On March 9, 2007, the Securities and Exchange Commission (SEC) published a release (the Proposing Release) proposing for comment a series of changes to its financial responsibility rules for broker-dealers, including changes to the net capital rule, customer protection rule, books and records rules, and notification rules.1 The rule amendments proposed by the SEC in the Proposing Release are referred to in this memorandum as the “Proposed Amendments” or “Proposals.” According to the Proposing Release, the Proposed Amendments are intended to address several emerging areas of concern regarding the financial requirements for broker-dealers.2
As discussed below, if adopted as currently contemplated, these rule changes would have a significant impact on the manner in which broker-dealers must safeguard customer cash balances they hold, especially with respect to so-called “sweep vehicles.” In brief, the SEC has proposed the following revisions to the customer protection rule to:
- Correct certain gaps between Rule 15c3-3 and the Securities Investor Protection Act of 1970 (SIPA) by requiring proprietary accounts of broker-dealers to be treated as “customer” accounts by the carrying firm, and requiring broker-dealers to include futures-related cash and futures options in portfolio margin accounts as free credits in determining the customer reserve calculation
- Impose two new limitations on the banks at which broker-dealers may hold their reserve accounts, for purposes of Rule 15c3-3: under the first limitation, broker-dealers would be prohibited from maintaining their reserve account with affiliated banks; under the second limitation, broker-dealers would be limited in the amount of cash reserves that may be maintained at any one non-affiliated bank
- Impose specific requirements for broker-dealers that seek to change their treatment of a customer’s free credit balance, making it unlawful for broker-dealers to convert, invest or otherwise transfer free credit balances except under three circumstances
- Clarify that balances in commodities accounts held by broker-dealers that are also futures commission merchants would not be considered free credit balances, even if the funds are not required to be segregated under the Commodities Exchange Act (CEA)
- Change the formula for calculating customer reserve requirements for broker-dealers using the “alternative test”
Other key changes to the net capital, books and records, and notification rules include:
- A new requirement that certain broker-dealers with significant capital make and keep current records documenting their implemented systems of internal risk management control
- A presumption that broker-dealers providing securities lending and borrowing settlement services are acting as principals and are subject to applicable capital deductions, absent appropriate disclosure
- Changes to the broker-dealer notification rule, Rule 17a-11, which would require broker-dealers to notify the SEC whenever the total amount of money payable against all securities loaned or subject to a repurchase agreement, or the total contract value of all securities borrowed or subject to a reverse repurchase agreement, exceeds 2,500% of tentative net capital
- A requirement that broker-dealers deduct from their net worth any liability assumed by a third party, such as a parent company or affiliate, if that third party is dependent on the broker-dealer’s income and assets to pay the liability
- A codification of the SEC’s view that capital contributions should be treated as liabilities if the contribution is made with the understanding that it may be withdrawn at the option of the investor or that is intended to be withdrawn within one year
Below is a more detailed summary of the Proposals. Comments are due 60 days after the publication of the Proposing Release in the Federal Register.
I. Amendments to the Customer Protection Rule
Generally, SEC Rule 15c3-3 requires broker-dealers to take certain steps to protect customer assets. The rule requires broker-dealers to obtain and maintain possession or control of customers’ fully paid and excess margin securities. It also requires broker-dealers to maintain in a reserve account for the benefit of customers the difference between the amount of money the firm owes customers (customer credits) and the amount of money customers owe the firm (customer debits).
One of the main purposes of Rule 15c3-3 is to ensure that sufficient assets are available to pay customers in the event of a broker-dealer’s insolvency, and thus to avoid a liquidation under SIPA.
A. Proprietary Accounts of Broker-Dealers Must Be Treated As “Customer” Accounts
The SEC proposes to amend Rule 15c3-3 to require broker-dealers to treat accounts that they carry for domestic and foreign broker-dealers in the same manner generally as “customer” accounts for the purposes of the reserve formula of Rule 15c3-3. This amendment is intended to address the fact that “customer” is defined differently under Rule 15c3-3 than under SIPA. Specifically, SEC Rule 15c3-3 excludes broker-dealers from the definition of customer, but SIPA includes broker-dealers within the definition of customer. According to the SEC, this gap creates a risk because in a liquidation, SIPA may require the return to customers of assets that Rule 15c3-3 did not require broker-dealers to protect. This disparity results in a heightened need for SIPC insurance to cover this deficit.3
To correct this gap, the Proposed Amendments would establish reserve requirements for a carrying firm with respect to proprietary accounts it carries for other broker-dealers. The carrying firm would be required to (1) perform a reserve computation for a proprietary account of another broker-dealer (referred to as a PAB); (2) establish and fund a separate reserve account at a bank for the benefit of introducing broker-dealers4; and (3) maintain an agreement with the bank holding the PAB reserve account and obtain a notification from the bank regarding the PAB reserve account.5 The Proposals would also specify the circumstances under which a carrying firm may make withdrawals from the PAB reserve account.6 While excess debits in the customer reserve account could offset deposit requirements in the PAB reserve account, excess debits in the PAB reserve account could not offset a deposit requirement in the customer reserve account.7 According to the SEC, “[t]his means the carrying broker-dealer could use PAB credits to finance ‘customer’ debits, but not the other way around.”8
Where the carrying firm is not in compliance with these requirements, the introducing broker-dealer would be required to deduct from its net worth any cash and securities in the proprietary account at the other broker-dealer.9 The Proposing Release states that broker-dealers would not be required to audit or examine their carrying brokers.10
Notably, under the Proposal, the carrying firm would not be required to obtain or maintain possession or control over fully paid or excess margin securities carried for a PAB account, provided it obtains the written permission of the PAB accountholder to use such securities in the ordinary course of its business.11 Presumably, then, without such an agreement the carrying firm would need to obtain and maintain possession or control of the other broker-dealer’s fully paid and excess margin securities.
B. Limitations on Banks Where Special Reserve Deposits May Be Held
The SEC has proposed two limitations with respect to the banks in which broker-dealers may hold their reserve accounts. Under the first limitation, broker-dealers would be prohibited from maintaining their reserve accounts with affiliated banks.12 The SEC’s rationale for this Proposal is that broker-dealers may not be sufficiently rigorous with respect to the due diligence it conducts over affiliated banks, and a broker-dealer’s customers may not be protected in the event of the parent’s insolvency.
Second, the SEC proposes to limit the amount of cash reserves that may be maintained at any one non-affiliated bank. A broker-dealer would be prohibited from depositing with one bank into the customer reserve account cash of more than 50% of the broker-dealer’s excess net capital (based on the most recent FOCUS report). In addition, the broker-dealer would be restricted from placing a cash reserve deposit that exceeded 10% of the equity capital of the bank (based on the bank’s most recently filed Call Report or Thrift Financial Report). Deposits of qualified securities, as opposed to cash, would not be impacted by this Proposal.13
Note that these restrictions would apply only to the reserve account requirement of Rule 15c3-3, not the possession or control requirements of that rule.
C. Expansion of the Definition of Qualified Securities to Include Certain Money Market Funds
Rule 15c3-3 limits the assets a broker-dealer may deposit into the reserve account to cash or “qualified securities.” Currently, “qualified securities” are those issued or guaranteed by the United States. Following a rulemaking petition from Federated Investors, Inc., the SEC has proposed to expand the definition to include money market funds described in Rule 2a-7 of the Investment Company Act of 1940 (the Investment Company Act) that only invest in securities meeting the definition of “qualified security.”14; The SEC has placed three conditions on a broker-dealer’s deposit of money market funds invested in qualified securities. First, the fund may not be an affiliate of the broker-dealer holding the fund’s shares. Second, the fund must agree to redeem fund shares in cash on the next business day, without any ability to delay redemption. Third, the value of the broker-dealer’s fund shares in the reserve account may not exceed 10% of the total value of the fund’s net assets (i.e., assets net of liabilities).15
D. Expansion of Possession and Control Requirements to Certain Securities Sold Short
The SEC proposes expanding Rule 15c3-3 to require broker-dealers to obtain possession or control over securities included on the broker-dealer’s books as proprietary short positions or as short positions for another person.16 As Rule 15c3-3 currently stands, a broker-dealer that sells short into a customer long position would not be required to obtain possession or control of the customer’s securities, and would be free to use the cash the customer paid for the securities.17 As proposed, Rule 15c3-3 would not require the broker-dealer to obtain possession or control until after the short position has aged more than 10 business days (or 30 calendar days if the broker-dealer is a market maker in the securities).18
E. Free Credit Balances
1. Treatment of Free Credit Balances
The SEC has proposed specific requirements for broker-dealers that seek to change their treatment of a customer’s free credit balance. The SEC describes a “free credit balance” as “funds payable by a broker-dealer to its customers on demand.”19 The Proposal would permit a broker-dealer to convert, invest or otherwise transfer free credit balances only in the following three circumstances:20
First, a broker-dealer may convert, invest or otherwise transfer the free credit balance to any type of investment or other product or to a different account upon the specific order, authorization or draft of the customer.21 This first circumstance does not address free credit balance sweeps to money market funds and bank deposit accounts. Those types of free credit balance sweeps are addressed by the second and third circumstances.
Second, the Proposal would permit a broker-dealer to change the sweep option of new customers from money market funds to bank deposit accounts (and vice versa) provided that certain conditions are met (e.g., the broker-dealer provides the customer with certain notices and the customer agrees prior to the change). The broker-dealer also would need to provide the customer with notice at least 30 calendar days before changing the sweep product (e.g., from one money market fund to another), product type (e.g., from a money market fund to a bank deposit, or vice versa), or the terms and conditions under which the free credit balances are swept. The notice would need to explain, among other things, how a customer could opt out of the change.22
Third, for existing customers as of the date of effectiveness of the Proposed Amendment, the broker-dealer would need to comply with these same notice requirements (unlike new customers, existing customers would not be required to agree prior to any change of the sweep option).23
2. Elimination of Rule 15c3-2
SEC Rule 15c3-2 requires broker-dealers to provide customers with quarterly notices of amounts due to the customer and a statement that the funds are payable on demand. The SEC proposes to incorporate these aspects of Rule 15c3-2 into Rule 15c3-3 and eliminate Rule 15c3-2 as a separate rule.24
F. Aggregate Debit Items Charge
Currently, SEC Rule 15c3-3 requires a broker-dealer to reduce the total debits in the reserve formula by a specific percentage of debit balances in customer cash and margin accounts. As it currently stands, if the broker-dealer computes its net capital pursuant to the “basic method,” the broker-dealer is required to reduce total debits by 1% of debit balances in customer cash and margin accounts when computing its reserve requirement. However, if the broker-dealer employs the “alternative method,” the broker-dealer must reduce its total debits by 3% of debit balances in customer cash and margin accounts when computing its reserve requirement. The “basic method” is a leverage test that requires a broker-dealer to maintain leverage of no more than 15 to 1. Under the alternative test, a broker-dealer’s net capital requirement is 2% of its aggregate debit items, which ties the net capital requirement of Rule 15c3-1 to the customer reserve requirement of Rule 15c3-3. The SEC proposes to change the required reduction for broker-dealers using the “alternative test” from 3% to 1% of debit balances in customer cash and margin accounts, thus conforming it to the reduction required under the “basic method.”25
G. Status of “Proprietary Accounts” under the Commodity Exchange Act
The CEA defines certain accounts, known as proprietary accounts (generally persons who have an ownership interest in the futures commission merchant), as outside the segregation requirement of the CEA. To the extent these “proprietary accounts” as defined in the CEA may also be “customers” as defined in Rule 15c3-3, and the accounts are held by entities that are both futures commission merchants and broker-dealers, a question has arisen whether the broker-dealer must treat cash in the commodities accounts as free credit balances.26 The Proposals seek to clarify that balances in commodities accounts held by broker-dealers that are also futures commission merchants would not be considered free credit balances, even if the funds are not required to be segregated under the CEA.27
II. Holding Futures Positions in a Securities Portfolio Margin Account
The SEC proposes changes to Rule 15c3-3 to provide SIPA protection to futures-related cash and futures options in portfolio margin accounts. These Proposals are in response to recent amendments by the Chicago Board Options Exchange and New York Stock Exchange to their margin rules (Portfolio Margin Rules), which allow broker-dealers to compute customer margin requirements using a portfolio margin methodology (i.e., where margin requirements are computed based on the net market risk of all positions in an account assuming certain potential market movements).28 Under the Portfolio Margin Rules, a broker-dealer may combine securities and futures positions into the portfolio margin account. Because SIPA protection only applies to customer claims for securities and cash and does not apply to futures contracts that are not also securities, the SEC has proposed to amend Rule 15c3-3’s definition of “free credit balance” to include daily marks to market, and proceeds resulting from closing out futures contracts and options thereon carried in a securities account pursuant to an SRO portfolio margining rule. Under this amended definition, broker-dealers holding these funds would need to treat them as “credit items” for purposes of the customer reserve computation. Also, because free credit balances are “cash” in a customer’s account, they would be “cash” for purposes of determining a customer’s net equity in a SIPA liquidation.29
On the debit side, the SEC proposes to amend Rule 15c3-3a to allow broker-dealers to include as debit items the amount of customer margin required and on deposit at a futures clearing organization related to futures positions carried in a securities account pursuant to SRO portfolio margining rules.30 Under SIPA, the term “customer property” includes resources provided through the use or realization of customers’ debit cash balances and other customer-related debit items as defined by the SEC. Thus, under the amended rule, these funds would be available to the liquidation trustee for distribution to a failed firm’s customers.31
III. Amendments to Books and Records Rules: Documenting Risk Management Procedures
The SEC is proposing amendments to its books and records rules, which would require certain broker-dealers to make and keep current records documenting their implemented systems of internal risk management control. For example, a broker-dealer active in securities lending is exposed to a variety of risks, including market risk, credit risk, liquidity risk and operational risk. Other broker-dealer activities give rise to these risks as well, including managing a repurchase book, dealing in OTC derivatives, trading proprietary positions and lending on margin.32;
The SEC’s Proposals would amend Rule 17a-3 to require certain large broker-dealers to document any implemented internal risk management control designed to assist in analyzing and managing the risks (e.g., market, credit, liquidity, operational) arising from the business activities they engage in, including, for example, securities lending and repurchase transactions, OTC derivative transactions, proprietary trading and margin lending. The requirement only would apply to broker-dealers that have more than (1) $1,000,000 in aggregate credit items as computed under the customer reserve formula, or (2) $20,000,000 in total capital including subordinated debt.33 The Proposal also would amend Rule 17a-4 to require a broker-dealer to maintain these records for three years after the date the broker-dealer ceases to use the system of controls.34 Note that the SEC is not proposing any minimum elements that must be included in a firm’s internal controls or specifying issues that must be addressed. Rather, the amendments would require broker-dealers to clearly identify the procedures, if any, that they use to manage their risks.35
The SEC expects that, for the most part, large broker-dealers already have well-documented procedures and controls for managing risks, as a matter of business practice. Moreover, many of these firms are part of a public company subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and SEC rules thereunder, which require the company to include in its annual report a report of management on the company’s internal control over financial reporting.36
IV. Amendments to the Net Capital Rule
A. Securities Lending and Borrowing and Repurchase/Reverse Repurchase Transactions
In response to concerns highlighted by the recent failure of MJK Clearing, Inc. (MJK), the SEC is proposing amendments to the net capital rule and notification provisions to improve regulatory oversight of securities lending and repurchase transactions. MJK’s failure is the largest SIPA liquidation to date. In two civil actions,37 the SEC alleged that MJK engaged in conduit securities lending transactions involving shares of a particular company, borrowing shares of the company from other broker-dealers in return for cash collateral, and then re-lending those shares to other broker-dealers that provided cash collateral to MJK in return. Subsequently, the market value of the company’s shares declined dramatically, and MJK failed to collect excess cash collateral provided to the broker-dealers that lent shares to it. Eventually, MJK went out of business, and its failure caused losses to the borrowing broker-dealers and other firms that re-lent the company’s securities. In subsequent litigation, disputes have arisen as to whether certain of these broker-dealers were acting as principals or agents. This uncertainty, in turn, has raised questions about whether the broker-dealers were taking appropriate net capital charges.
Under the net capital rule, broker-dealers are required to take certain charges against their net capital in connection with their securities lending and borrowing activities. A broker-dealer engaged in securities lending and borrowing activities might not take required charges on the theory that it was arranging the loans as agent, rather than principal, even if there is no express disclaimer of principal liability.38
To address concerns raised by MJK’s failure, the SEC has proposed amendments to Rule 15c3-1 to clarify that broker-dealers providing securities lending and borrowing settlement services are presumed, for purpose of this rule, to be acting as principals and are subject to applicable capital deductions. Under the Proposed Amendment, these deductions could be avoided if a broker-dealer takes certain steps to disclaim principal liability. Namely, the broker-dealer would be required to fully disclose the identity of each party (i.e., the borrower and lender) to the other, and each party would be required to expressly agree in writing that the obligations of the broker-dealer do not include a guarantee of performance by the other party and that such party’s remedies in the event of a default by the other party do not include a right of setoff against obligations, if any, of the broker-dealer.39
The SEC also proposes changes to its broker-dealer notification rule, Rule 17a-11, which would require broker-dealers to notify the SEC whenever the total amount of money payable against all securities loaned or subject to a repurchase agreement, or the total contract value of all securities borrowed or subject to a reverse repurchase agreement, exceeds 2,500% of tentative net capital. For purposes of this leverage threshold, however, transactions involving “government securities” (as defined in the Securities Exchange Act of 1934) are excluded from the calculation. To avoid frequent filing by firms that engage predominantly in securities lending and repurchase transactions, the Proposal would give a broker-dealer the option of submitting monthly reports regarding its securities lending and repurchase activities to its designated examining authority.40
B. New Requirements to Subtract Certain Items from Net Worth/Net Capital
1. Certain Liabilities or Expenses Assumed by Third Parties and Non-Permanent Capital Contributions
This Proposal has two components. First, the SEC proposes that broker-dealers must deduct from their net worth any liability assumed by a third party, such as a parent company or affiliate, if that third party is dependent on the broker-dealer’s income and assets to pay the liability.41 The SEC states in the Proposing Release that the broker-dealer may evidence this by maintaining a record of the third party’s most recent audited financial statements, tax returns or regulatory filings containing financial reports.42
Second, the SEC is proposing to codify their view that capital contributions should be treated as liabilities if the contribution is made with the understanding that it may be withdrawn at the option of the investor or is intended to be withdrawn within one year. The Proposal contains a presumption that any capital withdrawn within one year would be presumed to be subject to the deduction. Any withdrawal occurring within one year would require the written approval of the broker-dealer’s designated examining authority.43
2. Deductions in Connection with Required Fidelity Bonds
The SEC proposes to conform its net capital to certain SRO rules by requiring broker-dealers to deduct from net capital the excess of any deductible amount over the maximum deductible amount permitted under the rules of the broker-dealer’s examining authority in connection with a fidelity bond.44 Under SRO rules, broker-dealers are required to have in place fidelity bonds, and they must deduct from net capital the amount by which their deductibles exceed the limit in the SRO rules.45
C. Broker-Dealer Solvency Requirement
The SEC proposes a new requirement that broker-dealers cease operations if they become insolvent. In connection with this proposed requirement, the SEC is proposing a definition of “insolvent.”46 The Proposal would also require an insolvent broker-dealer to provide immediate notice to the SEC, the broker-dealer’s designated examining authority and, if applicable, the Commodities Futures Trading Commission.47
D. Changes to the Restrictions on Withdrawing Capital from a Broker-Dealer
Following the failure of Drexel Burnham Lambert, Inc., the SEC adopted Rule 15c3-1(e), which requires broker-dealers to provide notice to the SEC upon certain withdrawals of capital. The rule also permits the SEC to issue an order temporarily restricting a broker-dealer from withdrawing capital or making loans or advances to stockholders, insiders and affiliates under certain circumstances. The rule limits such orders to situations where all such withdrawals, advances or loans (on a net basis) within a 30 day period, would exceed 30% of the broker-dealer’s excess net capital. According to the SEC, in situations where such an order may be appropriate, often the books and records of the troubled broker-dealer are incomplete or inaccurate, making it difficult to determine if the 30% threshold has been met. In order to avoid such complications, the SEC proposes to remove the 30% of excess net capital limitation, so that it has the power to restrict withdrawals for up to 20 business days if it concludes that the withdrawal—regardless of amount—may be detrimental to the financial integrity of the broker-dealer or impacts its ability to repay its customer claims or other liabilities.48
E. Adjusted Net Capital Requirement
- Use of Pricing Models for Listed Options Haircuts: The SEC proposes to make permanent previously granted temporary relief, which permits broker-dealers to employ theoretical pricing models to calculate haircuts for listed options and related hedge positions. According the Proposal, the SEC’s experience with the temporary rule has demonstrated the appropriateness of making it permanent, including that periods of significant volatility did not result in significant increases in the number of deficits in non-clearing option specialist and market maker accounts, nor result in excessive leverage.49
- Money Market Funds: The SEC proposes to reduce the haircuts on money market funds from 2% to 1%. According to the Proposal, this is based on enhancements to Investment Company Act Rule 2a-7 “as well as the historical stability of money market funds as investments . . . .”50
The SEC has requested written comments on any aspect of the Proposed Amendments and other matters that might have an effect on them. Input from industry participants is requested regarding the impact of the Proposals on their business and operations (including, for example, the impact of the proposed changes to sweep programs) and whether the Proposals should be clarified or adjusted.
For more information on this or other SEC matters, please contact the authors listed above.
1 Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 55431(proposed Mar. 9, 2007) (“Proposing Release”), available at http://www.sec.gov/rules/proposed/2007/34-55431.pdf.
2See Proposing Release at 1.
3 Since 1998, the SEC has dealt with this issue by requiring broker-dealers whose accounts are carried by other broker-dealers to enter into an agreement, known as a Proprietary Account of Introducing Broker Agreement, pursuant to which the carrying broker would segregate the assets of the introducing broker in a manner substantially similar to Rule 15c3-3 would require, if the broker-dealer had been a customer. This was accomplished through a no-action letter issued by the SEC Division of Market Regulation staff in 1998. (See Letter from Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, to Raymond J. Hennessy, Vice President, New York Stock Exchange (NYSE), and Thomas Cassella, Vice President, NASD Regulation, Inc. (Nov. 10, 1998).) Absent such an agreement, the non-carrying broker-dealer would need to deduct the assets held by the carrying broker when computing its net capital. The amendment to Rule 15c3-3 as proposed, would at a fundamental level codify the no-action letter.
4 See Proposed Amendment Rule 15c3-3(e)(1).
5 See Proposed Amendment Rule 15c3-3(f). The SEC also has requested comment on whether others who are considered customers under SIPA but not under Rule 15c3-3, such as principal officers of the broker-dealer, should also be included in the PAB computation.
6See Proposed Amendment Rule 15c3-3(g).
7 See Proposed Amendment Rule 15c3-3(e)(4).
8 See Proposing Release at 9.
9 See Proposed Amendment Rule 15c3-1(c)(2)(iv)(E).
10See Proposing Release at 9-10.
11 See Proposed Amendment Rule 15c3-3(b)(5).
12 See Proposed Amendment Rule 15c3-3(e)(5).
13 See Proposed Amendment Rule 15c3-3(e)(5).
14 See Proposing Release at 13.
15 See Proposed Amendment Rule 15c3-3(a)(6). The SEC has specifically requested comments on whether the 10% threshold is appropriate, or whether it should be higher or lower.
16 See Proposed Amendment Rule 15c3-3(d)(4).
17 According to the SEC, this permits the carrying broker to monetize the customer’s security, in contradiction to the goals of Rule 15c3-3. (See Proposing Release at 16.)
18 See Proposed Amendment Rule 15c3-3(d)(4).
19 See Proposing Release at 18.
20 See Proposed Amendment Rule 15c3-3(j).
21 See Proposed Amendment Rule 15c3-3(j)(2)(i).
22See Proposed Amendment Rule 15c3-3(j)(2)(ii).
23 See Proposed Amendment Rule 15c3-3(j)(2)(iii).
24 See Proposed Amendment Rule 15c3-3(j)(1).
25See Proposed Amendment Rule 15c3-1(a)(1)(ii)(A).
26 See Proposing Release at 26-27.
27See Proposed Amendment Rule 15c3-3(a)(8).
28 Exchange Act Release No. 54918, 2006 SEC LEXIS 2913 (December 12, 2006); Exchange Act Release No. 54919, 2006 SEC LEXIS 2914 (December 12, 2006); Exchange Act Release No. 52031, 70 Fed. Reg. 42130 (July 21, 2005); Exchange Act Release No. 52032, 70 Fed. Reg. 42118 (July 21, 2005).
29 See Proposing Release at 27-29 and Proposed Amendment Rule 15c3-3(a)(8).
30See Proposed Amendment Rule 15c3-3a, Item 14.
31 See Proposing Release at 30.
32 See Proposing Release at 36.
33 See Proposed Amendment Rule 17a-3(a)(23).
34 See Proposed Amendment Rule 17a-4(e)(9).
35 See Proposing Release at 38.
36 See Proposing Release at 36-37.
37 See SEC Litigation Release No. 18641, 2004 SEC LEXIS 706 (March 26, 2004); SEC Complaint, SEC v. Thomas G. Brooks, No. CV 03-3319 ADM/AJB (D. Minn. June 2, 2003); SEC v. Thomas G. Brooks, SEC Litigation Release No. 18168, 2003 SEC LEXIS 1321 (June 3, 2003); SEC Complaint, SEC v. Kenneth P. D’Angelo et al., No. LACV 03-6499 CAS (VBKx) (C.D.Cal. September 11, 2003); SEC Litigation Release No. 18344, 2003 SEC LEXIS 2173 (September 11, 2003).
38 See Proposing Release at 32-34.
39 See Proposed Amendment Rule 15c3-1(c)(2)(iv)(B).
40 See Proposed Amendment Rule 17a-11(c)(5).
41 If the broker-dealer does not adjust its net worth by the amount of a liability assumed by the third party, the broker-dealer would have the burden of proving that the third party is not dependent on the broker-dealer’s resources to pay the expense. (See Proposed Amendment Rule 15c3-1(c)(2)(i)(F).)
42 See Proposing Release at 40.
43 See Proposed Amendment Rule 15c3-1(c)(2)(i)(G).
44 See Proposed Amendment Rule 15c3-1(c)(2)(xiv).
45 See Proposing Release at 42-43.
46 See Proposed Amendment Rule 15c3-1(c)(16).
47 See Proposed Amendment Rule 17a-11(b)(1).
48See Proposed Amendment Rule 15c3-1(e)(3)(i) and Proposing Release at 45-47.
49 See Proposing Release at 47-49 and Proposed Amendment Rule 15c3-1a(b)(1)(iv).
50 See Proposing Release at 49-50 and Proposed Amendment Rule 15c3-1(c)(2)(vi)(D)(1).