SEC no-action letter relating to prime brokerage: Difference between revisions

SEC no-action letter relating to prime brokerage (view source)

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 The SEC Enfrocement Division will not recommend that the Commission take enforcement action if, under such a prime broker arrangement, the executing broker and prime broker treat the customer account as if it were a broker-dealer credit account under [[Regulation T]] and:
 *[...][''Various matters relating to the regulatory status and set up of the prime broker itself]
-*The customer must keep a [[minimum net equity]] with the prime broker of at least $500,000 in liquid assets )<ref>Being cash or securities with “a ready market”: see the definition  in 15-c3 of “[https://www.law.cornell.edu/cfr/text/17/240.15c3-1. ready market]”, which amounts to a liquid public market: “... a recognized established securities market in which there exists independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for a particular security almost instantaneously ...”.</ref> and the customer is obliged to cure any [[passive breach]]es of that USD500,000 limit within a rather leisurely 5 business days, on pain of the [[PB]] publicly disowning its customer and [[DK]]ing<ref>Until the year of our Lord 2021, the [[JC]] laboured under the gentle misapprehension that “DK” stood for “drop-kick”. To an American, not being wise in the ways of rugby union, it turns out [[DK]] means she “does not know” — that is, rejects — the trade allegation. Strange but true.</ref> all subsequent trades.
+*The customer must keep a [[minimum net equity]] with the prime broker of at least $500,000 in liquid assets )<ref>Being cash or securities with “a ready market”: see the definition  in 15-c3 of “[https://www.law.cornell.edu/cfr/text/17/240.15c3-1. ready market]”, which amounts to a liquid public market: “... a recognized established securities market in which there exists independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for a particular security almost instantaneously ...”.</ref> and the customer is obliged to cure any [[passive breach]]es of that USD500,000 limit within a rather leisurely 5 business days, on pain of the [[PB]] publicly disowning its customer and [[DK]]ing<ref>Until the year of our Lord 2021, the [[JC]] laboured under the gentle misapprehension that “[[DK]]” stood for “drop-kick”. To an American, not being wise in the ways of rugby union, it turns out [[DK]] means she “does not know” — that is, rejects — the trade allegation. Strange but true.</ref> all subsequent trades.
 *A prime broker may settle prime broker trades for customers
 :*whose accounts are managed by a [[Investment Advisers Act of 1940|registered]] investment adviser as long as the account has a minimum net equity of at least $100,000 in liquid assets.
 :*who keep a [[minimum net equity]] with the prime broker of at least $100,000 in liquid assets, if the account cross-[[guarantee|guaranteed]] by another customer of the [[prime broker]] who itself has $500,000 in [[liquid assets]] in an account with the [[prime broker]].
-===Documentation===
+===5. Documentation===
-To qualify the customer must have executed a contract specifying the obligations and responsibilities of the arrangement, including:
+To qualify for no-action relief the following contracts must be executed and available for inspection:
+*The [[prime broker]] and [[executing broker]] must first have executed contract under which:
+:*each acknowledges and agrees to be bound by the terms of the [[SEC no-action letter|no-action letter]];
+:*the [[executing broker]] acknowledges its responsibility for [[Credit risk|credit sanction]]ing, [[KYC]] and locating shares to cover [[short sale]]s and [[DK]]’d trades; and
+:*the prime broker is obliged to notify the executing broker if its customer prime brokerage contract terminates
+*Both [[EB]] and [[PB]] must execute written contracts with their mutual customers consistent with the terms of the [[SEC no-action letter|no-action letter]].
+*The EB must inform any firm clearing its trades that is intends to act as an executing broker]]
+===6. Records===
+The PB must keep separate records for all of its customers available for inspection
+===7. EB notifications===
+The customer and the [[executing broker]] must inform the prime broker by open<ref>Technically, “morning”.</ref> on the next business day of each contract amount, the security, number of shares, and whether it was a long or short sale or purchase. The parties must use a registered clearing agent to issue trade confirmations by open<ref>Technically, “morning”.</ref> on the next business day.
+===8. Settlement by PB===
+The [[prime broker]] must confirm and settle the transactions the customer placed with the [[executing broker]] and within the timeframes above, unless it [[DK]]s a trade, which it must do by close of business on T+1. (This is why the executing broker must undertake its own KYC and credit review.)
+If, due to [[force majeure]] at the clearing agency, the [[prime broker]] receives a trade confirmation that was entered in a timely fashion after noon (eastern time) on T+1 the [[prime broker]] has until the close of business on T+1 of the day after receipt to [[DK]] the transaction.
 {{sa}}
 *[https://www.sec.gov/divisions/marketreg/mr-noaction/pbroker012594-out.pdf The famous SEC no-action letter]
 {{ref}}