SEC Customer Protection Rule Initiative

Authored by: Richard M. Herrick

The SEC has established the Customer Protection Rule Initiative (CPR Initiative) to address violations of Section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.

In their communication on this initiative, the SEC highlights the critical role that compliance with the Customer Protection Rule played in the orderly liquidation of Lehman Brothers during the 2008 financial crises. They also point out the recently announced $415 million penalty imposed on Merrill Lynch for “unprecedented violations of the Customer Protection Rule” emphasizing the seriousness with which the SEC views failures to comply with these rules.

In connection with the initiative, the Division of Enforcement, in coordination with the Division of Trading and Markets and the Office of Compliance Inspections and Examinations, will be conducting a risk-based sweep of certain broker-dealers seeking documents and data for the purpose of assessing their compliance with the Customer Protection Rule.

Action requested by the SEC

The SEC is asking that broker-dealers self-report any historical or ongoing instances of noncompliance by November 1, 2016. And, if enforcement action is warranted, the Division of Enforcement will recommend favorable settlement terms for self-reporters.

See the full communication from the SEC on this initiative here.

For more information on this topic, or to learn how Baker Tilly specialists can help, please contact our team.