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Temporary Exemption from Certain SEC Financial Responsibility Rules Amendments

The limited exemption will provide broker-dealers with more time to make necessary operational or systems changes.

On October 17, the Securities and Exchange Commission (SEC) issued an order[1] providing a temporary exemption for broker-dealers from certain of the financial responsibility rule amendments that were adopted on July 30, 2013. At that time, the SEC approved amendments to the net capital rule, the customer protection rule, the books and records rules, and the notification rules applicable to broker-dealers under the Securities Exchange Act of 1934.[2] The Financial Responsibility Rules Amendments will, among other things, affect a broker-dealer’s practices with respect to (1) proprietary accounts of broker-dealers, (2) the banks at which special reserve deposits may be deposited and maintained, (3) the holding of futures positions in a securities portfolio margin account, (4) securities lending and borrowing activities, (5) the treatment of free credit balances in connection with sweep programs, and (6) certain net capital calculations.[3] The Amendments were scheduled to take effect on October 21, 2013.

In light of the Amendments’ upcoming compliance deadline, some firms have determined that they will not be able to complete the significant operational and systems changes necessary to comply with certain of the Financial Responsibility Rules Amendments. As a result, the SEC issued its October 17 order, which provides broker-dealers a temporary exemption from some of the requirements of the Financial Responsibility Rules Amendments. The temporary exemption will sunset on March 3, 2014.

The rules subject to this time-limited exemption are highlighted below.

Rules Covered by the Temporary Exemption

Rule 15c3-3, except paragraph (j)(1), and Rule 15c3-3a

The changes to Rule 15c3-3 include provisions relating to the following:

  • Reserve calculations and possession or control requirements regarding proprietary accounts of broker-dealers

  • Reserve account requirements with respect to deposits at affiliated and unaffiliated banks

  • Handling of free credit balances and sweep programs

  • Treatment of “proprietary accounts” under the Commodity Exchange Act

  • Treatment of futures positions in securities portfolio margin accounts

Rule 17a-3

The changes to Rule 17a-3 cover the documentation of risk management controls.

Rule 17a-4

The changes to Rule 17a-4 deal with the notification that broker-dealers must provide in connection with a broker-dealer’s securities lending and borrowing activities.

Rule 15c3-1(c)(2)(iv)(E)(2)

This rule covers the required deductions in connection with cash and securities held in a securities account at a carrying broker or dealer, except where the account has been subordinated.

Rules Not Covered by the Temporary Exemption

The SEC is not granting a temporary exemption from the new requirements listed below, which were adopted in the Financial Responsibility Rules Amendments.

Rule 15c3-3(j)(1)

This provision involves a broker-dealer’s requirement to inform a customer regarding the amount and availability of the customer’s free credit balances.

The new requirements in Rule 15c3-1 (other than the requirement in Rule 15c3-1(c)(2)(iv)(E)(2))

The amendments to Rule 15c3-1 include the following:

  • The treatment of expense sharing agreements

  • The treatment of short-term capital contributions

  • A broker-dealer’s requirements in connection with that broker-dealer’s being insolvent

  • Temporary restrictions on capital withdrawals

The new requirements in Rule 17a-11

The amendment to Rule 17a-11 requires a broker-dealer to provide notice to the SEC and its designated examining authority in the event it becomes insolvent.

Conclusion

The temporary exemption should provide broker-dealers with additional time in which to make changes to their operations and systems to come into compliance with the Financial Responsibility Rules Amendments. In addition, the temporary exemption should provide the SEC with more time in which to address additional interpretive questions that broker-dealers may have regarding their requirements under the Amendments.


[1]See Order Providing Broker-Dealers a Temporary Exemption from the Requirements of Certain New Amendments to the Financial Responsibility Rules for Broker-Dealers under the Securities Exchange Act of 1934, Release No. 34-70701 (Oct. 17, 2013), available here.

[2]See Financial Responsibility Rules for Broker-Dealers, Release No. 34-70072, 78 Fed. Reg. 51,824 (Aug. 21, 2013), available here[hereinafter Financial Responsibility Rules Amendments or Amendments].

[3]. For more information on the Amendments, see our August 27, 2013 LawFlash, “SEC Amends Financial Responsibility Rules for Broker-Dealers,” available here.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume III, Number 292
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About this Author

Ignacio Sandoval, Morgan Lewis, Securities lawyer
Associate

A member of the firm’s securities industry practice, Ignacio A. Sandoval advises broker-dealers on matters relating to their obligations under federal securities laws and self-regulatory organization rules. Prior to joining Morgan Lewis, he was a special counsel in the Office of Chief Counsel in the SEC’s Division of Trading and Markets. Ignacio’s SEC experience includes matters involving domestic and foreign broker-dealer registration matters, anti-money laundering obligations, alternative trading systems, and high-frequency traders.

202-739-5201
John V. Ayanian, Securities Lawyer, Morgan Lewis
Partner

John V. Ayanian advises clients on broker-dealer and securities markets regulation. He counsels US and foreign financial institutions and markets on all aspects of their US securities trading, markets, and clearing activities. These include issues arising under US Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) rules. He also counsels broker-dealers on regulatory and transactional matters. Additionally, John advises market centers on issues involving market structure issues in the equity and options markets.

202-739-5946
Mark Fitterman, Morgan Lewis, Securities Attorney
Senior Counsel

A former associate director at the US Securities and Exchange Commission (SEC), Mark D. Fitterman advises clients on federal and state broker-dealer regulations and compliance. He also guides clients through SEC, Financial Industry Regulatory Authority (FINRA), exchange and state examinations, investigations, and enforcement actions. Mark’s regulatory and compliance practice includes counseling clients on financial responsibility rule compliance and trading and execution issues, as well as federal and state registration and compliance issues.

202-739-5019
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