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WASHINGTON, DC – The American Securities Association (ASA) today provided comments to the U.S. Securities and Exchange Commission (SEC) on its proposal to require certain broker-dealers to perform their customer and broker-dealer reserve computations and make any required deposits into their reserve bank accounts under Exchange Act Rules 15c3-3 (the Customer Protection Rule) daily rather than weekly.
“The American Securities Association is concerned this rulemaking process is being rushed and that finalizing it without a clear understanding of how different broker-dealer models work will have negative impacts on liquidity and competition,” said ASA President & CEO Chris Iacovella. “The Agency’s mandate is to fully consider the impact of its rules on competition, and this rule, as written clearly favors certain firms over others, which is unacceptable.”
In the letter to the SEC, ASA outlined numerous concerns associated with the proposal:
General Concerns: The SEC should consider the unintended and practical consequences of some components of its proposal as discussed below, so that it can make adjustments to achieve maximum effectiveness while minimizing unintended disruptions. The SEC has failed to appropriately weigh the costs of this change versus any potential benefits that could derive from the proposal. These costs include hiring and training staff, negative impacts on liquidity, implementing new systems to perform the daily calculation, and that many inputs used in the reserve calculation are not currently available on a daily basis.
External Sweep Programs: The Proposal does not adequately acknowledge how firms currently utilize external sweep programs through either a bank sweep program governed under FDIC or money market funds. Many firms off balance sheet external sweep offerings represent the majority of client cash holdings and may represent over 80% of these balances. These arrangements already address many of the desired outcomes of the proposed daily computations.
Implications of Daily Computation: While we recognize that there are potential benefits to more frequent computations, we raise concerns about the potential impact on liquidity, particularly in cases involving transitory free credits. A daily reserve computation will increase the likelihood of undue liquidity stress in situations where a free credit balance is transitory.
Clearing Broker Dealers: Clearing broker-dealers currently manage reserve requirements weekly, which has been effective for the industry and never resulted in any problems. We believe the SEC may be underestimating the adjustments required for daily computations and inadvertently creating an uneven playing field between broker-dealers and banks. The proposed amendments hold broker-dealers to a higher standard compared to banks, without concrete evidence of systemic failures in the broker-dealer sector.
Weekly PAB Computation & Optional Daily Computation: For firms performing both customer reserve and Proprietary Account of Broker-Dealer (PAB) computations, we recommend exempting the PAB computation from daily requirements. This adjustment would align with the goal of protecting customer reserves while mitigating stress on firms' resources. Moreover, the SEC should consider allowing optional daily computations under specific circumstances, such as early bond market closures, bank holidays, and days with low industry-wide activity.
Debit Relief: We urge the SEC to adjust the debit penalty requirement from 3 percent to 1 percent, as the proposed threshold is overly broad.
Timely Risk Based Thresholds: The current proposal only uses size as a threshold to perform the calculation and does not address risk or liquidity factors which may be better predictors of a failing firm. Quickly identifying these factors could be effective in identifying those firms trending toward failure. The SEC can require those firms to perform a daily reserve calculation while not penalizing every firm over a predetermined size who likely have very healthy balance sheets.
Simplified Intra-Week Calculation: We acknowledge that certain firms should be required to perform a daily reserve calculation, but we also believe that the vast majority of firms should be permitted to use a simplified intra-week calculation to achieve similar results without causing undue hardship.
The current rule outlines a structure to implement the existing weekly calculation on a daily basis. If we studied the inputs for each firm, we would likely find that most firms have five to ten key balances that have a material impact on the required reserve deposit.
Implementation Timeframe: Firms need adequate time to adjust their infrastructure, staffing, and technology to meet the proposed requirements. As the SEC notes in its release, only parts of the securities industry are currently performing daily computations. Those firms have had the benefit of budgeting and addressing staffing over a period of time. They have also had the benefit of a self-directed runway with time to consider budgets and technology spends that ultimately have been phased-in over time. In industry calls, these firms have shared that it took them approximately 25,000 hours of staff and technology work and 1 ½ years to move from weekly to daily. For firms that have yet to move to this standard, they will need adequate time to work with their Treasury, Operations, Legal, Compliance, Technology, and Human Resources functions (to name a few), and to update their infrastructure in a manner that is able to fulfil the requirements of any final proposal.
The full comment letter can be found here.
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About the American Securities Association
American Securities Association, based in Washington, DC, represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States.