SEC Passes New Broker-Dealer Amendments for Financial Responsibility

In last week's Compliance blog posting, we discussed a series of new rules announced by the Securities and Exchange Commission (SEC) on July 31, 2013 that brought changes to compliance reporting requirements for broker-dealers (BDs). For this week, we will be focusing on newly adopted amendments, released also on July 31st, related to BD financial responsibility. Both the compliance reporting requirement rules and the financial responsibility amendments, each within the purview of the Securities Exchange Act of 1934, aim to offer protection to those investors who work with broker-dealers in managing their assets.

The new amendments from July 31st particularly address changes to "financial responsibility" rules, including the Customer Protection rule (Rule 15c-3-3), the Net Capital rule (Rule 15c3-1), the Books and Records rules of Section 17 (17a-3 and 17a-4), and the Notification Rule (17a-11). A wide array of modifications were made, including:

  • The creation of new requirements under the Customer Protection rule for customer disclosure, notice and affirmative consent for cash that is directed from a securities account to a money market or bank deposit product;
  • A mandate under the Net Capital rule that requires BDs to deduct "the excess of any deductible amount over the amount permitted by SRO rules" from the net capital;
  • The documenting of BD market, credit and liquidity risk management controls under the amended Books and Records rule; and
  • The establishment, under the Notification rule, of notification when a BD goes beyond a certain limit for repurchase and securities lending activities.

While these amendments may not fully safeguard against the loss of investor assets in cases of misappropriation or other misconduct by a broker-dealer, they are a step closer in allowing the SEC to better regulate and monitor BD wrongdoings in the market place. These changes will go into effect 60 days after its publication in the Federal Register.

For more information or assistance on other compliance topics, please contact us at (619) 278-0020, or email us at info@corecls.com.