Quick Answer
Broker-dealers protect customer assets through safekeeping, segregation, and possession or control of fully paid and excess margin securities. Street name preserves beneficial ownership. Written authorization is required before eligible margin securities are lent, and borrowing fully paid or excess margin securities requires a written agreement at or before the loan.
Custody starts with a simple objective: customer securities must remain protected even when the firm is holding them. The framework distinguishes secure holding, legal separation, and recognized control locations and conditions.
How Do Safekeeping and Segregation Protect Assets?
- Safekeeping: Holding securities securely for a customer to protect against loss, theft, or damage.
- Segregation: Keeping customer securities separate from the broker-dealer's proprietary securities and from assets available to the firm's general creditors.
- Customer protection: The custody framework protects customer securities and funds when a broker-dealer holds them.
| Concept | Core question | Protection provided |
|---|---|---|
| Safekeeping | Are the securities held securely? | Protects against loss, theft, or damage. |
| Segregation | Are customer securities separated from firm assets? | Keeps them outside the firm's proprietary pool and away from general creditors. |
What Is the Difference Between Custody and Control?
- Custody: Physical possession of a certificated security or responsibility for holding a security for a customer.
- Control: A status based on recognized locations and conditions, including:
- Certificates in the custody or control of a clearing corporation, an organization that is a subsidiary of a national securities exchange or registered national securities association, or a custodian bank under a system for the central handling of securities, when delivery to the broker-dealer requires no payment of money or value and the firm's books or records identify customers entitled to specified quantities or units.
- Securities carried in an omnibus credit account at another broker-dealer in compliance with Regulation T, when the firm instructs the carrying broker-dealer to maintain possession or control free of any charge, lien, or claim of any kind in favor of the carrying broker-dealer or anyone claiming through it.
- Securities held in or in transit between the firm's offices.
- The customer-protection requirements direct a broker-dealer to promptly obtain and maintain physical possession or control of fully paid and excess margin securities carried for customers.
- The possession-or-control duty is not violated for fully paid or excess margin securities borrowed from a person if the firm and lender enter into a written agreement at or before the loan.
Fully paid or excess margin security carried for a customer → firm maintains physical possession or recognized control → customer asset receives custody protection
Exam Tip: Gotchas
- Eligible clearing locations use central handling. The certificates must be in the custody or control of a clearing corporation, an organization that is a subsidiary of a national securities exchange or registered national securities association, or a custodian bank under a system for the central handling of securities.
- Delivery must require no payment. Delivery to the firm must require no payment of money or value.
- Records must identify entitled customers. The firm's books or records must identify customers entitled to specified quantities or units.
- The omnibus-account restriction has a defined scope. The firm must instruct the carrying broker-dealer to keep the securities free of any charge, lien, or claim of any kind in favor of that carrying broker-dealer or anyone claiming through it.
- A timely written loan agreement can avoid a violation. The possession-or-control duty is not violated for fully paid or excess margin securities borrowed from a person if the firm and lender enter into a written agreement at or before the loan.
Who Owns Securities Held in Street Name?
- Street name: Securities registered in the name of a broker-dealer or its nominee while the firm records the customer as the beneficial owner.
- Beneficial owner: The customer with the economic ownership interest in securities held in street name.
- Directly held mutual fund shares: Shares registered directly on the fund's books in the customer's name, rather than held in street name by the broker-dealer.
Exam Tip: Gotchas
- Street name does not make the broker-dealer the customer's economic owner. The firm or its nominee is the registered holder; the customer remains the beneficial owner.
- Directly held mutual fund shares use customer-name registration. The shares are registered on the fund's books in the customer's name, rather than in street name.
When May a Firm Use Customer Securities?
- A member needs the customer's written authorization before lending margin securities that are eligible to be pledged or loaned.
- Before the first borrow of fully paid or excess margin securities with a customer, the member must give written disclosures.
- The written warning must state that the Securities Investor Protection Act may not protect the customer with respect to the customer's securities loan transaction. It must also state that collateral may be the customer's only recovery source if the member fails to return the securities.
Exam Tip: Gotchas
- The written disclosures come before the first borrow with that customer. Before borrowing fully paid or excess margin securities, the member must provide the required written disclosures.
- The written warning states two recovery risks. It says the Securities Investor Protection Act may not protect the customer with respect to the customer's securities loan transaction. It also says collateral may be the only recovery source if the member fails to return the securities.
Think of it this way: Safekeeping is the locked vault, segregation is the separate customer compartment, and control is using a recognized vault, custodian, or transfer route. Street name changes the name on the account record, but not the customer whose economic interest is inside that compartment.
What Should You Check on Exam Day?
- For a clearing corporation, an organization that is a subsidiary of a national securities exchange or registered national securities association, or a custodian bank, confirm central handling, payment-free delivery, and firm records identifying customers entitled to specified quantities or units.
- For an omnibus credit account, confirm Regulation T compliance and instructions that keep the securities free of any charge, lien, or claim of any kind in favor of the carrying broker-dealer or anyone claiming through it.
- For fully paid or excess margin securities borrowed from a person, confirm that the firm and lender entered into a written agreement at or before the loan.
- Look for written authorization before eligible margin securities are lent.
- Confirm that the written warning states possible loss of Securities Investor Protection Act coverage for the customer's securities loan transaction, and that collateral is the customer's possible only recovery source if the member fails to return the securities.