Menu

Broker-Dealers Can Hold Customers’ Initial Checks

Insurance   |   Securities Transactions and Compliance   |   Securities and Derivative Litigation   |   Life, Annuity, and Retirement Solutions   |   December 22, 2016
Download   
Share Page

A recent SEC no-action letter gives broker-dealers more time to perform suitability and other reviews when opening certain customer accounts.

The firms requesting the letter were affiliated with three different insurance company complexes and were engaged in retail sales of mutual funds, variable annuity and variable life insurance contracts, Section 529 plans, and other securities. The firms sometimes served as "introducing" brokers, who would open accounts for their customers with the firms’ "clearing" brokers.

Although, in order to fund the account, a customer might give an introducing broker a check made out to the clearing broker, the introducing firms did not want to be deemed to be carrying customer funds for purposes of broker-dealer net capital requirements. This meant that, under longstanding SEC interpretations, the checks had to be forwarded to the clearing broker by noon on the next business day following receipt.

This, however, did not allow enough time for the introducing firms’ process of forwarding the relevant account opening documentation to their "offices of supervisory jurisdiction" (OSJs) to correct any inaccuracies or omissions and determine that regulatory requirements (such as suitability, "know your customer," and anti-money laundering) were satisfied, before opening the account and forwarding the check to the clearing broker.

Accordingly, under the no-action letter, the introducing broker need not forward the check to its clearing broker until noon on the day after a registered principal of the introducing broker approves opening the account, provided that: (a) the principal’s review is completed within seven business days after the introducing broker has a complete application at its OSJ and (b) certain other conditions are met.

This is very similar to relief the SEC previously granted where a broker-dealer delays delivery of an initial check the customer has made payable to the issuer of a security (rather than, as here, to a clearing broker) that the customer is purchasing on a "subscription way" basis. See "‘Promptly Transmit’ Redefined for Some Customer Checks," Expect Focus Vol. III, 2015.


©2019 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.