Print  Save Email | Text A A A |
  Do You Recommend This Article?  

SEC Grace Period for B-Ds’ Customer Lending Violations Comes Under Fire

By Peter Rawlings November 18, 2020

The SEC’s recent decision to give broker-dealers a grace period to fix problems with their customer lending programs came under fire during outgoing Chairman Jay Clayton’s appearance Tuesday before the Senate banking committee.

The regulator issued a no-action letter on October 22 that gave broker-dealers six months to comply with a requirement for fully paid lending programs that they physically deliver collateral supporting the loan to the customer. The letter was issued after Finra alerted the agency that some B-Ds hadn’t been providing the required collateral.

At the U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing, Sen. Sherrod Brown, D-Ohio, castigated the SEC over its handling of the violations.

“It again plays into the belief that the SEC and this government [is] a deeper swamp than it was four years ago,” he said.

Brown pressed Clayton about how widespread the problem was and why brokers would need a full six months to fix the problem.

“It’s not clear they need six months,” Clayton said. “What is needed is a time for those types of transactions, stock out on loan and the like, to be unwound in what I would say is an orderly way so as not to adversely affect customers or the market itself.”

Multiple senators referred to Clayton’s appearance as his last before the committee. Clayton is set to leave the SEC at the end of this year.

Brown’s remarks echoed criticism by SEC commissioners Caroline Crenshaw and Allison Herren Lee, both Democratic appointees, who condemned the no-action letter in a joint statement in October and said B-Ds should fix the problem “without delay.”

According to the SEC’s no-action letter, Finra staffers warned the regulator’s Division of Trading and Markets about B-Ds operating fully-paid lending programs, in which B-Ds borrow stocks from their customers to lend out or support trading strategies, sharing the additional revenue with those customers.

Finra told the SEC that in some cases, B-Ds were not handing collateral over to the customers from whom they were borrowing, according to the no-action letter. In some cases, B-Ds deposited collateral into a customer’s securities account at the B-D or into an omnibus bank account in the B-D’s name, with the B-D still in control of that collateral, the letter said.

The SEC gave B-Ds that may have run afoul of the rule until Apr. 22, 2021 to provide the necessary collateral to fully secure those loans.

Do you have a news tip you’d like to share with FA-IQ? Email us at

Print  Save Email | Text A A A |
  Do You Recommend This Article?  
Tags:  Client retention , Regulatory/legal issues , Portfolio management

Comment or Feedback

* Required
Financial Advisor IQ will send a confirmation email to your registered email address.