4.2.2. Customer Reserve Bank Account
The customer protection rule requires a broker-dealer to periodically compute the amount of funds in its customers’ accounts obtained from the customer or from its use of customers’ securities (credits) and compare them to the amount the broker-dealer has lent to customers for the customers’ transactions (debits). If credits exceed debits, the broker-dealer is required to keep the difference on deposit in a “Special Reserve Account for the Exclusive Benefit of Customers.”
The computation to determine how much funds are needed in a customer reserve bank account must occur weekly, for most broker-dealers at the close of the last business day of the week. Any required deposits into the account must be made no later than one hour after the opening of banking business on the second following business day. If debits exceed credits, the firm, in theory, is not using customer money to conduct its own business, and therefore, no money need be deposited in the account.
The only acceptable deposits into the customer reserve bank account are cash and qualified securities, which are securities issued or guaranteed by the U.S. Treasury. Money in the account may not be withdrawn under any circumstances, unless an updated reserve formula calculation reflects a decrease in the reserve requirement. The amount of securities the broker-dealer holds in its possession or control plus the amount of funds held in the customer reserve bank account should equal the total amount the broker-dealer owes its customers.
Customer reserve account calculation. The calculation of credits and debits is specifically spelled out by the SEC. On the credit side are liabilities, such as free credit balances and money that the broker-dealer has borrowed and collateralized with the customers’ own securities. Credits also include payables, such as customer securities failed to receive, dividends that have been outstanding more than 30 calendar days,