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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-97877; File No. S7-11-23]
RIN 3235-AN28
Daily Computation of Customer and Broker-Dealer Reserve Requirements under the
Broker-Dealer Customer Protection Rule
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: The Securities and Exchange Commission (“Commission”) proposes to amend the
broker-dealer customer protection rule to require certain broker-dealers to perform their
customer and broker-dealer reserve computations and make any required deposits into their
reserve bank accounts daily rather than weekly. The Commission also is seeking comment on
whether similar daily reserve computation requirements should apply to broker-dealers and
security-based swap dealers with respect to their security-based swap customers.
DATES: Comments should be received on or before September 11, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
•
Use the Commission’s internet comment form
(https://www.sec.gov/rules/submitcomments.htm); or
•
Send an email to rule-comments@sec.gov. Please include File Number S7-11-23 on the
subject line.
Paper Comments:
•
Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-11-23. This file number should be included
on the subject line if e-mail is used. To help the Commission process and review your comments
more efficiently, please use only one method of submission. The Commission will post all
comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the Commission’s Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s
Public Reference Room. Do not include personal identifiable information in submissions; you
should submit only information that you wish to make available publicly. We may redact in part
or withhold entirely from publication submitted material that is obscene or subject to copyright
protection.
Studies, memoranda, or other substantive items may be added by the Commission or staff
to the comment file during this rulemaking. A notification of the inclusion in the comment file
of any such materials will be made available on our website. To ensure direct electronic receipt
of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director;
Thomas K. McGowan, Associate Director; Randall W. Roy, Deputy Associate Director;
Raymond Lombardo, Assistant Director; Sheila Dombal Swartz, Senior Special Counsel;
Timothy C. Fox, Branch Chief; or Abraham Jacob, Special Counsel, at (202) 551-5500, Office of
2
Broker-Dealer Finances, Division of Trading and Markets; Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:
Commission Reference
CFR Citation (17 CFR)
Rule 15c3-3
17 CFR 240.15c3-3
Table of Contents
I.
BACKGROUND ............................................................................................................. 4
A. Introduction ................................................................................................................ 4
B. Current Requirements of Rule 15c3-3 and its Relation to SIPA ............................... 6
1.
Rule 15c3-3 – Customer Accounts ................................................................... 6
2.
Rule 15c3-3 – Proprietary Accounts of Broker-Dealers ................................. 13
3.
Broker-Dealer Liquidations and SIPA ............................................................ 15
C. The Risk of a Mismatch in Funds Owed and Funds Reserved under Rule 15c3-3 . 19
II. PROPOSED AMENDMENTS ...................................................................................... 26
A. Proposed Amendments to Rule 15c3-3.................................................................... 26
B. Request for Comment .............................................................................................. 32
III. REQUEST FOR COMMENT - RESERVE ACCOUNT REQUIREMENTS FOR
SECURITY-BASED SWAPS ....................................................................................... 38
A. Discussion ................................................................................................................ 38
B. Request for Comment .............................................................................................. 40
IV. ECONOMIC ANALYSIS ............................................................................................. 41
A. Introduction .............................................................................................................. 41
B. Baseline .................................................................................................................... 45
1.
Regulatory Baseline ........................................................................................ 45
2.
Affected Broker-Dealers ................................................................................. 48
C. Benefits and Costs of the Proposed Amendments ................................................... 56
D. Effects on Efficiency, Competition, and Capital Formation.................................... 63
E. Reasonable Alternatives........................................................................................... 65
1.
Over-Funding of the Customer and PAB Reserve Bank Accounts ................ 65
2.
A Threshold Based on a Different Metric....................................................... 66
3.
Daily Computation Requirement for All Carrying Broker-Dealers ............... 67
4.
A Higher or Lower Threshold for Daily Computation ................................... 68
5.
Calculation based on the Maximum Value over the Past Year ...................... 69
6.
Daily Computation if an Average Required Deposit Exceeds a Threshold.... 71
7.
Daily Computation Requirement Based on Average Total Credits Per Number of
Customer and PAB Accounts ......................................................................... 72
8. Daily Computation based on Average Total Credits from the Most .............. 74
Recent Calendar Year .............................................................................................. 74
F. Request for Comment .............................................................................................. 76
V. PAPERWORK REDUCTION ACT .............................................................................. 77
3
A. Summary of Collections of Information under the Proposed Rule Amendments ... 78
B. Proposed Use of the Information ............................................................................. 79
C. Respondents ............................................................................................................. 79
1.
Recordkeeping Requirements ......................................................................... 79
2.
Notification Requirement................................................................................ 80
D. Total Annual Burden Estimate................................................................................ 80
1.
Recordkeeping Requirements ......................................................................... 80
2.
Notification Requirement................................................................................ 82
3.
Summary of the Proposed Burden Revisions ................................................. 83
E. Collections of Information are Mandatory ............................................................. 84
F. Confidentiality of Response to Collections of Information .................................... 85
G. Retention Period for Recordkeeping Requirements ............................................... 85
H. Request for Comment ............................................................................................. 85
VI. SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT .............. 87
VII. REGULATORY FLEXIBILITY ACT CERTIFICATION ........................................... 87
STATUTORY AUTHORITY ................................................................................................ 89
I.
BACKGROUND
A.
Introduction
Pursuant to section 15(c)(3)(A) of the Securities Exchange Act of 1934 (“Exchange
Act”), 1 the Commission is proposing to amend the broker-dealer customer protection rule. 2 As
discussed in more detail below, 3 the rule requires broker-dealers that maintain custody of
customer securities and cash (“carrying broker-dealers”) to have a special reserve account at a
bank that must hold cash and/or qualified securities in an amount determined by a computation
of the net cash owed to the broker-dealer’s customers. Generally, carrying broker-dealers are
required to perform the customer reserve computation and make any required deposits into the
customer reserve bank account weekly. Rule 15c3-3 also permits carrying broker-dealers to
perform the customer reserve computation more frequently than weekly (e.g., daily), and, in
1
15 U.S.C. 78o(c)(3)(A).
2
17 CFR 240.15c3-3.
3
See sections I.B.1. and I.B.2. of this release.
4
certain limited circumstances, to perform a monthly computation. Rule 15c3-3 also addresses the
manner in which a carrying broker-dealer holds proprietary securities and cash in accounts of
other broker-dealers, known as PAB accounts. “PAB account” generally means a proprietary
securities account of a broker-dealer. 4 For example, a broker-dealer that is not a carrying brokerdealer (e.g., an introducing broker-dealer) may hold its proprietary cash and securities at a
carrying broker-dealer. In this case, the securities account of the introducing broker-dealer held
at the carrying broker-dealer would be a PAB account and the introducing broker-dealer would
be a PAB account holder of the carrying broker-dealer. While broker-dealers are not treated as
customers under Rule 15c3-3, the rule requires a carrying broker-dealer to have a separate
special reserve account at a bank for PAB account holders; such special reserve bank account
must hold cash and/or qualified securities in an amount determined by a computation of the net
cash owed to PAB account holders. Generally, carrying broker-dealers are required to perform
the PAB reserve computation and make any required deposits into the PAB reserve bank account
weekly, similar to the requirements for the customer reserve bank account.
The proposed amendments would require carrying broker-dealers that had large amounts
of cash owed to customer and PAB accounts holders (i.e., large total credits), measured by both
their customer and PAB reserve computations for the previous twelve month ends (i.e., a rolling
twelve month average), to perform those computations and make any required deposits into their
respective customer and PAB reserve bank accounts daily (rather than weekly). Cash owed to
customers and PAB account holders may include cash proceeds received from sales of securities,
4
The term “PAB account” means a proprietary securities account of a broker-dealer (which includes a
foreign broker-dealer, or a foreign bank acting as a broker-dealer) other than a delivery-versus-payment
account or a receipt-versus-payment account. 17 CFR 240.15c3-3(a)(16). The term does not include an
account that has been subordinated to the claims of creditors of the carrying broker-dealer. Id.
5
cash deposited by customers and PAB account holders for the purposes of purchasing securities,
and monthly or quarterly dividends received on behalf of customers and PAB account holders.
These carrying broker-dealers—because they have owed large amounts of cash to their
customers and PAB account holders—can incur large deposit requirements from time to time.
This can lead to situations where—for a period of days—the net amount of cash owed to
customers and PAB account holders is substantially greater than the amounts held in their
combined customer and PAB reserve bank accounts. The proposed daily computation would
shorten the period during which this mismatch between the net amount owed and the amount on
deposit exists. The objective of the proposal is to reduce the risk caused by this mismatch for
carrying broker-dealers where the difference between the net amount owed and the amount on
deposit potentially is substantial. Large mismatches can lead to correspondingly large shortfalls
in the amounts available in the customer and PAB reserve bank accounts to make customers and
PAB account holders whole if the carrying broker-dealer fails financially. As explained below,
these potential shortfalls could lead to large-scale harm (e.g., delayed satisfaction of customer or
PAB account holder claims for securities and cash) or substantial losses (the inability to satisfy
those claims in full) if a carrying broker-dealer with a large mismatch is liquidated in a formal
proceeding under the Securities Investor Protection Act of 1970 (“SIPA”). 5
B.
Current Requirements of Rule 15c3-3 and its Relation to SIPA
1.
Rule 15c3-3 – Customer Accounts
Rule 15c3-3 is designed to give specific protection to customer funds and securities, in
effect forbidding broker-dealers from using customer assets to finance any part of their
5
See 15 U.S.C. 78aaa et seq.
6
businesses unrelated to servicing securities customers. For example, a broker-dealer is
“virtually” precluded from using customer funds to buy securities for its own account. 6 To meet
this objective, Rule 15c3-3 requires a carrying broker-dealer to take two primary steps to
safeguard these assets, as described in this section below. The steps are designed to protect
customers by segregating their securities and cash from the carrying broker-dealer’s proprietary
business activities. If the carrying broker-dealer fails financially, the customer securities and
cash should be readily available to be returned to the customers. In addition, if the failed
carrying broker-dealer is liquidated under SIPA, the customer securities and cash should be
isolated and readily identifiable as “customer property” and, consequently, available to be
distributed to customers ahead of other creditors. 7
The first step required by Rule 15c3-3 is that a carrying broker-dealer must maintain
physical possession or control over customers’ fully paid and excess margin securities. 8 Control
6
See Net Capital Requirements for Brokers and Dealers, Exchange Act Release No. 21651 (Jan. 11, 1985),
50 FR 2690, 2690 (Jan. 18, 1985). See also Broker-Dealers; Maintenance of Certain Basic Reserves,
Exchange Act Release No. 9856 (Nov. 17, 1972), 37 FR 25224, 25224 (Nov. 29, 1972).
7
At a high level, in such a liquidation, SIPA would provide for the appointment of a trustee who is required
to return customer name securities to customers of the debtor (15 U.S.C. 78fff-2(c)(2)), distribute the fund
of “customer property” ratably to customers (15 U.S.C. 78fff-2(b)), and obtain cash advances from the
Securities Investor Protection Corporation (“SIPC”) from the fund administered by SIPC (“SIPC Fund”) to
satisfy remaining customer net equity claims, to the extent provided by SIPA (15 U.S.C. 78fff-2(b) and
3(a)). Customer property is defined as “cash and securities (except customer name securities delivered to
the customer) at any time received, acquired, or held by or for the account of a debtor from or for the
securities accounts of a customer, and the proceeds of any such property transferred by the debtor,
including property unlawfully converted.” 15 U.S.C. 7lll(4). See also section I.B.3. of this release
(discussing broker-dealer liquidations under SIPA in more detail).
8
See 17 CFR 240.15c3-3(d). The term “fully paid securities” means all securities carried for the account of
a customer in a cash account as defined in Regulation T promulgated by the Board of Governors of the
Federal Reserve System (12 CFR 220.1 et seq.) (“Regulation T”), as well as securities carried for the
account of a customer in a margin account or any special account under Regulation T that have no loan
value for margin purposes, and all margin equity securities in such accounts if they are fully paid: provided,
however, that the term fully paid securities does not apply to any securities purchased in transactions for
which the customer has not made full payment. 17 CFR 240.15c3-3(a)(3). The term “margin securities”
means those securities carried for the account of a customer in a margin account as defined in section 4 of
7
means the carrying broker-dealer must hold these securities in one of several locations specified
in Rule 15c3-3 and free of liens or any other interest that could be exercised by a third-party to
secure an obligation of the carrying broker-dealer. 9 Permissible locations include a clearing
corporation and a “bank,” as defined in section 3(a)(6) of the Exchange Act. 10
The second step is that a carrying broker-dealer must maintain a reserve of funds or
qualified securities in an account at a bank that is at least equal in value to the net cash owed to
customers. 11 The account must be titled “Special Reserve Bank Account for the Exclusive
Regulation T (12 CFR 220.4), as well as securities carried in any other account (such accounts referred to
as “margin accounts”) other than the securities referred to in paragraph (a)(3) of Rule 15c3-3 (i.e., fully
paid securities). 17 CFR 240.15c3-3(a)(4). The term “excess margin securities” means those securities
referred to in paragraph (a)(4) of Rule 15c3-3 (i.e., margin securities) carried for the account of a customer
having a market value in excess of 140% of the total of the debit balances in the customer’s account or
accounts encompassed by paragraph (a)(4) of Rule 15c3-3, which the broker-dealer identifies as not
constituting margin securities. 17 CFR 240.15c3-3(a)(5).
9
See 17 CFR 240.15c3-3(c). A carrying broker-dealer does not treat customer securities as its own assets.
Rather, the carrying broker-dealer holds them in a custodial capacity, and the possession and control
requirement is designed to ensure that the carrying broker-dealer treats them in a manner that allows for
their prompt return.
10
Id. In 2020, the Commission issued a statement describing its position that, for a period of five years,
special purpose broker-dealers operating under the circumstances set forth in the statement will not be
subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have
obtained and maintained physical possession or control of customer fully-paid and excess margin crypto
asset securities for purposes of Rule 15c3-3. See Commission Statement on Custody of Digital Asset
Securities by Special Purpose Broker-Dealers, Exchange Act Release No. 90788 (Dec. 23, 2020), 86 FR
11627 (Feb. 21, 2021). While the proposed amendments would apply to all carrying broker-dealers,
including special purpose broker-dealers, the amendments would not alter the current possession and
control requirements of Rule 15c3-3 for any broker-dealer. See also Division of Trading and Markets,
Commission and Office of General Counsel, FINRA, Joint Staff Statement on Broker-Dealer Custody of
Digital Asset Securities (Jul. 8, 2019), available at https://www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-asset-securities. The 2019 staff statement represents the views of
the staff. It is not a rule, regulation, or statement of the Commission. Furthermore, the Commission has
neither approved nor disapproved its content. This staff statement, like all staff statements, has no legal
force or effect: it does not alter or amend applicable law; and it creates no new or additional obligations for
any person.
11
17 CFR 240.15c3-3(e). The term “qualified security” is defined in Rule 15c3-3 to mean a security issued
by the United States or a security in respect of which the principal and interest are guaranteed by the United
States (collectively, “U.S. Government securities” for purposes of this release). See 17 CFR 240.15c33(a)(6).
8
Benefit of Customers” (“customer reserve bank account”). 12 The amount of net cash owed to
customers is computed weekly as of the close of the last business day of the week pursuant to a
formula set forth in Exchange Act Rule 15c3-3a (“Rule 15c3-3a”) (“customer reserve
computation”). 13 Under the customer reserve computation, the carrying broker-dealer adds up
customer credit items and then subtracts from that amount customer debit items. 14 The credit
items include credit balances in customer accounts (i.e., cash owed to customers) and funds
obtained through the use of customer securities (e.g., a loan from a bank collateralized with
customer margin securities). 15 The debit items include money owed by customers (e.g., from
margin lending), securities borrowed by the carrying broker-dealer to effectuate customer short
12
See 17 CFR 240.15c3-3(e)(1). The purpose of giving the account this title is to alert the bank and creditors
of the carrying broker-dealer that this reserve fund is to be used to meet the carrying broker-dealer’s
obligations to customers (and not the carrying broker-dealer’s obligations to general creditors) in the event
the carrying broker-dealer is liquidated in a formal proceeding.
13
See 17 CFR 240.15c3-3a. Some carrying broker-dealers choose to perform a daily computation. See 17
CFR 240.15c3-3(e)(3)(iv). Further, the rule permits carrying broker-dealers in certain limited
circumstances to perform a monthly computation. These circumstances include: (1) the broker-dealer must
have aggregate indebtedness not exceeding 800 percent of net capital; (2) the broker-dealer carries
aggregate customer funds, as computed at the last required computation, not exceeding $1,000,000; and (3)
the broker-dealer must deposit in its customer reserve bank account not less than 105% of the amount
computed under the customer reserve formula. See 17 CFR 240.15c3-3(e)(3)(i).
14
See 17 CFR 240.15c3-3a.
15
See 17 CFR 240.15c3-3a, Items 1-9. Credits in the customer reserve computation include—among other
credits—free credit balances and other credit balances in customers’ securities accounts, monies borrowed
collateralized by securities carried for the accounts of customers, and monies payable against customers’
securities loaned. See 17 CFR 240.15c3-3a, Items 1-3, respectively. Carrying broker-dealers are permitted
to use customer margin securities to, for example, obtain bank loans to finance the funds used to lend to
customers to purchase the securities. The amount of the bank loan is a credit in the customer reserve
computation—which is accounted for in Item 2—because this is the amount that the carrying broker-dealer
would need to pay the bank to retrieve the securities. Similarly, carrying broker-dealers may use customer
margin securities to make stock loans to other broker-dealers in which the lending broker-dealer typically
receives cash in return. The amount payable to the other broker-dealer on the stock loan is a credit in the
customer reserve computation—which is accounted for in Item 3—because this is the amount the brokerdealer would need to pay the other broker-dealer to retrieve the securities. See also Recordkeeping and
Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants and
Broker-Dealers; Final Rule, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 68550, 68690 (Dec.
16, 2019) (containing FOCUS Report Part II – Computation for Determination of Customer Reserve
Requirements).
9
sales, and margin required and on deposit with certain clearing agencies as a consequence of
customer securities transactions. 16 If credit items exceed debit items, the net amount must be on
deposit in the customer reserve bank account in the form of cash and/or qualified securities. 17
The carrying broker-dealer must make a deposit into the customer reserve bank account by 10
a.m. of the second business day following the “as of” date of the new computation if the
computation shows the amount required to be on deposit in the customer reserve bank account is
greater than the amount currently on deposit in the account. 18 Conversely, if the computation
shows the amount required to be on deposit in the customer reserve bank account is less than the
amount currently on deposit in the account, the carrying broker-dealer can withdraw the
16
See 17 CFR 240.15c3-3a, Items 10-14. See also Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S.
Treasury Securities; Proposed Rule, Exchange Act Release No. 95763 (Sept. 14, 2022), 87 FR 64610 (Oct.
25, 2022) (proposing a new Item 15 in Rule 15c3-3a to permit margin required and on deposit at a covered
clearing agency for U.S. Treasury securities to be included as a debit item in the customer and PAB reserve
computations, subject to certain conditions). The Commission encourages commenters to review the U.S.
Treasury security clearing proposal to determine whether it might affect their comments on this proposing
release.
17
17 CFR 240.15c3-3(e). Customer cash is a balance sheet item of the carrying broker-dealer (i.e., the
amount of cash received from a customer increases the amount of the carrying broker-dealer’s assets and
creates a corresponding liability to the customer). The customer reserve computation is designed to isolate
these carrying broker-dealer assets so that an amount equal to the net liabilities to customers is held as a
reserve in the form of cash or U.S. Government securities. The requirement to maintain this reserve is
designed to effectively prevent the carrying broker-dealer from using customer funds for proprietary
business activities such as investing in securities. The goal is to put the carrying broker-dealer in a position
to be able to readily meet its cash obligations to customers by requiring the carrying broker-dealer to make
deposits of cash and/or U.S. Government securities into the customer reserve bank account in the amount
of the net cash owed to customers.
18
For carrying broker-dealers performing a weekly customer reserve computation as of the close of the last
business day of the week, the deposit so computed must be made no later than one hour after the opening of
banking business on the second following business day. See 17 CFR 240.15c3-3(e)(3)(i). For example, a
carrying broker-dealer would perform the customer reserve computation on Monday as of the close of
business on the previous Friday and generally be required to make the necessary deposit no later than 10
a.m. Tuesday.
10
difference. 19 A carrying broker-dealer also is required to make and maintain a record of each
computation. 20
The customer reserve computation permits the carrying broker-dealer to offset customer
credit items only with customer debit items. 21 This means the carrying broker-dealer can use
customer cash to facilitate customer transactions such as financing customer margin loans and
borrowing securities to make deliveries of securities customers have sold short. 22 The brokerdealer margin rules require securities customers to maintain a minimum level of equity in their
securities accounts (i.e., the customer’s ownership interest in the account, computed by adding
the current market value of long securities and the amount of any credit balance and subtracting
the current market value of all short securities and the amount of any debit balance). 23 In other
words, the cash and the market value of the customer’s securities in the account must be
sufficiently larger than the sum of the cash borrowed by the customer and market value of the
securities sold short by the customer. In addition to protecting the carrying broker-dealer from
19
See 17 CFR 240.15c3-3(e).
20
See 17 CFR 240.15c3-3(e)(3)(v). Each record must be preserved in accordance with Rule 17a-4. Id.
21
See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
22
For example, if a carrying broker-dealer holds $100 for customer A, the carrying broker-dealer can use that
$100 to finance a security purchase of customer B (i.e., make a margin loan to customer B). The $100 the
carrying broker-dealer owes customer A is a credit in the formula and the $100 customer B owes the
carrying broker-dealer is a debit in the formula. Therefore, under the customer reserve computation there
would be no requirement to maintain cash and/or U.S. Government securities in the customer reserve bank
account. However, if the carrying broker-dealer did not use the $100 held in customer A’s account for this
purpose, there would be no offsetting debit and, consequently, the carrying broker-dealer would need to
have on deposit in the customer reserve bank account cash and/or U.S. Government securities in an amount
at least equal to $100.
23
Broker-dealers are subject to margin requirements in Regulation T, in rules promulgated by the brokerdealer self-regulatory organizations (“SRO”) (see, e.g., FINRA Rules 4210-4240 and Cboe Exchange, Inc.
Rules 10.1-10.12), and with respect to security futures, in rules jointly promulgated by the Commission and
the Commodity Futures Trading Commission (17 CFR 242.400-406). Broker-dealers also may establish
their own margin requirements, so long as they are as restrictive as regulatory margin requirements. These
requirements are often referred to as “house” margin requirements. See, e.g., FINRA Rule 4210(d)
(requiring broker-dealers to establish procedures to formulate their own margin requirements). See also
FINRA Rule 4210(a)(5) (defining the term “equity” for purposes of FINRA margin requirements).
11
the consequences of a customer default, this equity serves to over-collateralize customers’
obligations to the broker-dealer. This buffer protects the customers whose cash was used to
facilitate the carrying broker-dealer’s financing of securities transactions of other customers (i.e.,
margin loans and short sales). For example, if the carrying broker-dealer fails, the customer
debits—because they generally are over-collateralized—should be attractive assets for another
broker-dealer to purchase or, if not purchased by another broker-dealer, they should be able to be
liquidated to a net positive equity. 24 The proceeds of the debits sale or liquidation can be used to
repay the customer cash used to finance customer obligations. This cash plus the cash and/or
qualified securities held in the customer reserve bank account should equal or exceed the total
amount of customer credit items as of the customer reserve computation date (e.g., as of the
close of business on Friday). 25 However, as discussed below, activity subsequent to the customer
reserve computation date can result in the carrying broker-dealer having large amounts of
additional credit items that do not get accounted for until the next customer reserve computation
24
The attractiveness of the over-collateralized debits facilitates the bulk transfer of customer accounts from a
failing or failed carrying broker-dealer to another broker-dealer. Regulation T, SRO margin rules, and a
broker-dealer’s house margin rules help to ensure the customer maintains a minimum level of equity in
their account, i.e., that the debit is over-collateralized. For example, if a customer purchases a listed equity
security, they can borrow up to 50% of the purchase price from the broker-dealer using the purchased
security as collateral for the loan. This is known as initial margin. After a customer buys securities on
margin, SRO margin rules require the customer to maintain a minimum amount of equity in their securities
margin account. This is known as maintenance margin. SRO margin rules require a customer to maintain
at least 25% of the total market value of the margin securities in their account. For example, if a customer
purchases $16,000 of listed equity securities, the customer can borrow $8,000 from the broker-dealer and
pay $8,000 in cash. If the market value of the listed equity securities falls to $12,000, the equity in the
securities margin account would total $4,000 ($12,000 - $8,000 = $4,000) and the broker-dealer’s loan to
the customer would be over-collateralized by $4,000. The customer would be in compliance with the 25%
SRO maintenance margin requirement of $3,000 as well (25% of $12,000 = $3,000). See 12 CFR
220.12(a) and FINRA Rule 4210(c)(1).
25
See Net Capital Requirements for Broker-Dealers; Amended Rules, Exchange Act Release No. 18417 (Jan.
13, 1982), 47 FR 3512, 3513 (Jan. 25, 1982). The alternative method is founded on the concept that if the
debit items in the reserve formula can be liquidated at or near their contract value, these assets, along with
any cash required to be on deposit under the customer protection rule, will be sufficient to satisfy all
customers-related liabilities (which are represented as credit items in the reserve formula).
12
and do not get reserved for until the next deposit into the customer reserve bank account. 26 This
can lead to a mismatch between the net amount of cash owed to customers and the amount
currently on deposit in the customer reserve bank account.
2.
Rule 15c3-3 – Proprietary Accounts of Broker-Dealers
Carrying broker-dealers also may carry accounts that hold proprietary securities and cash
of other broker-dealers, known as PAB accounts. 27 Broker-dealers are not within the definition
of “customer” for purposes of Rule 15c3-3. 28 The definition of “customer” in SIPA, however, is
broader than the definition in Rule 15c3-3 in that the SIPA definition includes broker-dealers. 29
As discussed in more detail below, broker-dealers—as customers under SIPA—have the right to
a pro rata share of customer property in a SIPA liquidation. 30
Because broker-dealers are entitled to a pro rata share of customer property, Rules 15c33 and 15c3-3a require carrying broker-dealers to: (1) perform a separate reserve computation for
PAB accounts in addition to the customer reserve computation described above (“PAB reserve
computation); 31 (2) establish and fund a separate bank account titled “Special Reserve Bank
Account for Brokers and Dealers” (“PAB reserve bank account”); and (3) obtain and maintain
26
See section I.C. of this release (explaining the implications of a weekly computation).
27
17 CFR 240.15c3-1(a)(16).
28
17 CFR 240.15c3-3(a)(1) (The term customer shall mean any person from whom or on whose behalf a
broker or dealer has received or acquired or holds funds or securities for the account of that person. The
term shall not include a broker or dealer, a municipal securities dealer, or a government securities broker or
government securities dealer.). Id.
29
See 15 U.S.C. 78lll(2).
30
See section I.B.3. of this release (discussing broker-dealer liquidations under SIPA in more detail). While
broker-dealers as “customers” under SIPA have a right to a pro rata share of customer property in a SIPA
liquidation, they are not entitled to receive an advance from the SIPC Fund. See 15 U.S.C. 78fff-3(a). See
infra section I.B.3. of this release (discussing advances from the SIPC Fund as a customer protection for
certain customers in a SIPA liquidation).
31
See supra section I.B.1. of this release (discussing Rule 15c3-3 and customer accounts).
13
physical possession or control of non-margin securities carried for a PAB account holder unless
the carrying broker-dealer has provided written notice to the PAB account holder that it may use
those securities in the ordinary course of its securities business, and has provided opportunity for
the PAB account holder to object to such use. 32 These requirements provide similar protections
to the securities and cash a carrying broker-dealer maintains for PAB account holders as are
provided for the securities and cash the broker-dealer maintains for customers. The objective in
applying these similar protections is to reduce the risk that, in the event a carrying broker-dealer
is liquidated under SIPA, the claims of SIPA customers (i.e., customers and PAB account
holders) will exceed the amount of customer property available and, thereby, expose the SIPC
Fund and potentially SIPA customers to losses. 33 In addition, if the customer property is
insufficient to fully satisfy all SIPA customer claims and losses are incurred, the PAB account
holders could be placed in financial distress. This could cause adverse impacts to the securities
markets beyond those resulting from the failure of the carrying broker-dealer, given that the PAB
account holders—as broker-dealers—provide services to investors and others who participate in
those markets. 34
Similar to the customer reserve computation, the amount of net cash owed to PAB
account holders is computed weekly as of the close of the last business day of the week pursuant
32
17 CFR 240.15c3-3(b)(5) and (e). See also Financial Responsibility Rules for Broker-Dealers; Final Rule,
Exchange Act Release No. 70072 (July 30, 2013), 78 FR 51824, 51827-31 (Aug. 21, 2013) (adopting a
PAB reserve computation and possession and control requirements for securities held in PAB accounts
under Rule 15c3-3) (“Financial Responsibility Rules for Broker-Dealers”).
33
See Financial Responsibility Rules for Broker-Dealers, 78 FR at 51827-28.
34
Id.
14
to the formula set forth in Rule 15c3-3a. 35 Specifically, carrying broker-dealers perform the
PAB reserve computation using the formula in Rule 15c3-3a—which is used to perform the
customer reserve computation—with modifications that tailor the computation to PAB (i.e.,
broker-dealer) accounts as compared with customer accounts. 36 If credit items exceed debit
items, the net amount owed to PAB account holders must be on deposit in the PAB reserve bank
account in the form of cash and/or qualified securities. The carrying broker-dealer must make a
deposit into the PAB reserve bank account if the computation shows an increase in the reserve
requirement.
37
If the computation shows a decrease in the reserve requirement, the carrying
broker-dealer may withdraw the difference. Finally, consistent with the requirements for the
customer reserve computation, the PAB reserve computation permits the carrying broker-dealer
to offset PAB credit items only with PAB debit items. 38
3.
Broker-Dealer Liquidations and SIPA
SIPA became law in 1970 with the purpose of affording certain protections against loss to
customers resulting from broker-dealer failure and, in doing so, promote investor confidence in
35
See Rule 15c3-3a. Some carrying broker-dealers choose to perform the PAB reserve computation daily.
See 17 CFR 240.15c3-3(e)(3)(iv). Further, Rule 15c3-3 permits certain carrying broker-dealers to perform
the PAB reserve computation monthly if they do not carry customer accounts or conduct a proprietary
trading business. See 17 CFR 240.15c3-3(e)(3)(iii).
36
See 17 CFR 240.15c3-3a, Notes Regarding the PAB Reserve Bank Account Computation. For example,
Note 1 states that broker-dealers should use the customer reserve formula for the purposes of computing the
PAB reserve formula, except that references to “accounts,” “customer accounts,” or “customers” will be
treated as references to PAB accounts. Further, Note 2 provides that any credit (including a credit applied
to reduce a debit) that is included in customer reserve formula may not be included as a credit in PAB
reserve formula. Id.
37
For carrying broker-dealers performing the PAB reserve computation weekly, as of the close of the last
business day of the week, the deposit so computed must be made no later than one hour after the opening of
banking business on the second following business day. See 17 CFR 240.15c3-3(e)(3)(i). Carrying brokerdealers also may satisfy a PAB reserve bank account deposit requirement with excess debits from the
customer reserve computation from the same date. However, a deposit requirement from the customer
reserve computation may not be satisfied with excess debits from the PAB reserve computation. See 17
CFR 240.15c3-3(e)(4).
38
See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
15
the nation’s securities markets. 39 SIPA established SIPC and directed SIPC to establish the SIPC
Fund. 40 The protections afforded by SIPA are designed to work as a “back stop” to the brokerdealer net capital rule, 41 which requires broker-dealers to maintain net liquid assets in excess of
all liabilities to customers and other creditors, and Rule 15c3-3. SIPC oversees the liquidation of
SIPC-member broker-dealers that fail financially and where customer assets the broker-dealer
holds (i.e., cash or securities) are missing from customers’ securities accounts (i.e., brokerdealers that cannot return these assets through a self-liquidation). 42 For example, cash and
securities may be missing from customers’ securities accounts in cases of unauthorized trading
or embezzlement. The Commission has authority to oversee SIPC, including to conduct
inspections of SIPC and to approve or disapprove changes to SIPC’s bylaws and rules. 43
In a SIPA liquidation of a broker-dealer, SIPC and a court-appointed trustee work to
return customers’ cash and securities as quickly as possible. Customers under SIPA (“SIPA
customers”) generally are entitled to a number of protections. These protections include the right
to share pro rata with other SIPA customers in the customer property held by the broker-dealer. 44
Broker-dealers with securities accounts at the failed broker-dealer—as SIPA customers—have
the right to a pro rata share of the customer property in a SIPA liquidation. 45 Consequently,
when a carrying broker-dealer is liquidated in a SIPA proceeding, each customer (including a
39
See 2022 SIPC Annual Report at 4, available at https://www.sipc.org/media/annual-reports/2022-annualreport.pdf.
40
See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
41
17 CFR 240.15c3-1.
42
With some limited exceptions set forth in SIPA, all registered broker-dealers are SIPC members. 15 U.S.C.
78ccc(a)(2). SIPC is a non-profit member organization created in 1970 under SIPA. 15 U.S.C. 78ccc(a).
43
15 U.S.C. 78ggg(c) and 78ccc(e).
44
See 15 U.S.C. 78fff-2(c).
45
See 15 U.S.C. 78fff-2(c) and 15 U.S.C. 78fff-3(a).
16
SIPA customer that is a broker-dealer) has a priority claim on the customer property compared to
general unsecured creditors of the carrying broker-dealer. 46 The SIPA protections also include
the ability for a SIPA customer—other than a SIPA customer that is a broker-dealer—to receive
an advance from the SIPC Fund of up to $500,000 (of which $250,000 can be used to cover cash
claims), if the amount of customer property is insufficient to satisfy the customer’s claim for
securities and/or cash. 47
The SIPC Fund largely is financed through assessments paid to SIPC by its broker-dealer
members. 48 The SIPC Fund is used to pay SIPC’s expenses, the administrative costs of a SIPA
liquidation to the extent the broker-dealer’s estate is insufficient to cover those costs, and—as
noted above—to pay advances to SIPA customers whose claims cannot be fully satisfied by the
estate of a failed carrying broker-dealer. 49 The SIPC Fund—which consists of cash and U.S.
Government securities—totaled approximately $4.05 billion as of December 31, 2022. 50 The
46
As discussed above in section I.B.2. of this release, this is why Rules 15c3-3 and 15c3-3a require carrying
broker-dealers to perform a PAB reserve computation for PAB account holders. SIPA liquidations
generally involve customer claims and the claims of general unsecured creditors. Customer claims are
satisfied out of the customer estate, while general unsecured claims are paid from the general estate (any
remaining assets). To the extent a customer’s claims are not fully satisfied through advances from the
SIPC Fund and the customer’s share of the customer estate, a customer will be eligible to receive a
distribution as a general creditor to the extent that there are any general estate assets. See 15 U.S.C. 78fff2(c)(1).
47
15 U.S.C. 78fff-3.
48
15 U.S.C. 78ddd(c) and (d). The SIPC Fund is also financed through interest on U.S. Government
securities held in the SIPC Fund. See 2022 SIPC Annual Report at 4.
49
In the event that the SIPC Fund is or may reasonably appear to be insufficient for the purposes of SIPA, the
Commission is authorized to lend SIPC up to $2.5 billion, which the Commission, in turn, would borrow
from the U.S. Treasury. 15 U.S.C. 78ddd(g) and (h). The Commission has not borrowed funds under the
authority in SIPA since the legislation was enacted in 1970.
50
Currently, the objective is to build the SIPC Fund to a level of $5 billion. See 2022 SIPC Annual Report at
3, 10. Between 1970 and 2022, SIPC has facilitated the return of cash and securities for accounts of
customers of failed broker-dealers totaling approximately $142 billion. Of that amount, approximately
$141.2 billion came from broker-dealer estates and $917 million came from trustee advances from the
SIPC Fund. Id. at 8. Further, of the approximately 770,400 customer claims from completed, or
substantially completed, cases that were satisfied between 1970 and 2022, only 355 claims were for cash
and securities valued greater than the limits of protection afforded by SIPA. Id. at 9.
17
schedule for calculation of the annual assessment for SIPC members is governed under the SIPC
bylaws and generally depends on the level of SIPC’s unrestricted net assets. 51 The current
assessment rate is 0.15 percent of net operating revenues. 52 A summary of the possible level of
SIPC assessments is as follows:
Table 1. SIPC Assessment Schedule
Unrestricted Net Assets/SIPC Fund
balance
Unrestricted net assets $2.5 – < $5 billion
(and reasonably likely to remain less than
$5 billion but not less than $2.5 billion)
SIPC Fund balance of $150 million –
unrestricted net assets of <$2.5 billion
SIPC Fund balance $100 million – <$150
million
SIPC Fund balance below $100 million
Annual Assessment Rate
0.15% of net operating revenues
0.25% of net operating revenues
Determined by SIPC, but not less than
0.25% of gross revenues
Determined by SIPC, but not less than 0.5%
of gross revenues
Unrestricted net assets >= $ 5 billion (and
SIPC may not more than once in any fourreasonably likely to remain > $5 billion
year period, increase or decrease the
1
(after review of study and consultation with assessment rate by up to, but not more than,
Commission and SROs))
25% of the assessment rate in effect at that
time.
1
When unrestricted net assets total $5 billion, SIPC will commission a study every four years to examine the
adequacy of SIPC’s unrestricted net asset balance and the SIPC Fund and the appropriate assessment rate. See
section 6(a)(1)(C) and (D) of SIPC’s Bylaws.
In addition to the Commission’s requirements under Rule 15c3-3, if either the
Commission or any SRO, such as FINRA, is aware of facts which lead it to believe that any
51
See Article 6, Assessments of SIPC Bylaws. SIPC’s unrestricted net assets are SIPC’s total assets
(including the SIPC Fund) less liabilities, which include estimated costs to complete ongoing SIPA
liquidations. See 2022 SIPC Annual Report at 20. See also 15 U.S.C. 78ddd(c) and (d) and 2022 SIPC
Annual Report at 21.
52
See Assessment Rate, available at https://www.sipc.org/for-members/assessment-rate. The amount of each
SIPC member’s assessment for the member’s fiscal year is the product of the assessment rate established
by SIPC for that fiscal year and either the member’s gross revenues or net operating revenues from the
securities business. See Section 6(a)(1) of SIPC’s Bylaws.
18
broker-dealer subject to its regulation is in or is approaching financial difficulty, it must
immediately notify SIPC, and, if such notification is by an SRO, the Commission.53 In a case
when an SRO notifies SIPC about a broker-dealer, and that broker-dealer has taken steps to
either reduce or liquidate its business, either voluntarily or at the direction of the SRO, the SRO
may render such assistance or oversight to such broker-dealer as it considers appropriate to
protect the interests of customers of such broker-dealer.
54
However, any actions the SRO takes
do not prevent or act as a bar from SIPC from taking an action as well. 55 If SIPC finds that a
broker-dealer has failed, or is in danger of not meeting its obligations to customers, SIPC can
initiate steps to begin a customer protection proceeding. For example, SIPC may, upon notice to
its broker-dealer member, file an application for a protective decree with any court that has
jurisdiction (i.e., a Federal District Court), whether or not the broker-dealer consents. 56 In
addition, no member of SIPC that has customers may enter into bankruptcy, insolvency, or a
receivership without approval from SIPC, except as provided in Title II of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. 57
C.
The Risk of a Mismatch in Funds Owed and Funds Reserved under Rule
15c3-3
Carrying broker-dealers receive customer- and PAB-related cash inflows in connection
with various securities transactions, including cash proceeds received from sales of securities,
cash deposited by customers and PAB account holders for the purposes of purchasing securities,
53
See 15 U.S.C. 78eee(a)(1).
54
See 15 U.S.C. 78eee(a)(2).
55
Id.
56
See 15 U.S.C. 78eee(a)(3)(A). See also 15 U.S.C. 78eee(b)(1) (detailing court proceedings).
57
See 15 U.S.C. 78eee(a)(3)(B).
19
and monthly or quarterly dividends received on behalf of customers and PAB account holders.
Cash credited to customers and PAB account holders often is quickly re-invested by the
customer or PAB account holder in securities such as money market mutual funds or securities
held by the customer or PAB account holder that are subject to dividend re-investment plans.
This cash also may be swept out of the customer’s or PAB account holder’s securities account at
the carrying broker-dealer to a bank or money market mutual fund as part of a program in which
customers’ and PAB account holders’ free credit balances are automatically invested in the
mutual fund or bank deposit product on the prior authorization of the customer or PAB account
holder (“sweep program”). 58 When customers and PAB account holders use their free credit
balances to invest in securities or bank deposit products, the amount of cash held by a carrying
broker-dealer for them is reduced and, therefore, the amount that needs to be deposited into the
customer or PAB reserve bank account also is reduced.
Carrying broker-dealers, however, may receive large cash inflows that are not deployed
for or on behalf of the customers or PAB account holders prior to the next required customer and
PAB reserve computations and deposits into the customer and PAB reserve bank accounts. In
this situation, the value of the cash and/or qualified securities in the customer and PAB reserve
bank accounts may not equal the net cash owed to customers and PAB account holders for a
period of time. For example, assume a carrying broker-dealer performs its customer and PAB
reserve computations weekly as required under Rule 15c3-3 (i.e., it has not elected to perform a
daily computation or meet the conditions in the rule to perform a monthly computation).
58
See 17 CFR 240.15c3-3(j)(2)(ii) (setting forth requirements under Rule 15c3-3 for this type of a program
for customer accounts). Broker-dealers are not customers under Rule 15c3-3. Therefore, PAB account
holders are not subject to the sweep program requirements under the rule with respect to their free credit
balances. See 17 CFR 15c3-3(a)(1). Nonetheless, PAB account holders may elect to have their free credit
balances included in a sweep program.
20
Typically, the carrying broker-dealer would perform the customer and PAB reserve
computations on Monday using credit and debit amounts as of the close of business on the
previous Friday. If the Monday computation showed a deposit requirement, the carrying brokerdealer would need to make that deposit by 10 a.m. the following business day, which typically
would be Tuesday. In this example, cash inflows received by the carrying broker-dealer on
Monday through Friday would not be accounted for until the carrying broker-dealer performs the
next customer and PAB reserve computations on the Monday of the following week and would
not be reserved for until the carrying broker-dealer makes the required deposits into the customer
and PAB reserve bank accounts no later than 10 a.m. on Tuesday of the following week.
Consequently, for a number of days, the net amount of cash owed to customers and PAB account
holders could be greater than the amounts deposited into the customer and PAB reserve bank
accounts. 59
This mismatch poses a risk to the carrying broker-dealer’s customers and PAB account
holders that the carrying broker-dealer could fail financially and be unable to return all the
59
To further illustrate this risk, assume on Monday of Week 1 a carrying broker-dealer performs a customer
reserve computation that shows as of close-of-business on Friday of the previous week the broker-dealer
had total credits of $30 billion and total debits of $25 billion and, therefore, had excess credits over debits
of $5 billion. Assume further, the carrying broker-dealer had $4.8 billion of cash and qualified securities
on deposit in its customer reserve bank account. Under Rule 15c3-3, the carrying broker dealer would need
to deposit $200 million into its customer reserve bank account no later than 10 a.m. on Tuesday of Week 1.
Assume further that the carrying broker-dealer receives $3 billion of cash inflows on Monday of Week 1
but does not facilitate any customer transactions during Week 1 that generate additional debits and the
customers do not deploy the $3 billion to purchase securities or into a sweep program. In this scenario, the
$3 billion of cash inflows on Monday of Week 1 would not get accounted for in the customer reserve
formula until the carrying broker-dealer performs the customer reserve computation on Monday of Week 2.
Assuming all else stays the same, the Week 2 customer reserve computation would result in a deposit
requirement of $3 billion, which would need to be made no later than 10 a.m. on the Tuesday of Week 2.
This means the net amount of cash owed to customers was $8 billion and the amount on deposit in the
customer reserve bank account was $4.8 billion on Monday through 10 a.m. on Tuesday of Week 1 and $5
billion from 10 a.m. on Tuesday of Week 1 through 10 a.m. on Tuesday of Week 2. Consequently, the
difference between the net amount of cash owed to customers and the amount on deposit in the customer
reserve bank account was $3.2 billion for Monday of Week 1 through 10 a.m. on Tuesday of Week 1 and
$3 billion from 10 a.m. on Tuesday of Week 1 through 10 a.m. on Tuesday of Week 2.
21
securities and cash owed to the customers and PAB account holders. In this situation, the
carrying broker-dealer would be liquidated under SIPA, and SIPC would be required to advance
money from the SIPC Fund—but not to PAB account holders—to the extent the fund of
customer property was insufficient to make customers whole through the pro rata distribution.
As discussed above, the amount that can be advanced to each customer is capped at $500,000 (of
which $250,000 can be used to cover cash claims). 60 Therefore, if the mismatch was sufficiently
large, customers’ claims may not be satisfied in full. Further, because PAB account holders—as
broker-dealers—are not entitled to advances from the SIPC Fund, their claims for securities and
cash would be at greater risk of not being satisfied in full. This could expose the PAB account
holder to financial stress and increased risk of liquidation. 61
As of the end of 2022, 162 carrying broker-dealers reported total credits in their customer
reserve computation of greater than $0. 62 These carrying broker-dealers reported an aggregate
amount of total customer credits of $1.03 trillion. In addition, 82 carrying broker-dealers
reported total credits in their PAB reserve computation of greater than $0. These carrying
broker-dealers reported an aggregate amount of PAB account holder total credits of $166.3
60
See section I.B.3. of this release (discussing broker-dealer liquidations under SIPA in more detail).
61
See section IV.C. of this release (discussing the benefits and costs of the proposed amendments).
62
This number of carrying broker-dealers is based on information reported by broker-dealers as of Dec. 31,
2022, in Form X-17A-5, the Financial and Operational Combined Uniform Single Report (“FOCUS
Report”). The FOCUS Reports showed that 162 carrying broker-dealers reported total credits of greater
than $0 on Line 4430 of the report (total credits in the customer reserve formula). Total credits in the
customer reserve computation is the sum of customer credits in the formula, including—among other
credits—free credit balances and other credit balances in customers’ securities accounts (Line 4340),
monies borrowed collateralized by securities carried for the accounts of customers (Line 4350), and monies
payable against customers’ securities loaned (Line 4360). See also section IV.B.2. of this release
(estimating that there are 187 broker-dealers that may currently fall within the scope of the Rule 15c3-3
based on carrying activities). This estimate includes broker-dealers that did not report credits greater than
$0 and/or that reported being exempt from the provisions of Rule 15c3-3.
22
billion.63 Moreover, some of these carrying broker-dealers have been required to deposit large
amounts of additional cash and/or qualified securities into their customer and/or PAB reserve
bank accounts after performing their customer and/or PAB reserve computations. For example,
during the 2022 calendar year, the largest required additional deposits into the customer reserve
bank accounts of these carrying broker-dealers ranged from approximately $1.6 billion to over
$6.0 billion following the customer reserve computation. 64 Furthermore, during the 2022
calendar year, the largest required additional deposits into their PAB reserve bank accounts
ranged from approximately $350 million to over $4.0 billion.65 The carrying broker-dealers that
reported the largest amounts of total credits for their customers and PAB account holders (and
that exceeded the proposed $250 Million Threshold discussed below) were more likely to
experience larger mismatches and the dollar amounts underlying those mismatches were
significantly larger (than carrying broker-dealers that do not exceed the proposed $250 Million
Threshold). 66
63
FOCUS Report data as of Dec. 31, 2022, showed that 82 broker-dealers reported total credits of greater
than $0 on Line 2170 of the report (total credits in the PAB reserve formula). Total credits in the PAB
reserve computation is the sum of PAB account holder credits in the formula, including—among other
credits—free credit balances and other credit balances in PAB securities accounts (Line 2110), monies
borrowed collateralized by securities carried for the accounts of PAB (Line 2120), and monies payable
against PAB securities loaned (Line 2130).
64
This is based on the 25 largest additional deposit requirements reported in the monthly FOCUS Reports
filed during the 2022 calendar year.
65
This is based on the 25 largest additional deposit requirements reported in the monthly FOCUS Reports
filed during the 2022 calendar year. The largest additional deposit requirements were made by carrying
broker-dealers that also had the 20 largest credit balances based on 2022 FOCUS Report data. In addition
to large deposit requirements, the customer and PAB reserve computations also permitted some carrying
broker-dealers to make large withdrawals from both their customer and PAB reserve bank accounts during
the 2022 calendar year. For example, during the 2022 calendar year, the 25 largest withdrawals from
customer reserve bank accounts ranged from approximately $1.3 billion to $6.0 billion, and the 25 largest
withdrawals from PAB reserve bank accounts ranged from $241.7 million to $3.5 billion.
66
This is based on the carrying broker-dealers that reported the largest amounts of total credits on their
FOCUS Reports as of Dec. 31, 2022, and comparing them to the carrying broker-dealers that reported the
23
These large deposit requirements indicate that there may be times when the net amount of
cash owed to customers and PAB account holders is substantially greater than the amounts on
deposit in the customer and PAB reserve bank accounts. As explained above, this creates the
potential risk that a carrying broker-dealer could fail financially and not be able to fully satisfy
claims of customers and PAB account holders for securities and cash. Moreover, given the
potential size of this mismatch between the cash owed and the cash reserved, the failure of a
carrying broker-dealer that has large total credits could cause widespread harm and potentially
substantial losses (as discussed above). It also potentially could deplete the SIPC Fund resulting
in the need to increase assessments on SIPC’s broker-dealer members to replenish it, with the
resulting costs potentially being passed through to investors. 67
To address these risks, the Commission is proposing amendments to Rule 15c3-3 to
require carrying broker-dealers with large total credits—the carrying broker-dealers most likely
to have large customer and PAB additional deposit requirements—to increase the frequency of
their customer and PAB reserve computations from weekly to daily. The objective is to more
dynamically match the net amount of cash owed to customers and PAB account holders with the
amount on deposit in the carrying broker-dealer’s customer and PAB reserve bank accounts by
shortening the timeframe that a mismatch can exist. 68 This objective also should enhance the
customer protection requirements of Rule 15c3-3.
largest deposits for the 2022 calendar year. See also section II.A.1. of this release (discussing the proposed
$250 Million Threshold) and Table 5 in section IV.B.2. of this release (detailing broker-dealer deposits and
withdrawals as a share of reserve accounts for the year 2022).
67
See section IV.C. of this release (discussing the benefits and costs of the proposed amendments).
68
To illustrate how a daily computation would reduce this risk, assume on Monday a carrying broker-dealer
performs a customer reserve computation that shows as of the close-of-business on Friday of the previous
week the broker-dealer had total credits of $30 billion and total debits of $25 billion and, therefore, had
24
In addition, performing daily (rather than weekly) customer and PAB reserve
computations would allow large carrying broker-dealers to more effectively manage their cash
flows and liquidity. For example, a carrying broker-dealer that performs weekly computations
generally cannot withdraw excess cash or U.S. Government securities from either its customer or
PAB reserve bank accounts until the following week even if the value of the account assets
exceeds the net cash owed to customers or PAB account holders during the current week. While
Rule 15c3-3 currently permits a carrying broker-dealer to elect to perform its customer and PAB
reserve calculations more frequently than weekly, 69 a practical effect of requiring carrying
broker-dealers to perform daily customer and PAB reserve computations would be to permit
them to withdraw these excess funds and securities more quickly. A number of carrying brokerdealers currently elect to perform daily customer and PAB reserve computations, including
eleven of the largest carrying broker-dealers. 70 Finally, an additional 52 carrying broker-dealers
that would be required to begin performing daily customer and PAB computations under the
excess credits over debits of $5 billion. Assume further, the carrying broker-dealer had $4.8 billion of cash
and qualified securities on deposit in its customer reserve bank account. Under a daily computation, the
carrying broker dealer would need to deposit $200 million into its customer reserve bank account no later
than 10 a.m. on Tuesday of that week. Assume further that the carrying broker-dealer receives $3 billion of
cash inflows on Monday but does not facilitate any customer transactions that generate any additional
debits and the customers do not deploy the $3 billion to purchase securities or into a sweep program.
Under a daily requirement, the carrying broker-dealer would perform a customer reserve computation on
Tuesday as of the close of business on Monday that would account for the $3 billion in cash inflows
received on Monday and be required to deposit $3 billion into the customer reserve bank account by 10
a.m. on Wednesday of the same week. Consequently, the mismatch would exist from the point in time on
Monday when the $3 billion was received until 10 a.m. on Wednesday of the same week when $3 billion
would need to be deposited into the customer reserve bank account (approximately two full days). Under a
weekly requirement, this mismatch would exist from the point in time on Monday when the $3 billion was
received until 10 a.m. on Tuesday of the following week when the next deposit into the customer reserve
bank account would need to be made (approximately eight full days).
69
See 17 CFR 240.15c3-3(e)(3)(iv).
70
Based on FOCUS Report data for the 2022 calendar year, these carrying broker-dealers are among the
largest broker-dealers measured by average total credits and total assets. These 11 carrying broker-dealers
accounted for 64 percent of the total amount of average total credits among all carrying-broker dealers with
positive customer or PAB credits reported in 2022. See section IV.B.2. of this release (discussing baseline
of affected broker-dealers in the economic analysis).
25
proposed rule (i.e., those carrying broker-dealers that are not already voluntarily performing
daily computations) may incur increased compliance costs. 71 As further discussed in the
Economic Analysis in section IV. of this release, these costs and benefits may ultimately be
passed through to customers and PAB account holders of the affected carrying broker-dealers. 72
II.
PROPOSED AMENDMENTS
A.
Proposed Amendments to Rule 15c3-3
In order to address the mismatch risk discussed above and enhance customer protection
requirements, the Commission is proposing amendments to Rule 15c3-3 that would require
carrying broker-dealers with large amounts of total credits to perform the customer and PAB
reserve computations daily (rather than weekly). 73 More specifically, the amendments would add
paragraph (e)(3)(i)(B) to Rule 15c3-3. 74 This paragraph would provide that a carrying brokerdealer with average total credits that are equal to or greater than $250 million must make the
computation 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. 75 The paragraph
would further provide that the deposit so computed must be made no later than one hour after the
71
Based on FOCUS Report data for the 2022 calendar year.
72
See section IV. of this release (discussing the benefits and costs of the proposed amendments).
73
See section I.C. of this release (discussing the mismatch risk).
74
See paragraph (e)(3)(i)(B) to Rule 15c3-3, as proposed to be amended. In addition, the Commission is
proposing the following conforming amendments to paragraph (e)(3)(i) of Rule 15c3-3: (1) paragraph
(e)(3)(i) would be re-lettered paragraph (e)(3)(i)(A); and (2) the text in paragraph (e)(3)(i) regarding
monthly computations would be set forth in new paragraph (e)(3)(i)(C). Further, the phrase “[e]xcept as
provided in paragraphs (e)(3)(i)(B)(1) and (C) of this section” would be added to the beginning of
paragraph (e)(3)(i)(A) of Rule 15c3-3, as proposed to be amended, to clarify that the weekly computation
requirement in paragraph (e)(3)(i)(A) applies unless the carrying broker-dealer is subject to the daily
computation requirement of paragraph (e)(3)(i)(B)(1) or meets the conditions of paragraph (e)(3)(i)(C) to
perform a monthly computation.
75
The text of paragraph (e)(3)(i)(B) of Rule 15c3-3, as proposed to be amended, is modelled closely on the
current text of paragraph (e)(3)(i) of Rule 15c3-3.
26
opening of banking business on the second following business day. For example, a carrying
broker-dealer performing the computation on Tuesday as of the close of business on Monday,
would be required to make the deposit on Wednesday, assuming all three days are business days.
On Wednesday, the carrying broker-dealer would perform the computation as of the close of
business Tuesday and be required to make the deposit on Thursday (assuming Thursday is a
business day).
For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission is proposing to define
average total credits as the arithmetic mean of the sum of total credits in the customer reserve
computation and PAB reserve computation reported in the twelve most recently filed month-end
FOCUS Reports (“$250 Million Threshold”). 76 The proposed definition of average total credits
is designed to serve as a straightforward way for the carrying broker-dealer to determine whether
its total credits equal or exceed the $250 Million Threshold. In addition, using the arithmetic
mean of total credit amounts reported in the twelve most recently filed month-end FOCUS
Reports to calculate the average total credits is designed to account for the fact that a carrying
broker-dealer’s total credits may fluctuate. A rolling average based on twelve most recently filed
month-end FOCUS Reports would provide for a more stable and representative metric as
compared to basing the calculation on a single filing such as the most recently filed FOCUS
Report.
The proposed $250 Million Threshold is designed to apply the daily computation
requirement to carrying broker-dealers that have large amounts of total credits. Based on
76
See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed to be amended. This would mean the carrying
broker-dealer would add up the sum of the total credits reported in the customer and PAB reserve
computations in each of the twelve most recently filed month-end FOCUS Reports and divide that amount
by 12 to calculate the arithmetic mean of the total credits.
27
FOCUS Report data, these carrying broker-dealers are the ones more likely to experience larger
mismatches between the net cash they owe customers and PAB account holders and the amounts
they have on deposit in their customer and PAB reserve bank accounts, and the dollar amounts
underlying those mismatches are significantly larger than carrying broker-dealers below the $250
Million Threshold. 77 The proposed $250 Million Threshold is designed to provide a balanced
demarcation between carrying broker-dealers with large amounts of total credits relative to
smaller carrying broker dealers (with lower average total credits), the former of which are more
likely to incur larger mismatches in any given year, and are more likely to better absorb any
potential increase in compliance costs. 78
Based on regulatory filings for the period of January 2022 through December 2022, the
$250 Million Threshold would apply the proposed daily computation requirement to
approximately 63 carrying broker-dealers. 79 These broker-dealers include 11 carrying broker-
77
Based on FOCUS Report data for the 2022 calendar year. See also Table 5 in section IV.B.2. of this
release (detailing broker-dealer deposits and withdrawals as a share of reserve accounts for the year 2022).
78
See section IV.C. of this release (discussing the costs and benefits of the proposed $250 Million Threshold).
79
This estimate is based on the arithmetic mean of the sum of total credits in the customer and PAB reserve
computations reported in each required monthly FOCUS Report filed for the 12 months ended Dec. 31,
2022. All of these broker-dealers reported total credits in their customer reserve computation during the
2022 calendar year. Approximately fourteen carrying broker-dealers that exceeded the $250 Million
Threshold reported no credits in their PAB reserve computations during the 2022 calendar year. The
number of affected carrying broker-dealers may vary month to month because the proposed $250 Million
Threshold is based on a 12-month rolling average. For example, the number of affected carrying brokerdealers varied monthly from 60 to 63 over the period from January 2022 through May 2023. There was
little variation, however, in the identity of the affected carrying broker-dealers. The same 59 carrying
broker-dealers met the proposed $250 Million Threshold in each month, and from one to four additional
carrying broker-dealers met the threshold in any given month. In total, over this period, 63 different
carrying broker dealers would have been affected. See Figure 1 (Number of Affected Broker-Dealers
under 12-Month Rolling Average, Over the Period from January 2022 – May 2023) in section IV.B.2. of
this release.
28
dealers that already voluntarily perform the customer reserve computation daily. 80 Under the
proposed $250 Million Threshold, approximately 100 carrying broker-dealers would continue to
be subject to a weekly customer and/or PAB reserve computation requirement. 81 In summary, in
proposing the $250 Million Threshold, the Commission seeks to reasonably balance the
enhancements to customer protection under Rule 15c3-3 through reductions in the mismatch
risk, with the potential increases in compliance costs and staffing that may be necessary to
perform a daily computation. 82
The Commission is proposing to require that a carrying broker-dealer comply with the
daily computation requirement for the customer and PAB reserve bank accounts no later than six
months after having average total credits that equal or are greater than $250 million. 83 The
purpose is to provide time for a carrying broker-dealer to prepare to perform a daily computation
after it exceeds the $250 Million Threshold. A carrying broker-dealer in this situation may need
to add resources in order to perform the computations, including hiring or assigning additional
staff to perform the daily computations.
Once a carrying broker-dealer begins to perform daily customer and PAB reserve
computations (because it exceeded the $250 Million Threshold), the proposed amendments
would require it to continue performing daily customer and PAB reserve computations for at
80
This is based on FOCUS Report data as of Dec. 31, 2022. Based on FOCUS Report data for 2022, ten out
of these 11 carrying broker-dealers were among the 20 largest carrying broker-dealers in terms of the
largest average total credits. All 11 of these carrying broker-dealers that currently perform their customer
reserve computation daily are among the 30 largest carrying broker-dealers in terms of average total
credits.
81
This estimate is based on 162 carrying broker-dealers that reported total credits greater than $0 on their
FOCUS Reports as of Dec. 31, 2022.
82
See section IV. of this release (discussing the costs and benefits of the proposed $250 Million Threshold).
83
See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed to be amended.
29
least 60 days after it falls below the $250 Million Threshold. More specifically, under paragraph
(e)(3)(i)(B)(2) of Rule 15c3-3, as proposed to be amended, a carrying broker-dealer performing
daily computations, whose average total credits falls below the $250 Million Threshold, could
elect to perform weekly computations under paragraph (e)(3)(i)(A) of Rule 15c3-3 by notifying
its designated examining authority in writing. 84 In order to revert to a weekly computation, the
carrying broker-dealer would need to wait 60 calendar days after notifying its designated
examining authority, in writing, of its election to perform weekly computations before it could
switch to performing weekly computations. 85 The purpose of this requirement is to provide the
designated examining authority with prior notice of the switch and to provide the designated
examining authority with the opportunity to contact the firm and ask how it intends to implement
the change. This would assist the designated examining authority in monitoring the firm.
If a carrying broker-dealer that provided the 60-day notice under the proposal reverts to a
weekly (rather than daily) customer and PAB reserve computation and subsequently exceeds the
$250 Million Threshold once again, the proposed rule would require the carrying broker-dealer
to comply with the daily computation requirement no later than six months after having average
total credits equal to or greater than $250 million. 86 This would be the same process as when a
carrying broker-dealer exceeded the $250 Million Threshold for the first time. The purpose of
this requirement would be to provide the carrying broker-dealer time to prepare to perform a
84
See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as proposed to be amended.
85
To illustrate how this would work, assume a carrying broker-dealer has been required to perform daily
customer and PAB reserve computations for five years. Assume further that with the filing of the FOCUS
Report for the October month-end in the fifth year the carrying broker-dealer calculates its average total
credits and the amount is below the $250 Million Threshold. At this point, the carrying broker-dealer could
provide notice to its designated examining authority of its election to begin performing the customer and
PAB reserve computations weekly. It would need to wait 60 days after providing that notice before it could
begin performing those computations weekly.
86
See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed to be amended.
30
daily computation. Carrying broker-dealers that fall below the $250 Million Threshold and
revert to weekly customer and PAB reserve computations may reduce the resources they
dedicate to performing the computations. Therefore, these carrying broker-dealers would need
some time to enhance their operational resources in order to increase the frequency of the
computations again. However, this may be an infrequent occurrence given that few carrying
broker-dealers likely would maintain average total credits that is close to the $250 Million
Threshold. Further, a carrying broker-dealer could choose to continue to perform daily customer
and PAB reserve computations even after it falls below the $250 Million Threshold, given the
practical effect on liquidity as a result of the ability to make more frequent withdrawals from its
customer and PAB reserve bank accounts. The largest carrying broker-dealers likely would be
required to perform daily computations an ongoing basis because their average total credits
would far exceed the proposed $250 Million Threshold. 87
The Commission also is proposing to amend paragraph (e)(3)(iv) of Rule 15c3-3.
Current paragraph (e)(3)(iv) of Rule 15c3-3 provides that computations in addition to the
computations required in paragraph (e)(3) (i.e., the weekly computation and permitted monthly
computation) may be made as of the close of any business day, and the deposits so computed
must be made no later than one hour after the opening of banking business on the second
following business day. 88 The amendment to paragraph (e)(3)(iv) would provide that
computations, other than those made under paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed
87
This is based on FOCUS Report data for the 12 months ended Dec. 31, 2022.
88
See 17 CFR 240.15c3-3(e)(3)(iv).
31
to be amended (i.e., the daily computations), may be made as of the close of any business day. 89
This amendment would specify that the option to perform a customer or PAB reserve
computation more frequently than weekly or monthly (as applicable) remains available to
carrying broker-dealers that are required to make such computations on a weekly or monthly
basis. Carrying broker-dealers currently performing daily customer and PAB reserve
computations have used this option.
B.
Request for Comment
The Commission requests comments from all members of the public on all aspects of the
proposed rule amendments. Commenters are requested to provide empirical data in support of
any arguments or analyses. With respect to any comments, the Commission notes that they are
of the greatest assistance to this rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives to the Commission’s
proposals where appropriate. In addition, the Commission is requesting comment on the
following specific aspects of the proposals:
1.
The objective of the proposed amendments is to address the risk that is created when the
amount of net cash owed to customers and PAB account holders by a carrying brokerdealer is greater than the amount on deposit in the broker-dealer’s customer and PAB
reserve bank accounts and the amount of that difference is substantial. Are there ways—
other than requiring daily customer and PAB reserve computations—to address this risk?
If so, identify them and explain how they would more appropriately address this risk. For
example, rather than a daily customer and PAB reserve computation requirement, should
89
This proposed amendment would insert the phrase “other than computations made under paragraph
(e)(3)(i)(B)(1) of this section,” following the words “this paragraph (e)(3),” in current paragraph (e)(3)(iv)
of Rule 15c3-3.
32
Rule 15c3-3 be modified to require a carrying broker-dealer to deposit cash and/or
qualified securities in the customer and PAB reserve bank accounts in an amount that is a
multiple of the required amount computed under the customer and PAB reserve
computations (i.e., overfund the customer and PAB reserve bank accounts weekly)? If
so, explain why. If not, explain why not. If Rule 15c3-3 were to be modified in this way,
should the multiple of the amount computed under the customer and PAB reserve
computations be 105%, 110% or some other percentage? If so, explain why.
2.
Should the definition of average total credits be modified to use a subset of credit items
rather than total credits? If so, explain why. If not, explain why not. For example, rather
than using the sum of total credits from the customer reserve computation (Line 4430 of
the FOCUS Report) and the PAB reserve computation (Line 2170 of the FOCUS Report),
should the definition use the sum of free credit balances and other credit balances from
the customer reserve computation (Line 4340 of the FOCUS Report) and the PAB
reserve computation (Line 2110 of the FOCUS Report)? If so, explain why. If not,
explain why not. If the definition used free credit balances and other credit balances, the
amounts reported by a carrying broker-dealer would be less than the amounts reported
using total credits (as free credit balances and other credit balances are one of several
components of total credits). Therefore, if the definition used free credit balances and
other credit balances, should the $250 Million Threshold be adjusted downward to
account for the lower amounts that would be reported by carrying broker-dealers? If so,
explain why. If not, explain why not. For example, if the definition were to be modified
in this way, should the threshold be lowered to $200 million, $150 million, or $100
million, or some other lower amount? If so, explain why. If not, explain why not.
33
3.
Should the definition of average total credits be modified so that it is based on a different
set of filed FOCUS Reports? If so, explain why. If not, explain why not. For example,
should it be the arithmetic mean of the total credits in the customer and PAB reserve
computations reported in each required FOCUS Report filed during the most recently
ended calendar year? If so, explain why. If not, explain why not. Should it be the
arithmetic mean of the FOCUS Reports filed for the previous four calendar quarters? If
so, explain why. If not, explain why not.
4.
Should the $250 Million Threshold be modified to be set at a higher or lower threshold? 90
If so, explain why. If not, explain why not. For example, should the threshold be $50
million, $100 million, $150 million, $200 million, $300 million, $500 million, or $1
billion? If so, recommend a different threshold and explain why it would be appropriate.
5.
Should Rule 15c3-3 be modified to require a carrying broker-dealer to perform daily
customer and PAB reserve computations using a different metric for the threshold? For
example, if Rule 15c3-3 were to be modified in this way, should the threshold be based
on a metric such as: (1) total assets; (2) net capital under 17 CFR 240.15c3-1 (Exchange
Act Rule 15c3-1); (3) the maximum value of total credits reported on the twelve most
recently filed month-end FOCUS Reports; (4) whether the required reserve bank account
deposit as a share of the reserve bank account balance prior to such deposit exceeds a
certain percentage threshold (e.g., 5% or 10%); or (5) the average total credits per
number of customer and PAB accounts? If so, explain why. If not, explain why not.
90
See Table 5 in section IV.B.2. of this release (detailing broker-dealer deposits and withdrawals as a share of
reserve account balance for the year 2022).
34
6.
Should Rule 15c3-3 be modified to require all carrying broker-dealers to perform daily
customer and PAB reserve computations? If so, explain why. If not, explain why not.
7.
Should the six-month period to begin performing the daily customer and PAB reserve
computations after having average total credits that equal or exceed the $250 Million
Threshold be modified? If so, explain why. If not, explain why not. For example, would
six months be a sufficient time to implement the necessary changes to begin performing a
daily computation? If so, explain why. If not, explain why not. Should the six-month
period be lengthened or shortened? If so, explain why. If not, explain why not. For
example, should the time period be 30 calendar days, 60 calendar days, three months,
nine months or one year? If so, recommend a different time period and explain why it
would be appropriate.
8.
If a carrying broker-dealer falls below the $250 Million Threshold, reverts to a weekly
computation after providing the 60-day prior notice, and subsequently exceeds the $250
Million Threshold again, should the six-month period to begin performing the daily
customer and PAB reserve computations be modified? If so, explain why. If not, explain
why not. For example, would a carrying broker-dealer need six months to implement the
changes necessary to perform the customer and PAB reserve computations daily after it
exceeds the $250 Million Threshold for a second or third time? If so, explain why. If
not, explain why not. In this case, should the six-month period be shortened? If so,
explain why. If not, explain why not. For example, should the time period for exceeding
the $250 Million Threshold for a second or subsequent time be 30 calendar days, 60
calendar days, or three months? If so, recommend a different time period and explain
why it would be appropriate.
35
9.
Should the requirement to provide a 60-day prior written notice to the carrying brokerdealer’s designated examining authority before switching to weekly customer and PAB
reserve computations be modified? If so, explain why. If not, explain why not. For
example, should the time period be 30 days, 90 days or 180 days? If so, recommend a
different time period and explain why it would be appropriate.
10.
Should Rule 15c3-3 be modified to specifically address the situation where a carrying
broker-dealer performing weekly customer and PAB reserve computations exceeds the
proposed $250 Million Threshold for a period of a month or two, but subsequently falls
below the proposed $250 Million Threshold during the six-month period to begin
performing the customer and PAB reserve computations daily? If so, explain why. If
not, explain why not. For example, if Rule 15c3-3 were to be modified in this way,
should the carrying broker-dealer be permitted to continue to perform its customer and
PAB reserve computations weekly, if it falls below the proposed $250 Million Threshold
during the six-month period? For example, if a carrying broker-dealer performing
weekly computations exceeds the proposed $250 Million Threshold in January and
February, but falls below the proposed $250 Million Threshold in March, April, May,
and June, should the carrying broker-dealer be permitted to continue to perform weekly
computations in July (as opposed to be required to perform daily computations beginning
in July)? In such a case, should the carrying broker-dealer be required to give a written
notice to its designated examining authority that it will continue to perform weekly
computations? If so, explain why. If not, explain why not.
11.
Should Rule 15c3-3 be modified to require carrying broker-dealers to perform the
customer and PAB reserve computations daily indefinitely once they exceed the $250
36
Million Threshold for the first time (with no option to revert to weekly computations with
a 60-day prior written notice)? If so, explain why. If not, explain why not.
12.
Should Rule 15c3-3 be modified to require carrying broker-dealers to document in
writing and preserve for three years under Exchange Act Rule 17a-4 the calculation of
their average total credits? 91 If so, explain why. If not, explain why not.
13.
If the proposal was adopted substantially as proposed, how long would carrying brokerdealers need to prepare to come into compliance with the new requirements? Please
explain. For example, would they need three, six, nine, twelve or some other number of
months? What data points would carrying broker-dealers use to assess the timing? Are
there any specific operational or technological issues that should be factored into a
compliance date?
14.
Would staggering the compliance dates over more than one calendar year help facilitate
an orderly implementation of the proposal, if adopted substantially as proposed? For
example, would it be appropriate for the compliance date to vary depending on the size of
the average total credits reported by carrying broker-dealers, with firms having larger
amounts of average total credits required to come into compliance sooner than firms with
smaller amounts of average total credits? More generally, if staggering is appropriate,
what would be an appropriate schedule of compliance dates for carrying broker-dealers
with different amounts of average total credits? Please recommend different compliance
dates for carrying broker-dealers with different amounts of average total credits and
explain why they would be appropriate. Should the fact that some carrying broker-
91
See 17 CFR 240.17a-4.
37
dealers already would be performing daily customer and PAB reserve computations
factor into the compliance date? If so, explain why. If not, explain why not.
15.
If the proposal was adopted substantially as proposed, would the six-month period to
begin performing daily customer and PAB reserve computations after having average
total credits that equal or exceed the $250 Million Threshold provide adequate time for
carrying broker-dealers to implement the changes necessary to comply with the rule
without the need for an additional delayed compliance date? If so, explain why. If not,
explain why not. For example, would the six-month period be adequate if the date to
begin performing the daily customer and PAB reserve computations fell near the end of
the calendar year when carrying broker-dealers may refrain from implementing new
information technology projects? If so, explain why. If not, explain why not.
III.
REQUEST FOR COMMENT - RESERVE ACCOUNT REQUIREMENTS FOR
SECURITY-BASED SWAPS
A.
Discussion
In 2019, the Commission adopted customer segregation requirements for broker-dealers
and security-based swap dealers (“SBSDs”) with respect to customer money, securities, and
property related to security-based swaps. 92 These requirements were based in part on the
requirements of Rules 15c3-3 and 15c3-3a discussed above. 93 Under the security-based swap
segregation requirements, broker-dealers—including broker-dealers registered as SBSDs—are
92
Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major-SecurityBased Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Exchange Act
Release No. 86175 (June 21, 2019), 84 FR 43872, 43930-43 (Aug. 22, 2019) (“SBS Segregation Adopting
Release”).
93
Id. See also sections I.B.1. and I.B.2. of this release (discussing the requirements of Rules 15c3-3 and
15c3-3a).
38
required to perform a separate weekly security-based swap customer reserve computation and
have a separate security-based swap customer reserve account that must hold the net amount of
cash owed to security-based swap customers. 94 Title 17 sections 240.18a-4 and 18a-4a
(“Exchange Act Rules 18a-4 and 18a-4a”) impose analogous security-based swap customer
reserve computation and deposit requirements on SBSDs that either are not registered as a
broker-dealer or are registered as special class of broker-dealer known as an over-the counter
derivatives dealer (“OTC derivatives dealer”). 95 As discussed below, the proposed amendments
would not alter these existing segregation rules for security-based swap customers to require a
daily (rather than weekly) computation and deposit. 96 However, the Commission seeks comment
on these matters below.
The proposed amendments do not include such daily requirements because almost all
carrying broker-dealers—including those also registered as SBSDs—that have credits related to
the security-based swap activities of their security-based swap customers account for these
credits in their customer reserve computation and in their customer reserve bank account. 97
94
See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b.
95
See 17 CFR 240.18a-4; 17 CFR 240.18a-4a. OTC derivatives dealers are limited purpose broker-dealers
that are authorized to trade in OTC derivatives (including a broader range of derivatives than security-based
swaps) and to use models to calculate net capital. See 17 CFR 240.3b-12 (defining the term “OTC
derivatives dealer”); OTC Derivatives Dealers, Exchange Act Release No. 40594 (Oct. 23, 1998), 63 FR
59362 (Nov. 3, 1998). OTC derivatives dealers are not members of SIPC.
96
The Commission proposed a daily computation requirement for security-based swap customers. See SBS
Segregation Adopting Release, 84 FR at 43940. In response to comment, the Commission adopted a
weekly security-based swap customer reserve requirement in light of the increased operational burdens for
broker-dealers and SBSDs as compared to a weekly computation. Id.
97
This is based on FOCUS Report data for calendar year 2022. The Commission notes that staff has stated
its views in Question 1 of Responses to Frequently Asked Questions Regarding Financial Responsibility
Requirements as Applied to Security-Based Swap Activities of Broker-Dealers and Security-Based Swap
Dealers (Oct. 8, 2021), available at https://www.sec.gov/tm/faqs-financial-responsibility-req-applied-sbs
(“SBS FAQ 1”). Based on FOCUS Report data for calendar year 2022, only one broker-dealer currently
performs a separate security-based swap customer reserve computation.
39
Therefore, the proposed amendments to the customer reserve requirements of Rule 15c3-3
discussed above would apply to the security-based swap credits computed by these brokerdealers. 98 These carrying broker-dealers would not include any debit items related to securitybased swap activities of their security-based swap customers in their customer reserve
computation. 99 Consequently, amending Rule 15c3-3 to require a daily security-based swap
customer reserve computation for broker-dealers, including those also registered as SBSDs,
would have virtually no impact because the credits related to security-based swap activity for
security-based swap customers generally are being included in the customer reserve
computation. This would include the daily customer reserve computations of those carrying
broker-dealers that exceed the proposed $250 Million Threshold.
In addition, the SBSDs registered with the Commission that are not dually registered as
broker-dealers (other than as OTC derivatives dealers) operate pursuant to an exemption from
the Commission’s security-based swap segregation rule. 100 Under this exemption, they are not
required to perform a security-based swap customer reserve computation or have a securitybased swap customer reserve account. In addition, these SBSDs are not members of SIPC.
B.
Request for Comment
The Commission generally requests comments on whether the security-based swap
customer reserve computation and deposit requirements should be daily (rather than weekly). In
addition, the Commission requests comments on the following specific issues, with
accompanying data and analysis:
98
See section II.A.1. of this release (discussing the proposed amendments).
99
See SBS FAQ 1 for staff views.
100
See 17 CFR 240.18a-4(f).
40
16.
Should Rule 15c3-3 be modified to require broker-dealers—including broker-dealers
(other than OTC derivatives dealers) registered as SBSDs—to perform daily securitybased swap customer reserve computations in addition to daily customer and PAB
reserve computations? If so, explain why. If not, explain why not.
17.
Should the Commission amend Exchange Act Rules 18a-4 and 18a-4a to require SBSDs
that are not registered as broker-dealers (other than as OTC derivatives dealers) to
perform daily security-based swap customer reserve computations? If so, explain why.
If not, explain why not.
IV.
ECONOMIC ANALYSIS
A.
Introduction
The Commission is mindful of the economic effects, including the benefits and costs, of
the proposed amendments. Section 3(f) of the Exchange Act provides that when engaging in
rulemaking that requires the Commission to consider or determine whether an action is necessary
or appropriate in the public interest, to also consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital formation. 101 Section
23(a)(2) of the Exchange Act also requires the Commission to consider the effect that the rules
and rule amendments would have on competition, and it prohibits the Commission from adopting
any rule that would impose a burden on competition not necessary or appropriate in furtherance
of the Exchange Act. 102 The analysis below addresses the likely economic effects of the
proposed amendments, including the anticipated benefits and costs of the amendments and their
101
See 15 U.S.C. 78c(f).
102
See 15 U.S.C. 78w(a)(2).
41
likely effects on efficiency, competition, and capital formation. The Commission also discusses
the potential economic effects of certain alternatives to the approaches taken in this proposal.
As part of their business, carrying broker-dealers regularly receive cash related to
customers’ and PAB account holders’ securities transactions, such as cash realized from sales of
securities. While it is common that customers’ and PAB account holders’ cash is quickly reinvested or swept out to a bank account or money market fund by the customer or PAB account
holder, it is also common for this cash to remain undeployed for or on behalf of customers and
PAB account holders for several days or longer prior to the next required customer and PAB
reserve computations and deposits into the customer and PAB reserve bank accounts. 103
Currently, the required balances in customer and PAB reserve bank accounts (net cash
owed to customers or PAB account holders) are required to be calculated weekly, and the
resulting amount must be held in the customer and PAB reserve bank accounts until the date of
next required deposit. 104 However, the value of the net cash owed to customers or PAB account
holders may change daily due to customers’ and PAB account holders’ transactions and redeployment of undeployed funds. On a weekly basis, this could result in a large intra-week
mismatch between the customer or PAB reserve bank account balances and actual net cash owed
to customers or PAB account holders. This intra-week mismatch introduces several potential
risks that are currently not internalized by carrying broker-dealers.
First, the mismatch between the calculated and the actual amounts of net cash owed to
customers and PAB account holders introduces a risk to other SIPC members. More specifically,
103
See section I.C. of this release (discussing the risk of a mismatch of funds owed and funds reserved under
Rule 15c3-3).
104
See section I.B.1. and 2. of this release (discussing customer protection requirements of Rule 15c3-3 for
customers and PAB account holders).
42
if a liquidation of a carrying broker-dealer with a mismatch of cash in its customer and PAB
reserve bank accounts is carried out under SIPA, the SIPC Fund balance would be used if there
are not enough assets in the broker-dealer’s estate to cover the difference between the net cash
owed to customers and the amount in the reserve bank account, 105 which may trigger a
subsequent increase in contributions from other SIPC members. This risk may be exacerbated
for carrying broker-dealers experiencing large aggregate intra-week mismatches. As a result, the
SIPC Fund would be at a higher risk of depletion. For example, as discussed in section IV.B.2.
below, mismatches are common among broker-dealers of all sizes (as measured by average total
credits). The largest carrying broker-dealers with average total credits of at least $500 billion
had mismatches of between 10 and 18 percent during 2022. 106
Second, this mismatch introduces a risk to customers and PAB account holders of
carrying broker-dealers. To the extent that there is mismatch of funds in the customer or PAB
reserve bank account, a failure of a carrying broker-dealer would prevent its customers or PAB
account holders from promptly receiving the whole amount of cash owed to them. In this
scenario, the funds owed to customers or PAB account holders may be tied up in liquidation
proceedings and these customers or PAB account holders would have to wait to receive their
funds back until the broker-dealer liquidation process is carried out under SIPA, which may take
105
See section I.B.3. of this release (discussing broker-dealer liquidations and SIPA, including the funding and
balance of the SIPC Fund). For an example of a customer reserve bank account mismatch, one carrying
broker-dealer had a deficit in its customer reserve bank account equal to $5 billion, yet the level of the
SIPC Fund at the time was at $2 billion. See Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Merrill Lynch Professional Clearing Corp., Order Instituting Administrative and Cease-and-Desist
Proceedings, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings,
and Imposing Remedial Sanctions and a Cease-and-Desist Order, Exchange Act Rel. No. 78141 (June 23,
2016).
106
Based on FOCUS Report data for 2022. The mismatch is calculated as the amount deposited (FOCUS
Report Line 4520) relative to the reserve account balance (Line 4530). These data are discussed in detail in
section IV.B.2 of this release, see Table 5 in that section and related discussion.
43
a significant amount of time. In addition, customers and PAB account holders may not receive
their funds in full if the liquidation proceedings do not result in a full recovery of funds owed to
customers and PAB account holders. This risk may be exacerbated for potential failures of
carrying broker-dealers with large amounts of customer or PAB reserve bank account balances,
such as when these carrying broker-dealers experience large aggregate intra-week mismatches
between the reserve bank account balances and actual net cash owed to customers or PAB
account holders. Under perfect information, investors would choose their carrying broker-dealer
in part based on the risk of failure and would continue to monitor the carrying broker-dealer for
risk of failure. However, monitoring costs and other frictions may prevent this.
The proposed daily customer and PAB reserve computations for carrying broker-dealers
with substantial amounts of total credits is aimed to address these risks and is expected to benefit
customers, PAB account holders, and other stakeholders of the affected carrying broker-dealers
by more dynamically matching the net cash owed to customers or PAB account holders and the
customer and PAB reserve bank account balances. More specifically, the daily customer and
PAB reserve computations would safeguard customers and PAB account holders of the affected
carrying broker-dealers by lessening the potential for large mismatches to build over time, and
thereby increasing the likelihood that they are made whole even if a carrying broker-dealer fails.
Daily computations would also decrease the risk that other stakeholders, such as contributors to
the SIPC Fund, would need to provide additional resources (e.g., in the form of increased
assessments) to address a failure of a carrying broker-dealer.
The proposed amendments may result in increased compliance costs for the affected
carrying broker-dealers. To the extent that each customer or PAB reserve computation takes a
significant amount of time or involves manual processes, affected carrying broker-dealers would
44
experience a one-time set up cost related to switching to a daily computation, as well as an
increase in ongoing costs related to more frequent computations. These costs, like the
aforementioned benefits, may ultimately be passed through to customers and PAB account
holders of the affected carrying broker-dealers.
Many of the benefits and costs discussed below are impracticable to quantify. For
example, the Commission lacks data that would help it predict how enhanced customer
protection related to daily customer and PAB reserve computations would affect customer and
PAB account holders’ activities in the accounts maintained by the affected carrying brokerdealers and whether customers and PAB account holders of non-affected carrying broker-dealers
would shift their capital to the affected carrying broker-dealers due to such increased protections;
data that would help the Commission estimate how carrying broker-dealers near the proposed
$250 Million Threshold may adjust their business activities as a result of the proposed changes;
and data on the complexity of customers’ and PAB account holders’ activities for different
carrying broker-dealers that would help the Commission estimate the potential costs for various
groups of the affected carrying broker-dealers. While the Commission has attempted to quantify
economic effects where possible, much of the discussion of economic effects is qualitative in
nature. The Commission seeks comment on all aspects of the economic analysis, especially any
data or information that would enable a quantification of the proposal’s economic effects.
B.
Baseline
1.
Regulatory Baseline
a.
Rule 15c3-3
Carrying broker-dealers are broker-dealers that maintain custody of customer securities
and cash. Rule 15c3-3, known as the broker-dealer customer protection rule, is designed to give
45
specific protection to customer funds and securities. For example, a broker-dealer is “virtually”
precluded from using customer funds to buy securities for its own account. 107
The current rule specifies that a carrying broker-dealer must undertake two primary steps
to safeguard these customer assets. First, carrying broker-dealers are required to maintain
physical possession or control over customers’ fully paid and excess margin securities. 108
Second, a carrying broker-dealer must maintain a reserve of funds and/or qualified securities in
an account at a bank that is at least equal in value to the net cash owed to customers. The
account must be a customer reserve bank account. The amount of net cash owed to customers is
computed weekly as of the close of the last business day of the week pursuant to the customer
reserve computation. 109 If credit items exceed debit items, the net amount must be on deposit in
the customer reserve bank account in the form of cash and/or qualified securities. 110 A carrying
broker-dealer also is required to make and maintain a record of each computation. 111
Carrying broker-dealers also may carry accounts that hold proprietary securities and cash
of other broker-dealers, known as PAB accounts. 112 Broker-dealers are not within the definition
of “customer” for purposes of Rule 15c3-3. The definition of “customer” in SIPA, however, is
broader than the definition in Rule 15c3-3 in that the SIPA definition includes broker-dealers.
As discussed in more detail in section I.B.3. of this release, broker-dealers—as customers under
107
See section I.B.1. of this release (describing the purposes of Rule 15c3-3).
108
See section I.B.1. of this release (describing possession and control requirements for customers’ securities).
109
Some carrying broker-dealers choose to perform a daily computation. See 17 CFR 240.15c3-3(e)(3)(iv).
Further, the rule permits carrying broker-dealers in certain limited circumstances to perform a monthly
computation. See 17 CFR 240.15c3-3(e)(3)(i). See also section I.B.1. of this release (describing the
customer reserve bank account and customer reserve computation).
110
17 CFR 240.15c3-3(e). See also section I.B.1. of this release (describing the customer reserve bank
account and customer reserve computation).
111
See 17 CFR 240.15c3-3(e)(3)(v). Each record must be preserved in accordance with Rule 17a-4. Id.
112
See section I.B.2. of this release (describing Rule 15c3-3 and PAB accounts).
46
SIPA—have the right to share equally with other customers in the customer property in a SIPA
liquidation in the event that there is a shortfall in the amount the broker-dealer owes its
customers. Because broker-dealers are entitled to a pro rata share of customer property, 113 Rules
15c3-3 and 15c3-3a require carrying broker-dealers to: (1) perform a PAB reserve computation
in addition to the customer reserve computation; 114 (2) establish and fund their PAB reserve bank
account; and (3) obtain and maintain physical possession or control of non-margin securities
carried for a PAB account holder. 115
b.
SIPA and the SIPC Fund
As described in section I.B.3. of this release, SIPA established SIPC and directed SIPC to
establish the SIPC Fund. 116 At the end of 2022, SIPC reported 3,396 members. 117 The SIPC
Fund totaled approximately $4.05 billion as of December 31, 2022, and currently the objective is
to build it to a level of $5 billion. To date, SIPC has carried out 330 liquidations since its
inception with approximately $142 billion in assets distributed to customers. 118 Of that, about
$141.2 billion came from debtors’ estates (i.e., SIPC broker-dealer members’ estates), while
$917 million came from the SIPC Fund. 119
113
See section I.B.3. of this release (describing broker-dealer liquidations and SIPA).
114
See section I.B.1. of this release (describing Rule 15c3-3 and customer accounts).
115
See section I.B.2. of this release (describing Rule 15c3-3 and PAB accounts).
116
See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
117
See 2022 SIPC Annual Report, Table 2, at 10.
118
As of the end of 2022. See section I.B.3. of this release, describing broker-dealer liquidations and SIPA.
The volume of proceedings was highest in the 1970s (15 per year), while between 1980 and 2003 the
number averaged about seven per year. Since 2003 the average has been one per year (with the highest
number, five, occurring in 2008, while there were 10 years with none). See 2022 SIPC Annual Report,
Figure 1, at 8.
119
See 2022 SIPC Annual Report at 8-9, for the statistics in this paragraph. SIPC refers to distributions to
customers as “advances,” though the 2022 SIPC Annual Report does not detail the timing of those
advances in the 330 proceedings.
47
c.
Reserve Account Requirement for Security-Based Swaps
In 2019, the Commission adopted customer segregation requirements for broker-dealers
and SBSDs with respect to customer money, securities, and property related to security-based
swaps. 120 These requirements were based in part on the requirements of Rules 15c3-3 and 15c33a discussed above. 121 Under these requirements, broker-dealers (including broker-dealers that
are also SBSDs) are required to perform a separate weekly security-based swap customer reserve
computation and have a separate security-based swap customer reserve account that must hold
the net amount of cash owed to security-based swap customers. 122
2.
Affected Broker-Dealers
Table 2 presents the universe of broker-dealers by presence of carrying activities. 123 As
of December 2022, 156 broker-dealers identified in Line 40 of the FOCUS Report that they carry
their own customer accounts. Among these, 65 reported having only customer credits, 66
reported having both customer and PAB credits, none reported having only PAB credits, 124 and 9
broker-dealers reported having no customer credits or debits. Further, 16 broker-dealers reported
having exemptions from the requirements of Rule 15c3-3, including performing a customer
120
See SBS Segregation Adopting Release. See also section III. of this release (discussing reserve account
requirements for security-based swaps).
121
Id. See also sections I.B.1. and I.B.2. of this release (discussing the requirements of Rules 15c3-3 and
15c3-3a).
122
See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b. See also section III. of this release (discussing reserve
account requirements for security-based swaps, and SBS FAQ 1 for staff views). SBSDs that are not
broker-dealers (other than OTC derivatives dealers) are subject to the segregation requirements of
Exchange Act Rules 18a-4 and 18a-4a.
123
Based on monthly FOCUS Report data for the reporting year 2022. The Commission assumes that brokerdealers that did not file FOCUS Reports for the last month of 2022 are no longer in business.
124
PAB account holders are not considered customers under 17 CFR 240.15c3-3(a)(1). See section I.B.2. of
this release (describing Rule 15c3-3 and proprietary accounts of broker-dealers).
48
reserve computation. 125 In addition, 31 broker-dealers that did not identify themselves as those
that carry their own customer accounts in Line 40 of the FOCUS Report reported customer
and/or PAB credits in their customer or PAB reserve computations. Among these, four brokerdealers had both customer and PAB credits, 26 broker-dealers had customer credits only, and one
broker-dealer had PAB account credits only.
When the Commission computes average total credits using data for January 2022
through December 2022, the Commission estimates that there are 187 broker-dealers (“carrying
broker-dealers”) that currently fall within the scope of the Rule 15c3-3 (though of this group, 25
carrying broker-dealers reported zero customer or PAB credits in 2022). In aggregate, these
carrying broker-dealers hold approximately 87 percent of all broker-dealer assets, 126 and report
approximately $1.2 trillion in total credits and approximately $0.92 trillion in average monthly
total debits, as of December 2022. 127
Table 1. Broker-Dealers by Carrying Activity, 2022.a
Broker-Dealer Type
#
Total
Total Credits, $B Total Debits, $B
Assets, Monthly Year-End Monthly Year$B
Average
Average
End
Carrying its own customer accounts:
156
4,487.7 1,306.9
1,177.0
1,024.3
913.6
125
There are three exemptions to Rule 15c3-3, each related to the procedure a broker-dealer follows when they
receive customer funds and securities. The first exemption is for broker-dealers that partake in limited
mutual fund and insurance-related business. The exemption allows such firms to briefly handle customer
funds, but not maintain indefinite custody of those funds or securities. The second exemption applies to
broker-dealers that clear their transactions on what is known as a “receive versus payment/delivery versus
payment (RVP/DVP) basis.” In an RVP/ DVP settlement, a broker-dealer executes simultaneous
exchanges of an equal value of funds for securities. As such, the broker-dealer does not end up holding any
residual customer funds or securities. The third exemption is also available to broker-dealers that
temporarily handle customer funds. This broker-dealer, called an “introducing broker,” establishes
accounts in the name of its customers at another broker-dealer, a “clearing broker.” The clearing broker
then maintains custody of those customers’ cash and securities in those accounts on a fully disclosed basis.
See 17 CFR 240.15c3-3(k).
126
Total assets are reported on Line 940 of the FOCUS Report.
127
The Commission uses monthly FOCUS Reports to calculate total credits and total debits. For each brokerdealer, Total Credits are calculated as the sum of customer credits reported on Line 4430 and the PAB
credits reported on Line 2170. Similarly, for each broker-dealer, Total Debits are calculated as the sum of
the customer debits reported on Line 4472 and the PAB debits reported on Line 2230.
49
- with positive customer and PAB credits
- with positive customer credits only
- with zero reported credits
- with reporting exemptions
Not carrying its own customer accounts:
- with positive customer and PAB credits
- with positive customer credits only
- with positive PAB credits only
Without any carrying activities
Total
a
66
65
9
16
31
4
26
1
3,411
3,598
3,982.3 1,261.2
446.8
45.7
54.5
0
4.1
58.0
22.6
8.0
0.3
49.7
22.3
0.4
0.01
694.0
5,239.7 1,329.5
1,138.5
38.5
0
20.5
0.1
20.4
0.01
1,197.5
982.8
41.5
0
4.2
0.3
3.8
0.02
1,028.5
879.4
34.3
0
3.8
0.1
3.7
0.01
917.4
Data are for calendar year 2022. The Commission uses monthly FOCUS Reports to calculate average monthly
total credits and total debits. For each broker-dealer, Total Credits are calculated as the sum of the average
monthly amount of customer credits reported on Line 4430 and the average monthly amount of PAB credits
reported on Line 2170. Similarly, for each broker-dealer, Total Debits are calculated as the sum of the average
monthly amount of customer debits reported on Line 4472 and the average monthly amount of PAB debits
reported on Line 2230.
Table 3 displays the broker-dealers that reported positive customer or PAB credits in
2022 into groups based on the size of their average monthly total customer and PAB credits
(averaged over January 2022 to December 2022). 128
Table 2. Carrying Broker-Dealers by Size of Average Total Credits, 2022
#
a
Total
assets
($B)
Total Customer Credits, Total PAB Credits,
$MM
$MM
#
Mean
Median
>$0-100MM 81 127.1 81
14.8
2.1
$100-250MM 18
101 18
133.3 120.3
$250-500MM
8 148.1
8
374.7 394.9
$500MM-1B
9 206.6
9
593.8 566.5
$1-5B 18 352.5 18 2056.7 1868.1
$5-10B
7 189.7
7 5779.7 5352.5
≥$10B 21 3362.1 21 51312.0 23941.5
Totala 162 4,487.1 162 7,203.5
84.7
Total Credits, $MM
# Mean Median
Mean
Median
18
0.4
12
4.3
3
8.6
7
98.0
16 127.5
7 820.0
19 7307.7
82 1,003.5
15.3
137.6
383.3
691.8
2184.2
6599.6
58619.8
8,207.0
2.4
128.6
401.1
667.6
1871.4
5892.1
29261.2
95.1
0
0
0
29.6
2.9
62.3
84.5
0.0
Table excludes carrying broker-dealers with zero reported credits in 2022.
The proposed daily computation would apply only to carrying broker-dealers whose
average total credits are above the proposed $250 Million Threshold. Therefore, the
128
The grouping is based on the average monthly amount of customer credits reported on Line 4430 and the
average monthly amount of PAB credits reported on Line 2170.
50
Commission estimates that, based on data for January 2022 through December 2022, the scope
of affected entities was 63 carrying broker-dealers, which held 86.4 percent of aggregate total
credits of all carrying broker-dealers.
The number of affected carrying broker-dealers may vary month to month since a 12month rolling average is used for the proposed $250 Million Threshold. To provide information
on how the number of entities may thus vary over time, Figure 1 displays the number of affected
broker-dealers for a sequence of 12-month rolling averages beginning with January 2022 and
extending through May 2023. 129
Figure 1. Number of Affected Broker-Dealers under 12-Month Rolling Average, Over the
Period from January 2022 – May 2023
129
Figure created from monthly FOCUS Reports, from January 2022 through May 2023. The first 12-month
computation period is January 2022 to December 2022, the second period is February 2022 through
January 2023, and so on. The total number of broker-dealers that reported positive total credits in each of
the six rolling periods shown in Figure 1 equaled 162, 162, 161, 161, 162 and 162, respectively.
51
As shown in Figure 1, the number of affected carrying broker-dealers varied monthly
from 60 to 63 over the period from January 2022 through May 2023. There was little variation,
however, in the identity of the affected carrying broker-dealers. The same fifty-nine carrying
broker-dealers met the threshold in each month, and from one to four additional broker-dealers
met the threshold in any given month. In total, over this period, 63 different carrying broker
dealers would have been affected. 130
With respect to the frequency of computation, based on the January 2022 to December
2022 period (12-month period), Table 4 displays the number of broker-dealers performing their
computations daily, weekly, and monthly in each size category for average total credits. 131
Table 3. Reserve Formula Computation Frequency, 2022
Average
Total Credits
>$0-100MM
$100-250MM
$250-500MM
$500MM-1B
$1-5B
$5-10B
>= 10B
Total
#
81
18
8
9
18
7
21
162
Customer Reserve Formula
PAB Reserve Formula
Daily Weekly
Monthly #
Daily Weekly Monthly
81
1
67
12
18
0
17
1
18
0
18
0
12
0
12
0
8
0
8
0
3
0
3
0
9
0
9
0
7
0
7
0
18
1
17
0
16
1
15
0
7
0
7
0
7
0
7
0
21
10
11
0
19
9
10
0
162
12
137
12
82
10
71
1
#
As shown in Table 4, out of 162 broker-dealers that reported the frequency of their
customer reserve formula computations, there were 12 carrying broker-dealers that performed
130
Only in one case did a carrying broker-dealer within the top-60 fall below the $250 Million Threshold from
one period to the next (leading to the decline from 63 to 62 carrying broker-dealers).
131
Data from monthly FOCUS Reports filed for the 2022 calendar year. A small number of broker-dealers did
not identify any customer or PAB reserve computation frequency (for example, for broker-dealers reporting
positive credits in customer accounts, one failed to report reporting frequency in their FOCUS Report).
Therefore, the total number of carrying broker-dealers exceeds the sum of the number of broker-dealers
who identified a daily, weekly, or monthly computation frequency. Of the carrying broker-dealers that
reported a filing frequency in 2022 calendar year, the reported frequency (daily, weekly, or monthly)
remained the same in each reported month.
52
the customer reserve computation daily, among which 10 also performed the PAB reserve
computation daily and two which do not report carrying PAB accounts. Among carrying brokerdealers performing the customer reserve computation daily, 11 had total credits above the
proposed $250 Million Threshold. These 11 carrying broker-dealers accounted for 64 percent of
the total amount of average total credits among all carrying-broker dealers with positive
customer or PAB credits reported in 2022. 132 All the carrying broker-dealers performing the
PAB reserve computation daily had total credits above the proposed $250 Million Threshold. 133
Based on the January 2022 to December 2022 period, there were 52 carrying brokerdealers with average total credits equal to $250 million or above performing the customer reserve
computation weekly and there were no carrying broker-dealers with average total credits equal to
$250 million or above performing the customer reserve computation monthly. Among the 52
carrying broker-dealers performing weekly customer reserve computation, there were 42
carrying broker-dealers that performed the PAB reserve computation weekly and there were no
carrying broker-dealers with average total credits equal to $250 million or above that performed
the PAB reserve computation monthly. Based on the data for 2022, the Commission estimates
that 52 carrying broker-dealers would be affected by the proposal.
Table 5 below shows the distribution of deposits required to be put into the customer and
PAB reserve bank accounts or permitted withdrawals after the reserve computation performed at
132
Calculated from monthly FOCUS Reports for 2022.
133
The broker-dealers identified as filing daily in the January 2022 to December 2022 sample were the same
broker-dealers identified in the April 2022 to May 2023 sample (for both customer and PAB accounts).
53
the end of the reporting period relative to the initial reserve bank account balance. 134 These
metrics provide a picture of the “mismatch” that occurs with respect to customer and PAB
accounts. The column “Average Mismatch” is calculated as the average of deposits (averaged
over 2022) for each broker-dealer relative to the average balance in the reserve account
(customer or PAB account).
With respect to customer reserve accounts, shown in Panel A, the largest average
mismatches occurred for broker-dealers over the $250 Million Threshold, with the largest
occurring for carrying broker-dealers within the $5 to $10 billion range. For the case of the
maximum mismatch during the year, there appears to be less of a correlation with carrying
broker-dealer size. 135 For PAB reserve accounts, shown in Panel B, the largest average mismatch
and the maximum mismatch occurred for the groups of carrying broker-dealers over $250
million in average total credits (it is also the case that the total amount of PAB accounts are
concentrated among those carrying broker-dealers).
Panel C and D of Table 5 display the average mismatch and maximum mismatch metrics
comparing the large carrying broker-dealers (over $1 billion in average total credits) that
currently compute their reserve accounts daily versus those that do so weekly. 136 With respect to
customer reserve accounts (Panel C), carrying broker-dealers that compute daily have larger
134
Calculated from monthly FOCUS Reports for 2022. The Commission isolated deposits (equal to or greater
than zero) from any month (Line 4520), relative to the reserve account balance, (Line 4530). For PAB
reserve bank accounts, deposits and amount in reserve account are FOCUS Lines 2290 and 2300,
respectively. Note, the Commission also recalculated by defining the deposit category as only values
greater than zero, but the average mismatch did not change very much for each category, nor did the pattern
seen in the table.
135
For the maximum mismatch, the Commission isolated the largest monthly deposit amount in 2022 (Line
4520), relative to the reserve account balance for that month (Line 4530). The same was done for PAB
reserve accounts (FOCUS Lines 2290 and 2300, respectively).
136
As noted above, the number and identity of the daily filers are consistent from December 2022 through
May 2023. See supra note 133.
54
average reserve balances and deposits, and lower average and maximum mismatches than those
that compute weekly. 137
For PAB reserve accounts (Panel D), the average or maximum mismatch do not appear as
correlated with daily versus weekly filing. 138
Table 4. Broker-Dealer Deposits and Withdrawals as a Share of Reserve Account Balance,
2022
Panel A: Customer Reserve Accounts
Average
Average
Broker-Dealer
Reserve
Deposit
#
Group
Balance
MM
MM
>$0-100MM 81
$9.5
$0.7
$100-250MM 18
$52.7
$1.9
$250-500MM
8
$180.8
$9.9
$500MM-1B
9
$124.2
$7.7
$1-5B 18
$732
$35.8
$5-10B
7
$1,147.2
$234
>= 10B 21 $14,150.6
$542.3
Panel B: PAB Reserve Accounts
Average
Broker-Dealer
Reserve
#
Group
Balance
MM
>$0-100 MM 18
$1.2
$100-250 MM 12
$5.3
$250-500 MM
3
$19.9
$500MM-1 B
7
$106.5
$1-5 B 16
$27.9
$5-10 B
7
$184.5
>= 10 B 19
$749.1
Average
Withdrawal
MM
Average
Mismatch %
Maximum
Mismatch %
-$4.1
-$16.2
-$16.0
-$32.2
-$61.4
6.1%
5.7%
6.1%
18.2%
5.4%
25.2%
27.1%
20.9%
35.9%
22.5%
-$122.4
-$841.6
31.9%
7.9%
57.4%
25.3%
Average
Deposit
MM
Average
Withdrawal
MM
Average
Mismatch %
Maximum
Mismatch %
$0.03
$0.3
$1.3
$4.5
$5.5
$56.2
$127.4
-$0.3
-$2.9
-$5.3
-$27.3
-$20.4
-$108.6
-$279.9
2.9%
2.3%
5.2%
11.4%
7.7%
10.4%
7.6%
18.7%
10.4%
24.7%
41.1%
44%
39%
29.4%
Panel C: Customer Reserve Accounts
137
Panel C omits the one carrying broker-dealer below the $250 Million Threshold that computed their
customer reserve account daily in 2022.
138
The patterns and inference drawn from Table 5 are similar if constructed with the rolling sample period
from June 2022 to May 2023. For example, for the daily filers shown in Panel C, the average mismatch is
4.9 percent, while for weekly filers, the average mismatch is 14.6 percent.
55
Broker-Dealer Group
All (weekly and daily)
>= 1B
Daily
>= 1B
Weekly
>= 1B
#
Average
Reserve
Balance
MM
Average
Deposit
MM
Average
Withdrawal
MM
Average
Mismatch
%
Maximum
Mismatch
%
46
$6,921.1
$297.2
-$441.1
10.7%
29.2%
11
$13,324.2
$482.3
-$1,227.8
5.2%
22.1%
35
$4,908.7
$239
-$178.9
12.4%
31.5%
Panel D: PAB Reserve Accounts
Average
Broker-Dealer
Reserve
#
Group
Balance
MM
All (weekly and daily)
>= 1B 42
Daily
>= 1B 10
Weekly
>= 1B 32
C.
Average
Deposit
MM
Average
Withdrawal
MM
Average
Mismatch %
Maximum
Mismatch %
$380.3
$69.1
-$159.1
8.1%
36.6%
$1,153.7
$216.8
-$356.5
8.9%
33.4%
$138.5
$22.9
-$74.5
7.9%
37.4%
Benefits and Costs of the Proposed Amendments
Customers and PAB account holders of the affected carrying broker-dealers are expected
to benefit from the proposed daily customer and PAB reserve computations. As reflected in the
discussion in section I.C of this release noting the large amounts of deposits carrying brokerdealers may receive, and as evidenced from the information in Table 5, a weekly customer and
PAB reserve computation can result in a carrying broker-dealer owing a net amount of cash to
customers or PAB account holders for a number of days that is greater than the current amounts
deposited into the customer and PAB reserve bank accounts. Hence, if a carrying broker-dealer
fails before the next reserve account computation and the reserve bank account balances do not
represent the actual net amount of cash owed to customers or PAB account holders, these
customers and PAB account holders may be at risk of not recovering their funds from the
56
carrying broker-dealer or having it tied up in a liquidation proceeding. Performing daily
customer and PAB reserve computations would likely decrease this risk.
Under the scenario where a carrying broker-dealer does not have sufficient funds to repay
what it owes to customers or PAB account holders, SIPC likely would need to initiate a
liquidation of the carrying broker-dealer under SIPA. 139 Although the SIPC Fund can be used to
advance funds to customers that are owed money, PAB account holders are not entitled to such
advances; therefore, they may not receive the funds owed to them by a failed carrying brokerdealer as promptly as customers of such broker-dealer may. In addition, there is a limit on
advances to customers in the amount of $500,000 per customer (of which $250,000 can be used
to cover cash claims). If some customers are owed more than such limit, these customers would
have to wait along with PAB account holders until a trustee is appointed who would
consequently attempt to recover assets of the failed carrying broker-dealer via asset sales or other
recovery methods. This recovery process may, in some cases, be lengthy. 140 In an extreme case,
the recovery amounts the trustee is able to receive may still be insufficient to make all customers
and PAB account holders whole, which means that these customers and PAB account holders
have to absorb the loss.
Based on these various circumstances surrounding a failure of a carrying broker-dealer,
from the customer’s or PAB account holder’s perspective, there are varying degrees of risk
related to a potential failure of a carrying broker-dealer, depending on whether it has enough
139
See section I.B.3 of this release (discussing broker-dealer liquidations and SIPA).
140
For example, it has been the case that customers of a liquidated carrying broker-dealer have had to wait up
to six months or more to access their assets during the liquidation period. See Michael P. Jamroz, The
Customer Protection Rule, 57 BUS. LAW. 1069 (May 2002), available at
https://www.jstor.org/stable/40688076.
57
funds to make all customer and PAB account holders whole at the time of its failure. Therefore,
maintaining levels of customer and PAB reserve bank account balances that more closely
represent the actual amounts of net cash owed to customers and PAB account holders would
benefit these customers and PAB account holders by decreasing the risk of not completely
recovering their funds from the carrying broker-dealer or having these funds tied up in a
liquidation proceeding. 141
In addition, performing daily customer and PAB reserve computations would benefit
customers and PAB account holders of the affected carrying broker-dealers by acting as a
prophylactic that reduces the risk of broker-dealers using customers’ or PAB account holders’
funds for other purposes that are not permissible under Rule 15c3-3, if the part of the net cash
owed to customers or PAB account holders is comingled with other funds in a broker-dealer’s
operating account. 142 When a carrying broker-dealer experiences a large inflow of customer
cash, reducing the time between that inflow and when the carrying broker-dealer performs its
next customer and PAB reserve computations and funds its reserve accounts could reduce the
risk that those funds may be inadvertently used for other purposes that may carry a risk to the
141
The Commission notes that, with daily computing, there will still be a mismatch between the actual net
cash owed to customers and the reserve account balance because of the deposit timing delay, which is the
morning of the second business day after the day of calculation. Should a carrying broker-dealer
computing daily fail, and the amount of the mismatch is lower than in the case of a weekly computation,
the customer may receive their funds more promptly from the carrying broker-dealers’ available assets than
in the case where mismatches are larger (which may imply a longer liquidation process), underscoring the
potential benefit from daily computing. It is also a possibility, however, that daily computing may lead to a
situation with large mismatches. If a carrying broker-dealer receives large customer deposits on
consecutive days, given the two-day settlement period, any mismatch may persist over that period, and
should the carrying broker-dealer fail, the benefits to customers of daily computation may be reduced.
142
The Commission notes that, with respect to each customer reserve computation required pursuant to Rule
15c3-3, a broker-dealer must not accept or use any of the amounts under items comprising total credits
under the customer reserve formula except for the specified purposes indicated under items comprising
total debits under the formula. See paragraph (e)(2) of Rule 15c3-3. 17 CFR 240.15c3-3(e)(2).
58
customers and PAB account holders. Under the proposal, the affected carrying broker-dealers
would not be able to do this, which would reduce the risk of reserve fund mismatches.
Other broker-dealers that are SIPC members may also benefit from the proposed daily
computation of the customer and PAB reserve formulas. Specifically, if a failing carrying
broker-dealer with a mismatch between the reserve bank account balances and actual cash owed
to customers and PAB account holders is put into SIPC liquidation, SIPC may be required to use
the SIPC Fund to advance money to customers from the SIPC Fund, reducing its balance and
potentially depleting the SIPC Fund. 143 Consequently, a reduction in the SIPC Fund balance
and/or SIPC’s unrestricted net assets may trigger increased contributions from member brokerdealers, as displayed in Table 1 in section I.B.3. of this release, with more substantive balance
reductions requiring larger increases in assessments of member broker-dealers, which may be
passed onto investors. Therefore, the proposed daily computation would benefit SIPC member
broker-dealers by reducing the risk of SIPC Fund depletion and a consequent increase in SIPC
assessments.
The proposed daily computation would apply only to carrying broker-dealers whose
average total credits exceed the $250 Million Threshold. Given the information from the 12month average based on the 2022 monthly FOCUS Reports as an example, the Commission
estimates that 52 broker-dealers would be required to switch to a daily computation of the
customer reserve formula and 42 broker-dealers would be required to switch to a daily
143
The Commission notes that, while broker-dealers (which includes PAB account holders) are customers for
the purposes of SIPA, they are not entitled to the advances from the SIPC Fund of up to $500,000 (limited
to $250,000 for cash claims) allowed under SIPA to make up for potential shortfalls after the pro rata
distribution of customer property. See 15 U.S.C. 78fff-3(a).
59
computation of the PAB reserve formula. 144 As shown in Table 5, carrying broker-dealers with
average total credits above the proposed $250 Million Threshold are more likely to experience
larger mismatches and the dollar amounts underlying those mismatches are significantly
larger. 145 And as shown in Panel C of Table 5, those carrying broker-dealers that compute daily
tend to have smaller mismatches than those that compute weekly. Hence, the proposal may
reduce the likelihood of mismatches, benefitting customers and PAB account holders of the
affected carrying broker-dealers.
Further, in cases where carrying broker-dealers with greater amounts of total credits are
more interdependent with other carrying broker-dealers than carrying broker-dealers with smaller
amounts of total credits, having more large broker-dealers computing daily may benefit financial
markets overall without imposing the costs of daily computation onto carrying broker-dealers
that do not have significant amounts of total credits. To the extent that carrying broker-dealers
above the threshold are more likely to have more PAB account holders (which include other
broker-dealers) or PAB account holders with greater amounts of cash in their PAB accounts, the
broker-dealers above the threshold may pose greater risk to other broker-dealers. As shown in
Table 3, among the 63 carrying broker-dealers above the proposed $250 Million Threshold,
based on data for January 2022 through December 2022, approximately 82.5 percent carry PAB
accounts while only approximately 26.6 percent of the unaffected broker-dealers carry PAB
accounts.
That is, should a carrying broker-dealer fail and not have sufficient funds in its PAB
reserve bank account to make whole its PAB account holders, a broker-dealer that is a PAB
144
See Table 3.
145
See discussion in section IV.B.2. of this release for more details on Table 5.
60
account holder of the failed carrying broker-dealer may consequently be exposed to financial
stress, which could further propagate to its PAB account holders, and so on. This risk is
exacerbated for PAB account holders because they are not entitled to advances from the SIPC
Fund. In that way, a failure of one large carrying broker-dealer with a mismatched PAB reserve
bank account may result in other carrying broker-dealers experiencing financial stress and
increased risk of liquidation. In so far as a daily computation for carrying broker-dealers with
total credits above the $250 Million Threshold reduces the chance that a large carrying brokerdealer has mismatched funds in its PAB reserve bank account, the potential for stress
propagation associated with a failure of a carrying broker-dealer could be reduced.
Affected broker-dealers may experience an increase in costs as a result of the proposed
daily computation. The Commission expect these costs to be primarily related to the operational
changes, staff increases, and upgrades required for daily computing and the costs related to the
recordkeeping requirements. The Commission estimates that it takes a carrying broker-dealer
between one to five hours per computation to prepare the records of the computations, or an
average of 2.5 hours. 146 Given the 52 carrying broker-dealers that would be required to switch to
a daily computation of the reserve formulas under the proposal, that implies an increase in the
aggregate annual recordkeeping burden of approximately $13 million.147 To the extent that
carrying broker-dealers with total credits above the $250 Million Threshold may experience
economies of scale and may have more sophisticated operational systems, with experienced and
146
See infra section V. of this release (discussing PRA).
147
Id. The Commission assumed an hourly rate of $295 per hour for a “financial reporting manager.” That
computes to a potential added cost of $13,726,350 ($295 x 46,530 hours) to the affected carrying brokerdealers.
61
well-trained staff, 148 the increase in compliance costs may not be substantial. In addition, the 11
carrying broker-dealers that already perform such computations daily (as shown in Table 4,
based on data for the period for January 2022 through December 2022) may not experience an
increase in compliance costs.
However, to the extent that the affected carrying broker-dealers that are just above the
threshold do not experience the same economies of scale as carrying broker-dealers that are well
above the threshold, they may be disproportionately affected by the proposed requirement and
the related costs. If these costs are significant, some carrying broker-dealers may decide to alter
their business to fall below the threshold and avoid the costs related to performing the customer
and PAB reserve computations daily. If so, the potential benefits of the proposal may be
mitigated.
Carrying broker-dealers just below or above the threshold may also experience
uncertainty related to being scoped into compliance with the daily computation requirement and
may experience costs related to this uncertainty. As displayed in Figure 1, some carrying brokerdealers are likely to drop below the $250 Million Threshold, and then once again exceed the
threshold in later months. The costs related to these fluctuations are uncertain, but are likely to
add, for such carrying broker-dealers, to the cost estimates cited above (for example, if additional
staff is needed by these carrying broker-dealers to monitor their customer reserve accounts more
closely than firms well above the $250 Million Threshold).
Finally, while switching back and forth between daily and weekly computations may
tailor the compliance costs to the size of customer activity, these fluctuations may also be
148
See related discussion in Stavros Gadinis, The SEC and the Financial Industry: Evidence from Enforcement
Against Broker-Dealers, 67 BUS. LAW. 679 (May 2012), available at https://www.jstor.org/stable/2324001.
62
confusing for customers and PAB account holders of carrying broker-dealers who decide to
switch. However, this potential cost or concern may be trivial as many customers may be
unaware of, or unconcerned by, the switch.
D.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments may affect competition among carrying broker-dealers. First,
to the extent that compliance costs would be passed onto customers and PAB account holders,
affected carrying broker-dealers that experience greater economies of scale may become more
competitive than other affected carrying broker-dealers. Second, to the extent that customers of
carrying broker-dealers value daily reserve computations more than the weekly computations,
the affected carrying broker-dealers may become more competitive relative to the unaffected
carrying broker-dealers. However, the Commission does not anticipate such an effect to be
large. Given the fact eleven carrying broker-dealers already compute daily, if such a competitive
advantage existed, and carrying broker-dealers performing weekly computations were losing
customers, then more carrying broker-dealers would have likely already converted to daily
computing.
The proposed amendments may increase liquidity in the securities markets, as they would
promote confidence in the broker-dealer industry and result in an increase of customer and PAB
account activities. As a consequence, market efficiency and capital formation in the underlying
markets may increase. Under the baseline there is a greater chance of a larger mismatch with
weekly reserve computations than with daily reserve computations, suggesting a greater risk in
doing business with a carrying broker-dealer that performs its customer and PAB reserve
computations weekly. Also, to the extent that the mismatch reflects an overfunding, there may
also be a greater cost to the carrying broker-dealer (and by extension its customers), since it ties
up capital that the broker-dealer could have put to more productive use.
63
Therefore, should customers and PAB account holders have a concern over mismatch in
reserve bank accounts and potential failures affect market participants’ willingness to expose
themselves to broker-dealers, there may be less capital committed to this market as otherwise.
However, similar to the point above, if customers of carrying broker-dealers were aware and
concerned of mismatches, the Commission might have already observed more carrying brokerdealers computing daily, in order to retain customers, than is currently the case under the
baseline. Therefore, the Commission does not anticipate any effect on capital formation in this
market to be significant.
In addition, in so far as capital loss could arise in times of market stress due to an
increased likelihood of carrying broker-dealer failures, market participants may become
concerned with the possibility of not getting their cash promptly or not getting paid in full, in an
event of a carrying broker-dealer failure and reduce their exposure to broker-dealers. To the
extent that the proposed daily computation requirement alleviates this concern, the risk of flight
of capital from securities markets may decrease during stressed market conditions and capital
inflow during normal market conditions may increase.
Finally, the proposed daily computation may benefit the affected carrying broker-dealers
by increasing their operational efficiency. For example, in a scenario where customer reserve or
PAB reserve accounts are over-funded, a carrying broker-dealer that performs a weekly
computation cannot withdraw excess cash from the customer reserve bank account until the
following reserve computation date, even if the value of the account exceeds the actual net cash
owed to customers, exposing this carrying broker-dealer to operational inefficiency. A daily
computation would permit the affected carrying broker-dealers to withdraw these excess funds in
a timely manner and would allow them to manage their funds and operations more effectively.
64
In this context, daily computation implies that a carrying broker-dealer’s capital commitments
are more efficiently employed.
Since the proposed requirements do not impact the scope of information available to
investors, the Commission does not anticipate effects on informational efficiency to be
significant.
E.
Reasonable Alternatives
1.
Over-Funding of the Customer and PAB Reserve Bank Accounts
As an alternative to daily computation requirements, the Commission could require an
over-funding approach which would apply to the customer and PAB reserve bank accounts. For
example, carrying broker-dealers would perform the required reserve computations and deposits
weekly and deposit a multiple of this amount (e.g., 105% or 110%) into the customer or PAB
reserve bank account. Under this alternative approach, carrying broker-dealers would avoid an
increase in compliance costs associated with a daily computation requirement (hence, this
alternative would apply to carrying broker-dealers choosing weekly funding). Insofar as the
compliance costs associated with the proposed daily computation would be passed onto
customers and PAB account holders of the affected carrying broker-dealers, this alternative
approach may be more beneficial for these customers and PAB account holders because it would
not imply an operational change and compliance costs related to the customer and PAB reserve
computation while offering extra protection for customers and PAB account holders.
However, under this alternative the carrying broker-dealer would need to fund the excess
with its own cash, which could result in funding costs, decreased liquidity, and opportunity costs
from not being able to deploy this cash in the firm’s business. As a result, requiring carrying
broker-dealers to place extra cash in a customer or PAB reserve bank account may result in an
65
operational efficiency decrease and potential reduction of carrying broker-dealers’ profits, which
may be passed onto customers, PAB account holders, and other stakeholders. In addition, this
approach may not account for the actual net cash owed to customers and PAB account holders, if
reserve bank account mismatches exceed the buffer that this alternative would require.
2.
A Threshold Based on a Different Metric
As an alternative, the Commission could set a threshold for compliance with a daily
computation requirement based on a different metric. For example, the Commission could set a
threshold based on total assets of $1 billion or net capital of $50 million. A threshold based on
such metrics may be more representative of the economies of scale that carrying broker-dealers
experience and may better indicate a carrying broker-dealer’s ability to comply with enhanced
requirements without substantial increases in compliance costs that could ultimately be passed
onto their customers.
Based on the monthly 2022 FOCUS Reports, the Commission estimates that under the
alternative threshold of $1 billion in total assets 80 broker-dealers would be required to perform
the customer and PAB reserve computations daily. Of the 63 carrying broker-dealers that are at
or above the $250 Million Threshold for average total credits, three have total assets below $1
billion, while 20 broker-dealers below the $250 Million Threshold have total assets over $1
billion.
With respect to a $50 million net capital threshold, 104 broker-dealers would be required
to perform the customer and PAB reserve computations daily. Of broker-dealers that are below
$250 Million Threshold for average total credits, 24 have net capital exceeding $50 million,
while of the group above $250 Million Threshold for average total credits, three have net capital
below $50 million.
66
If the alternative states that the broker-dealer has over $1 billion in total assets, or has
over $50 million net capital threshold, 105 broker-dealers would be required to perform the
customer and PAB reserve computations daily.
A drawback to this alternative is that some large broker-dealers with minimal amounts of
carrying activity would bear the added cost of switching to a daily computation. For example,
the group of 20 carrying broker-dealers below the $250 Million Threshold with $1 billion in
assets or more, had a combined total of average total credits of approximately $1.5 billion as of
the end of 2022. That amounted to only about 0.11 percent of average total credits for all brokerdealers for that year. 149
3.
Daily Computation Requirement for All Carrying Broker-Dealers
As an alternative, the Commission could require the daily computation requirement to
apply to all carrying broker-dealers (a “zero” threshold). Under this alternative, a greater number
of carrying broker-dealers would perform their customer and PAB reserve computations daily,
which would benefit more customers and PAB account holders compared to the proposal.
Specifically, under the zero threshold, 99 more carrying broker-dealers would experience the
benefits and costs discussed in section IV.C. of this release (compared to the 63 affected based
on the January 2022 to December 2022 period).
Further, to the degree that carrying broker-dealers with smaller amounts of total credits
are interdependent with other broker-dealer to the same degree as carrying broker-dealers with
larger amounts of total credits, the zero-threshold approach may benefit all PAB account holders
equally and potentially reducing the systemic risk to a greater degree relative to the proposal.
149
The numbers for this alternative do not change much if the rolling average is computed using the June 2022
to May 2023 period. See Table 7 below in section IV.E.6 of this release for those numbers.
67
The amount of credits held in the PAB reserve bank accounts of the 52 broker-dealers (with PAB
accounts) above the $250 Million Threshold makes up approximately 99 percent of the total
amount held in PAB reserve bank accounts (of the 82 broker-dealers that reported carrying PAB
accounts in 2022). 150
In particular, in so far as a daily computation for all carrying broker-dealers reduces the
chance that any carrying broker-dealer has funds in its PAB reserve bank account that are less
than the net amount of cash owed to PAB account holders, the potential for stress propagation
associated with a failure of a carrying broker-dealer could be reduced.
However, this alternative would impose compliance costs on a greater number of
carrying broker-dealers, which could be passed onto customers and PAB account holders. In
addition, customer protection benefits may be outweighed by the reduction in operational
efficiency of carrying broker-dealers with little customer and PAB account activity that may
arise from disproportional dedication of resources towards a de minimus business activity.
Relatedly, this alternative may also impose significant economic impact on small businesses. 151
4.
A Higher or Lower Threshold for Daily Computation
As an alternative, the Commission could have proposed a threshold higher or lower than
$250 million in average total credits. Under these alternatives, fewer or more carrying brokerdealers would be required to perform their customer and PAB reserve computations daily. For
example, if the threshold was set at $100 million, a total of 81 broker-dealers would be scoped
150
See Table 7 below in section IV.E.6 of this release for numbers based on the June 2022 to May 2023
period.
151
See 5 U.S.C. 601 through 612.
68
into the new requirements compared to the 63 under the proposal. Similarly, if the threshold was
set at $1 billion, only 46 broker-dealers would be scoped into the new requirements. 152
For the case of the $100 million threshold, with more carrying broker-dealers computing
daily, there would possibly be fewer broker-dealers having a mismatch between the net cash
owed to the carrying broker-dealer’s customers and the amounts deposited in their customer or
PAB reserve bank accounts. The potential cost of this alternative implies that more brokerdealers would incur the burden of performing their customer and PAB reserve computations
daily. If the threshold were set at $1 billion, fewer carrying broker-dealers would face the costs
of a daily computation than under the proposal. However, there would be fewer carrying brokerdealers computing daily, suggesting the potential for more carrying broker-dealers having a
mismatch than under the proposal.
5.
Calculation based on the Maximum Value over the Past Year
The proposed $250 Million Threshold would be the arithmetic mean of the total credits
in the customer and PAB reserve computations reported on the twelve most recently filed monthend FOCUS Reports. 153 As an alternative, the Commission could have proposed a threshold
based on the maximum value for total credits during the most recently ended calendar year. This
alternative may more appropriately account for the implied capacity of the carrying brokerdealer’s reserve bank accounts. For example, if total credits related to customers or PAB
account holders’ activity fluctuate throughout a year or based on economic cycles and such
152
See Table 7 below in section IV.E.6 of this release for numbers based on the June 2022 to May 2023
period.
153
This would mean, for example, if a carrying broker-dealer was required to file 12 FOCUS Reports for a
calendar year, the carrying broker-dealer would add up the Total Credits reported in both the customer and
PAB reserve formulas in each of the 12 FOCUS Reports filed, and divide the total by 12 to compute the
arithmetic mean.
69
fluctuations are predictable, the maximum value of total credits may be more representative of
the customer transactions’ volume. As another example, if a carrying broker-dealer experiences
trending growth of its customer base, the maximum value of total credits would also be more
representative of the current size of the customer base.
Table 6 below regroups carrying broker-dealers based on the maximum number reported
for total credits within a given year. Under this alternative, 74 carrying broker-dealers would be
scoped into the compliance with performing the customer and PAB reserve computations daily,
compared to the 63 that would be so under the proposal.
Table 5. Threshold based on Maximum Total Credits during 2022
Total Customer Credits,
Total
$MM
#
assets
($B)
#
Mean Median
>$0-100MM 70
78.1
70
15.5
3.4
$100-250MM 18
42.8
18
161.0
165.9
$250-500MM 13
142
13
354.5
371.6
$500MM-1B
8
87.6
8
705.7
736.8
$1-5B 25 584.8
25
2,338.1 2,057.1
$5-10B
6 149.8
6
7,070.8 6,367.5
>= 10B 22 3,402
22 55,584.5 26,096.5
Totala 162 4,487.1 162
8,295.1
171
a
Total PAB Credits,
Total Credits,
$MM
$MM
#
Mean Median
Mean Median
16
1.2
16.6
4
10
12.3
166.6 165.9
4
1.9
354.9 373.3
5
35.2
6.7
723.6 765.2
21
212.5
6.9 2,513.7 2,058.2
6
898.8
57.3 7,955.5 7,736.7
20 8,197.1 696.4 62,990.5 32,340
82
1,183
0 9,326.7
180
Table excludes carrying broker-dealers with zero reported credits in 2022.
A benefit of this alternative is those carrying broker-dealers with the largest amounts of total
credits would be scoped into daily computing, where the largest credits reported (as opposed to
the average) could be more indicative of a potential mismatch between the net cash owed to
customers and the reserve account balances.
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