SEC Recent & Proposed Broker – Dealer Amendments – A Comprehensive Guide

• Auditing and Assurance
• ||
• January 12, 2024

We have an in-depth exploration of the SEC’s recent and proposed Broker-Dealer Amendments—a comprehensive guidebook decoding the intricate world of securities transactions and the evolving roles within the financial landscape.

Here, we work through:

1. What are Broker-Dealers?

2. Impact of FINRA’s Regulatory Notice 23-02

• Amendment Overview
• Implementation Steps
• Summary

3. SEC Proposes Amendments to Enhance Customer Protection Rule

• Rule 15c3-3 Overview
• Proposed Amendments
• Summary

4. Footnote 74: Exemption Process for Non-Carrying Broker-Dealers

• Amendments and Industry Response
• Details of Footnote 74
• Summary

5. Closing Thoughts

Let’s explore further.

1. What are Broker-Dealers?

Broker: A broker is an intermediary who facilitates securities transactions between buyers and sellers. Brokers execute trades on behalf of their clients and earn a commission or fee for their services.

Dealer: A dealer, on the other hand, participates directly in the buying and selling of securities by acting as a principal in transactions. Dealers buy securities for their own account and sell them to customers, profiting from the spread between the buying and selling prices.

Broker-dealers must register with the SEC and adhere to a set of regulations to protect investors and the securities markets’ integrity. These regulations cover various aspects of their operations.

Understand more about — What are broker-dealer Audits? And its rules and requirements.

Here, we will explore the latest and proposed amendments that have significantly impacted Broker-Dealers, paving the way for a new era of heightened transparency, accuracy, and efficiency across their operations.

These changes are pivotal not only in streamlining the internal processes but also in boosting customer confidence, reflecting a commitment to excellence in the financial services industry.

The amendments are as follows:

2. Impact of FINRA’s Regulatory Notice 23-02: A Comprehensive Overview

The financial industry is on the verge of significant changes with the impending implementation of these new amendments for broker-dealers outlined in Regulatory Notice 23-02, which is set to take effect on January 1, 2024.

These amendments, impacting the delivery and content of account statements, require proactive assessment and strategic planning by broker-dealers. This article is about the key aspects of these amendments, offering insights into their implications and the necessary steps for successful implementation.

Amendment Overview

These amendments govern the obligation of member firms carrying customer accounts to deliver account statements to customers.

Amendment	Requirement	Implications
Carrying Agreements	Clearly specify the responsibilities of the parties in fully disclosed carrying agreements.	Firms must review and potentially revise existing agreements to ensure compliance.
Transmission of Statements	Quarterly deliver the customer statements, with exemptions for specific transactions.	Broker-dealers need to adapt their processes to ensure timely and compliant statement delivery.
Use of Electronic Media	Compliance with the SEC standards for electronic media use in statement delivery.	Firms can leverage electronic media, necessitating alignment with regulatory standards.
Holding Customer Mail	Allow firms to hold mail based on investor instructions who will not be receiving mail at his/her usual address	Broker-dealers must establish procedures for handling mail holds within regulatory limits.
Information Disclosure:	Clear and prominent disclosure of introducing and carrying firms’ identities and contact information.	Statements must adhere to specified disclosure standards to enhance transparency
Assets Held Externally	Clear separation of assets are not carried on behalf of a customer	Enhanced clarity and transparency on customer statements for externally held assets.
Use of Logos and Trademarks:	Identification of entities displaying logos on statements and their relationship to the introducing or carrying firm. Detailed disclosures to convey relationships and affiliations.	The statement must be revised by the firms indicating the relationship whose logos have been incorporated within the statements.
Use of Summary Statements:	Specific criteria for joint provision of account statements and summaries with other financial institutions	Firms must carefully structure joint statements in compliance with outlined criteria with other financial institutions for their common customers together with summary statements.

Implementation Steps:

Assessing Applicability:

• Organizations need to review each amendment to determine its relevance to the organization.
• They should be prioritizing amendments based on applicability and potential impact.

Implementing Changes:

• Engaging internal stakeholders for strategic planning.
• Updating written supervisory procedures to align with the new amendments.
• Referring to complementary rules and regulatory notices for comprehensive compliance.

Summary:

As broker-dealers gear up for the implementation of FINRA’s Regulatory Notice 23-02 in 2024, a thorough understanding of these amendments is essential. By taking a proactive and strategic approach, financial entities can ensure compliance, transparency, and seamless adaptation to the evolving regulatory landscape. Whether preparing statements in-house or relying on third-party vendors, the industry must collectively navigate these changes while upholding supervisory obligations.

3. SEC Proposes Amendments to Enhance Customer Protection Rule

On July 12, 2023, the Securities and Exchange Commission (SEC) introduced proposed amendments to the Customer Protection Rule, Rule 15c3-3.

The aim is to heighten the protection of customers and broker-dealers, known as PAB account holders, requiring/requiring certain carrying broker-dealers to increase the frequency of their net cash computations.

This proposed change reflects the SEC’s commitment to ensure the safety of cash and securities that broker-dealers hold on their customers’ behalf.

Rule 15c3-3 Overview:

Rule 15c3-3 mandates broker-dealers to maintain a special reserve bank account, safe guarding cash and qualified securities based on the computation of net cash owed to customers. Currently, these computations and required deposits into the customer reserve bank account are conducted on a weekly basis.

Proposed Amendments:

The SEC’s proposal brings forth several significant amendments:

1. Increased Frequency for Larger Broker-Dealers:

• Carrying broker-dealers with average total credits equal to or exceeding $250 million must transition from weekly to daily customer and PAB reserve computations.
• The average total credits are calculated based on the sum of total credits reported in the 12 most recently filed month-end FOCUS Reports.

2. Accelerated Deposit Timeline:

• Deposits into special reserve accounts must be made no later than one hour after the opening of the banking business on the following business day.

3. Implementation Period for Compliance (6 Months):

• Carrying broker-dealers crossing the $250 million threshold are granted a six-month grace period to implement necessary system and staffing changes for daily computations.

4. Reversion to Weekly Computations:

• The proposal requires continued daily computations if a carrying broker-dealer’s average total credits fall below the $250 million threshold.
• Reverting to weekly computations necessitates written notification to the designated examining authority, submitted 60 days before the change.

Summary:

The SEC’s proposed amendments to Rule 15c3-3 signal a proactive approach to enhance customer protection in the broker-dealer space. While the changes may present challenges, they underscore the industry’s commitment to robust compliance and safeguarding customer assets.

Carrying broker-dealers are urged to prepare for the proposed amendments, ensuring a seamless transition to daily computations and compliance with the heightened standards set forth by the SEC.

The above-mentioned amendment is still in the proposal stage, and SEC has requested comments from stakeholders on all aspects of the proposed amendments.

4. Footnote 74: Exemption Process for Non-Carrying Broker-Dealers

The Securities and Exchange Commission (SEC) has introduced an alternative for non-carrying broker-dealers seeking exemptive status under SEC Rule 15c3-3.

This initiative addresses concerns raised by firms that don’t hold customer funds and don’t fit neatly into the existing exemptions listed on the X-17A-5 Focus Report.

SEC’s Footnote 74 provides a much-needed alternative for the Broker-dealers, categorized as “Non-Covered Firms.”

Amendments and Industry Response:

1. Increased Flexibility for Non-Covered Firms:

• Non-Covered Firms engaged solely in activities specified as Non-Covered Firm activities are no longer exempt under Rule 15c3-3(k). Therefore, they are relieved from Rule 15c3-3 requirements.
• Non-covered firms are required to request FINRA to amend their membership agreements to reflect this change.

2. Proposed Focus Report Enhancement:

• This would formalize the exemption process for firms, allowing them to explicitly state their exemption on mandatory submissions.

3. Advocacy for Simplicity:

• Proposing that firms be allowed to choose “exempt” or “non-exempt” without specifying the reason for the exemption. This streamlined approach aligns with the SEC’s efforts to offer alternative exemptions not currently listed in the filings.

Details of Footnote 74:

The SEC and FINRA jointly issued guidance regarding the characterization of U.S. registered broker-dealers under Securities Exchange Act Rule 15c3-3.

1. Identification of Non-Covered Firms:

• Non-Covered Firms include those not carrying accounts for customers, not receiving customer funds or securities, and not holding funds or securities for customers or proprietary accounts of other broker-dealers.

2. Change in Filing Requirements:

• Going forward, Non-Covered Firms will need to file exemption reports and periodic FOCUS reports differently, providing detailed descriptions of their business activities and stating specific financial activities they did not engage in during the reporting period.

Summary:

The SEC’s proposed amendments, particularly the introduction of Footnote 74, represent a positive stride toward simplifying the exemption process for non-carrying broker-dealers.

While industry stakeholders appreciate this move, ongoing collaboration with the SEC and FINRA is crucial to ensure a seamless transition and progress in addressing regulatory challenges.

5. Closing Thoughts

The financial industry stands at the threshold of transformative changes. These amendments underscore the SEC’s commitment to bolstering transparency, safeguarding customer assets, and fortifying the regulatory framework governing broker-dealers.

However, their successful implementation hinges upon meticulous planning, collaboration, and adherence to compliance measures.

Broker-dealers must gear up for a paradigm shift, navigating the intricacies of amended rules, from the revised account statement delivery protocols to the heightened requirements for customer protection.

This journey toward regulatory compliance signifies not just a shift in operations but also an industry-wide commitment to ensuring the integrity of securities markets and bolstering investor confidence.

Together, as the financial landscape evolves, broker-dealers and regulatory bodies forge ahead, setting the stage for a more transparent, secure, and efficient future.

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