Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
SEC headquarters building in Washington

Regulation and Compliance > Federal Regulation > SEC

SEC Wants BDs to Assess Cash Reserves Daily

By Melanie Waddell

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • SEC Chairman Gary Gensler said the proposal would protect customers if a broker-dealer fails.
  • The SEC also said the proposal would assist broker-dealers in more dynamically matching the net amount of cash owed to customers and PAB account holders.
  • The proposal would affect broker-dealers with average total credits equal to or greater than $250 million.

The Securities and Exchange Commission on Wednesday proposed amendments to Rule 15c3-3, the customer protection rule, to require certain broker-dealers to increase the frequency with which they calculate the net cash they owe to customers and other broker-dealers, known as PAB account holders, from weekly to daily.

SEC Chairman Gary Gensler said in a statement that he was “pleased to support this proposal because, if adopted, it would help protect customers in the event that a broker-dealer fails.”

Net cash owed to customers and PAB account holders must be held in a special reserve bank account, according to the SEC.

“A key tenet of our securities laws is the segregation of customers’ cash and securities from a broker-dealer’s own account,” Gensler said. “Given the speed, scale, and volume of today’s market activity, I believe customers would benefit if broker-dealers carrying large credit balances made daily reserve account calculations and deposits. This frequency would better align with the inflows, swings, and balances that broker-dealers experience in today’s markets.”

Broker-dealers occasionally may have substantial deposit requirements as a result of customer and PAB reserve computations, the SEC said.

The proposal “would require broker-dealers with average total credits (the amount of cash they owe customers and PAB account holders) equal to or greater than $250 million to make the computations 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,” the SEC says.

“By reducing the timeframe between computations, the proposal would assist broker-dealers in more dynamically matching the net amount of cash owed to customers and PAB account holders with the amount on deposit in the broker-dealer’s customer and PAB reserve bank accounts,” the SEC added.

“The daily customer and PAB reserve computations would safeguard customers and PAB account holders by lessening the potential for large mismatches to build over time, thereby increasing the likelihood that they are made whole even if a broker-dealer fails,” the agency explained.

The potential mismatch “creates a risk that if a broker-dealer failed during this period, it may be unable to return all of the cash and securities owed to investors,” said SEC Commissioner Jaime Lizárraga, a Democrat, in a statement. “There’s a significant downside to reaching this stage in that customer claims may not be satisfied in full.”

As a result, Lizárraga continued, “the backstop fund established by Congress to protect investors when a brokerage firm fails, overseen by the Securities Investor Protection Corporation (SIPC), might be required to advance money to make investors whole. Given that the target amount for the SIPC fund is $5 billion, a failure of a carrying broker-dealer with a large shortfall could potentially deplete the SIPC fund.”

Added Lizárraga: “The amount of these potential shortfalls is not trivial. In 2022, following customer reserve calculations, certain broker-dealers were required to make additional deposits ranging between $1.6 billion to over $6 billion to replenish their reserve accounts. Recent failures in the banking sector brought into sharper focus the need to review vulnerabilities in the existing customer asset protection framework for broker-dealers.”

The public comment period will remain open for 60 days following publication on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.

SEC headquarters building in Washington. Photo: Diego M. Radzinschi/ALM

Melanie Waddell

@Think_MelanieW

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.