Quick Answer
Broker-dealers protect customer assets by safeguarding securities, keeping them separate from firm property and general creditors, and maintaining physical possession or control. Securities may be held in street name while the customer remains the beneficial owner. A firm may use customer securities only under the applicable customer-protection requirements.
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 the firm's ability to obtain a security promptly.
Safekeeping and Segregation
- 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. |
Custody and Control
- Custody: Physical possession of a certificated security or responsibility for holding a security for a customer.
- Control: The ability to obtain a security promptly, without paying money or obtaining another party's consent.
- The Customer Protection Rule requires a broker-dealer to maintain physical possession or control of customer securities and establishes customer-protection reserve and custody requirements.
Customer security held by firm → firm maintains possession or prompt control → customer asset receives custody protection
Exam Tip: Gotchas
- Control means prompt access without paying money or obtaining another party's consent. It is more than knowing where the security is held.
Street Name and Direct Holdings
- 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 are registered on the fund's books in the customer's name, rather than in street name.
Permissible Use of Customer Securities
- A member needs the customer's written authorization before lending margin securities that are eligible to be pledged or loaned.
- If a member borrows fully paid and excess margin securities, it must comply with the Customer Protection Rule.
Exam Tip: Gotchas
- Written authorization is required before lending eligible margin securities. Fully paid and excess margin securities remain subject to the Customer Protection Rule when borrowed.
Think of it this way: Safekeeping is the locked vault, segregation is the separate customer compartment, and control is having immediate access to the key. Street name changes the name on the account record, but not the customer whose economic interest is inside that compartment.