SEC Clarifies Intent of Amendments to “Fully Paid Securities” Definition

In a letter to FINRA, the SEC clarified that an amendment to the definition of “fully paid securities” in Exchange Act Rule 15c3-3 (“Customer Protection – Reserves and Custody of Securities”) was not intended to expand the scope of securities that cannot be rehypothecated by the broker-dealer. Rather, the SEC said that the technical amendment was merely meant to “amend out-of-date” citations and “remove text that the Commission believed to be superfluous or redundant.”

Lofchie Comment: In a somewhat cryptically worded letter, the SEC staff clarified that securities that have no lending value for purposes of the broker-dealer margin regulations, but that serve to collateralize a margin loan, may be rehypothecated by a broker-dealer. Any such rehypothecation would of course remain subject to the limits set out in Rule 15c3-3, which are intended to ensure that even an insolvent broker-dealer be able to make its custodial customers whole.