Broker-Dealers Borrowing Fully Paid and Excess Margin Securities from Customers
Summary
SIFMA provided comments to the SEC regarding the response to the October 22, 2020 letter from the U.S. Securities and Exchange Commission, Division of Trading and Markets to FINRA regarding broker-dealers’ borrowing of fully paid and excess margin securities from customers (the “No-Action Letter”) under paragraph (b)(3) of SEC Rule 15c3-3 (“Rule 15c3-3”).
Excerpt
January 14, 2021
By Email and FedEx
Elizabeth H. Baird
Michael A. Macchiaroli
Thomas K. McGowan
Division of Trading and Markets
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: October 22, 2020 No-Action Letter Regarding Broker-Dealers Borrowing Fully Paid and Excess Margin Securities from Customers
On behalf of the Securities Industry and Financial Markets Association (“SIFMA”),1 we respectfully submit for your consideration this response to the October 22, 2020 letter from the U.S. Securities and Exchange Commission, Division of Trading and Markets (the “Division”) to the Financial Industry Regulatory Authority, Inc. (“FINRA”) regarding broker-dealers’
borrowing of fully paid and excess margin securities from customers (the “No-Action Letter”) under paragraph (b)(3) of SEC Rule 15c3-3 (“Rule 15c3-3”).2
As described further herein, it is SIFMA’s position that, in addition to collateral arrangements involving the physical delivery of collateral to a customer, there are also collateral arrangements currently used by member firms that comply with paragraph (b)(3) because they are also consistent with the customer protection principles reflected in Rule 15c3-3. Specifically, while under such collateral arrangements currently used by member firms, customers may not be granted immediate access to, or the ability to reuse, the collateral (as can be the case in arrangements involving the physical delivery of collateral), these arrangements nevertheless are designed to ensure that in the event of an insolvency default by the borrowing broker-dealer, the customer will have direct access to and rights in (i.e., “control” of) the pledged collateral without the need for the broker-dealer’s involvement or consent.3 As such, the collateral should not become general property of the borrowing broker-dealer’s insolvency estate under the Securities Investor Protection Act of 19704 and, consequently, its customers should not have to rely on an unsecured general creditor claim under SIPA.