1
Q
Rule 15c3-3 Customer Protection Rule
A
- 1975
- places requirements on BDs to promptly obtain posession or control of securities on settlement
- Ensures BDs have sufficient funds on hand to meet customer liquidations
2
Q
Special Reserve Calculation
A
- for benefit of customers
- required for clearing BDs only ($250K BDs)
*Reserve Computation: must perform a weekly computation comparing the amoutn of monies that customers owe the firm (customer debits) to monies the firm owes customers (customer credits) - Intent: ensure the firm has enough money to pay existing customer claims
3
Q
Customer Reserve Account computation
A
**Customer debits: **
* debit balances in customer accounts
* fails to deliver for customer accounts
* stock borrowed for customer accounts
Customer Credits
* Credit balances in customer accounts
* failes to receive for customer accounts
* stock loand from customer acounts
* bank loans using customer collateral
4
Q
if aggregated customer debits exceed credits for the customer reserve calculation
A
then in a liquidation the net result if that the customers owe the firm money.
in this case no funds have to be desposited in the reserve account
5
Q
if aggregated credits exceed debits for the customer reserve calculation
A
the net results is a liability to customers
the excess portion representing the net liablity must be deposited to a special reserve bank account
6
Q
Special Reserve Bank Account
A
- a letter must be obtained from the bank stating that the bank understands its a “special reserve account” and that no liens can be placed on the account by the bank
- funds are solely payable to customers in the event of liquidation
- The bank cannot claim the accounts assets to meet the other liabilities of the BD
7
Q
Customer Reserve Fund deposits
A
- computation is performed weekly
- deposits can be made in cash or gov sec
- deposits must be made by 1 hour after the bank opens on the 2nd business day following the computation
- most firms compute on firday / deposit 10 am Tues
8
Q
excess funds in customer reserve account
A
the firm is free to remove them
9
Q
Monthly computation of Customer Reserve is allowed if
A
- the firm does not have credits in customer accounts in excess of $1MM
- AI/NC does not exceed 8:1
10
Q
If a monthly client reserve account calculation is used then the firm must desposit what amount?
A
105% of any calculated amount
11
Q
failure to make a customer reserve account deposit results in
A
- firm is required to make immediate electronic notice to FINRA and SEC
12
Q
Exemptions from the special reserve bank account requirement
A
- K-1 exemption: mutual fund BD
these firms mainly handle inv company shares - K-2-i Exemption: no margin accounts; all customer trades through a “special reserve bank account” (i.e. customer money is always segregated)
- K-2-ii Exemption: non-clearing BD
5-K fully disclosed BD and $5K fully disclosed BDs are exempt since they do not hold customer funds
13
Q
Customer Protection Rule Requires what re: fullly paid and excess margin securities?
A
requires firms to maintain full control over customer securities.
Daily requirement to “reduce all fully paid customer securities and all excess margin secutiies to possession or control”
14
Q
Posession or control
A
means that the firm physically has the security, or the firm knows the whereabouts of the security
15
Q
Posession and Control:
Fully Paid Securities
A
all fully paid customer securities must be segregated and placed in safe keeping
16
Q
Posession and control: excess margin securities
those in excess of 140% of customer debits
A
must be reduced to possession or control.
Excess margin: those in excess of the max amount allowed to be rehypothecated to a bank.
The max allowed is 140% of the customer debit balances
17
Q
If a customer buys 2,000 abc shares at $10 on margin
how much can be rehypothecated and how much is excess?
how much can the bank loan?
A
Debit is: $10K
Rehypothecate: 140% of $10K = $14K
Excess is 600 shares $6,000
Bank loan 70%= $14000 *70% = $9,800
18
Q
The 140% rule ensures
A
that a BD does not obtain a loan using customer securities that are in excess of the actual amounts loaned to customers
19
Q
Rule 15c2-1 required brokers cant:
A
can’t pledge customer securities to a bank that would result in a loan from the bank that exceeds the amount gien to the customer on those securities
20
Q
“fully paid” and “ excess margin securities” are considered to be in possession and control if:
A
- the certificates are in the custody of the firm or clearing corp
- the certificates are in the custody of a bank
- the certificates are in transfer for not more than 40 days
- the certificates are in transit for not more than 5 days
21
Q
The customer protection rule requires Buy Ins for:
A
- Fails to receive after 30 days: must be bought on next business day
- Customer fail to deliver after 10 Business days: must be bought in on teh 10th business day after settlement
- Short securities differences after 45 days (firm is missing securities on its books): ust be bought in after 45 days of discovery
22
Q
Buy in requirement for Fail to receive
A
Fail to receives 30 days or more old
Bought in next business day
23
Q
Buy in for Customer Fail to deliver
A
Any fail to deliver after 10 business days
Bought in on 10th business day after settlement
24
Q
Buy in Requirement for
Short Securities Differences (missing securities)
A
any short securities
buy in 45 days of discovery
25
SEC Reg SHO
Buy in Rules
* any fail to deliver resulting from a short sale must now be bought in on S+1
* Any Fail to deliver from a long sale must be bought on S+3
26
27
Rule 15c2-1
Hypothecation of Customer Securities
States a BD cannot:
* obtain loans in excess of funds lent to customers
* commingle the securities of one customer with those of another customer unless prior written consent is received from the customer (standard clause in a margin agreement)
* commingle firm and customer securities
* permit liens to be placed on customer securities for loans that are obtained for the firms use
* permit a cross lien to be placed on customer securities for loans obained using proprietary positions as collateral
28
When is the rehypothecation amount calculated as of?
Firms are only allowed to hypothecate securities once a transcation has settled.
the amount is computed as of the settlement date
29
How does a BD confirm treatement of hypothecated securities with the bank
Bank gets written compliance statement from the BD that the security pledged is carried for the account of a customer and that the provisions of this rule are not being violated
30
Requirement for excess margin securities
* FINRA requires that record of the actual customer be kept for excess margin securities
* BDs must have a procedure in place to identify the excess margin securities of customers that the firm holds under the possession or control
* FINRA recommends the firm use a system of electronic cards representing each security position wiht the actual customers names, or placing a tab on each certificate with the beneficial customers name or envelopes with customer names
31
Rule 17a-13
Physical counts of securities
Rule requires that every clearing broker dealer perform a quarterly count of securities "in possession or control" and reconclie the counts results with the BDs books and records
32
controlled securities
securities subject to repurchase agreements
in transfer
in transit
pledged, loaned, or borrowed
failed to receive
failed to deliver
33
who must perform the physical count of securities
performed or supervised by a person who does not have control over the physical custody of the securities and the securities records.
It is not acceptable for the head cashier to peform the count on their own
it is acceptable for the head cashier to perform the count under superfision of the general principal or indpendent accountant
34
When must record differences from the phsycial count be reorded
unresolved differnces found as a result of the physical count must be recorded on the boooks and records of the BD no later than 7 days after discovery
35
If differences in securities from books and records vs physcial count are short and cant be found...:
* Short Security difference
* firm has securities recorded as assets but they can't be found
* if they arent found they must be haircutted outo of net capital on an increasing scale.
* After 45 days they must be bought in (restores the position)
36
If differences in securities from books and records vs physcial count are in exces ...:
* long security difference
* there are more physical securities present than are recorded in their books and records
* firm cannot add them to its net capital
* it must fix records or identify owner
37
If the long securities difference is sold
* if a long securities difference is sold the net capital must be reduced by the amount of the sale
* this is to negt the positive effect of the sale on net capital
38
Short Securities Difference
* when the firm has fewer physical secutities than is recorded on its books
39
long securities difference
when a firm has more physical securities on hand than in its books and records
40
Rule 17f-1
Reporting of lost or Stolen Securities
* this rule established a central computer file of lost or stolen securities
* Requires that every BD check the computer file to ensure that every security that comes into its possession is not reported lost or stolen
41
who maintains that the central file of lost or stolen securities?
SIC (securities information center) in MA
SIC is a designee of the SEC for reporting lost or stolen securities
42
Exceptions to the Required Reports
* Securities received directly from the issuer (new issues)
* securities received from a federal reserve bank or branch
* securities received directly from another firm that is required to inquire (thus once the secuirty enters the "loop" from broker dealer to broker dealer no inquiry required
* Securities received from a customer of the firm where:
- the securities are registered in the name of that customer, or
- the securities were previously sold to the customer as verified by the internal records of the firm
* The amount of the transaction is $10K or less
43
Rule 17f-1 Reporting of lost securities:
Stolen or counterfeit securities
* must be reported to the Securities Information Center and Transfer Agent
within 1 day of discovery
* Notify the FBI promptly
44
Rule 17f-1 Reporting of lost securities:
Missing Securities
Reported to securities information center and transfer agent
within 1 day after the securities have been missing for 2 days
45
If securities that are reported lost or stolen are found:
* everyone must be informed of the discovery within 1 day
46
Securities Investor Protection Act of 1970
* protects customers from BD failure
* created the Securities Investor Protection Corporation (SIPC)
47
What is SIPC Coverage
* SIPC is an insurance fund derived from annual assessments made on BDs.
* Protects each customer of the firm for up to $500K of equity in an account, inclusive of coverage for cash balances not to exceed $250K
48
what happens if a BD fails
* a trustee is appointed to oversee the liquidation of the firms assets
* the date of the appointment is the valuation date for assts for purposes of SIPC
* customers must complete and submit the claim form to the trustee by the deadline to receive SIPC coverage
* Firm must cease all operations
49
In the event of a BD failure the trustee distributes assets as follows:
* **securities registered in customer name** are returned without dollar limitation (these are the fully paid securities which must be segregated by law)
* **street name (margin)** are distributed among the beneficial owners on a pro rata basis up to $500K of each equity in each customer account.
*
50
In the event of a BD liquidation if the distriubtion of securities does not meet the customer claim
SIPC insurance will fund the balance with the total coverage not exceeding $500K of equity inclusive of $250K of max cash coverage
51
Claims over $500K in the event of liquidation of a BD
the customer becomes a general creditor of the failed firm
52
SPIC coverage is applied by:
applied per customer name
i.e. if John jones has an account and a margin account it is considered to be a single account
53
What is Johns SIPC coverage:
cash account: $230K of sec
and 320K free credit balance
$480K
$230 securities
$250K cash (maxed)
54
There is no SIPC coverage for
no coverage is provided for the accounts of partners of the firm, nor for subordinated lenders to the firm
55
Mutual Fund Position SIPC Coverage
*mutual fund positions must be held at a BD to get SIPC coverage
* positions bought directly from a fund company (not through a BD) are not given SPIC coverage
56
SIPC logo requirements
Each BD must use its SIPC logo on its advertising
57
If a trustee is appointed in a liquidation the firm must
cease all operations
58
Firms are prohibited from the following related to SPIC:
* not paying SIPC assessments
* not filing reports
* concealing firm assets
* making false claims to the trustee
59
If a firm has a fail to deliver over 60 days
Under the code of conduct rules FINRA prohibits a member firm from selling a security for its own or a customer account if it has a fail to deliver for a domestic security older than 60 days in that account.
or a afiled to delivery more than 90 days for a foreign security
*note: really only applies to firm accounts as SEC requires buy in for customer accounts within 10 business days of settlment
60
SEC requires tht fails to deliver be bought in no later than
10 business days after settlement
61
FINRA restricts business exapansion if:
MORE than 15 days of
* the firms net capital is less than 150% of the min
* The firms ratio of AI/NC exceeds 10:1
* For firms under alternative method of net cap req: net capital falls below 5% of debits in the reserve formula
*
62
FINRA requires business reduction if:
15 conscutive days of:
* the firms net capital is less than 125% of min
* The firms AI/NC ratio exceeds 12:1
* alternative net cap firms: net capital falls below 4$ of debits in the reserve formula
63
FINRA can restrict a firm from expanding or have it reduce level of business for:
financial or operational reasons
* e.g. the firm experiences falling capital levels
* the firms books and records are not current
* the firm is unable to clear transactions
64
Fidelity Bond
* FINRA requires that member firms maintain fidelity bond coverage on all employees to insure against loss due to employee threft or misappropriation
* The amount of coverage increases as net capital required increases
65
Fidelity Bond Requirement:
Introducing BD (net cpiatal less than $250K)
Min coverage is Greater of $100K or 120% of Req Net Capital
66
Fidelity Bond Requirement:
Clearing BD
* the required coverage is set by a FINRA table
* Min: $600K (firms between $250K-$300K)
Max: $5MM (firms over $12MM Req Net Cap)
| *roughly 2 to 2.5 times the amount of net required capital
67
Required Annual Reivew of Fidelity Bond Coverage
* the amount of fidelity bond coverage carried by the firm must be reviewed at least annually at least 60 days in advance of the anniversary date of the issuance of the bond.
68
If a firm carries Fidelity Bond Coverage for another SRO
the coverage requirement is waived
69
If a carrier cancels fidelity bond coverage
FINRA must be notified immiatley in the event of cancellation or significant modification
70
Customer compliants received by clearing firm
FINRA requires each clearing member to:
* forward promptly any written customer complaint received by the clearing member regarding the introducing member or its asociated persons to:
the introducing firm
and FINRA
* the clearing firm must send the customer an acknowledgement in writing of reciept of the complaint and that the complaint was forwarded
71
Account Statement Erorr Notices
* FINRA requires that a notice is included in customer account statemetn notifyinig the cient that they should contact the BD promptly to report any inaccuracies or errors on the satement.
*
* notice must include contact inofmration - phone and contact person at the BD.
* When a clearing and introduing firm are involved two contact numbers need to be included.
* (contact person is typically compliance dept)
* reported inaccuracies must be confirmed to the customer in writing
72
Who is typically the contact person for statement inaccuarcies
* typically the compliance dept.
usally not ops as they may have made the error
and not service as they are servicing the acct.
