January 29, 2023

Volume XIII, Number 29

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January 27, 2023

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No-Action Relief Granted with Respect to Classification of Certain Persons as Owners of Broker-Dealers for Purposes of the Net Capital and Customer Protection Rules

On December 10, 2012, the Securities and Exchange Commission granted no-action relief in a situation in which a broker-dealer classifies: (1) a person (in one or more classes of ownership of the broker-dealer) as an owner of the firm (and not as a customer) for purposes of SEC Rule 15c3-3 (also known as the Customer Protection Rule) and (2) such person’s contributions in the firm as equity capital for purposes of SEC Rule 15c3-1 (also known as the Net Capital Rule). This situation applies, for example, where owners of a proprietary trading firm trade their own capital through the firm.

The No-Action letter provides guidance that such classifications are permissible as long as the following conditions are met:

  1. The broker-dealer obtains an opinion of independent legal counsel that: (a) it is duly formed, validly existing and in good standing; and (b) its governing documents are enforceable in accordance with their terms, each in the jurisdiction in which the broker-dealer was formed, organized or incorporated.
     
  2. Upon request by the SEC or the Financial Industry Regulatory Authority, the broker-dealer must be able to establish that the person is an equity participant in the firm under applicable law in the jurisdiction in which the broker-dealer was formed, organized or incorporated.
     
  3. The relationship between the person and the broker-dealer, and all applicable conditions of the arrangement, must be documented in an executed agreement wherein the parties agree and acknowledge certain conditions noted in the No-Action letter. 
     
  4. The person annually thereafter reaffirms in writing his/her understanding of, and agreement with, the terms and conditions of the executed agreement.
     
  5. The broker-dealer ensures that the person is appropriately registered with the designated examining authority for any activity performed by the person for which registration is required. If the person is not a natural person, each person authorized to perform any activity for which registration is required on behalf of that person must be so registered. Further, the broker-dealer has implemented a system of supervisory compliance and controls that apply to such activities of the person and all others authorized to perform such activities on behalf of that person.

Click here for the No-Action letter.  

©2023 Katten Muchin Rosenman LLPNational Law Review, Volume II, Number 361
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About this Author

Our Financial Services Practice advises a broad spectrum of domestic and international fund managers, trading advisors, banks, brokerages and proprietary trading firms in all aspects of exchange-traded and over-the-counter commodities, securities and derivatives transactions. We help clients find business-based solutions and make business-driven decisions that are in compliance with applicable regulatory requirements. Our lawyers have extensive experience in the financial markets and are fully attuned to the need to provide advice quickly and efficiently in light of the time-sensitive and...

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