3.2 Control Locations and Customer Delivery Deficits

Possession and Good Control Locations

Possession includes securities physically held in a qualifying manner. Control can include securities at a clearing agency, bank or another location satisfying Rule 15c3-3(c). A location code in a ledger is not proof of control.

Bank custody requires appropriate acknowledgments and absence of prohibited liens. Clearing-agency and foreign custody arrangements must meet their applicable conditions. Do not treat every foreign custodian as either automatically valid or prohibited.

In-transit securities between firm offices have a five-business-day condition. Bona fide transfer items have a 40-calendar-day condition involving completed transfer, acknowledgment or revalidated evidence. There is no general 30-day corporate versus 40-day municipal split. Track aging and documentation.

If customers require 15,000 shares, with 10,000 in an eligible location and 5,000 improperly pledged, the ledger’s 15,000 total does not cure the deficit. Initiate required release, recall, borrow or buy-in action. Adding cash to the reserve bank account does not generally cure a securities possession deficit.

Daily Determination of Possession or Control Deficits

Carrying broker-dealers must operate daily automated reconciliation routines to monitor possession and control compliance:

• Frequency of Determination: The possession or control calculation must be performed daily, as of the close of business of the preceding business day.
• The Deficit Calculation: Operations compares the aggregate customer requirement (Fully Paid + Excess Margin) against the aggregate quantity of securities actually positioned in good control locations.
• Remediation Timelines: When a deficit is identified (more shares required than available in good control), operations must take prompt corrective operational action:
  • Issue return instructions no later than the business day following the deficit determination and obtain possession/control within five business days after the instructions under the applicable Rule 15c3-3(d)(1) conditions.
  • Issue lien-release instructions no later than the business day following determination and obtain possession/control within two business days after instructions under the applicable conditions.
  • If a deficit arises from a fail to receive that has aged past statutory limits, the firm must initiate a buy-in or borrow to cure the shortage.

Customer Fails and Mandatory Buy-Ins (SEC Rule 15c3-3(m))

When a customer executes a long sale through a broker-dealer, the customer is legally required to deliver the sold securities to the firm on or before settlement date (T+1). If the customer fails to deliver the physical certificates or initiate an electronic transfer (e.g., via DRS or ACATS), a customer fail occurs.

Under SEC Rule 15c3-3(m):

• If a customer sells securities and has not delivered them to the broker-dealer within 10 business days after the settlement date (S+10), the broker-dealer must promptly close out the transaction by purchasing securities of like kind and quantity (execute a mandatory buy-in).
• The firm cannot waive this requirement or grant indefinite customer extensions. A broker-dealer may apply to FINRA for an extension under extraordinary circumstances (e.g., international mail delays, death of a registered owner with probate processing), but if the extension is not granted before the 10th business day post-settlement, the buy-in must be executed immediately.
• Reconcile the buy-in cost and any customer liability under the actual agreement and rule; do not assume a cashiering clerk may charge a disputed loss without review.

Quantity and Aging Example

Assume the firm owes customers 10,000 fully paid shares and has 7,000 eligible shares at the depository, 2,000 out on loan and 1,000 supported by a failed receipt. The stock record can explain all 10,000, but it does not establish 10,000 in possession/control. Identify the 3,000-share issue, determine which positions require recall, release, borrow or buy-in action, and apply the actual aging and remediation provisions.

The customer-delivery deadline under paragraph (m), the firm’s daily deficit determination and a clearing-agency SHO closeout are different requirements. A ten-business-day customer fail provision does not authorize leaving an unrelated short-sale fail open past Rule 204’s deadline.

Document the determination date, customer requirement, eligible quantity, location conditions, aging and action taken. Verify return of recalled shares through depository/physical receipt and the stock record. A sent recall email alone is not restored control.

If a bank claims a lien over supposedly segregated shares, escalate the agreement and actual encumbrance immediately. The custody location’s name does not resolve its legal status. Similarly, in-transfer items that age beyond the applicable condition need supporting evidence or corrective action. Do not restart their age by changing a location code without an actual qualifying event.

Sources checked 2026-10-20: SEC customer protection rule, SEC certificate reporting rule.