Cal. Code Regs. Tit. 10, § 260.216.8 - Hypothecation of Customers' Securities

Current through Register 2022 Notice Reg. No. 16, April 25, 2022

(a) General Provisions. The phrase "fraudulent, deceptive, or manipulative act or practice," as used in subdivision (b) of Section 25216 of the Code, is hereby defined to include the direct or indirect hypothecation by a broker-dealer, or its arranging for or permitting, directly or indirectly, the continued hypothecation of any securities carried for the account of any customer under circumstances

(1) that will permit the commingling of securities carried for the account of any such customer with securities carried for the account of any other customer, without first obtaining the written consent of each such customer to such hypothecation;

(2) that will permit such securities to be commingled with securities carried for the account of any person other than a bona fide customer of such broker-dealer under a lien for a loan made to such broker-dealer; or

(3) that will permit securities carried for the account of customers to be hypothecated, or subjected to any lien or liens or claim or claims of the pledgee or pledgees, for a sum which exceeds the aggregate indebtedness of all customers in respect of securities carried for their accounts; except that this clause is not violated by reason of an excess arising on any day through the reduction of the aggregate indebtedness of customers on such day, provided that funds or securities in an amount sufficient to eliminate such excess are paid or placed in transfer to pledgees for the purpose of reducing the sum of the liens or claims to which securities carried for the account of customers are subjected as promptly as practicable after such reduction occurs, but before the lapse of one-half hour after the commencement of banking hours on the next banking day at the place where the largest principal amount of loans of such broker-dealer are payable and, in any event, before such broker-dealer on such day has obtained or increased any bank loan collateralized by securities carried for the account of customers.

(b) Definitions. For the purposes of this section the term "customer" does not include any general or special partner or any director or officer of such broker-dealer, or any participant, as such, in any joint, group or syndicate account with such broker-dealer or with any partner, officer or director thereof;

(2) the term "securities carried for the account of any customer" shall mean:

(i) securities received by or on behalf of such broker-dealer for the account of any customer;

(ii) securities sold and appropriated by such broker-dealer to a customer, except that if such securities were subject to a lien when appropriated to a customer they are not "securities carried for the account of any customer" pending their release from such lien as promptly as practicable;

(iii) securities sold, but not appropriated, by such broker-dealer to a customer who has made any payment therefor, to the extent that such broker-dealer owns and has received delivery of securities of like kind, except that if such securities were subject to a lien when such payment was made they are not "securities carried for the account of any customer" pending their release from such lien as promptly as practicable;

(3) "aggregate indebtedness" shall not be reduced by reason of uncollected items; and, in computing aggregate indebtedness, related guarantee and guarantor accounts shall be treated as a single account and considered on a consolidated basis, and balances in accounts carrying both long and short positions shall be adjusted by treating the market value of the securities required to cover such short positions as though such market value were a debit; and

(4) in computing the sum of the liens or claims to which securities carried for the account of customers of a broker-dealer are subject, any rehypothecation of such securities by another broker-dealer shall be disregarded.

(c) Exemption for Cash Account. The provisions of subsection (a)(1) hereof shall not apply to any hypothecation of securities carried for the account of a customer in a special cash account within the meaning of Section 4(c) of Regulation T of the Board of Governors of the Federal Reserve System ( 12 CFR Part 220 ), provided that at or before the completion of the transaction of purchase of such securities for, or of sale of such securities to, such customer, written notice is given or sent to such customer disclosing that such securities are or may be hypothecated under circumstances which will permit the commingling thereof with securities carried for the account of other customers.

(d) Exemption for Clearing House Liens. The provisions of subsections (a)(2), (a)(3), and (f) hereof shall not apply to any lien or claim of the clearing corporation, or similar department or association, of a national securities exchange, or a registered national securities association for a loan made and to be repaid on the same calendar day, which is incidental to the clearing of transactions in securities or loans through such corporation, department or association; provided, however, that for the purpose of subsection (a)(3) hereof, "aggregate indebtedness of all customers in respect of securities carried for their accounts" shall not include indebtedness in respect of any securities subject to any lien or claim exempted by this subsection (d).

(e) Exemption for Certain Liens on Securities of Noncustomers. The provisions of subsection (a)(2) hereof shall not prevent such broker-dealer from permitting securities not carried for the account of a customer to be subjected (1) to a lien for a loan made against securities carried for the account of customers, or (2) to a lien for a loan made and to be repaid on the same calendar day. For the purpose of this exemption, a loan is "made against securities carried for the account of customers" if only securities carried for the account of customers are used to obtain or to increase such loan or as substitute for other securities carried for the account of customers.

(f) Notice of Certification Requirements. No person subject to this section shall hypothecate any security carried for the account of a customer unless, at or prior to the time of each such hypothecation, such person gives written notice to the pledgee that the security pledged is carried for the account of a customer and that such hypothecation does not contravene any provision of this section, except that in the case of an omnibus account the broker-dealer for whom such account is carried may furnish a signed statement to the person carrying such account that all securities carried therein by such broker-dealer will be securities carried for the account of its customers and that the hypothecation thereof by such broker-dealer will not contravene any provision of this Section. The provisions of this subsection (f) shall not apply to any hypothecation of securities under any lien or claim of a pledgee securing a loan made and to be repaid on the same calendar day nor to any broker-dealer registered under the Securities Exchange Act of 1934 ( 15 USC 78 a et seq.).

(g) The fact that securities carried for the accounts of customers and securities carried for the accounts of others are represented by one or more certificates in the custody of a clearing corporation or other subsidiary organization of either a national securities exchange or of a registered national securities association, or of a custodian bank, in accordance with a system for the central handling of securities established by a national securities exchange or a registered national securities association, pursuant to which system the hypothecation of such securities is effected by bookkeeping entries without physical delivery of such securities, shall not, in and of itself, result in a commingling of securities prohibited by subsection (a)(1) or (a)(2) hereof, whenever a participating member broker-dealer hypothecates securities in accordance with such system; provided that

(1) any custodian of any securities held by or for such system has entered into an agreement approved by the Securities and Exchange Commission that it will not for any reason, including the assertion of any claim, right or lien of any kind, refuse or refrain from promptly delivering any such securities (other than securities then hypothecated in accordance with such system) to such clearing corporation or other subsidiary organization or as directed by it, except that nothing in such agreement shall require the custodian to deliver any securities in contravention of any notice of levy, seizure or similar notice, or order, or judgment, issued or directed by a governmental agency or court, or officer thereof, having jurisdiction over such custodian, which on its face affects such securities; and

(2) such system has safeguards in the handling, transfer and delivery of securities and provisions for fidelity bond coverage of the employees and agents of the clearing corporation or other subsidiary organization and for periodic examinations by independent public accountants, approved by the Securities and Exchange Commission.

Notes

Cal. Code Regs. Tit. 10, § 260.216.8

Note: Authority cited: Sections 25216(b)and 25610, Corporations Code. Reference: Section 25216, Corporations Code.

1. Amendment of subsection (d) filed 7-20-72; effective thirtieth day thereafter (Register 72, No. 30).
2. Editorial correction filed 11-9-82 (Register 82, No. 46).