Protection of Customer Assets

Regulatory Obligations

SEA Rule 15c3-3 (Customer Protection Rule) imposes requirements on firms that are designed to protect customer funds and securities. Firms are obligated to maintain custody of customers’ fully paid and excess margin securities and safeguard customer funds. 

Firms satisfy these requirements by keeping reserves in a special reserve bank account and by maintaining customer securities in their physical possession or in a good control location, as specified in Rule 15c3-3. 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. 

Recent SEC Rule Amendments and Guidance Concerning Rule 15c3-3

  • The SEC extended the compliance date for the amendments to Rule 15c3-3(e)(3)(i)(B)(1), which require firms exceeding a specified threshold to increase the frequency of their reserve formula computations from weekly to daily, to June 30, 2026.
    • The SEC’s amendments to Rule 15c3-3 and Rule 15c3-1, permitting broker-dealers that perform a daily customer reserve computation to decrease customer-related receivables, or “aggregate debit items,” by 2 percent rather than 3 percent in the computation, was not impacted by the above noted extension.
    • Firms using the alternative net capital method can still choose to perform daily reserve computations and take the 2 percent debit reduction by notifying their DEA 30 days prior.
    • For additional information, please see the SEC’s Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule.
  • The SEC amended Rule 15c3-3a to permit margin required and on deposit at covered clearing agencies providing central counterparty services for U.S. Treasury securities resulting from a customer’s U.S. Treasury securities activity to be included by broker-dealers as a debit in the customer and proprietary accounts of broker-dealers reserve formulas, subject to certain conditions.
  • The SEC’s Division of Trading and Markets staff published FAQs relating to crypto asset activities and distributed ledger technology, and withdrew the 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities.
    • The FAQs address possession or control requirements for crypto asset securities, clarifies that paragraph (b) of Rule 15c3-3 does not apply to crypto assets that are not securities, and provides guidance regarding control locations for compliance with paragraph (c) of the rule. 

Findings

  • Inadequate Supervision: Failing to establish and maintain a reasonably designed supervisory system for determining the required reserve deposit, resulting in issues including:
    • incorrectly designating customer accounts as noncustomer accounts for purposes of the reserve formula computation; and
    • failing to identify, track or age suspense items.
  • Treatment of Free Credit Balances – Transfers to Another Account or Institution:
    • Failing to obtain appropriate specific authorization prior to transferring customer funds to a third party.
    • Failing to transfer those funds as specified in such authorization.
  • Inaccurate Reserve Formula Computations: Failing to complete accurate reserve formula computations due to factors including:
    • inadequate supervisory procedures and processes; and
    • limited coordination between various internal departments.
  • Insufficient Segregation of Customer Securities: Failing to maintain possession or control of customer fully paid or 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.
  • Failing to grant adequate access to FINOPs (particularly those who are part-time or contracted) to appropriate books and records to fulfill required duties.
  • Failing to adequately complete reconciliations with external parties to confirm the firm’s books and records reflect proper ownership and location of customer assets.

FINRA Reminds Firms of Their Obligation to Designate FINOPs

Effective Practices 

  • Periodic Evaluation of the Reserve Formula Computation Process: Performing variance analysis to review for material fluctuations, anomalies and new items to identify potential inaccuracies; establishing a process to identify system or operational changes that could impact the customer or PAB reserve formula computations; and reviewing adjustments to the reserve formula computations to ensure they are accurate and compliant with the Customer Protection Rule.
  • Good Control Locations: Ensure that all relevant documents are maintained to support the treatment of accounts as good control locations and perform periodic reviews to identify newly established accounts, potential miscoding, out-of-date paperwork or inactivity.
  • Check Forwarding Blotter Review: Creating and reviewing the firm’s checks received and forwarded blotters to confirm that they are accurately maintained and include the information required to evidence compliance with the Customer Protection Rule exemption (Rule 15c3-3(k)(2)(ii)).
  • Supervision: Ensuring experienced individuals perform and supervise reserve formula computations and possession or control processes (who also hold the proper registrations). 

Additional Resources

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