Customer Protection Rules
Various rules protect customers' assets and personal information. Understanding these protections is essential for maintaining customer trust and regulatory compliance.
SEC Rule 15c3-3 (Customer Protection Rule)
Rule 15c3-3 requires broker-dealers to segregate customer assets from firm assets.
Key Requirements
| Requirement | Description |
|---|---|
| Physical Possession/Control | Maintain custody of customer securities |
| Reserve Formula | Calculate customer reserve requirements |
| Special Reserve Account | Deposit excess funds in special bank account |
| Weekly Calculation | Compute requirements every week |
Purpose
- Prevent broker-dealer from using customer assets for firm purposes
- Ensure customers can receive securities if firm fails
- Protect customer assets in bankruptcy
SIPC (Securities Investor Protection Corporation)
SIPC provides limited protection when broker-dealers fail.
SIPC Coverage Limits
| Coverage | Maximum |
|---|---|
| Total Protection | $500,000 per customer |
| Cash Limit | $250,000 within total |
| Securities | Full $500,000 available |
What SIPC Covers
| Covered | Not Covered |
|---|---|
| Stocks and bonds | Commodity futures |
| Mutual funds | Fixed annuities |
| Money market funds | Currency/forex |
| Cash in account | Investment losses |
| Treasury securities | Cryptocurrency (generally) |
How SIPC Works
- Broker-dealer fails and enters liquidation
- SIPC trustee appointed to distribute assets
- Customers receive securities on the books
- SIPC covers shortfalls up to limits
- Excess claims may recover from estate
Separate Capacity Rule
Each "separate capacity" is protected up to the SIPC limits:
| Separate Capacity | Example |
|---|---|
| Individual account | John Smith—Individual |
| Joint account | John & Jane Smith—Joint |
| IRA account | John Smith—IRA |
| Trust account | Smith Family Trust |
Key Point: A customer with multiple accounts in different capacities gets multiple SIPC protections.
Complaint Handling
Firms must have procedures for handling customer complaints.
FINRA Requirements
| Requirement | Details |
|---|---|
| Written Procedures | Firm must have formal complaint process |
| Principal Review | Complaints must be reviewed by principal |
| Recordkeeping | Maintain complaint files for 4 years |
| Reporting | Report on Form U4/U5 as appropriate |
Customer Complaint Defined
A complaint is any written grievance alleging:
- Sales practice violations
- Theft or misappropriation
- Forgery or unauthorized trading
- Any violation of securities laws or rules
Response Timeline
- Acknowledge complaint promptly
- Investigate thoroughly
- Respond in writing
- Document resolution
Privacy Requirements (Regulation S-P)
Regulation S-P governs how firms handle customer personal information.
Privacy Notice Requirements
| Requirement | Details |
|---|---|
| Initial Notice | Provided when relationship established |
| Annual Notice | Provided every 12 months |
| Opt-Out Rights | Customers can limit sharing |
| Content | Types of info collected, shared, how protected |
Nonpublic Personal Information (NPI)
Information protected under Reg S-P includes:
- Account numbers
- Social Security numbers
- Transaction history
- Account balances
- Any personally identifiable financial information
Sharing Limitations
| Sharing With | Customer Consent Required? |
|---|---|
| Service providers | No (if for account servicing) |
| Affiliates | Opt-out available |
| Non-affiliated third parties | Opt-out or opt-in required |
Anti-Money Laundering (AML)
The Bank Secrecy Act requires firms to have AML programs.
AML Program Requirements
| Requirement | Description |
|---|---|
| Written Procedures | Policies and procedures |
| Compliance Officer | Designated AML officer |
| Employee Training | Ongoing AML training |
| Independent Testing | Annual audit of AML program |
Customer Identification Program (CIP)
Before opening an account, firms must obtain:
| Information | Purpose |
|---|---|
| Name | Verify identity |
| Date of Birth | Verify identity |
| Address | Verify identity |
| Identification Number | SSN or Tax ID |
Suspicious Activity Reporting (SAR)
Firms must file Suspicious Activity Reports for:
- Transactions of $5,000+ involving potential illegal activity
- Insider abuse or money laundering indicators
- Structuring to avoid reporting thresholds
- Unusual patterns without business purpose
Currency Transaction Reports (CTR)
Cash transactions over $10,000 must be reported on CTRs.
On the Exam
The Series 7 exam frequently tests:
- SIPC coverage limits ($500,000 total, $250,000 cash)
- What SIPC does and does not cover
- AML program requirements
- CIP information requirements
- Privacy notice requirements
What is the maximum SIPC protection for securities and cash combined in a customer account?
Which of the following is NOT protected by SIPC?
Under a firm's Customer Identification Program (CIP), which information must be obtained before opening an account?
A Suspicious Activity Report (SAR) must be filed for transactions involving potential illegal activity when the amount is:
Under Regulation S-P, firms must provide customers with a privacy notice:
12.6 Ethics and Professional Conduct
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