SEC Rule 15c3-3 - The Customer Protection Rule

SEC Rule 15c3-3: Possession or Control

Rule 15c3-3 requires that "a broker or dealer shall promptly obtain and shall thereafter maintain the physical possession or control of all fully-paid and excess margin securities carried by a broker or dealer for the account of customers."

Securities under the control of a broker-dealer include securities:

Excess Margin Securities means those securities carried in a customer's securities accounts having a market value in excess of 140% of the customer's net debit balance in such accounts.

When a customer's account contains more than one security, a broker-dealer may choose, at its option, which security (securities) comprise excess margin securities.

When calculating excess margin securities, the debit balance is exclusive of any credit balance in a bona fide short account after marking the short position(s) to the market.

Broker-dealers identify fully-paid and excess margin securities by issuing "seg" or "lock-up" instructions which are memoranda entries in the books and records. A system that facilitates the "revision" of these instructions on a daily basis (i.e. changes the identity of excess margin securities based on an allocation formula) is called a "fluid" segregation system. As long as revisions do not violate or flout the intent of the rule, they are permitted.

Instructions to reduce to possession or control fully-paid or excess margin securities must be issued within prescribed time frames. For purchases, instructions must be issued on or before the business day following settlement date, or business day following actual date of payment (whichever is later).