Division of Trading and Markets

June 26, 2020
(Updated January 25, 2022)

The Division of Trading and Markets (“Division”), U.S. Securities and Exchange Commission (“Commission”), has prepared the following responses to questions about certain provisions of the broker-dealer financial responsibility rules during the COVID-19 pandemic, and expects to update from time to time the staff’s responses to additional questions. These responses represent the views of the staff of the Division of Trading and Markets. They are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved this content. These responses, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

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; Raymond A. Lombardo, Assistant Director, at (202) 551-5755; or Timothy C. Fox, Branch Chief, at (202) 551-5687, Office of Financial Responsibility, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington DC 20549-7010.

Quarterly Securities Count of Physical Certificates

Q: May broker-dealers have additional time to conduct the quarterly securities count of physical certificates required by Rule 17a-13? (REVISED January 25, 2022)

A: FINRA and SEC staff understand that some broker-dealers continue to be unable to successfully conduct the quarterly physical securities count required by Rule 17a-13 under the Exchange Act due to restrictions on in-person gatherings and current health and safety recommendations. Accordingly, the SEC staff would not recommend enforcement action against a broker-dealer if a broker-dealer that is unable to successfully conduct its quarterly physical securities count required by Rule 17a-13 does not count physical securities in a quarterly securities count from April 2020 through March of 2022, and if the broker-dealer:

1. notifies the SEC’s Division of Examinations by email at OCIE-COVID@sec.gov and notifies the broker-dealer’s FINRA Risk Monitoring Analyst of the nature of the problem it will have conducting a physical count and an estimate of the number and value of physical certificates that cannot be counted; and
2. makes and retains a book-keeping summary of the movements of physical certificates that are received or delivered and were not counted during the impacted period to assist the firm in performing an accurate count once the impacted period passes.

In the event that guidance is needed past March 2022, the SEC staff will work with broker-dealers to evaluate whether additional measures may be appropriate.

Q: Should a broker-dealer include in its Compliance Report filed pursuant to Rule 17a-5(d)(3) a statement that the broker-dealer abstained from conducting the quarterly securities count of physical certificates provided the broker-dealer acted under the circumstances described above? Should a broker-dealer that abstained from conducting the quarterly securities count of physical certificates identify this as a deficiency in its internal control over compliance provided the broker-dealer acted under the circumstances described above? (ADDED, November 24, 2020)

A: No. A broker-dealer need not include a statement in its Compliance Report, filed pursuant to Rule 17a-5(d)(3), indicating that it abstained from conducting the quarterly securities count of physical certificates required by Rule 17a-13 and need not identify a deficiency in its internal control over compliance, provided the broker-dealer acted under the circumstances described above.

Q: Question 2 on the FOCUS Report Part II Financial and Operational Data page states: “Is the firm in compliance with Rule 17a-13 regarding periodic count and verification of securities positions and locations at least once in each calendar quarter?” Should a broker-dealer that acted under the circumstances described above check the “Yes” box (Item 4930), assuming the broker-dealer is otherwise in compliance with Rule 17a-13 regarding periodic count and verification of securities positions and locations at least once in each calendar quarter? (ADDED, November 24, 2020)

A: Yes. A broker-dealer should check the “Yes” box (Item 4930) if, acting under the circumstances described above, it abstained from conducting the quarterly securities count of physical certificates required by Rule 17a-13 and otherwise is in compliance with Rule 17a-13 regarding periodic count and verification of securities positions and locations at least once in each calendar quarter.

Broker-Dealer Net Capital with respect to Participation in Federal Reserve Money Market Mutual Fund Liquidity Facility 2020

Q: Does a broker-dealer participating in the Federal Reserve Money Market Mutual Fund Liquidity Facility (MMLF) have to take capital charges for securities purchased from a money market mutual fund and pledged to the Federal Reserve?

A: The Staff would not recommend enforcement action to the Commission against a broker-dealer participating in the Federal Reserve Money Market Mutual Fund Liquidity Facility (MMLF) if the broker-dealer does not take capital charges for securities purchased from a money market mutual fund and pledged to the Federal Reserve pursuant to the MMLF, if:

1. The broker-dealer purchases securities that are eligible for the MMLF (collectively, “MMLF eligible securities”);
2. The broker-dealer promptly delivers the MMLF eligible securities to a Federal Reserve Bank (“FRB”) and receives cash in return in an amount no less than the purchase price;
3. The term of the loan transaction between the FRB and the broker-dealer is until the maturity date of the collateral pledged to the FRB;
4. The loan transaction between the broker-dealer and the FRB is non-recourse (i.e., without recourse to the broker-dealer) and there is no requirement for the broker-dealer to deliver any additional margin to the FRB; and
5. The loan transaction otherwise meets all the terms and conditions set forth in the MMLF as those terms and conditions may be modified from time to time by the Federal Reserve.[1]

Prompt Transmission of Customer Checks under 15c3-3(k)(2)

Q: May broker-dealers have additional time to promptly transmit customer checks under paragraph (k)(2) of Rule 15c3-3?

A: FINRA and SEC staff understand that broker-dealers operating under the exemptions in paragraph (k)(2) of Rule 15c3-3 may be unable to access their premises and therefore may be delayed in forwarding customer checks due to the COVID-19 pandemic during April, May, or June. Accordingly, SEC staff will not recommend enforcement action if, during April, May, or June, broker-dealers in this situation take additional time to transmit customer checks provided:

• the firm transmits customer checks as promptly as is practicable under the current circumstances,
• broker-dealers that are unable to access their offices to transmit checks take reasonable steps to notify customers of alternative ways to fund their respective accounts (e.g., sending checks directly to the clearing broker-dealer, or funding the account online) and that the processing of their checks may be delayed due to the COVID-19 pandemic, and
• the broker-dealer notifies the SEC’s Office of Compliance Inspections and Examinations by email at OCIE-COVID@sec.gov and the broker-dealer’s FINRA Risk Monitoring Analyst of the nature of the problem it will have in promptly forwarding customer checks and the steps the broker-dealer has taken to notify customers.

In the event that guidance is needed past June, the SEC staff will work with broker-dealers to evaluate whether additional measures may be appropriate.

Q: How should the broker-dealer treat the additional time when filing its Exemption Report pursuant to Rule 17a-5(d)(4) under the Exchange Act? (ADDED, November 24, 2020)

A: When filing the Exemption Report pursuant to Rule 17a-5(d)(4), the broker-dealer should state in the Exemption Report (1) that it took additional time to transmit customer checks under paragraph (k)(2) of Rule 15c3-3, acting under the circumstances described above and (2) the specific time period during which such additional time was taken. The broker-dealer need not tabulate each exception that occurred between April and June.