Broker-Dealers Slammed with Tougher Custody Requirements

Stockpiling money

The SEC has instituted new reporting requirements for broker-dealers.* The rules are designed to strengthen audit requirements and give the regulator better insight into the way securities firms maintain custody of customers’ accounts. Broker-dealers will now be required to file new quarterly reports by the end of 2013 and face new annual reporting requirements by June of 2014.

Big Change With Tight Deadline

While not directly increasing the capital requirements for brokers, some of the rule changes will disqualify certain instruments previously used as capital and will require more careful tracking of capital overall.

Onnig Amendments

Rule 15c3-1 ~ Net Capital Rule

Broker-dealers must maintain more than a dollar of highly liquid assets for each dollar of customer liabilities.

Rule 15c3-3 ~ Customer Protection Rule

Broker-dealers are prohibited from using customer’s funds for their own proprietary business.

Rule 17a-13 ~ Quarterly Security Count Rule

Firms must count, examine and verify that the securities that are held in the customer accounts, and their own accounts, are indeed available. Any difference must be charged against capital. Statements showing securities held, cash positions and activity must be sent to customers at least quarterly.

While the change in rules has been expected, the short implementation period means that many firms will be pressed to make the necessary changes in time to remain compliant.

One important change that could pose serious issues for some firms is the newly created ban on holding cash at affiliated banks. Firms that currently utilize affiliated banks for custody accounts will need to make substantial changes in a relatively short period of time.

Custody Rules for Broker-Dealers: The Onnig Amendments

The new rules amend the Exchange Act, specifically Rule 15(c)3 and 17(a). These rules established the guidelines for net capital requirements, customer protection, record-keeping and notification rules for broker-dealers.

Together the rules are frequently called the “Onnig Amendments” after an SEC staffer who helped develop the rules in 2007. They helped codify the important requirement of segregating customer accounts from the brokerage’s own accounts.

The New Tighter Custody Requirements

Broker-dealers have long faced custody rules regarding the holding of customer’s assets. This latest round of amendments impacts the severity of the reporting requirements and where assets can be held. Broker-dealers and affiliated banks will need to address the reporting and custody issues soon.


* Broker-dealers are firms that trade securities for customers (i.e., brokers) and for their own accounts (i.e., dealers).


About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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