Segregation of Client Assets
Exchange Act Rule 15c3-3 (Customer Protection Rule) requires firms that maintain custody of customer securities and safeguard customer cash to segregate these assets from the firm’s proprietary business.
Noteworthy Examination Findings
- Omitted or Inaccurate Blotter Information – Some firms’ blotters lacked sufficient information to demonstrate that checks were forwarded in a timely manner or contained inaccurate information with respect to the status of checks.
- Inadequate Possession or Control Processes – FINRA noted the following deficiencies:
- Failure to obtain documentation (no lien letters) from custodians and issuers to show that all securities in a good control location were free of liens that could be exercised by a third party on the firm;
- Inability to identify deficits in fully paid and excess margin securities when certain firms did not correctly age the deficits due to errors in their formulas;
- Failure to confirm that fully paid securities were correctly segregated at custodian banks (FINRA notes that firms should consider verifying whether they have sufficient securities positions that exceed possession or control requirements prior to transferring such excess securities from a custodial account); and
- Failure to combine balances and positions in related customer securities accounts and accounts with the same Taxpayer Identification Numbers in order to determine the extent to which the market value of securities carried for the customer’s account exceeded 140 percent of the customer’s debit balance.
- Inaccurate Reserve Formula Calculations – Some firms did not exclude concentrated margin debit balances21 because they did not have a process to identify accounts under common control or related customer accounts.
- Coding Errors – FINRA noted joint customer and firm officer accounts miscoded as “non-customer” rather than “customer.” Some firms also coded foreign bank accounts as “PAB” without obtaining a written agreement acknowledging that the accounts are proprietary transactions of the foreign bank.22
- Interpretations of Financial and Operational Rules
- Customer Protection – Reserves and Custody of Securities (SEA Rule 15c3-3)
21 See the SEC’s Note E(5) to Exhibit A of SEA Rule 15c3-3 and the associated interpretation, Determination of the Includible Amount of a Customer’s Concentrated Margin Debit Balance in the Reserve Formula, Exchange Act Rule 15c3-3, Exhibit A - Note E(5)/01, in the Interpretations of Financial and Operational Rules.
22 Regarding foreign banks, see Foreign Banks - Customer and Non-Customer Classification, Exchange Act Rule 15c3-3(a)(1)/032, in the Interpretations of Financial and Operational Rules.