A carrying broker-dealer keeps all of its customers' cash in the same bank account as its own operating funds, and its ledger records to the penny how much of that balance belongs to each customer. Does that arrangement satisfy the segregation requirement?

No — the money itself must sit in a separate, dedicated account apart from the firm's own, because a book entry leaves the cash available to the firm's obligations

Yes — the requirement is a record-keeping standard, and a ledger identifying each customer's share to the penny satisfies it so long as the firm reconciles it to the bank balance daily

Yes — one pooled account is permitted provided the firm's own funds standing in it at all times exceed the total of the customer balances that the ledger records

No — the firm must open an individually titled bank account for each customer, so that no customer's cash is ever pooled with the cash of another customer of the firm

A carrying broker-dealer must repay a bank loan it took out to finance its own business. Which assets are available to it for that repayment?

Its proprietary assets together with customer free credit balances, which are the firm's to use until a customer calls for the money

Its proprietary assets alone, since customer funds and securities held in segregation may not be applied to the firm's own obligations

Its proprietary assets together with customer cash, provided the firm's net capital after the repayment still exceeds its regulatory minimum

Its proprietary assets together with customer securities held in possession or control, which may be sold if the firm replaces them promptly

A customer's shares are properly held in segregation at her carrying broker-dealer, and over the following year they lose forty percent of their market value. What has segregation done for her?

It has entitled her to compensation for the decline out of the reserve the firm maintains for the exclusive benefit of customers

It has preserved the value the shares had when they were placed in segregation, the firm making good any shortfall on their return

It has kept the shares hers and available for return, which is protection against the firm's failure rather than against the market

It has obliged the firm to sell the shares and hold the proceeds as cash once the decline passed a specified percentage

A broker-dealer that had held customer cash in its ordinary business accounts, mixed with its own money, fails and is placed into liquidation. Where does that leave a customer whose cash sat in those accounts?

Her cash forms part of the general estate and she has no priority claim to it, ranking with the firm's other unsecured creditors

Her cash is traced to her through the firm's records and returned in full before anything in the estate is distributed to creditors

Her cash ranks ahead of the firm's secured lenders, customer claims taking first priority wherever a broker-dealer has failed

Her cash is a secured claim up to the balance shown on the firm's last statement to her, and an unsecured claim for the remainder

Before comprehensive segregation rules existed, customers of failed broker-dealers routinely lost substantial parts of their assets. What had become of those assets?

They had been sold off during the failure to raise cash for the firm, at prices well below the values shown on the customers' own account statements

They had been transferred to the broker-dealers that took over the failing firms' business, which then declined to honour the customers' claims to them

They had been lost in the movement of records between offices, so that customers could no longer establish what it was that they had owned

A carrying broker-dealer must keep its customers' fully paid and excess margin securities in locations that satisfy SEC Rule 15c3-3. What has to be true of such a location?

It must be a bank or a central depository, a broker-dealer never being permitted to hold customer securities on its own premises

It must be away from the broker-dealer's own premises, so that the securities are beyond the reach of the firm's operations staff

It must be exclusively under the broker-dealer's control, and the securities there must be clearly identifiable as customer property

It must be examined each quarter by an independent accountant, who confirms the holdings there against the customers' statements

A carrying broker-dealer identifies a custodian it regards as entirely safe and proposes to hold customers' fully paid securities there. What governs whether it may do so?

The custodian's regulatory status governs, and any institution supervised by a federal banking agency is acceptable for the purpose

The firm's own written assessment of the custodian's safety governs, provided the assessment is documented and reviewed at least once a year

The customers' written consent governs, each customer being entitled to name the place at which their own securities are to be held

The rule names the locations at which those securities may be held, and the proposed custodian must be among them

A margin account holds securities with a market value of three hundred thousand dollars against a debit balance of one hundred and fifty thousand dollars. What amount must the carrying broker-dealer hold in its possession or control as excess margin securities?

One hundred and fifty thousand dollars

Two hundred and ten thousand dollars

One hundred and twenty thousand dollars

In the reserve formula under SEC Rule 15c3-3, which of the following is a customer credit item?

Securities borrowed to finance customer short positions

A carrying broker-dealer's computation produces customer credit items of four hundred and twenty million dollars and customer debit items of three hundred and sixty-five million dollars. What must the firm do?

Have three hundred and sixty-five million dollars on deposit in its Special Reserve Bank Account

Have four hundred and twenty million dollars on deposit in its Special Reserve Bank Account

Have fifty-five million dollars on deposit in its Special Reserve Bank Account

Keep no reserve deposit, since a deposit is required only where debit items exceed credit items

Certain large carrying broker-dealers must compute the customer reserve formula daily rather than weekly. What does a firm that qualifies to compute daily receive in return?

A reduction in the minimum net capital it must maintain, proportionate to the size of its customer debit items

An extended deposit deadline, later than the one that applies to firms computing the formula weekly

Permission to skip the computation in any week in which its customer credit items move by less than five percent

A smaller required charge against its aggregate debit items, which lowers the balance it must keep on deposit

In what assets must the balance required in a Special Reserve Bank Account be held?

Cash at qualifying banks and United States government securities purchased through accounts at such banks

Investment-grade corporate bonds and the commercial paper of qualifying banks, alongside cash on deposit

Any securities the firm also holds as proprietary positions, provided it marks them to market at each computation

Cash alone, since any security held in the account would introduce a market risk the reserve balance cannot carry

A carrying broker-dealer proposes to pledge assets held in its Special Reserve Bank Account overnight as collateral for its own funding, releasing them before the next computation. What does the customer protection framework permit here?

The pledge, provided the firm substitutes cash of equal value in the account for the period the pledged assets are out

Nothing of the kind, since the account's assets may not be used for any purpose other than satisfying customer claims

The pledge, provided it is unwound before the next computation so that the computed balance is left unaffected

Nothing of the kind, since the assets in the account become the customers' own property and the firm has no title left to pledge

The rules governing the Special Reserve Bank Account restrict how much of it may be held as cash at an affiliated bank, and cap concentrated cash at any one non-affiliated bank. What vulnerability do those restrictions address?

That a bank holding the reserve could delay a withdrawal long enough to stop a required deposit being made on time

That cash at a bank earns less than the account would earn in government securities of a comparable maturity

That the safety of the customer reserve would otherwise turn on the financial condition of the bank holding it

That deposits at an affiliated bank would be consolidated into the firm's own balance sheet and inflate its net capital

A carrying broker-dealer holds cash and securities for other broker-dealers that clear through it. Why did a structural gap in protection arise for those balances?

The balances were held in omnibus form and could not be attributed to any individual account holder

The possession-and-control obligation reaches only securities, so balances held as cash fell outside it

Broker-dealer account holders were presumed able to judge a carrying firm's solvency and to withdraw in time

The rule's protections were keyed to a defined term for customers that excluded other broker-dealers

A carrying broker-dealer holds cash and securities both for retail customers and for other broker-dealers that clear through it. What reserve obligations does it have?

Two: the customer reserve account, and a separate reserve account for the broker-dealer balances on an analogous formula

One: a single reserve account computed over the combined balances of its customers and of the firms it carries for

Two: the customer reserve account, and a deposit at its clearing organisation equal to the broker-dealer balances held

One: the customer reserve account, the broker-dealer balances being secured instead by a written guarantee from each firm

An introducing broker-dealer takes customer orders and clears every trade through a carrying firm under a fully disclosed arrangement. Which firm performs the possession-and-control and reserve computations for those customers' assets?

The introducing firm, which has the customer relationship and the record of what each customer owns

The carrying firm, which maintains the accounts and bears the customer protection compliance obligations

Each firm for the part it handles, the introducing firm for securities and the carrying firm for cash balances

Whichever firm the carrying agreement names, this obligation being allocated between them by commercial agreement

An introducing broker-dealer holds none of its customers' cash or securities. Which obligations does it still carry in its own right?

Its obligation to confirm each week that the carrying firm's records show its customers' assets in full

Its obligation to carry a fidelity bond covering the carrying firm's handling of the introduced customers' assets

Its suitability and conduct obligations under FINRA rules, which are unaffected by where the customers' assets are held

None in its own right, every obligation to the introduced customers passing to the carrying firm by the clearing agreement

An introducing firm, contrary to its usual practice, accepts physical certificates from a customer and keeps them in its office for several days before forwarding them. What is its position under SEC Rule 15c3-3 during those days?

It is within the rule only if it keeps the certificates beyond the settlement date of the trade they relate to

It is outside the rule, which attaches to a firm's chosen business category rather than to what it holds at any moment

It is outside the rule, because the carrying firm's arrangements cover every account introduced to it whatever happens

It is holding customer securities, so the requirements attach to it: they follow the holding of customer assets

A SIPC-member broker-dealer fails. How do the segregated customer assets and the SIPC fund relate to one another in getting customers paid?

The segregated assets are recovered and returned first, and the fund covers only losses remaining after that

The fund pays each customer first, up to its limits, and the segregated assets are then applied to what is still owed

The two are applied in proportion, each customer receiving part of the segregated assets and part of the fund's cover

The fund is drawn on only where the segregated assets sat at a bank that has itself failed, and not otherwise

A broker-dealer registered with the SEC carries customer accounts and complies fully with the customer protection rule, segregating every customer asset it holds. May it decide for itself whether to belong to SIPC?

Yes, since membership is optional for a firm that can show full compliance with the customer protection rule

No, since every broker-dealer registered with the SEC that carries customer accounts is required to be a member

Yes, since membership is optional, though a firm outside the scheme must say so before opening each account

No, though the requirement bites only once the firm's customer credit balances pass a stated threshold

The failure of MF Global in October 2011 left a large shortfall in customer segregated funds held under the commodity customer funds regime. What did that failure show about segregation requirements generally?

That customer funds should be held by the exchange rather than the broker, removing the broker's ability to reach them

That segregation is unsuited to derivatives, where positions move too quickly for a computed balance to mean anything

That a soundly conceived requirement can still fail when management overrides the controls, so balances need independent verification

That the shortfall followed from a permission to invest customer funds, a permission the regime has since withdrawn

An investment adviser has custody of its clients' funds and securities. What does the custody rule under the Investment Advisers Act require it to do with them?

Maintain them with a broker-dealer that is a FINRA member, no other kind of institution being permitted to hold them

Maintain them in a single account in the adviser's own name, reconciled to each client's holdings every quarter

Maintain them at any bank the client approves in writing, that approval being renewed at each annual review

Maintain them with a qualified custodian, in accounts that keep client assets apart from the adviser's own assets

An adviser never takes receipt of client money, but its agreement lets it instruct the client's bank to transfer funds out of the client's account. Does the custody rule reach it?

Yes, since authority to obtain possession of client funds is itself custody, actual holding not being required

No, since custody turns on actual possession, so an adviser that never receives client money falls outside

No, since an instruction given through the client's own bank is the client's transaction rather than the adviser's

Yes, but only while the authority is being exercised, each transfer bringing the adviser within the rule for that client

Among the deficiencies FINRA examinations identify is the designation of customer accounts as non-customer accounts. Why does that designation matter?

It moves those accounts' securities out of the possession-and-control requirement and into the firm's own proprietary positions

It takes those accounts out of the population the reserve formula is computed over, so the firm deposits less than it owes customers

It drops those accounts out of the firm's net capital computation, so the firm reports a larger capital cushion than it actually holds

It releases the firm from its books and records obligations for those accounts, so that no statement need be sent to the holder

A carrying broker-dealer discovers that some customers' fully paid securities are no longer available at the approved location where its records place them. What is required of it?

To move the affected customers' accounts to another carrying firm until the securities have been located

To note the deficiency at the next computation and correct it before the computation after that falls due

To act promptly to correct the deficiency and bring those securities back into its possession or control

To place the market value of the missing securities in the Special Reserve Bank Account and leave it there

A broker-dealer is subject to the SEC's net capital rule. What does FINRA require of it as to responsibility for its customer reserve computation and segregation compliance?

To certify each year that an independent accountant reviewed the computation before every deposit the firm made

To divide the responsibility among its general ledger account designees, each answering for the items within their own accounts

To place the responsibility on its chief compliance officer, whose written procedures must then cover the computation

To designate a qualified financial and operations principal to oversee financial and operational compliance, that computation included

A broker-dealer holds its customers' cash in its ordinary business accounts, mixed with its own money. In what circumstances does that cash become available to the firm's creditors?

On a bankruptcy filing or a SIPC liquidation, because a creditor suing a firm that is still trading and paying its debts cannot reach any customer money

On financial difficulty or a suit by its creditors as well as on a bankruptcy filing, because the cash is mixed with the firm's own money

Only on a net capital deficiency, because the rule then deems the commingled cash to be firm capital; until that point not even a creditor's lawsuit can reach it

On no occasion where the firm's ledger identifies each customer's share to the penny, because money recorded as the customers' stays outside the firm's estate

A carrying broker-dealer holds a cash balance for another broker-dealer that clears its trades through it. In which reserve computation does that balance belong?

The customer reserve computation, broker-dealer account holders being counted there alongside retail customers on the same terms

No reserve computation at all, balances held for other broker-dealers lying outside Rule 15c3-3's reserve requirements

A reserve computation for broker-dealer account holders, kept separate from the customer one and run on an analogous formula

The carrying firm's net capital computation alone, where the balance is charged against capital in place of any reserve

A SIPC-member broker-dealer that kept its customers' securities and cash properly segregated fails. Who returns that segregated property to the customers?

SIPC itself, which pays each customer out of its own fund and then takes over the segregated accounts to recover the cost

The firm's existing management, which goes on running the firm under court supervision until every customer account is settled

The bank holding the Special Reserve Bank Account, which pays the reserve balance directly to customers on the SEC's instruction

A trustee appointed in the liquidation proceeding SIPC initiates, who recovers the property and returns it from the segregated accounts

What Is a Segregated Account? Customer Protection Explained

What Is a Segregated Account?

A segregated account — in the context of broker-dealer regulation — is a separate, dedicated account maintained by a broker-dealer that holds customer assets entirely apart from the broker-dealer's own proprietary assets, ensuring that customer funds and securities cannot be used to meet the broker-dealer's own financial obligations and will be available for prompt return to customers in the event the broker-dealer becomes insolvent.

The requirement to maintain customer assets in segregated accounts — separate from firm assets — is the foundational customer protection mechanism of United States broker-dealer regulation, codified primarily in SEC Rule 15c3-3, the Customer Protection Rule, and underpinned by the Securities Investor Protection Act of 1970, which created the Securities Investor Protection Corporation to provide a backstop for customers of failed broker-dealers. The prohibition on commingling — mixing customer assets with firm assets — is one of the most absolute obligations in the entire regulatory framework governing broker-dealer conduct and is directly tested on the Series 7 examination.

The Foundational Principle — Why Segregation Matters

A broker-dealer that holds customer cash and securities in its ordinary business accounts — commingled with the firm's own proprietary assets — creates a catastrophic risk for its customers. If the broker-dealer suffers financial difficulties, is sued by creditors, or files for bankruptcy, the customer assets would be available to the firm's creditors as part of the general estate — the customers would have no priority claim to their specific securities or cash and would instead stand in line with all other unsecured creditors hoping for a proportionate distribution from whatever estate value remained.

This risk is not theoretical. In the pre-regulatory era before Rule 15c3-3, broker-dealer failures routinely resulted in customers losing substantial portions of their assets because those assets had been commingled with firm assets and used to finance the broker-dealer's own business activities. The failure of several major broker-dealers in the late 1960s during the paperwork crisis — a period of back-office dysfunction in which broker-dealers could not keep up with trading volume — demonstrated the vulnerability of customers whose assets were not systematically segregated and led directly to Congress enacting the Securities Investor Protection Act of 1970 and authorising the SEC to adopt the comprehensive segregation rules that became Rule 15c3-3 in 1972.

SEC Rule 15c3-3 — The Customer Protection Rule

SEC Rule 15c3-3 — formally titled Customer Protection — Reserves and Custody of Securities — is the primary federal regulation establishing the segregation requirements applicable to broker-dealers. The rule requires any broker-dealer that maintains custody of customer securities and cash — a carrying broker-dealer, as distinguished from an introducing broker-dealer that clears through another firm — to take two primary steps to protect those assets.

The first step is the possession and control requirement — the carrying broker-dealer must maintain physical possession or exclusive control over all fully paid securities and excess margin securities held for customers. Fully paid securities are securities in cash accounts and securities in margin accounts for which the customer owes no margin debt. Excess margin securities are margin account securities whose market value exceeds one hundred and forty percent of the customer's debit balance.

Both categories must be held by the broker-dealer in locations that are exclusively under the broker-dealer's control and are clearly identifiable as customer property — these locations are specified in the rule and include the broker-dealer's own vault, accounts at the Depository Trust Company designated as customer securities accounts, and certain bank custodian arrangements that meet the rule's control requirements. No customer fully paid or excess margin securities may be pledged, hypothecated, or otherwise used by the broker-dealer — they must be maintained in the firm's possession exclusively for the benefit of customers.

The second step is the Special Reserve Account requirement — the carrying broker-dealer must compute the net amount of cash it owes to customers weekly, or daily if it is one of the largest carrying firms, using the reserve formula specified in Exhibit A to Rule 15c3-3, and must deposit that computed amount into a Special Reserve Bank Account for the Exclusive Benefit of Customers maintained at a bank that meets specified criteria. This segregated cash reserve account holds the net customer cash obligation — the amount representing the excess of customer credits over customer debits — and ensures that even if the broker-dealer's other assets are insufficient to satisfy all obligations, the customer cash reserve is ring-fenced and immediately available for customer claims.

The Reserve Formula — Computing the Segregation Requirement

The reserve formula under Rule 15c3-3 Exhibit A computes the minimum balance required in the Special Reserve Bank Account by subtracting specified customer-related debit items from specified customer-related credit items.

Customer credits — amounts the broker-dealer owes to customers — include free credit balances in customer accounts, deposits of cash received from customers to purchase securities but not yet invested, net equities in customer accounts from short positions the broker-dealer has established on behalf of customers, and other amounts representing the firm's obligations to customers.

Customer debits — amounts customers effectively owe to the broker-dealer — include margin loans outstanding to customers, securities borrowed by the broker-dealer to finance customer short positions, fails to deliver on customer security sales that create a receivable from the counterparty, and other offsets representing amounts the broker-dealer can reasonably expect to collect that reduce its net obligation to customers.

The excess of credits over debits — the net amount owed to customers — must be on deposit in the Special Reserve Account no later than one hour after the opening of banking business on the second following business day. The computations are generally performed weekly, as of the close of the last business day of the week (a small broker-dealer that meets the conditions of Rule 15c3-3(e)(3)(i)(C) may compute monthly instead), and under SEC amendments adopted in December 2024 a carrying broker-dealer whose average total credits are five hundred million dollars or more must instead compute daily, as of the close of the previous business day, a requirement whose compliance date the SEC extended to June 30, 2026; the same amendments allow qualified daily-computing firms to reduce the required debit item charge from three percent to two percent.

The Special Reserve Bank Account — Restrictions on Permitted Assets

The funds deposited in the Special Reserve Bank Account must be held in specific forms of permissible assets to ensure their safety and liquidity. The original Rule 15c3-3 framework limited permissible Special Reserve Account assets to cash deposits at qualifying banks and United States government securities — Treasury bills, notes, and bonds — purchased through accounts at qualifying banks. Subsequent SEC rulemaking and no-action positions have moderately expanded the permissible asset categories in specific circumstances, but the core requirement that Special Reserve Account assets be highly liquid and low-risk instruments with minimal credit risk remains unchanged.

The Special Reserve Account must be established at a bank — as defined in Section 3(a)(6)(A) through (C) of the Securities Exchange Act — and must be clearly titled and documented as held for the exclusive benefit of customers. The broker-dealer may not use Special Reserve Account assets for any purpose other than satisfying customer claims — the account is ring-fenced from the firm's proprietary activities and from the claims of the firm's general creditors in the event of bankruptcy.

SEC amendments adopted in 2013 addressed a structural vulnerability in the original rule relating to the composition of cash deposits in the Special Reserve Account — restricting cash deposits held at affiliated banks and limiting cash at non-affiliated banks to amounts that do not create significant concentrated credit exposure, ensuring that the safety of the customer reserve is not impaired by the financial condition of the depository bank.

The Proprietary Accounts of Broker-Dealers — The PAB Account

The original Rule 15c3-3 defined customers to exclude other broker-dealers — meaning the cash and securities held by a carrying broker-dealer for the accounts of other broker-dealer customers were not subject to the same segregation protections as the assets of retail customers. This definitional gap created a structural vulnerability: when a carrying broker-dealer failed, the broker-dealer customers for whom it held assets might not be protected to the same extent as retail customers, despite having the same reasonable expectation that their assets were segregated.

The SEC addressed this vulnerability through the 2013 amendments to Rule 15c3-3 that required carrying broker-dealers to maintain a separate Proprietary Accounts of Broker-Dealers — PAB — reserve account for the assets of broker-dealer account holders, computed using a formula analogous to the customer reserve formula but calibrated to the PAB account population. The PAB reserve requirement extends the segregation protection to broker-dealer customers of a carrying firm, reducing the risk that those customers face asset losses in a carrying broker-dealer failure beyond what would result from the SIPA priority framework.

Introducing Versus Carrying Broker-Dealers

The segregation requirements of Rule 15c3-3 apply specifically to carrying broker-dealers — firms that physically hold customer securities and cash in their own accounts and custody infrastructure. Introducing broker-dealers — firms that take customer orders and communicate with customers but clear all trades through a separate carrying firm under a fully disclosed clearing arrangement — do not themselves hold customer assets and therefore are not subject to the possession and control or Special Reserve Account requirements of Rule 15c3-3.

In a fully disclosed clearing arrangement, the carrying firm maintains the customer accounts, holds the customer securities and cash, performs all the segregation and reserve computations required by Rule 15c3-3, and bears the customer protection compliance obligations. The introducing firm is responsible for its own suitability and conduct obligations under FINRA rules but is not the entity holding customer assets and is not the entity required to maintain segregated accounts.

Most retail investors are customers of introducing broker-dealers whose trades clear through large carrying broker-dealers such as National Financial Services, Pershing, or Apex Clearing — the institutional infrastructure that provides back-office services including securities custody, segregation compliance, and SIPC participation to hundreds of smaller introducing firms.

The Securities Investor Protection Corporation — The Backstop

The Securities Investor Protection Act of 1970 — enacted in direct response to the broker-dealer failures of the late 1960s paperwork crisis — created the Securities Investor Protection Corporation as a non-profit membership corporation funded by assessments on broker-dealer members to provide protection to customers of failed SIPC-member broker-dealers. Every broker-dealer registered with the SEC and carrying customer accounts is required to be a SIPC member.

When a SIPC-member broker-dealer fails, SIPC initiates a liquidation proceeding under which a trustee is appointed to recover and return customer assets. Customer securities and cash that were properly segregated in compliance with Rule 15c3-3 are returned to customers by the trustee from the segregated accounts — this is the primary and most important source of customer recovery in a broker-dealer failure. SIPC's own fund of one billion dollars — funded by member assessments — serves as a backstop for customer losses that remain after the trustee has recovered all available segregated assets, covering up to five hundred thousand dollars per customer per account type with a two hundred and fifty thousand dollar sublimit for cash claims.

The Lehman Brothers bankruptcy of September 2008 — the largest financial services bankruptcy in United States history — provided one of the most significant real-world tests of the Rule 15c3-3 segregation and SIPC protection framework. The SIPC trustee overseeing the Lehman Brothers Inc. liquidation reported in October 2012 that one hundred percent of Lehman Brothers customer property had been returned to customers without requiring any advance from the SIPC fund — confirming that the segregation requirements had functioned as designed to protect customer assets from the general creditor claims that consumed the firm's proprietary assets.

Segregated Accounts in Other Regulatory Contexts

The concept of account segregation appears across multiple regulatory frameworks beyond broker-dealer regulation — each adapted to the specific risk context of the regulated entity.

Commodity pool operators and commodity trading advisors regulated by the Commodity Futures Trading Commission are required to segregate customer commodity futures trading funds from firm assets under the Commodity Exchange Act's customer funds segregation rules — the analogous regime to Rule 15c3-3 in the futures and derivatives markets. The failure of MF Global in October 2011 — which resulted in approximately one point six billion dollars of customer segregated funds being found to be deficient — demonstrated that even properly conceived segregation requirements can fail when management overrides the controls, and prompted the CFTC to substantially strengthen the oversight and verification requirements for commodity customer fund segregation.

Registered investment advisers with custody of client assets — advisers who hold client funds or securities or who have authority to obtain possession of client funds — are subject to the custody rule under Investment Advisers Act Rule 206(4)-2, which requires advisers with custody to maintain client assets with a qualified custodian — a bank, broker-dealer, futures commission merchant, or foreign financial institution meeting specified criteria — in accounts that segregate client assets from adviser assets and that are held in the client's name or in the adviser's name as agent for the client. The custody rule's segregation requirement ensures that investment adviser clients whose assets are held at a qualified custodian retain direct ownership claims to those assets unaffected by the financial condition of the adviser.

FINRA Examination Priorities

FINRA's Annual Regulatory Oversight Reports have consistently identified segregation of assets and customer protection compliance — particularly computation of the customer reserve formula, proper designation of customer versus non-customer accounts, and maintenance of possession or control over fully paid and excess margin securities — as examination priorities. Common deficiencies identified in FINRA examinations include incorrect designation of customer accounts as non-customer accounts that reduces the required reserve balance, errors in the debit and credit items included in the reserve formula computation, and failures to promptly correct possession and control deficiencies when securities become unavailable at approved locations.

FINRA Rule 1220(a)(4) requires each broker-dealer subject to SEC Rule 15c3-1 — the net capital rule — to designate a qualified Financial and Operations Principal — a Series 27 or Series 28 licence holder — responsible for overseeing financial and operational compliance including the customer reserve computation and segregation requirements.

Examination Relevance and Key Takeaways

The segregated account is tested on the Series 7 examination in the context of the Customer Protection Rule, broker-dealer obligations to customers, the prohibition on commingling customer and firm assets, and the role of SIPC.

The key points to retain are these.

A segregated account holds customer assets entirely apart from broker-dealer firm assets — the foundational requirement of the customer protection framework preventing commingling of customer and proprietary assets. SEC Rule 15c3-3 — the Customer Protection Rule, adopted in 1972 under authority of the Securities Investor Protection Act of 1970 — requires carrying broker-dealers to take two primary steps. First, the possession and control requirement — maintaining physical possession or exclusive control over all fully paid securities and excess margin securities held for customers, which may not be pledged or used for any firm purpose. Second, the Special Reserve Bank Account requirement — computing the net cash owed to customers weekly, or daily for the largest carrying firms, using the Exhibit A reserve formula and depositing that amount in a Special Reserve Bank Account for the Exclusive Benefit of Customers at a qualifying bank, held in permissible assets primarily consisting of cash and United States government securities.

The 2013 SEC amendments added the Proprietary Accounts of Broker-Dealers reserve requirement extending analogous protection to broker-dealer account holders of carrying firms. The 2024 SEC amendments introduced a daily computation requirement for carrying broker-dealers with average total credits of five hundred million dollars or more, and reduced the aggregate debit items charge from three percent to two percent for qualifying daily-computing firms. Introducing broker-dealers do not hold customer assets and are not subject to Rule 15c3-3's possession and control or reserve account requirements — only carrying broker-dealers bear these obligations. SIPC — established by the Securities Investor Protection Act of 1970 — provides up to five hundred thousand dollars per customer per account type with a two hundred and fifty thousand dollar cash sublimit as a backstop for remaining customer losses after the trustee has recovered all properly segregated assets in a failed broker-dealer's liquidation. The Lehman Brothers Inc. liquidation confirmed that properly maintained segregation under Rule 15c3-3 protects customers from general creditor claims — the SIPC trustee returned one hundred percent of customer property without requiring SIPC fund advances.