# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ab22b82b66da12fe1 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-102022; 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: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting amendments to the broker-dealer customer protection rule to require certain broker-dealers to perform their reserve computations for accounts of customers and proprietary accounts of broker-dealers and make any required deposits into their reserve bank accounts daily rather than weekly. The Commission also is adopting amendments to the broker-dealer net capital rule and customer protection rule to permit certain broker-dealers that perform a daily reserve computation for accounts of customers to reduce aggregate debit items (i.e., customer-related receivables) by 2% rather than 3% as part of the computation. Finally, the Commission is adopting technical amendments to the Financial and Operational Combined Uniform Single Report (“FOCUS Report”) to conform it to the amendments with respect to the lowering of the debit reduction from 3% to 2%. DATES: Effective date: March 14, 2025. Compliance date: The compliance date is discussed in section III. of this release. 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; or Abraham Jacob, Special Counsel, at (202) 551-5500, Office of 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 amending: Commission Reference CFR Citation (17 CFR) Rule 15c3-1 17 CFR 240.15c3-1 Rule 15c3-3 17 CFR 240.15c3-3 Form X-17A-5 Part II 17 CFR 249.617 TABLE OF CONTENTS I. INTRODUCTION ............................................................................................................ 4 A. The Need For Daily Reserve Computations.............................................................. 4 B. Overview of the Final Amendments ......................................................................... 12 C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations ...................................... 15 1. Overview of Rule 15c3-3 ................................................................................. 15 2. Overview of Broker-Dealer Liquidations and SIPA ........................................ 20 II. DISCUSSION OF COMMENTS AND FINAL AMENDMENTS ................................. 23 A. Requirement to Perform a Daily Computation.......................................................... 23 1. Proposal ............................................................................................................ 23 2. Comments Received and Final Amendments................................................... 24 B. Compliance with Daily Reserve Computation after Exceeding $500 Million Threshold ................................................................................................................... 39 1. Proposal ............................................................................................................ 39 2. Comments Received and Final Amendments................................................... 40 C. Reducing the Aggregate Debit Reduction from 3% to 2% ....................................... 46 1. Amendments to Rules 15c3-1 and 15c3-3....................................................... 46 2. Conforming Amendments to the FOCUS Report ........................................... 58 D. Voluntary Customer and PAB Reserve Computations ............................................. 59 E. Other Comments........................................................................................................ 61 1. Sweep Programs and Other “Cash in Motion” or “Transitory” Credits” ......... 62 2. Requests for Interpretations and Clarifications ................................................ 71 F. Reserve Account Requirements for Security-Based Swaps ...................................... 77 III. COMPLIANCE DATE ..................................................................................................... 78 IV. ECONOMIC ANALYSIS ................................................................................................ 83 A. Introduction ............................................................................................................... 83 B. Baseline ..................................................................................................................... 88 1. Regulatory Baseline.......................................................................................... 88 2 2. 3. Affected Broker-Dealers .................................................................................. 95 Debit Reduction in the Customer Reserve Computation for Certain BrokerDealers .............................................................................................................. 104 C. Economic Effects of the Final Amendments ............................................................. 108 1. Benefits ............................................................................................................. 108 2. Costs ................................................................................................................. 114 3. Other Compliance Costs ................................................................................... 126 D. Effects on Efficiency, Competition, and Capital Formation ..................................... 128 E. Reasonable Alternatives ............................................................................................ 131 1. Over-Funding of the Customer and PAB Reserve Bank Accounts .................. 131 2. A Threshold Based on a Different Metric ........................................................ 132 3. Daily Computation Requirement for All Carrying Broker-Dealers ................. 134 4. A Higher or Lower Threshold for Daily Computation ..................................... 135 5. Calculation based on the Maximum Value over the Past Year ........................ 136 6. Daily Computation if an Average Required Deposit Exceeds a Threshold ..... 138 7. Daily Computation Requirement Based on Average Total Credits Per Number of Customer and PAB Accounts ........................................................................... 139 8. Daily Computation based on Average Total Credits from the Most Recent Calendar Year ................................................................................................... 141 9. Reduction of the Aggregate Debit Items Charge from 3% to 1% .................... 143 10. Exemption for Cash in Motion ......................................................................... 143 V. PAPERWORK REDUCTION ACT................................................................................. 145 A. Summary of Collections of Information under the Final Amendments .................... 146 B. Use of the Information .............................................................................................. 149 C. Respondents............................................................................................................... 149 1. Recordkeeping Requirements ........................................................................... 149 2. Notification Requirement to Revert to Weekly Computations ........................ 150 3. Notification Requirement to Voluntarily Perform Daily Customer Reserve Computation with 2% Debit Reduction ........................................................... 150 D. Total Annual Burden Estimate .................................................................................. 151 1. Recordkeeping Requirements ........................................................................... 151 2. Notification Requirement to Revert to Weekly Computations ........................ 156 3. Notification Requirement to Voluntarily Perform Daily Customer Reserve Computation with 2% Debit Reduction ........................................................... 157 4. Summary of the Burden Revisions ................................................................... 157 E. Collections of Information are Mandatory ................................................................ 159 F. Confidentiality of Response to Collections of Information ...................................... 159 G. Retention Period for Recordkeeping Requirements .................................................. 160 VI. REGULATORY FLEXIBILIY ACT CERTIFICATION ................................................ 160 VII. OTHER MATTERS ......................................................................................................... 162 STATUTORY AUTHORITY ................................................................................................... 163 3 I. INTRODUCTION A. The Need For Daily Reserve Computations Section 15(c)(3)(A) of the Securities Exchange Act of 1934 (“Exchange Act”) provides, in pertinent part, that no broker-dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (with exceptions for certain securities) in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of broker-dealers including, but not limited to, the acceptance of custody and use of customers’ securities and the carrying and use of customers’ deposits or credit balances. 1 The statute further provides, in pertinent part, that the rules and regulations shall require the maintenance of reserves with respect to customers’ deposits or credit balances. 2 Pursuant to this statutory directive, the Commission adopted the customer protection rule (“Rule 15c3-3”) in 1972. 3 This rule requires broker-dealers that hold customer cash and securities (“carrying broker-dealers”) to treat these assets in a manner that facilitates their prompt 1 15 U.S.C. 78o(c)(3)(A). The amendments to section 15(c)(3) of the Exchange Act granting this rulemaking authority were adopted in section 7(d) of the Securities Investor Protection Act of 1970 (“SIPA”). Pub. L. 91-598, §7(d), Dec. 30, 1970, 84 Stat. 1563. Rule 15c3-3 was promulgated in the aftermath of the securities industry “paper work crisis” of 1967-1970. See Commission, Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st Sess. 6 (1971) (“During the 1967-70 period of severe operational and financial problems, many firms, primarily because of inadequate and inefficient recordkeeping and segregation systems and procedures, and the infrequent counting of securities in their possession, mishandled and misused customers’ funds and securities.… Firms used customers’ free credit and other credit balances in their daily activities.”) Id. at 43. 2 15 U.S.C. 78o(c)(3)(A). 3 See Broker-Dealers; Maintenance of Certain Basic Reserves, Exchange Act Release No. 9856 (Nov. 17, 1972) [37 FR 25224 (Nov. 29, 1972)] (“Rule 15c3-3 Adopting Release”). 4 return to the customers if the broker-dealer fails financially. 4 The goal of the rule is to place a carrying broker-dealer in a position where it is able to wind down in an orderly self-liquidation without the need of financial assistance provided by the Securities Investor Protection Corporation (“SIPC”) through a formal proceeding under SIPA. 5 In order to facilitate an orderly self-liquidation, Rule 15c3-3 requires a carrying brokerdealer to compute the net amount of cash owed to customers under a formula in the rule (“customer reserve computation”). 6 Generally, carrying broker-dealers must perform their customer reserve computation and make any required deposits in a special reserve account at a bank (“customer reserve bank account”) weekly. 7 This weekly cadence has been in effect since 1973. 8 The rule also addresses how a carrying broker-dealer must treat proprietary securities and cash it holds for other broker-dealers, known as proprietary accounts of broker-dealers (“PAB accounts”). 9 While broker-dealers are not treated as customers under preexisting Rule 15c3-3, 4 See section I.C.1. of this release (discussing Rule 15c3-3). 5 See Financial Responsibility Rules for Broker-Dealers; Final Rule, Exchange Act Release No. 70072 (July 30, 2013) [78 FR 51824, 51869 (Aug. 21, 2013)] (“Financial Responsibility Rules for Broker-Dealers”); See also section I.C.2. of this release (discussing broker-dealer liquidations and SIPA). 6 The net amount of cash owed to customers is generally the amount the total cash owed to customers (e.g., cash balances in securities accounts) (referred to as “credits”) exceeds the total amount of cash customers owe the carrying broker-dealer (e.g., margin loans to customers) (referred to as “debits”). 17 CFR 240.15c3-3a (“Rule 15c3-3a”). 7 Preexisting Rule 15c3-3 also permits carrying broker-dealers to perform the customer reserve computation more frequently than weekly (e.g., daily) and, in certain limited circumstances, monthly. See paragraph (e)(3) of Rule 15c3-3. 8 See Rule 15c3-3 Adopting Release, 37 FR at 25226. While Rule 15c3-3 was adopted in 1972, the effective date for the rule was January 15, 1973. Id. 9 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. The term does not include an account that has been subordinated to the claims of creditors of the carrying broker-dealer. See paragraph (a)(16) of Rule 15c3-3. For example, a broker-dealer that is not a carrying broker-dealer (e.g., a broker-dealer that introduces its customer accounts to a carrying broker-dealer (“introducing broker-dealer”)) may hold its proprietary securities and cash at a carrying broker-dealer. In this case, the securities account of the introducing broker-dealer held at the 5 the rule requires a carrying broker-dealer to perform a PAB reserve computation and make any required deposits into its PAB reserve bank account weekly, similar to the requirements for the customer reserve computation and customer reserve bank account. 10 Since the adoption of Rule 15c3-3 in 1972, investor—including retail investor— participation in the U.S. securities markets has grown dramatically, which has led to a correspondingly dramatic increase in the amount of cash carrying broker-dealers hold for customers. 11 Cash owed to customers and PAB account holders may include proceeds received from sales of securities, cash customers and PAB account holders deposit for the purpose of purchasing securities, and monthly or quarterly dividends received on behalf of customers and PAB account holders. 12 Carrying broker-dealers may receive large cash inflows on behalf of their customers and PAB account holders during the week (e.g., month-end or quarter-end interest and dividend payments) and days prior to the next required weekly reserve computations and deposits into the reserve bank accounts. 13 This can lead to situations where—for a period of carrying broker-dealer would be a PAB account and the introducing broker-dealer would be a PAB account holder of the carrying broker-dealer. See Daily Computation of Customer and Broker-Dealer Reserve Requirements under the Broker-Dealer Customer Protection Rule, Exchange Act Release No. 97877 (July 12, 2023) [88 FR 45836, 45837 (July 18, 2023)] (“Proposing Release”). 10 See section I.C.1. of this release (discussing Rule 15c3-3). 11 Broker-dealers file monthly or quarterly financial and operational information using the FOCUS Report. Based on FOCUS Report data as of December 31, 2023, carrying broker-dealers, in aggregate, reported approximately $1.1 trillion in total customer and PAB credits. See section IV.B.2. of this release (discussing affected broker-dealers in the baseline). Of that amount, approximately $965 billion constituted total credits for customer accounts (the remaining balance was total credits for PAB accounts). Further, carrying broker-dealers reported approximately $319 billion in customer free credit balances. By comparison, free credit balances at year-end 1970 totaled $2 billion for all broker-dealers that were NYSE members and carried public customer accounts. See Study of Unsafe and Unsound Practices of Brokers and Dealers at 51. Free credit balances are generally liabilities of a broker-dealer to customers which are subject to immediate cash payment to customers on demand, whether resulting from sales of securities, dividends, interest, deposits or otherwise, subject to certain exclusions. See paragraph (a)(8) of Rule 15c3-3. 12 See Proposing Release, 88 FR at 45842. 13 See id. 6 days—the net amount of cash owed to customers and PAB account holders is greater than the amounts held in the carrying broker-dealer’s combined customer and PAB reserve bank accounts. 14 This creates a “mismatch” or difference between the net cash owed to customers and PAB accounts holders and the amounts held in the carrying broker-dealer’s combined customer and PAB reserve bank accounts. Moreover, because of the dramatic increase in cash held by carrying broker-dealers since 1972, the amount of the mismatch between cash owed and cash reserved can be much larger than the Commission contemplated when it adopted the requirement to perform a weekly reserve computation. The potential for much larger mismatches today (as compared to 1972) poses a risk that if the carrying broker-dealer fails financially it may not be able to promptly return all cash and securities owed to customers and PAB account holders in an orderly self-liquidation and, instead, will need to be liquidated in a SIPA proceeding. The potential size of the mismatch risk impacting carrying broker-dealers today can be demonstrated through the size of the deposits they are required to make into their reserve bank accounts. For example, during the 2023 calendar year, the largest required additional deposits into the customer reserve bank accounts of all carrying broker-dealers ranged from approximately $2.3 billion to over $10 billion. 15 During the 2023 calendar year, the largest required additional deposits into their PAB reserve bank accounts ranged from approximately $345 million to almost $4.0 billion.16 Furthermore, during the 2023 calendar year, the top ten 14 See id. 15 This data is based on the 25 largest additional deposit requirements reported in the monthly FOCUS Reports filed during the 2023 calendar year. 16 This data is based on the 25 largest additional deposit requirements reported in the monthly FOCUS Reports filed during the 2023 calendar year. The largest additional deposit requirements were made by carrying broker-dealers that also had the 25 largest credit balances based on 2023 FOCUS Report data. A total of nine carrying broker-dealers made the 25 largest additional deposit requirements into the customer 7 additional required deposits to the customer reserve bank accounts for the 20 carrying brokerdealers with the lowest average total credits (of the 49 carrying broker-dealers estimated to be subject to the final amendments), 17 ranged from approximately $74.3 million to over $600 million.18 Moreover, the largest potential mismatches today occur at carrying broker-dealers that reported the greatest amount of total credits for their customers and PAB account holders (i.e., amounts that exceed the final $500 million threshold discussed below). 19 In 2023, in the aggregate, the average mismatch for customer reserve bank accounts was 15.7% for carrying broker-dealers above the $500 million threshold. 20 It was 6.4% for carrying broker-dealers below the threshold. 21 These large deposit requirements and mismatch percentages indicate that there may be times when the net amount of cash owed to customers and PAB account holders is substantially reserve bank accounts. Six of the 25 largest additional deposits into the customer reserve bank accounts were made by three carrying broker-dealers that voluntarily perform a daily reserve computation. The mean of these additional deposit requirements was $4.2 billion, and the median was $3.6 billion. With respect to the largest deposits into the PAB reserve bank accounts, a total of six carrying broker-dealers made the 25 largest additional deposit requirements. Twenty-one of the 25 largest additional deposits into the PAB reserve bank accounts were made by four carrying broker-dealers that voluntarily perform a daily reserve computation. The mean of these additional deposit requirements was approximately $1.3 billion, and the median was approximately $1.1 billion. 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 2023 calendar year. For example, during the 2023 calendar year, the 25 largest withdrawals from customer reserve bank accounts ranged from approximately $1.2 billion to $4.8 billion, and the 25 largest withdrawals from PAB reserve bank accounts ranged from $170 million to $2.6 billion. 17 See section IV.B.2. in this release (discussing scope of affected entities in the economic baseline). 18 This data is based on the largest additional deposit requirements reported in the monthly FOCUS Reports filed during the 2023 calendar year for carrying broker-dealers above the $500 million threshold. 19 See section II.A. of this release (describing the final $500 million threshold). 20 See section IV.B.2. of this release (discussing average mismatches). The aggregated average mismatch of 15.7% is calculated as an average of the average mismatches for all carrying broker-dealers that met the $500 million threshold. The same was done for carrying broker-dealers below the $500 million threshold. 21 See section IV.B.2. of this release (discussing average mismatches). 8 greater than the amounts on deposit in the customer and PAB reserve bank accounts. 22 Large mismatches may lead to correspondingly large shortfalls in the amounts available in the customer and PAB reserve bank accounts, which, in the event of a failure of a carrying brokerdealer, may result in the delayed reimbursement of customer securities and cash, and the potential that customers’ claims may not be satisfied in full. 23 In the case of a large shortfall, the cash and securities 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 cash and securities until the broker-dealer liquidation is carried out under SIPA, which may take a significant amount of time. 24 This potential delay in obtaining access to their securities and cash also could cause customers to rapidly withdraw cash from a carrying broker-dealer during times of market turmoil, putting further stress on the carrying broker-dealer and the securities markets more generally, as well as potentially triggering or accelerating the failure of a carrying broker-dealer. Further, in a SIPA liquidation, SIPC may be required to advance money from the SIPC Fund 25 to the extent the fund of customer property was insufficient to make customers—but not to PAB account holders—whole through the pro rata distribution.26 In particular, if the 22 See Proposing Release, 88 FR at 45843. 23 See id. at 45842. 24 How quickly claims are satisfied in a SIPA liquidation depends on the complexity of the liquidation and the condition of the carrying broker-dealer’s records. See How The Claims Process Works, available at https://www.sipc.org/cases-and-claims/how-the-claims-process-works; see also Proposing Release, 88 FR at 45848; section IV.A. of this release (discussing potential risks that an intra-week mismatch introduces); section IV.C. (discussing economic effects of the final amendments). 25 See section I.C.2. of this release (discussing the SIPC Fund). 26 See Proposing Release, 88 FR at 45842. 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). Broker-dealers with securities accounts at a failed broker-dealer—as SIPA customers—have the right to a pro rata share of customer property in a 9 mismatch or difference between the net amount a carrying broker-dealer owes its customers and PAB account holders and the combined amounts in the customer and PAB reserve accounts was sufficiently large, customers’ claims may not be satisfied in full. 27 In this case, the trustee would need to use the SIPC Fund to satisfy customers’ claims to make them whole. This risk may be exacerbated for carrying broker-dealers experiencing large aggregate intra-week mismatches. 28 As a result, the SIPC Fund may be at a higher risk of depletion. 29 To address these risks, the Commission is amending Rule 15c3-3 to require carrying broker-dealers that owe large amounts of cash to customers and PAB account holders (i.e., have large total credits), measured by both their customer and PAB reserve computations for the previous 12 month ends (i.e., a rolling 12-month average), to perform those computations and make any required deposits into their respective reserve bank accounts daily rather than weekly. 30 The final amendments—by requiring daily rather than weekly reserve computations— will more quickly apply the protective measures of the Rule 15c3-3 reserve requirements to cash of customers and PAB account holders that is newly deposited into the carrying broker-dealer. This will reduce the risk—caused by the dramatic increase in cash carrying broker-dealers hold—that if the carrying broker-dealer fails financially, it may be unable to promptly return cash and securities to customers and PAB account holders through an orderly self-liquidation. It SIPA liquidation, but they are not entitled to advances from the SIPC Fund. See section I.C.2. of this release (providing an overview of broker-dealer liquidations and SIPA). 27 See Proposing Release, 88 FR at 45842. 28 See Proposing Release, 88 FR at 45848. See also section IV.A. of this release (discussing potential risks that an intra-week mismatch introduces). 29 See section IV.A. of this release (discussing potential risks that an intra-week mismatch introduces). 30 See section II.A. of this release (discussing the final $500 million threshold, which is a modification from the proposed $250 million threshold); See also Proposing Release, 88 FR at 45843-45 (discussing proposed $250 million threshold). 10 also reduces the risk that the SIPC Fund may be depleted. 31 Further, a daily computation—as compared with a weekly computation—will more dynamically match the net amount of cash owed to customers and PAB account holders with the amount on deposit in the carrying brokerdealer’s customer and PAB reserve bank accounts (i.e., daily changes in the net cash owed to customers and PAB account holders will be accounted for more quickly in the reserve computations). While Rule 15c3-3 currently permits a carrying broker-dealer to elect to perform its customer and PAB reserve computations more frequently than weekly, 32 a practical effect of a daily computation requirement will permit carrying broker-dealers to withdraw excess cash or qualified securities more quickly from the reserve bank account, which will improve their liquidity.33 In sum, the daily reserve computations—by protecting customer and PAB cash more quickly than is the case with weekly computations—will make the financial system safer by: (1) increasing the likelihood that a failing carrying broker-dealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities); (2) lowering the risk that the SIPC Fund may be depleted by having to address a large shortfall in customer cash held by a failed carrying broker-dealer; and (3) increasing the liquidity of carrying broker-dealers performing the daily customer and PAB reserve computations thereby positioning them to better address potential financial shocks. 31 See Proposing Release, 88 FR 45842-43, 45848. 32 See paragraph (e)(3)(iv) of Rule 15c3-3. 33 See supra note 16 (citing data related to the 25 largest withdrawals from customer and PAB reserve bank accounts for the calendar year 2023). 11 B. Overview of the Final Amendments The Commission proposed the requirement to perform daily customer and PAB reserve computations on July 12, 2023. 34 The Commission received comments from a variety of persons, including broker-dealers, retail investors, industry associations, and other market participants. 35 As discussed in detail below, the Commission has modified the final amendments in response to comments. For example, while the Commission is retaining the overall structure of the proposal, the Commission has raised the threshold from $250 million to $500 million. The Commission also is reducing the 3% aggregate debit items charge (“3% debit reduction”) that certain carrying broker-dealers must take in performing a customer reserve computation to 2% (“2% debit reduction”) if they perform a daily customer reserve computation. 36 The final amendments are summarized below. Daily Computation – Under the final amendments, a carrying broker-dealer that has average total credits that are equal to or greater than $500 million (“$500 Million Threshold”) must perform the customer and/or PAB reserve computations daily, rather than weekly as is required under preexisting Rule 15c3-3. 37 As proposed and under the final amendments, a carrying broker-dealer must perform the customer and PAB reserve computations, as applicable, as of the close of the previous business day, and any required deposits must be made no later than one hour after the opening of banking business on the second following business day. 38 34 See Proposing Release. 35 Comment letters on the Proposing Release are available at https://www.sec.gov/comments/s7-1123/s71123.htm. 36 See section II.C. of this release (describing this modification in more detail). 37 See paragraph (e)(3)(i)(A)(1) of Rule 15c3-3, as amended. 38 See id. 12 Definition of Average Total Credits – As proposed and under the final amendments, “average total credits” means the arithmetic mean of the sum of total credits in the customer reserve computation and the PAB reserve computation reported in the carrying broker-dealer’s 12 most recently filed month-end FOCUS Reports. 39 This means the average total credits are a 12-month rolling average, as the carrying broker-dealer must add up the sum of the total credits reported in the customer and PAB reserve computations in each of the 12 most recently filed month-end FOCUS Reports and divide that amount by 12 to calculate the arithmetic mean of the total credits. Six-Month Compliance Period after Exceeding $500 Million Threshold – Under the final amendments, a carrying broker-dealer must comply with the requirement to perform a customer and PAB reserve computation daily no later than six months after its average total credits equal or exceed the $500 Million Threshold. 40 60-day Written DEA Notification to Revert to Weekly Computation – Under the final amendments, in the event that a carrying broker-dealer’s 12-month rolling average of total credits subsequently falls below the $500 Million Threshold, it must continue to perform customer and PAB reserve computations daily until it provides written notification to its designated examining authority (“DEA”) of its election to perform weekly computations. The amendments require the carrying broker-dealer to provide this written notification 60 days prior to reverting to weekly computations. 41 39 See id. 40 See id. 41 See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as amended. 13 Lowering the 3% Debit Reduction to 2% for Carrying Broker Dealers that Perform a Daily Customer Reserve Computation – As discussed in more detail below, the minimum net capital requirement for broker-dealers is the greater of a fixed-dollar amount specified in Rule 15c3-1 and an amount determined by applying one of two financial ratios: the 15-to-1 aggregate indebtedness to net capital ratio (“basic method”) or the 2% of aggregate debit items ratio (“alternative method”). 42 A carrying broker-dealer using the alternative method must reduce aggregate debit items by 3% when performing its customer reserve computation under Rule 15c3-3. This can increase the amount the carrying broker-dealer must lock up in its customer reserve bank account. Under the final amendments, the Commission has modified Rule 15c3-1 to permit carrying broker-dealers that use the alternative method and are above the $500 Million Threshold (i.e., that perform a daily customer reserve computation) to reduce their aggregate debit items by 2% rather than 3%. 43 Further, carrying broker-dealers that use the alternative method and are below the $500 Million Threshold may voluntarily perform a daily customer reserve computation under Rule 15c3-3 and, in so doing, apply the 2% debit reduction in lieu of the 3% debit reduction if they notify their DEA at least 30-days prior to beginning the daily customer reserve computation. Under the final amendments, carrying broker-dealers voluntarily performing a daily reserve computation and applying the 2% debit reduction must receive prior approval from their DEA to revert to a weekly customer reserve computation. 44 If they revert to performing a weekly customer reserve computation, they also must revert to applying a 3% debit 42 See section I.C.1. of this release (describing these provisions of the Rule 15c3-1 in more detail). 43 See paragraph (a)(1)(ii)(A) of Rule 15c3-1, as amended and paragraph (e)(3)(v) of Rule 15c3-3, as amended. 44 See paragraph (e)(3)(v) of Rule 15c3-3, as amended. 14 reduction. Finally, under the final amendments, the Commission is adopting technical amendments to the FOCUS Report to conform it to the amendments with respect to the lowering of the debit reduction from 3% to 2%. Compliance Date – Generally, carrying broker-dealers that exceed the $500 Million Threshold using each of the 12 filed month-end FOCUS Reports from July 31, 2024, through June 30, 2025, must perform customer and PAB reserve computations daily beginning no later than December 31, 2025 (i.e., six months after June 30, 2025). 45 On or after the effective date of the final amendments, a carrying broker-dealer may voluntarily perform a daily customer reserve computation and apply the 2% debit reduction, provided it notifies its DEA in writing at least 30 calendar days prior to beginning the daily customer reserve computation that applies the 2% debit reduction. 46 Reserve Account Requirements for Security-Based Swaps – The Commission is not adopting any changes to the reserve account requirements for security-based swaps. C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations 1. Overview of Rule 15c3-3 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 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. 47 To meet 45 See section III. of this release (discussing the compliance date). 46 See id. 47 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)]; Proposing Release, 88 FR at 45837. 15 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. The final amendments address the second step. If the carrying broker-dealer fails financially, the customer securities and cash should be readily available to be returned to the customers, which facilitates an orderly self-liquidation. However, if the failed carrying brokerdealer 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. 48 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. 49 Control 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 a third-party could exercise to secure an obligation of the carrying broker-dealer. 50 Permissible locations include a clearing corporation and a “bank,” as defined in section 3(a)(6) of the Exchange Act. 51 48 See section I.C.2. of this release (discussing broker-dealer liquidations under SIPA). 49 See paragraph (b) of Rule 15c3-3; Proposing Release, 88 FR at 45838. 50 See paragraph (c) of Rule 15c3-3. 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. 51 See 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 “digital 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 final amendments apply to all carrying broker-dealers, including special 16 The second step is that Rule 15c3-3 requires carrying broker-dealers to have a customer reserve bank account that must hold cash and/or qualified securities (e.g., U.S. Treasury securities) in an amount determined by a computation of the net cash owed to the carrying broker-dealer’s customers pursuant to a formula set forth in Exchange Act Rule 15c3-3a, the customer reserve computation. 52 Preexisting Rule 15c3-3 requires carrying broker-dealers to perform the customer reserve computation as of the close of the last business day of the week 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), 53 and, in certain limited circumstances, to perform a monthly computation. 54 Under the customer reserve computation, the carrying broker-dealer adds up customer credit items and then subtracts from that amount customer debit items. 55 The credit items include credit balances in customer securities 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). 56 The debit items include money owed by customers (e.g., from margin purpose broker-dealers, the amendments do 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 (July 8, 2019), available at https://www.sec.gov/news/public-statement/joint-staffstatement-broker-dealercustody-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. 52 See Rule 15c3-3a. 53 See paragraph (e)(3)(iv) of Rule 15c3-3. 54 See paragraph (e)(3)(i) of Rule 15c3-3. 55 See Rule 15c3-3a. 56 See Rule 15c3-3a, Items 1-9; Proposing Release, 88 FR at 45838. 17 lending), securities borrowed by the carrying broker-dealer to effectuate customer short sales, and margin required and on deposit with certain clearing agencies as a consequence of customer securities transactions. 57 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. 58 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. 59 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 difference. 60 A carrying broker-dealer also must make and maintain a record of each computation. 61 The customer reserve computation permits the carrying broker-dealer to offset customer credit items only with customer debit items. 62 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. For example, if a carrying broker-dealer holds $100 for customer A, the carrying broker-dealer can use that $100 57 See Rule 15c3-3a, Items 10-15. 58 See paragraph (e) of Rule 15c3-3. 59 See paragraph (e)(3)(i) of Rule 15c3-3. 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. See Proposing Release, 88 FR at 45839. 60 See paragraph (e) of Rule 15c3-3. 61 See paragraph (e)(3)(v) of Rule 15c3-3. Each record must be preserved in accordance with Rule 17a-4. Id. See also Proposing Release, 88 FR at 45839. As a result of the final amendments, paragraph (e)(3)(v) is being re-designated as paragraph (e)(3)(vi). 62 See paragraph (e)(2) of Rule 15c3-3; Rule 15c3-3a. 18 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 customer reserve computation and the $100 customer B owes the carrying broker-dealer is a debit in the computation. Therefore, under the customer reserve computation there would be no requirement to maintain cash and/or qualified 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 qualified securities in an amount at least equal to $100. 63 Rule 15c3-3 also addresses how a carrying broker-dealer must treat proprietary securities and cash it holds for other broker-dealers, known as PAB accounts. While broker-dealers are not treated as customers of the carrying broker-dealer under Rule 15c3-3, 64 the rule requires the carrying broker-dealer to have a PAB reserve bank account. 65 The PAB reserve bank account must hold cash and/or qualified securities in an amount determined by the PAB reserve computation. Under preexisting Rule 15c3-3, carrying broker-dealers are generally required to perform the PAB reserve computation and make any required deposits into the PAB reserve bank 63 See Proposing Release 88 FR at 45839, n.22. 64 See paragraph (a)(1) 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 that have proprietary accounts at the carrying broker-dealer. As discussed in section I.C.2. of this release, broker-dealers—as customers under SIPA—have the right to a pro rata share of customer property in a SIPA liquidation. See 15 U.S.C. 78lll(2). 65 See paragraph (e)(1) of Rule 15c3-3. Carrying broker-dealers also must obtain and maintain physical possession or control of 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. See paragraph (b)(5) of Rule 15c3-3. See Financial Responsibility Rules for Broker-Dealers, 78 FR at 5182731 (adopting a PAB reserve computation and possession and control requirements for securities held in PAB accounts under Rule 15c3-3). 19 account weekly, similar to the requirements for the customer reserve computation. 66 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. 67 2. Overview of Broker-Dealer Liquidations and SIPA SIPA 68 affords certain protections against loss to customers resulting from a broker-dealer failure through the establishment of SIPC and the SIPC Fund. 69 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). 70 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, including broker-dealers with securities accounts at the failed broker-dealer (“SIPA customers”), generally are entitled to certain protections, including the right to share pro rata with other SIPA customers in the customer property held by the carrying broker-dealer by way of a priority claim 66 See paragraph (e)(3) of Rule 15c3-3; Proposing Release, 88 FR at 45839-40. 67 See paragraph (e)(2) of Rule 15c3-3. 68 See 15 U.S.C. 78aaa et seq. 69 See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1). 70 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); Proposing Release, 88 FR at 45840. 20 on the customer property compared to general unsecured creditors of the carrying brokerdealer. 71 SIPA protections also include the ability for a SIPA customer—other than a SIPA customer that is a broker-dealer (i.e., a PAB account holder)—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. 72 The SIPC Fund largely is financed through assessments paid to SIPC by its broker-dealer members. 73 The SIPC Fund is used to pay SIPC’s expenses, the administrative costs of a SIPA liquidation to the extent the carrying broker-dealer’s estate is insufficient to cover those costs, and—as stated above in this section—to pay advances to SIPA customers whose claims cannot be fully satisfied by the estate of a failed carrying broker-dealer. 74 The SIPC Fund—which consists of cash and U.S. Government securities—totaled approximately $4.47 billion as of 71 See 15 U.S.C. 78fff-2(c) and 15 U.S.C. 78fff-3(a). 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 if there are any general estate assets. See 15 U.S.C. 78fff2(c)(1). 72 15 U.S.C. 78fff-3. 73 15 U.S.C. 78ddd(c) and (d); Proposing Release, 88 FR at 45841. The SIPC Fund is also financed through interest on U.S. Government securities held in the SIPC Fund. See 2023 SIPC Annual Report at 4, available at https://www.sipc.org/media/annual-reports/2023-annual-report.pdf. 74 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. See 2023 SIPC Annual Report at 3; Proposing Release, 88 FR at 45841, n.49. In 2023, no liquidations under SIPA were initiated. Over the last ten-year period, the annual average of new cases was 0.2. Since the inception of SIPC, liquidation proceedings under SIPA were commenced for 330 SIPC-member broker-dealers. These 330 members represent less than 1% of the approximately 40,000 broker-dealers that have been SIPC members during the past fiftythree years. In addition, during that timeframe, cash and securities distributed for accounts of customers totaled approximately $142.5 billion. Of that amount, approximately $141.6 billion came from debtors’ estates and $915.7 million came from the SIPC Fund. Currently, SIPC has 3,297 members. See SIPC 2023 Annual Report at 8. 21 December 31, 2023. 75 Finally, the 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. 76 The current assessment rate (effective January 1, 2024) is 0.15% of net operating revenues. 77 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 Unrestricted net assets >= $ 5 billion (and reasonably likely to remain > $5 billion (after review of study* and consultation with Commission and SROs)) 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 SIPC may not more than once in any fouryear period, increase or decrease the assessment rate by up to, but not more than, 25% of the assessment rate in effect at that time. *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. 75 See 2023 SIPC Annual Report at 10. The target level of the SIPC Fund is set out in SIPC’s Bylaws and has increased from an initial target of $150 million in 1970, to the current target of $5.0 billion as measured in unrestricted net assets. See Article 6 (Assessments) of SIPC Bylaws; The SIPC Fund, available at https://www.sipc.org/about-sipc/the-sipc-fund; 2023 SIPC Annual Report at 3. 76 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 2023 SIPC Annual Report at 20. See also 15 U.S.C. 78ddd(c) and (d); Proposing Release, 88 FR at 45841. 77 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; Proposing Release, 88 FR at 45841. 22 II. DISCUSSION OF COMMENTS AND FINAL AMENDMENTS A. Requirement to Perform a Daily Computation 1. Proposal The Commission proposed 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. 78 More specifically, the amendments would add paragraph (e)(3)(i)(B) to Rule 15c3-3. 79 This paragraph would provide that a carrying brokerdealer with average total credits that are equal to or greater than $250 million (“$250 Million Threshold”) 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. 80 The paragraph would further provide that the deposit so computed must be made no later than one hour after the opening of banking business on the second following business day. 81 For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission proposed to define 78 See section I.A. of this release (discussing the need for daily reserve computations); Proposing Release, 88 FR at 45843. 79 See paragraph (e)(3)(i)(B) to Rule 15c3-3, as proposed to be amended. In addition, the Commission proposed 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. See Proposing Release, 88 FR at 45843, n.74. The Commission did not receive comments on these proposed conforming amendments and is adopting them as proposed. 80 The text of paragraph (e)(3)(i)(B) of Rule 15c3-3—as proposed to be amended—was modelled closely on the preexisting text of paragraph (e)(3)(i) of Rule 15c3-3. See Proposing Release 88 FR at 45843, n.75. 81 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). See Proposing Release 88 FR at 45844. 23 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. 82 Based on regulatory filings for the period of January 2022 through December 2022, the $250 Million Threshold would have applied the proposed daily computation requirement to approximately 63 carrying broker-dealers. 83 These broker-dealers included 11 carrying broker-dealers that already voluntarily performed the customer reserve computation daily. 84 2. Comments Received and Final Amendments Many commenters supported the overall proposal. 85 Commenters stated that the proposal would help protect customers, and address potential risks in a more timely and proactive manner, which safeguards investors and market participants, as well as strengthens the overall resilience of the financial markets. 86 One commenter, however, stated that the preexisting weekly reserve requirements have proven effective for the industry and not resulted in any problems. 87 The Commission agrees with commenters that the amendments to require daily customer and PAB reserve computations will protect customer and PAB cash more quickly than is the case with weekly computations. While the preexisting weekly customer and PAB reserve 82 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. See Proposing Release, 88 FR at 45844, n.76. 83 See Proposing Release, 88 FR at 45844, n.79. 84 See Proposing Release, 88 FR at 45844, n.80. 85 See, e.g., Letter from Joshua Beattie, FriendshipWorks (July 20, 2023); Roger Cryer (Aug. 16, 2023); Ethan Jenni (Aug. 20, 2023); Ruth Earle (Aug. 20, 2023); Jesse Tutti (Aug. 20, 2023); Nathan Saint (Aug. 20, 2023); Chris Edmondson (Aug. 20, 2023); and Janice Schrader (Aug. 21, 2023). 86 See Letter from Joseph (Sept. 8, 2023); Golden DOGE (Sept. 9, 2023). 87 See Letter from Christopher A. Iacovella President & CEO, American Securities Association (Sept. 11, 2023) (“ASA Letter”) at 4. 24 requirements have generally been effective, 88 the observed large deposit requirements, and differences or “mismatches” between the net amount of cash a carrying broker-dealer owes its customers and PAB account holders and the amounts on deposit in the customer and PAB reserve bank accounts, indicate that a daily reserve computation requirement enhances the preexisting rule. 89 As discussed in section I.A. of this release, a daily reserve computation requirement will make the financial system safer by: (1) increasing the likelihood that a failing carrying brokerdealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities); (2) lowering the risk that the SIPC Fund may be depleted by having to address a large shortfall in customer cash held by a failed carrying broker-dealer; and (3) increasing the liquidity of carrying broker-dealers performing the daily customer and PAB reserve computations thereby positioning them to better address potential financial shocks. Regarding the proposed $250 Million Threshold, one commenter suggested modifying the proposal to include a second test that would need to be met to trigger the requirement to perform daily reserve computations. 90 In particular, the commenter recommended requiring a carrying broker-dealer to perform daily computations if it exceeds the proposed $250 Million Threshold and has average net credits of $10 million or more because some carrying brokerdealers that meet the proposed $250 Million Threshold do not present a material risk as they do not carry a large excess of credits over debits. This commenter also stated that a number of 88 See section II.C.2. of this release (discussing broker-dealer liquidations and SIPA). 89 See section I.A. of this release (discussing the need for daily reserve computations); section IV.B.2. of this release (discussing average mismatches). 90 See Letter from Kevin Zambrowicz, Deputy General Counsel (Institutional) & Managing Partner, SIFMA (Sept. 11, 2023) (“SIFMA Letter) at 6-7. 25 carrying broker-dealers rarely have an excess of credits over debits because of the nature of their activities, and the customer protection benefit of a daily computation requirement for these carrying broker-dealers is minimal, and should be weighed against the significant costs of the proposal, which are not commensurate with the risk profiles they present. 91 Another commenter stated the Commission should adopt a threshold using risk or liquidity factors because they are better predictors of a failing carrying broker-dealer than a fixed threshold based on size. 92 The commenter stated that this threshold classification would avoid penalizing carrying brokerdealers with strong balance sheets that exceed a fixed threshold. 93 One commenter stated that the Commission should define the threshold as a formula that it could adjust periodically without further rulemaking, because the proposed threshold is based on a narrow set of FOCUS reports and could become outdated as a result of material changes. 94 Some commenters suggested eliminating the proposed $250 Million Threshold so that all carrying broker-dealers would be required to perform daily customer and PAB reserve computations. 95 One of these commenters stated that the mismatch risk applies equally to both 91 See id. 92 See ASA Letter at 5. 93 See id. The commenter did not identify specific risk or liquidity factors that the Commission could use for this purpose but suggested that the Commission could consider the liquidity factors in a FINRA concept release for a potential FINRA liquidity risk management rule. Id. 94 See Letter from Andrew Hartnett, NASAA President and Deputy Commissioner, Iowa Insurance Division (Sept. 11, 2023) (“NASAA Letter”) at 2-3. The commenter stated that this alternative would ensure that the Commission reevaluates, and refreshes (as necessary) the proposal’s systemic risk mitigation aims and ease the Commission’s future burdens given the significant effort required to engage in rulemaking. Id. at 3. 95 See Letter from Stephen W. Hall, Legal Director and Securities Specialist, Better Markets, Inc. (Sept. 11, 2023) (“Better Markets Letter”) at 8; Cory (Sept. 19, 2023) (“Cory Letter”). Another commenter stated that it is possible that a threshold based on a narrow set of FOCUS Reports could become stale if the data changes materially and that one remedy would be to require all carrying broker-dealers to compute reserve requirements daily. The commenter, however, recognized the Commission’s implicit concern that 26 large and small carrying broker-dealers, and, as such, the Commission should apply the requirement to all carrying broker-dealers so that customers are not left vulnerable simply because they hold their securities accounts at smaller broker-dealers. 96 The commenter also stated that this modification would eliminate the need for carrying broker-dealers to monitor their average total credits over a 12-month period to determine whether or not they meet the $250 Million Threshold. 97 The final amendments modify the proposal by raising the $250 Million Threshold to $500 million. This 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 are more likely to have larger mismatches in any given year, and are better positioned to absorb the increased costs resulting from performing daily reserve computations. 98 For example, when proposed, the threshold was estimated to apply the daily reserve computations requirement to 63 of the 187 total broker-dealers subject to the customer and PAB reserve requirements of Rule 15c3-3. 99 Further, at proposal, the mismatch risk was calculated as a carrying broker-dealer’s deposit divided by its reserve account balance from any month. The average of these mismatches for each carrying broker-dealer during 2022 extending the requirement to all carrying broker-dealers might be unnecessarily burdensome, and stated that there is a potential consensus to support a reasonable “balanced demarcation” [between carrying broker-dealers with large amounts of total credits relative to smaller carrying broker dealers]. See NASAA Letter at 2. 96 See Better Markets Letter at 8. 97 See id at 8-9. 98 See section IV.B.2. of this release (discussing the number of affected broker-dealers as part of the baseline for the economic analysis of the final amendments). 99 See Proposing Release, 88 FR at 45849-50. Included in the 187 carrying broker-dealers were 25 carrying broker-dealers that reported zero customer or PAB credits in 2022. 27 was computed to determine the average mismatches. 100 For example, in 2022, on the aggregate level, the average mismatch across the 187 carrying broker-dealers for customer reserve accounts was 11.2% for carrying broker-dealers above the proposed $250 Million Threshold. 101 It was 6.1% for carrying broker-dealers below the proposed $250 Million Threshold. The threshold is being raised to $500 Million to further narrow the scope of the final amendments to carrying broker-dealers whose average mismatches are larger as compared to carrying broker-dealers that are below the threshold. 102 In particular, the $500 Million Threshold is estimated to apply the daily computation requirement to 49 of the 191 carrying broker-dealers subject to the customer and PAB reserve requirements of Rule 15c3-3. 103 Nine of these 49 carrying broker-dealers already voluntarily perform daily customer and PAB reserve computations. 104 Moreover, it is estimated that these 49 carrying broker-dealers—in the aggregate—account for 99.3% of the total credits of all 191 carrying broker-dealers subject to the requirement. 105 Further, the average mismatches were generally higher for carrying brokerdealers above the $500 Million Threshold as compared to carrying broker-dealers below the 100 See id. at 45852. 101 See Proposing Release, 88 FR at 45852 (table 4 depicting broker-dealer deposits and withdrawals as a share of the reserve account balance). In this release, the aggregated average mismatch of 11.2% is calculated as an average of the average mismatches for all carrying broker-dealers that met the proposed $250 Million Threshold in 2022. A mismatch is calculated as a carrying broker-dealer’s deposit (FOCUS Report Line 4520) divided by its reserve account balance from any month (Line 4530). The average of these mismatches for each broker-dealer is computed to determine the “average mismatches.” The same was done for carrying broker-dealers below the proposed $250 Million Threshold in 2022. Using a $500 Million Threshold, based on 2022 data, on the aggregate level, the average mismatch across the 187 carrying broker-dealers for customer reserve accounts was 11.9% for carrying broker-dealers above the $500 Million Threshold, and 6.1% for carrying broker-dealers below the $500 Million Threshold. 102 See section IV.B.2. of this release. 103 Included in the 191 carrying broker-dealers were 29 carrying broker-dealers that reported zero customer or PAB credits in 2023. See section IV.B.2. of this release. 104 Based on FOCUS Report data for December 31, 2023. 105 See id. 28 threshold. 106 For example, the average mismatch across the 191 carrying broker-dealers for customer reserve bank accounts is 15.7% for carrying broker-dealers above the $500 Million Threshold. 107 It is 6.4% for carrying broker-dealers below the threshold. These data indicate that the $500 Million Threshold will apply to carrying broker-dealers that hold the bulk of total credits in the industry and to the carrying broker-dealers that tend to have the larger mismatches as measured by the average of reserve deposits required for the carrying broker-dealer relative to the average balance in its reserve accounts. In this way, the $500 Million Threshold 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 reserve computation. The $500 Million Threshold is a straightforward way to narrow the scope of the final rule to carrying broker-dealers that tend to have larger mismatches. For example, this modification will exclude an additional 12 carrying broker-dealers from the scope of the final rule. 108 For these reasons, the Commission is not modifying the final $500 Million Threshold to include the second test a commenter suggested (i.e., having average net credits of $10 million or more) or to use risk or liquidity factors, as a different commenter suggested. These suggested modifications would narrow the application of the rule in a way that would exclude some carrying broker-dealers from the daily reserve computation requirement that have the potential for large mismatch risks. Further, the final $500 Million Threshold—because it is based on total customer and PAB credits (as opposed to a net amount of credits)—will apply the daily reserve computations 106 See section IV.B.2. of this release, table 5 - Broker-Dealer Deposits and Withdrawals as a Share of Reserve Account Balance, 2023. 107 See section IV.B.2. of this release. 108 This estimate is based on FOCUS Report data for calendar year 2023. 29 requirement to carrying broker-dealers that tend to have large obligations to customers (e.g., through receiving large infusions of customer cash, holding cash balances in customers’ securities accounts, or using customer margin securities). Using a net credit amount, in addition to the $500 Million Threshold would exclude 10 of the 49 carrying broker-dealers that would be subject to the daily reserve requirement based on FOCUS Report data for calendar year 2023. 109 At the time of the weekly computation, however, a carrying broker-dealer may have substantial debits to offset the credits and, therefore, have a relatively small amount of excess credits in comparison to its total credits. This could cause the carrying broker-dealer to stay under the threshold notwithstanding the fact that it typically has large amounts of total credits, and large intra-week mismatches. 110 Consequently, a net credit amount may not indicate that a carrying broker-dealer is at a lower risk of large intra-week mismatches because it does not account for large fluctuations in the net cash owed to customers and PAB account holders between reserve computations. The final amendments are designed to reduce the mismatch risk for carrying broker-dealers with large amounts of total credits (who are more likely to have larger mismatches) by protecting customer and PAB cash more quickly than is the case with weekly computations. This will increase the likelihood that a failing carrying broker-dealer can selfliquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities). 109 See section IV.E.2. of this release (discussing alternative thresholds based on different metrics). 110 Based on FOCUS Report data for calendar year 2023, at least one carrying broker-dealer that would be excluded from the scope of the rule using a net credit amount in addition to a $500 Million Threshold had two of the top 100 largest deposits in customer reserve bank accounts in 2023. Further, four of the top 25 PAB reserve bank account deposits in calendar year 2023 were made by two carrying broker-dealers that would be excluded using the net credit amount in addition to the $500 Million Threshold. 30 Finally, the $500 Million Threshold also is designed as a straightforward way for a carrying broker-dealer to determine whether it is subject to the requirement to perform daily customer and PAB reserve computations. As such, it will be simple for carrying broker-dealers and the Commission or Commission staff to calculate and monitor because it is a fixed-threshold and the data for the calculation is derived from FOCUS Reports. 111 Setting formula-based thresholds that incorporate dynamic risk or liquidity factors would make the rule requirements less predictable and more complex to monitor because of their variability. Moreover, carrying broker-dealers in compliance with the net capital rule typically have strong balance sheets because the rule imposes a net liquid assets test that is designed to promote liquidity within broker-dealers. 112 During times of market stress, however, carrying broker-dealers may experience fluctuations in their capital if customers and/or PAB account holders rapidly withdraw cash and securities from their accounts to reduce their exposure to the carrying brokerdealer and the securities markets more generally. 113 Consequently, a formula-based threshold that incorporates dynamic risk or liquidity factors would exclude carrying broker-dealers that are more likely to experience larger mismatches, including carrying broker-dealers with large amounts of credits that have strong balance sheets. 114 A fixed threshold also is consistent with other thresholds and ratios in the Commission’s broker-dealer financial responsibility rules, which use fixed-dollar amounts or predetermined ratios that do not contain formulas for future 111 A uniform threshold also is less costly to monitor because it does not change. See the Economic Analysis in section IV. of this release (discussing the economic effects of the final amendments). 112 See Rule 15c3-1. The net capital rule also requires that a carrying broker-dealer must not otherwise be insolvent as defined in the net capital rule. See paragraph (a)(16) of Rule 15c3-1 (defining the term insolvent). 113 See section IV.D. of this release (discussing capital losses that could arise in times of market stress); section I.A. of this release (discussing the need for daily reserve computations). 114 See paragraph (a)(16) of Rule 15c3-1 (defining the term insolvent). 31 adjustments. 115 Finally, the $500 Million Threshold will incorporate any month-to-month material changes because it uses a 12-month rolling average (as compared to basing the calculation on a single filing or date). 116 For these reasons, the Commission is not adopting a formula-based threshold that incorporates dynamic risk or liquidity factors, or a threshold that can be adjusted without rulemaking as some commenters suggested. By adopting a $500 Million Threshold, the final rule does not apply the daily reserve computation requirement to all carrying broker-dealers, as a commenter suggested. 117 This suggested modification would apply the requirement to carrying broker-dealers that do not have the potential for large mismatch risks and that are less able to bear the costs of—and devote the resources necessary for—performing daily reserve computations because of their size or limited customer or PAB account carrying activity. Applying the daily reserve computation to all carrying broker-dealers would impose compliance costs on an additional 113 carrying brokerdealers with relatively less customer and PAB account activity. 118 Thus, it would subject them to increased compliance costs while they do not have the potential for large mismatches. 119 However, carrying broker-dealers below the $500 Million Threshold may choose to voluntarily perform a daily customer reserve computation in order to apply the 2% debit reduction in lieu of 115 See Rules 15c3-1 and 15c3-3. 116 See NASAA Letter at 2; see also Letter from Josephine Wang, President and CEO, SIPC (Sept. 11, 2023) (“SIPC Letter”) at 2 (supporting the rolling 12-month average). 117 The commenter also stated that applying the daily reserve computation requirement to all carrying brokerdealers would eliminate the need to monitor average total credits over a 12-month period. See Better Markets Letter at 8. As discussed above in this section, the $500 Million Threshold is a fairly simple calculation that relies on numbers carrying broker-dealers already report on the FOCUS Report. Consequently, it will not be difficult for carrying broker-dealers to determine whether they have triggered the daily reserve computation requirement. 118 See section IV.E.3. of this release (discussing applying the daily reserve requirement to all carrying brokerdealers as a reasonable alternative). 119 See id. 32 the 3% reduction. 120 In this way, the investor protection benefits of performing a daily computation may be expanded beyond the carrying broker-dealers that will be required to perform a daily computation, but in a way that does not impose undue costs on smaller carrying broker-dealers. For example, smaller carrying broker-dealers can analyze whether it is advantageous from a cost perspective to realize the liquidity benefits that result from performing a daily customer reserve computation and applying a 2% debit reduction in lieu of a 3% debit reduction. In addition to addressing the proposed $250 Million Threshold, some commenters suggested modifying the proposal in a way that would make the reserve computations a hybrid of the daily and weekly approaches where carrying broker-dealers would compute certain items in the reserve formula daily and others weekly. For example, two commenters 121 suggested that a more cost efficient and effective alternative to prevent a deficit of customer property in a SIPA liquidation (for carrying broker-dealers primarily conducting a DVP/RVP business) 122 would be to continue weekly computations with a daily calculation of free credit balances. 123 Another 120 See section II.C. of this release (describing the 2% debit reduction). 121 See SIFMA Letter at 10-11; Letter from Erik Soderberg, Head of Regulatory Affairs, Americas, Deutsche Bank Securities, Inc. (Sept. 11, 2023) (“Deutsche Bank Letter”) at 1-2. These commenters stated that inflows of customer cash to customer accounts for interest and dividends represent the vast bulk of any net equity that a carrying broker-dealer would owe its customers if such a carrying broker-dealer were subject to a liquidation. See SIFMA Letter at 10; see also Deutsche Bank Letter at 2. 122 DVP/RVP means a delivery-versus-payment or receipt-versus-payment. This generally refers to an arrangement whereby payment for securities purchased is made to the selling customer’s agent or delivery of securities sold is made to the buying customer’s agent in exchange for payment at time of settlement, usually in the form of cash. This settlement method generally guarantees the transfer of securities only happens after payment has been made. Carrying broker-dealers whose primary business is DVP/RVP transactions also may have limited carrying business (including for affiliates) including margin accounts. See SIFMA Letter at 10. 123 See SIFMA Letter at 10; Deutsche Bank Letter at 1-2. These commenters suggested that these carrying broker-dealers be permitted to calculate free credit balances daily as of the previous business day, identify whether such balances are greater than the free credit balances reflected in their most recent reserve computation, and, on the same day, either: (1) sweep any excess into a sweep program; or (2) deposit any increase into their customer reserve bank accounts. Id. 33 commenter acknowledged that while certain carrying broker-dealers should perform a daily reserve computation, the Commission should permit other carrying broker-dealers to perform a weekly reserve computation, and a simplified intra-week reserve computation of only material balances (while excluding cash balances moved to external sweep programs). 124 The final amendments retain the daily customer and PAB reserve computation requirement, as proposed. The hybrid approaches commenters suggested would not provide the same level of customer protection afforded by complete daily customer and PAB reserve computations because these hybrid approaches do not include all debits and credits. 125 As discussed above in section I.C.1. of this release, preexisting Rule 15c3-3 is designed to protect customers by segregating their securities and cash from the carrying broker-dealer’s proprietary business activities. This is accomplished through the customer and PAB reserve computations that must include all funds which have customer assets as their source, and ensures that the net amount of cash owed to customers and PAB account holders that is not deployed for customer or PAB account holder securities transactions is deposited in the customer and PAB reserve bank accounts. 126 Performing only a modified or hybrid customer or PAB reserve computation 124 See ASA Letter at 5; Letter from ASA (Jan. 19, 2024) (“ASA Letter 2”) at 2; Letter from ASA (Oct. 2, 2024) (“ASA Letter 3”). The commenter stated that this computation would achieve a similar purpose as the daily customer and PAB reserve computations requirement and provide relief for carrying brokerdealers from having to develop infrastructure and hire regulatory staff to perform a customer and PAB reserve computation daily. See ASA Letter at 5. 125 In this regard, in adopting the original customer reserve requirements of Rule 15c3-3 in 1972, the Commission stated that “[it] has taken a broad view of the Congressional mandate by requiring that the reserve account include all funds which have as their source customer assets.” See Rule 15c3-3 Adopting Release, 37 FR at 25224. 126 See 1972 15c3-3 Adopting Release, 37 FR at 25224 (One of the goals of Rule 15c3-3 is to “insure that customers’ funds held by a broker-dealer (both free credit balances and deposits which may be restricted as to withdrawal) and the cash which is realized through the lending, hypothecation and other permissible uses of customers’ securities are deployed in safe areas of the broker-dealer's business related to servicing his customers, or to the extent that the funds are not deployed in these limited areas, that they be deposited in a reserve bank account.”). Id. 34 increases the risk of a large mismatch for carrying broker-dealers with large amounts of credits that exceed the $500 Million Threshold because they would not be accounting for all credit items when performing daily reserve computations under these alternatives. 127 This, in turn, would increase the risk that a carrying broker-dealer may be unable to promptly return cash and securities to customer and PAB account holders in the event the carrying broker-dealer fails financially. Further, limiting the daily computation to the amount of free credit balances and including any increase in only free credit balances in a sweep program or a separate special reserve bank account, 128 or an intra-week computation of only certain credit items would not account for possible material changes in other credit items not accounted for daily that could substantially affect the customer or PAB reserve computation and any required deposit. Finally, the hybrid computations commenters suggested would introduce an additional level of complexity to the computation that could tax the resources of carrying broker-dealers while not achieving the full risk-reducing benefits of a complete daily reserve computation. 129 Another commenter stated that the Commission should adopt a separate $250 million threshold requirement for the customer and PAB reserve computations, to allow carrying brokerdealers to focus their resources on the reserve computation that merits the most attention, rather than one that presents minimal risk to the carrying broker-dealer or the financial system as a 127 See section I.A. of this release (describing the need for daily reserve computations). 128 See section II.E.1. of this release (discussing sweep programs and cash in motion and other transitory credits); section IV.E.10. (discussing exemption for cash in motion as a reasonable alternative). 129 See section I.A. of this release (describing the need for daily reserve computations). 35 whole. 130 This commenter also suggested as another alternative that the Commission permit a carrying broker-dealer that exceeds the proposed $250 Million Threshold to perform an optional weekly computation for either its customer or PAB accounts where credits in that particular computation fall below a certain level (e.g., $50 million). 131 Another commenter stated that for carrying broker-dealers performing both the customer and PAB reserve computations, the Commission should not require daily PAB reserve computations in order to protect customer reserves while mitigating stress on carrying broker-dealers’ resources. 132 The final amendments do not take these approaches commenters suggested to bifurcate the frequency of the customer and PAB reserve computations. Both the securities accounts of customers and PAB account holders would be affected if a carrying broker-dealer experiences a large intra-week mismatch in either its customer or PAB reserve bank accounts. This mismatch risk increases the risk to both the carrying broker-dealer’s customers and PAB account holders that if the carrying broker-dealer fails financially, the customers and PAB account holders may experience a delay in receiving their cash and securities or be subject to a disorderly liquidation. Requiring that a carrying broker-dealer that exceeds the $500 Million Threshold perform a daily customer and PAB reserve computation reduces the mismatch risk in each of these accounts and more dynamically matches the net cash owed to PAB account holders with the amount on 130 See Marshall Ollia, Chief Financial Officer, Raymond James & Associates, Inc. (Sept. 11, 2023) (“Raymond James Letter”) at 2-3. This commenter stated that its total customer credits would exceed $250 million but its PAB credit balances are significantly below the threshold. The commenter further stated that in practice it does not see large inflows or outflows of broker-dealer credit items in PAB accounts and so the carrying broker-dealer does not experience a mismatch in timing of those items. Id. 131 See Raymond James Letter at 3. This commenter stated, for example, where a carrying broker-dealer has $2.0 billion in customer credits, but only $45 million in PAB credits, then it would perform a customer reserve computation daily for the customer reserve bank account and have the option of performing PAB reserve computations weekly for the PAB reserve bank account. Id. 132 See ASA Letter at 4. 36 deposit in the customer and PAB reserve bank accounts. This requirement will reduce mismatch risk, and benefit both customer and PAB account holders if a carrying broker-dealer fails financially by ensuring their cash and securities are promptly returned to them. In addition, in the event of a SIPA liquidation of a failed carrying broker-dealer, both customers and PAB account holders would be part of the customer estate which would include both the customer and PAB reserve bank accounts to the extent needed to satisfy customers’ claims. 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 a greater risk of not being satisfied in full (as compared to non-broker-dealer customers). This could expose the PAB account holder to financial stress and increased risk of liquidation. 133 Therefore, because a large mismatch in the customer or PAB reserve bank account will affect both customers and PAB account holders in a SIPA liquidation, the final rules require a carrying broker-dealer to perform a daily customer and PAB reserve computation if it meets or exceeds the $500 Million Threshold. Finally, a daily requirement for both the customer and PAB reserve computations also will promote consistency by requiring that a carrying broker-dealer perform the customer and PAB reserve computations with the same frequency. 134 While Rule 15c3-3 currently permits a carrying broker-dealer to elect to perform its customer and PAB reserve computations more frequently than weekly, 135 a practical effect of requiring a uniform standard that a carrying 133 See Proposing Release, 88 FR at 45842. 134 Based on FOCUS Report data for December 31, 2023, all nine of the carrying broker-dealers above the $500 Million Threshold that voluntarily perform daily reserve computations currently perform daily customer and PAB reserve computations. 135 See paragraph (e)(3)(iv) of Rule 15c3-3. 37 broker-dealer perform both the customer and PAB reserve computations daily will be to permit the carrying broker-dealer to withdraw excess funds more quickly from either the customer or PAB reserve bank account (as compared to a weekly reserve computation). This consistency will increase liquidity for carrying broker-dealers and position them to better address potential financial shocks. 136 For the reasons discussed above in this section, the Commission has not modified the final amendments to establish the alternative thresholds or hybrid computations commenters suggested. However, to the extent that carrying broker-dealers incur costs to transition to a daily reserve computation, the modification of the final amendments to permit a 2% debit reduction in performing the customer reserve computation will provide them additional liquidity.137 This modification will reduce costs from the proposal for carrying broker-dealers without compromising the enhancements to customer protection that the final $500 Million Threshold is designed to provide (and without adopting any of the alternative thresholds or hybrid computations commenters suggested). Several commenters stated that carrying broker-dealers should perform reserve computations in real time or commented on the technological advances in the securities markets. 138 One commenter stated that technical prerequisites for such complex computational operations are already in place and should not be burdensome to carrying broker-dealers. 139 136 See section I.A. of this release (discussing the need for daily reserve computations). 137 See section II.C. of this release (describing the 2% debit reduction) and the Economic Analysis in section IV. of this release (discussing the costs and benefits of the rule). 138 See Letter from Greg Linder (Aug. 20, 2023) (“Linder Letter”); Andrew O’Donnell (July 30, 2023) (“O’Donnell Letter”) and Alex MacCartney (July 21, 2023); Joao F. Santos (July 28, 2023) (“Santos Letter”); Eddie Klas (July 18, 2023); Adam Whitehurst (July 12, 2023) (“Whitehurst Letter”); Cory Letter. 139 See Santos Letter. This commenter suggested that carrying broker-dealers be required to electronically publish whether reserve requirements have been met or breached. Id. 38 Another commenter stated that the Commission should not entertain any carrying broker-dealer’s objections that the proposal would be ineffective or burdensome to implement since the entirety of their services should now be automated. 140 Commenters also stated that the proposal is a necessary reform given technological advances and pace of today’s financial markets. 141 Although there have been technological advances to automate and streamline the customer and PAB reserve computations to enable carrying broker-dealers to perform a computation daily, there are still portions of the customer and PAB reserve computations that employees must perform manually (such as performing reconciliations or researching items in suspense accounts in order to properly credit the correct customer securities account), or required data inputs that a carrying broker-dealer may be unable to obtain in real time (such as data from a third party service provider). These manual items and unavailability of certain data in real time make it impractical to require carrying broker-dealers to perform a customer or PAB reserve computation in real time. Moreover, adjusting amounts deposited in the customer and PAB reserve bank accounts in real time would be impractical. B. Compliance with Daily Reserve Computation after Exceeding $500 Million Threshold 1. Proposal The Commission proposed to require that a carrying broker-dealer comply with performing a customer and PAB reserve computation daily no later than six months after having average total credits that are equal to or greater than $250 million. The purpose of the six-month compliance period in the proposed rule text was to provide time for a carrying broker-dealer to 140 See Whitehurst Letter; Anonymous Letter (Aug. 21, 2023). 141 See Whitehurst Letter; Cory Letter. 39 prepare to perform a customer and PAB reserve computation daily after it exceeds the proposed $250 Million Threshold. 142 The Commission stated that 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. 143 Once a carrying broker-dealer begins to perform customer and PAB reserve computations daily (because it exceeded the $250 Million Threshold), the Commission proposed to require the carrying broker-dealer to continue performing customer and PAB reserve computations daily for at least 60 days after it falls below the $250 Million Threshold. More specifically, under the proposal, a carrying broker-dealer could elect to perform computations weekly by notifying its DEA in writing at least 60 calendar days before reverting to a weekly computation. 144 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 proposed $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. 145 This would be the same process as when a carrying broker-dealer exceeded the proposed $250 Million Threshold for the first time. 2. Comments Received and Final Amendments The Commission sought comment on the proposed compliance period for beginning to perform customer and PAB reserve computations daily after a carrying broker-dealers exceeds 142 See Proposing Release, 88 FR at 45844. 143 See id. 144 See Proposing Release, 88 FR at 45844-45. 145 See Proposing Release, 88 FR at 45845. 40 the proposed $250 Million Threshold. 146 As discussed below in this section, the Commission received several comments regarding the proposed compliance period. One commenter suggested the Commission group carrying broker-dealers by size and select a transition period for compliance appropriate for carrying broker-dealers in each group to accelerate the transition to performing a customer and PAB reserve computation daily. 147 This commenter stated that six months may be longer than many large and sophisticated carrying broker-dealers need to complete the transition to a daily reserve computation after exceeding the proposed $250 Million Threshold. 148 Another commenter stated that the Commission should shorten the proposed six-month compliance period to three-months for a carrying broker-dealer to make the systems and staffing changes necessary to perform a daily computation after it exceeds the proposed $250 Million Threshold. 149 Finally, one commenter requested that the calculations for customer and PAB reserve computations be bifurcated, with the proposed $250 Million Threshold applied separately for the customer and PAB reserve computations, and that the six month compliance period apply when the particular type of average total credits (customer or PAB) crosses the proposed $250 Million Threshold. 150 As discussed in section II.A. of this release, the Commission is adopting a $500 Million Threshold as part of the final amendments. The six-month timeframe accounts for the fact that carrying broker-dealers of different sizes may need more or less time to comply with a 146 See id. at 45845-46. 147 See SIPC Letter at 1. The commenter did not suggest any specific groupings or time periods. Id. 148 See SIPC Letter at 1. 149 See Letter from Brad D. (Sept. 9, 2023). 150 See Raymond James Letter at 3. As discussed in section II.A.2. of this release, the Commission is adopting a single threshold, the $500 Million Threshold, for the customer and PAB reserve computations. As a result, a single compliance period once a carrying broker-dealer has exceeded the $500 Million Threshold is appropriate. 41 requirement to perform the customer and PAB reserve computations daily. The six-month timeframe, accordingly, provides a straightforward and uniform compliance period for carrying broker-dealers to meet if they exceed the $500 Million Threshold and must begin performing the customer and PAB reserve computations daily. A uniform compliance period also will be easier for the Commission, Commission staff and a carrying broker-dealer’s DEA to monitor for compliance because the same requirement will apply to all carrying broker-dealers. As such, the Commission is not modifying the final rule to provide for different compliance timeframes based on the size of a carrying broker-dealer, as commenters suggested. A six-month compliance period also helps to ensure a carrying broker-dealer that exceeds the $500 Million Threshold begins to perform a daily customer and PAB reserve computation within a reasonable period of time. In light of the enhancements to customer protection a daily reserve computation provides, it is important that carrying broker-dealers transition to a daily reserve computation as soon as practicable after exceeding the $500 Million Threshold. Shortening the compliance period to three-months, however, may not give carrying brokerdealers sufficient time to transition to a daily customer and PAB reserve computation, given the need to add resources in order to perform the computations, including hiring or assigning additional staff, upgrading systems, and making other operational changes. A six-month compliance period reasonably balances the importance of transitioning to a daily customer and PAB reserve computation soon after exceeding the $500 Million Threshold to enhance customer protection requirements, with the time period a carrying broker-dealer needs to make the changes required to comply with the rule. Therefore, the Commission is not modifying the final rule to provide for a three-month compliance period as a commenter suggested. 42 One commenter stated that the proposal would allow a carrying broker-dealer that is required to perform daily computations to revert to a weekly computation 60 days after notifying its DEA, but if it exceeds the proposed $250 Million Threshold, it would not be required to return to performing a customer and PAB reserve computation daily for six months. 151 The commenter stated that while the Commission assumes it may be infrequent that a carrying broker-dealer that reverts to weekly computations after falling below the proposed $250 Million Threshold re-crosses it shortly after because of increased customer activity, if such circumstances were to occur the carrying broker-dealer at issue would present the risk that the Commission is trying to address in the proposal for a period of six months. 152 Consequently, this commenter suggested that the Commission revise the rule so that a carrying broker-dealer that falls below the proposed $250 Million Threshold would enter a probationary period of six months during which time it would be required to immediately return to performing the customer and PAB reserve computations daily if its total credits re-crossed the threshold. 153 Another commenter suggested that the Commission provide a transition of not more than 30 days for a carrying broker-dealer that performs a customer and PAB reserve computation daily, reverts to a weekly computation because it falls below the proposed $250 Million Threshold, and then subsequently exceeds the proposed $250 Million Threshold and must perform a daily computation. This commenter stated that a carrying broker-dealer that formerly 151 See NASAA Letter at 3. 152 See id. 153 See id. at 3-4. 43 performed customer and PAB reserve computations daily is unlikely to require six months to reinstate procedures previously in effect. 154 In response to the comments that the Commission require a carrying broker-dealer to immediately return to performing a customer and PAB reserve computation daily if it exceeds the threshold for a second time, or only be permitted a three-month compliance period, the compliance period is designed to provide sufficient time for a carrying broker-dealer to prepare to perform a customer and PAB reserve computation daily after it exceeds the threshold. A carrying broker-dealer performing the customer and PAB reserve computations weekly which recrosses the $500 Million Threshold for a second or subsequent time will likely continue to need time to prepare to perform the customer and PAB reserve computations daily, because the carrying broker-dealer may have re-allocated resources when it reverted to a weekly computation. A return to performing a customer and PAB reserve computation daily likely means a carrying broker-dealer will require time to enhance its current operational resources in order to increase the frequency of the customer and PAB reserve computations once more. It also may be the case that a carrying broker-dealer may exceed the $500 Million Threshold for a second or subsequent time after a substantial period of time has passed. Finally, although a carrying broker-dealer may re-cross the $500 Million Threshold shortly after falling below it, and not yet have re-allocated resources required to perform a daily computation, consistent standards will be applied to all carrying broker-dealers that exceed the $500 Million Threshold after a long or short period of time as they will have the same risk profile. Therefore, a sixmonth compliance period is appropriate in this case. 154 See SIPC Letter at 2. 44 Some carrying broker-dealers’ average total credits may hover around the $500 Million Threshold from time to time. This will likely be an infrequent occurrence since there will only be a few carrying broker-dealers at any given time whose average total credits remain close to the $500 Million Threshold. 155 These carrying broker-dealers may choose to monitor and manage their average total credits to remain below the $500 Million Threshold or voluntarily perform the customer and PAB reserve computations daily to realize the beneficial impact on liquidity management resulting from the ability to make more frequent withdrawals from the customer and PAB reserve bank accounts. 156 Carrying broker-dealers that voluntarily perform the customer reserve computation daily also may apply the 2% debit reduction to the computation. 157 These alternatives will assist carrying broker-dealers in complying with the requirement to perform a customer and PAB reserve computation daily if they exceed the $500 Million Threshold. After review of the comments, the Commission is adopting the six-month compliance period after a carrying broker-dealer exceeds the $500 Million Threshold, and the 60-day written notice requirement to revert to a daily computation. 158 Therefore, under the amendments, a carrying broker-dealer must begin to perform a customer and PAB reserve computation daily no later than six months after its average total credits equal or exceed the $500 Million Threshold. This means, for example, that a carrying broker-dealer which exceeds the $500 Million Threshold for 12 filed monthly FOCUS Reports for a particular calendar year (i.e., FOCUS 155 For example, based on FOCUS Report data for the 2023 calendar year, there were three carrying brokerdealers with average total credits that were between $450 million and $500 million, and one carrying broker-dealer with average total credits between $500 million and $600 million. 156 See paragraph (e)(3)(iv) of Rule 15c3-3. 157 See paragraph (e)(3)(v) of Rule 15c3-3, as amended. 158 See paragraph (e)(3)(i)(B)(1) and (2) of Rule 15c3-3, as amended. 45 Reports filed for January through December in a calendar year), must begin performing a customer and PAB reserve computation daily no later than June 30th of the next calendar year. Finally, this amendment provides time for a carrying broker-dealer to prepare to perform a customer and PAB reserve computation daily after it exceeds the $500 Million Threshold. This preparation may involve adding resources to perform the computations, including, among other things, hiring extra staff, assigning additional staff, and updating or enhancing technology and software. C. Reducing the Aggregate Debit Reduction from 3% to 2% 1. Amendments to Rules 15c3-1 and 15c3-3 Under existing requirements, carrying broker-dealers—as part of the customer reserve computation—must reduce the value of debits items (i.e., customer-related receivables) in the customer reserve computation by either 1% (for debit balances in customers’ cash and margin accounts) or 3% (for aggregate debit items which includes all debit items). 159 Whether a carrying broker-dealer must apply the 1% or 3% debit reduction depends on how it calculates its minimum net capital requirement under Rule 15c3-1. Rule 15c3-1 requires that broker-dealers maintain a minimum level of net capital (meaning highly liquid capital) at all times. 160 The minimum net capital requirement for broker-dealers is the greater of a fixed-dollar amount specified in the rule and an amount determined by applying one of two financial ratios: the 15-to1 aggregate indebtedness to net capital ratio (basic method) or the 2% of aggregate debit items 159 See Note E(3) to Rule 15c3-3a (requiring the 1% debit reduction); paragraph (a)(1)(ii)(A) of Rule 15c3-1 (requiring the 3% debit reduction). The PAB reserve computation does not require either the 3% or the 1% debit reduction. See Rule 15c3-3a, Notes Regarding the PAB Computation, Note 4 (providing that Note E(3) to Rule 15c3-3a—which imposes the 1% debit reduction—does not apply to the PAB reserve computation); paragraph (a)(1)(ii)(A) of Rule 15c3-1 (imposing the 3% debit reduction in lieu of the 1% debit reduction of Note E(3) of Rule 15c3-3a for carrying broker-dealers using the alternative method). 160 See Rule 15c3-1. 46 ratio (alternative method). 161 Carrying broker-dealers electing the alternative method must maintain minimum net capital of the greater of $250,000 or 2% of their aggregate debit items included in the customer reserve computation. 162 In addition, a broker-dealer that uses the alternative method must provide the Commission with an “early warning” notice when the amount of its net capital falls below 5% of aggregate debit items. 163 Most carrying brokerdealers use the alternative method, including the 49 carrying broker-dealers that exceeded the $500 Million Threshold for calendar year 2023. 164 Under Rule 15c3-1, a carrying broker-dealer using the alternative method must reduce aggregate debit items (i.e., the total of all debit items in the customer reserve computation) by 3% when performing its customer reserve computation under Rule 15c3-3. 165 Conversely, Note E(3) to the customer reserve computation under Rule 15c3-3a requires a carrying broker-dealer using the basic method to reduce by 1% the total debit balances in customer cash and margin accounts (i.e., margin loan balances customers owe the carrying broker-dealer). 166 Both of these 161 See paragraphs (a)(1)(i) and (ii) of Rule 15c3-1. 162 See paragraphs (a)(1)(i) and (a)(2)(i) of Rule 15c3-1. Aggregate debit items in the customer reserve computation (FOCUS Line 4470) is total debit items before the 3% debit reduction. The Commission adopted the alternative method as part of the Commission’s continuing efforts to structure its rules to provide adequate protection for customers’ assets while recognizing the industry’s need for flexibility in efficiently allocating capital resources. See Net Capital Requirements for Brokers and Dealers; Amended Rules, Exchange Act Release No. 18417 (Jan. 13, 1982) [47 FR 3512, 3513 (Jan. 25, 1982)]. 163 See 17 CFR 240.17a-11(b)(2). This 5% of aggregate debits “early warning” threshold acts as a de facto minimum net capital requirement for broker-dealers using the alternative method since they seek to maintain sufficient levels of net capital to avoid the necessity of providing this regulatory notice. 164 Based on FOCUS Report data as of December 31, 2023, using the 3% aggregate debit item (Line 4471) and/or 2% aggregate debit items in computation of minimum regulatory capital requirements (Line 3870). Most broker-dealers that use the basic method to compute net capital are smaller broker-dealers that are not carrying broker-dealers, and generally have minimum net capital requirements that are less than the $250,000 required to use the alternative method. See also section IV.B.2. of this release (discussing the scope of affected broker-dealers). 165 See paragraph (a)(1)(ii)(A) of Rule 15c3-1. 166 See Rule 15c3-3a, Item 10 (debit balances in customers’ cash and margin accounts excluding unsecured accounts and accounts doubtful of collection). 47 provisions can increase the amount that must be on deposit (locked up) in the customer reserve bank account; however, the 3% debit reduction can result in an even larger increase in the deposit requirement. 167 This is because the reduction is larger (3% compared to 1%) and is applied to the total amount of debit items while the 1% debit reduction applies to a single category of debit items: customer margin loan balances. The Commission is lowering the 3% debit reduction to 2% in response to comments that a reduction as large as 3% would no longer be necessary if the requirement to perform a daily reserve computation is adopted. 168 This modification to the proposal is designed to recalibrate how Rule 15c3-3 addresses the risk that the amount on deposit in the customer reserve bank account is less than the net amount of cash owed to customers in light of the new requirement to perform daily customer and PAB reserve computations. As a commenter stated, “[u]nder a daily computation, the value of debit items and the amounts owing to customers on any given day are accounted for in the next day’s computation and the difference is protected via the following day’s deposit into the Special Reserve Bank Accounts” and therefore “[t]he amount of assets in the Special Reserve Bank Accounts would…more quickly reflect the amounts owing to customers on any given day and the value of debit items, thereby reducing the need for any cushion [(i.e., the 3% debit reduction)] to account for a potential mismatch.” 169 Similarly, another commenter stated that when the Commission adopted the 3% debit reduction in 1975 the purpose was to provide, in the event of a liquidation, an additional cushion of secured debit items which will be available to satisfy customers with whom the carrying broker-dealer effects 167 See Financial Responsibility Rules for Broker-Dealers, 78 FR at 51858. 168 See SIFMA Letter at 5; Raymond James Letter at 2; ASA Letter at 5; ASA Letter 2; ASA Letter 3. 169 See SIFMA Letter at 6. 48 transactions. 170 This commenter stated that a shift to a daily customer reserve computation enabled by technological advancements since 1975 will result in a more precise and up-to-date computation, thereby mitigating the risk that the 3% debit reduction addresses in the customer reserve computation. 171 The commenter went on to state that “a 1% deduction in line with that applied to other broker-dealers seems appropriate for firms that calculate net capital under the alternative method.” 172 Commenters suggested eliminating the 3% debit reduction that applies to carrying broker-dealers using the alternative method. This would then subject these carrying brokerdealers to the 1% debit reduction that applies to carrying broker-dealers using the basic method. For the reasons discussed below, the Commission is not taking this approach and instead is lowering the 3% debit reduction to 2%. In order to understand the Commission’s rationale for recalibrating Rule 15c3-3 in this manner, it is necessary to discuss the origins and purpose of the 3% debit reduction and its connection to Rule 15c3-1. Rule 15c3-3—when it was adopted in 1972—required carrying broker-dealers to reduce the value of debit balances in cash and margin accounts by 1% when performing the customer reserve computation. 173 Debit balances in cash and margin accounts was one of three categories of debit balances included in the customer reserve computation at that time (i.e., the 1% debit reduction did not apply to the total value of debits in the customer 170 See Raymond James Letter at 2. 171 See id. 172 See id. 173 See Rule 15c3-3 Adopting Release, 37 FR at 25229. 49 reserve computation). 174 In 1972, the Commission also proposed significant revisions to Rule 15c3-1 (the broker-dealer net capital rule). 175 The original rule prohibited a broker-dealer from having aggregate indebtedness that exceeded 2000% of its net capital, exclusive of exchange memberships and fixed assets (a 20-to-1 requirement). 176 Moreover, the rule did not apply to broker-dealers that were members of a securities exchange on the premise that these brokerdealers were subject to capital requirements promulgated by their respective exchanges. The 1972 proposed amendments—among other things—would apply Rule 15c3-1 to all brokerdealers (i.e., a uniform net capital rule) and change the minimum net capital requirement to the greater of a fixed-dollar amount and a ratio amount: the 15-to-1 aggregate indebtedness to net capital ratio (i.e., the basic method). Thus, as originally proposed in 1972, the amendments to Rule 15c3-1 did not include the alternative method of computing minimum net capital. While the 1972 amendments to Rule 15c3-1 were still pending, the Commission proposed further amendments to the rule as well as corresponding amendments to Rule 15c3-3. They included a 1974 proposal to add the alternative method of calculating minimum net capital. 177 The proposed alternative method would require a carrying broker-dealer to maintain a minimum level of net capital equal to the greater of $100,000 or 4% of aggregate debit balances 174 See id. In 1972, there were three categories of debit items in the customer reserve computation: Items 10, 11, and 12. Id. Item 10 was where the carrying broker-dealer recorded the value of debit balances in cash and margin accounts. Id. Today, there are six categories of debit items in the customer reserve computation: Items 10, 11, 12, 13, 14, and 15. See Rule 15c3-3a. Item 10 continues to be where the carrying broker-dealer records the value of debit balances in cash and margin accounts. Id. 175 See Net Capital Rule-Proposed Uniform and Comprehensive Regulation, Exchange Act Release No. 9891 (Dec. 5, 1972) [38 FR 56 (Jan. 3, 1973)]. 176 Net Capital Requirements for Brokers and Dealers; Amended Rules, 47 FR at 3512. 177 See Alternative Net Capital Requirement for Certain Brokers and Dealers, Exchange Act Release No. 11094 (Nov. 11, 1974) [39 FR 41540 (Nov. 29, 1974)]. 50 includable in the customer reserve computation. 178 At that time, the Commission acknowledged that the alternative method could result in lower minimum net capital requirements as compared with the basic method. 179 Given this impact, the Commission proposed a number of more stringent requirements for carrying broker-dealers using the alternative method, including that they would need to apply the 3% debit reduction in lieu of the existing 1% debit reduction in Rule 15c3-3. 180 In proposing the 3% debit reduction, the Commission explained that the proposed debit reduction would require a 100% reserve for customer funds not available for use by the broker-dealer, and an additional 3% commitment of the broker-dealer’s own liquid capital in the form of cash or qualified securities as an additional reserve and to insure the brokerdealer’s ability to finance its customer-related receivables. 181 The Commission adopted the proposed amendments to Rules 15c3-1 and 15c3-3 in 1975. 182 They included the alternative method for calculating the minimum net capital requirement and the requirement that carrying broker-dealers using the alternative method apply 178 Id. at 41541-42. 179 Id. at 41540. (“The Commission has determined to publish for comment a new concept to measure the capital adequacy of broker-dealers which would eliminate in part restraints presently imposed by the net capital ratio and aggregate indebtedness concepts which have served as the primary source of protection of customers and other broker-dealers for over 30 years. As a result of the numerous changes that have occurred in the securities industry over the last five years, the evolving future structure of the securities markets and the future needs of the nation’s corporate issuers to raise both equity and debt capital, it is important at this time to develop new approaches to the financial responsibility and capital adequacy of broker-dealers for both the protection of customers and to maintain sound and viable primary and secondary capital markets.”). 180 Id. at 41542. 181 Id. The Commission further explained that such additional reserves will be available to provide selfregulatory organizations and others with additional assets for the satisfaction of customer cash claims and to redeem customers’ securities which have been hypothecated or otherwise encumbered when necessary for the orderly winding up of the business of any broker-dealer. Id. 182 See Adoption of Uniform Net Capital Rule and an Alternative Net Capital Requirement for Certain Brokers and Dealer, Exchange Act Release No. 11497 (June. 26, 1975) [40 FR 29795 (July 16, 1975)]. 51 the 3% debit reduction. 183 In this regard, the Commission explained “that the objectives of the [alternative method] can only be achieved by further strengthening the custodial requirements and Reserve Formula safeguards developed for the protection of customer assets established by [Rule 15c3-3]” and therefore the alternative method “requires aggregate debit items in the Reserve Formula to be reduced by 3% rather than the 1% reduction of certain debit items which now exists.” 184 The Commission stated that this “reduction of debit items will thus provide, in the event of a liquidation, an additional cushion of secured debit items which will be available to satisfy customers with whom the broker or dealer effects transactions.” 185 Thus, the 3% debit reduction is designed to compensate for the potential lower minimum net capital requirement resulti [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ab22b82b66da12fe1. Public record. Not legal advice.