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What is the Customer Protection Rule?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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Crafted by the Securities and Exchange Commission, the Customer Protection Rule is a regulation that requires all brokers and broker dealers to maintain the credit balances of their clients in separate reserve accounts, rather than include those resources in the trading accounts of brokerage firm. The aim of the SEC ruling is to protect the customer credit balances from being lost in the shuffle of constant finance trading, as well as make it much easier for brokers to execute orders on customer accounts.

Along with the day to day process of trading, the Customer Protection Rule also can provide protection for the assets of an investor in the event that the brokerage firm should fail. Because the assets of the investor are segregated from the assets that are directly related to the firm, they cannot be used in order to settle the outstanding indebtedness of the failed business venture. Instead, the assets contained in the customer account can simply be transferred to another brokerage firm and the investor can continue to engage in his or her usual trading and investing actions.

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The Customer Protection Rule compliments several other government actions that are related to providing adequate customer protection for investors. The Rule works hand in hand with the Securities Investor Protection Act by helping to define the practices involved in managing the investor accounts entrusted to a brokerage firm. The Customer Protection Rule, along with the Net Capital Rule, is an important component of the broader Financial Responsibility Rules that define the basics of business operations with the United States.

The Customer Protection Rule, while drafted and enforced in the United States, is not unique. Many countries around the world have enacted similar regulations that work to protect the best interests of investors by defining the processes that brokers and other financial organizations will utilize to responsibly and ethically manage the investments entrusted to the firms. While the exact verbiage and process may vary slightly from one nation to another, the end result is the creation of a stable and safe environment for investors to work with financial experts to increase the value of the assets contained in investment portfolios.

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