§ 240.15c3-3 — Customer Protection Rule — reserves and custody of # securities.

Rule 15c3-3 protects customer funds and securities held by a broker-dealer by requiring (i) segregation of fully-paid and excess-margin securities in a "control" location and (ii) maintenance of a "customer reserve" bank account containing cash or qualifying securities in an amount calculated under the Customer Reserve Formula of § 240.15c3-3a.

(a) Definitions.

Customer.

"Customer" means any person from whom or on whose behalf a broker or dealer has received or acquired or holds funds or securities for the account of that person. The definition excludes broker-dealers acting for their own account, and certain qualified affiliates; special "customer" treatment is afforded to certain persons otherwise excluded in Rule 15c3-3(a).

Fully-paid securities.

"Fully-paid securities" means securities carried for the account of a customer in a cash account, or other securities for which the customer has paid the full purchase price.

Excess margin securities.

"Excess margin securities" means a customer's securities having a market value in excess of 140% of the total of the debit balance in the customer's margin account.

Qualified security / Qualified bank.

Terms defining the types of securities and depository institutions that may be used to satisfy the customer reserve requirement.

(b) Possession or control of securities.

A broker-dealer must promptly obtain and thereafter maintain the physical possession or control of all fully-paid securities and excess-margin securities carried for the account of customers. "Control" includes a recognized set of locations, such as:

1. A clearing corporation (e.g., DTC); 2. A bank, as defined in the Exchange Act, acting as custodian; 3. The broker-dealer's own vault; 4. A foreign depository, clearing agency, or custodian recognized by the Commission; or 5. Other locations approved by the Commission.

Securities must be segregated and may not be used to finance the broker-dealer's proprietary or non-customer activities. A "buy-in" obligation applies when the broker-dealer discovers that securities are not in possession or control as required (e.g., due to a fail-to-receive): the broker-dealer must take prompt steps to obtain possession or control and, if unable to do so within the timeframes specified in paragraph (d), must purchase the securities in the open market.

(c) Customer reserve account.

A broker-dealer must maintain a Special Reserve Bank Account for the Exclusive Benefit of Customers at a qualified bank. The account must at all times contain cash or qualified securities in an amount at least equal to the "net credit balance" computed under the Customer Reserve Formula in § 240.15c3-3a.

The computation must be made weekly, as of the close of business on Friday, and the deposit (or, if permitted, withdrawal) must be made no later than one hour after the opening of banking business on the second following business day. A broker-dealer that elects, and satisfies the eligibility criteria for, monthly computation may perform the computation as of the close of business on the last business day of the calendar month.

(d) Fail-to-receive close-out.

If any security in a fail-to-receive position has been outstanding for more than 30 calendar days, the broker-dealer must, within the next business day, close out the fail-to-receive by purchasing the security, or must take other action as provided by the rule. Shorter close-out windows apply for municipal securities (see MSRB Rule G-12) and in the context of threshold-security close-out under Regulation SHO Rule 204.

(e) Sweep programs.

Rule 15c3-3(j) governs money-market and bank-sweep programs by which a broker-dealer may invest free credit balances of customers in Commission-specified "qualifying" cash equivalents. Disclosures must be provided at account opening and at least annually thereafter. The customer's written consent to the sweep must be obtained, and the broker-dealer remains responsible for the return of customer cash on demand.

(f) Notification.

A broker-dealer that discovers, or has reason to believe, that it is in non-compliance with the possession-or-control or the reserve requirement must notify the Commission and its DEA on the same day. A deficiency in the reserve account is a "net capital event" that frequently triggers the early-warning notice requirements under Rule 15c3-1.

(g) Recordkeeping.

Records supporting the Customer Reserve Formula computation and the possession-or-control of customer securities must be preserved under § 240.17a-4 for a period of at least six years, the first two years in an easily accessible place, and must be reconcilable to the broker-dealer's general ledger and, where applicable, to the confirmations and account statements provided to customers.

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Broker-Dealer Reserve Account for Proprietary Accounts of Counterparties # (PAB).

Rule 15c3-3(e) and 15c3-3a further require a separate reserve computation and reserve account for non-customer broker-dealer counterparties — sometimes referred to as the PAB reserve. The computation is analogous to the customer reserve formula but applied to broker-dealer accounts that satisfy the "PAB Account" definition. Only a carrying broker-dealer that maintains PAB Accounts is subject to the PAB computation.