Recent No-Action Letter Affecting Exchange Act Rule 15c3-3 and the “Prompt” Transmittal of Customer Checks

September 6, 2016

On July 19, 2016, the staff of the Securities and Exchange Commission (“SEC”) issued a No-Action letter (the “letter”) regarding the prompt transmittal of customer checks to an introducing broker-dealer’s carrying firm. The letter impacts all introducing firms that claim the (k)(2)(ii) exemption from Securities and Exchange Act of 1934 (“Exchange Act”) Rule 15c3-3 (the “Customer Protection Rule”). The (k)(2)(ii) exemption currently requires that broker-dealers “promptly” transmit customer checks received. The SEC previously interpreted the term “promptly” to mean by noon of the next business day

The SEC staff granted this relief in response to the challenges broker-dealers encounter in their attempt to complete all documentation for new accounts quickly enough to allow them to transmit customer checks in the required time frame. More specifically, when broker-dealers were required to transmit customer checks by noon of the next business day they reported it difficult to comply with the applicable regulatory requirements, including the Financial Industry Regulatory Authority’s (“FINRA”) Know Your Customer and Suitability rules, as well as anti-money laundering rules.

According to the letter, the SEC staff will not recommend enforcement actions against any broker-dealer that “fails to transmit to the carrying broker-dealer a customer’s check payable to the carrying broker-dealer by noon of the next business day after receipt, if the purpose for holding the check is to complete the broker-dealer’s account opening process in compliance with applicable FINRA rules.”

The letter requires that broker-dealers also do the following:

  1. Establish policies and procedures reasonably designed to ensure safeguarding of customer checks
  2. Ensure that a registered representative of the member who takes possession of a check made payable to the carrying broker-dealer promptly transmits such checks to an OSJ of the member for processing
  3. Cause a registered principal to perform a review in accordance with FINRA Rule 2090 and determine whether to approve the account for opening within seven business days after an OSJ of the member receives a complete and correct application to open an account with the carrying broker-dealer, including a check made payable to the carrying broker-dealer
  4. Transmit the check to the carrying broker-dealer no later than noon of the business day following the date the registered principal determines whether to approve the opening of an account with a carrying broker-dealer
  5. Maintain a copy of each such check and create a record of the date the broker-dealer received the check from the customer, as well as the date the broker-dealer transmitted the check to the carrying broker-dealer or returned the check to the customer as appropriate, depending on whether the broker-dealer approved or rejected the account opening
  6. Disclose to customers the broker-dealer’s process for handling customer checks payable to a carrying broker-dealer in conjunction with the requested opening of a new account with the firm and the firm’s carrying broker-dealer