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Financial Responsibility Rules for Broker-Dealers

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Financial Responsibility Rules for Broker-Dealers SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 Release No. 34-70072; File No. S7-08-07 RIN 3235-AJ85 Financial Responsibility Rules for Broker-Dealers AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). These amendments are designed to address several areas of concern regarding the financial responsibility requirements for broker-dealers. The amendments also update certain financial responsibility requirements and make certain technical amendments. DATES: Effective Date: October 21, 2013. FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate Director, at (202) 551-5521; Randall Roy, Assistant Director, at (202) 551-5522; Raymond Lombardo, Branch Chief, at (202) 551-5755; Sheila Dombal Swartz, Special Counsel, (202) 551- 5545; Carrie A. O’Brien, Special Counsel, (202) 551-5640; or Kimberly N. Chehardy, Attorney Advisor, (202) 551-5791; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents I. BACKGROUND .................................................................................................................... 5 II. AMENDMENTS .................................................................................................................... 8 A. Amendments to the Customer Protection Rule .................................................................. 8 1. Background .................................................................................................................... 8 2. Proprietary Accounts of Broker-Dealers ...................................................................... 12 i. Definition of “PAB account” under Rule 15c3-3(a)(16) ........................................ 16 ii. Written Permission to Use PAB Account Securities .............................................. 21 iii. PAB Reserve Bank Accounts ................................................................................. 24 iv. Other PAB Issues Raised by Commenters ............................................................. 25 v. Amendment to Rule 15c3-1(c)(2)(iv)(E) Related to PAB Accounts ...................... 27 3. Banks Where Special Reserve Deposits May Be Held ................................................ 29 4. Allocation of Customers’ Fully Paid and Excess Margin Securities to Short Positions .................................................................................................................. 41 5. Importation of Rule 15c3-2 Requirements into Rule 15c3-3 and Treatment of Free Credit Balances ..................................................................................................................... 47 i. Importation of Rule 15c3-2 .................................................................................... 47 ii. Treatment of Free Credit Balances ......................................................................... 49 a. Treatment of Free Credit Balances Outside of a Sweep Program ...................... 53 b. Treatment of Free Credit Balances in a Sweep Program..................................... 55 6. “Proprietary Accounts” under the Commodity Exchange Act ..................................... 67 7. Expansion of the Definition of “Qualified Securities” to Include Certain Money Market Funds ........................................................................................................................ 71 B. Holding Futures Positions in a Securities Portfolio Margin Account .............................. 74 C. Amendments With Respect to Securities Lending and Borrowing and Repurchase/Reverse Repurchase Transactions ......................................................................... 82 D. Documentation of Risk Management Procedures ............................................................ 89 E. Amendments to the Net Capital Rule ............................................................................... 94 1. Requirement to Deduct From Net Worth Certain Liabilities or Expenses Assumed By Third Parties.......................................................................................................................... 97 2. Requirement to Subtract From Net Worth Certain Non-Permanent Capital Contributions ...................................................................................................................... 101 3. Requirement to Deduct the Amount by which a Fidelity Bond Deductible Exceeds SRO Limits ......................................................................................................................... 109 4. Broker-Dealer Solvency Requirement ....................................................................... 112 5. Amendment to Rule Governing Orders Restricting Withdrawal of Capital from a Broker-Dealer ..................................................................................................................... 117 6. Adjusted Net Capital Requirements ........................................................................... 122 i. Amendment to Appendix A of Rule 15c3-1 ......................................................... 122 ii. Money Market Funds ............................................................................................ 123 a. Clarification ....................................................................................................... 123 b. Proposed Haircut Reduction from 2% to 1% .................................................... 124 c. Aggregate Debit Items Charge .......................................................................... 126 F. Technical Amendments .................................................................................................. 127 III. RESPONSES TO SPECIFIC REQUESTS FOR COMMENT ...................................... 129 IV. PAPERWORK REDUCTION ACT .............................................................................. 132 A. Summary of the Collection of Information Requirements ............................................. 134 B. Use of Information ......................................................................................................... 135 C. Respondents ................................................................................................................... 137 D. Total Annual Reporting and Recordkeeping Burden ..................................................... 141 2 1. Securities Lending Agreements and Disclosures ....................................................... 141 2. DEA Permission to Withdraw Capital within One Year of Contribution .................. 143 3. Written Subordination Agreements under Rule 15c3-3 ............................................. 144 4. PAB Reserve Bank Account Recordkeeping Requirements ...................................... 145 5. Adequate Procedures Required under Paragraph (j)(1) of Rule 15c3-3 .................... 150 6. Treatment of Free Credit Balances ............................................................................ 152 7. Documentation of Risk Management Procedures ...................................................... 154 8. Notice Requirements .................................................................................................. 158 E. Collection of Information Is Mandatory ......................................................................... 160 F. Confidentiality ................................................................................................................ 161 G. Record Retention Period ................................................................................................ 162 V. ECONOMIC ANALYSIS .................................................................................................. 163 A. Introduction .................................................................................................................... 163 B. Economic Baseline ......................................................................................................... 166 C. Discussion of General Comments Received .................................................................. 171 D. Economic Analysis of the Amendments and Alternatives ............................................. 177 1. Amendments to the Customer Protection Rule .......................................................... 178 i. Economic Analysis ............................................................................................... 178 a. Proprietary Accounts of Broker-Dealers ........................................................... 178 (I). Summary of Amendments ........................................................................... 178 (II). Baseline and Incremental Economic Effects .............................................. 181 (III). Alternatives ............................................................................................... 182 (IV). Compliance Cost Estimates ....................................................................... 185 b. Banks Where Special Reserve Deposits May Be Held ..................................... 188 (I). Summary of Amendments ........................................................................... 188 (II). Baseline and
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