SEC seeks to raise capital requirements for brokers holding substantial customer funds

A unanimous SEC voted Wednesday to consider raising capital reserve requirements for broker-dealers who maintain custody of a substantial amount of customer cash and securities.

The Securities and Exchange Commission released a proposal for public comment that would require certain brokerages to compute the net cash they owe to customers and other broker-dealers more frequently. Under the proposal, brokers that carried average total credits of more than $250 million over the previous 12 months would have to make daily calculations of the size of the reserve fund they must maintain to meet those obligations.

Under current rules, brokerages must make those calculations on a weekly basis. Some already do the math on a daily basis. The proposed rule would require all of those at the $250 million threshold to switch to daily computations.

The proposal is designed to reduce the chances that brokerages that fail would be unable to return funds owed to customers and other brokers. The higher reserve requirement also would ease pressure on the Securities Investor Protection Corp. to step in and help investors recover their money after a brokerage collapses.

The SEC estimates 63 broker-dealers that custody customer funds would be subject to the proposed rule.

SEC Chair Gary Gensler said the proposal would update a rule the agency approved in 1972 that requires brokerages to maintain a special bank account that contains the net cash a broker owes to its customers.

“Our markets have evolved dramatically in the 51 years since [the original rule] was adopted,” Gensler said at an SEC open meeting. “Given the speed, scale, and volume of today’s market activity … I believe customers would benefit if broker-dealers carrying large credit balances made daily reserve account calculations and deposits. This frequency would better align with the inflows, swings, and balances that broker-dealers experience in today’s markets.”

Gensler said the 11 largest broker-dealers already make their reserve calculations on a daily basis. The proposal would mandate that practices for other brokerages that carry large credit balances.

Unlike the 3-2 vote along party lines to adopt a final rule on money-market fund reform earlier in the open meeting, the five-member SEC was unanimous in its support of releasing the broker capital proposal. The SEC has a 3-2 Democratic majority.

Republican SEC Commissioners Hester Peirce and Mark Uyeda were both on board with the proposal. Peirce said it is “narrowly tailored” to address the mismatch between the funds a brokerages has on hand and the amount they owe to customers.

Uyeda praised the SEC staff for providing supporting evidence that shows how they determined that the $250 million threshold was the correct starting point for a higher capital standard.

“Indeed, the data and observations of current broker-dealer practices are sufficiently robust so as to persuade me that the proposal is appropriate for public comment,” Uyeda said.

The proposal will be open for public input for 60 days following its publication in the Federal Register.