SEC Rule 15c3-3 - The Customer Protection Rule

Introduction to SEC Rule 15c3-3

SEC Rule 15c3-3 is often called the customer protection rule. The rule was adopted on November 10, 1972 in response to severe problems in the securities industry during the period 1968 to 1970. During the period the securities industry was experiencing severe recordkeeping problems. Trading volume had increased significantly and automation was in its infancy. More than a dozen New York Stock Exchange firms failed resulting in customer losses exceeding $100 million. To stop the erosion of public confidence in the securities industry the Exchange established a "Special Trust Fund" to cover customer losses at failed member firms. The "Fund" was financed by assessments on all members.

During the period a number of practices contributed to customer losses and loss in public confidence. It was not uncommon for broker-dealers to use customer securities and funds for their own business purposes. The increased volume and inability of broker-dealers to keep abreast with the surge in transactions resulted in significant recordkeeping problems, a large volume of "questioned trades" (uncompared trades), a breakdown in recordkeeping over the custody of securities and location, significant and recurring accounting out-of-balance conditions and a large volume of fail contracts. When failed firms were liquidated it was discovered that customer fully paid securities were pledged as collateral for bank loans and were liquidated by the lending banks to pay off the loans, customer free credit balances had been used to finance the broker-dealers' business, and customer securities could not be located.

As a result of these problems and customer losses Congress enacted the Securities Investor Protection Act of 1970 (SIPA) which created the Securities Investor Protection Corporation (SIPC) and required the SEC to strenghten customer protection and increase investor confidence in the securities industry by increasing the financial responsibility of broker-dealers.

Pursuant to this mandate the SEC established the customer protection rule (Rule 15c3-3) in 1972 and the uniform net capital rule (Rule 15c3-1) in 1975. Prior to that time each securities exchange and national securities association had its own net capital rule, often with varying treatment of identical items.