Quick Answer
A firm's supervisory procedures must address the physical safeguarding of customer funds and securities, including transmittals between customers, the firm, and third parties. The safeguarding duty reaches currency, checks, and other monetary instruments the same way it reaches certificated and bearer securities.
This topic covers what the firm's physical-handling duty protects, how far it reaches, and the reporting and recordkeeping obligations that ride along with it.
What Must Firm Procedures Cover for Safeguarding and Transmittals?
- A firm's supervisory policies and procedures must address the safeguarding of customer funds and securities.
- Firm procedures must also cover transmittals of funds, such as wires or
checks, or securities. The rule names four:
- from customers to third-party accounts;
- from customer accounts to outside entities such as banks or investment companies;
- from customer accounts to locations other than the customer's primary residence, such as a post office box, an "in care of" account, or an alternate address; and
- between customers and registered representatives, including the hand-delivery of checks.
- A documented method of customer confirmation, notification, or follow-up is required for each such transmittal. Firms may use reasonable risk-based criteria to determine the authenticity of transmittal instructions; the rule does not mandate one single verification method.
Exam Tip: Gotchas
- The hand-delivery of a check between a customer and a registered representative is a named, controlled transmittal. It triggers the firm's documented confirmation requirement the same as a wire transfer does.
What Counts as a Monetary Instrument (Cash Equivalent)?
- Monetary instrument: the Bank Secrecy Act (BSA) term behind the phrase "cash equivalents." A monetary instrument functions as close to currency as a paper instrument can, so the safeguarding duty above extends to these items too, not only to an ordinary check payable to the firm or to certificated securities.
| Category | What It Covers |
|---|---|
| Currency | Coin and paper money that circulates as legal tender, U.S. or foreign |
| Traveler's checks | Traveler's checks in any form |
| Negotiable instruments transferable by delivery | Personal checks, business checks, official bank checks, cashier's checks, third-party checks, promissory notes, and money orders, when in bearer form, endorsed without restriction, or otherwise in a form where title passes on delivery |
| Incomplete instruments | The same instrument types above, signed but with the payee's name left blank |
| Bearer securities | Securities or stock in bearer form, or otherwise in a form where title passes on delivery |
- The definition names one further trigger for the negotiable-instrument row, an instrument made out to a fictitious payee, but it applies that trigger only to a separate cross-border transportation report. It does not make an instrument a monetary instrument for the safeguarding duty here.
- Monetary instruments do not include warehouse receipts or bills of lading.
Exam Tip: Gotchas
- A cashier's check or money order is a monetary instrument, grouped with currency and traveler's checks. When it is in bearer form, endorsed without restriction, or otherwise transferable by delivery, it does not get the lighter handling a firm would give an ordinary personal check made out to a specific, non-transferable payee.
What Possession or Control Duty Applies to Customer Securities?
- A broker-dealer must promptly obtain, and thereafter maintain, physical possession or control of all fully paid securities and excess margin securities it carries for customer accounts.
- A temporary lag between when a security is required to be in the firm's possession or control and when it actually gets there does not violate this duty, but only when the lag results solely from normal business operations, such as same-day receipt and redelivery, and the firm takes timely, good-faith steps to establish possession or control.
- The burden of proof that a lag qualifies for that exception sits with the broker-dealer.
Exam Tip: Gotchas
- The temporary-lag exception is narrow, and the broker-dealer carries the burden of proof. A firm cannot simply assert the delay was normal; it must show the delay was solely the result of normal business operations and that it acted promptly and in good faith to fix it.
Does a Supervisory System Excuse Improper Use of Customer Property?
- Improper use: no member or person associated with a member may make improper use of a customer's securities or funds.
- This prohibition is separate from, and does not depend on, the firm's supervisory system covered earlier in this unit. A firm can maintain a reasonably designed supervisory system for safeguarding customer funds and securities, and an associated person can still individually violate this prohibition by misusing a specific customer's securities or funds.
Exam Tip: Gotchas
- A sound supervisory system for safeguarding customer property does not itself satisfy the improper-use prohibition. That prohibition is standalone and absolute; a well-designed supervisory system reduces the risk but does not excuse an individual violation.
When Must the Firm Report a Large Currency Transaction?
- A broker-dealer counts as a financial institution for currency-reporting purposes and must file a report of each deposit, withdrawal, exchange of currency, or other payment or transfer that involves a transaction in currency of more than $10,000.
- Multiple currency transactions on one business day aggregate into a single reportable transaction if the firm has knowledge they are by or on behalf of the same person and, added together, the cash in or cash out totals more than $10,000.
- A deposit made at night, over a weekend, or on a holiday counts as received on the next business day that follows it. That is the day it joins the aggregation.
- For this rule a firm and all of its domestic branch offices are one financial institution, along with any recordkeeping facility, wherever it is, that holds records of those domestic offices' transactions. Two branches do not give the customer two separate limits.
- This reporting and aggregation duty is the direct operational consequence of a firm physically receiving currency from a customer, which is why the safeguarding duty connects to it.
Exam Tip: Gotchas
- Two same-day currency transactions of $6,000 each by the same customer add up to $12,000 and trigger the reporting obligation under the aggregation rule, even though neither transaction alone crosses the $10,000 threshold.
- Splitting those two $6,000 transactions between two branch offices of the same firm changes nothing. The firm and its domestic branches count as one institution.
What Must the Daily Blotter Record Show?
- A firm's blotters, or other records of original entry, must contain an itemized daily record of all purchases and sales of securities, all receipts and deliveries of securities, including certificate numbers, all receipts and disbursements of cash, and all other debits and credits.
- This is the recordkeeping counterpart to the physical safeguarding duty: a cash receipt or disbursement the firm's supervisory system is protecting must also show up on the blotter.
- The blotter is only one of the record categories the firm must create. The full set, and the periods a firm must keep each record, belong to the books-and-records unit later in the course.
What Should You Check on Exam Day?
- Treat a monetary instrument the same as cash for safeguarding purposes; the category covers currency, traveler's checks, and several types of transferable checks and securities, not only paper money.
- Confirm a possession-or-control lag qualifies as normal-business-operations before treating it as excused; the broker-dealer carries that burden.
- Add same-day currency transactions by the same customer before comparing the total to the $10,000 reporting threshold, across every domestic branch of the firm, and count a night, weekend, or holiday deposit on the next business day.
- Remember that a firm's supervisory system does not excuse an individual's improper use of a specific customer's funds or securities.