On July 22, 2021, FINRA published Regulatory Notice 21-27 (the “Notice”), updating its Interpretations of Financial and Operational Rules to reflect communications from the SEC staff to FINRA.1 All of the interpretations updated as described in the notice are interpretations of SEC Rules 15c3-1 and 15c3-3 under the Securities Exchange Act. Rule 15c3-3(j) governs the treatment of customer funds held as free credit balances in customer securities accounts, including when such funds are automatically deposited, or “swept,” into bank deposit accounts through a broker-dealer’s sweep program (“Sweep Program”).
Among other things, Rule 15c3-3(j) requires that a “broker or dealer provide[] the customer with written notice at least 30 calendar days before … (C) Changing, adding or deleting products available through the Sweep Program.”2 Pursuant to an interpretation announced in the Notice (“Interpretation”):
“For purposes of [Securities Exchange Act] Rule 15c3-3(j)(2)(ii)(B)(3)(i)(C), “changing, adding or deleting products available through the Sweep Program” includes changing, adding or deleting a money market mutual fund product or a bank in such Sweep Program, as applicable.”3
Many broker-dealers offer Sweep Programs that sweep customer funds into multiple banks – in some case 15 or more different banks. Industry practice for providing notice to customers when a bank is added or removed from the list of banks in a broker’s Sweep Program is not uniform, with some brokers using their website to provide notice of such changes less than 30 days prior to the change. Further, a broker may have no control over a bank leaving its Sweep Program, precluding the ability to provide 30 days’ notice to customers.
We have spoken to both SEC and FINRA staff regarding the potential difficulties that the Interpretation could cause brokers maintaining Sweep Programs with multiple banks, particularly in the current economic environment. The staff understands the issue and is open to considering an exceptions process if one is proposed by the industry.
Let us know if you would like assistance in contacting the staff to discuss an exceptions process.
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Seward & Kissel LLP will continue to provide insight on developments regarding brokered deposits. If you have any questions about this or any other aspect of the Notice or of compliance with Rule 15c3-3(j) generally, please contact Paul Clark, Casey Jennings, or Nathan Brownback in the Washington, DC office at 202-737-8833
