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Claiming exemption as per Footnote 74 under SEC’s Customer Protection Rule


The U.S. SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority, Inc.) recently published a Frequently Asked Questions (FAQ) about the “exemption provisions” of SEC Rule 15c3-3, the consumer protection rule. Before this guideline, even though they did not meet all the requirements for (k) (2) (i) or (k) (2) (ii) on the FOCUS report of SEC, firms were still availing these exemptions. To address this issue, the SEC issued footnote 74, which allows these “Non-Covered Firms” to correctly avail for an exemption under Rule 15c3-3.

Footnote 74
If a firm qualifies for footnote 74, it may file an exemption report instead of a compliance report and can be classified as a “Non-Covered Firm”. According to the SEC’s, a firm must meet certain conditions to be eligible for Footnote 74:

  • Do not carry accounts of or for customers;
  • Do not receive, hold or owe, directly or indirectly, funds or securities for or to the customer, other than money or any other consideration received and as soon as practicable;
  • Not eligible for an exemption (k) (2) (i) or (k) (2) (ii); and
  • Do not hold proprietary accounts of broker-dealers (PAB) accounts.

Claiming exemption under footnote 74
A Non-Covered firm should no longer claim an exemption from Rule 15c3-3 for Non-Covered Firm activities in its FOCUS Report. Specifically, Items 4550, 4560, 4570, and 4580 on the FOCUS Reports should be left blank. In an exemption report, a Non-Covered Firm must include a description of all of its business activities and a statement that it has complied with the requirements of footnote 74 listed above during the reporting period. Additionally, once they have determined that they meet the exemption status as per footnote 74, these Non-Covered Firms must modify/amend their membership agreement with FINRA accordingly.

What types of businesses are considered “Non-Covered Firm”?
These footnote 74 brokers dealers are called Non-Covered Firms. The main difference between Non-Covered Firms and firms claiming an exemption provision under (k)(2)(i) is that (k)(2)(i) firms can receive funds and securities from the client provided that they are deposited and held in a special bank account in the broker dealers’ name. Whereas Non-Covered Firm do not receive funds and securities from clients and, if received, they will immediately transfer client funds and securities to the client or unaffiliated bank.

In summary, according to the guidance contained in the SEC, the following types of firms may be considered Non-Covered Firms:

  • Private placement agents who transact securities based on their best efforts or subscription (not based on firm commitments) and do not receive or hold client funds or securities;
  • M&A (Merger and acquisition) consulting firms that refer securities transactions to other broker-dealers;
  • Brokers dealers (BD) provide technology or platform services and do not receive or hold client funds or securities.

Requirements for meeting multiple exemptions
There will be instances where a firm will conduct many different business activities, with some activities falling under (k) (2) (i) and others under (k) (2) (ii). If so, firms should indicate both exemptions on the Focus report. 

In the case of a firm carrying out different business activities, some fall under (k) (2) (i), others under (k) (2) (ii), and others under footnote 74, the firm cannot claim an exemption under Rule 15c3-3 and cannot claim an exemption on the FOCUS report. Instead, the firm should explain its non-covered status in the memo item of the FOCUS report.

At AJSH, we assist our clients with SEC filings such as S-1, F-1 Regulation-A, 10Qs and 10Ks, internal audits, government audits, various corporate matters (company incorporation, statutory audits, ROC compliances, company winding-up) in India by providing them with adequate support and guidance from our end. If you have any questions or wish to know more about SEC’s customer protection rule exemption as per Footnote 74, kindly contact us.


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