SEC Proposes Requiring Daily Calculation of Customer and PAB Reserve Requirements for Certain Broker-Dealers
July 17, 2023
On July 12, the Securities and Exchange Commission (the “SEC”) proposed amendments to Securities Exchange Act Rule 15c3-3 (the “Customer Protection Rule”) to require carrying broker-dealers with $250 million or more in average total credits to perform the customer and PAB reserve account calculations and make any required deposits daily, rather than weekly (the “Proposal”).
The Commission unanimously approved publishing the Proposal for public comment.
Currently, the Customer Protection Rule requires carrying broker-dealers (i.e., broker-dealers that maintain custody of customer securities and cash) to calculate the amount required to be deposited into the customer reserve and PAB (i.e., broker-dealer proprietary) bank accounts on a weekly basis. The stated purpose of the Proposal is to reduce mismatches that may arise over the course of a week between the amounts deposited in the reserve account and the amount the broker-dealer actually owes customers and PAB account holders.
For example, take a carrying broker-dealer that performs its customer reserve computation on Monday, and determines its credits exceed its debits by $1 billion. It currently only has $900 million in the customer reserve account. On Tuesday morning, the broker-dealer deposits $100 million in the customer reserve account; the account now contains $1 billion, as required by the Customer Protection Rule. On Wednesday, the broker-dealer receives $500 million from customers. For the rest of the week, the broker-dealer does not facilitate any customer transactions generating debits, and customers do not redeploy the $500 million into securities. The broker-dealer now owes $1.5 billion to customers—the original $1 billion plus the new $500 million. However, under the current Customer Protection Rule, the broker-dealer would not be required to perform its customer reserve computation until the next Monday, and the required deposit of $500 million would not need be not made until the next Tuesday. Thus, from Wednesday until the following Tuesday, the broker-dealer would owe customers $1.5 billion, but would only have $1 billion in the customer reserve account—a $500 million shortfall. This could expose customers to losses were the broker-dealer to fail before Tuesday, and could strain or even drain the SIPC Fund, which covers customer losses up to $500,000 ($250,000 for cash).
The Proposal would require carrying broker-dealers with $250 million or more in average total credits to perform the customer and PAB reserve account calculations and make any required deposits daily, rather than weekly. The Proposal would define “average total credits” as the arithmetic mean of the sum of the total credits reported in its customer and PAB reserve computations in its twelve most recently filed month-end FOCUS Reports. The calculation is therefore a 12-month rolling average, and the Proposal would require a carrying broker-dealer to comply with the daily computation requirement no later than six months after having exceeded the $250 million threshold.
By requiring carrying broker-dealers exceeding the credit threshold to perform the reserve calculation and make any required deposits daily, the Proposal would reduce the timeframe over which mismatches could develop and persist. The Proposal would require broker-dealers subject to the daily requirement to perform the calculation on a given business day based on amounts as of the close of business the previous business day, and to make any required deposit within the first hour of the following business day. For example, a broker-dealer performing the computation on Tuesday would use figures as of the close of business Monday, and then make any required deposit Wednesday morning.
The SEC estimates that 63 broker-dealers would be subject to daily computation using the proposed methodology and threshold.Comments on the Proposal are due 30 days from its publication in the Federal Register or on September 11, 2023, whichever is later. The most significant questions posed by the Commission relate to the proposed $250 million threshold, including whether it should be set higher or lower, whether there should be a different standard altogether (e.g., total assets, net capital), or if the daily computation requirement should simply apply to all carrying broker-dealers.