Key Takeaways
- SEA Rule 15c3-3 safeguards customer assets.
- SIPC provides limited protection for missing securities.
- Net capital rules ensure broker-dealer solvency.
- Firms must maintain accurate books and records.
- Customer complaints require prompt handling and reporting.
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: