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Frequently Asked Questions Concerning the July 30, 2013 Amendments to the Broker-Dealer Financial Reporting Rule

Oct. 12, 2017

Division of Trading and Markets (Updated July 1, 2020)

The staff of the Division of Trading and Markets, U.S. Securities and Exchange Commission ("Commission"), is updating guidance concerning the amendments to the broker-dealer reporting rule, Rule 17a-5 under the Securities Exchange Act of 1934 ("Rule 17a-5"), that were adopted on July 30, 2013.1 This guidance represents the views of the staff of the Division of Trading and Markets (“staff”). It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This guidance, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. Additional information is available at: http://www.sec.gov/rules/final/2013/34-70073.pdf; and http://www.sec.gov/info/smallbus/secg/bd-small-entity-compliance-guide.htm.

The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with "MODIFIED" or "NEW" after the answer.

For Further Information Contact: Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 551-5522; Timothy C. Fox, Branch Chief, at (202) 551-6857; or Valentina Minak Deng, Special Counsel, at (202) 551-5778, Office of Financial Responsibility, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington DC 20549-7010.

Background

On July 30, 2013, the Commission amended certain reporting, audit, and notification requirements for broker-dealers registered with the Commission.2 Among other things, under the amendments, broker-dealers must file one of two new reports with the Commission annually – either a compliance report if the broker-dealer did not claim it was exempt from Rule 15c3-3 under the Securities Exchange Act of 1934 ("Rule 15c3-3") throughout the broker-dealer’s fiscal year or an exemption report if the broker-dealer did claim it was exempt from Rule 15c3-3 throughout the fiscal year.3 Subject to limited exceptions, a broker-dealer must file with the compliance report a report prepared by its independent public accountant based on an examination of the compliance report.4 A broker-dealer must file with the exemption report a report prepared by its independent public accountant based on a review of the exemption report.5

The examination and review, as well as the audit of the financial statements, must be conducted in accordance with standards of the Public Company Accounting Oversight Board.6

Additionally, the amendments generally provide new notice requirements for independent public accountants and broker-dealers. The amendments also require a broker-dealer that clears transactions or carries customer accounts to agree to allow representatives of the Commission or the broker-dealer’s designated examining authority ("DEA") to review the documentation associated with certain reports of the broker-dealer’s independent public accountant and to allow the accountant to discuss its findings with Commission or DEA representatives if requested in writing for purposes of an examination of the broker-dealer.7 The amendments also require broker-dealers that are members of the Securities Investor Protection Corporation ("SIPC") to file their annual reports with SIPC. Finally, the Commission adopted Form Custody, a new form that a broker-dealer must file with its DEA that elicits information about the broker-dealer’s practices with respect to, among other things, the custody of securities and funds of customers and non-customers.8

Answers to Frequently Asked Questions

Amendments to Rule 17a-5

Question 1:

A broker-dealer that is required to file a compliance report must state in the report, among other things, whether the broker-dealer’s Internal Control Over Compliance was effective during the most recent fiscal year. Internal Control Over Compliance ("ICOC") is defined to mean internal controls that have the objective of providing the broker- dealer with reasonable assurance that non-compliance with Securities Exchange Act of 1934 ("Exchange Act") Rules 15c3-1, 15c3-3, or 17a-13 or any rule of the DEA of the broker-dealer that requires account statements to be sent to the customers of the broker-dealer (an "Account Statement Rule") will be prevented or detected on a timely basis.9 A broker-dealer that is required to file an exemption report must state in the report, among other things, that, to its best knowledge and belief the broker-dealer met: (1) the identified exemption provisions in paragraph (k) of Rule 15c3-3 throughout the most recent fiscal year without exception; or (2) the identified exemption provisions in paragraph (k) of Rule 15c3-3 throughout the most recent fiscal year except as described in the exemption report. The requirement to file either a compliance or exemption report is effective for fiscal years ending on or after June 1, 2014.

In instances where a broker-dealer’s 2014 or 2015 fiscal year begins prior to June 1, 2014, must statements that refer to the "most recent fiscal year" in the compliance report or exemption report, as the case may be, cover the portion of the broker-dealer’s fiscal year that is prior to June 1, 2014?

Answer 1:

No. Where a broker-dealer’s 2014 or 2015 fiscal year begins prior to June 1, 2014, the staff will not object if the broker-dealer submits statements in its compliance report or exemption report that do not cover the period of the fiscal year that is prior to June 1, 2014 and instead cover only the period beginning after that date through the end of the broker-dealer’s fiscal year. However, in such cases a broker-dealer may still elect to have its statements cover the entire fiscal year.

Question 2:

The amendments to Rule 17a-5 will permit the independent public accountant’s report based on an examination of the compliance report to satisfy the internal control report requirement under Rule 206(4)-2 of the Investment Advisers Act of 1940 ("Custody Rule"). However, it may be the case that the period covered by the broker-dealer’s most recent internal control report under the Custody Rule ends prior to the beginning of the period that will be covered by the broker-dealer’s compliance report and corresponding accountant’s report based on an examination of the compliance report. For an investment adviser to rely on the independent public accountant’s report based on an examination of the compliance report to satisfy the requirement for an internal control report under the Custody Rule, can the broker-dealer extend the period of compliance and elect to file a compliance report and corresponding accountant’s report based on an examination of the compliance report that will cover the gap between the end of the period covered by the most recent internal control report under the Custody Rule and the beginning of the period that will be covered by the compliance report and corresponding accountant’s report based on an examination of the compliance report?

Answer 2:

Yes. The staff will not object if a broker-dealer elects to extend the period of the compliance report and corresponding accountant’s report based on an examination of the compliance report to cover the gap between the end of the period covered by the most recent internal control report under the Custody Rule and the beginning of the period covered by the compliance report and corresponding accountant’s report based on an examination of the compliance report. For example, a broker-dealer with a fiscal year end of December 31, 2014 that obtained an internal control report as of and for the period ended September 30, 2013 can elect to have its compliance report and corresponding accountant’s report based on an examination of the compliance report cover a period from October 1, 2013 through December 31, 2014 to satisfy its obligations under the Custody Rule. However, a broker-dealer will need to obtain an internal control report under the Custody Rule if the firm’s compliance report and corresponding accountant’s report based on an examination of the compliance report do not cover all of the gap between the end of the period covered by the most recent internal control report and the beginning of the period covered by the compliance report and corresponding accountant’s report based on an examination of the compliance report. For example, a broker-dealer that obtained an internal control report as of and for the period ended September 30, 2013 and that files its 2014 compliance report and corresponding accountant’s report based on an examination of the compliance report for the period from June 1, 2014 through the end of its fiscal year (as indicated above, the staff will not object to this approach), would need to obtain an internal control report for the period from October 1, 2013 to May 31, 2014 to satisfy the requirements in the Custody Rule. An approach which includes obtaining an internal control report and/or filing a compliance report and corresponding accountant’s report based on an examination of the compliance report covering all periods will also satisfy the Custody Rule (i.e., there are no gaps).

Question 3:

As noted in question 2 above, the independent public accountant’s report based on an examination of the compliance report can be used to satisfy the internal control report requirement under the Custody Rule. Can the accountant’s report also be used to satisfy the Custody Rule’s independent verification requirement (i.e., the annual surprise examination)?

Answer 3:

No. The independent public accountant’s report based on an examination of the compliance report will not satisfy any other requirement under the Custody Rule.

Question 4 (NEW, November 29, 2018).

Does the scope of Internal Control Over Compliance (ICOC) as it relates to compliance with the Account Statement Rule of a broker-dealer’s DEA include all disclosures and information included with the customer statements?

Answer 4:

Management’s assertions regarding the effectiveness of its ICOC need to address the requirements of the Account Statement Rule, including the information required under the rule to be documented in the account statement. Information included with an account statement that is not required to be documented in the statement under the Account Statement Rule need not be addressed. However, broker-dealers may nonetheless want to consider having controls to help ensure that all information included with the account statement is accurate and complete.

Question 5: (NEW, November 29, 2018).

In considering the broker-dealer’s ICOC as it relates to the Account Statement Rule of the DEA, how should controls over "below the line" securities positions be considered?

Answer 5:

See answer to Question 4. However, a broker-dealer should have a control to identify and label any securities appropriately to inform customers that such securities are not in its possession or control.

Question 6:

Paragraph (f)(2) of Rule 17a-5 requires a broker-dealer to file a statement regarding its independent public accountant no later than December 10 of each year. As a result of the amendments to Rule 17a-5, a broker-dealer that is required by Rule 17a-5 to engage an independent public accountant must file a new statement that contains the information and representations required under amended paragraph (f)(2) of Rule 17a-5 (even if the broker-dealer is not changing accountants).

Since the amendments to paragraph (f)(2) of Rule 17a-5 do not become effective until June 1, 2014, when must a broker-dealer file a new statement regarding its independent public accountant pursuant to paragraph (f)(2) of Rule 17a-5? What audit period should the new statement cover?

Answer 6:

A broker-dealer need not file a new statement regarding its independent public accountant under paragraph (f)(2) until after the amendments to this paragraph become effective on June 1, 2014. For a broker-dealer with a 2014 fiscal year end between June and December 2014, the new statement must be filed on or before the 10th day of the month in which the broker- dealer’s fiscal year ends because the representations in the statement need to address the work that the accountant will perform with respect to the broker-dealer’s annual reports for its fiscal year ending in 2014.

Broker-dealers that file their new statement between June and December 2014 for their 2014 fiscal year annual audit do not need to file a second new statement for their 2015 fiscal year by December 10, 2014 if the contractual commitment between the broker-dealer and independent public accountant is of a continuing nature. If the contractual commitment between the broker-dealer and independent public accountant is not of a continuing nature, then the broker-dealer must file a new statement under paragraph (f)(2) for the annual audit to be conducted the following calendar year no later than December 10, 2014.

Question 7:

Paragraph (d)(2)(ii) of Rule 17a-5 requires a broker-dealer’s financial report to contain supporting schedules that include, from Part II or Part IIA of the Financial and Operational Combined Uniform Single Reports ("FOCUS Reports"): (1) a Computation of Net Capital Under Rule 15c3-1; (2) a Computation for Determination of the Reserve Requirements under Exhibit A of Rule 15c3-3; and (3) Information Relating to the Possession or Control Requirements Under Rule 15c3-3. The recent amendments to Rule 15c3-3 require broker-dealers to perform reserve computations for proprietary accounts of broker-dealers ("PAB").10 Should the PAB computation be included in the supporting schedules under paragraph (d)(2)(ii) of Rule 17a-5?

Answer 7:

Yes. Paragraph (d)(2)(ii) requires the supporting schedules to include "a Computation for Determination of the Reserve Requirements under Exhibit A of Rule 15c3-3." Since both the customer and PAB reserve requirements are calculated under Exhibit A, the PAB reserve computation is required to be included in the schedule.

Question 8: (MODIFIED, July 1, 2020)

Paragraph (d)(1)(i)(B)(1) of Rule 17a-5 requires a broker-dealer that did not claim an exemption under paragraph (k) of Rule 15c3-3 throughout the most recent fiscal year to file a compliance report. Footnote 74 of the 2013 Release adopting amendments to Rule 17a-5 states: “There may be circumstances in which a broker-dealer has not held customer securities or funds during the fiscal year, but does not fit into one of the exemptive provisions [for Rule 15c3-3] listed under Item 24 of Part IIA [of the FOCUS Report]. Even though there is not a box to check on the FOCUS Report, these broker-dealers should file an exemption report and related accountant’s report.”[11] What types of broker-dealers would be covered by footnote 74 and, on that basis, file an exemption report instead of a compliance report? Are there other potential circumstances when a broker-dealer would file an exemption report as opposed to a compliance report?

Answer 8: (MODIFIED, July 1, 2020)

A broker-dealer that does not meet any of the exemption conditions of paragraph (k) of Rule 15c3-3 (i.e., paragraph (k)(1), (k)(2)(i) or (k)(2)(ii)), but also (1) does not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers, other than money or other consideration received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Exchange Act Rule 15c2-4 (“Rule 15c2-4”); (2) does not carry accounts of or for customers; and (3) does not carry PAB accounts (as defined in Rule 15c3-3) (“Non-Covered Firm”) would be covered by footnote 74; instead of filing a compliance report (and corresponding accountant’s report based on an examination of the compliance report), it may file an exemption report (and corresponding accountant’s report based on a review of the exemption report). A Non-Covered Firm that limits its business activities exclusively to one or more of the following would be eligible to file an exemption report: (1) proprietary trading; (2) effecting securities transactions via subscriptions; (3) receiving transaction-based compensation for identifying potential merger and acquisition opportunities for clients, referring securities transactions to other broker-dealers, or providing technology or platform services; (4) participating in distributions of securities (other than firm commitment underwritings) in accordance with the requirements of paragraphs (a) or (b)(2) of Rule 15c2-4; or (5) engaging solely in activities permitted for capital acquisition brokers (“CAB”) as defined in FINRA’s CAB rules and approved for membership in FINRA as a CAB.

A Non-Covered Firm that does not claim an exemption under paragraph (k) of Rule 15c3-3 should include in the exemption report a description of all the firm’s business activities and a statement that during the reporting period the firm (1) did not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers, other than money or other consideration received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Rule 15c2-4; (2) did not carry accounts of or for customers; and (3) did not carry PAB accounts (as defined in Rule 15c3-3).

Footnote 78 of the 2013 Release adopting amendments to Rule 17a-5 states: “Broker-dealers with extremely limited custodial activities (e.g., holding customer checks made out to a third party for limited periods of time) could seek relief from the Commission from the requirement to file the compliance report and report of the independent public accountant covering the compliance report.”12 Such firms should submit these requests to Commission staff by email to FinOpRequests@sec.gov. These requests should include the following information: a description of the firm’s business, the firm’s reasons for seeking relief, the name and contact information for the firm’s FINRA Regulatory Analyst, and, if applicable, a copy of last fiscal year’s annual report.

Question 8.1: (NEW, July 1, 2020)

If a broker-dealer, including a Non-Covered Firm, does not meet any of the exemption conditions of paragraph (k) of Rule 15c3-3, should the broker-dealer indicate on the FOCUS Report that it is claiming an exemption from Rule 15c3-3?

Answer 8.1: (NEW, July 1, 2020)

No. Items 4550, 4560, 4570 and 4580 of the FOCUS Report should be left blank.

Question 9 (NEW, November 29, 2018):

Must a broker-dealer that makes a claim of exemption from Rule 15c3-3 under paragraph (k)(2)(i) establish a "Special Account for the Exclusive Benefit of Customers?"

Answer 9:

Absent specific instruction from its DEA or the Commission, such a broker-dealer is not required to maintain a "Special Account for the Exclusive Benefit of Customers" if due to the nature of its business activities the broker-dealer would not ever be in possession of customer funds or securities. If customer funds or securities were received, however, and not promptly transmitted to such an account, the receipt of the funds or securities would be considered an exception that management would be required to describe in its exemption report.

Question 10 (NEW, November 29, 2018):

Broker-dealers that act as an intermediary pursuant to Exchange Act Rule 15a-6 may also make a claim(s) of exemption from Rule 15c3-3. If the broker-dealer meets the conditions of the claim(s) of exemption from Rule 15c3-3, are there any circumstances in which the broker-dealer would be required to prepare a Computation for Determination of Reserve Requirements and maintain a reserve in a Special Account for the Exclusive Benefit of Customers and also adhere to possession or control requirements?

Answer 10:

Assuming no other conditions are present which would require the broker- dealer to prepare the Computation for Determination of Reserve Requirements, maintain a Special Account for the Exclusive Benefit of Customers, and/or to adhere to the Possession or Control Requirements, and the claim of exemption is consistent with the broker-dealer’s Form BD and/or other documentation supporting that the regulator supports its claim, conducting the business activities related to Rule 15a-6 would not cause the broker-dealer to be subject to these requirements. However, these types of broker-dealers must comply with Exchange Act Rules 15c3-1, 17a-3, and 17a-4 with respect to transactions where they serve as an intermediary under Rule 15a-6.

Question 11 (NEW, November 29, 2018):

With regard to the fact pattern described in Question 10, would the broker dealer be required to file a compliance report or an exemption report?

Answer 11:

The broker dealer would be required to prepare and file an exemption report.

Question 12 (MODIFIED, July 1, 2020):

Non-carrying broker-dealers may have multiple business activities with customers. A non-carrying broker-dealer may introduce some customer transactions to a carrying broker-dealer on a fully disclosed basis in conformance with paragraph (k)(2)(ii) of Rule 15c3-3 and at the same time effect customer transactions in securities in conformance with paragraph (k)(2)(i) of Rule 15c3-3. In such cases, should the broker-dealer identify both paragraphs (k)(2)(i) and (k)(2)(ii) of Rule 15c3-3 as the exemptions under which it claims exemption from Rule 15c3-3 in its exemption report? Should all exceptions under both paragraphs be identified in the exemption report?

Answer 12: (MODIFIED, July 1, 2020)

Yes, the broker-dealer should identify each basis for the exemption in its exemption report. If both of the exemption provisions in paragraph (k)(2) of Rule 15c3-3 apply to the business activities of an introducing broker-dealer, the broker-dealer should reflect both exemption provisions supporting its claim of exemption in the exemption report, and should also identify any applicable exceptions under each.

Question 12.1 (NEW, July 1, 2020):

How should a broker-dealer indicate on the FOCUS Report that it is claiming an exemption from Rule 15c3-3 if the firm relies on more than one of the exemption provisions in paragraph (k)(2) of Rule 15c3-3 (i.e., paragraphs (k)(2)(i) and (k)(2)(ii))?

Answer 12.1 (NEW, July 1, 2020):

The broker-dealer should indicate on its FOCUS Report each exemption provision in paragraph (k)(2) of Rule 15c3-3 it is relying on to claim an exemption from the rule, as applicable (i.e., paragraphs (k)(2)(i) and (k)(2)(ii)).13

Question 12.2 (NEW, July 1, 2020):

Should a broker-dealer indicate on the FOCUS Report that it is claiming an exemption from Rule 15c3-3 if the firm conducts some activities pursuant to one or more of the exemptions in paragraph (k) of Rule 15c3-3 (i.e., paragraph (k)(2)(i) or (k)(2)(ii)), but also engages in activities not conducted pursuant to such an exemption in which the broker-dealer (1) directly or indirectly receives, holds, or otherwise owes funds or securities for or to customers (other than money or other consideration received and promptly transmitted in compliance with paragraph (a) or (b)(2) of Rule 15c2-4); (2) carries accounts of or for customers; or (3) carries PAB accounts (as defined in Rule 15c3-3)?

Answer 12.2 (NEW, July 1, 2020):

No. A broker-dealer that engages in one or more of the activities described in Items (1), (2), or (3) of Question 12.2 is subject to Rule 15c3-3 and, therefore, must not indicate on the FOCUS Report that it is claiming an exemption from the rule.

Question 13 (NEW, November 29, 2018):

With regard to the fact pattern in Question 12, what exemptions should a broker-dealer identify in its exemption report if only one provision of paragraph (k) of Rule 15c3-3 is claimed on the broker-dealer’s FOCUS Report?

Answer 13:

As stated in the answer to Question 12 above, the exemption report should identify both exemption provisions of paragraph (k) of Rule 15c3-3.

Question 14 (NEW, November 29, 2018):

Section 28(e) of the Exchange Act provides a safe harbor for persons who exercise investment discretion over beneficiaries' or clients' accounts to pay for research and brokerage services with commission dollars generated by account transactions. What is the appropriate treatment under the Rule 15c3-3 Customer Reserve Formula for research and brokerage services with commission dollars generated by account transactions ("Soft Dollar") liabilities under section 28(e) where the broker-dealer does not remit cash to the counterparty but pays invoices meeting the safe harbor?

Answer 14:

Rule 15c3-3 does not require a firm to include the amounts as credits in the reserve formula. Additionally, the existence of these credits would not preclude a firm from claiming an exemption under paragraph (k) of Rule 15c3-3 if it otherwise meets the requirements for exemption.

Question 15 (NEW, November 29, 2018):

Paragraph (b)(3) of Exchange Act Rule 17a-13 requires a broker-dealer to "verify all securities in transfer, in transit, pledge, loaned, borrowed, deposited, failed to receive, failed to deliver, subject to repurchase or reverse repurchase agreements or otherwise subject to his control or direction but not in his physical possession, where such securities have been in said status for longer than thirty days."

How can a broker-dealer demonstrate that it has "verified" all securities subject to this Rule?

Answer 15:

A broker-dealer may consider sending confirmations to counterparties to comply with the Rule. However, simply sending confirmations without an acknowledgement from the counterparty may not always be sufficient. In cases of non-responses to confirmation requests, a broker-dealer should consider performing alternative procedures to verify the existence and accuracy of all securities subject to confirmation procedures to demonstrate compliance with the Rule’s requirements. Some common examples of alternative procedures that would provide such evidence include, but are not limited to (i) vouching subsequent clearance of securities in transfer, in transit, pledge, loaned, borrowed, deposited, failed to receive, failed to deliver, subject to repurchase or reverse repurchase agreements, (ii) vouching rebates paid or received on securities loaned and borrowed; and (iii) vouching cash movements related to securities transactions.

Form Custody

Question 16:

Are there any types of broker-dealer that are not required to file Form Custody (e.g., broker-dealers that do not carry customer accounts)? How and when must Form Custody be filed?

Answer 16:

Beginning December 31, 2013, all broker-dealers must file Form Custody with their DEA within 17 business days after the end of each calendar quarter, with the first filing due in January 2014. A broker-dealer that files its FOCUS Report annually must file Form Custody each calendar quarter.

The Financial Industry Regulatory Authority, Inc. ("FINRA") requires designated member firms to file Form Custody through FINRA’s eFOCUS system. The Chicago Board Options Exchange ("CBOE") requires designated member firms to submit Form Custody in hard copy to the CBOE through a dedicated fax/email location until such time as the designated firms are notified by the CBOE that Form Custody is available for transmission through the WinJammer Online Filing System.

Question 17:

Certain line items in Form Custody ask for information regarding "broker- dealers." What is meant by this term?

Answer 17:

For purposes of Items 1, 2, and 4.A, the term "broker-dealers" refers to a broker-dealer registered with the Commission.

For purposes of Item 4.B, refer to the definition section of Form Custody.

Question 18:

Should the entries in Form Custody be based on settlement date positions or trade date positions?

Answer 18:

Settlement date positions.

Question 19:

How should futures collateral be reported on Form Custody?

Answer 19:

Futures collateral held in a non-securities account is outside the scope of Form Custody and should not be included in information reported on the form. However, if futures collateral is held in a securities account, then the account must be treated as a customer or non-customer account (as applicable) for purposes of Form Custody.

Question 20:

Items 3.D and 3.E of Form Custody elicit information about, among other things, the values of securities carried for the accounts of customers and non-customers. Do these items seek information only about fully-paid and excess margin securities?

Answer 20:

No. For Form Custody reporting purposes, it makes no difference if the securities are fully-paid, margin, or excess margin securities. All securities carried by a broker-dealer should be included.

Question 21:

Items 3.D and 3.E of Form Custody require a broker-dealer to indicate in terms of specified ranges the approximate market value of various types of securities carried for customers and non-customers, respectively. Should a broker-dealer take into account the market value of short positions? For example, if a broker-dealer carries customer accounts and those customers are long $30 million in U.S. equities and short $110 million in U.S. equities, resulting in a net short approximate market value of $80 million in U.S. equities, for Item 3.D should the broker-dealer check the box for U.S. equities and also check the box for: (1) "$50 million or less" (using the long amount); (2) "Greater than $50 million to $100 million" (using the net short amount); or (3) "Greater than $100 million to $500 million" (using the short amount)?

Answer 21:

A broker-dealer should report the approximate market value of aggregate long positions only. In the example, above, the broker-dealer should check the box for U.S. equities and the box for "$50 million or less" using the $30 million long amount.

Question 22:

For purposes of Items 3.D and 3.E of Form Custody, if a broker-dealer clears DVP/RVP accounts and the accounts are "long" or "short" due to failed transactions, should those market values be included?

Answer 22:

No, they should not be included.

Question 23:

For purposes Items 3.D and 3.E of Form Custody, how should a broker- dealer treat "un-priced" positions, such as alternative investments which might only be valued for Internal Revenue Service reporting purposes, but for which pricing is not carried on statements? Must the clearing firm value such positions for these purposes, or may they be valued as zero?

Answer 23:

To the extent that a position is valued, it should be reported. "Un-priced" positions for which prices are not reported on account statements may be valued at zero for purposes of Items 3.D and 3.E.

Question 24:

Item 4 of Form Custody elicits information about the operations of broker- dealers that carry accounts of customers that are introduced by other broker-dealers. For purposes of Item 4.A, who has the responsibility to report sub-clearing relationships?

Answer 24:

The clearing firm is responsible for reporting sub-clearing relationships.

Question 25:

Items 5 and 6 of Form Custody elicit information about whether a broker- dealer sends trade confirmations and account statements directly to its customers. Item 7 of Form Custody elicits information about whether a broker-dealer provides its customers and other accountholders with electronic access to information about securities and cash positions in their accounts. A broker-dealer may send trade confirmations and account statements directly to some customers, while allocating the responsibility to send confirmations and statement to certain customers to other broker- dealers. Likewise, a broker-dealer may provide some, but not all, customers and other account holders with electronic access to information about securities and cash positions in their accounts. In these situations, how should such a broker-dealer respond to these line items?

Answer 25:

In these situations, the appropriate response is "yes." For Items 5 and 6, the broker-dealer should also identify any broker-dealers to which it has allocated the responsibility to send the trade confirmations and account statements. For Item 7, the broker-dealer should explain that it does not provide electronic access for all its customers. In order to provide these identifications and explanations, a broker-dealer should use the technology provided by its DEA for purposes of filing Form Custody.


1 See Broker-Dealer Reports, Exchange Act Release No. 70073 (July 30, 2013), 78 FR 51910 (Aug. 21, 2013) ("Broker-Dealer Reports").

2 See Broker-Dealer Reports 78 FR at 51913–51945.

3 See Broker-Dealer Reports 78 FR at 51916–51923.

4 See Broker-Dealer Reports 78 FR at 51932–51936.

5 See Broker-Dealer Reports 78 FR at 51932–51936.

6 See Broker-Dealer Reports 78 FR at 51932–51936.

7 See Broker-Dealer Reports, 78 FR at 51945–51947.

8 See Broker-Dealer Reports, 78 FR at 51947–51956.

9 See Broker-Dealer Reports, 78 FR at 51918.

10 See Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78 FR 51824 (Aug. 21, 2013).

11 See Broker-Dealer Reports, Securities Exchange Act Release No. 70073 (July 30, 2013), 78 FR 51909, 51915 n.74 (August 21, 2013).

12 See Broker-Dealer Reports, 78 FR at 51915-16 n.78.

13 The exemption provision in paragraph (k)(1) of Rule 15c3-3 is exclusive. Therefore, a broker-dealer claiming the exemption in paragraph (k)(1) of Rule 15c3-3 cannot additionally claim an exemption in paragraph (k)(2) of Rule 15c3-3. See 17 CFR 240.15c3-3(k)(1)(i), (ii) (requiring that the broker-dealer’s transactions “are limited to” the activities identified in those paragraphs).

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