[Federal Register Volume 88, Number 136 (Tuesday, July 18, 2023)]
[Proposed Rules]
[Pages 45836-45863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15200]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-97877; File No. S7-11-23]
RIN 3235-AN28


Daily Computation of Customer and Broker-Dealer Reserve 
Requirements Under the Broker-Dealer Customer Protection Rule

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') 
proposes to amend the broker-dealer customer protection rule to require 
certain broker-dealers to perform their customer and broker-dealer 
reserve computations and make any required deposits into their reserve 
bank accounts daily rather than weekly. The Commission also is seeking 
comment on whether similar daily reserve computation requirements 
should apply to broker-dealers and security-based swap dealers with 
respect to their security-based swap customers.

DATES: Comments should be received on or before September 11, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-11-23 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-23. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on our website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director; Thomas K. McGowan, Associate Director; Randall W. Roy, Deputy 
Associate Director; Raymond Lombardo, Assistant Director; Sheila Dombal 
Swartz, Senior Special Counsel; Timothy C. Fox, Branch Chief; or 
Abraham Jacob, Special Counsel, at (202) 551-5500, Office of Broker-
Dealer Finances, Division of Trading and Markets; Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:

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           Commission  reference               CFR  citation (17 CFR)
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Rule 15c3-3...............................  17 CFR 240.15c3-3.
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Table of Contents

I. Background
    A. Introduction
    B. Current Requirements of Rule 15c3-3 and Its Relation to SIPA
    1. Rule 15c3-3--Customer Accounts
    2. Rule 15c3-3--Proprietary Accounts of Broker-Dealers
    3. Broker-Dealer Liquidations and SIPA
    C. The Risk of a Mismatch in Funds Owed and Funds Reserved Under 
Rule 15c3-3
II. Proposed Amendments
    A. Proposed Amendments to Rule 15c3-3
    B. Request for Comment
III. Request for Comment--Reserve Account Requirements for Security-
Based Swaps
    A. Discussion
    B. Request for Comment
IV. Economic Analysis
    A. Introduction

[[Page 45837]]

    B. Baseline
    1. Regulatory Baseline
    2. Affected Broker-Dealers
    C. Benefits and Costs of the Proposed Amendments
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
    1. Over-Funding of the Customer and PAB Reserve Bank Accounts
    2. A Threshold Based on a Different Metric
    3. Daily Computation Requirement for All Carrying Broker-Dealers
    4. A Higher or Lower Threshold for Daily Computation
    5. Calculation Based on the Maximum Value Over the Past Year
    6. Daily Computation if an Average Required Deposit Exceeds a 
Threshold
    7. Daily Computation Requirement Based on Average Total Credits 
per Number of Customer and PAB Accounts
    8. Daily Computation Based on Average Total Credits From the 
Most Recent Calendar Year
    F. Request for Comment
V. Paperwork Reduction Act
    A. Summary of Collections of Information Under the Proposed Rule 
Amendments
    B. Proposed Use of the Information
    C. Respondents
    1. Recordkeeping Requirements
    2. Notification Requirement
    D. Total Annual Burden Estimate
    1. Recordkeeping Requirements
    2. Notification Requirement
    3. Summary of the Proposed Burden Revisions
    E. Collections of Information are Mandatory
    F. Confidentiality of Response to Collections of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification Statutory Authority

I. Background

A. Introduction

    Pursuant to section 15(c)(3)(A) of the Securities Exchange Act of 
1934 (``Exchange Act''),\1\ the Commission is proposing to amend the 
broker-dealer customer protection rule.\2\ As discussed in more detail 
below,\3\ the rule requires broker-dealers that maintain custody of 
customer securities and cash (``carrying broker-dealers'') to have a 
special reserve account at a bank that must hold cash and/or qualified 
securities in an amount determined by a computation of the net cash 
owed to the broker-dealer's customers. Generally, carrying broker-
dealers are required to perform the customer reserve computation and 
make any required deposits into the customer reserve bank account 
weekly. Rule 15c3-3 also permits carrying broker-dealers to perform the 
customer reserve computation more frequently than weekly (e.g., daily), 
and, in certain limited circumstances, to perform a monthly 
computation. Rule 15c3-3 also addresses the manner in which a carrying 
broker-dealer holds proprietary securities and cash in accounts of 
other broker-dealers, known as PAB accounts. ``PAB account'' generally 
means a proprietary securities account of a broker-dealer.\4\ For 
example, a broker-dealer that is not a carrying broker-dealer (e.g., an 
introducing broker-dealer) may hold its proprietary cash and securities 
at a carrying broker-dealer. In this case, the securities account of 
the introducing broker-dealer held at the carrying broker-dealer would 
be a PAB account and the introducing broker-dealer would be a PAB 
account holder of the carrying broker-dealer. While broker-dealers are 
not treated as customers under Rule 15c3-3, the rule requires a 
carrying broker-dealer to have a separate special reserve account at a 
bank for PAB account holders; such special reserve bank account must 
hold cash and/or qualified securities in an amount determined by a 
computation of the net cash owed to PAB account holders. Generally, 
carrying broker-dealers are required to perform the PAB reserve 
computation and make any required deposits into the PAB reserve bank 
account weekly, similar to the requirements for the customer reserve 
bank account.
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    \1\ 15 U.S.C. 78o(c)(3)(A).
    \2\ 17 CFR 240.15c3-3.
    \3\ See sections I.B.1. and I.B.2. of this release.
    \4\ The term ``PAB account'' means a proprietary securities 
account of a broker-dealer (which includes a foreign broker-dealer, 
or a foreign bank acting as a broker-dealer) other than a delivery-
versus-payment account or a receipt-versus-payment account. 17 CFR 
240.15c3-3(a)(16). The term does not include an account that has 
been subordinated to the claims of creditors of the carrying broker-
dealer. Id.
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    The proposed amendments would require carrying broker-dealers that 
had large amounts of cash owed to customer and PAB accounts holders 
(i.e., large total credits), measured by both their customer and PAB 
reserve computations for the previous twelve month ends (i.e., a 
rolling twelve month average), to perform those computations and make 
any required deposits into their respective customer and PAB reserve 
bank accounts daily (rather than weekly). Cash owed to customers and 
PAB account holders may include cash proceeds received from sales of 
securities, cash deposited by customers and PAB account holders for the 
purposes of purchasing securities, and monthly or quarterly dividends 
received on behalf of customers and PAB account holders. These carrying 
broker-dealers--because they have owed large amounts of cash to their 
customers and PAB account holders--can incur large deposit requirements 
from time to time. This can lead to situations where--for a period of 
days--the net amount of cash owed to customers and PAB account holders 
is substantially greater than the amounts held in their combined 
customer and PAB reserve bank accounts. The proposed daily computation 
would shorten the period during which this mismatch between the net 
amount owed and the amount on deposit exists. The objective of the 
proposal is to reduce the risk caused by this mismatch for carrying 
broker-dealers where the difference between the net amount owed and the 
amount on deposit potentially is substantial. Large mismatches can lead 
to correspondingly large shortfalls in the amounts available in the 
customer and PAB reserve bank accounts to make customers and PAB 
account holders whole if the carrying broker-dealer fails financially. 
As explained below, these potential shortfalls could lead to large-
scale harm (e.g., delayed satisfaction of customer or PAB account 
holder claims for securities and cash) or substantial losses (the 
inability to satisfy those claims in full) if a carrying broker-dealer 
with a large mismatch is liquidated in a formal proceeding under the 
Securities Investor Protection Act of 1970 (``SIPA'').\5\
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    \5\ See 15 U.S.C. 78aaa et seq.
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B. Current Requirements of Rule 15c3-3 and Its Relation to SIPA

1. Rule 15c3-3--Customer Accounts
    Rule 15c3-3 is designed to give specific protection to customer 
funds and securities, in effect forbidding broker-dealers from using 
customer assets to finance any part of their businesses unrelated to 
servicing securities customers. For example, a broker-dealer is 
``virtually'' precluded from using customer funds to buy securities for 
its own account.\6\ To meet this objective, Rule 15c3-3 requires a 
carrying broker-dealer to take two primary steps to safeguard these 
assets, as described in this section below. The steps are designed to 
protect customers by segregating their securities and cash from the 
carrying broker-dealer's proprietary business activities. If the 
carrying broker-dealer fails financially, the customer securities and 
cash should

[[Page 45838]]

be readily available to be returned to the customers. In addition, if 
the failed carrying broker-dealer is liquidated under SIPA, the 
customer securities and cash should be isolated and readily 
identifiable as ``customer property'' and, consequently, available to 
be distributed to customers ahead of other creditors.\7\
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    \6\ See Net Capital Requirements for Brokers and Dealers, 
Exchange Act Release No. 21651 (Jan. 11, 1985), 50 FR 2690, 2690 
(Jan. 18, 1985). See also Broker-Dealers; Maintenance of Certain 
Basic Reserves, Exchange Act Release No. 9856 (Nov. 17, 1972), 37 FR 
25224, 25224 (Nov. 29, 1972).
    \7\ At a high level, in such a liquidation, SIPA would provide 
for the appointment of a trustee who is required to return customer 
name securities to customers of the debtor (15 U.S.C. 78fff-
2(c)(2)), distribute the fund of ``customer property'' ratably to 
customers (15 U.S.C. 78fff-2(b)), and obtain cash advances from the 
Securities Investor Protection Corporation (``SIPC'') from the fund 
administered by SIPC (``SIPC Fund'') to satisfy remaining customer 
net equity claims, to the extent provided by SIPA (15 U.S.C. 78fff-
2(b) and 3(a)). Customer property is defined as ``cash and 
securities (except customer name securities delivered to the 
customer) at any time received, acquired, or held by or for the 
account of a debtor from or for the securities accounts of a 
customer, and the proceeds of any such property transferred by the 
debtor, including property unlawfully converted.'' 15 U.S.C. 
7lll(4). See also section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail).
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    The first step required by Rule 15c3-3 is that a carrying broker-
dealer must maintain physical possession or control over customers' 
fully paid and excess margin securities.\8\ Control means the carrying 
broker-dealer must hold these securities in one of several locations 
specified in Rule 15c3-3 and free of liens or any other interest that 
could be exercised by a third-party to secure an obligation of the 
carrying broker-dealer.\9\ Permissible locations include a clearing 
corporation and a ``bank,'' as defined in section 3(a)(6) of the 
Exchange Act.\10\
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    \8\ See 17 CFR 240.15c3-3(d). The term ``fully paid securities'' 
means all securities carried for the account of a customer in a cash 
account as defined in Regulation T promulgated by the Board of 
Governors of the Federal Reserve System (12 CFR 220.1 et seq.) 
(``Regulation T''), as well as securities carried for the account of 
a customer in a margin account or any special account under 
Regulation T that have no loan value for margin purposes, and all 
margin equity securities in such accounts if they are fully paid: 
provided, however, that the term fully paid securities does not 
apply to any securities purchased in transactions for which the 
customer has not made full payment. 17 CFR 240.15c3-3(a)(3). The 
term ``margin securities'' means those securities carried for the 
account of a customer in a margin account as defined in section 4 of 
Regulation T (12 CFR 220.4), as well as securities carried in any 
other account (such accounts referred to as ``margin accounts'') 
other than the securities referred to in paragraph (a)(3) of Rule 
15c3-3 (i.e., fully paid securities). 17 CFR 240.15c3-3(a)(4). The 
term ``excess margin securities'' means those securities referred to 
in paragraph (a)(4) of Rule 15c3-3 (i.e., margin securities) carried 
for the account of a customer having a market value in excess of 
140% of the total of the debit balances in the customer's account or 
accounts encompassed by paragraph (a)(4) of Rule 15c3-3, which the 
broker-dealer identifies as not constituting margin securities. 17 
CFR 240.15c3-3(a)(5).
    \9\ See 17 CFR 240.15c3-3(c). A carrying broker-dealer does not 
treat customer securities as its own assets. Rather, the carrying 
broker-dealer holds them in a custodial capacity, and the possession 
and control requirement is designed to ensure that the carrying 
broker-dealer treats them in a manner that allows for their prompt 
return.
    \10\ Id. In 2020, the Commission issued a statement describing 
its position that, for a period of five years, special purpose 
broker-dealers operating under the circumstances set forth in the 
statement will not be subject to a Commission enforcement action on 
the basis that the broker-dealer deems itself to have obtained and 
maintained physical possession or control of customer fully-paid and 
excess margin crypto asset securities for purposes of Rule 15c3-3. 
See Commission Statement on Custody of Digital Asset Securities by 
Special Purpose Broker-Dealers, Exchange Act Release No. 90788 (Dec. 
23, 2020), 86 FR 11627 (Feb. 21, 2021). While the proposed 
amendments would apply to all carrying broker-dealers, including 
special purpose broker-dealers, the amendments would not alter the 
current possession and control requirements of Rule 15c3-3 for any 
broker-dealer. See also Division of Trading and Markets, Commission 
and Office of General Counsel, FINRA, Joint Staff Statement on 
Broker-Dealer Custody of Digital Asset Securities (Jul. 8, 2019), 
available at https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities. The 2019 
staff statement represents the views of the staff. It is not a rule, 
regulation, or statement of the Commission. Furthermore, the 
Commission has neither approved nor disapproved its content. This 
staff statement, like all staff statements, 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.
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    The second step is that a carrying broker-dealer must maintain a 
reserve of funds or qualified securities in an account at a bank that 
is at least equal in value to the net cash owed to customers.\11\ The 
account must be titled ``Special Reserve Bank Account for the Exclusive 
Benefit of Customers'' (``customer reserve bank account'').\12\ The 
amount of net cash owed to customers is computed weekly as of the close 
of the last business day of the week pursuant to a formula set forth in 
Exchange Act Rule 15c3-3a (``Rule 15c3-3a'') (``customer reserve 
computation'').\13\ Under the customer reserve computation, the 
carrying broker-dealer adds up customer credit items and then subtracts 
from that amount customer debit items.\14\ The credit items include 
credit balances in customer accounts (i.e., cash owed to customers) and 
funds obtained through the use of customer securities (e.g., a loan 
from a bank collateralized with customer margin securities).\15\ The 
debit items include money owed by customers (e.g., from margin 
lending), securities borrowed by the carrying broker-dealer to 
effectuate customer short sales, and margin required and on deposit 
with certain clearing agencies as a consequence of customer securities 
transactions.\16\ If credit items exceed debit items, the net amount 
must be on deposit in the customer reserve bank account in the form of 
cash and/or qualified securities.\17\ The carrying

[[Page 45839]]

broker-dealer must make a deposit into the customer reserve bank 
account by 10 a.m. of the second business day following the ``as of'' 
date of the new computation if the computation shows the amount 
required to be on deposit in the customer reserve bank account is 
greater than the amount currently on deposit in the account.\18\ 
Conversely, if the computation shows the amount required to be on 
deposit in the customer reserve bank account is less than the amount 
currently on deposit in the account, the carrying broker-dealer can 
withdraw the difference.\19\ A carrying broker-dealer also is required 
to make and maintain a record of each computation.\20\
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    \11\ 17 CFR 240.15c3-3(e). The term ``qualified security'' is 
defined in Rule 15c3-3 to mean a security issued by the United 
States or a security in respect of which the principal and interest 
are guaranteed by the United States (collectively, ``U.S. Government 
securities'' for purposes of this release). See 17 CFR 240.15c3-
3(a)(6).
    \12\ See 17 CFR 240.15c3-3(e)(1). The purpose of giving the 
account this title is to alert the bank and creditors of the 
carrying broker-dealer that this reserve fund is to be used to meet 
the carrying broker-dealer's obligations to customers (and not the 
carrying broker-dealer's obligations to general creditors) in the 
event the carrying broker-dealer is liquidated in a formal 
proceeding.
    \13\ See 17 CFR 240.15c3-3a. Some carrying broker-dealers choose 
to perform a daily computation. See 17 CFR 240.15c3-3(e)(3)(iv). 
Further, the rule permits carrying broker-dealers in certain limited 
circumstances to perform a monthly computation. These circumstances 
include: (1) the broker-dealer must have aggregate indebtedness not 
exceeding 800 percent of net capital; (2) the broker-dealer carries 
aggregate customer funds, as computed at the last required 
computation, not exceeding $1,000,000; and (3) the broker-dealer 
must deposit in its customer reserve bank account not less than 105% 
of the amount computed under the customer reserve formula. See 17 
CFR 240.15c3-3(e)(3)(i).
    \14\ See 17 CFR 240.15c3-3a.
    \15\ See 17 CFR 240.15c3-3a, Items 1-9. Credits in the customer 
reserve computation include--among other credits--free credit 
balances and other credit balances in customers' securities 
accounts, monies borrowed collateralized by securities carried for 
the accounts of customers, and monies payable against customers' 
securities loaned. See 17 CFR 240.15c3-3a, Items 1-3, respectively. 
Carrying broker-dealers are permitted to use customer margin 
securities to, for example, obtain bank loans to finance the funds 
used to lend to customers to purchase the securities. The amount of 
the bank loan is a credit in the customer reserve computation--which 
is accounted for in Item 2--because this is the amount that the 
carrying broker-dealer would need to pay the bank to retrieve the 
securities. Similarly, carrying broker-dealers may use customer 
margin securities to make stock loans to other broker-dealers in 
which the lending broker-dealer typically receives cash in return. 
The amount payable to the other broker-dealer on the stock loan is a 
credit in the customer reserve computation--which is accounted for 
in Item 3--because this is the amount the broker-dealer would need 
to pay the other broker-dealer to retrieve the securities. See also 
Recordkeeping and Reporting Requirements for Security-Based Swap 
Dealers, Major Security-Based Swap Participants and Broker-Dealers; 
Final Rule, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 
68550, 68690 (Dec. 16, 2019) (containing FOCUS Report Part II--
Computation for Determination of Customer Reserve Requirements).
    \16\ See 17 CFR 240.15c3-3a, Items 10-14. See also Standards for 
Covered Clearing Agencies for U.S. Treasury Securities and 
Application of the Broker-Dealer Customer Protection Rule With 
Respect to U.S. Treasury Securities; Proposed Rule, Exchange Act 
Release No. 95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022) 
(proposing a new Item 15 in Rule 15c3-3a to permit margin required 
and on deposit at a covered clearing agency for U.S. Treasury 
securities to be included as a debit item in the customer and PAB 
reserve computations, subject to certain conditions). The Commission 
encourages commenters to review the U.S. Treasury security clearing 
proposal to determine whether it might affect their comments on this 
proposing release.
    \17\ 17 CFR 240.15c3-3(e). Customer cash is a balance sheet item 
of the carrying broker-dealer (i.e., the amount of cash received 
from a customer increases the amount of the carrying broker-dealer's 
assets and creates a corresponding liability to the customer). The 
customer reserve computation is designed to isolate these carrying 
broker-dealer assets so that an amount equal to the net liabilities 
to customers is held as a reserve in the form of cash or U.S. 
Government securities. The requirement to maintain this reserve is 
designed to effectively prevent the carrying broker-dealer from 
using customer funds for proprietary business activities such as 
investing in securities. The goal is to put the carrying broker-
dealer in a position to be able to readily meet its cash obligations 
to customers by requiring the carrying broker-dealer to make 
deposits of cash and/or U.S. Government securities into the customer 
reserve bank account in the amount of the net cash owed to 
customers.
    \18\ For carrying broker-dealers performing a weekly customer 
reserve computation as of the close of the last business day of the 
week, the deposit so computed must be made no later than one hour 
after the opening of banking business on the second following 
business day. See 17 CFR 240.15c3-3(e)(3)(i). For example, a 
carrying broker-dealer would perform the customer reserve 
computation on Monday as of the close of business on the previous 
Friday and generally be required to make the necessary deposit no 
later than 10 a.m. Tuesday.
    \19\ See 17 CFR 240.15c3-3(e).
    \20\ See 17 CFR 240.15c3-3(e)(3)(v). Each record must be 
preserved in accordance with Rule 17a-4. Id.
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    The customer reserve computation permits the carrying broker-dealer 
to offset customer credit items only with customer debit items.\21\ 
This means the carrying broker-dealer can use customer cash to 
facilitate customer transactions such as financing customer margin 
loans and borrowing securities to make deliveries of securities 
customers have sold short.\22\ The broker-dealer margin rules require 
securities customers to maintain a minimum level of equity in their 
securities accounts (i.e., the customer's ownership interest in the 
account, computed by adding the current market value of long securities 
and the amount of any credit balance and subtracting the current market 
value of all short securities and the amount of any debit balance).\23\ 
In other words, the cash and the market value of the customer's 
securities in the account must be sufficiently larger than the sum of 
the cash borrowed by the customer and market value of the securities 
sold short by the customer. In addition to protecting the carrying 
broker-dealer from the consequences of a customer default, this equity 
serves to over-collateralize customers' obligations to the broker-
dealer. This buffer protects the customers whose cash was used to 
facilitate the carrying broker-dealer's financing of securities 
transactions of other customers (i.e., margin loans and short sales). 
For example, if the carrying broker-dealer fails, the customer debits--
because they generally are over-collateralized--should be attractive 
assets for another broker-dealer to purchase or, if not purchased by 
another broker-dealer, they should be able to be liquidated to a net 
positive equity.\24\ The proceeds of the debits sale or liquidation can 
be used to repay the customer cash used to finance customer 
obligations. This cash plus the cash and/or qualified securities held 
in the customer reserve bank account should equal or exceed the total 
amount of customer credit items as of the customer reserve computation 
date (e.g., as of the close of business on Friday).\25\ However, as 
discussed below, activity subsequent to the customer reserve 
computation date can result in the carrying broker-dealer having large 
amounts of additional credit items that do not get accounted for until 
the next customer reserve computation and do not get reserved for until 
the next deposit into the customer reserve bank account.\26\ This can 
lead to a mismatch between the net amount of cash owed to customers and 
the amount currently on deposit in the customer reserve bank account.
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    \21\ See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
    \22\ For example, if a carrying broker-dealer holds $100 for 
customer A, the carrying broker-dealer can use that $100 to finance 
a security purchase of customer B (i.e., make a margin loan to 
customer B). The $100 the carrying broker-dealer owes customer A is 
a credit in the formula and the $100 customer B owes the carrying 
broker-dealer is a debit in the formula. Therefore, under the 
customer reserve computation there would be no requirement to 
maintain cash and/or U.S. Government securities in the customer 
reserve bank account. However, if the carrying broker-dealer did not 
use the $100 held in customer A's account for this purpose, there 
would be no offsetting debit and, consequently, the carrying broker-
dealer would need to have on deposit in the customer reserve bank 
account cash and/or U.S. Government securities in an amount at least 
equal to $100.
    \23\ Broker-dealers are subject to margin requirements in 
Regulation T, in rules promulgated by the broker-dealer self-
regulatory organizations (``SRO'') (see, e.g., FINRA Rules 4210-4240 
and Cboe Exchange, Inc. Rules 10.1-10.12), and with respect to 
security futures, in rules jointly promulgated by the Commission and 
the Commodity Futures Trading Commission (17 CFR 242.400-406). 
Broker-dealers also may establish their own margin requirements, so 
long as they are as restrictive as regulatory margin requirements. 
These requirements are often referred to as ``house'' margin 
requirements. See, e.g., FINRA Rule 4210(d) (requiring broker-
dealers to establish procedures to formulate their own margin 
requirements). See also FINRA Rule 4210(a)(5) (defining the term 
``equity'' for purposes of FINRA margin requirements).
    \24\ The attractiveness of the over-collateralized debits 
facilitates the bulk transfer of customer accounts from a failing or 
failed carrying broker-dealer to another broker-dealer. Regulation 
T, SRO margin rules, and a broker-dealer's house margin rules help 
to ensure the customer maintains a minimum level of equity in their 
account, i.e., that the debit is over-collateralized. For example, 
if a customer purchases a listed equity security, they can borrow up 
to 50% of the purchase price from the broker-dealer using the 
purchased security as collateral for the loan. This is known as 
initial margin. After a customer buys securities on margin, SRO 
margin rules require the customer to maintain a minimum amount of 
equity in their securities margin account. This is known as 
maintenance margin. SRO margin rules require a customer to maintain 
at least 25% of the total market value of the margin securities in 
their account. For example, if a customer purchases $16,000 of 
listed equity securities, the customer can borrow $8,000 from the 
broker-dealer and pay $8,000 in cash. If the market value of the 
listed equity securities falls to $12,000, the equity in the 
securities margin account would total $4,000 ($12,000-$8,000 = 
$4,000) and the broker-dealer's loan to the customer would be over-
collateralized by $4,000. The customer would be in compliance with 
the 25% SRO maintenance margin requirement of $3,000 as well (25% of 
$12,000 = $3,000). See 12 CFR 220.12(a) and FINRA Rule 4210(c)(1).
    \25\ See Net Capital Requirements for Broker-Dealers; Amended 
Rules, Exchange Act Release No. 18417 (Jan. 13, 1982), 47 FR 3512, 
3513 (Jan. 25, 1982). The alternative method is founded on the 
concept that if the debit items in the reserve formula can be 
liquidated at or near their contract value, these assets, along with 
any cash required to be on deposit under the customer protection 
rule, will be sufficient to satisfy all customers-related 
liabilities (which are represented as credit items in the reserve 
formula).
    \26\ See section I.C. of this release (explaining the 
implications of a weekly computation).
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2. Rule 15c3-3--Proprietary Accounts of Broker-Dealers
    Carrying broker-dealers also may carry accounts that hold 
proprietary securities and cash of other broker-dealers, known as PAB 
accounts.\27\ Broker-dealers are not within the definition of 
``customer'' for purposes of Rule 15c3-3.\28\ The definition of 
``customer'' in SIPA, however, is broader than the definition in Rule 
15c3-3 in that the SIPA definition includes broker-dealers.\29\ As 
discussed in more detail below, broker-dealers--as customers under 
SIPA--have the right to a pro rata share of customer property in a SIPA 
liquidation.\30\
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    \27\ 17 CFR 240.15c3-1(a)(16).
    \28\ 17 CFR 240.15c3-3(a)(1) (The term customer shall mean any 
person from whom or on whose behalf a broker or dealer has received 
or acquired or holds funds or securities for the account of that 
person. The term shall not include a broker or dealer, a municipal 
securities dealer, or a government securities broker or government 
securities dealer.). Id.
    \29\ See 15 U.S.C. 78lll(2).
    \30\ See section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail). While broker-dealers 
as ``customers'' under SIPA have a right to a pro rata share of 
customer property in a SIPA liquidation, they are not entitled to 
receive an advance from the SIPC Fund. See 15 U.S.C. 78fff-3(a). See 
infra section I.B.3. of this release (discussing advances from the 
SIPC Fund as a customer protection for certain customers in a SIPA 
liquidation).

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[[Page 45840]]

    Because broker-dealers are entitled to a pro rata share of customer 
property, Rules 15c3-3 and 15c3-3a require carrying broker-dealers to: 
(1) perform a separate reserve computation for PAB accounts in addition 
to the customer reserve computation described above (``PAB reserve 
computation); \31\ (2) establish and fund a separate bank account 
titled ``Special Reserve Bank Account for Brokers and Dealers'' (``PAB 
reserve bank account''); and (3) obtain and maintain physical 
possession or control of non-margin securities carried for a PAB 
account holder unless the carrying broker-dealer has provided written 
notice to the PAB account holder that it may use those securities in 
the ordinary course of its securities business, and has provided 
opportunity for the PAB account holder to object to such use.\32\ These 
requirements provide similar protections to the securities and cash a 
carrying broker-dealer maintains for PAB account holders as are 
provided for the securities and cash the broker-dealer maintains for 
customers. The objective in applying these similar protections is to 
reduce the risk that, in the event a carrying broker-dealer is 
liquidated under SIPA, the claims of SIPA customers (i.e., customers 
and PAB account holders) will exceed the amount of customer property 
available and, thereby, expose the SIPC Fund and potentially SIPA 
customers to losses.\33\ In addition, if the customer property is 
insufficient to fully satisfy all SIPA customer claims and losses are 
incurred, the PAB account holders could be placed in financial 
distress. This could cause adverse impacts to the securities markets 
beyond those resulting from the failure of the carrying broker-dealer, 
given that the PAB account holders--as broker-dealers--provide services 
to investors and others who participate in those markets.\34\
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    \31\ See supra section I.B.1. of this release (discussing Rule 
15c3-3 and customer accounts).
    \32\ 17 CFR 240.15c3-3(b)(5) and (e). See also Financial 
Responsibility Rules for Broker-Dealers; Final Rule, Exchange Act 
Release No. 70072 (July 30, 2013), 78 FR 51824, 51827-31 (Aug. 21, 
2013) (adopting a PAB reserve computation and possession and control 
requirements for securities held in PAB accounts under Rule 15c3-3) 
(``Financial Responsibility Rules for Broker-Dealers'').
    \33\ See Financial Responsibility Rules for Broker-Dealers, 78 
FR at 51827-28.
    \34\ Id.
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    Similar to the customer reserve computation, the amount of net cash 
owed to PAB account holders is computed weekly as of the close of the 
last business day of the week pursuant to the formula set forth in Rule 
15c3-3a.\35\ Specifically, carrying broker-dealers perform the PAB 
reserve computation using the formula in Rule 15c3-3a--which is used to 
perform the customer reserve computation--with modifications that 
tailor the computation to PAB (i.e., broker-dealer) accounts as 
compared with customer accounts.\36\ If credit items exceed debit 
items, the net amount owed to PAB account holders must be on deposit in 
the PAB reserve bank account in the form of cash and/or qualified 
securities. The carrying broker-dealer must make a deposit into the PAB 
reserve bank account if the computation shows an increase in the 
reserve requirement.\37\ If the computation shows a decrease in the 
reserve requirement, the carrying broker-dealer may withdraw the 
difference. Finally, consistent with the requirements for the customer 
reserve computation, the PAB reserve computation permits the carrying 
broker-dealer to offset PAB credit items only with PAB debit items.\38\
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    \35\ See Rule 15c3-3a. Some carrying broker-dealers choose to 
perform the PAB reserve computation daily. See 17 CFR 240.15c3-
3(e)(3)(iv). Further, Rule 15c3-3 permits certain carrying broker-
dealers to perform the PAB reserve computation monthly if they do 
not carry customer accounts or conduct a proprietary trading 
business. See 17 CFR 240.15c3-3(e)(3)(iii).
    \36\ See 17 CFR 240.15c3-3a, Notes Regarding the PAB Reserve 
Bank Account Computation. For example, Note 1 states that broker-
dealers should use the customer reserve formula for the purposes of 
computing the PAB reserve formula, except that references to 
``accounts,'' ``customer accounts,'' or ``customers'' will be 
treated as references to PAB accounts. Further, Note 2 provides that 
any credit (including a credit applied to reduce a debit) that is 
included in customer reserve formula may not be included as a credit 
in PAB reserve formula. Id.
    \37\ For carrying broker-dealers performing the PAB reserve 
computation weekly, as of the close of the last business day of the 
week, the deposit so computed must be made no later than one hour 
after the opening of banking business on the second following 
business day. See 17 CFR 240.15c3-3(e)(3)(i). Carrying broker-
dealers also may satisfy a PAB reserve bank account deposit 
requirement with excess debits from the customer reserve computation 
from the same date. However, a deposit requirement from the customer 
reserve computation may not be satisfied with excess debits from the 
PAB reserve computation. See 17 CFR 240.15c3-3(e)(4).
    \38\ See 17 CFR 240.15c3-3(e)(2); 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

3. Broker-Dealer Liquidations and SIPA
    SIPA became law in 1970 with the purpose of affording certain 
protections against loss to customers resulting from broker-dealer 
failure and, in doing so, promote investor confidence in the nation's 
securities markets.\39\ SIPA established SIPC and directed SIPC to 
establish the SIPC Fund.\40\ The protections afforded by SIPA are 
designed to work as a ``back stop'' to the broker-dealer net capital 
rule,\41\ which requires broker-dealers to maintain net liquid assets 
in excess of all liabilities to customers and other creditors, and Rule 
15c3-3. SIPC oversees the liquidation of SIPC-member broker-dealers 
that fail financially and where customer assets the broker-dealer holds 
(i.e., cash or securities) are missing from customers' securities 
accounts (i.e., broker-dealers that cannot return these assets through 
a self-liquidation).\42\ For example, cash and securities may be 
missing from customers' securities accounts in cases of unauthorized 
trading or embezzlement. The Commission has authority to oversee SIPC, 
including to conduct inspections of SIPC and to approve or disapprove 
changes to SIPC's bylaws and rules.\43\
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    \39\ See 2022 SIPC Annual Report at 4, available at https://www.sipc.org/media/annual-reports/2022-annual-report.pdf.
    \40\ See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
    \41\ 17 CFR 240.15c3-1.
    \42\ With some limited exceptions set forth in SIPA, all 
registered broker-dealers are SIPC members. 15 U.S.C. 78ccc(a)(2). 
SIPC is a non-profit member organization created in 1970 under SIPA. 
15 U.S.C. 78ccc(a).
    \43\ 15 U.S.C. 78ggg(c) and 78ccc(e).
---------------------------------------------------------------------------

    In a SIPA liquidation of a broker-dealer, SIPC and a court-
appointed trustee work to return customers' cash and securities as 
quickly as possible. Customers under SIPA (``SIPA customers'') 
generally are entitled to a number of protections. These protections 
include the right to share pro rata with other SIPA customers in the 
customer property held by the broker-dealer.\44\ Broker-dealers with 
securities accounts at the failed broker-dealer--as SIPA customers--
have the right to a pro rata share of the customer property in a SIPA 
liquidation.\45\
---------------------------------------------------------------------------

    \44\ See 15 U.S.C. 78fff-2(c).
    \45\ See 15 U.S.C. 78fff-2(c) and 15 U.S.C. 78fff-3(a).

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[[Page 45841]]

Consequently, when a carrying broker-dealer is liquidated in a SIPA 
proceeding, each customer (including a SIPA customer that is a broker-
dealer) has a priority claim on the customer property compared to 
general unsecured creditors of the carrying broker-dealer.\46\ The SIPA 
protections also include the ability for a SIPA customer--other than a 
SIPA customer that is a broker-dealer--to receive an advance from the 
SIPC Fund of up to $500,000 (of which $250,000 can be used to cover 
cash claims), if the amount of customer property is insufficient to 
satisfy the customer's claim for securities and/or cash.\47\
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    \46\ As discussed above in section I.B.2. of this release, this 
is why Rules 15c3-3 and 15c3-3a require carrying broker-dealers to 
perform a PAB reserve computation for PAB account holders. SIPA 
liquidations generally involve customer claims and the claims of 
general unsecured creditors. Customer claims are satisfied out of 
the customer estate, while general unsecured claims are paid from 
the general estate (any remaining assets). To the extent a 
customer's claims are not fully satisfied through advances from the 
SIPC Fund and the customer's share of the customer estate, a 
customer will be eligible to receive a distribution as a general 
creditor to the extent that there are any general estate assets. See 
15 U.S.C. 78fff-2(c)(1).
    \47\ 15 U.S.C. 78fff-3.
---------------------------------------------------------------------------

    The SIPC Fund largely is financed through assessments paid to SIPC 
by its broker-dealer members.\48\ The SIPC Fund is used to pay SIPC's 
expenses, the administrative costs of a SIPA liquidation to the extent 
the broker-dealer's estate is insufficient to cover those costs, and--
as noted above--to pay advances to SIPA customers whose claims cannot 
be fully satisfied by the estate of a failed carrying broker-
dealer.\49\ The SIPC Fund--which consists of cash and U.S. Government 
securities--totaled approximately $4.05 billion as of December 31, 
2022.\50\ The schedule for calculation of the annual assessment for 
SIPC members is governed under the SIPC bylaws and generally depends on 
the level of SIPC's unrestricted net assets.\51\ The current assessment 
rate is 0.15 percent of net operating revenues.\52\ A summary of the 
possible level of SIPC assessments is as follows:
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    \48\ 15 U.S.C. 78ddd(c) and (d). The SIPC Fund is also financed 
through interest on U.S. Government securities held in the SIPC 
Fund. See 2022 SIPC Annual Report at 4.
    \49\ In the event that the SIPC Fund is or may reasonably appear 
to be insufficient for the purposes of SIPA, the Commission is 
authorized to lend SIPC up to $2.5 billion, which the Commission, in 
turn, would borrow from the U.S. Treasury. 15 U.S.C. 78ddd(g) and 
(h). The Commission has not borrowed funds under the authority in 
SIPA since the legislation was enacted in 1970.
    \50\ Currently, the objective is to build the SIPC Fund to a 
level of $5 billion. See 2022 SIPC Annual Report at 3, 10. Between 
1970 and 2022, SIPC has facilitated the return of cash and 
securities for accounts of customers of failed broker-dealers 
totaling approximately $142 billion. Of that amount, approximately 
$141.2 billion came from broker-dealer estates and $917 million came 
from trustee advances from the SIPC Fund. Id. at 8. Further, of the 
approximately 770,400 customer claims from completed, or 
substantially completed, cases that were satisfied between 1970 and 
2022, only 355 claims were for cash and securities valued greater 
than the limits of protection afforded by SIPA. Id. at 9.
    \51\ See Article 6, Assessments of SIPC Bylaws. SIPC's 
unrestricted net assets are SIPC's total assets (including the SIPC 
Fund) less liabilities, which include estimated costs to complete 
ongoing SIPA liquidations. See 2022 SIPC Annual Report at 20. See 
also 15 U.S.C. 78ddd(c) and (d) and 2022 SIPC Annual Report at 21.
    \52\ See Assessment Rate, available at https://www.sipc.org/for-members/assessment-rate. The amount of each SIPC member's assessment 
for the member's fiscal year is the product of the assessment rate 
established by SIPC for that fiscal year and either the member's 
gross revenues or net operating revenues from the securities 
business. See Section 6(a)(1) of SIPC's Bylaws.

                    Table 1--SIPC Assessment Schedule
------------------------------------------------------------------------
   Unrestricted net assets/SIPC Fund
                balance                       Annual assessment rate
------------------------------------------------------------------------
Unrestricted net assets $2.5-<$5         0.15% of net operating
 billion (and reasonably likely to        revenues.
 remain less than $5 billion but not
 less than $2.5 billion).
SIPC Fund balance of $150 million--      0.25% of net operating
 unrestricted net assets of <$2.5         revenues.
 billion.
SIPC Fund balance $100 million-<$150     Determined by SIPC, but not
 million.                                 less than 0.25% of gross
                                          revenues.
SIPC Fund balance below $100 million...  Determined by SIPC, but not
                                          less than 0.5% of gross
                                          revenues.
Unrestricted net assets >=$5 billion     SIPC may not more than once in
 (and reasonably likely to remain >$5     any four-year period, increase
 billion (after review of study \1\ and   or decrease the assessment
 consultation with Commission and         rate by up to, but not more
 SROs)).                                  than, 25% of the assessment
                                          rate in effect at that time.
------------------------------------------------------------------------
\1\ When unrestricted net assets total $5 billion, SIPC will commission
  a study every four years to examine the adequacy of SIPC's
  unrestricted net asset balance and the SIPC Fund and the appropriate
  assessment rate. See section 6(a)(1)(C) and (D) of SIPC's Bylaws.

    In addition to the Commission's requirements under Rule 15c3-3, if 
either the Commission or any SRO, such as FINRA, is aware of facts 
which lead it to believe that any broker-dealer subject to its 
regulation is in or is approaching financial difficulty, it must 
immediately notify SIPC, and, if such notification is by an SRO, the 
Commission.\53\ In a case when an SRO notifies SIPC about a broker-
dealer, and that broker-dealer has taken steps to either reduce or 
liquidate its business, either voluntarily or at the direction of the 
SRO, the SRO may render such assistance or oversight to such broker-
dealer as it considers appropriate to protect the interests of 
customers of such broker-dealer.\54\ However, any actions the SRO takes 
do not prevent or act as a bar from SIPC from taking an action as 
well.\55\ If SIPC finds that a broker-dealer has failed, or is in 
danger of not meeting its obligations to customers, SIPC can initiate 
steps to begin a customer protection proceeding. For example, SIPC may, 
upon notice to its broker-dealer member, file an application for a 
protective decree with any court that has jurisdiction (i.e., a Federal 
District Court), whether or not the broker-dealer consents.\56\ In 
addition, no member of SIPC that has customers may enter into 
bankruptcy, insolvency, or a receivership without approval from SIPC, 
except as provided in Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.\57\
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    \53\ See 15 U.S.C. 78eee(a)(1).
    \54\ See 15 U.S.C. 78eee(a)(2).
    \55\ Id.
    \56\ See 15 U.S.C. 78eee(a)(3)(A). See also 15 U.S.C. 
78eee(b)(1) (detailing court proceedings).
    \57\ See 15 U.S.C. 78eee(a)(3)(B).
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C. The Risk of a Mismatch in Funds Owed and Funds Reserved Under Rule 
15c3-3

    Carrying broker-dealers receive customer- and PAB-related cash 
inflows in connection with various securities transactions, including 
cash proceeds received from sales of securities, cash deposited by 
customers and PAB account holders for the purposes of purchasing 
securities, and monthly or quarterly dividends received on behalf of 
customers and PAB account holders. Cash credited to customers and PAB 
account holders often is quickly re-invested by the customer or PAB

[[Page 45842]]

account holder in securities such as money market mutual funds or 
securities held by the customer or PAB account holder that are subject 
to dividend re-investment plans. This cash also may be swept out of the 
customer's or PAB account holder's securities account at the carrying 
broker-dealer to a bank or money market mutual fund as part of a 
program in which customers' and PAB account holders' free credit 
balances are automatically invested in the mutual fund or bank deposit 
product on the prior authorization of the customer or PAB account 
holder (``sweep program'').\58\ When customers and PAB account holders 
use their free credit balances to invest in securities or bank deposit 
products, the amount of cash held by a carrying broker-dealer for them 
is reduced and, therefore, the amount that needs to be deposited into 
the customer or PAB reserve bank account also is reduced.
---------------------------------------------------------------------------

    \58\ See 17 CFR 240.15c3-3(j)(2)(ii) (setting forth requirements 
under Rule 15c3-3 for this type of a program for customer accounts). 
Broker-dealers are not customers under Rule 15c3-3. Therefore, PAB 
account holders are not subject to the sweep program requirements 
under the rule with respect to their free credit balances. See 17 
CFR 15c3-3(a)(1). Nonetheless, PAB account holders may elect to have 
their free credit balances included in a sweep program.
---------------------------------------------------------------------------

    Carrying broker-dealers, however, may receive large cash inflows 
that are not deployed for or on behalf of the customers or PAB account 
holders prior to the next required customer and PAB reserve 
computations and deposits into the customer and PAB reserve bank 
accounts. In this situation, the value of the cash and/or qualified 
securities in the customer and PAB reserve bank accounts may not equal 
the net cash owed to customers and PAB account holders for a period of 
time. For example, assume a carrying broker-dealer performs its 
customer and PAB reserve computations weekly as required under Rule 
15c3-3 (i.e., it has not elected to perform a daily computation or meet 
the conditions in the rule to perform a monthly computation). 
Typically, the carrying broker-dealer would perform the customer and 
PAB reserve computations on Monday using credit and debit amounts as of 
the close of business on the previous Friday. If the Monday computation 
showed a deposit requirement, the carrying broker-dealer would need to 
make that deposit by 10 a.m. the following business day, which 
typically would be Tuesday. In this example, cash inflows received by 
the carrying broker-dealer on Monday through Friday would not be 
accounted for until the carrying broker-dealer performs the next 
customer and PAB reserve computations on the Monday of the following 
week and would not be reserved for until the carrying broker-dealer 
makes the required deposits into the customer and PAB reserve bank 
accounts no later than 10 a.m. on Tuesday of the following week. 
Consequently, for a number of days, the net amount of cash owed to 
customers and PAB account holders could be greater than the amounts 
deposited into the customer and PAB reserve bank accounts.\59\
---------------------------------------------------------------------------

    \59\ To further illustrate this risk, assume on Monday of Week 1 
a carrying broker-dealer performs a customer reserve computation 
that shows as of close-of-business on Friday of the previous week 
the broker-dealer had total credits of $30 billion and total debits 
of $25 billion and, therefore, had excess credits over debits of $5 
billion. Assume further, the carrying broker-dealer had $4.8 billion 
of cash and qualified securities on deposit in its customer reserve 
bank account. Under Rule 15c3-3, the carrying broker dealer would 
need to deposit $200 million into its customer reserve bank account 
no later than 10 a.m. on Tuesday of Week 1. Assume further that the 
carrying broker-dealer receives $3 billion of cash inflows on Monday 
of Week 1 but does not facilitate any customer transactions during 
Week 1 that generate additional debits and the customers do not 
deploy the $3 billion to purchase securities or into a sweep 
program. In this scenario, the $3 billion of cash inflows on Monday 
of Week 1 would not get accounted for in the customer reserve 
formula until the carrying broker-dealer performs the customer 
reserve computation on Monday of Week 2. Assuming all else stays the 
same, the Week 2 customer reserve computation would result in a 
deposit requirement of $3 billion, which would need to be made no 
later than 10 a.m. on the Tuesday of Week 2. This means the net 
amount of cash owed to customers was $8 billion and the amount on 
deposit in the customer reserve bank account was $4.8 billion on 
Monday through 10 a.m. on Tuesday of Week 1 and $5 billion from 10 
a.m. on Tuesday of Week 1 through 10 a.m. on Tuesday of Week 2. 
Consequently, the difference between the net amount of cash owed to 
customers and the amount on deposit in the customer reserve bank 
account was $3.2 billion for Monday of Week 1 through 10 a.m. on 
Tuesday of Week 1 and $3 billion from 10 a.m. on Tuesday of Week 1 
through 10 a.m. on Tuesday of Week 2.
---------------------------------------------------------------------------

    This mismatch poses a risk to the carrying broker-dealer's 
customers and PAB account holders that the carrying broker-dealer could 
fail financially and be unable to return all the securities and cash 
owed to the customers and PAB account holders. In this situation, the 
carrying broker-dealer would be liquidated under SIPA, and SIPC would 
be required to advance money from the SIPC Fund--but not to PAB account 
holders--to the extent the fund of customer property was insufficient 
to make customers whole through the pro rata distribution. As discussed 
above, the amount that can be advanced to each customer is capped at 
$500,000 (of which $250,000 can be used to cover cash claims).\60\ 
Therefore, if the mismatch was sufficiently large, customers' claims 
may not be satisfied in full. Further, because PAB account holders--as 
broker-dealers--are not entitled to advances from the SIPC Fund, their 
claims for securities and cash would be at greater risk of not being 
satisfied in full. This could expose the PAB account holder to 
financial stress and increased risk of liquidation.\61\
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    \60\ See section I.B.3. of this release (discussing broker-
dealer liquidations under SIPA in more detail).
    \61\ See section IV.C. of this release (discussing the benefits 
and costs of the proposed amendments).
---------------------------------------------------------------------------

    As of the end of 2022, 162 carrying broker-dealers reported total 
credits in their customer reserve computation of greater than $0.\62\ 
These carrying broker-dealers reported an aggregate amount of total 
customer credits of $1.03 trillion. In addition, 82 carrying broker-
dealers reported total credits in their PAB reserve computation of 
greater than $0. These carrying broker-dealers reported an aggregate 
amount of PAB account holder total credits of $166.3 billion.\63\ 
Moreover, some of these carrying broker-dealers have been required to 
deposit large amounts of additional cash and/or qualified securities 
into their customer and/or PAB reserve bank accounts after performing 
their customer and/or PAB reserve computations. For example, during the 
2022 calendar year, the largest required additional deposits into the 
customer reserve bank accounts of these carrying broker-dealers ranged 
from approximately $1.6 billion to over $6.0 billion following the 
customer reserve

[[Page 45843]]

computation.\64\ Furthermore, during the 2022 calendar year, the 
largest required additional deposits into their PAB reserve bank 
accounts ranged from approximately $350 million to over $4.0 
billion.\65\ The carrying broker-dealers that reported the largest 
amounts of total credits for their customers and PAB account holders 
(and that exceeded the proposed $250 Million Threshold discussed below) 
were more likely to experience larger mismatches and the dollar amounts 
underlying those mismatches were significantly larger (than carrying 
broker-dealers that do not exceed the proposed $250 Million 
Threshold).\66\
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    \62\ This number of carrying broker-dealers is based on 
information reported by broker-dealers as of Dec. 31, 2022, in Form 
X-17A-5, the Financial and Operational Combined Uniform Single 
Report (``FOCUS Report''). The FOCUS Reports showed that 162 
carrying broker-dealers reported total credits of greater than $0 on 
Line 4430 of the report (total credits in the customer reserve 
formula). Total credits in the customer reserve computation is the 
sum of customer credits in the formula, including--among other 
credits--free credit balances and other credit balances in 
customers' securities accounts (Line 4340), monies borrowed 
collateralized by securities carried for the accounts of customers 
(Line 4350), and monies payable against customers' securities loaned 
(Line 4360). See also section IV.B.2. of this release (estimating 
that there are 187 broker-dealers that may currently fall within the 
scope of the Rule 15c3-3 based on carrying activities). This 
estimate includes broker-dealers that did not report credits greater 
than $0 and/or that reported being exempt from the provisions of 
Rule 15c3-3.
    \63\ FOCUS Report data as of Dec. 31, 2022, showed that 82 
broker-dealers reported total credits of greater than $0 on Line 
2170 of the report (total credits in the PAB reserve formula). Total 
credits in the PAB reserve computation is the sum of PAB account 
holder credits in the formula, including--among other credits--free 
credit balances and other credit balances in PAB securities accounts 
(Line 2110), monies borrowed collateralized by securities carried 
for the accounts of PAB (Line 2120), and monies payable against PAB 
securities loaned (Line 2130).
    \64\ This is based on the 25 largest additional deposit 
requirements reported in the monthly FOCUS Reports filed during the 
2022 calendar year.
    \65\ This is based on the 25 largest additional deposit 
requirements reported in the monthly FOCUS Reports filed during the 
2022 calendar year. The largest additional deposit requirements were 
made by carrying broker-dealers that also had the 20 largest credit 
balances based on 2022 FOCUS Report data. In addition to large 
deposit requirements, the customer and PAB reserve computations also 
permitted some carrying broker-dealers to make large withdrawals 
from both their customer and PAB reserve bank accounts during the 
2022 calendar year. For example, during the 2022 calendar year, the 
25 largest withdrawals from customer reserve bank accounts ranged 
from approximately $1.3 billion to $6.0 billion, and the 25 largest 
withdrawals from PAB reserve bank accounts ranged from $241.7 
million to $3.5 billion.
    \66\ This is based on the carrying broker-dealers that reported 
the largest amounts of total credits on their FOCUS Reports as of 
Dec. 31, 2022, and comparing them to the carrying broker-dealers 
that reported the largest deposits for the 2022 calendar year. See 
also section II.A.1. of this release (discussing the proposed $250 
Million Threshold) and Table 5 in section IV.B.2. of this release 
(detailing broker-dealer deposits and withdrawals as a share of 
reserve accounts for the year 2022).
---------------------------------------------------------------------------

    These large deposit requirements indicate that there may be times 
when the net amount of cash owed to customers and PAB account holders 
is substantially greater than the amounts on deposit in the customer 
and PAB reserve bank accounts. As explained above, this creates the 
potential risk that a carrying broker-dealer could fail financially and 
not be able to fully satisfy claims of customers and PAB account 
holders for securities and cash. Moreover, given the potential size of 
this mismatch between the cash owed and the cash reserved, the failure 
of a carrying broker-dealer that has large total credits could cause 
widespread harm and potentially substantial losses (as discussed 
above). It also potentially could deplete the SIPC Fund resulting in 
the need to increase assessments on SIPC's broker-dealer members to 
replenish it, with the resulting costs potentially being passed through 
to investors.\67\
---------------------------------------------------------------------------

    \67\ See section IV.C. of this release (discussing the benefits 
and costs of the proposed amendments).
---------------------------------------------------------------------------

    To address these risks, the Commission is proposing amendments to 
Rule 15c3-3 to require carrying broker-dealers with large total 
credits--the carrying broker-dealers most likely to have large customer 
and PAB additional deposit requirements--to increase the frequency of 
their customer and PAB reserve computations from weekly to daily. The 
objective is to more dynamically match the net amount of cash owed to 
customers and PAB account holders with the amount on deposit in the 
carrying broker-dealer's customer and PAB reserve bank accounts by 
shortening the timeframe that a mismatch can exist.\68\ This objective 
also should enhance the customer protection requirements of Rule 15c3-
3.
---------------------------------------------------------------------------

    \68\ To illustrate how a daily computation would reduce this 
risk, assume on Monday a carrying broker-dealer performs a customer 
reserve computation that shows as of the close-of-business on Friday 
of the previous week the broker-dealer had total credits of $30 
billion and total debits of $25 billion and, therefore, had excess 
credits over debits of $5 billion. Assume further, the carrying 
broker-dealer had $4.8 billion of cash and qualified securities on 
deposit in its customer reserve bank account. Under a daily 
computation, the carrying broker dealer would need to deposit $200 
million into its customer reserve bank account no later than 10 a.m. 
on Tuesday of that week. Assume further that the carrying broker-
dealer receives $3 billion of cash inflows on Monday but does not 
facilitate any customer transactions that generate any additional 
debits and the customers do not deploy the $3 billion to purchase 
securities or into a sweep program. Under a daily requirement, the 
carrying broker-dealer would perform a customer reserve computation 
on Tuesday as of the close of business on Monday that would account 
for the $3 billion in cash inflows received on Monday and be 
required to deposit $3 billion into the customer reserve bank 
account by 10 a.m. on Wednesday of the same week. Consequently, the 
mismatch would exist from the point in time on Monday when the $3 
billion was received until 10 a.m. on Wednesday of the same week 
when $3 billion would need to be deposited into the customer reserve 
bank account (approximately two full days). Under a weekly 
requirement, this mismatch would exist from the point in time on 
Monday when the $3 billion was received until 10 a.m. on Tuesday of 
the following week when the next deposit into the customer reserve 
bank account would need to be made (approximately eight full days).
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    In addition, performing daily (rather than weekly) customer and PAB 
reserve computations would allow large carrying broker-dealers to more 
effectively manage their cash flows and liquidity. For example, a 
carrying broker-dealer that performs weekly computations generally 
cannot withdraw excess cash or U.S. Government securities from either 
its customer or PAB reserve bank accounts until the following week even 
if the value of the account assets exceeds the net cash owed to 
customers or PAB account holders during the current week. While Rule 
15c3-3 currently permits a carrying broker-dealer to elect to perform 
its customer and PAB reserve calculations more frequently than 
weekly,\69\ a practical effect of requiring carrying broker-dealers to 
perform daily customer and PAB reserve computations would be to permit 
them to withdraw these excess funds and securities more quickly. A 
number of carrying broker-dealers currently elect to perform daily 
customer and PAB reserve computations, including eleven of the largest 
carrying broker-dealers.\70\ Finally, an additional 52 carrying broker-
dealers that would be required to begin performing daily customer and 
PAB computations under the proposed rule (i.e., those carrying broker-
dealers that are not already voluntarily performing daily computations) 
may incur increased compliance costs.\71\ As further discussed in the 
Economic Analysis in section IV. of this release, these costs and 
benefits may ultimately be passed through to customers and PAB account 
holders of the affected carrying broker-dealers.\72\
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    \69\ See 17 CFR 240.15c3-3(e)(3)(iv).
    \70\ Based on FOCUS Report data for the 2022 calendar year, 
these carrying broker-dealers are among the largest broker-dealers 
measured by average total credits and total assets. These 11 
carrying broker-dealers accounted for 64 percent of the total amount 
of average total credits among all carrying-broker dealers with 
positive customer or PAB credits reported in 2022. See section 
IV.B.2. of this release (discussing baseline of affected broker-
dealers in the economic analysis).
    \71\ Based on FOCUS Report data for the 2022 calendar year.
    \72\ See section IV. of this release (discussing the benefits 
and costs of the proposed amendments).
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II. Proposed Amendments

A. Proposed Amendments to Rule 15c3-3

    In order to address the mismatch risk discussed above and enhance 
customer protection requirements, the Commission is proposing 
amendments to Rule 15c3-3 that would require carrying broker-dealers 
with large amounts of total credits to perform the customer and PAB 
reserve computations daily (rather than weekly).\73\ More specifically, 
the amendments would add paragraph (e)(3)(i)(B) to Rule 15c3-3.\74\

[[Page 45844]]

This paragraph would provide that a carrying broker-dealer with average 
total credits that are equal to or greater than $250 million must make 
the computation necessary to determine the amounts required to be 
deposited in the customer and PAB reserve bank accounts daily as of the 
close of the previous business day.\75\ The paragraph would further 
provide that the deposit so computed must be made no later than one 
hour after the opening of banking business on the second following 
business day. For example, a carrying broker-dealer performing the 
computation on Tuesday as of the close of business on Monday, would be 
required to make the deposit on Wednesday, assuming all three days are 
business days. On Wednesday, the carrying broker-dealer would perform 
the computation as of the close of business Tuesday and be required to 
make the deposit on Thursday (assuming Thursday is a business day).
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    \73\ See section I.C. of this release (discussing the mismatch 
risk).
    \74\ See paragraph (e)(3)(i)(B) to Rule 15c3-3, as proposed to 
be amended. In addition, the Commission is proposing the following 
conforming amendments to paragraph (e)(3)(i) of Rule 15c3-3: (1) 
paragraph (e)(3)(i) would be re-lettered paragraph (e)(3)(i)(A); and 
(2) the text in paragraph (e)(3)(i) regarding monthly computations 
would be set forth in new paragraph (e)(3)(i)(C). Further, the 
phrase ``[e]xcept as provided in paragraphs (e)(3)(i)(B)(1) and (C) 
of this section'' would be added to the beginning of paragraph 
(e)(3)(i)(A) of Rule 15c3-3, as proposed to be amended, to clarify 
that the weekly computation requirement in paragraph (e)(3)(i)(A) 
applies unless the carrying broker-dealer is subject to the daily 
computation requirement of paragraph (e)(3)(i)(B)(1) or meets the 
conditions of paragraph (e)(3)(i)(C) to perform a monthly 
computation.
    \75\ The text of paragraph (e)(3)(i)(B) of Rule 15c3-3, as 
proposed to be amended, is modelled closely on the current text of 
paragraph (e)(3)(i) of Rule 15c3-3.
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    For purposes of paragraph (e)(3) of Rule 15c3-3, the Commission is 
proposing to define average total credits as the arithmetic mean of the 
sum of total credits in the customer reserve computation and PAB 
reserve computation reported in the twelve most recently filed month-
end FOCUS Reports (``$250 Million Threshold'').\76\ The proposed 
definition of average total credits is designed to serve as a 
straightforward way for the carrying broker-dealer to determine whether 
its total credits equal or exceed the $250 Million Threshold. In 
addition, using the arithmetic mean of total credit amounts reported in 
the twelve most recently filed month-end FOCUS Reports to calculate the 
average total credits is designed to account for the fact that a 
carrying broker-dealer's total credits may fluctuate. A rolling average 
based on twelve most recently filed month-end FOCUS Reports would 
provide for a more stable and representative metric as compared to 
basing the calculation on a single filing such as the most recently 
filed FOCUS Report.
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    \76\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed 
to be amended. This would mean the carrying broker-dealer would add 
up the sum of the total credits reported in the customer and PAB 
reserve computations in each of the twelve most recently filed 
month-end FOCUS Reports and divide that amount by 12 to calculate 
the arithmetic mean of the total credits.
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    The proposed $250 Million Threshold is designed to apply the daily 
computation requirement to carrying broker-dealers that have large 
amounts of total credits. Based on FOCUS Report data, these carrying 
broker-dealers are the ones more likely to experience larger mismatches 
between the net cash they owe customers and PAB account holders and the 
amounts they have on deposit in their customer and PAB reserve bank 
accounts, and the dollar amounts underlying those mismatches are 
significantly larger than carrying broker-dealers below the $250 
Million Threshold.\77\ The proposed $250 Million Threshold is designed 
to provide a balanced demarcation between carrying broker-dealers with 
large amounts of total credits relative to smaller carrying broker 
dealers (with lower average total credits), the former of which are 
more likely to incur larger mismatches in any given year, and are more 
likely to better absorb any potential increase in compliance costs.\78\
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    \77\ Based on FOCUS Report data for the 2022 calendar year. See 
also Table 5 in section IV.B.2. of this release (detailing broker-
dealer deposits and withdrawals as a share of reserve accounts for 
the year 2022).
    \78\ See section IV.C. of this release (discussing the costs and 
benefits of the proposed $250 Million Threshold).
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    Based on regulatory filings for the period of January 2022 through 
December 2022, the $250 Million Threshold would apply the proposed 
daily computation requirement to approximately 63 carrying broker-
dealers.\79\ These broker-dealers include 11 carrying broker-dealers 
that already voluntarily perform the customer reserve computation 
daily.\80\ Under the proposed $250 Million Threshold, approximately 100 
carrying broker-dealers would continue to be subject to a weekly 
customer and/or PAB reserve computation requirement.\81\ In summary, in 
proposing the $250 Million Threshold, the Commission seeks to 
reasonably balance the enhancements to customer protection under Rule 
15c3-3 through reductions in the mismatch risk, with the potential 
increases in compliance costs and staffing that may be necessary to 
perform a daily computation.\82\
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    \79\ This estimate is based on the arithmetic mean of the sum of 
total credits in the customer and PAB reserve computations reported 
in each required monthly FOCUS Report filed for the 12 months ended 
Dec. 31, 2022. All of these broker-dealers reported total credits in 
their customer reserve computation during the 2022 calendar year. 
Approximately fourteen carrying broker-dealers that exceeded the 
$250 Million Threshold reported no credits in their PAB reserve 
computations during the 2022 calendar year. The number of affected 
carrying broker-dealers may vary month to month because the proposed 
$250 Million Threshold is based on a 12-month rolling average. For 
example, the number of affected carrying broker-dealers varied 
monthly from 60 to 63 over the period from January 2022 through May 
2023. There was little variation, however, in the identity of the 
affected carrying broker-dealers. The same 59 carrying broker-
dealers met the proposed $250 Million Threshold in each month, and 
from one to four additional carrying broker-dealers met the 
threshold in any given month. In total, over this period, 63 
different carrying broker dealers would have been affected. See 
Figure 1 (Number of Affected Broker-Dealers under 12-Month Rolling 
Average, Over the Period from January 2022-May 2023) in section 
IV.B.2. of this release.
    \80\ This is based on FOCUS Report data as of Dec. 31, 2022. 
Based on FOCUS Report data for 2022, ten out of these 11 carrying 
broker-dealers were among the 20 largest carrying broker-dealers in 
terms of the largest average total credits. All 11 of these carrying 
broker-dealers that currently perform their customer reserve 
computation daily are among the 30 largest carrying broker-dealers 
in terms of average total credits.
    \81\ This estimate is based on 162 carrying broker-dealers that 
reported total credits greater than $0 on their FOCUS Reports as of 
Dec. 31, 2022.
    \82\ See section IV. of this release (discussing the costs and 
benefits of the proposed $250 Million Threshold).
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    The Commission is proposing to require that a carrying broker-
dealer comply with the daily computation requirement for the customer 
and PAB reserve bank accounts no later than six months after having 
average total credits that equal or are greater than $250 million.\83\ 
The purpose is to provide time for a carrying broker-dealer to prepare 
to perform a daily computation after it exceeds the $250 Million 
Threshold. A carrying broker-dealer in this situation may need to add 
resources in order to perform the computations, including hiring or 
assigning additional staff to perform the daily computations.
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    \83\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed 
to be amended.
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    Once a carrying broker-dealer begins to perform daily customer and 
PAB reserve computations (because it exceeded the $250 Million 
Threshold), the proposed amendments would require it to continue 
performing daily customer and PAB reserve computations for at least 60 
days after it falls below the $250 Million Threshold. More 
specifically, under paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as 
proposed to be amended, a carrying broker-dealer performing daily 
computations, whose average total credits falls below the $250 Million 
Threshold, could elect to perform weekly computations under paragraph 
(e)(3)(i)(A) of Rule 15c3-3 by notifying its designated examining 
authority in writing.\84\ In order to revert to a weekly computation, 
the carrying broker-dealer would need to wait 60 calendar days after 
notifying its designated examining authority, in writing, of its 
election to

[[Page 45845]]

perform weekly computations before it could switch to performing weekly 
computations.\85\ The purpose of this requirement is to provide the 
designated examining authority with prior notice of the switch and to 
provide the designated examining authority with the opportunity to 
contact the firm and ask how it intends to implement the change. This 
would assist the designated examining authority in monitoring the firm.
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    \84\ See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as proposed 
to be amended.
    \85\ To illustrate how this would work, assume a carrying 
broker-dealer has been required to perform daily customer and PAB 
reserve computations for five years. Assume further that with the 
filing of the FOCUS Report for the October month-end in the fifth 
year the carrying broker-dealer calculates its average total credits 
and the amount is below the $250 Million Threshold. At this point, 
the carrying broker-dealer could provide notice to its designated 
examining authority of its election to begin performing the customer 
and PAB reserve computations weekly. It would need to wait 60 days 
after providing that notice before it could begin performing those 
computations weekly.
---------------------------------------------------------------------------

    If a carrying broker-dealer that provided the 60-day notice under 
the proposal reverts to a weekly (rather than daily) customer and PAB 
reserve computation and subsequently exceeds the $250 Million Threshold 
once again, the proposed rule would require the carrying broker-dealer 
to comply with the daily computation requirement no later than six 
months after having average total credits equal to or greater than $250 
million.\86\ This would be the same process as when a carrying broker-
dealer exceeded the $250 Million Threshold for the first time. The 
purpose of this requirement would be to provide the carrying broker-
dealer time to prepare to perform a daily computation. Carrying broker-
dealers that fall below the $250 Million Threshold and revert to weekly 
customer and PAB reserve computations may reduce the resources they 
dedicate to performing the computations. Therefore, these carrying 
broker-dealers would need some time to enhance their operational 
resources in order to increase the frequency of the computations again. 
However, this may be an infrequent occurrence given that few carrying 
broker-dealers likely would maintain average total credits that is 
close to the $250 Million Threshold. Further, a carrying broker-dealer 
could choose to continue to perform daily customer and PAB reserve 
computations even after it falls below the $250 Million Threshold, 
given the practical effect on liquidity as a result of the ability to 
make more frequent withdrawals from its customer and PAB reserve bank 
accounts. The largest carrying broker-dealers likely would be required 
to perform daily computations an ongoing basis because their average 
total credits would far exceed the proposed $250 Million Threshold.\87\
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    \86\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed 
to be amended.
    \87\ This is based on FOCUS Report data for the 12 months ended 
Dec. 31, 2022.
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    The Commission also is proposing to amend paragraph (e)(3)(iv) of 
Rule 15c3-3. Current paragraph (e)(3)(iv) of Rule 15c3-3 provides that 
computations in addition to the computations required in paragraph 
(e)(3) (i.e., the weekly computation and permitted monthly computation) 
may be made as of the close of any business day, and the deposits so 
computed must be made no later than one hour after the opening of 
banking business on the second following business day.\88\ The 
amendment to paragraph (e)(3)(iv) would provide that computations, 
other than those made under paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, 
as proposed to be amended (i.e., the daily computations), may be made 
as of the close of any business day.\89\ This amendment would specify 
that the option to perform a customer or PAB reserve computation more 
frequently than weekly or monthly (as applicable) remains available to 
carrying broker-dealers that are required to make such computations on 
a weekly or monthly basis. Carrying broker-dealers currently performing 
daily customer and PAB reserve computations have used this option.
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    \88\ See 17 CFR 240.15c3-3(e)(3)(iv).
    \89\ This proposed amendment would insert the phrase ``other 
than computations made under paragraph (e)(3)(i)(B)(1) of this 
section,'' following the words ``this paragraph (e)(3),'' in current 
paragraph (e)(3)(iv) of Rule 15c3-3.
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B. Request for Comment

    The Commission requests comments from all members of the public on 
all aspects of the proposed rule amendments. Commenters are requested 
to provide empirical data in support of any arguments or analyses. With 
respect to any comments, the Commission notes that they are of the 
greatest assistance to this rulemaking initiative if accompanied by 
supporting data and analysis of the issues addressed in those comments 
and by alternatives to the Commission's proposals where appropriate. In 
addition, the Commission is requesting comment on the following 
specific aspects of the proposals:
    1. The objective of the proposed amendments is to address the risk 
that is created when the amount of net cash owed to customers and PAB 
account holders by a carrying broker-dealer is greater than the amount 
on deposit in the broker-dealer's customer and PAB reserve bank 
accounts and the amount of that difference is substantial. Are there 
ways--other than requiring daily customer and PAB reserve 
computations--to address this risk? If so, identify them and explain 
how they would more appropriately address this risk. For example, 
rather than a daily customer and PAB reserve computation requirement, 
should Rule 15c3-3 be modified to require a carrying broker-dealer to 
deposit cash and/or qualified securities in the customer and PAB 
reserve bank accounts in an amount that is a multiple of the required 
amount computed under the customer and PAB reserve computations (i.e., 
overfund the customer and PAB reserve bank accounts weekly)? If so, 
explain why. If not, explain why not. If Rule 15c3-3 were to be 
modified in this way, should the multiple of the amount computed under 
the customer and PAB reserve computations be 105%, 110% or some other 
percentage? If so, explain why.
    2. Should the definition of average total credits be modified to 
use a subset of credit items rather than total credits? If so, explain 
why. If not, explain why not. For example, rather than using the sum of 
total credits from the customer reserve computation (Line 4430 of the 
FOCUS Report) and the PAB reserve computation (Line 2170 of the FOCUS 
Report), should the definition use the sum of free credit balances and 
other credit balances from the customer reserve computation (Line 4340 
of the FOCUS Report) and the PAB reserve computation (Line 2110 of the 
FOCUS Report)? If so, explain why. If not, explain why not. If the 
definition used free credit balances and other credit balances, the 
amounts reported by a carrying broker-dealer would be less than the 
amounts reported using total credits (as free credit balances and other 
credit balances are one of several components of total credits). 
Therefore, if the definition used free credit balances and other credit 
balances, should the $250 Million Threshold be adjusted downward to 
account for the lower amounts that would be reported by carrying 
broker-dealers? If so, explain why. If not, explain why not. For 
example, if the definition were to be modified in this way, should the 
threshold be lowered to $200 million, $150 million, or $100 million, or 
some other lower amount? If so, explain why. If not, explain why not.
    3. Should the definition of average total credits be modified so 
that it is based on a different set of filed FOCUS Reports? If so, 
explain why. If not, explain why not. For example, should it be the 
arithmetic mean of the total credits in the customer and PAB reserve

[[Page 45846]]

computations reported in each required FOCUS Report filed during the 
most recently ended calendar year? If so, explain why. If not, explain 
why not. Should it be the arithmetic mean of the FOCUS Reports filed 
for the previous four calendar quarters? If so, explain why. If not, 
explain why not.
    4. Should the $250 Million Threshold be modified to be set at a 
higher or lower threshold? \90\ If so, explain why. If not, explain why 
not. For example, should the threshold be $50 million, $100 million, 
$150 million, $200 million, $300 million, $500 million, or $1 billion? 
If so, recommend a different threshold and explain why it would be 
appropriate.
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    \90\ See Table 5 in section IV.B.2. of this release (detailing 
broker-dealer deposits and withdrawals as a share of reserve account 
balance for the year 2022).
---------------------------------------------------------------------------

    5. Should Rule 15c3-3 be modified to require a carrying broker-
dealer to perform daily customer and PAB reserve computations using a 
different metric for the threshold? For example, if Rule 15c3-3 were to 
be modified in this way, should the threshold be based on a metric such 
as: (1) total assets; (2) net capital under 17 CFR 240.15c3-1 (Exchange 
Act Rule 15c3-1); (3) the maximum value of total credits reported on 
the twelve most recently filed month-end FOCUS Reports; (4) whether the 
required reserve bank account deposit as a share of the reserve bank 
account balance prior to such deposit exceeds a certain percentage 
threshold (e.g., 5% or 10%); or (5) the average total credits per 
number of customer and PAB accounts? If so, explain why. If not, 
explain why not.
    6. Should Rule 15c3-3 be modified to require all carrying broker-
dealers to perform daily customer and PAB reserve computations? If so, 
explain why. If not, explain why not.
    7. Should the six-month period to begin performing the daily 
customer and PAB reserve computations after having average total 
credits that equal or exceed the $250 Million Threshold be modified? If 
so, explain why. If not, explain why not. For example, would six months 
be a sufficient time to implement the necessary changes to begin 
performing a daily computation? If so, explain why. If not, explain why 
not. Should the six-month period be lengthened or shortened? If so, 
explain why. If not, explain why not. For example, should the time 
period be 30 calendar days, 60 calendar days, three months, nine months 
or one year? If so, recommend a different time period and explain why 
it would be appropriate.
    8. If a carrying broker-dealer falls below the $250 Million 
Threshold, reverts to a weekly computation after providing the 60-day 
prior notice, and subsequently exceeds the $250 Million Threshold 
again, should the six-month period to begin performing the daily 
customer and PAB reserve computations be modified? If so, explain why. 
If not, explain why not. For example, would a carrying broker-dealer 
need six months to implement the changes necessary to perform the 
customer and PAB reserve computations daily after it exceeds the $250 
Million Threshold for a second or third time? If so, explain why. If 
not, explain why not. In this case, should the six-month period be 
shortened? If so, explain why. If not, explain why not. For example, 
should the time period for exceeding the $250 Million Threshold for a 
second or subsequent time be 30 calendar days, 60 calendar days, or 
three months? If so, recommend a different time period and explain why 
it would be appropriate.
    9. Should the requirement to provide a 60-day prior written notice 
to the carrying broker-dealer's designated examining authority before 
switching to weekly customer and PAB reserve computations be modified? 
If so, explain why. If not, explain why not. For example, should the 
time period be 30 days, 90 days or 180 days? If so, recommend a 
different time period and explain why it would be appropriate.
    10. Should Rule 15c3-3 be modified to specifically address the 
situation where a carrying broker-dealer performing weekly customer and 
PAB reserve computations exceeds the proposed $250 Million Threshold 
for a period of a month or two, but subsequently falls below the 
proposed $250 Million Threshold during the six-month period to begin 
performing the customer and PAB reserve computations daily? If so, 
explain why. If not, explain why not. For example, if Rule 15c3-3 were 
to be modified in this way, should the carrying broker-dealer be 
permitted to continue to perform its customer and PAB reserve 
computations weekly, if it falls below the proposed $250 Million 
Threshold during the six-month period? For example, if a carrying 
broker-dealer performing weekly computations exceeds the proposed $250 
Million Threshold in January and February, but falls below the proposed 
$250 Million Threshold in March, April, May, and June, should the 
carrying broker-dealer be permitted to continue to perform weekly 
computations in July (as opposed to be required to perform daily 
computations beginning in July)? In such a case, should the carrying 
broker-dealer be required to give a written notice to its designated 
examining authority that it will continue to perform weekly 
computations? If so, explain why. If not, explain why not.
    11. Should Rule 15c3-3 be modified to require carrying broker-
dealers to perform the customer and PAB reserve computations daily 
indefinitely once they exceed the $250 Million Threshold for the first 
time (with no option to revert to weekly computations with a 60-day 
prior written notice)? If so, explain why. If not, explain why not.
    12. Should Rule 15c3-3 be modified to require carrying broker-
dealers to document in writing and preserve for three years under 
Exchange Act Rule 17a-4 the calculation of their average total credits? 
\91\ If so, explain why. If not, explain why not.
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    \91\ See 17 CFR 240.17a-4.
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    13. If the proposal was adopted substantially as proposed, how long 
would carrying broker-dealers need to prepare to come into compliance 
with the new requirements? Please explain. For example, would they need 
three, six, nine, twelve or some other number of months? What data 
points would carrying broker-dealers use to assess the timing? Are 
there any specific operational or technological issues that should be 
factored into a compliance date?
    14. Would staggering the compliance dates over more than one 
calendar year help facilitate an orderly implementation of the 
proposal, if adopted substantially as proposed? For example, would it 
be appropriate for the compliance date to vary depending on the size of 
the average total credits reported by carrying broker-dealers, with 
firms having larger amounts of average total credits required to come 
into compliance sooner than firms with smaller amounts of average total 
credits? More generally, if staggering is appropriate, what would be an 
appropriate schedule of compliance dates for carrying broker-dealers 
with different amounts of average total credits? Please recommend 
different compliance dates for carrying broker-dealers with different 
amounts of average total credits and explain why they would be 
appropriate. Should the fact that some carrying broker-dealers already 
would be performing daily customer and PAB reserve computations factor 
into the compliance date? If so, explain why. If not, explain why not.
    15. If the proposal was adopted substantially as proposed, would 
the six-month period to begin performing daily customer and PAB reserve 
computations after having average total credits that equal or exceed 
the $250 Million Threshold provide adequate time for carrying broker-
dealers to

[[Page 45847]]

implement the changes necessary to comply with the rule without the 
need for an additional delayed compliance date? If so, explain why. If 
not, explain why not. For example, would the six-month period be 
adequate if the date to begin performing the daily customer and PAB 
reserve computations fell near the end of the calendar year when 
carrying broker-dealers may refrain from implementing new information 
technology projects? If so, explain why. If not, explain why not.

III. Request for Comment--Reserve Account Requirements for Security-
Based Swaps

A. Discussion

    In 2019, the Commission adopted customer segregation requirements 
for broker-dealers and security-based swap dealers (``SBSDs'') with 
respect to customer money, securities, and property related to 
security-based swaps.\92\ These requirements were based in part on the 
requirements of Rules 15c3-3 and 15c3-3a discussed above.\93\ Under the 
security-based swap segregation requirements, broker-dealers--including 
broker-dealers registered as SBSDs--are required to perform a separate 
weekly security-based swap customer reserve computation and have a 
separate security-based swap customer reserve account that must hold 
the net amount of cash owed to security-based swap customers.\94\ Title 
17 sections 240.18a-4 and 18a-4a (``Exchange Act Rules 18a-4 and 18a-
4a'') impose analogous security-based swap customer reserve computation 
and deposit requirements on SBSDs that either are not registered as a 
broker-dealer or are registered as special class of broker-dealer known 
as an over-the counter derivatives dealer (``OTC derivatives 
dealer'').\95\ As discussed below, the proposed amendments would not 
alter these existing segregation rules for security-based swap 
customers to require a daily (rather than weekly) computation and 
deposit.\96\ However, the Commission seeks comment on these matters 
below.
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    \92\ Capital, Margin, and Segregation Requirements for Security-
Based Swap Dealers and Major-Security-Based Swap Participants and 
Capital and Segregation Requirements for Broker-Dealers, Exchange 
Act Release No. 86175 (June 21, 2019), 84 FR 43872, 43930-43 (Aug. 
22, 2019) (``SBS Segregation Adopting Release'').
    \93\ Id. See also sections I.B.1. and I.B.2. of this release 
(discussing the requirements of Rules 15c3-3 and 15c3-3a).
    \94\ See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b.
    \95\ See 17 CFR 240.18a-4; 17 CFR 240.18a-4a. OTC derivatives 
dealers are limited purpose broker-dealers that are authorized to 
trade in OTC derivatives (including a broader range of derivatives 
than security-based swaps) and to use models to calculate net 
capital. See 17 CFR 240.3b-12 (defining the term ``OTC derivatives 
dealer''); OTC Derivatives Dealers, Exchange Act Release No. 40594 
(Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). OTC derivatives dealers 
are not members of SIPC.
    \96\ The Commission proposed a daily computation requirement for 
security-based swap customers. See SBS Segregation Adopting Release, 
84 FR at 43940. In response to comment, the Commission adopted a 
weekly security-based swap customer reserve requirement in light of 
the increased operational burdens for broker-dealers and SBSDs as 
compared to a weekly computation. Id.
---------------------------------------------------------------------------

    The proposed amendments do not include such daily requirements 
because almost all carrying broker-dealers--including those also 
registered as SBSDs--that have credits related to the security-based 
swap activities of their security-based swap customers account for 
these credits in their customer reserve computation and in their 
customer reserve bank account.\97\ Therefore, the proposed amendments 
to the customer reserve requirements of Rule 15c3-3 discussed above 
would apply to the security-based swap credits computed by these 
broker-dealers.\98\ These carrying broker-dealers would not include any 
debit items related to security-based swap activities of their 
security-based swap customers in their customer reserve 
computation.\99\ Consequently, amending Rule 15c3-3 to require a daily 
security-based swap customer reserve computation for broker-dealers, 
including those also registered as SBSDs, would have virtually no 
impact because the credits related to security-based swap activity for 
security-based swap customers generally are being included in the 
customer reserve computation. This would include the daily customer 
reserve computations of those carrying broker-dealers that exceed the 
proposed $250 Million Threshold.
---------------------------------------------------------------------------

    \97\ This is based on FOCUS Report data for calendar year 2022. 
The Commission notes that staff has stated its views in Question 1 
of Responses to Frequently Asked Questions Regarding Financial 
Responsibility Requirements as Applied to Security-Based Swap 
Activities of Broker-Dealers and Security-Based Swap Dealers (Oct. 
8, 2021), available at https://www.sec.gov/tm/faqs-financial-responsibility-req-applied-sbs (``SBS FAQ 1''). Based on FOCUS 
Report data for calendar year 2022, only one broker-dealer currently 
performs a separate security-based swap customer reserve 
computation.
    \98\ See section II.A.1. of this release (discussing the 
proposed amendments).
    \99\ See SBS FAQ 1 for staff views.
---------------------------------------------------------------------------

    In addition, the SBSDs registered with the Commission that are not 
dually registered as broker-dealers (other than as OTC derivatives 
dealers) operate pursuant to an exemption from the Commission's 
security-based swap segregation rule.\100\ Under this exemption, they 
are not required to perform a security-based swap customer reserve 
computation or have a security-based swap customer reserve account. In 
addition, these SBSDs are not members of SIPC.
---------------------------------------------------------------------------

    \100\ See 17 CFR 240.18a-4(f).
---------------------------------------------------------------------------

B. Request for Comment

    The Commission generally requests comments on whether the security-
based swap customer reserve computation and deposit requirements should 
be daily (rather than weekly). In addition, the Commission requests 
comments on the following specific issues, with accompanying data and 
analysis:
    16. Should Rule 15c3-3 be modified to require broker-dealers--
including broker-dealers (other than OTC derivatives dealers) 
registered as SBSDs--to perform daily security-based swap customer 
reserve computations in addition to daily customer and PAB reserve 
computations? If so, explain why. If not, explain why not.
    17. Should the Commission amend Exchange Act Rules 18a-4 and 18a-4a 
to require SBSDs that are not registered as broker-dealers (other than 
as OTC derivatives dealers) to perform daily security-based swap 
customer reserve computations? If so, explain why. If not, explain why 
not.

IV. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the 
benefits and costs, of the proposed amendments. Section 3(f) of the 
Exchange Act provides that when engaging in rulemaking that requires 
the Commission to consider or determine whether an action is necessary 
or appropriate in the public interest, to also consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation.\101\ Section 23(a)(2) 
of the Exchange Act also requires the Commission to consider the effect 
that the rules and rule amendments would have on competition, and it 
prohibits the Commission from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the Exchange Act.\102\ The analysis below addresses the likely economic 
effects of the proposed amendments, including the anticipated benefits 
and costs of the amendments and their likely effects on efficiency, 
competition, and capital formation. The Commission also discusses the 
potential

[[Page 45848]]

economic effects of certain alternatives to the approaches taken in 
this proposal.
---------------------------------------------------------------------------

    \101\ See 15 U.S.C. 78c(f).
    \102\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As part of their business, carrying broker-dealers regularly 
receive cash related to customers' and PAB account holders' securities 
transactions, such as cash realized from sales of securities. While it 
is common that customers' and PAB account holders' cash is quickly re-
invested or swept out to a bank account or money market fund by the 
customer or PAB account holder, it is also common for this cash to 
remain undeployed for or on behalf of customers and PAB account holders 
for several days or longer prior to the next required customer and PAB 
reserve computations and deposits into the customer and PAB reserve 
bank accounts.\103\
---------------------------------------------------------------------------

    \103\ See section I.C. of this release (discussing the risk of a 
mismatch of funds owed and funds reserved under Rule 15c3-3).
---------------------------------------------------------------------------

    Currently, the required balances in customer and PAB reserve bank 
accounts (net cash owed to customers or PAB account holders) are 
required to be calculated weekly, and the resulting amount must be held 
in the customer and PAB reserve bank accounts until the date of next 
required deposit.\104\ However, the value of the net cash owed to 
customers or PAB account holders may change daily due to customers' and 
PAB account holders' transactions and re-deployment of undeployed 
funds. On a weekly basis, this could result in a large intra-week 
mismatch between the customer or PAB reserve bank account balances and 
actual net cash owed to customers or PAB account holders. This intra-
week mismatch introduces several potential risks that are currently not 
internalized by carrying broker-dealers.
---------------------------------------------------------------------------

    \104\ See section I.B.1. and 2. of this release (discussing 
customer protection requirements of Rule 15c3-3 for customers and 
PAB account holders).
---------------------------------------------------------------------------

    First, the mismatch between the calculated and the actual amounts 
of net cash owed to customers and PAB account holders introduces a risk 
to other SIPC members. More specifically, if a liquidation of a 
carrying broker-dealer with a mismatch of cash in its customer and PAB 
reserve bank accounts is carried out under SIPA, the SIPC Fund balance 
would be used if there are not enough assets in the broker-dealer's 
estate to cover the difference between the net cash owed to customers 
and the amount in the reserve bank account,\105\ which may trigger a 
subsequent increase in contributions from other SIPC members. This risk 
may be exacerbated for carrying broker-dealers experiencing large 
aggregate intra-week mismatches. As a result, the SIPC Fund would be at 
a higher risk of depletion. For example, as discussed in section 
IV.B.2. below, mismatches are common among broker-dealers of all sizes 
(as measured by average total credits). The largest carrying broker-
dealers with average total credits of at least $500 billion had 
mismatches of between 10 and 18 percent during 2022.\106\
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    \105\ See section I.B.3. of this release (discussing broker-
dealer liquidations and SIPA, including the funding and balance of 
the SIPC Fund). For an example of a customer reserve bank account 
mismatch, one carrying broker-dealer had a deficit in its customer 
reserve bank account equal to $5 billion, yet the level of the SIPC 
Fund at the time was at $2 billion. See Merrill Lynch, Pierce, 
Fenner & Smith Incorporated and Merrill Lynch Professional Clearing 
Corp., Order Instituting Administrative and Cease-and-Desist 
Proceedings, Pursuant to Sections 15(b) and 21C of the Securities 
Exchange Act of 1934, Making Findings, and Imposing Remedial 
Sanctions and a Cease-and-Desist Order, Exchange Act Rel. No. 78141 
(June 23, 2016).
    \106\ Based on FOCUS Report data for 2022. The mismatch is 
calculated as the amount deposited (FOCUS Report Line 4520) relative 
to the reserve account balance (Line 4530). These data are discussed 
in detail in section IV.B.2 of this release, see Table 5 in that 
section and related discussion.
---------------------------------------------------------------------------

    Second, this mismatch introduces a risk to customers and PAB 
account holders of carrying broker-dealers. To the extent that there is 
mismatch of funds in the customer or PAB reserve bank account, a 
failure of a carrying broker-dealer would prevent its customers or PAB 
account holders from promptly receiving the whole amount of cash owed 
to them. In this scenario, the funds owed to customers or PAB account 
holders may be tied up in liquidation proceedings and these customers 
or PAB account holders would have to wait to receive their funds back 
until the broker-dealer liquidation process is carried out under SIPA, 
which may take a significant amount of time. In addition, customers and 
PAB account holders may not receive their funds in full if the 
liquidation proceedings do not result in a full recovery of funds owed 
to customers and PAB account holders. This risk may be exacerbated for 
potential failures of carrying broker-dealers with large amounts of 
customer or PAB reserve bank account balances, such as when these 
carrying broker-dealers experience large aggregate intra-week 
mismatches between the reserve bank account balances and actual net 
cash owed to customers or PAB account holders. Under perfect 
information, investors would choose their carrying broker-dealer in 
part based on the risk of failure and would continue to monitor the 
carrying broker-dealer for risk of failure. However, monitoring costs 
and other frictions may prevent this.
    The proposed daily customer and PAB reserve computations for 
carrying broker-dealers with substantial amounts of total credits is 
aimed to address these risks and is expected to benefit customers, PAB 
account holders, and other stakeholders of the affected carrying 
broker-dealers by more dynamically matching the net cash owed to 
customers or PAB account holders and the customer and PAB reserve bank 
account balances. More specifically, the daily customer and PAB reserve 
computations would safeguard customers and PAB account holders of the 
affected carrying broker-dealers by lessening the potential for large 
mismatches to build over time, and thereby increasing the likelihood 
that they are made whole even if a carrying broker-dealer fails. Daily 
computations would also decrease the risk that other stakeholders, such 
as contributors to the SIPC Fund, would need to provide additional 
resources (e.g., in the form of increased assessments) to address a 
failure of a carrying broker-dealer.
    The proposed amendments may result in increased compliance costs 
for the affected carrying broker-dealers. To the extent that each 
customer or PAB reserve computation takes a significant amount of time 
or involves manual processes, affected carrying broker-dealers would 
experience a one-time set up cost related to switching to a daily 
computation, as well as an increase in ongoing costs related to more 
frequent computations. These costs, like the aforementioned benefits, 
may ultimately be passed through to customers and PAB account holders 
of the affected carrying broker-dealers.
    Many of the benefits and costs discussed below are impracticable to 
quantify. For example, the Commission lacks data that would help it 
predict how enhanced customer protection related to daily customer and 
PAB reserve computations would affect customer and PAB account holders' 
activities in the accounts maintained by the affected carrying broker-
dealers and whether customers and PAB account holders of non-affected 
carrying broker-dealers would shift their capital to the affected 
carrying broker-dealers due to such increased protections; data that 
would help the Commission estimate how carrying broker-dealers near the 
proposed $250 Million Threshold may adjust their business activities as 
a result of the proposed changes; and data on the complexity of 
customers' and PAB account holders' activities for different carrying 
broker-dealers that

[[Page 45849]]

would help the Commission estimate the potential costs for various 
groups of the affected carrying broker-dealers. While the Commission 
has attempted to quantify economic effects where possible, much of the 
discussion of economic effects is qualitative in nature. The Commission 
seeks comment on all aspects of the economic analysis, especially any 
data or information that would enable a quantification of the 
proposal's economic effects.

B. Baseline

1. Regulatory Baseline
a. Rule 15c3-3
    Carrying broker-dealers are broker-dealers that maintain custody of 
customer securities and cash. Rule 15c3-3, known as the broker-dealer 
customer protection rule, is designed to give specific protection to 
customer funds and securities. For example, a broker-dealer is 
``virtually'' precluded from using customer funds to buy securities for 
its own account.\107\
---------------------------------------------------------------------------

    \107\ See section I.B.1. of this release (describing the 
purposes of Rule 15c3-3).
---------------------------------------------------------------------------

    The current rule specifies that a carrying broker-dealer must 
undertake two primary steps to safeguard these customer assets. First, 
carrying broker-dealers are required to maintain physical possession or 
control over customers' fully paid and excess margin securities.\108\ 
Second, a carrying broker-dealer must maintain a reserve of funds and/
or qualified securities in an account at a bank that is at least equal 
in value to the net cash owed to customers. The account must be a 
customer reserve bank account. The amount of net cash owed to customers 
is computed weekly as of the close of the last business day of the week 
pursuant to the customer reserve computation.\109\ If credit items 
exceed debit items, the net amount must be on deposit in the customer 
reserve bank account in the form of cash and/or qualified 
securities.\110\ A carrying broker-dealer also is required to make and 
maintain a record of each computation.\111\
---------------------------------------------------------------------------

    \108\ See section I.B.1. of this release (describing possession 
and control requirements for customers' securities).
    \109\ Some carrying broker-dealers choose to perform a daily 
computation. See 17 CFR 240.15c3-3(e)(3)(iv). Further, the rule 
permits carrying broker-dealers in certain limited circumstances to 
perform a monthly computation. See 17 CFR 240.15c3-3(e)(3)(i). See 
also section I.B.1. of this release (describing the customer reserve 
bank account and customer reserve computation).
    \110\ 17 CFR 240.15c3-3(e). See also section I.B.1. of this 
release (describing the customer reserve bank account and customer 
reserve computation).
    \111\ See 17 CFR 240.15c3-3(e)(3)(v). Each record must be 
preserved in accordance with Rule 17a-4. Id.
---------------------------------------------------------------------------

    Carrying broker-dealers also may carry accounts that hold 
proprietary securities and cash of other broker-dealers, known as PAB 
accounts.\112\ Broker-dealers are not within the definition of 
``customer'' for purposes of Rule 15c3-3. The definition of 
``customer'' in SIPA, however, is broader than the definition in Rule 
15c3-3 in that the SIPA definition includes broker-dealers. As 
discussed in more detail in section I.B.3. of this release, broker-
dealers--as customers under SIPA--have the right to share equally with 
other customers in the customer property in a SIPA liquidation in the 
event that there is a shortfall in the amount the broker-dealer owes 
its customers. Because broker-dealers are entitled to a pro rata share 
of customer property,\113\ Rules 15c3-3 and 15c3-3a require carrying 
broker-dealers to: (1) perform a PAB reserve computation in addition to 
the customer reserve computation; \114\ (2) establish and fund their 
PAB reserve bank account; and (3) obtain and maintain physical 
possession or control of non-margin securities carried for a PAB 
account holder.\115\
---------------------------------------------------------------------------

    \112\ See section I.B.2. of this release (describing Rule 15c3-3 
and PAB accounts).
    \113\ See section I.B.3. of this release (describing broker-
dealer liquidations and SIPA).
    \114\ See section I.B.1. of this release (describing Rule 15c3-3 
and customer accounts).
    \115\ See section I.B.2. of this release (describing Rule 15c3-3 
and PAB accounts).
---------------------------------------------------------------------------

b. SIPA and the SIPC Fund
    As described in section I.B.3. of this release, SIPA established 
SIPC and directed SIPC to establish the SIPC Fund.\116\ At the end of 
2022, SIPC reported 3,396 members.\117\ The SIPC Fund totaled 
approximately $4.05 billion as of December 31, 2022, and currently the 
objective is to build it to a level of $5 billion. To date, SIPC has 
carried out 330 liquidations since its inception with approximately 
$142 billion in assets distributed to customers.\118\ Of that, about 
$141.2 billion came from debtors' estates (i.e., SIPC broker-dealer 
members' estates), while $917 million came from the SIPC Fund.\119\
---------------------------------------------------------------------------

    \116\ See 15 U.S.C. 78ccc(a)(1) and 78ddd(a)(1).
    \117\ See 2022 SIPC Annual Report, Table 2, at 10.
    \118\ As of the end of 2022. See section I.B.3. of this release, 
describing broker-dealer liquidations and SIPA. The volume of 
proceedings was highest in the 1970s (15 per year), while between 
1980 and 2003 the number averaged about seven per year. Since 2003 
the average has been one per year (with the highest number, five, 
occurring in 2008, while there were 10 years with none). See 2022 
SIPC Annual Report, Figure 1, at 8.
    \119\ See 2022 SIPC Annual Report at 8-9, for the statistics in 
this paragraph. SIPC refers to distributions to customers as 
``advances,'' though the 2022 SIPC Annual Report does not detail the 
timing of those advances in the 330 proceedings.
---------------------------------------------------------------------------

c. Reserve Account Requirement for Security-Based Swaps
    In 2019, the Commission adopted customer segregation requirements 
for broker-dealers and SBSDs with respect to customer money, 
securities, and property related to security-based swaps.\120\ These 
requirements were based in part on the requirements of Rules 15c3-3 and 
15c3-3a discussed above.\121\ Under these requirements, broker-dealers 
(including broker-dealers that are also SBSDs) are required to perform 
a separate weekly security-based swap customer reserve computation and 
have a separate security-based swap customer reserve account that must 
hold the net amount of cash owed to security-based swap customers.\122\
---------------------------------------------------------------------------

    \120\ See SBS Segregation Adopting Release. See also section 
III. of this release (discussing reserve account requirements for 
security-based swaps).
    \121\ Id. See also sections I.B.1. and I.B.2. of this release 
(discussing the requirements of Rules 15c3-3 and 15c3-3a).
    \122\ See 17 CFR 240.15c3-3(p); 17 CFR 240.15c3-3b. See also 
section III. of this release (discussing reserve account 
requirements for security-based swaps, and SBS FAQ 1 for staff 
views). SBSDs that are not broker-dealers (other than OTC 
derivatives dealers) are subject to the segregation requirements of 
Exchange Act Rules 18a-4 and 18a-4a.
---------------------------------------------------------------------------

2. Affected Broker-Dealers
    Table 2 presents the universe of broker-dealers by presence of 
carrying activities.\123\ As of December 2022, 156 broker-dealers 
identified in Line 40 of the FOCUS Report that they carry their own 
customer accounts. Among these, 65 reported having only customer 
credits, 66 reported having both customer and PAB credits, none 
reported having only PAB credits,\124\ and 9 broker-dealers reported 
having no customer credits or debits. Further, 16 broker-dealers 
reported having exemptions from the requirements of Rule 15c3-3, 
including performing a customer reserve computation.\125\ In

[[Page 45850]]

addition, 31 broker-dealers that did not identify themselves as those 
that carry their own customer accounts in Line 40 of the FOCUS Report 
reported customer and/or PAB credits in their customer or PAB reserve 
computations. Among these, four broker-dealers had both customer and 
PAB credits, 26 broker-dealers had customer credits only, and one 
broker-dealer had PAB account credits only.
---------------------------------------------------------------------------

    \123\ Based on monthly FOCUS Report data for the reporting year 
2022. The Commission assumes that broker-dealers that did not file 
FOCUS Reports for the last month of 2022 are no longer in business.
    \124\ PAB account holders are not considered customers under 17 
CFR 240.15c3-3(a)(1). See section I.B.2. of this release (describing 
Rule 15c3-3 and proprietary accounts of broker-dealers).
    \125\ There are three exemptions to Rule 15c3-3, each related to 
the procedure a broker-dealer follows when they receive customer 
funds and securities. The first exemption is for broker-dealers that 
partake in limited mutual fund and insurance-related business. The 
exemption allows such firms to briefly handle customer funds, but 
not maintain indefinite custody of those funds or securities. The 
second exemption applies to broker-dealers that clear their 
transactions on what is known as a ``receive versus payment/delivery 
versus payment (RVP/DVP) basis.'' In an RVP/DVP settlement, a 
broker-dealer executes simultaneous exchanges of an equal value of 
funds for securities. As such, the broker-dealer does not end up 
holding any residual customer funds or securities. The third 
exemption is also available to broker-dealers that temporarily 
handle customer funds. This broker-dealer, called an ``introducing 
broker,'' establishes accounts in the name of its customers at 
another broker-dealer, a ``clearing broker.'' The clearing broker 
then maintains custody of those customers' cash and securities in 
those accounts on a fully disclosed basis. See 17 CFR 240.15c3-3(k).
---------------------------------------------------------------------------

    When the Commission computes average total credits using data for 
January 2022 through December 2022, the Commission estimates that there 
are 187 broker-dealers (``carrying broker-dealers'') that currently 
fall within the scope of the Rule 15c3-3 (though of this group, 25 
carrying broker-dealers reported zero customer or PAB credits in 2022). 
In aggregate, these carrying broker-dealers hold approximately 87 
percent of all broker-dealer assets,\126\ and report approximately $1.2 
trillion in total credits and approximately $0.92 trillion in average 
monthly total debits, as of December 2022.\127\
---------------------------------------------------------------------------

    \126\ Total assets are reported on Line 940 of the FOCUS Report.
    \127\ The Commission uses monthly FOCUS Reports to calculate 
total credits and total debits. For each broker-dealer, Total 
Credits are calculated as the sum of customer credits reported on 
Line 4430 and the PAB credits reported on Line 2170. Similarly, for 
each broker-dealer, Total Debits are calculated as the sum of the 
customer debits reported on Line 4472 and the PAB debits reported on 
Line 2230.

                              Table 1--Broker-Dealers by Carrying Activity, 2022 a
----------------------------------------------------------------------------------------------------------------
                                                                  Total credits, $B         Total debits, $B
                                                    Total    ---------------------------------------------------
        Broker-dealer type             Number    assets,  $B    Monthly                   Monthly
                                                                average      Year-end     average      Year-end
----------------------------------------------------------------------------------------------------------------
Carrying its own customer                   156      4,487.7      1,306.9      1,177.0      1,024.3        913.6
 accounts:........................
    --with positive customer and             66      3,982.3      1,261.2      1,138.5        982.8        879.4
     PAB credits..................
    --with positive customer                 65        446.8         45.7         38.5         41.5         34.3
     credits only.................
    --with zero reported credits..            9         54.5            0            0            0            0
    --with reporting exemptions...           16          4.1  ...........  ...........  ...........  ...........
Not carrying its own customer                31         58.0         22.6         20.5          4.2          3.8
 accounts:........................
    --with positive customer and              4          8.0          0.3          0.1          0.3          0.1
     PAB credits..................
    --with positive customer                 26         49.7         22.3         20.4          3.8          3.7
     credits only.................
    --with positive PAB credits               1          0.4         0.01         0.01         0.02         0.01
     only.........................
Without any carrying activities...        3,411        694.0  ...........  ...........  ...........  ...........
                                   -----------------------------------------------------------------------------
        Total.....................        3,598      5,239.7      1,329.5      1,197.5      1,028.5        917.4
----------------------------------------------------------------------------------------------------------------
\a\ Data are for calendar year 2022. The Commission uses monthly FOCUS Reports to calculate average monthly
  total credits and total debits. For each broker-dealer, Total Credits are calculated as the sum of the average
  monthly amount of customer credits reported on Line 4430 and the average monthly amount of PAB credits
  reported on Line 2170. Similarly, for each broker-dealer, Total Debits are calculated as the sum of the
  average monthly amount of customer debits reported on Line 4472 and the average monthly amount of PAB debits
  reported on Line 2230.

    Table 3 displays the broker-dealers that reported positive customer 
or PAB credits in 2022 into groups based on the size of their average 
monthly total customer and PAB credits (averaged over January 2022 to 
December 2022).\128\
---------------------------------------------------------------------------

    \128\ The grouping is based on the average monthly amount of 
customer credits reported on Line 4430 and the average monthly 
amount of PAB credits reported on Line 2170.

                                         Table 2--Carrying Broker-Dealers by Size of Average Total Credits, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Total      Total customer credits, $MM         Total PAB credits, $MM       Total credits, $MM
                                              Number     assets  ---------------------------------------------------------------------------------------
                                                          ($B)      Number      Mean      Median     Number      Mean      Median      Mean      Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM.................................         81      127.1         81       14.8        2.1         18        0.4          0       15.3        2.4
$100-250MM................................         18        101         18      133.3      120.3         12        4.3          0      137.6      128.6
$250-500MM................................          8      148.1          8      374.7      394.9          3        8.6          0      383.3      401.1
$500MM-1B.................................          9      206.6          9      593.8      566.5          7       98.0       29.6      691.8      667.6
$1-5B.....................................         18      352.5         18     2056.7     1868.1         16      127.5        2.9     2184.2     1871.4
$5-10B....................................          7      189.7          7     5779.7     5352.5          7      820.0       62.3     6599.6     5892.1
>=$10B....................................         21     3362.1         21    51312.0    23941.5         19     7307.7       84.5    58619.8    29261.2
                                           -------------------------------------------------------------------------------------------------------------
    Total \a\.............................        162    4,487.1        162    7,203.5       84.7         82    1,003.5        0.0    8,207.0       95.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Table excludes carrying broker-dealers with zero reported credits in 2022.

    The proposed daily computation would apply only to carrying broker-
dealers whose average total credits are above the proposed $250 Million 
Threshold. Therefore, the Commission estimates that, based on data for 
January 2022 through December 2022, the scope of affected entities was 
63 carrying broker-dealers, which held 86.4 percent of aggregate total 
credits of all carrying broker-dealers.
    The number of affected carrying broker-dealers may vary month to 
month since a 12-month rolling average is used for the proposed $250 
Million Threshold. To provide information on how the number of entities 
may thus vary over time, Figure 1 displays the number of affected 
broker-dealers for a sequence of 12-month rolling averages

[[Page 45851]]

beginning with January 2022 and extending through May 2023.\129\
---------------------------------------------------------------------------

    \129\ Figure created from monthly FOCUS Reports, from January 
2022 through May 2023. The first 12-month computation period is 
January 2022 to December 2022, the second period is February 2022 
through January 2023, and so on. The total number of broker-dealers 
that reported positive total credits in each of the six rolling 
periods shown in Figure 1 equaled 162, 162, 161, 161, 162 and 162, 
respectively.
[GRAPHIC] [TIFF OMITTED] TP18JY23.005

    As shown in Figure 1, the number of affected carrying broker-
dealers varied monthly from 60 to 63 over the period from January 2022 
through May 2023. There was little variation, however, in the identity 
of the affected carrying broker-dealers. The same fifty-nine carrying 
broker-dealers met the threshold in each month, and from one to four 
additional broker-dealers met the threshold in any given month. In 
total, over this period, 63 different carrying broker dealers would 
have been affected.\130\
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    \130\ Only in one case did a carrying broker-dealer within the 
top-60 fall below the $250 Million Threshold from one period to the 
next (leading to the decline from 63 to 62 carrying broker-dealers).
---------------------------------------------------------------------------

    With respect to the frequency of computation, based on the January 
2022 to December 2022 period (12-month period), Table 4 displays the 
number of broker-dealers performing their computations daily, weekly, 
and monthly in each size category for average total credits.\131\
---------------------------------------------------------------------------

    \131\ Data from monthly FOCUS Reports filed for the 2022 
calendar year. A small number of broker-dealers did not identify any 
customer or PAB reserve computation frequency (for example, for 
broker-dealers reporting positive credits in customer accounts, one 
failed to report reporting frequency in their FOCUS Report). 
Therefore, the total number of carrying broker-dealers exceeds the 
sum of the number of broker-dealers who identified a daily, weekly, 
or monthly computation frequency. Of the carrying broker-dealers 
that reported a filing frequency in 2022 calendar year, the reported 
frequency (daily, weekly, or monthly) remained the same in each 
reported month.

                                                  Table 3--Reserve Formula Computation Frequency, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Customer reserve formula                           PAB reserve formula
            Average total credits               Number   -----------------------------------------------------------------------------------------------
                                                            Number       Daily      Weekly      Monthy      Number       Daily      Weekly      Monthly
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM...................................          81          81           1          67          12          18           0          17           1
$100-250MM..................................          18          18           0          18           0          12           0          12           0
$250-500MM..................................           8           8           0           8           0           3           0           3           0
$500MM-1B...................................           9           9           0           9           0           7           0           7           0
$1-5B.......................................          18          18           1          17           0          16           1          15           0
$5-10B......................................           7           7           0           7           0           7           0           7           0
>=10B.......................................          21          21          10          11           0          19           9          10           0
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................         162         162          12         137          12          82          10          71           1
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 45852]]

    As shown in Table 4, out of 162 broker-dealers that reported the 
frequency of their customer reserve formula computations, there were 12 
carrying broker-dealers that performed the customer reserve computation 
daily, among which 10 also performed the PAB reserve computation daily 
and two which do not report carrying PAB accounts. Among carrying 
broker-dealers performing the customer reserve computation daily, 11 
had total credits above the proposed $250 Million Threshold. These 11 
carrying broker-dealers accounted for 64 percent of the total amount of 
average total credits among all carrying-broker dealers with positive 
customer or PAB credits reported in 2022.\132\ All the carrying broker-
dealers performing the PAB reserve computation daily had total credits 
above the proposed $250 Million Threshold.\133\
---------------------------------------------------------------------------

    \132\ Calculated from monthly FOCUS Reports for 2022.
    \133\ The broker-dealers identified as filing daily in the 
January 2022 to December 2022 sample were the same broker-dealers 
identified in the April 2022 to May 2023 sample (for both customer 
and PAB accounts).
---------------------------------------------------------------------------

    Based on the January 2022 to December 2022 period, there were 52 
carrying broker-dealers with average total credits equal to $250 
million or above performing the customer reserve computation weekly and 
there were no carrying broker-dealers with average total credits equal 
to $250 million or above performing the customer reserve computation 
monthly. Among the 52 carrying broker-dealers performing weekly 
customer reserve computation, there were 42 carrying broker-dealers 
that performed the PAB reserve computation weekly and there were no 
carrying broker-dealers with average total credits equal to $250 
million or above that performed the PAB reserve computation monthly. 
Based on the data for 2022, the Commission estimates that 52 carrying 
broker-dealers would be affected by the proposal.
    Table 5 below shows the distribution of deposits required to be put 
into the customer and PAB reserve bank accounts or permitted 
withdrawals after the reserve computation performed at the end of the 
reporting period relative to the initial reserve bank account 
balance.\134\ These metrics provide a picture of the ``mismatch'' that 
occurs with respect to customer and PAB accounts. The column ``Average 
Mismatch'' is calculated as the average of deposits (averaged over 
2022) for each broker-dealer relative to the average balance in the 
reserve account (customer or PAB account).
---------------------------------------------------------------------------

    \134\ Calculated from monthly FOCUS Reports for 2022. The 
Commission isolated deposits (equal to or greater than zero) from 
any month (Line 4520), relative to the reserve account balance, 
(Line 4530). For PAB reserve bank accounts, deposits and amount in 
reserve account are FOCUS Lines 2290 and 2300, respectively. Note, 
the Commission also recalculated by defining the deposit category as 
only values greater than zero, but the average mismatch did not 
change very much for each category, nor did the pattern seen in the 
table.
---------------------------------------------------------------------------

    With respect to customer reserve accounts, shown in Panel A, the 
largest average mismatches occurred for broker-dealers over the $250 
Million Threshold, with the largest occurring for carrying broker-
dealers within the $5 to $10 billion range. For the case of the maximum 
mismatch during the year, there appears to be less of a correlation 
with carrying broker-dealer size.\135\ For PAB reserve accounts, shown 
in Panel B, the largest average mismatch and the maximum mismatch 
occurred for the groups of carrying broker-dealers over $250 million in 
average total credits (it is also the case that the total amount of PAB 
accounts are concentrated among those carrying broker-dealers).
---------------------------------------------------------------------------

    \135\ For the maximum mismatch, the Commission isolated the 
largest monthly deposit amount in 2022 (Line 4520), relative to the 
reserve account balance for that month (Line 4530). The same was 
done for PAB reserve accounts (FOCUS Lines 2290 and 2300, 
respectively).
---------------------------------------------------------------------------

    Panel C and D of Table 5 display the average mismatch and maximum 
mismatch metrics comparing the large carrying broker-dealers (over $1 
billion in average total credits) that currently compute their reserve 
accounts daily versus those that do so weekly.\136\ With respect to 
customer reserve accounts (Panel C), carrying broker-dealers that 
compute daily have larger average reserve balances and deposits, and 
lower average and maximum mismatches than those that compute 
weekly.\137\
---------------------------------------------------------------------------

    \136\ As noted above, the number and identity of the daily 
filers are consistent from December 2022 through May 2023. See supra 
note 133.
    \137\ Panel C omits the one carrying broker-dealer below the 
$250 Million Threshold that computed their customer reserve account 
daily in 2022.
---------------------------------------------------------------------------

    For PAB reserve accounts (Panel D), the average or maximum mismatch 
do not appear as correlated with daily versus weekly filing.\138\
---------------------------------------------------------------------------

    \138\ The patterns and inference drawn from Table 5 are similar 
if constructed with the rolling sample period from June 2022 to May 
2023. For example, for the daily filers shown in Panel C, the 
average mismatch is 4.9 percent, while for weekly filers, the 
average mismatch is 14.6 percent.

                               Table 4--Broker-Dealer Deposits and Withdrawals as a Share of Reserve Account Balance, 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Average
                  Broker-dealer group                       Number          reserve         Average          Average          Average         Maximum
                                                                          balance MM      deposit MM      withdrawal MM     mismatch %      mismatch %
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Panel A: Customer Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM.............................................              81            $9.5            $0.7             -$4.1             6.1            25.2
$100-250MM............................................              18            52.7             1.9             -16.2             5.7            27.1
$250-500MM............................................               8           180.8             9.9             -16.0             6.1            20.9
$500MM-1B.............................................               9           124.2             7.7             -32.2            18.2            35.9
$1-5B.................................................              18             732            35.8             -61.4             5.4            22.5
$5-10B................................................               7         1,147.2             234            -122.4            31.9            57.4
[gteqt]10B............................................              21        14,150.6           542.3            -841.6             7.9            25.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Panel B: PAB Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100 MM............................................              18             1.2            0.03              -0.3             2.9            18.7
$100-250 MM...........................................              12             5.3             0.3              -2.9             2.3            10.4
$250-500 MM...........................................               3            19.9             1.3              -5.3             5.2            24.7
$500MM-1 B............................................               7           106.5             4.5             -27.3            11.4            41.1
$1-5 B................................................              16            27.9             5.5             -20.4             7.7              44
$5-10 B...............................................               7           184.5            56.2            -108.6            10.4              39
[gteqt]10 B...........................................              19           749.1           127.4            -279.9             7.6            29.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 45853]]

 
                                                           Panel C: Customer Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
All (weekly and daily):
    >=1B..............................................              46         6,921.1           297.2            -441.1            10.7            29.2
Daily:
    >=1B..............................................              11        13,324.2           482.3          -1,227.8             5.2            22.1
Weekly:
    >=1B..............................................              35         4,908.7             239            -178.9            12.4            31.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Panel D: PAB Reserve Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
All (weekly and daily):
    >=1B..............................................              42           380.3            69.1            -159.1             8.1            36.6
Daily:
    >=1B..............................................              10         1,153.7           216.8            -356.5             8.9            33.4
Weekly:
    >=1B..............................................              32           138.5            22.9             -74.5             7.9            37.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Benefits and Costs of the Proposed Amendments

    Customers and PAB account holders of the affected carrying broker-
dealers are expected to benefit from the proposed daily customer and 
PAB reserve computations. As reflected in the discussion in section I.C 
of this release noting the large amounts of deposits carrying broker-
dealers may receive, and as evidenced from the information in Table 5, 
a weekly customer and PAB reserve computation can result in a carrying 
broker-dealer owing a net amount of cash to customers or PAB account 
holders for a number of days that is greater than the current amounts 
deposited into the customer and PAB reserve bank accounts. Hence, if a 
carrying broker-dealer fails before the next reserve account 
computation and the reserve bank account balances do not represent the 
actual net amount of cash owed to customers or PAB account holders, 
these customers and PAB account holders may be at risk of not 
recovering their funds from the carrying broker-dealer or having it 
tied up in a liquidation proceeding. Performing daily customer and PAB 
reserve computations would likely decrease this risk.
    Under the scenario where a carrying broker-dealer does not have 
sufficient funds to repay what it owes to customers or PAB account 
holders, SIPC likely would need to initiate a liquidation of the 
carrying broker-dealer under SIPA.\139\ Although the SIPC Fund can be 
used to advance funds to customers that are owed money, PAB account 
holders are not entitled to such advances; therefore, they may not 
receive the funds owed to them by a failed carrying broker-dealer as 
promptly as customers of such broker-dealer may. In addition, there is 
a limit on advances to customers in the amount of $500,000 per customer 
(of which $250,000 can be used to cover cash claims). If some customers 
are owed more than such limit, these customers would have to wait along 
with PAB account holders until a trustee is appointed who would 
consequently attempt to recover assets of the failed carrying broker-
dealer via asset sales or other recovery methods. This recovery process 
may, in some cases, be lengthy.\140\ In an extreme case, the recovery 
amounts the trustee is able to receive may still be insufficient to 
make all customers and PAB account holders whole, which means that 
these customers and PAB account holders have to absorb the loss.
---------------------------------------------------------------------------

    \139\ See section I.B.3 of this release (discussing broker-
dealer liquidations and SIPA).
    \140\ For example, it has been the case that customers of a 
liquidated carrying broker-dealer have had to wait up to six months 
or more to access their assets during the liquidation period. See 
Michael P. Jamroz, The Customer Protection Rule, 57 Bus. Law. 1069 
(May 2002), available at https://www.jstor.org/stable/40688076.
---------------------------------------------------------------------------

    Based on these various circumstances surrounding a failure of a 
carrying broker-dealer, from the customer's or PAB account holder's 
perspective, there are varying degrees of risk related to a potential 
failure of a carrying broker-dealer, depending on whether it has enough 
funds to make all customer and PAB account holders whole at the time of 
its failure. Therefore, maintaining levels of customer and PAB reserve 
bank account balances that more closely represent the actual amounts of 
net cash owed to customers and PAB account holders would benefit these 
customers and PAB account holders by decreasing the risk of not 
completely recovering their funds from the carrying broker-dealer or 
having these funds tied up in a liquidation proceeding.\141\
---------------------------------------------------------------------------

    \141\ The Commission notes that, with daily computing, there 
will still be a mismatch between the actual net cash owed to 
customers and the reserve account balance because of the deposit 
timing delay, which is the morning of the second business day after 
the day of calculation. Should a carrying broker-dealer computing 
daily fail, and the amount of the mismatch is lower than in the case 
of a weekly computation, the customer may receive their funds more 
promptly from the carrying broker-dealers' available assets than in 
the case where mismatches are larger (which may imply a longer 
liquidation process), underscoring the potential benefit from daily 
computing. It is also a possibility, however, that daily computing 
may lead to a situation with large mismatches. If a carrying broker-
dealer receives large customer deposits on consecutive days, given 
the two-day settlement period, any mismatch may persist over that 
period, and should the carrying broker-dealer fail, the benefits to 
customers of daily computation may be reduced.
---------------------------------------------------------------------------

    In addition, performing daily customer and PAB reserve computations 
would benefit customers and PAB account holders of the affected 
carrying broker-dealers by acting as a prophylactic that reduces the 
risk of broker-dealers using customers' or PAB account holders' funds 
for other purposes that are not permissible under Rule 15c3-3, if the 
part of the net cash owed to customers or PAB account holders is 
comingled with other funds in a broker-dealer's operating account.\142\ 
When a carrying broker-

[[Page 45854]]

dealer experiences a large inflow of customer cash, reducing the time 
between that inflow and when the carrying broker-dealer performs its 
next customer and PAB reserve computations and funds its reserve 
accounts could reduce the risk that those funds may be inadvertently 
used for other purposes that may carry a risk to the customers and PAB 
account holders. Under the proposal, the affected carrying broker-
dealers would not be able to do this, which would reduce the risk of 
reserve fund mismatches.
---------------------------------------------------------------------------

    \142\ The Commission notes that, with respect to each customer 
reserve computation required pursuant to Rule 15c3-3, a broker-
dealer must not accept or use any of the amounts under items 
comprising total credits under the customer reserve formula except 
for the specified purposes indicated under items comprising total 
debits under the formula. See paragraph (e)(2) of Rule 15c3-3. 17 
CFR 240.15c3-3(e)(2).
---------------------------------------------------------------------------

    Other broker-dealers that are SIPC members may also benefit from 
the proposed daily computation of the customer and PAB reserve 
formulas. Specifically, if a failing carrying broker-dealer with a 
mismatch between the reserve bank account balances and actual cash owed 
to customers and PAB account holders is put into SIPC liquidation, SIPC 
may be required to use the SIPC Fund to advance money to customers from 
the SIPC Fund, reducing its balance and potentially depleting the SIPC 
Fund.\143\ Consequently, a reduction in the SIPC Fund balance and/or 
SIPC's unrestricted net assets may trigger increased contributions from 
member broker-dealers, as displayed in Table 1 in section I.B.3. of 
this release, with more substantive balance reductions requiring larger 
increases in assessments of member broker-dealers, which may be passed 
onto investors. Therefore, the proposed daily computation would benefit 
SIPC member broker-dealers by reducing the risk of SIPC Fund depletion 
and a consequent increase in SIPC assessments.
---------------------------------------------------------------------------

    \143\ The Commission notes that, while broker-dealers (which 
includes PAB account holders) are customers for the purposes of 
SIPA, they are not entitled to the advances from the SIPC Fund of up 
to $500,000 (limited to $250,000 for cash claims) allowed under SIPA 
to make up for potential shortfalls after the pro rata distribution 
of customer property. See 15 U.S.C. 78fff-3(a).
---------------------------------------------------------------------------

    The proposed daily computation would apply only to carrying broker-
dealers whose average total credits exceed the $250 Million Threshold. 
Given the information from the 12-month average based on the 2022 
monthly FOCUS Reports as an example, the Commission estimates that 52 
broker-dealers would be required to switch to a daily computation of 
the customer reserve formula and 42 broker-dealers would be required to 
switch to a daily computation of the PAB reserve formula.\144\ As shown 
in Table 5, carrying broker-dealers with average total credits above 
the proposed $250 Million Threshold are more likely to experience 
larger mismatches and the dollar amounts underlying those mismatches 
are significantly larger.\145\ And as shown in Panel C of Table 5, 
those carrying broker-dealers that compute daily tend to have smaller 
mismatches than those that compute weekly. Hence, the proposal may 
reduce the likelihood of mismatches, benefitting customers and PAB 
account holders of the affected carrying broker-dealers.
---------------------------------------------------------------------------

    \144\ See Table 3.
    \145\ See discussion in section IV.B.2. of this release for more 
details on Table 5.
---------------------------------------------------------------------------

    Further, in cases where carrying broker-dealers with greater 
amounts of total credits are more interdependent with other carrying 
broker-dealers than carrying broker-dealers with smaller amounts of 
total credits, having more large broker-dealers computing daily may 
benefit financial markets overall without imposing the costs of daily 
computation onto carrying broker-dealers that do not have significant 
amounts of total credits. To the extent that carrying broker-dealers 
above the threshold are more likely to have more PAB account holders 
(which include other broker-dealers) or PAB account holders with 
greater amounts of cash in their PAB accounts, the broker-dealers above 
the threshold may pose greater risk to other broker-dealers. As shown 
in Table 3, among the 63 carrying broker-dealers above the proposed 
$250 Million Threshold, based on data for January 2022 through December 
2022, approximately 82.5 percent carry PAB accounts while only 
approximately 26.6 percent of the unaffected broker-dealers carry PAB 
accounts.
    That is, should a carrying broker-dealer fail and not have 
sufficient funds in its PAB reserve bank account to make whole its PAB 
account holders, a broker-dealer that is a PAB account holder of the 
failed carrying broker-dealer may consequently be exposed to financial 
stress, which could further propagate to its PAB account holders, and 
so on. This risk is exacerbated for PAB account holders because they 
are not entitled to advances from the SIPC Fund. In that way, a failure 
of one large carrying broker-dealer with a mismatched PAB reserve bank 
account may result in other carrying broker-dealers experiencing 
financial stress and increased risk of liquidation. In so far as a 
daily computation for carrying broker-dealers with total credits above 
the $250 Million Threshold reduces the chance that a large carrying 
broker-dealer has mismatched funds in its PAB reserve bank account, the 
potential for stress propagation associated with a failure of a 
carrying broker-dealer could be reduced.
    Affected broker-dealers may experience an increase in costs as a 
result of the proposed daily computation. The Commission expect these 
costs to be primarily related to the operational changes, staff 
increases, and upgrades required for daily computing and the costs 
related to the recordkeeping requirements. The Commission estimates 
that it takes a carrying broker-dealer between one to five hours per 
computation to prepare the records of the computations, or an average 
of 2.5 hours.\146\ Given the 52 carrying broker-dealers that would be 
required to switch to a daily computation of the reserve formulas under 
the proposal, that implies an increase in the aggregate annual 
recordkeeping burden of approximately $13 million.\147\ To the extent 
that carrying broker-dealers with total credits above the $250 Million 
Threshold may experience economies of scale and may have more 
sophisticated operational systems, with experienced and well-trained 
staff,\148\ the increase in compliance costs may not be substantial. In 
addition, the 11 carrying broker-dealers that already perform such 
computations daily (as shown in Table 4, based on data for the period 
for January 2022 through December 2022) may not experience an increase 
in compliance costs.
---------------------------------------------------------------------------

    \146\ See infra section V. of this release (discussing PRA).
    \147\ Id. The Commission assumed an hourly rate of $295 per hour 
for a ``financial reporting manager.'' That computes to a potential 
added cost of $13,726,350 ($295 x 46,530 hours) to the affected 
carrying broker-dealers.
    \148\ See related discussion in Stavros Gadinis, The SEC and the 
Financial Industry: Evidence from Enforcement Against Broker-
Dealers, 67 Bus. Law. 679 (May 2012), available at https://www.jstor.org/stable/2324001.
---------------------------------------------------------------------------

    However, to the extent that the affected carrying broker-dealers 
that are just above the threshold do not experience the same economies 
of scale as carrying broker-dealers that are well above the threshold, 
they may be disproportionately affected by the proposed requirement and 
the related costs. If these costs are significant, some carrying 
broker-dealers may decide to alter their business to fall below the 
threshold and avoid the costs related to performing the customer and 
PAB reserve computations daily. If so, the potential benefits of the 
proposal may be mitigated.

[[Page 45855]]

    Carrying broker-dealers just below or above the threshold may also 
experience uncertainty related to being scoped into compliance with the 
daily computation requirement and may experience costs related to this 
uncertainty. As displayed in Figure 1, some carrying broker-dealers are 
likely to drop below the $250 Million Threshold, and then once again 
exceed the threshold in later months. The costs related to these 
fluctuations are uncertain, but are likely to add, for such carrying 
broker-dealers, to the cost estimates cited above (for example, if 
additional staff is needed by these carrying broker-dealers to monitor 
their customer reserve accounts more closely than firms well above the 
$250 Million Threshold).
    Finally, while switching back and forth between daily and weekly 
computations may tailor the compliance costs to the size of customer 
activity, these fluctuations may also be confusing for customers and 
PAB account holders of carrying broker-dealers who decide to switch. 
However, this potential cost or concern may be trivial as many 
customers may be unaware of, or unconcerned by, the switch.

D. Effects on Efficiency, Competition, and Capital Formation

    The proposed amendments may affect competition among carrying 
broker-dealers. First, to the extent that compliance costs would be 
passed onto customers and PAB account holders, affected carrying 
broker-dealers that experience greater economies of scale may become 
more competitive than other affected carrying broker-dealers. Second, 
to the extent that customers of carrying broker-dealers value daily 
reserve computations more than the weekly computations, the affected 
carrying broker-dealers may become more competitive relative to the 
unaffected carrying broker-dealers. However, the Commission does not 
anticipate such an effect to be large. Given the fact eleven carrying 
broker-dealers already compute daily, if such a competitive advantage 
existed, and carrying broker-dealers performing weekly computations 
were losing customers, then more carrying broker-dealers would have 
likely already converted to daily computing.
    The proposed amendments may increase liquidity in the securities 
markets, as they would promote confidence in the broker-dealer industry 
and result in an increase of customer and PAB account activities. As a 
consequence, market efficiency and capital formation in the underlying 
markets may increase. Under the baseline there is a greater chance of a 
larger mismatch with weekly reserve computations than with daily 
reserve computations, suggesting a greater risk in doing business with 
a carrying broker-dealer that performs its customer and PAB reserve 
computations weekly. Also, to the extent that the mismatch reflects an 
overfunding, there may also be a greater cost to the carrying broker-
dealer (and by extension its customers), since it ties up capital that 
the broker-dealer could have put to more productive use.
    Therefore, should customers and PAB account holders have a concern 
over mismatch in reserve bank accounts and potential failures affect 
market participants' willingness to expose themselves to broker-
dealers, there may be less capital committed to this market as 
otherwise. However, similar to the point above, if customers of 
carrying broker-dealers were aware and concerned of mismatches, the 
Commission might have already observed more carrying broker-dealers 
computing daily, in order to retain customers, than is currently the 
case under the baseline. Therefore, the Commission does not anticipate 
any effect on capital formation in this market to be significant.
    In addition, in so far as capital loss could arise in times of 
market stress due to an increased likelihood of carrying broker-dealer 
failures, market participants may become concerned with the possibility 
of not getting their cash promptly or not getting paid in full, in an 
event of a carrying broker-dealer failure and reduce their exposure to 
broker-dealers. To the extent that the proposed daily computation 
requirement alleviates this concern, the risk of flight of capital from 
securities markets may decrease during stressed market conditions and 
capital inflow during normal market conditions may increase.
    Finally, the proposed daily computation may benefit the affected 
carrying broker-dealers by increasing their operational efficiency. For 
example, in a scenario where customer reserve or PAB reserve accounts 
are over-funded, a carrying broker-dealer that performs a weekly 
computation cannot withdraw excess cash from the customer reserve bank 
account until the following reserve computation date, even if the value 
of the account exceeds the actual net cash owed to customers, exposing 
this carrying broker-dealer to operational inefficiency. A daily 
computation would permit the affected carrying broker-dealers to 
withdraw these excess funds in a timely manner and would allow them to 
manage their funds and operations more effectively. In this context, 
daily computation implies that a carrying broker-dealer's capital 
commitments are more efficiently employed.
    Since the proposed requirements do not impact the scope of 
information available to investors, the Commission does not anticipate 
effects on informational efficiency to be significant.

E. Reasonable Alternatives

1. Over-Funding of the Customer and PAB Reserve Bank Accounts
    As an alternative to daily computation requirements, the Commission 
could require an over-funding approach which would apply to the 
customer and PAB reserve bank accounts. For example, carrying broker-
dealers would perform the required reserve computations and deposits 
weekly and deposit a multiple of this amount (e.g., 105% or 110%) into 
the customer or PAB reserve bank account. Under this alternative 
approach, carrying broker-dealers would avoid an increase in compliance 
costs associated with a daily computation requirement (hence, this 
alternative would apply to carrying broker-dealers choosing weekly 
funding). Insofar as the compliance costs associated with the proposed 
daily computation would be passed onto customers and PAB account 
holders of the affected carrying broker-dealers, this alternative 
approach may be more beneficial for these customers and PAB account 
holders because it would not imply an operational change and compliance 
costs related to the customer and PAB reserve computation while 
offering extra protection for customers and PAB account holders.
    However, under this alternative the carrying broker-dealer would 
need to fund the excess with its own cash, which could result in 
funding costs, decreased liquidity, and opportunity costs from not 
being able to deploy this cash in the firm's business. As a result, 
requiring carrying broker-dealers to place extra cash in a customer or 
PAB reserve bank account may result in an operational efficiency 
decrease and potential reduction of carrying broker-dealers' profits, 
which may be passed onto customers, PAB account holders, and other 
stakeholders. In addition, this approach may not account for the actual 
net cash owed to customers and PAB account holders, if reserve bank 
account mismatches exceed the buffer that this alternative would 
require.
2. A Threshold Based on a Different Metric
    As an alternative, the Commission could set a threshold for 
compliance

[[Page 45856]]

with a daily computation requirement based on a different metric. For 
example, the Commission could set a threshold based on total assets of 
$1 billion or net capital of $50 million. A threshold based on such 
metrics may be more representative of the economies of scale that 
carrying broker-dealers experience and may better indicate a carrying 
broker-dealer's ability to comply with enhanced requirements without 
substantial increases in compliance costs that could ultimately be 
passed onto their customers.
    Based on the monthly 2022 FOCUS Reports, the Commission estimates 
that under the alternative threshold of $1 billion in total assets 80 
broker-dealers would be required to perform the customer and PAB 
reserve computations daily. Of the 63 carrying broker-dealers that are 
at or above the $250 Million Threshold for average total credits, three 
have total assets below $1 billion, while 20 broker-dealers below the 
$250 Million Threshold have total assets over $1 billion.
    With respect to a $50 million net capital threshold, 104 broker-
dealers would be required to perform the customer and PAB reserve 
computations daily. Of broker-dealers that are below $250 Million 
Threshold for average total credits, 24 have net capital exceeding $50 
million, while of the group above $250 Million Threshold for average 
total credits, three have net capital below $50 million.
    If the alternative states that the broker-dealer has over $1 
billion in total assets, or has over $50 million net capital threshold, 
105 broker-dealers would be required to perform the customer and PAB 
reserve computations daily.
    A drawback to this alternative is that some large broker-dealers 
with minimal amounts of carrying activity would bear the added cost of 
switching to a daily computation. For example, the group of 20 carrying 
broker-dealers below the $250 Million Threshold with $1 billion in 
assets or more, had a combined total of average total credits of 
approximately $1.5 billion as of the end of 2022. That amounted to only 
about 0.11 percent of average total credits for all broker-dealers for 
that year.\149\
---------------------------------------------------------------------------

    \149\ The numbers for this alternative do not change much if the 
rolling average is computed using the June 2022 to May 2023 period. 
See Table 7 below in section IV.E.6 of this release for those 
numbers.
---------------------------------------------------------------------------

3. Daily Computation Requirement for All Carrying Broker-Dealers
    As an alternative, the Commission could require the daily 
computation requirement to apply to all carrying broker-dealers (a 
``zero'' threshold). Under this alternative, a greater number of 
carrying broker-dealers would perform their customer and PAB reserve 
computations daily, which would benefit more customers and PAB account 
holders compared to the proposal. Specifically, under the zero 
threshold, 99 more carrying broker-dealers would experience the 
benefits and costs discussed in section IV.C. of this release (compared 
to the 63 affected based on the January 2022 to December 2022 period).
    Further, to the degree that carrying broker-dealers with smaller 
amounts of total credits are interdependent with other broker-dealer to 
the same degree as carrying broker-dealers with larger amounts of total 
credits, the zero-threshold approach may benefit all PAB account 
holders equally and potentially reducing the systemic risk to a greater 
degree relative to the proposal. The amount of credits held in the PAB 
reserve bank accounts of the 52 broker-dealers (with PAB accounts) 
above the $250 Million Threshold makes up approximately 99 percent of 
the total amount held in PAB reserve bank accounts (of the 82 broker-
dealers that reported carrying PAB accounts in 2022).\150\
---------------------------------------------------------------------------

    \150\ See Table 7 below in section IV.E.6 of this release for 
numbers based on the June 2022 to May 2023 period.
---------------------------------------------------------------------------

    In particular, in so far as a daily computation for all carrying 
broker-dealers reduces the chance that any carrying broker-dealer has 
funds in its PAB reserve bank account that are less than the net amount 
of cash owed to PAB account holders, the potential for stress 
propagation associated with a failure of a carrying broker-dealer could 
be reduced.
    However, this alternative would impose compliance costs on a 
greater number of carrying broker-dealers, which could be passed onto 
customers and PAB account holders. In addition, customer protection 
benefits may be outweighed by the reduction in operational efficiency 
of carrying broker-dealers with little customer and PAB account 
activity that may arise from disproportional dedication of resources 
towards a de minimus business activity. Relatedly, this alternative may 
also impose significant economic impact on small businesses.\151\
---------------------------------------------------------------------------

    \151\ See 5 U.S.C. 601 through 612.
---------------------------------------------------------------------------

4. A Higher or Lower Threshold for Daily Computation
    As an alternative, the Commission could have proposed a threshold 
higher or lower than $250 million in average total credits. Under these 
alternatives, fewer or more carrying broker-dealers would be required 
to perform their customer and PAB reserve computations daily. For 
example, if the threshold was set at $100 million, a total of 81 
broker-dealers would be scoped into the new requirements compared to 
the 63 under the proposal. Similarly, if the threshold was set at $1 
billion, only 46 broker-dealers would be scoped into the new 
requirements.\152\
---------------------------------------------------------------------------

    \152\ See Table 7 below in section IV.E.6 of this release for 
numbers based on the June 2022 to May 2023 period.
---------------------------------------------------------------------------

    For the case of the $100 million threshold, with more carrying 
broker-dealers computing daily, there would possibly be fewer broker-
dealers having a mismatch between the net cash owed to the carrying 
broker-dealer's customers and the amounts deposited in their customer 
or PAB reserve bank accounts. The potential cost of this alternative 
implies that more broker-dealers would incur the burden of performing 
their customer and PAB reserve computations daily. If the threshold 
were set at $1 billion, fewer carrying broker-dealers would face the 
costs of a daily computation than under the proposal. However, there 
would be fewer carrying broker-dealers computing daily, suggesting the 
potential for more carrying broker-dealers having a mismatch than under 
the proposal.
5. Calculation Based on the Maximum Value Over the Past Year
    The proposed $250 Million Threshold would be the arithmetic mean of 
the total credits in the customer and PAB reserve computations reported 
on the twelve most recently filed month-end FOCUS Reports.\153\ As an 
alternative, the Commission could have proposed a threshold based on 
the maximum value for total credits during the most recently ended 
calendar year. This alternative may more appropriately account for the 
implied capacity of the carrying broker-dealer's reserve bank accounts. 
For example, if total credits related to customers or PAB account 
holders' activity fluctuate throughout a year or based on economic 
cycles and such fluctuations are predictable, the maximum value of 
total credits may be more representative of the customer transactions' 
volume. As another example, if a carrying broker-dealer experiences 
trending growth of its

[[Page 45857]]

customer base, the maximum value of total credits would also be more 
representative of the current size of the customer base.
---------------------------------------------------------------------------

    \153\ This would mean, for example, if a carrying broker-dealer 
was required to file 12 FOCUS Reports for a calendar year, the 
carrying broker-dealer would add up the Total Credits reported in 
both the customer and PAB reserve formulas in each of the 12 FOCUS 
Reports filed, and divide the total by 12 to compute the arithmetic 
mean.
---------------------------------------------------------------------------

    Table 6 below regroups carrying broker-dealers based on the maximum 
number reported for total credits within a given year. Under this 
alternative, 74 carrying broker-dealers would be scoped into the 
compliance with performing the customer and PAB reserve computations 
daily, compared to the 63 that would be so under the proposal.

                                              Table 5--Threshold Based on Maximum Total Credits During 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Total      Total customer credits, $MM         Total PAB credits, $MM       Total credits, $MM
                                              Number     assets  ---------------------------------------------------------------------------------------
                                                          ($B)      Number      Mean      Median     Number      Mean      Median      Mean      Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$0-100MM.................................         70       78.1         70       15.5        3.4         16        1.2  .........       16.6          4
$100-250MM................................         18       42.8         18      161.0      165.9         10       12.3  .........      166.6      165.9
$250-500MM................................         13        142         13      354.5      371.6          4        1.9  .........      354.9      373.3
$500MM-1B.................................          8       87.6          8      705.7      736.8          5       35.2        6.7      723.6      765.2
$1-5B.....................................         25      584.8         25    2,338.1    2,057.1         21      212.5        6.9    2,513.7    2,058.2
$5-10B....................................          6      149.8          6    7,070.8    6,367.5          6      898.8       57.3    7,955.5    7,736.7
>=10B.....................................         22      3,402         22   55,584.5   26,096.5         20    8,197.1      696.4   62,990.5     32,340
                                           -------------------------------------------------------------------------------------------------------------
    Total \a\.............................        162    4,487.1        162    8,295.1        171         82      1,183          0    9,326.7        180
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Table excludes carrying broker-dealers with zero reported credits in 2022.

    A benefit of this alternative is those carrying broker-dealers with 
the largest amounts of total credits would be scoped into daily 
computing, where the largest credits reported (as opposed to the 
average) could be more indicative of a potential mismatch between the 
net cash owed to customers and the reserve account balances. However, 
this alternative may also create uncertainty if any cyclical behavior 
of total credits that has occurred over some historical period, changes 
unexpectedly, leading to potential for a carrying broker-dealer 
oscillating between weekly and daily computations and deposits from 
year to year.
    Table 7 summarizes the number of affected broker-dealers under the 
alternatives proposed thus far versus the proposal, both for the 
rolling sample period defined from January 2022 to December 2022 and 
for the period defined from June 2022 to May 2023.

    Table 7--Summary of Affected Broker-Dealers Under Proposal Versus
                              Alternatives
------------------------------------------------------------------------
                                        Number of
                                     affected broker-      Number of
                                    dealers (based on   affected broker-
     Alternatives vs. proposal        period January   dealers (based on
                                     2022 to December   period June 2022
                                          2022)           to May 2023)
------------------------------------------------------------------------
Proposal..........................                 63                 61
Alternatives:
    Alt 1 Over-Funding............                162                162
    Alt 2 $1B in Total Assets.....                 80                 79
    Alt 2 $50MM in Net Capital....                104                103
    Alt 3 Daily for all...........                162                162
    Alt 4 Average T.C. >$1B.......                 46                 44
    Alt 4 Average T.C. >$100MM....                 81                 76
    Alt 5 Maximum Total Credits...                 74                 69
------------------------------------------------------------------------

6. Daily Computation if an Average Required Deposit Exceeds a Threshold
    As an alternative to performing the customer and PAB reserve 
computations daily for carrying broker-dealers over a threshold 
(defined by average total credits), the Commission could have proposed 
an approach that would require a daily computation in the case where 
the required reserve bank account deposit as a share of the reserve 
bank account balance prior to such deposit exceeds a certain percentage 
threshold (e.g., 5% or 10%).\154\
---------------------------------------------------------------------------

    \154\ See discussion related to Table 5 in section IV.B.2. of 
this release.
---------------------------------------------------------------------------

    This alternative approach would account for broker-dealer-specific 
trends related to customer transactions. If the customer base differs 
substantially between carrying broker-dealers, with customers of some 
broker-dealers trading more often or doing account activities that 
increase the carrying broker-dealer's total credits by more compared to 
the customer base of other broker-dealers, this alternative approach 
would focus only on those carrying broker-dealers that typically 
experience larger reserve mismatches. However, given the information 
displayed in Table 5, there does not appear to be a perfect correlation 
with broker-dealer size (measured by average total credits), and the 
deposit ``mismatch.'' \155\ Smaller-broker dealers have an average 
mismatch more than 5 percent (based on the January 2022 to December 
2022 period), implying the possibility of an undue burden with respect 
to compliance costs. That latter could ultimately be passed onto the 
carrying broker-dealers' customers and PAB account holders.
---------------------------------------------------------------------------

    \155\ Computed by dividing the numbers in column four by the 
numbers in column three of panel A of Table 5.

---------------------------------------------------------------------------

[[Page 45858]]

7. Daily Computation Requirement Based on Average Total Credits per 
Number of Customer and PAB Accounts
    As an alternative to performing the customer and PAB reserve 
computations daily for carrying broker-dealers over a threshold 
(defined by average total credits), the Commission could require daily 
computations based on average total credits per number of customer 
accounts. While a failure of carrying broker-dealers with smaller 
amounts of total credits may not pose a significant risk of depletion 
to the SIPC Fund, a threshold based on the average total credits may 
have limitations from an individual customer or PAB account holder 
prospective. This is because such a threshold does not account for the 
number of customers and PAB account holders a carrying broker-dealer 
might have and is disconnected from the per-customer protection 
approach that is used by SIPC.\156\
---------------------------------------------------------------------------

    \156\ Per 15 U.S.C. 78fff-2(c), customers of a failed broker-
dealer have the right to share pro rata with other SIPA customers in 
the customer property held by that broker-dealer. See section I.B.3. 
of this release for more details.
---------------------------------------------------------------------------

    For example, consider two broker-dealers, both with $150 million in 
total credits which is below the $250 million. The first broker-dealer 
has three customers, each contributing $50 million in credits towards 
the broker-dealer's aggregate value of total credits, and the second 
broker-dealer has 100 customers each contributing $1.5 million in 
credits towards the broker-dealer's aggregate value of total credits. 
Recall that the maximum advance from the SIPC Fund is $500,000 per 
customer. Consider a situation where both broker-dealers fail and their 
reserve bank accounts are underfunded by more than one percent of what 
is owed to customers (i.e., the shortage is above $1.5 million). In 
this situation, the customers of the second broker-dealer would be made 
whole promptly with an advance from the SIPC Fund, but the customers of 
the first broker-dealer would not be made whole (because the per-
customer loss is above maximum per-customer SIPC advance of $500,000) 
until SIPC recovers funds from the broker-dealer, which may take some 
time.
    The above example notwithstanding, data from the FOCUS Reports for 
2022 suggests the potential for this concern is likely negligible. 
Table 8 displays the amounts of average total credits per total 
accounts for each size grouping of broker-dealers. For the 162 firms 
that reported positive total credits in December 2022, the average 
amount of average total credits per account (with the number of 
customer accounts and PAB accounts combined) was notably larger for the 
firms above the $250 Million Threshold than for broker-dealers below 
the threshold. Firms above the $250 Million Threshold had about $19 
million per customer account, while firms below the $250 Million 
Threshold had about $1 million on average per customer account.\157\
---------------------------------------------------------------------------

    \157\ Calculated from monthly FOCUS Reports for 2022. The 
Commission divided average total credits in 2022 for each broker-
dealer by the number of total customer and PAB accounts for each 
broker-dealer (Lines 8080 and 8081, respectively), then computed the 
average of the per customer amount for each size category, and above 
and below the $250 Million Threshold. Lines 8080 and 8081 are 
reported in the December FOCUS Report each year, hence those numbers 
are not yet available for the rolling averages beyond 2022.

                   Table 8--Threshold Based on Average Total Credits per Accounts During 2022
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total credits   Total credits
                                                                  accounts (Cust        $MM         per account
                                                      Number          + PAB)     ----------------       $MM
                                                                 ----------------                ---------------
                                                                       Mean            Mean            Mean
----------------------------------------------------------------------------------------------------------------
>$0-100MM.......................................              81         204,081            15.3             0.7
$100-250MM......................................              18         311,261           137.6             1.9
$250-500MM......................................               8         122,261           383.3             0.1
$500MM-1B.......................................               9         114,678           691.8            60.3
$1-5B...........................................              18       1,542,836         2,184.2            34.3
$5-10B..........................................               7       6,226,305         6,599.6             1.9
>=10B...........................................              21       7,700,435        58,619.8             3.0
                                                 ---------------------------------------------------------------
    Total.......................................             162       1,587,598           8,207             9.8
----------------------------------------------------------------------------------------------------------------

8. Daily Computation Based on Average Total Credits From the Most 
Recent Calendar Year
    As an alternative to performing the customer and PAB reserve 
computations daily based on a 12-month rolling average of total 
credits, the Commission could instead require computation based on the 
arithmetic mean of the sum of total credits over the 12 months in the 
most recent calendar year. For example, whether a carrying-broker 
dealer exceeded the $250 Million Threshold at any point in 2023, would 
be based on the average total credits from January 2022 through 
December 2022.
    The potential benefit of basing the average total credit amount on 
the most recent calendar year is that carrying broker-dealers would 
know with certainty if they fell above or below the proposed $250 
Million Threshold and would be subject to daily or weekly computing for 
the entirety of the next calendar year. This potential benefit 
contrasts with the possible uncertainty that the rolling average 
computation would introduce for carrying broker-dealers that are close 
to the proposed $250 Million Threshold. That uncertainly may create an 
added cost for those carrying broker-dealers as they would need to 
constantly monitor their standing with respect to the $250 Million 
Threshold. This monitoring may involve additional staff, or existing 
staff devoting additional time to that task, and suggests the cost of 
the proposal may be marginally higher for some carrying broker-dealers 
than the cost estimates cited earlier in this release.\158\ Or, wishing 
to avoid this monitoring cost, the carrying broker-dealer may have to 
decide to switch to daily (or weekly) once and for all, which may also 
imply additional costs.
---------------------------------------------------------------------------

    \158\ See infra section V. of this release (discussing PRA).
---------------------------------------------------------------------------

    However, a potential cost of this alternative is that, over the 
course of a year, a carrying broker-dealer computing weekly (for 
example) may exceed the $250 Million Threshold. This may result in a 
situation where a carrying broker-dealer with average total credits 
above the $250 Million Threshold would not

[[Page 45859]]

be engaging in daily computation--as they would with a timelier and up-
to-date rolling average--and the risks of weekly computing discussed in 
this release would remain present for that carrying broker-dealer.

F. Request for Comment

    The Commission requests comment on all aspects of the economic 
analysis of the proposed amendments. To the degree possible, the 
Commission requests that commenters provide supporting data and 
analysis with respect to the benefits, costs, and effects on 
competition, efficiency, and capital formation of adopting the proposed 
amendments or any reasonable alternatives. In particular, the 
Commission ask commenters to consider the following questions:
    18. What additional qualitative or quantitative information should 
be considered as part of the baseline for the economic analysis of 
these amendments?
    19. Are the benefits and costs of proposed amendments accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account? If possible, please offer ways of estimating these benefits 
and costs. What additional considerations can be used to estimate the 
benefits and costs of the proposed amendments?
    20. Are the effects on competition, efficiency, and capital 
formation arising from the proposed amendments accurately 
characterized? If not, why not?
    21. Is the statement related to carrying broker-dealers with 
greater economies of scale gaining a competitive advantage, in the case 
that any increased costs of compliance are passed onto customers to a 
lesser degree, accurately characterized? If not, why not?
    22. Are the statements related to an increase in liquidity in 
securities markets, arising from a promotion of confidence in the 
broker-dealer industry, and/or more efficient management of funds due 
to lower likelihood of mismatch, accurately characterized? If not, why 
not?
    23. Are the statements related to operational efficiency increasing 
because of carrying broker-dealers' potential ability to withdraw 
excess funds in a timelier manner and thus, manage their funds and 
operations more effectively, accurately characterized? If not, why not?
    24. Are the economic effects of the above alternatives accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account?
    25. Are there other reasonable alternatives to the proposed 
amendments that should be considered? What are the costs, benefits, and 
effects on competition, efficiency, and capital formation of any other 
alternatives?
    26. Is the statement related to larger carrying broker-dealers' 
economies of scale accurately characterized? If not, why not? Should 
any of the costs or benefits be modified? What, if any, other costs or 
benefits should be taken into account? If possible, please offer ways 
of estimating these benefits and costs. What additional considerations 
can be used to estimate the benefits and costs of the proposed 
amendments?

V. Paperwork Reduction Act

    The proposed amendments to paragraph (e) of Rule 15c3-3 contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act (``PRA'').\159\ The Commission is submitting 
the proposed collection of information to the Office of Management and 
Budget (``OMB'') for review and approval in accordance with the PRA and 
its implementing regulations.\160\ For the proposed amendments, the 
title of the existing information collection is ``Customer Protection--
Reserves and Custody of Securities'' (OMB Control No. 3235-0078), and 
that collection would be revised by the changes in this proposal, if 
adopted. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.\161\
---------------------------------------------------------------------------

    \159\ See 44 U.S.C. 3501 et seq.
    \160\ See 44 U.S.C. 3507; 5 CFR 1320.11.
    \161\ See 5 CFR 1320.11(l).
---------------------------------------------------------------------------

    The burden estimates contained in this section do not include any 
other possible costs or economic effects beyond the burdens required to 
be calculated for PRA purposes.

A. Summary of Collections of Information Under the Proposed Rule 
Amendments

    Rule 15c3-3 requires each carrying broker-dealer to maintain a 
reserve of cash and/or qualified securities in a customer reserve bank 
account that is at least equal in value to the net cash owed to 
customers.\162\ Carrying broker-dealers also maintain a reserve of cash 
and/or qualified securities in a PAB reserve bank account in an amount 
that is at least equal in value to the net cash owed to PAB account 
holders.\163\ In order to determine the amount required to be deposited 
in the customer reserve bank account and the PAB reserve bank account, 
Rule 15c3-3 requires carrying broker-dealers to perform weekly customer 
and PAB reserve computations as of the close of the last business day 
of each week.\164\ The rule also requires carrying broker-dealers to 
make a record of each such computation.\165\
---------------------------------------------------------------------------

    \162\ 17 CFR 240.15c3-3(e). See also section I.B.1. of this 
release (discussing the customer reserve requirements of Rule 15c3-3 
in more detail).
    \163\ 17 CFR 240.15c3-3(e). See also section I.B.2. of this 
release (discussing the PAB account holder reserve requirements of 
Rule 15c3-3 in more detail).
    \164\ 17 CFR 240.15c3-3(e). Rule 15c3-3 also permits certain 
broker-dealers to perform their reserve computations monthly. 17 CFR 
240.15c3-3(e)(3)(i) and (iii). Some carrying broker-dealers also 
elect to perform daily customer and PAB reserve computations. 17 CFR 
240.15c3-3(e)(3)(iv).
    \165\ 17 CFR 240.15c3-3(e)(3)(v).
---------------------------------------------------------------------------

    Under the proposed amendments, carrying broker-dealers with average 
total credits equal to or greater than $250 million would be required 
to perform the customer and PAB reserve computations daily instead of 
weekly, and would also be required to make a record of each such daily 
computation.\166\ The proposed amendments also provide that a carrying 
broker-dealer performing daily customer and PAB reserve computations 
may elect to perform weekly computations if its average total credits 
fall below $250 million and it notifies its designated examining 
authority, in writing, of this election at least 60 calendar days prior 
to starting weekly computations.\167\
---------------------------------------------------------------------------

    \166\ See paragraph (e)(3)(i)(B)(1) of Rule 15c3-3, as proposed 
to be amended.
    \167\ See paragraph (e)(3)(i)(B)(2) of Rule 15c3-3, as proposed 
to be amended.
---------------------------------------------------------------------------

B. Proposed Use of the Information

    Rule 15c3-3 is an integral part of the Commission's financial 
responsibility program for broker-dealers. The requirement to document 
in writing the customer and PAB reserve computations facilitates the 
process by which the Commission and the broker-dealer's designated 
examining authority examines the broker-dealer's compliance with Rule 
15c3-3. The purpose of the proposed 60-day prior written notice 
requirement is to provide the designated examining authority with prior 
notice that the carrying broker-dealer is switching from daily to 
weekly customer and PAB reserve computations and provide the designated 
examining authority the opportunity to contact the firm and ask how it 
intends to implement the change. This would assist the designated 
examining authority in monitoring the firm.

[[Page 45860]]

C. Respondents

1. Recordkeeping Requirements
    Respondents under the proposed amendments would be carrying broker-
dealers with average total credits equal to or exceeding $250 million. 
The Commission estimates there are currently approximately 63 carrying 
broker-dealers that would have average total credits equal to or 
exceeding $250 million based on a review of FOCUS Report data for the 
12 months ended December 31, 2022. Of these carrying broker-dealers, 
the Commission estimates that 11 already perform the customer reserve 
computation daily. Of the 63 carrying broker-dealers that would have 
average total credits equal to or exceeding $250 million, the 
Commission estimates that 49 have total credits relating to PAB account 
holders of greater than $0, with 10 of these carrying broker-dealers 
already performing the PAB reserve computation daily. Consequently, for 
the purposes of the PRA, the Commission estimates that there are 52 
respondents for the customer reserve computation, and 39 respondents 
for the PAB reserve computation. These respondents are currently 
included in the collection of information associated with Rule 15c3-3 
related to weekly computations for the customer and PAB reserve 
computations. However, as a result of the proposed amendments, these 
respondents would need to perform daily customer and PAB reserve 
computations (rather than weekly computations).
2. Notification Requirement
    Based on a review of FOCUS Report data for the 2022 calendar year, 
the Commission preliminarily estimates that one carrying broker-dealer 
per year would provide notice to their designated examining authority 
that the carrying broker-dealer's average total credits has fallen 
below the $250 Million Threshold, and that such carrying broker-dealer 
would switch from a daily computation to a weekly computation.

D. Total Annual Burden Estimate

1. Recordkeeping Requirements
    Carrying broker-dealers that would be subject to the requirement to 
perform daily customer and PAB reserve computations under this proposal 
are required to perform such computations weekly. Therefore, the 
Commission preliminarily estimates that the proposed amendments would 
not impose any new one-time burdens on carrying broker-dealers to set 
up the process of creating the required record of the computations. 
Instead, the Commission preliminarily believes the proposed amendments 
would impose increased ongoing burdens on the respondent carrying 
broker-dealers because they would be required to increase the frequency 
of the customer and PAB reserve computations and, therefore, produce 
additional records of the computations.
    Specifically, the Commission believes that there would be an 
increase in the burdens associated with the collections of information 
titled ``Rule 15c3-3(e)(3)--daily computations'' for both the customer 
and PAB reserve computations, and a corresponding decrease in the 
burdens associated with the collections of information titled ``Rule 
15c3-3(e)(3)--weekly computations'' for the customer and PAB reserve 
computations as certain carrying broker-dealers will be required to 
shift from weekly to daily computations in connection with the proposed 
amendments. Based on experience with customer and PAB reserve 
computations, the Commission preliminary estimates that it takes 
between one and five hours to make a record of each such computation, 
and that the average time spent across all of the firms is 2.5 
hours.\168\
---------------------------------------------------------------------------

    \168\ This is consistent with the current collection of 
information for the customer and PAB reserve computations.
---------------------------------------------------------------------------

    As a result, the Commission estimates that the proposed amendments 
would impose aggregate annual ongoing burdens on respondent carrying 
broker-dealers required to perform daily customer and PAB reserve 
computations of 32,500 hours and 24,375 hours, respectively, or a total 
of 56,875 hours.\169\ When added to the currently approved burden hours 
of 7,500 hours and 1,875 hours for the customer and PAB reserve 
computations, respectively, the proposed revised burden hour estimates 
would be 40,000 hours for the daily customer reserve computation, and 
26,250 hours for the daily PAB reserve computation.
---------------------------------------------------------------------------

    \169\ This figure was calculated as follows: 52 respondent 
carrying broker-dealers that would be required to perform daily 
customer reserve computations x 2.5 hours/day x 250 business days = 
32,500 hours, plus 39 respondent carrying broker-dealers that would 
be required to perform daily PAB reserve computations x 2.5 hours/
day x 250 business days = 24,375 hours. Therefore, the total 
estimated burden is 32,500 hours + 24,375 hours = 56,875 hours.
---------------------------------------------------------------------------

    In addition to this increase, the Commission preliminarily 
estimates that there will be a corresponding decrease in the 
collections of information titled ``Rule 15c3-3(e)(3)--weekly 
computations'' for both the customer and PAB reserve computations. 
Specifically, the Commission preliminarily estimates that the proposed 
amendments would result in a revised burden hour estimate of 14,430 
hours with respect to weekly customer reserve computations,\170\ (a 
decrease of 6,760 hours) \171\ and 2,210 hours with respect to the 
weekly PAB reserve computations \172\ (a decrease of 5,070 hours).\173\
---------------------------------------------------------------------------

    \170\ This figure was calculated as follows: 163 respondents 
currently approved under the information collection related to 
weekly customer reserve computations titled ``Rule 15c3-3(e)(3)--
weekly computations'' minus the 52 respondent carrying broker-
dealers that would be required under the proposed amendments to 
perform daily customer reserve computations = 111 respondents x 2.5 
hours x 52 responses annually = 14,430 hours.
    \171\ This figure was calculated as follows: 21,190 burden hours 
currently approved with respect to the collection of information 
related to weekly customer reserve computations minus the revised 
proposed estimate of 14,430 hours resulting from fewer respondents 
performing weekly computations = 6,760 hours.
    \172\ This figure was calculated as follows: 56 respondents 
currently approved under the information collection related to 
weekly PAB reserve computations titled ``Rule 15c3-3(e)(3)--weekly 
computations'' minus the 39 respondent carrying broker-dealers that 
would be required under the proposed amendments to perform daily PAB 
reserve computations = 17 respondents x 2.5 hours x 52 responses 
annually = 2,210 hours.
    \173\ This figure was calculated as follows: 7,280 burden hours 
currently approved with respect to the collection of information 
related to weekly PAB reserve computations minus the revised 
proposed estimate of 2,210 hours resulting from fewer respondents 
performing weekly computations = 5,070 hours.
---------------------------------------------------------------------------

2. Notification Requirement
    Based on its experience with other notification requirements, the 
Commission preliminarily estimates that it would take a carrying 
broker-dealer 30 minutes to prepare and send the notification regarding 
its election to perform weekly customer and PAB reserve computations to 
its designated examining authority. This burden would represent a new 
collection of information. The Commission preliminarily estimates that 
relatively few carrying broker-dealers would send the notice either 
because their average total credits would be substantially greater than 
$250 million or because they would continue to perform daily 
computations even if their average total credits fell below the $250 
Million Threshold, given the liquidity benefits of performing a daily 
computation. Consequently, the Commission preliminarily estimates that 
one carrying broker-dealer per year would send the notice for a burden 
of 0.5 hours per year.\174\
---------------------------------------------------------------------------

    \174\ One response per year x 0.5 hours per response = 0.5 
hours.

---------------------------------------------------------------------------

[[Page 45861]]

3. Summary of the Proposed Burden Revisions \175\
---------------------------------------------------------------------------

    \175\ OMB Control No. 3235-0078 for Rule 15c3-3 includes thirty 
separate information collections. This summary show only those 
information collections that would be revised as a result of the 
proposed amendments.
---------------------------------------------------------------------------

    As a result of the proposed amendments, the burdens associated with 
daily computations for customer reserve accounts would increase by 
32,500 hours and the burdens associated with daily computations for PAB 
reserve accounts would increase by 24,375 hours. This increase would be 
accompanied by a decrease in burdens associated with weekly 
computations for customer and PAB reserve accounts of 6,760 hours and 
5,070 hours, respectively, as carrying broker-dealers with average 
total credits of $250 million or more shift from performing the 
customer and PAB reserve computations on a weekly to daily basis.
    Additionally, a new collection of information related to the 
notification requirement for carrying broker-dealers reverting to a 
weekly computation of the customer and PAB reserve formulas will result 
in an addition 0.5 burden hours per year.
    The net increase in estimated annual burdens associated with the 
proposed amendments to Rule 15c3-3 would be 45,045.5 hours. The table 
below summarizes these changes.

----------------------------------------------------------------------------------------------------------------
                                                                         Proposed estimated
                                                Currently approved     increase/ decrease in    Proposed revised
       Name of information collection            estimated annual      annual industry burden   annual industry
                                             industry burden (hours)          (hours)            burden (hours)
----------------------------------------------------------------------------------------------------------------
Rule 15c3-3(e)(3)--daily computations for                      7,500                   32,500             40,000
 customer reserve account \1\..............
Rule 15c3-3(e)--daily computations for PAB                     1,875                   24,375             26,250
 reserve account \2\.......................
Rule 15c3-3(e)(3)--weekly computations for                    21,190                  (6,760)             14,430
 customer reserve account \3\..............
Rule 15c3-3(3)(3)--weekly computations for                     7,280                  (5,070)              2,210
 PAB reserve account \4\...................
Rule 15c3-3(e)(B)(1) notification..........                      N/A                      0.5                0.5
----------------------------------------------------------------------------------------------------------------
    Total proposed change..................  .......................                 45,045.5
----------------------------------------------------------------------------------------------------------------
1. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
  information is ``Rule 15c3-3(e)(3)--daily computations.'' The Commission is revising the title of this
  collection of information in order to clarify that it is distinct from the collection of information related
  to daily computations for PAB reserve accounts, which currently shares the same title.
2. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
  information is ``Rule 15c3-3(e)(3)--daily computations.'' The Commission is revising the title of this
  collection of information in order to clarify that it is distinct from the collection of information related
  to daily computations for customer reserve accounts, which currently shares the same title.
3. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
  information is ``Rule 15c3-3(e)(3)--weekly computations.'' The Commission is revising the title of this
  collection of information in order to clarify that it is distinct from the collection of information related
  to weekly computations for PAB reserve accounts, which currently shares the same title.
4. In the most recently approved supporting statement for Rule 15c3-3, the title of this collection of
  information is ``Rule 15c3-3(e)(3)--weekly computations.'' The Commission is revising the title of this
  collection of information in order to clarify that it is distinct from the collection of information related
  to weekly computations for customer reserve accounts, which currently shares the same title.

E. Collections of Information Are Mandatory

    The collections of information under the proposed amendments to 
Rule 15c3-3 would be mandatory as to the carrying broker-dealers that 
would be subject to them.

F. Confidentiality of Response to Collections of Information

    The Commission expects to receive confidential information in 
connection with the collections of information. A carrying broker-
dealer requested by the Commission to produce records related to the 
proposed amendments under Rule 15c3-3 could request confidential 
treatment of the information.\176\ If a confidential treatment request 
was made, the Commission anticipates that it would keep the information 
confidential subject to applicable law.\177\
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    \176\ See 17 CFR 200.83. Information regarding requests for 
confidential treatment of information submitted to the Commission is 
available on the Commission's website at https://www.sec.gov/foia/howfo2.htm#privacy.
    \177\ See, e.g., 15 U.S.C. 78x (governing the public 
availability of information obtained by the Commission); 5 U.S.C. 
552 et seq.
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G. Retention Period for Recordkeeping Requirements

    The customer and PAB reserve computations must be preserved in 
accordance with the requirements of Rule 17a-4.\178\ Written 
notifications from carrying broker-dealers electing to compute the 
customer and PAB reserve formulas weekly after being subject to the 
daily requirement would be submitted to the carrying broker-dealer's 
designated examining authority. These notices would constitute 
communications relating to a carrying broker-dealer's ``business as 
such'' and, therefore, will need to be retained for three years.\179\
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    \178\ See 17 CFR 240.15c3-3(e)(3)(v); 17 CFR 240.17a-4.
    \179\ See 17 CFR 240.17a-4(b)(4).
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H. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    27. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    28. Evaluate the accuracy of the Commission's estimates of the 
burdens of the proposed collections of information;
    29. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    30. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    31. Evaluate whether the proposed rules and rule amendments would 
have any effects on any other collection of information not previously 
identified in this section.
    Persons submitting comments on the collection of information 
requirements

[[Page 45862]]

should direct them to the Office of Management and Budget, Attention: 
Desk Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Washington, DC 20503, and should 
also send a copy of their comments to Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File Number S7-11-23. Requests for materials submitted to 
OMB by the Commission with regard to this collection of information 
should be in writing, with reference to File Number S7-11-23 and be 
submitted to the Securities and Exchange Commission, Office of FOIA/PA 
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996,\180\ a rule is ``major'' if it has resulted, or is likely to 
result in: an annual effect on the economy of $100 million or more; a 
major increase in costs or prices for consumers or individual 
industries; or significant adverse effects on competition, investment, 
or innovation. The Commission requests comment on whether the proposed 
rules and rule amendments would be a ``major'' rule for purposes of the 
Small Business Regulatory Enforcement Fairness Act. In addition, the 
Commission solicits comment and empirical data on: the potential effect 
on the U.S. economy on annual basis; any potential increase in costs or 
prices for consumer or individual industries; and any potential effect 
on competition, investment, or innovation.
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    \180\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\181\ Section 603(a) of the Administrative Procedure Act,\182\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \183\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule which, if adopted, would not have a significant economic impact on 
a substantial number of small entities.\184\
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    \181\ See 5 U.S.C. 601 et seq.
    \182\ 5 U.S.C. 603(a).
    \183\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this proposed rulemaking, are set forth 
in 17 CFR 240.0-10 (``Rule 0-10'').
    \184\ See 5 U.S.C. 605(b).
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    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes a broker-dealer that: (1) had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements 
were prepared pursuant to paragraph (d) of 17 CFR 240.17a-5 (Exchange 
Act Rule 17a-5(d)),\185\ or, if not required to file such statements, a 
broker-dealer with total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (2) is not affiliated with any person (other than a 
natural person) that is not a small business or small 
organization.\186\
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    \185\ 17 CFR 240.17a-5(d).
    \186\ See 17 CFR 240.0-10(c).
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    The proposed rule amendments to Rule 15c3-3 would require certain 
carrying broker-dealers to perform the customer and PAB reserve 
computations on a daily rather than weekly basis. Only carrying broker-
dealers would be impacted by the proposed rule amendment.
    Based on FOCUS Report data, the Commission estimates that as of 
December 31, 2022, there were approximately 790 broker-dealers that 
were ``small'' for the purposes of Rule 0-10. The Commission estimates 
that none of these small broker-dealers is a carrying broker-dealer. As 
a result, the proposed rule amendments likely would not apply to small 
broker-dealers. Therefore, the Commission believes that the proposed 
amendments would not have a significant impact on a substantial number 
of small broker-dealers.
    For the foregoing reasons, the Commission certifies that the 
proposed amendments to Rule 15c3-3, if adopted, would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA. The Commission requests comment regarding this 
certification. The Commission invites commenters to address whether the 
proposed amendments to Rule 15c3-3 would have a significant economic 
impact on a substantial number of small entities, and, if so, what 
would be the nature of any impact on small entities. The Commission 
requests that commenters provide empirical data to support the extent 
of such impact.

Statutory Authority

    The Commission is proposing amendments to Rule 15c3-3 under the 
Commission's rulemaking authority pursuant to the Exchange Act, 15 
U.S.C. 78a et seq., and particularly, sections 15 and 23(a) (15 U.S.C. 
78o and 78w(a)), thereof.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5,78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *
    Section 240.15c3-3 is also issued under 15 U.S.C. 78c-5, 
78o(c)(2), 78(c)(3), 78q(a), 78w(a); sec. 6(c), 84 Stat. 1652; 15 
U.S.C. 78fff.
* * * * *
0
2. Section 240.15c3-3 is amended by revising paragraphs (e)(3)(i) and 
(iv) to read as follows:


Sec.  240.15c3-3  Customer protection--reserves and custody of 
securities.

* * * * *
    (e) * * *
    (3) * * *
    (i)(A) Except as provided in paragraphs (e)(3)(i)(B)(1) and (C) of 
this section, computations necessary to determine the amount required 
to be deposited in the Customer Reserve Bank Account and PAB Reserve 
Bank Account as specified in paragraph (e)(1)

[[Page 45863]]

of this section must be made weekly, as of the close of the last 
business day of the week, and the deposit so computed must be made no 
later than one hour after the opening of banking business on the second 
following business day.
    (B)(1) A broker or dealer with average total credits that are equal 
to or greater than $250 million must make the computations necessary to 
determine the amount required to be deposited in the Customer Reserve 
Bank Account and PAB Reserve Bank Account, as specified in paragraph 
(e)(1) of this section, daily as of the close of the previous business 
day, and the deposit so computed must be made no later than one hour 
after the opening of banking business on the second following business 
day. A broker or dealer must comply with this paragraph (e)(3)(i)(B)(1) 
no later than six months after having average total credits equal to or 
greater than $250 million and until such time as it has average total 
credits of less than $250 million and 60 days after having provided the 
60-day notice required by paragraph (e)(3)(i)(B)(2) of this section. 
For purposes of this paragraph (e)(3), average total credits means the 
arithmetic mean of the sum of Total Credits in the Customer Reserve 
Bank Account computation and the PAB Reserve Bank Account computation 
reported in the 12 most recently filed month-end Forms X-17A-5.
    (2) A broker or dealer computing the Customer Reserve Bank Account 
computation and the PAB Reserve Bank Account computation daily under 
paragraph (e)(3)(i)(B)(1) of this section whose average total credits 
falls below $250 million may elect to compute the Customer Reserve Bank 
Account and the PAB Reserve Bank Account computation weekly under 
paragraph (e)(3)(i)(A) of this section. Such broker or dealer must 
notify its designated examining authority, in writing, of this election 
at least 60 calendar days before computing the Customer Reserve Bank 
Account and the PAB Reserve Bank Account computation weekly under 
paragraph (e)(3)(i)(A) of this section.
    (C) A broker or dealer which has aggregate indebtedness not 
exceeding 800 percent of net capital (as defined in Sec.  240.15c3-1) 
and which carries aggregate customer funds (as defined in paragraph 
(a)(10) of this section), as computed at the last required computation 
pursuant to this section, not exceeding $1,000,000, may in the 
alternative make the Customer Reserve Bank Account computation monthly, 
as of the close of the last business day of the month, and, in such 
event, must deposit not less than 105 percent of the amount so computed 
no later than one hour after the opening of banking business on the 
second following business day.
* * * * *
    (iv) Computations in addition to the computations required in this 
paragraph (e)(3), other than computations made under paragraph 
(e)(3)(i)(B)(1) of this section, may be made as of the close of any 
business day, and the deposits so computed must be made no later than 
one hour after the opening of banking business on the second following 
business day.
* * * * *

    By the Commission.

    Dated: July 12, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15200 Filed 7-17-23; 8:45 am]
BILLING CODE 8011-01-P


