At the request of SIFMA's Capital Steering Committee, the SEC Division of Trading and Markets issued a no-action letter providing relief for broker-dealers with respect to custody requirements for accounts of investment funds and investment companies with common managers.

Rule 15c3-3 ("Customer protection-reserves and custody of securities") generally requires a broker-dealer to maintain a segregated special reserve account containing cash (or certain other safe assets) to satisfy customer claims in the event of a failure by the broker-dealer. The special reserve account formula makes several adjustments to take into account factors that might indicate a heightened risk that debit balances won't be paid in full. One of the adjustments, contained in Note E(5) to the reserve formula, imposes a concentration limit on customer debits. If the concentration limit is exceeded, a broker-dealer is required to keep more money in the special reserve account.

For the purposes of calculating the special reserve requirement, the no-action letter allows broker-dealers, in certain circumstances, to treat investment funds (whether registered under the Investment Company Act of 1940 or exempt from registration under Section 3(c)(1) or 3(c)(7) of the Act) as separate accounts, even if they share an investment manager or have affiliated investment managers. For publicly-offered funds registered under the Investment Companies Act, there are no further conditions. For other funds, the relief is available if any of the following conditions are met:

  • the fund's debit balance in the account is 2.5 percent or less of the broker-dealer's tentative net capital;
  • the fund is "not narrowly held"; or
  • there is no common ownership among the funds if they are narrowly held.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.