Physical Receipt, Delivery, and Safeguarding of Cash, Checks, and Securities

Beyond supervisory procedures and inspections, firms have a fundamental obligation to protect customer assets. SEC Rule 15c3-3 (the Customer Protection Rule) and FINRA requirements create a framework for keeping customer funds and securities safe.

Customer Protection Rule (SEC Rule 15c3-3)

This rule is a core investor protection measure in the securities industry:

• Broker-dealers must maintain physical possession or control of customers' fully paid securities and excess margin securities
• The firm must take timely steps in good faith to establish prompt physical possession or control
• The firm cannot use fully paid customer securities for its own trading or business purposes

Special Reserve Bank Account

• The firm must maintain a Special Reserve Bank Account for the exclusive benefit of customers
• The reserve must hold cash or qualified securities sufficient to cover the net cash owed to customers
• This protects customer assets in the event of the broker-dealer's insolvency
• The reserve computation determines how much the firm must set aside

Exam Tip: Gotchas

SEC Rule 15c3-3 requires broker-dealers to segregate customer assets from firm assets. The firm cannot commingle customer funds with its own money or use fully paid customer securities for proprietary trading. Violations can lead to severe sanctions, including firm closure.

Safeguarding Procedures

Internal inspections under FINRA Rule 3110(c) must specifically examine the safeguarding of customer funds and securities. Firms must have procedures addressing the physical receipt, delivery, and safekeeping of:

• Cash and cash equivalents - currency, cashier's checks, money orders
• Checks - proper endorsement, timely deposit, documentation
• Physical securities - stock/bond certificates received for deposit or transfer

Transmittal Procedures

When transmitting customer funds or securities, the firm must:

• Have procedures to verify the customer's instructions before transmitting
• Confirm the transmittal with the customer after it is completed
• Document the process

Authorization for Negotiable Instruments (FINRA Rule 4514)

• A member may not draw any negotiable instrument (check) from a customer's account unless the member has obtained prior written authorization from the customer
• The authorization must specifically authorize such drawings; a general trading authorization is not sufficient
• This prevents unauthorized withdrawals from customer accounts

Exam Tip: Gotchas

A general trading authorization is not enough to draw checks from a customer's account. The customer must provide specific written authorization for negotiable instrument drawings. Also note that Rule 15c3-3 is an SEC rule, not a FINRA rule, though FINRA enforces compliance through its inspection process.