SEC Division of Trading and Markets no-action letter: Securities Industry and Financial Markets Association, Re: Certain Amendments to Rule 15c3-3

DIVISION OF
TRADING AND MARKETS
Kevin M. Carroll
SEC TIES
UNITED STATES
D EXCHANGE
WASHINGTON, DC 20549
February 5, 2015
Managing Director and Associate General Counsel Securities Industry and Financial Markets Association ("SIFMA") 1101 New York Avenue, NW, 8th Floor Washington, D.C. 20005 Re: Certain Amendments to Rule 15c3-3 Dear Mr. Carroll:
SSI
This responds to your letter dated October 14, 2014, wherein you request that the staff of the Division of Trading and Markets ("Division") of the Securities and Exchange Commission ("Commission") re-issue without a sunset date the staffs previous no-action relief1 provided to broker-dealers with respect to a requirement to obtain prior written affirmative consent from a customer under paragraph G)(2)(ii)(A) of Rule 15c3-3 under the Securities Exchange Act of 1934 ("Exchange Act"). 2 You stated that the previous no-action relief works well within the context ofSIFMA member firms' existing systems and procedures, and benefits customers "''-""<-"'"'"'it allows to through on customers' oral instructions and the firm awaits Letter from Randall W. Assistant & SIFMA 17 CFR 240.1 5c3-3G)(2)(ii)(A). Paragraph of Rule l 5c3-3 a broker-dealer to transfer free credit balances held in a customer's securities account on or after the effective date of the into a product in its provided the customer prior written affirmative consent to having free credit balances in the customer's securities account included in the Sweep p,..,.,,.,,..""' after notified of the terms and conditions of the products available through the and that the broker-dealer may change the available under the

Mr. Kevin M. Carroll
February 5, 2015
Based on the foregoing, for the period beginning on March 3, 2015 and ending on September 30,2015, the Division will not recommend enforcement action to the Commission against a broker-dealer for not obtaining a customer's prior written consent to have free credit balances in the customer's securities account included in a Sweep Program if:

1. The broker-dealer has complied in full with all other provisions of paragraph
   (j)(2)(ii) of Rule 15c3-3 (which, as noted above, requires, among other things, that the broker-dealer obtain the affirmative consent of the customer after giving the customer notice of the general terms and conditions of the products available through the Sweep Program and that the broker-dealer may change the products available under the Sweep Program (see paragraph (j)(2)(ii)(A) of Rule 15c3-3));
2. The customer specifically consents that the free credit balances in the customer's
   securities account can begin being included in the broker-dealer's Sweep Program even though the customer has not yet executed the account agreement or other documentation containing the written consent required by paragraph (j)(2)(ii)(A) of Rule 15c3-3;
3. The broker-dealer documents at the time of the account opening that: (A) the
   broker-dealer obtained the affinnative consent of the customer after giving the customer notice of the general terms and conditions of the products available through the Sweep Program and that the broker-dealer may change the products available under the Sweep Program; and (B) the customer specifically agreed that the free credit balances in the customer's account can begin being included in the broker-dealer's Sweep rn''""'"' the customer has not yet executed the account agreement or other consent

Mr. Kevin M. Carroll
February 5, 2015
This letter expresses a staff position with respect to enforcement only and does not purport to state any legal conclusion on this matter. Any material change in circumstances may warrant a different conclusion and should be brought immediately to the Division's attention. Furthermore, this position may be withdrawn or modified if the staff determines that such action is necessary in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the securities laws. Sincerely, Michael A. Macchiaroli Associate Director

Invested in
October 14, 2014
Michael A. Macchiaroli
Associate Director
Division of Trading and Markets
Securities and Exchange Commission
1 00 F Street, NE
Washington, DC 20549-7010
Re: Request for nn•nH>r consent requirement
Dear Mr. Macchiaroli:
The Securities Industry and Financial Markets Association submits this on behalf of its members to respectfully request further relief from the recently imposed requirement under the Financial Responsibility Rules (collectively, the "Rules"i that a broker￾dealer obtain prior consent from a customer before placing customer funds into a sweep program define program as a service that the customer to automatically rr'-ln<e!Pr account 1 SIFMA the shared interests of hundreds of securities firms. banks and asset managers. SIFMA's mission is to support a strong financial investor creation and economic while building trust and confidence in the financial markets. with oft!ces in New York and is the U.S. member of the Global Financial Markets Association. For more 2 The recent amendments to the Rules became effective on March 3, 2014. Order ''rrnnnma the New Amendments to the Financialll"·'·uv,.,., Broker-Dealers under the Securities Act Release No. 70701 F.R. 62930 2013). 17 C.F.R.

affirmative consent from a customer to participate in a Sweep Program.5 requires firms to:
essence, the
(i) Obtain and document verbal consent prior to initiating a sweep; (ji) Provide prior notification of the general tenns and conditions of products available through the Sweep Program, and state that the broker-dealer may change the products available under the Sweep Program; (iii) Establish a process to obtain written consent within 90 calendar days of account opening; and (iv) If writien consent is not obtained within 90 calendar days, then the firm must stop including free credit balances in the Sweep Program. SIFMA and its members greatly appreciate your and your staffs efforts in working with us to obtain the current NAL The relief has proven helpful and beneficial to firms and customers alike. The NAL and its relief, however, are scheduled to sunset on March 3, 2015. Accordingly, we believe now is an appropriate time to address whether a more permanent solution is achievable in order to avoid a significant expenditure of time, money and resources by many of our member firms, and to ensure that customers' free credit balances can be put to work for them in a more timely manner, as discussed below.

signatures of, and responses from, multiple persons who will share ownership or access to the account, and who may not be present at account opening, thereby further delaying the process. When a customer calls or visits a firm's offices to open an account, the firm's financial advisor (''FA") generally explains the new account opening process to the customer. The FA will also collect from the customer certain personal and financial profile information for contemporaneous or later entry into the firm's electronic systems. It is also common for the customer to provide a deposit at account opening, whether by check, by wire transfer, by 'joumaling' money from an existing account to the new account, or by other means. During this process, the customer may express his or her preference that any free credit balances in the newly established account be transferred to a product in the firm's Sweep Program. If the customer is on the telephone, it is not possible to concurrently obtain their written consent to a Sweep Program, so the firm obtains their oral consent. If the customer is in-person, most firms likewise obtain the customer's oral consent to the Sweep Program at that time and thereafter, obtain the customer's written consent when they return their fully executed application package. With respect to in-person account openings, the SEC staff recently asked us whether firms could comply with the new Rule by having their new customers sign a separate, one-page "Consent to Sweep Program" form at account opening. The vast majority of firms have not undertaken to develop or implement such a form. Due to the fairly voluminous nature of the account opening documentation, a number of our member firms report that they generally treat application as a collective package, which is most easily reliably managed and tracked as same firms anticipate that it would be an expensive, time-consuming, rwr'"'"''"" to ensure

customers' new account forms, and are thereby incentivized to follow-up with their customers by telephone, email, mail, or otherwise, until the package is fully executed and returned. B. Supporting data re: new account openings and Sweep Programs. The SEC staff also requested that we furnish supporting data and information about our member finns' new account opening processes and the operational challenges they face in complying with the new Rule. Accordingly, we recently surveyed our members in order to collect information that we hope the staff will find helpful. The following discusses the aggregate survey responses of our members:
Survey Respondents
Twenty-one SIFMA member firms who open customer accounts with Sweep Program features responded to SIFMA's Financial Responsibility Rule- Sweep Program Survey (the "Survey"). These firms reported that collectively, they open, on average, approximately 6,372,000 customer accounts with Sweep Program features per year. The responding firms range in size and model from firms that open approximately 1,500,000 accounts per year to firms that open approximately 120 accounts per year. Account Opening Mechanism With respect to the means by which firms open new customer accounts (e.g., whether in￾by telephone, internet, mail, etc.), a number firms indicated that they were unable to specificity. firms, however, that they customer accounts

Industry Use of the Current NAL Relief of the Survey respondents currently rely on the NAL relief to comply with the new Rule. Seven of the Survey respondents have undertaken to implement a system/technology measure to suppress the sweep function until the customer's written consent is obtained. Ofthe nine firms not currently relying on the NAL relief, stated that their decision not to rely on the NAL relief may change ifthe NAL relief is made permanent. Customer Impact With respect to the seven Survey respondents that elected to develop and implement a system/technology measure to suppress the sweep function, and prevent the customer from participating in the Sweep Program until the firm has received the customer's written consent, the average yearly number of customer accounts impacted at these seven firms alone is approximately 839,000 accounts. The average total daily free credit balance in these accounts is approximately $514,540,000. Thus, to the customers' detriment, hundreds of millions of dollars sit idle and uninvested in hundreds of thousands of accounts, pending receipt of their written consent to the Sweep Program. c. The new Rule imposes a significantly greater scope and scale of costs and burdens that u"''"'"~' "''"'"'H-'"'""' nor addressed the cost-benefit analysis of the These costs both securities firms and investors alike. As discussed below, these costs also Act Release 70072 78F.R. 7 !d at 51 864 -- 65.

Thus, by the staffs estimate, the cost of all broker-dealers that carry free credit balances to comply with the new Rule would be approximately $37.6 million in the first year and $23.2 million in every year thereafter. The staffs estimate appears to contemplate that the only cost to firms would be that of generating and processing a new, up-front consent form, such as the Consent to Sweep Program form discussed above. As discussed, however, our members report that they generally have not undertaken to develop a separate, stand-alone form to obtain written customer consent to Sweep Programs at account opening, primarily because the account opening documents are already fairly voluminous and designed to be managed and tracked as a single package, and because it would require a costly, largely manual and labor-intensive process to collect, track, supervise, and ensure enterprise-wide compliance with an additional, stand-alone fonn at the point of account opening. Regardless, even if firms endeavored to obtain the customer's written consent to the Sweep Program at account opening, there would likely be many instances where the firm is unable to obtain that written consent. Because of those situations, firms would also need to develop and implement a system/technology measure to suppress the automatic sweep function and embargo the customer's free credit balances until such time as the firm receives the customer's written consent to the Sweep Program. The SEC staffs estimate does not appear to contemplate or address this additional, likely substantial, cost of compliance for broker-dealers. Costs to Customers to

Moreover, where a broker-dealer acting as or working with an IRS-approved custodian concludes that it cannot hold "plan assets" (including IRA assets) in cash or free credit balances, the only alternative may be to return the cash to the customer, which could trigger a taxable distribution from the plan or IRA and potentially expose the client to early withdrawal penalties of 1 0%. Furthermore, returning the cash to a plan may first require administrative action on the
part of the plan, which may not be easily obtained in a timely manner.
Potential Conflict with T'reasury Regulations
Yet another previously unidentified, potential conflict involves the interplay between the new Rule and certain Treasury Regulations. Specifically, Treasury Regulation§ L408-2(e) allows nonbank custodians who meet certain requirements to handle fiduciary accounts such as qualified retirement plan custodial accounts, IRAs, and Roth IRAs, among others. A number of SIFMA's members function as nonbank custodians under this provision. Section 1.408- 2( e)( 5)(iv) requires that funds held in a fiduciary capacity by a nonbank custodian "will not be held uninvested or undistributed any longer than is reasonable for the proper management of the account." There is a substantial risk that a nonbank custodian's decision to allow new customer deposits to remain uninvested because the customer had given only oral- but not written￾consent to a Sweep Program would not be deemed "reasonable" under the Treasury Regulations. Consequently, this potential conflict also represents a substantial risk to the continuing, Treasury-approved status of nonbank custodians and their ability to service fiduciary accounts. As discussed above, and generally speaking, current new account opening and «-'""'"'~., at

The current NAL relief generally works well within the context of our member firms' existing system and procedures. Our members can now avail themselves of the NAL relief, and best serve their clients, with fairly minimal burden and expense. Most of our member firms have not yet committed the time, money or resources to develop and implement the procedural, systemic, and automation fixes (e.g., Consent to Sweep Program form, suppress the sweep function, etc.), as discussed above, that would be necessary to comply with the new Rule. Our members caution that they would require significant lead-time to build-out these types of changes. The cunent NAL relief also benefits customers because it allows firms to follow through on their customers' oral instructions and put their opening deposits to work for them immediately in the Sweep Program, while the firm awaits the customer's written consent The cunent NAL relief also helps mitigate potential conflict with ERISA, the Code, and Treasury regulations, outlined above, insofar as it allows customers' deposits to remain invested through the Sweep Program for the first ninety days. If the current NAL is allowed to sunset, and absent alternative relief, costs expand exponentially costs to finns, costs to customers, costs of ERISA, Code and Treasury regulatory compliance, and yet, there would be no conesponding or additional benefit to either customers or to regulatory interests in return. tletm·e our members and their customers are subjected to these significant costs, we and appropriate to first with staff whether or not more lasting no￾is possible. member firms and their customers seek and long-

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