SEC Financial Responsibility Rules

by Julie Mendel, SILA-A, CDEi | Apr 30, 2020
SEC 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.  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.

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.

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