4330. Customer Protection — Permissible Use of Customers' Securities
(a) Authorization to Lend Customers' Margin Securities
No member shall lend securities that are held on margin for a customer and that are eligible to be pledged or loaned, unless such member shall first have obtained a written authorization from such customer permitting the lending of such securities.
(b) Requirements for Borrowing of Customers' Fully Paid or Excess Margin Securities
(1) A member that borrows fully paid or excess margin securities carried for the account of any customer shall:
(A) comply with the requirements of SEA Rule 15c3-3;
(B) comply with the requirements of Section 15(e) of the Exchange Act; and
(C) notify FINRA, in such manner and format as FINRA may require, at least 30 days prior to first engaging in such securities borrows.
(2) Prior to first entering into securities borrows with a customer pursuant to paragraph (b)(1) of this Rule, a member shall:
(A) have reasonable grounds for believing that the customer's loan(s) of securities are appropriate for the customer. In making this determination, the member shall exercise reasonable diligence to ascertain the essential facts relative to the customer, including, but not limited to, the customer's financial situation and needs, tax status, investment objectives, investment time horizon, liquidity needs, risk tolerance and any other information the customer may disclose to the member or associated person in connection with entering such securities loans.
(B) provide the customer, in writing (which may be electronic), with the following:
(i) clear and prominent notice stating that the provisions of the Securities Investor Protection Act of 1970 may not protect the customer with respect to the customer's securities loan transaction and that the collateral delivered to the customer may constitute the only source of satisfaction of the member's obligation in the event the member fails to return the securities; and
(ii) disclosures regarding the customer's rights with respect to the loaned securities, and the risks and financial impact associated with the customer's loan(s) of securities, including, but not limited to:
a. loss of voting rights;
b. the customer's right to sell the loaned securities and any limitations on the customer's ability to do so, if applicable;
c. the factors that determine the amount of compensation received by the member and its associated persons in connection with the use of the securities borrowed from the customer;
d. the factors that determine the amount of compensation (e.g., interest rate) to be paid to the customer and whether or not such compensation can be changed by the member under the terms of the borrow agreement;
e. the risks associated with each type of collateral provided to the customer;
f. that the securities may be “hard-to-borrow” because of short-selling or may be used to satisfy delivery requirements resulting from short sales;
g. potential tax implications, including payments deemed cash-in-lieu of dividend paid on securities while on loan; and
h. the member's right to liquidate the transaction because of a condition of the kind specified in Rule 4314(b).
(3) A member that is subject to paragraph (b)(1) of this Rule shall create and maintain records evidencing the member's compliance with the requirements of paragraph (b)(2) of this Rule. Such records shall be maintained in accordance with the requirements of SEA Rule 17a-4(a).
• • • Supplementary Material: --------------
.01 Definitions. For purposes of this Rule, the definitions contained in SEA Rule 15c3-3 shall apply.
.02 Authorization to Lend Customers' Margin Securities. For purposes of paragraph (a) of this Rule, members may use a single customer account agreement/margin agreement/loan consent signed by a customer as written authorization to permit the lending of a customer's margin eligible securities in lieu of obtaining a separate written authorization; provided such customer account agreement/margin agreement/loan consent includes clear and prominent disclosure that the firm may lend either to itself or others any securities held by the customer in its margin account.
.03 Notification to FINRA. FINRA, upon receipt of a member's written notification pursuant to paragraph (b)(1)(C) of this Rule, may request such additional information as it may deem necessary to evaluate compliance with SEA Rule 15c3-3, Section 15(e) of the Exchange Act and other applicable FINRA rules or federal securities laws or rules. Examples of additional information include, but are not limited to:
(a) the written agreement authorizing such borrowing of securities, which shall reflect the material terms of the arrangement;
(b) the types of customers that are parties to such securities borrows;
(c) the types of accounts used to effect the securities borrows (i.e., whether the subject securities are maintained in customers' cash or margin or other accounts);
(d) the types of collateral provided to customers in connection with such securities borrows, the frequency of marking to market of the collateral and the custody arrangements for such collateral;
(e) the operational and recordkeeping processes related to such securities borrows;
(f) the rebates paid/received in connection with such securities borrows and any other compensation arrangements related thereto;
(g) the procedures for handling customers' requests to sell the securities subject to such borrows; and
(h) disclosures made to customers.
.04 Appropriateness of Customer's Loan(s) of Securities. The member borrowing a customer's fully paid or excess margin securities is responsible for making the determination regarding the appropriateness of such borrow from a customer required by paragraph (b)(2)(A) of this Rule. However, in making that determination, when the member has entered into a carrying agreement with an introducing member, pursuant to Rule 4311, the member may rely on the representations of the introducing member that has a customer relationship with the lender.
.05 Appropriateness Determination for Institutional Customers. A member may fulfill the obligation set forth in paragraph (b)(2)(A) of this Rule for an institutional account, as defined in Rule 4512(c), by complying with the requirements of Rule 2111(b).
.06 Notification to FINRA of Pre-existing Fully Paid or Excess Margin Securities Borrows and Disclosures to Customers. Members with any existing fully paid or excess margin securities borrows with customers as of May 1, 2014 shall notify FINRA in writing, in such manner and format as FINRA may require, of such borrows within 30 days from May 1, 2014. Further, such members shall provide such customers with the disclosures required by paragraph (b)(2)(B) of this Rule within 180 days of May 1, 2014.
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Amended by SR-FINRA-2013-035 partially effective May 1, 2014 and fully effective October 28, 2014. Amended eff. March 17, 1983. Amended eff. December 12, 1974. Amended eff. October 18, 1972. Amended eff. March 1, 1972. Amended eff. December 19, 1968. Selected Notice: 14-05 |
- Regulatory Notice 17-22June 07, 2017
- Regulatory Notice 14-05February 03, 2014