What is 15c3-3 for dummies?

15c3-3(b) Physical possession or control of securities . 15c3-3(b)(1) A broker or dealer shall promptly obtain and shall thereafter maintain the physical possession or control of all fully-paid securities and excess margin securities carried by a broker or dealer for the account of customers.

What is Rule 15c3-3 exemptions?

(3) Upon written application by a broker or dealer, the Commission may exempt such broker or dealer from the provisions of this section, either unconditionally or on specified terms and conditions, if the Commission finds that the broker or dealer has established safeguards for the protection of funds and securities of ...

Who is considered a customer for the 15c3-3 customer protection rule?

8 Subparagraph (a)(1) of Rule 15c3-3 defines the term "customer." Generally, a customer is any person from whom or on whose behalf the broker-dealer has received or acquired securities for such person's securities account .

What are the net capital requirements for brokers or dealers SEC Rule 15c3 1?

A broker or dealer engaged in activities as a market maker as defined in paragraph (c)(8) of this section shall maintain net capital in an amount not less than $2,500 for each security in which it makes a market (unless a security in which it makes a market has a market value of $5 or less, in which event the amount of ...

◆ Rule 15c3-3 of the SEC (Customer Protection Reserves and Custody of Securities) requires broker dealers that hold . customer securities to obtain and maintain possession and control of fully paid and excess margin securities they hold for customers .

What are non allowable assets for broker-dealers?

Nonallowable assets are assets not readily convertible into cash (e.g., fixed assets, intercompany receivables, securities not readily marketable, unsecured receivables (certain receivables are allowable for the first 30 days)).

What are 15c3 5 risk controls?

Exchange Act Rule 15c3-5 (Market Access Rule) requires firms with market access or that provide market access to their customers to “appropriately control the risks associated with market access so as not to jeopardize their own financial condition, that of other market participants, the integrity of trading on the ...

What is the minimum net capital for a broker-dealer?

A broker-dealer that acts as a prime broker must maintain net capital of not less than $1,500,000 .

What is the purpose of Rule 15c3 1?

Exchange Act Rule 15c3-1 (Net Capital Rule) requires that firms must at all times have and maintain net capital at specific levels to protect customers and creditors from monetary losses that can occur when firms fail .

What is the minimum net capital requirement for CFTC?

Each futures commission merchant (FCM) is required to maintain adjusted net capital of $1,000,000 or some greater amount as determined under CFTC Regulation 1.17(a)(1)(i).

What is SEC Rule 15c3 3 investopedia?

In the United States, rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client , under Rule 15c3-3 of the SEC. Rehypothecation occurs when a lender uses an asset, supplied as collateral on a debt by a borrower, and applies its value to cover its own obligations.

A Guide to SEC Rule 15c3-3 - SmartAsset (2024)

A Guide to SEC Rule 15c3-3 - SmartAsset (1)

Securities and Exchange Commission (SEC) Rule 15c3-3 requires brokerage firms to maintain secure accounts. Also known as the Customer Protection Rule, SEC Rule 15c3-3 is part of the Code of Federal Regulations. It ensures that brokerage clients can withdraw assets at any time, and a brokerage has to work to uphold it.

A financial advisor can help you answer questions about the state of your securities.

Inside 15c3-3

Rule 15c3-3 applies to all registered broker-dealers. It governs the custody and use of customer-owned securities and funds held by brokerages.

The rule requires brokerages to have physical possession of customers’ securities. Those paper stock certificates or other items need to be kept in a safe place.

Brokers can store certificates on their own premises or at an SEC-approved third-party repository. Brokerages also have to keep securities customers that have have been paid for in full separate from those bought on margin. Even those used as collateral on a margin account must be stored separately.

The rule requires brokers to keep a daily record of customer securities in their possession or under their control. If the brokerage has fewer than the required number of shares, it must acquire additional securities withing a few days to make up for the shortfall.

Cash and Reserves

Another part of Rule 15c3-3 requires the brokerages to keep customers’ cash separate from their own. This means a brokerage cannot use its customers’ cash as working capital to pay for its operations. Customer cash can only be used to finance customer securities purchases.

Once a week, the brokerage has to calculate how much cash or cash-equivalent securities it requires. Those then have deposited in a special reserve account. That account is isolated from customers’ money, which will be protected if the brokerage firm goes under.

If the amount in the reserve account is too low, the brokerage has to make a deposit to meet requirement. Failing to do so is a criminal offense and the brokerage has to cease operations.

SEC 15c3-3 History

A Guide to SEC Rule 15c3-3 - SmartAsset (2)

The Customer Protection Rule was added in 1972 as a reaction to the Paperwork Crisis that crippled Wall Street from 1967 to 1970. Before computers, traders completed trades using paper slips carried by messengers.

As trading volume grew to 13 million shares a day in 1968, it overwhelmed the paperwork process. As result, many firms couldn’t complete trades.

Updating Customer Protections

A Guide to SEC Rule 15c3-3 - SmartAsset (3)

The SEC has refined Rule 15c3-3 over the years. After the financial crisis of 2008-2009 and the failure of Lehman Brothers, the SEC changed its reserve requirements

More recently, Rule15c3-3 has addressed digital currency such as Bitcoin. Since these securities don’t have physical form, it hasn’t been clear how to safeguard them.

Brokerages have been using private keys and digital wallets to secure customers’ cryptocurrency. Still, one estimate found criminals stole $1.7 billion worth of digital assets in 2018.

A 2019 clarification from the SEC and the Financial Industry Regulatory Authority (FINRA) attempted to address that issue. Before that time, it was unclear how customers could retrieve their money if a broker lost the digital key or misplaced assets.

The clarification suggested brokerages could conform to the custody requirements of Rule 15c3-3 if they used an intermediary to match buyers and sellers. But if the firm that holds the digital key also matches orders, regulators says that isn’t secure enough.

Bottom Line

The nearly 50-year-old Rule 15c3-3 dating from the days of paper-based trading may need further updates. The ultimate goal is to get brokerages to apply the same level of safety to digital assets that old-fashioned physical securities get.

The Customer Protection Rule should cover your investments regardless of whether they’re in physical or digital form. If you have concerns about how a brokerage is handling those investments or want to find investments that may be more secure, you could consult a financial advisor.

Investing Tips

SEC Rule 15c3-3 isn’t the only rule protecting your investments. If you have questions about the state of your securities, consider talking to a financial advisor.SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
If you’re wondering what kind of securities and investments fall under SEC protections like this one, check in with SmartAsset’s investment guide. Not only can it walk you through various investments, but its investment calculators can help you determine which of them may be right for you.