Federated Investors recently petitioned the Securities & Exchange Commission to "amend Rule 15c3-3 under the Securities Exchange Act of 1934, to treat U.S. government money market mutual fund shares ... as 'qualified securities' to meet a broker-dealer's deposit requirements under the Special Reserve Bank Account for the Exclusive Benefit of Customers." The SEC previously proposed to expand the use of money funds as brokerage reserves in its March 2007 "Amendments to Financial Responsibility Rules for Broker-Dealers," but these have yet to be adopted.
Law firm Pickard & Djinis explains in the "Petition for Rulemaking" letter, "This proposed amendment, we believe, will improve broker-dealers' operational flexibility in meeting their obligation under Rule 15c3-3 and will allow broker-dealers to obtain more competitive yields on such assets while, at the same time, not compromise the Rule 15c3-3's Congressional purpose of safeguarding customers' deposits or credit balances. Further, this proposed amendment would inure to the benefit of qualifying money market funds and provide the Commission with an opportunity to clearly express its confidence in money market mutual funds."
The letter wants to amend Rule 15c3-3 to define "qualified securities" to allow U.S. government money market funds as investments in the "Special Reserve Bank Account for the Exclusive Benefit of Customers." It says, "By using a U.S. government money market fund, the broker-dealer avoids the operational risk of purchasing and selling U.S. Treasury securities and can reduce the confusion, complexity and opportunity for error that can result. Broker-dealers would have much greater efficiency in their ability to maintain the appropriate level of deposit in the reserve account, and would be able to purchase and sell U.S. government money market funds in precise dollar amounts. Further, broker-dealers will also be able to reduce the human and other costs associated with managing a reserve account with U.S. Treasuries. In sum, the use of U.S. government money market funds will facilitate a broker-dealer's ability to meet its cash management and liquidity in a highly cost efficient manner."
"With aggregate reserve deposits being made by broker-dealers under Rule 15c3-3 reaching an estimated $150-$180 billion, a substantial portion of reserve deposits are backed by the balance sheets of these banks rather than FDIC insured.... This petitions asks that the Commission recognize that investments in U.S. government money market funds, with all the protections of the 1940 Act for registered investment companies; the strict requirements of Rule 2a-7 under the 1940 Act; and the stability of portfolio assets limited to investments in securities issued or guaranteed by the United States government or its agencies or instrumentalities (including repurchase transactions), would allow broker-dealers greater flexibility in meeting their Rule 15c3-3 reserve account requirements without denigrating customer protection," says the petition.
The letter continues, "Petitioner seeks this change to Rule 15c3-3 because it wishes to respond to the needs of its customers. Broker-dealers have a strong desire to avoid the operational risks of managing portfolios of U.S. Treasury securities and to limit the balance sheet risk of bank deposits. Money market funds, specifically money market funds that are limited to investments in securities issued or guaranteed by the United States Government or its agencies or instrumentalities (including repurchase transactions), are safe. FCMs enjoy the same conveniences for purposes analogous to the Rule 15c3-3 special reserve account requirement. We believe that it is long overdue for the SEC to allow broker-dealers and investors to enjoy this same advantage."
