Better Markets filed a comment letter with the Securities and Exchange Commission in response to the agency’s proposal that large broker-dealers calculate the net cash owed to their customers daily.
Why It Matters. SEC rules require that broker-dealers that maintain custody of customer cash have a special reserve account at a bank that must hold cash or qualified securities in an amount determined by a computation of the net cash owed to the broker-dealer’s customers. Currently, SEC rules require that broker-dealers calculate the amount of funds they need to deposit into the special reserve account weekly. If the weekly computation shows that the amount required to be on deposit in the special reserve account is greater than the amount currently on deposit in the account, then the broker-dealer must make a deposit into the special reserve account by 10 am of the second business day following the “as of” date of the new computation. Through these calculations and deposits, the cash or qualified securities held in the special reserve account should equal or exceed the net cash owed to the broker-dealer’s customers. The problem with this approach is that broker-dealers may receive large cash inflows prior to the next required computation of the amount they need to keep on deposit in their special reserve account. In this situation, the value of the cash or qualified securities in the special reserve account may fall well short of the net cash owed to customers for a period of time. This mismatch poses a risk that the broker-dealer could fail financially and be unable to return all the cash owed to customers.
What We Said. We support the SEC’s proposal to require large broker-dealers to calculate the net cash owed to customers daily. This change from the weekly calculation requirement, which the SEC adopted in 1972, reduces the risk that if these broker-dealers fail financially they will have insufficient funds in their special reserve account to return the cash owed to their customers. A requirement that broker-dealers calculate the amount of funds required in their special reserve account every day and make deposits if the daily calculations reveal a shortfall provides crucial protection to the customers of broker-dealers. A daily calculation requirement also helps to ensure that the customers of a failing broker-dealer are made whole through the broker-dealer’s own assets, rather than through the fund established by the Securities Investor Protection Corporation to satisfy the claims of customers of a failing broker-dealer (“SIPC Fund”). So long as the assets in the failing broker-dealer’s special reserve account are sufficient to return to customers their net cash owed, recourse to the SIPC Fund is unnecessary, which prevents the fund from being depleted. We view the daily calculation requirement as so important that we urged the Commission to expand the proposal to apply the requirement to all broker-dealers, regardless of their size.
Bottom Line. Better Markets supports the Commission’s efforts to better protect customers from the risk that their broker-dealer will fail financially by requiring that they calculate the net cash owed to customers daily and maintain a bank account with funds equal to the cash owed.
You can find the comment letter here.