SEC No-Action Letter 1994 — Prime Brokerage Framework

Overview

The SEC staff's January 25, 1994 no-action letter to the Prime Broker Committee is the basis for prime brokerage in the United States. The Division of Market Regulation wrote it in response to the committee's 1989 request. It describes the three-party arrangement of prime broker, executing broker, and customer. It also sets the conditions under which the staff would not recommend enforcement action when the two brokers treat the customer's account at the executing broker as a broker-dealer credit account under Regulation T.

Despite being over 30 years old, this No-Action Letter remains the primary regulatory framework for prime brokerage. No formal SEC rule has replaced it. Compliance with its conditions is essential for any firm operating a prime brokerage business.

Official citation: Prime Broker Committee Request, SEC No-Action Letter (January 25, 1994)

Who It Applies To

The No-Action Letter applies to all firms engaged in prime brokerage relationships — including the prime broker, executing brokers, and their institutional customers. It is particularly relevant for clearing firms that provide prime brokerage services and for any broker-dealer that executes trades on behalf of prime brokerage clients.

Key Requirements

Three-party structure: The arrangement the letter describes has three parties: the customer, the prime broker (which clears, finances, and carries the customer's trades), and one or more executing brokers (which execute them).
Minimum net equity: The prime broker may settle prime brokerage trades only for a customer with at least $500,000 of net equity in cash or securities with a ready market. The minimum is $100,000 for an account managed by a registered investment adviser. A customer who falls below the minimum has until noon on the fifth business day to restore it.
Trade details: By the morning of the next business day after trade date, the customer and the executing broker must give the prime broker the contract amount, the security, the number of shares or units, and whether the trade was a purchase, a long sale, or a short sale.
Written agreements: Before any prime brokerage activity starts, the prime broker and the executing broker must sign a contract setting out their obligations. Each of them must also have a contract with each customer, signed by the customer. Both brokers must keep these contracts in an easily accessible place and produce them when SEC or SRO staff ask.
Disaffirmation: The prime broker must settle each trade unless it disaffirms (DKs) it by the close of business on trade date plus one. It must keep a record of the trades it disaffirmed during the previous three years.
Confirmations: The executing broker must send the customer a Rule 10b-10 confirmation of each trade, either directly or, on the customer's separate written instruction, in care of the prime broker. On the day after the trade, the prime broker sends the customer its own notification of it.
Net capital: A prime broker must have net capital of at least $1.5 million. An executing broker that clears prime brokerage trades, or the firm that clears them for it, must have at least $1 million.

How Loffa Helps You Comply

Prime Broker Integrated Network (PBIN)

Agreement management: PBIN keeps the SIA-150 agreements between prime and executing brokers, and the SIA-151 clearance agreements between customers and the clearing brokers on the executing side, in one place. It checks each form for completeness and routes it to counterparties for review and execution.
Agreement records: PBIN keeps each agreement, its forms, and its audit trail for the life of the agreement plus six years, so you can produce them when examiners ask. Loffa retains the records it processes; your firm's own Rule 17a-4 obligations stay with your firm.
Agreement tracking: PBIN shows the status of every agreement across your counterparties, from submission through execution, amendment, and renewal, and sends alerts before an agreement expires.

Recent Updates

T+1 settlement (May 28, 2024): The letter counts its deadlines from trade date: trade details by the next morning, and disaffirmation by the close of business on trade date plus one. Since the move to T+1, that disaffirmation deadline falls on settlement date.
No formal rulemaking: No SEC rule has replaced the 1994 letter, and it remains the governing framework.