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A Guide to SEC Rule 15c3-3

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Here's a guide to SEC rule 15c3-3.

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.

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 brokerage cannot 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

Here's a guide to SEC rule 15c3-3.

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.

In the confusion, many securities were lost or stolen. One estimate is that organized crime rings took $400 million in securities during the crisis. Many Wall Street firms went under as customers took heavy losses.

SEC Rule 15c3-3 was meant to reduce the risk of another such crisis. Together with computer trading, it allows the multi-billion share daily trading volumes of the 21st Century to occur without a similar crisis

Updating Customer Protections

Here's a guide to SEC rule 15c3-3.

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. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will 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.

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The post A Guide to SEC Rule 15c3-3 appeared first on SmartAsset Blog.

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