New Guidance for Characterizing Certain Broker-Dealers Under the SEC’s Customer Protection Rule

August 18, 2020 by ACA Compliance Group


On July 1, 2020, the U.S. Securities and Exchange Commission ("SEC") and Financial Industry Regulatory Authority (“FINRA”) issued updated guidance on the characterization of U.S. registered broker-dealers under Securities Exchange Act (“Exchange Act”) Rule 15c3-3 (the “Customer Protection Rule”). In the past, FINRA has required all broker-dealers to claim an exemption under Rule 15c3-3, as provided in paragraph (k), in their membership agreements even when their business activities did not require the exemption. Some examples of these instances would include broker-dealers that:

  • Never receive customer funds or securities, or self-clear customer transactions through a separate account
  • Do not, directly or indirectly, receive or hold funds or securities for customers or otherwise owe such funds and securities to customers
  • Do not carry accounts of or for customers
  • Do not carry proprietary accounts of other broker-dealers

The July guidance, which was in the form of frequently asked questions, refers to such broker-dealers as “Non-Covered Firms.” This new guidance states that Non-Covered Firms that solely engage in Non-Covered Firm activities are no longer characterized as exempt under Rule 15c3-3(k), and thus no longer subject to any Rule 15c3-3 requirements. Consequently, such broker-dealers can no longer claim the exemption from the rule in their FINRA membership agreements, FOCUS report filings, and annual exemption reports as required under the provisions of Exchange Act Rule 17a-5.

Any broker-dealer that determines itself to be a Non-Covered Firm engaging in Non-Covered Firm activities may ask FINRA to amend its FINRA membership agreement to reflect this change. The broker-dealer should state in this request that it is not required to comply with Rule 15c3-3 by reason of the SEC’s guidance set forth in circumstances described in footnote 74 to Exchange Act Release No. 34-70073 (July 30, 2013). Such broker-dealers generally include:

  • Private placement agents that effect securities transactions on a best efforts or subscription basis (not on a firm commitment basis) and do not receive or hold customer funds or securities
  • Merger and acquisition advisory firms that refer securities transactions to other broker-dealers
  • Broker-dealers that provide technology or platform services and do not receive or hold customer funds or securities

The guidance also states that broker-dealers who engage in business activities that fit within the paragraph (k) exemption will continue to be exempt. These broker-dealers are not required to change their FINRA membership agreement unless they at some point restrict their business activities to those of a Non-Covered Firm.

Going forward, Non-Covered Firms will have to file annual exemption reports and periodic FOCUS reports differently. Firms that no longer need to claim a Rule 15c3-3 exemption with respect to Non-Covered Firm activities should describe their business activities in their exemption reports and also state that, during the reporting period, they:

  1. Did not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers other than money or other considerations received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Exchange Act Rule 15c2-4
  2. Did not carry accounts of or for customers
  3. Did not carry broker-dealer proprietary accounts as defined in Exchange Act Rule 15c3-3

In addition, a Non-Covered Firm should no longer indicate in its FOCUS report that it is claiming an exemption from Rule 15c3-3 with respect to Non-Covered Firm activities. Specifically, Items 4550, 4560, 4570 and 4580, Part II or Part IIA, under “Exemptive Provision under Rule 15c3-3” should be left blank.

ACA Guidance

Given these rule changes, broker-dealers should review their FINRA membership agreements regarding business activities and Customer Protection Rule exemptions to determine if they no longer require a 15c3-3(k) exemption. In addition, firms should also consider any required changes to the reports they file pursuant to Rule 17a-5. Finally, the written supervisory procedures should also be updated to reflect any changes.

For More Information

For more information, please contact your ACA consultant or Dee Stafford.

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