The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA) recently issued Frequently Asked Questions (FAQs) concerning the exemption provisions of SEC Rule 15c3-3, the Customer Protection Rule. Prior to this guidance, even if they did not meet all requirements for (k)(2)(i) or (k)(2)(ii) on the FOCUS Report, firms were choosing to file for a (k)(2)(i) if they did not have custody. To address this issue, the SEC released footnote 74 to allow these “Non-Covered Firms” to properly file for exemption under Rule 15c3-3.
What is Footnote 74?
If a firm qualifies for footnote 74, they would be eligible to file an Exemption Report instead of a Compliance Report and can be classified as a Non-Covered Firm. According to the SEC FAQ page, the firm must meet certain requirements in order to qualify for footnote 74:
- Not qualify for the (k)(2)(i) or (k)(2)(ii) exemption;
- Not directly or indirectly receive, hold, or otherwise owe funds or securities for or to customers, other than money or other consideration received and promptly;
- Not carry accounts of or for customers; and
- Not carry proprietary accounts of broker-dealers (PAB) accounts.
Additionally, a Non-Covered Firm that limits its business activities exclusively to one or more specific types would be eligible to file an exemption report. These business activities include:
- Proprietary trading;
- Effecting securities transactions via subscriptions;
- Receiving transaction-based compensation for identifying potential merger and acquisition opportunities for clients, referring securities transactions to other broker-dealers, or providing technology or platform services;
- Participating in distributions of securities (other than firm commitment underwritings) in accordance with the requirements of paragraphs (a) or (b)(2) of Rule 15c2-4; or
- Engaging solely in activities permitted for capital acquisition brokers (CAB) as defined in FINRA’s CAB rules and approved for membership in FINRA as a CAB.
Claiming Exemption Under Footnote 74
A Non-Covered Firm should no longer indicate in its FOCUS Report that it is claiming an exemption from Rule 15c3-3 with respect to Non-Covered Firm activities. Specifically, Items 4550, 4560, 4570, and 4580 should be left blank. Then, they should explain their non-covered status in the Memo Item of the FOCUS Report.
In the exemption report, a Non-Covered Firm should include a description of all the firm’s business activities and a statement that the firm complied with the footnote 74 requirements listed above during the reporting period.
Meeting Requirements for Multiple Exemptions
There will be cases where a firm will conduct a variety of business activities, with some falling under (k)(2)(i) and some falling under (k)(2)(ii). If this is the case, firms should indicate both exemptions on the FOCUS Report
In the event that a firm conducts a variety of business activities with some falling under (k)(2)(i), some falling under (k)(2)(ii), and some falling under footnote 74, the firm cannot claim an exemption under Rule 15c3-3 and should not claim an exemption on the FOCUS Report. Instead, the firm should explain its non-covered status in the Memo Item of the FOCUS Report.
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