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SEC Financial Responsibility Rules for Broker-Dealers

By Julie Mendel, SILA-A, CDEi
Feb 25, 2022
SEC financial responsibility rules

Broker-dealers have certain financial responsibility requirements imposed under the Securities Exchange Act of 1934 (Exchange Act). These rules are in place to help to protect customers from adverse consequences should a broker-dealer suffer from financial failure or collapse.

Broker-Dealer Requirements to Safeguard Customer Securities

The rules require safeguarding of customer securities and funds held by the broker-dealer and include requirements for broker-dealers to:

  • Keep a level of highly liquid assets that exceeds their liabilities so that in the event of financial failure, the broker-dealer will have sufficient liquid assets on hand to liquidate and pay all liabilities to its customers.
  • Segregate its customer securities and cash from the broker-dealer’s private activities which will increase availability of customer assets to be returned to customers should the broker-dealer fail.
  • Keep and maintain sufficient business records to account for all of its financial activities, and, in the event of examination, to assist regulators with confirming compliance with securities laws.
  • Provide certain notices to the SEC and other regulators if a financial-related event occurs, such as notifying when a firm’s net capital has fallen below its required minimum.

Amendments to Broker-Dealer Responsibility Rules

Recent amendments to the financial responsibility rules require a broker-dealer to, among other things:

  • Maintain a segregated reserve accounts for broker-dealer account holders and requires carrying broker-dealers to obtain and maintain possession and control of securities carried for a proprietary accounts of broker dealers (a PAB account), unless written notice to the account holder has been provided by the carrying broker-dealer that the securities may be used in the ordinary course of the carrying broker-dealer's securities business and no objection has been lodged.
  • Take physical possession or control of customer's fully paid and excess margin securities that allocate to a broker-dealer or non-customer short position, once that short position has aged more than 30 calendar days.
  • Cease conducting a securities business if certain insolvency events occur.
  • Deduct from net capital the excess of any deductible amount over the amount permitted by securities rules.
  • Keep and maintain records regarding their credit, market, and liquidity risk management controls.

The amendments apply only to a broker-dealer that has more than $1,000,000 in aggregate credit items as computed under the customer reserve formula of the rules, or $20,000,000 in capital including debt subordinated as required by the rules.

Learn More About Broker-Dealer Financial Responsibilities

Broker-dealers can order Firm Element courses, securities exam prep, annuity training, and other securities and insurance education products from WebCE. This was, broker-dealers can provide their employees with a one-stop-shop for their online education needs and make expanding into new product lines and services easier than ever.

To order courses, visit the WebCE Catalog. For larger discounts for your firm or agency, contact our corporate sales team at [email protected] or call at 877-488-9322.

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