SEC Rule 15c3-3 - Federal Lawyer
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SEC Rule 15c3-3

John W. Sellers
Attorney John W. Sellers
SEC Rule 15c3-3 Team Lead
Former DOJ Trial Attorney
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SEC Rule 15c3-3 is among the most important logistical regulations that broker-dealers and securities professionals and firms have to follow. While Rule 15c3-3 is rarely in the news, its mandates form the backbone of the compliance obligations that impact the daily business of securities trading. Complying with the strict requirements in Rule 15c3-3 is absolutely critical. Failing to do so can imperil the future of even the most successful securities firm.

The SEC compliance lawyers at Oberheiden P.C. have guided numerous securities firms through the process of complying with Rule 15c3-3. With our legal advice, securities professionals and firm executives have been able to rest assured that they are doing all that is necessary to comply with these important federal laws.

SEC Rule 15c3-3: An Overview

When Congress passed the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) it gave the U.S. Securities and Exchange Commission (SEC) the power to promulgate rules to further the purposes of the Act. Because the SEC is an executive branch, this has meant that the rules of enforcement can change rapidly and in response to pressing needs in the securities world, so long as those rules did not violate the intentions of Congress when it passed the Act.

One of those rules is SEC Rule 15c3-3, a regulation that is codified at 17 C.F.R. § 240.15c3-3. This extensive Rule lays out important recordkeeping requirements that securities professionals and firms have to follow. It also requires securities companies to maintain a reserve account in which they put any amounts that are payable and owed to customers. Finally, Rule 15c3-3 requires securities firms to keep their company’s funds separate from their clients’ funds.

The goal of the Rule is consumer protection. It ensures that securities firms and brokerages have enough cash on hand to let their clients withdraw their assets whenever they want, keeps companies from commingling funds, and protects clients in the event that a securities company fails.

However, the Rules’ requirements are onerous for securities firms, especially small ones that are just getting started. The penalties for failing to comply with them, unfortunately, are severe and potentially even criminal.

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Recordkeeping Requirements

Rule 15c3-3(b) requires all brokers or dealers to acquire and hold their customers’ securities. This means maintaining physical possession or control of the paper stock certificates or other tangible instruments. That possession needs to happen “promptly,” though temporary lags can occur so long as broker-dealers act in good faith and the violation is the result of normal business operations. Once obtained, broker-dealers have to keep these documents and instruments in a safe place.

The physical securities do not have to be directly possessed by the broker-dealer or his or her firm. Securities agents can comply with the law by storing the physical instruments with a third-party, so long as it is one that is approved by the SEC.

These recordkeeping and possession obligations apply to:

  • Fully-paid securities, and
  • Excess margin securities.

The Customer Reserve Bank Account

While the recordkeeping and physical possession requirements of Rule 15c3-3 are demanding, once compliance is met they require little in the way of ongoing maintenance.

The Customer Reserve Bank Account mandate of Rule 15c3-3(e), on the other hand, is a constant headache for brokerage firms and securities professionals.

Rule 15c3-3(e) requires all broker-dealers and their firms to maintain Customer Reserve Bank Accounts and deposit into them any funds that they owe to their customers. Calculating how much money needs to be deposited must be done at least once per week. That calculation requires totaling up the amounts that their customers owe to the firm and the amounts that the firm owes to the customer – calculations made difficult because they have to include both cash and the value of any securities in play. If the firm owes the customer anything, then it has to be deposited in the Customer Reserve Bank Account for the customer’s exclusive use.

No Commingling of Funds

While the terms of Rule 15c3-3 are more precise and the compliance obligations explicit, the general theme of many of the Rule’s major provisions is to segregate the firm’s money from the client’s money. By doing so, it protects the client from intentional wrongdoing, like embezzlement, as well as business failures, like if the securities firm goes bankrupt or winds down. By taking rigid steps towards segregating the funds, it prevents them from getting commingled and ensures that the customer has access to what is theirs.

Unfortunately, this is easier said than done, and the detail into which Rule 15c3-3 goes to specify how firms can comply with the requirement is minute.

Penalties of Non-Compliance

Failing to comply with the demands of Rule 15c3-3 are significant. They include administrative sanctions by the SEC and the Financial Industry Regulatory Authority (FINRA), civil litigation, and potentially even criminal charges.

Additionally, brokerage firms also face debilitating reputational harm for failing to comply with the SEC’s Customer Protection Rule. If it gets out that your firm is not securely holding on to the securities instruments that it has bought on behalf of its customers, or that it does not have sufficient assets in reserve should the unthinkable happen, it can make people think twice about tapping your organization to handle their money for them. Even if the allegations of misconduct prove to be empty, the negative publicity that they gain can hobble your company for years to come.

Frequently Asked Questions About Rule 15c3-3 and Oberheiden P.C.

Who is Covered by Rule 15c3-3?

 

Basically everyone in the securities industry is covered by Rule 15c3-3. Unless exceptions apply, it covers to all registered brokers or dealers, including those that are registered as security-based swap dealers or participants. The exceptions to Rule 15c3-3 coverage are slim. It is generally wise to presume that you fall under the guise of Rule 15c3-3 if you are a securities professional.

How Does Rule 15c3-3 Cover Cryptocurrency?

 

Cryptocurrencies and other digital assets create a compliance mess when it comes to Rule 15c3-3. Legally, Rule 15c3-3 requires broker-dealers to obtain prompt possession of physical securities instruments that they purchase with their clients, and to then maintain safe possession or control of those tangible documents.

But cryptocurrencies do not have these tangible instruments. The closest that they come to a tangible asset is the “wallet” that holds cryptocurrencies on the blockchain and the access code that opens that wallet.

The SEC has fielded numerous requests for guidance on the issue, releasing a statement on the topic back on July 8, 2019, and soliciting comments from industry insiders and practitioners in December, 2020.

It seems likely that Rule 15c3-3 will be amended in the near future to account for cryptocurrencies and to make concrete rules for how broker-dealers can comply with the law when there are no tangible securities documents to hold on to.

Is Rule 15c3-3 Going to Change in the Future?

 

It seems likely that the SEC will amend its Rule 15c3-3 in the coming years to better regulate cryptocurrency and instruct broker-dealers how to “possess” a digital asset’s equivalent to a traditional security’s physical certificate.

However, even without the pressing need to refine Rule 15c3-3’s recordkeeping obligations, the Rule is a frequent target for reactionary changes within the securities field. In the past 25 years alone, Rule 15c3-3 has been changed no fewer than five times: In 2019, 2013, 2003, 2002, and 1998. Nearly every amendment was meant to plug another hole in securities regulation that had been exploited by bad actors to defraud clients of their funds or to maximize profits at their clients’ expense or risk.

Keeping up with the inevitable updates to Rule 15c3-3 is a continuous task for securities professionals and their compliance teams.

Why Did the SEC Create Rule 15c3-3?

 

Rule 15c3-3 was first implemented by the SEC on November 29, 1972, in reaction to the so-called “Paperwork Crisis” that plagued Wall Street trading in the late 1960s and early 1970s. During these years, the number of securities transactions exploded, but the firms conducting the transactions still completed the trades by handing physical paper certificates from the seller to the buyer. As this became more and more unmanageable, some of these tangible securities certificates began disappearing in the hands of thieves, costing investors millions of dollars.

Instantaneous computer trading eliminated the problem, but it took years to make the practice reliable. The SEC implemented Rule 15c3-3 in an attempt to prevent the problems from occurring again.

Why Doesn’t Oberheiden P.C. Call Itself the Best SEC Compliance Firm?

 

Because that is something that we prefer our clients to say, instead. Our law firm is home to senior level attorneys and investigators who have extensive experience as regulators and lawyers at FINRA and the SEC. They have used that intimate understanding of law enforcement techniques to help securities professionals comply with the labyrinthine regulations that are promulgated by these same agencies. Many of our clients have praised the legal guidance that Oberheiden P.C. has been able to provide for them.


The SEC Compliance Lawyers at Oberheiden P.C.

These are just three of the most important and demanding compliance requirements that Rule 15c3-3 imposes on securities professionals and the firms for which they work. There are other nuanced compliance obligations that may or may not apply to the business practices at your particular firm. If they do apply, though, the onus is on you to ensure compliance or to face the consequences.

The SEC compliance lawyers at Oberheiden P.C. have guided hundreds of securities professionals and companies through the treacherous and often confusing obligations set by SEC Rule 15c3-3. Contact them online or call their law office at (888) 680-1745 to get an experienced team of securities litigation attorneys on your side to ensure that your legal obligations are being met.

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