reported an aggregate amount of
total customer credits of $1.03 trillion.
In addition, 82 carrying broker-dealers
reported total credits in their PAB
reserve computation of greater than $0.
These carrying broker-dealers reported
an aggregate amount of PAB account
holder total credits of $166.3 billion.63
Moreover, some of these carrying
broker-dealers have been required to
deposit large amounts of additional cash
and/or qualified securities into their
customer and/or PAB reserve bank
accounts after performing their
customer and/or PAB reserve
computations. For example, during the
2022 calendar year, the largest required
additional deposits into the customer
reserve bank accounts of these carrying
broker-dealers ranged from
approximately $1.6 billion to over $6.0
billion following the customer reserve
61 See section IV.C. of this release (discussing the
benefits and costs of the proposed amendments).
62 This number of carrying broker-dealers is based
on information reported by broker-dealers as of Dec.
31, 2022, in Form X–17A–5, the Financial and
Operational Combined Uniform Single Report
(‘‘FOCUS Report’’). The FOCUS Reports showed
that 162 carrying broker-dealers reported total
credits of greater than $0 on Line 4430 of the report
(total credits in the customer reserve formula). Total
credits in the customer reserve computation is the
sum of customer credits in the formula, including—
among other credits—free credit balances and other
credit balances in customers’ securities accounts
(Line 4340), monies borrowed collateralized by
securities carried for the accounts of customers
(Line 4350), and monies payable against customers’
securities loaned (Line 4360). See also section
IV.B.2. of this release (estimating that there are 187
broker-dealers that may currently fall within the
scope of the Rule 15c3–3 based on carrying
activities). This estimate includes broker-dealers
that did not report credits greater than $0 and/or
that reported being exempt from the provisions of
Rule 15c3–3.
63 FOCUS Report data as of Dec. 31, 2022, showed
that 82 broker-dealers reported total credits of
greater than $0 on Line 2170 of the report (total
credits in the PAB reserve formula). Total credits
in the PAB reserve computation is the sum of PAB
account holder credits in the formula, including—
among other credits—free credit balances and other
credit balances in PAB securities accounts (Line
2110), monies borrowed collateralized by securities
carried for the accounts of PAB (Line 2120), and
monies payable against PAB securities loaned (Line
2130).
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computation.64 Furthermore, during the
2022 calendar year, the largest required
additional deposits into their PAB
reserve bank accounts ranged from
approximately $350 million to over $4.0
billion.65 The carrying broker-dealers
that reported the largest amounts of total
credits for their customers and PAB
account holders (and that exceeded the
proposed $250 Million Threshold
discussed below) were more likely to
experience larger mismatches and the
dollar amounts underlying those
mismatches were significantly larger
(than carrying broker-dealers that do not
exceed the proposed $250 Million
Threshold).66
These large deposit requirements
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. As explained
above, this creates the potential risk that
a carrying broker-dealer could fail
financially and not be able to fully
satisfy claims of customers and PAB
account holders for securities and cash.
Moreover, given the potential size of
this mismatch between the cash owed
and the cash reserved, the failure of a
carrying broker-dealer that has large
total credits could cause widespread
harm and potentially substantial losses
(as discussed above). It also potentially
could deplete the SIPC Fund resulting
in the need to increase assessments on
SIPC’s broker-dealer members to
replenish it, with the resulting costs
potentially being passed through to
investors.67
64 This is based on the 25 largest additional
deposit requirements reported in the monthly
FOCUS Reports filed during the 2022 calendar year.
65 This is based on the 25 largest additional
deposit requirements reported in the monthly
FOCUS Reports filed during the 2022 calendar year.
The largest additional deposit requirements were
made by carrying broker-dealers that also had the
20 largest credit balances based on 2022 FOCUS
Report data. In addition to large deposit
requirements, the customer and PAB reserve
computations also permitted some carrying brokerdealers to make large withdrawals from both their
customer and PAB reserve bank accounts during the
2022 calendar year. For example, during the 2022
calendar year, the 25 largest withdrawals from
customer reserve bank accounts ranged from
approximately $1.3 billion to $6.0 billion, and the
25 largest withdrawals from PAB reserve bank
accounts ranged from $241.7 million to $3.5 billion.
66 This is based on the carrying broker-dealers
that reported the largest amounts of total credits on
their FOCUS Reports as of Dec. 31, 2022, and
comparing them to the carrying broker-dealers that
reported the largest deposits for the 2022 calendar
year. See also section II.A.1. of this release
(discussing the proposed $250 Million Threshold)
and Table 5 in section IV.B.2. of this release
(detailing broker-dealer deposits and withdrawals
as a share of reserve accounts for the year 2022).
67 See section IV.C. of this release (discussing the
benefits and costs of the proposed amendments).
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To address these risks, the
Commission is proposing amendments
to Rule 15c3–3 to require carrying
broker-dealers with large total credits—
the carrying broker-dealers most likely
to have large customer and PAB
additional deposit requirements—to
increase the frequency of their customer
and PAB reserve computations from
weekly to daily. The objective is to 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 by shortening the timeframe
that a mismatch can exist.68 This
objective also should enhance the
customer protection requirements of
Rule 15c3–3.
In addition, performing daily (rather
than weekly) customer and PAB reserve
computations would allow large
carrying broker-dealers to more
effectively manage their cash flows and
liquidity. For example, a carrying
broker-dealer that performs weekly
computations generally cannot
withdraw excess cash or U.S.
Government securities from either its
customer or PAB reserve bank accounts
until the following week even if the
value of the account assets exceeds the
net cash owed to customers or PAB
account holders during the current
week. While Rule 15c3–3 currently
permits a carrying broker-dealer to elect
68 To illustrate how a daily computation would
reduce this risk, assume on Monday a carrying
broker-dealer performs a customer reserve
computation that shows as of the close-of-business
on Friday of the previous week the broker-dealer
had total credits of $30 billion and total debits of
$25 billion and, therefore, had excess credits over
debits of $5 billion. Assume further, the carrying
broker-dealer had $4.8 billion of cash and qualified
securities on deposit in its customer reserve bank
account. Under a daily computation, the carrying
broker dealer would need to deposit $200 million
into its customer reserve bank account no later than
10 a.m. on Tuesday of that week. Assume further
that the carrying broker-dealer receives $3 billion of
cash inflows on Monday but does not facilitate any
customer transactions that generate any additional
debits and the customers do not deploy the $3
billion to purchase securities or into a sweep
program. Under a daily requirement, the carrying
broker-dealer would perform a customer reserve
computation on Tuesday as of the close of business
on Monday that would account for the $3 billion
in cash inflows received on Monday and be
required to deposit $3 billion into the customer
reserve bank account by 10 a.m. on Wednesday of
the same week. Consequently, the mismatch would
exist from the point in time on Monday when the
$3 billion was received until 10 a.m. on Wednesday
of the same week when $3 billion would need to
be deposited into the customer reserve bank
account (approximately two full days). Under a
weekly requirement, this mismatch would exist
from the point in time on Monday when the $3
billion was received until 10 a.m. on Tuesday of the
following week when the next deposit into the
customer reserve bank account would need to be
made (approximately eight full days).
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45843
to perform its customer and PAB reserve
calculations more frequently than
weekly,69 a practical effect of requiring
carrying broker-dealers to perform daily
customer and PAB reserve computations
would be to permit them to withdraw
these excess funds and securities more
quickly. A number of carrying brokerdealers currently elect to perform daily
customer and PAB reserve
computations, including eleven of the
largest carrying broker-dealers.70
Finally, an additional 52 carrying
broker-dealers that would be required to
begin performing daily customer and
PAB computations under the proposed
rule (i.e., those carrying broker-dealers
that are not already voluntarily
performing daily computations) may
incur increased compliance costs.71 As
further discussed in the Economic
Analysis in section IV. of this release,
these costs and benefits may ultimately
be passed through to customers and
PAB account holders of the affected
carrying broker-dealers.72
II. Proposed Amendments
A. Proposed Amendments to Rule 15c3–
3
In order to address the mismatch risk
discussed above and enhance customer
protection requirements, the
Commission is proposing 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).73 More
specifically, the amendments would add
paragraph (e)(3)(i)(B) to Rule 15c3–3.74
69 See
17 CFR 240.15c3–3(e)(3)(iv).
on FOCUS Report data for the 2022
calendar year, these carrying broker-dealers are
among the largest broker-dealers measured by
average total credits and total assets. These 11
carrying broker-dealers accounted for 64 percent of
the total amount of average total credits among all
carrying-broker dealers with positive customer or
PAB credits reported in 2022. See section IV.B.2. of
this release (discussing baseline of affected brokerdealers in the economic analysis).
71 Based on FOCUS Report data for the 2022
calendar year.
72 See section IV. of this release (discussing the
benefits and costs of the proposed amendments).
73 See section I.C. of this release (discussing the
mismatch risk).
74 See paragraph (e)(3)(i)(B) to Rule 15c3–3, as
proposed to be amended. In addition, the
Commission is proposing 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
70 Based
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This paragraph would provide that a
carrying broker-dealer with average total
credits that are equal to or greater than
$250 million 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.75 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. 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).
For purposes of paragraph (e)(3) of
Rule 15c3–3, the Commission is
proposing 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 (‘‘$250 Million Threshold’’).76
The proposed definition of average total
credits is designed to serve as a
straightforward way for the carrying
broker-dealer to determine whether its
total credits equal or exceed the $250
Million Threshold. In addition, using
the arithmetic mean of total credit
amounts reported in the twelve most
recently filed month-end FOCUS
Reports to calculate the average total
credits is designed to account for the
fact that a carrying broker-dealer’s total
credits may fluctuate. A rolling average
based on twelve most recently filed
month-end FOCUS Reports would
provide for a more stable and
representative metric as compared to
basing the calculation on a single filing
such as the most recently filed FOCUS
Report.
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.
75 The text of paragraph (e)(3)(i)(B) of Rule 15c3–
3, as proposed to be amended, is modelled closely
on the current text of paragraph (e)(3)(i) of Rule
15c3–3.
76 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.
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The proposed $250 Million Threshold
is designed to apply the daily
computation requirement to carrying
broker-dealers that have large amounts
of total credits. Based on FOCUS Report
data, these carrying broker-dealers are
the ones more likely to experience larger
mismatches between the net cash they
owe customers and PAB account
holders and the amounts they have on
deposit in their customer and PAB
reserve bank accounts, and the dollar
amounts underlying those mismatches
are significantly larger than carrying
broker-dealers below the $250 Million
Threshold.77 The proposed $250
Million 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
of which are more likely to incur larger
mismatches in any given year, and are
more likely to better absorb any
potential increase in compliance
costs.78
Based on regulatory filings for the
period of January 2022 through
December 2022, the $250 Million
Threshold would apply the proposed
daily computation requirement to
approximately 63 carrying brokerdealers.79 These broker-dealers include
11 carrying broker-dealers that already
voluntarily perform the customer
reserve computation daily.80 Under the
77 Based on FOCUS Report data for the 2022
calendar year. See also Table 5 in section IV.B.2.
of this release (detailing broker-dealer deposits and
withdrawals as a share of reserve accounts for the
year 2022).
78 See section IV.C. of this release (discussing the
costs and benefits of the proposed $250 Million
Threshold).
79 This estimate is based on the arithmetic mean
of the sum of total credits in the customer and PAB
reserve computations reported in each required
monthly FOCUS Report filed for the 12 months
ended Dec. 31, 2022. All of these broker-dealers
reported total credits in their customer reserve
computation during the 2022 calendar year.
Approximately fourteen carrying broker-dealers that
exceeded the $250 Million Threshold reported no
credits in their PAB reserve computations during
the 2022 calendar year. The number of affected
carrying broker-dealers may vary month to month
because the proposed $250 Million Threshold is
based on a 12-month rolling average. For example,
the number of affected carrying broker-dealers
varied monthly from 60 to 63 over the period from
January 2022 through May 2023. There was little
variation, however, in the identity of the affected
carrying broker-dealers. The same 59 carrying
broker-dealers met the proposed $250 Million
Threshold in each month, and from one to four
additional carrying broker-dealers met the threshold
in any given month. In total, over this period, 63
different carrying broker dealers would have been
affected. See Figure 1 (Number of Affected BrokerDealers under 12-Month Rolling Average, Over the
Period from January 2022–May 2023) in section
IV.B.2. of this release.
80 This is based on FOCUS Report data as of Dec.
31, 2022. Based on FOCUS Report data for 2022, ten
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proposed $250 Million Threshold,
approximately 100 carrying brokerdealers would continue to be subject to
a weekly customer and/or PAB reserve
computation requirement.81 In
summary, in proposing the $250 Million
Threshold, the Commission 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
computation.82
The Commission is proposing to
require that a carrying broker-dealer
comply with the daily computation
requirement for the customer and PAB
reserve bank accounts no later than six
months after having average total credits
that equal or are greater than $250
million.83 The purpose is to provide
time for a carrying broker-dealer to
prepare to perform a daily computation
after it exceeds the $250 Million
Threshold. 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.
Once a carrying broker-dealer begins
to perform daily customer and PAB
reserve computations (because it
exceeded the $250 Million Threshold),
the proposed amendments would
require it to continue performing daily
customer and PAB reserve computations
for at least 60 days after it falls below
the $250 Million Threshold. More
specifically, under paragraph
(e)(3)(i)(B)(2) of Rule 15c3–3, as
proposed to be amended, a carrying
broker-dealer performing daily
computations, whose average total
credits falls below the $250 Million
Threshold, could elect to perform
weekly computations under paragraph
(e)(3)(i)(A) of Rule 15c3–3 by notifying
its designated examining authority in
writing.84 In order to revert to a weekly
computation, the carrying broker-dealer
would need to wait 60 calendar days
after notifying its designated examining
authority, in writing, of its election to
out of these 11 carrying broker-dealers were among
the 20 largest carrying broker-dealers in terms of the
largest average total credits. All 11 of these carrying
broker-dealers that currently perform their customer
reserve computation daily are among the 30 largest
carrying broker-dealers in terms of average total
credits.
81 This estimate is based on 162 carrying brokerdealers that reported total credits greater than $0 on
their FOCUS Reports as of Dec. 31, 2022.
82 See section IV. of this release (discussing the
costs and benefits of the proposed $250 Million
Threshold).
83 See paragraph (e)(3)(i)(B)(1) of Rule 15c3–3, as
proposed to be amended.
84 See paragraph (e)(3)(i)(B)(2) of Rule 15c3–3, as
proposed to be amended.
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perform weekly computations before it
could switch to performing weekly
computations.85 The purpose of this
requirement is to provide the designated
examining authority with prior notice of
the switch and to provide the
designated examining authority with the
opportunity to contact the firm and ask
how it intends to implement the change.
This would assist the designated
examining authority in monitoring the
firm.
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 $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.86 This would be the
same process as when a carrying brokerdealer exceeded the $250 Million
Threshold for the first time. The
purpose of this requirement would be to
provide the carrying broker-dealer time
to prepare to perform a daily
computation. Carrying broker-dealers
that fall below the $250 Million
Threshold and revert to weekly
customer and PAB reserve computations
may reduce the resources they dedicate
to performing the computations.
Therefore, these carrying broker-dealers
would need some time to enhance their
operational resources in order to
increase the frequency of the
computations again. However, this may
be an infrequent occurrence given that
few carrying broker-dealers likely would
maintain average total credits that is
close to the $250 Million Threshold.
Further, a carrying broker-dealer could
choose to continue to perform daily
customer and PAB reserve computations
even after it falls below the $250 Million
Threshold, given the practical effect on
liquidity as a result of the ability to
make more frequent withdrawals from
its customer and PAB reserve bank
accounts. The largest carrying brokerdealers likely would be required to
85 To illustrate how this would work, assume a
carrying broker-dealer has been required to perform
daily customer and PAB reserve computations for
five years. Assume further that with the filing of the
FOCUS Report for the October month-end in the
fifth year the carrying broker-dealer calculates its
average total credits and the amount is below the
$250 Million Threshold. At this point, the carrying
broker-dealer could provide notice to its designated
examining authority of its election to begin
performing the customer and PAB reserve
computations weekly. It would need to wait 60 days
after providing that notice before it could begin
performing those computations weekly.
86 See paragraph (e)(3)(i)(B)(1) of Rule 15c3–3, as
proposed to be amended.
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perform daily computations an ongoing
basis because their average total credits
would far exceed the proposed $250
Million Threshold.87
The Commission also is proposing to
amend paragraph (e)(3)(iv) of Rule
15c3–3. Current paragraph (e)(3)(iv) of
Rule 15c3–3 provides that computations
in addition to the computations
required in paragraph (e)(3) (i.e., the
weekly computation and permitted
monthly computation) 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.88 The
amendment to paragraph (e)(3)(iv)
would provide that computations, other
than those made under paragraph
(e)(3)(i)(B)(1) of Rule 15c3–3, as
proposed to be amended (i.e., the daily
computations), may be made as of the
close of any business day.89 This
amendment would specify that the
option to perform a customer or PAB
reserve computation more frequently
than weekly or monthly (as applicable)
remains available to carrying brokerdealers that are required to make such
computations on a weekly or monthly
basis. Carrying broker-dealers currently
performing daily customer and PAB
reserve computations have used this
option.
B. Request for Comment
The Commission requests comments
from all members of the public on all
aspects of the proposed rule
amendments. Commenters are requested
to provide empirical data in support of
any arguments or analyses. With respect
to any comments, the Commission notes
that they are of the greatest assistance to
this rulemaking initiative if
accompanied by supporting data and
analysis of the issues addressed in those
comments and by alternatives to the
Commission’s proposals where
appropriate. In addition, the
Commission is requesting comment on
the following specific aspects of the
proposals:
1. The objective of the proposed
amendments is to address the risk that
is created when the amount of net cash
owed to customers and PAB account
holders by a carrying broker-dealer is
greater than the amount on deposit in
the broker-dealer’s customer and PAB
87 This is based on FOCUS Report data for the 12
months ended Dec. 31, 2022.
88 See 17 CFR 240.15c3–3(e)(3)(iv).
89 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 current
paragraph (e)(3)(iv) of Rule 15c3–3.
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45845
reserve bank accounts and the amount
of that difference is substantial. Are
there ways—other than requiring daily
customer and PAB reserve
computations—to address this risk? If
so, identify them and explain how they
would more appropriately address this
risk. For example, rather than a daily
customer and PAB reserve computation
requirement, should Rule 15c3–3 be
modified to require a carrying brokerdealer to deposit cash and/or qualified
securities in the customer and PAB
reserve bank accounts in an amount that
is a multiple of the required amount
computed under the customer and PAB
reserve computations (i.e., overfund the
customer and PAB reserve bank
accounts weekly)? If so, explain why. If
not, explain why not. If Rule 15c3–3
were to be modified in this way, should
the multiple of the amount computed
under the customer and PAB reserve
computations be 105%, 110% or some
other percentage? If so, explain why.
2. Should the definition of average
total credits be modified to use a subset
of credit items rather than total credits?
If so, explain why. If not, explain why
not. For example, rather than using the
sum of total credits from the customer
reserve computation (Line 4430 of the
FOCUS Report) and the PAB reserve
computation (Line 2170 of the FOCUS
Report), should the definition use the
sum of free credit balances and other
credit balances from the customer
reserve computation (Line 4340 of the
FOCUS Report) and the PAB reserve
computation (Line 2110 of the FOCUS
Report)? If so, explain why. If not,
explain why not. If the definition used
free credit balances and other credit
balances, the amounts reported by a
carrying broker-dealer would be less
than the amounts reported using total
credits (as free credit balances and other
credit balances are one of several
components of total credits). Therefore,
if the definition used free credit
balances and other credit balances,
should the $250 Million Threshold be
adjusted downward to account for the
lower amounts that would be reported
by carrying broker-dealers? If so, explain
why. If not, explain why not. For
example, if the definition were to be
modified in this way, should the
threshold be lowered to $200 million,
$150 million, or $100 million, or some
other lower amount? If so, explain why.
If not, explain why not.
3. Should the definition of average
total credits be modified so that it is
based on a different set of filed FOCUS
Reports? If so, explain why. If not,
explain why not. For example, should it
be the arithmetic mean of the total
credits in the customer and PAB reserve
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computations reported in each required
FOCUS Report filed during the most
recently ended calendar year? If so,
explain why. If not, explain why not.
Should it be the arithmetic mean of the
FOCUS Reports filed for the previous
four calendar quarters? If so, explain
why. If not, explain why not.
4. Should the $250 Million Threshold
be modified to be set at a higher or
lower threshold? 90 If so, explain why. If
not, explain why not. For example,
should the threshold be $50 million,
$100 million, $150 million, $200
million, $300 million, $500 million, or
$1 billion? If so, recommend a different
threshold and explain why it would be
appropriate.
5. Should Rule 15c3–3 be modified to
require a carrying broker-dealer to
perform daily customer and PAB reserve
computations using a different metric
for the threshold? For example, if Rule
15c3–3 were to be modified in this way,
should the threshold be based on a
metric such as: (1) total assets; (2) net
capital under 17 CFR 240.15c3–1
(Exchange Act Rule 15c3–1); (3) the
maximum value of total credits reported
on the twelve most recently filed
month-end FOCUS Reports; (4) whether
the required reserve bank account
deposit as a share of the reserve bank
account balance prior to such deposit
exceeds a certain percentage threshold
(e.g., 5% or 10%); or (5) the average
total credits per number of customer
and PAB accounts? If so, explain why.
If not, explain why not.
6. Should Rule 15c3–3 be modified to
require all carrying broker-dealers to
perform daily customer and PAB reserve
computations? If so, explain why. If not,
explain why not.
7. Should the six-month period to
begin performing the daily customer
and PAB reserve computations after
having average total credits that equal or
exceed the $250 Million Threshold be
modified? If so, explain why. If not,
explain why not. For example, would
six months be a sufficient time to
implement the necessary changes to
begin performing a daily computation?
If so, explain why. If not, explain why
not. Should the six-month period be
lengthened or shortened? If so, explain
why. If not, explain why not. For
example, should the time period be 30
calendar days, 60 calendar days, three
months, nine months or one year? If so,
recommend a different time period and
explain why it would be appropriate.
8. If a carrying broker-dealer falls
below the $250 Million Threshold,
90 See Table 5 in section IV.B.2. of this release
(detailing broker-dealer deposits and withdrawals
as a share of reserve account balance for the year
2022).
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reverts to a weekly computation after
providing the 60-day prior notice, and
subsequently exceeds the $250 Million
Threshold again, should the six-month
period to begin performing the daily
customer and PAB reserve computations
be modified? If so, explain why. If not,
explain why not. For example, would a
carrying broker-dealer need six months
to implement the changes necessary to
perform the customer and PAB reserve
computations daily after it exceeds the
$250 Million Threshold for a second or
third time? If so, explain why. If not,
explain why not. In this case, should the
six-month period be shortened? If so,
explain why. If not, explain why not.
For example, should the time period for
exceeding the $250 Million Threshold
for a second or subsequent time be 30
calendar days, 60 calendar days, or
three months? If so, recommend a
different time period and explain why it
would be appropriate.
9. Should the requirement to provide
a 60-day prior written notice to the
carrying broker-dealer’s designated
examining authority before switching to
weekly customer and PAB reserve
computations be modified? If so,
explain why. If not, explain why not.
For example, should the time period be
30 days, 90 days or 180 days? If so,
recommend a different time period and
explain why it would be appropriate.
10. Should Rule 15c3–3 be modified
to specifically address the situation
where a carrying broker-dealer
performing weekly customer and PAB
reserve computations exceeds the
proposed $250 Million Threshold for a
period of a month or two, but
subsequently falls below the proposed
$250 Million Threshold during the sixmonth period to begin performing the
customer and PAB reserve computations
daily? If so, explain why. If not, explain
why not. For example, if Rule 15c3–3
were to be modified in this way, should
the carrying broker-dealer be permitted
to continue to perform its customer and
PAB reserve computations weekly, if it
falls below the proposed $250 Million
Threshold during the six-month period?
For example, if a carrying broker-dealer
performing weekly computations
exceeds the proposed $250 Million
Threshold in January and February, but
falls below the proposed $250 Million
Threshold in March, April, May, and
June, should the carrying broker-dealer
be permitted to continue to perform
weekly computations in July (as
opposed to be required to perform daily
computations beginning in July)? In
such a case, should the carrying brokerdealer be required to give a written
notice to its designated examining
authority that it will continue to
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perform weekly computations? If so,
explain why. If not, explain why not.
11. Should Rule 15c3–3 be modified
to require carrying broker-dealers to
perform the customer and PAB reserve
computations daily indefinitely once
they exceed the $250 Million Threshold
for the first time (with no option to
revert to weekly computations with a
60-day prior written notice)? If so,
explain why. If not, explain why not.
12. Should Rule 15c3–3 be modified
to require carrying broker-dealers to
document in writing and preserve for
three years under Exchange Act Rule
17a–4 the calculation of their average
total credits? 91 If so, explain why. If not,
explain why not.
13. If the proposal was adopted
substantially as proposed, how long
would carrying broker-dealers need to
prepare to come into compliance with
the new requirements? Please explain.
For example, would they need three,
six, nine, twelve or some other number
of months? What data points would
carrying broker-dealers use to assess the
timing? Are there any specific
operational or technological issues that
should be factored into a compliance
date?
14. Would staggering the compliance
dates over more than one calendar year
help facilitate an orderly
implementation of the proposal, if
adopted substantially as proposed? For
example, would it be appropriate for the
compliance date to vary depending on
the size of the average total credits
reported by carrying broker-dealers,
with firms having larger amounts of
average total credits required to come
into compliance sooner than firms with
smaller amounts of average total credits?
More generally, if staggering is
appropriate, what would be an
appropriate schedule of compliance
dates for carrying broker-dealers with
different amounts of average total
credits? Please recommend different
compliance dates for carrying brokerdealers with different amounts of
average total credits and explain why
they would be appropriate. Should the
fact that some carrying broker-dealers
already would be performing daily
customer and PAB reserve computations
factor into the compliance date? If so,
explain why. If not, explain why not.
15. If the proposal was adopted
substantially as proposed, would the
six-month period to begin performing
daily customer and PAB reserve
computations after having average total
credits that equal or exceed the $250
Million Threshold provide adequate
time for carrying broker-dealers to
91 See
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implement the changes necessary to
comply with the rule without the need
for an additional delayed compliance
date? If so, explain why. If not, explain
why not. For example, would the sixmonth period be adequate if the date to
begin performing the daily customer
and PAB reserve computations fell near
the end of the calendar year when
carrying broker-dealers may refrain from
implementing new information
technology projects? If so, explain why.
If not, explain why not.
III. Request for Comment—Reserve
Account Requirements for Security–
Based Swaps
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A. Discussion
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.92 These requirements were
based in part on the requirements of
Rules 15c3–3 and 15c3–3a discussed
above.93 Under the security-based swap
segregation requirements, brokerdealers—including broker-dealers
registered as SBSDs—are required to
perform a separate weekly securitybased swap customer reserve
computation and have a separate
security-based swap customer reserve
account that must hold the net amount
of cash owed to security-based swap
customers.94 Title 17 sections 240.18a–
4 and 18a–4a (‘‘Exchange Act Rules
18a–4 and 18a–4a’’) impose analogous
security-based swap customer reserve
computation and deposit requirements
on SBSDs that either are not registered
as a broker-dealer or are registered as
special class of broker-dealer known as
an over-the counter derivatives dealer
(‘‘OTC derivatives dealer’’).95 As
discussed below, the proposed
amendments would not alter these
92 Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and MajorSecurity-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’’).
93 Id. See also sections I.B.1. and I.B.2. of this
release (discussing the requirements of Rules 15c3–
3 and 15c3–3a).
94 See 17 CFR 240.15c3–3(p); 17 CFR 240.15c3–
3b.
95 See 17 CFR 240.18a–4; 17 CFR 240.18a–4a.
OTC derivatives dealers are limited purpose brokerdealers that are authorized to trade in OTC
derivatives (including a broader range of derivatives
than security-based swaps) and to use models to
calculate net capital. See 17 CFR 240.3b–12
(defining the term ‘‘OTC derivatives dealer’’); OTC
Derivatives Dealers, Exchange Act Release No.
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998).
OTC derivatives dealers are not members of SIPC.
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existing segregation rules for securitybased swap customers to require a daily
(rather than weekly) computation and
deposit.96 However, the Commission
seeks comment on these matters below.
The proposed amendments do not
include such daily requirements
because almost all carrying brokerdealers—including those also registered
as SBSDs—that have credits related to
the security-based swap activities of
their security-based swap customers
account for these credits in their
customer reserve computation and in
their customer reserve bank account.97
Therefore, the proposed amendments to
the customer reserve requirements of
Rule 15c3–3 discussed above would
apply to the security-based swap credits
computed by these broker-dealers.98
These carrying broker-dealers would not
include any debit items related to
security-based swap activities of their
security-based swap customers in their
customer reserve computation.99
Consequently, amending Rule 15c3–3 to
require a daily security-based swap
customer reserve computation for
broker-dealers, including those also
registered as SBSDs, 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. This
would include the daily customer
reserve computations of those carrying
broker-dealers that exceed the proposed
$250 Million Threshold.
In addition, the SBSDs registered with
the Commission that are not dually
registered as broker-dealers (other than
as OTC derivatives dealers) operate
pursuant to an exemption from the
Commission’s security-based swap
segregation rule.100 Under this
exemption, they are not required to
96 The Commission proposed a daily computation
requirement for security-based swap customers. See
SBS Segregation Adopting Release, 84 FR at 43940.
In response to comment, the Commission adopted
a weekly security-based swap customer reserve
requirement in light of the increased operational
burdens for broker-dealers and SBSDs as compared
to a weekly computation. Id.
97 This is based on FOCUS Report data for
calendar year 2022. 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 SecurityBased Swap Activities of Broker-Dealers and
Security-Based Swap Dealers (Oct. 8, 2021),
available at https://www.sec.gov/tm/faqs-financialresponsibility-req-applied-sbs (‘‘SBS FAQ 1’’).
Based on FOCUS Report data for calendar year
2022, only one broker-dealer currently performs a
separate security-based swap customer reserve
computation.
98 See section II.A.1. of this release (discussing
the proposed amendments).
99 See SBS FAQ 1 for staff views.
100 See 17 CFR 240.18a–4(f).
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45847
perform a security-based swap customer
reserve computation or have a securitybased swap customer reserve account.
In addition, these SBSDs are not
members of SIPC.
B. Request for Comment
The Commission generally requests
comments on whether the securitybased swap customer reserve
computation and deposit requirements
should be daily (rather than weekly). In
addition, the Commission requests
comments on the following specific
issues, with accompanying data and
analysis:
16. Should Rule 15c3–3 be modified
to require broker-dealers—including
broker-dealers (other than OTC
derivatives dealers) registered as
SBSDs—to perform daily security-based
swap customer reserve computations in
addition to daily customer and PAB
reserve computations? If so, explain
why. If not, explain why not.
17. Should the Commission amend
Exchange Act Rules 18a–4 and 18a–4a
to require SBSDs that are not registered
as broker-dealers (other than as OTC
derivatives dealers) to perform daily
security-based swap customer reserve
computations? If so, explain why. If not,
explain why not.
IV. Economic Analysis
A. Introduction
The Commission is mindful of the
economic effects, including the benefits
and costs, of the proposed amendments.
Section 3(f) of the Exchange Act
provides that when engaging in
rulemaking that requires the
Commission to consider or determine
whether an action is necessary or
appropriate in the public interest, to
also consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition, and capital formation.101
Section 23(a)(2) of the Exchange Act
also requires the Commission to
consider the effect that the rules and
rule amendments would have on
competition, and it prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the Exchange Act.102 The
analysis below addresses the likely
economic effects of the proposed
amendments, including the anticipated
benefits and costs of the amendments
and their likely effects on efficiency,
competition, and capital formation. The
Commission also discusses the potential
101 See
102 See
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economic effects of certain alternatives
to the approaches taken in this proposal.
As part of their business, carrying
broker-dealers regularly receive cash
related to customers’ and PAB account
holders’ securities transactions, such as
cash realized from sales of securities.
While it is common that customers’ and
PAB account holders’ cash is quickly reinvested or swept out to a bank account
or money market fund by the customer
or PAB account holder, it is also
common for this cash to remain
undeployed for or on behalf of
customers and PAB account holders for
several days or longer prior to the next
required customer and PAB reserve
computations and deposits into the
customer and PAB reserve bank
accounts.103
Currently, the required balances in
customer and PAB reserve bank
accounts (net cash owed to customers or
PAB account holders) are required to be
calculated weekly, and the resulting
amount must be held in the customer
and PAB reserve bank accounts until the
date of next required deposit.104
However, the value of the net cash owed
to customers or PAB account holders
may change daily due to customers’ and
PAB account holders’ transactions and
re-deployment of undeployed funds. On
a weekly basis, this could result in a
large intra-week mismatch between the
customer or PAB reserve bank account
balances and actual net cash owed to
customers or PAB account holders. This
intra-week mismatch introduces several
potential risks that are currently not
internalized by carrying broker-dealers.
First, the mismatch between the
calculated and the actual amounts of net
cash owed to customers and PAB
account holders introduces a risk to
other SIPC members. More specifically,
if a liquidation of a carrying brokerdealer with a mismatch of cash in its
customer and PAB reserve bank
accounts is carried out under SIPA, the
SIPC Fund balance would be used if
there are not enough assets in the
broker-dealer’s estate to cover the
difference between the net cash owed to
customers and the amount in the reserve
bank account,105 which may trigger a
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103 See
section I.C. of this release (discussing the
risk of a mismatch of funds owed and funds
reserved under Rule 15c3–3).
104 See section I.B.1. and 2. of this release
(discussing customer protection requirements of
Rule 15c3–3 for customers and PAB account
holders).
105 See section I.B.3. of this release (discussing
broker-dealer liquidations and SIPA, including the
funding and balance of the SIPC Fund). For an
example of a customer reserve bank account
mismatch, one carrying broker-dealer had a deficit
in its customer reserve bank account equal to $5
billion, yet the level of the SIPC Fund at the time
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subsequent increase in contributions
from other SIPC members. This risk may
be exacerbated for carrying brokerdealers experiencing large aggregate
intra-week mismatches. As a result, the
SIPC Fund would be at a higher risk of
depletion. For example, as discussed in
section IV.B.2. below, mismatches are
common among broker-dealers of all
sizes (as measured by average total
credits). The largest carrying brokerdealers with average total credits of at
least $500 billion had mismatches of
between 10 and 18 percent during
2022.106
Second, this mismatch introduces a
risk to customers and PAB account
holders of carrying broker-dealers. To
the extent that there is mismatch of
funds in the customer or PAB reserve
bank account, a failure of a carrying
broker-dealer would prevent its
customers or PAB account holders from
promptly receiving the whole amount of
cash owed to them. In this scenario, the
funds 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
funds back until the broker-dealer
liquidation process is carried out under
SIPA, which may take a significant
amount of time. In addition, customers
and PAB account holders may not
receive their funds in full if the
liquidation proceedings do not result in
a full recovery of funds owed to
customers and PAB account holders.
This risk may be exacerbated for
potential failures of carrying brokerdealers with large amounts of customer
or PAB reserve bank account balances,
such as when these carrying brokerdealers experience large aggregate intraweek mismatches between the reserve
bank account balances and actual net
cash owed to customers or PAB account
holders. Under perfect information,
investors would choose their carrying
broker-dealer in part based on the risk
of failure and would continue to
monitor the carrying broker-dealer for
risk of failure. However, monitoring
was at $2 billion. See Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Merrill Lynch
Professional Clearing Corp., Order Instituting
Administrative and Cease-and-Desist Proceedings,
Pursuant to Sections 15(b) and 21C of the Securities
Exchange Act of 1934, Making Findings, and
Imposing Remedial Sanctions and a Cease-andDesist Order, Exchange Act Rel. No. 78141 (June 23,
2016).
106 Based on FOCUS Report data for 2022. The
mismatch is calculated as the amount deposited
(FOCUS Report Line 4520) relative to the reserve
account balance (Line 4530). These data are
discussed in detail in section IV.B.2 of this release,
see Table 5 in that section and related discussion.
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costs and other frictions may prevent
this.
The proposed daily customer and
PAB reserve computations for carrying
broker-dealers with substantial amounts
of total credits is aimed to address these
risks and is expected to benefit
customers, PAB account holders, and
other stakeholders of the affected
carrying broker-dealers by more
dynamically matching the net cash
owed to customers or PAB account
holders and the customer and PAB
reserve bank account balances. More
specifically, the daily customer and
PAB reserve computations would
safeguard customers and PAB account
holders of the affected carrying brokerdealers by lessening the potential for
large mismatches to build over time,
and thereby increasing the likelihood
that they are made whole even if a
carrying broker-dealer fails. Daily
computations would also decrease the
risk that other stakeholders, such as
contributors to the SIPC Fund, would
need to provide additional resources
(e.g., in the form of increased
assessments) to address a failure of a
carrying broker-dealer.
The proposed amendments may result
in increased compliance costs for the
affected carrying broker-dealers. To the
extent that each customer or PAB
reserve computation takes a significant
amount of time or involves manual
processes, affected carrying brokerdealers would experience a one-time set
up cost related to switching to a daily
computation, as well as an increase in
ongoing costs related to more frequent
computations. These costs, like the
aforementioned benefits, may ultimately
be passed through to customers and
PAB account holders of the affected
carrying broker-dealers.
Many of the benefits and costs
discussed below are impracticable to
quantify. For example, the Commission
lacks data that would help it predict
how enhanced customer protection
related to daily customer and PAB
reserve computations would affect
customer and PAB account holders’
activities in the accounts maintained by
the affected carrying broker-dealers and
whether customers and PAB account
holders of non-affected carrying brokerdealers would shift their capital to the
affected carrying broker-dealers due to
such increased protections; data that
would help the Commission estimate
how carrying broker-dealers near the
proposed $250 Million Threshold may
adjust their business activities as a
result of the proposed changes; and data
on the complexity of customers’ and
PAB account holders’ activities for
different carrying broker-dealers that
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would help the Commission estimate
the potential costs for various groups of
the affected carrying broker-dealers.
While the Commission has attempted to
quantify economic effects where
possible, much of the discussion of
economic effects is qualitative in nature.
The Commission seeks comment on all
aspects of the economic analysis,
especially any data or information that
would enable a quantification of the
proposal’s economic effects.
B. Baseline
1. Regulatory Baseline
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a. Rule 15c3–3
Carrying broker-dealers are brokerdealers that maintain custody of
customer securities and cash. Rule
15c3–3, known as the broker-dealer
customer protection rule, is designed to
give specific protection to customer
funds and securities. For example, a
broker-dealer is ‘‘virtually’’ precluded
from using customer funds to buy
securities for its own account.107
The current rule specifies that a
carrying broker-dealer must undertake
two primary steps to safeguard these
customer assets. First, carrying brokerdealers are required to maintain
physical possession or control over
customers’ fully paid and excess margin
securities.108 Second, a carrying brokerdealer must maintain a reserve of funds
and/or qualified securities in an account
at a bank that is at least equal in value
to the net cash owed to customers. The
account must be a customer reserve
bank account. The amount of net cash
owed to customers is computed weekly
as of the close of the last business day
of the week pursuant to the customer
reserve computation.109 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.110 A carrying
broker-dealer also is required to make
and maintain a record of each
computation.111
107 See section I.B.1. of this release (describing the
purposes of Rule 15c3–3).
108 See section I.B.1. of this release (describing
possession and control requirements for customers’
securities).
109 Some carrying broker-dealers choose to
perform a daily computation. See 17 CFR 240.15c3–
3(e)(3)(iv). Further, the rule permits carrying brokerdealers in certain limited circumstances to perform
a monthly computation. See 17 CFR 240.15c3–
3(e)(3)(i). See also section I.B.1. of this release
(describing the customer reserve bank account and
customer reserve computation).
110 17 CFR 240.15c3–3(e). See also section I.B.1.
of this release (describing the customer reserve bank
account and customer reserve computation).
111 See 17 CFR 240.15c3–3(e)(3)(v). Each record
must be preserved in accordance with Rule 17a–4.
Id.
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Carrying broker-dealers also may
carry accounts that hold proprietary
securities and cash of other brokerdealers, known as PAB accounts.112
Broker-dealers are not within the
definition of ‘‘customer’’ for purposes 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. As discussed in
more detail in section I.B.3. of this
release, broker-dealers—as customers
under SIPA—have the right to share
equally with other customers in the
customer property in a SIPA liquidation
in the event that there is a shortfall in
the amount the broker-dealer owes its
customers. Because broker-dealers are
entitled to a pro rata share of customer
property,113 Rules 15c3–3 and 15c3–3a
require carrying broker-dealers to: (1)
perform a PAB reserve computation in
addition to the customer reserve
computation; 114 (2) establish and fund
their PAB reserve bank account; and (3)
obtain and maintain physical possession
or control of non-margin securities
carried for a PAB account holder.115
b. SIPA and the SIPC Fund
As described in section I.B.3. of this
release, SIPA established SIPC and
directed SIPC to establish the SIPC
Fund.116 At the end of 2022, SIPC
reported 3,396 members.117 The SIPC
Fund totaled approximately $4.05
billion as of December 31, 2022, and
currently the objective is to build it to
a level of $5 billion. To date, SIPC has
carried out 330 liquidations since its
inception with approximately $142
billion in assets distributed to
customers.118 Of that, about $141.2
billion came from debtors’ estates (i.e.,
SIPC broker-dealer members’ estates),
while $917 million came from the SIPC
Fund.119
112 See section I.B.2. of this release (describing
Rule 15c3–3 and PAB accounts).
113 See section I.B.3. of this release (describing
broker-dealer liquidations and SIPA).
114 See section I.B.1. of this release (describing
Rule 15c3–3 and customer accounts).
115 See section I.B.2. of this release (describing
Rule 15c3–3 and PAB accounts).
116 See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
117 See 2022 SIPC Annual Report, Table 2, at 10.
118 As of the end of 2022. See section I.B.3. of this
release, describing broker-dealer liquidations and
SIPA. The volume of proceedings was highest in the
1970s (15 per year), while between 1980 and 2003
the number averaged about seven per year. Since
2003 the average has been one per year (with the
highest number, five, occurring in 2008, while there
were 10 years with none). See 2022 SIPC Annual
Report, Figure 1, at 8.
119 See 2022 SIPC Annual Report at 8–9, for the
statistics in this paragraph. SIPC refers to
distributions to customers as ‘‘advances,’’ though
the 2022 SIPC Annual Report does not detail the
timing of those advances in the 330 proceedings.
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45849
c. Reserve Account Requirement for
Security-Based Swaps
In 2019, the Commission adopted
customer segregation requirements for
broker-dealers and SBSDs with respect
to customer money, securities, and
property related to security-based
swaps.120 These requirements were
based in part on the requirements of
Rules 15c3–3 and 15c3–3a discussed
above.121 Under these requirements,
broker-dealers (including broker-dealers
that are also SBSDs) are required to
perform a separate weekly securitybased swap customer reserve
computation and have a separate
security-based swap customer reserve
account that must hold the net amount
of cash owed to security-based swap
customers.122
2. Affected Broker-Dealers
Table 2 presents the universe of
broker-dealers by presence of carrying
activities.123 As of December 2022, 156
broker-dealers identified in Line 40 of
the FOCUS Report that they carry their
own customer accounts. Among these,
65 reported having only customer
credits, 66 reported having both
customer and PAB credits, none
reported having only PAB credits,124
and 9 broker-dealers reported having no
customer credits or debits. Further, 16
broker-dealers reported having
exemptions from the requirements of
Rule 15c3–3, including performing a
customer reserve computation.125 In
120 See SBS Segregation Adopting Release. See
also section III. of this release (discussing reserve
account requirements for security-based swaps).
121 Id. See also sections I.B.1. and I.B.2. of this
release (discussing the requirements of Rules 15c3–
3 and 15c3–3a).
122 See 17 CFR 240.15c3–3(p); 17 CFR 240.15c3–
3b. See also section III. of this release (discussing
reserve account requirements for security-based
swaps, and SBS FAQ 1 for staff views). SBSDs that
are not broker-dealers (other than OTC derivatives
dealers) are subject to the segregation requirements
of Exchange Act Rules 18a–4 and 18a–4a.
123 Based on monthly FOCUS Report data for the
reporting year 2022. The Commission assumes that
broker-dealers that did not file FOCUS Reports for
the last month of 2022 are no longer in business.
124 PAB account holders are not considered
customers under 17 CFR 240.15c3–3(a)(1). See
section I.B.2. of this release (describing Rule 15c3–
3 and proprietary accounts of broker-dealers).
125 There are three exemptions to Rule 15c3–3,
each related to the procedure a broker-dealer
follows when they receive customer funds and
securities. The first exemption is for broker-dealers
that partake in limited mutual fund and insurancerelated business. The exemption allows such firms
to briefly handle customer funds, but not maintain
indefinite custody of those funds or securities. The
second exemption applies to broker-dealers that
clear their transactions on what is known as a
‘‘receive versus payment/delivery versus payment
(RVP/DVP) basis.’’ In an RVP/DVP settlement, a
broker-dealer executes simultaneous exchanges of
an equal value of funds for securities. As such, the
E:\FR\FM\18JYP1.SGM
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
addition, 31 broker-dealers that did not
identify themselves as those that carry
their own customer accounts in Line 40
of the FOCUS Report reported customer
and/or PAB credits in their customer or
PAB reserve computations. Among
these, four broker-dealers had both
customer and PAB credits, 26 brokerdealers had customer credits only, and
one broker-dealer had PAB account
credits only.
When the Commission computes
average total credits using data for
January 2022 through December 2022,
the Commission estimates that there are
187 broker-dealers (‘‘carrying brokerdealers’’) that currently fall within the
scope of the Rule 15c3–3 (though of this
group, 25 carrying broker-dealers
reported zero customer or PAB credits
in 2022). In aggregate, these carrying
broker-dealers hold approximately 87
percent of all broker-dealer assets,126
and report approximately $1.2 trillion in
total credits and approximately $0.92
trillion in average monthly total debits,
as of December 2022.127
TABLE 1—BROKER-DEALERS BY CARRYING ACTIVITY, 2022 a
Broker-dealer type
Number
Total credits, $B
Total
assets,
$B
Total debits, $B
Monthly
average
Year-end
Monthly
average
Year-end
Carrying its own customer accounts: ..............................
—with positive customer and PAB credits ...............
—with positive customer credits only .......................
—with zero reported credits .....................................
—with reporting exemptions .....................................
Not carrying its own customer accounts: ........................
—with positive customer and PAB credits ...............
—with positive customer credits only .......................
—with positive PAB credits only ...............................
Without any carrying activities .........................................
156
66
65
9
16
31
4
26
1
3,411
4,487.7
3,982.3
446.8
54.5
4.1
58.0
8.0
49.7
0.4
694.0
1,306.9
1,261.2
45.7
0
....................
22.6
0.3
22.3
0.01
....................
1,177.0
1,138.5
38.5
0
....................
20.5
0.1
20.4
0.01
....................
1,024.3
982.8
41.5
0
....................
4.2
0.3
3.8
0.02
....................
913.6
879.4
34.3
0
....................
3.8
0.1
3.7
0.01
....................
Total ...................................................................
3,598
5,239.7
1,329.5
1,197.5
1,028.5
917.4
a Data are for calendar year 2022. The Commission uses monthly FOCUS Reports to calculate average monthly total credits and total debits.
For each broker-dealer, Total Credits are calculated as the sum of the average monthly amount of customer credits reported on Line 4430 and
the average monthly amount of PAB credits reported on Line 2170. Similarly, for each broker-dealer, Total Debits are calculated as the sum of
the average monthly amount of customer debits reported on Line 4472 and the average monthly amount of PAB debits reported on Line 2230.
Table 3 displays the broker-dealers
that reported positive customer or PAB
credits in 2022 into groups based on the
size of their average monthly total
customer and PAB credits (averaged
over January 2022 to December 2022).128
TABLE 2—CARRYING BROKER-DEALERS BY SIZE OF AVERAGE TOTAL CREDITS, 2022
Number
Total customer credits,
$MM
Number
Total PAB credits,
$MM
Mean
Median
Number
Mean
Total credits,
$MM
Median
Mean
Median
>$0–100MM .............
$100–250MM ...........
$250–500MM ...........
$500MM–1B .............
$1–5B .......................
$5–10B .....................
≥$10B .......................
81
18
8
9
18
7
21
127.1
101
148.1
206.6
352.5
189.7
3362.1
81
18
8
9
18
7
21
14.8
133.3
374.7
593.8
2056.7
5779.7
51312.0
2.1
120.3
394.9
566.5
1868.1
5352.5
23941.5
18
12
3
7
16
7
19
0.4
4.3
8.6
98.0
127.5
820.0
7307.7
0
0
0
29.6
2.9
62.3
84.5
15.3
137.6
383.3
691.8
2184.2
6599.6
58619.8
2.4
128.6
401.1
667.6
1871.4
5892.1
29261.2
Total a ................
162
4,487.1
162
7,203.5
84.7
82
1,003.5
0.0
8,207.0
95.1
a Table
ddrumheller on DSK120RN23PROD with PROPOSALS1
Total
assets
($B)
excludes carrying broker-dealers with zero reported credits in 2022.
The proposed daily computation
would apply only to carrying brokerdealers whose average total credits are
above the proposed $250 Million
Threshold. Therefore, the Commission
estimates that, based on data for January
2022 through December 2022, the scope
of affected entities was 63 carrying
broker-dealers, which held 86.4 percent
of aggregate total credits of all carrying
broker-dealers.
The number of affected carrying
broker-dealers may vary month to
month since a 12-month rolling average
is used for the proposed $250 Million
Threshold. To provide information on
how the number of entities may thus
vary over time, Figure 1 displays the
number of affected broker-dealers for a
sequence of 12-month rolling averages
broker-dealer does not end up holding any residual
customer funds or securities. The third exemption
is also available to broker-dealers that temporarily
handle customer funds. This broker-dealer, called
an ‘‘introducing broker,’’ establishes accounts in the
name of its customers at another broker-dealer, a
‘‘clearing broker.’’ The clearing broker then
maintains custody of those customers’ cash and
securities in those accounts on a fully disclosed
basis. See 17 CFR 240.15c3–3(k).
126 Total assets are reported on Line 940 of the
FOCUS Report.
127 The Commission uses monthly FOCUS
Reports to calculate total credits and total debits.
For each broker-dealer, Total Credits are calculated
as the sum of customer credits reported on Line
4430 and the PAB credits reported on Line 2170.
Similarly, for each broker-dealer, Total Debits are
calculated as the sum of the customer debits
reported on Line 4472 and the PAB debits reported
on Line 2230.
128 The grouping is based on the average monthly
amount of customer credits reported on Line 4430
and the average monthly amount of PAB credits
reported on Line 2170.
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
beginning with January 2022 and
extending through May 2023.129
threshold in each month, and from one
to four additional broker-dealers met the
threshold in any given month. In total,
over this period, 63 different carrying
broker dealers would have been
affected.130
With respect to the frequency of
computation, based on the January 2022
As shown in Figure 1, the number of
affected carrying broker-dealers varied
monthly from 60 to 63 over the period
from January 2022 through May 2023.
There was little variation, however, in
the identity of the affected carrying
broker-dealers. The same fifty-nine
carrying broker-dealers met the
to December 2022 period (12-month
period), Table 4 displays the number of
broker-dealers performing their
computations daily, weekly, and
monthly in each size category for
average total credits.131
TABLE 3—RESERVE FORMULA COMPUTATION FREQUENCY, 2022
Customer reserve formula
Number
ddrumheller on DSK120RN23PROD with PROPOSALS1
PAB reserve formula
Number
Daily
Weekly
Monthy
Number
Daily
Weekly
Monthly
>$0–100MM ...............
$100–250MM .............
$250–500MM .............
$500MM–1B ...............
$1–5B .........................
$5–10B .......................
≥10B ...........................
81
18
8
9
18
7
21
81
18
8
9
18
7
21
1
0
0
0
1
0
10
67
18
8
9
17
7
11
12
0
0
0
0
0
0
18
12
3
7
16
7
19
0
0
0
0
1
0
9
17
12
3
7
15
7
10
1
0
0
0
0
0
0
Total ....................
162
162
12
137
12
82
10
71
1
129 Figure created from monthly FOCUS Reports,
from January 2022 through May 2023. The first 12month computation period is January 2022 to
December 2022, the second period is February 2022
through January 2023, and so on. The total number
of broker-dealers that reported positive total credits
in each of the six rolling periods shown in Figure
1 equaled 162, 162, 161, 161, 162 and 162,
respectively.
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130 Only in one case did a carrying broker-dealer
within the top-60 fall below the $250 Million
Threshold from one period to the next (leading to
the decline from 63 to 62 carrying broker-dealers).
131 Data from monthly FOCUS Reports filed for
the 2022 calendar year. A small number of brokerdealers did not identify any customer or PAB
reserve computation frequency (for example, for
broker-dealers reporting positive credits in
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Fmt 4702
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customer accounts, one failed to report reporting
frequency in their FOCUS Report). Therefore, the
total number of carrying broker-dealers exceeds the
sum of the number of broker-dealers who identified
a daily, weekly, or monthly computation frequency.
Of the carrying broker-dealers that reported a filing
frequency in 2022 calendar year, the reported
frequency (daily, weekly, or monthly) remained the
same in each reported month.
E:\FR\FM\18JYP1.SGM
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Average total credits
45852
Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
As shown in Table 4, out of 162
broker-dealers that reported the
frequency of their customer reserve
formula computations, there were 12
carrying broker-dealers that performed
the customer reserve computation daily,
among which 10 also performed the
PAB reserve computation daily and two
which do not report carrying PAB
accounts. Among carrying brokerdealers performing the customer reserve
computation daily, 11 had total credits
above the proposed $250 Million
Threshold. These 11 carrying brokerdealers accounted for 64 percent of the
total amount of average total credits
among all carrying-broker dealers with
positive customer or PAB credits
reported in 2022.132 All the carrying
broker-dealers performing the PAB
reserve computation daily had total
credits above the proposed $250 Million
Threshold.133
Based on the January 2022 to
December 2022 period, there were 52
carrying broker-dealers with average
total credits equal to $250 million or
above performing the customer reserve
computation weekly and there were no
carrying broker-dealers with average
total credits equal to $250 million or
above performing the customer reserve
computation monthly. Among the 52
carrying broker-dealers performing
weekly customer reserve computation,
there were 42 carrying broker-dealers
that performed the PAB reserve
computation weekly and there were no
carrying broker-dealers with average
total credits equal to $250 million or
above that performed the PAB reserve
computation monthly. Based on the data
for 2022, the Commission estimates that
52 carrying broker-dealers would be
affected by the proposal.
Table 5 below shows the distribution
of deposits required to be put into the
customer and PAB reserve bank
accounts or permitted withdrawals after
the reserve computation performed at
the end of the reporting period relative
to the initial reserve bank account
balance.134 These metrics provide a
picture of the ‘‘mismatch’’ that occurs
with respect to customer and PAB
accounts. The column ‘‘Average
Mismatch’’ is calculated as the average
of deposits (averaged over 2022) for
each broker-dealer relative to the
average balance in the reserve account
(customer or PAB account).
With respect to customer reserve
accounts, shown in Panel A, the largest
average mismatches occurred for brokerdealers over the $250 Million
Threshold, with the largest occurring for
carrying broker-dealers within the $5 to
$10 billion range. For the case of the
maximum mismatch during the year,
there appears to be less of a correlation
with carrying broker-dealer size.135 For
PAB reserve accounts, shown in Panel
B, the largest average mismatch and the
maximum mismatch occurred for the
groups of carrying broker-dealers over
$250 million in average total credits (it
is also the case that the total amount of
PAB accounts are concentrated among
those carrying broker-dealers).
Panel C and D of Table 5 display the
average mismatch and maximum
mismatch metrics comparing the large
carrying broker-dealers (over $1 billion
in average total credits) that currently
compute their reserve accounts daily
versus those that do so weekly.136 With
respect to customer reserve accounts
(Panel C), carrying broker-dealers that
compute daily have larger average
reserve balances and deposits, and
lower average and maximum
mismatches than those that compute
weekly.137
For PAB reserve accounts (Panel D),
the average or maximum mismatch do
not appear as correlated with daily
versus weekly filing.138
TABLE 4—BROKER-DEALER DEPOSITS AND WITHDRAWALS AS A SHARE OF RESERVE ACCOUNT BALANCE, 2022
Broker-dealer group
Average
reserve
balance MM
Number
Average
deposit MM
Average
withdrawal MM
Average
mismatch %
Maximum
mismatch %
Panel A: Customer Reserve Accounts
>$0–100MM .........................................
$100–250MM .......................................
$250–500MM .......................................
$500MM–1B .........................................
$1–5B ...................................................
$5–10B .................................................
≥10B .....................................................
81
18
8
9
18
7
21
$9.5
52.7
180.8
124.2
732
1,147.2
14,150.6
$0.7
1.9
9.9
7.7
35.8
234
542.3
¥$4.1
¥16.2
¥16.0
¥32.2
¥61.4
¥122.4
¥841.6
6.1
5.7
6.1
18.2
5.4
31.9
7.9
25.2
27.1
20.9
35.9
22.5
57.4
25.3
¥0.3
¥2.9
¥5.3
¥27.3
¥20.4
¥108.6
¥279.9
2.9
2.3
5.2
11.4
7.7
10.4
7.6
18.7
10.4
24.7
41.1
44
39
29.4
Panel B: PAB Reserve Accounts
ddrumheller on DSK120RN23PROD with PROPOSALS1
>$0–100 MM ........................................
$100–250 MM ......................................
$250–500 MM ......................................
$500MM–1 B ........................................
$1–5 B ..................................................
$5–10 B ................................................
≥10 B ....................................................
18
12
3
7
16
7
19
132 Calculated from monthly FOCUS Reports for
2022.
133 The broker-dealers identified as filing daily in
the January 2022 to December 2022 sample were the
same broker-dealers identified in the April 2022 to
May 2023 sample (for both customer and PAB
accounts).
134 Calculated from monthly FOCUS Reports for
2022. The Commission isolated deposits (equal to
or greater than zero) from any month (Line 4520),
relative to the reserve account balance, (Line 4530).
For PAB reserve bank accounts, deposits and
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1.2
5.3
19.9
106.5
27.9
184.5
749.1
0.03
0.3
1.3
4.5
5.5
56.2
127.4
amount in reserve account are FOCUS Lines 2290
and 2300, respectively. Note, the Commission also
recalculated by defining the deposit category as
only values greater than zero, but the average
mismatch did not change very much for each
category, nor did the pattern seen in the table.
135 For the maximum mismatch, the Commission
isolated the largest monthly deposit amount in 2022
(Line 4520), relative to the reserve account balance
for that month (Line 4530). The same was done for
PAB reserve accounts (FOCUS Lines 2290 and
2300, respectively).
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136 As noted above, the number and identity of
the daily filers are consistent from December 2022
through May 2023. See supra note 133.
137 Panel C omits the one carrying broker-dealer
below the $250 Million Threshold that computed
their customer reserve account daily in 2022.
138 The patterns and inference drawn from Table
5 are similar if constructed with the rolling sample
period from June 2022 to May 2023. For example,
for the daily filers shown in Panel C, the average
mismatch is 4.9 percent, while for weekly filers, the
average mismatch is 14.6 percent.
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
TABLE 4—BROKER-DEALER DEPOSITS AND WITHDRAWALS AS A SHARE OF RESERVE ACCOUNT BALANCE, 2022—
Continued
Broker-dealer group
Average
reserve
balance MM
Number
Average
deposit MM
Average
withdrawal MM
Average
mismatch %
Maximum
mismatch %
Panel C: Customer Reserve Accounts
All (weekly and daily):
≥1B ................................................
Daily:
≥1B ................................................
Weekly:
≥1B ................................................
46
6,921.1
297.2
¥441.1
10.7
29.2
11
13,324.2
482.3
¥1,227.8
5.2
22.1
35
4,908.7
239
¥178.9
12.4
31.5
Panel D: PAB Reserve Accounts
All (weekly and daily):
≥1B ................................................
Daily:
≥1B ................................................
Weekly:
≥1B ................................................
ddrumheller on DSK120RN23PROD with PROPOSALS1
C. Benefits and Costs of the Proposed
Amendments
Customers and PAB account holders
of the affected carrying broker-dealers
are expected to benefit from the
proposed daily customer and PAB
reserve computations. As reflected in
the discussion in section I.C of this
release noting the large amounts of
deposits carrying broker-dealers may
receive, and as evidenced from the
information in Table 5, a weekly
customer and PAB reserve computation
can result in a carrying broker-dealer
owing a net amount of cash to
customers or PAB account holders for a
number of days that is greater than the
current amounts deposited into the
customer and PAB reserve bank
accounts. Hence, if a carrying brokerdealer fails before the next reserve
account computation and the reserve
bank account balances do not represent
the actual net amount of cash owed to
customers or PAB account holders,
these customers and PAB account
holders may be at risk of not recovering
their funds from the carrying brokerdealer or having it tied up in a
liquidation proceeding. Performing
daily customer and PAB reserve
computations would likely decrease this
risk.
Under the scenario where a carrying
broker-dealer does not have sufficient
funds to repay what it owes to
customers or PAB account holders, SIPC
likely would need to initiate a
liquidation of the carrying broker-dealer
under SIPA.139 Although the SIPC Fund
can be used to advance funds to
139 See section I.B.3 of this release (discussing
broker-dealer liquidations and SIPA).
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42
380.3
69.1
¥159.1
8.1
36.6
10
1,153.7
216.8
¥356.5
8.9
33.4
32
138.5
22.9
¥74.5
7.9
37.4
customers that are owed money, PAB
account holders are not entitled to such
advances; therefore, they may not
receive the funds owed to them by a
failed carrying broker-dealer as
promptly as customers of such brokerdealer may. In addition, there is a limit
on advances to customers in the amount
of $500,000 per customer (of which
$250,000 can be used to cover cash
claims). If some customers are owed
more than such limit, these customers
would have to wait along with PAB
account holders until a trustee is
appointed who would consequently
attempt to recover assets of the failed
carrying broker-dealer via asset sales or
other recovery methods. This recovery
process may, in some cases, be
lengthy.140 In an extreme case, the
recovery amounts the trustee is able to
receive may still be insufficient to make
all customers and PAB account holders
whole, which means that these
customers and PAB account holders
have to absorb the loss.
Based on these various circumstances
surrounding a failure of a carrying
broker-dealer, from the customer’s or
PAB account holder’s perspective, there
are varying degrees of risk related to a
potential failure of a carrying brokerdealer, depending on whether it has
enough funds to make all customer and
PAB account holders whole at the time
of its failure. Therefore, maintaining
levels of customer and PAB reserve
bank account balances that more closely
140 For example, it has been the case that
customers of a liquidated carrying broker-dealer
have had to wait up to six months or more to access
their assets during the liquidation period. See
Michael P. Jamroz, The Customer Protection Rule,
57 Bus. Law. 1069 (May 2002), available at https://
www.jstor.org/stable/40688076.
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represent the actual amounts of net cash
owed to customers and PAB account
holders would benefit these customers
and PAB account holders by decreasing
the risk of not completely recovering
their funds from the carrying brokerdealer or having these funds tied up in
a liquidation proceeding.141
In addition, performing daily
customer and PAB reserve computations
would benefit customers and PAB
account holders of the affected carrying
broker-dealers by acting as a
prophylactic that reduces the risk of
broker-dealers using customers’ or PAB
account holders’ funds for other
purposes that are not permissible under
Rule 15c3–3, if the part of the net cash
owed to customers or PAB account
holders is comingled with other funds
in a broker-dealer’s operating
account.142 When a carrying broker141 The Commission notes that, with daily
computing, there will still be a mismatch between
the actual net cash owed to customers and the
reserve account balance because of the deposit
timing delay, which is the morning of the second
business day after the day of calculation. Should a
carrying broker-dealer computing daily fail, and the
amount of the mismatch is lower than in the case
of a weekly computation, the customer may receive
their funds more promptly from the carrying brokerdealers’ available assets than in the case where
mismatches are larger (which may imply a longer
liquidation process), underscoring the potential
benefit from daily computing. It is also a possibility,
however, that daily computing may lead to a
situation with large mismatches. If a carrying
broker-dealer receives large customer deposits on
consecutive days, given the two-day settlement
period, any mismatch may persist over that period,
and should the carrying broker-dealer fail, the
benefits to customers of daily computation may be
reduced.
142 The Commission notes that, with respect to
each customer reserve computation required
pursuant to Rule 15c3–3, a broker-dealer must not
accept or use any of the amounts under items
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dealer experiences a large inflow of
customer cash, reducing the time
between that inflow and when the
carrying broker-dealer performs its next
customer and PAB reserve computations
and funds its reserve accounts could
reduce the risk that those funds may be
inadvertently used for other purposes
that may carry a risk to the customers
and PAB account holders. Under the
proposal, the affected carrying brokerdealers would not be able to do this,
which would reduce the risk of reserve
fund mismatches.
Other broker-dealers that are SIPC
members may also benefit from the
proposed daily computation of the
customer and PAB reserve formulas.
Specifically, if a failing carrying brokerdealer with a mismatch between the
reserve bank account balances and
actual cash owed to customers and PAB
account holders is put into SIPC
liquidation, SIPC may be required to use
the SIPC Fund to advance money to
customers from the SIPC Fund, reducing
its balance and potentially depleting the
SIPC Fund.143 Consequently, a
reduction in the SIPC Fund balance
and/or SIPC’s unrestricted net assets
may trigger increased contributions
from member broker-dealers, as
displayed in Table 1 in section I.B.3. of
this release, with more substantive
balance reductions requiring larger
increases in assessments of member
broker-dealers, which may be passed
onto investors. Therefore, the proposed
daily computation would benefit SIPC
member broker-dealers by reducing the
risk of SIPC Fund depletion and a
consequent increase in SIPC
assessments.
The proposed daily computation
would apply only to carrying brokerdealers whose average total credits
exceed the $250 Million Threshold.
Given the information from the 12month average based on the 2022
monthly FOCUS Reports as an example,
the Commission estimates that 52
broker-dealers would be required to
switch to a daily computation of the
customer reserve formula and 42 brokerdealers would be required to switch to
a daily computation of the PAB reserve
comprising total credits under the customer reserve
formula except for the specified purposes indicated
under items comprising total debits under the
formula. See paragraph (e)(2) of Rule 15c3–3. 17
CFR 240.15c3–3(e)(2).
143 The Commission notes that, while brokerdealers (which includes PAB account holders) are
customers for the purposes of SIPA, they are not
entitled to the advances from the SIPC Fund of up
to $500,000 (limited to $250,000 for cash claims)
allowed under SIPA to make up for potential
shortfalls after the pro rata distribution of customer
property. See 15 U.S.C. 78fff–3(a).
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formula.144 As shown in Table 5,
carrying broker-dealers with average
total credits above the proposed $250
Million Threshold are more likely to
experience larger mismatches and the
dollar amounts underlying those
mismatches are significantly larger.145
And as shown in Panel C of Table 5,
those carrying broker-dealers that
compute daily tend to have smaller
mismatches than those that compute
weekly. Hence, the proposal may reduce
the likelihood of mismatches,
benefitting customers and PAB account
holders of the affected carrying brokerdealers.
Further, in cases where carrying
broker-dealers with greater amounts of
total credits are more interdependent
with other carrying broker-dealers than
carrying broker-dealers with smaller
amounts of total credits, having more
large broker-dealers computing daily
may benefit financial markets overall
without imposing the costs of daily
computation onto carrying brokerdealers that do not have significant
amounts of total credits. To the extent
that carrying broker-dealers above the
threshold are more likely to have more
PAB account holders (which include
other broker-dealers) or PAB account
holders with greater amounts of cash in
their PAB accounts, the broker-dealers
above the threshold may pose greater
risk to other broker-dealers. As shown
in Table 3, among the 63 carrying
broker-dealers above the proposed $250
Million Threshold, based on data for
January 2022 through December 2022,
approximately 82.5 percent carry PAB
accounts while only approximately 26.6
percent of the unaffected broker-dealers
carry PAB accounts.
That is, should a carrying brokerdealer fail and not have sufficient funds
in its PAB reserve bank account to make
whole its PAB account holders, a
broker-dealer that is a PAB account
holder of the failed carrying brokerdealer may consequently be exposed to
financial stress, which could further
propagate to its PAB account holders,
and so on. This risk is exacerbated for
PAB account holders because they are
not entitled to advances from the SIPC
Fund. In that way, a failure of one large
carrying broker-dealer with a
mismatched PAB reserve bank account
may result in other carrying brokerdealers experiencing financial stress and
increased risk of liquidation. In so far as
a daily computation for carrying brokerdealers with total credits above the $250
Million Threshold reduces the chance
Table 3.
discussion in section IV.B.2. of this release
for more details on Table 5.
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145 See
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that a large carrying broker-dealer has
mismatched funds in its PAB reserve
bank account, the potential for stress
propagation associated with a failure of
a carrying broker-dealer could be
reduced.
Affected broker-dealers may
experience an increase in costs as a
result of the proposed daily
computation. The Commission expect
these costs to be primarily related to the
operational changes, staff increases, and
upgrades required for daily computing
and the costs related to the
recordkeeping requirements. The
Commission estimates that it takes a
carrying broker-dealer between one to
five hours per computation to prepare
the records of the computations, or an
average of 2.5 hours.146 Given the 52
carrying broker-dealers that would be
required to switch to a daily
computation of the reserve formulas
under the proposal, that implies an
increase in the aggregate annual
recordkeeping burden of approximately
$13 million.147 To the extent that
carrying broker-dealers with total
credits above the $250 Million
Threshold may experience economies of
scale and may have more sophisticated
operational systems, with experienced
and well-trained staff,148 the increase in
compliance costs may not be
substantial. In addition, the 11 carrying
broker-dealers that already perform such
computations daily (as shown in Table
4, based on data for the period for
January 2022 through December 2022)
may not experience an increase in
compliance costs.
However, to the extent that the
affected carrying broker-dealers that are
just above the threshold do not
experience the same economies of scale
as carrying broker-dealers that are well
above the threshold, they may be
disproportionately affected by the
proposed requirement and the related
costs. If these costs are significant, some
carrying broker-dealers may decide to
alter their business to fall below the
threshold and avoid the costs related to
performing the customer and PAB
reserve computations daily. If so, the
potential benefits of the proposal may
be mitigated.
146 See infra section V. of this release (discussing
PRA).
147 Id. The Commission assumed an hourly rate
of $295 per hour for a ‘‘financial reporting
manager.’’ That computes to a potential added cost
of $13,726,350 ($295 × 46,530 hours) to the affected
carrying broker-dealers.
148 See related discussion in Stavros Gadinis, The
SEC and the Financial Industry: Evidence from
Enforcement Against Broker-Dealers, 67 Bus. Law.
679 (May 2012), available at https://www.jstor.org/
stable/2324001.
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Carrying broker-dealers just below or
above the threshold may also experience
uncertainty related to being scoped into
compliance with the daily computation
requirement and may experience costs
related to this uncertainty. As displayed
in Figure 1, some carrying brokerdealers are likely to drop below the
$250 Million Threshold, and then once
again exceed the threshold in later
months. The costs related to these
fluctuations are uncertain, but are likely
to add, for such carrying broker-dealers,
to the cost estimates cited above (for
example, if additional staff is needed by
these carrying broker-dealers to monitor
their customer reserve accounts more
closely than firms well above the $250
Million Threshold).
Finally, while switching back and
forth between daily and weekly
computations may tailor the compliance
costs to the size of customer activity,
these fluctuations may also be confusing
for customers and PAB account holders
of carrying broker-dealers who decide to
switch. However, this potential cost or
concern may be trivial as many
customers may be unaware of, or
unconcerned by, the switch.
D. Effects on Efficiency, Competition,
and Capital Formation
The proposed amendments may affect
competition among carrying brokerdealers. First, to the extent that
compliance costs would be passed onto
customers and PAB account holders,
affected carrying broker-dealers that
experience greater economies of scale
may become more competitive than
other affected carrying broker-dealers.
Second, to the extent that customers of
carrying broker-dealers value daily
reserve computations more than the
weekly computations, the affected
carrying broker-dealers may become
more competitive relative to the
unaffected carrying broker-dealers.
However, the Commission does not
anticipate such an effect to be large.
Given the fact eleven carrying brokerdealers already compute daily, if such a
competitive advantage existed, and
carrying broker-dealers performing
weekly computations were losing
customers, then more carrying brokerdealers would have likely already
converted to daily computing.
The proposed amendments may
increase liquidity in the securities
markets, as they would promote
confidence in the broker-dealer industry
and result in an increase of customer
and PAB account activities. As a
consequence, market efficiency and
capital formation in the underlying
markets may increase. Under the
baseline there is a greater chance of a
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larger mismatch with weekly reserve
computations than with daily reserve
computations, suggesting a greater risk
in doing business with a carrying
broker-dealer that performs its customer
and PAB reserve computations weekly.
Also, to the extent that the mismatch
reflects an overfunding, there may also
be a greater cost to the carrying brokerdealer (and by extension its customers),
since it ties up capital that the brokerdealer could have put to more
productive use.
Therefore, should customers and PAB
account holders have a concern over
mismatch in reserve bank accounts and
potential failures affect market
participants’ willingness to expose
themselves to broker-dealers, there may
be less capital committed to this market
as otherwise. However, similar to the
point above, if customers of carrying
broker-dealers were aware and
concerned of mismatches, the
Commission might have already
observed more carrying broker-dealers
computing daily, in order to retain
customers, than is currently the case
under the baseline. Therefore, the
Commission does not anticipate any
effect on capital formation in this
market to be significant.
In addition, in so far as capital loss
could arise in times of market stress due
to an increased likelihood of carrying
broker-dealer failures, market
participants may become concerned
with the possibility of not getting their
cash promptly or not getting paid in
full, in an event of a carrying brokerdealer failure and reduce their exposure
to broker-dealers. To the extent that the
proposed daily computation
requirement alleviates this concern, the
risk of flight of capital from securities
markets may decrease during stressed
market conditions and capital inflow
during normal market conditions may
increase.
Finally, the proposed daily
computation may benefit the affected
carrying broker-dealers by increasing
their operational efficiency. For
example, in a scenario where customer
reserve or PAB reserve accounts are
over-funded, a carrying broker-dealer
that performs a weekly computation
cannot withdraw excess cash from the
customer reserve bank account until the
following reserve computation date,
even if the value of the account exceeds
the actual net cash owed to customers,
exposing this carrying broker-dealer to
operational inefficiency. A daily
computation would permit the affected
carrying broker-dealers to withdraw
these excess funds in a timely manner
and would allow them to manage their
funds and operations more effectively.
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45855
In this context, daily computation
implies that a carrying broker-dealer’s
capital commitments are more
efficiently employed.
Since the proposed requirements do
not impact the scope of information
available to investors, the Commission
does not anticipate effects on
informational efficiency to be
significant.
E. Reasonable Alternatives
1. Over-Funding of the Customer and
PAB Reserve Bank Accounts
As an alternative to daily computation
requirements, the Commission could
require an over-funding approach which
would apply to the customer and PAB
reserve bank accounts. For example,
carrying broker-dealers would perform
the required reserve computations and
deposits weekly and deposit a multiple
of this amount (e.g., 105% or 110%) into
the customer or PAB reserve bank
account. Under this alternative
approach, carrying broker-dealers would
avoid an increase in compliance costs
associated with a daily computation
requirement (hence, this alternative
would apply to carrying broker-dealers
choosing weekly funding). Insofar as the
compliance costs associated with the
proposed daily computation would be
passed onto customers and PAB account
holders of the affected carrying brokerdealers, this alternative approach may
be more beneficial for these customers
and PAB account holders because it
would not imply an operational change
and compliance costs related to the
customer and PAB reserve computation
while offering extra protection for
customers and PAB account holders.
However, under this alternative the
carrying broker-dealer would need to
fund the excess with its own cash,
which could result in funding costs,
decreased liquidity, and opportunity
costs from not being able to deploy this
cash in the firm’s business. As a result,
requiring carrying broker-dealers to
place extra cash in a customer or PAB
reserve bank account may result in an
operational efficiency decrease and
potential reduction of carrying brokerdealers’ profits, which may be passed
onto customers, PAB account holders,
and other stakeholders. In addition, this
approach may not account for the actual
net cash owed to customers and PAB
account holders, if reserve bank account
mismatches exceed the buffer that this
alternative would require.
2. A Threshold Based on a Different
Metric
As an alternative, the Commission
could set a threshold for compliance
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with a daily computation requirement
based on a different metric. For
example, the Commission could set a
threshold based on total assets of $1
billion or net capital of $50 million. A
threshold based on such metrics may be
more representative of the economies of
scale that carrying broker-dealers
experience and may better indicate a
carrying broker-dealer’s ability to
comply with enhanced requirements
without substantial increases in
compliance costs that could ultimately
be passed onto their customers.
Based on the monthly 2022 FOCUS
Reports, the Commission estimates that
under the alternative threshold of $1
billion in total assets 80 broker-dealers
would be required to perform the
customer and PAB reserve computations
daily. Of the 63 carrying broker-dealers
that are at or above the $250 Million
Threshold for average total credits, three
have total assets below $1 billion, while
20 broker-dealers below the $250
Million Threshold have total assets over
$1 billion.
With respect to a $50 million net
capital threshold, 104 broker-dealers
would be required to perform the
customer and PAB reserve computations
daily. Of broker-dealers that are below
$250 Million Threshold for average total
credits, 24 have net capital exceeding
$50 million, while of the group above
$250 Million Threshold for average total
credits, three have net capital below $50
million.
If the alternative states that the
broker-dealer has over $1 billion in total
assets, or has over $50 million net
capital threshold, 105 broker-dealers
would be required to perform the
customer and PAB reserve computations
daily.
A drawback to this alternative is that
some large broker-dealers with minimal
amounts of carrying activity would bear
the added cost of switching to a daily
computation. For example, the group of
20 carrying broker-dealers below the
$250 Million Threshold with $1 billion
in assets or more, had a combined total
of average total credits of approximately
$1.5 billion as of the end of 2022. That
amounted to only about 0.11 percent of
average total credits for all brokerdealers for that year.149
3. Daily Computation Requirement for
All Carrying Broker-Dealers
As an alternative, the Commission
could require the daily computation
requirement to apply to all carrying
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4. A Higher or Lower Threshold for
Daily Computation
As an alternative, the Commission
could have proposed a threshold higher
149 The numbers for this alternative do not change
much if the rolling average is computed using the
June 2022 to May 2023 period. See Table 7 below
in section IV.E.6 of this release for those numbers.
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broker-dealers (a ‘‘zero’’ threshold).
Under this alternative, a greater number
of carrying broker-dealers would
perform their customer and PAB reserve
computations daily, which would
benefit more customers and PAB
account holders compared to the
proposal. Specifically, under the zero
threshold, 99 more carrying brokerdealers would experience the benefits
and costs discussed in section IV.C. of
this release (compared to the 63 affected
based on the January 2022 to December
2022 period).
Further, to the degree that carrying
broker-dealers with smaller amounts of
total credits are interdependent with
other broker-dealer to the same degree
as carrying broker-dealers with larger
amounts of total credits, the zerothreshold approach may benefit all PAB
account holders equally and potentially
reducing the systemic risk to a greater
degree relative to the proposal. The
amount of credits held in the PAB
reserve bank accounts of the 52 brokerdealers (with PAB accounts) above the
$250 Million Threshold makes up
approximately 99 percent of the total
amount held in PAB reserve bank
accounts (of the 82 broker-dealers that
reported carrying PAB accounts in
2022).150
In particular, in so far as a daily
computation for all carrying brokerdealers reduces the chance that any
carrying broker-dealer has funds in its
PAB reserve bank account that are less
than the net amount of cash owed to
PAB account holders, the potential for
stress propagation associated with a
failure of a carrying broker-dealer could
be reduced.
However, this alternative would
impose compliance costs on a greater
number of carrying broker-dealers,
which could be passed onto customers
and PAB account holders. In addition,
customer protection benefits may be
outweighed by the reduction in
operational efficiency of carrying
broker-dealers with little customer and
PAB account activity that may arise
from disproportional dedication of
resources towards a de minimus
business activity. Relatedly, this
alternative may also impose significant
economic impact on small
businesses.151
150 See Table 7 below in section IV.E.6 of this
release for numbers based on the June 2022 to May
2023 period.
151 See 5 U.S.C. 601 through 612.
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or lower than $250 million in average
total credits. Under these alternatives,
fewer or more carrying broker-dealers
would be required to perform their
customer and PAB reserve computations
daily. For example, if the threshold was
set at $100 million, a total of 81 brokerdealers would be scoped into the new
requirements compared to the 63 under
the proposal. Similarly, if the threshold
was set at $1 billion, only 46 brokerdealers would be scoped into the new
requirements.152
For the case of the $100 million
threshold, with more carrying brokerdealers computing daily, there would
possibly be fewer broker-dealers having
a mismatch between the net cash owed
to the carrying broker-dealer’s
customers and the amounts deposited in
their customer or PAB reserve bank
accounts. The potential cost of this
alternative implies that more brokerdealers would incur the burden of
performing their customer and PAB
reserve computations daily. If the
threshold were set at $1 billion, fewer
carrying broker-dealers would face the
costs of a daily computation than under
the proposal. However, there would be
fewer carrying broker-dealers computing
daily, suggesting the potential for more
carrying broker-dealers having a
mismatch than under the proposal.
5. Calculation Based on the Maximum
Value Over the Past Year
The proposed $250 Million Threshold
would be the arithmetic mean of the
total credits in the customer and PAB
reserve computations reported on the
twelve most recently filed month-end
FOCUS Reports.153 As an alternative,
the Commission could have proposed a
threshold based on the maximum value
for total credits during the most recently
ended calendar year. This alternative
may more appropriately account for the
implied capacity of the carrying brokerdealer’s reserve bank accounts. For
example, if total credits related to
customers or PAB account holders’
activity fluctuate throughout a year or
based on economic cycles and such
fluctuations are predictable, the
maximum value of total credits may be
more representative of the customer
transactions’ volume. As another
example, if a carrying broker-dealer
experiences trending growth of its
152 See Table 7 below in section IV.E.6 of this
release for numbers based on the June 2022 to May
2023 period.
153 This would mean, for example, if a carrying
broker-dealer was required to file 12 FOCUS
Reports for a calendar year, the carrying brokerdealer would add up the Total Credits reported in
both the customer and PAB reserve formulas in
each of the 12 FOCUS Reports filed, and divide the
total by 12 to compute the arithmetic mean.
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customer base, the maximum value of
total credits would also be more
representative of the current size of the
customer base.
Table 6 below regroups carrying
broker-dealers based on the maximum
number reported for total credits within
a given year. Under this alternative, 74
carrying broker-dealers would be scoped
into the compliance with performing the
customer and PAB reserve computations
daily, compared to the 63 that would be
so under the proposal.
TABLE 5—THRESHOLD BASED ON MAXIMUM TOTAL CREDITS DURING 2022
Number
Total
assets
($B)
Total customer credits, $MM
Number
Mean
Median
Total PAB credits, $MM
Number
Mean
Total credits, $MM
Median
Mean
Median
>$0–100MM .............
$100–250MM ...........
$250–500MM ...........
$500MM–1B .............
$1–5B .......................
$5–10B .....................
≥10B .........................
70
18
13
8
25
6
22
78.1
42.8
142
87.6
584.8
149.8
3,402
70
18
13
8
25
6
22
15.5
161.0
354.5
705.7
2,338.1
7,070.8
55,584.5
3.4
165.9
371.6
736.8
2,057.1
6,367.5
26,096.5
16
10
4
5
21
6
20
1.2
12.3
1.9
35.2
212.5
898.8
8,197.1
................
................
................
6.7
6.9
57.3
696.4
16.6
166.6
354.9
723.6
2,513.7
7,955.5
62,990.5
4
165.9
373.3
765.2
2,058.2
7,736.7
32,340
Total a ................
162
4,487.1
162
8,295.1
171
82
1,183
0
9,326.7
180
a Table
excludes carrying broker-dealers with zero reported credits in 2022.
A benefit of this alternative is those
carrying broker-dealers with the largest
amounts of total credits would be
scoped into daily computing, where the
largest credits reported (as opposed to
the average) could be more indicative of
a potential mismatch between the net
cash owed to customers and the reserve
account balances. However, this
alternative may also create uncertainty
if any cyclical behavior of total credits
that has occurred over some historical
period, changes unexpectedly, leading
to potential for a carrying broker-dealer
oscillating between weekly and daily
computations and deposits from year to
year.
Table 7 summarizes the number of
affected broker-dealers under the
alternatives proposed thus far versus the
proposal, both for the rolling sample
period defined from January 2022 to
December 2022 and for the period
defined from June 2022 to May 2023.
TABLE 7—SUMMARY OF AFFECTED BROKER-DEALERS UNDER PROPOSAL VERSUS ALTERNATIVES
Number of
affected brokerdealers
(based on period
January 2022 to
December 2022)
Alternatives vs. proposal
Proposal .......................................................................................................................................................
Alternatives:
Alt 1 Over-Funding ...............................................................................................................................
Alt 2 $1B in Total Assets ......................................................................................................................
Alt 2 $50MM in Net Capital ..................................................................................................................
Alt 3 Daily for all ...................................................................................................................................
Alt 4 Average T.C. >$1B ......................................................................................................................
Alt 4 Average T.C. >$100MM ..............................................................................................................
Alt 5 Maximum Total Credits ................................................................................................................
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6. Daily Computation if an Average
Required Deposit Exceeds a Threshold
As an alternative to performing the
customer and PAB reserve computations
daily for carrying broker-dealers over a
threshold (defined by average total
credits), the Commission could have
proposed an approach that would
require a daily computation in the case
where the required reserve bank account
deposit as a share of the reserve bank
account balance prior to such deposit
exceeds a certain percentage threshold
(e.g., 5% or 10%).154
154 See
discussion related to Table 5 in section
IV.B.2. of this release.
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This alternative approach would
account for broker-dealer-specific trends
related to customer transactions. If the
customer base differs substantially
between carrying broker-dealers, with
customers of some broker-dealers
trading more often or doing account
activities that increase the carrying
broker-dealer’s total credits by more
compared to the customer base of other
broker-dealers, this alternative approach
would focus only on those carrying
broker-dealers that typically experience
larger reserve mismatches. However,
given the information displayed in
Table 5, there does not appear to be a
perfect correlation with broker-dealer
size (measured by average total credits),
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Number of
affected brokerdealers
(based on period
June 2022 to May
2023)
63
61
162
80
104
162
46
81
74
162
79
103
162
44
76
69
and the deposit ‘‘mismatch.’’ 155
Smaller-broker dealers have an average
mismatch more than 5 percent (based on
the January 2022 to December 2022
period), implying the possibility of an
undue burden with respect to
compliance costs. That latter could
ultimately be passed onto the carrying
broker-dealers’ customers and PAB
account holders.
155 Computed by dividing the numbers in column
four by the numbers in column three of panel A of
Table 5.
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7. Daily Computation Requirement
Based on Average Total Credits per
Number of Customer and PAB Accounts
As an alternative to performing the
customer and PAB reserve computations
daily for carrying broker-dealers over a
threshold (defined by average total
credits), the Commission could require
daily computations based on average
total credits per number of customer
accounts. While a failure of carrying
broker-dealers with smaller amounts of
total credits may not pose a significant
risk of depletion to the SIPC Fund, a
threshold based on the average total
credits may have limitations from an
individual customer or PAB account
holder prospective. This is because such
a threshold does not account for the
number of customers and PAB account
holders a carrying broker-dealer might
have and is disconnected from the percustomer protection approach that is
used by SIPC.156
For example, consider two brokerdealers, both with $150 million in total
credits which is below the $250 million.
The first broker-dealer has three
customers, each contributing $50
million in credits towards the brokerdealer’s aggregate value of total credits,
and the second broker-dealer has 100
customers each contributing $1.5
million in credits towards the brokerdealer’s aggregate value of total credits.
Recall that the maximum advance from
the SIPC Fund is $500,000 per
customer. Consider a situation where
both broker-dealers fail and their reserve
bank accounts are underfunded by more
than one percent of what is owed to
customers (i.e., the shortage is above
$1.5 million). In this situation, the
customers of the second broker-dealer
would be made whole promptly with an
advance from the SIPC Fund, but the
customers of the first broker-dealer
would not be made whole (because the
per-customer loss is above maximum
per-customer SIPC advance of $500,000)
until SIPC recovers funds from the
broker-dealer, which may take some
time.
The above example notwithstanding,
data from the FOCUS Reports for 2022
suggests the potential for this concern is
likely negligible. Table 8 displays the
amounts of average total credits per total
accounts for each size grouping of
broker-dealers. For the 162 firms that
reported positive total credits in
December 2022, the average amount of
average total credits per account (with
the number of customer accounts and
PAB accounts combined) was notably
larger for the firms above the $250
Million Threshold than for brokerdealers below the threshold. Firms
above the $250 Million Threshold had
about $19 million per customer account,
while firms below the $250 Million
Threshold had about $1 million on
average per customer account.157
TABLE 8—THRESHOLD BASED ON AVERAGE TOTAL CREDITS PER ACCOUNTS DURING 2022
Number
Total credits
$MM
Total credits
per account
$MM
Mean
Mean
Mean
>$0–100MM .....................................................................................................
$100–250MM ...................................................................................................
$250–500MM ...................................................................................................
$500MM–1B .....................................................................................................
$1–5B ...............................................................................................................
$5–10B .............................................................................................................
≥10B .................................................................................................................
81
18
8
9
18
7
21
204,081
311,261
122,261
114,678
1,542,836
6,226,305
7,700,435
15.3
137.6
383.3
691.8
2,184.2
6,599.6
58,619.8
0.7
1.9
0.1
60.3
34.3
1.9
3.0
Total ..........................................................................................................
162
1,587,598
8,207
9.8
8. Daily Computation Based on Average
Total Credits From the Most Recent
Calendar Year
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Number of
accounts
(Cust + PAB)
As an alternative to performing the
customer and PAB reserve computations
daily based on a 12-month rolling
average of total credits, the Commission
could instead require computation
based on the arithmetic mean of the sum
of total credits over the 12 months in the
most recent calendar year. For example,
whether a carrying-broker dealer
exceeded the $250 Million Threshold at
any point in 2023, would be based on
the average total credits from January
2022 through December 2022.
The potential benefit of basing the
average total credit amount on the most
156 Per 15 U.S.C. 78fff–2(c), customers of a failed
broker-dealer have the right to share pro rata with
other SIPA customers in the customer property held
by that broker-dealer. See section I.B.3. of this
release for more details.
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recent calendar year is that carrying
broker-dealers would know with
certainty if they fell above or below the
proposed $250 Million Threshold and
would be subject to daily or weekly
computing for the entirety of the next
calendar year. This potential benefit
contrasts with the possible uncertainty
that the rolling average computation
would introduce for carrying brokerdealers that are close to the proposed
$250 Million Threshold. That
uncertainly may create an added cost for
those carrying broker-dealers as they
would need to constantly monitor their
standing with respect to the $250
Million Threshold. This monitoring may
involve additional staff, or existing staff
devoting additional time to that task,
and suggests the cost of the proposal
may be marginally higher for some
carrying broker-dealers than the cost
estimates cited earlier in this release.158
Or, wishing to avoid this monitoring
cost, the carrying broker-dealer may
have to decide to switch to daily (or
weekly) once and for all, which may
also imply additional costs.
However, a potential cost of this
alternative is that, over the course of a
year, a carrying broker-dealer computing
weekly (for example) may exceed the
$250 Million Threshold. This may result
in a situation where a carrying brokerdealer with average total credits above
the $250 Million Threshold would not
157 Calculated from monthly FOCUS Reports for
2022. The Commission divided average total credits
in 2022 for each broker-dealer by the number of
total customer and PAB accounts for each brokerdealer (Lines 8080 and 8081, respectively), then
computed the average of the per customer amount
for each size category, and above and below the
$250 Million Threshold. Lines 8080 and 8081 are
reported in the December FOCUS Report each year,
hence those numbers are not yet available for the
rolling averages beyond 2022.
158 See infra section V. of this release (discussing
PRA).
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be engaging in daily computation—as
they would with a timelier and up-todate rolling average—and the risks of
weekly computing discussed in this
release would remain present for that
carrying broker-dealer.
F. Request for Comment
The Commission requests comment
on all aspects of the economic analysis
of the proposed amendments. To the
degree possible, the Commission
requests that commenters provide
supporting data and analysis with
respect to the benefits, costs, and effects
on competition, efficiency, and capital
formation of adopting the proposed
amendments or any reasonable
alternatives. In particular, the
Commission ask commenters to
consider the following questions:
18. What additional qualitative or
quantitative information should be
considered as part of the baseline for the
economic analysis of these
amendments?
19. Are the benefits and costs of
proposed amendments accurately
characterized? If not, why not? Should
any of the costs or benefits be modified?
What, if any, other costs or benefits
should be taken into account? If
possible, please offer ways of estimating
these benefits and costs. What
additional considerations can be used to
estimate the benefits and costs of the
proposed amendments?
20. Are the effects on competition,
efficiency, and capital formation arising
from the proposed amendments
accurately characterized? If not, why
not?
21. Is the statement related to carrying
broker-dealers with greater economies of
scale gaining a competitive advantage,
in the case that any increased costs of
compliance are passed onto customers
to a lesser degree, accurately
characterized? If not, why not?
22. Are the statements related to an
increase in liquidity in securities
markets, arising from a promotion of
confidence in the broker-dealer
industry, and/or more efficient
management of funds due to lower
likelihood of mismatch, accurately
characterized? If not, why not?
23. Are the statements related to
operational efficiency increasing
because of carrying broker-dealers’
potential ability to withdraw excess
funds in a timelier manner and thus,
manage their funds and operations more
effectively, accurately characterized? If
not, why not?
24. Are the economic effects of the
above alternatives accurately
characterized? If not, why not? Should
any of the costs or benefits be modified?
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What, if any, other costs or benefits
should be taken into account?
25. Are there other reasonable
alternatives to the proposed
amendments that should be considered?
What are the costs, benefits, and effects
on competition, efficiency, and capital
formation of any other alternatives?
26. Is the statement related to larger
carrying broker-dealers’ economies of
scale accurately characterized? If not,
why not? Should any of the costs or
benefits be modified? What, if any, other
costs or benefits should be taken into
account? If possible, please offer ways of
estimating these benefits and costs.
What additional considerations can be
used to estimate the benefits and costs
of the proposed amendments?
V. Paperwork Reduction Act
The proposed amendments to
paragraph (e) of Rule 15c3–3 contain
‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (‘‘PRA’’).159
The Commission is submitting the
proposed collection of information to
the Office of Management and Budget
(‘‘OMB’’) for review and approval in
accordance with the PRA and its
implementing regulations.160 For the
proposed amendments, the title of the
existing information collection is
‘‘Customer Protection—Reserves and
Custody of Securities’’ (OMB Control
No. 3235–0078), and that collection
would be revised by the changes in this
proposal, if adopted. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.161
The burden estimates contained in
this section do not include any other
possible costs or economic effects
beyond the burdens required to be
calculated for PRA purposes.
A. Summary of Collections of
Information Under the Proposed Rule
Amendments
Rule 15c3–3 requires each carrying
broker-dealer to maintain a reserve of
cash and/or qualified securities in a
customer reserve bank account that is at
least equal in value to the net cash owed
to customers.162 Carrying broker-dealers
also maintain a reserve of cash and/or
qualified securities in a PAB reserve
bank account in an amount that is at
least equal in value to the net cash owed
44 U.S.C. 3501 et seq.
44 U.S.C. 3507; 5 CFR 1320.11.
161 See 5 CFR 1320.11(l).
162 17 CFR 240.15c3–3(e). See also section I.B.1.
of this release (discussing the customer reserve
requirements of Rule 15c3–3 in more detail).
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160 See
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45859
to PAB account holders.163 In order to
determine the amount required to be
deposited in the customer reserve bank
account and the PAB reserve bank
account, Rule 15c3–3 requires carrying
broker-dealers to perform weekly
customer and PAB reserve computations
as of the close of the last business day
of each week.164 The rule also requires
carrying broker-dealers to make a record
of each such computation.165
Under the proposed amendments,
carrying broker-dealers with average
total credits equal to or greater than
$250 million would be required to
perform the customer and PAB reserve
computations daily instead of weekly,
and would also be required to make a
record of each such daily
computation.166 The proposed
amendments also provide that a
carrying broker-dealer performing daily
customer and PAB reserve computations
may elect to perform weekly
computations if its average total credits
fall below $250 million and it notifies
its designated examining authority, in
writing, of this election at least 60
calendar days prior to starting weekly
computations.167
B. Proposed Use of the Information
Rule 15c3–3 is an integral part of the
Commission’s financial responsibility
program for broker-dealers. The
requirement to document in writing the
customer and PAB reserve computations
facilitates the process by which the
Commission and the broker-dealer’s
designated examining authority
examines the broker-dealer’s
compliance with Rule 15c3–3. The
purpose of the proposed 60-day prior
written notice requirement is to provide
the designated examining authority with
prior notice that the carrying brokerdealer is switching from daily to weekly
customer and PAB reserve computations
and provide the designated examining
authority the opportunity to contact the
firm and ask how it intends to
implement the change. This would
assist the designated examining
authority in monitoring the firm.
163 17 CFR 240.15c3–3(e). See also section I.B.2.
of this release (discussing the PAB account holder
reserve requirements of Rule 15c3–3 in more
detail).
164 17 CFR 240.15c3–3(e). Rule 15c3–3 also
permits certain broker-dealers to perform their
reserve computations monthly. 17 CFR 240.15c3–
3(e)(3)(i) and (iii). Some carrying broker-dealers also
elect to perform daily customer and PAB reserve
computations. 17 CFR 240.15c3–3(e)(3)(iv).
165 17 CFR 240.15c3–3(e)(3)(v).
166 See paragraph (e)(3)(i)(B)(1) of Rule 15c3–3, as
proposed to be amended.
167 See paragraph (e)(3)(i)(B)(2) of Rule 15c3–3, as
proposed to be amended.
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C. Respondents
1. Recordkeeping Requirements
Respondents under the proposed
amendments would be carrying brokerdealers with average total credits equal
to or exceeding $250 million. The
Commission estimates there are
currently approximately 63 carrying
broker-dealers that would have average
total credits equal to or exceeding $250
million based on a review of FOCUS
Report data for the 12 months ended
December 31, 2022. Of these carrying
broker-dealers, the Commission
estimates that 11 already perform the
customer reserve computation daily. Of
the 63 carrying broker-dealers that
would have average total credits equal
to or exceeding $250 million, the
Commission estimates that 49 have total
credits relating to PAB account holders
of greater than $0, with 10 of these
carrying broker-dealers already
performing the PAB reserve
computation daily. Consequently, for
the purposes of the PRA, the
Commission estimates that there are 52
respondents for the customer reserve
computation, and 39 respondents for the
PAB reserve computation. These
respondents are currently included in
the collection of information associated
with Rule 15c3–3 related to weekly
computations for the customer and PAB
reserve computations. However, as a
result of the proposed amendments,
these respondents would need to
perform daily customer and PAB reserve
computations (rather than weekly
computations).
2. Notification Requirement
Based on a review of FOCUS Report
data for the 2022 calendar year, the
Commission preliminarily estimates
that one carrying broker-dealer per year
would provide notice to their
designated examining authority that the
carrying broker-dealer’s average total
credits has fallen below the $250
Million Threshold, and that such
carrying broker-dealer would switch
from a daily computation to a weekly
computation.
D. Total Annual Burden Estimate
ddrumheller on DSK120RN23PROD with PROPOSALS1
1. Recordkeeping Requirements
Carrying broker-dealers that would be
subject to the requirement to perform
daily customer and PAB reserve
computations under this proposal are
required to perform such computations
weekly. Therefore, the Commission
preliminarily estimates that the
proposed amendments would not
impose any new one-time burdens on
carrying broker-dealers to set up the
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process of creating the required record
of the computations. Instead, the
Commission preliminarily believes the
proposed amendments would impose
increased ongoing burdens on the
respondent carrying broker-dealers
because they would be required to
increase the frequency of the customer
and PAB reserve computations and,
therefore, produce additional records of
the computations.
Specifically, the Commission believes
that there would be an increase in the
burdens associated with the collections
of information titled ‘‘Rule 15c3–
3(e)(3)—daily computations’’ for both
the customer and PAB reserve
computations, and a corresponding
decrease in the burdens associated with
the collections of information titled
‘‘Rule 15c3–3(e)(3)—weekly
computations’’ for the customer and
PAB reserve computations as certain
carrying broker-dealers will be required
to shift from weekly to daily
computations in connection with the
proposed amendments. Based on
experience with customer and PAB
reserve computations, the Commission
preliminary estimates that it takes
between one and five hours to make a
record of each such computation, and
that the average time spent across all of
the firms is 2.5 hours.168
As a result, the Commission estimates
that the proposed amendments would
impose aggregate annual ongoing
burdens on respondent carrying brokerdealers required to perform daily
customer and PAB reserve computations
of 32,500 hours and 24,375 hours,
respectively, or a total of 56,875
hours.169 When added to the currently
approved burden hours of 7,500 hours
and 1,875 hours for the customer and
PAB reserve computations, respectively,
the proposed revised burden hour
estimates would be 40,000 hours for the
daily customer reserve computation,
and 26,250 hours for the daily PAB
reserve computation.
In addition to this increase, the
Commission preliminarily estimates
that there will be a corresponding
decrease in the collections of
information titled ‘‘Rule 15c3–3(e)(3)—
weekly computations’’ for both the
168 This is consistent with the current collection
of information for the customer and PAB reserve
computations.
169 This figure was calculated as follows: 52
respondent carrying broker-dealers that would be
required to perform daily customer reserve
computations × 2.5 hours/day × 250 business days
= 32,500 hours, plus 39 respondent carrying brokerdealers that would be required to perform daily
PAB reserve computations × 2.5 hours/day × 250
business days = 24,375 hours. Therefore, the total
estimated burden is 32,500 hours + 24,375 hours =
56,875 hours.
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customer and PAB reserve
computations. Specifically, the
Commission preliminarily estimates
that the proposed amendments would
result in a revised burden hour estimate
of 14,430 hours with respect to weekly
customer reserve computations,170 (a
decrease of 6,760 hours) 171 and 2,210
hours with respect to the weekly PAB
reserve computations 172 (a decrease of
5,070 hours).173
2. Notification Requirement
Based on its experience with other
notification requirements, the
Commission preliminarily estimates
that it would take a carrying brokerdealer 30 minutes to prepare and send
the notification regarding its election to
perform weekly customer and PAB
reserve computations to its designated
examining authority. This burden
would represent a new collection of
information. The Commission
preliminarily estimates that relatively
few carrying broker-dealers would send
the notice either because their average
total credits would be substantially
greater than $250 million or because
they would continue to perform daily
computations even if their average total
credits fell below the $250 Million
Threshold, given the liquidity benefits
of performing a daily computation.
Consequently, the Commission
preliminarily estimates that one
carrying broker-dealer per year would
send the notice for a burden of 0.5 hours
per year.174
170 This figure was calculated as follows: 163
respondents currently approved under the
information collection related to weekly customer
reserve computations titled ‘‘Rule 15c3–3(e)(3)—
weekly computations’’ minus the 52 respondent
carrying broker-dealers that would be required
under the proposed amendments to perform daily
customer reserve computations = 111 respondents
× 2.5 hours × 52 responses annually = 14,430 hours.
171 This figure was calculated as follows: 21,190
burden hours currently approved with respect to
the collection of information related to weekly
customer reserve computations minus the revised
proposed estimate of 14,430 hours resulting from
fewer respondents performing weekly computations
= 6,760 hours.
172 This figure was calculated as follows: 56
respondents currently approved under the
information collection related to weekly PAB
reserve computations titled ‘‘Rule 15c3–3(e)(3)—
weekly computations’’ minus the 39 respondent
carrying broker-dealers that would be required
under the proposed amendments to perform daily
PAB reserve computations = 17 respondents × 2.5
hours × 52 responses annually = 2,210 hours.
173 This figure was calculated as follows: 7,280
burden hours currently approved with respect to
the collection of information related to weekly PAB
reserve computations minus the revised proposed
estimate of 2,210 hours resulting from fewer
respondents performing weekly computations =
5,070 hours.
174 One response per year × 0.5 hours per
response = 0.5 hours.
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Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
3. Summary of the Proposed Burden
Revisions 175
As a result of the proposed
amendments, the burdens associated
with daily computations for customer
reserve accounts would increase by
32,500 hours and the burdens associated
with daily computations for PAB
reserve accounts would increase by
24,375 hours. This increase would be
accompanied by a decrease in burdens
associated with weekly computations
for customer and PAB reserve accounts
of 6,760 hours and 5,070 hours,
respectively, as carrying broker-dealers
with average total credits of $250
million or more shift from performing
the customer and PAB reserve
computations on a weekly to daily basis.
Additionally, a new collection of
information related to the notification
Currently
approved estimated
annual industry burden
(hours)
Name of information collection
45861
requirement for carrying broker-dealers
reverting to a weekly computation of the
customer and PAB reserve formulas will
result in an addition 0.5 burden hours
per year.
The net increase in estimated annual
burdens associated with the proposed
amendments to Rule 15c3–3 would be
45,045.5 hours. The table below
summarizes these changes.
Proposed
estimated increase/
decrease in
annual industry
burden
(hours)
Proposed revised
annual industry
burden
(hours)
Rule 15c3–3(e)(3)—daily computations for customer reserve account 1 ................................................................................................
Rule 15c3–3(e)—daily computations for PAB reserve account 2 ..........
Rule 15c3–3(e)(3)—weekly computations for customer reserve account 3 ................................................................................................
Rule 15c3–3(3)(3)—weekly computations for PAB reserve account 4 ..
Rule 15c3–3(e)(B)(1) notification ...........................................................
7,500
1,875
32,500
24,375
40,000
26,250
21,190
7,280
N/A
(6,760)
(5,070)
0.5
14,430
2,210
0.5
Total proposed change ...................................................................
........................................
45,045.5
1. In the most recently approved supporting statement for Rule 15c3–3, the title of this collection of information is ‘‘Rule 15c3–3(e)(3)—daily
computations.’’ The Commission is revising the title of this collection of information in order to clarify that it is distinct from the collection of information related to daily computations for PAB reserve accounts, which currently shares the same title.
2. In the most recently approved supporting statement for Rule 15c3–3, the title of this collection of information is ‘‘Rule 15c3–3(e)(3)—daily
computations.’’ The Commission is revising the title of this collection of information in order to clarify that it is distinct from the collection of information related to daily computations for customer reserve accounts, which currently shares the same title.
3. In the most recently approved supporting statement for Rule 15c3–3, the title of this collection of information is ‘‘Rule 15c3–3(e)(3)—weekly
computations.’’ The Commission is revising the title of this collection of information in order to clarify that it is distinct from the collection of information related to weekly computations for PAB reserve accounts, which currently shares the same title.
4. In the most recently approved supporting statement for Rule 15c3–3, the title of this collection of information is ‘‘Rule 15c3–3(e)(3)—weekly
computations.’’ The Commission is revising the title of this collection of information in order to clarify that it is distinct from the collection of information related to weekly computations for customer reserve accounts, which currently shares the same title.
E. Collections of Information Are
Mandatory
G. Retention Period for Recordkeeping
Requirements
The collections of information under
the proposed amendments to Rule
15c3–3 would be mandatory as to the
carrying broker-dealers that would be
subject to them.
The customer and PAB reserve
computations must be preserved in
accordance with the requirements of
Rule 17a–4.178 Written notifications
from carrying broker-dealers electing to
compute the customer and PAB reserve
formulas weekly after being subject to
the daily requirement would be
submitted to the carrying broker-dealer’s
designated examining authority. These
notices would constitute
communications relating to a carrying
broker-dealer’s ‘‘business as such’’ and,
therefore, will need to be retained for
three years.179
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F. Confidentiality of Response to
Collections of Information
The Commission expects to receive
confidential information in connection
with the collections of information. A
carrying broker-dealer requested by the
Commission to produce records related
to the proposed amendments under
Rule 15c3–3 could request confidential
treatment of the information.176 If a
confidential treatment request was
made, the Commission anticipates that
it would keep the information
confidential subject to applicable
law.177
175 OMB Control No. 3235–0078 for Rule 15c3–3
includes thirty separate information collections.
This summary show only those information
collections that would be revised as a result of the
proposed amendments.
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H. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
27. Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
176 See 17 CFR 200.83. Information regarding
requests for confidential treatment of information
submitted to the Commission is available on the
Commission’s website at https://www.sec.gov/foia/
howfo2.htm#privacy.
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Commission’s functions, including
whether the information shall have
practical utility;
28. Evaluate the accuracy of the
Commission’s estimates of the burdens
of the proposed collections of
information;
29. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
30. Evaluate whether there are ways
to minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology;
and
31. Evaluate whether the proposed
rules and rule amendments would have
any effects on any other collection of
information not previously identified in
this section.
Persons submitting comments on the
collection of information requirements
177 See, e.g., 15 U.S.C. 78x (governing the public
availability of information obtained by the
Commission); 5 U.S.C. 552 et seq.
178 See 17 CFR 240.15c3–3(e)(3)(v); 17 CFR
240.17a–4.
179 See 17 CFR 240.17a–4(b)(4).
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should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090, with
reference to File Number S7–11–23.
Requests for materials submitted to
OMB by the Commission with regard to
this collection of information should be
in writing, with reference to File
Number S7–11–23 and be submitted to
the Securities and Exchange
Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington,
DC 20549–2736. As OMB is required to
make a decision concerning the
collection of information between 30
and 60 days after publication, a
comment to OMB is best assured of
having its full effect if OMB receives it
within 30 days of publication.
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VI. Small Business Regulatory
Enforcement Fairness Act
Under the Small Business Regulatory
Enforcement Fairness Act of 1996,180 a
rule is ‘‘major’’ if it has resulted, or is
likely to result in: an annual effect on
the economy of $100 million or more; a
major increase in costs or prices for
consumers or individual industries; or
significant adverse effects on
competition, investment, or innovation.
The Commission requests comment on
whether the proposed rules and rule
amendments would be a ‘‘major’’ rule
for purposes of the Small Business
Regulatory Enforcement Fairness Act. In
addition, the Commission solicits
comment and empirical data on: the
potential effect on the U.S. economy on
annual basis; any potential increase in
costs or prices for consumer or
individual industries; and any potential
effect on competition, investment, or
innovation.
VII. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) requires the Commission, in
promulgating rules, to consider the
impact of those rules on small
entities.181 Section 603(a) of the
Administrative Procedure Act,182 as
amended by the RFA, generally requires
the Commission to undertake a
regulatory flexibility analysis of all
proposed rules to determine the impact
180 Public Law 104–121, Title II, 110 Stat. 857
(1996).
181 See 5 U.S.C. 601 et seq.
182 5 U.S.C. 603(a).
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of such rulemaking on ‘‘small
entities.’’ 183 Section 605(b) of the RFA
states that this requirement shall not
apply to any proposed rule which, if
adopted, would not have a significant
economic impact on a substantial
number of small entities.184
For purposes of Commission
rulemaking in connection with the RFA,
a small entity includes a broker-dealer
that: (1) had total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared pursuant to
paragraph (d) of 17 CFR 240.17a–5
(Exchange Act Rule 17a–5(d)),185 or, if
not required to file such statements, a
broker-dealer with total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the last business
day of the preceding fiscal year (or in
the time that it has been in business, if
shorter); and (2) is not affiliated with
any person (other than a natural person)
that is not a small business or small
organization.186
The proposed rule amendments to
Rule 15c3–3 would require certain
carrying broker-dealers to perform the
customer and PAB reserve computations
on a daily rather than weekly basis.
Only carrying broker-dealers would be
impacted by the proposed rule
amendment.
Based on FOCUS Report data, the
Commission estimates that as of
December 31, 2022, there were
approximately 790 broker-dealers that
were ‘‘small’’ for the purposes of Rule
0–10. The Commission estimates that
none of these small broker-dealers is a
carrying broker-dealer. As a result, the
proposed rule amendments likely would
not apply to small broker-dealers.
Therefore, the Commission believes that
the proposed amendments would not
have a significant impact on a
substantial number of small brokerdealers.
For the foregoing reasons, the
Commission certifies that the proposed
amendments to Rule 15c3–3, if adopted,
would not have a significant economic
impact on a substantial number of small
entities for purposes of the RFA. The
Commission requests comment
regarding this certification. The
183 Section 601(b) of the RFA permits agencies to
formulate their own definitions of ‘‘small entities.’’
See 5 U.S.C. 601(b). The Commission has adopted
definitions for the term ‘‘small entity’’ for the
purposes of rulemaking in accordance with the
RFA. These definitions, as relevant to this proposed
rulemaking, are set forth in 17 CFR 240.0–10 (‘‘Rule
0–10’’).
184 See 5 U.S.C. 605(b).
185 17 CFR 240.17a–5(d).
186 See 17 CFR 240.0–10(c).
PO 00000
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Commission invites commenters to
address whether the proposed
amendments to Rule 15c3–3 would have
a significant economic impact on a
substantial number of small entities,
and, if so, what would be the nature of
any impact on small entities. The
Commission requests that commenters
provide empirical data to support the
extent of such impact.
Statutory Authority
The Commission is proposing
amendments to Rule 15c3–3 under the
Commission’s rulemaking authority
pursuant to the Exchange Act, 15 U.S.C.
78a et seq., and particularly, sections 15
and 23(a) (15 U.S.C. 78o and 78w(a)),
thereof.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping
requirements, Securities.
Text of Amendments
In accordance with the foregoing, title
17, chapter II of the Code of Federal
Regulations is proposed to be amended
as follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read, in part, as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5,78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l,
78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p,
78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, 7201 et seq., and 8302; 7
U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; and Pub. L. 111–203, 939A, 124
Stat. 1376 (2010); and Pub. L. 112–106, sec.
503 and 602, 126 Stat. 326 (2012), unless
otherwise noted.
*
*
*
*
*
Section 240.15c3–3 is also issued under 15
U.S.C. 78c–5, 78o(c)(2), 78(c)(3), 78q(a),
78w(a); sec. 6(c), 84 Stat. 1652; 15 U.S.C.
78fff.
*
*
*
*
*
2. Section 240.15c3–3 is amended by
revising paragraphs (e)(3)(i) and (iv) to
read as follows:
■
§ 240.15c3–3 Customer protection—
reserves and custody of securities.
*
*
*
*
*
(e) * * *
(3) * * *
(i)(A) Except as provided in
paragraphs (e)(3)(i)(B)(1) and (C) of this
section, computations necessary to
determine the amount required to be
deposited in the Customer Reserve Bank
Account and PAB Reserve Bank
Account as specified in paragraph (e)(1)
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ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 88, No. 136 / Tuesday, July 18, 2023 / Proposed Rules
of this section must be made weekly, as
of the close of the last business day of
the week, and the deposit so computed
must be made no later than one hour
after the opening of banking business on
the second following business day.
(B)(1) A broker or dealer with average
total credits that are equal to or greater
than $250 million must make the
computations necessary to determine
the amount required to be deposited in
the Customer Reserve Bank Account
and PAB Reserve Bank Account, as
specified in paragraph (e)(1) of this
section, daily as of the close of the
previous business day, and the deposit
so computed must be made no later than
one hour after the opening of banking
business on the second following
business day. A broker or dealer must
comply with this paragraph
(e)(3)(i)(B)(1) no later than six months
after having average total credits equal
to or greater than $250 million and until
such time as it has average total credits
of less than $250 million and 60 days
after having provided the 60-day notice
required by paragraph (e)(3)(i)(B)(2) of
this section. For purposes of this
paragraph (e)(3), average total credits
means the arithmetic mean of the sum
of Total Credits in the Customer Reserve
Bank Account computation and the PAB
Reserve Bank Account computation
reported in the 12 most recently filed
month-end Forms X–17A–5.
(2) A broker or dealer computing the
Customer Reserve Bank Account
computation and the PAB Reserve Bank
Account computation daily under
paragraph (e)(3)(i)(B)(1) of this section
whose average total credits falls below
$250 million may elect to compute the
Customer Reserve Bank Account and
the PAB Reserve Bank Account
computation weekly under paragraph
(e)(3)(i)(A) of this section. Such broker
or dealer must notify its designated
examining authority, in writing, of this
election at least 60 calendar days before
computing the Customer Reserve Bank
Account and the PAB Reserve Bank
Account computation weekly under
paragraph (e)(3)(i)(A) of this section.
(C) A broker or dealer which has
aggregate indebtedness not exceeding
800 percent of net capital (as defined in
§ 240.15c3–1) and which carries
aggregate customer funds (as defined in
paragraph (a)(10) of this section), as
computed at the last required
computation pursuant to this section,
not exceeding $1,000,000, may in the
alternative make the Customer Reserve
Bank Account computation monthly, as
of the close of the last business day of
the month, and, in such event, must
deposit not less than 105 percent of the
amount so computed no later than one
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18:21 Jul 17, 2023
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hour after the opening of banking
business on the second following
business day.
*
*
*
*
*
(iv) Computations in addition to the
computations required in this paragraph
(e)(3), other than computations made
under paragraph (e)(3)(i)(B)(1) of this
section, 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.
*
*
*
*
*
By the Commission.
Dated: July 12, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–15200 Filed 7–17–23; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Parts 5 and 202
[Docket No. FR–6291–P–01]
RIN 2502–AJ60
Revision of Investing Lenders and
Investing Mortgagees Requirements
and Expansion of GovernmentSponsored Enterprises Definition
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner, Department of Housing
and Urban Development, HUD.
ACTION: Proposed rule.
AGENCY:
HUD proposes to revise the
requirements for investing lenders and
investing mortgagees to gain or maintain
status as a Federal Housing
Administration (FHA) approved lender
or mortgagee. This proposed revision
would make FHA’s approval
requirements consistent with investing
mortgagees’ and investing lenders’ risk,
reduce barriers to FHA approval for new
investing mortgagees and investing
lenders, and increase access to capital
for all FHA-approved mortgagees and
lenders. HUD also proposes to make
clarifying edits to ensure that
certification language is applicable to
investing lenders and investing
mortgagees. In addition, HUD proposes
to define the Government-Sponsored
Enterprises (GSEs) separately from other
governmental-type entities to ensure
that FHA requirements specific to loan
origination do not improperly apply to
the GSEs. Finally, HUD proposes to
eliminate obsolete language related to
SUMMARY:
PO 00000
Frm 00042
Fmt 4702
Sfmt 4702
45863
lender and mortgagee net worth
requirements.
Comment Due Date: September
18, 2023.
ADDRESSES: There are two methods for
submitting public comments. All
submissions must refer to the above
docket number and title.
1. Electronic Submission of
Comments. Comments may be
submitted electronically through the
Federal eRulemaking Portal at
www.regulations.gov. HUD strongly
encourages commenters to submit
comments electronically. Electronic
submission of comments allows the
commenter maximum time to prepare
and submit a comment, ensures timely
receipt by HUD, and enables HUD to
make comments immediately available
to the public. Comments submitted
electronically through
www.regulations.gov can be viewed by
other commenters and interested
members of the public. Commenters
should follow the instructions provided
on that website to submit comments
electronically.
2. Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street SW, Room 10276,
Washington, DC 20410–0500.
DATES:
Note: To receive consideration as a public
comment, comments must be submitted
through one of the two methods specified
above.
Public Inspection of Public
Comments. HUD will make all properly
submitted comments and
communications available for public
inspection and copying during regular
business hours at the above address.
Due to security measures at the HUD
Headquarters building, you must
schedule an appointment in advance to
review the public comments by calling
the Regulations Division at 202–708–
3055 (this is not a toll-free number).
HUD welcomes and is prepared to
receive calls from individuals who are
deaf or hard of hearing, as well as
individuals with speech or
communication disabilities. To learn
more about how to make an accessible
telephone call, please visit https://
www.fcc.gov/consumers/guides/
telecommunications-relay-service-trs.
Copies of all comments submitted are
available for inspection and
downloading at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Volky Garcia, Division Director,
Department of Housing and Urban
Development, 451 7th Street SW,
E:\FR\FM\18JYP1.SGM
18JYP1
]]>Agencies
[Federal Register Volume 88, Number 136 (Tuesday, July 18, 2023)]
[Proposed Rules]
[Pages 45836-45863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15200]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-97877; 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: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'')
proposes to amend the broker-dealer customer protection rule to require
certain broker-dealers to perform their customer and broker-dealer
reserve computations and make any required deposits into their reserve
bank accounts daily rather than weekly. The Commission also is seeking
comment on whether similar daily reserve computation requirements
should apply to broker-dealers and security-based swap dealers with
respect to their security-based swap customers.
DATES: Comments should be received on or before September 11, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-11-23 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-11-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's Public Reference Room. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.
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; Timothy C. Fox, Branch Chief; 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 proposing amendments to:
------------------------------------------------------------------------
Commission reference CFR citation (17 CFR)
------------------------------------------------------------------------
Rule 15c3-3............................... 17 CFR 240.15c3-3.
------------------------------------------------------------------------
Table of Contents
I. Background
A. Introduction
B. Current Requirements of Rule 15c3-3 and Its Relation to SIPA
1. Rule 15c3-3--Customer Accounts
2. Rule 15c3-3--Proprietary Accounts of Broker-Dealers
3. Broker-Dealer Liquidations and SIPA
C. The Risk of a Mismatch in Funds Owed and Funds Reserved Under
Rule 15c3-3
II. Proposed Amendments
A. Proposed Amendments to Rule 15c3-3
B. Request for Comment
III. Request for Comment--Reserve Account Requirements for Security-
Based Swaps
A. Discussion
B. Request for Comment
IV. Economic Analysis
A. Introduction
[[Page 45837]]
B. Baseline
1. Regulatory Baseline
2. Affected Broker-Dealers
C. Benefits and Costs of the Proposed Amendments
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
F. Request for Comment
V. Paperwork Reduction Act
A. Summary of Collections of Information Under the Proposed Rule
Amendments
B. Proposed Use of the Information
C. Respondents
1. Recordkeeping Requirements
2. Notification Requirement
D. Total Annual Burden Estimate
1. Recordkeeping Requirements
2. Notification Requirement
3. Summary of the Proposed Burden Revisions
E. Collections of Information are Mandatory
F. Confidentiality of Response to Collections of Information
G. Retention Period for Recordkeeping Requirements
H. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification Statutory Authority
I. Background
A. Introduction
Pursuant to section 15(c)(3)(A) of the Securities Exchange Act of
1934 (``Exchange Act''),\1\ the Commission is proposing to amend the
broker-dealer customer protection rule.\2\ As discussed in more detail
below,\3\ the rule requires broker-dealers that maintain custody of
customer securities and cash (``carrying broker-dealers'') to have a
special reserve account at a bank that must hold cash and/or qualified
securities in an amount determined by a computation of the net cash
owed to the broker-dealer's customers. Generally, carrying broker-
dealers are required to perform the customer reserve computation 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),
and, in certain limited circumstances, to perform a monthly
computation. Rule 15c3-3 also addresses the manner in which a carrying
broker-dealer holds proprietary securities and cash in accounts of
other broker-dealers, known as PAB accounts. ``PAB account'' generally
means a proprietary securities account of a broker-dealer.\4\ For
example, a broker-dealer that is not a carrying broker-dealer (e.g., an
introducing broker-dealer) may hold its proprietary cash and securities
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. While broker-dealers are
not treated as customers under Rule 15c3-3, the rule requires a
carrying broker-dealer to have a separate special reserve account at a
bank for PAB account holders; such special reserve bank account must
hold cash and/or qualified securities in an amount determined by a
computation of the net cash owed to PAB account holders. Generally,
carrying broker-dealers are 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
bank account.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78o(c)(3)(A).
\2\ 17 CFR 240.15c3-3.
\3\ See sections I.B.1. and I.B.2. of this release.
\4\ 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. 17 CFR
240.15c3-3(a)(16). The term does not include an account that has
been subordinated to the claims of creditors of the carrying broker-
dealer. Id.
---------------------------------------------------------------------------
The proposed amendments would require carrying broker-dealers that
had large amounts of cash owed to customer and PAB accounts holders
(i.e., large total credits), measured by both their customer and PAB
reserve computations for the previous twelve month ends (i.e., a
rolling twelve month average), to perform those computations and make
any required deposits into their respective customer and PAB reserve
bank accounts daily (rather than weekly). Cash owed to customers and
PAB account holders may include cash proceeds received from sales of
securities, cash deposited by customers and PAB account holders for the
purposes of purchasing securities, and monthly or quarterly dividends
received on behalf of customers and PAB account holders. These carrying
broker-dealers--because they have owed large amounts of cash to their
customers and PAB account holders--can incur large deposit requirements
from time to time. This can lead to situations where--for a period of
days--the net amount of cash owed to customers and PAB account holders
is substantially greater than the amounts held in their combined
customer and PAB reserve bank accounts. The proposed daily computation
would shorten the period during which this mismatch between the net
amount owed and the amount on deposit exists. The objective of the
proposal is to reduce the risk caused by this mismatch for carrying
broker-dealers where the difference between the net amount owed and the
amount on deposit potentially is substantial. Large mismatches can lead
to correspondingly large shortfalls in the amounts available in the
customer and PAB reserve bank accounts to make customers and PAB
account holders whole if the carrying broker-dealer fails financially.
As explained below, these potential shortfalls could lead to large-
scale harm (e.g., delayed satisfaction of customer or PAB account
holder claims for securities and cash) or substantial losses (the
inability to satisfy those claims in full) if a carrying broker-dealer
with a large mismatch is liquidated in a formal proceeding under the
Securities Investor Protection Act of 1970 (``SIPA'').\5\
---------------------------------------------------------------------------
\5\ See 15 U.S.C. 78aaa et seq.
---------------------------------------------------------------------------
B. Current Requirements of Rule 15c3-3 and Its Relation to SIPA
1. Rule 15c3-3--Customer Accounts
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.\6\ 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. If the
carrying broker-dealer fails financially, the customer securities and
cash should
[[Page 45838]]
be readily available to be returned to the customers. In addition, 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.\7\
---------------------------------------------------------------------------
\6\ 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).
\7\ At a high level, in such a liquidation, SIPA would provide
for the appointment of a trustee who is required to return customer
name securities to customers of the debtor (15 U.S.C. 78fff-
2(c)(2)), distribute the fund of ``customer property'' ratably to
customers (15 U.S.C. 78fff-2(b)), and obtain cash advances from the
Securities Investor Protection Corporation (``SIPC'') from the fund
administered by SIPC (``SIPC Fund'') to satisfy remaining customer
net equity claims, to the extent provided by SIPA (15 U.S.C. 78fff-
2(b) and 3(a)). Customer property is defined as ``cash and
securities (except customer name securities delivered to the
customer) at any time received, acquired, or held by or for the
account of a debtor from or for the securities accounts of a
customer, and the proceeds of any such property transferred by the
debtor, including property unlawfully converted.'' 15 U.S.C.
7lll(4). See also section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail).
---------------------------------------------------------------------------
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.\8\ 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
could be exercised by a third-party to secure an obligation of the
carrying broker-dealer.\9\ Permissible locations include a clearing
corporation and a ``bank,'' as defined in section 3(a)(6) of the
Exchange Act.\10\
---------------------------------------------------------------------------
\8\ See 17 CFR 240.15c3-3(d). The term ``fully paid securities''
means all securities carried for the account of a customer in a cash
account as defined in Regulation T promulgated by the Board of
Governors of the Federal Reserve System (12 CFR 220.1 et seq.)
(``Regulation T''), as well as securities carried for the account of
a customer in a margin account or any special account under
Regulation T that have no loan value for margin purposes, and all
margin equity securities in such accounts if they are fully paid:
provided, however, that the term fully paid securities does not
apply to any securities purchased in transactions for which the
customer has not made full payment. 17 CFR 240.15c3-3(a)(3). The
term ``margin securities'' means those securities carried for the
account of a customer in a margin account as defined in section 4 of
Regulation T (12 CFR 220.4), as well as securities carried in any
other account (such accounts referred to as ``margin accounts'')
other than the securities referred to in paragraph (a)(3) of Rule
15c3-3 (i.e., fully paid securities). 17 CFR 240.15c3-3(a)(4). The
term ``excess margin securities'' means those securities referred to
in paragraph (a)(4) of Rule 15c3-3 (i.e., margin securities) carried
for the account of a customer having a market value in excess of
140% of the total of the debit balances in the customer's account or
accounts encompassed by paragraph (a)(4) of Rule 15c3-3, which the
broker-dealer identifies as not constituting margin securities. 17
CFR 240.15c3-3(a)(5).
\9\ See 17 CFR 240.15c3-3(c). 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.
\10\ 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 crypto 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 proposed
amendments would apply to all carrying broker-dealers, including
special purpose broker-dealers, the amendments would 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 (Jul. 8, 2019),
available at https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities. 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.
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The second step is that 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.\11\ The
account must be titled ``Special Reserve Bank Account for the Exclusive
Benefit of Customers'' (``customer reserve bank account'').\12\ The
amount of net cash owed to customers is computed weekly as of the close
of the last business day of the week pursuant to a formula set forth in
Exchange Act Rule 15c3-3a (``Rule 15c3-3a'') (``customer reserve
computation'').\13\ Under the customer reserve computation, the
carrying broker-dealer adds up customer credit items and then subtracts
from that amount customer debit items.\14\ The credit items include
credit balances in customer 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).\15\ 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.\16\ 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.\17\ The carrying
[[Page 45839]]
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.\18\
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.\19\ A carrying broker-dealer also is required
to make and maintain a record of each computation.\20\
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\11\ 17 CFR 240.15c3-3(e). The term ``qualified security'' is
defined in Rule 15c3-3 to mean a security issued by the United
States or a security in respect of which the principal and interest
are guaranteed by the United States (collectively, ``U.S. Government
securities'' for purposes of this release). See 17 CFR 240.15c3-
3(a)(6).
\12\ See 17 CFR 240.15c3-3(e)(1). The purpose of giving the
account this title is to alert the bank and creditors of the
carrying broker-dealer that this reserve fund is to be used to meet
the carrying broker-dealer's obligations to customers (and not the
carrying broker-dealer's obligations to general creditors) in the
event the carrying broker-dealer is liquidated in a formal
proceeding.
\13\ See 17 CFR 240.15c3-3a. Some carrying broker-dealers choose
to perform a daily computation. See 17 CFR 240.15c3-3(e)(3)(iv).
Further, the rule permits carrying broker-dealers in certain limited
circumstances to perform a monthly computation. These circumstances
include: (1) the broker-dealer must have aggregate indebtedness not
exceeding 800 percent of net capital; (2) the broker-dealer carries
aggregate customer funds, as computed at the last required
computation, not exceeding $1,000,000; and (3) the broker-dealer
must deposit in its customer reserve bank account not less than 105%
of the amount computed under the customer reserve formula. See 17
CFR 240.15c3-3(e)(3)(i).
\14\ See 17 CFR 240.15c3-3a.
\15\ See 17 CFR 240.15c3-3a, Items 1-9. Credits in the customer
reserve computation include--among other credits--free credit
balances and other credit balances in customers' securities
accounts, monies borrowed collateralized by securities carried for
the accounts of customers, and monies payable against customers'
securities loaned. See 17 CFR 240.15c3-3a, Items 1-3, respectively.
Carrying broker-dealers are permitted to use customer margin
securities to, for example, obtain bank loans to finance the funds
used to lend to customers to purchase the securities. The amount of
the bank loan is a credit in the customer reserve computation--which
is accounted for in Item 2--because this is the amount that the
carrying broker-dealer would need to pay the bank to retrieve the
securities. Similarly, carrying broker-dealers may use customer
margin securities to make stock loans to other broker-dealers in
which the lending broker-dealer typically receives cash in return.
The amount payable to the other broker-dealer on the stock loan is a
credit in the customer reserve computation--which is accounted for
in Item 3--because this is the amount the broker-dealer would need
to pay the other broker-dealer to retrieve the securities. See also
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants and Broker-Dealers;
Final Rule, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR
68550, 68690 (Dec. 16, 2019) (containing FOCUS Report Part II--
Computation for Determination of Customer Reserve Requirements).
\16\ See 17 CFR 240.15c3-3a, Items 10-14. See also Standards for
Covered Clearing Agencies for U.S. Treasury Securities and
Application of the Broker-Dealer Customer Protection Rule With
Respect to U.S. Treasury Securities; Proposed Rule, Exchange Act
Release No. 95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022)
(proposing a new Item 15 in Rule 15c3-3a to permit margin required
and on deposit at a covered clearing agency for U.S. Treasury
securities to be included as a debit item in the customer and PAB
reserve computations, subject to certain conditions). The Commission
encourages commenters to review the U.S. Treasury security clearing
proposal to determine whether it might affect their comments on this
proposing release.
\17\ 17 CFR 240.15c3-3(e). 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.
\18\ For carrying broker-dealers performing a weekly customer
reserve computation as of the close of the last business day of the
week, the deposit so computed must be made no later than one hour
after the opening of banking business on the second following
business day. See 17 CFR 240.15c3-3(e)(3)(i). 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.
\19\ See 17 CFR 240.15c3-3(e).
\20\ See 17 CFR 240.15c3-3(e)(3)(v). Each record must be
preserved in accordance with Rule 17a-4. Id.
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The customer reserve computation permits the carrying broker-dealer
to offset customer credit items only with customer debit items.\21\
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.\22\ The broker-dealer margin rules require
securities customers to maintain a minimum level of equity in their
securities accounts (i.e., the customer's ownership interest in the
account, computed by adding the current market value of long securities
and the amount of any credit balance and subtracting the current market
value of all short securities and the amount of any debit balance).\23\
In other words, the cash and the market value of the customer's
securities in the account must be sufficiently larger than the sum of
the cash borrowed by the customer and market value of the securities
sold short by the customer. In addition to protecting the carrying
broker-dealer from the consequences of a customer default, this equity
serves to over-collateralize customers' obligations to the broker-
dealer. This buffer protects the customers whose cash was used to
facilitate the carrying broker-dealer's financing of securities
transactions of other customers (i.e., margin loans and short sales).
For example, if the carrying broker-dealer fails, the customer debits--
because they generally are over-collateralized--should be attractive
assets for another broker-dealer to purchase or, if not purchased by
another broker-dealer, they should be able to be liquidated to a net
positive equity.\24\ The proceeds of the debits sale or liquidation can
be used to repay the customer cash used to finance customer
obligations. This cash plus the cash and/or qualified securities held
in the customer reserve bank account should equal or exceed the total
amount of customer credit items as of the customer reserve computation
date (e.g., as of the close of business on Friday).\25\ However, as
discussed below, activity subsequent to the customer reserve
computation date can result in the carrying broker-dealer having large
amounts of additional credit items that do not get accounted for until
the next customer reserve computation and do not get reserved for until
the next deposit into the customer reserve bank account.\26\ This can
lead to a mismatch between the net amount of cash owed to customers and
the amount currently on deposit in the customer reserve bank account.
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\21\ See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
\22\ 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 formula and the $100 customer B owes the carrying
broker-dealer is a debit in the formula. Therefore, under the
customer reserve computation there would be no requirement to
maintain cash and/or U.S. Government 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 debit and, consequently, the carrying broker-
dealer would need to have on deposit in the customer reserve bank
account cash and/or U.S. Government securities in an amount at least
equal to $100.
\23\ Broker-dealers are subject to margin requirements in
Regulation T, in rules promulgated by the broker-dealer self-
regulatory organizations (``SRO'') (see, e.g., FINRA Rules 4210-4240
and Cboe Exchange, Inc. Rules 10.1-10.12), and with respect to
security futures, in rules jointly promulgated by the Commission and
the Commodity Futures Trading Commission (17 CFR 242.400-406).
Broker-dealers also may establish their own margin requirements, so
long as they are as restrictive as regulatory margin requirements.
These requirements are often referred to as ``house'' margin
requirements. See, e.g., FINRA Rule 4210(d) (requiring broker-
dealers to establish procedures to formulate their own margin
requirements). See also FINRA Rule 4210(a)(5) (defining the term
``equity'' for purposes of FINRA margin requirements).
\24\ The attractiveness of the over-collateralized debits
facilitates the bulk transfer of customer accounts from a failing or
failed carrying broker-dealer to another broker-dealer. Regulation
T, SRO margin rules, and a broker-dealer's house margin rules help
to ensure the customer maintains a minimum level of equity in their
account, i.e., that the debit is over-collateralized. For example,
if a customer purchases a listed equity security, they can borrow up
to 50% of the purchase price from the broker-dealer using the
purchased security as collateral for the loan. This is known as
initial margin. After a customer buys securities on margin, SRO
margin rules require the customer to maintain a minimum amount of
equity in their securities margin account. This is known as
maintenance margin. SRO margin rules require a customer to maintain
at least 25% of the total market value of the margin securities in
their account. For example, if a customer purchases $16,000 of
listed equity securities, the customer can borrow $8,000 from the
broker-dealer and pay $8,000 in cash. If the market value of the
listed equity securities falls to $12,000, the equity in the
securities margin account would total $4,000 ($12,000-$8,000 =
$4,000) and the broker-dealer's loan to the customer would be over-
collateralized by $4,000. The customer would be in compliance with
the 25% SRO maintenance margin requirement of $3,000 as well (25% of
$12,000 = $3,000). See 12 CFR 220.12(a) and FINRA Rule 4210(c)(1).
\25\ See Net Capital Requirements for Broker-Dealers; Amended
Rules, Exchange Act Release No. 18417 (Jan. 13, 1982), 47 FR 3512,
3513 (Jan. 25, 1982). The alternative method is founded on the
concept that if the debit items in the reserve formula can be
liquidated at or near their contract value, these assets, along with
any cash required to be on deposit under the customer protection
rule, will be sufficient to satisfy all customers-related
liabilities (which are represented as credit items in the reserve
formula).
\26\ See section I.C. of this release (explaining the
implications of a weekly computation).
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2. Rule 15c3-3--Proprietary Accounts of Broker-Dealers
Carrying broker-dealers also may carry accounts that hold
proprietary securities and cash of other broker-dealers, known as PAB
accounts.\27\ Broker-dealers are not within the definition of
``customer'' for purposes of Rule 15c3-3.\28\ The definition of
``customer'' in SIPA, however, is broader than the definition in Rule
15c3-3 in that the SIPA definition includes broker-dealers.\29\ As
discussed in more detail below, broker-dealers--as customers under
SIPA--have the right to a pro rata share of customer property in a SIPA
liquidation.\30\
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\27\ 17 CFR 240.15c3-1(a)(16).
\28\ 17 CFR 240.15c3-3(a)(1) (The term customer shall mean any
person from whom or on whose behalf a broker or dealer has received
or acquired or holds funds or securities for the account of that
person. The term shall not include a broker or dealer, a municipal
securities dealer, or a government securities broker or government
securities dealer.). Id.
\29\ See 15 U.S.C. 78lll(2).
\30\ See section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail). While broker-dealers
as ``customers'' under SIPA have a right to a pro rata share of
customer property in a SIPA liquidation, they are not entitled to
receive an advance from the SIPC Fund. See 15 U.S.C. 78fff-3(a). See
infra section I.B.3. of this release (discussing advances from the
SIPC Fund as a customer protection for certain customers in a SIPA
liquidation).
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[[Page 45840]]
Because broker-dealers are entitled to a pro rata share of customer
property, Rules 15c3-3 and 15c3-3a require carrying broker-dealers to:
(1) perform a separate reserve computation for PAB accounts in addition
to the customer reserve computation described above (``PAB reserve
computation); \31\ (2) establish and fund a separate bank account
titled ``Special Reserve Bank Account for Brokers and Dealers'' (``PAB
reserve bank account''); and (3) obtain and maintain physical
possession or control of non-margin 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.\32\ These
requirements provide similar protections to the securities and cash a
carrying broker-dealer maintains for PAB account holders as are
provided for the securities and cash the broker-dealer maintains for
customers. The objective in applying these similar protections is to
reduce the risk that, in the event a carrying broker-dealer is
liquidated under SIPA, the claims of SIPA customers (i.e., customers
and PAB account holders) will exceed the amount of customer property
available and, thereby, expose the SIPC Fund and potentially SIPA
customers to losses.\33\ In addition, if the customer property is
insufficient to fully satisfy all SIPA customer claims and losses are
incurred, the PAB account holders could be placed in financial
distress. This could cause adverse impacts to the securities markets
beyond those resulting from the failure of the carrying broker-dealer,
given that the PAB account holders--as broker-dealers--provide services
to investors and others who participate in those markets.\34\
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\31\ See supra section I.B.1. of this release (discussing Rule
15c3-3 and customer accounts).
\32\ 17 CFR 240.15c3-3(b)(5) and (e). See also Financial
Responsibility Rules for Broker-Dealers; Final Rule, Exchange Act
Release No. 70072 (July 30, 2013), 78 FR 51824, 51827-31 (Aug. 21,
2013) (adopting a PAB reserve computation and possession and control
requirements for securities held in PAB accounts under Rule 15c3-3)
(``Financial Responsibility Rules for Broker-Dealers'').
\33\ See Financial Responsibility Rules for Broker-Dealers, 78
FR at 51827-28.
\34\ Id.
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Similar to the customer reserve computation, the amount of net cash
owed to PAB account holders is computed weekly as of the close of the
last business day of the week pursuant to the formula set forth in Rule
15c3-3a.\35\ Specifically, carrying broker-dealers perform the PAB
reserve computation using the formula in Rule 15c3-3a--which is used to
perform the customer reserve computation--with modifications that
tailor the computation to PAB (i.e., broker-dealer) accounts as
compared with customer accounts.\36\ If credit items exceed debit
items, the net amount owed to PAB account holders must be on deposit in
the PAB reserve bank account in the form of cash and/or qualified
securities. The carrying broker-dealer must make a deposit into the PAB
reserve bank account if the computation shows an increase in the
reserve requirement.\37\ If the computation shows a decrease in the
reserve requirement, the carrying broker-dealer may withdraw the
difference. 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.\38\
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\35\ See Rule 15c3-3a. Some carrying broker-dealers choose to
perform the PAB reserve computation daily. See 17 CFR 240.15c3-
3(e)(3)(iv). Further, Rule 15c3-3 permits certain carrying broker-
dealers to perform the PAB reserve computation monthly if they do
not carry customer accounts or conduct a proprietary trading
business. See 17 CFR 240.15c3-3(e)(3)(iii).
\36\ See 17 CFR 240.15c3-3a, Notes Regarding the PAB Reserve
Bank Account Computation. For example, Note 1 states that broker-
dealers should use the customer reserve formula for the purposes of
computing the PAB reserve formula, except that references to
``accounts,'' ``customer accounts,'' or ``customers'' will be
treated as references to PAB accounts. Further, Note 2 provides that
any credit (including a credit applied to reduce a debit) that is
included in customer reserve formula may not be included as a credit
in PAB reserve formula. Id.
\37\ For carrying broker-dealers performing the PAB reserve
computation weekly, as of the close of the last business day of the
week, the deposit so computed must be made no later than one hour
after the opening of banking business on the second following
business day. See 17 CFR 240.15c3-3(e)(3)(i). Carrying broker-
dealers also may satisfy a PAB reserve bank account deposit
requirement with excess debits from the customer reserve computation
from the same date. However, a deposit requirement from the customer
reserve computation may not be satisfied with excess debits from the
PAB reserve computation. See 17 CFR 240.15c3-3(e)(4).
\38\ See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
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3. Broker-Dealer Liquidations and SIPA
SIPA became law in 1970 with the purpose of affording certain
protections against loss to customers resulting from broker-dealer
failure and, in doing so, promote investor confidence in the nation's
securities markets.\39\ SIPA established SIPC and directed SIPC to
establish the SIPC Fund.\40\ The protections afforded by SIPA are
designed to work as a ``back stop'' to the broker-dealer net capital
rule,\41\ which requires broker-dealers to maintain net liquid assets
in excess of all liabilities to customers and other creditors, and Rule
15c3-3. 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).\42\ For example, cash and securities may be
missing from customers' securities accounts in cases of unauthorized
trading or embezzlement. The Commission has authority to oversee SIPC,
including to conduct inspections of SIPC and to approve or disapprove
changes to SIPC's bylaws and rules.\43\
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\39\ See 2022 SIPC Annual Report at 4, available at https://www.sipc.org/media/annual-reports/2022-annual-report.pdf.
\40\ See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
\41\ 17 CFR 240.15c3-1.
\42\ 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).
\43\ 15 U.S.C. 78ggg(c) and 78ccc(e).
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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 (``SIPA customers'')
generally are entitled to a number of protections. These protections
include the right to share pro rata with other SIPA customers in the
customer property held by the broker-dealer.\44\ Broker-dealers with
securities accounts at the failed broker-dealer--as SIPA customers--
have the right to a pro rata share of the customer property in a SIPA
liquidation.\45\
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\44\ See 15 U.S.C. 78fff-2(c).
\45\ See 15 U.S.C. 78fff-2(c) and 15 U.S.C. 78fff-3(a).
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[[Page 45841]]
Consequently, when a carrying broker-dealer is liquidated in a SIPA
proceeding, each customer (including a SIPA customer that is a broker-
dealer) has a priority claim on the customer property compared to
general unsecured creditors of the carrying broker-dealer.\46\ The SIPA
protections also include the ability for a SIPA customer--other than a
SIPA customer that is a broker-dealer--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.\47\
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\46\ As discussed above in section I.B.2. of this release, this
is why Rules 15c3-3 and 15c3-3a require carrying broker-dealers to
perform a PAB reserve computation for PAB account holders. 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 to the extent that there are any general estate assets. See
15 U.S.C. 78fff-2(c)(1).
\47\ 15 U.S.C. 78fff-3.
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The SIPC Fund largely is financed through assessments paid to SIPC
by its broker-dealer members.\48\ The SIPC Fund is used to pay SIPC's
expenses, the administrative costs of a SIPA liquidation to the extent
the broker-dealer's estate is insufficient to cover those costs, and--
as noted above--to pay advances to SIPA customers whose claims cannot
be fully satisfied by the estate of a failed carrying broker-
dealer.\49\ The SIPC Fund--which consists of cash and U.S. Government
securities--totaled approximately $4.05 billion as of December 31,
2022.\50\ 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.\51\ The current assessment
rate is 0.15 percent of net operating revenues.\52\ A summary of the
possible level of SIPC assessments is as follows:
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\48\ 15 U.S.C. 78ddd(c) and (d). The SIPC Fund is also financed
through interest on U.S. Government securities held in the SIPC
Fund. See 2022 SIPC Annual Report at 4.
\49\ 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.
\50\ Currently, the objective is to build the SIPC Fund to a
level of $5 billion. See 2022 SIPC Annual Report at 3, 10. Between
1970 and 2022, SIPC has facilitated the return of cash and
securities for accounts of customers of failed broker-dealers
totaling approximately $142 billion. Of that amount, approximately
$141.2 billion came from broker-dealer estates and $917 million came
from trustee advances from the SIPC Fund. Id. at 8. Further, of the
approximately 770,400 customer claims from completed, or
substantially completed, cases that were satisfied between 1970 and
2022, only 355 claims were for cash and securities valued greater
than the limits of protection afforded by SIPA. Id. at 9.
\51\ 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 2022 SIPC Annual Report at 20. See
also 15 U.S.C. 78ddd(c) and (d) and 2022 SIPC Annual Report at 21.
\52\ See Assessment Rate, available at https://www.sipc.org/for-members/assessment-rate. 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.
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 \1\ 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.
------------------------------------------------------------------------
\1\ 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.
In addition to the Commission's requirements under Rule 15c3-3, if
either the Commission or any SRO, such as FINRA, is aware of facts
which lead it to believe that any broker-dealer subject to its
regulation is in or is approaching financial difficulty, it must
immediately notify SIPC, and, if such notification is by an SRO, the
Commission.\53\ In a case when an SRO notifies SIPC about a broker-
dealer, and that broker-dealer has taken steps to either reduce or
liquidate its business, either voluntarily or at the direction of the
SRO, the SRO may render such assistance or oversight to such broker-
dealer as it considers appropriate to protect the interests of
customers of such broker-dealer.\54\ However, any actions the SRO takes
do not prevent or act as a bar from SIPC from taking an action as
well.\55\ If SIPC finds that a broker-dealer has failed, or is in
danger of not meeting its obligations to customers, SIPC can initiate
steps to begin a customer protection proceeding. For example, SIPC may,
upon notice to its broker-dealer member, file an application for a
protective decree with any court that has jurisdiction (i.e., a Federal
District Court), whether or not the broker-dealer consents.\56\ In
addition, no member of SIPC that has customers may enter into
bankruptcy, insolvency, or a receivership without approval from SIPC,
except as provided in Title II of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.\57\
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\53\ See 15 U.S.C. 78eee(a)(1).
\54\ See 15 U.S.C. 78eee(a)(2).
\55\ Id.
\56\ See 15 U.S.C. 78eee(a)(3)(A). See also 15 U.S.C.
78eee(b)(1) (detailing court proceedings).
\57\ See 15 U.S.C. 78eee(a)(3)(B).
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C. The Risk of a Mismatch in Funds Owed and Funds Reserved Under Rule
15c3-3
Carrying broker-dealers receive customer- and PAB-related cash
inflows in connection with various securities transactions, including
cash proceeds received from sales of securities, cash deposited by
customers and PAB account holders for the purposes of purchasing
securities, and monthly or quarterly dividends received on behalf of
customers and PAB account holders. Cash credited to customers and PAB
account holders often is quickly re-invested by the customer or PAB
[[Page 45842]]
account holder in securities such as money market mutual funds or
securities held by the customer or PAB account holder that are subject
to dividend re-investment plans. This cash also may be swept out of the
customer's or PAB account holder's securities account at the carrying
broker-dealer to a bank or money market mutual fund as part of a
program in which customers' and PAB account holders' free credit
balances are automatically invested in the mutual fund or bank deposit
product on the prior authorization of the customer or PAB account
holder (``sweep program'').\58\ When customers and PAB account holders
use their free credit balances to invest in securities or bank deposit
products, the amount of cash held by a carrying broker-dealer for them
is reduced and, therefore, the amount that needs to be deposited into
the customer or PAB reserve bank account also is reduced.
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\58\ See 17 CFR 240.15c3-3(j)(2)(ii) (setting forth requirements
under Rule 15c3-3 for this type of a program for customer accounts).
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 17
CFR 15c3-3(a)(1). Nonetheless, PAB account holders may elect to have
their free credit balances included in a sweep program.
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Carrying broker-dealers, however, may receive large cash inflows
that are not deployed for or on behalf of the customers or PAB account
holders prior to the next required customer and PAB reserve
computations and deposits into the customer and PAB reserve bank
accounts. In this situation, the value of the cash and/or qualified
securities in the customer and PAB reserve bank accounts may not equal
the net cash owed to customers and PAB account holders for a period of
time. For example, assume a carrying broker-dealer performs its
customer and PAB reserve computations weekly as required under Rule
15c3-3 (i.e., it has not elected to perform a daily computation or meet
the conditions in the rule to perform a monthly computation).
Typically, the carrying broker-dealer would perform the customer and
PAB reserve computations on Monday using credit and debit amounts as of
the close of business on the previous Friday. If the Monday computation
showed a deposit requirement, the carrying broker-dealer would need to
make that deposit by 10 a.m. the following business day, which
typically would be Tuesday. In this example, cash inflows received by
the carrying broker-dealer on Monday through Friday would not be
accounted for until the carrying broker-dealer performs the next
customer and PAB reserve computations on the Monday of the following
week and would not be reserved for until the carrying broker-dealer
makes the required deposits into the customer and PAB reserve bank
accounts no later than 10 a.m. on Tuesday of the following week.
Consequently, for a number of days, the net amount of cash owed to
customers and PAB account holders could be greater than the amounts
deposited into the customer and PAB reserve bank accounts.\59\
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\59\ To further illustrate this risk, assume on Monday of Week 1
a carrying broker-dealer performs a customer reserve computation
that shows as of close-of-business on Friday of the previous week
the broker-dealer had total credits of $30 billion and total debits
of $25 billion and, therefore, had excess credits over debits of $5
billion. Assume further, the carrying broker-dealer had $4.8 billion
of cash and qualified securities on deposit in its customer reserve
bank account. Under Rule 15c3-3, the carrying broker dealer would
need to deposit $200 million into its customer reserve bank account
no later than 10 a.m. on Tuesday of Week 1. Assume further that the
carrying broker-dealer receives $3 billion of cash inflows on Monday
of Week 1 but does not facilitate any customer transactions during
Week 1 that generate additional debits and the customers do not
deploy the $3 billion to purchase securities or into a sweep
program. In this scenario, the $3 billion of cash inflows on Monday
of Week 1 would not get accounted for in the customer reserve
formula until the carrying broker-dealer performs the customer
reserve computation on Monday of Week 2. Assuming all else stays the
same, the Week 2 customer reserve computation would result in a
deposit requirement of $3 billion, which would need to be made no
later than 10 a.m. on the Tuesday of Week 2. This means the net
amount of cash owed to customers was $8 billion and the amount on
deposit in the customer reserve bank account was $4.8 billion on
Monday through 10 a.m. on Tuesday of Week 1 and $5 billion from 10
a.m. on Tuesday of Week 1 through 10 a.m. on Tuesday of Week 2.
Consequently, the difference between the net amount of cash owed to
customers and the amount on deposit in the customer reserve bank
account was $3.2 billion for Monday of Week 1 through 10 a.m. on
Tuesday of Week 1 and $3 billion from 10 a.m. on Tuesday of Week 1
through 10 a.m. on Tuesday of Week 2.
---------------------------------------------------------------------------
This mismatch poses a risk to the carrying broker-dealer's
customers and PAB account holders that the carrying broker-dealer could
fail financially and be unable to return all the securities and cash
owed to the customers and PAB account holders. In this situation, the
carrying broker-dealer would be liquidated under SIPA, and SIPC would
be required to advance money from the SIPC Fund--but not to PAB account
holders--to the extent the fund of customer property was insufficient
to make customers whole through the pro rata distribution. As discussed
above, 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).\60\
Therefore, if the mismatch was sufficiently large, customers' claims
may not be satisfied in full. 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 greater risk of not being
satisfied in full. This could expose the PAB account holder to
financial stress and increased risk of liquidation.\61\
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\60\ See section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail).
\61\ See section IV.C. of this release (discussing the benefits
and costs of the proposed amendments).
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As of the end of 2022, 162 carrying broker-dealers reported total
credits in their customer reserve computation of greater than $0.\62\
These carrying broker-dealers reported an aggregate amount of total
customer credits of $1.03 trillion. In addition, 82 carrying broker-
dealers reported total credits in their PAB reserve computation of
greater than $0. These carrying broker-dealers reported an aggregate
amount of PAB account holder total credits of $166.3 billion.\63\
Moreover, some of these carrying broker-dealers have been required to
deposit large amounts of additional cash and/or qualified securities
into their customer and/or PAB reserve bank accounts after performing
their customer and/or PAB reserve computations. For example, during the
2022 calendar year, the largest required additional deposits into the
customer reserve bank accounts of these carrying broker-dealers ranged
from approximately $1.6 billion to over $6.0 billion following the
customer reserve
[[Page 45843]]
computation.\64\ Furthermore, during the 2022 calendar year, the
largest required additional deposits into their PAB reserve bank
accounts ranged from approximately $350 million to over $4.0
billion.\65\ The carrying broker-dealers that reported the largest
amounts of total credits for their customers and PAB account holders
(and that exceeded the proposed $250 Million Threshold discussed below)
were more likely to experience larger mismatches and the dollar amounts
underlying those mismatches were significantly larger (than carrying
broker-dealers that do not exceed the proposed $250 Million
Threshold).\66\
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\62\ This number of carrying broker-dealers is based on
information reported by broker-dealers as of Dec. 31, 2022, in Form
X-17A-5, the Financial and Operational Combined Uniform Single
Report (``FOCUS Report''). The FOCUS Reports showed that 162
carrying broker-dealers reported total credits of greater than $0 on
Line 4430 of the report (total credits in the customer reserve
formula). Total credits in the customer reserve computation is the
sum of customer credits in the formula, including--among other
credits--free credit balances and other credit balances in
customers' securities accounts (Line 4340), monies borrowed
collateralized by securities carried for the accounts of customers
(Line 4350), and monies payable against customers' securities loaned
(Line 4360). See also section IV.B.2. of this release (estimating
that there are 187 broker-dealers that may currently fall within the
scope of the Rule 15c3-3 based on carrying activities). This
estimate includes broker-dealers that did not report credits greater
than $0 and/or that reported being exempt from the provisions of
Rule 15c3-3.
\63\ FOCUS Report data as of Dec. 31, 2022, showed that 82
broker-dealers reported total credits of greater than $0 on Line
2170 of the report (total credits in the PAB reserve formula). Total
credits in the PAB reserve computation is the sum of PAB account
holder credits in the formula, including--among other credits--free
credit balances and other credit balances in PAB securities accounts
(Line 2110), monies borrowed collateralized by securities carried
for the accounts of PAB (Line 2120), and monies payable against PAB
securities loaned (Line 2130).
\64\ This is based on the 25 largest additional deposit
requirements reported in the monthly FOCUS Reports filed during the
2022 calendar year.
\65\ This is based on the 25 largest additional deposit
requirements reported in the monthly FOCUS Reports filed during the
2022 calendar year. The largest additional deposit requirements were
made by carrying broker-dealers that also had the 20 largest credit
balances based on 2022 FOCUS Report data. 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
2022 calendar year. For example, during the 2022 calendar year, the
25 largest withdrawals from customer reserve bank accounts ranged
from approximately $1.3 billion to $6.0 billion, and the 25 largest
withdrawals from PAB reserve bank accounts ranged from $241.7
million to $3.5 billion.
\66\ This is based on the carrying broker-dealers that reported
the largest amounts of total credits on their FOCUS Reports as of
Dec. 31, 2022, and comparing them to the carrying broker-dealers
that reported the largest deposits for the 2022 calendar year. See
also section II.A.1. of this release (discussing the proposed $250
Million Threshold) and Table 5 in section IV.B.2. of this release
(detailing broker-dealer deposits and withdrawals as a share of
reserve accounts for the year 2022).
---------------------------------------------------------------------------
These large deposit requirements 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. As explained above, this creates the
potential risk that a carrying broker-dealer could fail financially and
not be able to fully satisfy claims of customers and PAB account
holders for securities and cash. Moreover, given the potential size of
this mismatch between the cash owed and the cash reserved, the failure
of a carrying broker-dealer that has large total credits could cause
widespread harm and potentially substantial losses (as discussed
above). It also potentially could deplete the SIPC Fund resulting in
the need to increase assessments on SIPC's broker-dealer members to
replenish it, with the resulting costs potentially being passed through
to investors.\67\
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\67\ See section IV.C. of this release (discussing the benefits
and costs of the proposed amendments).
---------------------------------------------------------------------------
To address these risks, the Commission is proposing amendments to
Rule 15c3-3 to require carrying broker-dealers with large total
credits--the carrying broker-dealers most likely to have large customer
and PAB additional deposit requirements--to increase the frequency of
their customer and PAB reserve computations from weekly to daily. The
objective is to 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 by
shortening the timeframe that a mismatch can exist.\68\ This objective
also should enhance the customer protection requirements of Rule 15c3-
3.
---------------------------------------------------------------------------
\68\ To illustrate how a daily computation would reduce this
risk, assume on Monday a carrying broker-dealer performs a customer
reserve computation that shows as of the close-of-business on Friday
of the previous week the broker-dealer had total credits of $30
billion and total debits of $25 billion and, therefore, had excess
credits over debits of $5 billion. Assume further, the carrying
broker-dealer had $4.8 billion of cash and qualified securities on
deposit in its customer reserve bank account. Under a daily
computation, the carrying broker dealer would need to deposit $200
million into its customer reserve bank account no later than 10 a.m.
on Tuesday of that week. Assume further that the carrying broker-
dealer receives $3 billion of cash inflows on Monday but does not
facilitate any customer transactions that generate any additional
debits and the customers do not deploy the $3 billion to purchase
securities or into a sweep program. Under a daily requirement, the
carrying broker-dealer would perform a customer reserve computation
on Tuesday as of the close of business on Monday that would account
for the $3 billion in cash inflows received on Monday and be
required to deposit $3 billion into the customer reserve bank
account by 10 a.m. on Wednesday of the same week. Consequently, the
mismatch would exist from the point in time on Monday when the $3
billion was received until 10 a.m. on Wednesday of the same week
when $3 billion would need to be deposited into the customer reserve
bank account (approximately two full days). Under a weekly
requirement, this mismatch would exist from the point in time on
Monday when the $3 billion was received until 10 a.m. on Tuesday of
the following week when the next deposit into the customer reserve
bank account would need to be made (approximately eight full days).
---------------------------------------------------------------------------
In addition, performing daily (rather than weekly) customer and PAB
reserve computations would allow large carrying broker-dealers to more
effectively manage their cash flows and liquidity. For example, a
carrying broker-dealer that performs weekly computations generally
cannot withdraw excess cash or U.S. Government securities from either
its customer or PAB reserve bank accounts until the following week even
if the value of the account assets exceeds the net cash owed to
customers or PAB account holders during the current week. While Rule
15c3-3 currently permits a carrying broker-dealer to elect to perform
its customer and PAB reserve calculations more frequently than
weekly,\69\ a practical effect of requiring carrying broker-dealers to
perform daily customer and PAB reserve computations would be to permit
them to withdraw these excess funds and securities more quickly. A
number of carrying broker-dealers currently elect to perform daily
customer and PAB reserve computations, including eleven of the largest
carrying broker-dealers.\70\ Finally, an additional 52 carrying broker-
dealers that would be required to begin performing daily customer and
PAB computations under the proposed rule (i.e., those carrying broker-
dealers that are not already voluntarily performing daily computations)
may incur increased compliance costs.\71\ As further discussed in the
Economic Analysis in section IV. of this release, these costs and
benefits may ultimately be passed through to customers and PAB account
holders of the affected carrying broker-dealers.\72\
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\69\ See 17 CFR 240.15c3-3(e)(3)(iv).
\70\ Based on FOCUS Report data for the 2022 calendar year,
these carrying broker-dealers are among the largest broker-dealers
measured by average total credits and total assets. These 11
carrying broker-dealers accounted for 64 percent of the total amount
of average total credits among all carrying-broker dealers with
positive customer or PAB credits reported in 2022. See section
IV.B.2. of this release (discussing baseline of affected broker-
dealers in the economic analysis).
\71\ Based on FOCUS Report data for the 2022 calendar year.
\72\ See section IV. of this release (discussing the benefits
and costs of the proposed amendments).
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II. Proposed Amendments
A. Proposed Amendments to Rule 15c3-3
In order to address the mismatch risk discussed above and enhance
customer protection requirements, the Commission is proposing
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).\73\ More specifically,
the amendments would add paragraph (e)(3)(i)(B) to Rule 15c3-3.\74\
[[Page 45844]]
This paragraph would provide that a carrying broker-dealer with average
total credits that are equal to or greater than $250 million 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.\75\ 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. 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).
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\73\ See section I.C. of this release (discussing the mismatch
risk).
\74\ See paragraph (e)(3)(i)(B) to Rule 15c3-3, as proposed to
be amended. In addition, the Commission is proposing 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.
\75\ The text of paragraph (e)(3)(i)(B) of Rule 15c3-3, as
proposed to be amended, is modelled closely on the current text of
paragraph (e)(3)(i) of Rule 15c3-3.
---------------------------------------------------------------------------
For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission is
proposing 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 (``$250 Million Threshold'').\76\ The proposed
definition of average total credits is designed to serve as a
straightforward way for the carrying broker-dealer to determine whether
its total credits equal or exceed the $250 Million Threshold. In
addition, using the arithmetic mean of total credit amounts reported in
the twelve most recently filed month-end FOCUS Reports to calculate the
average total credits is designed to account for the fact that a
carrying broker-dealer's total credits may fluctuate. A rolling average
based on twelve most recently filed month-end FOCUS Reports would
provide for a more stable and representative metric as compared to
basing the calculation on a single filing such as the most recently
filed FOCUS Report.
---------------------------------------------------------------------------
\76\ 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.
---------------------------------------------------------------------------
The proposed $250 Million Threshold is designed to apply the daily
computation requirement to carrying broker-dealers that have large
amounts of total credits. Based on FOCUS Report data, these carrying
broker-dealers are the ones more likely to experience larger mismatches
between the net cash they owe customers and PAB account holders and the
amounts they have on deposit in their customer and PAB reserve bank
accounts, and the dollar amounts underlying those mismatches are
significantly larger than carrying broker-dealers below the $250
Million Threshold.\77\ The proposed $250 Million 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 of which are
more likely to incur larger mismatches in any given year, and are more
likely to better absorb any potential increase in compliance costs.\78\
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\77\ Based on FOCUS Report data for the 2022 calendar year. See
also Table 5 in section IV.B.2. of this release (detailing broker-
dealer deposits and withdrawals as a share of reserve accounts for
the year 2022).
\78\ See section IV.C. of this release (discussing the costs and
benefits of the proposed $250 Million Threshold).
---------------------------------------------------------------------------
Based on regulatory filings for the period of January 2022 through
December 2022, the $250 Million Threshold would apply the proposed
daily computation requirement to approximately 63 carrying broker-
dealers.\79\ These broker-dealers include 11 carrying broker-dealers
that already voluntarily perform the customer reserve computation
daily.\80\ Under the proposed $250 Million Threshold, approximately 100
carrying broker-dealers would continue to be subject to a weekly
customer and/or PAB reserve computation requirement.\81\ In summary, in
proposing the $250 Million Threshold, the Commission 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 computation.\82\
---------------------------------------------------------------------------
\79\ This estimate is based on the arithmetic mean of the sum of
total credits in the customer and PAB reserve computations reported
in each required monthly FOCUS Report filed for the 12 months ended
Dec. 31, 2022. All of these broker-dealers reported total credits in
their customer reserve computation during the 2022 calendar year.
Approximately fourteen carrying broker-dealers that exceeded the
$250 Million Threshold reported no credits in their PAB reserve
computations during the 2022 calendar year. The number of affected
carrying broker-dealers may vary month to month because the proposed
$250 Million Threshold is based on a 12-month rolling average. For
example, the number of affected carrying broker-dealers varied
monthly from 60 to 63 over the period from January 2022 through May
2023. There was little variation, however, in the identity of the
affected carrying broker-dealers. The same 59 carrying broker-
dealers met the proposed $250 Million Threshold in each month, and
from one to four additional carrying broker-dealers met the
threshold in any given month. In total, over this period, 63
different carrying broker dealers would have been affected. See
Figure 1 (Number of Affected Broker-Dealers under 12-Month Rolling
Average, Over the Period from January 2022-May 2023) in section
IV.B.2. of this release.
\80\ This is based on FOCUS Report data as of Dec. 31, 2022.
Based on FOCUS Report data for 2022, ten out of these 11 carrying
broker-dealers were among the 20 largest carrying broker-dealers in
terms of the largest average total credits. All 11 of these carrying
broker-dealers that currently perform their customer reserve
computation daily are among the 30 largest carrying broker-dealers
in terms of average total credits.
\81\ This estimate is based on 162 carrying broker-dealers that
reported total credits greater than $0 on their FOCUS Reports as of
Dec. 31, 2022.
\82\ See section IV. of this release (discussing the costs and
benefits of the proposed $250 Million Threshold).
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The Commission is proposing to require that a carrying broker-
dealer comply with the daily computation requirement for the customer
and PAB reserve bank accounts no later than six months after having
average total credits that equal or are greater than $250 million.\83\
The purpose is to provide time for a carrying broker-dealer to prepare
to perform a daily computation after it exceeds the $250 Million
Threshold. 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.
---------------------------------------------------------------------------
\83\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed
to be amended.
---------------------------------------------------------------------------
Once a carrying broker-dealer begins to perform daily customer and
PAB reserve computations (because it exceeded the $250 Million
Threshold), the proposed amendments would require it to continue
performing daily customer and PAB reserve computations for at least 60
days after it falls below the $250 Million Threshold. More
specifically, under paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as
proposed to be amended, a carrying broker-dealer performing daily
computations, whose average total credits falls below the $250 Million
Threshold, could elect to perform weekly computations under paragraph
(e)(3)(i)(A) of Rule 15c3-3 by notifying its designated examining
authority in writing.\84\ In order to revert to a weekly computation,
the carrying broker-dealer would need to wait 60 calendar days after
notifying its designated examining authority, in writing, of its
election to
[[Page 45845]]
perform weekly computations before it could switch to performing weekly
computations.\85\ The purpose of this requirement is to provide the
designated examining authority with prior notice of the switch and to
provide the designated examining authority with the opportunity to
contact the firm and ask how it intends to implement the change. This
would assist the designated examining authority in monitoring the firm.
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\84\ See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as proposed
to be amended.
\85\ To illustrate how this would work, assume a carrying
broker-dealer has been required to perform daily customer and PAB
reserve computations for five years. Assume further that with the
filing of the FOCUS Report for the October month-end in the fifth
year the carrying broker-dealer calculates its average total credits
and the amount is below the $250 Million Threshold. At this point,
the carrying broker-dealer could provide notice to its designated
examining authority of its election to begin performing the customer
and PAB reserve computations weekly. It would need to wait 60 days
after providing that notice before it could begin performing those
computations weekly.
---------------------------------------------------------------------------
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 $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.\86\ This would be the same process as when a carrying broker-
dealer exceeded the $250 Million Threshold for the first time. The
purpose of this requirement would be to provide the carrying broker-
dealer time to prepare to perform a daily computation. Carrying broker-
dealers that fall below the $250 Million Threshold and revert to weekly
customer and PAB reserve computations may reduce the resources they
dedicate to performing the computations. Therefore, these carrying
broker-dealers would need some time to enhance their operational
resources in order to increase the frequency of the computations again.
However, this may be an infrequent occurrence given that few carrying
broker-dealers likely would maintain average total credits that is
close to the $250 Million Threshold. Further, a carrying broker-dealer
could choose to continue to perform daily customer and PAB reserve
computations even after it falls below the $250 Million Threshold,
given the practical effect on liquidity as a result of the ability to
make more frequent withdrawals from its customer and PAB reserve bank
accounts. The largest carrying broker-dealers likely would be required
to perform daily computations an ongoing basis because their average
total credits would far exceed the proposed $250 Million Threshold.\87\
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\86\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed
to be amended.
\87\ This is based on FOCUS Report data for the 12 months ended
Dec. 31, 2022.
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The Commission also is proposing to amend paragraph (e)(3)(iv) of
Rule 15c3-3. Current paragraph (e)(3)(iv) of Rule 15c3-3 provides that
computations in addition to the computations required in paragraph
(e)(3) (i.e., the weekly computation and permitted monthly computation)
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.\88\ The
amendment to paragraph (e)(3)(iv) would provide that computations,
other than those made under paragraph (e)(3)(i)(B)(1) of Rule 15c3-3,
as proposed to be amended (i.e., the daily computations), may be made
as of the close of any business day.\89\ This amendment would specify
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 are required to make such computations on
a weekly or monthly basis. Carrying broker-dealers currently performing
daily customer and PAB reserve computations have used this option.
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\88\ See 17 CFR 240.15c3-3(e)(3)(iv).
\89\ 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 current
paragraph (e)(3)(iv) of Rule 15c3-3.
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B. Request for Comment
The Commission requests comments from all members of the public on
all aspects of the proposed rule amendments. Commenters are requested
to provide empirical data in support of any arguments or analyses. With
respect to any comments, the Commission notes that they are of the
greatest assistance to this rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments
and by alternatives to the Commission's proposals where appropriate. In
addition, the Commission is requesting comment on the following
specific aspects of the proposals:
1. The objective of the proposed amendments is to address the risk
that is created when the amount of net cash owed to customers and PAB
account holders by a carrying broker-dealer is greater than the amount
on deposit in the broker-dealer's customer and PAB reserve bank
accounts and the amount of that difference is substantial. Are there
ways--other than requiring daily customer and PAB reserve
computations--to address this risk? If so, identify them and explain
how they would more appropriately address this risk. For example,
rather than a daily customer and PAB reserve computation requirement,
should Rule 15c3-3 be modified to require a carrying broker-dealer to
deposit cash and/or qualified securities in the customer and PAB
reserve bank accounts in an amount that is a multiple of the required
amount computed under the customer and PAB reserve computations (i.e.,
overfund the customer and PAB reserve bank accounts weekly)? If so,
explain why. If not, explain why not. If Rule 15c3-3 were to be
modified in this way, should the multiple of the amount computed under
the customer and PAB reserve computations be 105%, 110% or some other
percentage? If so, explain why.
2. Should the definition of average total credits be modified to
use a subset of credit items rather than total credits? If so, explain
why. If not, explain why not. For example, rather than using the sum of
total credits from the customer reserve computation (Line 4430 of the
FOCUS Report) and the PAB reserve computation (Line 2170 of the FOCUS
Report), should the definition use the sum of free credit balances and
other credit balances from the customer reserve computation (Line 4340
of the FOCUS Report) and the PAB reserve computation (Line 2110 of the
FOCUS Report)? If so, explain why. If not, explain why not. If the
definition used free credit balances and other credit balances, the
amounts reported by a carrying broker-dealer would be less than the
amounts reported using total credits (as free credit balances and other
credit balances are one of several components of total credits).
Therefore, if the definition used free credit balances and other credit
balances, should the $250 Million Threshold be adjusted downward to
account for the lower amounts that would be reported by carrying
broker-dealers? If so, explain why. If not, explain why not. For
example, if the definition were to be modified in this way, should the
threshold be lowered to $200 million, $150 million, or $100 million, or
some other lower amount? If so, explain why. If not, explain why not.
3. Should the definition of average total credits be modified so
that it is based on a different set of filed FOCUS Reports? If so,
explain why. If not, explain why not. For example, should it be the
arithmetic mean of the total credits in the customer and PAB reserve
[[Page 45846]]
computations reported in each required FOCUS Report filed during the
most recently ended calendar year? If so, explain why. If not, explain
why not. Should it be the arithmetic mean of the FOCUS Reports filed
for the previous four calendar quarters? If so, explain why. If not,
explain why not.
4. Should the $250 Million Threshold be modified to be set at a
higher or lower threshold? \90\ If so, explain why. If not, explain why
not. For example, should the threshold be $50 million, $100 million,
$150 million, $200 million, $300 million, $500 million, or $1 billion?
If so, recommend a different threshold and explain why it would be
appropriate.
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\90\ See Table 5 in section IV.B.2. of this release (detailing
broker-dealer deposits and withdrawals as a share of reserve account
balance for the year 2022).
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5. Should Rule 15c3-3 be modified to require a carrying broker-
dealer to perform daily customer and PAB reserve computations using a
different metric for the threshold? For example, if Rule 15c3-3 were to
be modified in this way, should the threshold be based on a metric such
as: (1) total assets; (2) net capital under 17 CFR 240.15c3-1 (Exchange
Act Rule 15c3-1); (3) the maximum value of total credits reported on
the twelve most recently filed month-end FOCUS Reports; (4) whether the
required reserve bank account deposit as a share of the reserve bank
account balance prior to such deposit exceeds a certain percentage
threshold (e.g., 5% or 10%); or (5) the average total credits per
number of customer and PAB accounts? If so, explain why. If not,
explain why not.
6. Should Rule 15c3-3 be modified to require all carrying broker-
dealers to perform daily customer and PAB reserve computations? If so,
explain why. If not, explain why not.
7. Should the six-month period to begin performing the daily
customer and PAB reserve computations after having average total
credits that equal or exceed the $250 Million Threshold be modified? If
so, explain why. If not, explain why not. For example, would six months
be a sufficient time to implement the necessary changes to begin
performing a daily computation? If so, explain why. If not, explain why
not. Should the six-month period be lengthened or shortened? If so,
explain why. If not, explain why not. For example, should the time
period be 30 calendar days, 60 calendar days, three months, nine months
or one year? If so, recommend a different time period and explain why
it would be appropriate.
8. If a carrying broker-dealer falls below the $250 Million
Threshold, reverts to a weekly computation after providing the 60-day
prior notice, and subsequently exceeds the $250 Million Threshold
again, should the six-month period to begin performing the daily
customer and PAB reserve computations be modified? If so, explain why.
If not, explain why not. For example, would a carrying broker-dealer
need six months to implement the changes necessary to perform the
customer and PAB reserve computations daily after it exceeds the $250
Million Threshold for a second or third time? If so, explain why. If
not, explain why not. In this case, should the six-month period be
shortened? If so, explain why. If not, explain why not. For example,
should the time period for exceeding the $250 Million Threshold for a
second or subsequent time be 30 calendar days, 60 calendar days, or
three months? If so, recommend a different time period and explain why
it would be appropriate.
9. Should the requirement to provide a 60-day prior written notice
to the carrying broker-dealer's designated examining authority before
switching to weekly customer and PAB reserve computations be modified?
If so, explain why. If not, explain why not. For example, should the
time period be 30 days, 90 days or 180 days? If so, recommend a
different time period and explain why it would be appropriate.
10. Should Rule 15c3-3 be modified to specifically address the
situation where a carrying broker-dealer performing weekly customer and
PAB reserve computations exceeds the proposed $250 Million Threshold
for a period of a month or two, but subsequently falls below the
proposed $250 Million Threshold during the six-month period to begin
performing the customer and PAB reserve computations daily? If so,
explain why. If not, explain why not. For example, if Rule 15c3-3 were
to be modified in this way, should the carrying broker-dealer be
permitted to continue to perform its customer and PAB reserve
computations weekly, if it falls below the proposed $250 Million
Threshold during the six-month period? For example, if a carrying
broker-dealer performing weekly computations exceeds the proposed $250
Million Threshold in January and February, but falls below the proposed
$250 Million Threshold in March, April, May, and June, should the
carrying broker-dealer be permitted to continue to perform weekly
computations in July (as opposed to be required to perform daily
computations beginning in July)? In such a case, should the carrying
broker-dealer be required to give a written notice to its designated
examining authority that it will continue to perform weekly
computations? If so, explain why. If not, explain why not.
11. Should Rule 15c3-3 be modified to require carrying broker-
dealers to perform the customer and PAB reserve computations daily
indefinitely once they exceed the $250 Million Threshold for the first
time (with no option to revert to weekly computations with a 60-day
prior written notice)? If so, explain why. If not, explain why not.
12. Should Rule 15c3-3 be modified to require carrying broker-
dealers to document in writing and preserve for three years under
Exchange Act Rule 17a-4 the calculation of their average total credits?
\91\ If so, explain why. If not, explain why not.
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\91\ See 17 CFR 240.17a-4.
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13. If the proposal was adopted substantially as proposed, how long
would carrying broker-dealers need to prepare to come into compliance
with the new requirements? Please explain. For example, would they need
three, six, nine, twelve or some other number of months? What data
points would carrying broker-dealers use to assess the timing? Are
there any specific operational or technological issues that should be
factored into a compliance date?
14. Would staggering the compliance dates over more than one
calendar year help facilitate an orderly implementation of the
proposal, if adopted substantially as proposed? For example, would it
be appropriate for the compliance date to vary depending on the size of
the average total credits reported by carrying broker-dealers, with
firms having larger amounts of average total credits required to come
into compliance sooner than firms with smaller amounts of average total
credits? More generally, if staggering is appropriate, what would be an
appropriate schedule of compliance dates for carrying broker-dealers
with different amounts of average total credits? Please recommend
different compliance dates for carrying broker-dealers with different
amounts of average total credits and explain why they would be
appropriate. Should the fact that some carrying broker-dealers already
would be performing daily customer and PAB reserve computations factor
into the compliance date? If so, explain why. If not, explain why not.
15. If the proposal was adopted substantially as proposed, would
the six-month period to begin performing daily customer and PAB reserve
computations after having average total credits that equal or exceed
the $250 Million Threshold provide adequate time for carrying broker-
dealers to
[[Page 45847]]
implement the changes necessary to comply with the rule without the
need for an additional delayed compliance date? If so, explain why. If
not, explain why not. For example, would the six-month period be
adequate if the date to begin performing the daily customer and PAB
reserve computations fell near the end of the calendar year when
carrying broker-dealers may refrain from implementing new information
technology projects? If so, explain why. If not, explain why not.
III. Request for Comment--Reserve Account Requirements for Security-
Based Swaps
A. Discussion
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.\92\ These requirements were based in part on the
requirements of Rules 15c3-3 and 15c3-3a discussed above.\93\ Under the
security-based swap segregation requirements, broker-dealers--including
broker-dealers registered as SBSDs--are required to perform a separate
weekly security-based swap customer reserve computation and have a
separate security-based swap customer reserve account that must hold
the net amount of cash owed to security-based swap customers.\94\ Title
17 sections 240.18a-4 and 18a-4a (``Exchange Act Rules 18a-4 and 18a-
4a'') impose analogous security-based swap customer reserve computation
and deposit requirements on SBSDs that either are not registered as a
broker-dealer or are registered as special class of broker-dealer known
as an over-the counter derivatives dealer (``OTC derivatives
dealer'').\95\ As discussed below, the proposed amendments would not
alter these existing segregation rules for security-based swap
customers to require a daily (rather than weekly) computation and
deposit.\96\ However, the Commission seeks comment on these matters
below.
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\92\ 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'').
\93\ Id. See also sections I.B.1. and I.B.2. of this release
(discussing the requirements of Rules 15c3-3 and 15c3-3a).
\94\ See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b.
\95\ See 17 CFR 240.18a-4; 17 CFR 240.18a-4a. OTC derivatives
dealers are limited purpose broker-dealers that are authorized to
trade in OTC derivatives (including a broader range of derivatives
than security-based swaps) and to use models to calculate net
capital. See 17 CFR 240.3b-12 (defining the term ``OTC derivatives
dealer''); OTC Derivatives Dealers, Exchange Act Release No. 40594
(Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). OTC derivatives dealers
are not members of SIPC.
\96\ The Commission proposed a daily computation requirement for
security-based swap customers. See SBS Segregation Adopting Release,
84 FR at 43940. In response to comment, the Commission adopted a
weekly security-based swap customer reserve requirement in light of
the increased operational burdens for broker-dealers and SBSDs as
compared to a weekly computation. Id.
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The proposed amendments do not include such daily requirements
because almost all carrying broker-dealers--including those also
registered as SBSDs--that have credits related to the security-based
swap activities of their security-based swap customers account for
these credits in their customer reserve computation and in their
customer reserve bank account.\97\ Therefore, the proposed amendments
to the customer reserve requirements of Rule 15c3-3 discussed above
would apply to the security-based swap credits computed by these
broker-dealers.\98\ These carrying broker-dealers would not include any
debit items related to security-based swap activities of their
security-based swap customers in their customer reserve
computation.\99\ Consequently, amending Rule 15c3-3 to require a daily
security-based swap customer reserve computation for broker-dealers,
including those also registered as SBSDs, 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. This would include the daily customer
reserve computations of those carrying broker-dealers that exceed the
proposed $250 Million Threshold.
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\97\ This is based on FOCUS Report data for calendar year 2022.
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 https://www.sec.gov/tm/faqs-financial-responsibility-req-applied-sbs (``SBS FAQ 1''). Based on FOCUS
Report data for calendar year 2022, only one broker-dealer currently
performs a separate security-based swap customer reserve
computation.
\98\ See section II.A.1. of this release (discussing the
proposed amendments).
\99\ See SBS FAQ 1 for staff views.
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In addition, the SBSDs registered with the Commission that are not
dually registered as broker-dealers (other than as OTC derivatives
dealers) operate pursuant to an exemption from the Commission's
security-based swap segregation rule.\100\ Under this exemption, they
are not required to perform a security-based swap customer reserve
computation or have a security-based swap customer reserve account. In
addition, these SBSDs are not members of SIPC.
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\100\ See 17 CFR 240.18a-4(f).
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B. Request for Comment
The Commission generally requests comments on whether the security-
based swap customer reserve computation and deposit requirements should
be daily (rather than weekly). In addition, the Commission requests
comments on the following specific issues, with accompanying data and
analysis:
16. Should Rule 15c3-3 be modified to require broker-dealers--
including broker-dealers (other than OTC derivatives dealers)
registered as SBSDs--to perform daily security-based swap customer
reserve computations in addition to daily customer and PAB reserve
computations? If so, explain why. If not, explain why not.
17. Should the Commission amend Exchange Act Rules 18a-4 and 18a-4a
to require SBSDs that are not registered as broker-dealers (other than
as OTC derivatives dealers) to perform daily security-based swap
customer reserve computations? If so, explain why. If not, explain why
not.
IV. Economic Analysis
A. Introduction
The Commission is mindful of the economic effects, including the
benefits and costs, of the proposed amendments. Section 3(f) of the
Exchange Act provides that when engaging in rulemaking that requires
the Commission to consider or determine whether an action is necessary
or appropriate in the public interest, to also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\101\ Section 23(a)(2)
of the Exchange Act also requires the Commission to consider the effect
that the rules and rule amendments would have on competition, and it
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the Exchange Act.\102\ The analysis below addresses the likely economic
effects of the proposed amendments, including the anticipated benefits
and costs of the amendments and their likely effects on efficiency,
competition, and capital formation. The Commission also discusses the
potential
[[Page 45848]]
economic effects of certain alternatives to the approaches taken in
this proposal.
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\101\ See 15 U.S.C. 78c(f).
\102\ See 15 U.S.C. 78w(a)(2).
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As part of their business, carrying broker-dealers regularly
receive cash related to customers' and PAB account holders' securities
transactions, such as cash realized from sales of securities. While it
is common that customers' and PAB account holders' cash is quickly re-
invested or swept out to a bank account or money market fund by the
customer or PAB account holder, it is also common for this cash to
remain undeployed for or on behalf of customers and PAB account holders
for several days or longer prior to the next required customer and PAB
reserve computations and deposits into the customer and PAB reserve
bank accounts.\103\
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\103\ See section I.C. of this release (discussing the risk of a
mismatch of funds owed and funds reserved under Rule 15c3-3).
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Currently, the required balances in customer and PAB reserve bank
accounts (net cash owed to customers or PAB account holders) are
required to be calculated weekly, and the resulting amount must be held
in the customer and PAB reserve bank accounts until the date of next
required deposit.\104\ However, the value of the net cash owed to
customers or PAB account holders may change daily due to customers' and
PAB account holders' transactions and re-deployment of undeployed
funds. On a weekly basis, this could result in a large intra-week
mismatch between the customer or PAB reserve bank account balances and
actual net cash owed to customers or PAB account holders. This intra-
week mismatch introduces several potential risks that are currently not
internalized by carrying broker-dealers.
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\104\ See section I.B.1. and 2. of this release (discussing
customer protection requirements of Rule 15c3-3 for customers and
PAB account holders).
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First, the mismatch between the calculated and the actual amounts
of net cash owed to customers and PAB account holders introduces a risk
to other SIPC members. More specifically, if a liquidation of a
carrying broker-dealer with a mismatch of cash in its customer and PAB
reserve bank accounts is carried out under SIPA, the SIPC Fund balance
would be used if there are not enough assets in the broker-dealer's
estate to cover the difference between the net cash owed to customers
and the amount in the reserve bank account,\105\ which may trigger a
subsequent increase in contributions from other SIPC members. This risk
may be exacerbated for carrying broker-dealers experiencing large
aggregate intra-week mismatches. As a result, the SIPC Fund would be at
a higher risk of depletion. For example, as discussed in section
IV.B.2. below, mismatches are common among broker-dealers of all sizes
(as measured by average total credits). The largest carrying broker-
dealers with average total credits of at least $500 billion had
mismatches of between 10 and 18 percent during 2022.\106\
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\105\ See section I.B.3. of this release (discussing broker-
dealer liquidations and SIPA, including the funding and balance of
the SIPC Fund). For an example of a customer reserve bank account
mismatch, one carrying broker-dealer had a deficit in its customer
reserve bank account equal to $5 billion, yet the level of the SIPC
Fund at the time was at $2 billion. See Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch Professional Clearing
Corp., Order Instituting Administrative and Cease-and-Desist
Proceedings, Pursuant to Sections 15(b) and 21C of the Securities
Exchange Act of 1934, Making Findings, and Imposing Remedial
Sanctions and a Cease-and-Desist Order, Exchange Act Rel. No. 78141
(June 23, 2016).
\106\ Based on FOCUS Report data for 2022. The mismatch is
calculated as the amount deposited (FOCUS Report Line 4520) relative
to the reserve account balance (Line 4530). These data are discussed
in detail in section IV.B.2 of this release, see Table 5 in that
section and related discussion.
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Second, this mismatch introduces a risk to customers and PAB
account holders of carrying broker-dealers. To the extent that there is
mismatch of funds in the customer or PAB reserve bank account, a
failure of a carrying broker-dealer would prevent its customers or PAB
account holders from promptly receiving the whole amount of cash owed
to them. In this scenario, the funds 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 funds back
until the broker-dealer liquidation process is carried out under SIPA,
which may take a significant amount of time. In addition, customers and
PAB account holders may not receive their funds in full if the
liquidation proceedings do not result in a full recovery of funds owed
to customers and PAB account holders. This risk may be exacerbated for
potential failures of carrying broker-dealers with large amounts of
customer or PAB reserve bank account balances, such as when these
carrying broker-dealers experience large aggregate intra-week
mismatches between the reserve bank account balances and actual net
cash owed to customers or PAB account holders. Under perfect
information, investors would choose their carrying broker-dealer in
part based on the risk of failure and would continue to monitor the
carrying broker-dealer for risk of failure. However, monitoring costs
and other frictions may prevent this.
The proposed daily customer and PAB reserve computations for
carrying broker-dealers with substantial amounts of total credits is
aimed to address these risks and is expected to benefit customers, PAB
account holders, and other stakeholders of the affected carrying
broker-dealers by more dynamically matching the net cash owed to
customers or PAB account holders and the customer and PAB reserve bank
account balances. More specifically, the daily customer and PAB reserve
computations would safeguard customers and PAB account holders of the
affected carrying broker-dealers by lessening the potential for large
mismatches to build over time, and thereby increasing the likelihood
that they are made whole even if a carrying broker-dealer fails. Daily
computations would also decrease the risk that other stakeholders, such
as contributors to the SIPC Fund, would need to provide additional
resources (e.g., in the form of increased assessments) to address a
failure of a carrying broker-dealer.
The proposed amendments may result in increased compliance costs
for the affected carrying broker-dealers. To the extent that each
customer or PAB reserve computation takes a significant amount of time
or involves manual processes, affected carrying broker-dealers would
experience a one-time set up cost related to switching to a daily
computation, as well as an increase in ongoing costs related to more
frequent computations. These costs, like the aforementioned benefits,
may ultimately be passed through to customers and PAB account holders
of the affected carrying broker-dealers.
Many of the benefits and costs discussed below are impracticable to
quantify. For example, the Commission lacks data that would help it
predict how enhanced customer protection related to daily customer and
PAB reserve computations would affect customer and PAB account holders'
activities in the accounts maintained by the affected carrying broker-
dealers and whether customers and PAB account holders of non-affected
carrying broker-dealers would shift their capital to the affected
carrying broker-dealers due to such increased protections; data that
would help the Commission estimate how carrying broker-dealers near the
proposed $250 Million Threshold may adjust their business activities as
a result of the proposed changes; and data on the complexity of
customers' and PAB account holders' activities for different carrying
broker-dealers that
[[Page 45849]]
would help the Commission estimate the potential costs for various
groups of the affected carrying broker-dealers. While the Commission
has attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The Commission
seeks comment on all aspects of the economic analysis, especially any
data or information that would enable a quantification of the
proposal's economic effects.
B. Baseline
1. Regulatory Baseline
a. Rule 15c3-3
Carrying broker-dealers are broker-dealers that maintain custody of
customer securities and cash. Rule 15c3-3, known as the broker-dealer
customer protection rule, is designed to give specific protection to
customer funds and securities. For example, a broker-dealer is
``virtually'' precluded from using customer funds to buy securities for
its own account.\107\
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\107\ See section I.B.1. of this release (describing the
purposes of Rule 15c3-3).
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The current rule specifies that a carrying broker-dealer must
undertake two primary steps to safeguard these customer assets. First,
carrying broker-dealers are required to maintain physical possession or
control over customers' fully paid and excess margin securities.\108\
Second, a carrying broker-dealer must maintain a reserve of funds and/
or qualified securities in an account at a bank that is at least equal
in value to the net cash owed to customers. The account must be a
customer reserve bank account. The amount of net cash owed to customers
is computed weekly as of the close of the last business day of the week
pursuant to the customer reserve computation.\109\ 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.\110\ A carrying broker-dealer also is required to make and
maintain a record of each computation.\111\
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\108\ See section I.B.1. of this release (describing possession
and control requirements for customers' securities).
\109\ Some carrying broker-dealers choose to perform a daily
computation. See 17 CFR 240.15c3-3(e)(3)(iv). Further, the rule
permits carrying broker-dealers in certain limited circumstances to
perform a monthly computation. See 17 CFR 240.15c3-3(e)(3)(i). See
also section I.B.1. of this release (describing the customer reserve
bank account and customer reserve computation).
\110\ 17 CFR 240.15c3-3(e). See also section I.B.1. of this
release (describing the customer reserve bank account and customer
reserve computation).
\111\ See 17 CFR 240.15c3-3(e)(3)(v). Each record must be
preserved in accordance with Rule 17a-4. Id.
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Carrying broker-dealers also may carry accounts that hold
proprietary securities and cash of other broker-dealers, known as PAB
accounts.\112\ Broker-dealers are not within the definition of
``customer'' for purposes 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. As
discussed in more detail in section I.B.3. of this release, broker-
dealers--as customers under SIPA--have the right to share equally with
other customers in the customer property in a SIPA liquidation in the
event that there is a shortfall in the amount the broker-dealer owes
its customers. Because broker-dealers are entitled to a pro rata share
of customer property,\113\ Rules 15c3-3 and 15c3-3a require carrying
broker-dealers to: (1) perform a PAB reserve computation in addition to
the customer reserve computation; \114\ (2) establish and fund their
PAB reserve bank account; and (3) obtain and maintain physical
possession or control of non-margin securities carried for a PAB
account holder.\115\
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\112\ See section I.B.2. of this release (describing Rule 15c3-3
and PAB accounts).
\113\ See section I.B.3. of this release (describing broker-
dealer liquidations and SIPA).
\114\ See section I.B.1. of this release (describing Rule 15c3-3
and customer accounts).
\115\ See section I.B.2. of this release (describing Rule 15c3-3
and PAB accounts).
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b. SIPA and the SIPC Fund
As described in section I.B.3. of this release, SIPA established
SIPC and directed SIPC to establish the SIPC Fund.\116\ At the end of
2022, SIPC reported 3,396 members.\117\ The SIPC Fund totaled
approximately $4.05 billion as of December 31, 2022, and currently the
objective is to build it to a level of $5 billion. To date, SIPC has
carried out 330 liquidations since its inception with approximately
$142 billion in assets distributed to customers.\118\ Of that, about
$141.2 billion came from debtors' estates (i.e., SIPC broker-dealer
members' estates), while $917 million came from the SIPC Fund.\119\
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\116\ See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
\117\ See 2022 SIPC Annual Report, Table 2, at 10.
\118\ As of the end of 2022. See section I.B.3. of this release,
describing broker-dealer liquidations and SIPA. The volume of
proceedings was highest in the 1970s (15 per year), while between
1980 and 2003 the number averaged about seven per year. Since 2003
the average has been one per year (with the highest number, five,
occurring in 2008, while there were 10 years with none). See 2022
SIPC Annual Report, Figure 1, at 8.
\119\ See 2022 SIPC Annual Report at 8-9, for the statistics in
this paragraph. SIPC refers to distributions to customers as
``advances,'' though the 2022 SIPC Annual Report does not detail the
timing of those advances in the 330 proceedings.
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c. Reserve Account Requirement for Security-Based Swaps
In 2019, the Commission adopted customer segregation requirements
for broker-dealers and SBSDs with respect to customer money,
securities, and property related to security-based swaps.\120\ These
requirements were based in part on the requirements of Rules 15c3-3 and
15c3-3a discussed above.\121\ Under these requirements, broker-dealers
(including broker-dealers that are also SBSDs) are required to perform
a separate weekly security-based swap customer reserve computation and
have a separate security-based swap customer reserve account that must
hold the net amount of cash owed to security-based swap customers.\122\
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\120\ See SBS Segregation Adopting Release. See also section
III. of this release (discussing reserve account requirements for
security-based swaps).
\121\ Id. See also sections I.B.1. and I.B.2. of this release
(discussing the requirements of Rules 15c3-3 and 15c3-3a).
\122\ See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b. See also
section III. of this release (discussing reserve account
requirements for security-based swaps, and SBS FAQ 1 for staff
views). SBSDs that are not broker-dealers (other than OTC
derivatives dealers) are subject to the segregation requirements of
Exchange Act Rules 18a-4 and 18a-4a.
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2. Affected Broker-Dealers
Table 2 presents the universe of broker-dealers by presence of
carrying activities.\123\ As of December 2022, 156 broker-dealers
identified in Line 40 of the FOCUS Report that they carry their own
customer accounts. Among these, 65 reported having only customer
credits, 66 reported having both customer and PAB credits, none
reported having only PAB credits,\124\ and 9 broker-dealers reported
having no customer credits or debits. Further, 16 broker-dealers
reported having exemptions from the requirements of Rule 15c3-3,
including performing a customer reserve computation.\125\ In
[[Page 45850]]
addition, 31 broker-dealers that did not identify themselves as those
that carry their own customer accounts in Line 40 of the FOCUS Report
reported customer and/or PAB credits in their customer or PAB reserve
computations. Among these, four broker-dealers had both customer and
PAB credits, 26 broker-dealers had customer credits only, and one
broker-dealer had PAB account credits only.
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\123\ Based on monthly FOCUS Report data for the reporting year
2022. The Commission assumes that broker-dealers that did not file
FOCUS Reports for the last month of 2022 are no longer in business.
\124\ PAB account holders are not considered customers under 17
CFR 240.15c3-3(a)(1). See section I.B.2. of this release (describing
Rule 15c3-3 and proprietary accounts of broker-dealers).
\125\ There are three exemptions to Rule 15c3-3, each related to
the procedure a broker-dealer follows when they receive customer
funds and securities. The first exemption is for broker-dealers that
partake in limited mutual fund and insurance-related business. The
exemption allows such firms to briefly handle customer funds, but
not maintain indefinite custody of those funds or securities. The
second exemption applies to broker-dealers that clear their
transactions on what is known as a ``receive versus payment/delivery
versus payment (RVP/DVP) basis.'' In an RVP/DVP settlement, a
broker-dealer executes simultaneous exchanges of an equal value of
funds for securities. As such, the broker-dealer does not end up
holding any residual customer funds or securities. The third
exemption is also available to broker-dealers that temporarily
handle customer funds. This broker-dealer, called an ``introducing
broker,'' establishes accounts in the name of its customers at
another broker-dealer, a ``clearing broker.'' The clearing broker
then maintains custody of those customers' cash and securities in
those accounts on a fully disclosed basis. See 17 CFR 240.15c3-3(k).
---------------------------------------------------------------------------
When the Commission computes average total credits using data for
January 2022 through December 2022, the Commission estimates that there
are 187 broker-dealers (``carrying broker-dealers'') that currently
fall within the scope of the Rule 15c3-3 (though of this group, 25
carrying broker-dealers reported zero customer or PAB credits in 2022).
In aggregate, these carrying broker-dealers hold approximately 87
percent of all broker-dealer assets,\126\ and report approximately $1.2
trillion in total credits and approximately $0.92 trillion in average
monthly total debits, as of December 2022.\127\
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\126\ Total assets are reported on Line 940 of the FOCUS Report.
\127\ The Commission uses monthly FOCUS Reports to calculate
total credits and total debits. For each broker-dealer, Total
Credits are calculated as the sum of customer credits reported on
Line 4430 and the PAB credits reported on Line 2170. Similarly, for
each broker-dealer, Total Debits are calculated as the sum of the
customer debits reported on Line 4472 and the PAB debits reported on
Line 2230.
Table 1--Broker-Dealers by Carrying Activity, 2022 a
----------------------------------------------------------------------------------------------------------------
Total credits, $B Total debits, $B
Total ---------------------------------------------------
Broker-dealer type Number assets, $B Monthly Monthly
average Year-end average Year-end
----------------------------------------------------------------------------------------------------------------
Carrying its own customer 156 4,487.7 1,306.9 1,177.0 1,024.3 913.6
accounts:........................
--with positive customer and 66 3,982.3 1,261.2 1,138.5 982.8 879.4
PAB credits..................
--with positive customer 65 446.8 45.7 38.5 41.5 34.3
credits only.................
--with zero reported credits.. 9 54.5 0 0 0 0
--with reporting exemptions... 16 4.1 ........... ........... ........... ...........
Not carrying its own customer 31 58.0 22.6 20.5 4.2 3.8
accounts:........................
--with positive customer and 4 8.0 0.3 0.1 0.3 0.1
PAB credits..................
--with positive customer 26 49.7 22.3 20.4 3.8 3.7
credits only.................
--with positive PAB credits 1 0.4 0.01 0.01 0.02 0.01
only.........................
Without any carrying activities... 3,411 694.0 ........... ........... ........... ...........
-----------------------------------------------------------------------------
Total..................... 3,598 5,239.7 1,329.5 1,197.5 1,028.5 917.4
----------------------------------------------------------------------------------------------------------------
\a\ Data are for calendar year 2022. The Commission uses monthly FOCUS Reports to calculate average monthly
total credits and total debits. For each broker-dealer, Total Credits are calculated as the sum of the average
monthly amount of customer credits reported on Line 4430 and the average monthly amount of PAB credits
reported on Line 2170. Similarly, for each broker-dealer, Total Debits are calculated as the sum of the
average monthly amount of customer debits reported on Line 4472 and the average monthly amount of PAB debits
reported on Line 2230.
Table 3 displays the broker-dealers that reported positive customer
or PAB credits in 2022 into groups based on the size of their average
monthly total customer and PAB credits (averaged over January 2022 to
December 2022).\128\
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\128\ The grouping is based on the average monthly amount of
customer credits reported on Line 4430 and the average monthly
amount of PAB credits reported on Line 2170.
Table 2--Carrying Broker-Dealers by Size of Average Total Credits, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Total customer credits, $MM Total PAB credits, $MM Total credits, $MM
Number assets ---------------------------------------------------------------------------------------
($B) Number Mean Median Number Mean Median Mean Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM................................. 81 127.1 81 14.8 2.1 18 0.4 0 15.3 2.4
$100-250MM................................ 18 101 18 133.3 120.3 12 4.3 0 137.6 128.6
$250-500MM................................ 8 148.1 8 374.7 394.9 3 8.6 0 383.3 401.1
$500MM-1B................................. 9 206.6 9 593.8 566.5 7 98.0 29.6 691.8 667.6
$1-5B..................................... 18 352.5 18 2056.7 1868.1 16 127.5 2.9 2184.2 1871.4
$5-10B.................................... 7 189.7 7 5779.7 5352.5 7 820.0 62.3 6599.6 5892.1
>=$10B.................................... 21 3362.1 21 51312.0 23941.5 19 7307.7 84.5 58619.8 29261.2
-------------------------------------------------------------------------------------------------------------
Total \a\............................. 162 4,487.1 162 7,203.5 84.7 82 1,003.5 0.0 8,207.0 95.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Table excludes carrying broker-dealers with zero reported credits in 2022.
The proposed daily computation would apply only to carrying broker-
dealers whose average total credits are above the proposed $250 Million
Threshold. Therefore, the Commission estimates that, based on data for
January 2022 through December 2022, the scope of affected entities was
63 carrying broker-dealers, which held 86.4 percent of aggregate total
credits of all carrying broker-dealers.
The number of affected carrying broker-dealers may vary month to
month since a 12-month rolling average is used for the proposed $250
Million Threshold. To provide information on how the number of entities
may thus vary over time, Figure 1 displays the number of affected
broker-dealers for a sequence of 12-month rolling averages
[[Page 45851]]
beginning with January 2022 and extending through May 2023.\129\
---------------------------------------------------------------------------
\129\ Figure created from monthly FOCUS Reports, from January
2022 through May 2023. The first 12-month computation period is
January 2022 to December 2022, the second period is February 2022
through January 2023, and so on. The total number of broker-dealers
that reported positive total credits in each of the six rolling
periods shown in Figure 1 equaled 162, 162, 161, 161, 162 and 162,
respectively.
[GRAPHIC] [TIFF OMITTED] TP18JY23.005
As shown in Figure 1, the number of affected carrying broker-
dealers varied monthly from 60 to 63 over the period from January 2022
through May 2023. There was little variation, however, in the identity
of the affected carrying broker-dealers. The same fifty-nine carrying
broker-dealers met the threshold in each month, and from one to four
additional broker-dealers met the threshold in any given month. In
total, over this period, 63 different carrying broker dealers would
have been affected.\130\
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\130\ Only in one case did a carrying broker-dealer within the
top-60 fall below the $250 Million Threshold from one period to the
next (leading to the decline from 63 to 62 carrying broker-dealers).
---------------------------------------------------------------------------
With respect to the frequency of computation, based on the January
2022 to December 2022 period (12-month period), Table 4 displays the
number of broker-dealers performing their computations daily, weekly,
and monthly in each size category for average total credits.\131\
---------------------------------------------------------------------------
\131\ Data from monthly FOCUS Reports filed for the 2022
calendar year. A small number of broker-dealers did not identify any
customer or PAB reserve computation frequency (for example, for
broker-dealers reporting positive credits in customer accounts, one
failed to report reporting frequency in their FOCUS Report).
Therefore, the total number of carrying broker-dealers exceeds the
sum of the number of broker-dealers who identified a daily, weekly,
or monthly computation frequency. Of the carrying broker-dealers
that reported a filing frequency in 2022 calendar year, the reported
frequency (daily, weekly, or monthly) remained the same in each
reported month.
Table 3--Reserve Formula Computation Frequency, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Customer reserve formula PAB reserve formula
Average total credits Number -----------------------------------------------------------------------------------------------
Number Daily Weekly Monthy Number Daily Weekly Monthly
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM................................... 81 81 1 67 12 18 0 17 1
$100-250MM.................................. 18 18 0 18 0 12 0 12 0
$250-500MM.................................. 8 8 0 8 0 3 0 3 0
$500MM-1B................................... 9 9 0 9 0 7 0 7 0
$1-5B....................................... 18 18 1 17 0 16 1 15 0
$5-10B...................................... 7 7 0 7 0 7 0 7 0
>=10B....................................... 21 21 10 11 0 19 9 10 0
-----------------------------------------------------------------------------------------------------------
Total................................... 162 162 12 137 12 82 10 71 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 45852]]
As shown in Table 4, out of 162 broker-dealers that reported the
frequency of their customer reserve formula computations, there were 12
carrying broker-dealers that performed the customer reserve computation
daily, among which 10 also performed the PAB reserve computation daily
and two which do not report carrying PAB accounts. Among carrying
broker-dealers performing the customer reserve computation daily, 11
had total credits above the proposed $250 Million Threshold. These 11
carrying broker-dealers accounted for 64 percent of the total amount of
average total credits among all carrying-broker dealers with positive
customer or PAB credits reported in 2022.\132\ All the carrying broker-
dealers performing the PAB reserve computation daily had total credits
above the proposed $250 Million Threshold.\133\
---------------------------------------------------------------------------
\132\ Calculated from monthly FOCUS Reports for 2022.
\133\ The broker-dealers identified as filing daily in the
January 2022 to December 2022 sample were the same broker-dealers
identified in the April 2022 to May 2023 sample (for both customer
and PAB accounts).
---------------------------------------------------------------------------
Based on the January 2022 to December 2022 period, there were 52
carrying broker-dealers with average total credits equal to $250
million or above performing the customer reserve computation weekly and
there were no carrying broker-dealers with average total credits equal
to $250 million or above performing the customer reserve computation
monthly. Among the 52 carrying broker-dealers performing weekly
customer reserve computation, there were 42 carrying broker-dealers
that performed the PAB reserve computation weekly and there were no
carrying broker-dealers with average total credits equal to $250
million or above that performed the PAB reserve computation monthly.
Based on the data for 2022, the Commission estimates that 52 carrying
broker-dealers would be affected by the proposal.
Table 5 below shows the distribution of deposits required to be put
into the customer and PAB reserve bank accounts or permitted
withdrawals after the reserve computation performed at the end of the
reporting period relative to the initial reserve bank account
balance.\134\ These metrics provide a picture of the ``mismatch'' that
occurs with respect to customer and PAB accounts. The column ``Average
Mismatch'' is calculated as the average of deposits (averaged over
2022) for each broker-dealer relative to the average balance in the
reserve account (customer or PAB account).
---------------------------------------------------------------------------
\134\ Calculated from monthly FOCUS Reports for 2022. The
Commission isolated deposits (equal to or greater than zero) from
any month (Line 4520), relative to the reserve account balance,
(Line 4530). For PAB reserve bank accounts, deposits and amount in
reserve account are FOCUS Lines 2290 and 2300, respectively. Note,
the Commission also recalculated by defining the deposit category as
only values greater than zero, but the average mismatch did not
change very much for each category, nor did the pattern seen in the
table.
---------------------------------------------------------------------------
With respect to customer reserve accounts, shown in Panel A, the
largest average mismatches occurred for broker-dealers over the $250
Million Threshold, with the largest occurring for carrying broker-
dealers within the $5 to $10 billion range. For the case of the maximum
mismatch during the year, there appears to be less of a correlation
with carrying broker-dealer size.\135\ For PAB reserve accounts, shown
in Panel B, the largest average mismatch and the maximum mismatch
occurred for the groups of carrying broker-dealers over $250 million in
average total credits (it is also the case that the total amount of PAB
accounts are concentrated among those carrying broker-dealers).
---------------------------------------------------------------------------
\135\ For the maximum mismatch, the Commission isolated the
largest monthly deposit amount in 2022 (Line 4520), relative to the
reserve account balance for that month (Line 4530). The same was
done for PAB reserve accounts (FOCUS Lines 2290 and 2300,
respectively).
---------------------------------------------------------------------------
Panel C and D of Table 5 display the average mismatch and maximum
mismatch metrics comparing the large carrying broker-dealers (over $1
billion in average total credits) that currently compute their reserve
accounts daily versus those that do so weekly.\136\ With respect to
customer reserve accounts (Panel C), carrying broker-dealers that
compute daily have larger average reserve balances and deposits, and
lower average and maximum mismatches than those that compute
weekly.\137\
---------------------------------------------------------------------------
\136\ As noted above, the number and identity of the daily
filers are consistent from December 2022 through May 2023. See supra
note 133.
\137\ Panel C omits the one carrying broker-dealer below the
$250 Million Threshold that computed their customer reserve account
daily in 2022.
---------------------------------------------------------------------------
For PAB reserve accounts (Panel D), the average or maximum mismatch
do not appear as correlated with daily versus weekly filing.\138\
---------------------------------------------------------------------------
\138\ The patterns and inference drawn from Table 5 are similar
if constructed with the rolling sample period from June 2022 to May
2023. For example, for the daily filers shown in Panel C, the
average mismatch is 4.9 percent, while for weekly filers, the
average mismatch is 14.6 percent.
Table 4--Broker-Dealer Deposits and Withdrawals as a Share of Reserve Account Balance, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average
Broker-dealer group Number reserve Average Average Average Maximum
balance MM deposit MM withdrawal MM mismatch % mismatch %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel A: Customer Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM............................................. 81 $9.5 $0.7 -$4.1 6.1 25.2
$100-250MM............................................ 18 52.7 1.9 -16.2 5.7 27.1
$250-500MM............................................ 8 180.8 9.9 -16.0 6.1 20.9
$500MM-1B............................................. 9 124.2 7.7 -32.2 18.2 35.9
$1-5B................................................. 18 732 35.8 -61.4 5.4 22.5
$5-10B................................................ 7 1,147.2 234 -122.4 31.9 57.4
[gteqt]10B............................................ 21 14,150.6 542.3 -841.6 7.9 25.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: PAB Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100 MM............................................ 18 1.2 0.03 -0.3 2.9 18.7
$100-250 MM........................................... 12 5.3 0.3 -2.9 2.3 10.4
$250-500 MM........................................... 3 19.9 1.3 -5.3 5.2 24.7
$500MM-1 B............................................ 7 106.5 4.5 -27.3 11.4 41.1
$1-5 B................................................ 16 27.9 5.5 -20.4 7.7 44
$5-10 B............................................... 7 184.5 56.2 -108.6 10.4 39
[gteqt]10 B........................................... 19 749.1 127.4 -279.9 7.6 29.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 45853]]
Panel C: Customer Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
All (weekly and daily):
>=1B.............................................. 46 6,921.1 297.2 -441.1 10.7 29.2
Daily:
>=1B.............................................. 11 13,324.2 482.3 -1,227.8 5.2 22.1
Weekly:
>=1B.............................................. 35 4,908.7 239 -178.9 12.4 31.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel D: PAB Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
All (weekly and daily):
>=1B.............................................. 42 380.3 69.1 -159.1 8.1 36.6
Daily:
>=1B.............................................. 10 1,153.7 216.8 -356.5 8.9 33.4
Weekly:
>=1B.............................................. 32 138.5 22.9 -74.5 7.9 37.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
C. Benefits and Costs of the Proposed Amendments
Customers and PAB account holders of the affected carrying broker-
dealers are expected to benefit from the proposed daily customer and
PAB reserve computations. As reflected in the discussion in section I.C
of this release noting the large amounts of deposits carrying broker-
dealers may receive, and as evidenced from the information in Table 5,
a weekly customer and PAB reserve computation can result in a carrying
broker-dealer owing a net amount of cash to customers or PAB account
holders for a number of days that is greater than the current amounts
deposited into the customer and PAB reserve bank accounts. Hence, if a
carrying broker-dealer fails before the next reserve account
computation and the reserve bank account balances do not represent the
actual net amount of cash owed to customers or PAB account holders,
these customers and PAB account holders may be at risk of not
recovering their funds from the carrying broker-dealer or having it
tied up in a liquidation proceeding. Performing daily customer and PAB
reserve computations would likely decrease this risk.
Under the scenario where a carrying broker-dealer does not have
sufficient funds to repay what it owes to customers or PAB account
holders, SIPC likely would need to initiate a liquidation of the
carrying broker-dealer under SIPA.\139\ Although the SIPC Fund can be
used to advance funds to customers that are owed money, PAB account
holders are not entitled to such advances; therefore, they may not
receive the funds owed to them by a failed carrying broker-dealer as
promptly as customers of such broker-dealer may. In addition, there is
a limit on advances to customers in the amount of $500,000 per customer
(of which $250,000 can be used to cover cash claims). If some customers
are owed more than such limit, these customers would have to wait along
with PAB account holders until a trustee is appointed who would
consequently attempt to recover assets of the failed carrying broker-
dealer via asset sales or other recovery methods. This recovery process
may, in some cases, be lengthy.\140\ In an extreme case, the recovery
amounts the trustee is able to receive may still be insufficient to
make all customers and PAB account holders whole, which means that
these customers and PAB account holders have to absorb the loss.
---------------------------------------------------------------------------
\139\ See section I.B.3 of this release (discussing broker-
dealer liquidations and SIPA).
\140\ For example, it has been the case that customers of a
liquidated carrying broker-dealer have had to wait up to six months
or more to access their assets during the liquidation period. See
Michael P. Jamroz, The Customer Protection Rule, 57 Bus. Law. 1069
(May 2002), available at https://www.jstor.org/stable/40688076.
---------------------------------------------------------------------------
Based on these various circumstances surrounding a failure of a
carrying broker-dealer, from the customer's or PAB account holder's
perspective, there are varying degrees of risk related to a potential
failure of a carrying broker-dealer, depending on whether it has enough
funds to make all customer and PAB account holders whole at the time of
its failure. Therefore, maintaining levels of customer and PAB reserve
bank account balances that more closely represent the actual amounts of
net cash owed to customers and PAB account holders would benefit these
customers and PAB account holders by decreasing the risk of not
completely recovering their funds from the carrying broker-dealer or
having these funds tied up in a liquidation proceeding.\141\
---------------------------------------------------------------------------
\141\ The Commission notes that, with daily computing, there
will still be a mismatch between the actual net cash owed to
customers and the reserve account balance because of the deposit
timing delay, which is the morning of the second business day after
the day of calculation. Should a carrying broker-dealer computing
daily fail, and the amount of the mismatch is lower than in the case
of a weekly computation, the customer may receive their funds more
promptly from the carrying broker-dealers' available assets than in
the case where mismatches are larger (which may imply a longer
liquidation process), underscoring the potential benefit from daily
computing. It is also a possibility, however, that daily computing
may lead to a situation with large mismatches. If a carrying broker-
dealer receives large customer deposits on consecutive days, given
the two-day settlement period, any mismatch may persist over that
period, and should the carrying broker-dealer fail, the benefits to
customers of daily computation may be reduced.
---------------------------------------------------------------------------
In addition, performing daily customer and PAB reserve computations
would benefit customers and PAB account holders of the affected
carrying broker-dealers by acting as a prophylactic that reduces the
risk of broker-dealers using customers' or PAB account holders' funds
for other purposes that are not permissible under Rule 15c3-3, if the
part of the net cash owed to customers or PAB account holders is
comingled with other funds in a broker-dealer's operating account.\142\
When a carrying broker-
[[Page 45854]]
dealer experiences a large inflow of customer cash, reducing the time
between that inflow and when the carrying broker-dealer performs its
next customer and PAB reserve computations and funds its reserve
accounts could reduce the risk that those funds may be inadvertently
used for other purposes that may carry a risk to the customers and PAB
account holders. Under the proposal, the affected carrying broker-
dealers would not be able to do this, which would reduce the risk of
reserve fund mismatches.
---------------------------------------------------------------------------
\142\ The Commission notes that, with respect to each customer
reserve computation required pursuant to Rule 15c3-3, a broker-
dealer must not accept or use any of the amounts under items
comprising total credits under the customer reserve formula except
for the specified purposes indicated under items comprising total
debits under the formula. See paragraph (e)(2) of Rule 15c3-3. 17
CFR 240.15c3-3(e)(2).
---------------------------------------------------------------------------
Other broker-dealers that are SIPC members may also benefit from
the proposed daily computation of the customer and PAB reserve
formulas. Specifically, if a failing carrying broker-dealer with a
mismatch between the reserve bank account balances and actual cash owed
to customers and PAB account holders is put into SIPC liquidation, SIPC
may be required to use the SIPC Fund to advance money to customers from
the SIPC Fund, reducing its balance and potentially depleting the SIPC
Fund.\143\ Consequently, a reduction in the SIPC Fund balance and/or
SIPC's unrestricted net assets may trigger increased contributions from
member broker-dealers, as displayed in Table 1 in section I.B.3. of
this release, with more substantive balance reductions requiring larger
increases in assessments of member broker-dealers, which may be passed
onto investors. Therefore, the proposed daily computation would benefit
SIPC member broker-dealers by reducing the risk of SIPC Fund depletion
and a consequent increase in SIPC assessments.
---------------------------------------------------------------------------
\143\ The Commission notes that, while broker-dealers (which
includes PAB account holders) are customers for the purposes of
SIPA, they are not entitled to the advances from the SIPC Fund of up
to $500,000 (limited to $250,000 for cash claims) allowed under SIPA
to make up for potential shortfalls after the pro rata distribution
of customer property. See 15 U.S.C. 78fff-3(a).
---------------------------------------------------------------------------
The proposed daily computation would apply only to carrying broker-
dealers whose average total credits exceed the $250 Million Threshold.
Given the information from the 12-month average based on the 2022
monthly FOCUS Reports as an example, the Commission estimates that 52
broker-dealers would be required to switch to a daily computation of
the customer reserve formula and 42 broker-dealers would be required to
switch to a daily computation of the PAB reserve formula.\144\ As shown
in Table 5, carrying broker-dealers with average total credits above
the proposed $250 Million Threshold are more likely to experience
larger mismatches and the dollar amounts underlying those mismatches
are significantly larger.\145\ And as shown in Panel C of Table 5,
those carrying broker-dealers that compute daily tend to have smaller
mismatches than those that compute weekly. Hence, the proposal may
reduce the likelihood of mismatches, benefitting customers and PAB
account holders of the affected carrying broker-dealers.
---------------------------------------------------------------------------
\144\ See Table 3.
\145\ See discussion in section IV.B.2. of this release for more
details on Table 5.
---------------------------------------------------------------------------
Further, in cases where carrying broker-dealers with greater
amounts of total credits are more interdependent with other carrying
broker-dealers than carrying broker-dealers with smaller amounts of
total credits, having more large broker-dealers computing daily may
benefit financial markets overall without imposing the costs of daily
computation onto carrying broker-dealers that do not have significant
amounts of total credits. To the extent that carrying broker-dealers
above the threshold are more likely to have more PAB account holders
(which include other broker-dealers) or PAB account holders with
greater amounts of cash in their PAB accounts, the broker-dealers above
the threshold may pose greater risk to other broker-dealers. As shown
in Table 3, among the 63 carrying broker-dealers above the proposed
$250 Million Threshold, based on data for January 2022 through December
2022, approximately 82.5 percent carry PAB accounts while only
approximately 26.6 percent of the unaffected broker-dealers carry PAB
accounts.
That is, should a carrying broker-dealer fail and not have
sufficient funds in its PAB reserve bank account to make whole its PAB
account holders, a broker-dealer that is a PAB account holder of the
failed carrying broker-dealer may consequently be exposed to financial
stress, which could further propagate to its PAB account holders, and
so on. This risk is exacerbated for PAB account holders because they
are not entitled to advances from the SIPC Fund. In that way, a failure
of one large carrying broker-dealer with a mismatched PAB reserve bank
account may result in other carrying broker-dealers experiencing
financial stress and increased risk of liquidation. In so far as a
daily computation for carrying broker-dealers with total credits above
the $250 Million Threshold reduces the chance that a large carrying
broker-dealer has mismatched funds in its PAB reserve bank account, the
potential for stress propagation associated with a failure of a
carrying broker-dealer could be reduced.
Affected broker-dealers may experience an increase in costs as a
result of the proposed daily computation. The Commission expect these
costs to be primarily related to the operational changes, staff
increases, and upgrades required for daily computing and the costs
related to the recordkeeping requirements. The Commission estimates
that it takes a carrying broker-dealer between one to five hours per
computation to prepare the records of the computations, or an average
of 2.5 hours.\146\ Given the 52 carrying broker-dealers that would be
required to switch to a daily computation of the reserve formulas under
the proposal, that implies an increase in the aggregate annual
recordkeeping burden of approximately $13 million.\147\ To the extent
that carrying broker-dealers with total credits above the $250 Million
Threshold may experience economies of scale and may have more
sophisticated operational systems, with experienced and well-trained
staff,\148\ the increase in compliance costs may not be substantial. In
addition, the 11 carrying broker-dealers that already perform such
computations daily (as shown in Table 4, based on data for the period
for January 2022 through December 2022) may not experience an increase
in compliance costs.
---------------------------------------------------------------------------
\146\ See infra section V. of this release (discussing PRA).
\147\ Id. The Commission assumed an hourly rate of $295 per hour
for a ``financial reporting manager.'' That computes to a potential
added cost of $13,726,350 ($295 x 46,530 hours) to the affected
carrying broker-dealers.
\148\ See related discussion in Stavros Gadinis, The SEC and the
Financial Industry: Evidence from Enforcement Against Broker-
Dealers, 67 Bus. Law. 679 (May 2012), available at https://www.jstor.org/stable/2324001.
---------------------------------------------------------------------------
However, to the extent that the affected carrying broker-dealers
that are just above the threshold do not experience the same economies
of scale as carrying broker-dealers that are well above the threshold,
they may be disproportionately affected by the proposed requirement and
the related costs. If these costs are significant, some carrying
broker-dealers may decide to alter their business to fall below the
threshold and avoid the costs related to performing the customer and
PAB reserve computations daily. If so, the potential benefits of the
proposal may be mitigated.
[[Page 45855]]
Carrying broker-dealers just below or above the threshold may also
experience uncertainty related to being scoped into compliance with the
daily computation requirement and may experience costs related to this
uncertainty. As displayed in Figure 1, some carrying broker-dealers are
likely to drop below the $250 Million Threshold, and then once again
exceed the threshold in later months. The costs related to these
fluctuations are uncertain, but are likely to add, for such carrying
broker-dealers, to the cost estimates cited above (for example, if
additional staff is needed by these carrying broker-dealers to monitor
their customer reserve accounts more closely than firms well above the
$250 Million Threshold).
Finally, while switching back and forth between daily and weekly
computations may tailor the compliance costs to the size of customer
activity, these fluctuations may also be confusing for customers and
PAB account holders of carrying broker-dealers who decide to switch.
However, this potential cost or concern may be trivial as many
customers may be unaware of, or unconcerned by, the switch.
D. Effects on Efficiency, Competition, and Capital Formation
The proposed amendments may affect competition among carrying
broker-dealers. First, to the extent that compliance costs would be
passed onto customers and PAB account holders, affected carrying
broker-dealers that experience greater economies of scale may become
more competitive than other affected carrying broker-dealers. Second,
to the extent that customers of carrying broker-dealers value daily
reserve computations more than the weekly computations, the affected
carrying broker-dealers may become more competitive relative to the
unaffected carrying broker-dealers. However, the Commission does not
anticipate such an effect to be large. Given the fact eleven carrying
broker-dealers already compute daily, if such a competitive advantage
existed, and carrying broker-dealers performing weekly computations
were losing customers, then more carrying broker-dealers would have
likely already converted to daily computing.
The proposed amendments may increase liquidity in the securities
markets, as they would promote confidence in the broker-dealer industry
and result in an increase of customer and PAB account activities. As a
consequence, market efficiency and capital formation in the underlying
markets may increase. Under the baseline there is a greater chance of a
larger mismatch with weekly reserve computations than with daily
reserve computations, suggesting a greater risk in doing business with
a carrying broker-dealer that performs its customer and PAB reserve
computations weekly. Also, to the extent that the mismatch reflects an
overfunding, there may also be a greater cost to the carrying broker-
dealer (and by extension its customers), since it ties up capital that
the broker-dealer could have put to more productive use.
Therefore, should customers and PAB account holders have a concern
over mismatch in reserve bank accounts and potential failures affect
market participants' willingness to expose themselves to broker-
dealers, there may be less capital committed to this market as
otherwise. However, similar to the point above, if customers of
carrying broker-dealers were aware and concerned of mismatches, the
Commission might have already observed more carrying broker-dealers
computing daily, in order to retain customers, than is currently the
case under the baseline. Therefore, the Commission does not anticipate
any effect on capital formation in this market to be significant.
In addition, in so far as capital loss could arise in times of
market stress due to an increased likelihood of carrying broker-dealer
failures, market participants may become concerned with the possibility
of not getting their cash promptly or not getting paid in full, in an
event of a carrying broker-dealer failure and reduce their exposure to
broker-dealers. To the extent that the proposed daily computation
requirement alleviates this concern, the risk of flight of capital from
securities markets may decrease during stressed market conditions and
capital inflow during normal market conditions may increase.
Finally, the proposed daily computation may benefit the affected
carrying broker-dealers by increasing their operational efficiency. For
example, in a scenario where customer reserve or PAB reserve accounts
are over-funded, a carrying broker-dealer that performs a weekly
computation cannot withdraw excess cash from the customer reserve bank
account until the following reserve computation date, even if the value
of the account exceeds the actual net cash owed to customers, exposing
this carrying broker-dealer to operational inefficiency. A daily
computation would permit the affected carrying broker-dealers to
withdraw these excess funds in a timely manner and would allow them to
manage their funds and operations more effectively. In this context,
daily computation implies that a carrying broker-dealer's capital
commitments are more efficiently employed.
Since the proposed requirements do not impact the scope of
information available to investors, the Commission does not anticipate
effects on informational efficiency to be significant.
E. Reasonable Alternatives
1. Over-Funding of the Customer and PAB Reserve Bank Accounts
As an alternative to daily computation requirements, the Commission
could require an over-funding approach which would apply to the
customer and PAB reserve bank accounts. For example, carrying broker-
dealers would perform the required reserve computations and deposits
weekly and deposit a multiple of this amount (e.g., 105% or 110%) into
the customer or PAB reserve bank account. Under this alternative
approach, carrying broker-dealers would avoid an increase in compliance
costs associated with a daily computation requirement (hence, this
alternative would apply to carrying broker-dealers choosing weekly
funding). Insofar as the compliance costs associated with the proposed
daily computation would be passed onto customers and PAB account
holders of the affected carrying broker-dealers, this alternative
approach may be more beneficial for these customers and PAB account
holders because it would not imply an operational change and compliance
costs related to the customer and PAB reserve computation while
offering extra protection for customers and PAB account holders.
However, under this alternative the carrying broker-dealer would
need to fund the excess with its own cash, which could result in
funding costs, decreased liquidity, and opportunity costs from not
being able to deploy this cash in the firm's business. As a result,
requiring carrying broker-dealers to place extra cash in a customer or
PAB reserve bank account may result in an operational efficiency
decrease and potential reduction of carrying broker-dealers' profits,
which may be passed onto customers, PAB account holders, and other
stakeholders. In addition, this approach may not account for the actual
net cash owed to customers and PAB account holders, if reserve bank
account mismatches exceed the buffer that this alternative would
require.
2. A Threshold Based on a Different Metric
As an alternative, the Commission could set a threshold for
compliance
[[Page 45856]]
with a daily computation requirement based on a different metric. For
example, the Commission could set a threshold based on total assets of
$1 billion or net capital of $50 million. A threshold based on such
metrics may be more representative of the economies of scale that
carrying broker-dealers experience and may better indicate a carrying
broker-dealer's ability to comply with enhanced requirements without
substantial increases in compliance costs that could ultimately be
passed onto their customers.
Based on the monthly 2022 FOCUS Reports, the Commission estimates
that under the alternative threshold of $1 billion in total assets 80
broker-dealers would be required to perform the customer and PAB
reserve computations daily. Of the 63 carrying broker-dealers that are
at or above the $250 Million Threshold for average total credits, three
have total assets below $1 billion, while 20 broker-dealers below the
$250 Million Threshold have total assets over $1 billion.
With respect to a $50 million net capital threshold, 104 broker-
dealers would be required to perform the customer and PAB reserve
computations daily. Of broker-dealers that are below $250 Million
Threshold for average total credits, 24 have net capital exceeding $50
million, while of the group above $250 Million Threshold for average
total credits, three have net capital below $50 million.
If the alternative states that the broker-dealer has over $1
billion in total assets, or has over $50 million net capital threshold,
105 broker-dealers would be required to perform the customer and PAB
reserve computations daily.
A drawback to this alternative is that some large broker-dealers
with minimal amounts of carrying activity would bear the added cost of
switching to a daily computation. For example, the group of 20 carrying
broker-dealers below the $250 Million Threshold with $1 billion in
assets or more, had a combined total of average total credits of
approximately $1.5 billion as of the end of 2022. That amounted to only
about 0.11 percent of average total credits for all broker-dealers for
that year.\149\
---------------------------------------------------------------------------
\149\ The numbers for this alternative do not change much if the
rolling average is computed using the June 2022 to May 2023 period.
See Table 7 below in section IV.E.6 of this release for those
numbers.
---------------------------------------------------------------------------
3. Daily Computation Requirement for All Carrying Broker-Dealers
As an alternative, the Commission could require the daily
computation requirement to apply to all carrying broker-dealers (a
``zero'' threshold). Under this alternative, a greater number of
carrying broker-dealers would perform their customer and PAB reserve
computations daily, which would benefit more customers and PAB account
holders compared to the proposal. Specifically, under the zero
threshold, 99 more carrying broker-dealers would experience the
benefits and costs discussed in section IV.C. of this release (compared
to the 63 affected based on the January 2022 to December 2022 period).
Further, to the degree that carrying broker-dealers with smaller
amounts of total credits are interdependent with other broker-dealer to
the same degree as carrying broker-dealers with larger amounts of total
credits, the zero-threshold approach may benefit all PAB account
holders equally and potentially reducing the systemic risk to a greater
degree relative to the proposal. The amount of credits held in the PAB
reserve bank accounts of the 52 broker-dealers (with PAB accounts)
above the $250 Million Threshold makes up approximately 99 percent of
the total amount held in PAB reserve bank accounts (of the 82 broker-
dealers that reported carrying PAB accounts in 2022).\150\
---------------------------------------------------------------------------
\150\ See Table 7 below in section IV.E.6 of this release for
numbers based on the June 2022 to May 2023 period.
---------------------------------------------------------------------------
In particular, in so far as a daily computation for all carrying
broker-dealers reduces the chance that any carrying broker-dealer has
funds in its PAB reserve bank account that are less than the net amount
of cash owed to PAB account holders, the potential for stress
propagation associated with a failure of a carrying broker-dealer could
be reduced.
However, this alternative would impose compliance costs on a
greater number of carrying broker-dealers, which could be passed onto
customers and PAB account holders. In addition, customer protection
benefits may be outweighed by the reduction in operational efficiency
of carrying broker-dealers with little customer and PAB account
activity that may arise from disproportional dedication of resources
towards a de minimus business activity. Relatedly, this alternative may
also impose significant economic impact on small businesses.\151\
---------------------------------------------------------------------------
\151\ See 5 U.S.C. 601 through 612.
---------------------------------------------------------------------------
4. A Higher or Lower Threshold for Daily Computation
As an alternative, the Commission could have proposed a threshold
higher or lower than $250 million in average total credits. Under these
alternatives, fewer or more carrying broker-dealers would be required
to perform their customer and PAB reserve computations daily. For
example, if the threshold was set at $100 million, a total of 81
broker-dealers would be scoped into the new requirements compared to
the 63 under the proposal. Similarly, if the threshold was set at $1
billion, only 46 broker-dealers would be scoped into the new
requirements.\152\
---------------------------------------------------------------------------
\152\ See Table 7 below in section IV.E.6 of this release for
numbers based on the June 2022 to May 2023 period.
---------------------------------------------------------------------------
For the case of the $100 million threshold, with more carrying
broker-dealers computing daily, there would possibly be fewer broker-
dealers having a mismatch between the net cash owed to the carrying
broker-dealer's customers and the amounts deposited in their customer
or PAB reserve bank accounts. The potential cost of this alternative
implies that more broker-dealers would incur the burden of performing
their customer and PAB reserve computations daily. If the threshold
were set at $1 billion, fewer carrying broker-dealers would face the
costs of a daily computation than under the proposal. However, there
would be fewer carrying broker-dealers computing daily, suggesting the
potential for more carrying broker-dealers having a mismatch than under
the proposal.
5. Calculation Based on the Maximum Value Over the Past Year
The proposed $250 Million Threshold would be the arithmetic mean of
the total credits in the customer and PAB reserve computations reported
on the twelve most recently filed month-end FOCUS Reports.\153\ As an
alternative, the Commission could have proposed a threshold based on
the maximum value for total credits during the most recently ended
calendar year. This alternative may more appropriately account for the
implied capacity of the carrying broker-dealer's reserve bank accounts.
For example, if total credits related to customers or PAB account
holders' activity fluctuate throughout a year or based on economic
cycles and such fluctuations are predictable, the maximum value of
total credits may be more representative of the customer transactions'
volume. As another example, if a carrying broker-dealer experiences
trending growth of its
[[Page 45857]]
customer base, the maximum value of total credits would also be more
representative of the current size of the customer base.
---------------------------------------------------------------------------
\153\ This would mean, for example, if a carrying broker-dealer
was required to file 12 FOCUS Reports for a calendar year, the
carrying broker-dealer would add up the Total Credits reported in
both the customer and PAB reserve formulas in each of the 12 FOCUS
Reports filed, and divide the total by 12 to compute the arithmetic
mean.
---------------------------------------------------------------------------
Table 6 below regroups carrying broker-dealers based on the maximum
number reported for total credits within a given year. Under this
alternative, 74 carrying broker-dealers would be scoped into the
compliance with performing the customer and PAB reserve computations
daily, compared to the 63 that would be so under the proposal.
Table 5--Threshold Based on Maximum Total Credits During 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Total customer credits, $MM Total PAB credits, $MM Total credits, $MM
Number assets ---------------------------------------------------------------------------------------
($B) Number Mean Median Number Mean Median Mean Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM................................. 70 78.1 70 15.5 3.4 16 1.2 ......... 16.6 4
$100-250MM................................ 18 42.8 18 161.0 165.9 10 12.3 ......... 166.6 165.9
$250-500MM................................ 13 142 13 354.5 371.6 4 1.9 ......... 354.9 373.3
$500MM-1B................................. 8 87.6 8 705.7 736.8 5 35.2 6.7 723.6 765.2
$1-5B..................................... 25 584.8 25 2,338.1 2,057.1 21 212.5 6.9 2,513.7 2,058.2
$5-10B.................................... 6 149.8 6 7,070.8 6,367.5 6 898.8 57.3 7,955.5 7,736.7
>=10B..................................... 22 3,402 22 55,584.5 26,096.5 20 8,197.1 696.4 62,990.5 32,340
-------------------------------------------------------------------------------------------------------------
Total \a\............................. 162 4,487.1 162 8,295.1 171 82 1,183 0 9,326.7 180
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Table excludes carrying broker-dealers with zero reported credits in 2022.
A benefit of this alternative is those carrying broker-dealers with
the largest amounts of total credits would be scoped into daily
computing, where the largest credits reported (as opposed to the
average) could be more indicative of a potential mismatch between the
net cash owed to customers and the reserve account balances. However,
this alternative may also create uncertainty if any cyclical behavior
of total credits that has occurred over some historical period, changes
unexpectedly, leading to potential for a carrying broker-dealer
oscillating between weekly and daily computations and deposits from
year to year.
Table 7 summarizes the number of affected broker-dealers under the
alternatives proposed thus far versus the proposal, both for the
rolling sample period defined from January 2022 to December 2022 and
for the period defined from June 2022 to May 2023.
Table 7--Summary of Affected Broker-Dealers Under Proposal Versus
Alternatives
------------------------------------------------------------------------
Number of
affected broker- Number of
dealers (based on affected broker-
Alternatives vs. proposal period January dealers (based on
2022 to December period June 2022
2022) to May 2023)
------------------------------------------------------------------------
Proposal.......................... 63 61
Alternatives:
Alt 1 Over-Funding............ 162 162
Alt 2 $1B in Total Assets..... 80 79
Alt 2 $50MM in Net Capital.... 104 103
Alt 3 Daily for all........... 162 162
Alt 4 Average T.C. >$1B....... 46 44
Alt 4 Average T.C. >$100MM.... 81 76
Alt 5 Maximum Total Credits... 74 69
------------------------------------------------------------------------
6. Daily Computation if an Average Required Deposit Exceeds a Threshold
As an alternative to performing the customer and PAB reserve
computations daily for carrying broker-dealers over a threshold
(defined by average total credits), the Commission could have proposed
an approach that would require a daily computation in the case where
the required reserve bank account deposit as a share of the reserve
bank account balance prior to such deposit exceeds a certain percentage
threshold (e.g., 5% or 10%).\154\
---------------------------------------------------------------------------
\154\ See discussion related to Table 5 in section IV.B.2. of
this release.
---------------------------------------------------------------------------
This alternative approach would account for broker-dealer-specific
trends related to customer transactions. If the customer base differs
substantially between carrying broker-dealers, with customers of some
broker-dealers trading more often or doing account activities that
increase the carrying broker-dealer's total credits by more compared to
the customer base of other broker-dealers, this alternative approach
would focus only on those carrying broker-dealers that typically
experience larger reserve mismatches. However, given the information
displayed in Table 5, there does not appear to be a perfect correlation
with broker-dealer size (measured by average total credits), and the
deposit ``mismatch.'' \155\ Smaller-broker dealers have an average
mismatch more than 5 percent (based on the January 2022 to December
2022 period), implying the possibility of an undue burden with respect
to compliance costs. That latter could ultimately be passed onto the
carrying broker-dealers' customers and PAB account holders.
---------------------------------------------------------------------------
\155\ Computed by dividing the numbers in column four by the
numbers in column three of panel A of Table 5.
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[[Page 45858]]
7. Daily Computation Requirement Based on Average Total Credits per
Number of Customer and PAB Accounts
As an alternative to performing the customer and PAB reserve
computations daily for carrying broker-dealers over a threshold
(defined by average total credits), the Commission could require daily
computations based on average total credits per number of customer
accounts. While a failure of carrying broker-dealers with smaller
amounts of total credits may not pose a significant risk of depletion
to the SIPC Fund, a threshold based on the average total credits may
have limitations from an individual customer or PAB account holder
prospective. This is because such a threshold does not account for the
number of customers and PAB account holders a carrying broker-dealer
might have and is disconnected from the per-customer protection
approach that is used by SIPC.\156\
---------------------------------------------------------------------------
\156\ Per 15 U.S.C. 78fff-2(c), customers of a failed broker-
dealer have the right to share pro rata with other SIPA customers in
the customer property held by that broker-dealer. See section I.B.3.
of this release for more details.
---------------------------------------------------------------------------
For example, consider two broker-dealers, both with $150 million in
total credits which is below the $250 million. The first broker-dealer
has three customers, each contributing $50 million in credits towards
the broker-dealer's aggregate value of total credits, and the second
broker-dealer has 100 customers each contributing $1.5 million in
credits towards the broker-dealer's aggregate value of total credits.
Recall that the maximum advance from the SIPC Fund is $500,000 per
customer. Consider a situation where both broker-dealers fail and their
reserve bank accounts are underfunded by more than one percent of what
is owed to customers (i.e., the shortage is above $1.5 million). In
this situation, the customers of the second broker-dealer would be made
whole promptly with an advance from the SIPC Fund, but the customers of
the first broker-dealer would not be made whole (because the per-
customer loss is above maximum per-customer SIPC advance of $500,000)
until SIPC recovers funds from the broker-dealer, which may take some
time.
The above example notwithstanding, data from the FOCUS Reports for
2022 suggests the potential for this concern is likely negligible.
Table 8 displays the amounts of average total credits per total
accounts for each size grouping of broker-dealers. For the 162 firms
that reported positive total credits in December 2022, the average
amount of average total credits per account (with the number of
customer accounts and PAB accounts combined) was notably larger for the
firms above the $250 Million Threshold than for broker-dealers below
the threshold. Firms above the $250 Million Threshold had about $19
million per customer account, while firms below the $250 Million
Threshold had about $1 million on average per customer account.\157\
---------------------------------------------------------------------------
\157\ Calculated from monthly FOCUS Reports for 2022. The
Commission divided average total credits in 2022 for each broker-
dealer by the number of total customer and PAB accounts for each
broker-dealer (Lines 8080 and 8081, respectively), then computed the
average of the per customer amount for each size category, and above
and below the $250 Million Threshold. Lines 8080 and 8081 are
reported in the December FOCUS Report each year, hence those numbers
are not yet available for the rolling averages beyond 2022.
Table 8--Threshold Based on Average Total Credits per Accounts During 2022
----------------------------------------------------------------------------------------------------------------
Number of Total credits Total credits
accounts (Cust $MM per account
Number + PAB) ---------------- $MM
---------------- ---------------
Mean Mean Mean
----------------------------------------------------------------------------------------------------------------
>$0-100MM....................................... 81 204,081 15.3 0.7
$100-250MM...................................... 18 311,261 137.6 1.9
$250-500MM...................................... 8 122,261 383.3 0.1
$500MM-1B....................................... 9 114,678 691.8 60.3
$1-5B........................................... 18 1,542,836 2,184.2 34.3
$5-10B.......................................... 7 6,226,305 6,599.6 1.9
>=10B........................................... 21 7,700,435 58,619.8 3.0
---------------------------------------------------------------
Total....................................... 162 1,587,598 8,207 9.8
----------------------------------------------------------------------------------------------------------------
8. Daily Computation Based on Average Total Credits From the Most
Recent Calendar Year
As an alternative to performing the customer and PAB reserve
computations daily based on a 12-month rolling average of total
credits, the Commission could instead require computation based on the
arithmetic mean of the sum of total credits over the 12 months in the
most recent calendar year. For example, whether a carrying-broker
dealer exceeded the $250 Million Threshold at any point in 2023, would
be based on the average total credits from January 2022 through
December 2022.
The potential benefit of basing the average total credit amount on
the most recent calendar year is that carrying broker-dealers would
know with certainty if they fell above or below the proposed $250
Million Threshold and would be subject to daily or weekly computing for
the entirety of the next calendar year. This potential benefit
contrasts with the possible uncertainty that the rolling average
computation would introduce for carrying broker-dealers that are close
to the proposed $250 Million Threshold. That uncertainly may create an
added cost for those carrying broker-dealers as they would need to
constantly monitor their standing with respect to the $250 Million
Threshold. This monitoring may involve additional staff, or existing
staff devoting additional time to that task, and suggests the cost of
the proposal may be marginally higher for some carrying broker-dealers
than the cost estimates cited earlier in this release.\158\ Or, wishing
to avoid this monitoring cost, the carrying broker-dealer may have to
decide to switch to daily (or weekly) once and for all, which may also
imply additional costs.
---------------------------------------------------------------------------
\158\ See infra section V. of this release (discussing PRA).
---------------------------------------------------------------------------
However, a potential cost of this alternative is that, over the
course of a year, a carrying broker-dealer computing weekly (for
example) may exceed the $250 Million Threshold. This may result in a
situation where a carrying broker-dealer with average total credits
above the $250 Million Threshold would not
[[Page 45859]]
be engaging in daily computation--as they would with a timelier and up-
to-date rolling average--and the risks of weekly computing discussed in
this release would remain present for that carrying broker-dealer.
F. Request for Comment
The Commission requests comment on all aspects of the economic
analysis of the proposed amendments. To the degree possible, the
Commission requests that commenters provide supporting data and
analysis with respect to the benefits, costs, and effects on
competition, efficiency, and capital formation of adopting the proposed
amendments or any reasonable alternatives. In particular, the
Commission ask commenters to consider the following questions:
18. What additional qualitative or quantitative information should
be considered as part of the baseline for the economic analysis of
these amendments?
19. Are the benefits and costs of proposed amendments accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account? If possible, please offer ways of estimating these benefits
and costs. What additional considerations can be used to estimate the
benefits and costs of the proposed amendments?
20. Are the effects on competition, efficiency, and capital
formation arising from the proposed amendments accurately
characterized? If not, why not?
21. Is the statement related to carrying broker-dealers with
greater economies of scale gaining a competitive advantage, in the case
that any increased costs of compliance are passed onto customers to a
lesser degree, accurately characterized? If not, why not?
22. Are the statements related to an increase in liquidity in
securities markets, arising from a promotion of confidence in the
broker-dealer industry, and/or more efficient management of funds due
to lower likelihood of mismatch, accurately characterized? If not, why
not?
23. Are the statements related to operational efficiency increasing
because of carrying broker-dealers' potential ability to withdraw
excess funds in a timelier manner and thus, manage their funds and
operations more effectively, accurately characterized? If not, why not?
24. Are the economic effects of the above alternatives accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account?
25. Are there other reasonable alternatives to the proposed
amendments that should be considered? What are the costs, benefits, and
effects on competition, efficiency, and capital formation of any other
alternatives?
26. Is the statement related to larger carrying broker-dealers'
economies of scale accurately characterized? If not, why not? Should
any of the costs or benefits be modified? What, if any, other costs or
benefits should be taken into account? If possible, please offer ways
of estimating these benefits and costs. What additional considerations
can be used to estimate the benefits and costs of the proposed
amendments?
V. Paperwork Reduction Act
The proposed amendments to paragraph (e) of Rule 15c3-3 contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act (``PRA'').\159\ The Commission is submitting
the proposed collection of information to the Office of Management and
Budget (``OMB'') for review and approval in accordance with the PRA and
its implementing regulations.\160\ For the proposed amendments, the
title of the existing information collection is ``Customer Protection--
Reserves and Custody of Securities'' (OMB Control No. 3235-0078), and
that collection would be revised by the changes in this proposal, if
adopted. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.\161\
---------------------------------------------------------------------------
\159\ See 44 U.S.C. 3501 et seq.
\160\ See 44 U.S.C. 3507; 5 CFR 1320.11.
\161\ See 5 CFR 1320.11(l).
---------------------------------------------------------------------------
The burden estimates contained in this section do not include any
other possible costs or economic effects beyond the burdens required to
be calculated for PRA purposes.
A. Summary of Collections of Information Under the Proposed Rule
Amendments
Rule 15c3-3 requires each carrying broker-dealer to maintain a
reserve of cash and/or qualified securities in a customer reserve bank
account that is at least equal in value to the net cash owed to
customers.\162\ Carrying broker-dealers also maintain a reserve of cash
and/or qualified securities in a PAB reserve bank account in an amount
that is at least equal in value to the net cash owed to PAB account
holders.\163\ In order to determine the amount required to be deposited
in the customer reserve bank account and the PAB reserve bank account,
Rule 15c3-3 requires carrying broker-dealers to perform weekly customer
and PAB reserve computations as of the close of the last business day
of each week.\164\ The rule also requires carrying broker-dealers to
make a record of each such computation.\165\
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\162\ 17 CFR 240.15c3-3(e). See also section I.B.1. of this
release (discussing the customer reserve requirements of Rule 15c3-3
in more detail).
\163\ 17 CFR 240.15c3-3(e). See also section I.B.2. of this
release (discussing the PAB account holder reserve requirements of
Rule 15c3-3 in more detail).
\164\ 17 CFR 240.15c3-3(e). Rule 15c3-3 also permits certain
broker-dealers to perform their reserve computations monthly. 17 CFR
240.15c3-3(e)(3)(i) and (iii). Some carrying broker-dealers also
elect to perform daily customer and PAB reserve computations. 17 CFR
240.15c3-3(e)(3)(iv).
\165\ 17 CFR 240.15c3-3(e)(3)(v).
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Under the proposed amendments, carrying broker-dealers with average
total credits equal to or greater than $250 million would be required
to perform the customer and PAB reserve computations daily instead of
weekly, and would also be required to make a record of each such daily
computation.\166\ The proposed amendments also provide that a carrying
broker-dealer performing daily customer and PAB reserve computations
may elect to perform weekly computations if its average total credits
fall below $250 million and it notifies its designated examining
authority, in writing, of this election at least 60 calendar days prior
to starting weekly computations.\167\
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\166\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed
to be amended.
\167\ See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as proposed
to be amended.
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B. Proposed Use of the Information
Rule 15c3-3 is an integral part of the Commission's financial
responsibility program for broker-dealers. The requirement to document
in writing the customer and PAB reserve computations facilitates the
process by which the Commission and the broker-dealer's designated
examining authority examines the broker-dealer's compliance with Rule
15c3-3. The purpose of the proposed 60-day prior written notice
requirement is to provide the designated examining authority with prior
notice that the carrying broker-dealer is switching from daily to
weekly customer and PAB reserve computations and provide the designated
examining authority the opportunity to contact the firm and ask how it
intends to implement the change. This would assist the designated
examining authority in monitoring the firm.
[[Page 45860]]
C. Respondents
1. Recordkeeping Requirements
Respondents under the proposed amendments would be carrying broker-
dealers with average total credits equal to or exceeding $250 million.
The Commission estimates there are currently approximately 63 carrying
broker-dealers that would have average total credits equal to or
exceeding $250 million based on a review of FOCUS Report data for the
12 months ended December 31, 2022. Of these carrying broker-dealers,
the Commission estimates that 11 already perform the customer reserve
computation daily. Of the 63 carrying broker-dealers that would have
average total credits equal to or exceeding $250 million, the
Commission estimates that 49 have total credits relating to PAB account
holders of greater than $0, with 10 of these carrying broker-dealers
already performing the PAB reserve computation daily. Consequently, for
the purposes of the PRA, the Commission estimates that there are 52
respondents for the customer reserve computation, and 39 respondents
for the PAB reserve computation. These respondents are currently
included in the collection of information associated with Rule 15c3-3
related to weekly computations for the customer and PAB reserve
computations. However, as a result of the proposed amendments, these
respondents would need to perform daily customer and PAB reserve
computations (rather than weekly computations).
2. Notification Requirement
Based on a review of FOCUS Report data for the 2022 calendar year,
the Commission preliminarily estimates that one carrying broker-dealer
per year would provide notice to their designated examining authority
that the carrying broker-dealer's average total credits has fallen
below the $250 Million Threshold, and that such carrying broker-dealer
would switch from a daily computation to a weekly computation.
D. Total Annual Burden Estimate
1. Recordkeeping Requirements
Carrying broker-dealers that would be subject to the requirement to
perform daily customer and PAB reserve computations under this proposal
are required to perform such computations weekly. Therefore, the
Commission preliminarily estimates that the proposed amendments would
not impose any new one-time burdens on carrying broker-dealers to set
up the process of creating the required record of the computations.
Instead, the Commission preliminarily believes the proposed amendments
would impose increased ongoing burdens on the respondent carrying
broker-dealers because they would be required to increase the frequency
of the customer and PAB reserve computations and, therefore, produce
additional records of the computations.
Specifically, the Commission believes that there would be an
increase in the burdens associated with the collections of information
titled ``Rule 15c3-3(e)(3)--daily computations'' for both the customer
and PAB reserve computations, and a corresponding decrease in the
burdens associated with the collections of information titled ``Rule
15c3-3(e)(3)--weekly computations'' for the customer and PAB reserve
computations as certain carrying broker-dealers will be required to
shift from weekly to daily computations in connection with the proposed
amendments. Based on experience with customer and PAB reserve
computations, the Commission preliminary estimates that it takes
between one and five hours to make a record of each such computation,
and that the average time spent across all of the firms is 2.5
hours.\168\
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\168\ This is consistent with the current collection of
information for the customer and PAB reserve computations.
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As a result, the Commission estimates that the proposed amendments
would impose aggregate annual ongoing burdens on respondent carrying
broker-dealers required to perform daily customer and PAB reserve
computations of 32,500 hours and 24,375 hours, respectively, or a total
of 56,875 hours.\169\ When added to the currently approved burden hours
of 7,500 hours and 1,875 hours for the customer and PAB reserve
computations, respectively, the proposed revised burden hour estimates
would be 40,000 hours for the daily customer reserve computation, and
26,250 hours for the daily PAB reserve computation.
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\169\ This figure was calculated as follows: 52 respondent
carrying broker-dealers that would be required to perform daily
customer reserve computations x 2.5 hours/day x 250 business days =
32,500 hours, plus 39 respondent carrying broker-dealers that would
be required to perform daily PAB reserve computations x 2.5 hours/
day x 250 business days = 24,375 hours. Therefore, the total
estimated burden is 32,500 hours + 24,375 hours = 56,875 hours.
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In addition to this increase, the Commission preliminarily
estimates that there will be a corresponding decrease in the
collections of information titled ``Rule 15c3-3(e)(3)--weekly
computations'' for both the customer and PAB reserve computations.
Specifically, the Commission preliminarily estimates that the proposed
amendments would result in a revised burden hour estimate of 14,430
hours with respect to weekly customer reserve computations,\170\ (a
decrease of 6,760 hours) \171\ and 2,210 hours with respect to the
weekly PAB reserve computations \172\ (a decrease of 5,070 hours).\173\
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\170\ This figure was calculated as follows: 163 respondents
currently approved under the information collection related to
weekly customer reserve computations titled ``Rule 15c3-3(e)(3)--
weekly computations'' minus the 52 respondent carrying broker-
dealers that would be required under the proposed amendments to
perform daily customer reserve computations = 111 respondents x 2.5
hours x 52 responses annually = 14,430 hours.
\171\ This figure was calculated as follows: 21,190 burden hours
currently approved with respect to the collection of information
related to weekly customer reserve computations minus the revised
proposed estimate of 14,430 hours resulting from fewer respondents
performing weekly computations = 6,760 hours.
\172\ This figure was calculated as follows: 56 respondents
currently approved under the information collection related to
weekly PAB reserve computations titled ``Rule 15c3-3(e)(3)--weekly
computations'' minus the 39 respondent carrying broker-dealers that
would be required under the proposed amendments to perform daily PAB
reserve computations = 17 respondents x 2.5 hours x 52 responses
annually = 2,210 hours.
\173\ This figure was calculated as follows: 7,280 burden hours
currently approved with respect to the collection of information
related to weekly PAB reserve computations minus the revised
proposed estimate of 2,210 hours resulting from fewer respondents
performing weekly computations = 5,070 hours.
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2. Notification Requirement
Based on its experience with other notification requirements, the
Commission preliminarily estimates that it would take a carrying
broker-dealer 30 minutes to prepare and send the notification regarding
its election to perform weekly customer and PAB reserve computations to
its designated examining authority. This burden would represent a new
collection of information. The Commission preliminarily estimates that
relatively few carrying broker-dealers would send the notice either
because their average total credits would be substantially greater than
$250 million or because they would continue to perform daily
computations even if their average total credits fell below the $250
Million Threshold, given the liquidity benefits of performing a daily
computation. Consequently, the Commission preliminarily estimates that
one carrying broker-dealer per year would send the notice for a burden
of 0.5 hours per year.\174\
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\174\ One response per year x 0.5 hours per response = 0.5
hours.
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[[Page 45861]]
3. Summary of the Proposed Burden Revisions \175\
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\175\ OMB Control No. 3235-0078 for Rule 15c3-3 includes thirty
separate information collections. This summary show only those
information collections that would be revised as a result of the
proposed amendments.
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As a result of the proposed amendments, the burdens associated with
daily computations for customer reserve accounts would increase by
32,500 hours and the burdens associated with daily computations for PAB
reserve accounts would increase by 24,375 hours. This increase would be
accompanied by a decrease in burdens associated with weekly
computations for customer and PAB reserve accounts of 6,760 hours and
5,070 hours, respectively, as carrying broker-dealers with average
total credits of $250 million or more shift from performing the
customer and PAB reserve computations on a weekly to daily basis.
Additionally, a new collection of information related to the
notification requirement for carrying broker-dealers reverting to a
weekly computation of the customer and PAB reserve formulas will result
in an addition 0.5 burden hours per year.
The net increase in estimated annual burdens associated with the
proposed amendments to Rule 15c3-3 would be 45,045.5 hours. The table
below summarizes these changes.
----------------------------------------------------------------------------------------------------------------
Proposed estimated
Currently approved increase/ decrease in Proposed revised
Name of information collection estimated annual annual industry burden annual industry
industry burden (hours) (hours) burden (hours)
----------------------------------------------------------------------------------------------------------------
Rule 15c3-3(e)(3)--daily computations for 7,500 32,500 40,000
customer reserve account \1\..............
Rule 15c3-3(e)--daily computations for PAB 1,875 24,375 26,250
reserve account \2\.......................
Rule 15c3-3(e)(3)--weekly computations for 21,190 (6,760) 14,430
customer reserve account \3\..............
Rule 15c3-3(3)(3)--weekly computations for 7,280 (5,070) 2,210
PAB reserve account \4\...................
Rule 15c3-3(e)(B)(1) notification.......... N/A 0.5 0.5
----------------------------------------------------------------------------------------------------------------
Total proposed change.................. ....................... 45,045.5
----------------------------------------------------------------------------------------------------------------
1. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
information is ``Rule 15c3-3(e)(3)--daily computations.'' The Commission is revising the title of this
collection of information in order to clarify that it is distinct from the collection of information related
to daily computations for PAB reserve accounts, which currently shares the same title.
2. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
information is ``Rule 15c3-3(e)(3)--daily computations.'' The Commission is revising the title of this
collection of information in order to clarify that it is distinct from the collection of information related
to daily computations for customer reserve accounts, which currently shares the same title.
3. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
information is ``Rule 15c3-3(e)(3)--weekly computations.'' The Commission is revising the title of this
collection of information in order to clarify that it is distinct from the collection of information related
to weekly computations for PAB reserve accounts, which currently shares the same title.
4. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
information is ``Rule 15c3-3(e)(3)--weekly computations.'' The Commission is revising the title of this
collection of information in order to clarify that it is distinct from the collection of information related
to weekly computations for customer reserve accounts, which currently shares the same title.
E. Collections of Information Are Mandatory
The collections of information under the proposed amendments to
Rule 15c3-3 would be mandatory as to the carrying broker-dealers that
would be subject to them.
F. Confidentiality of Response to Collections of Information
The Commission expects to receive confidential information in
connection with the collections of information. A carrying broker-
dealer requested by the Commission to produce records related to the
proposed amendments under Rule 15c3-3 could request confidential
treatment of the information.\176\ If a confidential treatment request
was made, the Commission anticipates that it would keep the information
confidential subject to applicable law.\177\
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\176\ See 17 CFR 200.83. Information regarding requests for
confidential treatment of information submitted to the Commission is
available on the Commission's website at https://www.sec.gov/foia/howfo2.htm#privacy.
\177\ See, e.g., 15 U.S.C. 78x (governing the public
availability of information obtained by the Commission); 5 U.S.C.
552 et seq.
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G. Retention Period for Recordkeeping Requirements
The customer and PAB reserve computations must be preserved in
accordance with the requirements of Rule 17a-4.\178\ Written
notifications from carrying broker-dealers electing to compute the
customer and PAB reserve formulas weekly after being subject to the
daily requirement would be submitted to the carrying broker-dealer's
designated examining authority. These notices would constitute
communications relating to a carrying broker-dealer's ``business as
such'' and, therefore, will need to be retained for three years.\179\
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\178\ See 17 CFR 240.15c3-3(e)(3)(v); 17 CFR 240.17a-4.
\179\ See 17 CFR 240.17a-4(b)(4).
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H. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
27. Evaluate whether the proposed collections of information are
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
28. Evaluate the accuracy of the Commission's estimates of the
burdens of the proposed collections of information;
29. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
30. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
31. Evaluate whether the proposed rules and rule amendments would
have any effects on any other collection of information not previously
identified in this section.
Persons submitting comments on the collection of information
requirements
[[Page 45862]]
should direct them to the Office of Management and Budget, Attention:
Desk Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Washington, DC 20503, and should
also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with
reference to File Number S7-11-23. Requests for materials submitted to
OMB by the Commission with regard to this collection of information
should be in writing, with reference to File Number S7-11-23 and be
submitted to the Securities and Exchange Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
VI. Small Business Regulatory Enforcement Fairness Act
Under the Small Business Regulatory Enforcement Fairness Act of
1996,\180\ a rule is ``major'' if it has resulted, or is likely to
result in: an annual effect on the economy of $100 million or more; a
major increase in costs or prices for consumers or individual
industries; or significant adverse effects on competition, investment,
or innovation. The Commission requests comment on whether the proposed
rules and rule amendments would be a ``major'' rule for purposes of the
Small Business Regulatory Enforcement Fairness Act. In addition, the
Commission solicits comment and empirical data on: the potential effect
on the U.S. economy on annual basis; any potential increase in costs or
prices for consumer or individual industries; and any potential effect
on competition, investment, or innovation.
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\180\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
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VII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\181\ Section 603(a) of the Administrative Procedure Act,\182\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \183\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant economic impact on
a substantial number of small entities.\184\
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\181\ See 5 U.S.C. 601 et seq.
\182\ 5 U.S.C. 603(a).
\183\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this proposed rulemaking, are set forth
in 17 CFR 240.0-10 (``Rule 0-10'').
\184\ See 5 U.S.C. 605(b).
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes a broker-dealer that: (1) had total capital (net
worth plus subordinated liabilities) of less than $500,000 on the date
in the prior fiscal year as of which its audited financial statements
were prepared pursuant to paragraph (d) of 17 CFR 240.17a-5 (Exchange
Act Rule 17a-5(d)),\185\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\186\
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\185\ 17 CFR 240.17a-5(d).
\186\ See 17 CFR 240.0-10(c).
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The proposed rule amendments to Rule 15c3-3 would require certain
carrying broker-dealers to perform the customer and PAB reserve
computations on a daily rather than weekly basis. Only carrying broker-
dealers would be impacted by the proposed rule amendment.
Based on FOCUS Report data, the Commission estimates that as of
December 31, 2022, there were approximately 790 broker-dealers that
were ``small'' for the purposes of Rule 0-10. The Commission estimates
that none of these small broker-dealers is a carrying broker-dealer. As
a result, the proposed rule amendments likely would not apply to small
broker-dealers. Therefore, the Commission believes that the proposed
amendments would not have a significant impact on a substantial number
of small broker-dealers.
For the foregoing reasons, the Commission certifies that the
proposed amendments to Rule 15c3-3, if adopted, would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA. The Commission requests comment regarding this
certification. The Commission invites commenters to address whether the
proposed amendments to Rule 15c3-3 would have a significant economic
impact on a substantial number of small entities, and, if so, what
would be the nature of any impact on small entities. The Commission
requests that commenters provide empirical data to support the extent
of such impact.
Statutory Authority
The Commission is proposing amendments to Rule 15c3-3 under the
Commission's rulemaking authority pursuant to the Exchange Act, 15
U.S.C. 78a et seq., and particularly, sections 15 and 23(a) (15 U.S.C.
78o and 78w(a)), thereof.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Amendments
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5,78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L.
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise
noted.
* * * * *
Section 240.15c3-3 is also issued under 15 U.S.C. 78c-5,
78o(c)(2), 78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15
U.S.C. 78fff.
* * * * *
0
2. Section 240.15c3-3 is amended by revising paragraphs (e)(3)(i) and
(iv) to read as follows:
Sec. 240.15c3-3 Customer protection--reserves and custody of
securities.
* * * * *
(e) * * *
(3) * * *
(i)(A) Except as provided in paragraphs (e)(3)(i)(B)(1) and (C) of
this section, computations necessary to determine the amount required
to be deposited in the Customer Reserve Bank Account and PAB Reserve
Bank Account as specified in paragraph (e)(1)
[[Page 45863]]
of this section must be made weekly, as of the close of the last
business day of the week, and the deposit so computed must be made no
later than one hour after the opening of banking business on the second
following business day.
(B)(1) A broker or dealer with average total credits that are equal
to or greater than $250 million must make the computations necessary to
determine the amount required to be deposited in the Customer Reserve
Bank Account and PAB Reserve Bank Account, as specified in paragraph
(e)(1) of this section, daily as of the close of the previous business
day, and the deposit so computed must be made no later than one hour
after the opening of banking business on the second following business
day. A broker or dealer must comply with this paragraph (e)(3)(i)(B)(1)
no later than six months after having average total credits equal to or
greater than $250 million and until such time as it has average total
credits of less than $250 million and 60 days after having provided the
60-day notice required by paragraph (e)(3)(i)(B)(2) of this section.
For purposes of this paragraph (e)(3), average total credits means the
arithmetic mean of the sum of Total Credits in the Customer Reserve
Bank Account computation and the PAB Reserve Bank Account computation
reported in the 12 most recently filed month-end Forms X-17A-5.
(2) A broker or dealer computing the Customer Reserve Bank Account
computation and the PAB Reserve Bank Account computation daily under
paragraph (e)(3)(i)(B)(1) of this section whose average total credits
falls below $250 million may elect to compute the Customer Reserve Bank
Account and the PAB Reserve Bank Account computation weekly under
paragraph (e)(3)(i)(A) of this section. Such broker or dealer must
notify its designated examining authority, in writing, of this election
at least 60 calendar days before computing the Customer Reserve Bank
Account and the PAB Reserve Bank Account computation weekly under
paragraph (e)(3)(i)(A) of this section.
(C) A broker or dealer which has aggregate indebtedness not
exceeding 800 percent of net capital (as defined in Sec. 240.15c3-1)
and which carries aggregate customer funds (as defined in paragraph
(a)(10) of this section), as computed at the last required computation
pursuant to this section, not exceeding $1,000,000, may in the
alternative make the Customer Reserve Bank Account computation monthly,
as of the close of the last business day of the month, and, in such
event, must deposit not less than 105 percent of the amount so computed
no later than one hour after the opening of banking business on the
second following business day.
* * * * *
(iv) Computations in addition to the computations required in this
paragraph (e)(3), other than computations made under paragraph
(e)(3)(i)(B)(1) of this section, 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.
* * * * *
By the Commission.
Dated: July 12, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15200 Filed 7-17-23; 8:45 am]
BILLING CODE 8011-01-P
