Home News Proposed Rule Change to Enhance Client Protection in Broker-Dealer Operations

Proposed Rule Change to Enhance Client Protection in Broker-Dealer Operations


The Securities and Exchange Commission (SEC) is taking steps to strengthen the regulations that govern how broker-dealers secure sufficient cash to safeguard clients’ holdings in the event of a firm’s failure.

In a unanimous vote, all five of the SEC’s commissioners have put forth a proposal to require broker-dealers to calculate their cash reserves in a reserve bank account on a daily basis, as opposed to the current weekly schedule.

Maintaining the Segregation of Customer Funds

SEC Chairman Gary Gensler emphasizes that the protection of customers’ cash and securities from a broker-dealer’s own accounts is a fundamental principle of our securities laws. With the rapid pace, immense scale, and high volume of today’s market activity, Chairman Gensler believes that customers would benefit greatly if broker-dealers with substantial credit balances perform daily calculations and deposits into reserve accounts.

Aligning with Modern Market Realities

The proposed update aims to align the regulations with the dynamics of today’s markets, including the inflows, fluctuations, and balances experienced by broker-dealers. The SEC’s Customer Protection Rule would be amended to mandate that broker-dealers maintaining at least $250 million in client or investor cash in PAB (Proprietary Accounts of Broker-Dealers) accounts perform daily calculations of their cash reserves. If necessary, they would be required to increase their deposits to ensure adequate coverage for clients.

Seeking Public Input

Before finalizing the rule change, the SEC invites public comments on the proposed amendment. Interested parties will have 60 days from the date of publication on the SEC’s website, or 30 days from its appearance in the Federal Register (whichever period is longer), to express their views.

This proposed rule change highlights the SEC’s commitment to enhancing client protection measures in the operations of broker-dealers. By adapting the regulations to reflect the realities of today’s rapidly evolving markets, the SEC aims to ensure the continued safety and security of clients’ investments.

New Reserve Rule Proposed for Broker-Dealers

The Securities and Exchange Commission (SEC) is considering a new rule that would impact approximately 63 broker-dealers, according to an analysis conducted by the law firm Morgan Lewis. Under this proposed rule, brokers who hold cash amounts of less than $250 million for their clients would be allowed to continue with their current weekly calculation schedule.

For covered brokers, the new rule would require them to compute their reserve levels based on the previous day’s closing balance. Subsequently, any required deposits to cover any shortfall would need to be made within one hour of the bank’s opening on the following day. As an example, if a broker performed their calculation on a Tuesday using Monday’s closing balance, they would need to deposit any necessary funds on Wednesday morning, assuming it is a business day.

This proposal gained notable attention thanks to its unanimous support. It is worth mentioning that, at the time, the two Republican commissioners have expressed criticism towards many of the initiatives introduced by Gensler, often echoing industry concerns that the SEC is rushing through a wide range of issues.

Commissioner Mark Uyeda, who is also a Republican, expressed support for the proposal citing concerns about substantial market volatility potentially leading to underfunded reserve accounts under the current weekly-calculation schedule. He noted that tracking these calculations on a daily basis is now less costly than in the past, and it can result in improved customer protection and reduced systemic risk.

As of now, this proposed rule remains under consideration by the SEC.


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