On July 29, 2016, the SEC issued a no-action letter concerning an introducing broker-dealer’s obligation to promptly transmit customer checks to a carrying firm. This no-action letter provides limited relief from the requirement to promptly transmit customer checks payable to the carrying firm by noon the next business day. This relief, which is subject to a number of conditions, applies only if the introducing firm’s purpose for holding the check is to complete its account opening process in compliance with FINRA rules. FINRA has stated that this no-action letter applies to every introducing firm.
Background
Introducing firms are typically exempt from the requirements of Securities Exchange Act Rule 15c3-3, also known as the Customer Protection Rule. To qualify for the exemption, the introducing firm must, among other things, promptly transmit all customer funds and securities to its clearing firm. According to the SEC, prompt transmittal means “transmission or delivery is made no later than noon of the next business day after the receipt of such funds or securities.”
Need for Relief
This no-action letter responds to three introducing firms that reported challenges meeting the requirement to promptly transmit customer checks when a new customer wishing to open an account provided a check payable to the carrying firm with the account opening paperwork. These introducing firms indicated that their obligations to comply with various FINRA rules governing the opening of new accounts could delay the forwarding of a customer’s check to the carrying firm.
Conditions for Relief
According to the no-action letter, the SEC will not recommend enforcement action if an introducing firms fails to transmit a customer’s check payable to the carrying firm by noon of the next business day if:
- The introducing firm’s purpose for holding the check is to complete its account opening process in compliance with FINRA rules;
- The introducing firm establishes policies and procedures reasonably designed to ensure that customer checks are safeguarded;
- The introducing firm ensures that any registered representative taking possession of a check made payable to the carrying firm promptly transmits such check to an OSJ of the introducing firm;
- A registered principal performs a review in accordance with FINRA Rule 2090 (Know Your Customer) and determines whether to approve the account for opening within seven business days after an OSJ of the introducing firm receives a complete and correct application to open an account with the carrying firm;
- The introducing firm transmits the check to the carrying firm no later than noon of the business day following the date on which a registered principal determines to approve the opening of an account with the carrying firm;
- The introducing firm maintains a copy of each check and creates a record of the date on which the check was received from the customer and the date on which the check was transmitted to the carrying firm if the customer’s account opening request is approved or the date on which the check was returned to the customer if the customer’s account opening request is denied;
- The introducing firm discloses to customers its process for handling customer checks payable to a carrying firm in conjunction with the requested opening of a new account with the introducing firm and its carrying firm.
Concluding Thoughts
An introducing firm is not required to collect and hold a customer’s check payable to the carrying firm while a principal reviews the account opening documents and decides whether to approve the customer’s request to open an account. The introducing firm could, instead, wait until the principal completes the review and approves the new account before it accepts a check payable to the carrying firm. In our opinion, waiting to collect checks is the best approach for the broker-dealer wishing to minimize risk. A broker-dealer that holds a customer’s check in a manner contrary to the no-action letter may become subject not only to the full requirements of the Customer Protection Rule but also to the $250,000 minimum net capital requirement applicable to broker-dealers that hold customer funds. In most cases, we would not recommend that an introducing firm assume these additional risks.