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Home » 2025 Issues » 90 FR (01/13/2025) » 2024-31178. Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule

  2024-31178. Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule  

  • Commission reference CFR citation (17 CFR)
    Rule 15c3-1 17 CFR 240.15c3-1.
    Rule 15c3-3 17 CFR 240.15c3-3.
    Form X-17A-5 Part II 17 CFR 249.617.

    Table of Contents

    I. Introduction

    A. The Need For Daily Reserve Computations

    B. Overview of the Final Amendments

    C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations

    1. Overview of Rule 15c3-3

    2. Overview of Broker-Dealer Liquidations and SIPA

    II. Discussion of Comments and Final Amendments

    A. Requirement To Perform a Daily Computation

    1. Proposal

    2. Comments Received and Final Amendments

    B. Compliance With Daily Reserve Computation After Exceeding $500 Million Threshold

    1. Proposal

    2. Comments Received and Final Amendments

    C. Reducing the Aggregate Debit Reduction From 3% to 2%

    1. Amendments to Rules 15c3-1 and 15c3-3

    2. Conforming Amendments to the FOCUS Report

    D. Voluntary Customer and PAB Reserve Computations

    E. Other Comments

    1. Sweep Programs and Other “Cash in Motion” or “Transitory” Credits”

    2. Requests for Interpretations and Clarifications

    F. Reserve Account Requirements for Security-Based Swaps

    III. Compliance Date

    IV. Economic Analysis

    A. Introduction

    B. Baseline

    1. Regulatory Baseline

    2. Affected Broker-Dealers

    3. Debit Reduction in the Customer Reserve Computation for Certain Broker-Dealers

    C. Economic Effects of the Final Amendments

    1. Benefits

    2. Costs

    3. Other Compliance Costs

    D. Effects on Efficiency, Competition, and Capital Formation

    E. Reasonable Alternatives

    1. Over-Funding of the Customer and PAB Reserve Bank Accounts

    2. A Threshold Based on a Different Metric

    3. Daily Computation Requirement for All Carrying Broker-Dealers

    4. A Higher or Lower Threshold for Daily Computation

    5. Calculation Based on the Maximum Value Over the Past Year

    6. Daily Computation if an Average Required Deposit Exceeds a Threshold

    7. Daily Computation Requirement Based on Average Total Credits per Number of Customer and PAB Accounts

    8. Daily Computation Based on Average Total Credits From the Most Recent Calendar Year

    9. Reduction of the Aggregate Debit Items Charge From 3% to 1%

    10. Exemption for Cash in Motion

    V. Paperwork Reduction Act

    A. Summary of Collections of Information Under the Final Amendments

    B. Use of the Information

    C. Respondents

    1. Recordkeeping Requirements

    2. Notification Requirement To Revert to Weekly Computations

    3. Notification Requirement To Voluntarily Perform Daily Customer Reserve Computation With 2% Debit Reduction

    D. Total Annual Burden Estimate

    1. Recordkeeping Requirements

    2. Notification Requirement To Revert to Weekly Computations

    3. Notification Requirement To Voluntarily Perform Daily Customer Reserve Computation With 2% Debit Reduction

    4. Summary of the Burden Revisions

    E. Collections of Information Are Mandatory

    F. Confidentiality of Response to Collections of Information

    G. Retention Period for Recordkeeping Requirements

    VI. Regulatory Flexibiliy Act Certification

    VII. Other Matters

    Statutory Authority

    I. Introduction

    A. The Need For Daily Reserve Computations

    Section 15(c)(3)(A) of the Securities Exchange Act of 1934 (“Exchange Act”) provides, in pertinent part, that no broker-dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (with exceptions for certain securities) in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of broker-dealers including, but not limited to, the acceptance of custody and use of customers' securities and the carrying and use of customers' deposits or credit balances.[1] The statute further ( print page 2791) provides, in pertinent part, that the rules and regulations shall require the maintenance of reserves with respect to customers' deposits or credit balances.[2]

    Pursuant to this statutory directive, the Commission adopted the customer protection rule (“Rule 15c3-3”) in 1972.[3] This rule requires broker-dealers that hold customer cash and securities (“carrying broker-dealers”) to treat these assets in a manner that facilitates their prompt return to the customers if the broker-dealer fails financially.[4] The goal of the rule is to place a carrying broker-dealer in a position where it is able to wind down in an orderly self-liquidation without the need of financial assistance provided by the Securities Investor Protection Corporation (“SIPC”) through a formal proceeding under SIPA.[5]

    In order to facilitate an orderly self-liquidation, Rule 15c3-3 requires a carrying broker-dealer to compute the net amount of cash owed to customers under a formula in the rule (“customer reserve computation”).[6] Generally, carrying broker-dealers must perform their customer reserve computation and make any required deposits in a special reserve account at a bank (“customer reserve bank account”) weekly.[7] This weekly cadence has been in effect since 1973.[8] The rule also addresses how a carrying broker-dealer must treat proprietary securities and cash it holds for other broker-dealers, known as proprietary accounts of broker-dealers (“PAB accounts”).[9] While broker-dealers are not treated as customers under preexisting Rule 15c3-3, the rule requires a carrying broker-dealer to perform a PAB reserve computation and make any required deposits into its PAB reserve bank account weekly, similar to the requirements for the customer reserve computation and customer reserve bank account.[10]

    Since the adoption of Rule 15c3-3 in 1972, investor—including retail investor—participation in the U.S. securities markets has grown dramatically, which has led to a correspondingly dramatic increase in the amount of cash carrying broker-dealers hold for customers.[11] Cash owed to customers and PAB account holders may include proceeds received from sales of securities, cash customers and PAB account holders deposit for the purpose of purchasing securities, and monthly or quarterly dividends received on behalf of customers and PAB account holders.[12] Carrying broker-dealers may receive large cash inflows on behalf of their customers and PAB account holders during the week ( e.g., month-end or quarter-end interest and dividend payments) and days prior to the next required weekly reserve computations and deposits into the reserve bank accounts.[13] This can lead to situations where—for a period of days—the net amount of cash owed to customers and PAB account holders is greater than the amounts held in the carrying broker-dealer's combined customer and PAB reserve bank accounts.[14] This creates a “mismatch” or difference between the net cash owed to customers and PAB accounts holders and the amounts held in the carrying broker-dealer's combined customer and PAB reserve bank accounts. Moreover, because of the dramatic increase in cash held by carrying broker-dealers since 1972, the amount of the mismatch between cash owed and cash reserved can be much larger than the Commission contemplated when it adopted the requirement to perform a weekly reserve computation. The potential for much larger mismatches today (as compared to 1972) poses a risk that if the carrying broker-dealer fails financially it may not be able to promptly return all cash and securities owed to customers and PAB account holders in an orderly self-liquidation and, instead, will need to be liquidated in a SIPA proceeding.

    The potential size of the mismatch risk impacting carrying broker-dealers today can be demonstrated through the size of the deposits they are required to make into their reserve bank accounts. For example, during the 2023 calendar year, the largest required additional deposits into the customer reserve bank accounts of all carrying broker-dealers ranged from approximately $2.3 billion to over $10 billion.[15] During the 2023 calendar year, the largest required additional deposits into their PAB reserve bank accounts ranged from approximately $345 million to almost $4.0 billion.[16] Furthermore, during the ( print page 2792) 2023 calendar year, the top ten additional required deposits to the customer reserve bank accounts for the 20 carrying broker-dealers with the lowest average total credits (of the 49 carrying broker-dealers estimated to be subject to the final amendments),[17] ranged from approximately $74.3 million to over $600 million.[18] Moreover, the largest potential mismatches today occur at carrying broker-dealers that reported the greatest amount of total credits for their customers and PAB account holders ( i.e., amounts that exceed the final $500 million threshold discussed below).[19] In 2023, in the aggregate, the average mismatch for customer reserve bank accounts was 15.7% for carrying broker-dealers above the $500 million threshold.[20] It was 6.4% for carrying broker-dealers below the threshold.[21]

    These large deposit requirements and mismatch percentages indicate that there may be times when the net amount of cash owed to customers and PAB account holders is substantially greater than the amounts on deposit in the customer and PAB reserve bank accounts.[22] Large mismatches may lead to correspondingly large shortfalls in the amounts available in the customer and PAB reserve bank accounts, which, in the event of a failure of a carrying broker-dealer, may result in the delayed reimbursement of customer securities and cash, and the potential that customers' claims may not be satisfied in full.[23] In the case of a large shortfall, the cash and securities owed to customers or PAB account holders may be tied up in liquidation proceedings and these customers or PAB account holders would have to wait to receive their cash and securities until the broker-dealer liquidation is carried out under SIPA, which may take a significant amount of time.[24] This potential delay in obtaining access to their securities and cash also could cause customers to rapidly withdraw cash from a carrying broker-dealer during times of market turmoil, putting further stress on the carrying broker-dealer and the securities markets more generally, as well as potentially triggering or accelerating the failure of a carrying broker-dealer.

    Further, in a SIPA liquidation, SIPC may be required to advance money from the SIPC Fund [25] to the extent the fund of customer property was insufficient to make customers—but not to PAB account holders—whole through the pro rata distribution.[26] In particular, if the mismatch or difference between the net amount a carrying broker-dealer owes its customers and PAB account holders and the combined amounts in the customer and PAB reserve accounts was sufficiently large, customers' claims may not be satisfied in full.[27] In this case, the trustee would need to use the SIPC Fund to satisfy customers' claims to make them whole. This risk may be exacerbated for carrying broker-dealers experiencing large aggregate intra-week mismatches.[28] As a result, the SIPC Fund may be at a higher risk of depletion.[29]

    To address these risks, the Commission is amending Rule 15c3-3 to require carrying broker-dealers that owe large amounts of cash to customers and PAB account holders ( i.e., have large total credits), measured by both their customer and PAB reserve computations for the previous 12 month ends ( i.e., a rolling 12-month average), to perform those computations and make any required deposits into their respective reserve bank accounts daily rather than weekly.[30] The final amendments—by requiring daily rather than weekly reserve computations—will more quickly apply the protective measures of the Rule 15c3-3 reserve requirements to cash of customers and PAB account holders that is newly deposited into the carrying broker-dealer. This will reduce the risk—caused by the dramatic increase in cash carrying broker-dealers hold—that if the carrying broker-dealer fails financially, it may be unable to promptly return cash and securities to customers and PAB account holders through an orderly self-liquidation. It also reduces the risk that the SIPC Fund may be depleted.[31] Further, a daily computation—as compared with a weekly computation—will more dynamically match the net amount of cash owed to customers and PAB account holders with the amount on deposit in the carrying broker-dealer's customer and PAB reserve bank accounts ( i.e., daily changes in the net cash owed to customers and PAB account holders will be accounted for more quickly in the reserve computations). While Rule 15c3-3 currently permits a carrying broker-dealer to elect to perform its customer and PAB reserve computations more frequently than weekly,[32] a practical effect of a daily computation requirement will permit carrying broker-dealers to withdraw excess cash or qualified securities more quickly from the reserve bank account, which will improve their liquidity.[33]

    In sum, the daily reserve computations—by protecting customer and PAB cash more quickly than is the ( print page 2793) case with weekly computations—will make the financial system safer by: (1) increasing the likelihood that a failing carrying broker-dealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities); (2) lowering the risk that the SIPC Fund may be depleted by having to address a large shortfall in customer cash held by a failed carrying broker-dealer; and (3) increasing the liquidity of carrying broker-dealers performing the daily customer and PAB reserve computations thereby positioning them to better address potential financial shocks.

    B. Overview of the Final Amendments

    The Commission proposed the requirement to perform daily customer and PAB reserve computations on July 12, 2023.[34] The Commission received comments from a variety of persons, including broker-dealers, retail investors, industry associations, and other market participants.[35] As discussed in detail below, the Commission has modified the final amendments in response to comments. For example, while the Commission is retaining the overall structure of the proposal, the Commission has raised the threshold from $250 million to $500 million. The Commission also is reducing the 3% aggregate debit items charge (“3% debit reduction”) that certain carrying broker-dealers must take in performing a customer reserve computation to 2% (“2% debit reduction”) if they perform a daily customer reserve computation.[36]

    The final amendments are summarized below.

    Daily Computation —Under the final amendments, a carrying broker-dealer that has average total credits that are equal to or greater than $500 million (“$500 Million Threshold”) must perform the customer and/or PAB reserve computations daily, rather than weekly as is required under preexisting Rule 15c3-3.[37] As proposed and under the final amendments, a carrying broker-dealer must perform the customer and PAB reserve computations, as applicable, as of the close of the previous business day, and any required deposits must be made no later than one hour after the opening of banking business on the second following business day.[38]

    Definition of Average Total Credits —As proposed and under the final amendments, “average total credits” means the arithmetic mean of the sum of total credits in the customer reserve computation and the PAB reserve computation reported in the carrying broker-dealer's 12 most recently filed month-end FOCUS Reports.[39] This means the average total credits are a 12-month rolling average, as the carrying broker-dealer must add up the sum of the total credits reported in the customer and PAB reserve computations in each of the 12 most recently filed month-end FOCUS Reports and divide that amount by 12 to calculate the arithmetic mean of the total credits.

    Six-Month Compliance Period after Exceeding $500 Million Threshold —Under the final amendments, a carrying broker-dealer must comply with the requirement to perform a customer and PAB reserve computation daily no later than six months after its average total credits equal or exceed the $500 Million Threshold.[40]

    60-day Written DEA Notification to Revert to Weekly Computation —Under the final amendments, in the event that a carrying broker-dealer's 12-month rolling average of total credits subsequently falls below the $500 Million Threshold, it must continue to perform customer and PAB reserve computations daily until it provides written notification to its designated examining authority (“DEA”) of its election to perform weekly computations. The amendments require the carrying broker-dealer to provide this written notification 60 days prior to reverting to weekly computations.[41]

    Lowering the 3% Debit Reduction to 2% for Carrying Broker Dealers that Perform a Daily Customer Reserve Computation —As discussed in more detail below, the minimum net capital requirement for broker-dealers is the greater of a fixed-dollar amount specified in Rule 15c3-1 and an amount determined by applying one of two financial ratios: the 15-to-1 aggregate indebtedness to net capital ratio (“basic method”) or the 2% of aggregate debit items ratio (“alternative method”).[42] A carrying broker-dealer using the alternative method must reduce aggregate debit items by 3% when performing its customer reserve computation under Rule 15c3-3. This can increase the amount the carrying broker-dealer must lock up in its customer reserve bank account.

    Under the final amendments, the Commission has modified Rule 15c3-1 to permit carrying broker-dealers that use the alternative method and are above the $500 Million Threshold ( i.e., that perform a daily customer reserve computation) to reduce their aggregate debit items by 2% rather than 3%.[43] Further, carrying broker-dealers that use the alternative method and are below the $500 Million Threshold may voluntarily perform a daily customer reserve computation under Rule 15c3-3 and, in so doing, apply the 2% debit reduction in lieu of the 3% debit reduction if they notify their DEA at least 30-days prior to beginning the daily customer reserve computation. Under the final amendments, carrying broker-dealers voluntarily performing a daily reserve computation and applying the 2% debit reduction must receive prior approval from their DEA to revert to a weekly customer reserve computation.[44] If they revert to performing a weekly customer reserve computation, they also must revert to applying a 3% debit reduction. Finally, under the final amendments, the Commission is adopting technical amendments to the FOCUS Report to conform it to the amendments with respect to the lowering of the debit reduction from 3% to 2%.

    Compliance Date —Generally, carrying broker-dealers that exceed the $500 Million Threshold using each of the 12 filed month-end FOCUS Reports from July 31, 2024, through June 30, 2025, must perform customer and PAB reserve computations daily beginning no later than December 31, 2025 ( i.e., six months after June 30, 2025).[45] On or after the effective date of the final amendments, a carrying broker-dealer may voluntarily perform a daily customer reserve computation and apply the 2% debit reduction, provided it notifies its DEA in writing at least 30 calendar days prior to beginning the daily customer reserve computation that applies the 2% debit reduction.[46]

    Reserve Account Requirements for Security-Based Swaps —The Commission is not adopting any changes to the reserve account requirements for security-based swaps. ( print page 2794)

    C. Overview of Rule 15c3-3 and Broker-Dealer Liquidations

    1. Overview of Rule 15c3-3

    Rule 15c3-3 is designed to give specific protection to customer funds and securities, in effect forbidding broker-dealers from using customer assets to finance any part of their businesses unrelated to servicing securities customers. For example, a broker-dealer is “virtually” precluded from using customer funds to buy securities for its own account.[47] To meet this objective, Rule 15c3-3 requires a carrying broker-dealer to take two primary steps to safeguard these assets, as described in this section below. The steps are designed to protect customers by segregating their securities and cash from the carrying broker-dealer's proprietary business activities. The final amendments address the second step. If the carrying broker-dealer fails financially, the customer securities and cash should be readily available to be returned to the customers, which facilitates an orderly self-liquidation. However, if the failed carrying broker-dealer is liquidated under SIPA, the customer securities and cash should be isolated and readily identifiable as “customer property” and, consequently, available to be distributed to customers ahead of other creditors.[48]

    The first step required by Rule 15c3-3 is that a carrying broker-dealer must maintain physical possession or control over customers' fully paid and excess margin securities.[49] Control means the carrying broker-dealer must hold these securities in one of several locations specified in Rule 15c3-3 and free of liens or any other interest that a third-party could exercise to secure an obligation of the carrying broker-dealer.[50] Permissible locations include a clearing corporation and a “bank,” as defined in section 3(a)(6) of the Exchange Act.[51]

    The second step is that Rule 15c3-3 requires carrying broker-dealers to have a customer reserve bank account that must hold cash and/or qualified securities ( e.g., U.S. Treasury securities) in an amount determined by a computation of the net cash owed to the carrying broker-dealer's customers pursuant to a formula set forth in Exchange Act Rule 15c3-3a, the customer reserve computation.[52] Preexisting Rule 15c3-3 requires carrying broker-dealers to perform the customer reserve computation as of the close of the last business day of the week and make any required deposits into the customer reserve bank account weekly. Rule 15c3-3 also permits carrying broker-dealers to perform the customer reserve computation more frequently than weekly ( e.g., daily),[53] and, in certain limited circumstances, to perform a monthly computation.[54]

    Under the customer reserve computation, the carrying broker-dealer adds up customer credit items and then subtracts from that amount customer debit items.[55] The credit items include credit balances in customer securities accounts ( i.e., cash owed to customers) and funds obtained through the use of customer securities ( e.g., a loan from a bank collateralized with customer margin securities).[56] The debit items include money owed by customers ( e.g., from margin lending), securities borrowed by the carrying broker-dealer to effectuate customer short sales, and margin required and on deposit with certain clearing agencies as a consequence of customer securities transactions.[57] If credit items exceed debit items, the net amount must be on deposit in the customer reserve bank account in the form of cash and/or qualified securities.[58] The carrying broker-dealer must make a deposit into the customer reserve bank account by 10 a.m. of the second business day following the “as of” date of the new computation if the computation shows the amount required to be on deposit in the customer reserve bank account is greater than the amount currently on deposit in the account.[59] Conversely, if the computation shows the amount required to be on deposit in the customer reserve bank account is less than the amount currently on deposit in the account, the carrying broker-dealer can withdraw the difference.[60] A carrying broker-dealer also must make and maintain a record of each computation.[61]

    The customer reserve computation permits the carrying broker-dealer to offset customer credit items only with customer debit items.[62] This means the carrying broker-dealer can use customer cash to facilitate customer transactions such as financing customer margin loans and borrowing securities to make deliveries of securities customers have sold short. For example, if a carrying broker-dealer holds $100 for customer A, the carrying broker-dealer can use that $100 to finance a security purchase of customer B ( i.e., make a margin loan to customer B). The $100 the carrying broker-dealer owes customer A is a credit in the customer reserve computation and the $100 customer B owes the carrying broker-dealer is a debit in the computation. Therefore, under the customer reserve computation there would be no requirement to maintain cash and/or qualified securities in the customer reserve bank account. However, if the carrying broker-dealer did not use the $100 held in customer A's account for this purpose, there would be no offsetting ( print page 2795) debit and, consequently, the carrying broker-dealer would need to have on deposit in the customer reserve bank account cash and/or qualified securities in an amount at least equal to $100.[63]

    Rule 15c3-3 also addresses how a carrying broker-dealer must treat proprietary securities and cash it holds for other broker-dealers, known as PAB accounts. While broker-dealers are not treated as customers of the carrying broker-dealer under Rule 15c3-3,[64] the rule requires the carrying broker-dealer to have a PAB reserve bank account.[65] The PAB reserve bank account must hold cash and/or qualified securities in an amount determined by the PAB reserve computation. Under preexisting Rule 15c3-3, carrying broker-dealers are generally required to perform the PAB reserve computation and make any required deposits into the PAB reserve bank account weekly, similar to the requirements for the customer reserve computation.[66] Finally, consistent with the requirements for the customer reserve computation, the PAB reserve computation permits the carrying broker-dealer to offset PAB credit items only with PAB debit items.[67]

    2. Overview of Broker-Dealer Liquidations and SIPA

    SIPA [68] affords certain protections against loss to customers resulting from a broker-dealer failure through the establishment of SIPC and the SIPC Fund.[69] SIPC oversees the liquidation of SIPC-member broker-dealers that fail financially and where customer assets the broker-dealer holds ( i.e., cash or securities) are missing from customers' securities accounts ( i.e., broker-dealers that cannot return these assets through a self-liquidation).[70]

    In a SIPA liquidation of a broker-dealer, SIPC and a court-appointed trustee work to return customers' cash and securities as quickly as possible. Customers under SIPA, including broker-dealers with securities accounts at the failed broker-dealer (“SIPA customers”), generally are entitled to certain protections, including the right to share pro rata with other SIPA customers in the customer property held by the carrying broker-dealer by way of a priority claim on the customer property compared to general unsecured creditors of the carrying broker-dealer.[71]

    SIPA protections also include the ability for a SIPA customer—other than a SIPA customer that is a broker-dealer ( i.e., a PAB account holder)—to receive an advance from the SIPC Fund of up to $500,000 (of which $250,000 can be used to cover cash claims), if the amount of customer property is insufficient to satisfy the customer's claim for securities and/or cash.[72] The SIPC Fund largely is financed through assessments paid to SIPC by its broker-dealer members.[73] The SIPC Fund is used to pay SIPC's expenses, the administrative costs of a SIPA liquidation to the extent the carrying broker-dealer's estate is insufficient to cover those costs, and—as stated above in this section—to pay advances to SIPA customers whose claims cannot be fully satisfied by the estate of a failed carrying broker-dealer.[74] The SIPC Fund—which consists of cash and U.S. Government securities—totaled approximately $4.47 billion as of December 31, 2023.[75] Finally, the schedule for calculation of the annual assessment for SIPC members is governed under the SIPC Bylaws and generally depends on the level of SIPC's unrestricted net assets.[76] The current assessment rate (effective January 1, 2024) is 0.15% of net operating revenues.[77] A summary of the possible level of SIPC assessments is as follows:

    ( print page 2796)

    Table 1—SIPC Assessment Schedule
    Unrestricted net assets/SIPC Fund balance Annual assessment rate
    Unrestricted net assets $2.5-<$5 billion (and reasonably likely to remain less than $5 billion but not less than $2.5 billion) 0.15% of net operating revenues.
    SIPC Fund balance of $150 million—unrestricted net assets of <$2.5 billion 0.25% of net operating revenues.
    SIPC Fund balance $100 million-<$150 million Determined by SIPC, but not less than 0.25% of gross revenues.
    SIPC Fund balance below $100 million Determined by SIPC, but not less than 0.5% of gross revenues.
    Unrestricted net assets ≥$5 billion (and reasonably likely to remain >$5 billion (after review of study * and consultation with Commission and SROs)) SIPC may not more than once in any four-year period, increase or decrease the assessment rate by up to, but not more than, 25% of the assessment rate in effect at that time.
    * When unrestricted net assets total $5 billion, SIPC will commission a study every four years to examine the adequacy of SIPC's unrestricted net asset balance and the SIPC Fund and the appropriate assessment rate. See section 6(a)(1)(C) and (D) of SIPC's Bylaws.

    II. Discussion of Comments and Final Amendments

    A. Requirement To Perform a Daily Computation

    1. Proposal

    The Commission proposed amendments to Rule 15c3-3 that would require carrying broker-dealers with large amounts of total credits to perform the customer and PAB reserve computations daily rather than weekly.[78] More specifically, the amendments would add paragraph (e)(3)(i)(B) to Rule 15c3-3.[79] This paragraph would provide that a carrying broker-dealer with average total credits that are equal to or greater than $250 million (“$250 Million Threshold”) must make the computation necessary to determine the amounts required to be deposited in the customer and PAB reserve bank accounts daily as of the close of the previous business day.[80] The paragraph would further provide that the deposit so computed must be made no later than one hour after the opening of banking business on the second following business day.[81] For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission proposed to define average total credits as the arithmetic mean of the sum of total credits in the customer reserve computation and PAB reserve computation reported in the twelve most recently filed month-end FOCUS Reports.[82] Based on regulatory filings for the period of January 2022 through December 2022, the $250 Million Threshold would have applied the proposed daily computation requirement to approximately 63 carrying broker-dealers.[83] These broker-dealers included 11 carrying broker-dealers that already voluntarily performed the customer reserve computation daily.[84]

    2. Comments Received and Final Amendments

    Many commenters supported the overall proposal.[85] Commenters stated that the proposal would help protect customers, and address potential risks in a more timely and proactive manner, which safeguards investors and market participants, as well as strengthens the overall resilience of the financial markets.[86] One commenter, however, stated that the preexisting weekly reserve requirements have proven effective for the industry and not resulted in any problems.[87]

    The Commission agrees with commenters that the amendments to require daily customer and PAB reserve computations will protect customer and PAB cash more quickly than is the case with weekly computations. While the preexisting weekly customer and PAB reserve requirements have generally been effective,[88] the observed large deposit requirements, and differences or “mismatches” between the net amount of cash a carrying broker-dealer owes its customers and PAB account holders and the amounts on deposit in the customer and PAB reserve bank accounts, indicate that a daily reserve computation requirement enhances the preexisting rule.[89]

    As discussed in section I.A. of this release, a daily reserve computation requirement will make the financial system safer by: (1) increasing the likelihood that a failing carrying broker-dealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities); (2) lowering the risk that the SIPC Fund may be depleted by having to address a large shortfall in customer cash held by a failed carrying broker-dealer; and (3) increasing the liquidity of carrying broker-dealers performing the daily customer and PAB reserve computations thereby positioning them to better address potential financial shocks. ( print page 2797)

    Regarding the proposed $250 Million Threshold, one commenter suggested modifying the proposal to include a second test that would need to be met to trigger the requirement to perform daily reserve computations.[90] In particular, the commenter recommended requiring a carrying broker-dealer to perform daily computations if it exceeds the proposed $250 Million Threshold and has average net credits of $10 million or more because some carrying broker-dealers that meet the proposed $250 Million Threshold do not present a material risk as they do not carry a large excess of credits over debits. This commenter also stated that a number of carrying broker-dealers rarely have an excess of credits over debits because of the nature of their activities, and the customer protection benefit of a daily computation requirement for these carrying broker-dealers is minimal, and should be weighed against the significant costs of the proposal, which are not commensurate with the risk profiles they present.[91] Another commenter stated the Commission should adopt a threshold using risk or liquidity factors because they are better predictors of a failing carrying broker-dealer than a fixed threshold based on size.[92] The commenter stated that this threshold classification would avoid penalizing carrying broker-dealers with strong balance sheets that exceed a fixed threshold.[93] One commenter stated that the Commission should define the threshold as a formula that it could adjust periodically without further rulemaking, because the proposed threshold is based on a narrow set of FOCUS reports and could become outdated as a result of material changes.[94]

    Some commenters suggested eliminating the proposed $250 Million Threshold so that all carrying broker-dealers would be required to perform daily customer and PAB reserve computations.[95] One of these commenters stated that the mismatch risk applies equally to both large and small carrying broker-dealers, and, as such, the Commission should apply the requirement to all carrying broker-dealers so that customers are not left vulnerable simply because they hold their securities accounts at smaller broker-dealers.[96] The commenter also stated that this modification would eliminate the need for carrying broker-dealers to monitor their average total credits over a 12-month period to determine whether or not they meet the $250 Million Threshold.[97]

    The final amendments modify the proposal by raising the $250 Million Threshold to $500 million. This threshold is designed to provide a balanced demarcation between carrying broker-dealers with large amounts of total credits relative to smaller carrying broker-dealers (with lower average total credits). The former are more likely to have larger mismatches in any given year, and are better positioned to absorb the increased costs resulting from performing daily reserve computations.[98] For example, when proposed, the threshold was estimated to apply the daily reserve computations requirement to 63 of the 187 total broker-dealers subject to the customer and PAB reserve requirements of Rule 15c3-3.[99] Further, at proposal, the mismatch risk was calculated as a carrying broker-dealer's deposit divided by its reserve account balance from any month. The average of these mismatches for each carrying broker-dealer during 2022 was computed to determine the average mismatches.[100] For example, in 2022, on the aggregate level, the average mismatch across the 187 carrying broker-dealers for customer reserve accounts was 11.2% for carrying broker-dealers above the proposed $250 Million Threshold.[101] It was 6.1% for carrying broker-dealers below the proposed $250 Million Threshold.

    The threshold is being raised to $500 Million to further narrow the scope of the final amendments to carrying broker-dealers whose average mismatches are larger as compared to carrying broker-dealers that are below the threshold.[102] In particular, the $500 Million Threshold is estimated to apply the daily computation requirement to 49 of the 191 carrying broker-dealers subject to the customer and PAB reserve requirements of Rule 15c3-3.[103] Nine of these 49 carrying broker-dealers already voluntarily perform daily customer and PAB reserve computations.[104] Moreover, it is estimated that these 49 carrying broker-dealers—in the aggregate—account for 99.3% of the total credits of all 191 carrying broker-dealers subject to the requirement.[105] Further, the average mismatches were generally higher for carrying broker-dealers above the $500 Million Threshold as compared to carrying broker-dealers below the threshold.[106] For example, the average mismatch across the 191 carrying broker-dealers for customer reserve bank accounts is 15.7% for carrying broker-dealers above the $500 Million Threshold.[107] It is 6.4% for carrying broker-dealers below the threshold.

    These data indicate that the $500 Million Threshold will apply to carrying ( print page 2798) broker-dealers that hold the bulk of total credits in the industry and to the carrying broker-dealers that tend to have the larger mismatches as measured by the average of reserve deposits required for the carrying broker-dealer relative to the average balance in its reserve accounts. In this way, the $500 Million Threshold seeks to reasonably balance the enhancements to customer protection under Rule 15c3-3 through reductions in the mismatch risk, with the potential increases in compliance costs and staffing that may be necessary to perform a daily reserve computation. The $500 Million Threshold is a straightforward way to narrow the scope of the final rule to carrying broke/r-dealers that tend to have larger mismatches. For example, this modification will exclude an additional 12 carrying broker-dealers from the scope of the final rule.[108] For these reasons, the Commission is not modifying the final $500 Million Threshold to include the second test a commenter suggested ( i.e., having average net credits of $10 million or more) or to use risk or liquidity factors, as a different commenter suggested. These suggested modifications would narrow the application of the rule in a way that would exclude some carrying broker-dealers from the daily reserve computation requirement that have the potential for large mismatch risks.

    Further, the final $500 Million Threshold—because it is based on total customer and PAB credits (as opposed to a net amount of credits)—will apply the daily reserve computations requirement to carrying broker-dealers that tend to have large obligations to customers ( e.g., through receiving large infusions of customer cash, holding cash balances in customers' securities accounts, or using customer margin securities). Using a net credit amount, in addition to the $500 Million Threshold would exclude 10 of the 49 carrying broker-dealers that would be subject to the daily reserve requirement based on FOCUS Report data for calendar year 2023.[109] At the time of the weekly computation, however, a carrying broker-dealer may have substantial debits to offset the credits and, therefore, have a relatively small amount of excess credits in comparison to its total credits. This could cause the carrying broker-dealer to stay under the threshold notwithstanding the fact that it typically has large amounts of total credits, and large intra-week mismatches.[110] Consequently, a net credit amount may not indicate that a carrying broker-dealer is at a lower risk of large intra-week mismatches because it does not account for large fluctuations in the net cash owed to customers and PAB account holders between reserve computations. The final amendments are designed to reduce the mismatch risk for carrying broker-dealers with large amounts of total credits (who are more likely to have larger mismatches) by protecting customer and PAB cash more quickly than is the case with weekly computations. This will increase the likelihood that a failing carrying broker-dealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash and securities).

    Finally, the $500 Million Threshold also is designed as a straightforward way for a carrying broker-dealer to determine whether it is subject to the requirement to perform daily customer and PAB reserve computations. As such, it will be simple for carrying broker-dealers and the Commission or Commission staff to calculate and monitor because it is a fixed-threshold and the data for the calculation is derived from FOCUS Reports.[111] Setting formula-based thresholds that incorporate dynamic risk or liquidity factors would make the rule requirements less predictable and more complex to monitor because of their variability. Moreover, carrying broker-dealers in compliance with the net capital rule typically have strong balance sheets because the rule imposes a net liquid assets test that is designed to promote liquidity within broker-dealers.[112] During times of market stress, however, carrying broker-dealers may experience fluctuations in their capital if customers and/or PAB account holders rapidly withdraw cash and securities from their accounts to reduce their exposure to the carrying broker-dealer and the securities markets more generally.[113] Consequently, a formula-based threshold that incorporates dynamic risk or liquidity factors would exclude carrying broker-dealers that are more likely to experience larger mismatches, including carrying broker-dealers with large amounts of credits that have strong balance sheets.[114] A fixed threshold also is consistent with other thresholds and ratios in the Commission's broker-dealer financial responsibility rules, which use fixed-dollar amounts or predetermined ratios that do not contain formulas for future adjustments.[115] Finally, the $500 Million Threshold will incorporate any month-to-month material changes because it uses a 12-month rolling average (as compared to basing the calculation on a single filing or date).[116] For these reasons, the Commission is not adopting a formula-based threshold that incorporates dynamic risk or liquidity factors, or a threshold that can be adjusted without rulemaking as some commenters suggested.

    By adopting a $500 Million Threshold, the final rule does not apply the daily reserve computation requirement to all carrying broker-dealers, as a commenter suggested.[117] This suggested modification would apply the requirement to carrying broker-dealers that do not have the potential for large mismatch risks and that are less able to bear the costs of—and devote the resources necessary for—performing daily reserve computations because of their size or limited customer or PAB account carrying activity. Applying the daily reserve computation to all carrying broker-dealers would impose compliance costs on an additional 113 carrying broker-dealers with relatively less customer and PAB account activity.[118] Thus, it would ( print page 2799) subject them to increased compliance costs while they do not have the potential for large mismatches.[119] However, carrying broker-dealers below the $500 Million Threshold may choose to voluntarily perform a daily customer reserve computation in order to apply the 2% debit reduction in lieu of the 3% reduction.[120] In this way, the investor protection benefits of performing a daily computation may be expanded beyond the carrying broker-dealers that will be required to perform a daily computation, but in a way that does not impose undue costs on smaller carrying broker-dealers. For example, smaller carrying broker-dealers can analyze whether it is advantageous from a cost perspective to realize the liquidity benefits that result from performing a daily customer reserve computation and applying a 2% debit reduction in lieu of a 3% debit reduction.

    In addition to addressing the proposed $250 Million Threshold, some commenters suggested modifying the proposal in a way that would make the reserve computations a hybrid of the daily and weekly approaches where carrying broker-dealers would compute certain items in the reserve formula daily and others weekly. For example, two commenters [121] suggested that a more cost efficient and effective alternative to prevent a deficit of customer property in a SIPA liquidation (for carrying broker-dealers primarily conducting a DVP/RVP business) [122] would be to continue weekly computations with a daily calculation of free credit balances.[123] Another commenter acknowledged that while certain carrying broker-dealers should perform a daily reserve computation, the Commission should permit other carrying broker-dealers to perform a weekly reserve computation, and a simplified intra-week reserve computation of only material balances (while excluding cash balances moved to external sweep programs).[124]

    The final amendments retain the daily customer and PAB reserve computation requirement, as proposed. The hybrid approaches commenters suggested would not provide the same level of customer protection afforded by complete daily customer and PAB reserve computations because these hybrid approaches do not include all debits and credits.[125] As discussed above in section I.C.1. of this release, preexisting Rule 15c3-3 is designed to protect customers by segregating their securities and cash from the carrying broker-dealer's proprietary business activities. This is accomplished through the customer and PAB reserve computations that must include all funds which have customer assets as their source, and ensures that the net amount of cash owed to customers and PAB account holders that is not deployed for customer or PAB account holder securities transactions is deposited in the customer and PAB reserve bank accounts.[126] Performing only a modified or hybrid customer or PAB reserve computation increases the risk of a large mismatch for carrying broker-dealers with large amounts of credits that exceed the $500 Million Threshold because they would not be accounting for all credit items when performing daily reserve computations under these alternatives.[127] This, in turn, would increase the risk that a carrying broker-dealer may be unable to promptly return cash and securities to customer and PAB account holders in the event the carrying broker-dealer fails financially.

    Further, limiting the daily computation to the amount of free credit balances and including any increase in only free credit balances in a sweep program or a separate special reserve bank account,[128] or an intra-week computation of only certain credit items would not account for possible material changes in other credit items not accounted for daily that could substantially affect the customer or PAB reserve computation and any required deposit. Finally, the hybrid computations commenters suggested would introduce an additional level of complexity to the computation that could tax the resources of carrying broker-dealers while not achieving the full risk-reducing benefits of a complete daily reserve computation.[129]

    Another commenter stated that the Commission should adopt a separate $250 million threshold requirement for the customer and PAB reserve computations, to allow carrying broker-dealers to focus their resources on the reserve computation that merits the most attention, rather than one that presents minimal risk to the carrying broker-dealer or the financial system as a whole.[130] This commenter also suggested as another alternative that the Commission permit a carrying broker-dealer that exceeds the proposed $250 Million Threshold to perform an optional weekly computation for either its customer or PAB accounts where credits in that particular computation fall below a certain level ( e.g., $50 ( print page 2800) million).[131] Another commenter stated that for carrying broker-dealers performing both the customer and PAB reserve computations, the Commission should not require daily PAB reserve computations in order to protect customer reserves while mitigating stress on carrying broker-dealers' resources.[132]

    The final amendments do not take these approaches commenters suggested to bifurcate the frequency of the customer and PAB reserve computations. Both the securities accounts of customers and PAB account holders would be affected if a carrying broker-dealer experiences a large intra-week mismatch in either its customer or PAB reserve bank accounts. This mismatch risk increases the risk to both the carrying broker-dealer's customers and PAB account holders that if the carrying broker-dealer fails financially, the customers and PAB account holders may experience a delay in receiving their cash and securities or be subject to a disorderly liquidation. Requiring that a carrying broker-dealer that exceeds the $500 Million Threshold perform a daily customer and PAB reserve computation reduces the mismatch risk in each of these accounts and more dynamically matches the net cash owed to PAB account holders with the amount on deposit in the customer and PAB reserve bank accounts. This requirement will reduce mismatch risk, and benefit both customer and PAB account holders if a carrying broker-dealer fails financially by ensuring their cash and securities are promptly returned to them.

    In addition, in the event of a SIPA liquidation of a failed carrying broker-dealer, both customers and PAB account holders would be part of the customer estate which would include both the customer and PAB reserve bank accounts to the extent needed to satisfy customers' claims. Further, because PAB account holders—as broker-dealers—are not entitled to advances from the SIPC Fund, their claims for securities and cash would be at a greater risk of not being satisfied in full (as compared to non-broker-dealer customers). This could expose the PAB account holder to financial stress and increased risk of liquidation.[133] Therefore, because a large mismatch in the customer or PAB reserve bank account will affect both customers and PAB account holders in a SIPA liquidation, the final rules require a carrying broker-dealer to perform a daily customer and PAB reserve computation if it meets or exceeds the $500 Million Threshold.

    Finally, a daily requirement for both the customer and PAB reserve computations also will promote consistency by requiring that a carrying broker-dealer perform the customer and PAB reserve computations with the same frequency.[134] While Rule 15c3-3 currently permits a carrying broker-dealer to elect to perform its customer and PAB reserve computations more frequently than weekly,[135] a practical effect of requiring a uniform standard that a carrying broker-dealer perform both the customer and PAB reserve computations daily will be to permit the carrying broker-dealer to withdraw excess funds more quickly from either the customer or PAB reserve bank account (as compared to a weekly reserve computation). This consistency will increase liquidity for carrying broker-dealers and position them to better address potential financial shocks.[136]

    For the reasons discussed above in this section, the Commission has not modified the final amendments to establish the alternative thresholds or hybrid computations commenters suggested. However, to the extent that carrying broker-dealers incur costs to transition to a daily reserve computation, the modification of the final amendments to permit a 2% debit reduction in performing the customer reserve computation will provide them additional liquidity.[137] This modification will reduce costs from the proposal for carrying broker-dealers without compromising the enhancements to customer protection that the final $500 Million Threshold is designed to provide (and without adopting any of the alternative thresholds or hybrid computations commenters suggested).

    Several commenters stated that carrying broker-dealers should perform reserve computations in real time or commented on the technological advances in the securities markets.[138] One commenter stated that technical prerequisites for such complex computational operations are already in place and should not be burdensome to carrying broker-dealers.[139] Another commenter stated that the Commission should not entertain any carrying broker-dealer's objections that the proposal would be ineffective or burdensome to implement since the entirety of their services should now be automated.[140] Commenters also stated that the proposal is a necessary reform given technological advances and pace of today's financial markets.[141]

    Although there have been technological advances to automate and streamline the customer and PAB reserve computations to enable carrying broker-dealers to perform a computation daily, there are still portions of the customer and PAB reserve computations that employees must perform manually (such as performing reconciliations or researching items in suspense accounts in order to properly credit the correct customer securities account), or required data inputs that a carrying broker-dealer may be unable to obtain in real time (such as data from a third party service provider). These manual items and unavailability of certain data in real time make it impractical to require carrying broker-dealers to perform a customer or PAB reserve computation in real time. Moreover, adjusting amounts deposited in the customer and PAB reserve bank accounts in real time would be impractical.

    B. Compliance With Daily Reserve Computation After Exceeding $500 Million Threshold

    1. Proposal

    The Commission proposed to require that a carrying broker-dealer comply with performing a customer and PAB reserve computation daily no later than six months after having average total credits that are equal to or greater than $250 million. The purpose of the six-month compliance period in the ( print page 2801) proposed rule text was to provide time for a carrying broker-dealer to prepare to perform a customer and PAB reserve computation daily after it exceeds the proposed $250 Million Threshold.[142] The Commission stated that a carrying broker-dealer in this situation may need to add resources in order to perform the computations, including hiring or assigning additional staff to perform the daily computations.[143]

    Once a carrying broker-dealer begins to perform customer and PAB reserve computations daily (because it exceeded the $250 Million Threshold), the Commission proposed to require the carrying broker-dealer to continue performing customer and PAB reserve computations daily for at least 60 days after it falls below the $250 Million Threshold. More specifically, under the proposal, a carrying broker-dealer could elect to perform computations weekly by notifying its DEA in writing at least 60 calendar days before reverting to a weekly computation.[144] If a carrying broker-dealer that provided the 60-day notice under the proposal reverts to a weekly rather than daily customer and PAB reserve computation and subsequently exceeds the proposed $250 Million Threshold once again, the proposed rule would require the carrying broker-dealer to comply with the daily computation requirement no later than six months after having average total credits equal to or greater than $250 million.[145] This would be the same process as when a carrying broker-dealer exceeded the proposed $250 Million Threshold for the first time.

    2. Comments Received and Final Amendments

    The Commission sought comment on the proposed compliance period for beginning to perform customer and PAB reserve computations daily after a carrying broker-dealers exceeds the proposed $250 Million Threshold.[146] As discussed below in this section, the Commission received several comments regarding the proposed compliance period.

    One commenter suggested the Commission group carrying broker-dealers by size and select a transition period for compliance appropriate for carrying broker-dealers in each group to accelerate the transition to performing a customer and PAB reserve computation daily.[147] This commenter stated that six months may be longer than many large and sophisticated carrying broker-dealers need to complete the transition to a daily reserve computation after exceeding the proposed $250 Million Threshold.[148] Another commenter stated that the Commission should shorten the proposed six-month compliance period to three-months for a carrying broker-dealer to make the systems and staffing changes necessary to perform a daily computation after it exceeds the proposed $250 Million Threshold.[149] Finally, one commenter requested that the calculations for customer and PAB reserve computations be bifurcated, with the proposed $250 Million Threshold applied separately for the customer and PAB reserve computations, and that the six month compliance period apply when the particular type of average total credits (customer or PAB) crosses the proposed $250 Million Threshold.[150]

    As discussed in section II.A. of this release, the Commission is adopting a $500 Million Threshold as part of the final amendments. The six-month timeframe accounts for the fact that carrying broker-dealers of different sizes may need more or less time to comply with a requirement to perform the customer and PAB reserve computations daily. The six-month timeframe, accordingly, provides a straightforward and uniform compliance period for carrying broker-dealers to meet if they exceed the $500 Million Threshold and must begin performing the customer and PAB reserve computations daily. A uniform compliance period also will be easier for the Commission, Commission staff and a carrying broker-dealer's DEA to monitor for compliance because the same requirement will apply to all carrying broker-dealers. As such, the Commission is not modifying the final rule to provide for different compliance timeframes based on the size of a carrying broker-dealer, as commenters suggested.

    A six-month compliance period also helps to ensure a carrying broker-dealer that exceeds the $500 Million Threshold begins to perform a daily customer and PAB reserve computation within a reasonable period of time. In light of the enhancements to customer protection a daily reserve computation provides, it is important that carrying broker-dealers transition to a daily reserve computation as soon as practicable after exceeding the $500 Million Threshold. Shortening the compliance period to three-months, however, may not give carrying broker-dealers sufficient time to transition to a daily customer and PAB reserve computation, given the need to add resources in order to perform the computations, including hiring or assigning additional staff, upgrading systems, and making other operational changes. A six-month compliance period reasonably balances the importance of transitioning to a daily customer and PAB reserve computation soon after exceeding the $500 Million Threshold to enhance customer protection requirements, with the time period a carrying broker-dealer needs to make the changes required to comply with the rule. Therefore, the Commission is not modifying the final rule to provide for a three-month compliance period as a commenter suggested.

    One commenter stated that the proposal would allow a carrying broker-dealer that is required to perform daily computations to revert to a weekly computation 60 days after notifying its DEA, but if it exceeds the proposed $250 Million Threshold, it would not be required to return to performing a customer and PAB reserve computation daily for six months.[151] The commenter stated that while the Commission assumes it may be infrequent that a carrying broker-dealer that reverts to weekly computations after falling below the proposed $250 Million Threshold re-crosses it shortly after because of increased customer activity, if such circumstances were to occur the carrying broker-dealer at issue would present the risk that the Commission is trying to address in the proposal for a period of six months.[152] Consequently, this commenter suggested that the Commission revise the rule so that a carrying broker-dealer that falls below the proposed $250 Million Threshold would enter a probationary period of six months during which time it would be required to immediately return to performing the customer and PAB reserve computations daily if its total credits re-crossed the threshold.[153]

    Another commenter suggested that the Commission provide a transition of not more than 30 days for a carrying broker-dealer that performs a customer and PAB reserve computation daily, reverts to a weekly computation because it falls below the proposed $250 Million ( print page 2802) Threshold, and then subsequently exceeds the proposed $250 Million Threshold and must perform a daily computation. This commenter stated that a carrying broker-dealer that formerly performed customer and PAB reserve computations daily is unlikely to require six months to reinstate procedures previously in effect.[154]

    In response to the comments that the Commission require a carrying broker-dealer to immediately return to performing a customer and PAB reserve computation daily if it exceeds the threshold for a second time, or only be permitted a three-month compliance period, the compliance period is designed to provide sufficient time for a carrying broker-dealer to prepare to perform a customer and PAB reserve computation daily after it exceeds the threshold. A carrying broker-dealer performing the customer and PAB reserve computations weekly which recrosses the $500 Million Threshold for a second or subsequent time will likely continue to need time to prepare to perform the customer and PAB reserve computations daily, because the carrying broker-dealer may have re-allocated resources when it reverted to a weekly computation. A return to performing a customer and PAB reserve computation daily likely means a carrying broker-dealer will require time to enhance its current operational resources in order to increase the frequency of the customer and PAB reserve computations once more. It also may be the case that a carrying broker-dealer may exceed the $500 Million Threshold for a second or subsequent time after a substantial period of time has passed. Finally, although a carrying broker-dealer may re-cross the $500 Million Threshold shortly after falling below it, and not yet have re-allocated resources required to perform a daily computation, consistent standards will be applied to all carrying broker-dealers that exceed the $500 Million Threshold after a long or short period of time as they will have the same risk profile. Therefore, a six-month compliance period is appropriate in this case.

    Some carrying broker-dealers' average total credits may hover around the $500 Million Threshold from time to time. This will likely be an infrequent occurrence since there will only be a few carrying broker-dealers at any given time whose average total credits remain close to the $500 Million Threshold.[155] These carrying broker-dealers may choose to monitor and manage their average total credits to remain below the $500 Million Threshold or voluntarily perform the customer and PAB reserve computations daily to realize the beneficial impact on liquidity management resulting from the ability to make more frequent withdrawals from the customer and PAB reserve bank accounts.[156] Carrying broker-dealers that voluntarily perform the customer reserve computation daily also may apply the 2% debit reduction to the computation.[157] These alternatives will assist carrying broker-dealers in complying with the requirement to perform a customer and PAB reserve computation daily if they exceed the $500 Million Threshold.

    After review of the comments, the Commission is adopting the six-month compliance period after a carrying broker-dealer exceeds the $500 Million Threshold, and the 60-day written notice requirement to revert to a daily computation.[158] Therefore, under the amendments, a carrying broker-dealer must begin to perform a customer and PAB reserve computation daily no later than six months after its average total credits equal or exceed the $500 Million Threshold. This means, for example, that a carrying broker-dealer which exceeds the $500 Million Threshold for 12 filed monthly FOCUS Reports for a particular calendar year ( i.e., FOCUS Reports filed for January through December in a calendar year), must begin performing a customer and PAB reserve computation daily no later than June 30th of the next calendar year. Finally, this amendment provides time for a carrying broker-dealer to prepare to perform a customer and PAB reserve computation daily after it exceeds the $500 Million Threshold. This preparation may involve adding resources to perform the computations, including, among other things, hiring extra staff, assigning additional staff, and updating or enhancing technology and software.

    C. Reducing the Aggregate Debit Reduction From 3% to 2%

    1. Amendments to Rules 15c3-1 and 15c3-3

    Under existing requirements, carrying broker-dealers—as part of the customer reserve computation—must reduce the value of debits items ( i.e., customer-related receivables) in the customer reserve computation by either 1% (for debit balances in customers' cash and margin accounts) or 3% (for aggregate debit items which includes all debit items).[159] Whether a carrying broker-dealer must apply the 1% or 3% debit reduction depends on how it calculates its minimum net capital requirement under Rule 15c3-1. Rule 15c3-1 requires that broker-dealers maintain a minimum level of net capital (meaning highly liquid capital) at all times.[160] The minimum net capital requirement for broker-dealers is the greater of a fixed-dollar amount specified in the rule and an amount determined by applying one of two financial ratios: the 15-to-1 aggregate indebtedness to net capital ratio (basic method) or the 2% of aggregate debit items ratio (alternative method).[161] Carrying broker-dealers electing the alternative method must maintain minimum net capital of the greater of $250,000 or 2% of their aggregate debit items included in the customer reserve computation.[162] In addition, a broker-dealer that uses the alternative method must provide the Commission with an “early warning” notice when the amount of its net capital falls below 5% of aggregate debit items.[163] Most carrying broker-dealers use the alternative method, including the 49 carrying broker-dealers that ( print page 2803) exceeded the $500 Million Threshold for calendar year 2023.[164]

    Under Rule 15c3-1, a carrying broker-dealer using the alternative method must reduce aggregate debit items ( i.e., the total of all debit items in the customer reserve computation) by 3% when performing its customer reserve computation under Rule 15c3-3.[165] Conversely, Note E(3) to the customer reserve computation under Rule 15c3-3a requires a carrying broker-dealer using the basic method to reduce by 1% the total debit balances in customer cash and margin accounts ( i.e., margin loan balances customers owe the carrying broker-dealer).[166] Both of these provisions can increase the amount that must be on deposit (locked up) in the customer reserve bank account; however, the 3% debit reduction can result in an even larger increase in the deposit requirement.[167] This is because the reduction is larger (3% compared to 1%) and is applied to the total amount of debit items while the 1% debit reduction applies to a single category of debit items: customer margin loan balances.

    The Commission is lowering the 3% debit reduction to 2% in response to comments that a reduction as large as 3% would no longer be necessary if the requirement to perform a daily reserve computation is adopted.[168] This modification to the proposal is designed to recalibrate how Rule 15c3-3 addresses the risk that the amount on deposit in the customer reserve bank account is less than the net amount of cash owed to customers in light of the new requirement to perform daily customer and PAB reserve computations. As a commenter stated, “[u]nder a daily computation, the value of debit items and the amounts owing to customers on any given day are accounted for in the next day's computation and the difference is protected via the following day's deposit into the Special Reserve Bank Accounts” and therefore “[t]he amount of assets in the Special Reserve Bank Accounts would . . . more quickly reflect the amounts owing to customers on any given day and the value of debit items, thereby reducing the need for any cushion [( i.e., the 3% debit reduction)] to account for a potential mismatch.” [169] Similarly, another commenter stated that when the Commission adopted the 3% debit reduction in 1975 the purpose was to provide, in the event of a liquidation, an additional cushion of secured debit items which will be available to satisfy customers with whom the carrying broker-dealer effects transactions.[170] This commenter stated that a shift to a daily customer reserve computation enabled by technological advancements since 1975 will result in a more precise and up-to-date computation, thereby mitigating the risk that the 3% debit reduction addresses in the customer reserve computation.[171] The commenter went on to state that “a 1% deduction in line with that applied to other broker-dealers seems appropriate for firms that calculate net capital under the alternative method.” [172]

    Commenters suggested eliminating the 3% debit reduction that applies to carrying broker-dealers using the alternative method. This would then subject these carrying broker-dealers to the 1% debit reduction that applies to carrying broker-dealers using the basic method. For the reasons discussed below, the Commission is not taking this approach and instead is lowering the 3% debit reduction to 2%.

    In order to understand the Commission's rationale for recalibrating Rule 15c3-3 in this manner, it is necessary to discuss the origins and purpose of the 3% debit reduction and its connection to Rule 15c3-1. Rule 15c3-3—when it was adopted in 1972—required carrying broker-dealers to reduce the value of debit balances in cash and margin accounts by 1% when performing the customer reserve computation.[173] Debit balances in cash and margin accounts was one of three categories of debit balances included in the customer reserve computation at that time ( i.e., the 1% debit reduction did not apply to the total value of debits in the customer reserve computation).[174] In 1972, the Commission also proposed significant revisions to Rule 15c3-1 (the broker-dealer net capital rule).[175] The original rule prohibited a broker-dealer from having aggregate indebtedness that exceeded 2000% of its net capital, exclusive of exchange memberships and fixed assets (a 20-to-1 requirement).[176] Moreover, the rule did not apply to broker-dealers that were members of a securities exchange on the premise that these broker-dealers were subject to capital requirements promulgated by their respective exchanges. The 1972 proposed amendments—among other things—would apply Rule 15c3-1 to all broker-dealers ( i.e., a uniform net capital rule) and change the minimum net capital requirement to the greater of a fixed-dollar amount and a ratio amount: the 15-to-1 aggregate indebtedness to net capital ratio ( i.e., the basic method). Thus, as originally proposed in 1972, the amendments to Rule 15c3-1 did not include the alternative method of computing minimum net capital.

    While the 1972 amendments to Rule 15c3-1 were still pending, the Commission proposed further amendments to the rule as well as corresponding amendments to Rule 15c3-3. They included a 1974 proposal to add the alternative method of calculating minimum net capital.[177] The proposed alternative method would require a carrying broker-dealer to maintain a minimum level of net capital equal to the greater of $100,000 or 4% of aggregate debit balances includable in the customer reserve computation.[178] At that time, the Commission acknowledged that the alternative method could result in lower minimum net capital requirements as compared with the basic method.[179] Given this ( print page 2804) impact, the Commission proposed a number of more stringent requirements for carrying broker-dealers using the alternative method, including that they would need to apply the 3% debit reduction in lieu of the existing 1% debit reduction in Rule 15c3-3.[180] In proposing the 3% debit reduction, the Commission explained that the proposed debit reduction would require a 100% reserve for customer funds not available for use by the broker-dealer, and an additional 3% commitment of the broker-dealer's own liquid capital in the form of cash or qualified securities as an additional reserve and to insure the broker-dealer's ability to finance its customer-related receivables.[181]

    The Commission adopted the proposed amendments to Rules 15c3-1 and 15c3-3 in 1975.[182] They included the alternative method for calculating the minimum net capital requirement and the requirement that carrying broker-dealers using the alternative method apply the 3% debit reduction.[183] In this regard, the Commission explained “that the objectives of the [alternative method] can only be achieved by further strengthening the custodial requirements and Reserve Formula safeguards developed for the protection of customer assets established by [Rule 15c3-3]” and therefore the alternative method “requires aggregate debit items in the Reserve Formula to be reduced by 3% rather than the 1% reduction of certain debit items which now exists.” [184] The Commission stated that this “reduction of debit items will thus provide, in the event of a liquidation, an additional cushion of secured debit items which will be available to satisfy customers with whom the broker or dealer effects transactions.” [185]

    Thus, the 3% debit reduction is designed to compensate for the potential lower minimum net capital requirement resulting from carrying broker-dealers electing the alternative method in lieu of the basic method. Consequently, the Commission lowered the capital requirements and strengthened the customer reserve computation requirements for carrying broker-dealers using the alternative method. In particular, the 3% debit reduction decreases the amount of debits that offset credits in the customer reserve computation and, thereby, can increase the amounts carrying broker-dealers must lock up in their customer reserve bank accounts. The 3% debit reduction applies to aggregate debit items in the customer reserve computation under Rule 15c3-3 ( i.e., all debit items in the customer reserve computation). Carrying broker-dealers that use the basic method to compute their minimum net capital requirement must reduce certain debits ( i.e., not all debits) by 1%. This results in a lower reduction and a correspondingly smaller potential increase in the amount carrying broker-dealers applying the 1% debit reduction must lock up in their customer reserve bank accounts.

    For these reasons, the Commission is not eliminating the 3% debit reduction as commenters suggested because doing so would subject carrying broker-dealers using the alternative method to the same 1% debit reduction that applies to carrying broker-dealers using the basic method.[186] As discussed above in this section, the 3% debit reduction is designed to compensate for how the alternative method can result in a lower minimum net capital requirement than the basic method. In addition, as stated in this section above, the 49 carrying broker-dealers that exceeded the $500 Million Threshold for calendar year 2023 use the alternative method for net capital purposes. The Commission also estimates that these 49 carrying broker-dealers, based on FOCUS Report data for January 2023 through December 2023, held 99.3% of aggregate total credits of all carrying broker-dealers.[187] Therefore, carrying broker-dealers using the alternative method for net capital hold the bulk of customer credits ( i.e., amounts the carrying broker-dealer owes customers) as compared to carrying broker-dealers using the basic method.

    However, the new requirement to perform daily customer reserve computations significantly strengthens the customer protection measures of Rule 15c3-3. In particular, performing a daily customer reserve computation reduces the risk that the net amount of cash owed to customers will be substantially greater than the amount on deposit in a carrying broker-dealer's customer reserve bank account.[188] A daily computation requirement allows for cash owed to customers from a particular day to be included in that day's customer reserve computation, computed the next business day and any required deposits made the following business day. Therefore, under a daily customer reserve computation, the amount on deposit in the customer reserve bank account will more quickly reflect the net amount of cash the carrying broker-dealer owes its customers. Performing a daily customer reserve computation also will reduce the maximum time between required deposits into a customer reserve bank account to two business days. In contrast, under a weekly customer reserve computation, a carrying broker-dealer performs the customer reserve computation on Monday, using numbers as of the close of business on Friday, and makes any required deposits in its customer reserve bank account on Tuesday (typically) of each week. Therefore, the next deposit requirement under a weekly customer reserve computation will be the Tuesday of the following week.

    These enhancements to the customer protection measures of Rule 15c3-3 warrant a corresponding adjustment to the 3% debit reduction in order to avoid overcompensating for the differences between the alternative and basic method. Consequently, the Commission is lowering the 3% debit reduction to 2% for carrying broker-dealers that use the alternative method if they perform a daily customer reserve computation. 189 ( print page 2805) Lowering the debit reduction to 2% is designed to adjust this risk-reducing measure in response to the customer protection enhancements of the new daily customer reserve computation requirements while maintaining a debit reduction amount (2% as compared to 1%) that will continue to compensate for the differences between the alternative and basic methods of calculating minimum net capital requirements.

    In order to implement this change, the Commission is amending paragraph (a)(1)(ii)(A) of Rule 15c3-1 to provide that a carrying broker-dealer that is required to perform a daily customer reserve computation under paragraph (e) of Rule 15c3-3 may reduce aggregate debit items in such computation by 2% (rather than 3%).[190] Carrying broker-dealers that elect the alternative method for calculating their minimum net capital requirement and perform their customer reserve computation weekly must continue to apply the preexisting 3% debit reduction. Further, this amendment to Rule 15c3-1 applies only to a carrying broker-dealer's customer reserve computation. It does not amend or change the minimum net capital requirements for carrying broker-dealers under Rule 15c3-1 irrespective of whether they use the basic or alternative methods. Consequently, carrying broker-dealers electing the alternative method must continue to maintain the greater of $250,000 or 2% of aggregate debit items under Rule 15c3-1 and they remain subject to an early warning notification requirement under Rule 17a-11 if their net capital falls below 5% of aggregate debit items.[191]

    In addition, the Commission is modifying paragraph (e)(3) of Rule 15c3-3 to add a new paragraph (e)(3)(v) to permit a carrying broker-dealer that voluntarily performs the customer reserve computation daily under preexisting paragraph (e)(3)(iv) of Rule 15c3-1 to reduce its aggregate debit items by 2%, if the carrying broker-dealer notifies its DEA, in writing, of its election at least 30 calendar days before beginning such computation.[192] The new paragraph also provides that if a carrying broker-dealer has notified its DEA of this election, the carrying broker-dealer must continue to compute the customer reserve computation daily unless a change is approved by its DEA.[193] This amendment is being made in Rule 15c3-3 (as compared to Rule 15c3-1 where the 3% and 2% debit reduction provisions are located) because it relates to a carrying broker-dealer voluntarily performing a daily customer reserve computation. Therefore, to maintain consistency with existing rule text, this new paragraph follows paragraph (e)(3)(iv) of Rule 15c3-3, which permits carrying broker-dealers to voluntarily perform reserve computations more frequently than required under the rule.[194] The notice requirement to voluntarily begin the daily customer reserve computations with the 2% debit reduction will assist the DEA in monitoring the carrying broker-dealer. For example, upon receiving the notice, the DEA can contact the carrying broker-dealer to inquire about its plan for transitioning to a daily customer reserve computation and about any changes to its systems and processes for performing the daily computation and for applying the lower 2% debit reduction (in lieu of the 3% debit reduction). The approval requirement to revert to performing a weekly customer reserve computation is designed to ensure that a carrying broker-dealer performs a daily customer reserve requirement consistently rather than constantly switching between daily and weekly reserve computations depending on which approach is more advantageous on a given day. This will prevent a carrying broker-dealer from performing a daily customer reserve computation on an ad hoc basis solely to reduce an excess of credits over debits in the customer reserve computation and thereby minimize deposit requirements in the customer reserve bank account.

    Commenters stated that lowering the 3% debit reduction will increase the liquidity of carrying broker-dealers because it will reduce the extra buffer of broker-dealer capital that must be deposited into the customer reserve bank account. For example, a commenter stated that the new requirement to perform a customer reserve computation daily would reduce the need for any cushion to account for a mismatch and, consequently, would increase liquidity and lower costs for customer financing by allowing carrying broker-dealers to use assets that would otherwise be locked up (in their customer reserve bank account).[195] This commenter further stated that the increased liquidity resulting from lowering the amount of the 3% debit reduction could be redeployed by carrying broker-dealers to provide customers with more financing at a lower cost, which benefits customers and carrying broker-dealers.[196] This commenter also stated that carrying broker-dealers would use this additional liquidity to pay the costs associated with transitioning from weekly to daily reserve computations, potentially allowing carrying broker-dealers to make the transition more efficiently and at a lower relative cost.[197] Another commenter stated that this modification would provide financial relief to carrying broker-dealers.[198]

    Decreasing the debit reduction from 3% to 2% will provide extra liquidity to carrying broker-dealers, as commenters suggested. Enhancing the liquidity of carrying broker-dealers will position them to better withstand financial shocks and thereby lower the risk that such a shock causes the carrying broker-dealer to fail financially (which in turn will benefit the carrying broker-dealer's customers, counterparties, and creditors). Further, carrying broker-dealers will be able to use this extra liquidity to pay the initial and ongoing compliance costs to transition from weekly to daily reserve computations. They also may use the extra liquidity to address situations where they must make large additional deposits into the customer or PAB reserve bank accounts to account for large infusions of customer or PAB account holder cash that is intended to be swept out of the broker-dealer but gets accounted for in the reserve computations before it can be swept.[199]

    ( print page 2806)

    2. Conforming Amendments to the FOCUS Report

    The Commission is adopting amendments to the Part II of the FOCUS Report to conform the reporting obligations with the final amendment lowering the debit reduction from 3% to 2% for carrying broker-dealers that use the alternative method and perform daily customer and PAB reserve computations.[200] Currently, in the Computation for Determination of Customer Reserve Requirements in Part II of the FOCUS Report, the form includes a line for a carrying broker-dealer that uses the alternative method for computing net capital to report the 3% debit reduction. The amendments to the FOCUS Report add a line to report the 2% debit reduction in lieu of reporting the 3% debit reduction. The existing line to report the 3% deduction is being retained for carrying broker-dealers that are below the $500 Million Threshold and that do not voluntarily perform daily customer and PAB reserve computations.

    Further, the Commission is amending the line for reporting “Total Debits” in the Computation for Determination of Customer Reserve Requirements in Part II of the FOCUS Report to reflect that Total Debits equals “Aggregate Debit Items” less the 3% or 2% debit reduction, as applicable. The Commission also is adding an additional line under “Frequency of Computation” to require that a carrying broker-dealer check one of two new boxes to indicate whether it is using the 2% debit reduction or 3% debit reduction. Finally, the Commission is amending the footnote to the Computation for Determination of Customer Reserve Requirements in the FOCUS Report Part II to add a reference to paragraph (e)(3)(v) of Rule 15c3-3.

    D. Voluntary Customer and PAB Reserve Computations

    The Commission proposed to amend paragraph (e)(3)(iv) of Rule 15c3-3, which permits interim reserve computations to be performed between the days that the weekly or permitted monthly computations must be performed.[201] In particular, preexisting paragraph (e)(3)(iv) of Rule 15c3-3 provided that computations in addition to the computations required in paragraph (e)(3) ( i.e., the weekly and permitted monthly computations) may be made as of the close of any business day, and the deposits so computed must be made no later than one hour after the opening of banking business on the second following business day.[202] The amendment to paragraph (e)(3)(iv) provides that computations—other than those made under paragraph (e)(3)(i)(B)( 1) of Rule 15c3-3, as amended ( i.e., the daily computations)—may be made as of the close of any business day.[203] This amendment specifies that the option to perform a customer or PAB reserve computation more frequently than weekly or monthly (as applicable) remains available to carrying broker-dealers that must make such computations weekly or monthly. Carrying broker-dealers voluntarily performing daily customer and PAB reserve computations have used this option.[204]

    A commenter stated that the proposal permits carrying broker-dealers that perform weekly reserve computations to continue to make voluntary, interim computations but does not expressly require approval from the carrying broker-dealer's DEA.[205] The commenter stated that the Commission should make this approval a requirement in the final rule, as well as require approval from the DEA for the carrying broker-dealer to cease performing the interim computation.[206] The commenter stated these changes would help guard against a carrying broker-dealer performing interim reserve computations opportunistically to minimize required reserve account deposits.[207]

    The final amendments do not include this modification, as it would impose new requirements on carrying broker-dealers that elect to perform an interim reserve computation. Further, carrying broker-dealers that utilize this provision to perform an interim reserve computation will remain subject to the 3% debit reduction. In addition, the Commission estimates that, based on data for January 2023 through December 2023, 49 carrying broker-dealers, which held 99.3% of aggregated total credits of all carrying broker-dealers, will exceed the $500 Million Threshold and will be required to perform a daily customer and PAB reserve computation.[208] Because these carrying broker-dealers will perform daily customer and PAB computations under the final amendments, they will not perform interim reserve computations. Given that these carrying broker-dealers hold nearly all of the total credits of all carrying broker-dealers, an amendment to the rule as the commenter suggested is not merited given the relatively smaller amounts required to be on deposit for the remaining carrying broker-dealers.[209] For these reasons, the Commission is not adopting the commenter's suggested modification and is adopting the amendment as proposed.[210]

    E. Other Comments

    The Commission received other comments related to the proposal that cover technical questions about how the final amendments will operate, as well as requests for clarification and interpretations on specific issues related to performing a customer and PAB reserve computation daily.

    1. Sweep Programs and Other “Cash in Motion” or “Transitory” Credits”

    The Commission received two comments regarding sweep programs [211] ( print page 2807) and performing daily customer and PAB reserve computations.[212] One commenter stated that a daily reserve computation would not benefit customers of carrying broker-dealers with widely-used sweep programs.[213] This commenter stated that sweep programs contribute to protecting customer assets and already address the mismatch risk the proposal seeks to remedy by regularly moving customer cash off a carrying broker-dealer's balance sheet.[214] In addition, this commenter stated that if a carrying broker-dealer receives customer cash after the daily sweep cutoff time, it is generally swept early the next business day and, as such, will be protected sooner than including such cash in a daily reserve computation.[215]

    This commenter also stated that there are potential benefits to more frequent customer and PAB reserve computations but raised concerns about potential impacts on liquidity, particularly in cases where a free credit balance is “transitory” or is “cash in motion,” [216] such as cash that the carrying broker-dealer needs the next day to fund an Automated Clearing House transfer or a wire request received after banking cutoff times.[217] This commenter stated that carrying broker-dealers may need to use their own funds to account for transitory funds and that this may result in only large carrying broker-dealers (with substantial liquidity) being able to service ultra-high net worth clients with large transitory credits.[218] The commenter stated that this would disadvantage smaller carrying broker-dealers who would be unable to compete for certain types of clients or transactions.[219] Another commenter stated that the proposed daily computation requirement would impose substantial unintended costs on carrying broker-dealers that regularly deposit inflows of customer cash into reserve bank accounts or transfer them into a sweep account.[220] For these carrying broker-dealers, the commenter stated that a daily computation could require them to segregate large portions of funds that are already protected by virtue of the sweep/deposit.[221] Commenters stated that, although this issue exists with the preexisting weekly computations under Rule 15c3-3, this risk is exacerbated under a daily computation because carrying broker- dealers will no longer have a week to resolve any issues, which creates uncertainty, as the amount of cash tied up would vary each day.[222]

    One commenter stated that Commission staff has previously recognized this issue under existing staff no-action positions where carrying broker-dealers in certain circumstances have withdrawn funds from the special reserve bank account or deposited funds into separate special reserve bank accounts that are promptly swept or are otherwise used to meet specific customer instructions.[223] This commenter further stated that if funds the carrying broker-dealer receives from or for customers are swept on a same or next day basis into a sweep program or into a customer reserve bank account, they are protected against loss and there is no reason for including these amounts in a reserve computation.[224] Accordingly, the commenter suggested that the Commission simplify the staff no-action positions and permit a carrying broker-dealer to exclude from the customer and PAB reserve computations any funds that the carrying broker-dealer has swept or deposited promptly upon receipt.[225]

    Another commenter stated that the Commission should permit cash held for a customer that is intended to be swept not be treated as a credit in the customer reserve computation. The commenter stated that this suggestion is analogous to a current interpretation under Rule 15c3-3a that states, if a carrying broker-dealer pre-funds a redemption of money market shares but still carries the shares long in the customer's account, it cannot treat the pre-funding as a debit in the reserve computation. The commenter stated that cash held for a customer that is intended to be swept should not be treated as a credit in the reserve computation just as pre-funded money market fund redemptions are not treated as debits in the computation.[226]

    For the reasons discussed below, the final amendments do not exclude cash that is intended to be swept or is otherwise “transitory” or in “motion” from the customer and PAB reserve computations. However, the final amendments lowering the debit reduction from 3% to 2% in the customer reserve computations mitigate concerns commenters raised about how a daily reserve requirement could require carrying broker-dealers to use their own capital to fund reserve account deposit requirements that relate ( print page 2808) to cash that will be swept or otherwise deployed the next day. In particular, a carrying broker-dealer can use the additional liquidity available to it through the lower 2% debit reduction to meet a required reserve deposit that results from a situation where cash is not swept or otherwise deployed quickly enough to avoid its inclusion in the customer or PAB reserve computations. Further, in response to the comment that smaller carrying broker-dealers may be disadvantaged in servicing customers with large transitory credits as compared to larger carrying broker-dealers with more liquidity, smaller carrying broker-dealers (as measured in terms of average total credits) also can use this additional liquidity to provide services to all types of customers, including ultra-high net worth individuals with large transitory credits.[227] In addition, raising the threshold to $500 Million will exclude an additional cohort of smaller carrying broker-dealers—relative to the carrying broker-dealers subject to the requirement—from the scope of the final amendments as compared to the proposal. These smaller carrying broker-dealers (as measured in terms of average total credits) may continue to perform weekly customer and PAB reserve computations and will have a week to resolve any issues related to transitory credits.[228] Lowering the debit reduction from 3% to 2% and increasing the threshold from $250 million to $500 million will address—in part—concerns about transitory credits by either providing excess liquidity to account for these credits or excluding a larger number of relatively smaller carrying broker-dealers from the need to address these credits on a daily basis.

    Transferring cash in a customer or PAB account to an FDIC-insured bank as part of a sweep program protects customers' and PAB account holders' cash in that it is no longer on the carrying broker-dealer's balance sheet. Other cash that has been redeployed such as cash used to purchase securities also is no longer included on a carrying broker-dealer's balance sheet.[229] However, this does not mean that it would be appropriate to permit a carrying broker-dealer performing daily customer and PAB reserve computations to exclude cash of customer and PAB account holders (including cash received after the daily cutoff time for a sweep program and other “transitory credits”) from its customer and PAB reserve computations because the intent is to sweep the cash out of the accounts or otherwise deploy it before the next deposit into the customer and PAB reserve accounts is due. Uninvested cash (such as cash received after a sweep cut-off time) held for customers and PAB account holders remains in the customer's or PAB account holder's securities account and on a carrying broker-dealer's balance sheet. A carrying broker-dealer must include this cash in its customer or PAB reserve computation for that particular business day because the carrying broker-dealer owes that cash to its customer and PAB account holders, and it will not receive FDIC protection until it is swept the next business day.

    As discussed in section I.C.1. of this release, preexisting Rule 15c3-3 is designed to protect customers by segregating their securities and cash from the carrying broker-dealer's proprietary business activities. This is accomplished through the customer and PAB reserve computations. If a carrying broker-dealer excludes customer and PAB cash that is included in its books and records from its reserve computation, it increases the risk that—if the carrying broker-dealer fails—the cash and securities may not be readily available to be returned to customers and PAB account holders. This, in turn, would increase the risk that a carrying broker-dealer may be unable to promptly return cash and securities to customer and PAB account holders in the event the carrying broker-dealer fails financially. This risk is exacerbated for PAB account holders, as they are not entitled to advances from the SIPC Fund.

    In response to the comment that the Commission should permit cash held for a customer that is intended to be swept not be treated as a credit in the customer reserve computation, a carrying broker-dealer cannot include this debit in the reserve computation because the receivable is from the money market fund and not the customer. In other words, the carrying broker-dealer cannot treat the pre-funding like a margin loan collateralized by the money market shares carried in the account. Margin loans are debits in the reserve computation, but they are loans to the customers to purchase the securities and the customer owes the money to the carrying broker-dealer. In the case of cash intended to be swept, however, the carrying broker-dealer holds the cash for the customer, which is a credit item in the reserve computation. This cash is a customer payable ( i.e., customer credit) until it is swept and is no longer on the carrying broker-dealer's books and records. A carrying broker-dealer must include such customer credits in its customer reserve computation.

    In response to comments that the issue related to cash in motion or transitory credits will be exacerbated under a daily computation requirement because a carrying broker-dealer will no longer have a week to resolve issues under a daily computation requirement because credit amounts vary each day,[230] the scenario of having to account for cash that the carrying broker-dealer no longer holds also can occur under the preexisting weekly reserve computation requirement. For example, customer cash deposited at the carrying broker-dealer on Friday after the time when it can be swept to a money market fund or bank must be accounted for in the customer reserve computation performed the following Monday (using numbers as of the close of business Friday) and, to the extent it creates a deposit requirement, the required deposit must be made by 10 a.m. on Tuesday even though by that time the customer cash has been swept to the money market fund or bank. Moreover, unless the carrying broker-dealer performs an intra-week reserve computation, the cash must remain in the customer reserve bank account until the following Tuesday. A daily reserve computation requirement will shorten the time that the cash must be held in the customer reserve bank account.

    While a daily reserve computation requirement will shorten the time that a carrying broker-dealer must hold cash in the customer reserve bank account, the Commission recognizes that a carrying broker-dealer performing a daily reserve computation will need to manage its sweep cash and other transitory credits daily rather than weekly. This increase in frequency in performing the customer and PAB reserve computations will not exacerbate the issue related to sweep-related cash and transitory credits as daily cash fluctuations may become more predictable over time, but it will require the carrying broker-dealer to manage this cash more quickly and efficiently, as compared to a weekly computation. This increase in efficiency, however, as a result of a daily reserve computation requirement ( print page 2809) will allow a carrying broker-dealer to withdraw funds more quickly from its customer reserve bank account, as compared to a weekly reserve computation, which will improve its liquidity.[231]

    Further, while the amount of credits related to cash that is not swept in a particular business day or other “cash in motion” would vary each day under a daily reserve computation requirement, the same is true for all customer credits and debits in the customer and PAB reserve computations. Therefore, a carrying broker-dealer must maintain sufficient capital or access to funding to make any required deposit into its customer or PAB reserve bank account, including any increased deposit requirements related to “transitory credits” or “cash in motion,” including when cash is not swept soon enough. This ensures that broker-dealers maintain sufficient access to capital and funding to support the volume of customer and PAB account holder business that they are carrying.

    While lowering the debit reduction to 2% and raising of the threshold to $500 million mitigates concerns commenters raised regarding issues related to cash sweeps and other transitory credits, the Commission recognizes that carrying broker-dealers performing a daily reserve computation may sometimes experience liquidity issues with respect to unusual or large inflows of customer cash received late in the day that is intended to be transferred to a sweep program under paragraph (j)(2)(ii) under Rule 15c3-3. If the unusual or large inflow of cash is swept out of the broker-dealer on the day the computation is performed, it nonetheless will be accounted for in the computation and may result in an increased deposit requirement. This issue merits further consideration. However, any potential solution must not diminish customer protection and be practical. Further, attempting to develop an appropriate solution would be a complex undertaking and could affect a range of carrying broker-dealers depending on their business model, the types of accounts the carrying broker-dealer services, and the products offered in the carrying broker-dealer's sweep program. The Commission would need to assess many factors, for example, the amount of cash that would be considered large or unusual ( i.e., not routine) on a particular business day, the size of cash inflows that typically may be received by the broker-dealer on the business days following a large or unusual cash inflow, the types of customer accounts or firm business models affected by unusual or large cash inflows ( e.g., retail or institutional accounts), and the practices of carrying broker-dealers currently performing daily computations. For these reasons, the Commission is not excluding credits arising from unusual or large inflows of cash from a carrying broker-dealer's daily reserve computation at this time. The Commission encourages market participants to engage with Commission staff regarding their particular facts and circumstances on this issue.

    Finally, a commenter stated that if a carrying broker-dealer must use its own funds to make a required deposit because customer transitory credits are no longer available, it could result in commingling of carrying broker-dealer and customer assets and/or constitute a misuse of the special reserve account.[232] In response, the commenter appears to have misunderstood the requirements of Rule 15c3-3. Carrying broker-dealers may deposit their own cash and/or qualified securities in a customer or PAB reserve bank account to meet any minimum deposit requirements under Rule 15c3-3 or as an additional buffer above the minimum deposit amount. These deposits to the customer and PAB reserve bank accounts comply with the requirements of Rule 15c3-3.[233]

    2. Requests for Interpretations and Clarifications

    A commenter stated that the Commission should allow carrying broker-dealers to notify their DEA if they will be unable to perform a customer or PAB reserve computation or make a required deposit on a specific day due to exigent circumstances.[234] The commenter stated that carrying broker-dealers occasionally face unexpected circumstances that could make it difficult or impossible to perform their reserve computation (or part of the computation) on a specific day, or to make the required deposit into the special reserve bank account.[235] For example, the commenter stated that an unexpected market close (which could result from a systems outage or a natural disaster) could temporarily prevent personnel from accessing systems necessary to make the reserve computation; a bank may be unable to accept deposits due to a systems outage; or the failure of a third-party system may make it impossible for a carrying broker-dealer to access data necessary to compute some element of the reserve computation.[236] The commenter further stated these events actually occur and provided an example of a significant processing issue that a large financial market utility had in 2023 that affected the ability of carrying broker-dealers to accurately calculate their end-of-day balances.[237] The commenter stated that the problems such exigent circumstances cause often cannot be resolved in a day, and because these events are beyond the carrying broker-dealer's control, the Commission should not penalize a carrying broker-dealer for its inability to perform the reserve computation or make a required deposit on a particular day because of them.[238]

    More specifically, in order to address situations where there is an exigent circumstance, the commenter stated that the Commission should allow carrying broker-dealers to notify their DEA within 24 hours (including an explanation) if they will be unable to perform a customer or PAB reserve computation or make a required deposit on a specific day due to exigent circumstances.[239] The explanation ( print page 2810) would describe the circumstances and why it prevents the carrying broker-dealer from performing the reserve computation or making the deposit. The commenter also stated that if the carrying broker-dealer cannot perform the computation, the Commission should permit it to use to the prior day's figures to perform the computation, and suggested that the Commission should require carrying broker-dealers to subsequently notify their DEA of the steps taken to remedy the deficiency.[240]

    The Commission recognizes that there may be exigent circumstances beyond the control of the carrying broker-dealer that could interfere with its ability to perform its customer or PAB reserve computation or make a required deposit into the customer or PAB reserve bank accounts.[241] For example, exigent circumstances beyond the control of the carrying broker-dealer may include, among other things, a natural disaster; the failure of a third-party data provider's system that affects the carrying broker-dealer's ability to access data necessary to compute the customer or PAB reserve computation, or part of the computation; or where a carrying broker-dealer cannot make a required deposit at a specific bank because the bank cannot accept deposits due to a systemwide outage. The Commission expects that these exigent circumstances would be rare. The Commission further recognizes that performing a daily computation—as compared to a weekly computation—increases the potential that exigent circumstances could interfere with the operations necessary to comply with the computation and deposit requirements of Rule 15c3-3, given the greater frequency of the necessary computations and deposits. Moreover, this interference—in certain circumstances—could occur even though the carrying broker-dealer has established and maintained effective internal controls over compliance.[242]

    If the exigent circumstances interfere with the carrying broker-dealer's ability to perform the reserve computation, the firm is encouraged to notify its DEA of the situation, explain how the exigent circumstances are interfering with its ability to perform the customer or PAB reserve computation,[243] and describe any steps it is taking to address the situation such as using the prior day's figures to perform the computation, depositing an additional buffer into the customer or PAB reserve account, or opening a reserve account at an alternative bank.

    Commenters also stated that the Commission should not require carrying broker-dealers to perform a computation (or make it optional) on certain days on which markets are closed or close early because it is not practical to perform a computation on these days.[244] In particular, one commenter stated that exchanges and financial market utilities often close early on the business day before a major holiday, and that this makes it difficult to receive on a timely basis certain information needed to perform the reserve computation, as exchanges and financial market utilities may not update the systems and data needed to conduct the computation.[245] This commenter suggested that the Commission should treat New Year's Eve, the Friday before Memorial Day, the Wednesday before Thanksgiving, the Friday after Thanksgiving, and Christmas Eve as non-business days for purposes of the customer and PAB reserve computations.[246] Commenters also suggested that the Commission also should not treat days on which either exchanges or banks, but not both, are open, or where exchanges or banks close early, as non-business days for purposes of the reserve computations (including Veterans Day, Columbus Day, and Good Friday).[247] One commenter stated that this flexibility could improve operational efficiency and mitigate the burden on carrying broker-dealers during unusual market conditions.[248] Another commenter stated that it has found that customers enjoy the same holidays and half-days, reducing the number of customer transactions and, thus, any fluctuations in required minimum account balances are likely to be within acceptable ranges.[249]

    The Commission recognizes there may be days where it is more challenging for a carrying broker-dealer to perform a customer or PAB reserve computation due to staffing issues related to holidays or when banks or exchanges are closed or close early. Performing a daily computation—as compared to a weekly computation—means that the work necessary to perform the daily computations will need to be performed on these days. Carrying broker-dealers should contact the Commission or Commission staff, as well as their DEA, if they anticipate that performing the reserve computations or making the required deposits will be challenging for these or other reasons. The Commission or Commission staff will evaluate these requests and may provide exemptive or other relief as appropriate. For example, the Commission or Commission staff could consider that in some circumstances many employees of a carrying broker-dealer may not be working certain days before major holidays, and as such, carrying broker-dealers may need an ( print page 2811) additional day to complete their customer and PAB reserve computations and deposits.[250] Finally, when a deposit requirement falls on a day that banks are closed, the carrying broker-dealer should make the deposit by 10 a.m. of the next business day that the banks are open.

    F. Reserve Account Requirements for Security-Based Swaps

    The Commission sought comment in the proposal on whether carrying broker-dealers should perform the security-based swap customer reserve computation daily (rather than weekly).[251] One commenter stated that the Commission should not change the reserve account requirements for SBSDs.[252] The commenter stated that it is unnecessary to make any changes because as the Proposing Release stated that almost all carrying broker-dealers that have security-based swap credits already take those credits into account and stand-alone SBSDs generally operate under an exemption from reserve computation requirements under 17 CFR 240.18a-4(f) (“Rule 18a-4(f)”). Therefore, the commenter stated requiring a daily computation for security-based swap activity would have virtually no benefit.[253]

    The Commission agrees with the commenter that amending Rule 15c3-3 to require a broker-dealer (including a broker-dealer (other than an OTC derivatives dealer) also registered as an SBSD) to perform a security-based swap customer reserve computation daily would have virtually no impact because the credits related to security-based swap activity for security-based swap customers generally are being included in the customer reserve computation.[254] The Commission also agrees with the commenter that there would be virtually no benefit to requiring stand-alone SBSDs to perform a reserve computation daily since all of them operate under the exemption under Rule 18a-4(f).[255] Therefore, the Commission is not adopting a daily reserve requirement for the security-based swap customer reserve computation under Rule 15c3-3 or 17 CFR 240.18a-4 as part of the final amendments.

    III. Compliance Date

    In the Proposing Release, the Commission sought input from commenters on the appropriate compliance date or implementation schedule for the proposed amendments. Specifically, the Commission requested comment regarding various aspects of the proposal that would impact a carrying broker-dealer's ability to comply with the new amendments, including the amount of time a carrying broker-dealer would need to comply with the requirement to perform a customer and PAB reserve computation daily, whether there are any technological or operational issues that should be considered, or whether a staggered compliance date depending on the size of the average total credits would be appropriate, among other things.[256]

    The Commission received a few comments relating to the compliance date.[257] Stating that there are complexities associated with moving from weekly to daily customer and PAB reserve computations, commenters requested various time periods for implementation of the daily customer and PAB reserve computation requirements. These commenters suggested computing the 12-month rolling average starting one year after publication of the final rule,[258] a compliance timeline of at least 18 months from the final rule,[259] as well as implementation dates of no earlier than January 2025 and mid- to late-2025.[260] One commenter stated that carrying broker-dealers do not need an additional compliance period beyond the six months prescribed in the proposed rule after a carrying broker-dealer exceeds the proposed $250 Million Threshold.[261] Commenters stated the proposal would require significant time, experience, and expense to implement, would present significant operational challenges, and that the transition to a daily computation would require significant time to find, hire and train new staff to conduct the computation as well as complete the extensive systems and operations changes.[262] One commenter also stated that third party data providers, such as service bureaus, would need to be able to provide carrying broker-dealers with more timely information than is currently available.[263]

    Commenters also suggested that the Commission consider the cumulative burdens of implementing the amendments and other regulatory obligations with potentially overlapping compliance dates.[264] Specifically, one commenter stated that the same carrying broker-dealers who will be required to move to a daily computation are also managing multiple other regulatory requirements.[265] The commenter further stated that unless the Commission provides adequate time to manage the new regulatory requirements together, carrying broker-dealers will face an unmanageable clash of compliance requirements all converging at the same time.[266] Commenters also stated that many finance, operations, and information technology employees of carrying broker-dealers needed to create and test new programs and systems, among other requirements, are also involved in the implementation of other large-scale, complex initiatives ( print page 2812) mandated by other new regulations.[267] Commenters stated that these initiatives call on the same personnel, technology, and monetary resources to implement them properly.[268]

    After consideration of the comments, the Commission agrees that carrying broker-dealers need sufficient time to comply with the requirement to perform daily customer and PAB reserve computations beyond the six months provided in the rule after a carrying broker-dealer exceeds the $500 Million Threshold.[269] Carrying broker-dealers must begin calculating their average total credits using the 12 most recently filed month-end FOCUS Reports ending with the FOCUS Report for June 30, 2025. As a result, carrying broker-dealers that exceed the $500 Million Threshold using each of the 12 filed month-end FOCUS Reports from July 31, 2024, through June 30, 2025, must perform customer and PAB computations daily beginning no later than December 31, 2025. This aligns with the requirements of the final amendments, as carrying broker-dealers are provided six months under paragraph (e)(3)(i)(B)( 1) of Rule 15c3-3, as amended, to begin performing customer and PAB reserve computations daily after exceeding the $500 Million Threshold.

    While one commenter stated that the 12-month rolling average for total credits should start one year after publication of the final rule, given the importance of addressing the mismatch risk the final amendments are designed to address, it is important for carrying broker-dealers to comply with the requirement to perform customer and PAB reserve computations daily as soon as practicable, while also having sufficient time to modify and/or upgrade existing technology, to employ additional staff, and to adjust internal processes to comply with the daily reserve computation requirement. The Commission agrees with commenters that stated an implementation date no sooner than January 2025 is appropriate. Thus, as described above in this section, by requiring carrying broker-dealers to begin computing a daily customer and PAB reserve computation beginning no later than December 31, 2025, carrying broker dealers will have sufficient time to perform the tasks necessary to be able to begin daily customer and PAB reserve computations as required by the final amendments.

    Further, the additional six month compliance period provided for carrying broker-dealers in this section beyond the six month compliance period in the rule is appropriate (for a total compliance period of approximately one year) and recognizes that numerous carrying broker-dealers will prepare to transition to a daily customer and PAB reserve computation at the same time.[270] This additional time considers that these carrying broker-dealers may need to interview and hire new employees and may use common service providers. Therefore, the extra six months will apply to all affected carrying broker-dealers, and a common transition period will be easier to administer and more equitable.

    The Commission also recognizes the need for third-party data providers to provide data for a customer or PAB reserve computation on a timelier basis. Although commenters did not specify a period of time necessary for third-party service providers to transition to a more frequent provision of information, carrying broker-dealers will have approximately one year from adoption to make arrangements with such third-party service providers. As multiple carrying broker-dealers already perform daily customer and PAB reserve computations on a voluntary basis, to the extent third-party service providers supply needed data to these carrying broker-dealers, they should be in a position to implement the processes and agreements necessary to provide additional carrying broker-dealers with the necessary data. The requirement to begin daily customer and PAB reserve computations beginning no later than December 31, 2025, is an adequate time period to accomplish these tasks.

    Further, the compliance period also will provide carrying broker-dealers whose average total credits may hover close to the $500 Million Threshold a sufficient period of time between the date the amendments are adopted and the June 30, 2025 calculation date for average total credits to determine if they will be subject to the requirement to perform a customer and PAB reserve computation daily or whether they will manage their customer and PAB credits to remain below the $500 Million Threshold. Because the requirement to calculate average total credits ends with the FOCUS Report for June 30, 2025, part of this time period is forward looking to enable carrying broker-dealers to make these determinations or adjustments after the Commission adopts the final amendments.

    A carrying broker-dealer that elects the alternative method for net capital and voluntarily elects to perform the customer reserve computation daily pursuant to paragraph (e)(3)(v) of Rule 15c3-3, as amended, and reduces aggregate debit items by 2% may do so on or after the effective date of the final amendments, provided that the required notification to the carrying broker-dealer's DEA has been made at least 30 days prior to beginning the daily computation (with the 2% debit reduction).

    Finally, the compliance date for the amendments to the Form X-17A-5, Part II ( i.e., Part II of the FOCUS Report) is March 1, 2026. This will allow carrying broker-dealers the opportunity to become familiar with the changes and make any necessary updates to their policies, procedures, systems, and practices. In addition, it allows FINRA to develop and test these updates to its eFOCUS system.[271]

    IV. Economic Analysis

    A. Introduction

    The Commission is mindful of the economic effects, including the benefits and costs, of the final amendments. Section 3(f) of the Exchange Act provides that when engaging in rulemaking that requires the Commission to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.[272] Section 23(a)(2) of the Exchange Act also requires the Commission to consider the effect that the rules and rule amendments would have on competition, and it prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act.[273] The analysis below addresses the likely economic effects of the final amendments, including the anticipated ( print page 2813) benefits and costs of the amendments and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this adoption.

    As part of their business, carrying broker-dealers regularly receive cash related to customers' and PAB account holders' securities transactions, such as cash realized from sales of securities. While it is common that customers' and PAB account holders' cash is quickly re-invested or swept out to a bank account or money market fund by the customer or PAB account holder, it is also common for this cash to remain undeployed for or on behalf of customers and PAB account holders for several days or longer prior to the next required customer and PAB reserve computations and deposits into the customer and PAB reserve bank accounts.[274]

    Under preexisting paragraph (e)(3)(i) of Rule 15c3-3, the required balances in customer and PAB reserve bank accounts (net cash owed to customers or PAB account holders) are required to be calculated weekly, and the resulting amount must be held in the customer and PAB reserve bank accounts until the date of next required deposit.[275] However, the value of the net cash owed to customers or PAB account holders may change daily due to customers' and PAB account holders' transactions and re-deployment of undeployed funds. On a weekly basis, this could result in a large intra-week mismatch between the customer or PAB reserve bank account balances and actual net cash owed to customers or PAB account holders. This intra-week mismatch introduces several potential risks that are not internalized by carrying broker-dealers.

    First, the mismatch between the calculated and the actual amounts of net cash owed to customers and PAB account holders introduces a risk to other SIPC members. More specifically, if a liquidation of a carrying broker-dealer with a large mismatch of cash in its customer and PAB reserve bank accounts is carried out under SIPA, it increases the risk that the SIPC Fund balance would be used if there are not enough assets in the carrying broker-dealer's estate to cover the difference between the net cash owed to customers and the amount in the reserve bank account,[276] which may trigger a subsequent increase in contributions from other SIPC members. This risk may be exacerbated for carrying broker-dealers experiencing large aggregate intra-week mismatches. As a result, the SIPC Fund may be at a higher risk of depletion. For example, as discussed in section IV.B.2. below, mismatches are common among carrying broker-dealers of all sizes (as measured by average total credits). The largest carrying broker-dealers with average total credits of at least $500 million [277] had mismatches of between 11% and 20% during 2023.[278]

    Second, this mismatch introduces a risk to customers and PAB account holders of carrying broker-dealers. To the extent that there is mismatch of funds in the customer or PAB reserve bank account, a failure of a carrying broker-dealer may result in the delayed reimbursement of customer or PAB securities and cash. In this scenario, the funds owed to customers or PAB account holders may be tied up in liquidation proceedings and these customers or PAB account holders would have to wait to receive their funds back until the broker-dealer liquidation process is carried out under SIPA, which may take a significant amount of time. In addition, customers and PAB account holders may not receive their funds in full if the liquidation proceedings do not result in a full recovery of funds owed to customers and PAB account holders. This risk may be exacerbated for potential failures of carrying broker-dealers with large amounts of customer or PAB reserve bank account balances, such as when these carrying broker-dealers experience large aggregate intra-week mismatches between the reserve bank account balances and actual net cash owed to customers or PAB account holders.

    The requirement to perform daily customer and PAB reserve computations for carrying broker-dealers with large amounts of total credits is aimed to address these risks and is expected to benefit customers, PAB account holders, and other stakeholders of the affected carrying broker-dealers by more dynamically matching the net cash owed to customers or PAB account holders and the customer and PAB reserve bank account balances. More specifically, the daily customer and PAB reserve computations will safeguard customers and PAB account holders of the affected carrying broker-dealers by covering the mismatches promptly, and hence neutralizing the potential of some of these mismatches to build over the week, and thereby reducing the risk of a potential delay in the return of cash and securities in the event of a failure of the affected carrying broker-dealer. Daily computations will also decrease the risk that other stakeholders, such as contributors to the SIPC Fund, would need to provide additional resources ( e.g., in the form of increased assessments) to address a failure of a carrying broker-dealer.[279]

    The final amendments may result in increased compliance costs for the affected carrying broker-dealers. To the extent that each customer or PAB reserve computation takes a significant amount of time or involves manual processes, affected carrying broker-dealers will experience a one-time set up cost related to switching to a daily computation, as well as an increase in ongoing costs related to more frequent computations. These costs, like the aforementioned benefits, may ultimately be passed through to customers and PAB account holders of the affected carrying broker-dealers.

    Below, the Commission discusses many of the benefits and costs that are likely to result from the adoption of these amendments. To the extent practicable, the effects are quantified based on available data. Although the Commission is providing estimates of direct compliance costs where possible, customer and PAB account holders' may modify their activity in accounts maintained by the affected carrying broker-dealers and customers and PAB ( print page 2814) account holders of non-affected carrying broker-dealers might shift their capital to the affected carrying broker-dealers due to such increased protections; and carrying broker-dealers near the $500 Million Threshold may adjust their business activities as a result of the final amendments. Moreover, the complexity of customers' and PAB account holders' activities for different carrying broker-dealers makes it challenging for the Commission to estimate the potential costs for various groups of the affected carrying broker-dealers. While the Commission has attempted to quantify economic effects where possible, much of the discussion of economic effects is qualitative in nature. The Commission sought comment on all aspects of the economic analysis,[280] especially any data or information that would enable a quantification of the proposal's economic effects and the analysis below takes into consideration relevant comments received.

    B. Baseline

    1. Regulatory Baseline

    The baseline against which the costs, benefits, and the effects on efficiency, competition and capital formation of the final amendments are measured consists of current requirements for carrying broker-dealers under the customer protection rule and the current market structure and regulatory framework. As discussed in detail below, the economic analysis appropriately considers existing regulatory requirements as part of its economic baseline against which the benefits and costs of the final amendments are measured.[281]

    Several commenters expressed concern about the need to concurrently comply with the final amendments and “other core regulatory obligations.” [282] Specifically, commenters mentioned the rule and amendments adopted in the Settlement Cycle Adopting Release [283] and two other regulatory obligations, namely the new margin requirements under FINRA Rule 4210 and the CAT CAIS amendments.[284] Although the specific regulatory obligations mentioned by commenters have been implemented,[285] the Commission has considered the potential effects on entities affected by the final amendments that are implementing other recently adopted rules during the compliance period for these amendments. These recently adopted rules include the Rule 10c-1a Adopting Release,[286] the Treasury Clearing Release,[287] the Rule 605 Adopting ( print page 2815) Release,[288] the Electronic Submission Adopting Release,[289] and the Customer Notification Adopting Release.[290] These adopted rules were not included as part of the baseline in the Proposing Release because they were not yet adopted at that time, but they are part of the baseline against which this economic analysis considers the benefits and costs of the final amendments. Accordingly, this economic analysis also considers potential economic effects arising from any overlap that may exist between the compliance period for the final amendments and the compliance periods for these other adopted rules.[291]

    a. Rule 15c3-3

    Carrying broker-dealers are broker-dealers that maintain custody of customer securities and cash. Rule 15c3-3, known as the broker-dealer customer protection rule, is designed to give specific protection to customer funds and securities. For example, a broker-dealer is “virtually” precluded from using customer funds to buy securities for its own account.[292]

    Preexisting Rule 15c3-3 specifies that a carrying broker-dealer must undertake two primary steps to safeguard these customer assets. First, carrying broker-dealers are required to maintain physical possession or control over customers' fully paid and excess margin securities.[293] Second, a carrying broker-dealer must maintain a customer reserve bank account that must hold funds and/or qualified securities that are at least equal in value to the net cash owed to customers. The amount of net cash owed to customers is computed weekly as of the close of the last business day of the week pursuant to the customer reserve computation.[294] Performing a customer reserve computation requires a carrying broker-dealer to add up customer credit items and then subtract from that amount customer debit items. To ensure accuracy of the computations, these credit and debit items are reconciled with other firm data and the computations pass through pre-established internal controls.[295] If credit items exceed debit items, the net amount must be on deposit in the customer reserve bank account.[296] A carrying broker-dealer also is required to make and maintain a record of each computation.[297] Rule 15c3-3 also specifies the way a carrying broker-dealer carries accounts that hold proprietary securities and cash of other broker-dealers, known as PAB accounts.[298] Broker-dealers are not within the definition of “customer” for purposes of Rule 15c3-3, however, the definition of “customer” under SIPA, includes broker-dealers with a proprietary securities account at a carrying broker-dealer. As discussed in more detail in section I.C.2. of this release, broker-dealers—as SIPA customers—have the right to share pro rata with other customers in the customer property in a SIPA liquidation if there is a shortfall in the amount the failed broker-dealer owes its customers. Because broker-dealers that are SIPA customers are entitled to a pro rata share of customer property,[299] Rules 15c3-3 and 15c3-3a require carrying broker-dealers to: (1) perform a PAB reserve computation in addition to the customer reserve computation; [300] (2) establish and hold cash and/or qualified securities in their PAB reserve bank account in an amount determined by the PAB reserve computation; and (3) obtain and maintain physical possession or control of securities carried for a PAB account holder, unless the carrying broker-dealer has provided written notice to the PAB account holder that it may use those securities in the ordinary course of its securities business and has provided opportunity for the PAB account holder to object to such use.[301]

    b. SIPA and the SIPC Fund

    As described in section I.C.2. of this release, SIPA established SIPC and directed SIPC to establish the SIPC Fund.[302] At the end of 2023, SIPC reported 3,297 members.[303] The SIPC Fund totaled approximately $4.47 billion as of December 31, 2023, and currently the objective is to build it to a level of $5 billion. To date, SIPC has carried out 330 liquidations since its inception with approximately $141.6 billion in assets distributed to customers.[304] Of that, about $141.6 billion came from debtors' estates ( i.e., SIPC broker-dealer members' estates), ( print page 2816) while $915.7 million came from the SIPC Fund.[305]

    c. Reserve Account Requirement for Security-Based Swaps

    In 2019, the Commission adopted customer segregation requirements for broker-dealers and SBSDs with respect to customer money, securities, and property related to security-based swaps.[306] Under these requirements, broker-dealers (including broker-dealers that are also SBSDs) are required to perform a separate weekly security-based swap customer reserve computation and have a separate security-based swap customer reserve account that must hold the net amount of cash owed to security-based swap customers.[307] These requirements were based in part on the requirements of Rules 15c3-3 and 15c3-3a discussed above.[308]

    2. Affected Broker-Dealers

    Table 2 presents the universe of broker-dealers by presence of carrying activities.[309] As of December 2023, 157 broker-dealers identified in Line 40 of the FOCUS Report reported that they carry their own customer accounts. Among these, 64 reported having only customer credits, 64 reported having both customer and PAB credits, none reported having only PAB credits,[310] and 14 broker-dealers reported having no customer credits or debits. Further, 15 broker-dealers reported having exemptions from the requirements of Rule 15c3-3, including performing a customer reserve computation.[311] In addition, 34 broker-dealers that did not identify themselves as those that carry their own customer accounts in Line 40 of the FOCUS Report reported customer and/or PAB credits in their customer or PAB reserve computations. Among these, five broker-dealers had both customer and PAB credits, 28 broker-dealers had customer credits only, and one broker-dealer had PAB account credits only.

    When the Commission computed average total credits using data for January 2023 through December 2023, the Commission estimated that there are 191 broker-dealers (“carrying broker-dealers”) that currently fall within the scope of the Rule 15c3-3 (though of this group, 29 carrying broker-dealers reported zero customer or PAB credits in 2023). In aggregate, these carrying broker-dealers hold approximately 83% of all broker-dealer assets,[312] and report approximately $1.1 trillion in total credits and approximately $0.93 trillion in total debits, as of December 2023.[313]

    Table 2—Broker-Dealers by Carrying Activity, 2023  a
    Broker-dealer type Number Total assets, $B Total credits, $B Total debits, $B
    Monthly average Year-end Monthly average Year-end
    Carrying its own customer accounts 157 4,782.7 1,027.4 1,102.7 825.7 922.4
    —with positive customer and PAB credits 64 4,143.0 993.8 1,079.0 794.5 901.1
    —with positive customer credits only 64 570.6 33.5 23.7 31.2 21.3
    —with zero reported credits 14 64.2 0 0 0 0
    —with reporting exemptions 15 5.0
    Not carrying its own customer accounts 34 110.1 20.5 21.9 6.3 7.8
    —with positive customer and PAB credits 5 49.6 2.0 2.4 1.8 2.3
    —with positive customer credits only 28 59.7 18.4 19.2 4.4 5.2
    —with positive PAB credits only 1 0.8 0.06 0.4 0.07 0.4
    Without any carrying activities 3,208 1013.8
    Total 3,399 5,906.6 1,047.9 1,124.6 832.0 930.2
    a  Data are for calendar year 2023. The Commission uses monthly FOCUS Reports to calculate average monthly total credits and total debits. For each carrying broker-dealer, total credits are calculated as the sum of the average monthly amount of customer credits reported on Line 4430 and the average monthly amount of PAB credits reported on Line 2170. Similarly, for each broker-dealer, total debits are calculated as the sum of the average monthly amount of customer debits reported on Line 4472 and the average monthly amount of PAB debits reported on Line 2230.
    ( print page 2817)

    Table 3 displays the carrying broker-dealers that reported positive customer or PAB credits in 2023 into groups based on the size of their average monthly total customer and PAB credits (averaged over January 2023 to December 2023).314

    Table 3—Carrying Broker-Dealers by Size of Average Total Credits, 2023
      Number Total assets ($B) Total customer credits, $MM Total PAB credits, $MM Total credits, $MM
    Number Mean Median Number Mean Median Mean Median
    >$0-100MM 87 272.2 87 13.6 1.9 22 0.9 0 14.5 2.2
    $100-250MM 14 132.3 14 157.1 152.3 8 3.2 0 160.3 153.9
    $250-500MM 12 341.6 12 296.1 296.6 8 61.0 13.5 357.2 315.3
    $500MM-1B 8 122.7 8 673.6 633.1 7 24.1 2.5 697.7 633.2
    $1-5B 17 337.3 17 2,239.8 2,103.3 15 104.6 6.3 2,344.3 2,136.5
    $5-10B 6 122.9 6 6,554.2 6,702.3 6 646.8 64.8 7,201.0 6,734.2
    ≥$10B 18 3,494.7 18 46,919.0 33,591.7 16 5,939.0 183.0 52,858.1 36,846.2
    Total a 162 4,823.6 162 5,767.1 57.7 82 701.3 0.0 6,468.4 63.0
    a  Table excludes carrying broker-dealers with zero reported credits in 2023.

    The final amendments modify the proposal by raising the proposed $250 Million Threshold to $500 million. Thus, the daily computation requirement applies only to carrying broker-dealers whose average total credits are above the $500 Million Threshold. Therefore, the Commission estimates that, based on data for January 2023 through December 2023, the scope of affected entities was 49 carrying broker-dealers, which held 99.3% of aggregate total credits of all carrying broker-dealers.

    The number of affected carrying broker-dealers may vary month to month since a 12-month rolling average is used for the calculation of the $500 Million Threshold. To provide information on how the number of entities may thus vary over time, Figure 1 displays the number of affected carrying broker-dealers for a sequence of 12-month rolling averages beginning with January 2023 and extending through May 2024.315

    ( print page 2818)

    As shown in Figure 1, the number of affected carrying broker-dealers varied monthly from 49 to 48 over the period from January 2023 through May 2024. There was little variation, however, in the identity of the affected carrying broker-dealers. The same 47 carrying broker-dealers met the $500 Million Threshold in each month, and from one to two additional carrying broker-dealers met the $500 Million Threshold in any given month.[316] In total, over this period, 50 different carrying broker dealers would have been affected.

    With respect to the frequency of computation, based on the January 2023 to December 2023 period (12-month period), table 4 displays the number of carrying broker-dealers performing their computations daily, weekly, and monthly in each size category for average total credits.[317]

    Table 4—Reserve Formula Computation Frequency, 2023
    Average total credits Number Customer reserve formula PAB reserve formula
    Number Daily Weekly Monthly Number Daily Weekly Monthly
    >$0-100MM 87 87 1 72 11 22 0 18 1
    $100-250MM 14 14 0 14 0 8 0 6 0
    $250-500MM 12 12 0 12 0 8 0 8 0
    $500MM-1B 8 8 0 8 0 7 0 7 0
    $1-5B 17 17 1 16 0 15 1 14 0
    ( print page 2819)
    $5-10B 6 6 0 6 0 6 0 6 0
    ≥10B 18 18 8 10 0 16 8 8 0
    Total 162 162 10 138 11 82 9 67 1

    As shown in table 4, out of 162 carrying broker-dealers that reported the frequency of their customer reserve computations, 10 carrying broker-dealers performed the customer reserve computation daily, among which 9 also performed the PAB reserve computation daily and one which does not report carrying PAB accounts. Among carrying broker-dealers performing the customer reserve computation daily, 9 had total credits above the $500 Million Threshold. These 9 carrying broker-dealers accounted for 61.9% of the total amount of average total credits among all carrying-broker dealers with positive customer or PAB credits reported in 2023.[318] All the carrying broker-dealers performing the PAB reserve computation daily had total credits above the $500 Million Threshold.[319]

    Based on the January 2023 to December 2023 period, there were 40 carrying broker-dealers with average total credits equal to $500 million or above performing the customer reserve computation weekly and there were no carrying broker-dealers with average total credits equal to $500 million or above performing the customer reserve computation monthly. Among the 40 carrying broker-dealers performing a weekly customer reserve computation, there were 35 carrying broker-dealers that performed the PAB reserve computation weekly and there were no carrying broker-dealers with average total credits equal to $500 million or above that performed the PAB reserve computation monthly. Based on the data for 2023, the Commission estimates that 40 carrying broker-dealers will be affected by the final amendments.

    Table 5 below shows the distribution of deposits required to be put into the customer and PAB reserve bank accounts or permitted withdrawals after the reserve computation performed at the end of the reporting period relative to the reserve bank account balance.[320] These metrics provide a picture of the “mismatch” that occurs with respect to customer and PAB accounts. Specifically, this mismatch is calculated as a carrying broker-dealer's deposit divided by its reserve account balance from any month.[321] The average of these mismatches for each broker-dealer over 2023 is computed to determine the “average mismatches.” For the “maximum mismatches,” each broker-dealer's largest deposit amount in 2023 is divided by its reserve account balance for that month.[322] The distributions of the average and maximum mismatches are presented in the columns “Average Mismatch” and “Maximum Mismatch” of table 5.

    The average mismatches and maximum mismatches were generally lower for carrying broker-dealers below the $500 Million Threshold, than for carrying broker-dealers above the $500 Million Threshold.

    With respect to customer reserve accounts, shown in panel A, the mismatches were larger for the groups of carrying broker-dealers with over $500 million in average total credits, with the largest occurring for carrying broker-dealers within the $5 to $10 billion range. On the aggregate level, for carrying broker-dealers above the $500 Million Threshold, the average mismatch was 15.7%, while it was only 6.4% for carrying broker-dealers below the $500 Million Threshold.[323] Similarly, the maximum mismatch for carrying broker-dealers above the $500 Million Threshold was 36.1%, while it was 20.9% for carrying broker-dealers below the $500 Million Threshold.[324]

    For PAB reserve accounts, shown in panel B, the largest average mismatches and the maximum mismatches occurred for the groups of carrying broker-dealers with over $250 million in average total credits, with the largest occurring for carrying broker-dealers with over $10 billion in average total credits.

    Panels C and D of table 5 display the average mismatch and maximum mismatch metrics comparing the large carrying broker-dealers (over $1 billion in average total credits) that currently compute their reserve accounts daily versus those that do so weekly. With respect to customer reserve accounts (panel C), carrying broker-dealers that compute daily have larger average reserve balances and deposits, and lower average and maximum mismatches than those that compute weekly.

    For PAB reserve accounts (panel D), the average or maximum mismatch do not appear as correlated with daily versus weekly filing. ( print page 2820)

    Table 5—Broker-Dealer Deposits and Withdrawals as a Share of Reserve Account Balance, 2023
    Broker-dealer group Number Average reserve balance MM Average deposit MM Average withdrawal MM Average mismatch (%) Maximum mismatch (%)
    Panel A: Customer Reserve Accounts
    >$0-100MM 87 $9.9 $0.5 −$3.0 6.5 19.8
    $100-250MM 14 69.7 3.5 −18.4 6.5 26.5
    250-500MM 12 194.7 11.2 −25.6 5.0 22.1
    500MM-1B 8 190.8 15.8 −24.1 20.8 42.0
    1-5B 17 697.3 56.6 −62.9 15.8 37.9
    5-10B 6 2,848.8 512.5 −142.9 24.3 52.1
    ≥10B 18 11,626.0 784.7 −785.1 10.8 26.7
    Panel B: PAB Reserve Accounts
    >0-100 MM 22 1.3 0.03 −0.3 1.7 11.3
    100-250 MM 8 10.8 0.2 −2.0 1.3 7.1
    250-500 MM 8 87.6 3.9 −21.8 4.5 25.4
    500MM-1 B 7 3.2 0.3 −0.7 4.8 21.4
    1-5 B 15 45.6 5.8 −20.0 9.8 40.4
    5-10 B 6 79.3 12.8 −85.7 4.9 37.6
    ≥10 B 16 528.0 101.8 −245.7 12.5 49.4
    Panel C: Customer Reserve Accounts
    All (weekly and daily):
    ≥1B 41 5,810.1 443.0 −395.0 14.8 35.1
    Daily:
    ≥1B 9 13,028.4 423.9 −978.5 3.8 15.2
    Weekly:
    ≥1B 32 3,780.0 448.3 −200.5 17.9 40.6
    Panel D: PAB Reserve Accounts
    All (weekly and daily):
    ≥1B 37 259.7 48.4 −141.5 10.1 43.8
    Daily:
    ≥1B 9 778.3 148.4 −278.2 10.5 49.7
    Weekly:
    ≥1B 28 93.0 16.3 −77.1 10.0 41.7

    3. Debit Reduction in the Customer Reserve Computation for Certain Broker-Dealers

    Several commenters suggested that the Commission reduce the aggregate debit items charge that certain carrying broker-dealers must take when performing their customer reserve computation under Rule 15c3-3.[325] Rule 15c3-1 requires broker-dealers to maintain a minimum level of net capital at all times. Carrying broker-dealers using the alternative method for computing their net capital must maintain minimum net capital of the greater of $250,000 or 2% of their aggregate debit items computed under the customer reserve computation. In addition, a broker-dealer that uses the alternative method to compute its net capital must provide the Commission with an “early warning” notice when its aggregate debit items in its customer reserve computation fall below 5%. All carrying broker-dealers with total credits more than $500 million in their customer reserve computation as of December 31, 2023, use the alternative method. A carrying broker-dealer using the alternative method to compute its minimum net capital requirement must reduce aggregate debit items by 3% when performing its customer reserve computation under Rule 15c3-3. This provision serves to increase the amount of funds a carrying broker-dealer must deposit into its customer reserve bank account.

    Commenters recommended that the Commission eliminate the 3% debit reduction and instead apply the 1% debit reduction that currently applies to carrying broker-dealers using the basic method to compute their net capital. One commenter stated a reduction of the 3% debit reduction is warranted because under a daily customer reserve computation the value of debit items and amounts carrying broker-dealers owe customers on any given day are accounted for in the next day's customer reserve computation and the difference is protected in the next day's deposit into the customer reserve bank account.[326] This commenter stated that the new requirement to perform a customer reserve computation daily would reduce the need for any cushion to account for a mismatch and, consequently, would increase liquidity and lower costs for customer financing by allowing carrying broker-dealers to use assets that would otherwise be locked up (in their customer reserve bank account).[327] This commenter further stated that carrying broker-dealers could use the added liquidity to provide customers with more financing at a lower cost, and (reducing the debit reduction) would thereby benefit customers as well as carrying broker-dealers.[328]

    Another commenter stated that when the Commission adopted the 3% debit reduction in 1975 it stated that the ( print page 2821) purpose was to provide, in the event of a liquidation, an additional cushion of secured debit items which will be available to satisfy customers with whom the carrying broker-dealer effects transactions.[329] This commenter stated that a shift to a daily customer reserve computation enabled by technological advancements since 1975 would result in a more precise and up-to-date computation, thereby mitigating the risk that the 3 debit reduction addresses in the customer reserve computation.[330] The commenter went on to state that “a 1% debit reduction in line with that applied to other broker-dealers seems appropriate for firms that calculate net capital under the alternative method.”

    The Commission agrees that performing a customer and PAB reserve computation daily will reduce the mismatch risk and more dynamically match the amount a carrying broker-dealer owes its customers and PAB account holders and the amount on deposit in its customer reserve bank account. When the mismatch risk is reduced by moving from weekly to daily calculations, the aggregate debit items need not be reduced by the 3%. However, the Commission disagrees with commenters that performing a daily customer reserve computation merits a decrease of the 3% debit reduction to 1% of customer margin loan balances. The 1% debit reduction applies to carrying broker-dealers that use the basic method to calculate their minimum net capital requirements. Net capital requirements are formulated differently under the alternative and basic methods. While the basic method targets the overall leverage of a carrying broker-dealer directly, under the alternative method, the net capital rule is formulated as a percentage of total customer receivables. Under the weekly-computation regime, the 3% debit reduction has been designed to compensate for the potential lower minimum net capital requirement resulting from carrying broker-dealers electing the alternative method in lieu of the basic method. Consequently, the Commission strengthened the customer reserve computation requirements for carrying broker-dealers using the alternative method. A 1% debit reduction could lead to inadequate combined levels of liquidity and capital buffers at carrying broker-dealers that use the alternative method to calculate their minimum net capital requirements.

    The Commission is modifying the final rule amendments to permit carrying broker-dealers that use the alternative method to reduce aggregate debit items by 2% rather than 3% if they perform a daily customer reserve computation. This amendment will apply to both carrying broker-dealers that are required to perform a daily customer reserve computation because they exceed the $500 Million Threshold and carrying broker-dealers below the $500 Million Threshold that voluntarily perform a daily computation. Performing a daily customer reserve computation reduces the risk that the net amount of cash owed to customers will be substantially greater than the net amount on deposit in a carrying broker-dealer's customer reserve bank account.

    A daily computation requirement allows for cash owed to customers from a particular day to be included in that day's customer reserve computation, computed the next business day and any required deposits made the following business day. Therefore, under a daily customer reserve computation, the amount on deposit in the customer reserve bank account will more quickly reflect the net amount of cash the carrying broker-dealer owes its customers, and therefore, reduces the need for the current 3% “cushion.” Performing a daily customer reserve computation will reduce the maximum time between required deposits into a customer reserve bank account to two business days.

    A 2% debit reduction is reasonable given the lower mismatch risk under a daily customer reserve computation. This 2% “buffer” also will provide carrying broker-dealers with a safeguard to ensure a carrying broker-dealer maintains adequate balances in its customer reserve bank account to ensure that the customer securities and cash should be readily available to return to customers and PAB account holders in the event the carrying broker-dealer fails financially. Further, carrying broker-dealers will be able to use this extra liquidity to pay the initial and ongoing compliance costs to transition from a weekly to daily customer reserve computation under the final rule amendments. Carrying broker-dealers below the $500 Million Threshold also may choose to voluntarily perform a daily customer reserve computation to use the 2% debit reduction. The combined requirement of a daily customer reserve computation and a 2% debit reduction will provide this additional flexibility while enhancing customer protection requirements under Rule 15c3-3.

    C. Economic Effects of the Final Amendments

    1. Benefits

    Customers and PAB account holders of the affected carrying broker-dealers are expected to benefit from the requirement to perform daily customer and PAB reserve computations. As reflected in the discussion in section I.A. of this release noting the large amounts of deposits carrying broker-dealers may receive, and as evidenced from the information in table 5, a weekly customer and PAB reserve computation can result in a carrying broker-dealer owing a net amount of cash to customers or PAB account holders for a number of days that is greater than the current amounts deposited into the customer and PAB reserve bank accounts. Hence, if a carrying broker-dealer fails before the next reserve account computation and the reserve bank account balances do not represent the actual net amount of cash owed to customers or PAB account holders, these customers and PAB account holders may be at risk of having their funds tied up in a liquidation proceeding. Performing daily customer and PAB reserve computations would likely decrease this risk.

    Under the scenario where a carrying broker-dealer does not have sufficient funds to repay what it owes to customers or PAB account holders, SIPC likely would need to initiate a liquidation of the carrying broker-dealer under SIPA.[331] Although the SIPC Fund can be used to advance funds to customers that are owed money, PAB account holders are not entitled to such advances; therefore, they may not receive the funds owed to them by a failed carrying broker-dealer as promptly as other customers of such broker-dealer may. In addition, there is a limit on advances to customers in the amount of $500,000 per customer (of which $250,000 can be used to cover cash claims). If some customers are owed more than such limit, these customers would have to wait along with PAB account holders until a trustee is appointed who would consequently attempt to recover assets of the failed carrying broker-dealer via asset sales or other recovery methods. This recovery process may, in some cases, be lengthy.[332] In an extreme case, ( print page 2822) the amounts the trustee is able to recover may still be insufficient to make all customers and PAB account holders whole, which means that these customers and PAB account holders would absorb the loss.

    Based on these various circumstances, from the customer's or PAB account holder's perspective, there are varying degrees of risk related to a potential failure of a carrying broker-dealer, depending on whether it can promptly return cash and securities to customers and PAB account holders, or whether it has enough funds to make all customer and PAB account holders whole at the time of its failure. Therefore, maintaining levels of customer and PAB reserve bank account balances that more closely represent the actual amounts of net cash owed to customers and PAB account holders will benefit these customers and PAB account holders by decreasing the risk of not completely recovering their funds from the carrying broker-dealer or having these funds tied up in a liquidation proceeding.[333]

    In addition, performing daily computations will benefit customers and PAB account holders of the affected carrying broker-dealers by more quickly applying the protective measures of the Rule 15c3-3 reserve requirements to cash of customers and PAB account holders that is newly deposited into the carrying broker-dealer. This reduces the likelihood of carrying broker-dealers inadvertently using customers' or PAB account holders' funds to finance any part of their business.[334]

    Other carrying broker-dealers that are SIPC members may also benefit from the requirement to perform daily customer and PAB reserve computations. Specifically, if a failing carrying broker-dealer with a mismatch between the reserve bank account balances and actual cash owed to customers and PAB account holders is put into SIPA liquidation, SIPC may be required to use the SIPC Fund to advance money to customers from the SIPC Fund, reducing its balance and potentially depleting the SIPC Fund. Consequently, a reduction in the SIPC Fund balance and/or SIPC's unrestricted net assets may trigger increased contributions from member broker-dealers, as displayed in table 1 in section I.C.2. of this release, with more substantive balance reductions requiring larger increases in assessments of member broker-dealers, which may be passed on to investors in the form of higher fees or commissions. Therefore, the requirement to perform daily computations will benefit SIPC member broker-dealers by reducing the risk of SIPC Fund depletion and a consequent increase in SIPC assessments.

    The requirement to perform daily computations will apply only to carrying broker-dealers whose average total credits exceed the $500 Million Threshold. Given the information from the 12-month average based on the 2023 monthly FOCUS Reports as an example, the Commission estimates that 40 carrying broker-dealers will be required to switch to a daily computation of the customer reserve formula and 35 carrying broker-dealers will be required to switch to a daily computation of the PAB reserve formula.[335] As shown in table 5, carrying broker-dealers with average total credits above the $500 Million Threshold are more likely to experience larger mismatches and the dollar amounts underlying those mismatches are significantly larger.[336] And as shown in panel C of table 5, those carrying broker-dealers that compute daily tend to have smaller mismatches than those that compute weekly. Hence, the final amendments may reduce the likelihood of mismatches, benefitting customers and PAB account holders of the affected carrying broker-dealers.

    Further, in cases where carrying broker-dealers with greater amounts of total credits are more interdependent with other carrying broker-dealers than carrying broker-dealers with smaller amounts of total credits, having additional large carrying broker-dealers computing daily may benefit financial markets overall without imposing the costs of daily computation onto carrying broker-dealers that do not have significant amounts of total credits.

    Carrying broker-dealers above the $500 Million Threshold are more likely to have PAB accounts, and these PAB accounts hold much greater amounts of total credits. To be specific, 89.8% of carrying broker-dealers above the $500 Million Threshold hold PAB accounts, and they have an average value of $2.3 billion in total PAB credits; whereas only 33.6% of carrying broker-dealers below the threshold hold PAB accounts, and they have an average value of $7.6 million in total PAB credits. Therefore, the carrying broker-dealers above the $500 million threshold are likely to pose greater risk to other broker-dealers. That is, should a carrying broker-dealer fail and not have sufficient funds in its PAB reserve bank account to make whole its PAB account holders, a broker-dealer that is a PAB account holder of the failed carrying broker-dealer may experience delays in the reimbursement of its securities and cash and consequently be exposed to financial stress, which could further propagate to its PAB account holders, and so on. This risk is exacerbated for PAB account holders because they are not entitled to advances from the SIPC Fund. In that way, a failure of one large carrying broker-dealer with a mismatched PAB reserve bank account may result in other carrying broker-dealers experiencing financial stress and increased risk of liquidation. Insofar as a daily computation for carrying broker-dealers with total credits above the $500 Million Threshold reduces the chance that a large carrying broker-dealer has mismatched funds in its PAB reserve bank account, the potential for stress propagation associated with a failure of a carrying broker-dealer will be reduced.

    As discussed in the baseline section, a carrying broker-dealer using the alternative method to compute its minimum net capital requirement must currently reduce aggregate debit items by 3% when performing its customer reserve computation under Rule 15c3-3. This provision serves to increase the amount of funds a carrying broker-dealer must deposit into its customer reserve bank account. Also, as mentioned in the baseline section, commenters recommended that the Commission eliminate the 3% debit reduction and instead apply the 1% debit reduction that currently applies to carrying broker-dealers using the basic method to compute their net capital.[337]

    The Commission is modifying the final rule amendments to permit carrying broker-dealers to reduce aggregate debit items by 2% rather than 3% if they perform a daily customer reserve computation. This amendment will apply to both carrying broker- ( print page 2823) dealers that are required to perform a daily customer reserve computation because they exceed the $500 Million Threshold and carrying broker-dealers below the $500 Million Threshold that voluntarily perform a daily computation. This amendment creates an incentive for smaller carrying broker-dealers to voluntarily perform a daily customer reserve computation. To the extent that they do so, this would reduce the likelihood of a mismatch of funds in their customer and PAB reserve bank accounts, thereby also reducing the risk that customers and PAB account holders experience delays in recovering their funds from the carrying broker-dealer in case of its failure as well as other risks associated with the failure.[338]

    For the 49 broker-dealers on Figure 1 of the baseline section that met the threshold in 2023, the Commission used FOCUS data on aggregate debits to estimate that the change from 3% to 2% adopted by the rule amendments would have freed up a monthly average of $7.41 billion of liquidity. The reduction in aggregate debit items from 3% to 2% mitigates the additional costs to carrying broker dealers who change to a daily calculation while still being congruent with investor protection; the change to a daily calculation, which lowers mismatch risk,[339] allows for this change.

    2. Costs

    Affected broker-dealers may experience an increase in costs resulting from the shift to the daily computation requirement. If under the weekly computation requirement, the carrying broker-dealers relied on staff who fulfilled other functions to also perform the weekly computations,[340] under the daily computation requirement, these carrying broker-dealers will need to make operational changes in order to re-allocate the effort of this staff across the week or hire new personnel who will be assigned the task of performing daily computing.[341] The Commission also expects that the carrying broker-dealers may need to upgrade their systems and internal controls [342] or potentially create or purchase new programming and systems, and update the infrastructure of various functions,[343] to facilitate the increased frequency of computations and accelerate the coordination of departments and groups involved in providing the necessary information on credit and debit items used to perform the computations.[344] Implementing these operational changes, potential staff increases, and upgrades may require the carrying broker-dealers to incur initial start-up compliance costs.

    The Commission received comments offering estimates of these start-up costs. One commenter stated that for a carrying broker-dealer that currently performs daily reserve computations, it took over 25,000 man-hours to complete the shift from weekly to daily computing.[345] This commenter also stated that it may require anywhere from 12,000 to 25,000 man-hours to complete the technology and systems changes necessary to make the shift, at cost estimates of $2 million to $3 million.[346] The estimated figure of the man-hours spent by a carrying broker-dealer that has already implemented the shift to daily computing reasonably represents the man-hours for a large carrying broker-dealer, and therefore can be interpreted as an upper bound of the effort required to implement the necessary technology and systems changes.[347] The commenter did not provide additional information about assumptions or methodologies used to derive a cost of $2 to $3 million from the stated range of 12,000 to 25,000 man-hours. Given that on average the 40 of 49 affected broker-dealers who compute weekly have smaller amounts of total credits and assets than the carrying broker-dealers who currently perform daily reserve computations, the stated cost estimate of $3 million can be interpreted as an upper bound of the initial costs that a carrying broker-dealer may incur in the course of implementing the necessary technology and systems changes to comply with the final amendments.[348] The Commission, however, will lower the 3% debit reduction to 2% for the carrying broker-dealers using the alternative method for net capital purposes, if they perform a daily customer reserve computation. This will free-up liquidity of these carrying broker-dealers, thus partially mitigating their compliance costs.

    The Commission received comments regarding the ongoing costs. One commenter stated that performing a weekly computation requires numerous personnel from various departments and groups to obtain thousands of credit and debit items, reconcile these items with other firm data, and ensure accurate computations.[349] A different commenter stated that implementing the final amendments will require carrying broker-dealers to devote the full-time efforts of multiple new personnel in order to perform daily calculations and deposits.[350] This commenter stated that when performing and documenting each weekly calculation, no fewer than 55 employees are involved in some aspect of the reserve computations.[351]

    The Commission acknowledges that the ongoing costs may increase as a result of implementing the final amendments. The Commission also agrees that completing a reserve computation requires a successful coordination of multiple personnel across various departments within a carrying broker-dealer, while the team responsible for performing the computation collects and validates information on credit and debit items ensuring the accuracy of computations. Thus, the estimate of 55 employees involved in various aspects of the reserve computations may be a reasonable approximation of the number of personnel that participate in providing and processing information about the credit and debit items for the reserve computations. However, as a result of implementing the operational changes and technology upgrades to comply with the final amendments, the ( print page 2824) increase in the carrying broker-dealers' ongoing costs can be partially mitigated through automation and an accelerated coordination of departments and groups involved in providing the necessary information on credit and debit items. The Commission also recognizes that not all work related to performing the reserve computation can be automated.[352] However, the workload associated with the manual verification and validation of the transactions underlying the reserve computations can be reallocated across the week, as a result of operational changes. For example, if a carrying broker-dealer performed the work of verifying and investigating all the transactions at the end of the week, when a weekly computation was conducted, under the daily computation requirement, this carrying broker-dealer will be verifying the transactions daily, as they happen, and hence this workload will be spread out across the week. If the effort of the existing staff cannot be reallocated across the week effectively, implementing the final amendments will require the carrying broker-dealers to hire new personnel. However, as the new personnel takes over the task of performing daily reserve computations, the workload of the staff previously involved in performing weekly reserve computations could be reduced.

    One commenter stated that a realistic estimate of the time it takes to complete a reserve computation runs into the dozens of hours, depending on the complexity of the carrying broker-dealer's business, with some carrying broker-dealers spending 60 to 75 man-hours per week on computations.[353] This commenter concluded that moving to daily computing would mean a burden of over 400 man-hours a week for some carrying broker-dealers, meaning that the burden would increase more than five times.

    The Commission recognizes that it may take up to 60 to 75 man-hours per week to complete a (weekly) reserve computation for carrying broker-dealers with complex operations. However, the Commission does not expect a more than five times increase in man-hours for the carrying broker-dealers required to transition from weekly to daily reserve computations, as it was suggested by one of the commenters.

    To the extent that the carrying broker-dealers successfully implement the operational changes and technology upgrades discussed above, with automation, accelerated coordination of departments and groups involved in providing the information for the reserve computations, and staff effort being reallocated across the week, the number of man-hours spent on performing one reserve computation is unlikely to increase (and therefore stay below 75 man-hours). As a result, the weekly number of man-hours spent on complying with the final amendments is unlikely to increase more than five times for carrying broker-dealers making the shift from weekly to daily computations, as it was suggested by one of the commenters, and hence will be lower than 400 man-hours.

    The daily computation requirement will also lead to an increase in the recordkeeping costs.[354] The Commission estimates that it will cost a carrying broker-dealer $184,000 annually per reserve computation to prepare the records of that computation.[355] The 9 carrying broker-dealers that already perform such computations daily (as shown in table 4, based on data for the period for January 2023 through December 2023) may not experience an increase in recordkeeping costs, however. Given the 40 carrying broker-dealers required to switch to a daily computation of the customer reserve formula and the 35 carrying broker-dealers required to switch to a daily computation of the PAB reserve formula, that implies that the aggregate annual costs of preparing records of reserve computations will increase by approximately $11 million.[356]

    One commenter stated that the 2.5 hour burden provided in the Proposing Release significantly underestimated the costs associated with shifting to the daily computation requirement.[357] Another commenter also stated that the Commission underestimated the staffing and time that will be needed to transition to daily computations and deposits. These commenters suggested that these costs are larger than the figures estimated in the Proposing Release. In response, the 2.5 hour burden reflects solely the costs of making a record of each customer or PAB reserve computation, only one of the components of the costs of implementing the final amendments. This estimate does not represent any other (initial or ongoing) economic costs that carrying broker-dealers may incur while fulfilling the daily computation requirements.[358]

    To the extent that the affected carrying broker-dealers that are just above the $500 Million Threshold do not experience the same economies of scale as carrying broker-dealers that are well above the threshold, they may be disproportionately affected by the daily computation requirements and the related costs. If these costs are significant, some carrying broker-dealers may decide to alter their business to fall below the threshold and avoid the costs related to performing the customer and PAB reserve computations daily. If so, the benefits of the final amendments may be reduced.

    Carrying broker-dealers just below or above the $500 Million Threshold may also experience uncertainty related to being scoped into compliance with the daily computation requirement and may experience costs related to this uncertainty. As displayed in Figure 1, some carrying broker-dealers are likely to drop below the $500 Million Threshold over time, and then once again exceed the threshold in later months. The costs related to these fluctuations are uncertain, but are likely to add, for such carrying broker-dealers, to the costs cited above (for example, if additional staff is needed by these carrying broker-dealers to monitor their customer reserve accounts more closely than carrying broker-dealers well above the $500 Million Threshold).

    Furthermore, while switching back and forth between daily and weekly computations may tailor the compliance costs to the size of customer activity, these fluctuations may also be confusing for customers and PAB account holders of carrying broker-dealers who decide to switch. However, this potential cost or concern may be trivial as many customers may be unaware of, or unconcerned by, the switch.

    Finally, in order to avoid incurring the costs related to the uncertainty of having to switch back and forth between daily and weekly computations, some of these carrying broker-dealers may prefer to voluntarily perform daily ( print page 2825) computations after being scoped into compliance for the first time and paying the start-up costs associated with the final amendments, even if their average total credits temporarily fall below the $500 Million Threshold.

    The Commission received several comments supporting the proposal to require carrying broker-dealers with large amounts of credits to perform daily customer and PAB reserve computations; [359] however, some of the commenters suggested modifications to the proposed threshold.

    For example, some commenters suggested that the Commission should apply the final rule requirements to all carrying broker-dealers.[360] One commenter stated that customer protection rationale applies equally to clients of both small and large broker-dealers.[361] Furthermore, the same commenter stated that requiring all carrying broker-dealers to perform daily computations eliminates the need for carrying broker-dealers to monitor their average total credits over the twelve-month period.[362]

    The final amendments do not extend to carrying broker-dealers with average total credits below the $500 Million Threshold. Applying the daily computation requirement to these carrying broker-dealers would impose compliance costs on 113 more broker-dealers with relatively less customer and PAB account activity.[363] Furthermore, as shown in panels A and B of table 5, carrying broker-dealers with average total credits below the $500 Million Threshold are less likely to experience larger mismatches, and the dollar amounts of these mismatches are smaller, relative to carrying broker-dealers above the $500 Million Threshold. Thus, extending the daily computation requirement to these broker-dealers would subject them to increased compliance costs while they do not have potential for large mismatch risks.

    Several commenters also suggested establishing alternative thresholds.[364] One commenter proposed that the Commission define the threshold as a formula that could be adjusted periodically to ensure that the systemic risk mitigation aims can be reevaluated if necessary.[365] Another commenter suggested incorporating risk and liquidity factors into the threshold as they may be better predictors of a failing carrying broker-dealer.[366]

    The Commission disagrees with these commenters' recommendations to establish alternative thresholds. Setting formula-based thresholds that incorporate dynamic risk or liquidity factors instead of a fixed-dollar threshold would make the rule requirements less predictable and more complex to monitor for the carrying broker-dealers above the threshold. Furthermore, a dynamic formula-based threshold would increase the uncertainty of the carrying broker-dealers that would expect to be scoped into compliance with the requirements of the rule due to being just below the threshold, and, as a result, experience higher costs related to this uncertainty. As displayed in Figure 1 and discussed above, if the threshold is fixed, some carrying broker-dealers are likely to drop below it and then exceed the threshold again in later months. These fluctuations would be larger and more costly for the carrying broker-dealers if they are expected to comply with a formula-based threshold that incorporates dynamic factors. A uniform fixed-dollar threshold will make the rule requirements more predictable and easier to monitor over time for the carrying broker-dealers. Another commenter suggested to require carrying broker-dealers to perform daily computations if their average total credits exceed the proposed $250 Million Threshold and their average net credits are more than $10 million.[367] This commenter stated that including this additional metric would ensure that the rule requirements exclude broker-dealers without a large excess of credits over debits, as these carrying broker-dealers do not present a large mismatch risk.[368] The Commission disagrees with this commenter's suggestion. Although carrying broker-dealers may have lower average excess of credits over debits, these carrying broker-dealers remain at risk for a large mismatch.[369] The net credit metric does not take into account fluctuations in the value of net cash owed to customers and PAB account holders, and hence lower average net credits do not necessarily indicate that the carrying broker-dealer is at a lower risk of large intra-week mismatches. Furthermore, the commenter did not provide any data supporting the suggestion that carrying broker-dealers with net credits below $10 million necessarily experience lower mismatches.

    The Commission is adopting a $500 Million Threshold to narrow the scope of the final amendments to carrying broker-dealers that tend to have larger mismatches. The $500 Million Threshold excludes 12 carrying broker-dealers, as compared to the proposed $250 Million Threshold. The final amendments are designed to reduce the mismatch risk for carrying broker-dealers with large amounts of total credits by reducing the time between the inflows of customer funds and when the carrying broker-dealers perform their next reserve computations and fund their reserve accounts, as these carrying broker-dealers are more likely to have larger mismatches, and the dollar amounts underlying these mismatches are significantly larger. Also, as stated above, a uniform threshold will make it easier for the carrying broker-dealers to comply with the final amendments.

    Some commenters also suggested that carrying broker-dealers should perform the reserve computations in real time, given that the technical prerequisites for complex computational operations are already present.[370] The Commission disagrees with these commenters. Performing the reserve computations in real time may not be feasible, as these computations are often accompanied by manual validations of the underlying transactions. Automating these components of computations is technically difficult and would be comparatively costlier for the carrying broker-dealers than the final amendments.

    One commenter suggested establishing conditions under which either the customer or PAB reserve computations would be exempt from the daily computation requirement.[371] The commenter stated that if one of the computations (customer or PAB) has significantly less credits relative to the other, it may not be necessary or appropriate to require a daily reserve computation for the smaller category of account.[372] The commenter's suggestion included setting separate threshold requirements for each category of computations.[373] One commenter also proposed to exempt PAB reserve computations from the rule requirements entirely.[374] The ( print page 2826) Commission disagrees with these commenters. As stated above, having a daily computation requirement with a uniform threshold that applies to average total credits will be less costly to monitor for carrying broker-dealers expecting to be scoped into compliance, than a requirement prescribing a more complex threshold. Furthermore, exempting PAB reserve computations from the rule requirements would increase the risks of the PAB account holders as they are not entitled to advances from the SIPC Fund in case of the carrying broker-dealer's liquidation.

    One commenter stated that the Commission has not appropriately weighed the costs of implementing the rule requirements against any potential benefits that could derive from the rule.[375] This commenter also suggested that these costs could be passed down to investors buying and selling securities.[376]

    The Commission recognizes that complying with the rule requirements may be costly for the carrying broker-dealers. However, the customers and PAB account holders are expected to significantly benefit from the protections provided by the final amendments. Performing daily customer and PAB reserve computations will decrease the risk of delays in recovering their funds from the carrying broker-dealer in case of its failure. Moreover, maintaining customer and PAB reserve account balances that more closely represent the amounts of cash owed to customers and PAB account holders will reduce the risk of not completely recovering their funds from the carrying broker-dealer. These risks are exacerbated for PAB account holders as they are not entitled to advances from SIPC Fund, and hence their benefits from the protections provided by the final amendments are expected to be larger. Performing daily computations will also benefit customers and PAB account holders of carrying broker-dealers by more quickly applying the protective measures of the Rule 15c3-3 reserve requirements to cash of customers and PAB account holders that is newly deposited into the carrying broker-dealer. This is expected to reduce the likelihood that customer funds may be inadvertently used to finance any part of the carrying broker-dealer's business. In addition, other carrying broker-dealers may also benefit from the final amendments, since the requirement to perform daily computations may reduce the risk of SIPC Fund depletion.

    3. Other Compliance Costs

    Several commenters suggested that the Commission should consider the cumulative burdens of implementing the proposed rule amendments and other regulatory obligations with potentially overlapping compliance dates.[377] Specifically, one commenter stated that “the same firms who will be required to move to a daily computation are also managing multiple other regulatory requirements.” [378] The commenter further stated that “unless the SEC provides adequate time to manage the new regulatory requirements together, firms will face an unmanageable clash of compliance requirements all converging at the same time.” [379] The Commission has considered the potential effects on carrying broker-dealers that are implementing other recently adopted Commission rules during the compliance period for these amendments.

    Consistent with its long-standing practice, the Commission's economic analysis in each adopting release considers the incremental benefits and costs for the specific rule—that is, the benefits and costs stemming from that rule compared to the baseline. The Commission acknowledges the possibility that complying with more than one rule in the same time period may entail costs that could exceed the costs if the rules were to be complied with separately. One of the rules mentioned by commenters which culminated in the recent adoption of the rules and amendments in the Settlement Cycle Adopting Release has a compliance date that occurred before the effective date of the final amendments,[380] such that there is no overlap in transition periods.[381]

    With respect to the other recently adopted Commission rules discussed above, for which the compliance periods overlap, in part with the compliance period for the final amendments,[382] carrying broker-dealers subject to the amendments will be subject to one or more of those other recently adopted rules only when those carrying broker-dealers' activities fall within the scope of the other rules. Specifically, the rules and amendments adopted in the Rule 605 Adopting Release apply to market centers, which includes certain carrying broker-dealers.[383] The Rule 10c-1a Adopting Release and the Customer Notification Adopting Release also apply to certain carrying broker-dealers, although due to differing requirements, these rules may not all apply to any given carrying broker-dealer.[384] The Electronic Submission Adopting Release applies to entities that file FOCUS Reports, which includes all carrying broker-dealers.[385] The Treasury Clearing Release applies to certain clearing agencies for U.S. Treasury securities and certain participants of the covered clearing agencies, which could include carrying broker-dealers.[386] Where rules affecting the same entities have overlapping compliance periods, the Commission acknowledges that there may be additional costs on those carrying broker-dealers subject to one or more other rules.

    D. Effects on Efficiency, Competition, and Capital Formation

    The final amendments may affect competition among carrying broker-dealers. First, to the extent that compliance costs would be passed onto customers and PAB account holders, affected carrying broker-dealers that experience greater economies of scale may become more competitive than other affected carrying broker-dealers. Second, to the extent that customers of carrying broker-dealers value daily reserve computations more than the weekly computations, the affected carrying broker-dealers may become more competitive relative to the unaffected carrying broker-dealers. However, the Commission does not anticipate such an effect to be large. Given the fact that ten carrying broker-dealers already compute daily, if such a competitive advantage existed and was sufficiently large, and carrying broker- ( print page 2827) dealers performing weekly computations were losing customers, then more carrying broker-dealers would have likely already converted to daily computing. On the other hand, to the extent that the some of the affected carrying broker-dealers that are just above the $500 Million Threshold do not experience the same economies of scale as carrying broker-dealers that are well above the threshold, they may decide to alter their business or adjust the size of their activities to fall below the threshold and avoid incurring the compliance costs associated with implementing the final amendments, which may in turn adversely impact competition.

    As discussed above, the Commission acknowledges that overlapping compliance periods may in some cases increase costs.[387] The Commission acknowledges that to the extent overlap occurs between the compliance periods of this rule and the compliance periods of other rules, there could be costs that could affect competition. However, the compliance date is spread over a period extending to December 2025. The Commission therefore does not expect the risk of negative competitive effects from increased compliance costs from overlapping compliance periods to be significant.

    The final amendments may increase liquidity in the securities markets, as they will promote confidence in the broker-dealer industry by increasing its resilience and result in an increase of customer and PAB account activities. As a consequence, market efficiency and capital formation in the underlying markets may increase. Under the baseline there is a greater chance of a larger mismatch with weekly reserve computations than with daily reserve computations, potentially suggesting a greater risk in doing business with a carrying broker-dealer that performs its customer and PAB reserve computations weekly. Also, to the extent that the mismatch reflects an overfunding, there may also be a greater cost to the carrying broker-dealer (and by extension its customers), since it ties up capital that the carrying broker-dealer could have put to more productive use.

    Therefore, should customers and PAB account holders have a concern over mismatch in reserve bank accounts and potential failures affect market participants' willingness to expose themselves to carrying broker-dealers, there may be less capital committed to this market as otherwise. However, similar to the point above, if customers of carrying broker-dealers were aware and concerned of mismatches, the Commission might have already observed more carrying broker-dealers computing daily, in order to retain customers, than is currently the case under the baseline. Therefore, the Commission does not anticipate any effect on capital formation in this market to be significant.

    In addition, insofar as capital loss could arise in times of market stress due to an increased likelihood of carrying broker-dealer failures, market participants may become concerned with the possibility of not getting their cash promptly or not getting paid in full in an event of a carrying broker-dealer failure and reduce their exposure to carrying broker-dealers. To the extent that the daily computation requirement alleviates this concern, the risk of flight of capital from securities markets may decrease during stressed market conditions and capital inflow during normal market conditions may increase.

    Finally, the daily computation requirement may benefit the affected carrying broker-dealers by increasing their operational efficiency. For example, in a scenario where customer reserve or PAB reserve bank accounts are over-funded, a carrying broker-dealer that performs a weekly computation cannot withdraw excess cash from the customer reserve bank account until the following reserve computation date, even if the value of the account exceeds the actual net cash owed to customers, exposing this carrying broker-dealer to operational inefficiency. A daily computation would permit the affected carrying broker-dealers to withdraw these excess funds in a timely manner and would allow them to manage their funds and operations more effectively.

    Since the final amendments do not impact the scope of information available to investors, the Commission does not anticipate effects on informational efficiency to be significant.

    E. Reasonable Alternatives

    1. Over-Funding of the Customer and PAB Reserve Bank Accounts

    As an alternative to daily computation requirements, the Commission considered an over-funding approach which would have applied to the customer and PAB reserve bank accounts. For example, carrying broker-dealers would have performed the required reserve computations and deposits weekly and deposited a multiple of this amount ( e.g., 105% or 110%) into the customer or PAB reserve bank account. Under this alternative approach, carrying broker-dealers would have avoided an increase in compliance costs associated with a daily computation requirement (hence, this alternative would have applied to carrying broker-dealers choosing weekly funding). Insofar as the compliance costs associated with the daily computation would be passed onto customers and PAB account holders of the affected carrying broker-dealers, this alternative approach would have been more beneficial for these customers and PAB account holders because it would not have implied an operational change and compliance costs related to the customer and PAB reserve computation while offering extra protection for customers and PAB account holders.

    However, under this alternative the carrying broker-dealer would have needed to fund the excess with its own cash, which could have resulted in funding costs, decreased liquidity, and opportunity costs from not being able to deploy this cash in the carrying broker-dealer's business. As a result, requiring carrying broker-dealers to place extra cash in a customer or PAB reserve bank account could have resulted in an operational efficiency decrease and potential reduction of carrying broker-dealers' profits, which may be passed onto customers, PAB account holders, and other stakeholders. In addition, this approach would not have accounted for the actual net cash owed to customers and PAB account holders if reserve bank account mismatches exceeded the buffer that this alternative would have required.

    2. A Threshold Based on a Different Metric

    As an alternative, the Commission considered setting a threshold for compliance with a daily computation requirement based on a different metric. For example, the Commission could have set a threshold based on total assets of $1 billion or net capital of $50 million. A threshold based on such metrics could have been more representative of the economies of scale that carrying broker-dealers experience and could have better indicated a carrying broker-dealer's ability to comply with enhanced requirements without substantial increases in compliance costs that could have ultimately been passed onto their customers.

    Based on the monthly 2023 FOCUS Reports, the Commission estimates that under the alternative threshold of $1 billion in total assets 78 carrying broker- ( print page 2828) dealers would have been required to perform the customer and PAB reserve computations daily. Of the 49 carrying broker-dealers that are at or above the $500 Million Threshold for average total credits, one has total assets below $1 billion, while 30 carrying broker-dealers below the $500 Million Threshold have total assets over $1 billion.

    With respect to a $50 million net capital threshold, 100 carrying broker-dealers would have been required to perform the customer and PAB reserve computations daily. Of the carrying broker-dealers that are below $500 Million Threshold for average total credits, 51 have net capital exceeding $50 million, while of the group above $500 Million Threshold for average total credits, none have net capital below $50 million.

    If the alternative had stated that the carrying broker-dealer has over $1 billion in total assets, or has over $50 million net capital threshold, 101 carrying broker-dealers would have been required to perform the customer and PAB reserve computations daily.

    A drawback to this alternative is that some large broker-dealers with minimal amounts of carrying activity would have borne the added cost of switching to a daily computation. For example, the group of 30 carrying broker-dealers below the $500 Million Threshold with $1 billion in assets or more, had a combined total of average total credits of approximately $4.6 billion as of the end of 2023. That amounted to only about 0.44% of average total credits for all carrying broker-dealers for that year.[388]

    The Commission received a comment suggesting the Commission require carrying broker-dealers to perform daily reserve computations if the average total credits exceed the proposed $250 Million Threshold and average net credits exceed $10 million.[389] This commenter stated that including this additional net credits metric would ensure that the rule requirements exclude carrying broker-dealers without a large excess of credits over debits, as these carrying broker-dealers do not present a large mismatch risk.

    Under this alternative, based on the monthly 2023 FOCUS Reports, 51 carrying broker-dealers would have been required to perform the reserve computations daily, compared to the 49 under the final amendments with the threshold set to $500 Million.[390] The potential drawback to this alternative is that some of the carrying broker-dealers with large amounts of average total credits would have been excluded from the daily computation requirement. To be specific, out of 10 carrying broker-dealers above the $500 Million Threshold that would have been scoped out of the compliance under this alternative, 7 carrying broker-dealers have over $1 billion in average total credits. Given the information displayed in table 5, carrying broker-dealers in this group are more likely to have larger mismatches, which suggests that under this alternative approach, there is a potential for more carrying broker-dealers to have a large mismatch, than under the final amendments.

    3. Daily Computation Requirement for All Carrying Broker-Dealers

    As an alternative, the Commission considered requiring the daily computation requirement to apply to all carrying broker-dealers with positive average total credits. Under this alternative, a greater number of carrying broker-dealers would have performed their customer and PAB reserve computations daily, which would have benefitted more customers and PAB account holders compared to the final amendments. Specifically, under the zero threshold, 113 more carrying broker-dealers would have experienced the benefits and costs discussed in section IV.C. of this release (compared to the 49 affected based on the January 2023 to December 2023 period).

    Further, to the degree that carrying broker-dealers with smaller amounts of total credits are interdependent with other broker-dealers to the same degree as carrying broker-dealers with larger amounts of total credits, this approach would have benefitted all PAB account holders equally and potentially reduced the systemic risk to a greater degree relative to the final amendments. The number of credits held in the PAB reserve bank accounts of the 44 carrying broker-dealers (with PAB accounts) above the $500 Million Threshold makes up approximately 99% of the total amount held in PAB reserve bank accounts (of the 82 broker-dealers that reported carrying PAB accounts in 2023).[391]

    In particular, insofar as a daily computation for all carrying broker-dealers reduces the chance that any carrying broker-dealer has funds in its PAB reserve bank account that are less than the net amount of cash owed to PAB account holders, the potential for stress propagation associated with a failure of a carrying broker-dealer could be reduced.

    However, this alternative would have imposed compliance costs on a greater number of carrying broker-dealers, which could have been passed onto customers and PAB account holders. In addition, customer protection benefits may have been not justified by the reduction in operational efficiency of carrying broker-dealers with little customer and PAB account activity that may arise from disproportional dedication of resources towards a de minimis business activity. Finally, this alternative would have also imposed significant economic impact on small businesses.

    4. A Higher or Lower Threshold for Daily Computation

    As an alternative, the Commission considered a threshold higher or lower than $500 million in average total credits. Under these alternatives, fewer or more carrying broker-dealers would have been required to perform their customer and PAB reserve computations daily. For example, if the threshold was set at $100 million, a total of 75 carrying broker-dealers would have been scoped into the new requirements compared to the 49 under the final amendments. Similarly, if the threshold was set at $1 billion, only 41 carrying broker-dealers would have been scoped into the new requirements.[392]

    If the threshold were $100 million, more carrying broker-dealers would perform daily computations, which would mean that fewer broker-dealers would have a mismatch between the net cash owed to the carrying broker-dealer's customers and the amounts deposited in their customer or PAB reserve bank accounts. On the other hand, more broker-dealers would have incurred the burden of performing their customer and PAB reserve computations daily. If the threshold were set at $1 billion, fewer carrying broker-dealers would face the costs of a daily computation than under the final amendments. However, there would have been fewer carrying broker-dealers computing daily, suggesting the potential for more carrying broker-dealers having a mismatch than under the final amendments. ( print page 2829)

    5. Calculation Based on the Maximum Value Over the Past Year

    The $500 Million Threshold is the arithmetic mean of the total credits in the customer and PAB reserve computations reported on the twelve most recently filed month-end FOCUS Reports.[393] As an alternative, the Commission considered a threshold based on the maximum value for total credits during the most recently ended calendar year. This alternative may have more appropriately accounted for the implied capacity of the carrying broker-dealer's reserve bank accounts. For example, if total credits related to customers or PAB account holders' activity fluctuated throughout a year or based on economic cycles and such fluctuations are predictable, the maximum value of total credits may have been more representative of the customer transactions' volume. As another example, if a carrying broker-dealer experiences trending growth of its customer base, the maximum value of total credits would have also been more representative of the current size of the customer base.

    Table 6 below regroups carrying broker-dealers based on the maximum number reported for total credits within a given year. Under this alternative, 59 carrying broker-dealers would have been scoped into the final rule, compared to the 49 that are scoped into the rule under the final amendments.

    Table 6—Threshold Based on Maximum Total Credits During 2023
      Number Total assets ($B) Total customer credits, $MM Total PAB credits, $MM Total credits, $MM
    Number Mean Median Number Mean Median Mean Median
    >$0-100MM 76 212.8 76 14.4 2.7 17 0.3 14.7 2.9
    $100-250MM 16 91.3 16 159.0 140.2 7 0.1 159.1 140.2
    $250-500MM 11 147.8 11 323.8 303.7 6 37.7 1.2 360.3 333.6
    $500MM-1B 12 301.7 12 540.8 554.9 10 135.6 32.7 643.4 614.1
    $1-5B 22 412.7 22 2,386.7 2,257.6 19 168.8 12.4 2,491.6 2,516.9
    $5-10B 5 133.1 5 7,261.8 7,421.5 5 212.1 76.0 7,460.7 7,457.7
    ≥10B 20 3,524.2 20 49,360.3 30,366.1 18 8,336.9 330.1 57,157.6 33,833.3
    Total a 162 4,823.6 162 6,726.6 122.1 82 1,071.5 0 7,719.8 125.6
    a  Table excludes carrying broker-dealers with zero reported credits in 2023.

    A benefit of this alternative is those carrying broker-dealers with the largest amounts of total credits would be scoped into daily computing, where the largest credits reported (as opposed to the average) could be more indicative of a potential mismatch between the net cash owed to customers and the reserve account balances. However, this alternative may also create uncertainty if any cyclical behavior of total credits that has occurred over some historical period, changes unexpectedly, leading to potential for a carrying broker-dealer oscillating between weekly and daily computations and deposits from year to year.

    Table 7 summarizes the number of affected broker-dealers under the alternatives thus far versus the final amendments, both for the rolling sample period defined from January 2023 to December 2023 and for the period defined from June 2023 to May 2024.

    Table 7—Summary of Affected Broker-Dealers Under the Final Amendments Versus Alternatives
    Alternatives vs. final amendments Number of affected broker-dealers (based on period January 2023 to December 2023) Number of affected broker-dealers (based on period June 2023 to May 2024)
    Final Amendments 49 48
    Alternatives:
    Alt 1 Over-Funding 162 160
    Alt 2 $1B in Total Assets 78 79
    Alt 2 $50MM in Net Capital 100 103
    Alt 2 $10MM in Net Credits and Average T.C. >$250MM 51 51
    Alt 3 Daily for all 162 160
    Alt 4 Average T.C. >$1B 41 40
    Alt 4 Average T.C. >$100MM 75 76
    Alt 5 Maximum Total Credits 59 57

    6. Daily Computation if an Average Required Deposit Exceeds a Threshold

    As an alternative to performing the customer and PAB reserve computations daily for carrying broker-dealers over a threshold (defined by average total credits), the Commission considered an approach that would have required a daily computation in the case where the required reserve bank account deposit as a share of the reserve bank account balance prior to such deposit exceeds a ( print page 2830) certain percentage threshold ( e.g., 5% or 10%).[394]

    This alternative approach would have accounted for broker-dealer-specific trends related to customer transactions. If the customer base differed substantially between carrying broker-dealers, with customers of some carrying broker-dealers trading more often or doing account activities that increased the carrying broker-dealer's total credits by more compared to the customer base of other broker-dealers, this alternative approach would have focused only on those carrying broker-dealers that typically experience larger reserve mismatches. However, given the information displayed in table 5, there does not appear to be a perfect correlation with carrying broker-dealer size (measured by average total credits), and the deposit “mismatch.” [395] Smaller-broker dealers can have an average mismatch of more than 5% (based on the January 2023 to December 2023 period), implying the possibility of an undue burden with respect to compliance costs. That latter could have ultimately been passed onto the carrying broker-dealers' customers and PAB account holders.

    7. Daily Computation Requirement Based on Average Total Credits per Number of Customer and PAB Accounts

    As an alternative to performing the customer and PAB reserve computations daily for carrying broker-dealers over a threshold (defined by average total credits), the Commission considered requiring daily computations based on average total credits per number of customer accounts. While a failure of carrying broker-dealers with smaller amounts of total credits may not have posed a significant risk of depletion to the SIPC Fund, a threshold based on the average total credits may have had limitations from an individual customer or PAB account holder prospective. This is because such a threshold does not account for the number of customers and PAB account holders a carrying broker-dealer might have and is disconnected from the per-customer protection approach that is used by SIPC.[396]

    For example, consider two carrying broker-dealers, both with $150 million in total credits, which is below the $500 Million Threshold. The first carrying broker-dealer has three customers, each contributing $50 million in credits towards the carrying broker-dealer's aggregate value of total credits, and the second carrying broker-dealer has 100 customers each contributing $1.5 million in credits towards the carrying broker-dealer's aggregate value of total credits. Recall that the maximum advance from the SIPC Fund is $500,000 per customer. Consider a situation where both carrying broker-dealers fail and their reserve bank accounts are underfunded by more than 1% of what is owed to customers ( i.e., the shortage is above $1.5 million). In this situation, the customers of the second carrying broker-dealer would be made whole promptly with an advance from the SIPC Fund, but the customers of the first carrying broker-dealer would not be made whole (because the per-customer loss is above maximum per-customer SIPC advance of $500,000) until SIPC recovers funds from the carrying broker-dealer, which may take some time.

    The above example notwithstanding, data from the FOCUS Reports for 2023 suggests the potential for this concern is likely negligible. Table 8 displays the amounts of average total credits per total accounts for each size grouping of carrying broker-dealers. For the 162 carrying broker-dealers that reported positive total credits in December 2023, the average amount of average total credits per account (with the number of customer accounts and PAB accounts combined) was notably larger for the carrying broker-dealers above the $500 Million Threshold than for carrying broker-dealers below the threshold. Carrying broker-dealers above the $500 Million Threshold had about $13 million per customer account, while carrying broker-dealers below the $500 Million Threshold had about $.5 million on average per customer account.[397]

    Table 8—Threshold based on Average Total Credits per Accounts During 2023
      Number Number of accounts (cust + PAB) Total credits $MM Total credits per account $MM
    Mean Mean Mean
    >$0-100MM 87 214,951 14.5 0.6
    $100-250MM 14 480,321 160.3 0.1
    $250-500MM 12 469,612 357.2 0.4
    $500MM-1B 8 141,807 697.7 1.3
    $1-5B 17 1,964,257 2,344.3 33.6
    $5-10B 6 11,133,250 7,201.0 2.1
    ≥10B 18 7,783,768 52,858.1 2.1
    Total 162 1,682,066 6,468.4 5.1

    8. Daily Computation Based on Average Total Credits From the Most Recent Calendar Year

    As an alternative to performing the customer and PAB reserve computations daily based on a 12-month rolling average of total credits, the Commission considered requiring computation based on the arithmetic mean of the sum of total credits over the 12 months in the most recent calendar year. For example, whether a carrying-broker dealer exceeded the $500 Million Threshold at any point in 2024, would have been based on the average total credits from January 2023 through December 2023.

    The potential benefit of basing the average total credit amount on the most recent calendar year is that carrying ( print page 2831) broker-dealers would have known with certainty if they fell above or below the $500 Million Threshold and would have been subject to daily or weekly computing for the entirety of the next calendar year. This potential benefit contrasted with the possible uncertainty that the rolling average computation would have introduced for carrying broker-dealers that are close to the $500 Million Threshold. That uncertainly may have created an added cost for those carrying broker-dealers as they would have needed to constantly monitor their standing with respect to the $500 Million Threshold. This monitoring may have involved additional staff, or existing staff devoting additional time to that task, and suggests the cost of the final amendments may be marginally higher for some carrying broker-dealers than the cost estimates cited earlier in this release.[398] Or, wishing to avoid this monitoring cost, the carrying broker-dealer may have had to decide to switch to daily (or weekly) once and for all, which may have also implied additional costs.

    However, a potential cost of this alternative was that, over the course of a year, a carrying broker-dealer computing weekly (for example) may exceed the $500 Million Threshold. This may have resulted in a situation where a carrying broker-dealer with average total credits above the $500 Million Threshold would not have been engaging in daily computation—as it would have with a timelier and up-to-date rolling average—and the risks of weekly computing discussed in this release would have remained present for that carrying broker-dealer.

    9. Reduction of the Aggregate Debit Items Charge From 3% to 1%

    The Commission could have implemented a debit-items charge reduction from 3% to 1%, as suggested by some commenters.[399] This change would have freed up double the amount of liquidity ($14.82 billion) compared to the reduction from 3% to 2% finally chosen by the Commission.

    As mentioned in the baseline, however, a 1% debit reduction already applies to firms that use the basic method to calculate their net capital requirements. Net capital requirements are formulated differently under the alternative and basic methods. While the basic method targets the leverage of a carrying broker-dealer directly, under the alternative method, the net capital rule is formulated as a percentage of total customer receivables. The 1% debit reduction should not be applied to firms that calculate their net capital requirements under the alternative method. Otherwise, their combined levels of liquidity and capital buffers under the customer protection and net capital rules may fall below adequate levels. The 2% debit reduction will be appropriate because moving from weekly to daily computations, the mismatch risk, which has been discussed earlier, will be reduced, and so the original 3% debit reduction will not be required in the new regime.

    10. Exemption for Cash in Motion

    The Commission could have adopted an alternative that exempts from the reserve computations cash that has been “directed off of the [carrying broker dealer's] balance sheet,” [400] for example, cash that is subject to a sweep program in accordance with paragraph (j)(2)(ii) of Rule 15c3-3.[401] Commenters raised the following scenario: a customer deposits cash with the carrying broker-dealer near the close of the business (say, Monday for example). It is sufficiently late in the day that the carrying broker-dealer cannot sweep the cash into the money market fund or bank; however, according to the customer's preset instructions, the carrying broker-dealer will automatically sweep the funds into the money market fund or bank account the first thing next morning (Tuesday). Such funds would become part of the customer reserve computation and would need to be deposited in the customer reserve bank account on Wednesday, even though, as of the next morning (on Tuesday), they are no longer held by the carrying broker-dealer. Thus, the carrying broker-dealer would need to fund the customer reserve bank account from its own reserves. Commenters stated that this situation creates new costs in the daily versus the weekly computation. Under the weekly computation, cash deposited on Monday would be swept out on Tuesday, and therefore would not be subject to the weekly reserve computation the next Monday (using numbers as of the close of business the previous Friday).[402]

    The Commission recognizes that this alternative would lower costs for carrying broker-dealers in that it would reduce the amount of cash they would need to set aside. However, the Commission does not believe the relative cost savings to be substantial, as the carrying broker-dealer would only be required to fund the reserve bank account overnight (in the example above from Wednesday to Thursday), because, under the commenter's assumption, the cash is swept out as of Tuesday morning and therefore would not be required to be held (in the customer reserve bank account) as of Thursday. Moreover, the cost only applies to cash that is received before close of business and yet after the sweep deadline. Any cash received before the sweep deadline on Monday would not be part of the reserve computation as of Monday afternoon.

    On the other hand, retaining this requirement maintains the current level of customer protection, providing a buffer against the situation where the funds in the customer reserve bank account turn out to be insufficient to pay customers in the event of broker-dealer failure.

    V. Paperwork Reduction Act

    Paragraph (e) of Rule 15c3-3 contains “collection of information” requirements within the meaning of the Paperwork Reduction Act (“PRA”).[403] Specifically, paragraph (e) of Rule 15c3-3 requires carrying broker-dealers to make and maintain a record of each customer and PAB reserve computation and to preserve each such record in accordance with Rule 17a-4.[404] The Commission has submitted the final collection of information to the Office of Management and Budget (“OMB”) for review and approval in accordance with the PRA and its implementing regulations.[405] For the amendments, the title of the existing information collection is “Customer Protection—Reserves and Custody of Securities” ( print page 2832) (OMB Control No. 3235-0078), and the amendments revise that collection. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.[406] The Commission published notice soliciting comments on the collection of information requirements in the Proposing Release [407] and submitted the proposed collections of information to OMB for review in accordance with the PRA.[408] The initial burden estimates from the Proposing Release have been adjusted, as discussed below, to reflect updated information used to make the current estimates, including updated FOCUS Report data.[409]

    The burden estimates contained in this section are recordkeeping and notification burdens. The recordkeeping burden relates solely to the requirement for carrying broker-dealers to make and maintain a record of the customer and PAB reserve computations and do not include any other possible costs or economic effects beyond the burdens required to be calculated for PRA purposes.[410]

    A. Summary of Collections of Information Under the Final Amendments

    Rule 15c3-3 requires each carrying broker-dealer to maintain a reserve of cash and/or qualified securities in a customer reserve bank account that is at least equal in value to the net cash owed to customers.[411] Carrying broker-dealers also maintain a reserve of cash and/or qualified securities in a PAB reserve bank account in an amount that is at least equal in value to the net cash owed to PAB account holders.[412] In order to determine the amount required to be deposited in the customer and PAB reserve bank accounts, Rule 15c3-3 requires carrying broker-dealers to perform weekly customer and PAB reserve computations as of the close of the last business day of each week.[413] The rule requires carrying broker-dealers to make and maintain a record of each such computation, and to also preserve each such record in accordance with Rule 17a-4.[414] This recordkeeping requirement represents a collection of information for PRA purposes. This is an existing PRA burden. As described in this section below, the estimated hourly burden associated with this collection of information is not changing. Instead, the total burden is being revised to reflect that the number of respondents subject to the estimated burden will change as a result of the amendments to Rule 15c3-3 adopted by the Commission.

    As a result of the amendments, carrying broker-dealers with average total credits equal to or greater than the $500 Million Threshold must perform the customer and PAB reserve computations daily instead of weekly, and must make and maintain a record of each such daily computation, and also preserve each such record.[415] The amendments also provide that a carrying broker-dealer performing daily customer and PAB reserve computations may elect to perform weekly computations if its average total credits fall below the $500 Million Threshold and it notifies its DEA, in writing, of this election at least 60 calendar days prior to starting weekly computations.[416] This notification requirement represents a collection of information for the purposes of the PRA.

    Further, as a result of the amendments to Rule 15c3-3, carrying broker-dealers that elect to voluntarily perform the customer reserve computation daily and seek to reduce aggregate debit items in the customer reserve computation by 2% instead of 3% must provide notification to their DEA 30 calendar days prior to operating under this provision.[417] This notification requirement represents a collection of information for PRA purposes.

    In addition, as a result of the amendment to paragraph (a)(1)(ii)(A) of Rule 15c3-1,[418] a carrying broker-dealer required to perform a daily customer reserve computation may reduce aggregate debit items in such computation by 2% rather than 3%. This paragraph does not contain an information collection requirement. Therefore, the Commission is not estimating any new collection of information burdens, or revising any existing burden estimates, in connection with this amendment.

    Finally, the Commission is adopting technical amendments to Part II of the FOCUS Report (OMB Control No. 3235-0123) to conform it to the amendments with respect to the lowering of the debit reduction from 3% to 2%.[419] Because these amendments, as described above in section II.C.2 of this release, add only two additional lines to a lengthy form, carrying broker-dealers can quickly familiarize themselves with them. Accordingly, the addition of the two new line items will not affect the current estimated burden.

    B. Use of the Information

    Rule 15c3-3 is an integral part of the Commission's financial responsibility program for broker-dealers. The requirement to document in writing the customer and PAB reserve computations facilitates the process by which the Commission and the carrying broker-dealer's DEA examine the broker-dealer's compliance with Rule 15c3-3. The purpose of the 60-day written notice requirement is to provide the DEA with prior notice that the carrying broker-dealer is switching from daily to weekly customer and PAB reserve computations and provide the DEA the opportunity to contact the carrying broker-dealer and ask how it intends to implement the change. This will assist the DEA in monitoring the carrying broker-dealer. Similarly, the 30-day notification requirement for carrying broker-dealers electing to voluntarily perform a daily customer reserve computation and deduct 2% of aggregate debit items is to ensure that the carrying broker-dealer's DEA is aware of the carrying broker-dealer's election and is able to monitor its compliance with those requirements.

    C. Respondents

    1. Recordkeeping Requirements

    Under the amendments, respondents are carrying broker-dealers with average total credits equal to or exceeding the $500 Million Threshold. The Commission estimates there are approximately 49 carrying broker-dealers that will have average total credits equal to or exceeding the $500 ( print page 2833) Million Threshold based on a review of FOCUS Report data for the calendar year 2023. Of these carrying broker-dealers, the Commission estimates that 9 already perform the customer reserve computation daily, and therefore already make, maintain, and preserve a record of each such computation. Of the 49 carrying broker-dealers that would have average total credits equal to or exceed the $500 Million Threshold, the Commission estimates that 44 perform a PAB reserve computation, with 9 of these carrying broker-dealers already performing the PAB reserve computation daily, and therefore already make, maintain, and preserve a record of each such computation. Consequently, for the purposes of the PRA, the Commission estimates that there are 40 respondents for the requirement to make, maintain, and to preserve a record of each customer reserve computation, and 35 respondents for the requirement to make, maintain, and to preserve a record of each PAB reserve computation. These respondents are currently included in the collection of information associated with Rule 15c3-3 related to weekly computations for the customer and PAB reserve computations and the requirement to make, maintain, and to preserve a record of each such computation. However, as a result of the amendments, these respondents will need to perform daily customer and PAB reserve computations rather than weekly computations, and make, maintain, and preserve a record of each such computation.

    2. Notification Requirement To Revert to Weekly Computations

    Based on a review of FOCUS Report data for the calendar year 2023, the Commission estimates that one carrying broker-dealer per year will provide notice to their DEA that the carrying broker-dealer's average total credits has fallen below the $500 Million Threshold, and that such carrying broker-dealer will switch from a daily computation to a weekly computation.

    3. Notification Requirement To Voluntarily Perform Daily Customer Reserve Computation With 2% Debit Reduction

    Based on a review of FOCUS Report data for the calendar year 2023, the Commission estimates that 9 carrying broker-dealers that are above the $500 Million Threshold already voluntarily perform daily customer reserve computations.[420] The Commission estimates that these nine carrying broker-dealers will notify their DEA of their intent to continuing to perform daily customer reserve computations voluntarily pursuant to paragraph (e)(3)(v) of Rule 15c3-3. Additionally, the Commission estimates that an additional 6 carrying broker-dealers that have significant debit balances may voluntarily elect to perform daily customer reserve computations in order to deduct 2% of aggregate debit items instead of 3% in connection with the computation. Consequently, the Commission estimates that there are 15 respondents associated with this collection of information.

    D. Total Annual Burden Estimate

    1. Recordkeeping Requirements

    Carrying broker-dealers subject to the requirement to perform daily customer and PAB reserve computations under the final amendments were previously required to perform such computations weekly. Under preexisting paragraph (e)(3)(v) of Rule 15c3-3, carrying broker-dealers subject to the requirement to perform customer and PAB reserve computations are also subject to the requirement to make and maintain a record of each such computation and to preserve it in accordance with Rule 17a-4.[421] Carrying broker-dealers are able to elect to maintain the required record of the customer and PAB reserve computation in a physical ( i.e., paper format) or electronic format under the record preservation requirements of Rule 17a-4, but given the size and sophistication of carrying broker-dealers subject to the requirement to perform daily customer and PAB reserve computations, and the nature of the actual computations, based on staff experience with carrying broker-dealer operations, the Commission estimates that carrying broker-dealers subject to the requirement to perform daily customer and PAB reserve computations will likely have electronic systems, including electronic recordkeeping systems meeting the record preservation requirements of Rule 17a-4, in place and will use those systems to make and maintain, and preserve the record of the computations in electronic format. Because these electronic recordkeeping systems are part of the record preservation requirements of Rule 17a-4, the costs of those systems are accounted for in the collection of information for Rule 17a-4 because broker-dealers use these systems for their overall recordkeeping.

    Because carrying broker-dealers already have in place processes, personnel, and the systems and technology necessary to meet the record preservation requirements of Rule 17a-4, including for the purpose of making and maintaining the record of the customer and PAB reserve computations, and preserving such records in compliance with Rule 17a-4, they will not need to hire additional staff or upgrade or develop new technology or systems, and have already expended the time, effort, and/or financial resources to generate and maintain the required records.[422] Therefore, the Commission estimates that the amendments will not impose any new one-time burdens or start-up costs ( e.g., hardware acquisition, cloud storage costs, systems/tech upgrades, tech services, etc.) on carrying broker-dealers to set up the process of creating the required record of such computations.

    Instead, the amendments will impose increased ongoing burdens on the respondent carrying broker-dealers because they must increase the frequency of the customer and PAB reserve computations and, therefore, must make, maintain, and preserve additional records of the computations. Specifically, there will be an increase in the burdens associated with the collections of information titled “Rule 15c3-3(e)(3)—daily computations” for ( print page 2834) both the customer and PAB reserve computations, and a corresponding decrease in the burdens associated with the collections of information titled “Rule 15c3-3(e)(3)—weekly computations” for the customer and PAB reserve computations as certain carrying broker-dealers will shift from weekly to daily computations in connection with the amendments. Based on experience with customer and PAB reserve computations, the Commission estimates that it takes between one and five hours to make a record of each such computation, and that the average time spent across all carrying broker-dealers is 2.5 hours.[423]

    The Commission received one comment on this estimate stating that the Proposing Release does not state a basis for this 2.5 hour estimate and that the estimate is so wide of the mark that it cannot support the Commission's analysis of paperwork burdens (or costs, burdens, and effects on competition of the proposal). This commenter stated that each weekly calculation takes approximately 10 hours and that during these 10 hours more than 50 employees are involved in some part of the data collection, performing calculations, verifying figures, and transferring funds to banks that are part of performing the reserve computations.[424] In response, the specific tasks the commenter listed do not specify what amount of the 10 hours is dedicated to making, maintaining, and preserving a record of the computation, as required by Rule 15c3-3. Instead, the tasks the commenter listed relate to the steps necessary to perform a computation. The 2.5 hours is based on staff experience with customer and PAB reserve computations and recordkeeping requirements and staff's understanding that these records are made, maintained, and preserved either in an electronic format or as a paper copy. Some carrying broker-dealers may take more time, while others may take less time to make, maintain and preserve a record of the computations. As a result, the 2.5 hour burden estimate is the estimate of the time it takes a carrying broker-dealer to make a record of the computation for purposes of the PRA.[425] As noted above, carrying broker-dealers already have in place the personnel, systems, and technology in place to make, maintain, and preserve the required records and to comply with the record preservation requirements of Rule 17a-4. As a result, the Commission is retaining the estimate of 2.5 hours for purposes of the PRA.[426]

    Consequently, the Commission estimates that the amendments will impose aggregate annual ongoing burdens on respondent carrying broker-dealers required to perform daily customer and PAB reserve computations of 25,000 hours and 21,875 hours, respectively, or a total of 46,875 hours.[427] When added to the currently approved burden hours of 9,375 hours and 6,875 hours for the customer and PAB reserve computations, respectively, the revised burden hour estimates are 34,375 hours for the daily customer reserve computation, and 28,750 hours for the daily PAB reserve computation.

    In addition to this increase, the Commission estimates that there will be a corresponding decrease in the collections of information titled “Rule 15c3-3(e)(3)—weekly computations” for both the customer and PAB reserve computations. Specifically, the Commission estimates that the amendments will result in a revised burden hour estimate of 15,730 hours with respect to weekly customer reserve computations [428] (a decrease of 5,200 hours [429] ), and 5,460 hours with respect to the weekly PAB reserve computations [430] (a decrease of 4,550 hours [431] ).

    2. Notification Requirement To Revert to Weekly Computations

    Based on its experience with other notification requirements, in the Proposing Release, the Commission estimated that it will take a carrying broker-dealer 30 minutes to prepare and send the notification regarding its election to perform weekly customer and PAB reserve computations to its DEA. The Commission did not receive comments on the estimate and is adopting it as proposed. This burden represents a new collection of information. The Commission estimates that relatively few carrying broker-dealers will send the notice either because their average total credits will be substantially greater than the $500 ( print page 2835) Million Threshold or because they will continue to perform daily computations, even if their average total credits fall below the $500 Million Threshold, given the liquidity benefits of performing a daily computation. Consequently, the Commission estimates that one carrying broker-dealer per year will send the notice for a burden of 0.5 hours per year.[432]

    3. Notification Requirement To Voluntarily Perform Daily Customer Reserve Computation With 2% Debit Reduction

    Based on its experience with other notification requirements, the Commission estimates that it will take a carrying broker-dealer 30 minutes to prepare and send the notification regarding its election to voluntarily perform a daily customer reserve computation. This burden represents a new collection of information. The Commission estimates that there are 15 respondents: 9 in the first year; 3 in the second year; and 3 in the third year, or alternatively, 5 respondents per year on average. Consequently, the Commission estimates that this will result in an annualized burden of approximately 2.5 hours per year.[433]

    4. Summary of the Burden Revisions [434]

    As a result of the amendments, the Commission estimates that the burdens associated with the requirement to make, maintain, and preserve a record of the daily customer reserve computations will increase by 25,000 hours and the burdens associated with the requirement to make, maintain, and preserve a record of the daily PAB reserve computations will increase by 21,875 hours. This increase will be accompanied by a decrease in burdens associated with the recordkeeping requirement for weekly customer and PAB reserve computations of 5,200 hours and 4,550 hours,[435] respectively, as carrying broker-dealers with average total credits that exceed the $500 Million Threshold shift from performing the customer and PAB reserve computations weekly to daily.

    Additionally, a new collection of information related to the notification requirement for carrying broker-dealers reverting to weekly customer and PAB reserve computations will result in an additional 0.5 burden hours per year.

    Lastly, a new collection of information related to the notification requirement for carrying broker-dealers electing to voluntarily perform daily customer reserve computations and to reduce aggregate debit items by 2% instead of 3% will result in an additional 2.5 burden hours per year.

    The net increase in estimated annual burdens associated with the amendments to Rule 15c3-3, as adopted, is estimated to be 37,128 hours. The table below summarizes these changes.

    Name of information collection Currently approved estimated annual industry burden (hours) Estimated increase/decrease in annual industry burden (hours) Revised annual industry burden (hours)
    Rule 15c3-3(e)(3)—daily computations for customer reserve account 1 9,375 25,000 34,375
    Rule 15c3-3(e)—daily computations for PAB reserve account 6,875 21,875 28,750
    Rule 15c3-3(e)(3)—weekly computations for customer reserve account 2 20,930 (5,200) 15,730
    Rule 15c3-3(3)(3)—weekly computations for PAB reserve account 10,010 (4,550) 5,460
    Rule 15c3-3(e)(i)(B)( 2) notification N/A 0.5 0.5
    Rule 15c3-3(e) N/A 2.5 2.5
    Total Change: 37,128
    1  In the most recently approved supporting statement for Rule 15c3-3, the titles of the collections of information related to daily customer and PAB reserve computations are both listed as “Rule 15c3-3(e)(3)—daily computations.” The Commission is revising the titles of these collections of information as set forth in this table in order to clarify that they are distinct collections of information.
    2  In the most recently approved supporting statement for Rule 15c3-3, the titles of the collections of information related to weekly customer and PAB reserve computations are both listed as “Rule 15c3-3(e)(3)—weekly computations.” The Commission is revising the titles of these collections of information as set forth in this table in order to clarify that they are distinct collections of information.
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Document Information

Effective Date:
3/14/2025
Published:
01/13/2025
Department:
Securities and Exchange Commission
Entry Type:
Rule
Action:
Final rule.
Document Number:
2024-31178
Dates:
Effective date: March 14, 2025.
Pages:
2790-2839 (50 pages)
Docket Numbers:
Release No. 34-102022, File No. S7-11-23
RINs:
3235-AN28: Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule
RIN Links:
https://www.federalregister.gov/regulations/3235-AN28/daily-computation-of-customer-and-broker-dealer-reserve-requirements-under-the-broker-dealer-custome
Topics:
Brokers, Investment companies, Reporting and recordkeeping requirements, Securities
PDF File:
2024-31178.pdf
CFR: (2)
17 CFR 240
17 CFR 249