Segregation of Assets and Customer Protection

Regulatory Obligations and Related Considerations

Regulatory Obligations

Exchange Act Rule 15c3-3 (Customer Protection Rule) imposes requirements on member firms that are designed to protect customer funds and securities. Member firms are obligated to maintain custody of customers’ fully paid and excess margin securities, safeguard customer cash by segregating these assets from the firm’s proprietary business activities and promptly delivering them to their owner upon request. Member firms can satisfy these requirements by keeping customer funds in a special reserve bank account and by maintaining customer securities in their physical possession or in a good control location that allows the firm to direct their movements. Member firms are required to maintain a reserve of cash or qualified securities in the special reserve bank account that is at least equal in value to the net cash owed to customers, including cash obtained from the use of customer securities. The amount of net cash owed to customers is computed pursuant to the formula set forth in Exhibit A to Rule 15c3-3.

Related Considerations

  • What is your firm’s process to prevent, identify, escalate and resolve new or increased deficits that are in violation of the Customer Protection Rule?
  • What controls does your firm have in place to identify and monitor its possession or control deficits, including the creation, cause and resolution?
  • If your firm claims an exemption from the Customer Protection Rule and it is required to forward customer checks promptly to your firm’s clearing firm, how does your firm implement consistent processes for check forwarding and maintain accurate blotters to document that checks were forwarded in a timely manner?
  • How does your firm train staff on Customer Protection Rule requirements?
  • What are your firm’s processes to confirm that it correctly completes its reserve formula computation and maintains the amounts that must be deposited into the special reserve bank account(s)?
  • If your firm is engaging in digital asset transactions, what controls including systems and procedures has it established to confirm compliance with the Customer Protection Rule? Has your firm analyzed these controls and procedures to address potential concerns arising from acting as a custodian (i.e., holding or controlling customer property)?

Findings and Effective Practices

Findings

  • Inconsistent Check Forwarding Processes: Failing to implement consistent processes for check forwarding to comply with an exemption from the Customer Protection Rule.
  • Inaccurate Reserve Formula Computations: Failing to complete accurate reserve formula computations, due to factors such as inadequate supervisory procedures and processes, limited coordination between various internal departments and inaccurate account coding.
  • Inaccurate Segregation of Customer Securities: Failing to maintain possession or control of customer fully paid and excess margin securities due to inadequate supervisory procedures and processes to identify, monitor, and resolve possession or control deficits and inaccurate coding of good control locations.

Effective Practices

  • Confirming Control Agreements: Collaborating with legal and compliance departments to confirm that all agreements supporting control locations are finalized and executed before the accounts are established and accurately coded as good control accounts on firms’ books and records.
  • Addressing Conflicts of Interest: Confirming which staff have system access to establish a good new control location and that they are independent from the business areas to avoid potential conflicts of interest; and conducting ongoing review to address emerging conflicts of interest.
  • Reviews and Exception Reports for Good Control Locations: Conducting periodic review of and implementing exception reports for existing control locations for potential miscoding, out-of-date paperwork or inactivity.
  • Check Forwarding Blotter Review: Creating and reviewing your firm’s checks received and forwarded blotters to confirm that they are up to date and include the information required to document compliance with the Customer Protection Rule exemption.

Additional Resources

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Appendix—Using FINRA Reports in Your Firm’s Compliance Program