SEC Rule 17f-1 calls for the SEC or its designee, currently the Securities Information Center (SIC), to maintain records of lost, counterfeit, missing, or stolen securities. This rule was created in an effort to reduce trafficking in lost, stolen, missing, and counterfeit securities. The database of securities maintained by the SIC can only be accessed by registered BDs and other financial institutions to ascertain if securities that have come into their possession have been reported as lost, stolen, missing, or counterfeit.
No Criminal Action Suspected
Upon discovery of the likely loss of a security, if no criminal action is suspected, a member has two business days to locate the missing security. If it is still missing on the third day, the loss must be reported to the SIC and the transfer agent.
Criminal Action Suspected
If securities are missing and criminal action is suspected, a member has one business day to report the loss to the SIC and the transfer agent. In addition, the FBI must be notified promptly. If the securities are later recovered, those parties who were originally notified must be advised of the recovery within one business day. Only the party reporting the loss can make notification of the recovery.
Exceptions to Inquiry
Every member is required to inquire of the SIC regarding certain securities coming into its possession as to whether the security has been reported as lost, missing, counterfeit or stolen. Exceptions are made to this inquiry rule if the security is:
- Received directly from the issuer;
- Received from another reporting institution (e.g., member firm);
- Received from an existing customer of the firm and registered in the customer’s name, or was previously sold to that customer as verified by the member’s records; and
- Part of a transaction valued at $10,000 or less.
However, any member may inquire at any time as to the validity of any security delivered into the firm. In essence, the rule requires inquiry only if securities are received from a new customer in registered or bearer form, or from an existing customer in bearer form in which the record of the purchase is not available.
Broker-dealers that carry securities are required to make a count quarterly. If securities are discovered missing as the result of a quarterly securities count, the member has 10 business days to report to the SIC.
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