[Federal Register Volume 79, Number 85 (Friday, May 2, 2014)]
[Proposed Rules]
[Pages 25194-25386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09108]
[[Page 25193]]
Vol. 79
Friday,
No. 85
May 2, 2014
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers; Proposed Rules
Federal Register / Vol. 79 , No. 85 / Friday, May 2, 2014 / Proposed
Rules
[[Page 25194]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-71958; File No. S7-05-14]
RIN 3235-AL45
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), the Securities and
Exchange Commission (``Commission''), pursuant to the Securities
Exchange Act of 1934 (``Exchange Act''), is proposing recordkeeping,
reporting, and notification requirements applicable to security-based
swap dealers (``SBSDs'') and major security-based swap participants
(``MSBSPs''), securities count requirements applicable to certain
SBSDs, and additional recordkeeping requirements applicable to broker-
dealers to account for their security-based swap and swap activities.
The Commission also is proposing an additional capital charge provision
that would be added to the proposed capital rule for certain SBSDs.
Finally, the Commission is proposing technical amendments to the
broker-dealer recordkeeping, reporting, and notification requirements.
DATES: Comments should be received on or before July 1, 2014.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-05-14 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments to Kevin M. O'Neill, Deputy Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.
All submissions should refer to File Number S7-05-14. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments also are available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make publicly available.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Assistant Director, at (202) 551-5522;
Denise Landers, Senior Special Counsel, at (202) 551-5544; Raymond A.
Lombardo, Branch Chief, at (202) 551-5755; Timothy C. Fox, Special
Counsel at (202) 551-5687; or Valentina Minak Deng, Special Counsel, at
(202) 551-5778, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Rules and Rule Amendments
A. Recordkeeping
1. Introduction
2. Records To Be Made and Kept Current
3. Record Maintenance and Preservation Requirements
B. Reporting
1. Introduction
2. Periodic Filing of Proposed Form SBS
3. Filing of Annual Audited Financial Reports and Other Reports
C. Notification
1. Introduction
2. Amendments to Rule 17a-11 and Proposed Rule 18a-8
3. Additional Proposed Amendments to Rule 17a-11
D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
1. Introduction
2. Proposed Rule 18a-9
3. Capital Charge
III. General Request for Comment
IV. Paperwork Reduction Act
A. Summary of Collections of Information Under the Proposed
Rules and Proposed Rule Amendments
1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
5. Proposed Rule 18a-9
B. Proposed Use of Information
C. Respondents
D. Total Initial and Annual Recordkeeping and Reporting Burden
1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
5. Proposed Rule 18a-9
E. Collection of Information Is Mandatory
G. Retention Period for Recordkeeping Requirements
H. Request for Comment
V. Economic Analysis
A. Introduction
B. Baseline of Economic Analysis
1. OTC Derivatives Market
2. OTC Derivatives Market Participants and Broker-Dealers
C. Analysis of the Proposed Program and Alternatives
1. Overview--The Proposed Recordkeeping, Reporting,
Notification, and Securities Count Program
2. Alternatives to the Proposed Recordkeeping, Reporting,
Notification, and Securities Count Rules
3. Requirements To Make and Keep Records
4. Requirements To Preserve Records
5. Reporting
6. Notification Requirements
7. Quarterly Securities Count
D. Impact on Efficiency, Competition, and Capital Formation
E. Implementation Considerations
VI. Regulatory Flexibility Act Certification
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Basis and Text of the Proposed Amendments and New
Rules
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\1\ Title VII of the Dodd-Frank Act (``Title VII'') established a
new regulatory framework for the over-the-counter (``OTC'') derivatives
markets.\2\ In this
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regard, Title VII was enacted, among other reasons, to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and regulation of SBSDs and MSBSPs; (2) imposing clearing
and trade execution requirements on swaps and security-based swaps,
subject to certain exceptions; (3) creating recordkeeping and real-time
reporting regimes; and (4) enhancing the Commission's rulemaking and
enforcement authorities with respect to all registered entities and
intermediaries subject to the Commission's oversight.\3\
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.'' See Public Law 111-203, 701. The Dodd-Frank Act assigns
responsibility for the oversight of the U.S. OTC derivatives markets
to the Commission, the Commodity Futures Trading Commission
(``CFTC''), and certain prudential regulators. The term prudential
regulator is defined in section 1(a)(39) of the Commodity Exchange
Act (``CEA'') (7 U.S.C. 1(a)(39)) and that definition is
incorporated by reference in section 3(a)(74) of the Exchange Act
(15 U.S.C. 78c(a)(74)). Pursuant to the definition, the Board of
Governors of the Federal Reserve System (``Federal Reserve''), the
Office of the Comptroller of the Currency (``OCC''), the Federal
Deposit Insurance Corporation (``FDIC''), the Farm Credit
Administration, or the Federal Housing Finance Agency (collectively,
the ``prudential regulators'') is the prudential regulator of an
SBSD, MSBSP, swap participant, or major swap participant if the
entity is directly supervised by that agency. The Commission has
oversight authority with respect to a security-based swap as defined
in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)),
including to implement a registration and oversight program for a
security-based swap dealer as defined in section 3(a)(71) of the
Exchange Act (15 U.S.C. 78c(a)(71)) and a major security-based swap
participant as defined in section 3(a)(67) of the Exchange Act (15
U.S.C. 78c(a)(67)). The CFTC has oversight authority with respect to
a swap as defined in section 1(a)(47) of the CEA (7 U.S.C.
1(a)(47)), including to implement a registration and oversight
program for a swap dealer as defined in section 1(a)(49) of the CEA
(7 U.S.C. 1(a)(49)) and a major swap participant as defined in
section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The Commission and
the CFTC jointly have adopted rules to further define, among other
things, the terms swap, swap dealer, major swap participant,
security-based swap, security-based swap dealer, and major security-
based swap participant. See Further Definition of ``Swap,''
``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange
Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012)
(joint Commission/CFTC final rule); Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', Exchange Act Release No. 66868
(Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (joint Commission/CFTC
final rule).
\3\ See Public Law 111-203, 701 through 774.
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Section 764 of the Dodd-Frank Act added section 15F to the Exchange
Act.\4\ Section 15F(f)(2) provides that the Commission shall adopt
rules governing reporting and recordkeeping for SBSDs and MSBSPs.\5\
Section 15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such
reports as are required by the Commission, by rule or regulation,
regarding the transactions and positions and financial condition of the
SBSD or MSBSP.\6\ Section 15F(f)(1)(B)(ii) provides that SBSDs and
MSBSPs without a prudential regulator (respectively, ``nonbank SBSDs''
and ``nonbank MSBSPs'') shall keep books and records in such form and
manner and for such period as may be prescribed by the Commission by
rule or regulation.\7\ Section 15F(f)(1)(B)(i) provides that SBSDs and
MSBSPs for which there is a prudential regulator (respectively, ``bank
SBSDs'' and ``bank MSBSPs'') shall keep books and records of all
activities related to their business as an SBSD or MSBSP in such form
and manner and for such period as may be prescribed by the Commission
by rule or regulation.\8\ Section 15F(g) of the Exchange Act requires
SBSDs and MSBSPs to maintain daily trading records with respect to
security-based swaps and provides that the Commission shall adopt rules
governing daily trading records for SBSDs and MSBSPs.\9\ Finally,
section 15F(i)(2) of the Exchange Act provides that the Commission
shall adopt rules governing documentation standards for SBSDs and
MSBSPs.\10\
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\4\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
\5\ See 15 U.S.C. 78o-10(f)(2).
\6\ See 15 U.S.C. 78o-10(f)(1).
\7\ See 15 U.S.C. 78o-10(f)(1)(B)(ii). A nonbank SBSD or nonbank
MSBSP could be dually registered with the Commission as a broker-
dealer (respectively, a ``broker-dealer SBSD'' or ``broker-dealer
MSBSP'') or registered with the Commission only as an SBSD or MSBSP
(respectively, a ``stand-alone SBSD'' or ``stand-alone MSBSP''). Any
of these registrants or a bank SBSD or bank MSBSP also could
register with the CFTC as a futures commission merchant (``FCM''),
swap dealer, or major swap participant.
\8\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
\9\ See 15 U.S.C. 78o-10(g).
\10\ See 15 U.S.C. 78o-10(i).
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The Commission anticipates that a number of broker-dealers will
register as SBSDs (broker-dealer SBSDs) or potentially as MSBSPs
(``broker-dealer MSBSPs).\11\ Further, the Commission expects that some
broker-dealers that are not registered as an SBSD or an MSBSP
nonetheless will engage in security-based swap and swap activities.\12\
The Commission has authority under section 17(a)(1) of the Exchange Act
to adopt rules requiring broker-dealers--which would include broker-
dealer SBSDs and broker-dealer MSBSPs--to make and keep for prescribed
periods such records, furnish such copies thereof, and make and
disseminate such reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange
Act.\13\ The Commission also is proposing largely technical amendments
to the broker-dealer recordkeeping, reporting, and notification
rules.\14\
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\11\ While it is anticipated that some broker-dealers and banks
will register as SBSDs in order to engage in security-based swap
activities, it is unclear whether broker-dealers or banks will
register as MSBSPs. For example, a broker-dealer or bank may be
required to register as an MSBSP because of the nature of its
security-based swap activities. See 15 U.S.C. 78a(c)(67) (defining
the term major security-based swap participant); Further Definition
of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', 77 FR 30596 (further defining the
term major security-based swap participant). In this case, the
broker-dealer or bank may conclude that it is more efficient to
register as an SBSD in order to engage in security-based swap
activities permitted of an SBSD but not of an MSBSP. Nonetheless,
because a broker-dealer or bank could register as an MSBSP, the
proposed rules and the discussion in this release contemplate these
categories of registrants. A broker-dealer MSBSP would be subject to
all the securities laws applicable to a broker-dealer, including
capital, margin, segregation, recordkeeping, reporting,
notification, and securities count requirements, and to any
additional requirements that would be applicable only to MSBSPs.
Similarly, a bank MSBSP would be subject to all laws and regulations
applicable to a bank and to any additional requirements that would
be applicable only to MSBSPs.
\12\ The term security-based swap dealer is defined in section
3(a)(71) of the Exchange Act. See 15 U.S.C. 78c(a)(71). The
definition excludes an entity that enters into security-based swaps
agreements for its own account, either individually or in a
fiduciary capacity, but not as a part of a regular business. See 15
U.S.C. 78c(a)(71)(C). Further, section 3(a)(71)(D) provides that the
Commission shall exempt from designation as an SBSD an entity that
engages in a de minimis quantity of security-based swap dealing in
connection with transactions with or on behalf of its customers and
that the Commission shall promulgate regulations to establish
factors with respect to the making of any determination to exempt.
See 15 U.S.C. 78c(a)(71)(D). The Commission has adopted Rule 3a71-2
to establish a de minimis exception under section 3(a)(71)(D) of the
Exchange Act. See 17 CFR 240.3a71-2; Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', 77 FR 30635-30643.
\13\ See 15 U.S.C. 78q(a)(1). Section 771 of the Dodd-Frank Act
states that unless otherwise provided by its terms, Subtitle B of
Title VII (relating to the regulation of the security-based swap
markets) does not divest any appropriate Federal banking agency, the
Commission, the CFTC, or any other Federal or State agency, of any
authority derived from any other provision of applicable law. See
Public Law 111-203, 771.
\14\ See 17 CFR 240.17a-3 (``Rule 17a-3''); 17 CFR 240.17a-4
(``Rule 17a-4''); 17 CFR 240.17a-5 (``Rule 17a-5''); 17 CFR 240.17a-
11 (``Rule 17a-11''). The Dodd-Frank Act amended the definition of
security in section 3(a)(10) of the Exchange Act to include a
security-based swap. See Public Law 111-203, 761(a)(2); 15 U.S.C.
78c(a)(10). Therefore, the term security as used in Rules 17a-3,
17a-4, 17a-5, and 17a-11 includes a security-based swap, and any
requirement in those rules relating to a security applies to a
security-based swap. The Commission, however, has issued temporary
exemptive relief to address the effect that the amendment to the
definition of security would have on requirements in Exchange Act
provisions and rules that did not otherwise apply specifically to
security-based swaps prior to the amendment. See Order Granting
Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927
(July 7, 2011) (``[R]egistered broker-dealers will solely be exempt
from those provisions and rules to the extent that those provisions
or rules do not apply to the broker's or dealer's security-based
swap positions or activities as of July 15, 2011--the day before the
effectiveness of the change to the ``security'' definition. In other
words, during the exemptive period the application of current law
will remain unchanged, and those particular Exchange Act
requirements will continue to apply to registered broker-dealers'
security-based swap activities and positions to the same extent they
apply currently. This approach is intended to help avoid undue
market disruptions resulting from the change to the ``security''
definition, while at the same time preserving the current
application of those particular provisions or rules to security-
based swap activity by registered broker-dealers. Thus, under this
approach of preserving the status quo, no exemption will be provided
in connection with the [requirements in Exchange Act sections 17(a)
and 17(b) and Rules 17a-3, 17a-4, 17a-5, 17a-8, and 17a-13] under
the Exchange Act to the extent that those requirements currently
apply to registered broker-dealer activities or positions involving
instruments that will be security-based swaps (but registered
broker-dealers will be exempted in connection with those
requirements to the extent that the requirements do not already
apply to activities or positions involving those instruments.'');
Order Extending Temporary Exemptions under the Securities Exchange
Act of 1934 in Connection with the Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218
(Feb. 13, 2013) (extending exemptive relief through February 11,
2014); Order Extending Temporary Exemptions under the Securities
Exchange Act of 1934 in Connection with the Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, Exchange Release No. 71485 (Feb. 5, 2014)
(extending exemptive relief with respect to Rules 17a-3, 17a-4, 17a-
5, 17a-11, and 17a-13 until the earliest compliance date set forth
in any final rules regarding recordkeeping and reporting
requirements for SBSDs and MSBSPs). The Commission expects that the
adoption of the amendments contemplated herein would eliminate the
need for temporary exemptive relief from section 17(a) and section
17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and
17a-13 thereunder.
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Pursuant to sections 15F and 17(a) of the Exchange Act, the
Commission is proposing to amend Rules 17a-3, 17a-4, 17a-5, and 17a-11
to establish a recordkeeping, reporting, and notification program for
broker-dealer SBSDs and broker-dealer MSBSPs. The amendments to Rules
17a-3 and 17a-4 would establish additional recordkeeping requirements
applicable to broker-dealers that are not dually registered as an SBSD
or MSBSP to the extent they engage in security-based swap or swap
activities.
Pursuant to section 15F of the Exchange Act, the Commission is
proposing new Rules 18a-5 through 18a-9.\15\ These new rules would
establish a recordkeeping, reporting, and notification program for
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, and
securities count requirements for stand-alone SBSDs.\16\ In addition,
pursuant to sections 15F and 17(a) of the Exchange Act, the Commission
is proposing new FOCUS Report Form SBS (``Form SBS'') that would be
used by all types of SBSDs and MSBSPs to report financial and
operational information and, in the case of broker-dealer SBSDs and
broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB,
or Part II CSE of the Financial and Operational Combined Uniform Single
Report (``FOCUS Report'').\17\
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\15\ The Commission has proposed new Rules 18a-1 through 18a-4
to establish capital and margin requirements for SBSDs and MSBSPs,
segregation requirements for SBSDs, and notification requirements
with respect to segregation for SBSDs and MSBSPs. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012),
77 FR 70213 (Nov. 23, 2012).
\16\ The Commission is not proposing securities count
requirements for stand-alone MSBSPs or bank SBSDs. Broker-dealer
SBSDs and broker-dealer MSBSPs would be subject to the existing
securities count rule applicable to broker-dealers--Rule 17a-13. 17
CFR 240.17a-13. The Commission is not proposing amendments to Rule
17a-13. While in this release Rule 17a-11 is referred to as a
notification rule and Rule 17a-13 is referred to as a securities
count rule, Rule 17a-11 can be viewed as a reporting rule and Rule
17a-13 can be viewed as a recordkeeping rule. See Prompt Notice of
Net Capital or Recordkeeping Violations, Exchange Act Release No.
9268 (July 29, 1971), 36 FR 14725 (Aug. 11, 1971) (adopting Rule
17a-11, in part, under section 17(a) of Exchange Act, which, as
discussed above, requires a broker-dealer to make and keep for
prescribed periods such records, furnish such copies thereof, and
make and disseminate such reports as the Commission, by rule,
prescribes as necessary or appropriate in the public interest, for
the protection of investors, or otherwise in furtherance of the
Exchange Act); Quarterly Securities Counts by Certain Exchange
Members, Brokers and Dealers, Exchange Act Release No. 9376 (Oct.
29, 1971), 36 FR 21178 (Nov. 4, 1971) (similarly adopting Rule 17a-
13, in part, under section 17(a) of Exchange Act).
\17\ A broker-dealer must file the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE depending on the type of broker-
dealer. A more detailed discussion of the FOCUS Report appears below
in section II.B.2. of this release.
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The proposed new rules are modeled on broker-dealer Rules 17a-3,
17a-4, 17a-5, 17a-11, and 17a-13, and on the FOCUS Report.
Specifically: (1) Proposed Rules 18a-5 and 18a-6 (the new recordkeeping
rules) are modeled on Rules 17a-3 and 17a-4, respectively (the broker-
dealer recordkeeping rules); \18\ (2) proposed Rule 18a-7 and proposed
Form SBS (the new reporting rules) are modeled on Rule 17a-5 and on the
FOCUS Report, respectively (the broker-dealer reporting rules); \19\
(3) proposed Rule 18a-8 (the new notification rule) is modeled on Rule
17a-11 (the broker-dealer notification rule); \20\ and (4) proposed
Rule 18a-9 (the new securities count rule) is modeled on the Rule 17a-
13 (the broker-dealer securities count rule).\21\
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\18\ Compare proposed Rule 18a-5, with 17 CFR 240.17a-3; compare
proposed Rule 18a-6, with 17 CFR 240.17a-4.
\19\ Compare proposed Rule 18a-7, with 17 CFR 240.17a-5; compare
proposed Form SBS, with the FOCUS Report.
\20\ Compare proposed Rule 18a-8, with 17 CFR 240.17a-11.
\21\ Compare proposed Rule 18a-9, with 17 CFR 240.17a-13.
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The broker-dealer recordkeeping, reporting, notification, and
security count requirements served as the model for the proposals
because SBSDs and MSBSPs are expected to operate in financial markets
and effect financial transactions that are similar to the financial
markets in which broker-dealers operate and the financial transactions
that broker-dealers effect.\22\ In addition, as discussed below, the
objectives of these broker-dealer requirements are similar to the
objectives underlying the proposals regarding security-based swaps.
Moreover, the broker-dealer requirements have existed for many years
and have established a system of recordkeeping for securities
transactions that reflect and support prudent business practices and
accountability of broker-dealers and have facilitated the ability of
securities regulators to review and monitor compliance with securities
laws.\23\ Consequently, the Commission preliminarily believes the
broker-dealer requirements provide an appropriate template on which to
model a recordkeeping, reporting, and notification program for SBSDs
and MSBSPs and a securities count program for SBSDs. Furthermore, as
discussed above, it is expected that some nonbank SBSDs will dually
register as broker-dealers in order to be able to offer customers a
broader range of securities-based services than would be permitted of a
nonbank SBSD.\24\ Therefore, establishing consistent requirements could
avoid potential competitive disparities between stand-alone SBSDs and
broker-dealer SBSDs with respect to their security-based swap business.
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\22\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70216 (stating a similar rationale for basing the proposed capital,
margin, and segregation requirements for SBSDs on the broker-dealer
capital, margin, and segregation requirements).
\23\ See, e.g., Commission Guidance to Broker-Dealers on the Use
of Electronic Storage Media Under the Electronic Signatures in
Global and National Commerce Act of 2000 With Respect to Rule 17a-
4(f), Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May
7, 2001).
\24\ Although a broker-dealer SBSD would be able to offer
customers a broader range of securities-based services than a bank
SBSD, bank SBSDs are not expected to register as broker-dealers
because of the regulatory burden associated with complying with the
requirements applicable to all three types of entities.
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Additionally, in accordance with Title VII, the Commission recently
proposed, among other things, capital and margin
[[Page 25197]]
requirements applicable to nonbank SBSDs and nonbank MSBSPs, and
segregation requirements applicable to SBSDs.\25\ The capital, margin,
and segregation proposals that would be applicable to SBSDs were
modeled on the capital, margin, and segregation requirements that are
applicable to broker-dealers.\26\ The broker-dealer capital, margin,
segregation, recordkeeping, reporting, notification, and securities
count requirements are known collectively as the broker-dealer
financial responsibility rules.\27\ The financial responsibility rules
collectively establish a comprehensive regulatory program designed to
promote the prudent operation of broker-dealers and the safeguarding of
customer securities and funds held by broker-dealers. The
recordkeeping, reporting, notification, and securities count
requirements applicable to broker-dealers are an integral part of the
financial responsibility rules as they are designed to provide
transparency into the business activities of broker-dealers and to
assist the Commission and other securities regulators in reviewing and
monitoring compliance with the capital, margin, and segregation
requirements. Similarly, the proposed recordkeeping, reporting,
notification, and securities count requirements applicable to SBSDs and
MSBSPs along with the proposed capital, margin, and segregation
requirements for these registrants are designed to establish a
comprehensive financial responsibility program for SBSDs and MSBSPs.
Like the broker-dealer rules, the proposed recordkeeping, reporting,
notification, and securities count requirements applicable to SBSDs and
MSBSPs are designed to provide transparency into the business
activities of SBSDs and MSBSPs and assist the Commission in reviewing
and monitoring compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs.
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\25\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
\26\ Id. See also 17 CFR 240.15c3-1 (the broker-dealer capital
rule); FINRA Rules 4210 through 4240 (certain broker-dealer margin
rules); 17 CFR 240.15c3-3 (the broker-dealer segregation rule).
\27\ See 17 CFR 240.3a40-1.
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While the proposed recordkeeping, reporting, notification, and
securities count rules are modeled on the broker-dealer rules, stand-
alone SBSDs and stand-alone MSBSPs will not engage in the same range of
activities permitted of broker-dealers. For example, broker-dealers are
permitted to act as dealers with respect to all types of securities,
whereas stand-alone SBSDs would be permitted to act as dealers only
with respect to security-based swaps and stand-alone MSBSPs would not
be permitted to act as dealers with respect to any types of securities.
Consequently, the proposed requirements in the new rules applicable to
stand-alone SBSDs and stand-alone MSBSPs reflect these differences and
are narrower in scope than those applicable to broker-dealer SBSDs and
broker-dealer MSBSPs. Further, the proposed requirements applicable to
bank SBSDs and bank MSBSPs are narrower in scope than those applicable
to stand-alone SBSDs and stand-alone MSBSPs for three reasons. First,
as noted above, the recordkeeping and reporting requirements for bank
SBSDs and bank MSBSPs--unlike those for nonbank SBSDs and nonbank
MSBSPs--must be related to their business as an SBSD or MSBSP.\28\
Second, as banks, these registrants are subject to existing
recordkeeping and reporting requirements administered by the prudential
regulators and therefore to avoid potentially duplicative or
conflicting requirements, the Commission has proposed fewer
requirements for these entities. Third, the prudential regulators--
rather than the Commission--will administer the capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs
and, as noted above, one of the purposes of the proposed recordkeeping
requirements is to assist the Commission in reviewing and monitoring
compliance with the proposed capital and margin rules applicable to
nonbank SBSDs and nonbank MSBSPs, which the Commission will
administer.\29\
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\28\ Compare 15 U.S.C. 78o-10(f)(1)(B)(i), with 15 U.S.C. 78o-
10(f)(1)(B)(ii) and 15 U.S.C. 78q(a). As noted above, section
15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and
bank MSBSP shall keep books and records of all activities related to
the business as an SBSD or MSBSP in such form and manner and for
such period as may be prescribed by the Commission by rule or
regulation (emphasis added). See 15 U.S.C. 78o-10(f)(1)(B)(i).
Whereas, section 15F(f)(1)(B)(ii) of the Exchange Act provides that
each nonbank SBSD and nonbank MSBSP shall keep books and records in
such form and manner and for such period as may be prescribed by the
Commission by rule or regulation. See 15 U.S.C. 78o-10(f)(1)(B)(ii).
Further, section 17(a) of the Exchange Act provides that broker-
dealers shall make and keep for prescribed periods such records,
furnish such copies thereof, and make and disseminate such reports
as the Commission, by rule, prescribes as necessary or appropriate
in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act. See 15
U.S.C. 78q(a).
\29\ Section 15F(e)(1)(A) of the Exchange Act provides that the
prudential regulators shall prescribe capital and margin
requirements for bank SBSDs and bank MSBSPs, and section 4s(e)(1)(A)
of the CEA provides that the prudential regulators shall prescribe
capital and margin requirements for swap dealers and major swap
participants for which there is a prudential regulator (``bank swap
dealers'' and ``bank swap participants''). See 15 U.S.C. 78o-
10(e)(1)(A); 7 U.S.C. 6s(e)(1)(A). The prudential regulators have
proposed capital and margin requirements for bank swap dealers, bank
SBSDs, bank swap participants, and bank MSBSPs. See Margin and
Capital Requirements for Covered Swap Entities, 76 FR 27564 (May 11,
2011).
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The Commission recognizes that there may be alternative
recordkeeping, reporting, notification, and securities count programs
that could be used as a model to design a recordkeeping, reporting,
notification, and securities count program for SBSDs and MSBSPs.
Accordingly, in response to the requests for comment in this release,
interested parties are encouraged to consider whether alternative
approaches would be appropriate for SBSDs and MSBSPs generally as well
as for each type of potential registrant--broker-dealer SBSD, broker-
dealer MSBSP, stand-alone SBSD, stand-alone MSBSP, bank SBSD, and bank
MSBSP--taking into account the unique characteristics and activities of
each type of potential registrant.
Some of the current rules that are proposed to be amended and the
proposed new rules prescribe recordkeeping or reporting requirements
based on requirements in other rules that have been proposed but not
yet adopted. For example, Rules 17a-3 and 17a-4, as proposed to be
amended, and proposed Rules 18a-5 and 18a-6 would directly or
indirectly cross-reference requirements in proposed Rule 901 of
Regulation SBSR and proposed Rules 15Fh-1 through 15Fh-6 and proposed
Rule 15Fk-1.\30\ Similarly, Rules 17a-3, 17a-4, 17a-5, and 17a-11, as
proposed to be amended, and proposed Rules 18a-5, 18a-6, 18a-7, and
18a-8 cross-reference requirements in the proposed capital, margin, and
segregation requirements for SBSDs and MSBSPs.\31\ If a cross-
referenced rule is modified from the proposal when adopted, the
Commission intends to make any necessary corresponding modifications to
the rules proposed in this release when they are adopted.
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\30\ See section II.A. of this release.
\31\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
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Finally, the Commission also is proposing to add a capital charge
provision to proposed Rule 18a-1.\32\ Proposed Rule 18a-1 would
establish net capital requirements for stand-alone SBSDs and is modeled
on Rule 15c3-1
[[Page 25198]]
under the Exchange Act (the broker-dealer net capital rule) (``Rule
15c3-1'').\33\ The capital charge provision that would be added to
proposed Rule 18a-1, which is modeled on a provision in Rule 15c3-1,
was inadvertently omitted from proposed Rule 18a-1 when originally
proposed. The Commission preliminarily believes that proposed Rule 18a-
1 should include a provision that parallels the capital charge in Rule
15c3-1.
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\32\ This proposal is discussed below in greater detail in
section II.D.3. of this release.
\33\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257.
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The Commission staff consulted with staff from the prudential
regulators and the CFTC in drafting the proposals discussed in this
release.\34\ In addition, the proposals of the CFTC were considered in
developing the Commission's proposed recordkeeping, reporting,
notification and securities count rules for SBSDs and MSBSPs.
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\34\ See Public Law 111-203, 712(a)(2). The CFTC has adopted
recordkeeping and reporting rules for swap dealers and major swap
participants. See Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules; Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3,
2012).
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Request for Comment
The Commission requests comment on the general approach that would
require SBSDs and MSBSPs to comply with recordkeeping, reporting,
notification, and securities count rules modeled on the broker-dealer
recordkeeping, reporting, notification, and securities count rules. In
addition, the Commission requests comment, including empirical data in
support of comments, in response to the following questions:
1. Will the entities that register as nonbank SBSDs engage in a
securities business with respect to security-based swaps that is
similar to the securities business conducted by broker-dealers? If not,
describe how the securities activities of nonbank SBSDs will differ
from the securities activities of broker-dealers.
2. Will the entities that register as bank SBSDs engage in a
securities business with respect to security-based swaps that is
similar to the securities business conducted by broker-dealers? If not,
describe how the securities activities of bank SBSDs will differ from
the securities activities of broker-dealers.
3. How many broker-dealers will register as SBSDs? Describe the
types of broker-dealers that will register as SBSDs and the types of
activities these broker-dealers currently engage in? How many banks
will register as SBSDs? Describe the types of banks that will register
as SBSDs and the types of activities these banks currently engage in?
4. How many entities will register as MSBSPs? What types of
entities? How many broker-dealers will register as MSBSPs? How many
banks will register as MSBSPs?
5. Are there requirements in these proposed rules applicable to
broker-dealer SBSDs and broker-dealer MSBSPs but currently not
applicable to stand-alone SBSDs or stand-alone MSBSPs that should be
applicable to standalone SBSDs or stand-alone MSBSPs, or vice versa?
6. Are there requirements in these proposed rules applicable to
broker-dealer SBSDs and broker-dealer MSBSPs but currently not
applicable to bank SBSDs or bank MSBSPs that should be applicable to
bank SBSDs or bank MSBSPs, or vice versa?
7. Are there provisions in the rules that the CFTC adopted
governing recordkeeping and reporting obligations of swap dealers and
major swap participants that the Commission should consider
incorporating into the recordkeeping and reporting requirements for
SBSDs and MSBSPs? If so, please identify the specific provision and
explain why the Commission should incorporate it.
8. In the release adopting a further definition of major security-
based swap participant, the Commission stated that an entity's
security-based swap positions in general would be attributed to a
parent, other affiliate, or guarantor for purposes of the MSBSP
analysis to the extent that the counterparties to those positions would
have recourse to that other entity in connection with the position.\35\
The Commission further stated that an entity that becomes an MSBSP by
virtue of security-based swaps directly entered into by others must be
responsible for compliance with all applicable requirements with
respect to those security-based swaps (and must be liable for failures
to comply), but may delegate operational compliance with transaction-
focused requirements to entities that directly are party to the
transactions.\36\ The Commission stated its preliminary belief that the
same approach should apply in the cross-border context when the
guarantor and the guaranteed persons are located in different
jurisdictions.\37\ The Commission preliminarily believes that certain
of the recordkeeping requirements that would be applicable to MSBSPs
under the proposed amendments are transaction-focused and, therefore,
that an MSBSP may delegate operational compliance with them to the
entities that are directly a party to the transaction.\38\ For example,
the Commission preliminarily believes that the proposed requirements
discussed below in section II.A.2. of this release under which MSBSPs
would need to make and keep current memoranda of proprietary orders,
confirmations, accountholder information, and records relating to
certain business conduct standards are transaction-focused. Similarly,
the proposed requirements to retain communications relating to the
MSBSP's ``business as such'' are transaction-focused. On the other
hand, the Commission preliminarily believes that other recordkeeping
requirements proposed for MSBSPs are entity-level requirements and,
therefore an MSBSP would not be permitted to delegate operational
compliance with respect to these requirements to other entities. For
example, the Commission preliminarily believes that the proposed
requirement that an MSBSP make and keep current a general ledger (or
other records) reflecting all assets and liabilities, income and
expense, and capital accounts is an entity-level requirement.
Commenters are asked to identify which of the recordkeeping
requirements applicable to MSBSPs in proposed new Rules 18a-5 and 18a-6
that they believe are transaction-focused and to explain their reasons
for identifying them as such. Commenters also are asked to identify any
operational compliance challenges with respect to the proposed
recordkeeping requirements raised by attributing guaranteed security-
based swap positions to an MSBSP.
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\35\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant'', 77 FR
30689.
\36\ Id.
\37\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968, 31034 (May 23, 2013).
\38\ The Commission preliminarily believes that the proposed
reporting and notification requirements that would be applicable to
MSBSPs are not transaction-focused and, therefore, the MSBSP could
not delegate operation compliance with respect to these requirements
to other entities.
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[[Page 25199]]
II. Proposed Rules and Rule Amendments
A. Recordkeeping
1. Introduction
As discussed above in section I. of this release, section 15F(f)(2)
of the Exchange Act provides that the Commission shall adopt rules
governing recordkeeping for SBSDs and MSBSPs.\39\ The Commission also
has concurrent authority under section 17(a)(1) of the Exchange Act to
prescribe recordkeeping requirements for broker-dealers.\40\ Further,
section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank
SBSD and bank MSBSP shall keep books and records of all activities
related to its business as an SBSD or MSBSP in such form and manner and
for such period as may be prescribed by the Commission by rule or
regulation.\41\ Section 15F(f)(1)(B)(ii) provides that each nonbank
SBSD and nonbank MSBSP shall keep books and records in such form and
manner and for such period as may be prescribed by the Commission by
rule or regulation.\42\
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\39\ See 15 U.S.C. 78o-10(f)(2).
\40\ See 15 U.S.C. 78q(a)(1).
\41\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
\42\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
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Section 15F(g) of the Exchange Act prescribes statutory
recordkeeping requirements applicable to SBSDs and MSBSPs and requires
the Commission to adopt rules with respect to these statutory
requirements.\43\ In particular, section 15F(g)(1) provides that each
registered SBSD and MSBSP shall maintain daily trading records of the
security-based swaps of the registered SBSD and MSBSP and all related
records (including related cash or forward transactions) and recorded
communications, including electronic mail, instant messages, and
recordings of telephone calls, for such period as may be required by
the Commission by rule or regulation.\44\ Section 15F(g)(2) provides
that the daily trading records shall include such information as the
Commission shall require by rule or regulation.\45\ Section 15F(g)(3)
provides that each registered SBSD and MSBSP shall maintain daily
trading records for each counterparty in a manner and form that is
identifiable with each security-based swap transaction.\46\ Section
15F(g)(4) provides that each registered SBSD and MSBSP shall maintain a
complete audit trail for conducting comprehensive and accurate trade
reconstructions.\47\ Finally, section 15F(g)(5) provides that the
Commission shall adopt rules governing daily trading records for SBSDs
and MSBSPs.\48\
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\43\ See 15 U.S.C. 78o-10(g).
\44\ See 15 U.S.C. 78o-10(g)(1).
\45\ See 15 U.S.C. 78o-10(g)(2).
\46\ See 15 U.S.C. 78o-10(g)(3).
\47\ See 15 U.S.C. 78o-10(g)(4).
\48\ See 15 U.S.C. 78o-10(g)(5).
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Section 15F(i)(1) of the Exchange Act provides that each registered
SBSD and MSBSP shall conform with such standards as may be prescribed
by the Commission, by rule or regulation, that relate to timely and
accurate confirmation, processing, netting, documentation, and
valuation of all security-based swaps.\49\ Section 15F(i)(2) provides
that the Commission shall adopt rules governing documentation standards
for SBSDs and MSBSPs.\50\
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\49\ See 15 U.S.C. 78o-10(i)(1).
\50\ See 15 U.S.C. 78o-10(i)(2). Pursuant to section 15F(i) of
the Exchange Act, the Commission has proposed Rule 15Fi-1 that would
prescribe standards related to timely and accurate confirmation and
documentation of security-based swaps. See Trade Acknowledgment and
Verification of Security-Based Swap Transactions, Exchange Act
Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011).
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After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission is proposing to establish a recordkeeping
program for these registrants under sections 15F and 17(a) of the
Exchange Act that is modeled on the recordkeeping program for broker-
dealers codified in Rules 17a-3 and 17a-4.\51\ Rules 17a-3 and 17a-4
specify requirements with respect to the records that a broker-dealer
must make and keep current, as well as how long and, the manner in
which, these records and other records relating to a broker-dealer's
business must be maintained and preserved.\52\
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\51\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
\52\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
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In particular, Rule 17a-3 requires a broker-dealer to make and keep
current certain books and records.\53\ The required records include,
among other records: Blotters containing an itemized daily record of
all purchases and sales of securities; ledgers reflecting all assets
and liabilities, income and expense, and capital accounts; a securities
record or ledger reflecting separately for each security as of the
clearance dates all ``long'' or ``short'' positions; a memorandum of
each brokerage order; a memorandum of each purchase or sale of a
security for the account of the broker-dealer; and copies of
confirmations.\54\
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\53\ See 17 CFR 240.17a-3.
\54\ Id. As noted above in section I. of this release, the Dodd-
Frank Act amended the definition of security in section 3(a)(10) of
the Exchange Act to include a security-based swap. See Public Law
111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference
in Rules 17a-3 and 17a-4 to a security includes a security-based
swap. The Commission, however, has issued temporary exemptive relief
excluding security-based swaps from the definition of security to
the extent Commission rules did not otherwise apply specifically to
security-based swaps prior to the amendment. See Order Granting
Temporary Exemptions under the Securities Exchange Act of 1934 in
Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, 76 FR 39927.
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Rule 17a-4 requires a broker-dealer to preserve additional records
if the broker-dealer makes or receives the type of record.\55\ The
categories of records include, among other records, check books, bank
statements, bills receivable or payable, communications relating to the
broker-dealer's business as such, and written agreements.\56\ The rule
also establishes retention periods for all records required to be made
and kept current under Rule 17a-3 and preserved under Rule 17a-4, and
prescribes, among other things, how the records must be retained,
including requirements for firms that preserve their records
electronically.\57\
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\55\ See 17 CFR 240.17a-4.
\56\ Id.
\57\ Id.
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The recordkeeping program codified in Rules 17a-3 and 17a-4 is
designed, among other things, to promote the prudent operation of
broker-dealers and assist the Commission, self-regulatory organizations
(``SROs''), and state securities regulators in conducting effective
examinations of broker-dealers.\58\ As the Commission has stated,
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\58\ See, e.g., See Commission Guidance to Broker-Dealers on the
Use of Electronic Storage Media under the Electronic Signatures in
Global and National Commerce Act of 2000 with Respect to Rule 17a-
4(f), 66 FR 22916; Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, Exchange Act
Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (``The
Commission has required that broker-dealers create and maintain
certain records so that, among other things, the Commission, [SROs],
and State Securities Regulators . . . may conduct effective
examinations of broker-dealers.'') (footnote omitted).
In combination, Rules 17a-3 and 17a-4 require broker-dealers to
create, and preserve in an accessible manner, a comprehensive record
of each securities transaction they effect and of their securities
business in general. These rules impose minimum recordkeeping
requirements that are based on standards a prudent broker-dealer
should follow in the normal course of business. The requirements are
an integral part of the investor protection function of the
Commission, and other securities regulators, in that the preserved
records are the primary means of monitoring compliance with
applicable securities laws, including antifraud provisions and
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financial responsibility standards.\59\
\59\ See Commission Guidance to Broker-Dealers on the Use of
Electronic Storage Media under the Electronic Signatures in Global
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66
FR 22917.
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[[Page 25200]]
Under the proposed recordkeeping program for SBSDs and MSBSPs,
broker-dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would
be subject to Rules 17a-3 and 17a-4.\60\ The Commission is proposing
amendments to these rules to account for the security-based swap and
swap activities of broker-dealers, including broker-dealers registered
as SBSDs and MSBSPs, as well as to implement the specific recordkeeping
requirements mandated under the Dodd-Frank Act.\61\ Stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be subject to
proposed Rules 18a-5 and 18a-6, which are modeled on Rules 17a-3 and
17a-4, respectively, as these rules are proposed to be amended.
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\60\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4.
\61\ As discussed in more detail below, the Commission also is
proposing additional largely technical amendments to Rules 17a-3 and
17a-4.
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Proposed Rules 18a-5 and 18a-6 would not include a parallel
requirement for every requirement in Rules 17a-3 and 17a-4 because some
of the requirements in Rules 17a-3 and 17a-4 relate to activities that
are not expected or permitted of SBSDs and MSBSPs. Further, the
proposed recordkeeping requirements that would be applicable to bank
SBSDs and bank MSBSPs are more limited in scope because, as discussed
above in section I. of this release: (1) The Commission's authority
under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities
related to the conduct of business as an SBSD or MSBSP; (2) bank SBSDs
and bank MSBSPs are subject to recordkeeping requirements applicable to
banks; and (3) the prudential regulators--rather than the Commission--
are responsible for capital, margin, and other prudential requirements
applicable to bank SBSDs and bank MSBSPs. For these reasons, the
proposed recordkeeping requirements that would be applicable to bank
SBSDs and bank MSBSPs are designed to be tailored more specifically to
their security-based swap activities as an SBSD or an MSBSP.\62\
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\62\ As discussed below in section II.B.2. of this release, the
Commission is proposing that bank SBSDs and bank MSBSPs be subject
to a limited reporting program of general information about their
overall financial condition based on discrete elements of the
reporting program the prudential regulators have established for
banks.
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2. Records To Be Made and Kept Current
As discussed above, Rule 17a-3 requires a broker-dealer to make and
keep current certain records.\63\ The Commission is proposing to amend
this rule to account for the security-based swap and swap activities of
broker-dealers, including broker-dealer SBSDs and broker-dealer
MSBSPs.\64\ The Commission also is proposing additional largely
technical amendments to Rule 17a-3.\65\ With respect to stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission
is proposing new Rule 18a-5--which is modeled on Rule 17a-3, as
proposed to be amended--to require these registrants to make and keep
current certain records.\66\ For the reasons discussed above, proposed
Rule 18a-5 does not include a parallel requirement for every
requirement in Rule 17a-3.\67\ In addition, paragraph (a) of proposed
Rule 18a-5 contains one set of recordkeeping requirements applicable to
stand-alone SBSDs and stand-alone MSBSPs and paragraph (b) of proposed
Rule 18a-5 contains a separate set of recordkeeping requirements
applicable to bank SBSDs and bank MSBSPs that are more limited in
scope.\68\
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\63\ See 17 CFR 240.17a-3.
\64\ Broker-dealer SBSDs and broker-dealer MSBSPs would be
required to make and keep current all the records required of
broker-dealers under Rule 17a-3, as proposed to be amended, plus the
additional records required specifically of an SBSD or MSBSP.
\65\ The proposed technical amendments are discussed below in
section II.A.2.b. of this release.
\66\ See proposed Rule 18a-5.
\67\ The Commission is not proposing to include in proposed Rule
18a-5 requirements that would parallel requirements in paragraphs
(a)(4), (a)(13), (a)(14), (a)(15), and (a)(16) of Rule 17a-3. These
paragraphs require broker-dealers to make and keep current records
with respect to activities that stand-alone SBSDs and stand-alone
MSBSPs would not be expected or permitted to engage in or would not
relate to a bank's business as an SBSD or MSBSP, or relate to rules
that would not apply to stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs. Further, the Commission is not proposing to
include in proposed Rule 18a-5 requirements that would parallel
requirements in paragraphs (a)(17), (a)(18), (a)(19), and (a)(20) of
Rule 17a-3. These requirements are designed to enhance the ability
of regulators, particularly State securities regulators, to conduct
effective and efficient sales practice examinations. See Books and
Records Requirements for Brokers and Dealers Under the Securities
Exchange Act of 1934, 66 FR 55818. By adopting these requirements,
the Commission enabled States to adopt and enforce similar rules on
the State level under the National Securities Market Improvement Act
of 1996. See National Securities Markets Improvement Act of 1996,
Public Law 104-290, 110 Stat. 3416 (1996). As discussed below, the
Commission has proposed external business conduct rules for SBSDs
and MSBSPs and, as discussed below, the Commission is proposing
recordkeeping requirements to support examinations for compliance
with these proposed external business conduct rules.
\68\ Compare paragraph (a), with paragraph (b) of proposed new
Rule 18a-5.
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As discussed above, section 15F(g) of the Exchange Act provides,
among other things, that each registered SBSD and MSBSP shall maintain:
(1) Daily trading records of the security-based swaps of the registered
SBSD and MSBSP; (2) daily trading records for each counterparty in a
manner and form that is identifiable with each security-based swap
transaction; and (3) a complete audit trail for conducting
comprehensive and accurate trade reconstructions.\69\ Further, section
15F(g)(2) provides that the daily trading records shall include such
information as the Commission shall require by rule or regulation.\70\
To implement section 15F(g) of the Exchange Act, Rule 17a-3, as
proposed to be amended, and proposed Rule 18a-5 include provisions
that, among other things, are designed to require information that
would facilitate a comprehensive and accurate trade reconstruction for
each security-based swap transaction.
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\69\ See 15 U.S.C. 78o-10(g)(1), (3), and (4).
\70\ See 15 U.S.C. 78o-10(g)(2).
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In this regard, the amendments to Rule 17a-3 and proposed Rule 18a-
5 would require broker-dealers, SBSDs, and MSBSPs to make and keep
current daily trading records,\71\ ledger accounts,\72\ a securities
record,\73\ memoranda of brokerage orders,\74\ and/or memoranda of
proprietary trades \75\ with respect to security-based swap activity.
The Commission has proposed Rule 901 of Regulation SBSR, which would
require market participants, including broker-dealers, SBSDs, and
MSBSPs, to report certain data elements to security-based swap data
repositories.\76\
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\71\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.
\72\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.
\73\ See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-
5.
\74\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended; paragraph (b)(4) of proposed Rule 18a-5.
\75\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.
\76\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Securities Exchange Act Release No.
63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010). See also Cross-
Border Security-Based Swap Activities; Re-Proposal of Regulation
SBSR and Certain Rules and Forms Relating to the Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 78 FR 30968 (re-proposing certain aspects of
Regulation SBSR).
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The following data elements that would be required to be reported
under proposed Rule 901 also would need to be documented in the daily
trading records, ledger accounts, memoranda of brokerage orders, and/or
memoranda of
[[Page 25201]]
proprietary trades of security-based swap transactions required under
the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The
type of security-based swap; \77\ (2) the reference security, index, or
obligor; \78\ (3) the date and time of execution; \79\ (4) the
effective date; \80\ (5) the termination or maturity date; \81\ (6) the
notional amount; \82\ (7) the unique transaction identifier; \83\ and
(8) the unique counterparty identifier.\84\ The following data elements
that would be required to be reported under proposed Rule 901 would
also need to be documented in the securities record of security-based
swap transactions required under the proposed amendments to Rule 17a-3
and proposed Rule 18a-5: (1) The reference security, index, or obligor;
\85\ (2) the unique transaction identifier; \86\ (3) the unique
counterparty identifier; \87\ (4) whether the security-based swap is
cleared or not cleared; \88\ and (5) if cleared, identification of the
clearing agency where the security-based swap is cleared.\89\ In
addition, the securities record for security-based swaps would parallel
the securities record for securities by requiring a record of whether
the security-based swap is a ``long'' or ``short'' position.\90\
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\77\ Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, 75 FR 75213 (discussing the requirement in
paragraph (c)(1) of proposed Rule 901 to report the asset class of
the security-based swap).
\78\ See id. at 75214 (discussing the requirement in paragraph
(c)(2) of proposed Rule 901 to report the specific assets or issuers
of any securities upon which the security-based swap is based).
\79\ See id. at 75213 (discussing the requirement in paragraph
(c)(4) of proposed Rule 901 to report the time and date of execution
of the security-based swap).
\80\ See id. at 75214 (discussing the requirement in paragraph
(c)(5) of proposed Rule 901 to report the effective date of the
security-based swap).
\81\ See id. at 75214 (discussing the requirement in paragraph
(c)(6) to of proposed Rule 901 to report the scheduled termination
date of the security-based swap).
\82\ See id. at 75214 (discussing the requirement in paragraph
(c)(3) of proposed Rule 901 to report the notional amount of the
security-based swap).
\83\ See id. at 75221 (discussing the requirement in paragraph
(g) of proposed Rule 901 to report the unique transaction identifier
for the security-based swap).
\84\ See id. at 75217-75218, 75221-75222 (discussing the
requirement in paragraph (d) of proposed Rule 901 to report the
unique identifier of the counterparty to the security-swap
transaction).
\85\ See id. at 75214 (discussing the requirement in paragraph
(c)(2) of proposed Rule 901 to report the specific assets or issuers
of any securities upon which the security-based swap is based).
\86\ See id. at 75221 (discussing the requirement in paragraph
(g) of proposed Rule 901 to report the unique transaction identifier
for the security-based swap).
\87\ See id. at 75217-75218, 75221-75222 (discussing the
requirement in paragraph (d)(1)(i) of proposed Rule 901 to report
the participant ID of the counterparty to the security-swap
transaction).
\88\ See id. at 75214 (discussing the requirement in paragraph
(c)(9) of proposed Rule 901 to report the whether or not the
security-based swap will be cleared by a clearing agency).
\89\ See id. at 75218 (discussing the requirement in paragraph
(d)(1)(vi) of proposed Rule 901 to report the name of the clearing
agency if the security-based swap will be cleared).
\90\ Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(ii)
of Rule 17a-3, as proposed to be amended, and paragraphs (a)(4)(ii)
and (b)(3)(ii) of proposed Rule 18a-5.
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Where a data element that would need to be documented in the daily
trading records of security-based swap transactions under the proposed
amendments to Rule 17a-3 or proposed Rule 18a-5 is substantively the
same as a data element that would need to be reported under proposed
Rule 901, the Commission preliminarily believes that the type of
information that would need to be documented in the daily trading
records could be the same data element reported under proposed Rule
901.\91\
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\91\ Proposed Rule 901 may be modified when adopted, which could
include changing or eliminating certain data elements required to be
reported under the rule. Any such modifications to the data elements
could change the Commission's preliminary view on the comparability
of the information to be recorded in the daily trading records and
the information to be reported pursuant to proposed Rule 901.
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a. Amendments to Rule 17a-3 and Proposed Rule 18a-5
Undesignated Introductory Paragraph
Rule 17a-3, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\92\ The note further explains that an
SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is
subject to the books and records requirements under proposed Rule 18a-
5.\93\
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\92\ See undesignated introductory paragraph of Rule 17a-3, as
proposed to be amended.
\93\ Id.
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Similarly, proposed Rule 18a-5 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
an MSBSP that is not dually registered as a broker-dealer.\94\ The note
further explains that a broker-dealer that is dually registered as an
SBSD or MSBSP is subject to the books and records requirements under
Rule 17a-3.\95\
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\94\ See undesignated introductory paragraph of proposed Rule
18a-5.
\95\ Id.
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Trade Blotters
Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and
keep current trade blotters (or other records of original entry)
containing an itemized daily record of all transactions in securities,
all receipts and deliveries of securities, all receipts and
disbursements of cash, and all other debits and credits.\96\ The
Commission is proposing to amend paragraph (a)(1) of Rule 17a-3 to
require that the blotters specifically account for security-based
swaps, and proposing to include parallel blotter requirements in
paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5 that are modeled on
paragraph (a)(1) of Rule 17a-3, as proposed to be amended.\97\ In
particular, paragraph (a)(1) of Rule 17a-3, as proposed to be amended,
would require broker-dealers, including broker-dealer SBSDs and broker-
dealer MSBSPs, to make and keep current blotters containing an itemized
daily record of all transactions in securities, including security-
based swaps, all receipts and deliveries of securities, all receipts
and disbursements of cash, and all other debits and credits.\98\ In
order to document the attributes of security-based swaps, the proposed
amendments also would require that such records show the contract price
of the security-based swap, and include for each purchase and sale, the
following information: (1) The type of security-based swap; (2) the
reference security, index, or obligor; (3) the date and time of
execution; (4) the effective date; (5) the termination or maturity
date; (6) the notional amount; (7) the unique transaction identifier;
and (8) the unique counterparty identifier.\99\
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\96\ See 17 CFR 240.17a-3(a)(1).
\97\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.
\98\ See paragraph (a)(1) of Rule 17a-3, as proposed to be
amended.
\99\ See id.
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Paragraph (a)(1) of proposed Rule 18a-5 mirrors paragraph (a)(1) of
Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same types of blotters as broker-dealers.\100\ Paragraph (b)(1) of
proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs
to make and keep current the same types of blotters but only with
respect to their security-based swap activities.\101\
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\100\ Compare paragraph (a)(1) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(1) of proposed Rule 18a-5.
\101\ See paragraph (b)(1) of proposed Rule 18a-5.
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General Ledger
Paragraph (a)(2) of Rule 17a-3 requires broker-dealers to make and
[[Page 25202]]
keep current ledgers (or other records) reflecting all assets and
liabilities, income and expense, and capital accounts.\102\ These
records reflect the overall financial condition of the broker-dealer
and in the Commission's view can incorporate security-based swap
activities without the need for a clarifying amendment. Because the
overall financial condition of stand-alone SBSDs and stand-alone MSBSPs
is a matter of regulatory concern for the Commission, the Commission is
proposing to include a parallel provision in paragraph (a)(2) of
proposed Rule 18a-5 that mirrors paragraph (a)(2) of Rule 17a-3.\103\
Consequently, stand-alone SBSDs and stand-alone MSBSPs would be
required to make and keep current the same types of general
ledgers.\104\
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\102\ See 17 CFR 240.17a-3(a)(2).
\103\ Compare 17 CFR 240.17a-3(a)(2), with paragraph (a)(2) of
proposed Rule 18a-5.
\104\ See paragraph (a)(2) of proposed Rule 18a-5.
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Ledgers for Customer and Non-Customer Accounts
Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and
keep current certain ledger accounts (or other records) relating to
securities and commodities transactions in customer and non-customer
cash and margin accounts.\105\ The Commission is proposing to amend
paragraph (a)(3) of Rule 17a-3 to require that the ledgers (or other
records) specifically account for security-based swaps, and to include
parallel ledger requirements in paragraphs (a) and (b) of proposed Rule
18a-5 that are modeled on paragraph (a)(3) of Rule 17a-3, as proposed
to be amended.\106\ In particular, paragraph (a)(3) of Rule 17a-3 would
be amended to include a requirement that broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs, make and keep current
ledger accounts (or other records) itemizing separately as to each
security-based swap: (1) The type of security-based swap; (2) the
reference security, index, or obligor; (3) date and time of execution;
(4) the effective date; (5) the termination or maturity date; (6) the
notional amount; (7) the unique transaction identifier; and (8) the
unique counterparty identifier.\107\
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\105\ See 17 CFR 240.17a-3(a)(3).
\106\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.
\107\ See paragraph (a)(3) of Rule 17a-3, as proposed to be
amended.
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Paragraph (a)(3) of Rule 18a-5 is modeled on paragraph (a)(3) of
Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same types of ledgers (or other records).\108\ Unlike paragraph (a)(3)
of Rule 17a-3, paragraph (a)(3) of proposed Rule 18a-5 would not refer
to ``cash and margin accounts'' as these types of accounts involve
activities that would not be permitted of stand-alone SBSDs and stand-
alone MSBSPs because they are not registered as broker-dealers.\109\
Paragraph (b)(2) of proposed Rule 18a-5 similarly would require bank
SBSDs and bank MSBSPs to make and keep current ledger accounts (or
other records) relating to securities and commodity transactions but
only with respect to their security-based swap customers and non-
customers.\110\
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\108\ Compare paragraph (a)(3) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(3) of proposed Rule 18a-5.
\109\ See id.
\110\ See paragraph (b)(2) of proposed Rule 18a-5. The
Commission has proposed a definition of security-based swap customer
for the purposes of proposed Rule 18a-4. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70278. Proposed Rule 18a-4--which is modeled
on Rule 15c3-3--would establish segregation requirements for SBSDs
with respect to their security-based swap customers. Id. at 70274-
70288. The term security-based swap customer would be defined in
proposed Rule 18a-4 to mean any person from whom or on whose behalf
the SBSD has received or acquired or holds funds or other property
for the account of the person with respect to a cleared or non-
cleared security-based swap transaction. Id. at 70278. The
definition would exclude a person to the extent that person has a
claim for funds or other property which by contract, agreement or
understanding, or by operation of law, is part of the capital of the
SBSD or is subordinated to all claims of security-based swap
customers of the SBSD. Id.
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Stock Record
Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and
keep current a securities record (also referred to as a ``stock
record'').\111\ This is a record of the broker-dealer's custody and
movement of securities. The ``long'' side of the record accounts for
the broker-dealer's responsibility as a custodian of securities and
shows, for example, the securities the firm has received from customers
and securities owned by the broker-dealer. The ``short'' side of the
record shows where the securities are located such as at a securities
depository.
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\111\ See 17 CFR 240.17a-3(a)(5).
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The Commission is proposing to amend paragraph (a)(5) of Rule 17a-3
to require that the securities record specifically account for
security-based swaps, and to include parallel securities record
requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are
modeled on paragraph (a)(5) of Rule 17a-3, as proposed to be
amended.\112\ Paragraph (a)(5) of Rule 17a-3, as proposed to be
amended, would contain separate provisions: One for securities other
than security-based swaps and one for security-based swaps.\113\
Specifically, paragraph (a)(5)(i) would apply to securities other than
security-based swaps and largely mirror the current text of paragraph
(a)(5) of Rule 17a-3.\114\ Paragraph (a)(5)(ii) would apply to
security-based swaps.\115\ This paragraph would require a broker-
dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make
and keep current a securities record or ledger reflecting separately
for each security-based swap: (1) The reference security, index, or
obligor; (2) the unique transaction identifier; (3) the unique
counterparty identifier; (4) whether it is a ``long'' or ``short''
position in the security-based swap; (5) whether the security-based
swap is cleared or not cleared; and (6) if cleared, identification of
the clearing agency where the security-based swap is cleared.\116\
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\112\ See paragraph (a)(5) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(4) and (b)(3) of proposed Rule 18a-5.
\113\ See paragraphs (a)(5)(i)-(ii) of Rule 17a-3, as proposed
to be amended.
\114\ Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(i)
of Rule 17a-3, as proposed to be amended.
\115\ See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be
amended.
\116\ See id.
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Paragraph (a)(4) of proposed Rule 18a-5 mirrors paragraph (a)(5) of
Rule 17a-3 as proposed to be amended, and therefore, stand-alone SBSDs
and stand-alone MSBSPs would be required to make and keep current the
same type of securities record.\117\ Paragraph (b)(3) of proposed Rule
18a-5 similarly would require bank SBSDs and bank MSBSPs to make and
keep current a securities record of the firm's securities positions but
only with respect to positions related to their business as an SBSD or
MSBSP.\118\
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\117\ Compare paragraph (a)(5) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(4) of proposed Rule 18a-5.
\118\ See paragraph (b)(3) of proposed Rule 18a-5.
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Memoranda of Brokerage Orders
Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security.
The memorandum must show the terms and conditions of each brokerage
order.\119\ The Commission is proposing to amend paragraph (a)(6) of
Rule 17a-3 to require
[[Page 25203]]
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current a memorandum of each brokerage order, given or
received for the purchase or sale of a security-based swap.\120\ The
Commission is not proposing to include a parallel provision in
paragraph (a) of proposed Rule 18a-5 applicable to stand-alone SBSDs
and stand-alone MSBSPs because these registrants would not be permitted
to engage in the business of effecting brokerage orders in security-
based swaps without registering as a broker-dealer or a bank.\121\ The
Commission is proposing to include a parallel provision that would be
applicable to bank SBSDs and bank MSBSPs in paragraph (b) of proposed
Rule 18a-5 that is modeled on paragraph (a)(6) of Rule 17a-3, as
proposed to be amended.\122\
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\119\ See 17 CFR 240.17a-3(a)(6).
\120\ See paragraph (a)(6) of Rule 17a-3, as proposed to be
amended.
\121\ Generally, persons engaged in brokerage activities are
required to register as brokers under section 15(b) of the Exchange
Act. See 15 U.S.C. 78o(b). Banks are permitted to engage in certain
limited securities brokerage activities. Specifically, section
3(a)(4) of the Exchange Act provides eleven exceptions to broker-
dealer registration for banks. See 15 U.S.C. 78c(a)(4). In addition,
the Commission and the Federal Reserve promulgated joint rules
establishing further exemptions permitting banks to engage in
certain securities brokerage activities without registering as a
broker-dealer. See Definitions of Terms and Exemptions Relating to
the ``Broker'' Exceptions for Banks, Exchange Act Release No. 56501
(Sept. 24, 2007), 72 FR 56514 (Oct. 3, 2007); 17 CFR 247.100-781.
These exceptions and exemptions permit a bank to act as a broker or
agent in securities transactions provided they satisfy certain
conditions. Section 716 of the Dodd-Frank Act (``Swap Push-Out
Provision'') generally prohibits providing certain types of federal
assistance, including FDIC insurance, to SBSDs and MSBSPs with
respect to any swap, security-based swap, or other activity of the
SBSD or MSBSP. See Public Law 111-203, 716. The Swap Push-Out
Provision excludes MSBSPs that are insured depository institutions.
See Public Law 111-203, 716(b)(2)(B). Further, SBSDs that are
insured depository institutions are permitted to engage in certain
swap and security-based swap activities under certain conditions and
still qualify for federal assistance. See Public Law 111-203, 716(d)
through (f). Thus, a bank SBSD or bank MSBSP may act as a broker or
agent in a security-based swap transaction. In such instances, the
brokerage order record requirements of paragraph (b)(4) of proposed
Rule 18a-5 would apply.
\122\ See paragraph (b)(4) of proposed Rule 18a-5.
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Paragraph (a)(6) of Rule 17a-3, as proposed to be amended, would
contain separate provisions: One for brokerage orders involving
securities other than security-based swaps and one for brokerage orders
involving security-based swaps.\123\ Specifically, proposed paragraphs
(a)(6)(i)(A) and (B) would apply to securities other than security-
based swaps and largely mirror the current text of paragraph (a)(6) of
Rule 17a-3.\124\ Proposed paragraph (a)(6)(ii) would apply to brokerage
orders involving security-based swaps.\125\ This paragraph would
require a broker-dealer, including a broker-dealer SBSD and broker-
dealer MSBSP, to make and keep current a memorandum of each brokerage
order, and of any other instruction, given or received for the purchase
or sale of a security-based swap, whether executed or unexecuted. The
memorandum would need to include information that is similar to the
information currently required under Rule 17a-3 for brokerage
orders.\126\ In addition, to account for the attributes of security-
based swaps, the memorandum would need to include: (1) The type of
security-based swap; (2) the reference security, index, or obligor; (3)
the date and time of execution; (4) the effective date; (5) the
termination or maturity date; (6) the notional amount; (7) the unique
transaction identifier; and (8) the unique counterparty
identifier.\127\
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\123\ See paragraph (a)(6) of Rule 17a-3, as proposed to be
amended. Rule 17a-3 currently contains paragraphs (a)(6)(i) and
(ii). See 17 CFR 240.17a-3(a)(6)(i) and (ii). Under the amendments,
paragraph (a)(6)(i) of Rule 17a-3 would be redesignated as paragraph
(a)(6)(i)(A) and paragraph (a)(6)(ii) would be redesignated as
paragraph (a)(6)(i)(B). The new requirement to make and keep current
a memorandum of each security-based swap brokerage order would be
contained in paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
\124\ Compare 17 CFR 240.17a-3(a)(6)(i) and (ii), with
paragraphs (a)(6)(i)(A) and (B) of Rule 17a-3, as proposed to be
amended.
\125\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
\126\ Compare 17 CFR 240.17a-3(a)(6)(i), with paragraph
(a)(6)(ii) of Rule 17a-3, as proposed to be amended.
\127\ See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be
amended.
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Paragraph (b)(4) of proposed Rule 18a-5 similarly would require
bank SBSDs and bank MSBSPs to document key terms of brokerage orders
but only with respect to security-based swaps.\128\ Consequently,
proposed paragraph (b)(4) would not contain a provision for securities
that are not security-based swaps.\129\ Instead, the entire paragraph
mirrors paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended,
which, as discussed above, relates solely to security-based swaps.\130\
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\128\ See paragraph (b)(4) of proposed Rule 18a-5.
\129\ See id.
\130\ Compare paragraph (a)(6)(ii) of Rule 17a-3, as proposed to
be amended, with paragraph (b)(4) of proposed Rule 18a-5.
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Memoranda of Proprietary Orders
Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each purchase and sale for the account of
the broker-dealer.\131\ Generally, paragraph (a)(7) of Rule 17a-3
requires broker-dealers to document the terms of securities
transactions where they are acting as a dealer or otherwise trading for
their own account. The Commission is proposing to amend paragraph
(a)(7) of Rule 17a-3 to require the terms of security-based swap
transactions to be documented, and to include parallel memorandum
requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are
modeled on paragraph (a)(7) of Rule 17a-3, as proposed to be
amended.\132\ Paragraph (a)(7) of Rule 17a-3, as proposed to be
amended, would contain two separate provisions: One for securities
other than security-based swaps and one for security-based swaps.\133\
Specifically, proposed paragraph (a)(7)(i) would apply to securities
other than security-based swaps and largely would mirror the current
text of paragraph (a)(7) of Rule 17a-3.\134\ Paragraph (a)(7)(ii) would
apply to security-based swaps.\135\ This paragraph would require
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current a memorandum documenting each security-based
swap transaction for the account of the broker-dealer. The memorandum
would need to include certain information regarding the purchase or
sale of a security-based swap for the account of the broker-dealer that
is similar to the information currently required under paragraph (a)(7)
of Rule 17a-3.\136\ In addition, to account for the attributes of
security-based swaps, the memorandum would need to include: (1) The
type of security-based swap; (2) the reference security, index, or
obligor; (3) the date and time of execution; (4) the effective date;
(5) the termination or maturity date; (6) the notional amount; (7) the
unique transaction identifier; and (8) the unique counterparty
identifier.\137\
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\131\ See 17 CFR 240.17a-3(a)(7).
\132\ See paragraph (a)(7) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.
\133\ See paragraphs (a)(7)(i) and (ii) of Rule 17a-3, as
proposed to be amended.
\134\ Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(i)
of Rule 17a-3, as proposed to be amended.
\135\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended.
\136\ Compare 17 CFR 240.17a-3(a)(7), with paragraph (a)(7)(ii)
of Rule 17a-3, as proposed to be amended.
\137\ See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be
amended.
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Paragraph (a)(5) of proposed Rule 18a-5 would require stand-alone
SBSDs and stand-alone MSBSPs to make memoranda of proprietary
transactions but only with respect to security-based swaps.\138\ This
is because a stand-alone SBSD or a stand-alone MSBSP would need to be
registered as a broker-dealer
[[Page 25204]]
(and therefore would be subject to Rule 17a-3) (or, in certain
circumstances, a bank) to deal in securities other than security-based
swaps. Paragraph (b)(5) of proposed Rule 18a-5 would require bank SBSDs
and bank MSBSPs to make memoranda of proprietary transactions but also
only with respect to security-based swaps.\139\
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\138\ See paragraph (a)(5) of proposed Rule 18a-5.
\139\ See paragraph (b)(5) of proposed Rule 18a-5.
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Confirmations
Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to make and
keep current copies of confirmations of purchases and sales of
securities.\140\ The Commission is proposing to amend paragraph (a)(8)
to require that confirmations of security-based swaps be documented,
and to include analogous confirmation requirements in paragraphs (a)
and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(8) of
Rule 17a-3, as proposed to be amended.\141\ Paragraph (a)(8) of Rule
17a-3, as proposed to be amended, would contain separate provisions:
One for securities other than security-based swaps and one for
security-based swaps.\142\ Specifically, proposed paragraph (a)(8)(i)
would apply to confirmations of securities transactions other than
security-based swap transactions and largely mirror the current text of
paragraph (a)(8) of Rule 17a-3.\143\ Proposed paragraph (a)(8)(ii)
would apply to confirmations of security-based swap transactions.\144\
As discussed above, section 15F(i)(2) of the Exchange Act provides that
the Commission shall adopt rules governing documentation standards for
SBSDs and MSBSPs.\145\ Pursuant to section 15F(i)(2), the Commission
proposed Rule 15Fi-1 under the Exchange Act (``Rule 15Fi-1'') to
prescribe standards related to timely and accurate confirmation and
documentation of security-based swaps.\146\ Under this proposed rule,
SBSDs and MSBSPs would be required to acknowledge and, thereafter,
verify security-based swap transactions.\147\ Consequently, paragraph
(a)(8)(ii) of Rule 17a-3 would require broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current
copies of the security-based swap trade acknowledgments and
verifications made pursuant to proposed Rule 15Fi-1.\148\
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\140\ See 17 CFR 240.17a-3(a)(8). See also 17 CFR 240.10b-10 (a
requirement that broker-dealers disclose specified information to
customers at or before completion of a securities transaction).
\141\ See paragraph (a)(8) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(6) and (b)(6) of proposed Rule 18a-5.
\142\ See paragraphs (a)(8)(i) and (a)(8)(ii) of Rule 17a-3, as
proposed to be amended.
\143\ Compare paragraph (a)(8)(i) of Rule 17a-3, as proposed to
be amended, with 17 CFR 240.17a-3(a)(8).
\144\ See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be
amended.
\145\ See 15 U.S.C. 78o-10(i)(2).
\146\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3859.
\147\ Id.
\148\ See paragraph (a)(8)(ii) of Rule 17a-3, as proposed to be
amended.
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Paragraph (a)(6) of proposed Rule 18a-5 would require stand-alone
SBSDs and stand-alone MSBSPs to make and keep current copies of
confirmations of all purchases or sales of securities, which would
include securities other than security-based swaps.\149\ Paragraph
(a)(6) also would specify that, for security-based swap transactions,
stand-alone SBSDs and stand-alone MSBSPs would need to make and keep
current copies of the security-based swap trade acknowledgments and
verifications made pursuant to proposed Rule 15Fi-1.\150\ Paragraph
(b)(6) would require bank SBSDs and bank MSBSPs to make and keep
current copies of all confirmations of purchases and sales of
securities but only if related to their business as an SBSD or
MSBSP.\151\ This would require a bank SBSD or bank MSBSP to make and
keep current copies of confirmations relating to transactions in
securities, other than security-based swaps, if the transaction was
related to their business as an SBSD or MSBSP. For example, this
requirement would apply if the bank SBSD or bank MSBSP entered into a
transaction in the security underlying a security-based swap to hedge
the risk of the security-based swap. Paragraph (b)(6) also would
specify that, for security-based swap transactions, bank SBSDs and bank
MSBSPs would need to make and keep current copies of the security-based
swap trade acknowledgments and verifications made pursuant to proposed
Rule 15Fi-1.\152\
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\149\ See paragraph (a)(6) of proposed Rule 18a-5.
\150\ Id.
\151\ See paragraph (b)(6) of proposed Rule 18a-5.
\152\ Id.
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Accountholder Information
Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make and
keep current certain information with respect to each securities
accountholder.\153\ The Commission is proposing to amend paragraph
(a)(9) to require certain information with respect to security-based
swap accountholders, and to include similar requirements in paragraphs
(a) and (b) of proposed Rule 18a-5.\154\ The amendments to Rule 17a-3
would add a new paragraph (a)(9)(iv).\155\ This paragraph would require
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
to make and keep current, in the case of a security-based swap account:
(1) A record of the unique counterparty identifier of the
accountholder; (2) the name and address of accountholder; and (3) the
signature of each person authorized to transact business in the
security-based swap account.\156\ Consequently, in the case of accounts
of legal entities (e.g., a corporation, partnership, or trust),
signatures would be required from persons authorized by the entity to
transact business in the account.
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\153\ See 17 CFR 240.17a-3(a)(9).
\154\ See paragraph (a)(9) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5.
\155\ See paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be
amended.
\156\ Id.
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Paragraphs (a)(7) and (b)(7) of proposed Rule 18a-5 mirror
paragraph (a)(9)(iv) of Rule 17a-3, as proposed to be amended.\157\
Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs would be required to make and keep current the same types
of records with respect to security-based swap accountholders.
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\157\ Compare paragraph (a)(9)(iv) of Rule 17a-3, as proposed to
be amended, with paragraphs (a)(7) and (b)(7) of proposed Rule 18a-
5.
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Options Positions
Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and
keep current a record of all options positions.\158\ The Commission is
not proposing to amend paragraph (a)(10) of Rule 17a-3 to account for
security-based swaps.\159\ In addition, because the records required
under this paragraph are not specific to security-based swaps, the
Commission is not proposing to include an analogous provision in
paragraph (b) applicable to bank SBSDs and bank MSBSPs. However, in
order to facilitate the monitoring of the financial condition of stand-
alone SBSDs and stand-alone MSBSPs, the Commission is proposing to
include a parallel provision in paragraph (a)(8) of proposed Rule 18a-5
applicable to stand-alone SBSDs and stand-alone MSBSPs.\160\
Consequently, under the
[[Page 25205]]
proposed rule, these registrants would be required to make and keep
current the same type of records broker-dealers must keep: A record of
all puts, calls, spreads, straddles, and other options in which the
stand-alone SBSD or stand-alone MSBSP has any direct or indirect
interest or which the stand-alone SBSD or stand-alone MSBSP has granted
or guaranteed, containing, at a minimum, an identification of the
security and the number of units involved.\161\
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\158\ See 17 CFR 240.17a-3(a)(10).
\159\ As discussed below in section II.A.2.b. of this release,
the Commission is proposing technical amendments to paragraph
(a)(10) of Rule 17a-3.
\160\ See paragraph (a)(8) of proposed Rule 18a-5. The second
sentence of paragraph (a)(10) of Rule 17a-3 applies only to a
special class of broker-dealers that limit their activities to
dealing in OTC derivatives (``OTC derivatives dealers''). See 17 CFR
240.17a-3(a)(10); OTC Derivatives Dealers, Exchange Act Release No.
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). Consequently, it
is not included in paragraph (a)(8) of proposed Rule 18a-5.
\161\ See paragraph (a)(8) of proposed Rule 18a-5.
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Trial Balances and Computation of Net Capital
Paragraph (a)(11) of Rule 17a-3 requires broker-dealers to make and
keep current a record of the proof of money balances of all ledger
accounts in the form of trial balances and certain records relating to
the computation of aggregate indebtedness and net capital under Rule
15c3-1.\162\ The Commission is not proposing to amend paragraph (a)(11)
to account for security-based swaps because the impact of security-
based swaps on those computations is reflected in the amendments to the
capital rules that have been proposed by the Commission to apply to
broker-dealer SBSDs and stand-alone SBSDs.\163\ In addition, because
the records required under the rule are not specific to security-based
swaps and because bank SBSDs and bank MSBSPs will be subject to capital
requirements administered by the prudential regulators, the Commission
is not proposing to include a parallel provision in paragraph (b) of
proposed Rule 18a-5 applicable to these types of registrants.
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\162\ See 17 CFR 240.17a-3(a)(11).
\163\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257. As discussed below in section II.A.2.b. of this
release, the Commission is proposing technical amendments to
paragraph (a)(11) of Rule 17a-3.
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The Commission, however, is proposing to include a parallel
requirement in paragraph (a)(9) of proposed Rule 18a-5 applicable to
stand-alone SBSDs and stand-alone MSBSPs because the types of records
required under paragraph (a)(11) of Rule 17a-3 would facilitate the
review and monitoring of the financial condition and regulatory capital
of stand-alone SBSDs and stand-alone MSBSPs. As noted above, the
Commission will administer the capital rules applicable to stand-alone
SBSDs and stand-alone MSBSPs.\164\ Under Paragraph (a)(9) of proposed
Rule 18a-5, stand-alone SBSDs and stand-alone MSBSPs would be required
to make and keep current similar records to those required under
paragraph (a)(11) of Rule 17a-3 but in relation to the proposed capital
rules for these entities: (1) Proposed Rule 18a-1 in the case of stand-
alone SBSDs; and (2) proposed Rule 18a-2 in the case of stand-alone
MSBSPs.\165\ Specifically, paragraph (a)(9) would require stand-alone
SBSDs and stand-alone MSBSPs to make and keep current a record of the
proof of money balances of all ledger accounts in the form of trial
balances, and a record as of the trial balance date of the computation
of net capital pursuant to proposed Rule 18a-1 or the computation of
tangible net worth pursuant to proposed Rule 18a-2. The trial balances
and computations would need to be prepared at least once a month in
relation to the financial reporting on Form SBS that the Commission is
proposing for these registrants under proposed Rule 18a-7.\166\
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\164\ See paragraph (a)(9) of proposed Rule 18a-5.
\165\ See id. See also Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70213 (proposing Rule 18a-1 applicable to stand-alone SBSDs
and Rule 18a-2 applicable to nonbank MSBSPs that would establish
capital standards for these registrants).
\166\ The proposed requirements to file Form SBS are discussed
below in section II.B.2. of this release.
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Associated Persons
Paragraph (a)(12) of Rule 17a-3 requires broker-dealers to make and
keep current records of information about associated persons of the
broker-dealer.\167\ This requirement will apply to broker-dealer SBSDs
and broker-dealer MSBSPs and, therefore, the Commission is not
proposing to amend paragraph (a)(12) to account for security-based
swaps.\168\ The Commission, however, is proposing to include parallel
provisions in paragraphs (a) and (b) of proposed Rule 18a-5.\169\
Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs would be required to make and keep current a questionnaire
or application for employment for each associated person, which must
include the associated person's identifying information, business
affiliations for the past ten years, relevant disciplinary history,
relevant criminal record, and place of business, among other
things.\170\
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\167\ See 17 CFR 240.17a-3(a)(12).
\168\ As discussed below in section II.A.2.b. of this release,
the Commission is proposing technical amendments to paragraph
(a)(12) of Rule 17a-3.
\169\ Compare 17 CFR 240.17a-3(a)(12), with paragraphs (a)(10)
and (b)(8) of proposed Rule 18a-5.
\170\ See paragraph (a)(10) and (b)(8) of proposed Rule 18a-5.
Unlike paragraph (a)(12) of Rule 17a-3, paragraphs (a)(10) and
(b)(8) do not permit applications of registration made by the
associated person to an SRO to satisfy the requirements because the
Dodd-Frank Act did not establish SROs for SBSDs and MSBSPs. Compare
17 CFR 240.17a-3(a)(12), with paragraph (a)(10) and (b)(8) of
proposed Rule 18a-5.
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Further, the Commission is proposing to amend the definition of
associated person in Rule 17a-3 to include in the definition a person
associated with an SBSD or MSBSP as defined under section 3(a)(70) of
the Exchange Act.\171\ Section 761 of the Dodd-Frank Act added section
3(a)(70) to the Exchange Act to define the terms person associated with
a security-based swap dealer or major security-based swap participant
and associated person of a security-based swap dealer or major
security-based swap participant.\172\ Paragraph (c)(1) of proposed Rule
18a-5 similarly would provide that the term associated person means for
the purposes of proposed Rule 18a-5 a person associated with an SBSD or
MSBSP as defined under section 3(a)(70) of the Exchange Act.\173\
Paragraph (c)(2) of proposed Rule 18a-5 would limit the definition of
the term associated person for purposes of the rule and with respect to
bank SBSDs and bank MSBSPs to persons whose activities relate to the
conduct of business as an SBSD or MSBSP.\174\
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\171\ See paragraph (f)(4) of Rule 17a-3, as proposed to be
amended; 15 U.S.C. 78c(a)(70).
\172\ See Public Law 111-203, 761; 15 U.S.C. 78c(a)(70).
\173\ See paragraph (c)(1) of proposed Rule 18a-5.
\174\ See paragraph (c)(2) of proposed Rule 18a-5.
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Liquidity Stress Test
Funding liquidity risk has been defined as the risk that a firm
will not be able to efficiently meet both expected and unexpected
current and future cash flow and collateral needs without adversely
impacting either the daily operations or the financial condition of the
firm.\175\ The financial crisis of 2008
[[Page 25206]]
demonstrated that the funding liquidity risk management practices of
certain individual financial institutions were not sufficient to handle
a liquidity stress event of that magnitude.\176\ In particular, it has
been observed that the stress tests utilized at the time by financial
institutions had weaknesses \177\ and the amount of contingent
liquidity they maintained to replace external sources of funding was
insufficient to cover the institutions' liquidity needs.\178\
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\175\ See Joint Forum, Bank for International Settlements, The
management of liquidity risk in financial groups, 1 n.1 (May 2006),
available at http://www.bis.org/publ/joint16.pdf. See also Basel
Committee on Banking Supervision, Bank for International
Settlements, Principles for Sound Liquidity Risk Management and
Supervision, n.2 (Sept. 2008), available at http://www.bis.org/publ/bcbs144.pdf (``Funding liquidity risk is the risk that the firm will
not be able to meet efficiently both expected and unexpected current
and future cash flow and collateral needs without affecting either
daily operations or the financial condition of the firm. Market
liquidity risk is the risk that a firm cannot easily offset or
eliminate a position at the market price because of inadequate
market depth or market disruption.''); Amendments to Financial
Responsibility Rules for Broker-Dealers, Exchange Act Release No.
55432 (Mar. 9, 2007), 72 FR 12862, 12870 n.72 (Mar. 19, 2007)
(``Liquidity risk includes the risk that a firm will not be able to
unwind or hedge a position or meet cash demands as they become
due.''); Enhanced Prudential Standards and Early Remediation
Requirements for Covered Companies, Federal Reserve, 77 FR 594 (Jan.
5, 2012) (proposing a rule to require certain large financial
institutions to conduct liquidity stress testing at least monthly).
\176\ See Senior Supervisors Group, Risk Management Lessons from
the Global Bank Crisis of 2008, (Oct. 21, 2009), available at http://www.sec.gov/news/press/2009/report102109.pdf.
\177\ Id. at 14 (``Market conditions and the deteriorating
financial state of firms exposed weaknesses in firms' approaches to
liquidity stress testing, particularly with respect to secured
borrowing and contingent funding needs. These deteriorating
conditions underscored the need for greater consideration of the
overlap between systemic and firm-specific events and longer time
horizons, and the connection between stress tests and business-as-
usual liquidity management.'').
\178\ Id. at 15 (``Interviewed firms typically calculated and
maintained a measurable funding cushion, such as `months of
coverage,' which is conceptually similar to rating agencies' twelve-
month liquidity alternatives analyses. Some institutions were
required to maintain a liquidity cushion that could withstand the
loss of unsecured funding for one year. Many institutions found that
this metric did not capture important elements of stress that the
organizations faced, such as the loss of secured funding and demands
for collateral to support clearing and settlement activity and to
mitigate the risks of accepting novations.'') (emphasis in the
original).
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The Commission has proposed that certain broker-dealers, including
broker-dealer SBSDs, and certain stand-alone SBSDs be subject to
liquidity stress test requirements.\179\ In particular, the Commission
has proposed amendments to Rule 15c3-1 that would establish liquidity
stress test requirements for broker-dealers that have been approved to
use internal models to calculate market and credit risk charges when
computing net capital (``ANC broker-dealers''), which would include
broker-dealer SBSDs approved to use internal models for this purpose
(``ANC broker-dealer SBSDS'').\180\ The Commission has proposed
identical liquidity stress test requirements for stand-alone SBSDs that
are approved to use internal models to calculate market and credit risk
charges when computing net capital under proposed Rule 18a-1 (``stand-
alone ANC SBSDs'').\181\ Under the proposed liquidity stress test
requirements, ANC broker-dealers and stand-alone ANC SBSDs would be
required, among other things, to conduct a liquidity stress test at
least monthly that takes into account certain assumed conditions
lasting for thirty consecutive days and to establish a written
contingency funding plan.
---------------------------------------------------------------------------
\179\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254 (proposing funding liquidity stress test requirements).
\180\ Id. Rule 15c3-1 requires that a broker-dealer perform two
calculations: (1) A computation of the minimum amount of net capital
the firm must maintain; and (2) a computation of the amount of net
capital the firm is maintaining. See 17 CFR 240.15c3-1. In computing
net capital, a broker-dealer must, among other things, make certain
adjustments to net worth such as deducting illiquid assets and
taking other capital charges and adding qualifying subordinated
loans. See 17 CFR 240.15c3-1(c)(2)(i) through (xiii). The amount
remaining after these deductions is defined as tentative net
capital. See 17 CFR 240.15c3-1(c)(15). The final step in computing
net capital is to take prescribed percentage deductions
(``standardized haircuts'') from the mark-to-market value of the
proprietary positions (e.g., securities, money market instruments,
and commodities) that are included in tentative net capital. See 17
CFR 240.15c3-1(c)(2)(vi). The standardized haircuts are designed to
account for the market risk inherent in these positions and to
create a buffer of liquidity to protect against other risks
associated with the securities business. ANC broker-dealers and OTC
derivatives dealers are permitted, with Commission approval, to
calculate net capital using internal models as the basis for taking
market risk and credit risk charges in lieu of the standardized
haircuts for classes of positions for which they have been approved
to use models. See 17 CFR 240.15c3-1(a)(5) and (a)(7); 17 CFR
240.15c3-1e; 17 CFR 240.15c3-1f. Broker-dealer SBSDs that seek to
use internal models to calculate market and credit risk charges when
computing net capital would need to be approved to operate as ANC
broker-dealers. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70256. Theoretically, a broker-dealer MSBSP could be
authorized to operate as an ANC broker-dealer, in which case it
would be subject to the liquidity stress test requirement.
\181\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
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To promote compliance with these proposed requirements and the risk
management practices of ANC broker-dealers, the Commission is proposing
to amend Rule 17a-3 to add a requirement that ANC broker-dealers,
including ANC broker-dealer SBSDs, make and keep current a report of
the results of the monthly liquidity stress test, a record of the
assumptions underlying the liquidity stress test, and the liquidity
funding plan required under the proposed amendments to Rule 15c3-
1.\182\ The Commission is not proposing to include a similar provision
in paragraph (b) of proposed Rule 18a-5 applicable to bank SBSDs
because these registrants would not be subject to the Commission's
capital requirements, including the funding liquidity stress test
requirement. However, the Commission is proposing to include a parallel
provision applicable to stand-alone SBSDs in paragraph (a) of proposed
Rule 18a-5 that is modeled on the requirement that would be added to
Rule 17a-3, as proposed to be amended.\183\ Consequently, stand-alone
ANC SBSDs would be required to make and keep current a report of the
results of the monthly liquidity stress test, a record of the
assumptions underlying the liquidity stress test, and the liquidity
funding plan.\184\
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\182\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
\183\ Compare paragraph (a)(24) of Rule 17a-3, as proposed to be
amended, with paragraph (a)(11) of proposed Rule 18a-5.
\184\ See paragraph (a)(11) of proposed Rule 18a-5.
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Account Equity and Margin Calculations Under Proposed Rule 18a-3
The Commission has proposed Rule 18a-3, which would establish
margin requirements with respect to non-cleared security-based swaps
applicable to nonbank SBSDs and nonbank MSBSPs.\185\ Proposed Rule 18a-
3 would require nonbank SBSDs, among other things, to perform two daily
calculations for each security-based swap account: The amount of equity
in the account and a margin amount for the account.\186\ Nonbank MSBSPs
would be required to calculate only the equity in the account.\187\ The
Commission is proposing to require that nonbank SBSDs and nonbank
MSBSPs make and keep current a record of the daily calculations that
would be required under Rule 18a-3 by amending Rule 17a-3 and including
a parallel provision in paragraph (a) of proposed Rule 18a-5.\188\ The
objective of these requirements is to promote compliance with proposed
Rule 18a-3, to require records to assist nonbank SBSDs and nonbank
MSBSPs in managing their credit risk to security-based swap
counterparties, and to assist Commission examiners in reviewing
[[Page 25207]]
compliance with those rule requirements.\189\
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\185\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274.
\186\ Id. at 70260-70262.
\187\ Id. at 70262-70263.
\188\ See paragraph (a)(25) of Rule 17a-3, as proposed to be
amended; paragraph (a)(12) of proposed Rule 18a-5. See also Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70257-70274.
\189\ As discussed above in section I. of this release, section
15F(e)(1)(A) of the Exchange Act provides that the prudential
regulators shall prescribe capital and margin requirements for bank
SBSDs and bank MSBSPs. See 15 U.S.C. 78o-10(e)(1)(A).
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Possession or Control Requirements Under Proposed Rule 18a-4
Rule 15c3-3 under the Exchange Act (``Rule 15c3-3'') requires a
broker-dealer that carries customer securities or cash (a ``carrying
broker-dealer'') to maintain physical possession or control over
customers' fully paid and excess margin securities.\190\ Physical
possession or control means the carrying broker-dealer must hold these
securities in one of several locations specified in Rule 15c3-3 and
free of liens or any other interest that could be exercised by a third
party to secure an obligation of the broker-dealer.\191\ Permissible
locations include a bank, as defined in section 3(a)(6) of the Exchange
Act, and a clearing agency.\192\ The Commission has proposed Rule 18a-4
to establish security-based swap customer protection requirements that
are modeled on the requirements in Rule 15c3-3.\193\ Paragraph (b)(1)
of proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based swap
customers.\194\ The physical possession or control requirement of
paragraph (b)(1) of proposed Rule 18a-4 would prohibit SBSDs from
lending or hypothecating excess securities collateral of security-based
swap customers, and would require SBSDs to either physically hold
excess securities collateral or to custody the collateral in a
satisfactory control location.\195\ Paragraph (b)(2) of proposed new
Rule 18a-4 would identify five satisfactory control locations for
excess securities collateral.\196\ Paragraph (b)(3) of Rule 18a-4 would
require that each business day the SBSD must determine from its books
and records the quantity of excess securities collateral that the firm
had in its possession or control as of the close of the previous
business day and the quantity of excess securities collateral the firm
did not have in its possession or control on that day.\197\ The
paragraph would provide further that the SBSD must take steps to
retrieve excess securities collateral from certain specifically
identified non-control locations if securities and money market
instruments of the same issue and class are at these locations.\198\
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\190\ See 17 CFR 240.15c3-3(d). The term fully paid securities
includes all securities carried for the account of a customer in a
special cash account as defined in Regulation T promulgated by the
Federal Reserve, as well as margin equity securities within the
meaning of Regulation T which are carried for the account of a
customer in a general account or any special account under
Regulation T during any period when section 8 of Regulation T (12
CFR 220.8) specifies that margin equity securities shall have no
loan value in a general account or special convertible debt security
account, and all such margin equity securities in such account if
they are fully paid: provided, however, that the term fully paid
securities shall not apply to any securities which are purchased in
transactions for which the customer has not made full payment. See
17 CFR 240.15c3-3(a)(3). The term margin securities means those
securities carried for the account of a customer in a general
account as defined in Regulation T, as well as securities carried in
any special account other than the securities referred to in
paragraph (a)(3) of Rule 15c3-3. See 17 CFR 240.15c3-3(a)(4). The
term excess margin securities means those securities referred to in
paragraph (a)(4) of Rule 15c3-3 carried for the account of a
customer having a market value in excess of 140% of the total of the
debit balances in the customer's account or accounts encompassed by
paragraph (a)(4) of Rule 15c3-3 which the broker-dealer identifies
as not constituting margin securities. See 17 CFR 240.15c3-3(a)(5).
\191\ See 17 CFR 240.15c3-3(c). Customer securities held by the
carrying broker-dealer are not assets of the firm. Rather, the
carrying broker-dealer holds them in a custodial capacity and the
possession or control requirement is designed to ensure that the
carrying broker-dealer treats them in a manner that allows for their
prompt return.
\192\ Id.
\193\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288. As broker-dealers, broker-dealer SBSDs and broker-
dealer MSBSPs would be subject to Rule 15c3-3 with respect to
customers that are not security-based swap customers and, in the
case of a broker-dealer SBSD, Rule 18a-4 with respect to security-
based swap customers. Id. at 70277 (``A broker-dealer SBSD would
need to treat security-based swap accounts separately from other
securities accounts and, consequently, would need to perform
separate possession or control and reserve account computations for
security-based swap accounts and other securities accounts. The
former would be subject to the possession or control and reserve
account requirements in proposed new Rule 18a-4 and the latter would
continue to be subject to the analogous requirements in Rule 15c3-3.
This would keep separate the segregated customer property related to
security-based swaps from customer property related to other
securities, including property of retail securities customers.'').
\194\ Under proposed Rule 18a-4, the term excess securities
collateral would be defined to mean securities and money market
instruments carried for the account of a security-based swap
customer that have a market value in excess of the current exposure
of the SBSD to the customer, excluding, under certain specified
conditions, securities or money market instruments used to meet a
margin requirement of a registered security-based swap clearing
agency or of another SBSD. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70279. As noted above, the term security-based swap customer
would be defined to mean any person from whom or on whose behalf the
SBSD has received or acquired or holds funds or other property for
the account of the person with respect to a cleared or non-cleared
security-based swap transaction. Id. at 70278. The definition would
exclude a person to the extent that person has a claim for funds or
other property which by contract, agreement or understanding, or by
operation of law, is part of the capital of the SBSD or is
subordinated to all claims of security-based swap customers of the
SBSD. Id.
\195\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70278.
\196\ Id. at 70280-70281.
\197\ Id. at 70281-70282.
\198\ Id. at 70281.
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The Commission is proposing to require that all SBSDs make and keep
current a record of compliance with the possession or control
requirement under proposed Rule 18a-4 by amending Rule 17a-3 to add
this new requirement and including parallel requirements in paragraphs
(a) and (b) of proposed Rule 18a-5.\199\ Consequently, this new
recordkeeping requirement would apply to broker-dealer SBSDs, stand-
alone SBSDs, and bank SBSDs.\200\ The records required under this
proposal would need to document that each business day the firm took
the steps required under paragraph (b) of proposed Rule 18a-3 described
above. The objective of this new recordkeeping requirement would be to
promote compliance with the possession or control requirements of
proposed Rule 18a-4 and to assist Commission examiners in reviewing
compliance.
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\199\ See paragraph (a)(26) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(13) and (b)(9) of proposed Rule 18a-5.
\200\ See id.
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Customer Reserve Requirements Under Proposed Rule 18a-4
Rule 15c3-3 requires a carrying broker-dealer to maintain a reserve
of funds or qualified securities in an account at a bank that is at
least equal in value to the net cash owed to customers.\201\ The amount
of net cash owed to customers is computed pursuant to a formula set
forth in Exhibit A to Rule 15c3-3.\202\ The Commission has proposed a
parallel requirement in proposed Rule 18a-4.\203\ Proposed Rule 18a-4
would require an SBSD, among other things, to maintain a security-based
swap customer reserve
[[Page 25208]]
account at an unaffiliated bank separate from any other bank account of
the SBSD.\204\ Further, it would provide that the SBSD must at all
times maintain in the security-based swap customer reserve account cash
and/or qualified securities in amounts computed daily in accordance
with Exhibit A to proposed Rule 18a-4.\205\
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\201\ See 17 CFR 240.15c3-3(e). The term qualified security is
defined in Rule 15c3-3 to mean a security issued by the U.S. or a
security in respect of which the principal and interest are
guaranteed by the U.S. See 17 CFR 240.15c3-3(a)(6).
\202\ See 17 CFR 240.15c3-3a.
\203\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287. As noted above, broker-dealer SBSDs and broker-dealer
MSBSPs would be subject to Rule 15c3-3 with respect to customers
that are not security-based swap customers and, in the case of a
broker-dealer SBSD, Rule 18a-4 with respect to security-based swap
customers.
\204\ Id.
\205\ Id.
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The Commission is proposing to require that all types of SBSDs make
and keep current a record of their reserve computations under proposed
Rule 18a-4 by amending Rule 17a-3 to add the requirement and to include
parallel requirements in paragraphs (a) and (b) of proposed Rule 18a-
5.\206\ The objective of this requirement would be to promote SBSD
compliance with the customer reserve computation requirement and to
assist Commission examiners in reviewing compliance.
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\206\ See paragraph (a)(27) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(14) and (b)(10) of proposed Rule 18a-5.
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Unverified Transactions
Prudent practice requires counterparties to promptly confirm the
terms of executed OTC derivatives transactions.\207\ Consequently, the
Commission proposed Rule 15Fi-1 to promote the efficient operation of
the security-based swap market and to facilitate market participants'
management of the risk of trading in security-based swaps.\208\ Among
other things, proposed Rule 15Fi-1 would require broker-dealers, SBSDs,
and MSBSPs to provide trade acknowledgments containing the details of a
security-based swap transaction within prescribed timeframes and to
establish, maintain, and enforce written policies and procedures that
are reasonably designed to obtain prompt verification of the terms of
the trade acknowledgments.\209\
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\207\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3860.
\208\ Id. at 3861.
\209\ Id. at 3861-3867.
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To promote compliance with proposed Rule 15Fi-1 and the risk
management practices of broker-dealers, SBSDs, and MSBSPs, the
Commission is proposing to amend Rule 17a-3 to add a requirement to
make a record of each security-based swap trade acknowledgment that is
not verified within five business days of execution and to include
parallel provisions in paragraphs (a) and (b) of proposed Rule 18a-
5.\210\ Consequently, all types of SBSDs and MSBSPs would be required
to make and keep current these records. While the Commission did not
prescribe a timeframe in proposed Rule 15Fi-1 within which security-
based swap trade acknowledgements would need to be verified, the
proposed rule does require procedures reasonably designed to obtain
``prompt verification.'' \211\ The proposed requirement to make a
record of security-based swap trade acknowledgments that are not
verified within five business days is not intended to establish a
maximum timeframe within which verification should be obtained under
proposed Rule 15Fi-1. The five business day threshold is designed to
require SBSDs and MSBSPs to make a record of transactions that have
gone unverified for a significant length of time.\212\ This could
indicate a deficiency in the controls established to verify
transactions or the existence of a disagreement with the counterparty
as to the terms of the transaction.
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\210\ See paragraph (a)(28) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(15) and (b)(11) of proposed Rule 18a-5.
\211\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3866.
\212\ Proposed Rule 15Fi-1 requires registered entities to
verify the terms of security-based swap transactions with the
counterparty. However, a party that is not a registered entity is
not required to verify a security-based swap transaction. Registered
entities must have procedures to verify security-based swap
transactions with unregistered entities. Id. at 3866-3867.
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Records Relating to Business Conduct Standards
The Commission has proposed Rules 15Fh-1 through 15Fh-6 and Rule
15Fk-1 to establish external business conduct requirements for SBSDs
and MSBSPs.\213\ As currently proposed, the requirements in these
rules, would address (among other things):
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\213\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 64766 (June 29, 2011), 76 FR 42396 (July 18, 2011).
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Verification of the status of the counterparty;
Certain disclosures related to the daily mark and its
calculation;
Disclosures regarding material incentives, conflicts of
interest, material risks, and characteristics of the security-based
swap, and certain clearing rights;
Certain ``know your counterparty'' and suitability
obligations for SBSDs;
Supervisory requirements including written policies and
procedures;
Certain requirements regarding interactions with special
entities;
Provisions intended to prevent SBSDs and independent
representatives of special entities from engaging in certain ``pay to
play'' activities; and
Certain minimum requirements relating to chief compliance
officers.
To promote compliance with these external business conduct
standards, the Commission is proposing amendments to Rule 17a-3 and to
include parallel provisions in paragraphs (a) and (b) of proposed Rule
18a-5.\214\ First, the Commission is proposing that all types of SBSDs
be required to make and keep current a record that demonstrates their
compliance with proposed Rule 15Fh-6 (regarding political contributions
by certain security-based swap dealers).\215\ Second, the Commission is
proposing that all types of SBSDs and MSBSPs be required to make and
keep current a record that demonstrates their compliance with proposed
Rules 15Fh-1 through 15Fh-5 and Rule 15Fk-1, as applicable.\216\ These
paragraphs would require covered firms to keep supporting documents
evidencing their compliance with the business conduct standards; a mere
attestation of compliance would not be sufficient. To the extent that
the rules require providing or receiving written disclosures or written
representations, the SBSD or MSBSP would be required to retain a copy
of such disclosure or representation.\217\
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\214\ See paragraphs (a)(29) and (a)(30) of Rule 17a-3, as
proposed to be amended; paragraphs (a)(16), (a)(17), (b)(12) and
(b)(13) of proposed Rule 18a-5.
\215\ See paragraph (a)(29) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(16) and (b)(12) of proposed Rule 18a-5.
\216\ See paragraph (a)(30) of Rule 17a-3, as proposed to be
amended; paragraphs (a)(17) and (b)(13) of proposed Rule 18a-5.
Paragraph (b)(2) of proposed Rule 15Fk-1 would require chief
compliance officers of SBSDs and MSBSPs to establish, maintain and
review written policies and procedures reasonably designed to
achieve compliance with section 15F of the Act and the rules and
regulations thereunder, by the SBSDs and MSBSPs.
\217\ See paragraph (a)(14) of Rule 17a-4, as proposed to be
amended; paragraphs (b)(1)(xii) and (b)(2)(vii) of proposed Rule
18a-6.
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Request for Comment
The Commission generally requests comment on the proposals to
require broker-dealers, SBSDs, and MSBSPs to make and keep current
certain types of records. In addition, the Commission requests comment,
including empirical data in support of comments, in response to the
following questions:
1. Are the provisions in Rule 17a-3 that would be included as
parallel provisions in paragraph (a) of proposed Rule 18a-5 appropriate
for stand-alone SBSDs and stand-alone MSBSPs? If not, explain why not.
Are there alternative provisions the Commission should consider? If so,
describe them. Are there provisions in Rule 17a-3 that are not being
included as parallel provisions in paragraph (a) of proposed Rule 18a-5
that would be appropriate for stand-alone SBSDs and stand-alone MSBSPs?
If so, explain why.
[[Page 25209]]
2. Are the provisions in Rule 17a-3 that would be included as
parallel provisions in paragraph (b) of proposed Rule 18a-5 appropriate
for bank SBSDs and bank MSBSPs? If not, explain why not. Are there
alternative provisions the Commission should consider? If so, describe
them. Are there provisions in Rule 17a-3 that are not being included as
parallel provisions in paragraph (b) of proposed Rule 18a-5 that would
be appropriate for bank SBSDs and bank MSBSPs? If so, explain why.
3. Are the recordkeeping provisions that would be added to
paragraph (a) of Rule 17a-3 appropriate for broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs? If not, explain why not.
Are there alternative provisions the Commission should consider? If so,
describe them.
4. Paragraph (a)(23) of Rule 17a-3, as recently amended, requires
certain broker-dealers to make and keep current a record documenting
the broker-dealer's credit, market, and liquidity risk management
controls.\218\ Should an analogous requirement be added to Rule 18a-5?
Explain why or why not.
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\218\ See Financial Responsibility Rules for Broker-Dealers, 78
FR 51907.
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5. Is the five business day time frame for triggering the
unverified transaction record requirement an appropriate length of
time? Should the time frame be shorter (e.g., three days)? Should the
time frame be longer (e.g., seven or ten days)?
6. How do the types of records that would need to be made under
Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5 align
with the types of records that an FCM or a swap dealer would be
required to make? Commenters are asked to identify and explain
requirements that they believe would result in a dually registered
entity (e.g., a broker-dealer/FCM or an SBSD/swap dealer) needing to
make two sets of records that address the same matter or information as
opposed to a single record that includes information that would satisfy
requirements of both recordkeeping programs.
7. As noted above, certain data elements that would need to be
documented under the proposed amendments to Rule 17a-3 or proposed Rule
18a-5 are substantively the same as certain data elements that would
need to be reported under proposed Rule 901. Should any additional data
elements required to be reported under proposed Rule 901 be required to
be recorded in the daily trading records under the proposed amendments
to Rule 17a-3 or proposed Rule 18a-5? Are any of the data elements that
would be required to be recorded in the daily trading records not
appropriate for such records? If so, identify them and explain why. Are
there any data elements that should be required to be recorded even
though they are not required by proposed Rule 901? If so, identify them
and explain why.
8. Can the data elements with respect to security-based swaps that
would be required to be recorded in the daily trading records under the
proposed amendments to Rule 17a-3 and proposed Rule 18a-5 be stored in,
and retrieved from, a single database in order to generate the various
types of records that would need to be made (e.g., ledger accounts,
securities record, memoranda of brokerage orders, and memoranda of
proprietary trades)? If not, explain why not. If so, describe any
system changes that would need to be made and identify, estimate, and
quantify the burden(s) associated with such system changes.
9. Paragraph (a)(29) of Rule 17a-3, as proposed to be amended, and
paragraphs (a)(16) and (b)(12) of proposed Rule 18a-5 require broker-
dealer SBSDs, stand-alone SBSDs, and bank SBSDs, respectively, to make
and keep a record that demonstrates they complied with the business
conduct standards required under proposed Rule 15Fh-6. Should these
paragraphs also require these entities to make and keep specified
records pertaining to proposed Rule 15Fh-6 to help in evaluating
compliance? Explain why or why not. For example, based on the
provisions of proposed Rule 15Fh-6, should the following rule text be
used in paragraphs (a)(29) and (a)(30) of Rule 17a-3, as proposed to be
amended (and in paragraphs (a)(16) and (a)(17), and paragraphs (b)(12)
and (b)(13) of proposed Rule 18a-5):
``(29) A record with respect to Sec. 240.15Fh-6 [as proposed at 76
FR 42396, July 18, 2011] containing the following information:
(i) The names, titles, and business and residence addresses of all
covered associates of the broker or dealer;
(ii) All municipal entities to which a broker or dealer has
provided services in connection with the solicitation or entry into
security-based swaps or trading strategies involving security-based
swaps in the past five years, but not before six months prior to the
effective date of Sec. 240.15Fh-6 [as proposed at 76 FR 42396, July
18, 2011]; and
(iii) In chronological order, all direct or indirect contributions
made by the broker or dealer or any of its covered associates
(including contributions made up to six months prior to becoming a
covered associate) to an official of a municipal entity, or direct or
indirect payments to a political party of a state or political
subdivision thereof, or to a political action committee, including:
(A) The name and title of each contributor;
(B) The name and title, including the city, county, state, or other
political subdivision, of each recipient of a contribution or payment;
(C) Whether the contributor was entitled to vote for the recipient
at the time of the contribution;
(D) The amount and date of each contribution and payment; and
(E) Whether any such contribution was the subject of the exception
for certain returned contributions pursuant to Sec. 240.15Fh-6(d) or
(e) [as proposed at 76 FR 42396, July 18, 2011]; and
(iv) The name and business address of each municipal advisor to
whom the broker or dealer provides or agrees to provide, directly or
indirectly, payment to solicit a municipal entity for services on its
behalf; and, for purposes of this paragraph, the terms contribution,
covered associates, municipal entity, official of municipal entity,
payment and solicit will have the same meaning as set forth in Sec.
240.15Fh-6(a) [as proposed at 76 FR 42396, July 18, 2011].
(30) A record that demonstrates the broker or dealer has complied
with the business conduct standards as required under Sec. 240.15Fh-1
through Sec. 240.15Fh-6 and Sec. 240.15Fk-1 [as proposed at 76 FR
42396, July 18, 2011].''?
If this rule text should be used, explain why. If this rule text
should not be used, explain why not. Is there alternative rule text
that should be used? If so, explain why alternative rule text should be
used?
b. Additional Proposed Amendments to Rule 17a-3
The Commission is proposing several amendments to Rule 17a-3 to
eliminate obsolete text, improve readability, and modernize
terminology. Reference is made throughout Rule 17a-3 to ``members'' of
a national securities exchange as a distinct class of registrant in
addition to ``brokers'' and ``dealers''. The Commission is proposing to
remove these references to ``members'' given that the rule applies to
brokers-dealers, which would include members of a national securities
exchange that are brokers-dealers.\219\ The Commission is
[[Page 25210]]
proposing a second global change that would replace the word ``shall''
in the rule with the word ``must'' or ``will'' where appropriate.\220\
Similarly, when defining terms, the Commission is proposing to replace
the phrase ``shall mean'' with the word ``means''.\221\ The Commission
also proposes to make certain stylistic, corrective, and punctuation
amendments to improve the rule's readability.\222\
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\219\ The proposed amendments would delete the word ``member''
from the title and from the following paragraphs of Rule 17a-3, as
proposed to be amended: (a), (a)(3), (a)(5)(i), (a)(6)(i),
(a)(7)(i), (a)(8)(i), (a)(9), (a)(10), (a)(11), (a)(12), (a)(17)(i),
(a)(18), (a)(19), (a)(20), (a)(22), (b), (e), (f)(2), and (f)(4).
See Rule 17a-3, as proposed to be amended.
\220\ The proposed amendments would replace the word ``shall''
with the word ``must'' or ``will'' in the following paragraphs of
Rule 17a-3, as proposed to be amended: (a), (a)(6)(i)(A), (a)(7)(i),
(a)(10), (a)(11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i),
(a)(19)(i), (b), (d), (e), and (f)(4). See Rule 17a-3, as proposed
to be amended.
\221\ The proposed amendments would replace the phrase ``shall
mean'' with the word ``means'' in the following paragraphs of Rule
17a-3, as proposed to be amended: (a)(6)(i)(A), (a)(16)(ii)(A), and
(a)(16)(ii)(B). See Rule 17a-3, as proposed to be amended.
\222\ The Commission proposes the following stylistic and
corrective changes to Rule 17a-3, as proposed to be amended: (1)
Adding to paragraph (a)(1) the phrase ``such securities were''; (2)
adding to paragraph (a)(4)(vi) the word ``and'' after the semicolon;
(3) replacing the word ``of'' with the word ``or'' in paragraph
(a)(5), resulting in the phrase ``for its account or for the account
of its customers or partners''; (4) replacing the phrase ``purchase
or sale of securities'' with the phrase ``purchase or sale of a
security'' in the first sentence of paragraph (a)(6)(i); (5)
replacing the word ``and'' with the word ``or'' in paragraph (a)(7),
resulting in the phrase ``A memorandum of each purchase or sale'';
(6) replacing the phrase ``in respect of'' to with the phrase ``with
respect to'' in paragraph (a)(9); (7) adding the phrase ``, as
applicable:'' after the word ``indicating'' in paragraph (a)(9); (8)
including the word ``and'' between the second-to-last and last
subparagraphs of paragraph (a)(9) (instead of after every
subparagraph); (9) replacing cross-reference in paragraph (a)(12) to
``paragraph (h)(4)'' with a cross-reference to ``paragraph (f)(4)''
due to the proposed deletion of two paragraphs; (10) amending
paragraph (a)(12)(i)(G) to refer to a ``broker or dealer'' instead
of a ``broker-dealer''; and (11) replacing the superfluous ``or''
with a comma in the phrase ``wrongful taking of property or
bribery'' in paragraph (a)(12)(i)(G).
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The Commission is proposing to simplify the text in paragraph (a)
of Rule 17a-3 to state that Rule 17a-3 applies to ``every broker or
dealer'', since the undesignated introductory paragraph already
provides sufficient detail as to the types of registrants to which the
rule applies.\223\
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\223\ See undesignated introductory paragraph of Rule 17a-3, as
proposed to be amended.
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In recognition of the fact that broker-dealers may execute orders
for non-customers, the Commission is proposing to amend paragraph
(a)(6) of Rule 17a-3 to specify that a broker-dealer must maintain a
copy of the customer's or non-customer's subscription agreement.
The Commission is proposing to restructure paragraph (a)(11) of
Rule 17a-3 to eliminate paragraphs (a)(11)(i)-(ii).\224\ Under these
amendments, the text of paragraph (a)(11)(i) of Rule 17a-3 would be set
forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as
proposed to be amended, and the text of paragraph (a)(11)(ii) would be
deleted from the rule.\225\
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\224\ See paragraph (a)(11) of Rule 17a-3, as proposed to be
amended.
\225\ Id.
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The Commission is proposing to amend the ``Provided, however''
paragraph in paragraph (a)(12) of Rule 17a-3 that follows paragraph
(a)(12)(i)(H) by replacing the list of SROs and exchanges with the term
``a self-regulatory organization.'' \226\ Thus, rather than naming
specific SROs, the paragraph would use the generic term ``a self-
regulatory organization.''
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\226\ See paragraph (a)(12) of Rule 17a-3, as proposed to be
amended.
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The Commission also is proposing amendments to paragraph (b) of
Rule 17a-3. Paragraph (b)(1) is designed to avoid duplication and
prevent an introducing broker-dealer from having to make and keep
current the same records that would customarily be made by the firm's
clearing broker-dealer. However, the language in paragraph (b)(1)
beginning with the phrase ``Provided, That'' is outdated insofar is it
references a capital standard that has been superseded. In revising
paragraph (b)(1), the intent of the provision--to avoid the duplicative
creation of records related to transactions introduced by one broker or
dealer and cleared by a different broker or dealer--remains the same.
However, the Commission is proposing to clarify the provision and
eliminate the outdated capital standard reference.\227\ The Commission
also is proposing to delete paragraph (b)(2) as it would be redundant
of paragraph (b) of Rule 17a-3, as proposed to be amended.
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\227\ Paragraph (b) of Rule 17a-3, as proposed to be amended,
would read as follows: ``A broker or dealer registered pursuant to
section 15 of the Act, that introduces accounts on a fully-disclosed
basis, is not required to make or keep such records of transactions
cleared for such broker or dealer as are made and kept by a clearing
broker or dealer pursuant to the requirements of Sec. 240.17a-3 and
Sec. 240.17a-4. Nothing herein will be deemed to relieve such
broker or dealer from the responsibility that such books and records
be accurately maintained and preserved as specified in Sec.
240.17a-3 and Sec. 240.17a-4.''
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The Commission is proposing to remove paragraphs (c) and (d) of
Rule 17a-3. Paragraph (c) is outdated and references instruments such
as U.S. Defense Savings Stamps and U.S. Defense Savings Bonds that are
no longer widely circulated and thus a specific carve-out for these
instruments from the general rule set forth in paragraph (a) of Rule
17a-3 is antiquated.\228\ Paragraph (d) provides a de minimis exception
from paragraph (a) of Rule 17a-3 for any cash transaction of $100 or
less involving only subscription rights or warrants which by their
terms expire within 90 days after the issuance thereof. This exemption
was adopted in 1953 to reduce the burden and expense of making
accounting entries for these rights transactions. The Commission
preliminarily believes that the burden associated with these accounting
entries is no longer significant in light of the technological advances
in recordkeeping systems since 1953.\229\ In addition, the Commission
preliminarily believes the removal of this exemption would affect a
small number of transactions.
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\228\ The Defense Savings Bond initiated by the U.S. Treasury
and the U.S. Defense Savings Stamps introduced by the U.S. Postal
Service were measures to finance the U.S. effort in World Wars I and
II. The bonds matured in 10 years from the date of issuance. The
Defense Savings Bonds were replaced by Series E savings bonds, which
ceased to be issued as of June 1980. Today, these instruments are
not widely held and are valued more as collectibles than for their
face value. See information available at www.Treasurydirect.gov.
\229\ See Preservation of Records and Reports of Certain
Stabilizing Activities, 18 FR 2879 (May 19, 1953) (``It has been
pointed out to the Commission that the accounting entries
appropriate in the case of the usual securities transaction are
unnecessarily burdensome and expensive as to these rights
transactions because of the small sums involved and because in many
cases there is no continuing relationship between the customer and
the firm'').
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As a consequence of the proposed removal of current paragraphs (c)
and (d) from Rule 17a-3, current paragraphs (e), (f), (g), and (h)
would be redesignated as paragraphs (c), (d), (e), and (f),
respectively.
Current paragraph (e) references Municipal Securities Rulemaking
Board (``MSRB'') Rule G-8 and states that compliance with such rule
will be deemed to be compliance with this section. The proposed
amendments would add the phrase ``or any successor rule'' to the
reference to Rule G-8 so that the cross-reference does not become
superseded over time.
Request for Comment
The Commission generally requests comment on these additional
proposed amendments to Rule 17a-3, including comment on whether any of
the proposed amendments would result in substantive changes to the
requirements applicable to broker-dealers. In addition, the Commission
requests comment, including empirical data in support of comments, in
response to the following questions:
1. Paragraphs (a)(12)(i)(E) through (G) of Rule 17a-3 currently
require broker-dealers to retain certain records with
[[Page 25211]]
regard to certain actions taken against their associated persons when
they were associated with a broker-dealer. Should these requirements be
expanded to include actions taken when they were associated with other
types of entities (e.g., SBSDs, MSBSPs, FCMs, investment advisers)? If
so, which entities should be covered? Please explain. Also identify,
estimate, and quantify any associated burdens with expanding these
requirements to include actions taken when broker-dealers are
associated with these other types of entities.
2. Do broker-dealers still rely on the exemptions provided in
paragraphs (b)(2), (c), and/or (d) of Rule 17a-3? If so, quantify the
extent to which these exemptions are relied on, and the burden
associated with the Commission's proposal to eliminate these
exemptions. In addition, would any system changes be needed if the
exemptions provided in paragraphs (b)(2), (c), and/or (d) of Rule 17a-3
were eliminated? If so, identify, estimate, and quantify the burden(s)
associated with such system changes.
3. Record Maintenance and Preservation Requirements
As discussed above, Rule 17a-4 requires a broker-dealer to preserve
certain types of records if it makes or receives them. The rule also
prescribes the period of time these records and the records required to
be made and kept current under Rule 17a-3 must be preserved and the
manner in which they must be preserved. The Commission is proposing
amendments to Rule 17a-4 that are designed to account for the security-
based swap activities of broker-dealers, including broker-dealer SBSDs
and broker-dealer MSBSPs.\230\ The Commission also is proposing
additional largely technical amendments to Rule 17a-4. With respect to
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the
Commission is proposing new Rule 18a-6--which is modeled on Rule 17a-4,
as proposed to be amended--to establish record maintenance and
preservation requirements for these types of registrants.
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\230\ Broker-Dealer SBSDs and broker-dealer MSBSPs would be
subject to all the record maintenance and preservation requirements
applicable to broker-dealers under Rule 17a-4, as proposed to be
amended, plus the additional requirements specifically applicable
only to SBSDs and MSBSPs.
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For the reasons discussed above in sections I. and II.A.1. of this
release, proposed Rule 18a-6 does not include a parallel requirement
for every requirement in Rule 17a-4.\231\ In addition, for the reasons
described in section I. of this release, the recordkeeping requirements
in proposed Rule 18a-6 applicable to bank SBSDs and bank MSBSPs are
more limited in scope than the requirements in the rule applicable to
stand-alone SBSDs and stand-alone MSBSPs.
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\231\ The Commission is not proposing to include in proposed
Rule 18a-6 requirements that would parallel the requirements in
paragraphs (b)(11), (g), (h), (k), and (l) of Rule 17a-4. These
requirements relate to activities that the Commission preliminarily
believes would not be relevant to stand-alone SBSDs or stand-alone
MSBSPs. Other requirements in Rule 17a-4 that would not be included
as parallel requirements in proposed Rule 18a-6 are discussed below.
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The proposed amendments to Rule 17a-4 and proposed Rule 18a-6 are
discussed in more detail below.
a. Amendments to Rule 17a-4 and Proposed Rule 18a-6
Undesignated Introductory Paragraph
Rule 17a-4, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\232\ The note further explains that an
SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is
subject to the record maintenance and preservation requirements under
proposed Rule 18a-6.\233\
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\232\ See undesignated introductory paragraph of Rule 17a-4, as
proposed to be amended.
\233\ Id.
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Similarly, proposed Rule 18a-6 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not registered as a broker-dealer.\234\ The note further
explains that a broker-dealer that is dually registered as an SBSD or
MSBSP is subject to the record maintenance and preservation
requirements under Rule 17a-4.\235\
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\234\ See undesignated introductory paragraph of proposed Rule
18a-6.
\235\ Id.
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Six Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5
Records
Paragraph (a) of Rule 17a-4 provides that brokers-dealers subject
to Rule 17a-3 must preserve for a period of not less than six years,
the first two years in an easily accessible place, certain categories
of records required to be made and kept current under Rule 17a-3 (the
``six year preservation requirement'').\236\ Specifically, the six year
preservation requirement applies to records required under the
following paragraphs of Rule 17a-3, as proposed to be amended:
Paragraph (a)(1) (trade blotters); paragraph (a)(2) (general ledgers);
paragraph (a)(3) (ledgers of customer and non-customer accounts);
paragraph (a)(5) (stock record); paragraph (a)(21) (person who can
explain records at each office); paragraph (a)(22) (principal
responsible for establishing compliance procedures); and paragraph (d)
(security future product records).\237\ Consequently, broker-dealer
SBSDs and broker-dealer MSBSPs would be required to preserve for six
years the same categories of records as broker-dealers not registered
as SBSDs or MSBSPs.\238\
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\236\ See 17 CFR 240.17a-4(a).
\237\ Id. As discussed below in section II.A.3.b. of this
release, the Commission is proposing technical amendments to
paragraph (a) of Rule 17a-4.
\238\ See paragraph (a) of Rule 17a-4, as proposed to be
amended.
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As discussed above in section II.A.2.a. of this release, paragraphs
(a) and (b) of proposed Rule 18a-5 would contain certain recordkeeping
requirements that are parallel to existing requirements in Rule 17a-3.
Under these parallel requirements, stand-alone SBSDs, stand-alone
MSBSPs, bank SBSDs, and bank MSBSPs would need to make and keep current
certain categories of records that broker-dealers must maintain under
the six year preservation requirement in Rule 17a-4. Consequently,
paragraph (a) of proposed Rule 18a-6 similarly would require that these
categories of records must be preserved for a period of not less than
six years, the first two years in an easily accessible place.\239\
Further, similar to paragraphs (a) and (b) of proposed Rule 18a-5,
paragraph (a) of proposed Rule 18a-6 contains one set of six year
preservation requirements applicable to stand-alone SBSDs and stand-
alone MSBSPs and a separate set applicable to bank SBSDs and bank
MSBSPs.\240\
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\239\ See paragraph (a) of proposed Rule 18a-6.
\240\ Id.
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In particular, paragraph (a)(1) of proposed Rule 18a-6 would apply
to stand-alone SBSDs and stand-alone MSBSPs.\241\ These registrants
would be required to preserve for at least six years, the first two
years in an easily accessible place, the records required to be made
and kept current under the following paragraphs of proposed Rule 18a-5:
Paragraph (a)(1) (trade blotters); paragraph (a)(2) (general ledgers);
paragraph (a)(3) (ledgers of customer
[[Page 25212]]
and non-customer accounts); and paragraph (a)(4) (stock record).\242\
Paragraph (a)(2) of proposed Rule 18a-6 would apply to bank SBSDs and
bank MSBSPs.\243\ These registrants would be required to preserve for
at least six years, the first two years in an easily accessible place,
the records required under the following paragraphs of proposed Rule
18a-5: Paragraph (b)(1) (trade blotters); paragraph (b)(2) (ledgers of
security-based swap customers and non-customers); and paragraph (b)(3)
(stock record).\244\
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\241\ See paragraph (a)(1) of proposed Rule 18a-6 (providing
that it applies to SBSDs and MSBSPs subject to paragraph (a) of
proposed Rule 18a-5).
\242\ See paragraph (a)(1) of proposed Rule 18a-6.
\243\ See paragraph (a)(2) of proposed Rule 18a-6 (providing
that it applies to SBSDs and MSBSPs subject to paragraph (b) of
proposed Rule 18a-5).
\244\ See paragraph (a)(2) of proposed Rule 18a-6.
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Three Year Preservation Requirement for Certain Rule 17a-3 and Rule
18a-5 Records
Paragraph (b) of Rule 17a-4 provides that broker-dealers subject to
Rule 17a-3 must preserve for at least three years, the first two years
in an easily accessible place, certain records required to be made and
kept current under Rule 17a-3 (the ``three year preservation
requirement'').\245\ Specifically, paragraph (b)(1) of Rule 17a-4
imposes the three year preservation requirement on the records required
to be made and kept current under the following paragraphs of Rule 17a-
3, as proposed to be amended: Paragraph (a)(4) (certain ledgers);
paragraph (a)(6) (memoranda of brokerage orders); paragraph (a)(7)
(memoranda of proprietary orders); paragraph (a)(8) (confirmations);
paragraph (a)(9) (accountholder information); paragraph (a)(10)
(options positions); paragraph (a)(16) (internal broker-dealer system);
paragraph (a)(18) (associated person complaints); paragraph (a)(19)
(associated person compensation); paragraph (a)(20) (advertisement and
sales literature compliance); and paragraph (e) (records of each
broker-dealer office).\246\
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\245\ See 17 CFR 240.17a-4(b).
\246\ Id. Currently, Rule 17a-4 does not cross-reference
paragraph (a)(11) of Rule 17a-3 (trial balances and computation of
net capital). See 17 CFR 240.17a-3(a)(11); 17 CFR 240.17a-4. The
Commission is proposing to correct this omission by adding a cross
reference to paragraph (a)(11) of Rule 17a-3 in paragraph (b)(1) of
Rule 17a-4, as proposed to be amended. This would require broker-
dealers to preserve these records for three years, the first two
years in an easily accessible place. Based on staff experience, the
Commission believes that broker-dealers have been preserving these
records in a manner consistent with this proposed requirement.
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The Commission is not proposing to amend or change any of the
existing cross-references to Rule 17a-3 in paragraph (b)(1) of Rule
17a-4.\247\ The Commission is, however, proposing to add cross-
references to certain new paragraphs that would be added to Rule 17a-3
to address security-based swap activities of broker-dealers, including
broker-dealer SBSDs and broker-dealer MSBSPs. Specifically, paragraph
(b)(1) of Rule 17a-4, as proposed to be amended, would apply the three
year preservation requirement to the records required under the
following paragraphs of Rule 17a-3, as proposed to be amended:
Paragraph (a)(24) (liquidity stress test); paragraph (a)(25) (proposed
Rule 18a-3 calculations); paragraph (a)(26) (compliance with proposed
Rule 18a-4 possession or control requirements); paragraph (a)(27)
(proposed Rule 18a-4 reserve account computations); paragraph (a)(28)
(unverified transactions); paragraph (a)(29) (political contributions);
and paragraph (a)(30) (compliance with external business conduct
requirements).\248\
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\247\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended.
\248\ Id.
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As discussed above in section II.A.2.a. of this release, paragraphs
(a) and (b) of proposed Rule 18a-5 would require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain categories of records that broker-dealers are required
to make and keep current under Rule 17a-3 and certain categories of
records the Commission is proposing broker-dealers be required to make
and keep current under amendments to Rule 17a-3. Under these parallel
requirements, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs would need to make and keep current certain categories of
records that currently are subject to the three year preservation
requirement in Rule 17a-4 or, with respect to the new categories of
records, are proposed to be subject to the three year preservation
requirement. Consequently, paragraph (b) of proposed Rule 18a-6 would
similarly require that these categories of records be preserved for a
period of not less than three years, the first two years in an easily
accessible place.\249\ Further, similar to paragraph (a) of proposed
Rule 18a-6, paragraph (b) would contain two sets of provisions.\250\
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\249\ See paragraph (b) of proposed Rule 18a-6.
\250\ Id.
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Paragraph (b)(1)(i) of proposed Rule 18a-6 would apply to stand-
alone SBSDs and stand-alone MSBSPs.\251\ These registrants would be
required to preserve for a period of not less than three years, the
first two years in an easily accessible place, the records required to
be made and kept current under the following paragraphs of proposed
Rule 18a-5, as applicable: Paragraph (a)(5) (memoranda of proprietary
orders); paragraph (a)(6) (confirmations); paragraph (a)(7)
(accountholder information); paragraph (a)(8) (options positions);
paragraph (a)(9) (trial balances and computation of net capital or
tangible net worth); paragraph (a)(11) (liquidity stress test);
paragraph (a)(12) (proposed Rule 18a-3 calculations); paragraph (a)(13)
(compliance with proposed Rule 18a-4 possession or control
requirements); paragraph (a)(14) (proposed Rule 18a-4 reserve account
computations); paragraph (a)(15) (unverified transactions); paragraph
(a)(16) (political contributions); and paragraph (a)(17) (compliance
with external business conduct requirements).\252\
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\251\ See paragraph (b)(1)(i) of proposed Rule 18a-6 (providing
that it applies to SBSDs and MSBSPs subject to paragraph (a) of
proposed Rule 18a-5).
\252\ See paragraph (b)(1)(i) of proposed Rule 18a-6.
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Paragraph (b)(2) of proposed Rule 18a-6 would apply to bank SBSDs
and bank MSBSPs.\253\ These registrants would be required to preserve
for a period of not less than three years, the first two years in an
easily accessible place, the records required to be made and kept
current under the following paragraphs of proposed Rule 18a-5, as
applicable: Paragraph (b)(4) (memoranda of brokerage orders); paragraph
(b)(5) (memoranda of proprietary orders); paragraph (b)(6)
(confirmations); paragraph (b)(7) (accountholder information);
paragraph (b)(9) (compliance with proposed Rule 18a-4 possession or
control requirements); paragraph (b)(10) (proposed Rule 18a-4 reserve
account computations); paragraph (b)(11) (unverified transactions);
paragraph (b)(12) (political contributions); and paragraph (b)(13)
(compliance with external business conduct requirements).\254\
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\253\ See paragraph (b)(2) of proposed Rule 18a-6 (providing
that it applies to SBSDs and MSBSPs subject to paragraph (b) of
proposed Rule 18a-5).
\254\ See paragraph (b)(2)(i) of proposed Rule 18a-6.
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Three Year Preservation Requirement for Certain Other Records
Paragraph (b) of Rule 17a-4 also provides that a broker-dealer
subject to Rule 17a-3 must preserve for a period of not less than three
years, the first two years in an easily accessible place, other
categories of records if the broker-dealer makes or receives the
record.\255\ These are not categories of records a broker-dealer is
required to make and keep
[[Page 25213]]
current under Rule 17a-3 but rather types of records that a broker-
dealer may make or receive in the ordinary course of business.\256\
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\255\ See 17 CFR 240.17a-4(b)(2) through (12).
\256\ Id.
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As discussed in detail below, the Commission is proposing
amendments to these provisions in paragraph (b) of Rule 17a-4 to
account for security-based swaps, and is proposing amendments requiring
that broker-dealers, including broker-dealer SBSDs and broker-dealer
MSBSPs, preserve certain additional records related to security-based
swap activities. Further, the Commission is proposing in paragraph (b)
of proposed Rule 18a-6 that stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs be required to preserve similar records.
In addition, paragraphs (b)(3), (b)(4), (b)(5), and (b)(7) of Rule
17a-4 require the preservation of certain types of records if they
relate to the broker-dealer's business as such (i.e., as a broker-
dealer).\257\ Security-based swap activities of a broker-dealer that is
not registered as an SBSD or MSBSP would be part of the broker-dealer's
business as such for the purposes of Rule 17a-4 just like activities
relating to other types of securities. In the case of a broker-dealer
SBSD or broker-dealer MSBSP, the Commission is proposing to amend
paragraph (m) of Rule 17a-4 to make clear that the business as such of
a broker-dealer dually registered as an SBSD or MSBSP would include the
firm's business as an SBSD or MSBSP.\258\
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\257\ See 17 CFR 240.17a-4(b)(3) through (5) and (b)(7).
\258\ See paragraph (m)(5) of Rule 17a-4, as proposed to be
amended.
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The following is a discussion of the proposed amendments to Rule
17a-4 with respect to certain other records that would be subject to
the three year preservation requirement and parallel provisions that
would be included in proposed Rule 18a-6.
Bank Records. Paragraph (b)(2) of Rule 17a-4 requires broker-
dealers to preserve all check books, bank statements, cancelled checks,
and cash reconciliations.\259\ The Commission is not proposing to amend
paragraph (b)(2) of Rule 17a-4 to specifically account for security-
based swaps. However, the Commission is proposing to include a parallel
requirement in paragraph (b)(1) of Rule 18a-6 that would mirror
paragraph (b)(2) of Rule 17a-4.\260\ In particular, paragraph
(b)(1)(ii) would require stand-alone SBSDs and stand-alone MSBSPs to
preserve these types of bank records.\261\
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\259\ See 17 CFR 240.17a-4(b)(2).
\260\ Compare paragraph (b)(1)(ii) of proposed Rule 18a-6, with
17 CFR 240.17a-4(b)(2).
\261\ See paragraph (b)(1)(ii) of proposed Rule 18a-6.
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Bills. Paragraph (b)(3) of Rule 17a-4 requires broker-dealers,
which would include broker-dealer SBSDs and broker-dealer MSBSPs, to
preserve all bills receivable or payable, paid or unpaid, relating to
the business of the member, broker, or dealer.\262\ The Commission is
proposing to include a parallel requirement in paragraph (b)(1) of
proposed Rule 18a-6 that would mirror paragraph (b)(3) of Rule 17a-
4.\263\ In particular, paragraph (b)(1)(iii) of proposed Rule 18a-6
would require stand-alone SBSDs and stand-alone MSBSPs to preserve
these types of bills.\264\
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\262\ See 17 CFR 240.17a-4(b)(3).
\263\ Compare paragraph (b)(1)(iii) of proposed Rule 18a-6, with
17 CFR 240.17a-4(b)(3).
\264\ See paragraph (b)(1)(iii) of proposed Rule 18a-6.
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Communications. Paragraph (b)(4) of Rule 17a-4 requires broker-
dealers to preserve originals of all communications received and copies
of all communications sent (and any approvals thereof) by the broker-
dealer (including inter-office memoranda and communications) relating
to its business as such, including all communications which are subject
to rules of an SRO of which the broker-dealer is a member regarding
communications with the public.\265\ The Commission is proposing
amendments to paragraph (b)(4) to account for security-based swap
activities and to include parallel requirements in paragraphs (b)(1)
and (b)(2) of proposed Rule 18a-6 that are modeled on paragraph (b)(4)
of Rule 17a-4, as proposed to be amended.\266\
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\265\ See 17 CFR 240.17a-4(b)(4). Paragraph (b)(4) of Rule 17a-4
further provides the term communications as used in the paragraph
includes sales scripts. Id.
\266\ Compare paragraphs (b)(1)(iv) and (b)(2)(ii) of proposed
Rule 18a-6, with paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
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The proposed amendments to paragraph (b)(4) of Rule 17a-4 also
would implement section 15F(g)(1) of the Exchange Act.\267\ Section
15F(g)(1) provides that each registered SBSD and MSBSP shall maintain
daily trading records of the security-based swaps of the registered
SBSD and MSBSP and all related records (including related cash or
forward transactions) and recorded communications, including electronic
mail, instant messages, and recordings of telephone calls, for such
period as may be required by the Commission by rule or regulation.\268\
The term communications, as used in paragraph (b)(4) of Rule 17a-4,
includes all electronic communications (e.g., emails and instant
messages).\269\ Moreover, communications related to daily trading of
security-based swaps would be communications relating to the business
as such of a broker-dealer, including a broker-dealer SBSD and broker-
dealer MSBSP. Consequently, the Commission need not amend paragraph
(b)(4) of Rule 17a-4 to establish a retention period applicable to
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,
with respect to electronic mail and instant messages relating to their
trading in security-based swaps.
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\267\ See 15 U.S.C. 78o-10(g)(1).
\268\ Id.
\269\ See, e.g., Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information; Additional Examples Under the Securities Act of 1933,
Securities Exchange Act of 1934, and Investment Company Act of 1940,
Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15,
1996), at n. 32 (``Broker-dealers also are subject to recordkeeping
requirements that would be applicable to all electronic
communications received and sent by the firm relating to its
business''); Reporting Requirements for Brokers or Dealers Under the
Securities Exchange Act of 1934, Exchange Act Release No. 38245
(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997); Books and Records
Requirements for Brokers and Dealers Under the Securities Exchange
Act of 1934, 66 FR 55818, 55825 (``Paragraph (b)(4) of Rule 17a-4
previously required that each broker-dealer keep originals of all
communications received and copies of all communications sent by the
firm relating to its business as a broker-dealer, including inter-
office memoranda and communications. With respect to memoranda,
including email messages, the Commission has stated that the content
and audience of the message determine whether a copy must be
preserved, regardless of whether the message was sent on paper or
sent electronically'').
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However, the Commission has not previously interpreted the term
communications to include telephonic communications. Therefore, to
implement section 15F(g)(1) of the Exchange Act, the Commission is
proposing to amend the preservation requirement in paragraph (b)(4) of
Rule 17a-4 to include ``recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the Exchange Act.'' \270\
Under this proposed requirement, a broker-dealer SBSD or a broker-
dealer MSBSP would be required to preserve for three years telephone
calls that it chooses to record to the extent the calls are required to
be maintained pursuant to section 15F(g)(1) of the Exchange Act.\271\
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\270\ See paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
\271\ See 15 U.S.C. 78o-10(g)(1).
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The Commission is proposing to include parallel communication
preservation requirements for stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs modeled on paragraph (b)(4) of Rule 17a-4,
as
[[Page 25214]]
proposed to be amended.\272\ The provision applicable to bank SBSDs and
bank MSBSPs would limit the requirement to communications that relate
to the business of an SBSD or MSBSP.\273\
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\272\ Compare paragraphs (b)(1)(iv) and (b)(2)(ii) of proposed
Rule 18a-6, with paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
\273\ See paragraph (b)(2)(ii) of proposed Rule 18a-6.
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Trial balances. Paragraph (b)(5) of Rule 17a-4 requires broker-
dealers, which would include broker-dealer SBSDs and broker-dealer
MSBSPs, to preserve all trial balances, computations of aggregate
indebtedness and net capital (and working papers in connection
therewith), financial statements, branch office reconciliations, and
internal audit working papers, relating to the firm's business as a
broker-dealer.\274\ The Commission is proposing to include a parallel
requirement in paragraph (b)(1) of proposed Rule 18a-6 applicable to
stand-alone SBSDs and stand-alone MSBSPs that is modeled on paragraph
(b)(5) of Rule 17a-4.\275\ In particular, paragraph (b)(1)(v) of
proposed Rule 18a-6 would require stand-alone SBSDs and stand-alone
MSBSPs to preserve similar types of records.\276\ In contrast to
paragraph (b)(5) of Rule 17a-4, the provision would not refer to
computations of ``aggregate indebtedness'' because this type of
computation would not be part of the capital rule for stand-alone SBSDs
or stand-alone MSBSPs.\277\ Further, to account for the proposed
capital standard for stand-alone MSBSPs, the paragraph would refer to
tangible net worth.\278\
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\274\ See 17 CFR 240.17a-4(b)(5). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to paragraph (b)(5) of proposed Rule 18a-6.
\275\ Compare paragraph (b)(1)(v) of proposed Rule 18a-6, with
17 CFR 240.17a-4(b)(5).
\276\ See paragraph (b)(1)(v) of proposed Rule 18a-6.
\277\ See paragraph (b)(1)(v) of proposed Rule 18a-6. See also
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70217-70256.
\278\ See paragraph (b)(1)(v) of proposed Rule 18a-6. See also
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70256-70257 (proposing a
tangible net worth capital standard for nonbank MSBSPs). A broker-
dealer MSBSP would be subject to the net capital requirements in
Rule 15c3-1.
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Account Documents. Paragraph (b)(6) of Rule 17a-4 requires broker-
dealers, which would include broker-dealer SBSDs and broker-dealer
MSBSPs, to preserve all guarantees of accounts and all powers of
attorney and other evidence of the granting of any discretionary
authority given in respect of any account, and copies of resolutions
empowering an agent to act on behalf of a corporation.\279\ The
Commission is proposing to include parallel requirements in paragraphs
(b)(1) and (b)(2) of proposed Rule 18a-6 modeled on paragraph (b)(6) of
Rule 17a-4.\280\ In particular, paragraphs (b)(1)(vi) and (b)(2)(iii)
of proposed Rule 18a-6 would require stand-alone SBSDs, stand-alone
MSBSPs, bank SBSDs, and bank MSBSPs, respectively, to preserve similar
types of records, but only with respect to security-based swap
accounts.\281\ For example, under the proposal, bank SBSDs and bank
MSBSPs would not be required to maintain these records with respect to
accounts involving exclusively banking related services.
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\279\ See 17 CFR 240.17a-4(b)(6).
\280\ Compare paragraphs (b)(1)(vi) and (b)(2)(iii) of proposed
Rule 18a-6, with 17 CFR 240.17a-4(b)(6).
\281\ See paragraphs (b)(1)(vi) and (b)(2)(iii) of proposed Rule
18a-6.
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Written Agreements. Paragraph (b)(7) of Rule 17a-4 requires a
broker-dealer to preserve all written agreements (or copies thereof)
entered into by such broker-dealer relating to its business as such,
including agreements with respect to any account.\282\ The Commission
is proposing amendments to paragraph (b)(7) of Rule 17a-4 to account
for security-based swaps and to include parallel requirements in
paragraphs (b)(1) and (b)(2) of proposed Rule 18a-6 modeled on
paragraph (b)(7) of Rule 17a-4, as proposed to be amended.\283\ The
amendments to paragraph (b)(7) of Rule 17a-4 would establish a
preservation requirement that written agreements with respect to a
security-based swap customer or non-customer, including governing
documents or any document establishing the terms and conditions of such
person's securities-based swaps, must be maintained with such person's
account records.\284\ This provision is designed to facilitate the
examination of the broker-dealer by requiring it to maintain these
records together.
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\282\ See 17 CFR 240.17a-4(b)(7).
\283\ Compare paragraphs (b)(1)(vii) and (b)(2)(iv) of proposed
Rule 18a-6, with paragraph (b)(7) of Rule 17a-4, as proposed to be
amended.
\284\ See paragraph (b)(7) of Rule 17a-4, as proposed to be
amended.
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The parallel requirements in proposed Rule 18a-6 would require
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to
preserve similar types of records and include the same preservation
requirement.\285\ The provision applicable to bank SBSDs and bank
MSBSPs would limit the preservation requirement to written agreements
relating to the registrant's business as an SBSD or MSBSP.\286\
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\285\ See paragraphs (b)(1)(vii) and (b)(2)(iv) of proposed Rule
18a-6.
\286\ See paragraph (b)(2)(iv) of proposed Rule 18a-6.
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Information Supporting Financial Reports. Paragraph (b)(8) of Rule
17a-4 requires a broker-dealer to preserve records containing various
types of information that support amounts included in the broker-
dealer's FOCUS Report prepared as of the broker-dealer's audit date and
amounts in the annual audited financial statements the broker-dealer is
required to file under Rule 17a-5 or Rule 17a-12, as applicable.\287\
The paragraph specifically identifies the types of supporting
information that needs to be preserved, including money balances,
securities positions, futures positions, commodity positions, and
options positions, among other things.\288\ The Commission is proposing
amendments to paragraph (b)(8) of Rule 17a-4 to account for swap and
security-based swap activities of broker-dealers, including broker-
dealer SBSDs and broker-dealer MSBSPs, and to include parallel
requirements applicable to stand-alone SBSDs and stand-alone MSBSPs in
paragraph (b)(1) of proposed Rule 18a-6 modeled on paragraph (b)(8) of
Rule 17a-4, as proposed to be amended.\289\
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\287\ See 17 CFR 240.17a-4(b)(8); 17 CFR 240.17a-5; 17 CFR
240.17a-12. Rule 17a-12 prescribes reporting requirements for OTC
derivatives dealers that are similar to the reporting requirements
in Rule 17a-5 applicable to broker-dealers. Compare 17 CFR 240.17a-
12, with 17 CFR 240.17a-5.
\288\ See 17 CFR 240.17a-4(b)(8)(i) through (xv).
\289\ Compare paragraph (b)(1)(viii) of proposed Rule 18a-6,
with paragraph (b)(8) of Rule 17a-4, as proposed to be amended.
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The amendments to paragraph (b)(8) of Rule 17a-4 would add a
reference to proposed Form SBS in the introductory text after
references to certain parts of the FOCUS Report.\290\ Thus, broker-
dealer SBSDs and broker-dealer MSBSPs--which would file proposed Form
SBS rather than the FOCUS Report--would need to preserve information in
support of proposed Form SBS. Further, the amendments to paragraph
(b)(8) of Rule 17a-4 would add the phrase ``or swaps'' after the phrase
``commodity contracts'' and the phrase ``and swap'' after the term
``commodity'' wherever they appear in the paragraph.\291\ This would
require broker-dealers, including broker-dealer SBSDs and broker-dealer
MSBSPs, to preserve the same type of supporting information with
respect to swap
[[Page 25215]]
positions as is required with respect to commodity positions.
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\290\ See paragraph (b)(8) of Rule 17a-4, as proposed to be
amended.
\291\ See paragraphs (b)(8)(v) through (viii) of Rule 17a-4, as
proposed to be amended.
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Paragraph (b)(8)(xiii) of Rule 17a-4 requires broker-dealers to
preserve records containing detail relating to information for
possession or control requirements under Rule 15c3-3 and reported on a
schedule to certain parts of the FOCUS Report.\292\ As noted above in
section II.A.2.a. of this release, Rule 15c3-3 requires a carrying
broker-dealer to maintain physical possession or control over
customers' fully paid and excess margin securities.\293\ The Commission
has proposed a parallel requirement in proposed Rule 18a-4 that would
apply to SBSDs with respect to their security-based swap
customers.\294\ Moreover, as discussed below in section II.B.2.b. of
this release, the Commission is proposing that SBSDs report information
relating to possession or control requirements in proposed Form SBS.
Consequently, the Commission is proposing to amend paragraph (b)(8) of
Rule 17a-4 by adding a new paragraph that is modeled on paragraph
(b)(8)(xiii) of Rule 17a-4 but that relates to the possession or
control requirements in proposed Rule 18a-4 instead of the possession
or control requirements in Rule 15c3-3.\295\ Thus, broker-dealer SBSDs
would be required to preserve records that contain detail relating to
information for possession or control requirements under Rule 18a-4 and
reported on proposed Form SBS.
---------------------------------------------------------------------------
\292\ See 17 CFR 240.17a-4(b)(8)(xiii).
\293\ See 17 CFR 240.15c3-3.
\294\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70278-70282.
\295\ Compare paragraph (b)(8)(xiii) of Rule 17a-4, as proposed
to be amended, with 17 CFR 240.17a-4(b)(8)(xiii).
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Finally, the Commission's proposed capital requirements for nonbank
SBSDs would require these registrants to maintain minimum net capital
of not less than the greater of a fixed-dollar amount or a ratio
amount.\296\ The ratio amount for a broker-dealer SBSD would be the sum
of the current ratio amount prescribed in Rule 15c3-1 and an amount
equal to 8% of the firm's risk margin amount (``8% margin
factor'').\297\ The ratio amount for a stand-alone SBSD would be an
amount equal to the 8% margin factor.\298\ The term risk margin amount
would be defined as the sum of: (1) The greater of the total margin
required to be delivered by the nonbank SBSD with respect to security-
based swap transactions cleared for security-based swap customers at a
clearing agency or the amount of the deductions that would apply to the
cleared security-based swap positions of the security-based swap
customers pursuant to paragraph (c)(1)(vi) of Rule 18a-1; and (2) the
total margin amount calculated by the stand-alone SBSD with respect to
non-cleared security-based swaps pursuant to proposed new Rule 18a-
3.\299\ Accordingly, to determine its minimum net capital requirement,
a nonbank SBSD would need to calculate the amount equal to the 8%
margin factor.\300\ The Commission is proposing to amend paragraph
(b)(8) of Rule 17a-4 by adding a new paragraph that would require a
broker-dealer SBSD to preserve records that contain detail relating to
the calculation of the risk margin amount.\301\
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\296\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70221-70229. The fixed-dollar amount applicable to nonbank SBSDs,
other than ANC broker-dealer SBSDs, would be $20 million. The fixed
dollar amount applicable to ANC broker-dealer SBSDs would be $1
billion. Id. In addition, stand-alone ANC SBSDs would be subject to
a $100 million minimum tentative net capital requirement and ANC
broker-dealer SBSDs would be subject to a $5 billion minimum
tentative net capital requirement. Id.
\297\ Id. Rule 15c3-1 prescribes two financial ratio
requirements. See 17 CFR 240.15c3-1(a)(1). The first financial ratio
requirement provides that a broker-dealer must not permit its
aggregate indebtedness to all other persons to exceed 1500% of its
net capital (i.e., a 15-to-1 aggregate indebtedness to net capital
requirement). See 17 CFR 240.15c3-1(a)(1)(i). Stated another way,
the broker-dealer must maintain, at a minimum, an amount of net
capital equal to 1/15th (or 6.67%) of its aggregate indebtedness.
This financial ratio generally is used by smaller broker-dealers
that do not hold customer securities and cash and is the default
financial ratio requirement that all broker-dealers must apply
unless they affirmatively elect to be subject to the second
financial ratio requirement by notifying their designated examining
authority (``DEA'') of the election. See 17 CFR 240.15c3-1(a)(1)(i)
and (ii). The second financial ratio requirement provides that a
broker-dealer must not permit its net capital to be less than 2% of
aggregate debit items (i.e., customer-related obligations to the
broker-dealer). See 17 CFR 240.15c3-1(a)(1)(ii). Customer debit
items--computed pursuant to Rule 15c3-3--consist of, among other
things, margin loans to customers and securities borrowed by the
broker-dealer to effectuate deliveries of securities sold short by
customers. See 17 CFR 240.15c3-3; 17 CFR 240.15c3-3a. This ratio
generally is used by larger broker-dealers that hold customer
securities and funds.
\298\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70221-70229. Neither the 15-to-1 aggregate indebtedness to net
capital ratio nor the 2% of aggregate debit items ratio would be
applicable to stand-alone SBSDs. Id.
\299\ Id. at 70223.
\300\ Id. at 70221-70229.
\301\ See paragraph (b)(8)(xvi) of Rule 17a-4, as proposed to be
amended.
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As indicated above, the Commission is proposing to include a
parallel requirement in paragraph (b)(1) of proposed Rule 18a-6, which
is modeled on paragraph (b)(8) of Rule 17a-4, as proposed to be
amended.\302\ Thus,
[[Page 25216]]
stand-alone SBSDs and stand-alone MSBSPs would be required to preserve
similar types of records, as applicable, containing information
supporting their financial reports.\303\
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\302\ Compare paragraph (b)(1)(viii) of proposed Rule 18a-6,
with paragraph (b)(8) of Rule 17a-4, as proposed to be amended. More
specifically: (1) Paragraph (b)(1)(viii)(A) of proposed Rule 18a-6
would be modeled on paragraph (b)(8)(i) of Rule 17a-4, as proposed
to be amended, except the former would refer to security-based swap
customers rather than customers and not contain a reference to cash
accounts; (2) paragraph (b)(1)(viii)(B) of proposed Rule 18a-6 would
be modeled on paragraph (b)(8)(ii) of Rule 17a-4, as proposed to be
amended, except the former would refer to security-based swap non-
customers instead of non-customers and to security-based swap
accounts instead of securities accounts, and not contain a reference
to cash accounts; (3) paragraph (b)(1)(viii)(C) of proposed Rule
18a-6 would mirror paragraph (b)(8)(iii) of Rule 17a-4, as proposed
to be amended; (4) paragraph (b)(1)(viii)(D) of proposed Rule 18a-6
would mirror paragraph (b)(8)(v) of Rule 17a-4, as proposed to be
amended; (5) paragraph (b)(1)(viii)(E) of proposed Rule 18a-6 would
mirror paragraph (b)(8)(vi) of Rule 17a-4, as proposed to be
amended; (6) paragraph (b)(1)(viii)(F) of proposed Rule 18a-6 would
mirror paragraph (b)(8)(vii) of Rule 17a-4, as proposed to be
amended; (7) paragraph (b)(1)(viii)(G) of proposed Rule 18a-6 would
mirror paragraph (b)(8)(viii) of Rule 17a-4, as proposed to be
amended; (8) paragraph (b)(1)(viii)(H) of proposed Rule 18a-6 would
mirror paragraph (b)(8)(ix) of Rule 17a-4, as proposed to be
amended; (9) paragraph (b)(1)(viii)(I) of proposed Rule 18a-6 would
mirror paragraph (b)(8)(x) of Rule 17a-4, as proposed to be amended;
(10) paragraph (b)(1)(viii)(J) of proposed Rule 18a-6 would mirror
paragraph (b)(8)(xi) of Rule 17a-4, as proposed to be amended; (11)
paragraph (b)(1)(viii)(K) of proposed Rule 18a-6 would be modeled on
paragraph (b)(8)(xii) of Rule 17a-4, as proposed to be amended,
except the former would refer to proposed Rule 18a-1 (the proposed
capital rule for stand-alone SBSDs) rather than Rule 15c3-1 (the
broker-dealer capital rule); (12) paragraph (b)(1)(viii)(L) of
proposed Rule 18a-6 would mirror paragraph (b)(8)(xiv) of Rule 17a-
4, as proposed to be amended; (13) paragraph (b)(1)(viii)(M) of
proposed Rule 18a-6 would be modeled on paragraph (b)(8)(xv) of Rule
17a-4, as proposed to be amended, except the former would refer to
proposed Rule 18a-1 and proposed Rule 18a-2 (the proposed tangible
net worth rule for nonbank MSBSPs) rather than Rule 15c3-1; (14)
paragraph (b)(1)(viii)(N) of proposed Rule 18a-6 would be modeled on
paragraph (b)(8)(xvi) of Rule 17a-4, as proposed to be amended,
except the former would refer to proposed Rule 18a-1 rather than
Rule 15c3-1; and (15) paragraph (b)(1)(viii)(O) of proposed Rule
18a-6 would be modeled on paragraph (b)(8)(xvii) of Rule 17a-4, as
proposed to be amended, except the former would refer to proposed
Rule 18a-7 (the proposed reporting rule for nonbank SBSDs and
nonbank MSBSPs) rather than Rule 17a-5 (the broker-dealer reporting
rule) and Rule 17a-12 (the OTC derivatives dealer reporting rule).
The Commission is not proposing to include in paragraph (b)(1)(viii)
of proposed Rule 18a-6 provisions that would be analogous to
paragraphs (b)(8)(iv) and (b)(8)(xiii) of Rule 17a-4, as proposed to
be amended. Paragraph (b)(8)(iv) relates to a provision in Rule
15c3-1 for which there is not a parallel provision in proposed Rule
18a-1. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70255-70256. Paragraph (b)(8)(xiii) relates to Rule 15c3-3, which
does not apply to stand-alone SBSDs or stand-alone MSBSPs. Id. at
70274-70288.
\303\ See paragraphs (b)(1)(vii) and (b)(2)(iv) of proposed Rule
18a-6.
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The Commission is proposing a preservation requirement for bank
SBSDs that would require these registrants to preserve the same types
of records related to Rule 18a-4 that broker-dealer SBSDs would need to
preserve under paragraph (b)(8)(xiv) of Rule 17a-4, as proposed to be
amended, and that stand-alone SBSDs would be required to preserve under
paragraph (b)(1)(viii)(L) of proposed Rule 18a-6.\304\ Specifically,
bank SBSDs would be required to preserve records containing detail
relating to information for possession or control requirements under
proposed Rule 18a-4 and reported on proposed Form SBS that is in
support of amounts included in the report prepared as of the audit date
on proposed Form SBS and in annual audited financial statements
required by proposed Rule 18a-7.\305\
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\304\ Compare paragraph (b)(2)(v) of proposed Rule 18a-6, with
paragraph (b)(8)(xiv) of Rule 17a-4, as proposed to be amended, and
paragraph (b)(1)(viii)(L) of proposed Rule 18a-6.
\305\ See paragraph (b)(2)(v) of proposed Rule 18a-6.
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Rule 15c3-4 Risk Management Records. OTC derivatives dealers and
ANC broker-dealers are required to comply with Rule 15c3-4.\306\ This
rule requires these types of broker-dealers to establish, document, and
maintain a system of internal risk management controls to assist in
managing the risks associated with the firm's business activities,
including market, credit, leverage, liquidity, legal, and operational
risks.\307\ The rule also requires periodic reviews (which may be
performed by internal audit staff) and annual reviews (which must be
conducted by independent certified public accountants) of the firm's
risk management systems.\308\ Paragraph (b)(10) of Rule 17a-4 requires
broker-dealers subject to Rule 15c3-4 (i.e., OTC derivatives dealers
and ANC broker-dealers) to preserve the records required to be made
under the rule and the results of the periodic reviews required to be
conducted under the rule.\309\ The Commission has proposed that nonbank
SBSDs and nonbank MSBSPs be required to comply with Rule 15c3-4.\310\
Consequently, nonbank SBSDs and nonbank MSBSPs should be required to
preserve the same types of records relating to Rule 15c3-4 as ANC
broker-dealers and OTC derivatives dealers.\311\
---------------------------------------------------------------------------
\306\ See 17 CFR 240.15c3-4. See also OTC Derivatives Dealers,
63 FR 59362; Alternative Net Capital Requirements for Broker-Dealers
That Are Part of Consolidated Supervised Entities, and Exchange Act
Release No. 49830 (June 8, 2004), 69 FR 34428 (June 21, 2004).
\307\ See 17 CFR 240.15c3-4.
\308\ See 17 CFR 240.15c3-4(c)(3). The annual review must be
conducted in accordance with procedures agreed to by the firm and
the independent public accountant conducting the review.
\309\ See 17 CFR 240.17a-4(b)(10).
\310\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70250-70251.
\311\ See paragraph (b)(1)(ix) of proposed Rule 18a-6.
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Paragraph (b)(10) of Rule 17a-4 applies the preservation
requirements for records relating to Rule 15c3-4 to broker-dealers,
which includes broker-dealer SBSDs and broker-dealer MSBSPs.\312\ The
Commission is proposing to include a parallel requirement in paragraph
(b)(1) of proposed Rule 18a-6 applicable to stand-alone SBSDs and
stand-alone MSBSPs that would mirror paragraph (b)(10) of Rule 17a-
4.\313\ In particular, paragraph (b)(1)(ix) of proposed Rule 18a-6
would require stand-alone SBSDs and stand-alone MSBSPs to preserve the
records required to made under Rule 15c3-4 and the results of the
periodic reviews required to be conducted under the rule.\314\ The
Commission did not propose that bank SBSDs and bank MSBSPs comply with
Rule 15c3-4.\315\ Consequently, the Commission is not proposing a
parallel record preservation requirement for these registrants.
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\312\ See 17 CFR 240.17a-4(b)(10).
\313\ Compare 17 CFR 240.17a-4(b)(10), with paragraph (b)(1)(ix)
of proposed Rule 18a-6.
\314\ See paragraph (b)(1)(ix) of proposed Rule 18a-6.
\315\ See 15 U.S.C. 78o-10(d)(2)(A) (providing that the
Commission may not prescribe rules imposing prudential requirements
on SBSDs and MSBSPs for which there is a prudential regulator).
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Credit Risk Determinations. Under Appendix E to Rule 15c3-1, ANC
broker-dealers are permitted to add back to net worth uncollateralized
receivables from counterparties arising from OTC derivatives
transactions when computing net capital.\316\ Instead of the 100%
deduction that applies to most unsecured receivables under Rule 15c3-1,
ANC broker-dealers are permitted to take a credit risk charge based on
the uncollateralized credit exposure to the counterparty.\317\ In most
cases, the credit risk charge is significantly less than a 100%
deduction, since it is a percentage of the amount of the receivable
that otherwise would be deducted in full. The Commission has proposed
that this treatment be narrowed under proposed amendments to the
capital requirements for ANC broker-dealers so that it would apply only
to uncollateralized receivables from commercial end users arising from
security-based swaps (i.e., uncollateralized receivables from other
types of counterparties would be subject to the 100% deduction from net
worth).\318\ In addition, the proposed capital requirements for nonbank
SBSDs permitted to use internal models to calculate market and credit
risk charges when computing net capital (i.e., ANC broker-dealer SBSDs
and stand-alone ANC SBSDs) similarly would allow these registrants to
take credit risk charges with respect to uncollateralized receivables
but only from commercial end users arising from security-based
swaps.\319\
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\316\ See 17 CFR 240.15c3-1e(c). OTC derivatives dealers are
permitted to treat such uncollateralized receivables in a similar
manner. See 17 CFR 240.15c3-1f.
\317\ See 17 CFR 240.15c3-1(a)(7); 17 CFR 240.15c3-1e(c).
\318\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70240-70245.
\319\ See id.
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The method for computing the credit risk charge is set forth in
Appendix E of Rule 15c3-1.\320\ Among other things, the amount of the
credit risk charge is based on the creditworthiness of the
counterparty.\321\ Paragraphs (c)(4)(vi)(D) and (E) of Appendix E of
Rule 15c3-1 require ANC broker-dealers to make and keep current records
relating to the bases of their internal credit assessments of
counterparties for purposes of the credit risk charge.\322\ The
Commission has proposed a parallel requirement for stand-alone ANC
SBSDs.\323\ Paragraph (b)(12) of
[[Page 25217]]
Rule 17a-4 requires ANC broker-dealers--and would require ANC broker-
dealer SBSDs--to preserve the records required under paragraphs
(c)(4)(vi)(D) and (E) of Appendix E of Rule 15c3-1 in accordance with
Rule 17a-4.\324\ The Commission is proposing to include a parallel
requirement in paragraph (b)(1) of proposed Rule 18a-6 applicable to
stand-alone ANC SBSDs that is modeled on paragraph (b)(12) of Rule 17a-
4.\325\ Consequently, stand-alone ANC SBSDs would be required to
preserve the same types of records required to be made under proposed
Rule 18a-1.
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\320\ See 17 CFR 240.15c3-1e(c).
\321\ See id. Consistent with section 939A of the Dodd-Frank
Act, the Commission recently adopted amendments eliminating the use
of credit ratings of nationally recognized statistical rating
organizations for the purposes of determining the credit risk
charges under Appendix E. See Public Law 111-203, 939A; Removal of
Certain References to Credit Ratings Under the Securities Exchange
Act of 1934, Exchange Act Release No. 71194 (Dec. 27, 2013), 79 FR
1522 (Jan. 8, 2014). Consequently, an ANC broker-dealer must use
internal credit assessments to determine the credit risk charges (as
would an ANC broker-dealer SBSD). See also Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70240-70245 (proposing that stand-alone ANC
SBSDs must use internal credit assessments for purposes of
determining credit risk changes).
\322\ See 17 CFR 240.15c3-1e(c)(4)(vi)(D) and (E).
\323\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70340 (setting forth the text of paragraphs (e)(2)(iv)(F)(1) and (2)
of proposed Rule 18a-1).
\324\ See 17 CFR 240.17a-4(b)(12).
\325\ See paragraph (b)(1)(x) of proposed Rule 18a-6.
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Regulation SBSR. Section 13A(a)(1) of the Exchange Act provides
that all security-based swaps that are not accepted for clearing shall
be subject to regulatory reporting.\326\ Section 13(m)(1)(G) of the
Exchange Act \327\ provides that each security-based swap (whether
cleared or uncleared) shall be reported to a registered swap data
repository, and section 13(m)(1)(C) of the Exchange Act \328\ generally
provides that transaction, volume, and pricing data of all security-
based swaps shall be publicly disseminated in real time, except in the
case of block trades.\329\ On November 19, 2010, the Commission
proposed Regulation SBSR to implement these requirements.\330\ On May
1, 2013, the Commission re-proposed Regulation SBSR as part of its
release on cross-border security-based swap activities.\331\
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\326\ See 15 U.S.C. 78m-1(a)(1).
\327\ See 15 U.S.C. 78m(m)(1)(G).
\328\ See 15 U.S.C. 78m(m)(1)(C).
\329\ Section 13(m)(1)(E) of the Exchange Act provides, among
other things, that, with respect to cleared security-based swaps,
the rule promulgated by the Commission related to public
dissemination shall contain provisions that specify the criteria for
determining what constitutes a large notional security-based swap
transaction (block trade) for particular markets and contracts and
specify the appropriate time delay for reporting large notional
security-based swap transactions (block trades) to the public. 15
U.S.C. 78m(m)(1)(E).
\330\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 75 FR 75208.
\331\ See Cross-Border Security-Based Swap Activities, Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, 78 FR 30968.
---------------------------------------------------------------------------
Re-proposed Regulation SBSR would assign to one side of a security-
based swap transaction the duty to report the transaction to a
registered swap data repository.\332\ Although any type of counterparty
could in theory become a reporting side, re-proposed Regulation SBSR
includes a reporting hierarchy that would assign the duty primarily to
SBSDs and MSBSPs. In addition, re-proposed Regulation SBSR would
require SBSDs and MSBSPs to establish, maintain, and enforce written
policies and procedures that are reasonably designed to ensure that
such entities comply with any security-based swap transaction reporting
obligations.\333\
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\332\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 75 FR 75208.
\333\ See id.
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The Commission is proposing to amend paragraph (b) of Rule 17a-4 to
add a requirement that broker-dealers, including broker-dealer SBSDs
and broker-dealer MSBSPs, preserve the information they are required to
submit to a registered swap data repository under Regulation SBSR.\334\
In addition, the Commission is proposing to include parallel
requirements in paragraphs (b)(1) and (b)(2) of proposed Rule 18a-
6.\335\ Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs would be required to preserve the same types of
records.\336\
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\334\ See paragraph (b)(14) of Rue 17a-4, as proposed to be
amended.
\335\ Compare paragraph (b)(14) of Rule 17a-4, as proposed to be
amended, with paragraphs (b)(1)(xi) and (b)(2)(vi) of proposed Rule
18a-6.
\336\ See paragraphs (b)(1)(xi) and (b)(2)(vi) of proposed Rule
18a-6.
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Records Relating to Business Conduct Standards. As discussed above
in section II.A.2.a. of this release, the Commission has proposed Rules
15Fh-1 through 15Fh-6 and Rule 15Fk-1.\337\ These rules, among other
things, would require SBSDs and MSBSPs to make certain disclosures,
provide certain notices, and make other records.\338\ The Commission is
proposing to amend paragraph (b) of Rule 17a-4 to add a requirement
that broker-dealer SBSDs and broker-dealer MSBSPs preserve copies of
documents, communications, and notices related to business conduct
standards as required under Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-
1.\339\ In addition, the Commission is proposing to include parallel
requirements in paragraphs (b)(1) and (b)(2) of proposed Rule 18a-
6.\340\ Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs would be required to preserve the same types of
records.\341\
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\337\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42396.
\338\ See id.
\339\ See paragraph (b)(15) of Rule 17a-4, as proposed to be
amended.
\340\ Compare paragraph (b)(15) of Rule 17a-4, as proposed to be
amended, with paragraphs (b)(1)(xii) and (b)(2)(vii) of proposed
Rule 18a-6.
\341\ See paragraphs (b)(1)(xii) and (b)(2)(vii) of proposed
Rule 18a-6.
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Section 15F(h)(4)(C) of the Exchange Act imposes duties on SBSDs
that act as advisors to special entities.\342\ Proposed Rule 15Fh-2(a)
would provide an exclusion to the definition of acting as an advisor to
a special entity.\343\ To fall within the exclusion, the SBSD would be
required to obtain a written representation from the special entity
that it will not rely on recommendations provided by the SBSD, and that
the special entity will rely on advice from a qualified independent
representative (as defined in proposed Rule 15F-5(a)).\344\ The SBSD
also would be required to have a reasonable basis to believe that the
special entity is advised by a qualified independent representative (as
defined in proposed Rule 15F-5(a)), and the SBSD would be required to
disclose to the special entity that it is not undertaking to act in the
best interest of the special entity as otherwise required by section
15F(h)(4) of the Exchange Act.\345\
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\342\ See 15 U.S.C. 78o-10(h)(4)(C).
\343\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42424.
\344\ See id.
\345\ See id.
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If an SBSD is acting as an advisor to a special entity, section
15F(h)(4)(C) and proposed Rule 15Fh-4(b) would require the SBSD to make
reasonable efforts to obtain such information as it considers necessary
to make a reasonable determination that a security-based swap or
trading strategy involving a security-based swap is in the best
interests of the special entity.\346\ The information that would be
required to be collected to make this determination includes, but is
not limited to: The authority of the special entity to enter into the
transaction; the financial status and future funding needs of the
special entity; the tax status of the special entity; the investment or
financing objectives of the special entity; the experience of the
special entity with respect to security-based swap transactions
generally and of the type and complexity being recommended; whether the
special entity has the financial capability to withstand changes in
market conditions during the
[[Page 25218]]
term of the security-based swap; and other relevant information.\347\
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\346\ See 15 U.S.C. 78o-10(h)(4)(C); Business Conduct Standards
for Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR 42423-42424.
\347\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42423-
42424.
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Section 15F(h)(5)(A) and proposed Rule 15Fh-5 would require an SBSD
or MSBSP that is acting as a counterparty to a special entity to have a
reasonable basis to believe that the special entity has an independent
representative that is independent of the SBSD or MSBSP and that meets
certain specified qualifications, including that the independent
representative:
Has sufficient knowledge to evaluate the transaction and
related risks;
is not subject to a statutory disqualification;
undertakes a duty to act in the best interests of the
special entity;
makes appropriate and timely disclosures to the special
entity of material information concerning the security-based swap;
will provide written representations to the special entity
regarding fair pricing and appropriateness of the security-based swap;
in the case of employee benefit plans subject to the
Employee Retirement Income Security Act of 1974 (``ERISA''), is a
fiduciary as defined in section 3(21) of ERISA; and
in the case of a State, State agency, city, county,
municipality, other political subdivision of a State, or governmental
plan, is subject to restrictions on certain political
contributions.\348\
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\348\ See id. at 42428, n. 224.
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The Commission is proposing to amend paragraph (b) of Rule 17a-4 to
add a requirement that broker-dealer SBSDs and broker-dealer MSBSPs
preserve records relating to the determinations made pursuant to
section 15F(h)(4)(C) and section 15F(h)(5)(A) of the Exchange Act.\349\
In addition, the Commission is proposing to include parallel
requirements in paragraphs (b)(1) and (b)(2) of proposed Rule 18a-
6.\350\ Consequently, stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs would be required to preserve the same types of
records.\351\
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\349\ See paragraph (b)(16) of Rue 17a-4, as proposed to be
amended.
\350\ Compare paragraph (b)(16) of Rule 17a-4, as proposed to be
amended, with paragraphs (b)(1)(xiii) and (b)(2)(viii) of proposed
Rule 18a-6.
\351\ See paragraphs (b)(1)(xiii) and (b)(2)(viii) of proposed
Rule 18a-6.
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Corporate Documents
Paragraph (d) of Rule 17a-4 requires broker-dealers to preserve
during the life of the enterprise corporate documents such as articles
of incorporation, minute books, and stock certificate books.\352\ It
also requires broker-dealers to preserve during the life of the
enterprise registration and licensing information such as all Forms BD,
Forms BDW, and licenses or other documentation showing registration
with a securities regulatory authority.\353\ The Commission is
proposing to amend paragraph (d) of Rule 17a-4 to add references to
proposed Form SBSE-BD and proposed Form SBSE-W.\354\ Forms SBSE and
SBSE-W are the registration and withdrawal of registration forms,
respectively, the Commission has proposed for broker-dealer SBSDs and
broker-dealer MSBSPs.\355\
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\352\ See 17 CFR 240.17a-4(d).
\353\ See id.
\354\ See paragraph (d) of Rule 17a-4, as proposed to be
amended.
\355\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 65543
(Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011).
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The Commission is proposing to include a parallel requirement in
paragraph (c) of proposed Rule 18a-6 that is modeled on paragraph (d)
of Rule 17a-4, as proposed to be amended.\356\ This would require
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to
preserve the same types of records during the life of the
enterprise.\357\ Paragraph (c) of proposed Rule 18a-6 would reference
proposed Form SBSE and proposed Form SBSE-A rather than proposed Form
SBSE-BD because these are the registration forms that the Commission
has proposed for SBSDs and MSBSPs that are not dually registered as
broker-dealers.\358\
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\356\ Compare paragraph (d) of Rule 17a-4, as proposed to be
amended, with paragraph (c) of proposed Rule 18a-6.
\357\ See paragraph (c) of proposed Rule 18a-6.
\358\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65802-65807.
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Associated Persons
As discussed above in section II.A.2.a. of this release, paragraph
(a)(12) of Rule 17a-3 requires broker-dealers, which would include
broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current
records of information about associated persons of the broker-
dealer.\359\ The Commission is proposing to include parallel
requirements in Rule 18a-5 to require stand-alone SBSDs, stand-alone
MSBSPs, bank SBSDs, and bank MSBSPs to make and keep current the same
types of records.\360\ Paragraph (e)(1) of Rule 17a-4 requires broker-
dealers to maintain and preserve these records in an easily accessible
place until at least three years after the associated person's
employment and any other connection with the broker-dealer has
terminated.\361\ The Commission is proposing to include a parallel
record maintenance and preservation requirement in proposed Rule 18a-6
that would apply to the associated person records that stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be
required to make and keep current.\362\
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\359\ See 17 CFR 240.17a-3(a)(12). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to this paragraph.
\360\ See paragraphs (a)(10) and (b)(8) of proposed Rule 18a-5.
\361\ See 17 CFR 240.17a-4(e)(1).
\362\ Compare 17 CFR 240.17a-4(e)(1), with paragraph (d)(1) of
proposed Rule 18a-6. Paragraph (h)(2) of proposed Rule 18a-6 would
define the term associated person to have the same meaning as that
term is defined in paragraph (c) of proposed Rule 18a-5.
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Regulatory Authority Reports
Paragraph (e)(6) of Rule 17a-4 requires broker-dealers, which would
include broker-dealer SBSDs and broker-dealer MSBSPs, to maintain and
preserve in an easily accessible place each report that a securities
regulatory authority has requested or required the firm to make and
furnish to it pursuant to an order of settlement, and each regulatory
exam report until three years after the date of the report.\363\ The
Commission is proposing to include parallel record maintenance and
preservation requirements in proposed Rule 18a-6.\364\ Specifically,
paragraph (d)(2)(i) of proposed Rule 18a-6 would require stand-alone
SBSDs and stand-alone MSBSPs to maintain and preserve in an easily
accessible place each report which a regulatory authority has
[[Page 25219]]
requested or required the firm to make and furnish to it pursuant to an
order or settlement, and each regulatory authority examination report
until three years after the date of the report.\365\ Paragraph
(d)(2)(ii) of proposed Rule 18a-6 would require bank SBSDs and bank
MSBSPs to maintain and preserve the same types of records for the same
period of time, but only if the records relate to security-based swap
activities.\366\
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\363\ See 17 CFR 240.17a-4(e)(6). Paragraph (m)(3) of Rule 17a-4
defines the term security regulatory authority to have the meaning
set forth in paragraph (h)(3) of Rule 17a-3. See 17 CFR 240.17a-
4(m)(3). Paragraph (h)(3) of Rule 17a-3 defines the term securities
regulatory authority to mean the Commission, any self-regulatory
organization, or any securities commission (or any agency or office
performing like functions) of the States. See 17 CFR 240.17a-
3(h)(3). The Commission is proposing to amend this definition to
include the CFTC and a prudential regulator to the extent the
prudential regulator oversees security-based swap activities. See
paragraph (f)(3) of Rule 17a-3, as proposed to be amended. Paragraph
(h)(1) of proposed Rule 18a-6 would define the term securities
regulatory authority in the same way as that term would be defined
in paragraph (f)(3) of Rule 17a-3, as proposed to be amended.
Compare paragraph (f)(3) of Rule 17a-3, as proposed to be amended,
with paragraph (h)(1) of proposed Rule 18a-6. As discussed below in
section II.A.3.b. of this release, the Commission is proposing
technical amendments to paragraph (h)(3) of Rule 17a-3.
\364\ Compare 17 CFR 240.17a-4(e)(6), with paragraphs (d)(2)(i)
and (ii) of proposed Rule 18a-6.
\365\ See paragraph (d)(2)(i) of proposed Rule 18a-6.
\366\ See paragraph (d)(2)(ii) of proposed Rule 18a-6.
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Compliance, Supervisory, and Procedures Manuals
Paragraph (e)(7) of Rule 17a-4 requires broker-dealers, which would
include broker-dealer SBSDs and broker-dealer MSBSPs, to maintain and
preserve in an easily accessible place each compliance, supervisory,
and procedures manual, including any updates, modifications, and
revisions to the manual, describing the policies and practices of the
broker-dealer with respect to compliance with applicable laws and
rules, and supervision of the activities of each natural person
associated with the broker-dealer until three years after the
termination of the use of the manual.\367\ The Commission is proposing
to include parallel record maintenance and preservation requirements in
proposed Rule 18a-6.\368\ Specifically, paragraph (d)(3)(i) of proposed
Rule 18a-6 would require stand-alone SBSDs and stand-alone MSBSPs to
maintain and preserve in an easily accessible place each compliance,
supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the firm with respect to compliance with applicable laws
and rules, and supervision of the activities of each natural person
associated with the firm until three years after the termination of the
use of the manual.\369\ Paragraph (d)(3)(ii) of proposed Rule 18a-6
would require bank SBSDs and bank MSBSPs to maintain and preserve the
same types of compliance, supervisory, and procedures manuals for the
same period of time, but only if the manuals involve compliance with
applicable laws and rules relating to security-based swap
activities.\370\
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\367\ See 17 CFR 240.17a-4(e)(7). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to this paragraph.
\368\ Compare 17 CFR 240.17a-4(e)(7), with paragraphs (d)(3)(i)
and (ii) of proposed Rule 18a-6.
\369\ See paragraph (d)(3)(i) of proposed Rule 18a-6.
\370\ See paragraph (d)(3)(ii) of proposed Rule 18a-6.
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Electronic Storage
Paragraph (f) of Rule 17a-4 provides that the records a broker-
dealer, which would include a broker-dealer SBSD or a broker-dealer
MSBSP, is required to maintain and preserve under Rule 17a-3 and Rule
17a-4 may be immediately produced or reproduced on micrographic media
or by means of electronic storage media.\371\ The rule defines the term
micrographic media to mean microfilm or microfiche, or any similar
medium.\372\ The term electronic storage media is defined to mean any
digital storage medium or system that meets the requirements set forth
in paragraph (f) of Rule 17a-4.\373\ Paragraph (f)(2) of Rule 17a-4
prescribes requirements that are specific to the use of electronic
storage media and paragraph (f)(3) prescribes requirements that apply
to micrographic media and electronic storage media.\374\ These
requirements are designed to ensure ready access to, and the
reliability and permanence of, records a broker-dealer maintains and
preserves using micrographic or electronic storage media.\375\ Thus,
the requirements, among other things, include safeguards against data
erasure, provisions for immediate verification of stored material, and
requirements for back-up facilities.\376\
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\371\ See 17 CFR 240.17a-4(f). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to this paragraph.
\372\ See 17 CFR 240.17a-4(f)(1)(i).
\373\ See 17 CFR 240.17a-4(f)(1)(ii). See also Electronic
Storage of Broker-Dealer Records, 68 FR 25281 (Commission
interpretation of electronic storage requirements in paragraph (f)
of Rule 17a-4).
\374\ See 17 CFR 240.17a-4(f)(2) and (3).
\375\ See Reporting Requirements for Brokers or Dealers Under
the Securities Exchange Act of 1934, 62 FR 6469-6470.
\376\ See id.
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The Commission is proposing to include a parallel record
maintenance and preservation requirement in proposed Rule 18a-6, but
only with respect to electronic storage media.\377\ The Commission
preliminarily believes that SBSDs and MSBSPs that are not dually
registered as broker-dealers would not use micrographic media to
maintain and preserve records because electronic storage media is more
technologically advanced and offers greater flexibility in managing
records.\378\ However, the Commission is seeking comment below on
whether proposed Rule 18a-6 should permit micrographic media as an
option.
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\377\ Compare 17 CFR 240.17a-4(f), with paragraph (e) of
proposed Rule 18a-6.
\378\ The Commission preliminarily believes that most broker-
dealers use electronic storage media rather than micrographic media
for the same reasons.
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Paragraph (e) of proposed Rule 18a-6 would permit stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to use
electronic storage media to maintain and preserve the records required
to be maintained and preserved under the rule.\379\ The paragraph would
prescribe requirements for using electronic storage media that parallel
the requirements in paragraph (f) of Rule 17a-4, which, as discussed
above, are designed to ensure ready access to, and the reliability and
permanence of, the records.\380\
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\379\ See paragraph (e) of proposed Rule 18a-6.
\380\ Compare 17 CFR 240.17a-4(f)(2) and (3), with paragraphs
(e)(2) and (3) of proposed Rule 18a-6.
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Prompt Production of Records
Rule 17a-4 contains provisions designed to ensure that the records
a broker-dealer, including a broker-dealer SBSD or broker-dealer MSBSP,
is required to maintain and preserve under the rule will be promptly
produced to the Commission and other security-regulators. In this
regard, paragraph (i) of Rule 17a-4 contains provisions that apply when
a broker-dealer uses a third party to prepare or maintain the records
required to be maintained and preserved pursuant to Rules 17a-3 and
17a-4.\381\ In particular, the paragraph requires the third-party to
file with the Commission a written undertaking in a form acceptable to
the Commission, signed by a duly authorized person, to the effect that
such records are the property of the broker-dealer and will be
surrendered promptly on request of the broker-dealer and including the
following representation:
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\381\ See 17 CFR 240.17a-4(i). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to this paragraph.
With respect to any books and records maintained or preserved on
behalf of [broker-dealer], the undersigned hereby undertakes to
permit examination of such books and records at any time or from
time to time during business hours by representatives or designees
of the Securities and Exchange Commission, and to promptly furnish
to said Commission or its designee true, correct, complete and
current hard copy of any or all or any part of such books and
records.\382\
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\382\ Id.
The Commission is proposing to include a parallel requirement in
proposed Rule 18a-6 that would apply when a stand-alone SBSD, stand-
alone
[[Page 25220]]
MSBSP, bank SBSD, or bank MSBSP uses a third party to prepare or
maintain records required pursuant to Rules 18a-5 and 18a-6.\383\
Consequently, the third party would be required to file with the
Commission an undertaking in which it agrees, among other things, to
furnish to the Commission or its designee true, correct, complete, and
current hard copy of any or all or any part of such books and
records.\384\
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\383\ Compare 17 CFR 240.17a-4(i), with paragraph (f) of
proposed Rule 18a-6.
\384\ See paragraph (f) of proposed Rule 18a-6.
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Paragraph (j) of Rule 17a-4 requires a broker-dealer, which would
include a broker-dealer SBSD or broker-dealer MSBSP, to furnish
promptly to a representative of the Commission legible, true, complete,
and current copies of those records of the broker-dealer that are
required to be preserved under Rule 17a-4, or any other records of the
broker-dealer subject to examination under section 17(b) of the
Exchange Act that are requested by the representative of the
Commission.\385\ The Commission is proposing to include a parallel
requirement in proposed Rule 18a-6.\386\ Specifically, paragraph (g) of
proposed Rule 18a-6 would require SBSDs and MSBSPs to furnish promptly
to a representative of the Commission legible, true, complete, and
current copies of those records of the SBSD or MSBSP that are required
to be to be preserved under the rule, or any other records of the SBSD
or MSBSP subject to examination or required to be made or maintained
pursuant to section 15F of the Exchange Act, which are requested by a
representative of the Commission.\387\
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\385\ See 17 CFR 240.17a-4(j). Section 17(b) of the Exchange Act
provides, among other things, that all records of a broker-dealer
are subject at any time, or from time to time, to such reasonable,
periodic, special, or other examinations by representatives of the
Commission and the appropriate regulatory agency of the broker-
dealer as the Commission or the appropriate regulatory agency deems
necessary or appropriate in the public interest, for the protection
of investors, or otherwise in furtherance of the purposes of the
Exchange Act. See 15 U.S.C. 78q(b). As discussed below in section
II.A.3.b. of this release, the Commission is proposing technical
amendments to this paragraph.
\386\ Compare 17 CFR 240.17a-4(j), with paragraph (g) of
proposed Rule 18a-6. Section 15F(f)(1)(C) of the Exchange Act
provides that SBSDs and MSBSPs shall keep books and records
described in sections 15F(f)(1)(B)(i) and (ii) open to inspection
and examination by any representative of the Commission. See 15
U.S.C. 78o-10(f)(1)(C). In addition, section 15F(j) of the Exchange
Act imposes duties on SBSDs and MSBSPs with respect to monitoring of
trading, risk management procedures, disclosing information to the
Commission and the prudential regulators, obtaining information,
conflicts of interest, and antitrust considerations. See 15 U.S.C.
78o-10(j). With respect to disclosing information, section 15F(j)(3)
provides that an SBSD and MSBSP shall disclose to the Commission and
to the prudential regulator for the SBSD or MSBSP, as applicable,
information concerning: (1) Terms and conditions of its security-
based swaps; (2) security-based swap trading operations, mechanisms,
and practices; (3) financial integrity protections relating to
security-based swaps; and (4) other information relevant to its
trading in security-based swaps. See 15 U.S.C. 78o-10(j)(3).
\387\ See paragraph (g) of proposed Rule 18a-6.
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Request for Comment
The Commission generally requests comment on the proposals to
require broker-dealers, SBSDs, and MSBSPs to maintain and preserve
certain records. In addition, the Commission requests comment,
including empirical data in support of comments, in response to the
following questions:
1. Are the Commission's proposals regarding the records SBSDs and
MSBSPs must maintain and preserve under Rule 17a-4, as proposed to be
amended, and proposed Rule 18a-6 comprehensive enough to capture all
records relating to their activities as SBSDs and MSBSPs, including
records that must be made and/or maintained pursuant to provisions in
section 15F of the Exchange Act that are not otherwise covered by Rule
17a-4, as proposed to be amended, and proposed Rule 18a-6? Conversely,
are these proposals too broad? Explain why or why not. For example,
should the Commission establish a catch-all record maintenance and
preservation requirement in Rule 17a-4 and proposed Rule 18a-6 that
applies to any record relating to the registrant's activities as an
SBSD or MSBSP or required to be made and/or maintained pursuant to
section 15F of the Exchange Act? Explain why or why not.
2. Are the provisions in Rule 17a-4 that would be included as
parallel provisions in proposed Rule 18a-6 applicable to stand-alone
SBSDs and stand-alone MSBSPs appropriate for these types of
registrants? If not, explain why not. Are there alternative provisions
the Commission should consider? If so, describe them. Are there
provisions in Rule 17a-4 that are not being included as parallel
provisions in proposed Rule 18a-6 applicable to stand-alone SBSDs and
stand-alone MSBSPs that would be appropriate for these types of
registrants? If so, explain why.
3. Are the provisions in Rule 17a-4 that would be included as
parallel provisions in proposed Rule 18a-6 applicable to bank SBSDs and
bank MSBSPs appropriate for these types of registrants? If not, explain
why not. Are there alternative provisions the Commission should
consider? If so, describe them. Are there provisions in Rule 17a-4 that
are not being included as parallel provisions in proposed Rule 18a-6
applicable to bank SBSDs and bank MSBSPs that would be appropriate for
these types of registrants? If so, explain why.
4. Are the recordkeeping provisions that would be added to Rule
17a-4 appropriate for broker-dealers, including broker-dealer SBSDs and
broker-dealer MSBSPs? If not, explain why not. Are there alternative
provisions the Commission should consider? If so, describe them.
5. Should proposed Rule 18a-6 include a record storage provision
that permits the use of micrographic media? If so, explain why.
6. The Commission proposes to establish a retention period for
recordings of telephone calls related to security-based swaps that must
be maintained in accordance with section 15F(g) of the Exchange Act.
Should the Commission require broker-dealers, SBSDs, and/or MSBSPs to
make recordings of telephone calls relating to security-based swaps?
Should the Commission require broker-dealers, SBSDs, and/or MSBSPs to
retain recordings of telephone calls relating to any topic? Explain why
or why not.
7. Should the retention period for recorded telephone calls be
different than the proposed three year period? For example, should it
be a longer or shorter time frame? If the retention period should be
different than three years, explain how long such recordings should be
kept and why that different retention period would be more appropriate.
8. Are there recordkeeping requirements currently not included in
these proposed rules that should be applied to ANC broker-dealer SBSDs?
If so, please describe them.
9. Are there additional requirements that should be included in
these proposed rules to promote compliance with the external business
conduct standards for SBSDs and MSBSPs? If so, please describe them.
10. Are there additional requirements to promote the disaggregation
by the reporting entities of composite security-based swap transactions
into segments based on risk as opposed to limiting the data collected
to the transaction documents? If so, please describe them.
b. Additional Proposed Amendments to Rule 17a-4
The Commission is proposing several amendments to Rule 17a-4 to
eliminate obsolete text, improve readability, and modernize
terminology. Reference is made throughout Rule 17a-4 to ``members'' of
a national securities exchange as a distinct class of registrant
[[Page 25221]]
in addition to brokers-dealers. The Commission is proposing to remove
these references to ``members'' given that the rule applies to brokers-
dealers, which would include members of a national securities exchange
that are brokers-dealers.\388\ The Commission is proposing a second
global change that would replace the phrase ``Every broker and dealer''
with ``Every broker or dealer''.\389\
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\388\ The proposed amendments would delete the word ``member''
from the title and from the following paragraphs of Rule 17a-4, as
proposed to be amended: (a), (b), (b)(3), (b)(4), (b)(5), (b)(7),
(c), (d), (e), (e)(1), (e)(6), (e)(7), (e)(8), (f)(2), (f)(3), (i),
(j), (k)(1), (k)(2), and (l). See Rule 17a-4, as proposed to be
amended.
\389\ The proposed amendments would replace the phrase ``Every
broker and dealer'' with the phrase ``Every broker or dealer'' in
the following paragraphs of Rule 17a-4, as proposed to be amended:
(a), (b), (c), (d), (e), and (j). See Rule 17a-4, as proposed to be
amended.
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The Commission is proposing a global change that would replace the
use of the word ``shall'' in the rule with the word ``must'' or
``will'' where appropriate.\390\ In paragraph (m) of Rule 17a-4 the
Commission would replace the words ``shall have'' with the word
``has''.\391\ The Commission also proposes to make certain stylistic,
corrective, and punctuation amendments to improve the readability of
Rule 17a-4.\392\
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\390\ The proposed amendments would replace the word ``shall''
with the word ``must'' or ``will'' in the following paragraphs of
Rule 17a-4, as proposed to be amended: (a), (b), (b)(11), (c), (d),
(e), (e)(8), (f)(2), (f)(3), (g), (i), (j), (k)(1), and (l). See
Rule 17a-4, as proposed to be amended.
\391\ The proposed amendments would replace the phrase ``shall
have'' with the word ``has'' in the following paragraphs of Rule
17a-4, as proposed to be amended: (m)(1), (m)(2), (m)(3), and
(m)(4). See Rule 17a-4, as proposed to be amended.
\392\ The Commission proposes the following stylistic and
corrective changes to Rule 17a-4, as proposed to be amended: (1) In
paragraph (a), replacing the phrases ``paragraphs Sec. '' and
``paragraph Sec. '' with the symbols ``Sec. Sec. '' and ``Sec.
'', respectively; (2) adding the word ``and'' between phrase ``money
balance'' and the word ``position'' in paragraph (b)(8)(i) of Rule
17a-4 for consistency with paragraph (b)(8)(ii) of Rule 17a-4; (3)
replacing the phrase ``out of the money options'' with the phrase
``out-of-the-money options'' in paragraph (b)(8)(ix) of Rule 17a-4;
(4) replacing the phrase ``paragraph (a)(12) of Sec. 240.17a-3''
with the phrase ``Sec. 240.17a-3(a)(12)'' in paragraph (e)(1); (5)
replacing the phrase ``paragraph (a)(13) of Sec. 240.17a-3'' with
the phrase ``Sec. 240.17a-3(a)(13)'' in paragraph (e)(2); (6)
replacing the phrase ``paragraph (a)(15) of Sec. 240.17a-3'' with
the phrase ``Sec. 240.17a-3(a)(15)'' in paragraph (e)(3); (7)
replacing the phrase ``for the life'' with the phrase ``during the
life'' in paragraph (e)(3) of Rule 17a-4; (8) replacing the phrase
``paragraph (a)(14) of Sec. 240.17a-13'' with ``Sec. 240.17a-
13(a)(14)'' in paragraph (e)(4); (9) replacing the phrase ``this
paragraph'' with the phrase ``this section'' in paragraph (f); (10)
replacing the phrase ``each index'' with the phrase ``the index'' in
paragraph (f)(3)(iv)(B); (11) replacing the phrase ``the self-
regulatory organizations'' with the phrase ``any self-regulatory
organization'' in paragraph (f)(3)(vi); (12) in paragraph
(f)(3)(vii), adding quotation marks around the phrase ``the
undersigned'' to clarify that the phrase is a defined term; (13)
replacing the phrase ``Rule 17a-4'' with the phrase ``Sec. 240.17a-
4'' in paragraph (f)(3)(vii); and (14) in paragraph (g), replacing
the phrase ``section 15 of the Securities Exchange Act of 1934 as
amended (48 Stat. 895, 49 Stat. 1377; 15 U.S.C. 78o)'' with the
phrase ``section 15 of the Act (15 U.S.C. 78o''.
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Further, as discussed above in section II.A.2.b. of this release,
the Commission is proposing to eliminate the requirements in current
paragraphs (c) and (d) of Rule 17a-3 and, as a consequence current
paragraphs (e), (f), (g), and (h) would be redesignated as paragraphs
(c), (d), (e), and (f), respectively. The Commission proposes to amend
Rule 17a-4 to make corresponding changes to cross-references to these
paragraphs of Rule 17a-3.
Proposed amendments to paragraph (a)(8) would replace the phrase
``annual audited financial statements'' with the phrase ``the annual
financial statements'' to reflect the broader range of documents
required by Rule 17a-5. Due to the insertion of paragraphs (a)(8)(xiv)
and (a)(8)(xvi) to Rule 17a-4, as discussed above, the Commission
proposes to redesignate paragraphs (a)(8)(xiv) and (a)(8)(xv) as
paragraphs (a)(8)(xv) and (a)(8)(xvii), respectively.
Proposed amendments to paragraph (h) would add after the phrase
``Rule G-9 of the Municipal Securities Rulemaking Board'' the phrase
``or any successor rule'' to address the possibility of a future change
in how the MSRB's rules are designated.
Request for Comment
The Commission generally requests comment on these additional
proposed amendments to Rule 17a-4, including comment on whether any of
the proposed amendments would result in substantive changes to the
requirements applicable to broker-dealers.
B. Reporting
1. Introduction
As discussed above, section 764 of the Dodd-Frank Act added section
15F to the Exchange Act.\393\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting for SBSDs and
MSBSPs.\394\ Further, section 15F(f)(1)(A) provides that SBSDs and
MSBSPs shall make such reports as are required by the Commission, by
rule or regulation, regarding the transactions and positions and
financial condition of the SBSD or MSBSP.\395\ In addition, the
Commission has concurrent authority under section 17(a)(1) of the
Exchange Act to prescribe reporting requirements for broker-
dealers.\396\
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\393\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
\394\ See 15 U.S.C. 78o-10(f)(2).
\395\ See 15 U.S.C. 78o-10(f)(1)(A).
\396\ See 15 U.S.C. 78q(a)(1).
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After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission is proposing to establish a reporting program
for these registrants under sections 15F and 17(a) of the Exchange Act
that is modeled on the reporting program for broker-dealers codified in
Rule 17a-5.\397\ Rule 17a-5--which was recently amended \398\--has two
main elements: (1) A requirement that broker-dealers file periodic
unaudited reports containing information about their financial and
operational condition on a FOCUS Report; and (2) a requirement that
broker-dealers annually file financial statements and certain reports
and a report covering the financial statements and reports prepared by
an independent public accountant registered with the Public Company
Accounting Oversight Board (``PCAOB'') in accordance with PCAOB
standards.\399\
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\397\ See 17 CFR 240.17a-5; 17 CFR 249.617.
\398\ The recent amendments to Rule 17a-5 are discussed below.
See Broker-Dealer Reports, Exchange Act Release No. 70073 (July 30,
2013), 78 FR 51910 (Aug. 21, 2013). These amendments will not be
fully effective until June 1, 2014. This release refers to these
amendments as the recently adopted amendments or recently adopted
requirements of Rule 17a-5.
\399\ See id. These requirements are described in more detail
below.
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The reporting program established under Rule 17a-5 is designed,
among other things, to promote compliance with Rules 15c3-1 and 15c3-3
and to assist the Commission, SROs, and state securities regulators in
conducting effective examinations of broker-dealers. As the Commission
has stated, the reporting requirements, ``together with the
Commission's inspection powers, [are] an integral element in the
arsenal for protection of customers against the risks involved in
leaving securities with their broker-dealer.'' \400\ The broker-dealer
reporting requirements promote transparency of the financial and
operational condition of the broker-dealer to the Commission, the
firm's DEA, and, in the case of a portion of the annual reports, to the
public.\401\ In the release adopting Rule 17a-5, the Commission stated
its intention to periodically review the reporting requirements ``in
order to continue modifying and updating the financial
[[Page 25222]]
and operational reporting systems to keep pace with the changing
securities industry.'' \402\
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\400\ See Commission, Study of Unsafe and Unsound Practices of
Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st Sess. 6
(1971) at 24.
\401\ As discussed below in section II.B.3.a. of this release,
paragraph (d) of Rule 17a-5 requires broker-dealers to file certain
audited annual reports with the Commission. A portion of these
reports is made public.
\402\ See Exchange Act Release No. 11935 (Dec. 17, 1975), 40 FR
59706, 59707 (Dec. 30, 1975).
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Under the proposed reporting program for SBSDs and MSBSPs, broker-
dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would be
subject to Rule 17a-5.\403\ The Commission is proposing amendments to
this rule to account for broker-dealers that are dually registered as
an SBSD or MSBSP.\404\ Stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs would be subject to proposed Rule 18a-7, which
is modeled on Rule 17a-5, as proposed to be amended. Proposed Rule 18a-
7 would not include a parallel requirement for every requirement in
Rule 17a-5 because some of the requirements in Rule 17a-5 relate to
activities that are not expected or permitted of SBSDs and MSBSPs.
Similarly, while all types of SBSDs and MSBSPs would use proposed Form
SBS, broker-dealer SBSDs and broker-dealer MSBSPs would be required to
provide more information than stand-alone SBSDs and stand-alone MSBSPs.
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\403\ Except for the requirement to file one of the parts of the
FOCUS Report, broker-dealer SBSDs and broker-dealer MSBSPs would be
subject to all the reporting requirements applicable to broker-
dealers under Rule 17a-5, as proposed to be amended, plus the
additional requirements specifically applicable to an SBSD or MSBSP.
As discussed below in section II.B.2. of this release, a broker-
dealer SBSD or broker-dealer MSBSP would file proposed Form SBS
rather than one of the parts of the FOCUS Report.
\404\ As discussed below in section II.B.3.b. of this release,
the Commission also is proposing technical amendments to Rule 17a-5.
---------------------------------------------------------------------------
Further, the reporting requirements in proposed Rule 18a-7 and
proposed Form SBS applicable to bank SBSDs and bank MSBSPs are more
limited in scope because, as discussed above in section I. of this
release, bank SBSDs and bank MSBSPs are subject to reporting
requirements applicable to banks. Further, the prudential regulators--
rather than the Commission--are responsible for capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs.
For these reasons, the proposed reporting requirements for bank SBSDs
and bank MSBSPs generally are designed to be tailored specifically to
their activities as an SBSD or an MSBSP (as opposed to their activities
as banks). However, as discussed below, the Commission is proposing
that bank SBSDs and bank MSBSPs report certain general financial
information that banks are required to report pursuant to requirements
of the prudential regulators. Bank SBSDs and bank MSBSPs would be able
to use the same information reported under the requirements of the
prudential regulators to comply with the proposed reporting
requirements applicable to bank SBSDs and bank MSBSPs. The objective is
to provide the Commission with a means to monitor the financial
condition of bank SBSDs and bank MSBSPs without requiring these
entities to report information not already reported to their prudential
regulators.
2. Periodic Filing of Proposed Form SBS
a. Amendments to Rule 17a-5 and Proposed Rule 18a-7
Undesignated Introductory Paragraph
Rule 17a-5, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\405\ The note further explains that an
SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is
subject to the reporting requirements under proposed Rule 18a-7.\406\
Further, the Commission is proposing to remove paragraph (a)(1) of Rule
17a-5, which provides that paragraph (a) shall apply to every broker-
dealer registered pursuant to section 15 of the Exchange Act.\407\ This
text would be redundant of the undesignated introductory paragraph of
Rule 17a-5, as proposed to be amended.\408\
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\405\ See undesignated introductory paragraph of Rule 17a-5, as
proposed to be amended.
\406\ See id.
\407\ See 17 CFR 240.17a-5(a).
\408\ See undesignated introductory paragraph of Rule 17a-5, as
proposed to be amended.
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Similarly, proposed Rule 18a-7 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not dually registered as a broker-dealer.\409\ The note
further explains that a broker-dealer dually registered as an SBSD or
MSBSP is subject to the reporting requirements under Rule 17a-5.\410\
---------------------------------------------------------------------------
\409\ See undesignated introductory paragraph of proposed Rule
18a-7.
\410\ See id.
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Requirement To File Proposed Form SBS
Broker-dealers periodically report information about their
financial and operational condition on the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE. Each version of the report is designed
for a particular type of broker-dealer and the information to be
reported is tailored to the type of broker-dealer. Specifically: (1)
The FOCUS Report Part IIA is designed to be used by a broker-dealer
that does not hold customer funds or securities; \411\ (2) the FOCUS
Report Part II is designed to be used by a broker-dealer that holds
customer funds or securities; \412\ (3) the FOCUS Report Part IIB is
designed to be used by an OTC derivatives dealer; \413\ and (4) the
FOCUS Report Part II CSE is designed to be used by an ANC broker-
dealer.\414\ The FOCUS Report Part II CSE elicits the most detailed
information of the four parts, including the most detail about a firm's
derivatives activities.
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\411\ The FOCUS Report Part IIA is available at http://www.sec.gov/about/forms/formx-17a-5_2f.pdf.
\412\ The FOCUS Report Part II is available at http://www.sec.gov/about/forms/formx-17a-5_2.pdf.
\413\ The FOCUS Report Part IIB is available at http://www.sec.gov/about/forms/formx-17a-5_2b.pdf.
\414\ The FOCUS Report Part II CSE was developed by the New York
Stock Exchange, Inc. (``NYSE''). See Exhibit 3 to Self-Regulatory
Organizations; New York Stock Exchange, Inc.; Notice of Filing of
Proposed Rule Change To Require Members That Use Appendix E To
Calculate Net Capital To File Supplemental and Alternative Reports,
Exchange Act Release No. 51980 (July 6, 2005), 70 FR 40767 (July 14,
2005). See also Self-Regulatory Organizations; New York Stock
Exchange, Inc.; Order Approving Proposed Rule Change to Require
Members That Use Appendix E to Calculate Net Capital to File
Supplemental and Alternative Reports, Exchange Act Release No. 52269
(Aug. 16, 2005), 70 FR 49349 (Aug. 23, 2005).
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Paragraph (a) of Rule 17a-5 requires a broker-dealer, other than an
OTC derivatives dealer, to file the FOCUS Report Part II or Part
IIA.\415\ The Commission is proposing to amend this paragraph so that
it would require a broker-dealer that is dually registered as an SBSD
or MSBSP to file proposed Form SBS rather than the FOCUS Report Part II
or Part IIA and to add a parallel requirement in proposed Rule 18a-7 to
require stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
[[Page 25223]]
bank MSBSPs to periodically file proposed Form SBS.\416\
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\415\ See 17 CFR 240.17a-5(a). The requirement that an OTC
derivatives dealer file the FOCUS Report Part IIB is set forth in
paragraph (a) of Rule 17a-12. See 17 CFR 240.17a-12(a). While an ANC
broker-dealer is required under paragraph (a) of Rule 17a-5 to file
the FOCUS Report Part IIA, FINRA Rule 4521(b) provides that ANC
broker-dealers must file supplemental and alternative reports as may
be prescribed by FINRA. Under this rule, FINRA requires ANC broker-
dealers to file the FOCUS Report Part II CSE in lieu of the FOCUS
Report Part IIA. See also Self-Regulatory Organizations; New York
Stock Exchange, Inc.; Order Approving Proposed Rule Change to
Require Members That Use Appendix E to Calculate Net Capital to File
Supplemental and Alternative Reports, 70 FR 49349 (Commission
approval of amendments to NYSE Rule 418 requiring ANC broker-dealers
to file Part II CSE).
\416\ Compare paragraph (a)(1)(iv) of Rule 17a-5, as proposed to
be amended, with paragraphs (a)(1) and (2) of proposed Rule 18a-7.
As a consequence of the proposed removal of paragraph (a)(1) of Rule
17a-5, paragraphs (a)(2)(i), (a)(2(ii), and (a)(2)(iii) would be
redesignated paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii),
respectively. Further, as discussed below, the Commission is
proposing to add a new paragraph (a)(1)(iv) to Rule 17a-5. As a
consequence of the removal of paragraph (a)(1) and the addition of
paragraph (a)(1)(iv), paragraph (a)(2)(iv) would be redesignated
paragraph (a)(1)(v). Further, as a consequence of the removal of
paragraph (a)(1), paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and
(a)(7) of Rule 17a-5 would be redesignated paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6), respectively.
---------------------------------------------------------------------------
Currently, paragraph (a)(2) of Rule 17a-5 provides that a broker-
dealer must file the FOCUS Report Part II if it clears transactions or
carries customer accounts or the FOCUS Report Part IIA if it does not
clear transactions or carry customer accounts.\417\ The paragraph
further provides that these reports must be filed within seventeen
business days after the end of the quarter and within seventeen
business days after the end of the fiscal year of the broker-dealer if
the date of the fiscal year end is not the end of a calendar
quarter.\418\ Paragraph (a)(3) provides that reports required to be
filed with the Commission under paragraph (a) (which includes the
reports required under paragraph (a)(2)) shall be considered filed when
received at the Commission's principal office in Washington, DC, and
the regional office of the Commission for the region in which the
broker-dealer has its principal place of business.\419\ Paragraph
(a)(3) further provides that all reports filed pursuant to paragraph
(a) shall be deemed to be confidential.\420\
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\417\ See 17 CFR 240.17a-5(a)(2)(ii) and (iii).
\418\ See id.
\419\ See 17 CFR 240.17a-5(a)(3).
\420\ See id.
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Notwithstanding these requirements, substantially all broker-
dealers file the FOCUS Report directly with their SROs pursuant to
plans established by the SROs under paragraph (a)(4) of Rule 17a-5
(rather than filing them directly with the Commission).\421\ Generally,
the reporting requirements under the SRO's plans are consistent with,
or more rigorous than, the requirements in paragraph (a)(2) of Rule
17a-5 in terms of the part of the FOCUS Report a broker-dealer must
file and the frequency of filing.\422\ Thus, while most broker-dealers
do not file the FOCUS Report pursuant to paragraphs (a)(2) and (a)(3)
of Rule 17a-5, these provisions establish a baseline for SROs in
designing their plans, which must be declared effective by the
Commission.
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\421\ Specifically, paragraph (a)(4) of Rule 17a-5 contains an
exception from the requirement to file the FOCUS Report directly
with the Commission applicable to brokers-dealers that are members
of a national securities exchange or a registered national
securities association if the exchange or association maintains
records containing the information required by the FOCUS Report and
transmits such information to the Commission pursuant to a plan that
has been submitted to, and declared effective by, the Commission
(``FOCUS filing plan'' or ``Plan''). See 17 CFR 240.17a-5(a)(4).
FINRA and other SROs have had FOCUS filing plans in effect since the
1970s under this exception. See, e.g., Self-Regulatory
Organizations; Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Association's FOCUS Filing
Plan, Exchange Act Release No. 36780, (Jan. 26, 1996), 61 FR 3743
(Feb. 1, 1996).
\422\ Currently, FINRA's plan (which applies to most broker-
dealers) requires monthly filing of the FOCUS Report Part II for
members that are subject to the requirements of paragraph (e) of
Rule 15c3-3, or that conduct a business in accordance with paragraph
(k)(2)(i) of Rule 15c3-3, or that are subject to paragraphs
(a)(2)(i) through (iii) of Rule 15c3-1. See 17 CFR 240.15c3-
1(a)(2)(i) through (iii); 17 CFR 240.15c3-3(e) and (k)(2)(i).
FINRA's plan requires quarterly filing of the FOCUS Report Part IIA
for members that conduct a business in accordance with the
provisions of paragraph (k)(1)(i) through (iii), (k)(2)(ii), and
(k)(3) of Rule 15c3-3 and are not subject to paragraphs (a)(2)(i)
through (iii) of Rule 15c3-1, and for members that conduct a
business in accordance with paragraphs (a)(6) through (8) of Rule
15c3-1. See 17 CFR 240.15c3-1(a)(2)(i) through (iii) and (a)(6)
through (8); 17 CFR 240.15c3-3(k)(1)(i) through (iii), (k)(2)(ii),
and (k)(3). These firms generally are non-carrying broker-dealers
and firms that do not meet the definition of dealer under Rule 15c3-
1. Further, as noted above, ANC broker-dealers file the FOCUS Report
Part II CSE pursuant to FINRA Rule 4521(b) rather than the FOCUS
Report Part II.
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The Commission is proposing to amend paragraph (a)(2) of Rule 17a-5
to account for the fact that some broker-dealers likely will be
registered as an SBSD or potentially as an MSBSP and, therefore, these
categories of registrants would be subject to the reporting
requirements under Rule 17a-5.\423\ The proposed amendments would
require broker-dealer SBSDs and broker-dealer MSBSPs to file proposed
Form SBS rather than the FOCUS Report Part II or Part IIA.
Specifically, the amendments would specify that the requirement to file
the FOCUS Report Part II or Part IIA directly with the Commission in
paragraph (a) applies only to broker-dealers that are not dually
registered as an SBSD or MSBSP.\424\ In addition, the Commission
proposes to add a new paragraph (a)(1)(iv) to Rule 17a-5.\425\ This
paragraph would provide that a broker-dealer dually registered as an
SBSD or MSBSP must file proposed Form SBS with the Commission within
seventeen business days of the end of the month.\426\ Thus, the
paragraph would require broker-dealer SBSDs and broker-dealer MSBSPs to
file proposed Form SBS on a monthly basis. This would be consistent
with the plans of the SROs, which generally require carrying broker-
dealers and broker-dealers that act as dealers to file the FOCUS Report
Part II on a monthly (rather than quarterly) basis.\427\
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\423\ As noted above, the Commission is proposing to redesignate
paragraph (a)(2) of Rule 17a-5 as paragraph (a)(1).
\424\ See paragraphs (a)(1)(ii) and (iii) of Rule 17a-5, as
proposed to be amended.
\425\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended.
\426\ See id.
\427\ Because this would be a monthly filing requirement, the
Commission is not proposing to require broker-dealer SBSDs and
broker-dealer MSBSPs to also file proposed Form SBS within 17
business days after the end of the fiscal year of the firm where
that date is not the end of a calendar quarter as is required under
paragraphs (a)(2)(ii) and (iii) of Rule 17a-5 (which require
quarterly filing of the FOCUS Report Part II and Part IIA,
respectively). Compare 17 CFR 240.17a-5(a)(2)(ii) and (iii), with
paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be amended.
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The Commission is proposing to include a parallel requirement in
paragraph (a)(1) of proposed Rule 18a-7 that is modeled on paragraph
(a)(1)(iv) of Rule 17a-5, as proposed to be amended, that would apply
to stand-alone SBSDs and stand-alone MSBSPs.\428\ Under this paragraph,
these registrants would be required to file proposed Form SBS with the
Commission or its designee within seventeen business days after the end
of each month.\429\ The reference to a Commission designee is intended
to provide the Commission with the option of requiring that these
registrants file proposed Form SBS with a third party.\430\
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\428\ Compare paragraph (a)(1)(iv) of Rule 17a-5, as proposed to
be amended, with paragraph (a)(1) of proposed Rule 18a-7.
\429\ See paragraph (a)(1) of proposed Rule 18a-7.
\430\ As discussed above, generally all broker-dealers file the
FOCUS Report with their SROs rather than directly with the
Commission.
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Paragraph (a)(2) of proposed Rule 18a-7 would apply to bank SBSDs
and bank MSBSPs and require these registrants to file proposed Form SBS
with the Commission or its designee within seventeen business days
after the end of each calendar quarter (instead of each month).\431\
The Commission would require quarterly financial reporting for bank
SBSDs and bank MSBSPs, instead of monthly reporting, because the
prudential regulators currently require banks to file reports of
financial and operational condition known as call reports on a
quarterly basis.\432\ As discussed below in section II.B.3.a. of this
release, the information that would be reported by bank SBSDs and bank
[[Page 25224]]
MSBSPs on proposed Form SBS largely would be information that banks are
required to provide in the call reports.
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\431\ See paragraph (a)(2) of proposed Rule 18a-7.
\432\ See Consolidated Reports of Condition and Income for a
Bank with Domestic and Foreign Offices--FFIEC 031 (``FFIEC Form
031'' or ``call report''). See also 12 U.S.C. 161; 12 U.S.C. 324; 12
U.S.C. 1464; 12 U.S.C. 1817.
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Paragraph (a)(3) of proposed Rule 18a-7 would apply to SBSDs
authorized by the Commission to compute net capital using internal
models pursuant to paragraph (d) of proposed Rule 18a-1. The Commission
would require these registrants to file most of the required documents
within 17 business days after the end of each month.\433\ However, to
correspond with the timing requirement in paragraph (d)(9)(i)(C)(1)-(2)
of proposed Rule 18a-1,\434\ these registrants would be required to
file the following reports within seventeen business days after the end
of each calendar quarter (instead of each month): A report identifying
the number of business days for which actual daily net trading loss
exceeded the corresponding daily value at risk (``VaR''); and the
results of backtesting of all internal models used to compute allowable
capital, indicating the number of backtesting exceptions.\435\
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\433\ See paragraph (a)(3)(i)-(vii) of proposed Rule 18a-7.
\434\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70337.
\435\ See paragraph (a)(3)(viii)-(ix) of proposed Rule 18a-7.
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The Commission also is proposing amendments to paragraphs
(a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and (a)(1)(v) of Rule 17a-5 that
would make explicit the requirement that the FOCUS Report or Form SBS
filed by a broker-dealer must be ``executed.'' \436\ Additionally,
paragraphs (a)(1) and (a)(2) of proposed Rule 18a-7 would contain
parallel language requiring that a Form SBS filed by a stand-alone
SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP must be executed.
---------------------------------------------------------------------------
\436\ See paragraphs (a)(1)(ii)-(iv) of Rule 17a-5, as proposed
to be amended. Part II, Part IIA, Part IIB, and Part II CSE of the
FOCUS Report each has a section for the filer to execute the form.
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Finally, as noted above, paragraph (a)(4) of Rule 17a-5 contains an
exception from the requirement to file a FOCUS Report directly with the
Commission applicable to broker-dealers that are members of a national
securities exchange or a registered national securities association if
that exchange or association maintains records containing the
information required by the FOCUS Report and transmits such information
to the Commission pursuant to a plan that has been submitted to, and
declared effective by, the Commission.\437\ The Commission proposes to
add a reference to proposed Form SBS to this provision so that SROs
could include the filing of Form SBS in their plans.\438\ If
incorporated into the plans, broker-dealer SBSDs and broker-dealer
MSBSPs would file proposed Form SBS with their SRO (rather than
directly with the Commission). The Commission preliminarily expects
that the reporting requirements under an SRO's plan with respect to
proposed Form SBS would need to be at least as rigorous as the
requirements in paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended, to be declared effective by the Commission.
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\437\ See 17 CFR 240.17a-5(a)(4).
\438\ See paragraph (a)(3) of Rule 17a-5, as proposed to be
amended. Further, paragraph (a)(5) of Rule 17a-5 requires broker-
dealers to file Form Custody (17 CFR 249.1900) with their DEAs
within 17 business days after the end of each calendar quarter and
within 17 business days after the end of the fiscal year of the
broker-dealer where that date is not the end of a calendar quarter.
See 17 CFR 240.17a-5(a)(5). The DEA must maintain the information
obtained through the filing of Form Custody and must promptly
transmit that information to the Commission at such time as it
transmits the applicable part of the FOCUS Report pursuant to a
plan. See id. The Commission is proposing to amend this provision to
include a reference to proposed Form SBS to account for the fact
that broker-dealer SBSDs and broker-dealer MSBSPs would file
proposed Form SBS with their DEAs along with Form Custody (rather
than the FOCUS Report) if the SROs incorporate the filing of Form
SBS in their plans. See paragraph (a)(4) of Rule 17a-5, as proposed
to be amended.
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b. Information Elicited in Form SBS
As discussed above, all categories of SBSDs and MSBSPs would be
required to file proposed Form SBS. This form is modeled on the FOCUS
Report, particularly the FOCUS Report Part II CSE.\439\ The FOCUS
Report Part II CSE served as the template for designing proposed Form
SBS because it is designed to account for the use of internal models by
ANC broker-dealers and elicits more detailed information about
derivatives positions and exposures than the FOCUS Report Part II and
Part IIA.\440\ Based on staff experience, including experience
monitoring ANC broker-dealers, the Commission anticipates that most
SBSDs will use internal models to compute their net capital.\441\
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\439\ Compare proposed Form SBS, with the FOCUS Report Part II
CSE.
\440\ The FOCUS Report Part IIB elicits similar information
about derivatives positions and exposures but otherwise is more
limited than the FOCUS Report Part II CSE because OTC derivatives
dealers are permitted to engage in only a narrow range of
activities. See 17 CFR 240.3b-12; 17 CFR 240.15a-1. Specifically,
Rule 3b-12, defining the term OTC derivatives dealer, provides,
among other things, that an OTC derivatives dealer's securities
activities must be limited to engaging in dealer activities in
eligible OTC derivative instruments (as defined in the rule) that
are securities; issuing and reacquiring securities that are issued
by the dealer, including warrants on securities, hybrid securities,
and structured notes; engaging in cash management securities
activities (as defined in Rule 3b-14 (17 CFR 240.3b-14); engaging in
ancillary portfolio management securities activities (as defined in
the rule); and engaging in such other securities activities that the
Commission designates by order. See 17 CFR 240.3b-12. Rule 15a-1,
governing the securities activities of OTC derivatives dealers,
provides that an OTC derivatives dealer must effect transactions in
OTC derivatives with most types of counterparties through an
affiliated Commission-registered broker-dealer that is not an OTC
derivatives dealer. See 17 CFR 240.15a-1.
\441\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70293.
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The FOCUS Report elicits financial and operational information
about a broker-dealer through sections consisting of uniquely numbered
line items. The information (e.g., a number or dollar amount) is
entered into the line items.\442\ Generally, a line item that is common
to Part II, Part IIA, Part IIB, and Part II CSE of the FOCUS Report
shares the same unique number, which facilitates aggregating
information and comparing reported information across broker-
dealers.\443\ Proposed Form SBS similarly would elicit information
about the financial and operational condition of an SBSD or MSBSP
through sections consisting of uniquely numbered line items. Line items
on proposed Form SBS that correspond to line items on the FOCUS Report
would share the same unique number and require the entry of the same
type of information.\444\ Proposed Form SBS would not include a
parallel line item for each line item on the FOCUS Report because not
all of the information required on the FOCUS Report is relevant for
SBSDs and MSBSPs.\445\ Further, proposed Form
[[Page 25225]]
SBS would have lines and corresponding line items that are not on the
FOCUS Report. The additional lines and line items would elicit more
detail about the security-based swap and swap activities of the SBSD
and MSBSP filers.\446\
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\442\ As used in this release, the term line refers to the lines
in the left column on the FOCUS Report and proposed Form SBS that
describe the type of entries to be made on that line. The term line
item refers to the fields into which information is entered. For
example, Line 1 of the statement of financial condition section on
Form SBS is cash and Line Item 200 is the field to enter the dollar
amount of cash and Line Item 750 is the field to enter the total
dollar amount of cash.
\443\ For example, Line Item 200 is the field to enter the
dollar amount of cash and Line Item 750 is the field to enter the
total dollar amount of cash in the statement of financial condition
section for each part of the FOCUS Report. The FOCUS Report Part IIB
and Part II CSE share certain common sections that have common
entries but the line items for the entries are assigned different
numbers. Proposed Form SBS would use the numbers assigned to the
line items in Part II CSE.
\444\ For example, Line Item 200 is the field to enter the
dollar amount of cash and Line Item 750 is the field to enter the
total dollar amount of cash in the statement of financial condition
section on proposed Form SBS.
\445\ The FOCUS Report Part II CSE has the most line items of
the four parts of the FOCUS Report and, consequently, generally will
serve as the means of comparing proposed Form SBS with the FOCUS
Report for purposes of the discussion in this release. Proposed Form
SBS would not include line items from Part II CSE that are obsolete,
inapplicable, or redundant of the additional line items on proposed
Form SBS. Specifically, proposed Form SBS would not include Line
Item 18 (box checked if FOCUS Part II CSE is filed pursuant to Rule
17a-11 under the Exchange Act); Line Item 98 (SEC File No.); Line
Item 99 (As of date the for statement of financial condition); Line
Item 291 (Derivatives Receivable--Allowable); Line Item 801
(Derivatives Payable--Total); Line Item 3635 (Total Market Risk
Exposure); Line Item 3679 (Total Credit Risk Exposure); Line Item
3931 (Number of months included in this statement); Line Item 3932
(For the period from); Line Item 3933 (For the period to); Line Item
4070 (Interest Expense, Includes interest on accounts subject to
subordination agreements); and Line Items 5000-5350 (Financial and
operational data).
\446\ Line items that are unique to proposed Form SBS are
identified on the Form by the number 99, 999, 9999, or 99999 for the
purposes of this proposing release.
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As discussed below, broker-dealer SBSDs and broker-dealer MSBSPs
would be required to report the most information on proposed Form SBS
because it would elicit information about their activities as a broker-
dealer and as an SBSD or MSBSP. Stand-alone SBSDs and stand-alone
MSBSPs would be required to report information similar to that required
of broker-dealer SBSDs and broker-dealer MSBSPs. The information
elicited from bank SBSDs and bank MSBSPs would: (1) Derive largely from
the information they report on the call reports; and (2) focus on their
business as an SBSD or MSBSP.\447\
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\447\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
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Proposed Form SBS is divided into five parts. Part 1 would apply to
nonbank SBSDs and nonbank MSBSPs (i.e., broker-dealer SBSDs, broker-
dealer MSBSPs, stand-alone SBSDs, and stand-alone MSBSPs) and is
similar to the FOCUS Report Part II CSE, but includes additional
sections and line items to elicit more detail about security-based swap
and swap activities. Part 2 would apply to bank SBSDs and bank MSBSPs
and elicit certain financial information that these classes of
registrants--as banks--would need to report in the call reports plus
certain additional information about security-based swap and swap
activities. Part 3 would apply to an SBSD or MSBSP that is dually
registered as an FCM and elicit information about the firm's net
capital computation and segregation of customer assets under CFTC
rules. Part 4 would apply to nonbank SBSDs and nonbank MSBSPs and
elicit detailed information about a firm's security-based swap and swap
positions, counterparties, and exposures. Part 5 would apply to bank
SBSDs and bank MSBSPs and also elicit detailed information about a
firm's security-based swap and swap positions, but on a more limited
basis than Part 4.
Proposed Form SBS would have a cover page that largely is in the
same format as the cover page of the FOCUS Report, but includes line
items to indicate the type of registrant filing Form SBS: (1) A stand-
alone SBSD; (2) a stand-alone MSBSP; (3) a broker-dealer SBSD; (4) a
broker-dealer MSBSP; (5) a bank MSBSP; or (6) a bank MSBSP. The heading
at the top of each remaining page of proposed Form SBS would identify
the type of registrant that must enter the information to be reported
on the page.
A general description of each Part of proposed Form SBS appears
below, including a more detailed description of the components of Form
SBS for which there are not parallel components in the FOCUS Report. In
addition to proposed Form SBS, the Commission is proposing instructions
for Form SBS to provide further guidance on the information to be
entered into certain line items.\448\ The instructions are modeled on
the instructions to the FOCUS Report Part II, but with more
instructions to cover the additional line items and sections that are
not on the FOCUS Report Part II.\449\
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\448\ See instructions to proposed Form SBS.
\449\ Compare instructions to proposed Form SBS, with
instructions to the FOCUS Report Part II. The instructions to the
FOCUS Report Part IIA are available at http://www.sec.gov/about/forms/formx-17a-5_2a.pdf.
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i. Part 1 of Proposed Form SBS
Part 1 of proposed Form SBS would apply to nonbank SBSDs and
nonbank MSBSPs. This part of Form SBS is modeled on the FOCUS Report,
particularly the FOCUS Report Part II CSE, but includes additional
sections and line items to report more detail about security-based swap
and swap activities.\450\ Like the FOCUS Report Part II CSE, Part 1 of
proposed Form SBS would require the filer to enter information into the
following sections, as applicable: (1) A statement of financial
condition; \451\ (2) a computation of net capital; \452\ (3) a
computation of minimum net capital required; \453\ (4) a statement of
income (loss); \454\ (5) a statement of capital withdrawals, a
statement of changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of creditors; \455\ (6) certain
[[Page 25226]]
financial and operational data; \456\ (7) a customer reserve account
computation under Rule 15c3-3; \457\ (8) information for possession or
control requirements under Rule 15c3-3; \458\ and (9) a computation for
the determination of reserve requirements for proprietary accounts of
broker-dealers (``PAB'').\459\ Part 1 of proposed Form SBS includes
additional line items in certain of these sections to elicit more
detail about security-based swap and swap activities.\460\ Further,
Part 1 has the following additional sections: (1) a computation of
tangible net worth under proposed Rule 18a-2; \461\ (2) a reserve
account computation under proposed Rule 18a-4; \462\ and (3)
information for possession or control requirements under proposed Rule
18a-4.\463\ The additional line items and sections are discussed below.
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\450\ Compare Part 1 proposed Form SBS, with the FOCUS Report
Part II CSE. As discussed below, the FOCUS Report has a number of
sections that are common to all the parts thereof. Generally, a
section on the FOCUS Report Part II CSE elicits information that is
as detailed, if not more detailed, than the parallel section on the
FOCUS Report Part II, Part IIA, or Part IIB.
\451\ Each part of the FOCUS Report has a section to provide a
statement of financial condition that elicits detail about the
assets, liabilities and ownership equity of the broker-dealer. Part
1 of proposed Form SBS similarly has a section to provide a
statement of financial condition. See Part 1 of proposed Form SBS,
Statement of Financial Condition. This section would need to be
completed by nonbank SBSDs and nonbank MSBSPs. As discussed below,
the statement of financial condition section on proposed Form SBS
has additional line items that are not on the FOCUS Report.
\452\ Each part of the FOCUS Report has a section to provide a
computation of net capital under Rule 15c3-1. Part 1 of proposed
Form SBS similarly has sections to provide a computation of net
capital that would need to be completed by nonbank SBSDs (i.e.,
broker-dealer SBSDs and stand-alone SBSDs) and broker-dealer MSBSPs
(all of which would be subject to a net capital rule). See Part 1 of
proposed Form SBS, Computation of Net Capital (Filer Authorized to
use Models) and Computation of Net Capital (Filer Not Authorized to
use Models). As discussed below, proposed Form SBS has two net
capital computation sections: one for firms that are authorized to
use models and one for firms that are not authorized to use models.
Further, these sections have additional line items that are not on
the FOCUS Report.
\453\ Each part of the FOCUS Report has a section to provide a
computation of minimum required net capital under Rule 15c3-1. Part
1 of proposed Form SBS similarly has sections to provide a required
minimum net capital computation that would need to be completed by
nonbank SBSDs and broker-dealer MSBSPs. See Part 1 of proposed Form
SBS, Computation of Minimum Regulatory Capital Requirements (Broker-
Dealer) and Computation of Minimum Regulatory Capital Requirements
(Non-Broker-Dealer). As discussed below, proposed Form SBS has two
minimum net capital computation sections: one for broker-dealer
filers (i.e., broker-dealer SBSDs and broker-dealer MSBSPs) and one
for stand-alone SBSDs. Further, these sections have additional line
items that are not on the FOCUS Report.
\454\ Each part of the FOCUS Report has a section to provide a
statement of income (loss) that elicits detail about the revenue and
expenses of the broker-dealer during the reporting period. Part 1 of
proposed Form SBS similarly has a statement of income (loss) section
that would need to be completed by nonbank SBSDs and nonbank MSBSPs.
See Part 1 of proposed Form SBS, Statement of Income (Loss). As
discussed below, the statement of income (loss) section on proposed
Form SBS is modeled on a supplemental statement of income form
promulgated by FINRA. The proposed Form SBS section has additional
line items that are not on FINRA's form.
\455\ The FOCUS Report Part II, Part IIB, and Part II CSE have
sections to provide a statement of capital withdrawals, a statement
of changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of general creditors. The FOCUS
Report Part IIA has sections to provide a statement of changes in
ownership equity and a statement of changes in liabilities
subordinated to claims of general creditors. In the statement of
capital withdrawals section, a broker-dealer must report information
about the firm's ownership equity and subordinated liabilities
maturing or proposed to be withdrawn within the next six months and
accruals that have not been deducted in the computation of net
capital. In the statements of changes in ownership equity and
liabilities subordinated to claims of general creditors sections, a
broker-dealer must report the amount of such equity and liability
balances, respectively, as of the beginning of the reporting period
and as of the end of the reporting period and provide detail with
respect to changes in the balances. The information reported in all
these statements is designed to assist securities regulators in
monitoring the financial condition of the broker-dealer and the
firm's compliance with the net capital rule. For example, under Rule
15c3-1, broker-dealers are subject to debt-to-equity ratio
requirements, limitations governing the withdrawal of equity
capital, and requirements with respect to subordinated loans that
qualify to be added back to net worth when computing net capital.
See 17 CFR 240.15c3-1d ; 17 CFR 240.15c3-3(d) and (e). Nonbank SBSDs
and broker-dealer MSBSPs would be subject to similar requirements
and limitations. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70254-70256. Consequently, Part 1 of proposed Form SBS has sections
to provide a statement of capital withdrawals, a statement of
changes in ownership equity, and a statement of changes in
liabilities subordinated to claims of creditors that would need to
be completed by nonbank SBSDs and broker-dealer MSBSPs. See Part 1
of proposed Form SBS, Capital Withdrawals and Capital Withdrawals
Recap. These sections on proposed Form SBS have the same line items
as the parallel sections on the FOCUS Report Part II CSE and there
are no additional line items.
\456\ Each part of the FOCUS Report has a section to report
certain financial and operational data. The FOCUS Report Part II CSE
has additional sections to report operational charges deducted from
net capital under Rule 15c3-1 and potential operational charges.
Broker-dealers must report information on these sections about,
among other things, the number of income and non-income producing
personnel, fails, security concentrations, lease and rentals
payables, money suspense and balancing differences, and securities
differences. Certain of these items--including securities
differences--result in charges when computing net capital. See 17
CFR 240.15c3-1(c)(2)(v). Securities regulators use this information
to monitor, among other things, whether the broker-dealer is
processing securities transactions in a timely manner and properly
accounting for the securities it holds. Part 1 of proposed Form SBS
similarly has sections to report this type of financial and
operational data that would need to be completed by nonbank SBSDs
and broker-dealer MSBSPs. See Part 1 of proposed Form SBS, Financial
and Operational Data. The sections of the form have the same line
items as the parallel sections in the FOCUS Report Part II CSE and
there are no additional line items.
\457\ The FOCUS Report Part II and Part II CSE have a section to
provide a computation of the customer reserve requirement under Rule
15c3-3. As discussed above in section II.A.2.a. of this release,
Rule 15c3-3 requires a carrying broker-dealer to maintain a reserve
of funds or qualified securities in an account at a bank that is at
least equal in value to the net cash owed to customers. See 17 CFR
240.15c3-3(e). The amount of net cash owed to customers is computed
pursuant to a formula set forth in Exhibit A to Rule 15c3-3. See 17
CFR 240.15c3-3a. Part 1 of proposed Form SBS similarly has a section
to provide a computation of the customer reserve requirement under
Rule 15c3-3 that would need to be completed by broker-dealer SBSDs
and broker-dealer MSBSPs that hold funds and securities for
customers that are not security-based swap customers. See Part 1 of
proposed Form SBS, Computation for Determination of Reserve
Requirements. This section has the same line items as the parallel
section on the FOCUS Report Part II CSE and there are no additional
line items. Further, as discussed below, proposed Form SBS has a
section to provide a separate computation for the security-based
swap customer reserve account requirement under proposed Rule 18a-4.
In addition, the FOCUS Report Part IIA has a section to claim an
exemption under Rule 15c3-3. In this section, a broker-dealer
claiming an exemption under Rule 15c3-3 must identify whether it is
relying on paragraph (k)(1), (k)(2)(A), (k)(2)(B), or (k)(3) of Rule
15c3-3. Part 1 of proposed Form SBS similarly has a section in which
a broker-dealer SBSD or broker-dealer MSBSP could claim an exemption
from Rule 15c3-3. See Part 1 of proposed Form SBS, Exemptive
Provision under Rule 15c3-3.
\458\ The FOCUS Report Part II and Part II CSE have a section to
report information relating to the possession or control requirement
under Rule 15c3-3. As discussed above in section II.A.2.a. of this
release, Rule 15c3-3 requires a carrying broker-dealer to maintain
physical possession or control over customers' fully paid and excess
margin securities. See 17 CFR 240.15c3-3(d). Physical possession or
control means the carrying broker-dealer must hold these securities
in one of several locations specified in Rule 15c3-3 and free of
liens or any other interest that could be exercised by a third party
to secure an obligation of the broker-dealer. See 17 CFR 240.15c3-
3(c). Part 1 of proposed Form SBS similarly has a section to report
the same information about the possession or control requirement
under Rule 15c3-3 as is required in the FOCUS Report Part II and
Part II CSE. See Part 1 of proposed Form SBS, Computation for
Determination of Reserve Requirements. This section would need to be
completed by broker-dealer SBSDs and broker-dealer MSBSPs that hold
funds and securities for customers that are not security-based swap
customers. This section has the same line items as the parallel
section on the FOCUS Report Part II CSE and there are no additional
line items. Further, as discussed below, proposed Form SBS has a
section to report the same type of information about the possession
or control requirement relating to security-based swap customers
under proposed Rule 18a-4.
\459\ The FOCUS Report Part II CSE has a section to provide the
computation of the reserve requirement for proprietary accounts of
broker-dealers. This computation is a result of a broker-dealer not
being a customer as that term is defined in Rule 15c3-3. See 17 CFR
240.15c3-3(a)(1). Accordingly, a carrying broker-dealer that holds
the account of another broker-dealer is not required to maintain
possession or control of the fully paid and excess margin securities
of the other the broker-dealer or include credit and debit items
associated with the account of the other broker-dealer in its
customer reserve computation. The absence of a requirement to
protect the other broker-dealer's cash under Rule 15c3-3 raised a
question of whether the other broker-dealer could treat cash held by
the carrying broker-dealer as an allowable asset under Rule 15c3-1.
In response, the Commission staff issued a no-action letter stating
that the staff would not recommend enforcement action to the
Commission if a broker-dealer treated cash held by another broker-
dealer as an allowable asset under Rule 15c3-1, provided the other
broker-dealer agreed to: (1) perform a reserve computation for
broker-dealer accounts; (2) establish a separate special reserve
bank account, and; (3) maintain cash or qualified securities in the
reserve account equal to the computed reserve requirement. See
Letter from Michael A. Macchiaroli, Associate Director, Division of
Market Regulation, Commission, to Raymond J. Hennessy, Vice
President, NYSE, and Thomas Cassella, Vice President, NASD
regulation, Inc. (Nov. 10, 1998). The Commission recently codified
this letter through amendments to Rule 15c3-3. See Financial
Responsibility Rules for Broker-Dealers, Exchange Act Release No.
70072 (July 30, 2013); 78 FR 51824 (Aug. 21, 2013). Part 1 of
proposed Form SBS similarly has a section to provide a computation
of PAB reserve requirements. See Part 1 of proposed Form SBS,
Computation for Determination of PAB Requirements. This section
would need to be completed by broker-dealer SBSDs and broker-dealer
MSBSPs. The section has the same line items as the parallel section
on the FOCUS Report Part II CSE and there are no additional line
items.
\460\ As noted above, additional line items are identified on
proposed Form SBS by the number 99, 999, 9999, or 99999 for the
purposes of this proposing release.
\461\ Proposed Rule 18a-2 would require stand-alone MSBSPs to
maintain positive tangible net worth. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70256-70257. Under proposed Rule 18a-2,
tangible net worth would be defined to mean the MSBSP's net worth as
determined in accordance with generally accepted accounting
principles in the U.S., excluding goodwill and other intangible
assets.
\462\ As discussed above in section II.A.2.a. of this release,
proposed Rule 18a-4 would require an SBSD, among other things, to
maintain a security-based swap customer reserve account at a bank
separate from any other bank account of the SBSD. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70282-70287. Further, it would provide
that the SBSD must at all times maintain in the security-based swap
customer reserve account cash and/or qualified securities in amounts
computed daily in accordance with Exhibit A to proposed Rule 18a-4.
See id.
\463\ As discussed above in section II.A.2.a. of this release,
proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based
swap customers. See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70278-70282.
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Statement of Financial Condition
The line items in the statement of financial condition section on
proposed Form SBS are largely the same line items in the statement of
financial
[[Page 25227]]
condition section on the FOCUS Report Part II CSE.\464\ However, as
discussed below, the proposed Form SBS section has additional line
items that are not in the Part II CSE section.
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\464\ Compare Part 1 of proposed Form SBS, Statement of
Financial Condition, with the FOCUS Report Part II CSE, Statement of
Financial Condition.
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First, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of receivables from other
broker-dealers and clearing organizations.\465\ The detail includes the
amount of such receivables includible in the reserve computation under
Rule 15c3-3.\466\ The proposed Form SBS section requires the same
detail about these receivables.\467\ Additionally, it requires detail
about the dollar amount of the receivables includible in the reserve
computation under proposed Rule 18a-4.\468\
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\465\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 3A-3E.
\466\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 3A1, 3B1, 3C1, and 3D1.
\467\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 3A-3E.
\468\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 3A2, 3B2, 3C2, and 3D2. As discussed in section
II.A.2.a. of this release, proposed Rule 18a-4 is modeled on Rule
15c3-3. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288.
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Second, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of payables to other broker-
dealers and clearing organizations.\469\ The detail includes the amount
of such payables includible in the reserve computation under Rule 15c3-
3.\470\ The proposed Form SBS section requires the same detail about
these payables.\471\ Additionally, it requires detail about the dollar
amount of the payables includible in the reserve computation under
proposed Rule 18a-4.\472\
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\469\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 21A-21E.
\470\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 21A1, 21B1, 21C1, and 21D1.
\471\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 20A-20E.
\472\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 20A2, 20B2, 20C2, and 20D2.
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Third, a broker-dealer must enter detail in the FOCUS Report Part
II CSE section about the dollar amount of payables to securities and
commodities customers.\473\ The broker-dealer also must provide the
dollar amount of the payable to securities customers representing free
credit balances.\474\ The proposed Form SBS section requires the same
detail about payables to securities and commodities customers.\475\
Additionally, it requires detail about the dollar amount of payables to
security-based swap customers, including the amount of the payables
representing free credits, and the amount of payables to swap
customers.\476\
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\473\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 22A-22B.
\474\ See FOCUS Report Part II CSE, Line Item 950.
\475\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 21A-21B.
\476\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 21C-21D.
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Fourth, a broker-dealer must enter into the FOCUS Report Part II
CSE section the dollar amount of payables to securities and commodities
non-customers.\477\ The proposed Form SBS section requires the entry of
the same information.\478\ Additionally, it requires the entry of the
dollar amount of the payables to security-based swap and swap non-
customers.\479\
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\477\ See FOCUS Report Part II CSE, Statement of Financial
Condition, Lines 23A-23B.
\478\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 22A-22B.
\479\ See Part 1 of proposed Form SBS, Statement of Financial
Condition, Lines 22C-22D.
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Computation of Net Capital
Nonbank SBSDs and broker-dealer MSBSPs would need to complete a
computation of net capital section on proposed Form SBS.\480\ Unlike
the FOCUS Report Part II CSE, there are two sections on proposed Form
SBS: One applicable to filers that are authorized to use internal
models; and one applicable to filers that are not authorized to use
internal models.\481\
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\480\ Broker-dealer SBSDs and broker-dealer MSBSPs--as broker-
dealers--would be subject to Rule 15c3-1 and, therefore, would be
required to compute net capital as that term is defined in the rule.
See 17 CFR 240.15c3-1(c)(2). Stand-alone MSBSPs would be subject to
a tangible net worth capital standard pursuant to proposed Rule 18a-
2, and therefore, would not compute net capital. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70256-70257. The Commission has proposed
that stand-alone SBSDs be subject to a net capital requirement in
proposed Rule 18a-1 that is modeled on Rule 15c3-1. See id. at
70217-70257. Under proposed Rule 18a-1, stand-alone SBSDs would be
required to compute net capital as defined in proposed Rule 18a-1.
See id. The definition in proposed Rule 18a-1 is modeled on the
definition in Rule 15c3-1 and, consequently, proposed Form SBS does
not have separate net capital computation sections for broker-dealer
filers and stand-alone SBSD filers.
\481\ All broker-dealers that file the FOCUS Report Part II CSE
have been approved to use models. Accordingly, it does not need to
have a computation for broker-dealers not approved to use models.
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Computation for Filers Authorized to use Models. The line items in
the net capital computation section on proposed Form SBS applicable to
filers authorized to use models are largely the same line items in the
computation of net capital section on the FOCUS Report Part II
CSE.\482\ However, as discussed below, the proposed Form SBS section
has additional line items that are not on the FOCUS Report Part II CSE
section.
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\482\ Compare Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), with FOCUS Report Part II
CSE, Computation of Net Capital.
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First, a broker-dealer must enter detail in the Part II CSE section
about deductions and other charges that the firm must subtract from net
worth, including the total dollar amount of non-allowable assets from
the Statement of Financial Condition.\483\ The detail includes charges
for under-margined securities accounts of customers and non-
customers,\484\ and under-margined accounts of commodities customers
and non-customers.\485\ The proposed Form SBS section would require the
same detail about these deductions.\486\ In addition, the section would
require detail about the amount of deductions for under-margined
accounts of security-based swap customers and non-customers,\487\ and
under-margined
[[Page 25228]]
accounts of swap customers and non-customers.\488\
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\483\ See FOCUS Report Part II CSE, Computation of Net Capital,
Line 6A.
\484\ See FOCUS Report Part II CSE, Computation of Net Capital,
Line 6A1. Paragraph (c)(2)(xii) of Rule 15c3-1 requires a broker-
dealer to deduct the amount of cash required in each customer's or
non-customer's account to meet the maintenance margin requirements
of the DEA for the broker-dealer, after application of calls for
margin, marks to the market or other required deposits which are
outstanding five business days or less. See 17 CFR 240.15c3-
1(c)(2)(xii). Broker-dealers are subject to maintenance margin
requirements in rules promulgated by their DEAs. See, e.g., FINRA
Rules 4210 through 4240.
\485\ See FOCUS Report Part II CSE, Computation of Net Capital
Line 6A2. Paragraphs (a)(3)(xii) and (a)(3)(xiii) of Appendix B to
Rule 15c3-1 prescribe capital deductions for under-margined customer
and non-customer commodity accounts. See 17 CFR 240.15c3-
1b(a)(3)(xii) and (xiii).
\486\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 6A1-6A2.
\487\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Line 6A3. The Commission
has proposed that nonbank SBSDs be required to deduct the amount of
cash required in the account of each security-based swap customer to
meet the margin requirements of a clearing agency, DEA, or the
Commission, after application of calls for margin, marks to the
market, or other required deposits which are outstanding one
business day or less and to take certain capital charger in lieu of
collecting margin from certain types of entities or with respect to
certain types of accounts. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70245-70248. In addition, as discussed above in section
II.A.2.a. of this release, the Commission has proposed margin
requirements for nonbank SBSDs and nonbank MSBSPs with respect to
non-cleared security-based swaps. See id. at 70257-70274. Security-
based swap clearing agencies require their clearing members to post
margin for proprietary and customer positions of the member cleared
by the clearing agency. See Process for Submissions for Review of
Security-Based Swaps for Mandatory Clearing and Notice Filing
Requirements for Clearing Agencies; Technical Amendments to Rule
19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, Exchange Act Release No. 67286 (June 28, 2012), 77 FR
41602, 41603 (July 13, 2012). They also may require their clearing
members to collect margin from their security-based swap customers.
See id.
\488\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Authorized to Use Models), Line 6A4. Derivatives clearing
organizations require their clearing members to post margin for
proprietary and customer swaps positions of the member cleared by
the clearing organization. See Process for Submissions for Review of
Security-Based Swaps for Mandatory Clearing and Notice Filing
Requirements for Clearing Agencies; Technical Amendments to Rule
19b-4 and Form 19b-4 Applicable to All Self-Regulatory
Organizations, 77 FR 41603. They also may require their clearing
members to collect margin from their swaps customers. See id.
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Second, an ANC broker-dealer must provide detail on a schedule to
the FOCUS Report Part II CSE about the credit risk charges it takes as
part of its capital computation.\489\ Specifically, the FOCUS Report
Part II CSE schedule requires the ANC broker-dealer to provide detail
with respect to the three components of the credit risk charge, namely:
(1) The aggregate counterparty exposure charge; (2) the aggregate
counterparty concentration charge; and (3) the portfolio concentration
charge.\490\ Proposed Form SBS would require the same detail about
these components of the credit risk charge but require that it be
reported in the net capital computation section rather than on a
separate schedule.\491\ The proposed Form also would require additional
detail about the first component of the credit risk charge: the
counterparty exposure charge.\492\ Under the proposed capital
requirements for nonbank SBSDs, a firm authorized to use models would
need to calculate a counterparty exposure charge for a commercial end
user in the same manner as an ANC broker-dealer.\493\ Specifically, the
exposure charge for a commercial end user that is insolvent, in a
bankruptcy proceeding, or in default of an obligation on its senior
debt would be the net replacement value of the security-based swaps
with the end user.\494\ The counterparty exposure charge for all other
commercial end users would be the credit equivalent amount of the
firm's exposure to the end user multiplied by an applicable credit risk
weight factor and then multiplied by 8%.\495\ Proposed Form SBS would
have line items to enter the aggregate counterparty exposure charge for
these two categories of commercial end users (i.e., (1) end users that
are insolvent, in a bankruptcy proceeding, or in default of an
obligation on their senior debt; and (2) all other end users and to
enter the sum of the two categories).\496\
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\489\ See FOCUS Report Part II CSE, Schedule 1--FINRA
Supplementary Capital Information, Lines 6A-6C. As discussed above
in section II.B.3.a. of this release, ANC broker-dealers are
permitted to add back to net worth uncollateralized receivables from
counterparties arising from OTC derivatives transactions when
computing net capital. See 17 CFR 240.15c3-1e(c). Instead of the
100% deduction that applies to most unsecured receivables under Rule
15c3-1, ANC broker-dealers are permitted to take the credit risk
charge. See 17 CFR 240.15c3-1(a)(7); 17 CFR 240.15c3-1e(c).
\490\ See Part II CSE, Schedule 1--FINRA Supplementary Capital
Information, Lines 6A-6C.
\491\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 15A-15C. As
discussed above in section II.B.3.a. of this release, the Commission
has proposed that ANC broker-dealers be permitted to add back to net
worth uncollateralized receivables and take the corresponding credit
risk charge but only with respect to receivables from counterparties
that are commercial end users as that term would be defined in
proposed amendments to Rule 15c3-1 and only with respect to
security-based swaps. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70240-70245. In addition, the proposed capital requirements
for ANC broker-dealer SBSDs and stand-alone ANC SBSDs similarly
would allow these registrants to take credit risk charges with
respect to uncollateralized receivables but only from commercial end
users arising from security-based swaps. See id. Under these
proposals, the firms would take a credit risk charge that consists
of the three components identified above: (1) A counterparty
exposure charge; (2) a concentration charge if the current exposure
to a single counterparty exceeds certain thresholds; and (3) a
portfolio concentration charge if aggregate current exposure to all
counterparties exceeds certain thresholds. See id.
\492\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Authorized to Use Models), Line 15A.
\493\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70240-70245.
\494\ See id.
\495\ See id. The credit equivalent amount is the sum of the
firm's: (1) Maximum potential exposure (``MPE'') to the commercial
end user multiplied by a backtesting determined factor; and (2)
current exposure to the commercial end user. The MPE amount would be
a charge to address potential future exposure and would be
calculated using the firm's VaR model as applied to the commercial
end user's positions after giving effect to a netting agreement with
the end user, taking into account collateral received from the end
user, and taking into account the current replacement value of the
end user's positions. See id. The current exposure amount would be
the current replacement value of the commercial end user's positions
after giving effect to a netting agreement with the counterparty and
taking into account collateral received from the counterparty. See
id.
\496\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Authorized to Use Models), Lines 15A, 15A1, and 15A2.
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Computation for filers not authorized to use models. The line items
in the net capital computation section on proposed Form SBS applicable
to filers not authorized to use models are largely the same line items
in the computation of net capital section on the FOCUS Report Part
II.\497\ However, as discussed below, the proposed Form SBS section has
additional line items that are not in the Part II section.
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\497\ Compare Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), with the FOCUS Report
Part II, Computation of Net Capital. The FOCUS Report Part II is
used by broker-dealers that have not been approved to use internal
models as part of their net capital computation.
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First, as discussed above, the computation section applicable to
filers authorized to use models includes line items to enter charges
with respect to under-margined security-based swap and swap accounts.
The computation section applicable to filers not authorized to use
models similarly would require detail about the amount of charges
relating to under-margined accounts of security-based swap customers
and non-customers,\498\ and under-margined accounts of swap customers
and non-customers.\499\
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\498\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 6A3.
\499\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 6A4.
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Second, a broker-dealer that is not authorized to use models is
required to enter in the FOCUS Report Part II net capital computation
section detail about the dollar amount of the standardized haircuts it
takes on various categories of proprietary securities positions.\500\
The proposed Form SBS section requires the same detail about
standardized haircuts.\501\ The section also requires additional
entries for the amount of the standardized haircuts applied to
security-based swap \502\ and swap positions.\503\
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\500\ See FOCUS Report Part II, Computation of Net Capital,
Lines 9A-9E.
\501\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Lines 9A-9E.
\502\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 10. The proposed
capital rules for nonbank SBSDs would prescribe standardized
haircuts for security-based swaps. See Capital, Margin, and
Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70231-70237.
\503\ See Part 1 of proposed Form SBS, Computation of Net
Capital (Filer Not Authorized to Use Models), Line 11. The proposed
capital rules for nonbank SBSDs would prescribe standardized
haircuts for swaps. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70248-70250.
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[[Page 25229]]
Computation of Minimum Regulatory Capital Requirements
Proposed Form SBS has two sections for computing minimum required
net capital: One for broker-dealer filers (i.e., broker-dealer SBSDs
and broker-dealer MSBSPs) and one for stand-alone SBSDs.\504\ As
discussed above in section II.A.3.a. of this release, Rule 15c3-1, as
proposed to be amended, and proposed Rule 18a-1 would prescribe minimum
net capital requirements applicable to nonbank SBSDs as the greater of
a fixed-dollar amount and a ratio amount.\505\ The ratio amount
applicable to a broker-dealer SBSD would be the sum of the current
ratio amount prescribed in Rule 15c3-1 (the 15-to-1 aggregate
indebtedness to net capital ratio or the 2% of aggregate debit items
ratio) and an amount equal to the 8% margin factor.\506\ The ratio
amount applicable to a stand-alone SBSD would be an amount equal solely
to the 8% margin factor.\507\ Because the minimum net capital
requirement computation that would be applicable to a broker-dealer
filer differs from the computation that would be applicable to a stand-
alone SBSD, proposed Form SBS would contain a separate section for each
type of filer. The line items in the minimum net capital requirement
section on proposed Form SBS applicable to broker-dealer filers are
largely the same line items in the minimum net capital requirement
section on the FOCUS Report Part II.\508\ The computation section
applicable to stand-alone SBSDs is a substantially scaled down version
of the parallel FOCUS Report Part II section. As discussed below, both
sections on proposed Form SBS have additional line items that are not
on the Part II section.
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\504\ See Part 1 of proposed Form SBS, Broker-Dealer Computation
of Minimum Regulatory Capital Requirements and Non-Broker-Dealer
Computation of Minimum Regulatory Capital Requirements. As noted
above, broker-dealer MSBSPS--as broker-dealers--would be subject to
Rule 15c3-1, and therefore would be subject to a minimum net capital
requirement. See 17 CFR 140.15c3-1(a). Stand-alone MSBSPs would be
subject to a tangible net worth standard pursuant to proposed Rule
18a-2, and therefore would not be subject to a minimum net capital
requirement. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257.
\505\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70221-70229.
\506\ See id.
\507\ See id. Neither the 15-to-1 aggregate indebtedness to net
capital ratio nor the 2% of aggregate debit items ratio would apply
to stand-alone SBSDs. See id.
\508\ Compare Part 1 of proposed Form SBS, Computation of
Minimum Regulatory Capital Requirements (Broker-Dealer), with the
FOCUS Report Part II, Computation of Basic Net Capital Requirement,
Computation of Aggregate Indebtedness, Computation of Alternate Net
Capital Requirement, and Other Ratios.
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First, both sections require the entry of detail about the amount
of excess tentative net capital held by the firm.\509\ The proposed
capital requirements for nonbank SBSDs prescribe minimum tentative net
capital requirements for ANC broker-dealer SBSDs and stand-alone ANC
SBSDs.\510\ These filers would need to indicate in proposed Form SBS:
(1) The amount of tentative net capital they maintain; (2) their
minimum tentative net capital requirement; \511\ (3) their excess
tentative net capital; \512\ and (4) the amount of tentative net
capital in excess of 120% of their minimum tentative net capital
requirement.\513\
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\509\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Lines 1-4; Part 1
of proposed Form SBS, Computation of Minimum Regulatory Capital
Requirements (Non-Broker-Dealer), Lines 1-4.
\510\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70226-70227. Tentative net capital would be the amount of net
capital maintained by the firm before applying standardized haircuts
or using internal models to determine deductions on the mark-to-
market value of proprietary positions to arrive at the broker-
dealer's amount of net capital. See id. The minimum tentative net
capital requirement is designed to account for the fact that VaR
models, while more risk sensitive than standardized haircuts, tend
to substantially reduce the amount of the deductions to tentative
net capital in comparison to the standardized haircuts because the
models recognize more offsets between related positions (i.e.,
positions that show historical correlations) than the standardized
haircuts. See id.
\511\ Under the proposed capital requirements, an ANC broker-
dealer SBSD would be required to maintain minimum tentative net
capital of $5 billion and a stand-alone ANC SBSD would be required
to maintain minimum tentative net capital of $100 million. See
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70226-70227.
\512\ The amount of excess tentative net capital would be the
amount that the tentative net capital exceeds the amount of required
tentative net capital.
\513\ As discussed below in section II.C.2. of the release, Rule
17a-11, as proposed to be amended, and proposed Rule 18a-8 would
require an ANC broker-dealer SBSD and a stand-alone ANC SBSD to file
a regulatory notice if the firm's tentative net capital falls below
120% of its required minimum tentative net capital.
---------------------------------------------------------------------------
Second, both sections would have line items to enter the amount of
the 8% margin factor. As discussed above, the minimum net capital
requirement for a nonbank SBSD would be the greater of a fixed-dollar
amount and a ratio amount. The ratio amount for a broker-dealer SBSD
would be the sum of the existing ratio requirement and the 8% margin
factor. Consequently, the computation section for broker-dealer filers
has line items to enter amounts for (as applicable): (1) The 15-to-1
aggregate indebtedness to net capital ratio; (2) the 2% of aggregate
debit items ratio; and (3) the 8% margin factor.\514\ The section for
stand-alone SBSDs has a line item to enter the 8% margin factor.\515\
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\514\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Lines 4A-4C.
\515\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Non-Broker-Dealer), Line 4.
---------------------------------------------------------------------------
Third, a broker-dealer must provide detail in the FOCUS Report Part
II CSE section about the dollar amount of net capital in excess of the
greater of: (1) 5% of combined aggregate debit items; and (2) 120% of
the firm's minimum net capital requirement.\516\ The proposed Form SBS
sections would require a broker-dealer SBSD, broker-dealer MSBSP, and
stand-alone SBSD to enter the amount of net capital in excess of 120%
of the minimum net capital requirement.\517\
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\516\ See FOCUS Report Part II CSE, Computation of Net Capital
Requirement, Line 15. As discussed below in section II.C.2. of the
release, Rule 17a-11 requires a broker to give notification when its
net capital falls below 5% of aggregate debit items and when its net
capital falls below 120% of the minimum net capital requirement. See
17 CFR 240.17a-11(c)(2)-(3).
\517\ See Part 1 of proposed Form SBS, Computation of Minimum
Regulatory Capital Requirements (Broker-Dealer), Line 9A. See also
Part 1 of proposed Form SBS, Computation of Minimum Regulatory
Capital Requirements (Non-Broker-Dealer), Line 9A. As noted above,
Rule 17a-11 requires a broker dealer to give notification when its
net capital computation performed pursuant to Rule 15c3-1 shows that
its total net capital is less than 120% of the broker-dealer's
required minimum net capital. See 17 CFR 240.17a-11(c)(3). As
discussed below in section II.C.2. of the release, proposed Rule
18a-8 would require a stand-alone SBSD to notify the Commission when
its net capital computation shows that its total net capital is less
than 120% of the SBSD's required minimum net capital.
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Statement of Income (Loss)
FINRA has adopted Form SSOI with the Commission's approval ``to
magnify the data from the Statement of Income (Loss) page of the FOCUS
Report.'' \518\
[[Page 25230]]
The statement of income (loss) section on proposed Form SBS is modeled
on Form SSOI and uses the same line items to report information about
categories of revenues and expenses.\519\ However, as discussed below,
the proposed Form SBS section has additional line items that are not on
Form SSOI.
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\518\ Self-Regulatory Organizations; Financial Industry
Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and
Order Granting Accelerated Approval of a Proposed Rule Change, as
Modified By Amendment No. 2, Adopting FINRA Rule 4524 (Supplemental
FOCUS Information) and Proposed Supplementary Schedule to the
Statement of Income (Loss) Page of FOCUS Reports, Exchange Act
Release No. 66364 (Feb. 9, 2012), 77 FR 8938 (Feb. 15, 2012). (Form
SSOI ``is intended to capture more granular detail of a firm's
revenue and expense information. The lack of more specific revenue
and expense categories for certain business activities on the
Statement of Income (Loss) Page has led many firms to report much of
their revenue and expenses as `other' (miscellaneous), a very
general categorization that provides FINRA limited visibility into
revenue and expense trends.'') Form SSOI is available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/industry/p125702.pdf.
\519\ Compare Part 1 of proposed Form SBS, Statement of Income
(Loss), with Form SSOI.
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First, a broker-dealer is required to enter into Form SSOI detail
about the amount of revenue attributable to fees or commissions with
respect to various categories of securities.\520\ The statement of
income (loss) section on proposed Form SBS would require a nonbank SBSD
or nonbank MSBSP to enter the same information.\521\ In addition, the
section would elicit information about commissions and fees
attributable to security-based swaps, mixed swaps, and swaps.\522\
---------------------------------------------------------------------------
\520\ See FINRA Form SSOI, Lines 1A-1M.
\521\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 1A-1P.
\522\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 1M-1O.
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Second, a broker-dealer is required to enter into Form SSOI detail
about the amount of revenue attributable to gains or losses on
principal trades with respect to various categories of financial
instruments, including security-based swaps and swaps.\523\ The
statement of income (loss) section on proposed Form SBS would require
an SBSD or MSBSP to enter the same information, except that it would
require additional detail about gains or losses with respect to
security-based swaps and swaps.\524\ Specifically, the section would
require entries for gains and losses with respect to the following
categories of security-based swaps: (1) Debt security-based swaps
(other than credit default swaps); (2) equity security-based swaps, (3)
credit default swaps; and (4) other security-based swaps.\525\ It
further would require entries for gains and losses with respect to
mixed swaps \526\ and the following categories of swaps: (1) Interest
rate swaps; (2) foreign exchange swaps; (3) commodity swaps; (4) debt
index swaps (other than credit default swaps); (5) equity index swaps;
(6) credit default swaps; and (7) other swaps.\527\
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\523\ See FINRA Form SSOI, Lines 5A-5O.
\524\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5A-5P.
\525\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5L1-5L4.
\526\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Line 5M.
\527\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 5N1-5N7.
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Third, a broker-dealer is required to enter into the statement of
income (loss) section on the FOCUS Report Part II detail about the
amount of gains or losses on the firm's securities investment
accounts.\528\ Specifically, the section requires: (1) The dollar
amount of the realized gains or losses; (2) the dollar amount of the
unrealized gains or losses; and (3) the total dollar amount of the
gains or losses.\529\ Form SSOI requires the total dollar amount of
gains or losses on firm investments but not the detail on the realized
and unrealized gains or losses that must be reported on the FOCUS
Report Part II.\530\ The statement of income (loss) section on proposed
Form SBS would require an SBSD or MSBSP to report the same detail about
capital gains and losses on investment accounts as the FOCUS Report
Part II.\531\
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\528\ See FOCUS Report Part II Lines 3a-3c.
\529\ See id.
\530\ See FINRA Form SSOI, Line 6.
\531\ See Part 1 of proposed Form SBS, Statement of Income
(Loss), Lines 6A-6C.
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Computation of Tangible Net Worth
Proposed Rule 18a-2 would require stand-alone MSBSPs to maintain
positive tangible net worth.\532\ Under proposed Rule 18a-2, tangible
net worth would be defined to mean the MSBSP's net worth, as determined
in accordance with GAAP in the U.S., excluding goodwill and other
intangible assets.\533\ Part 1 of proposed Form SBS has a computation
of tangible net worth section that would need to be completed by an
MSBSP.\534\ In separate lines, the MSBSP would enter: (1) Total
ownership equity; and (2) goodwill and other intangible assets.\535\
The difference between those two line items would be entered in a third
line to indicate the MSBSP's tangible net worth.\536\
---------------------------------------------------------------------------
\532\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257.
\533\ See id.
\534\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth.
\535\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth, Lines 1 and 2.
\536\ See Part 1 of proposed Form SBS, Computation of Tangible
Net Worth, Line 3.
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Reserve Account Computation Under Proposed Rule 18a-4
Proposed Rule 18a-4 would require an SBSD, among other things, to
maintain a security-based swap customer reserve account at a bank
separate from any other bank account of the SBSD.\537\ Further,
proposed Rule 18a-4 would provide that the SBSD must at all times
maintain in the security-based swap customer reserve bank account cash
and/or qualified securities in amounts computed daily in accordance
with a formula set forth in Exhibit A to proposed Rule 18a-4.\538\ The
formula in Exhibit A to proposed Rule 18a-4 is modeled closely on the
formula in Exhibit A to Rule 15c3-3.\539\ Consequently, the steps
necessary to compute the reserve account deposit requirement under
proposed Rule 18a-4 are, for the most part, the same steps necessary to
compute the reserve account deposit requirement under Rule 15c3-3.
---------------------------------------------------------------------------
\537\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287. As noted above, broker-dealer SBSDs and broker-dealer
MSBSPs would be subject to Rule 15c3-3 with respect to customers
that are not security-based swap customers and, in the case of a
broker-dealer SBSD, Rule 18a-4 with respect to security-based swap
customers. Proposed Rule 18a-4 would provide that the SBSD must at
all times maintain in the security-based swap customer reserve
account cash and/or qualified securities in amounts computed daily
in accordance with Exhibit A to proposed Rule 18a-4.
\538\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287.
\539\ See id.
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Part 1 of proposed Form SBS has a section on which a broker-dealer
SBSD or stand-alone SBSD would provide a computation of the deposit
requirement for the security-based swap customer reserve account.\540\
The section is modeled on the sections in the FOCUS Report Part II and
Part II CSE on which broker-dealers provide a computation of the
reserve account deposit requirement under Rule 15c3-3.\541\ The
computation section on proposed Form SBS has two line items that are
not on the FOCUS Report Part II CSE or Part II section to account for
two additional debit items
[[Page 25231]]
that are part of the formula in Appendix A to proposed Rule 18a-4.\542\
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\540\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A. Part 2 of proposed Form SBS has an identical
section that a bank SBSD would complete.
\541\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with FOCUS Report Part II CSE, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3, and FOCUS Report Part II, Computation for the Determination
of Reserve Requirements for Broker-Dealers under Rule 15c3-3.
\542\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, Lines 17 and 18. The line items on these lines
require the entry of the amount of margin required and on deposit
related to cleared and non-cleared security-based swaps. See also
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70282-70287.
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Information for Possession or Control Requirements Under Proposed Rule
18a-4
Proposed Rule 18a-4 would require an SBSD to promptly obtain and
thereafter maintain physical possession or control of all excess
securities collateral carried for the accounts of security-based swap
customers.\543\ Part 1 of proposed Form SBS has a section on which a
broker-dealer SBSD or a stand-alone SBSD would enter information
related to the possession or control requirements of Rule 18a-4.\544\
The section is modeled on the sections in the FOCUS Report Part II and
Part II CSE on which broker-dealers report information related to the
possession or control requirements of Rule 15c3-3.\545\
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\543\ Under proposed Rule 18a-4, the term excess securities
collateral would be defined to mean securities and money market
instruments carried for the account of a security-based swap
customer that have a market value in excess of the current exposure
of the SBSD to the customer, excluding, under certain specified
conditions, securities or money market instruments used to meet a
margin requirement of a registered security-based swap clearing
agency or of another SBSD. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70279. The term security-based swap customer would be defined
to mean any person from whom or on whose behalf the SBSD has
received or acquired or holds funds or other property for the
account of the person with respect to a cleared or non-cleared
security-based swap transaction. See id. at 70278. The definition
would exclude a person to the extent that person has a claim for
funds or other property which by contract, agreement or
understanding, or by operation of law, is part of the capital of the
SBSD or is subordinated to all claims of security-based swap
customers of the SBSD. See id.
\544\ See Part 1 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4. Part 2 of
proposed Form SBS has an identical section that a bank SBSD would
complete.
\545\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with FOCUS Report Part II CSE, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3, and FOCUS Report Part II, Computation for the Determination
of Reserve Requirements for Broker-Dealers under Rule 15c3-3.
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ii. Part 2 of Proposed Form SBS
As discussed above, the proposed reporting requirements for bank
SBSDs and bank MSBSPs generally are designed to be tailored
specifically to their activities as an SBSD or an MSBSP. However, in
order to be able to monitor the financial condition of bank SBSDs and
bank MSBSPs, the Commission is proposing a limited program of reporting
certain general financial information by these registrants, which is
based on the reporting requirements of the prudential regulators.
Specifically, banks are required to file quarterly reports on FFIEC
Form 031.\546\ Like the FOCUS Report, FFIEC Form 031 elicits financial
and operational information about a bank, which is entered into
uniquely numbered line items. Part 2 of proposed Form SBS would require
a bank SBSD or a bank MSBSP to report certain of the information
reported on FFIEC Form 031.\547\ Specifically, Part 2 has: (1) A
balance sheet section that largely mirrors Schedule RC to FFIEC Form
031; (2) a statement of regulatory capital section that is a scaled
down version of Schedule RC-R to FFIEC Form 031; and (3) an income
statement section that is a scaled down version of Schedule RI to FFIEC
Form 031. Line items on proposed Form SBS that correspond to line items
on FFIEC Form 031 would require the entry of the same type of
information.\548\
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\546\ See 12 U.S.C. 161; 12 U.S.C. 324; 12 U.S.C. 1464; and 12
U.S.C. 1817. FFIEC Form 031 is available at http://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201303_f.pdf.
\547\ Obtaining a bank's FFIEC Form 031 information through Form
SBS will allow Commission staff to easily and efficiently retrieve
and transfer the information into a database where values can be
compared over time and with other firms. For example, broker-dealers
submit FOCUS Reports electronically to FINRA through a user-
interactive portal known as ``eFOCUS.'' This allows FINRA and
Commission staff to easily and efficiently retrieve firm-specific
data as well as aggregate data across firms.
\548\ The identifying number of each Line Item on proposed Form
SBS shares the same first four characters as the corresponding Line
Item on FFIEC Form 031. However, the Form SBS line items end with an
additional ``b'' character. For example, Line Item 0081 on FFIEC
Form 031 is Line Item 0081b on proposed Form SBS. The additional
``b'' accounts for the fact that some of the line items on FFIEC
Form 031 have the same unique numbers as line items on the FOCUS
Report.
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Part 2 of proposed Form SBS also has sections for: (1) A reserve
account computation under proposed Rule 18a-4; and (2) information for
possession or control requirements under proposed Rule 18a-4. The
sections of Part 2 are discussed below.
Balance Sheet
A bank must report detail about its assets, liabilities, and equity
capital on Schedule RC to FFIEC Form 031.\549\ Schedule RC also has a
``Memoranda'' section that elicits information about the bank's
external auditors and fiscal year end date.\550\ Bank SBSDs and bank
MSBSPs would be required to report detail about their assets,
liabilities, and equity capital on a balance sheet section on Part 2 of
proposed Form SBS.\551\ The balance sheet section would have the same
line items as Schedule RC to FFIEC Form 031, except it would not
include line items from the ``Memoranda'' section.\552\ Consequently,
bank SBSDs and bank MSBSPs would be required to report in proposed Form
SBS the same information about assets, liabilities, and equity capital
that they report in Schedule RC (excluding the Memoranda information).
---------------------------------------------------------------------------
\549\ See FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-
29.
\550\ See FFIEC Form 031, Schedule RC, Balance Sheet, Memoranda,
Lines 1-2.
\551\ See Part 2 of proposed Form SBS, Balance Sheet
(Information As Reported On FFIEC Form 031--Schedule RC), Lines 1-
29.
\552\ Compare Part 2 of proposed Form SBS, Balance Sheet
(Information As Reported On FFIEC Form 031--Schedule RC), Lines 1-
29, with FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-29.
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Regulatory Capital
A bank must report detail about its regulatory capital on Schedule
RC-R to FFIEC Form 031.\553\ Schedule RC-R also has a ``Memoranda''
section that elicits detail about derivatives.\554\ The information
elicited on Schedule RC-R is designed to facilitate an analysis of the
bank's regulatory capital. As discussed above in section II.A.1. of
this release, the prudential regulators are responsible for
administering capital requirements for bank SBSDs and bank MSBSPs.\555\
The prudential regulators have proposed capital rules that would
require a bank SBSD or bank MSBSP to comply with the capital rules
applicable to banks.\556\
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\553\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Lines 1-62.
\554\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Memoranda, Lines 1-2.
\555\ See 15 U.S.C. 78o-10(e)(2).
\556\ See Margin and Capital Requirements for Covered Swap
Entities, 76 FR 27564.
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Bank SBSDs and bank MSBSPs would be required to report detail about
their regulatory capital on a section on Part 2 of proposed Form
SBS.\557\ The regulatory capital section would include certain--but not
all--of the line items on Schedule RC-R.\558\ The included line items
require a bank to enter total amounts of the components of bank
regulatory capital (e.g., total Tier 1, Tier 2, or Tier 3 capital) and
other summary
[[Page 25232]]
measures. The objective is to require high level reporting of key
elements of the regulatory capital of a bank SBSD or bank MSBSP to
obtain a profile of the firm's regulatory capital position. Thus, the
information elicited in Part 2 of proposed Form SBS would not involve
the level of detail required by the prudential regulators on Schedule
RC-R.
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\557\ See Part 2 of Proposed Form SBS, Regulatory Capital
(Information As Reported On FFIEC Form 031--Schedule RC-R), Lines 1-
10.
\558\ See Line Items 3210, 8274, 5311, 1395, 3792, A223, L138,
7204, 7206, 7205, 7273, 7274, and 7275 of FFIEC Form 031 and
proposed Form SBS.
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Income Statement
A bank must report detail about its income (loss) and expenses on
Schedule RI to FFIEC Form 031.\559\ Schedule RI also has a
``Memoranda'' section that elicits further detail about income
(loss).\560\ Bank SBSDs and bank MSBSPs would be required to report
detail about their income (loss) and expenses on an income section on
Part 2 of proposed Form SBS.\561\ However, the level of detail would be
significantly less than is required in Schedule RI. Specifically, to
focus the reporting on summary information and information relevant to
securities and derivatives activities, the income section only includes
line items from Schedule RI that require the entry of: (1) Total
amounts for categories of income, expense, and loss; \562\ (2) detail
about gains and losses on securities positions; \563\ (3) detail about
trading revenues; \564\ and (4) detail about gains and losses on
derivatives.\565\
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\559\ See FFIEC Form 031, Schedule RI, Income Statement, Lines
1-14.
\560\ See FFIEC Form 031, Schedule RI, Income Statement,
Memoranda, Lines 1-14.
\561\ See Part 2 of Proposed Form SBS, Income Statement
(Information As Reported On FFIEC Form 031--Schedule RI), Lines 1-
11.
\562\ See Line Items 4107, 4073, 4079, 4093, 4301, and 4340 of
FFIEC Form 031 and proposed Form SBS.
\563\ See Line Items 3521 and 3196 of FFIEC Form 031 and
proposed Form SBS.
\564\ See Line Items 8757, 8758, 8759, 8760, F186, K090, and
K094 of FFIEC Form 031 and proposed Form SBS.
\565\ See Line Items C889, C890, and A251 of FFIEC Form 031 and
proposed Form SBS.
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Reserve Account Computation Under Proposed Rule 18a-4
As discussed above, Part 1 of proposed Form SBS has a section on
which a broker-dealer SBSD or stand-alone SBSD would provide a
computation of the deposit requirement for the security-based swap
customer reserve account.\566\ This section is modeled on the sections
of the FOCUS Report Part II and Part II CSE on which broker-dealers
provide a computation of the customer reserve account deposit
requirement under Rule 15c3-3.\567\ Part 2 of proposed Form SBS has an
identical section that would be completed by a bank SBSD.\568\
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\566\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A.
\567\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with the FOCUS Report Part II CSE, Computation for
the Determination of Reserve Requirements for Broker-Dealers under
Rule 15c3-3 and the FOCUS Report Part II, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3.
\568\ See Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A.
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Information for Possession or Control Requirements Under Proposed Rule
18a-4
As discussed above, Part 1 of proposed Form SBS has a section on
which a broker-dealer SBSD or a stand-alone SBSD would enter
information related to the possession or control requirements of Rule
18a-4.\569\ The section is modeled on the sections of the FOCUS Report
Part II and Part II CSE on which broker-dealers provide information
related to the possession or control requirements of Rule 15c3-3.\570\
Part 2 of proposed Form SBS has an identical section that would be
completed by a bank SBSD.\571\
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\569\ See Part 1 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4.
\570\ Compare Part 1 of proposed Form SBS, Computation for
Determination of the Amount to be Maintained in the Special Account
for the Exclusive Benefit of Security-Based Swap Customers--Rule
18a-4, Exhibit A, with the FOCUS Report Part II CSE, Computation for
the Determination of Reserve Requirements for Broker-Dealers under
Rule 15c3-3 and the FOCUS Report Part II, Computation for the
Determination of Reserve Requirements for Broker-Dealers under Rule
15c3-3.
\571\ See Part 2 of proposed Form SBS, Information for
Possession or Control Requirements under Rule 18a-4.
---------------------------------------------------------------------------
iii. Part 3 of Proposed Form SBS
FCMs are required to periodically file with the CFTC and their
designated SRO Form 1-FR-FCM.\572\ Like the FOCUS Report and FFIEC Form
031, Form 1-FR-FCM elicits financial and operational information about
an FCM, which is entered into uniquely numbered line items. To account
for ANC broker-dealers that are dually registered as FCMs, the FOCUS
Report Part II CSE incorporates, substantially in the same format, the
following from Form 1-FR FCM: \573\ (1) A section to show a statement
of segregation requirements and funds in segregation for customers
trading on U.S. commodity exchanges; \574\ (2) a section to show a
statement of segregation requirements and funds in segregation for
customers' dealer options account; \575\ (3) a section to show a
summary statement of secured amounts and funds held in separate
accounts for foreign futures and foreign options customers pursuant to
CFTC Regulation 30.7; \576\ (4) a section to show a
[[Page 25233]]
statement of secured amounts and funds held in separate accounts for
foreign futures and foreign options customers pursuant to CFTC
Regulation 30.7; \577\ and (5) a section to show a computation of the
firm's minimum capital requirement.\578\ An ANC broker-dealer dually
registered as an FCM can file the FOCUS Report Part II CSE rather than
Form 1-FR-FCM.\579\
---------------------------------------------------------------------------
\572\ See 17 CFR 1.10. See also Form 1-FR-FCM, available at
http://www.nfa.futures.org/NFA-registration/templates-and-forms/form1FR-fcm.HTML.
\573\ The FOCUS Report Part II CSE assigns different numbers to
the line items.
\574\ See FOCUS Report Part II CSE, Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges, Lines 1-14. Section 4d of the CEA requires each
FCM to segregate from its own assets all money, securities and other
property deposited by futures customers to margin, secure, or
guarantee futures contracts and options on futures contracts traded
on designated contract markets. It further requires an FCM to treat
and deal with futures customer funds as belonging to the futures
customer, and prohibits an FCM from using the funds deposited by the
futures customer to margin or extend credit to any person other than
the futures customer that deposited the funds. 7 U.S.C. 6d. The CFTC
has adopted Rules 1.20 through 1.30 to implement section 4d. See 17
CFR 1.20 through 1.30. The Statement of Segregation Requirements and
Funds in Segregation for Customers Trading on U.S. Commodity
Exchanges generally indicates the total amount of funds held by the
FCM in segregated accounts, the total amount of funds that the FCM
must hold in segregated accounts to meet its regulatory obligations
to futures customers, and whether the firm holds excess segregated
funds in the segregated accounts as of the reporting date.
\575\ See FOCUS Report Part II CSE, Statement of Segregation
Requirements and Funds in Segregation for Customers' Dealer Options
Accounts, Lines 1-3. Rule 1.32 requires an FCM to prepare a daily
computation which shows: (1) The amount of funds that an FCM is
required to segregate for customers who are trading on U.S.
commodity exchanges pursuant to the CEA and CFTC rules; (2) the
amount of funds the FCM actually has in segregated accounts; and (3)
the amount, if any, of the FCM's residual interest in the customer
funds segregated. See 17 CFR 1.32.
\576\ See FOCUS Report Part II CSE, Statement of Secured Amounts
and Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to Commission Regulation 30.7, Foreign
Futures and Foreign Options Secured Amount: Summary, Lines I-II, 1-
3. Section 4(b) of the CEA provides that the CFTC may adopt rules
and regulations proscribing fraud and requiring minimum financial
standards, the disclosure of risk, the filing of reports, the
keeping of books and records, the safeguarding of the funds
deposited by persons for trading on foreign markets, and
registration with the CFTC by any person located in the U.S. who
engages in the offer or sale of any contract of sale of a commodity
for future delivery that is made subject to the rules of a board of
trade located outside of the U.S. See 7 U.S.C. 6. Pursuant to
section 4(b), the CFTC adopted Part 30 of its regulations to address
foreign futures and foreign option transactions. See 17 CFR 30.1
through 30.13. Rule 30.7 provides that an FCM may deposit the funds
belonging to foreign futures or foreign options customer in an
account or accounts maintained at a bank or trust company located in
the U.S., a bank or trust company located outside the U.S. that has
in excess of $1 billion of regulatory capital, an FCM registered
with the CFTC, a derivatives clearing organization, a member of a
foreign board of trade, a foreign clearing organization, or a
depository selected by the member of a foreign board of trade or
foreign clearing organization. See 17 CFR 30.7.
\577\ See FOCUS Report Part II CSE, Statement of Secured Amounts
and Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to Commission Regulation 30.7, Funds
Deposited In Separate 17 CFR Sec. 30.7 Accounts, Lines 1-8. This
statement generally indicates the total amount of funds held by the
FCM in secured accounts, the total amount of funds that the FCM must
hold in secured accounts to meet its regulatory obligations to
foreign futures or foreign options customers, and whether the firm
holds excess secured funds in the secured accounts as of the
reporting date.
\578\ See FOCUS Report Part II CSE, Computation of CFTC Minimum
Net Capital Requirement, Lines A-C. A broker-dealer dually
registered as an FCM is required to maintain net capital in an
amount at least equal to the greater of: (1) The minimum amount
required of a broker-dealer under Rule 15c3-1; and (2) the minimum
amount required of an FCM under CFTC Rule 1.17. See 17 CFR 1.17; 17
CFR 240.15c3-1.
\579\ See 17 CFR 1.10(h) (allowing broker-dealers to file the
FOCUS Report instead of Form 1-FR-FCM so long as all information
required to be furnished on and submitted with Form 1-FR-FCM is
provided with the FOCUS Report). See also instructions to Form 1-FR-
FCM, available at http://www.cftc.gov/ucm/groups/public/@iointermediaries/documents/file/1fr-fcminstructions.pdf; Enhancing
Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 FR
68506, 68513 (Nov. 14, 2013).
---------------------------------------------------------------------------
The CFTC recently adopted amendments to Form 1-FR-FCM that change
the format of the sections identified in items (1), (3), and (4) above
to enhance customer protections, risk management programs, internal
monitoring and controls, capital and liquidity standards, customer
disclosures, and auditing and examination programs for FCMs.\580\ The
format of these sections in proposed Form SBS are substantively the
same as the format of these recently amended sections of Form 1-FR-
FCM.\581\
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\580\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68512.
\581\ One of the objectives of including the Form 1-FR-FCM
sections in proposed Form SBS is to permit a filer that is dually
registered as an FCM to be able to use proposed Form SBS to comply
with reporting requirements of the CFTC, subject to approval by the
CFTC. This objective could be defeated if the format of the sections
on proposed Form SBS is substantively different than the format of
the sections on Form 1-FR-FCM. See 17 CFR 1.10(h) (allowing broker-
dealers to file the FOCUS Report instead of Form 1-FR-FCM so long as
all information required to be furnished on and submitted with Form
1-FR-FCM is provided with the FOCUS Report).
---------------------------------------------------------------------------
In addition, the CFTC adopted a new section for Form 1-FR-FCM that
requires an FCM to provide detail about segregation requirements and
funds in cleared swap customer accounts.\582\ This new section is
comparable to the section on which an FCM provides a Statement of
Segregation Requirements and Funds in Segregation for Customers Trading
on U.S. Commodity Exchanges.\583\ The purpose of the new section is to
provide an FCM that carries accounts for customers that maintain
cleared swap positions with a means to document and to demonstrate its
compliance with its obligation to treat, and deal with all money,
securities, and property of any swap customer received to margin,
guarantee, or secure a swap cleared by or through a derivatives
clearing organization (including money, securities, or property
accruing to swap customers as the result of such a swap) as belonging
to the FCM's swap customers as required by section 4d of the CEA.\584\
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\582\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68514.
\583\ See Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68513.
\584\ See id. at 68507. See also 7 U.S.C. 6d.
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Consistent with the CFTC's recent amendment, proposed Form SBS
would include a section requiring an FCM filer to report detail about
segregation requirements and funds in cleared swap customer
accounts.\585\ The format of the section mirrors the format of the
section adopted by the CFTC to be included on Form 1-FR-FCM.
---------------------------------------------------------------------------
\585\ See Part 3 of proposed Form SBS, Statement of Cleared
Swaps Customer Segregation Requirements and Funds in Cleared Swaps
Customer Accounts under Section 4D(F) of the Commodity Exchange Act,
Lines 1-16.
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iv. Part 4 of Proposed Form SBS
Part 4 of proposed Form SBS would apply to nonbank SBSDs and
nonbank MSBSPs. Part 4 consists of four schedules that elicit detailed
information about a firm's security-based swap and swap positions,
counterparties, and exposures. As discussed below, certain of the
schedules are modeled on schedules to the FOCUS Report.
The schedules in Part 4 of proposed Form SBS would require filers
to report information relating to their exposures resulting from over-
the-counter derivatives exposures (including exposures relating to
security-based swaps and swaps). The instructions to proposed Form SBS
would define terms that are used to indicate the type of information to
be entered about the exposures. Specifically, the terms are: (1) Gross
replacement value also referred to as gross replacement value--
receivable; \586\ (2) gross replacement value--payable; \587\ (3) net
replacement value; \588\ (4) current net exposure; \589\
[[Page 25234]]
(5) total exposure; \590\ and (6) margin collected.\591\
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\586\ The instructions to proposed Form SBS would define the
terms gross replacement value and gross replacement value--
receivable as the amount that would need to be paid to enter into
identical contracts with respect to derivatives positions that have
a positive mark-to-market value to the firm (i.e., are receivable
positions of the firm), without applying any netting or collateral.
See the Definitions section of the instructions to proposed Form
SBS. Applicable netting and collateral rules would include Appendix
E to Rule 15c3-1 that prescribes, and proposed Rule 18a-1 that would
prescribe, requirements for when netting agreements and collateral
can be taken into account for purposes of calculating credit risk
charges as part of computing net capital. See 17 CFR 240.15c3-
1e(c)(4)(iv) and (v); Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70240-70245. In addition, proposed Rule 18a-3 would prescribe when
netting agreements and collateral can be taken into account for
purposes calculating margin requirements for non-cleared security-
based swaps. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70260-70265. The CFTC also has requirements for netting agreements
and collateral for the purposes of the proposed capital requirements
for swap dealers and major swap participants. See Enhancing
Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 FR
68506. Similarly, the prudential regulators have proposed
requirements for netting agreements and collateral for the purposes
of their proposed capital and margin requirements for bank SBSDs,
bank MSBSPs, bank swap dealers, and bank major swap participants.
See Margin and Capital Requirements for Covered Swap Entities, 76 FR
27564.
\587\ The instructions to proposed Form SBS would define the
term gross replacement value--payable as the amount that would need
to be paid to enter into identical contracts with respect to
derivatives positions that have a negative mark-to-market value to
the firm (i.e., are payable positions of the firm), without applying
any netting or collateral. See the Definitions section of the
instructions to proposed Form SBS.
\588\ The instructions to proposed Form SBS would define the
term net replacement value as the amount of the ``gross replacement
value--receivable'' minus the amount of the ``gross replacement
value--payable'' that may be netted for each counterparty in
accordance with applicable rules. See the Definitions section of the
instructions to proposed Form SBS.
\589\ The instructions to proposed Form SBS would define the
term current net exposure as the net replacement value minus the
fair market value of collateral collected that may be applied under
applicable rules (e.g., taking into account haircuts to the fair
market value of the collateral required under applicable rules). See
the Definitions section of the instructions to proposed Form SBS.
\590\ The instructions to proposed Form SBS would define the
term total exposure as the sum of the following (as applicable): (1)
The current net exposure; (2) the amount of initial margin for
cleared security-based swaps and swaps required by a clearing agency
or derivatives clearing organization (regardless of whether the
margin has been collected); (3) the margin amount for uncleared
security-based swaps calculated under paragraph (c) of proposed Rule
18a-3; (4) the initial margin for non-cleared swaps calculated under
the CFTC's rules (regardless of whether the margin has been
collected); and (5) maximum potential exposure as defined in 17 CFR
Sec. Sec. 240.15c3-1 or 18a-1, as applicable, for any over-the-
counter derivatives not included above. See the Definitions section
of the instructions to proposed Form SBS.
\591\ The instructions to proposed Form SBS would define the
term margin collected as the amount of initial margin collateral
collected that can be applied against the firm's total exposure
under applicable rules. See the Definitions section of the
instructions to proposed Form SBS.
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Schedule 1
ANC broker-dealers are required to complete a schedule on the FOCUS
Report Part II CSE to report the dollar amount of the aggregate long
and short positions in various categories of financial instruments held
by the firm.\592\ The categories include, for example, U.S. treasury
securities, foreign debt securities, foreign equity securities, and
corporate obligations. The schedule has a single line for
derivatives.\593\ Schedule 1 to Part 4 of proposed Form SBS has a
subsection that elicits the dollar amount of the aggregate long and
short positions in the same categories of non-derivative financial
instruments as the FOCUS Report Part II CSE section.\594\
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\592\ See FOCUS Report Part II CSE, Aggregate Securities and OTC
Derivatives Positions, Lines 1-15. OTC derivatives dealers are
required to provide similar information in a section on the FOCUS
Report Part IIB. See FOCUS Report Part IIB, Schedule VI, Aggregate
Securities and Commodities Positions, Lines 1-15.
\593\ See FOCUS Report Part II CSE, Aggregate Securities and OTC
Derivatives Positions, Line 11.
\594\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 1-18.
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Schedule 1 elicits more detail about security-based swap, mixed
swap, and swap positions than the parallel FOCUS Report Part II CSE
section.\595\ Specifically, it would require the filer to enter the
aggregate long and short positions for cleared and non-cleared: (1)
Debt security-based swaps (other than credit default swaps); (2) equity
security-based swaps, (3) credit default security-based swaps; and (4)
other security-based swaps.\596\ It further would require the same
information with respect to mixed swaps \597\ and the following
categories of swaps: (1) Interest rate swaps; (2) foreign exchange
swaps; (3) commodity swaps; (4) debt index swaps (other than credit
default swaps); (5) equity index swaps; (6) credit default swaps; and
(7) other swaps.\598\ The instructions to proposed Form SBS would
direct firms to report the month-end gross replacement value for
cleared and non-cleared receivables in the long column, and report the
month-end gross replacement value for cleared and non-cleared
receivables in the short column.\599\
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\595\ In addition to the differences discussed below, for
increased clarity, Line 2 of the proposed Form SBS schedule would
read ``U.S. government agency and U.S. government-sponsored
enterprises'' instead of ``U.S. government agency and government-
sponsored entities''. Compare FOCUS Report Part II CSE, Aggregate
Securities and OTC Derivatives Positions, Line 2 with Part 4 of
proposed Form SBS, Schedule 1, Aggregate Securities, Commodities,
and Swaps Positions, Line 2. Moreover, the proposed Form SBS
schedule would elicit detail with respect to two categories of U.S.
government agency securities and U.S. government sponsored
enterprise securities: debt securities and mortgage-backed
securities. Finally, for increased clarity, Line 17 would read
``Securities with no ready market'' instead of ``Investments with no
ready market''. Compare FOCUS Report Part II CSE, Aggregate
Securities and OTC Derivatives Positions, Line 13 with Part 4 of
proposed Form SBS, Schedule 1, Aggregate Securities, Commodities,
and Swaps Positions, Line 17. See also Letter from Howard Spindel,
Senior Managing Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA LLC to FINRA (Feb. 25,
2013), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/noticecomments/p213401.pdf (suggesting such a
modification).
\596\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 12A-12D.
\597\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Line 13.
\598\ See Part 4 of proposed Form SBS, Schedule 1, Aggregate
Securities, Commodities, and Swaps Positions, Lines 14A-14G.
\599\ See instructions to proposed Form SBS for Part 4, Schedule
1.
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Schedule 2
ANC broker-dealers are required to provide detail on Schedule III
to the FOCUS Report Part II CSE about the fifteen counterparties to
which they have the largest credit exposures in derivatives.\600\ The
FOCUS Report Part II CSE specifies that an ANC broker-dealer must
provide for each of the fifteen counterparties: (1) A counterparty
identifier; (2) the counterparty's country; (3) the counterparty's
industry segment; (4) the counterparty's credit rating; (5) the gross
replacement value of the receivables from and payables to the
counterparty; (6) the net replacement value of the transactions with
the counterparty; (7) the current net exposure to the counterparty; (8)
the total credit exposure to the counterparty; and (9) the aggregate
maximum potential exposure to the counterparty.\601\ It also requires
total amounts for items (5) through (9) above (i.e., the sum of the
amounts for the fifteen counterparties).\602\
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\600\ See FOCUS Report Part II CSE, Schedule III, Credit-
Concentration Report for Fifteen Largest Net Exposures in
Derivatives. OTC derivatives dealers are required to provide similar
information in a section on the FOCUS Report Part IIB. See FOCUS
Report Part IIB, Schedule I, Credit-Concentration Report for Twenty
Largest Current Net Exposures.
\601\ See FOCUS Report Part II CSE, Schedule III, Credit-
Concentration Report for Fifteen Largest Net Exposures in
Derivatives.
\602\ See FOCUS Report Part II CSE Line Items 7810, 7811, 7812,
7813, 7814, and 7815.
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Schedule 2 to Part 4 of proposed Form SBS has two tables that are
modeled on Schedule III to the FOCUS Report Part II CSE.\603\ The first
table would require a nonbank SBSD or a nonbank MSBSP to identify in
the first column the fifteen counterparties to which the firm has the
largest current net exposure in the order from the largest to the
smallest current net exposure.\604\ The second table would require the
filer to identify in the first column the fifteen counterparties to
which the firm as the largest total exposure in the order from the
largest to the smallest total exposure.\605\ For each counterparty, the
filer would need to enter into the tables the following information:
(1) The counterparty's unique identifier; (2) the counterparty's
internal credit rating assigned by the SBSD or MSBSP; (3) the amount of
the gross replacement value--receivables from the counterparty (gross
gain); (4) the amount of the gross replacement value--payables to the
counterparty (gross gain); (5) the amount of the net replacement value
of the derivatives positions with the counterparty; (6) the current net
exposure to the counterparty; (7) the total exposure to the
counterparty; and (8) the margin collected from the counterparty.\606\
For items (3) through (8) above, the filer also would be required to
provide the aggregate amounts for all counterparties
[[Page 25235]]
other than the fifteen specifically reported counterparties.
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\603\ Compare Part 4 of proposed Form SBS, Schedule 2, Credit
Concentration Report for Fifteen Largest Exposures in Derivatives,
with FOCUS Report Part II CSE, Schedule III, Credit-Concentration
Report for Fifteen Largest Net Exposures in Derivatives.
\604\ See Part 4 of proposed Form SBS, Schedule 2, Credit
Concentration Report for Fifteen Largest Exposures in Derivatives,
Table I.
\605\ See Part 4 of proposed Form SBS, Schedule 2, Credit
Concentration Report for Fifteen Largest Exposures in Derivatives,
Table II.
\606\ See Part 4 of proposed Form SBS, Schedule 2, Credit
Concentration Report for Fifteen Largest Exposures in Derivatives,
Tables I and II. The Commission is proposing to add a line item to
elicit the amount of margin collected from the counterparty in order
to provide a means to monitor how much of the exposure to the
counterparty is collateralized thereby mitigating the risk to the
firm of the counterparty's default.
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Schedule 3
ANC broker-dealers are required to provide detail on a table on
Schedule IV to the FOCUS Report Part II CSE about their aggregate
credit exposures to counterparties grouped by the internal credit
rating assigned by the ANC broker-dealer to the counterparty.\607\
Specifically, for each notch in the ANC broker-dealer's rating scale,
the firm must provide the following information aggregated across all
counterparties rated at that notch: (1) The current net exposure to the
counterparties; (2) the net replacement value of the transactions with
the counterparties; (3) the gross replacement value of the receivables
from and payables to the counterparties; and (4) the aggregate maximum
potential exposure to the counterparties.\608\ It also requires total
amounts for these items.\609\
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\607\ See FOCUS Report Part II CSE, Schedule IV, Portfolio
Summary of OTC Derivatives Exposures by Internal Credit Rating.
\608\ See id.
\609\ See FOCUS Report Part II CSE Line Items 7820, 7821, 7822,
7823, and 7824.
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Schedule 3 to Part 4 of proposed Form SBS has a table that is
modeled on Schedule IV to the FOCUS Report Part II CSE.\610\ This table
would require the filer to set forth its internal credit rating scale
in the left hand column.\611\ For each notch in the rating scale, the
filer would need to provide: (1) The amount of the gross replacement
value--receivables from the counterparties rated at that notch; (2) the
amount of the gross replacement value--payables to the counterparties
rated at that notch; (3) the amount of the net replacement value of the
derivatives positions with the counterparties rated at that notch; (4)
the current net exposure to the counterparties rated at that notch; (5)
the total exposure to the counterparties rated at that notch; and (6)
the margin collected from the counterparties rated at that notch.\612\
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\610\ See Part 4 of proposed Form SBS, Schedule 3, Portfolio
Summary of OTC Derivatives Exposures by Internal Credit Rating.
\611\ The instructions to proposed Form SBS would provide that
each category and notches within a category would constitute a
``notch'' in the rating scale. For example, the following symbols
would each represent a notch in the rating scale in descending
order: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-,
CCC+, CCC, CCC-, CC, C, and D.
\612\ See Part 4 of proposed Form SBS, Schedule 3, Portfolio
Summary of OTC Derivatives Exposures by Internal Credit Rating. As
noted above, the line item added to the schedule to elicit the
amount of margin collected from the counterparties is intended to
have a means to monitor how much of the exposure to the
counterparties is collateralized thereby mitigating the risk to the
firm of a counterparty's default.
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Schedule 4
ANC broker-dealers are required to provide detail on a table on
Schedule II to the FOCUS Report Part II CSE about their OTC derivatives
exposures grouped by country.\613\ Specifically, for each country, the
firm must provide the following information aggregated across all
counterparties located in that country and grouped by credit rating
category: (1) The current net exposure to the counterparties; (2) the
net replacement value of the transactions with the counterparties; and
(3) the gross replacement value of the receivables from and payables to
the counterparties.\614\ It also requires total amounts for these
items.\615\
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\613\ See FOCUS Report Part II CSE, Schedule II, Geographic
Distribution of OTC Derivatives Exposures for Ten Largest Countries.
OTC derivatives dealers are required to provide similar information
in a section on the FOCUS Report Part IIB. See FOCUS Report Part
IIB, Schedule III, Geographic Distribution of OTC Derivatives
Exposures.
\614\ See id.
\615\ See FOCUS Report Part II CSE Line Items 7901, 7902, 7903,
and 7904.
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Schedule 4 to Part 4 of proposed Form SBS has two tables that are
modeled on Schedule II to the FOCUS Report Part II CSE.\616\ The first
table would require the filer to identify in the left column the ten
largest countries in terms of the filer's aggregate current net
exposure to counterparties located in the country in the order from the
largest to the smallest current net exposure amounts.\617\ The second
table would require the filer to identify in the left column the ten
largest countries in terms of the filer's aggregate total exposure to
counterparties located in the country in the order from the largest to
the smallest total exposure amounts.\618\ For each country, the filer
would need to enter into the tables the following information: (1) The
amount of the gross replacement value--receivables from the
counterparties located in the country; (2) the amount of the gross
replacement value--payables to counterparties located in the country;
(3) the amount of the net replacement value of the derivatives
positions with the counterparties located in the country; (4) the
current net exposure to counterparties located in the country; (5) the
total exposure to counterparties located in the country; and (6) the
amount of margin collected from counterparties located in the
country.\619\
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\616\ See Part 4 of proposed Form SBS, Schedule 4, Geographic
Distribution of OTC Derivatives Exposures for Ten Largest Countries.
\617\ See Part 4 of proposed Form SBS, Schedule 4, Geographic
Distribution of OTC Derivatives Exposures for Ten Largest Countries,
Table I.
\618\ See Part 4 of proposed Form SBS, Schedule 4, Geographic
Distribution of OTC Derivatives Exposures for Ten Largest Countries,
Table II.
\619\ See Part 4 of proposed Form SBS, Schedule 4, Geographic
Distribution of OTC Derivatives Exposures for Ten Largest Countries,
Tables I and II. Requiring nonbank SBSDs and nonbank MSBSPs to
report their derivatives exposures by country allows Commission
staff to monitor firms with concentrated exposures to a particular
country, which can present risk if a localized event occurs (e.g., a
sovereign downgrade). As noted above, the line item added to the
schedule to elicit the amount of margin collected from the
counterparties is intended to provide a means to monitor how much of
the exposure to the counterparties is collateralized thereby
mitigating the risk to the firm of a counterparty's default.
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v. Part 5 of Proposed Form SBS
Part 5 of proposed Form SBS would apply to bank SBSDs and bank
MSBSPs. Part 5 consists of one schedule that is a truncated version of
Schedule 1 to Part 4 of proposed Form SBS.\620\ Specifically, Schedule
1 to Part 5 only would elicit detail about the filer's security-based
swap, mixed-swap, and swap positions. In particular, Schedule 1 to Part
5 would require the filer to report the aggregate long and short
positions for the following categories of cleared and non-cleared
security-based swaps: (1) Debt security-based swaps (other than credit
default swaps); (2) equity security-based swaps, (3) credit default
security-based swaps; and (4) other security-based swaps.\621\ It
further would require the same information with respect to mixed swaps
\622\ and the following categories of swaps: (1) Interest rate swaps;
(2) foreign exchange swaps; (3) commodity swaps; (4) debt index swaps
(other than credit default swaps); (5) equity index swaps; (6) credit
default swaps; and (7) other swaps.\623\
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\620\ See Part 5 of proposed Form SBS, Schedule 1, Aggregate
Security-Based Swap and Swaps Positions.
\621\ See Part 5 of proposed Form SBS, Schedule 1, Aggregate
Security-Based Swap and Swaps Positions, Lines 1A-1D.
\622\ See Part 5 of proposed Form SBS, Schedule 1, Aggregate
Security-Based Swap and Swaps Positions, Line 2.
\623\ See Part 5 of proposed Form SBS, Schedule 1, Aggregate
Security-Based Swap and Swaps Positions, Lines 3A-3G.
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Request for Comment
The Commission generally requests comment on proposed Form SBS. In
addition, the Commission requests comment, including empirical data in
support of comments, in response to the following questions:
1. As proposed, a broker-dealer that is not dually registered as an
SBSD or MSBSP would continue to file Part IIA, Part IIB, or Part II CSE
of the FOCUS Report, as applicable, whereas SBSDs and MSBSPs (including
broker-dealer SBSDs and broker-dealer MSBSPs)
[[Page 25236]]
would file Form SBS. As an alternative, all broker-dealers, SBSDs, and
MSBSPs could be required to file the same consolidated form--Form SBS,
which could be re-titled the ``FOCUS Report Part II'' or some similar
name. Under this alternative, broker-dealers not dually registered as
an SBSD or MSBSP (``stand-alone broker-dealers'') would complete Parts
1 and 4 of Form SBS (and would also complete Part 3 if they are dually
registered as an FCM). Should all broker-dealers, SBSDs, and MSBSPs
file the same consolidated form? Explain why or why not, and quantify
any estimated burdens associated with this alternative.
2. Does proposed Form SBS elicit the appropriate information for
the various types of registrants that would be required to complete and
file the form (e.g., stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
bank MSBSPs, broker-dealer SBSDs, and broker-dealer MSPSPs)? If not,
how should proposed Form SBS be modified to address the information
elicited from particular registrant(s)?
3. If stand-alone SBSDs and stand-alone MSBSPs are required to file
Form SBS with the Commission (instead of with the Commission's
designee), should the Commission require these firms to file Form SBS
electronically? Explain why or why not. If Form SBS should be filed
electronically, should it be filed using the Commission's EDGAR system,
as an Excel spreadsheet, as a delimiter separated value (DSV) file,
and/or using some other electronic format?
4. Are there any line items in proposed Form SBS that require
further clarification or instruction? If so, identify the applicable
line items and explain the needed clarification or instruction.
5. Proposed Form SBS consists of five parts. An SBSD or MSBSP would
need to complete: (1) Parts 1 and 4 of Form SBS if it is a stand-alone
SBSD, broker-dealer SBSD, stand-alone MSBSP, or broker-dealer MSBSP; or
(2) Parts 2 and 5 of Form SBS if it is a bank SBSD or bank MSBSP.
Should Parts 1 and 4 be consolidated into a single part? Should Parts 2
and 5 be consolidated into a single part? Explain why or why not.
6. Proposed Form SBS would include line items that are not on the
FOCUS Report or CFTC Form 1-FR-FCM. Is it inappropriate to include any
of these new line items on Form SBS? If so, identify the line item and
explain why it would not be appropriate to include it. Should any new
line items that are not currently included in proposed Form SBS be
added? If so, describe the new line item and where it should be
included on the form, provide accompanying instructions, and explain
why it should be included.
7. Are there any line items that should not be included on proposed
Form SBS because they are no longer relevant to broker-dealer
activities or would not be relevant to SBSD or MSBSP activities? For
example, are Line Items 150, 160, and 190 relevant to broker-dealer
activities? Similarly, is Note B to the Financial and Operational Data
section widely used? Explain why or why not. If a line item is not
relevant to broker-dealer activities, should the Commission remove it
from the FOCUS Report? Explain why or why not.
8. Should the Commission rely on the public call reports completed
by bank SBSDs and bank MSBSPs to gather the information necessary to
monitor the transactions, positions and financial condition of the bank
SBSDs and bank MSBSPs, instead of requiring such firms to complete and
file with the Commission Parts 2 and 5 of Form SBS? If so, explain why.
9. The instructions for proposed Form SBS define ``total exposure''
as the sum of several amounts, including ``[t]he amount of initial
margin for cleared security-based swaps and swaps required by a
clearing agency or derivatives clearing organization (regardless of
whether the margin has been collected).'' Should the definition of
``total exposure'' instead include the capital charge that would apply
to the positions under Rule 15c3-1 or proposed Rule 18a-1, as
applicable? Explain why or why not.
10. According to the proposed instructions for proposed Form SBS,
firms should report on Line Item 120 the market value of encumbered
securities that the firm transferred to a creditor and that the
creditor has the right to sell or re-pledge. Should this instruction
instead direct firms to report any encumbered security, whether or not
the creditor has the right to sell or re-pledge the collateral? If this
instruction should be changed, should the instructions for the FOCUS
Report relating to the corresponding line item also be changed? Explain
why or why not.
11. With respect to Line Items 190, 650, 660, and 900 of proposed
Form SBS, do broker-dealers continue to own exchange memberships as
assets? If so, are their values, relative to the rest of a broker-
dealer's assets, significant enough to continue collecting this
information as a separate line item? Explain why or why not.
12. Should broker-dealer MSBSPs be required to complete the section
entitled ``Computation of Tangible Net Worth'' in addition to the
sections relating to the computation of net capital and minimum net
capital requirement? Explain why or why not.
13. Schedule 1 of Part 4 and Schedule 1 of Part 5 of proposed Form
SBS request information about four categories of security-based swaps:
(1) Debt security-based swaps, (2) equity security-based swaps, (3)
credit default security-based swaps, and (4) other security-based
swaps. These schedules also request information about seven categories
of swaps: (1) Interest rate swaps, (2) foreign exchange swaps, (3)
commodity swaps, (4) debt index swaps, (5) equity index swaps, (6)
credit default swaps, and (7) other swaps. Should different categories
of security-based swaps and swaps be specified for purposes of the
Form? Explain why or why not. If different categories should be
specified, identify and define the alternative categories, and explain
why these alternative categories should be specified.
14. Are there terms used in proposed Form SBS and/or its
instructions that are not defined that should be defined? If so,
identify the term and describe how it should be defined. For example,
should the following terms in Schedule 1 of Part 4 and Schedule 1 of
Part 5 of proposed Form SBS be defined: (1) Debt security-based swap;
(2) equity security-based swap; (3) credit default security-based swap;
(4) interest rate swap; (5) foreign exchange swap; (6) commodity swap;
(7) debt index swap; (8) equity index swap; and/or (9) credit default
swap? If so, how should these terms be defined?
15. Are there reporting requirements currently not included in
these proposed rules that should be applied to ANC broker-dealer SBSDs?
If so, please describe them.
16. Are there additional requirements to promote the reporting of
composite security-based swap transactions into disaggregated data
based on risk? If so, please describe them.
3. Filing of Annual Audited Financial Reports and Other Reports
Rule 17a-5 generally requires a broker-dealer to, among other
things, annually file reports audited by a PCAOB-registered independent
public accountant, disclose certain financial information to customers,
and notify the Commission of a change of accountant.\624\ The rule also
requires the independent public accountant to notify the broker-dealer
if the accountant discovers an instance of non-compliance with certain
broker-dealer rules or an instance of material
[[Page 25237]]
weakness. As discussed above, the Commission is proposing to amend Rule
17a-5 to account for broker-dealers that are dually registered as SBSDs
or MSBSPs. The Commission also is proposing certain largely technical
amendments to Rule 17a-5. With respect to stand-alone SBSDs and stand-
alone MSBSPs, the Commission is proposing to include in new Rule 18a-7
many requirements that would parallel requirements in Rule 17a-5, as
proposed to be amended. However, proposed Rule 18a-7 does not include a
parallel requirement for every requirement in Rule 17a-5.\625\ Further,
the requirements in proposed Rule 18a-7, other than the requirement
discussed above in section II.B.2. of this release to periodically file
proposed Form SBS, would not apply to bank SBSDs and bank MSBSPs.
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\624\ See 17 CFR 240.17a-5.
\625\ The Commission is not proposing to include in proposed
Rule 18a-7 a requirement that is parallel to the Exemption Report
requirement in paragraph (d)(4) of Rule 17a-5, as proposed to be
amended, because all SBSDs would be subject to the segregation
requirements in proposed Rule 18a-4. Proposed Rule 18a-7 also would
not include requirements that parallel the requirements in
paragraphs (d)(6) and (e)(4) of Rule 17a-5, as proposed to be
amended, requiring broker-dealers to file certain reports with the
Securities Investor Protection Corporation (``SIPC'') because stand-
alone SBSDs and stand-alone MSBSPs would not be members of SIPC. In
addition, proposed Rule 18a-7 would not include a requirement that
parallels the requirement for a broker-dealer to file Form Custody
with the firm's DEA. Additional differences between proposed Rule
18-7 and Rule 17a-5, as proposed to be amended, are discussed below.
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a. Amendments to Rule 17a-5 and Proposed Rule 18a-7
Additional ANC Broker-Dealer Reports
Paragraph (a)(6) of Rule 17a-5 requires ANC broker-dealers to
periodically file certain reports with the Commission.\626\ The reports
contain information related to the ANC broker-dealer's use of internal
models to calculate market and credit risk charges when computing net
capital.\627\ Specifically, ANC broker-dealers must file on either a
monthly or quarterly basis the following reports:
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\626\ See 17 CFR 240.17a-5(a)(6).
\627\ See id.
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For each product for which the broker-dealer calculates a
deduction for market risk other than in accordance with paragraphs
(b)(1) or (b)(3) of Appendix E of Rule 15c3-1, the product category and
the amount of the deduction for market risk (monthly report);
A graph reflecting, for each business line, the daily
intra-month VaR (monthly report);
The aggregate VaR for the broker-dealer (monthly report);
For each product for which the broker-dealer uses scenario
analysis, the product category and the deduction for market risk
(monthly report);
Credit risk information on derivatives exposures,
including: (1) Overall current exposure; (2) current exposure
(including commitments) listed by counterparty for the 15 largest
exposures; (3) the 10 largest commitments listed by counterparty; (4)
the broker-dealer's maximum potential exposure listed by counterparty
for the fifteen largest exposures; (5) the broker-dealer's aggregate
maximum potential exposure; (6) a summary report reflecting the broker-
dealer's current and maximum potential exposures by credit rating
category; and (7) a summary report reflecting the broker-dealer's
current exposure for each of the top ten countries to which the broker-
dealer is exposed (by residence of the main operating group of the
counterparty) (monthly report);
Regular risk reports supplied to the broker-dealer's
senior management in the format described in the application (monthly
report);
A report identifying the number of business days for which
the actual daily net trading loss exceeded the corresponding daily VaR
(quarterly report); and
The results of backtesting of all internal models used to
compute allowable capital, including VaR and credit risk models,
indicating the number of backtesting exceptions (quarterly
report).\628\
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\628\ See id.
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The Commission uses these reports to monitor the financial
condition, internal risk management control system, and activities of
an ANC broker-dealer.\629\
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\629\ Alternative Net Capital Requirements for Broker-Dealers
That Are Part of Consolidated Supervised Entities, 69 FR 34449.
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As discussed above in section II.A.2.a. of this release, the
Commission has proposed amendments to Rule 15c3-1 that would establish
liquidity stress test requirements for ANC broker-dealers, which would
include ANC broker-dealer SBSDs.\630\ Further, the Commission has
proposed identical liquidity stress test requirements for stand-alone
ANC SBSDs as part of the capital requirements for SBSDs.\631\ Under the
proposed liquidity stress test requirements, ANC broker-dealers and
stand-alone ANC SBSDs would be required, among other things, to conduct
a liquidity stress test at least monthly that takes into account
certain assumed conditions lasting for 30 consecutive days.\632\ The
Commission is proposing to amend Rule 17a-5 to add a requirement that
an ANC broker-dealer must file a monthly report with the Commission
containing the results of the liquidity stress test.\633\
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\630\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
\631\ See id.
\632\ See id.
\633\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to be
amended.
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The Commission also proposes to include a parallel reporting
requirement in proposed Rule 18a-7 applicable to stand-alone ANC SBSDs
that is modeled on the reporting requirement in Rule 17a-5, as proposed
to be amended, applicable to ANC broker-dealers.\634\ Consequently,
stand-alone ANC SBSDs would be required to file the same types of
reports relating to their use of internal models and liquidity stress
tests as ANC broker-dealers, including ANC broker-dealer SBSDs.
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\634\ Compare paragraph (a)(5) of Rule 17a-5, as proposed to be
amended, with paragraph (a)(3) of proposed Rule 18a-7.
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Termination of Membership in an SRO
Paragraph (b) of Rule 17a-5 requires a broker-dealer to file with
the Commission the FOCUS Report Part II or Part IIA, as applicable,
within two business days after terminating its membership with a
national securities exchange or national securities association.\635\
The Commission is proposing to amend paragraph (b) of Rule 17a-5 to
provide that in either of these events the broker-dealer must file Part
II, Part IIA or proposed Form SBS.\636\ This change is designed to
account for broker-dealer SBSDs and broker-dealer MSBSPs, which, as
discussed above, would use proposed Form SBS instead of the FOCUS
Report Part II or Part IIA.
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\635\ See 17 CFR 240.17a-5(b).
\636\ See paragraph (b) of Rule 17a-5, as proposed to be amended
(emphasis added to highlight the modification). The Commission is
not proposing to include a parallel requirement in proposed Rule
18a-7 applicable to stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, or bank MSBSPs because such SBSDs and MSBSPs would not be
eligible for membership in a national securities exchange or
national securities association.
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Customer Statements
Paragraph (c) of Rule 17a-5 requires, among other things, that
certain broker-dealers annually send their customers audited statements
that must include, among other things: (1) A statement of financial
condition with appropriate notes; (2) a footnote containing a statement
of the amount of the firm's net capital and required net capital and
other information, if applicable, related
[[Page 25238]]
to the firm's net capital; \637\ and (3) if, in connection with the
most recent annual audit of the broker-dealer, the independent public
accountant identified one or more material weaknesses, a statement by
the broker-dealer that one or more material weaknesses have been
identified and that a copy of the report of the independent public
accountant is currently available for the customer's inspection.\638\
In addition, paragraph (c) requires these broker-dealers to send their
customers unaudited statements dated six months from the date of the
audited statements that contain: (1) A statement of financial condition
with appropriate notes; and (2) a footnote about the firm's net capital
as described above.\639\ Under paragraph (c)(5) of Rule 17a-5, a
broker-dealer is exempt from sending the statement of financial
condition to customers if the broker-dealer, among other things: (1)
Sends its customers semi-annually the statements described above
relating to the firm's net capital and, if applicable, the
identification of a material weakness; and (2) makes the statement of
financial condition described above available on the broker-dealer's
Web site home page and maintains a toll-free number that customers can
call to request a copy of the statement, which the broker-dealer must
send promptly to the customer at no charge.\640\
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\637\ The statement in the footnote must include summary
financial statements of the broker-dealer's subsidiaries
consolidated pursuant to Appendix C of Rule 15c3-1, where material,
and the effect thereof on the net capital and required net capital
of the broker-dealer. See 17 CFR 240.17a-5(c)(2)(ii). Appendix C to
Rule 15c3-1 requires a broker-dealer in computing its net capital
and aggregate indebtedness to consolidate in a single computation
assets and liabilities of any subsidiary or affiliate for which it
guarantees, endorses or assumes directly or indirectly obligations
or liabilities. See 17 CFR 240.15c3-1c. The assets and liabilities
of a subsidiary or affiliate whose liabilities and obligations have
not been guaranteed, endorsed, or assumed directly or indirectly by
the broker-dealer may also be consolidated. See id.
\638\ See 17 CFR 240.17a-5(c)(1) and (2). A material weakness is
discussed below in more detail.
\639\ See 17 CFR 240.17a-5(c)(3).
\640\ See 17 CFR 240.17a-5(c)(5).
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The Commission has stated that the information sent to a customer
about the broker-dealer is ``essential for a customer to have in order
to judge'' whether the broker-dealer is financially sound and able to
efficiently and safely handle securities transactions, monies and
securities.\641\ The Commission preliminarily believes that it is not
necessary to amend paragraph (c) of Rule 17a-5 to account for broker-
dealers that are dually registered as an SBSD or MSBSP. These
registrants will be required to send or disclose to their customers,
including security-based swap customers, the information currently
required to be sent or disclosed under paragraph (c).\642\
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\641\ See Reports to be Made by Certain Exchange Members,
Brokers, and Dealers and Related Audit Requirements of Form X-17A-5,
Exchange Act Release No. 9658 (June 30, 1972), 37 FR 14607, 14607
(July 21, 1972).
\642\ See the broad definition of customer in paragraph (c)(4)
of Rule 17a-5. See 17 CFR 240.17a-5(c)(4). As discussed below in
section II.B.3.b. of this release, the Commission is proposing
certain technical amendments to paragraph (c) of Rule 17a-5.
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However, the Commission is proposing to include a parallel customer
statement requirement in proposed Rule 18a-7 that is modeled on
paragraph (c) of Rule 17a-5.\643\ Proposed Rule 18a-7, however, would
require (rather than make optional) Web site disclosure of the mandated
information.\644\ Specifically, stand-alone SBSDs and stand-alone
MSBSPs would be required to disclose on their Internet Web sites an
audited statement of financial condition with appropriate notes within
ten business days after the date the firm is required to file its
audited annual reports with the Commission.\645\ Web site disclosure
generally provides customers with readily accessible information that
can be easily viewed at any time. Further, this form of disclosure
generally is less expensive and burdensome than other forms of
disclosure. Consequently, the Commission preliminarily anticipates that
firms would opt for Web site disclosure if given the choice.
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\643\ Compare 17 CFR 240.17a-5(c), with paragraph (b) of
proposed Rule 18a-7.
\644\ See paragraph (b) of proposed Rule 18a-7.
\645\ See paragraph (b)(1)(i) of proposed Rule 18a-7. As
discussed in more detail below, the Commission is proposing to
require nonbank SBSDs and nonbank MSBSPs to annually file audited
financial reports with the Commission that would need to include,
among other items, a statement of financial condition. Under
paragraph (c)(2) of Rule 17a-5, a broker-dealer's audited statements
must be sent to customers within 105 calendar days of the date of
the broker-dealer's audited annual reports. See 17 CFR 240.17a-
5(c)(2). Further, the broker-dealer's audited annual reports must be
filed with the Commission within 60 calendar days after the end of
the broker-dealer's fiscal year. See 17 CFR 240.17a-5(d)(5).
Consequently, the broker-dealer has 45 calendar days after filing
the audited annual reports with the Commission to send the audited
financial statements to customers. The Commission is proposing a
shorter timeframe (10 business days) in proposed Rule 18a-7 to make
the web-based disclosures after filing the audited annual reports
with the Commission because posting this information to the internet
should take substantially less time than preparing mailings to be
sent to all customers.
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In addition to the audited statement of financial condition with
appropriate notes, a stand-alone SBSD would be required to disclose on
its Internet Web site at the same time: (1) A statement of the amount
of the firm's net capital and required net capital and other
information, if applicable, related to the firm's net capital; \646\
and (2) if, in connection with the firm's most recent annual reports,
the report of the independent public accountant identifies one or more
material weaknesses, a copy of the report.\647\ Further, stand-alone
SBSDs and stand-alone MSBSPs also would be required to disclose on
their Web sites an unaudited statement of financial condition as of a
date that is six months after the date of the most recent audited
annual reports and the other information discussed above.\648\ This
disclosure would need to be made within 30 calendar days of the date of
the unaudited statement of financial condition.\649\ Finally, stand-
alone SBSDs and stand-alone MSBSPs would be required to make the
information required to be disclosed to customers on their Web sites
under paragraph (b) of proposed Rule 18a-7 available in writing upon
request of the customer and maintain a toll-free number to receive such
requests.\650\
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\646\ The statement would need to include summary financial
statements of the broker-dealer's subsidiaries consolidated pursuant
to Appendix C of Rule 15c3-1, where material, and the effect thereof
on the net capital and required net capital of the SBSD. See
paragraph (b)(1)(ii) of proposed Rule 18a-7.
\647\ See paragraph (b)(1)(iii) of proposed Rule 18a-7.
\648\ See paragraph (b)(2) of proposed Rule 18a-7.
\649\ The Commission is proposing a shorter time period (30
calendar days after the date of the unaudited financial statement as
opposed to 65 calendar days) for the web-based disclosure of the
unaudited financial statements and other statements, because, as
discussed above, posting this information on a Web site should take
less time than mailing documents. Compare paragraph (b)(2) of
proposed Rule 18a-7, with 17 CFR 240.17a-5(c)(3).
\650\ See paragraph (b)(3) of proposed Rule 18a-7. While bank
SBSDs and bank MSBSPs would not be subject to paragraph (b) of
proposed Rule 18a-7, bank call reports are available at: http://www2.fdic.gov/Call_TFR_Rpts/. See 12 CFR 261.10(d)(3) and (4); 12
CFR 304.2; 12 CFR Pt. 3, Appendix C.
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Annual Reports
Under the recent amendments to Rule 17a-5, paragraph (d) of the
rule requires broker-dealers, among other things, to file with the
Commission each year annual reports consisting of a financial report
and either a compliance report or an exemption report, as well as
reports that are prepared by an independent public accountant
registered with the PCAOB covering the financial report and the
compliance report or the exemption report in accordance with standards
of the PCAOB.\651\ The financial report must contain financial
[[Page 25239]]
statements, including, among others, a statement of financial
condition, a statement of income, and a statement of cash flows.\652\
The financial report also must contain, as applicable, supporting
schedules consisting of a computation of net capital under Rule 15c3-1,
a computation of the reserve requirements under Rule 15c3-3, and
information relating to the possession or control requirements under
Rule 15c3-3.\653\
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\651\ See 17 CFR 240.17a-5(d). See also Broker-Dealer Reports,
78 FR 51910 (setting forth the effective dates for the amendments).
\652\ See 17 CFR 240.17a-5(d)(2)(i).
\653\ See 17 CFR 240.17a-5(d)(2)(ii).
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A broker-dealer that does not claim it was exempt from Rule 15c3-3
throughout the most recent fiscal year must file the compliance report,
and a broker-dealer that does claim it was exempt from Rule 15c3-3
throughout the most recent fiscal year must file the exemption
report.\654\ The compliance report must contain statements as to
whether: (1) The broker-dealer has established and maintained Internal
Control Over Compliance (a defined term); (2) the Internal Control Over
Compliance of the broker-dealer was effective during the most recent
fiscal year; (3) the Internal Control Over Compliance of the broker-
dealer was effective as of the end of the most recent fiscal year; (4)
the broker-dealer was in compliance with Rule 15c3-1 and paragraph (e)
of Rule 15c3-3 as of the end of the most recent fiscal year; and (5)
the information the broker-dealer used to state whether it was in
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 was
derived from the books and records of the broker-dealer.\655\ Further,
if applicable, the compliance report must contain a description of: (1)
Each identified material weakness (a defined term) in the Internal
Control Over Compliance during the most recent fiscal year; and (2)
each instance of non-compliance with Rule 15c3-1 or paragraph (e) of
Rule 15c3-3 as of the end of the most recent fiscal year.\656\ The
exemption report must contain the following statements made to the best
knowledge and belief of the broker-dealer: (1) A statement that
identifies the provisions in paragraph (k) of Rule 15c3-3 under which
the broker-dealer claimed an exemption from Rule 15c3-3; (2) a
statement that the broker-dealer met the identified exemption
provisions without exception or that it met the identified exemption
provisions throughout the most recent fiscal year except as described
in the exemption report; and (3) if applicable, a statement that
identifies each exception during the most recent fiscal year in meeting
the exemption provisions and that briefly describes the nature of each
exception and the approximate date(s) on which the exception
existed.\657\
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\654\ See 17 CFR 240.17a-5(d)(1)(i)(B)(1) and (2).
\655\ See 17 CFR 240.17a-5(d)(3)(i)(A). The term Internal
Control Over Compliance means internal controls that have the
objective of providing the broker-dealer with reasonable assurance
that non-compliance with Rule 15c3-1, Rule 15c3-3, Rule 17a-13, or
any rule of the DEA of the broker-dealer that requires account
statements to be sent to the customers of the broker-dealer (an
``Account Statement Rule'') will be prevented or detected on a
timely basis. See 17 CFR 240.17a-5(d)(3)(i).
\656\ See 17 CFR 240.17a-5(d)(3)(i)(B) and (C). A material
weakness is a deficiency, or a combination of deficiencies, in
Internal Control Over Compliance such that there is a reasonable
possibility that non-compliance with Rule 15c3-1 or paragraph (e) of
Rule 15c3-3 will not be prevented or detected on a timely basis or
that non-compliance to a material extent with Rule 15c3-3, except
for paragraph (e), Rule 17a-13, or any Account Statement Rule will
not be prevented or detected on a timely basis. A deficiency in
Internal Control Over Compliance exists when the design or operation
of a control does not allow the management or employees of the
broker-dealer, in the normal course of performing their assigned
functions, to prevent or detect on a timely basis non-compliance
with Rule 15c3-1, Rule 15c3-3, Rule 17a-13, or any Account Statement
Rule.
\657\ See 17 CFR 240.17a-5(d)(4).
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The Commission is proposing amendments to the requirements in
paragraph (d) of Rule 17a-5 that require broker-dealers to file annual
reports with the Commission and is proposing to include a parallel
requirement in proposed Rule 18a-7 to require stand-alone SBSDs and
stand-alone MSBSPs to file annual reports with the Commission.\658\ The
amendments to paragraph (d) of Rule 17a-5 are designed to account for
broker-dealers that are dually registered as an SBSD or MSBSP.
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\658\ Compare paragraph (d) of Rule 17a-5, as proposed to be
amended, with paragraph (c) of proposed Rule 18a-7.
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First, under the proposals, all broker-dealer SBSDs would be
required to file the compliance report. It is likely that a broker-
dealer SBSD would carry funds and securities of customers and,
therefore, would not be exempt from Rule 15c3-3. In this case, under
the recently adopted requirements of Rule 17a-5, the broker-dealer SBSD
would be required to file the compliance report. The Commission
believes that a broker-dealer SBSD that has only security-based swap
customers also should be required to file the compliance report because
this report and the related report of the independent public accountant
covering the compliance report would serve the same customer protection
objectives in terms of promoting compliance with proposed Rule 18a-4 as
these reports will serve in terms of promoting compliance with Rule
15c3-3.\659\ For this reason, the Commission is proposing to amend
paragraph (d)(1)(i)(B)(1) of Rule 17a-5 to provide that a broker-dealer
must file the compliance report if it did not claim it was exempt from
Rule 15c3-3 throughout the most recent fiscal year or it is subject to
proposed Rule 18a-4.\660\ Further, paragraph (d)(1)(i)(B)(2) of Rule
17a-5 would be amended to provide that a broker-dealer must file the
exemption report if the broker-dealer did claim it was exempt from Rule
15c3-3 throughout the most recent fiscal year and it is not subject to
proposed Rule 18a-4.\661\
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\659\ See Broker-Dealer Reports, 78 FR 51916-51920.
\660\ See paragraph (d)(1)(i)(B)(1) of Rule 17a-5, as proposed
to be amended.
\661\ See paragraph (d)(1)(i)(B)(2) of Rule 17a-5, as proposed
to be amended.
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Second, paragraph (d) of Rule 17a-5 provides that the financial
statements in the financial report must be prepared in accordance with
U.S. GAAP and must be in a format that is consistent with, and the
supporting schedules must include information from, the FOCUS Report
Part II or Part IIA.\662\ Further, the supporting schedules must
contain a reconciliation if the computation of net capital under Rule
15c3-1 or the customer reserve requirement under Rule 15c3-3 in the
supporting schedule is materially different than computation in the
broker-dealer's most recent FOCUS Report Part II or Part IIA.\663\ The
amendments to the reporting requirements in paragraph (d) of Rule 17a-5
would add a reference to proposed Rule 18a-4 to be included with the
existing references to Rules 15c3-1 and 15c3-3, and to proposed Form
SBS to be included with each reference to the FOCUS Report Part II and
Part IIA to account for broker-dealer SBSDs and broker-dealer MSBSPs
that would use proposed Form SBS rather than the FOCUS Report Part II
or Part IIA.\664\
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\662\ See 17 CFR 240.17a-5(d)(2)(i) and (ii).
\663\ See 17 CFR 240.17a-5(d)(2)(iii).
\664\ See paragraphs (d)(2)(i) through (iii) of Rule 17a-5, as
proposed to be amended.
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Third, as discussed above, the supporting schedules require a
computation of the reserve requirements under Rule 15c3-3 and
information relating to the possession or control requirements under
Rule 15c3-3.\665\ Further, the statements required in the compliance
report and the definitions of Internal Control Over Compliance and
material weakness for the purposes of the compliance report make
reference to Rule 15c3-3 or paragraph (e) of Rule 15c3-3.\666\ The
proposed amendments would add references to proposed Rule 18a-4
generally or to specific parallel
[[Page 25240]]
requirements in proposed Rule 18a-4 so that the supporting schedule and
compliance report requirements would incorporate information relating
to proposed Rule 18a-4 in addition to information relating to Rule
15c3-3.\667\
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\665\ See 17 CFR 240.17a-5(d)(2)(ii).
\666\ See 17 CFR 240.17a-5(d)(3)(i) through (iii).
\667\ See paragraphs (d)(2)(ii) and (iii) and (d)(3)(i) through
(iii) of Rule 17a-5, as proposed to be amended.
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As indicated above, the Commission is proposing to include parallel
annual reporting requirements in proposed Rule 18a-7 applicable to
stand-alone SBSDs and stand-alone MSBSPs that are modeled on paragraph
(d) of Rule 17a-5, as proposed to be amended.\668\ Under these proposed
parallel requirements, stand-alone SBSDs and stand-alone MSBSPs would
be required to annually file with the Commission a financial
report.\669\ In addition, stand-alone SBSDs would be required to file a
compliance report stating that the SBSD has established and maintains
internal controls that have the objective of providing reasonable
assurance that non-compliance with Rules 18a-1, 18a-4, and 18a-9 will
be prevented or detected on a timely basis.\670\
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\668\ Compare paragraphs (d)(1) through (3) of Rule 17a-5, as
proposed to be amended, with paragraphs (c)(1) through (3) of
proposed Rule 18a-7.
\669\ See paragraph (c)(1)(i)(A) of proposed Rule 18a-7.
\670\ See paragraph (c)(1)(i)(B) of proposed Rule 18a-7.
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Further, stand-alone SBSDs and stand-alone MSBSPs would be required
to file a report of an independent public accountant covering the
financial report and the compliance report, as applicable.\671\ The
Commission is not proposing to include a requirement in proposed Rule
18a-7 that would parallel the exemption report requirement in Rule 17a-
5 because there are no exemption provisions in proposed Rule 18a-4 that
parallel the exemption provisions in Rule 15c3-3.\672\
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\671\ See paragraph (c)(1)(i)(C) of proposed Rule 18a-7.
\672\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288.
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The financial report under Rule 18a-7 would need to contain the
same types of financial statements as are required for the financial
report under Rule 17a-5.\673\ Further, it also would need to contain
the same types of supporting schedules and reconciliations as the
financial report under Rule 17a-5, as proposed to be amended, except
that the Rule 18a-7 financial report would require information relating
to Rules 18a-1 and 18a-2, as applicable, rather than Rule 15c3-1.\674\
The financial report under Rule 17a-5, as proposed to be amended, and
proposed Rule 18a-7 would require information relating to proposed Rule
18a-4.
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\673\ Compare 17 CFR 240.17a-5(d)(2)(i), with paragraph
(c)(2)(i) of proposed Rule 18a-7.
\674\ Compare Rule 17a-5, as proposed to be amended, with
paragraph (c)(2)(ii) and (iii) of proposed Rule 18a-7.
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Similar to the financial report, the compliance report under Rule
18a-7 would need to contain the same type of statements and information
as the compliance report under Rule 17a-5, as proposed to be amended,
except the Rule 18a-7 compliance report would require information
relating to Rules 18a-1 and 18a-9 rather than Rules 15c3-1, Rule 15c3-
3, Rule 17a-13, and the Account Statement Rules.\675\ The compliance
report under Rule 17a-5, as proposed to be amended, and proposed Rule
18a-7 would require information relating to proposed Rule 18a-4.
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\675\ Compare 17 CFR 240.17a-5(d)(3), with paragraph (c)(3) of
proposed Rule 18a-7.
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Timing and Location of Filing
Paragraph (d)(5) of Rule 17a-5 provides that a broker-dealer must
file the annual reports with the Commission not more than sixty
calendar days after the end of the fiscal year of the broker-
dealer.\676\ The Commission is proposing to include a parallel
requirement in proposed Rule 18a-7 that would mirror paragraph (d)(5)
of Rule 17a-5.\677\ Consequently, stand-alone SBSDs and stand-alone
MSBSPs would be required to file the annual reports required under
proposed Rule 18a-7 within 60 calendar days after the end of their
fiscal years.\678\
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\676\ See 17 CFR 240.17a-5(d)(5).
\677\ Compare 17 CFR 240.17a-5(d)(5), with paragraph (c)(4) of
proposed Rule 18a-7.
\678\ See paragraph (c)(4) of proposed Rule 18a-7.
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Paragraph (d)(6) of Rule 17a-5 provides that a broker-dealer must
file the annual reports: (1) At the office of the Commission for the
region where the broker-dealer has its principal place of business; (2)
at the Commission's principal office in Washington, DC; (3) at the
principal office of the broker-dealer's DEA; and (4) with SIPC.\679\
The Commission is proposing to include a parallel requirement in
proposed Rule 18a-7 that is modeled on paragraph (d)(5) of Rule 17a-
5.\680\ In particular, paragraph (c)(5) of proposed Rule 18a-5 would
require stand-alone SBSDs and stand-alone MSBSPs to file the annual
reports at the regional office of the Commission for the region in
which the SBSD or MSBSP has its principal place of business and the
Commission's principal office in Washington, DC.\681\
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\679\ See 17 CFR 240.17a-5(d)(6). Paragraph (d)(6) further
provides that the broker-dealer must provide copies of the reports
to all SROs of which the broker-dealer is a member, unless the SRO
by rule waives this requirement. See id.
\680\ Compare 17 CFR 240.17a-5(d)(6), with paragraph (c)(5) of
proposed Rule 18a-7.
\681\ See paragraph (c)(5) of proposed Rule 18a-7. There would
be no requirement to file the reports with SIPC or a DEA because
stand-alone SBSDs and stand-alone MSBSPs would not be members of
SIPC and would not have a DEA.
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Nature and Form of the Reports
Paragraph (e) of Rule 17a-5 among other things: (1) Provides
certain exceptions from the requirement that a broker-dealer engage an
independent public accountant to audit the annual reports, (2) requires
the broker-dealer to attach an oath or affirmation to the financial
reports; (3) provides that the annual reports are not confidential
except that the broker-dealer can request confidentiality for all of
the annual reports other than the statement of financial condition; and
(4) requires a broker-dealer to file certain additional reports with
SIPC.\682\
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\682\ See 17 CFR 240.17a-5(e).
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Paragraph (e)(2) of Rule 17a-5 requires a broker-dealer to attach
an oath or affirmation to its financial report indicating that the
report is true and correct and that the broker-dealer does not have any
proprietary interest in one of its customer accounts.\683\ Paragraph
(e)(2) also requires that the oath or affirmation must be made before a
person duly authorized to administer such oaths or affirmations and
prescribes who must make the oath or affirmation on behalf of the
broker-dealer.\684\ The Commission adopted the FOCUS Report Part III as
the means for the broker-dealer to provide the oath or affirmation
required under paragraph (e)(2).\685\ The FOCUS Report Part III elicits
certain basic information about
[[Page 25241]]
the broker-dealer and the independent public accountant (e.g., name and
address), contains a checklist to indicate the statements and other
information included in the annual reports, and sets forth the text of
the oath or affirmation required under paragraph (e)(2) of Rule 17a-
5.\686\
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\683\ See 17 CFR 240.17a-5(e)(2).
\684\ See 17 CFR 240.17a-5(e)(2). If the broker or dealer is a
sole proprietorship, the oath or affirmation must be made by the
proprietor; if a partnership, by a general partner; if a
corporation, by a duly authorized officer; or if a limited liability
company or limited liability partnership, by the chief executive
officer, chief financial officer, manager, managing member, or those
members vested with management authority for the limited liability
company or limited liability partnership. Id.
\685\ See 17 CFR 242.617. See also FOCUS Reporting System;
Requirements for Financial Reporting, Exchange Act Release No. 14242
(Dec. 9, 1977), 42 FR 63883 (Dec. 21, 1977) (``The Commission
proposed the facing page for the annual report based on its
experience that the processing of the annual report would be greatly
facilitated if the identification information were submitted in a
consistent format. The proposed facing page requires basic
identification information, including the . . . name and address of
the broker or dealer and its accountant, the oath or affirmation,
and the itemization of the materials included in the report.''). See
also FOCUS Report Part III, available at http://www.sec.gov/about/forms/formx-17a-5_3.pdf.
\686\ See FOCUS Report Part III.
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The Commission is proposing to amend paragraph (e)(2) of Rule 17a-5
to remove the text of the oath or affirmation because the text of oath
or affirmation is set forth on the FOCUS Report Part III.\687\ The
proposed amendments also would state explicitly in the text of Rule
17a-5 that a broker-dealer is required to attach a complete and
executed FOCUS Report Part III to the confidential and non-confidential
portions of the annual reports filed with the Commission.\688\
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\687\ Compare 17 CFR 240.17a-5(e)(2), with paragraph (e)(2) of
Rule 17a-5, as proposed to be amended.
\688\ See paragraph (e)(2) of Rule 17a-5, as proposed to be
amended.
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In addition, the Commission is proposing a number of amendments to
the FOCUS Report Part III to accommodate use of the FOCUS Report Part
III by OTC derivatives dealers, stand-alone SBSDs, and stand-alone
MSBSPs.\689\ The Commission also proposes amendments to Part III of the
FOCUS Report to address the recently adopted amendments to Rule 17a-
5.\690\ Further, the Commission is proposing a number of technical
changes to the FOCUS Report Part III.\691\
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\689\ These amendments would: (1) Add a reference to Rule 17a-12
and proposed Rule 18a-7 to the subtitle; (2) remove the phrase
``Name of Broker-Dealer'' and in its place add the phrase ``Name of
Firm'' in section A; (3) add check boxes to section A for the filer
to indicate whether it is registered as an OTC derivatives dealer,
broker-dealer, SBSD, and/or MSBSP; (4) add to the check list at the
end of the Form boxes to indicate whether the annual reports
attached to the Form include: (i) A computation of net capital
pursuant to proposed Rule 18a-1; (ii) a computation of tangible net
worth under Rule 18a-2; (iii) a computation for determination of
reserve requirements pursuant to proposed Rule 18a-4; (iv)
information relating to possession or control requirements under
proposed Rule 18a-4; (v) a reconciliation, including appropriate
explanation of the computation of net capital under proposed Rule
18a-1; (vi) a reconciliation, including appropriate explanation of
the computation of tangible net worth under proposed Rule 18a-2;
(vii) a reconciliation, including appropriate explanation of the
computation of reserve requirements under proposed Rule 18a-4;
(viii) an independent public accountant's report based on an
examination of the financial statements under Rule 17a-12; (ix) an
independent public accountant's report based on an examination of
the financial report under proposed Rule 18a-7; and (x) an
independent public accountant's report based on an examination of
the compliance report under proposed Rule 18a-7; and (5) replace the
check box entitled ``A Reconciliation, including appropriate
explanation of the Computation of Net Capital Under Rule 15c3-1 and
the Computation for Determination of the Reserve Requirements Under
Exhibit A of Rule 15c3-3'' with two check boxes entitled: (i) ``A
reconciliation, including appropriate explanation of the computation
of net capital under 17 C.F.R. Sec. 240.15c3-1''; and (ii) A
reconciliation, including appropriate explanation of the computation
of net capital under 17 C.F.R. Sec. 240.15c3-3. See Part III of the
FOCUS Report, as proposed to be amended. The proposals also would
amend the instructions at the end of the Form with respect to
seeking confidential treatment for portions of the annual reports by
adding a reference to the provisions of proposed Rule 18a-7
governing how to request confidential treatment and replacing the
phrase ``For conditions of'' with the phrase ``To request.'' Id.
\690\ See Broker-Dealer Reports, 78 FR 51910. These amendments
would: (1) Add the phrase ``PCAOB-Registered'' before the phrase
``Independent Public Accountant'' in section B; (2) remove check
boxes in section B to indicate whether the independent public
accountant is certified, a public accountant, or an accountant not
registered in the U.S.; (3) add to the check list at the end of the
Form boxes to indicate whether the annual reports attached to the
Form include: (i) The exemption report under Rule 17a-5; (ii) the
compliance report under Rule 17a-5; (iii) the independent public
accountant's report based on an examination of the financial report
under Rule 17a-5; (iv) the independent public accountant's report
based on the examination of the compliance report, as required by
Rule 17a-5; or (v) the independent public accountant's report based
on the review of the exemption report under Rule 17a-5. See Part III
of the FOCUS Report, as proposed to be amended. The amendments also
would remove from the checklist an item to indicate whether any
material inadequacies under Rule 17a-5 were found to exist or found
to have existed since the date of the previous audit. See id.
\691\ The proposed technical amendments are as follows: (1)
Removing the phrase ``See Section 240.17a-5(e)(2)'' in the
instruction for broker-dealers that claim an exemption from the
requirement that the annual report be covered by an opinion of an
independent public accountant and in its place adding the phrase
``See 17 CFR 240.17a-5(e)(1)(ii), if applicable.''; and (2) removing
the ``Statement of Changes in Financial Condition'' from the
checklist and in its place adding the phrase ``Statement of cash
flows''.
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The Commission is proposing to add a reference to proposed Form SBS
to the references to the FOCUS Report Part II and Part IIA in paragraph
(e)(3) of Rule 17a-5 to account for broker-dealers that are dually
registered as an SBSD or MSBSP and, therefore, would use proposed Form
SBS instead of the FOCUS Report Part II or Part IIA.\692\
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\692\ See paragraph (e)(3) of Rule 17a-5, as proposed to be
amended.
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The Commission is proposing to include parallel provisions in
proposed Rule 18a-7 to the provisions in paragraph (e) of Rule 17a-5,
as proposed to be amended. Under these provisions, stand-alone SBSDs
and stand-alone MSBSPs would be required to attach a completed and
executed FOCUS Report Part III to the confidential and non-confidential
portions of the annual report.\693\ In addition, paragraph (d)(2) of
proposed Rule 18a-7 would provide that the annual reports are not
confidential except that if the statement of financial condition is
bound separately from the balance of the annual reports and each page
of the balance of the annual reports is stamped ``confidential'', then
the balance of the annual reports will be deemed confidential to the
extent permitted by law.\694\ Paragraph (d)(2) of proposed Rule 18a-7
would mirror the confidential treatment of broker-dealer annual reports
under Rule 17a-5.\695\
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\693\ Compare paragraph (e)(2) of Rule 17a-5, as proposed to be
amended, with paragraph (d)(1) of proposed Rule 18a-7.
\694\ See paragraph (d)(2) of proposed Rule 18a-7.
\695\ Compare 17 CFR 240.17a-5(e)(3), with paragraph (d)(2) of
proposed Rule 18a-7.
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Qualification of the Independent Public Accountant
As discussed above, a broker-dealer is required to file with the
Commission a report of a PCAOB-registered independent public accountant
covering the annual reports.\696\ Paragraph (f) of Rule 17a-5: (1)
Prescribes certain minimum qualifications for the independent public
accountant; (2) requires the broker-dealer to file with the Commission
a statement concerning the accountant; and (3) requires the broker-
dealer to file a notice when replacing the independent public
accountant.\697\
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\696\ See 17 CFR 240.17a-5(d)(1)(i)(C).
\697\ See 17 CFR 240.17a-5(f).
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More specifically, paragraph (f)(1) of Rule 17a-5 provides that the
independent public accountant must be qualified and independent in
accordance with the independence requirements of Rule 2-01 of
Regulation S-X and registered with the PCAOB if required by the
Sarbanes-Oxley Act of 2002.\698\
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\698\ See 17 CFR 240.17a-5(f)(1). See also 15 U.S.C
78q(e)(1)(A); 17 CFR 210.2-01. Prior to the Sarbanes-Oxley Act,
section 17(e)(1)(A) of the Exchange Act required that the annual
financial statements a broker-dealer must file with the Commission
be ``certified by an independent public accountant.'' The Sarbanes-
Oxley Act established the PCAOB and amended section 17(e)(1)(A) to
provide that the annual financial statements must be ``certified by
a registered [with the PCAOB] public accounting firm.'' See
Sarbanes-Oxley Act, Public Law 107-204, 101, 116 Stat. 745 (2002);
15 U.S.C 78q(e)(1)(A). Title I of the Sarbanes-Oxley Act prescribed
specific PCAOB registration, standards-setting, inspection,
investigation, disciplinary, foreign application, oversight, and
funding programs in connection with audits of issuers. See Public
Law 107-204 generally and, in particular, Sec. 2(a)(7) (defining
the term issuer as an issuer as defined in section 3 of the Exchange
Act, the securities of which are registered under section 12 of the
Exchange Act, or that files or has filed a registration statement
that has not yet become effective under the Securities Act of 1933
and that it has not withdrawn). However, as originally enacted, the
Sarbanes-Oxley Act did not expressly prescribe similar programs in
connection with audits of broker-dealers that are not issuers. The
Dodd-Frank Act amended the Sarbanes-Oxley Act to provide the PCAOB
with explicit authority to, among other things, establish (subject
to Commission approval) auditing and related attestation, quality
control, ethics, and independence standards for registered public
accounting firms with respect to their preparation of audit reports
to be included in broker-dealer filings with the Commission, and the
authority to conduct and require an inspection program of registered
public accounting firms that audit broker-dealers. See Public Law
111-203, 982. Further, the Dodd-Frank Act amended section 17(e) of
the Exchange Act to provide, among other things, that a broker-
dealer must annually file with the Commission a balance sheet and
income statement certified by an independent public accounting firm,
or by a registered (with the PCAOB) public accounting firm if the
firm is required to be registered (with the PCAOB) under the
Sarbanes-Oxley Act of 2002. See Public Law 111-203, 982(e)(1); 15
U.S.C 78q(e)(1). Additionally, the Dodd-Frank Act added section
104(a)(2)(D) to the Sarbanes-Oxley Act, which provides that a public
accounting firm is not required to register with the PCAOB if the
public accounting firm is exempt from an inspection program
established by the PCAOB. See id. To date, the PCAOB has not
exempted the audits by independent public accountants of any class
of broker-dealer from the PCAOB's permanent inspection program. See
Public Company Accounting Oversight Board; Order Approving Proposed
Temporary Rule for an Interim Program of Inspection Related to
Audits of Brokers and Dealers, Exchange Act Release No. 65163 (Aug.
18, 2011), 76 FR 52996 (Aug. 24, 2011). At this time, there is no
reason to expect that any types of broker-dealer audits will be
exempt from the PCAOB permanent inspection program, and any PCAOB
determination to exempt broker-dealer audits from the PCAOB's
permanent inspection program must be approved by the Commission.
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[[Page 25242]]
Paragraph (f)(2) requires a broker-dealer to annually file with the
Commission no later than December 10 a statement regarding the
independent public accountant engaged to audit its annual reports.\699\
The statement must contain, among other things: (1) The name, address,
telephone number, and registration number of the broker-dealer; (2) the
name, address, and telephone number of the independent public
accountant; (3) the date of the fiscal year of the annual reports of
the broker-dealer covered by the engagement; (4) whether the engagement
is for a single year or is of a continuing nature; and (5) a
representation that the independent public accountant has undertaken to
prepare reports covering the annual reports as required by paragraph
(g) of Rule 17a-5.\700\
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\699\ See 17 CFR 240.17a-5(f)(2). Paragraph (f)(2) further
provides that if the engagement of an independent public accountant
is of a continuing nature, providing for successive engagements, no
further filing is required after the original filing. See id. On the
other hand, if the engagement is for a single year, or if the most
recent engagement has been terminated or amended, a new statement
must be filed by the required date. See id.
\700\ See 17 CFR 240.17a-5(f)(2). Under the recent amendments to
Rule 17a-5, broker-dealers that clear transactions or carry customer
accounts must include certain representations in the statement as
well. See Broker-Dealer Reports, 78 FR 51992-51993.
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Paragraph (f)(3) of Rule 17a-5 requires a broker-dealer to file a
notice with the Commission if it replaces the independent public
accountant engaged to prepare reports covering the annual reports.\701\
The notice must contain, among other things: (1) The date of the
notification of termination or the engagement of the new independent
public accountant; (2) the details of any issues arising during the
twenty-four months (or the period of the engagement, if less than
twenty-four months) preceding the termination or new engagement
relating to any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, or compliance with
applicable rules of the Commission; and (3) whether the accountant's
report covering the annual reports for any of the past two fiscal years
contained an adverse opinion or a disclaimer of opinion or was
qualified as to uncertainties, audit scope, or accounting principles,
and must describe the nature of each such adverse opinion, disclaimer
of opinion, or qualification.\702\
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\701\ See 17 CFR 240.17a-5(f)(3). The notice must be received at
the Commission's principal office in Washington, DC and at the
applicable regional office of the Commission not more than fifteen
days after: (1) The broker-dealer has notified the independent
public accountant that provided the reports covering the annual
reports for the most recent fiscal year that the independent public
accountant's services will not be used in future engagements; (2)
the broker-dealer has notified an independent public accountant that
was engaged to provide the reports covering the annual reports that
the engagement has been terminated; (3) an independent public
accountant has notified the broker-dealer that the independent
public accountant would not continue under an engagement to provide
the reports covering the annual reports; or (4) a new independent
public accountant has been engaged to provide the reports covering
the annual reports without any notice of termination having been
given to or by the previously engaged independent public accountant.
See id.
\702\ See 17 CFR 240.17a-5(f)(3).
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Broker-dealer SBSDs and broker-dealer MSBSPs will be required to
engage independent public accountants that meet the qualifications in
Rule 17a-5 and file the statements and notices required by the rule.
The Commission is proposing to include in proposed Rule 18a-7 parallel
independent public accountant qualification, statement, and notice
requirements applicable to stand-alone SBSDs and stand-alone MSBSPs
that are modeled on the requirements in paragraph (f) of Rule 17a-
5.\703\
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\703\ Compare 17 CFR 240.17a-5(f), with paragraph (e) of
proposed Rule 18a-7.
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Paragraph (e)(1) of proposed Rule 18a-7 is modeled on paragraph
(f)(1) of Rule 17a-5.\704\ Paragraph (e)(1) would provide that an
independent public accountant engaged by a stand-alone SBSD or stand-
alone MSBSP must be qualified and independent in accordance with Rule
2-01 of Regulation S-X and registered with the PCAOB.\705\ While the
PCAOB's authority with respect to audits of stand-alone SBSDs and
stand-alone MSBSPs would be more limited than its authority with
respect to audits of issuers and broker-dealers, the Commission
preliminarily believes that it would be appropriate to require stand-
alone SBSDs and stand-alone MSBSPs to engage an independent public
accountant that is registered with the PCAOB.\706\ In particular, the
[[Page 25243]]
Commission has greater confidence in the quality of audits conducted by
an independent public accountant registered with the PCAOB.\707\
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\704\ Compare 17 CFR 240.17a-5(f)(1), with paragraph (e)(1) of
proposed Rule 18a-7.
\705\ See paragraph (e)(1) of proposed Rule 18a-7. With respect
to qualifications, paragraph (a) of Rule 2-01 provides that the
Commission will not recognize any person as a certified public
accountant who is not duly registered and in good standing as such
under the laws of the place of the accountant's residence or
principal office. See 17 CFR 210.2-01(a). Paragraph (a) further
provides that the Commission will not recognize any person as a
public accountant who is not in good standing and entitled to
practice as such under the laws of the place of the accountant's
residence or principal office. See id. With respect to independence,
paragraph (b) of Rule 2-01 provides that the Commission will not
recognize an accountant as independent, with respect to an audit
client, if the accountant is not, or a reasonable investor with
knowledge of all relevant facts and circumstances would conclude
that the accountant is not, capable of exercising objective and
impartial judgment on all issues encompassed within the accountant's
engagement. See 17 CFR 210.2-01(b). Paragraph (b) further provides
that in determining whether an accountant is independent, the
Commission will consider all relevant circumstances, including all
relationships between the accountant and the audit client, and not
just those relating to reports filed with the Commission. See id.
Paragraph (c) of Rule 2-01 sets forth a non-exclusive specification
of circumstances inconsistent with independence as required under
paragraph (b). See 17 CFR 210.2-01(c). For example, an accountant is
prohibited from providing the following non-audit services, among
others, to an audit client: (1) Bookkeeping or other services
related to the accounting records or financial statements of the
audit client; (2) financial information systems design and
implementation; and (3) management functions or human resources. See
id. Not all of the independence requirements in Rule 2-01 that are
applicable to audits of issuers would be applicable to engagements
under proposed Rule 18a-7. For example, the independent public
accountants of stand-alone SBSDs and stand-alone MSBSPs that are not
issuers would not be subject to the partner rotation requirements or
the compensation requirements of Rule 2-01 because the statute
mandating those requirements is limited to issuers. See 15 U.S.C.
78j-1(j); 17 CFR 210.2-01(c)(6). Additionally, the independent
public accountants would not be subject to the cooling-off period
requirements for employment or the audit committee pre-approval
requirements because those requirements only reference issuers
within the independence rules. See 17 CFR 210.2-01(c)(2) and (c)(7).
\706\ See Custody of Funds or Securities of Clients by
Investment Advisers, Investment Advisers Act Release No. 2968 (Dec.
30, 2009), 75 FR 1456 (Jan. 11, 2010) (adopting rules requiring
certain investment advisers to undergo annual surprise examinations
performed by, and obtain internal control reports prepared by,
independent public accountants registered with the PCAOB).
\707\ See id. at 1460.
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Paragraph (e)(2) of proposed Rule 18a-7 is modeled on paragraph
(f)(2) of Rule 17a-5.\708\ Under paragraph (e)(2), a stand-alone SBSD
or stand-alone MSBSP would be required to annually file with the
Commission no later than December 10 a statement regarding the
independent public accountant engaged to audit its annual reports.\709\
The statement would need to contain similar information as is required
in the statement under paragraph (f)(2) of Rule 17a-5.\710\
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\708\ Compare 17 CFR 240.17a-5(f)(2), with paragraph (e)(2) of
proposed Rule 18a-7.
\709\ See paragraph (e)(2) of proposed Rule 18a-7. Like
paragraph (f)(2) of Rule 17a-5, paragraph (e)(2) of proposed Rule
18a-7 would provide that if the engagement of an independent public
accountant is of a continuing nature, providing for successive
engagements, no further filing would be required. See id. Further,
if the engagement is for a single year, or if the most recent
engagement has been terminated or amended, a new statement would
need to be filed by the required date. See id.
\710\ Compare 17 CFR 240.17a-5(f)(2), with paragraph (e)(2) of
proposed Rule 18a-7.
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Paragraph (e)(3) of proposed Rule 18a-7 is modeled on paragraph
(f)(3) of Rule 17a-5.\711\ Under paragraph (e)(3), a stand-alone SBSD
or stand-alone MSBSP would be required to file a notice with the
Commission if the firm replaces the independent public accountant
engaged to prepare the reports covering the annual reports.\712\ The
notice would need to contain the same information as is required in the
notice under paragraph (f)(3) of Rule 17a-5.\713\
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\711\ Compare 17 CFR 240.17a-5(f)(3), with paragraph (e)(3) of
proposed Rule 18a-7.
\712\ See paragraph (e)(3) of proposed Rule 18a-7. Like
paragraph (f)(3) of Rule 17a-5, paragraph (e)(3) of proposed Rule
18a-7 would require that the notice must be received at the
Commission's principal office in Washington, DC and at the
applicable regional office of the Commission not more than 15 days
after: (1) The stand-alone SBSD or stand-alone MSBSP has notified
the independent public accountant that provided the reports covering
the annual reports for the most recent fiscal year that the
independent public accountant's services will not be used in future
engagements; (2) the stand-alone SBSD or stand-alone MSBSP has
notified an independent public accountant that was engaged to
provide the reports covering the annual reports that the engagement
has been terminated; (3) an independent public accountant has
notified the stand-alone SBSD or stand-alone MSBSP that the
independent public accountant would not continue under an engagement
to provide the reports covering the annual reports; or (4) a new
independent public accountant has been engaged to provide the
reports covering the annual reports without any notice of
termination having been given to or by the previously engaged
independent public accountant. See id.
\713\ Compare 17 CFR 240.17a-5(f)(3), with paragraph (e)(3) of
proposed Rule 18a-7.
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Engagement of the Independent Public Accountant
Under the recent amendments to Rule 17a-5, paragraph (g) of the
rule provides that the independent public accountant engaged by the
broker-dealer to provide the reports covering the annual reports must,
as part of the engagement, undertake to prepare the following reports,
as applicable, in accordance with PCAOB standards: (1) A report based
on an examination of the financial report; and (2) either a report
based on an examination of certain statements in the compliance report
or a report based on a review of the exemption report.\714\ As broker-
dealers, dually registered broker-dealer SBSDs and broker-dealer MSBSPs
will be required to engage their independent public accountants to
undertake an examination of their financial report and compliance
report.
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\714\ See 17 CFR 240.17a-5(g). The PCAOB recently adopted, and
the Commission approved, standards for examinations of compliance
reports of broker-dealers and reviews of exemption reports of
broker-dealers and for audits of supplemental information
accompanying financial statements. See Public Company Accounting
Oversight Board; Order Granting Approval of Proposed Rules,
Standards for Attestation Engagements Related to Broker and Dealer
Compliance or Exemption Reports Required by the U.S. Securities and
Exchange Commission and Related Amendments to PCAOB Standards,
Exchange Act Release No. 71524 (Feb. 12, 2014). See also PCAOB,
Standards for Attestation Engagements Related to Broker and Dealer
Compliance or Exemption Reports Required by the U.S. Securities and
Exchange Commission, PCAOB Release No. 2013-007 (Oct. 10, 2013),
available at http://pcaobus.org/Rules/Rulemaking/Docket035/PCAOB_Release_2013_007.pdf; PCAOB. The PCAOB also recently adopted, and
the Commission approved Auditing Standard No. 17, which applies when
the auditor of a company's financial statements is engaged to
perform audit procedures and report on supplemental information that
accompanies financial statements, including supporting schedules
that broker-dealers are required to file pursuant to Rule 17a-5
under the Exchange Act. See Public Company Accounting Oversight
Board; Order Granting Approval of Proposed Rules, Auditing Standard
No. 17, Auditing Supplemental Information Accompanying Audited
Financial Statements, and Related Amendments to PCAOB Standards,
Exchange Act Release No. 71525 (Feb. 12, 2014). See also, PCAOB,
Auditing Standard No. 17: Auditing Supplemental Information
Accompanying Audited Financial Statements and Related Amendments to
PCAOB Standards, PCAOB Release No. 2013-008 (Oct. 10, 2013),
available at http://pcaobus.org/Rules/Rulemaking/Docket036/PCAOB_Release_2013_008.pdf.
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The Commission is proposing to include parallel engagement of
accountant requirements in proposed Rule 18a-7 that would be applicable
to stand-alone SBSDs and stand-alone MSBSPs that are modeled on the
requirements in paragraph (g) of Rule 17a-5.\715\ Specifically,
paragraph (f) of proposed Rule 18a-7 would provide that the independent
public accountant engaged by a stand-alone SBSD or stand-alone MSBSP
must, as part of the engagement, undertake to prepare a report based on
an examination of the financial report and, in the case of the SBSD, a
report based on an examination of certain statements in the compliance
report.\716\ There would not be a provision relating to an exemption
report because, as explained above, broker-dealer SBSDs and stand-alone
SBSDs would be required to file the compliance report (and would not be
permitted to file the exemption report in lieu of the compliance
report).
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\715\ Compare 17 CFR 240.17a-5(g), with paragraph (f) of
proposed Rule 18a-7.
\716\ See paragraph (f) of proposed Rule 18a-7.
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Notification of Non-Compliance or Material Weakness
Under the recent amendments to Rule 17a-5, paragraph (h) of the
rule provides that the independent public accountant engaged to prepare
reports covering the annual reports must immediately notify the broker-
dealer if the accountant determines during the course of preparing the
reports that the broker-dealer is not in compliance with Rule 15c3-1,
Rule 15c3-3, Rule 17a-13, or an Account Statement Rule or if the
accountant determines that any material weakness exists in the broker-
dealer's Internal Control Over Compliance.\717\ If the notice from the
accountant concerns an instance of non-compliance that would require a
broker-dealer to provide a notification under Rule 15c3-1, Rule 15c3-3,
or Rule 17a-11, or if the notice concerns a material weakness, the
broker-dealer must provide a notification in accordance with Rule 15c3-
1, Rule 15c3-3, or Rule 17a-11, as applicable, and provide a copy of
the notification to the independent public accountant.\718\ If the
independent public accountant does not receive the notification within
one business day, or if the independent public accountant does not
agree with the statements in the notification, then the independent
public accountant must notify the Commission and the DEA within one
business day.\719\ The report from the independent public accountant
must, if the broker-dealer failed to file a notification, describe any
instances of non-compliance that required a
[[Page 25244]]
notification under Rule 15c3-1, Rule 15c3-3, or Rule 17a-11, or any
material weaknesses.\720\ If the broker-dealer filed a notification,
the report from the accountant must detail the aspects of the
notification of the broker-dealer with which the accountant does not
agree.\721\
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\717\ See 17 CFR 240.17a-5(h). The term material weakness is
defined with regard to the compliance report and, therefore, applies
only to a broker-dealer that files a compliance report
\718\ See 17 CFR 240.17a-5(h). See also 17 CFR 240.15c3-
1(a)(6)(iv)(B), (a)(6)(v), (a)(7)(ii), (c)(2)(x)(C)(1), and (e); 17
CFR 240.15c3-1d(c)(2); 17 CFR 240.15c3-3(i); 17 CFR 240.17a-11.
Notifications under Rule 17a-11 also must be filed with the CFTC if
the broker-dealer is registered dually registered as a futures
commission merchant with the CFTC. See 17 CFR 240.17a-11(g).
\719\ See 17 CFR 240.17a-5(h).
\720\ See id.
\721\ See id.
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The Commission is proposing to amend paragraph (h) of Rule 17a-5 to
add references to proposed Rule 18a-4 to the references to Rule 15c3-1,
Rule 15c3-3, and Rule 17a-13.\722\ Thus, the independent public
accountant would need to notify the broker-dealer if the accountant
determines the broker-dealer is not in compliance with proposed Rule
18a-4.\723\ Depending on the nature of the noncompliance, the broker-
dealer may need to provide notification to the Commission in accordance
with Rule 17a-11.\724\
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\722\ See paragraph (h) of Rule 17a-5, as proposed to be
amended.
\723\ See id.
\724\ See id. As discussed below in section II.C.2. of this
release, the Commission is proposing to amend Rule 17a-11 to require
notification to the Commission if a broker-dealer SBSD fails to make
a required deposit into its reserve account under paragraph (c) of
proposed Rule 18a-4.
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The Commission is proposing to include parallel notification
requirements in proposed Rule 18a-7 applicable to stand-alone SBSDs and
stand-alone MSBSPs that are modeled on paragraph (h) of Rule 17a-5, as
proposed to be amended.\725\ Because stand-alone SBSDs and stand-alone
MSBSPs would be subject to different rules, paragraph (g) of proposed
Rule 18a-7 would contain separate provisions for each type of
registrant.\726\
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\725\ Compare paragraph (h) of Rule 17a-5, as proposed to be
amended, with paragraph (g) of proposed Rule 18a-7.
\726\ See paragraphs (g)(1)-(2) of proposed Rule 18a-7.
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Paragraph (g)(1) would apply to stand-alone SBSDs.\727\ Under this
paragraph, the independent public accountant of a stand-alone SBSD
would be required to notify the SBSD if the accountant determines that
the SBSD is not in compliance with proposed Rules 18a-1, 18a-4, or 18a-
9 or that any material weaknesses exist.\728\ Consequently, the
independent public accountant would need to provide notice to a stand-
alone SBSD regarding noncompliance with requirements that parallel the
requirements for which an independent public accountant must provide
notice to a broker-dealer under paragraph (h) of Rule 17a-5.\729\
Further, the independent public accountant would need to provide notice
of a material weakness just as a broker-dealer's independent public
accountant must provide notice of a material weakness.\730\ Like Rule
17a-5, the receipt by a stand-alone SBSD of a notice would trigger the
requirement for the SBSD to notify the Commission if the noncompliance
requires notification under Rule 18a-8 or if the notice concerns a
material weakness and to provide a copy of the notice to the
accountant.\731\ Further, the accountant would be required to notify
the Commission if the accountant does not receive a copy of the notice
or if the accountant disagrees with the notice.\732\
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\727\ See paragraph (g)(1) of proposed Rule 18a-7.
\728\ See id.
\729\ Compare 17 CFR 240.17a-5(h), with paragraph (g)(1) of
proposed Rule 18a-7. As discussed above, proposed Rules 18a-1 and
18a-4 are modeled on Rules 15c3-1 and 15c3-3, respectively. Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70217-70257, 70274-70288. As discussed
below in section II.C.2. of this release, proposed Rule 18a-8 is
modeled on Rule 17a-11 (the broker-dealer notification rule). Stand-
alone SBSDs would not be subject to an Account Statement Rule.
\730\ Compare 17 CFR 240.17a-5(h), with paragraph (g)(1) of
proposed Rule 18a-7. As discussed above, the definition of the term
material weakness in proposed Rule 18a-7 is modeled on the
definition of the term material weakness in Rule 17a-5. Compare 17
CFR 240.17a-5(d)(3)(iii), with paragraph (c)(3)(iii) of proposed
Rule 18a-7.
\731\ Compare 17 CFR 240.17a-5(h), with paragraph (g)(1) of
proposed Rule 18a-7.
\732\ See paragraph (g)(1) of proposed Rule 18a-7.
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Paragraph (g)(2) of proposed Rule 18a-7 would apply to stand-alone
MSBSPs.\733\ Because the Commission is not proposing that MSBSPs be
subject to proposed Rule 18a-4, proposed Rule 18a-9, or the requirement
to file a compliance report, the notification triggers in paragraph
(g)(2) would be limited to noncompliance with the proposed Rule 18a-2
(the proposed tentative net worth standard for stand-alone
MSBSPs).\734\ Like Rule 17a-5 and paragraph (g)(1) of proposed Rule
18a-7, the receipt by a stand-alone MSBSP of a notice of noncompliance
with proposed Rule 18a-2 would trigger the requirement for the MSBSP to
notify the Commission under Rule 18a-8 and to provide a copy of the
notice to the independent public accountant.\735\ Further, the
accountant would be required to notify the Commission if the accountant
does not receive a copy of the notice or if the accountant disagrees
with the notice.\736\
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\733\ See paragraph (g)(2) of proposed Rule 18a-7.
\734\ See id. As discussed above, the concept of material
weakness applies in the context of the filing of the compliance
report and the report of the independent public accountant covering
the compliance report.
\735\ See paragraph (g)(2) of proposed Rule 18a-7. As discussed
below in section II.C.2. of this release, proposed Rule 18a-8 would
require a stand-alone MSBSP to provide notice to the Commission if
the firm receives notice of noncompliance with proposed Rule 18a-2
or determines that it is not in compliance with proposed Rule 18a-2.
\736\ See paragraph (g)(2) of proposed Rule 18a-7.
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Reports of the Independent Public Accountant
Under the recent amendments to Rule 17a-5, Paragraph (i) of the
rule prescribes requirements for the reports of the independent public
accountant covering the broker-dealer's annual reports, including: (1)
Technical requirements; \737\ (2) required representations; \738\ (3)
the opinions or conclusions to be expressed in the accountant's
reports; \739\ and (4) requirements related to matters to which the
accountant takes exception.\740\
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\737\ See 17 CFR 240.17a-5(i)(1). Paragraph (i)(1) of Rule 17a-5
provides that the report of the independent public accountant must:
(1) Be dated; (2) be signed manually; (3) indicate the city and
state where issued; and (iv) identify without detailed enumeration
the items covered by the report. See id.
\738\ See 17 CFR 240.17a-5(i)(2). Paragraph (i)(2) provides that
the report of the independent public accountant must: (1) State
whether the examinations or review, as applicable, were made in
accordance with standards of the PCAOB; and (2) identify any
examination and, if applicable, review procedures deemed necessary
by the independent public accountant under the circumstances of the
particular case that have been omitted and the reason for their
omission. See id. The paragraph further provides that nothing in
Rule 17a-5 may be construed to imply authority for the omission of
any procedure that independent public accountants would ordinarily
employ in the course of an examination or review made for the
purpose of expressing the opinions or conclusions required under
Rule 17a-5. See id.
\739\ See 17 CFR 240.17a-5(i)(3). Paragraph (i)(3) provides that
the report of the independent public accountant must state clearly:
(1) The opinion of the independent public accountant with respect to
the financial report and the accounting principles and practices
reflected in that report; (2) the opinion of the independent public
accountant with respect to the financial report as to the
consistency of the application of the accounting principles, or as
to any changes in those principles, that have a material effect on
the financial statements; and (3)(i) the opinion of the independent
public accountant with respect to certain statements in the
compliance report; or (ii) the conclusion of the independent public
accountant with respect to certain statements in the exemption
report. See id.
\740\ See 17 CFR 240.17a-5(i)(4). Paragraph (i)(4) provides that
any matters to which the independent public accountant takes
exception must be clearly identified, the exceptions must be
specifically and clearly stated, and, to the extent practicable, the
effect of each such exception on any related items contained in the
annual reports must be given.
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As broker-dealers dually registered as SBSDs or MSBSPs, the
independent public accountants of these registrants will need to
prepare reports covering the registrant's financial report and
compliance report pursuant to the requirements prescribed in paragraph
(i) of Rule 17a-5.
The Commission is proposing to include parallel independent public
accountant report requirements in proposed Rule 18a-7 applicable to
[[Page 25245]]
stand-alone SBSDs and stand-alone MSBSPs that are modeled on paragraph
(i) of Rule 17a-5.\741\ Specifically, paragraph (h) of proposed Rule
18a-7 prescribes parallel requirements for the reports of the
independent public accountant covering the stand-alone SBSD's or stand-
alone MSBSP's annual reports, namely: (1) Technical requirements; \742\
(2) required representations; \743\ (3) the opinions or conclusions to
be expressed in the accountant's reports; \744\ and (4) requirements
related to matters to which the accountant takes exception.\745\ The
requirements in paragraph (h) of proposed Rule 18a-7 would not include
the requirements relating to the review engagement with respect to the
exemption report because, as discussed above, stand-alone SBSDs and
stand-alone MSBSPs would not file exemption reports as part of their
annual reports.\746\
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\741\ Compare 17 CFR 240.17a-5(i), with paragraph (h) of
proposed Rule 18a-7.
\742\ Compare 17 CFR 240.17a-5(i)(1), with paragraph (h)(1) of
proposed Rule 18a-7.
\743\ Compare 17 CFR 240.17a-5(i)(2), with paragraph (h)(2) of
proposed Rule 18a-7.
\744\ Compare 17 CFR 240.17a-5(i)(3), with paragraph (h)(3) of
proposed Rule 18a-7.
\745\ Compare 17 CFR 240.17a-5(i)(4), with paragraph (h)(4) of
proposed Rule 18a-7.
\746\ See paragraph (h) of proposed Rule 18a-7.
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Extensions and Exemptions
Paragraph (m) of Rule 17a-5 governs the granting of extensions of
time to comply with the requirements of Rule 17a-5 and the granting of
exemptions from complying with the requirements of the rule, and also
provides two self-executing exemptions from complying with Rule 17a-5
for certain types of broker-dealers.\747\ As broker-dealers, dually
registered SBSDs or MSBSPs will be able to seek extensions and
exemptions under the provisions of paragraph (m).
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\747\ See 17 CFR 240.17a-5(m). Paragraph (m)(1) of Rule 17a-5
provides that a broker-dealer's DEA may extend the period for filing
the annual reports and requires the DEA to maintain a record of each
granted extension. See 17 CFR 240.17a-5(m)(1). Paragraph (m)(2)
exempts from the requirements of Rule 17a-5 entities that are: (1)
banks or insurance companies as those terms defined in the Exchange
Act; (2) are registered as broker-dealers to sell variable
contracts; and (3) are exempt from Rule 15c3-1. See 17 CFR 240.17a-
5(m)(2). Paragraph (m)(3) of Rule 17a-5 provides that the Commission
may grant an extension of time or an exemption, upon written request
of a national securities exchange, registered national securities
association or the broker-dealer, from any of the requirements of
Rule 17a-5 either unconditionally or on specified terms and
conditions. See 17 CFR 240.17a-5(m)(3). Paragraph (m)(4) of Rule
17a-5 exempts from the requirements of Rule 17a-5 entities
registered as broker-dealers under section 15(b)(11)(A) of the
Exchange Act the purpose of effecting transactions in security
futures products. See 17 CFR 240.17a-5(m)(4).
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The Commission is proposing to include a parallel extension and
exemption provision in proposed Rule 18a-7 applicable to stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs that is modeled
on paragraph (m) of Rule 17a-5, but that only provides that the
Commission may grant extensions or exemptions.\748\ Specifically,
paragraph (i) of proposed Rule 18a-7 would provide that upon written
application by a stand-alone SBSD or stand-alone MSBSP to the
Commission or on its own motion, the Commission may grant an extension
of time or an exemption from any of the requirements of proposed Rule
18a-7 either unconditionally or on specified terms and conditions.\749\
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\748\ Compare 17 CFR 240.17a-5(m), with paragraph (i) of
proposed Rule 18a-7. As discussed above in section II.B.2. of this
release, bank SBSDs and bank MSBSPs would be required to file
proposed Form SBS on a quarterly basis. These types of registrants
would be able to use the provisions of paragraph (i) of proposed
Rule 18a-7 to seek extensions and exemptions from the provisions of
the rule relating to the filing of proposed Form SBS.
\749\ See paragraph (i) of proposed Rule 18a-7. Paragraph (i) of
proposed Rule 18a-7 does not include the self-executing exemption in
paragraph (m)(2) of Rule 17a-5 (applicable to banks and insurance
companies registered as broker-dealers to sell variable contracts)
and in paragraph (m)(4) of Rule 17a-5 (applicable to broker-dealers
only effecting transactions in security futures products). Stand-
alone SBSDs and stand-alone MSBSPs would not qualify for these
exemptions because, among other things, they would engage in a
broader range of activities than those permitted of entities that
may use the exemptions.
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Notification of Change of Fiscal Year
Paragraph (n)(1) of Rule 17a-5 requires a broker-dealer to notify
the Commission and its DEA of a change of its fiscal year.\750\
Paragraph (n)(2) requires that the notice contain a detailed
explanation for the reasons for the change and requires that changes in
the filing period for the annual reports must be approved in writing by
the broker-dealer's DEA.\751\ As broker-dealers, dually registered
broker-dealer SBSDs and broker-dealer MSBSPs will be required to file
the notices of changes in fiscal years and obtain approvals from their
DEAs as prescribed in paragraph (n).
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\750\ See 17 CFR 240.17a-5(n)(1).
\751\ See 17 CFR 240.17a-5(n)(2).
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The Commission is proposing to include a parallel change in fiscal
year requirement in proposed Rule 18a-7 applicable to stand-alone SBSDs
and stand-alone MSBSPs that is modeled on paragraph (n) of Rule 17a-5,
but that only provides that the Commission may approve a change in the
filing period for the annual reports.\752\ Specifically, paragraph
(j)(1) of proposed Rule 18a-7 would provide that, in the event any
stand-alone SBSD or stand-alone MSBSP finds it necessary to change its
fiscal year, it must file, with the Commission's principal office in
Washington, DC and the regional office of the Commission for the region
in which the SBSD or MSBSP has its principal place of business, a
notice of such change.\753\ Paragraph (j)(2) would provide that the
notice must contain a detailed explanation of the reasons for the
change and that any change in the filing period for the annual reports
must be approved in writing by the Commission.\754\
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\752\ Compare 17 CFR 240.17a-5(n), with paragraph (j) of
proposed Rule 18a-7.
\753\ See paragraph (j)(1) of proposed Rule 18a-7.
\754\ See paragraph (j)(2) of proposed Rule 18a-7.
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Filing Requirements
Paragraph (o) of Rule 17a-5 provides that a filing pursuant to the
rule is deemed to be accomplished when it is received by the
Commission's principal office with duplicates filed simultaneously at
the locations prescribed in other parts of Rule 17a-5.\755\ As broker-
dealers, dually registered broker-dealer SBSDs and broker-dealer MSBSPs
will be required to comply with the filing requirements prescribed in
paragraph (o).
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\755\ See 17 CFR 240.17a-5(o).
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The Commission is proposing to include a parallel filing
requirement in proposed Rule 18a-7 applicable to stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs that mirrors paragraph
(o) of Rule 17a-5.\756\ Specifically, paragraph (k) of proposed Rule
18a-7 would provide that for purposes of the filing requirements in the
rule, filing will be deemed to have been accomplished upon receipt at
the Commission's principal office in Washington, DC, with duplicate
originals simultaneously filed at the locations prescribed in the
particular paragraph of the rule which is applicable.\757\
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\756\ Compare 17 CFR 240.17a-5(o), with paragraph (k) of
proposed Rule 18a-7.
\757\ See paragraph (k) of proposed Rule 18a-7.
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Request for Comment
The Commission generally requests comment on the proposed
amendments to Rule 17a-5 and proposed Rule 18a-7. In addition, the
Commission requests comment, including empirical data in support of
comments, in response to the following questions:
1. Will the majority of stand-alone SBSDs apply to use internal
models to calculate net capital? If not, what portion of stand-alone
SBSDs will apply to use internal models?
[[Page 25246]]
2. Paragraph (j)(2) of proposed Rule 18a-7 would require the
Commission to approve a change in the fiscal year of a stand-alone SBSD
or stand-alone MSBSP. Should the rule instead provide that a stand-
alone SBSD or stand-alone MSBSP may provide notice to the Commission of
a change in fiscal year and that the notice will be deemed approved by
the Commission unless the Commission rejects the change within a
prescribed period of time such as 30, 60, or 90 days? Are there any
other alternative approval mechanisms the Commission should consider?
3. Under the recently adopted amendments to Rule 17a-5, paragraphs
(f)(2)(ii)(F) and (G) require each clearing broker-dealer to include a
representation in its statement regarding its independent public
accountant that the broker-dealer agrees to allow Commission and DEA
examination staff to review the audit documentation associated with its
annual audit reports required under Rule 17a-5 and to allow its
independent public accountant to discuss findings relating to the audit
reports with Commission and DEA examination staff if requested for the
purposes of an examination of the broker-dealer. Should this
requirement apply to stand-alone SBSDs? Explain why or why not.
4. Will entities already registered with the Commission as
investment advisers, but not as broker-dealers, also register with the
Commission as SBSDs? If so, would the compliance report and the
independent public accountant's report based on an examination of the
compliance report be sufficient to satisfy the requirement that certain
investment advisers obtain an internal control report pursuant to Rule
206(4)-2 under the Investment Advisers Act of 1940?
5. Could there be broker-dealer SBSDs that claim an exemption from
Rule 15c3-3, but that would be subject to Rule 18a-4? Please provide
data to support the answer. If there would be a broker-dealer SBSD that
claims an exemption from Rule 15c3-3 but would be subject to Rule 18a-
4, should the firm submit an exemption report under paragraph
(d)(1)(i)(B)(2) relating to its exemption from Rule 15c3-3 and also
submit a compliance report under paragraph (d)(1)(i)(B)(1) of Rule 17a-
5 relating to its compliance with Rule 18a-4? Please explain why or why
not.
6. Paragraph (b)(1) of proposed Rule 18a-7 would require each
nonbank stand-alone SBSD and nonbank stand-alone MSBSP to make certain
documents publicly available on its Web site within ten business days
after the date the firm is required to file its annual reports with the
Commission. Should firms be given more or less time than ten business
days to post the requisite documents on their Web sites? Explain why or
why not.
7. Paragraph (b)(2) of proposed Rule 18a-7 would require each
nonbank stand-alone SBSD and nonbank stand-alone MSBSP to make publicly
available on its Web site unaudited statements as of the date that is
six months after the date of the most recent audited statements filed
with the Commission. These reports would need to be made publicly
available within thirty calendar days of the date of the statements.
Should firms be given more or less time than thirty calendar days to
post their unaudited financial statements on their Web sites? Explain
why or why not.
b. Additional Proposed Amendments to Rule 17a-5
The Commission is proposing several amendments to Rule 17a-5 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission is proposing a global change that would
replace the use of the word ``shall'' in the rule with the word
``must'' or ``will'' where appropriate.\758\ The Commission also
proposes to make certain stylistic, corrective, and punctuation
amendments to improve Rule 17a-5's readability.\759\
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\758\ The proposed amendments would replace the word ``shall''
with the word ``must'' or ``will'' in the following paragraphs of
Rule 17a-5, as proposed to be amended: (a)(1)(v), (a)(2), (a)(3),
(a)(6), (b)(1), (b)(3), (b)(4), (b)(5), (c)(1), (c)(2), (c)(2)(i),
(c)(2)(ii), (c)(3), (c)(4)(iii), (e)(3), note to paragraph (h), (k),
(l), (m)(1), (m)(2), (m)(4), (n)(2), and (o). See Rule 17a-5, as
proposed to be amended.
\759\ The Commission proposes the following stylistic and
corrective changes to Rule 17a-5, as proposed to be amended: (1)
Clarifying in paragraph (a)(5) that ANC broker-dealers must file
additional reports ``with the Commission''; (2) replacing
``monthly'' with ``on a monthly basis'' in paragraph (a)(1)(v); (3)
replacing ``10 largest commitments'' with ``ten largest
commitments'' in paragraph (a)(5)(v)(C); (4) replacing ``broker or
dealer's'' with ``broker's or dealer's'' in paragraphs (a)(5)(v)(D)-
(G); (5) cross-referencing ``paragraphs (c)(1) and (c)(2)'' and
``paragraphs (c)(2)(i) and (c)(2)(ii)'' instead of ``paragraphs
(c)(1) and (2)'' and ``paragraphs (c)(2)(i) and (ii)'' in paragraph
(c)(3); (6) cross-referencing ``paragraphs (c)(2)(iii) and
(c)(2)(iv)'' instead of ``paragraphs (c)(2)(iii) and (iv)'' in
paragraph (c)(5)(i)(C); (9) eliminating the quotation marks around
the defined term ``customer'' in paragraph (c)(4), and instead
italicizing the defined term if it is not already italicized; (7)
replacing the phrase ``Home page'' with the phrase ``home page'' in
paragraph (c)(5)(iii)(C); (8) referring to a broker-dealer's annual
report in the singular instead of the plural in paragraph (e)(1)(ii)
by replacing the phrase ``annual reports'', and the words ``are'',
and ``reports'' with the phrase ``an annual report'', the word
``is'', and the phrase ``a report'', respectively; (9) adding the
word ``the'' before the phrase ``independent public accountant does
not agree'' in paragraph (f)(3)(v)(B); (10) removing the phrase ``by
telegram'' in the last sentence of the Note to paragraph (h); (11)
adding the word ``Reserved'' in brackets in paragraph (j); (12)
replacing the phrase ``Division of Market Regulation'' with the
phrase ``Division of Trading and Markets'' in paragraph (k); (13)
replacing the phrase ``Securities Exchange Act of 1934'' with the
word ``Act'' in paragraph (l); (14) removing the U.S.C. citations
from paragraphs (m)(2) and (m)(4), since the rule already cites to
the applicable section of the Exchange Act; and (15) replacing the
phrase ``Sec. 240.17a-5'' with the phrase ``this section'' in
paragraph (o).
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As a consequence of the proposed deletion of current paragraph
(a)(1) of Rule 17a-5, paragraphs (a)(2)(i), (a)(2)(ii), and (a)(2)(iii)
would be redesignated paragraphs (a)(1)(i), (a)(1)(ii), and
(a)(1)(iii), respectively (and the cross-references to these paragraphs
would also be updated accordingly). Further, as discussed above, the
Commission is proposing to add a new paragraph (a)(1)(iv) to Rule 17a-
5. As a consequence of the proposed deletion of paragraph (a)(1) and
addition of paragraph (a)(1)(iv), paragraph (a)(2)(iv) would be
redesignated paragraph (a)(1)(v). Further, as a consequence of the
deletion of paragraph (a)(1), paragraphs (a)(3), (a)(4), (a)(5),
(a)(6), and (a)(7) of Rule 17a-5 would be redesignated paragraphs
(a)(2), (a)(3), (a)(4), (a)(5), and (a)(6), respectively (and the
cross-references to these paragraphs would also be updated
accordingly).
The Commission is proposing to amend paragraph (a)(4) of Rule 17a-5
to specify that a DEA ``must promptly transmit that information''
obtained through the filing of Form Custody, instead of merely
requiring that the DEA ``transmit the information'' obtained through
the Form Custody filing. Pursuant to this amendment, the DEA must
provide this information promptly to the Commission after it is
obtained from the broker-dealers, which would facilitate the
Commission's monitoring of broker-dealer custody practices.
Instead of grouping the ANC reports required by paragraph (a)(5) by
the applicable timeframe, the Commission is proposing to specify the
applicable timeframe in each paragraph requiring an ANC report to be
filed. As a result, the numbering within paragraph (a)(5) of Rule 17a-
5, as proposed to be amended, would be largely restructured due to the
consolidation of paragraph (a)(5)(i)(A) into paragraph (a)(5)(i), and
due to the elimination of certain sublevels to improve the paragraph's
organization.
As discussed above, the Commission is proposing to add to paragraph
(e)(2) of Rule 17a-5 a reference to Part III of Form X-17A-5, which
contains the required oath or affirmation. Thus, the Commission does
not believe it is necessary to identify the content of the oath or
affirmation, and proposes to
[[Page 25247]]
remove the required text of the oath or affirmation in the rule text.
The Commission also proposes to add clarity by specifying that the oath
or affirmation is ``made in Part III of Form X-17A-5''.
Since the recently adopted amendments to Rule 17a-5 require a more
diverse range of annual filings, the Commission is proposing to amend
paragraph (e)(2) of Rule 17a-5 to reference ``the annual reports''
instead of ``the financial report''.
Reference is made in paragraph (e)(3) to a ``member'' of a national
securities exchange as a distinct class of registrant in addition to a
``broker'' and ``dealer''. The Commission is proposing to remove this
reference to a ``member'' given that the rule applies to brokers-
dealers, which would include a member of a national securities exchange
that is a broker-dealer.
Request for Comment
The Commission generally requests comment on these additional
proposed amendments to Rule 17a-5, including comment on whether any of
the proposed amendments would result in substantive changes to the
requirements applicable to broker-dealers.
C. Notification
1. Introduction
As discussed above, section 764 of the Dodd-Frank Act added section
15F to the Exchange Act.\760\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting for SBSDs and
MSBSPs.\761\ Further, section 15F(f)(1)(A) provides that SBSDs and
MSBSPs shall make such reports as are required by the Commission, by
rule or regulation, regarding the transactions and positions and
financial condition of the SBSD or MSBSP.\762\ In addition, the
Commission also has concurrent authority under section 17(a)(1) of the
Exchange Act to prescribe reporting requirements for broker-
dealers.\763\
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\760\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
\761\ See 15 U.S.C. 78o-10(f)(2).
\762\ See 15 U.S.C. 78o-10(f)(1)(A).
\763\ See 15 U.S.C. 78q(a)(1).
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After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission is proposing to establish a notification program
for these registrants under sections 15F(f) and 17(a) of the Exchange
Act that is modeled on the notification program for broker-dealers
codified in Rule 17a-11.\764\ Rule 17a-11 specifies the circumstances
under which a broker-dealer must notify the Commission and other
regulators about its financial or operational condition, as well as the
form that the notice must take.\765\
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\764\ See 17 CFR 240.17a-11. As discussed below, the Commission
also is proposing a parallel notification requirement applicable to
stand-alone SBSDs that is modeled on a broker-dealer notification
requirement in paragraph (i) of Rule 15c3-3. See 17 CFR 240.15c3-
3(i).
\765\ See 17 CFR 240.17a-11.
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Rule 17a-11 was promulgated in the aftermath of the securities
industry ``paper work crisis'' of 1967-1970.\766\ This crisis prompted
the Commission to undertake a study of unsafe and unsound practices of
brokers and dealers.\767\ The study found, among other things, that
early warning signals required of broker-dealers at the time were
inadequate to foretell financial and operational difficulties in a
reliable and timely manner.\768\ This diminished the Commission's
ability to take effective proactive steps to respond when a broker-
dealer was experiencing or was likely to experience financial
difficulty.\769\ In response, the Commission adopted Rule 17a-11.\770\
This rule requires a broker-dealer to notify the Commission when, among
other things, its net capital falls below 120% of the minimum required
amount or below the minimum required amount, or when the firm fails to
make and keep current the books and records required by Commission
rules.\771\
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\766\ See Study of Unsafe and Unsound Practices of Brokers and
Dealers.
\767\ See id.
\768\ See id. at 2.
\769\ See id. at 12.
\770\ See Prompt Notice of Net Capital or Recordkeeping
Violations, 36 FR 14725. See also Prompt Notice of Net Capital or
Record Keeping Violations, Exchange Act Release No. 9128 (Apr. 20,
1971), 36 FR 7972 (Apr. 28, 1971) (proposing Rule 17a-11)
(``Experience during the past 3 years has demonstrated that neither
the Commission nor any self-regulatory body is receiving an adequate
and timely flow of information on the financial and operational
condition of broker-dealers. Accordingly, there is a need for a
Commission rule which would impose upon firms (and, secondarily,
upon the self-regulatory bodies themselves) a duty to report net
capital and operational problems.'').
\771\ See 17 CFR 240.17a-11.
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The Commission is proposing to establish notification requirements
applicable to SBSDs and MSBSPs in order to require the timely
notification to the Commission of information about potential problems
at these registrants. The Commission would use the notifications to
respond, when necessary, to financial or operational problems at a
particular SBSD or MSBSP by, for example, heightening its supervision
of the firm.
Under the proposed notification program for SBSDs and MSBSPs,
broker-dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would
be subject to Rule 17a-11.\772\ The Commission is proposing amendments
to this rule to account for a broker-dealer that is dually registered
as an SBSD or MSBSP. Stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs would be subject to proposed Rule 18a-8, which is
modeled on Rule 17a-11, as proposed to be amended. Proposed Rule 18a-8
would not include a parallel requirement for every requirement in Rule
17a-11.\773\
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\772\ See id.
\773\ The Commission is not proposing to include in proposed
Rule 18a-8 notice requirements that would parallel the notice
requirements in paragraphs (c)(1) and (2) of Rule 17a-11 because
these requirements relate to ratios in Rule 15c3-1 (the capital rule
for broker-dealers) that are not incorporated into proposed Rule
18a-1 (the proposed capital standard for stand-alone SBSDs) or
proposed Rule 18a-2 (the proposed capital standard for stand-alone
MSBSPs). The Commission is not proposing to include in proposed Rule
18a-8 a notice requirement that would parallel the notice
requirement in paragraph (f) of Rule 17a-11 because this requirement
generally arises in the context of an Exchange's supervision of a
broker-dealer as an SRO of the firm. The Commission is not proposing
to include in proposed Rule 18a-8 a provision that would parallel
the provision in paragraph (h) of Rule 17a-11 because this provision
cross-references notice requirements in other Commission rules that
would not apply to a stand-alone SBSD or stand-alone MSBSP. Finally,
the Commission is not proposing to include in proposed Rule 18a-8 a
provision that would parallel the provision in paragraph (i) of Rule
17a-11 because this provision establishes an exemption for a special
class of broker-dealer.
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For the reasons discussed above in section I. of this release, the
proposed notification requirements for bank SBSDs and bank MSBSPs are
substantially narrower in scope than the notification requirements for
broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs, and
stand-alone MSBSPs. Moreover, the proposed notification requirements
applicable to bank SBSDs and bank MSBSPs, in one case, parallel a
notification requirement the prudential regulators have established for
banks.\774\ Thus, bank SBSDs and bank MSBSPs would be able to use the
same information reported to the prudential regulators to comply with
the proposed requirement.
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\774\ See paragraph (c) of proposed Rule 18a-8.
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2. Amendments to Rule 17a-11 and Proposed Rule 18a-8
Undesignated Introductory Paragraph
Rule 17a-11, as proposed to be amended, would contain an
undesignated introductory paragraph explaining that the rule applies to
a broker-dealer, including a broker-dealer dually registered with the
Commission as an SBSD or MSBSP.\775\ The note
[[Page 25248]]
further explains that an SBSD or MSBSP that is not dually registered as
a broker-dealer (i.e., a stand-alone SBSD, stand-alone MSBSP, bank
SBSD, or bank MSBSP) is subject to the notification requirements under
proposed Rule 18a-8.\776\ Further, the Commission is proposing to
delete paragraph (a) of Rule 17a-11, which provides that the rule shall
apply to every broker-dealer registered pursuant to section 15 of the
Exchange Act.\777\ This text would be redundant, given the proposed
undesignated introductory paragraph of Rule 17a-5.\778\
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\775\ See undesignated introductory paragraph of Rule 17a-11, as
proposed to be amended.
\776\ See id.
\777\ See 17 CFR 240.17a-11(a). As a consequence of this
deletion, paragraphs (b), (c), (d), and (e) of Rule 17a-11 would be
redesignated paragraphs (a), (b), (c), and (d), respectively.
Further, as discussed below, the Commission is proposing to add two
new notification provisions to Rule 17a-11 that would be codified in
paragraphs (e) and (f) of the rule, as proposed to be amended. As a
consequence of the deletion of paragraph (a) and addition of the two
new provisions, paragraphs (f), (g), (h), and (i) would be
redesignated paragraphs (g), (h), (i), and (j), respectively.
\778\ See undesignated introductory paragraph of Rule 17a-11, as
proposed to be amended.
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Similarly, proposed Rule 18a-8 would contain an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
an MSBSP that is not registered as a broker-dealer.\779\ The note
further explains that a broker-dealer that is dually registered as an
SBSD or MSBSP is subject to the notification requirements under Rule
17a-11.\780\
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\779\ See undesignated introductory paragraph of proposed Rule
18a-8.
\780\ See id.
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Failure To Meet Minimum Capital Requirements
Paragraph (b) of Rule 17a-11 requires a broker-dealer to notify the
Commission if the firm's net capital or, if applicable, tentative net
capital declines below the minimum amount required under Rule 15c3-
1.\781\ Specifically, paragraph (b)(1) requires notification to the
Commission when a broker-dealer's net capital falls below the required
level the same day it discovers or is notified by the Commission or its
DEA of the net capital deficiency.\782\ If the broker-dealer disagrees
with the Commission or the DEA that a net capital deficiency exists,
the firm can indicate in the notice the reasons for disagreeing.
Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives dealer or
an ANC broker-dealer to also notify the Commission when its tentative
net capital falls below the minimum required for these types of broker-
dealers.\783\ In either case, the notice must specify the broker-
dealer's net capital or tentative net capital requirement and its
current amount of net capital or tentative net capital.\784\ As broker-
dealers, dually registered SBSDs and MSBSPs will be required to comply
with the existing notification requirements.
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\781\ See 17 CFR 240.17a-11(b).
\782\ See 17 CFR 240.17a-11(b)(1) . Rule 15c3-1 requires broker-
dealers to maintain a minimum level of net capital (meaning highly
liquid capital) at all times. See 17 CFR 240.15c3-1. The rule
requires that a broker-dealer perform two calculations: (1) A
computation of the minimum amount of net capital the broker-dealer
must maintain; and (2) a computation of the amount of net capital
the broker-dealer is maintaining. See 17 CFR 240.15c3-1(a) and
(c)(2). As discussed above in sections II.A. and II.B.2.b. of this
release, the minimum net capital requirement is the greater of a
fixed-dollar amount specified in the rule and an amount determined
by applying one of two financial ratios: The 15-to-1 aggregate
indebtedness to net capital ratio or the 2% of aggregate debit items
ratio. See 17 CFR 240.15c3-1(a).
\783\ See 17 CFR 240.17a-11(b)(2).
\784\ See 17 CFR 240.17a-11(b)(1) and (2). As discussed above,
paragraph (b) of Rule 17a-11 would be redesignated paragraph (a).
Further, as discussed below in section II.C.3. of this release, the
Commission is proposing certain technical amendments to the text in
paragraph (b), which would be contained in paragraph (a) of Rule
17a-11, as proposed to be amended.
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The Commission is proposing to include parallel capital deficiency
notification requirements in proposed Rule 18a-8 applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled on the requirements
in paragraph (b) of Rule 17a-5.\785\ Specifically, paragraph (a)(1)(i)
of proposed Rule 18a-8 would require a stand-alone SBSD to give notice
to the Commission on the same day if the firm's net capital declines
below the minimum amount required pursuant to proposed Rule 18a-1 or if
the Commission informs the stand-alone SBSD that it is or has been in
violation of proposed Rule 18a-1.\786\ The notice would need to specify
the stand-alone SBSD's net capital requirement and its current amount
of net capital.\787\ Further, if the notice is triggered by the
Commission informing the stand-alone SBSD that it is or has been in
violation of proposed Rule 18a-1 and the SBSD disagrees, the SBSD could
specify the reasons for the disagreement in the notice.\788\
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\785\ Compare 17 CFR 240.17a-11(b), with paragraph (a) of
proposed Rule 18a-8.
\786\ See paragraph (a)(1)(i) of proposed Rule 18a-8. Proposed
Rule 18a-1--which is modeled on Rule 15c3-1--would specify minimum
net capital requirements for stand-alone SBSDs. See Capital, Margin,
and Segregation Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70221-70230.
\787\ See paragraph (a)(1)(i) of proposed Rule 18a-8.
\788\ See id.
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Paragraph (a)(1)(ii) of proposed Rule 18a-8 would require a stand-
alone ANC SBSD to give notice to the Commission on the same day if its
tentative net capital declines below the minimum amount required
pursuant to proposed Rule 18a-1 or if the Commission informs the stand-
alone ANC SBSD that is or has been in violation of proposed Rule 18a-
1.\789\ The notice would need to specify the stand-alone ANC SBSD's
tentative net capital requirement and its current amount of tentative
net capital.\790\ Further, if the notice is triggered by the Commission
informing the stand-alone ANC SBSD that it is or has been in violation
of proposed Rule 18a-1 and the SBSD disagrees, the SBSD could specify
the reasons for the disagreement in the notice.\791\
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\789\ See paragraph (a)(1)(ii) of proposed Rule 18a-8. Proposed
Rule 18a-1 would specify minimum tentative net capital requirements
for stand-alone ANC SBSDs. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70226-70227.
\790\ See paragraph (a)(1)(ii) of proposed Rule 18a-8.
\791\ See id.
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Paragraph (a)(2) of proposed Rule 18a-8 would require a stand-alone
MSBSP to give notice to the Commission on the same day if it fails to
maintain a positive tangible net worth pursuant to proposed Rule 18a-2
or if the Commission informs the stand-alone MSBSP that it is or has
been in violation of proposed Rule 18a-2.\792\ The notice would need to
specify the extent to which the firm has failed to maintain positive
tangible net worth. Further, if the notice is triggered by the
Commission informing the stand-alone MSBSP that it is or has been in
violation of proposed Rule 18a-2 and the MSBSP disagrees, the MSBSP
could specify the reasons for the disagreement in the notice.
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\792\ See paragraph (a)(2) of proposed Rule 18a-8. Proposed Rule
18a-2 would require stand-alone MSBSPs to maintain positive tangible
net worth. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257. Under proposed Rule 18a-2, tangible net worth would be
defined to mean the stand-alone MSBSP's net worth as determined in
accordance with generally accepted accounting principles in the
U.S., excluding goodwill and other intangible assets. See id.
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Early Warning of Potential Capital or Model Problem
Paragraph (c) of Rule 17a-11 specifies four events that, if they
occur, trigger a requirement that a broker-dealer send notice promptly
(but within twenty-four hours) to the Commission.\793\ These
[[Page 25249]]
notices are designed to provide the Commission with ``early warning''
that the broker-dealer may experience financial difficulty. The events
triggering the early warning notification requirements are:
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\793\ See 17 CFR 240.17a-11(c).
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The computation of a broker-dealer subject to the
aggregate indebtedness standard of Rule 15c3-1 shows that its aggregate
indebtedness is in excess of 1,200% of its net capital;\794\
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\794\ See 17 CFR 240.17a-11(c)(1). As discussed above, the
minimum net capital requirement for certain types of broker-dealers
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 15-to-1 aggregate indebtedness to
net capital ratio. See 17 CFR 240.15c3-1(a)(1)(i). Consequently,
requiring notification when a broker-dealer has a 12-to-1 aggregate
indebtedness to net capital ratio provides notice before the firm
reaches the minimum 15-to-1 requirement.
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The computation of a broker-dealer which has elected to
use the alternative standard of calculating net capital under Rule
15c3-1 shows that the firm's net capital is less than 5% of aggregate
debit items computed in accordance with Appendix A of Rule 15c3-3;\795\
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\795\ See 17 CFR 240.17a-11(c)(2). As discussed above, the
minimum net capital requirement for certain types of broker-dealers
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 2% of aggregate debit items ratio.
See 17 CFR 240.15c3-1(a)(1)(ii). Consequently, requiring
notification when a broker-dealer has net capital equal to 5% of
aggregate debit items provides notice before the firm reaches the 2%
minimum requirement.
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A broker-dealer's net capital computation shows that its
total net capital is less than 120% of its required minimum level of
net capital or of its required minimum level of tentative net capital,
in the case of an OTC derivatives dealer;\796\
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\796\ See 17 CFR 240.17a-11(c)(3).
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With respect to an OTC derivatives dealer, the occurrence
of the fourth and each subsequent backtesting exception under Appendix
F of Rule 15c3-1 during any 250 business day measurement period.\797\
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\797\ See 17 CFR 240.17a-11(c)(4). OTC derivatives dealers (and
ANC broker-dealers) take market risk charges when computing net
capital that are determined using the VaR models instead of applying
standardized haircuts. The amount of the VaR measure computed by the
model must be multiplied by a factor of at least three but
potentially a greater factor based on the number of exceptions to
the measure resulting from quarterly backtesting exercises. A
backtesting exception occurs when the ANC broker-dealer's actual
one-day loss exceeds the amount estimated by its VaR model. Multiple
backtesting exceptions can indicate a problem with the VaR model.
See, e.g., Basel Committee on Banking Supervision, Supervisory
framework for the use of ``backtesting'' in conjunction with the
internal models approach to market risk capital requirements (Jan.
1996), available at http://www.bis.org/publ/bcbs22.pdf (``The
essence of all backtesting efforts is the comparison of actual
trading results with model-generated risk measures. If this
comparison is close enough, the backtest raises no issues regarding
the quality of the risk measurement model. In some cases, however,
the comparison uncovers sufficient differences that problems almost
certainly must exist, either with the model or with the assumptions
of the backtest. In between these two cases is a grey area where the
test results are, on their own, inconclusive.'').
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As broker-dealers, dually registered SBSDs and MSBSPs will be
required to comply with the existing notification requirements.\798\
The Commission is proposing to add a new notification requirement in
paragraph (c) applicable to broker-dealer MSBSPs. Specifically,
paragraph (c)(5) of Rule 17a-3, as proposed to be amended, would
require a broker-dealer MSBSP to notify the Commission when its level
of tangible net worth falls below $20 million.\799\
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\798\ As discussed above, paragraph (c) of Rule 17a-11 would be
redesignated paragraph (b). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (c), which would be
contained in paragraph (b) of Rule 17a-5, as proposed to be amended.
\799\ See paragraph (b)(6) of Rule 17a-11, as proposed to be
amended. As discussed above, proposed Rule 18a-2 would require
nonbank MSBSP to maintain a positive tangible net equity. See
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70256-70257. The Commission,
however, did not propose that a nonbank MSBSP be required to a
minimum amount of positive net equity. See id. The CFTC proposed a
$20 million fixed-dollar ``tangible net equity'' minimum requirement
for swap dealers and major swap participants that are not FCMs and
are not affiliated with a U.S. bank holding company. See Capital
Requirements of Swap Dealers and Major Swap Participants, 78 FR
27827. Further, OTC derivatives dealers are required to maintain
minimum net capital of $20 million. See 17 CFR 240.15c3-1(a)(5). In
addition, the Commission has proposed a $20 million fixed-dollar
minimum net capital requirement for stand-alone SBSDs. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70221-70227. The proposed $20 million
early warning threshold for broker-dealer MSBSPs is based on these
proposals and requirements.
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The Commission also is proposing to include parallel early warning
notification requirements in proposed Rule 18a-8 applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled on the requirements
in paragraph (c) of Rule 17a-5.\800\ Specifically, paragraph (b)(1) of
proposed Rule 18a-8 would require a stand-alone SBSD to notify the
Commission promptly (but within twenty-four hours) when the SBSD's net
capital falls below 120% of the SBSD's required minimum tentative net
capital.\801\ Paragraph (b)(2) of proposed Rule 18a-8 would require a
stand-alone ANC SBSD to notify the Commission when the SBSD's tentative
net capital falls below 120% of the SBSD's required minimum net
capital.\802\ Paragraph (b)(3) of proposed Rule 18a-8 would require a
stand-alone MSBSP to notify the Commission when its level of tangible
net worth falls below $20 million.\803\ Finally, paragraph (b)(4) of
proposed Rule 18a-8 would require a stand-alone ANC SBSD to report the
occurrence of the fourth and any subsequent backtesting exception
performed pursuant to paragraph (d) of Rule 18a-1 during any 250
business day measurement period.\804\
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\800\ Compare 17 CFR 240.17a-11(c), with paragraph (b) of
proposed Rule 18a-8.
\801\ See paragraph (b)(1) of proposed Rule 18a-8.
\802\ See paragraph (b)(2) of proposed Rule 18a-8.
\803\ See paragraph (b)(3) of proposed Rule 18a-8.
\804\ See paragraph (b)(4) of proposed Rule 18a-8.
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Notice of Adjustment of Reported Capital Category
Prudential regulators have established five capital categories that
are used to describe a bank's capital strength: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.\805\ The definition
of each capital category is based on capital measures under the bank
capital standard and other factors.\806\ A bank is required to notify
its appropriate prudential regulator of adjustments to the bank's
capital category that may have occurred that would put the bank into a
lower capital category from the category previously assigned to it.
Following the notice, the prudential regulator determines whether the
bank needs to adjust its capital category.\807\ Because these notices
may indicate that a bank is in or approaching financial difficulty, the
Commission is proposing to include a notification requirement in
proposed Rule 18a-8 that would require a bank SBSD or a bank MSBSP to
give notice to the Commission when it files an adjustment of reported
capital category with its prudential regulator by transmitting a copy
of the notice to the Commission.\808\
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\805\ See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 208.43.
\806\ See id.
\807\ See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 325.102(c).
\808\ See paragraph (b) of proposed Rule 18a-8.
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Failure To Make and Keep Current Books and Records
Paragraph (d) of Rule 17a-11 requires a broker-dealer that fails to
make and keep current the books and records required under Rule 17a-3
to notify the Commission of this fact on the same day that the failure
arises.\809\ The notice must specify the books and records which have
not been made or which are
[[Page 25250]]
not current.\810\ In addition, a broker-dealer is required to report to
the Commission within forty-eight hours of the original notice a report
stating what the broker or dealer has done or is doing to correct the
situation.\811\ As broker-dealers, dually registered SBSDs and MSBSPs
will be required to comply with the existing notification requirements
in paragraph (d).\812\
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\809\ See 17 CFR 240.17a-11(d).
\810\ See id.
\811\ See id.
\812\ As discussed above, paragraph (d) of Rule 17a-11 would be
redesignated paragraph (c). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain
technical amendments to the text in paragraph (d), which would be
contained in paragraph (c) of Rule 17a-5, as proposed to be amended.
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The Commission is proposing to include a parallel books and records
notification requirement in proposed Rule 18a-7 applicable to stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs that is
modeled on the requirement in paragraph (d) of Rule 17a-5.\813\
Specifically, paragraph (d) of proposed Rule 18a-8 would require a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP that
fails to make and keep current the books and records required under
proposed Rule 18a-5 to give notice of this fact that same day and
specify in the notice the books and records which have not been made or
which are not current.\814\ Further, these registrants would be
required to transmit a report within 48 hours of the notice stating
what the registrant has done or is doing to correct the situation.\815\
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\813\ Compare 17 CFR 240.17a-11(d), with paragraph (d) of
proposed Rule 18a-8.
\814\ See paragraph (d) of proposed Rule 18a-8. As discussed
above in section II.A.2.a. of this release, proposed Rule 18a-5--
which is modeled on Rule 17a-3--would require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.
\815\ See paragraph (d) of proposed Rule 18a-8.
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Material Weakness
The recently adopted amendments to paragraph (e) of Rule 17a-11
require a broker-dealer to provide notification about a material
weakness as that term is defined in Rule 17a-5.\816\ Specifically,
paragraph (e) provides that, whenever a broker-dealer discovers or is
notified by an independent public accountant of a material weakness as
defined in Rule 17a-5, the broker-dealer must: (1) give notice to the
Commission within twenty-four hours of the discovery or notification of
the material weakness; and (2) transmit a report within forty-eight
hours of the notice stating what the broker-dealer has done or is doing
to correct the situation.\817\ As broker-dealers, dually registered
broker-dealer SBSDs and broker-dealer MSBSPs will be required to comply
with the existing notification requirements in paragraph (e).\818\
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\816\ See Broker-Dealer Reports, 78 FR 51993. As discussed above
in section II.B.3.a. of this release, under the recently adopted
amendments to Rule 17a-5, the concept of material weakness is used
for the purposes of the compliance report and the report of the
independent public accountant covering the compliance report. See 17
CFR 240.17a-5(d)(3). A material weakness is defined in Rule 17a-5 to
mean a deficiency, or a combination of deficiencies, in Internal
Control Over Compliance (as that term is defined in the rule) such
that there is a reasonable possibility that non-compliance with Rule
15c3-1 or paragraph (e) of Rule 15c3-3 will not be prevented or
detected on a timely basis or that non-compliance to a material
extent with Rule 15c3-3, except for paragraph (e), Rule 17a-13, or
any Account Statement Rule will not be prevented or detected on a
timely basis. See 17 CFR 240.17a-5(d)(3)(iii). The recently amended
rule further provides that a deficiency in Internal Control Over
Compliance exists when the design or operation of a control does not
allow the management or employees of the broker or dealer, in the
normal course of performing their assigned functions, to prevent or
detect on a timely basis non-compliance with Rule 15c3-1, Rule 15c3-
3, Rule.17a-13, or any Account Statement Rule. See id. The term
Internal Control Over Compliance means internal controls that have
the objective of providing the broker-dealer with reasonable
assurance that non-compliance with Rule 15c3-1, Rule 15c3-3, Rule
17a-13, or any Account Statement Rule will be prevented or detected
on a timely basis. See 17 CFR 240.17a-5(d)(3)(ii).
\817\ See Broker-Dealer Reports, 78 FR 51993. Paragraph (i) of
Rule 17a-12 requires an OTC derivatives dealer to take the same
steps when it discovers or is notified of a material inadequacy as
defined in Rule 17a-12. Rule 17a-12--the reporting rule for OTC
derivatives dealers--is similar to Rule 17a-5. See 17 CFR 240.17a-
12. However, rather than using the concept of material weakness,
Rule 17a-12 uses the concept of material inadequacy. See id. The
Commission replaced the use of material inadequacy with material
weakness in Rule 17a-5 through the recent amendments to the rule,
which were designed, among other things, to (1) increase the focus
of carrying broker-dealers and their independent public accountants
on compliance, and internal control over compliance, with certain
financial and custodial requirements; and (2) strengthen and clarify
broker-dealer audit and reporting requirements in order to
facilitate consistent compliance with these requirements. See
Broker-Dealer Reports, 78 FR 51911. As discussed above in section
II.B.3.a. of this release, the Commission is proposing to use the
concept of material weakness in proposed Rule 18a-7.
\818\ As discussed above, paragraph (e) of Rule 17a-11 would be
redesignated paragraph (d). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (e), which would be
contained in paragraph (d) of Rule 17a-5, as proposed to be amended.
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The Commission is proposing to include a parallel material weakness
notification requirement in proposed Rule 18a-7 applicable to stand-
alone SBSDs that is modeled on paragraph (e) of Rule 17a-11. \819\
Specifically, paragraph (e) of Rule 18a-8 would provide that, whenever
a stand-alone SBSD discovers or is notified by an independent public
accountant of a material weakness as defined in Rule 18a-7, the SBSD
must: (1) give notice to the Commission within twenty-four hours of the
discovery or notification of the material weakness; and (2) transmit a
report within forty-eight hours of the notice indicating what the SBSD
has done or is doing to correct the situation.\820\
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\819\ Compare 17 CFR 240.17a-11(e), with paragraph (e) of
proposed Rule 18a-8. As discussed above in section II.B.3.a. of this
release, stand-alone MSBSPs would not be required to file with the
Commission a compliance report or a report of the independent public
accountant covering the compliance report. Consequently, as the
concept of material weakness is used in the context of these
reports, the material weakness notification requirement would not
apply or be relevant to stand-alone MSBSPs. Further, as discussed
above in section II.B.3.a. of this release, bank SBSDs and bank
MSBSPs would not be subject to the requirements in proposed Rule
18a-7 to file annual reports with the Commission. Consequently, the
material weakness notification requirement would not apply or be
relevant to these registrants.
\820\ See paragraph (e) of proposed Rule 18a-8.
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Insufficient Liquidity Reserves
As discussed above in section II.A. of this release, the Commission
has proposed amendments to Rule 15c3-1 that would establish liquidity
stress test requirements for ANC broker-dealers, which would include
ANC broker-dealer SBSDs.\821\ Further, the Commission has proposed
identical liquidity stress test requirements for stand-alone ANC SBSDs
as part of the capital requirements for SBSDs.\822\ Under the proposed
liquidity stress test requirements, ANC broker-dealers, including ANC
broker-dealer SBSDs, and stand-alone ANC SBSDs would be required, among
other things, to: (1) perform a liquidity stress test at least monthly
that takes into account certain assumed conditions lasting for thirty
consecutive days; and (2) maintain at all times liquidity reserves
based on the results of the liquidity stress test comprised of
unencumbered cash or U.S. government securities.\823\
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\821\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
\822\ See id.
\823\ See id.
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Given the importance to the health of a financial institution of
maintaining adequate liquidity, the Commission is proposing a new
notification requirement that would apply to ANC broker-dealers,
including ANC broker-dealer SBSDs.\824\ Specifically, paragraph (e) of
Rule 17a-5, as proposed to be amended, would require an ANC broker-
dealer to give immediate notice
[[Page 25251]]
in writing if the liquidity stress test conducted pursuant to Rule
15c3-1, as proposed to be amended, indicates that the amount of the
firm's liquidity reserve is insufficient.\825\ The Commission is
proposing to include a parallel liquidity notification requirement in
proposed Rule 18a-8 applicable to stand-alone ANC SBSDs.\826\ The
proposed liquidity notification requirements are designed to provide
the Commission with notice of a liquidity shortfall at an ANC broker-
dealer or stand-alone ANC SBSD that could impair the ability of the
firm to withstand a liquidity crisis.
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\824\ See paragraph (e) of Rule 17a-5, as proposed to be
amended. As discussed above, current paragraph (e) of Rule 17a-5
would be redesignated paragraph (d).
\825\ See paragraph (e) of Rule 17a-11, as proposed to be
amended. Current paragraph (f) of Rule 17a-11 provides that every
national securities exchange or national securities association that
learns that a member broker-dealer has failed to send notice or
transmit a report as required by paragraphs (b), (c), (d), or (e) of
Rule 17a-11, even after being advised by the securities exchange or
the national securities association to send notice or transmit a
report, shall immediately give notice of such failure in accordance
with paragraph (g) of Rule 17a-11. See 17 CFR 240.17a-11(f). As
discussed above, the Commission is proposing to redesignate current
paragraph (f) as paragraph (g). Further, the Commission is proposing
to replace the specific reference to ``paragraphs (b), (c), (d), or
(e)'' of Rule 17a-11 in current paragraph (f) with a reference to
``this section''. This would incorporate all the notices required
under Rule 17a-11, including notices that would be required under
the new liquidity notification requirement. See paragraph (g) of
Rule 17a-11, as proposed to be amended.
\826\ Compare paragraph (e) of Rule 17a-11, as proposed to be
amended, with paragraph (f) of proposed Rule 18a-8.
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Failure To Make a Required Reserve Deposit
As discussed above in section II.A. of this release, Rule 15c3-3
requires a carrying broker-dealer to maintain a reserve of funds or
qualified securities in an account at a bank that is at least equal in
value to the net cash owed to customers, and proposed Rule 18a-4 would
include a parallel requirement with respect to security-based swap
customers applicable to SBSDs, including broker-dealer SBSDs.\827\
Under paragraph (i) of Rule 15c3-3, a broker-dealer is required to
notify the Commission and its DEA if it fails to make a required
deposit into its customer reserve account under Rule 15c3-3.\828\ Since
a broker-dealer SBSD would be required to maintain a separate reserve
account for its security-based swap customers under Rule 18a-4, the
Commission is proposing a new notification requirement in Rule 17a-11
that would be triggered if a broker-dealer fails to make a required
deposit into its security-based swap customer reserve account.\829\ In
addition, the Commission is proposing to include a parallel reserve
account notification requirement in proposed Rule 18a-8 applicable to
stand-alone SBSDs and bank SBSDs.\830\
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\827\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287.
\828\ See 17 CFR 240.15c3-3(i).
\829\ See paragraph (f) of Rule 17a-11, as proposed to be
amended. As discussed above, current paragraph (f) of Rule 17a-5
would be redesignated paragraph (g).
\830\ Compare paragraph (h) of Rule 17a-11, as proposed to be
amended, with paragraph (g) of proposed Rule 18a-8.
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Manner of Notification
Paragraph (g) of Rule 17a-11 provides that every notice or report
required to be given or transmitted by the rule shall be given or
transmitted to the principal office of the Commission in Washington,
DC, the regional office of the Commission for the region in which the
broker-dealer has its principal place of business, the DEA of which
such broker-dealer is a member, and the CFTC if the broker-dealer is
registered as an FCM.\831\
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\831\ See 17 CFR 240.17a-11(g).
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Paragraph (g) further provides that for the purposes of Rule 17a-
11, notice shall be given or transmitted by telegraphic notice or
facsimile transmission and that a report about how the broker-dealer is
addressing a failure to make and keep current books and records or a
material weakness may be transmitted by overnight delivery.\832\ The
Commission is proposing to amend this paragraph to no longer permit
notice by telegraphic transmission, and instead to only allow notice by
facsimile transmission.\833\ This proposal recognizes that telegrams
are no longer widely used in the U.S.,\834\ and that Commission staff
no longer receive Rule 17a-11 notices by telegram. As broker-dealers,
dually registered broker-dealer SBSDs and broker-dealer MSBSPs will be
required to give notice or transmit the notices and reports, including
the proposed new notices, pursuant to the requirements specified in
paragraph (g).\835\
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\832\ See id.
\833\ See paragraph (h) of Rule 17a-11, as proposed to be
amended.
\834\ See Tom Standage, No Morse, L.A. Times, Feb. 8, 2006, at
B15 (noting that Western Union discontinued its telegram services
effective January 27, 2006).
\835\ As discussed above, paragraph (g) of Rule 17a-11 would be
redesignated paragraph (h). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (g), which would be
contained in paragraph (h) of Rule 17a-5, as proposed to be amended.
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The Commission is proposing to include a parallel manner of
notification requirement in proposed Rule 18a-8 that is modeled on
paragraph (g) of Rule 17a-11. \836\ Specifically, paragraph (i) of
proposed Rule 18a-8 would provide that a stand-alone SBSD, stand-alone
MSBSP, bank SBSD, or bank MSBSP required to give notice or transmit a
report under the rule would need to do so in the same manner as a
broker-dealer under paragraph (g) of Rule 17a-11, except there would be
no requirement to give notice or provide a report to a DEA as these
registrants would not have DEAs.\837\
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\836\ Compare 17 CFR 240.17a-11(g), with paragraph (h) of
proposed Rule 18a-8.
\837\ See paragraph (h) of proposed Rule 18a-8.
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Request for Comment
The Commission generally requests comment on the proposed
amendments to Rule 17a-11 and proposed Rule 18a-9. In addition, the
Commission requests comment, including empirical data in support of
comments, in response to the following question:
1. Should paragraph (f) of Rule 17a-11 be amended to require a
broker-dealer's DEA (in addition to a broker-dealer's national
securities exchange or national securities association) to transmit
notice to the Commission upon learning that a broker-dealer failed to
send notice in accordance with Rule 17a-11? If so, explain why. If not,
explain why not. For example, given the responsibilities of a DEA, is a
DEA more likely to learn if a broker-dealer for which it serves as DEA
has failed to send notice in accordance with Rule 17a-11 than a
national securities exchange or national securities association of
which the broker-dealer is a member? Commenters are asked to provide
information and data about the costs and benefits of requiring the DEA
to provide notice.
2. Rule 17a-11 is proposed to be amended to include new
notification requirements applicable to broker-dealers (e.g., requiring
notice if the broker-dealer's liquidity stress test indicates that the
amount of its liquidity reserve is insufficient). Consequently, this
would expand the types of instances in which a national securities
exchange or national securities association would be required to give
notice under paragraph (g) of Rule 17a-11, as proposed to be amended,
if the exchange or association learns that a broker-dealer has failed
to do so under Rule 17a-11. Would this expansion materially increase
the number of notices that would need to be sent by national securities
exchanges and national securities associations under Rule 17a-11? If
so, please explain why and quantify the increased burden
[[Page 25252]]
resulting from the increased number of notices that would need to be
sent.
3. Additional Proposed Amendments to Rule 17a-11
The Commission is proposing several amendments to Rule 17a-11 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission is proposing a global change to Rule 17a-11
that would replace the use of the word ``shall'' in the rule with the
word ``must'' or ``will'' where appropriate.\838\ The Commission also
proposes to make certain stylistic, corrective, and punctuation
amendments to improve Rule 17a-11's readability.\839\
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\838\ The proposed amendments would replace the word ``shall''
with the word ``must'' or ``will'' in the following paragraphs of
Rule 17a-11, as proposed to be amended: (a)(1), (a)(2), (b), (c),
(g), (h), and (j). See Rule 17a-11, as proposed to be amended.
\839\ The Commission proposes the following stylistic and
corrective changes to Rule 17a-11, as proposed to be amended: (1)
Replacing the phrase ``this Sec. 240.17a-11'' with the phrase
``this section'' in paragraph (a)(1); (2) replacing the phrase
``Every broker or dealer who'' with the phrase ``Every broker or
dealer that'' in paragraph (c); (3) replacing the phrase ``such
discovery or notification of the material inadequacy or the material
weakness'' with the phrase ``the discovery or notification of the
material inadequacy or material weakness'' in paragraph (d)(1); and
(4) removing the U.S.C. citations from paragraph (j) since the rule
already cites to the applicable section of the Exchange Act.
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As a consequence of the proposed deletion of paragraph (a),
paragraphs (b), (c), (d), and (e) of Rule 17a-11 would be redesignated
paragraphs (a), (b), (c), and (d), respectively. Further, as discussed
above, the Commission is proposing to add two new notification
provisions to Rule 17a-11 that would be codified in paragraphs (e) and
(f) of the rule, as proposed to be amended. As a consequence of the
deletion of paragraph (a) and the addition of the two new provisions,
paragraphs (f), (g), (h), and (i) would be redesignated paragraphs (g),
(h), (i), and (j), respectively. Similarly, due to the proposed
addition and deletion of paragraphs, the Commission is proposing a
global change that would replace the cross-references to ``paragraph
(g)'' of Rule 17a-11 with ``paragraph (h)'' of Rule 17a-11.\840\
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\840\ The proposed amendments would replace the phrase
``paragraph (g)'' with the phrase ``paragraph (h)'' in the following
paragraphs of Rule 17a-11, as proposed to be amended: (a)(1), (b),
(c), (d)(1), (d)(2), and (g). See Rule 17a-11, as proposed to be
amended.
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Reference is made in paragraph (g) to a ``member'' of a national
securities exchange as a distinct class of registrant in addition to a
``broker'' and ``dealer''. The Commission is proposing to remove this
reference to a ``member'' given that the rule applies to brokers-
dealers, which would include a member of a national securities exchange
that is a broker-dealer.
The Commission is also proposing to replace a specific reference to
the notices required under ``paragraphs (b), (c), (d), or (e)'' of Rule
17a-11 in current paragraph (f) with a reference to ``this section''.
This would incorporate all the notices required under Rule 17a-11,
including notices that would be required under the new security-based
swap customer reserve account notification requirement.
Finally, the Commission proposes to amend paragraph (i) to
reference ``Sec. 240.15c3-1, Sec. 240.15c3-1d, Sec. 240.15c3-3,
Sec. 240.17a-5, and Sec. 240.17a-12'' instead of ``Sec. 240.15c3-
1(a)(6)(iv)(B), Sec. 240.15c3-1(a)(6)(v), Sec. 240.15c3-1(a)(7)(ii),
Sec. 240.15c3-1(c)(2)(x)(B)(1), Sec. 240.15c3-1(e), Sec. 240.15c3-
1d(c)(2), Sec. 240.15c3-3(i), Sec. 240.17a-5(h)(2), and Sec.
240.17a-12(f)(2)''. This proposed amendment corrects certain cross-
references that are outdated due to the recently adopted amendments to
some of these rules.\841\ It also eliminates cross-references to
specific paragraphs in the event of future amendments to these cross-
referenced rules.
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\841\ See Broker-Dealer Reports, 78 FR 51910; Financial
Responsibility Rules for Broker-Dealers, 78 FR 51824.
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Request for Comment
The Commission generally requests comment on these additional
proposed amendments to Rule 17a-11, including comment on whether any of
the proposed amendments would result in substantive changes to the
requirements applicable to broker-dealers.
D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
1. Introduction
As discussed above, section 764 of the Dodd-Frank Act added section
15F to the Exchange Act.\842\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting and recordkeeping for
SBSDs and MSBSPs.\843\ Further, section 15F(f)(1)(A) provides that
SBSDs and MSBSPs shall make such reports as are required by the
Commission, by rule or regulation, regarding the transactions and
positions and financial condition of the SBSD or MSBSP.\844\ In
addition, section 15F(f)(1)(B)(ii) provides that nonbank SBSDs and
nonbank MSBSPs shall keep books and records in such form and manner and
for such period as may be prescribed by the Commission by rule or
regulation.\845\
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\842\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
\843\ See 15 U.S.C. 78o-10(f)(2).
\844\ See 15 U.S.C. 78o-10(f)(1)(A).
\845\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
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After considering the anticipated business activities of nonbank
SBSDs, the Commission is proposing to establish a securities count
program for these registrants under sections 15F that is modeled on the
securities count program for broker-dealers codified in Rule 17a-
13.\846\ Rule 17a-13 requires certain broker-dealers (generally,
broker-dealers that hold funds and securities) to examine and count the
securities they physically hold, account for the securities that are
subject to their control or direction but are not in their physical
possession, verify the locations of securities under certain
circumstances, and compare the results of the count and verification
with their records.\847\
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\846\ See 17 CFR 240.17a-13.
\847\ See id. As noted in section I. of this release, the Dodd-
Frank Act amended the definition of security in section 3(a)(10) of
the Exchange Act to include a security-based swap. See Public Law
111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference
in Rule 17a-13 to a security in the Exchange Act includes a
security-based swap. The Commission, however, has issued temporary
exemptive relief excluding security-based swaps from the definition
of security to the extent Commission rules did not otherwise apply
specifically to security-based swaps prior to the amendment. See
Order Granting Temporary Exemptions under the Securities Exchange
Act of 1934 in Connection with the Pending Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, 76 FR 39927.
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Like Rule 17a-11, Rule 17a-13 was adopted in the aftermath of the
securities industry ``paper work'' crisis of 1967-1970.\848\ At that
time, the Commission identified several factors contributing to the
crisis, including, that securities were not checked and counted
frequently enough nor controlled tightly enough.\849\ The Commission
also identified corrective measures to counter these conditions in the
future,\850\ including requiring broker-dealers to conduct quarterly
security counts as part of the effort to eliminate the ``deficiencies
in broker-dealers' internal controls and procedures for safeguarding
securities reflected by material amounts of unresolved security
differences, suspense balances and unverified
[[Page 25253]]
transfer items.''\851\ As the Commission stated when proposing Rule
17a-13,
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\848\ See Quarterly Securities Counts by Certain Exchange
Members, Brokers and Dealers, Exchange Act Release No. 9140 (Apr.
19, 1971), 36 FR 7974 (Apr. 28, 1971); Net Capital Requirements for
Brokers and Dealers; Amended Rules, Exchange Act Release No. 18417
(Jan. 13, 1982), 47 FR 3512 (Jan. 25, 1982).
\849\ See Study of Unsafe and Unsound Practices of Brokers and
Dealers at 2.
\850\ See id. at 3-5.
\851\ Id. at 30.
One of a broker-dealer's major functions is that of moving funds
from buyer to seller in exchange for securities. The movement of
these funds and securities is monitored and directed by the books
and records of the broker-dealers involved in the various
transactions. To the extent that a firm's records do not accurately
reflect the movement and location of funds and securities, the
ability of that firm to operate efficiently and even its continued
viability come into question. The insolvency of many broker-dealers
in the past few years is attributable to a large extent to their
loss of operational control. Once a firm's operations reach a
certain level of errors, it is a Herculean task, requiring
extraordinary sums of capital, to reverse the process and to resolve
past errors so that the firm's present records accurately reflect
its position. That part of the broker-dealer's operations dealing
with the movement and location of securities has, in the past, been
subject only to the once-a-year check of the X-17A-5 audit. The
accounting record for the location and movement of securities is the
stock record. The annual audit may disclose differences between
positions reflected in the stock record and the results of a
physical count of securities and verification of securities
positions outside the firm. Many accountants have advised and urged
their clients to make regular periodic box counts, but this advice
has not always been followed. Furthermore, some firms have failed to
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research and resolve promptly stock record differences.\852\
\852\ Quarterly Securities Counts by Certain Exchange Members,
Brokers and Dealers, 36 FR 7974.
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Rule 17a-13 continues to play an important role today, given the
volume of securities transactions and the resulting movement of
securities between control locations and broker-dealers.
Under the proposed securities count program for SBSDs, broker-
dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would be
subject to Rule 17a-13. Consequently, they will be required to comply
with the existing securities count requirements in the rule.
Stand-alone SBSDs would be subject to proposed Rule 18a-9, which is
modeled on Rule 17a-13. Proposed Rule 18a-9 would not include a
parallel requirement for every requirement in Rules 17a-13.\853\ In
addition, proposed Rule 18a-9 would not apply to stand-alone MSBSPs
because the customer protection rationale for Rule 17a-13 and proposed
Rule 18a-9 is not as pertinent to stand-alone MSBSPs. For example, the
Commission preliminarily does not anticipate that stand-alone MSBSPs
will engage in securities operations involving the movement of funds
and securities from buyer to seller that are as complex as the
operations of dealers in securities such as broker-dealers and SBSDs.
Finally, for the reasons discussed above in section I. of this release,
proposed Rule 18a-9 would not apply to bank SBSDs and bank MSBSPs.
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\853\ The Commission is not proposing to include in proposed
Rule 18a-9 provisions that would parallel the provisions in
paragraphs (a)(1), (a)(2), (a)(3), and (e) of Rule 17a-13. These
paragraphs of Rule 17a-13 provide exemptions from complying with
Rule 17a-13 for certain types of broker-dealers. See 17 CFR 240.17a-
13(a)(1), (a)(2), (a)(3), and (e). The Commission preliminarily
believes that SBSDs will not limit their activities to the types of
activities in which the exempt broker-dealers engage. However, the
Commission is requesting comment below on this question.
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2. Proposed Rule 18a-9
Undesignated Introductory Paragraph
Proposed Rule 18a-9 contains an undesignated introductory paragraph
explaining that the rule applies only to an SBSD that is not dually
registered as a broker-dealer (i.e., a stand-alone SBSD), provided,
however, that the rule does not apply to an SBSD with a prudential
regulator (i.e., a bank SBSD).\854\ The note further explains that a
broker-dealer, including a broker-dealer that is dually registered as
an SBSD, is subject to the securities count requirements under Rule
17a-13.\855\
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\854\ See undesignated introductory paragraph of proposed Rule
18a-9.
\855\ See id.
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Requirement To Perform a Securities Count
Paragraph (b) of Rule 17a-13 prescribes the requirement to perform
a quarterly securities count and specifies the steps a broker-dealer
must take in performing a count. Specifically, it requires a broker-
dealer to at least once in each calendar quarter:
Physically examine and count all securities held including
securities that are the subjects of repurchase or reverse repurchase
agreements;\856\
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\856\ See 17 CFR 240.17a-13(b)(1).
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Account for all securities in transfer, in transit,
pledged, loaned, borrowed, deposited, failed to receive, failed to
deliver, subject to repurchase or reverse repurchase agreements or
otherwise subject to the broker-dealer's control or direction but not
in the broker-dealer's physical possession by examination and
comparison of the supporting detail records with the appropriate ledger
control accounts;\857\
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\857\ See 17 CFR 240.17a-13(b)(2).
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Verify all securities in transfer, in transit, pledge,
loaned, borrowed, deposited, failed to receive, failed to deliver,
subject to repurchase or reverse repurchase agreements or otherwise
subject to the broker-dealer's control or direction but not in the
broker-dealer's physical possession, where such securities have been in
said status for longer than thirty days;\858\
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\858\ See 17 CFR 240.17a-13(b)(3).
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Compare the results of the count and verification with the
broker-dealer's records; \859\ and
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\859\ See 17 CFR 240.17a-13(b)(4).
---------------------------------------------------------------------------
Record on the books and records of the broker-dealer all
unresolved differences setting forth the security involved and date of
comparison in a security count difference account no later than seven
business days after the date of each required quarterly security
examination, count, and verification in accordance with the
requirements provided in paragraph (c) of the Rule.\860\
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\860\ See 17 CFR 240.17a-13(b)(5). This paragraph further
provides that no examination, count, verification, and comparison
for the purpose of the rule shall be within two months of or more
than four months following a prior examination, count, verification,
and comparison made hereunder. See id.
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In general terms, the rule requires a broker-dealer to physically
examine, count and verify all securities positions (e.g., equities,
corporate bonds, and government securities, and, after the Commission's
exemptive relief expires, security-based swaps), and to compare the
results of the count and verification with the firm's records at least
once each calendar quarter. A securities count difference results when
the count reflects positions different than those reflected in the
firm's books and records. As discussed above in section II.A.2.a. of
this release, a broker-dealer's securities record consists of a
``long'' side and a ``short'' side. The ``long'' side of the record
accounts for the broker-dealer's responsibility as a custodian of
securities and shows, for example, the securities the firm has received
from customers and securities owned by the broker-dealer. The ``short''
side of the record shows where the securities are located such as at a
securities depository. A short securities difference occurs when the
amount of securities on the ``long'' side of the securities record are
greater than the amount of securities on the ``short'' side of the
securities. A long securities difference occurs when the opposite is
true. The rule requires the firm to record on its books and records any
unresolved differences within seven business days after the date of
each required count. The seven business days should be measured from
the date of the commencement of the count. A broker-dealer must take a
capital charge for short securities differences outstanding seven
business
[[Page 25254]]
days or more and for long securities differences where the securities
have been sold before they are adequately resolved.\861\
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\861\ See 17 CFR 240.15c3-1(c)(2)(v).
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The Commission is proposing to include parallel securities count
requirements in proposed Rule 18a-9 that would mirror the requirements
in paragraph (b) of Rule 17a-13.\862\ Consequently, a stand-alone SBSD
would be required to perform a securities count each quarter following
steps specified in paragraph (a) of Rule 18a-9 that are identical to
the steps specified in paragraph (b) of Rule 17a-13.\863\ Moreover, a
securities count would need to be performed no sooner than two months
after the last count and no later than four months after the last
count.\864\
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\862\ Compare 17 CFR 240.17a-13(b), with paragraph (a) of
proposed Rule 18a-9.
\863\ See paragraph (a) of proposed Rule 18a-9.
\864\ See id.
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Date of the Count
Paragraph (c) of Rule 17a-13 provides that: (1) The examination,
count, verification, and comparison may be made either as of a date
certain or on a cyclical basis covering the entire list of securities;
(2) in either case the recordation shall be effected within seven
business days subsequent to the examination, count, verification, and
comparison of a particular security; (3) in the event that an
examination, count, verification, and comparison is made on a cyclical
basis, it shall not extend over more than one calendar quarter-year;
and (4) no security shall be examined, counted, verified, or compared
for the purpose of the rule less than two months or more than four
months after a prior examination, count, verification, and
comparison.\865\ This permits a broker-dealer to perform the securities
count on a rolling basis throughout the quarter as opposed to all in
one day. For example, on day one the broker-dealer could perform the
count with respect to securities of ABC Corporation, on day two the
broker-dealer could perform the count with respect to securities of DEF
Corporation, and on day three the broker-dealer could perform the count
with respect to securities of GHI Corporation.
---------------------------------------------------------------------------
\865\ See 17 CFR 240.17a-13(c).
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The Commission is proposing to include a parallel securities count
requirement in proposed Rule 18a-9 that would mirror the requirement in
paragraph (c) of Rule 17a-13.\866\ Consequently, a stand-alone SBSD
could perform the securities count as of a date certain or on a
cyclical basis subject conditions that are identical to the conditions
in paragraph (c) of Rule 17a-13.\867\
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\866\ Compare 17 CFR 240.17a-13(c), with paragraph (b) of
proposed Rule 18a-9.
\867\ See paragraph (b) of proposed Rule 18a-9.
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Separation of Duties
Paragraph (d) of Rule 17a-13 provides that the examination, count,
verification, and comparison shall be made or supervised by persons
whose regular duties do not require them to have direct responsibility
for the proper care and protection of the securities or the making or
preservation of the subject records.\868\ Thus, the rule requires a
separation of duties as a control to promote the integrity of the
securities count process.\869\
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\868\ See 17 CFR 240.17a-13(d).
\869\ See id.
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The Commission is proposing to include a parallel separation of
duties requirement in proposed Rule 18a-9 that would mirror the
requirement in paragraph (d) of Rule 17a-13.\870\ Consequently, a
stand-alone SBSD would need to assign responsibility for making or
supervising the count to individuals whose regular duties do not
require them to have direct responsibility for the proper care and
protection of the securities or the making or preservation of the
subject records.\871\
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\870\ Compare 17 CFR 240.17a-13(d), with paragraph (c) of
proposed Rule 18a-9.
\871\ See paragraph (c) of proposed Rule 18a-9.
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Exemptions
Paragraph (f) of Rule 17a-13 provides that the Commission may, upon
written request, exempt from the provisions of the rule, either
unconditionally or on specified terms and conditions, any broker-dealer
that satisfies the Commission it is not necessary in the public
interest and for the protection of investors to subject the firm to
certain or all of the provisions of the rule, because of the special
nature of the firm's business, the safeguards the firm has established
for the protection of customers' funds and securities, or such other
reason as the Commission deems appropriate.\872\
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\872\ See 17 CFR 240.17a-13(f).
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The Commission is proposing to include a parallel exemption
provision in proposed Rule 18a-9 that would mirror the provision in
paragraph (f) of Rule 17a-13.\873\ Consequently, a stand-alone SBSD
could seek an exemption from proposed Rule 18a-9 or from a specific
requirement in the rule.\874\ The standard for granting such requests
would be the same standard as is used for granting exemptions from Rule
17a-13.
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\873\ Compare 17 CFR 240.17a-13(f), with paragraph (d) of
proposed Rule 18a-9.
\874\ See paragraph (d) of proposed Rule 18a-9.
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Request for Comment
The Commission generally requests comment on proposed Rule 18a-9.
In addition, the Commission requests comment, including empirical data
in support of comments, in response to the following questions:
1. Are there any categories of stand-alone SBSDs to which proposed
Rule 18a-9 should not apply? If so, explain why.
2. Should proposed Rule 18a-9 apply to stand-alone MSBSPs? If so,
explain why. Should proposed Rule 18a-9 apply to bank SBSDs? If so,
explain why. Should proposed Rule 18a-9 apply to bank MSBSPs? If so,
explain why.
3. How should security-based swaps be treated with respect to the
requirements in Rule 17a-13 and proposed Rule 18a-9 to examine and
count the securities they physically hold, account for the securities
that are subject to their control or direction but are not in their
physical possession, verify the locations of securities under certain
circumstances, and compare the results of the count and verification
with their records?
3. Capital Charge
As discussed above, Rule 15c3-1 requires a broker-dealer to take a
capital charge for short securities differences that are unresolved for
seven days or longer and for long securities differences where the
securities have been sold before they are adequately resolved.\875\ The
Commission's proposed capital rule for stand-alone SBSDs is modeled
closely on Rule 15c3-1 but the proposal did not include these types of
capital charges.\876\ The failure to include these capital charges in
proposed Rule 18a-1 was inadvertent and, consequently, the Commission
is proposing to include them in the rule.
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\875\ See 17 CFR 240.15c3-1(c)(2)(v).
\876\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70214.
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Request for Comment
The Commission generally requests comment on this proposed capital
charge. In addition, the Commission requests comment, including
empirical data in support of comments, in response to the following
questions:
1. Is the proposed capital appropriate for stand-alone SBSDs? If
not, explain why.
[[Page 25255]]
III. General Request for Comment
The Commission invites comment, including relevant data and
analysis, regarding all aspects of the proposed rules. The Commission
also requests comment on appropriate effective dates for the proposals,
including whether it would be appropriate to stagger or delay the
effective dates for the requirements based on the nature or
characteristics of the activities or entities to which they would
apply.
IV. Paperwork Reduction Act
Certain provisions of the rule amendments and new rules proposed in
this release would contain a new ``collection of information'' within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\877\ The
Commission is submitting the proposed rule amendments and proposed new
rules to the Office of Management and Budget (``OMB'') for review and
approval in accordance with the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to a collection of
information unless it displays a currently valid OMB control number.
The titles for the collections of information are:
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\877\ See 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
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(1) Rule 17a-3--Records to be made by certain brokers and dealers
(OMB control number 3235-0033);
(2) Rule 17a-4--Records to be preserved by certain brokers and
dealers (OMB control number 3235-0279);
(3) Rule 17a-5--Reports to be made by certain brokers and dealers
(OMB control number 3235-0123);
(4) Rule 17a-11--Notification provisions for brokers and dealers
(OMB control number 3235-0085);
(5) Rule 18a-5--Records to be made by certain security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
(6) Rule 18a-6--Records to be preserved by certain security-based
swap dealers and major security-based swap participants (a proposed new
collection of information);
(7) Rule 18a-7--Reports to be made by certain security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
(8) Rule 18a-8--Notification provisions for security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
(9) Rule 18a-9--Quarterly security counts to be made by certain
security-based swap dealers (a proposed new collection of information);
and
(10) Form SBS (a proposed new collection of information).
The burden estimates contained in this section do not include any other
possible costs or economic effects beyond the burdens required to be
calculated for PRA purposes.
A. Summary of Collections of Information Under the Proposed Rules and
Proposed Rule Amendments
1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting and recordkeeping for SBSDs and MSBSPs.\878\ Rule
17a-3 requires a broker-dealer to make and keep current certain
records.\879\ The Commission is proposing to amend this rule to account
for the security-based swap and swap activities of broker-dealers,
including broker-dealer SBSDs and broker-dealer MSBSPs. With respect to
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the
Commission is proposing new Rule 18a-5--which is modeled on Rule 17a-3,
as proposed to be amended--to require these registrants to make and
keep current certain records.\880\ Proposed Rule 18a-5 would not
include a parallel requirement for every requirement in Rule 17a-3
because some of the requirements in Rule 17a-3 relate to activities
that are not expected or permitted of SBSDs and MSBSPs. Further, the
proposed recordkeeping requirements for bank SBSDs and bank MSBSPs are
tailored specifically to their activities as an SBSD or an MSBSP
because: (1) the Commission's authority under section 15F(f) of the
Exchange Act is tied to activities related to the SBSD or MSBSP
business; (2) bank SBSDs and bank MSBSPs are subject to recordkeeping
requirements applicable to banks; and (3) the prudential regulators--
rather than the Commission--establish and monitor capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs.
---------------------------------------------------------------------------
\878\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
\879\ See 17 CFR 240.17a-3.
\880\ See proposed Rule 18a-5.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-3 and proposed Rule 18a-5 would
establish a number of new collections of information, as summarized in
the table below.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-SBSD/ MSBSP Non-model broker- ANC broker-dealer Broker-dealer Non-model stand- ANC stand-alone
broker-dealers dealer SBSDs SBSDs MSBSPs alone SBSDs SBSDs Bank SBSDs Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters................. 17a-3(a)(1)*....... 17a-3(a)(1)*...... 17a-3(a)(1)*...... 17a-3(a)(1)*...... 18a-5(a)(1)....... 18a-5(a)(1)....... 18a-5(b)(1)....... 18a-5(a)(1).
General ledger................. ................... .................. .................. .................. 18a-5(a)(2)....... 18a-5(a)(2)....... .................. 18a-5(a)(2).
Ledgers for customer and non- 17a-3(a)(3)*....... 17a-3(a)(3)*...... 17a-3(a)(3)*...... 17a-3(a)(3)*...... 18a-5(a)(3)....... 18a-5(a)(3)....... 18a-5(b)(2)....... 18a-5(a)(3).
customer accounts.
Stock record................... 17a-3(a)(5)*....... 17a-3(a)(5)*...... 17a-3(a)(5)*...... 17a-3(a)(5)*...... 18a-5(a)(4)....... 18a-5(a)(4)....... 18a-5(b)(3)....... 18a-5(a)(4).
Memoranda of brokerage orders.. 17a-3(a)(6)*....... 17a-3(a)(6)*...... 17a-3(a)(6)*...... 17a-3(a)(6)*...... .................. .................. 18a-5(b)(4). ..................
Memoranda of proprietary orders 17a-3(a)(7)*....... 17a-3(a)(7)*...... 17a-3(a)(7)*...... 17a-3(a)(7)*...... 18a-5(a)(5)....... 18a-5(a)(5)....... 18a-5(b)(5)....... 18a-5(a)(5).
Confirmations.................. 17a-3(a)(8)*....... 17a-3(a)(8)*...... 17a-3(a)(8)*...... 17a-3(a)(8)*...... 18a-5(a)(6)....... 18a-5(a)(6)....... 18a-5(b)(6)....... 18a-5(a)(6).
Accountholder information...... 17a-3(a)(9)*....... 17a-3(a)(9)*...... 17a-3(a)(9)*...... 17a-3(a)(9)*...... 18a-5(a)(7)....... 18a-5(a)(7)....... 18a-5(b)(7)....... 18a-5(a)(7).
Options positions.............. ................... .................. .................. .................. 18a-5(a)(8)....... 18a-5(a)(8)....... .................. 18a-5(a)(8).
Trial balances and computation ................... .................. .................. .................. 18a-5(a)(9)....... 18a-5(a)(9)....... .................. 18a-5(a)(9).
of net capital.
Associated person's employment ................... .................. .................. .................. 18a-5(a)(10)...... 18a-5(a)(10)...... 18a-5(b)(8)....... 18a-5(a)(10).
application.
[[Page 25256]]
Liquidity stress test.......... ................... .................. 17a-3(a)(24)...... .................. .................. 18a-5(a)(11).
Account equity and margin ................... 17a-3(a)(25)...... 17a-3(a)(25)...... 17a-3(a)(25)...... 18a-5(a)(12)...... 18a-5(a)(12)...... .................. 18a-5(a)(12).
calculations under proposed
Rule 18a-3.
Possession or control ................... 17a-3(a)(26)...... 17a-3(a)(26)...... .................. 18a-5(a)(13)...... 18a-5(a)(13)...... 18a-5(b)(9).
requirements under proposed
Rule 18a-4.
Customer reserve requirements ................... 17a-3(a)(27)...... 17a-3(a)(27)...... .................. 18a-5(a)(14)...... 18a-5(a)(14)...... 18a-5(b)(10).
under proposed Rule 18a-4.
Unverified transactions........ ................... 17a-3(a)(28)...... 17a-3(a)(28)...... 17a-3(a)(28)...... 18a-5(a)(15)...... 18a-5(a)(15)...... 18a-5(b)(11)...... 18a-5(a)(15).
Political contributions........ ................... 17a-3(a)(29)...... 17a-3(a)(29)...... .................. 18a-5(a)(16)...... 18a-5(a)(16)...... 18a-5(b)(12).
Compliance with external ................... 17a-3(a)(30)...... 17a-3(a)(30)...... 17a-3(a)(30)...... 18a-5(a)(17)...... 18a-5(a)(17)...... 18a-5(b)(13)...... 18a-5(a)(17).
business conduct requirements.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Broker-dealers are currently required to comply with these paragraphs of Rule 17a-3, but the Commission proposes to amend these paragraphs to tailor the types of records that should be made
and kept with respect to security-based swaps, and to make certain technical changes.
2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting and recordkeeping for SBSDs and MSBSPs.\881\ Rule
17a-4 requires a broker-dealer to preserve certain records if it makes
or receives them.\882\ The Commission is proposing to amend this rule
to account for the security-based swap and swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs. With
respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank
MSBSPs, the Commission is proposing new Rule 18a-6--which is modeled on
Rule 17a-4, as proposed to be amended--to require these registrants to
preserve certain records if they make or receive them.\883\ Proposed
Rule 18a-6 would not include a parallel requirement for every
requirement in Rule 17a-4 because some of the requirements in Rule 17a-
4 relate to activities that are not expected or permitted of SBSDs and
MSBSPs. In addition, the recordkeeping requirements for bank SBSDs and
bank MSBSPs are tailored specifically to bank SBSD and bank MSBSP
activities relating to operating as an SBSD or an MSBSP.
---------------------------------------------------------------------------
\881\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
\882\ See 17 CFR 240.17a-4.
\883\ See proposed Rule 18a-6.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-4 and proposed Rule 18a-6 would
establish a number of new collections of information, as summarized in
the table below.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-SBSD/ MSBSP Non-model broker- ANC broker-dealer Broker-dealer Non-model stand- ANC stand-alone
broker- dealers dealer SBSDs SBSDs MSBSPs alone SBSDs SBSDs Bank SBSDs Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Records To Be Preserved for a Period of Not Less Than 6 Years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters................. ................... .................. .................. .................. 18a-6(a)(1) citing 18a-6(a)(1) citing 18a-6(a)(2) citing 18a-6(a)(1) citing
18a-5(a)(1). 18a-5(a)(1). 18a-5(b)(1). 18a-5(a)(1).
General ledger................. ................... .................. .................. .................. 18a-6(a)(1) citing 18a-6(a)(1) citing .................. 18a-6(a)(1) citing
18a-5(a)(2). 18a-5(a)(2). 18a-5(a)(2).
Ledgers for customer and non- ................... .................. .................. .................. 18a-6(a)(1) citing 18a-6(a)(1) citing 18a-6(a)(2) citing 18a-6(a)(1) citing
customer accounts. 18a-5(a)(3). 18a-5(a)(3). 18a-5(b)(2). 18a-5(a)(3).
Stock record................... ................... .................. .................. .................. 18a-6(a)(1) citing 18a-6(a)(1) citing 18a-6(a)(2) citing 18a-6(a)(1) citing
18a-5(a)(4). 18a-5(a)(4). 18a-5(b)(3). 18a-5(a)(4).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Records To Be Preserved for a Period of Not Less Than 3 Years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Memoranda of brokerage orders.. ................... .................. .................. .................. .................. .................. 18a-6(b)(2)(i)
citing 18a-
6(b)(4)
Memoranda of proprietary orders ................... .................. .................. .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i) 18a-6(b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
6(a)(5). 6(a)(5). 6(b)(5). 6(a)(5).
Confirmations.................. ................... .................. .................. .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i) 18a-6(b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
6(a)(6). 6(a)(6). 6(b)(6). 6(a)(6).
[[Page 25257]]
Accountholder information...... ................... .................. .................. .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i) 18a-6(b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
6(a)(7). 6(a)(7). 6(b)(7). 6(a)(7).
Options positions.............. ................... .................. .................. .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) .................. 18a-6(b)(1)(i)
citing 18a- citing 18a- citing 18a-
6(a)(8). 6(a)(8). 6(a)(8).
Trial balances and computation 17a-4(b)(1) citing 17a-4(b)(1) citing 17a-4(b)(1) citing 17a-4(b)(1) citing 18a-6(b)(1)(i) 18a-6(b)(1)(i) .................. 18a-6(b)(1)(i)
of net capital. 17a-3(a)(11). 17a-3(a)(11). 17a-3(a)(11). 17a-3(a)(11). citing 18a- citing 18a- citing 18a-
6(a)(9). 6(a)(9). 6(a)(9).
Liquidity stress test.......... ................... .................. 17a-4(b)(1) citing .................. .................. 18a-6(b)(1)(i)
17a-3(a)(24). citing 18a-
6(a)(11).
Account equity and margin ................... 17a-4(b)(1) citing 17a-4(b)(1) citing 17a-4(b)(1) citing 18a-6(b)(1)(i) 18a-6(b)(1)(i) .................. 18a-6(b)(1)(i)
calculations under proposed 17a-3(a)(25). 17a-3(a)(25). 17a-3(a)(25). citing 18a- citing 18a- citing 18a-
Rule 18a-3. 6(a)(12). 6(a)(12). 6(a)(12).
Possession or control ................... 17a-4(b)(1) citing 17a-4(b)(1) citing .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i)
requirements under proposed 17a-3(a)(26). 17a-3(a)(26). citing 18a- citing 18a- citing 18a-
Rule 18a-4. 6(a)(13). 6(a)(13). 6(b)(9).
Customer reserve requirements ................... 17a-4(b)(1) citing 17a-4(b)(1) citing .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i)
under proposed Rule 18a-4. 17a-3(a)(27). 17a-3(a)(27). citing 18a- citing 18a- citing 18a-
6(a)(14). 6(a)(14). 6(b)(10).
Unverified transactions........ ................... 17a-4(b)(1) citing 17a-4(b)(1) citing 17a-4(b)(1) citing 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i) 18a-6(b)(1)(i)
17a-3(a)(28). 17a-3(a)(28). 17a-3(a)(28). citing 18a- citing 18a- citing 18a- citing 18a-
6(a)(15). 6(a)(15). 6(b)(11). 6(a)(15).
Political contributions........ ................... 17a-4(b)(1) citing 17a-4(b)(1) citing .................. 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i)
17a-3(a)(29). 17a-3(a)(29). citing 18a- citing 18a- citing 18a-
6(a)(16). 6(a)(16). 6(b)(12).
Compliance with external ................... 17a-4(b)(1) citing 17a-4(b)(1) citing 17a-4(b)(1) citing 18a-6(b)(1)(i) 18a-6(b)(1)(i) 18a-6(b)(2)(i) 18a-6(b)(1)(i)
business conduct requirements. 17a-3(a)(30). 17a-3(a)(30). 17a-3(a)(30). citing 18a- citing 18a- citing 18a- citing 18a-
6(a)(17). 6(a)(17). 6(b)(13). 6(a)(17).
Bank records................... ................... .................. .................. .................. 18a-6(b)(1)(ii)... 18a-6(b)(1)(ii)... .................. 18a-6(b)(1)(ii).
Bills.......................... ................... .................. .................. .................. 18a-6(b)(1)(iii).. 18a-6(b)(1)(iii).. .................. 18a-6(b)(1)(iii).
Communications................. 17a-4(b)(4)*....... 17a-4(b)(4)*...... 17a-4(b)(4)*...... 17a-4(b)(4)*...... 18a-6(b)(1)(iv)... 18a-6(b)(1)(iv)... 18a-6(b)(2)(ii)... 18a-6(b)(1)(iv).
Trial balances................. ................... .................. .................. .................. 18a-6(b)(1)(v).... 18a-6(b)(1)(v).... .................. 18a-6(b)(1)(v).
Account documents.............. ................... .................. .................. .................. 18a-6(b)(1)(vi)... 18a-6(b)(1)(vi)... 18a-6(b)(2)(iii).. 18a-6(b)(1)(vi).
Written agreements............. 17a-4(b)(7)*....... 17a-4(b)(7)*...... 17a-4(b)(7)*...... 17a-4(b)(7)*...... 18a-6(b)(1)(vii).. 18a-6(b)(1)(vii).. 18a-6(b)(2)(iv)... 18a-6(b)(1)(vii).
Information supporting 17a-4(b)(8)*....... 17a-4(b)(8)*...... 17a-4(b)(8)*...... 17a-4(b)(8)*...... 18a-6(b)(1)(viii). 18a-6(b)(1)(viii). 18a-6(b)(2)(v).... 18a-6(b)(1)(viii).
financial reports.
Rule 15c3-4 risk management ................... .................. .................. .................. 18a-6(b)(1)(ix)... 18a-6(b)(1)(ix)... .................. 18a-6(b)(1)(ix).
records (OTC derivatives
dealers only).
Internal credit ratings........ ................... .................. .................. .................. .................. 18a-6(b)(1)(x)
Regulation SBSR information.... 17a-4(b)(14)....... 17a-4(b)(14)...... 17a-4(b)(14)...... 17a-4(b)(14)...... 18a-6(b)(1)(xi)... 18a-6(b)(1)(xi)... 18a-6(b)(2)(vi)... 18a-6(b)(1)(xi).
Records relating to business ................... 17a-4(b)(15)...... 17a-4(b)(15)...... 17a-4(b)(15)...... 18a-6(b)(1)(xii).. 18a-6(b)(1)(xii).. 18a-6(b)(2)(vii).. 18a-6(b)(1)(xii).
conduct standards.
Special entity documents....... ................... 17a-4(b)(16)...... 17a-4(b)(16)...... 17a-4(b)(16)...... 18a-6(b)(1)(xiii). 18a-6(b)(1)(xiii). 18a-6(b)(2)(viii). 18a-6(b)(1)(xiii).
Associated person's employment ................... .................. .................. .................. 18a-6(d)(1)....... 18a-6(d)(1)....... 18a-6(d)(1)....... 18a-6(d)(1).
application.
Regulatory authority reports... ................... .................. .................. .................. 18a-6(d)(2)(i).... 18a-6(d)(2)(i).... 18a-6(d)(2)(ii)... 18a-6(d)(2)(i).
Compliance, supervisory, and ................... .................. .................. .................. 18a-6(d)(3)(i).... 18a-6(d)(3)(i).... 18a-6(d)(3)(ii)... 18a-6(d)(3)(i).
procedures manuals.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Life of the enterprise and of any successor enterprise
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate documents............ 17a-4(d)*.......... 17a-4(d)*......... 17a-4(d)*......... 17a-4(d)*......... 18a-6(c).......... 18a-6(c).......... .................. 18a-6(c).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Broker-dealers are currently required to comply with these paragraphs of Rule 17a-4, but the Commission proposes to amend these paragraphs as required by the Dodd-Frank Act or to tailor to
the types of records that should be preserved with respect to security-based swaps, and to make certain technical changes.
[[Page 25258]]
3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs and MSBSPs.\884\ Further, section
15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such reports as
are required by the Commission, by rule or regulation, regarding the
transactions and positions and financial condition of the SBSD or
MSBSP.\885\ The Commission has concurrent authority under section
17(a)(1) of the Exchange Act to prescribe reporting requirements for
broker-dealers.\886\
---------------------------------------------------------------------------
\884\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
\885\ See 15 U.S.C. 78o-10(f)(1)(A).
\886\ See 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------
Rule 17a-5 requires a broker-dealer to annually file reports
audited by a PCAOB-registered independent public accountant, disclose
certain financial information to customers, file with the Commission a
statement about its engagement of an independent public accountant,
notify the Commission of a change of accountant, and to notify the
Commission of the change in fiscal year.\887\ The rule also requires
the independent public accountant to notify the broker-dealer if the
accountant discovers an instance of non-compliance with certain broker-
dealer rules or an instance of material weakness.\888\ Rule 17a-5
requires broker-dealers to file a financial report, compliance report,
and/or exemption report with the Commission on an annual basis.\889\
ANC broker-dealers are required to file with the Commission additional
information relating to market risk, credit risk, and the monthly
liquidity stress test on a periodic basis.\890\
---------------------------------------------------------------------------
\887\ See 17 CFR 240.17a-5.
\888\ See 17 CFR 240.17a-5(h).
\889\ See 17 CFR 240.17a-5(d).
\890\ See 17 CFR 240.17a-5(a)(5).
---------------------------------------------------------------------------
The Commission is proposing amendments to Rule 17a-5 to account for
the security-based swap activities of broker-dealer SBSDs and broker-
dealer MSBSPs.\891\ Proposed Rule 18a-7--which is modeled on Rule 17a-
5, as proposed to be amended--would establish reporting requirements
for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank
MSBSPs.\892\ Under Rule 17a-5, as proposed to be amended, and proposed
Rule 18a-7, SBSDs and MSBSPs would be required to periodically file
proposed Form SBS.\893\ Broker-dealer SBSDs and broker-dealer MSBSPs
would file Form SBS instead of the applicable part of Form X-17A-
5.\894\ Form SBS would include additional entries as compared to Part
II CSE of Form X-17A-5 to account for the firm's security-based swap
activities.
---------------------------------------------------------------------------
\891\ See Rule 17a-5, as proposed to be amended. See also
section II.B. of this release.
\892\ See proposed Rule 18a-7.
\893\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended; paragraphs (a)(1) and (2) of proposed Rule 18a-7. Nonbank
SBSDs and nonbank MSBSPs would be required to file Form SBS on a
monthly basis, whereas bank SBSDs and bank MSBSPs would be required
to file Form SBS on a quarterly basis. Compare paragraphs (a)(1)(iv)
of Rule 17a-5, as proposed to be amended, with paragraph (a)(1) of
proposed Rule 18a-7, and paragraph (a)(2) of proposed Rule 18a-7.
\894\ As described above, a broker-dealer is required to file
with the Commission or the broker-dealer's DEA a different part of
Form X-17A-5 (Part II, Part IIA, Part IIB, or Part II CSE),
depending on the nature of its business.
---------------------------------------------------------------------------
Proposed Rule 18a-7 does not include a parallel requirement for
every requirement in Rule 17a-5.\895\ Moreover, instead of requiring
stand-alone SBSDs and stand-alone MSBSPs to make available to customers
an audited statement of financial condition with appropriate notes and
certain reports of the independent public accountant, the Commission
proposes that stand-alone SBSDs and stand-alone MSBSPs make such
information available on their public Web site.\896\ Further, for the
reasons discussed above, the reporting requirements in proposed Rule
18a-7, other than the requirement to periodically file proposed Form
SBS, would not apply to bank SBSDs and bank MSBSPs.
---------------------------------------------------------------------------
\895\ For example, as described in further detail above, the
Commission is not proposing a requirement in Rule 18a-7 that is
parallel to the exemption report requirement in Rule 17a-5 or the
requirement to file certain reports with SIPC. See 17 CFR 240.17a-
5(d)(4) and (e)(4).
\896\ Compare 17 CFR 240.17a-5(c), with paragraph (b) of
proposed Rule 18a-7.
---------------------------------------------------------------------------
4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs and MSBSPs.\897\ Section 15F(f)(1)(A)
provides that SBSDs and MSBSPs shall make such reports as are required
by the Commission, by rule or regulation, regarding the transactions
and positions and financial condition of the SBSD or MSBSP.\898\ In
addition, the Commission has concurrent authority under section
17(a)(1) of the Exchange Act to prescribe reporting requirements for
broker-dealers.\899\
---------------------------------------------------------------------------
\897\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
\898\ See 15 U.S.C. 78o-10(f)(1)(A).
\899\ See 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------
Rule 17a-11 specifies the circumstances under which a broker-dealer
must notify the Commission and other securities regulators about its
financial or operational condition, as well as the form that the notice
must take.\900\ The Commission is proposing amendments to Rule 17a-11
to account for the security-based swap activities of broker-dealer
SBSDs and broker-dealer MSBSPs.\901\ Proposed Rule 18a-8--which is
modeled on Rule 17a-11, as proposed to be amended--would establish
notification requirements for stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs.\902\
---------------------------------------------------------------------------
\900\ See 17 CFR 240.17a-11.
\901\ See paragraphs (b)(5), (e), and (f) of Rule 17a-11, as
proposed to be amended.
\902\ See proposed Rule 18a-8.
---------------------------------------------------------------------------
Proposed Rule 18a-8 would not include a parallel requirement for
every requirement in Rule 17a-11 because some of the Rule 17a-11
notices relate to calculations that would not be relevant to stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.\903\
Further, the notification requirements for bank SBSDs and bank MSBSPs
are designed to be tailored specifically to their activities as an SBSD
or an MSBSP.
---------------------------------------------------------------------------
\903\ See, e.g., 17 CFR 240.17a-11(b)(2) and (c)(1).
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-11 and proposed Rule 18a-8
would establish a number of new collections of information, as
summarized in the table below.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-SBSD/ MSBSP Non-model broker- ANC broker-dealer Broker-dealer ANC stand-alone Non-model stand-
broker-dealers dealer SBSDs SBSDs MSBSPs SBSDs alone SBSDs Bank SBSDs Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net capital below minimum...... ................... .................. .................. .................. 18a-8............. 18a-8
(a)(1)(i)......... (a)(1)(i).........
Tentative net capital below ................... .................. .................. .................. 18a-8 (a)(1)(ii).
minimum.
[[Page 25259]]
Tangible net worth below ................... .................. .................. .................. .................. .................. .................. 18a-8 (a)(2).
minimum.
Early warning of net capital... ................... .................. .................. .................. 18a-8(b)(1)....... 18a-8(b)(1).
Early warning of tentative net ................... .................. .................. .................. 18a-8 (b)(2).
capital.
Early warning of tangible net ................... .................. .................. 17a-11 (b)(6)..... .................. .................. .................. 18a-8(b)(3).
worth.
Backtesting exception.......... ................... .................. .................. .................. 18a-8(b)(4).
Notice of adjustment of ................... .................. .................. .................. .................. .................. 18a-8(c).
reported capital category.
Failure to make and keep ................... .................. .................. .................. 18a-8(d).......... 18a-8(d).......... 18a-8(d).......... 18a-8(d).
current books and records.
Material weakness.............. ................... .................. .................. .................. 18a-8(e).......... 18a-8(e).
Insufficient liquidity reserves ................... .................. 17a-11(e)......... .................. 18a-8(f).
Failure to make a required 17a-11(f).......... 17a-11(f)......... 17a-11(f)......... .................. 18a-8(g).......... 18a-8(g).......... 18a-8(g).
reserve deposit.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5. Proposed Rule 18a-9
Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs.\904\ In addition, section
15F(f)(2)(B)(ii) provides that nonbank SBSDs shall keep books and
records in such form and manner and for such period as may be
prescribed by the Commission by rule or regulation.\905\
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\904\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
\905\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
---------------------------------------------------------------------------
Proposed Rule 18a-9, which is modeled on Rule 17a-13, would require
stand-alone SBSDs to examine and count the securities they physically
hold, account for the securities that are subject to their control or
direction but are not in their physical possession, verify the
locations of securities under certain circumstances, and compare the
results of the count and verification with their records.\906\
---------------------------------------------------------------------------
\906\ Proposed Rule 18a-9 does not include the exceptions from
applicability that Rule 17a-13 includes. See 17 CFR 240.17a-13(a)
and (e).
---------------------------------------------------------------------------
B. Proposed Use of Information
Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5
would require broker-dealers, SBSDs, and MSBSPs to make and keep
current certain books and records. Rule 17a-4, as proposed to be
amended, and proposed Rule 18a-6 would require broker-dealers, SBSDs,
and MSBSPs to preserve certain records if the firm makes or receives
the type of record. These rules are designed, among other things, to
promote the prudent operation of broker-dealers, SBSDs, and MSBSPs and
to assist the Commission, SROs, and state securities regulators in
conducting effective examinations.\907\ Thus, the collections of
information under the proposed amendments to Rules 17a-3 and 17a-4, and
proposed Rules 18a-5 and 18a-6, would facilitate the examinations of
broker-dealers, SBSDs, and MSBSPs.
---------------------------------------------------------------------------
\907\ See, e.g., Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, 66 FR 55818
(``The Commission has required that broker-dealers create and
maintain certain records so that, among other things, the
Commission, [SROs], and State Securities Regulators . . . may
conduct effective examinations of broker-dealers'' (footnote
omitted)).
---------------------------------------------------------------------------
Rule 17a-5, as proposed to be amended, and proposed Rule 18a-7
would establish reporting requirements for broker-dealers, SBSDs, and
MSBSPs. Rule 17a-11, as proposed to be amended, and proposed Rule 18a-8
would require broker-dealers, SBSDs, and MSBSPs to notify the
Commission of certain events related to their financial condition. The
rules are designed to promote compliance with the proposed financial
responsibility requirements for SBSDs and MSBSPs, facilitate
regulators' oversight and examinations of such firms, and promote
transparency of SBSDs' and MSBSPs' financial condition and operation.
Proposed Rule 18a-9 would require a stand-alone SBSD to physically
examine, count and verify all securities positions (e.g., equities,
corporate bonds, and government securities), and to compare the results
of the count and verification with the firm's records at least once
each calendar quarter. This proposed rule is designed to promote an
SBSD's custody of securities and accurate accounting for securities.
C. Respondents
Consistent with prior releases, the Commission estimates that fifty
or fewer entities ultimately may be required to register with the
Commission as SBSDs.\908\
---------------------------------------------------------------------------
\908\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70292; Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant'', 77 FR 30725.
---------------------------------------------------------------------------
In addition, consistent with prior releases, based on available
data regarding the single-name credit default swap market--which the
Commission believes will comprise the majority of security-based
swaps--the Commission estimates that the number of MSBSPs likely will
be five or fewer and, in actuality, may be zero.\909\ Therefore, to
capture the likely number of MSBSPs that may be subject to the
collections of information for purposes of this PRA, the Commission
estimates for purposes of this PRA that five entities will register
with the Commission as MSBSPs. Accordingly, for purposes of calculating
PRA reporting burdens, the Commission estimates there will be fifty
SBSDs and five MSBSPs.
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\909\ See id.
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[[Page 25260]]
[GRAPHIC] [TIFF OMITTED] TP02MY14.000
Of the five MSBSPs, the Commission estimates that one firm also
would be registered as a broker-dealer and an FCM.\910\ By definition,
an MSBSP's primary business is not engaging in security-based swap
activity, so it would be rare for an MSBSP to qualify as a broker-
dealer and/or FCM but not an SBSD. Such an MSBSP would be engaged in
the business of effecting securities transactions,\911\ but not in the
business of effecting security-based swap transactions \912\ or
commodities, securities futures products, or swaps \913\ and yet
involved in enough security-based swap transactions to be required to
register as an MSBSP.\914\ However, the Commission estimates there will
be one broker-dealer FCM MSBSP for the purposes of calculating PRA
burdens, in recognition that broker-dealer MSBSPs and stand-alone
MSBSPs are subject to different burdens under the proposed and amended
rules in certain instances.\915\
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\910\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65808.
\911\ See 15 U.S.C. 78c(a)(4) (generally defining broker as any
person engaged in the business of effecting transactions in
securities for the account of others).
\912\ See 15 U.S.C. 78c(a)(71) (generally defining security-
based swap dealer as any person who holds himself out as a dealer in
security-based swaps, makes a market in security-based swaps,
regularly enters into security-based swaps with counterparties as an
ordinary course of business for its own account, or engages in any
other activity causing it to be commonly known in the trade as a
dealer or market maker in security-based swaps).
\913\ See 7 U.S.C. 1a(28) (generally defining futures commission
merchant as a person engaged in soliciting or in accepting orders
for the purchase or sale of a commodity for future delivery, a
security futures product, or a swap).
\914\ See 15 U.S.C. 78c(a)(67) (generally defining major
security-based swap participant as any person who is not an SBSD but
maintains a substantial position in security-based swaps for any of
the major security-based swap categories, whose outstanding
security-based swaps could have serious adverse effects on the
financial stability of the U.S. banking system or financial markets,
or is highly leveraged and maintains a substantial position in
security-based swaps for any of the major security-based swap
categories).
\915\ The Commission believes that the broker-dealer MSBSP would
register as an FCM, since the broker-dealer may find it beneficial
to hedge security and security-based swap positions with futures
contracts, options on futures, or swaps. See Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR 65814.
---------------------------------------------------------------------------
The Commission previously estimated that sixteen broker-dealers
would likely seek to register as SBSDs.\916\ The Commission is
retaining this estimate for purposes of this release. The Commission
believes that all sixteen broker-dealer SBSDs also will be registered
as FCMs, since SBSDs may find it beneficial to hedge security-based
swap positions with futures contracts, options on futures, or
swaps.\917\ Accordingly, for purposes of calculating PRA reporting
burdens, the Commission estimates there will be sixteen broker-dealer
FCM SBSDs.
---------------------------------------------------------------------------
\916\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70292.
\917\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65814.
---------------------------------------------------------------------------
For purposes of calculating PRA reporting burdens, the Commission
estimates there would be twenty-five bank SBSDs and nine stand-alone
SBSDs.\918\ Because the Commission estimates that sixteen broker-
dealers would likely register as SBSDs, there would be an estimated
maximum of thirty-four non-broker-dealer SBSDs consisting of bank SBSDs
and stand-alone SBSDs.\919\ For business planning purposes, risk
management purposes, potential regulatory requirements, and other
reasons, some of these entities likely would register with the
Commission as stand-alone SBSDs. Because many of the dealers that
currently engage in OTC derivatives activities are banks, the
Commission estimates that approximately 75% of the thirty-four non-
broker-dealer SBSDs would register as bank SBSDs (i.e., twenty-five
firms),\920\ and the remaining 25% would register as stand-alone SBSDs
(i.e., nine firms).\921\
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\918\ The Commission does not anticipate that any firms will be
dually registered as a broker-dealer and a bank.
\919\ 50 SBSDs - 16 broker-dealer SBSDs = 34 maximum non-broker-
dealer SBSDs.
\920\ 34 maximum estimated non-broker-dealer SBSDs x 75% = 25.5,
rounded to 25 bank SBSDs.
\921\ 34 maximum estimated non-broker-dealer SBSDs x 25% = 8.5,
rounded to 9 stand-alone FCM SBSDs.
---------------------------------------------------------------------------
The Commission believes that none of the bank SBSDS would register
as FCMs, because of the burden associated with complying with three
different supervisors' regulatory requirements.\922\ However, the
Commission believes that all of the stand-alone SBSDs would register as
FCMs, since SBSDs may find it beneficial to hedge security-based swap
positions with futures contracts, options on futures, or swaps.\923\
---------------------------------------------------------------------------
\922\ In addition, the Commission understands that banks do not
register as FCMs; rather, bank affiliates register as FCMs.
\923\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65814.
---------------------------------------------------------------------------
Of the nine stand-alone FCM SBSDs, the Commission estimates that,
based on its experience with ANC broker-dealers and OTC derivatives
dealers, the majority of stand-alone SBSDs would apply to use internal
models.\924\ Consequently, the Commission is estimating that six of the
nine stand-alone SBSDs would apply to operate as ANC stand-alone SBSDs,
which would use internal models to compute net capital under proposed
Rule 18a-1. Because the Commission estimates that there would be six
ANC stand-alone SBSDs, the Commission estimates that three stand-alone
SBSDs would not use internal models to compute net capital.\925\
---------------------------------------------------------------------------
\924\ VaR models, while more risk-sensitive than standardized
haircuts, tend to substantially reduce the amount of the deductions
to tentative net capital in comparison to the standardized haircuts
because the models recognize more offsets between related positions
than the standardized haircuts. Therefore, the Commission expects
that stand-alone SBSDs that have the capability to use internal
models to calculate net capital would choose to do so.
\925\ 9 stand-alone FCM SBSDs - 6 ANC stand-alone FCM SBSDs = 3
non-model stand-alone FCM SBSDs.
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[[Page 25261]]
[GRAPHIC] [TIFF OMITTED] TP02MY14.001
Of the sixteen broker-dealer FCM SBSDs, the Commission estimates
that ten firms would operate as ANC broker-dealer SBSDs, which use
internal models to compute net capital under Rule 15c3-1.\926\ Because
the Commission estimates that ten broker-dealer SBSDs would be ANC
broker-dealer SBSDs, it is estimated that six broker-dealer SBSDs would
not use internal models to compute net capital.\927\
---------------------------------------------------------------------------
\926\ Currently, 6 broker-dealers are registered as ANC broker-
dealers and 1 broker-dealer's application to register as an ANC
broker-dealer is pending. The Commission has previously estimated
that all current and future ANC broker-dealers will also register as
SBSDs. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70293.
\927\ 16 broker-dealer FCM SBSDs - 10 ANC broker-dealer FCM
SBSDs = 6 non-model broker-dealer FCM SBSDs.
---------------------------------------------------------------------------
As of April 1, 2013, there were 4,545 broker-dealers registered
with the Commission. The Commission estimates that twenty-five
registered broker-dealers will be engaged in security-based swap
activities but would not be required to register as an SBSD or MSBSP.
Other than OTC derivatives dealers, which are subject to significant
limitations on their activities, broker-dealers historically have not
participated in a significant way in security-based swap trading for at
least two reasons.\928\ First, because the Exchange Act has not
previously defined security-based swaps as ``securities,'' security-
based swaps have not been required to be traded through registered
broker-dealers.\929\ Second, a broker-dealer engaging in security-based
swap activities is currently subject to existing regulatory
requirements with respect to those activities, including capital,
margin, segregation, and recordkeeping requirements. Specifically, the
existing broker-dealer capital requirements make it relatively costly
to conduct these activities in broker-dealers. As a result, security-
based swap activities are mostly concentrated in
---------------------------------------------------------------------------
\928\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70302.
\929\ See Public Law 111-203, 761 (amending definition of
``security'' in 15 U.S.C. 78c(a)(10)).
[GRAPHIC] [TIFF OMITTED] TP02MY14.002
affiliates of broker-dealers, not broker-dealers themselves.\930\
---------------------------------------------------------------------------
\930\ See International Swaps and Derivatives Association
(``ISDA''), Margin Survey 2012 (May 1, 2012) (``ISDA Margin Survey
2012''), at Appendix 1, available at http://www2.isda.org/attachment/NDM5MQ==/ISDA%20Margin%20Survey%202012%20FORMATTED.pdf.
The ISDA Margin Survey is conducted annually to examine the state of
collateral use and management among derivatives dealers and end-
users. Appendix 1 to the survey lists firms that responded to the
survey including broker-dealers. See id.
---------------------------------------------------------------------------
The Commission generally requests comment on all aspects of these
estimates of the number of respondents. Commenters should provide
specific data and analysis to support any comments they submit with
respect to the number of respondents, including identifying any sources
of industry information that could be used to estimate the number of
respondents.
D. Total Initial and Annual Recordkeeping and Reporting Burden
1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
The proposed amendments to Rule 17a-3 and proposed Rule 18a-5 would
impose collection of information requirements that result in initial
and annual time burdens for broker-dealers, SBSDs, and MSBSPs. Current
Rule 17a-3 imposes an estimated annual burden of 539 hours per firm and
$8,256 in costs and a total industry burden of 2,449,755 hours and
$37,523,520 in costs.\931\ The Commission estimates that the proposed
amendments to Rule 17a-3 would impose the following initial and annual
burdens:
---------------------------------------------------------------------------
\931\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3 (Mar.
28, 2011), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=238297&version=1.
[[Page 25262]]
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
New security-based swap Per firm: 30 hours.. Per firm: 42 hours.
records \932\. Industry: 1,260 Industry: 1,764
hours. hours.
New burdens applicable to Per firm: 60 hours.. Per firm: 75 hours.
broker-dealer SBSDs and Industry: 1,020 Industry: 1,275
broker[dash]dealer MSBSPs hours. hours.
\933\.
New burdens applicable to Per firm: 60 hours.. Per firm: 75 hours.
broker-dealer SBSDs \934\. Industry: 960 hours. Industry: 1,200
hours.
New burdens applicable to Per firm: 20 hours.. Per firm: 25 hours.
ANC broker-dealers \935\. Industry: 200 hours. Industry: 250 hours.
-------------------------------------------
Total--Proposed Industry: 3,440 Industry: 4,489
amendments to Rule 17a- hours. hours.
3.
------------------------------------------------------------------------
The Commission estimates that proposed Rule 18a-5 would impose the
following initial and annual burdens:
---------------------------------------------------------------------------
\932\ See paragraphs (a)(1), (a)(3), (a)(5)(ii), (a)(6)(ii),
(a)(7)(ii), (a)(8)(ii), and (a)(9)(iv) of Rule 17a-3, as proposed to
be amended.
\933\ See paragraphs (a)(25), (a)(28), and (a)(30) of Rule 17a-
3, as proposed to be amended.
\934\ See paragraphs (a)(26), (a)(27), and (a)(29) of Rule 17a-
3, as proposed to be amended.
\935\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Burdens applicable to stand- Per firm: 260 hours Per firm: 325 hours
alone SBSDs and stand-alone and $1,000. and $4,650.
MSBSPs \936\. Industry: 3,380 Industry: 4,225
hours and $13,000. hours and $60,450.
Burdens applicable to stand- Per firm: 60 hours.. Per firm: 75 hours.
alone SBSDs \937\. Industry: 540 hours. Industry: 675 hours.
Burdens applicable to ANC Per firm: 20 hours.. Per firm: 25 hours.
stand-alone SBSDs \938\. Industry: 120 hours. Industry: 150 hours.
Burdens applicable to bank Per firm: 200 hours. Per firm: 250 hours.
SBSDs and bank MSBSPs \939\. Industry: 5,000 Industry: 6,250
hours. hours.
Burdens applicable to bank Per firm: 60 hours.. Per firm: 75 hours.
SBSDs \940\. Industry: 1,500 Industry: 1,875
hours. hours.
-------------------------------------------
Total--Proposed Rule 18a- Industry: 10,540 Industry: 13,175
5. hours and $13,000. hours and $60,450.
------------------------------------------------------------------------
Estimated Ongoing Hours and Costs of Current Rule 17a-3
In the Supporting Statement accompanying the most recent extension
of Rule 17a-3's collection, the estimated ongoing burden for a
registered broker-dealer to make and keep current the books and records
required by Rule 17a-3 averages out to 539 hours per year and $8,256
per year (after adjusting for increases in postage prices), although
actual recordkeeping requirements vary depending on the broker-dealer's
size and complexity.\941\ Given that 4,545 broker-dealers were
registered with the Commission as of April 1, 2013, current Rule 17a-3
creates an estimated industry-wide ongoing annual burden of 2,449,755
hours \942\ and $37,523,520.\943\
---------------------------------------------------------------------------
\936\ See paragraphs (a)(1) through (a)(10), (a)(12), (a)(15),
and (a)(17) of proposed Rule 18a-5.
\937\ See paragraphs (a)(13), (a)(14), and (a)(16) of proposed
Rule 18a-5.
\938\ See paragraph (a)(11) of proposed Rule 18a-5.
\939\ See paragraphs (b)(1) through (b)(8), (b)(11), and (b)(13)
of proposed Rule 18a-5.
\940\ See paragraphs (b)(9), (b)(10), and (b)(12) of proposed
Rule 18a-5.
\941\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-3 at 9 (2,723,970
hours/year/5,057 registered broker-dealers = 539 hours/year per
registered broker-dealer).
\942\ 539 hours/year x 4,545 registered broker-dealers =
2,449,755 hours/year.
\943\ $8,256/year x 4,545 registered broker-dealers =
$37,523,520/year.
---------------------------------------------------------------------------
Estimated Hours and Costs of Proposed Amendments to Rule 17a-3
Many of the proposed amendments to Rule 17a-3 are not expected to
impose an initial burden. Most of the additional proposed amendments
discussed in section II.A.2.b. of this release are largely clarifying
changes that should not impose an hour burden or costs. With respect to
the proposed new records required by the proposed amendments to Rule
17a-3, these are not expected to impose initial dollar costs because
firms should already own or have established the requisite
recordkeeping system software. Firms will likely need to program
software to begin collecting additional records and may need to update
their compliance manuals to reflect that certain paragraphs of Rule
17a-3 have been proposed to be re-numbered. The Commission expects
these services to be performed in-house, and these hourly burdens are
estimated below.
The Commission does not expect there to be a burden associated with
its proposal to modify the definition of securities regulatory
authority to include the CFTC and prudential regulators to the extent
they oversee security-based swap activities, because the Commission
does not expect any broker-dealers to dually register as banks and
estimates that thirty-four broker-dealers would be dually registered as
FCMs,\944\ swap dealers, and/or major swap participants.\945\ In the
three instances that securities regulatory authority is mentioned, the
broker-dealer must provide certain information to its securities
regulatory
[[Page 25263]]
authority if the firm does not make the required record or memorandum
containing the information and the information is requested by the
securities regulatory authority.\946\ The Commission understands that
it is already industry practice to make the required record and
memorandum of the information in these three instances (especially
among more sophisticated entities dually registered with the Commission
and the CFTC), and therefore the Commission does not believe that this
proposed amendment would impose an additional burden.
---------------------------------------------------------------------------
\944\ The Commission estimates that 34 broker-dealers are dually
registered as FCMs-17 non-SBSD/MSBSP broker-dealers, 16 broker-
dealer SBSDs, and 1 broker-dealer MSBSP. As of March 31, 2013, 34
broker-dealers reported a positive value on Line Item 7060 of the
FOCUS Report (amount required to be segregated under CFTC rules),
which is a line item that is only filled in by FCMs.
\945\ The Commission estimates that all 17 estimated broker-
dealer FCM SBSDs and broker-dealer FCM MSBSPs would also register as
swap dealers or major swap participants. See Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR 65814 (estimating that 35 SBSDs or MSBSPs would
also be registered with the CFTC as swap dealers or major swap
participants).
\946\ See paragraphs (a)(6)(i), (a)(7)(i), and (a)(19)(i) of
Rule 17a-3, as proposed to be amended.
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The Commission proposes to eliminate three exemptions from Rule
17a-3 which should not affect the burden of complying with Rule 17a-3.
Paragraph (b)(2) exempts transactions cleared by a bank if the bank
keeps the requisite records for the broker-dealer,\947\ but the
Commission believes that this exemption is not relied on. Paragraph (c)
exempts records of certain U.S. bond sales \948\ and paragraph (d)
exempts records of certain de minimis cash transactions,\949\ but the
Commission believes these transactions are currently automatically
recorded as a matter of practice because it likely takes more time to
identify these transactions as exempt than to make and keep records of
these transactions.
---------------------------------------------------------------------------
\947\ See 17 CFR 240.17a-3(b)(2).
\948\ See 17 CFR 240.17a-3(c).
\949\ See 17 CFR 240.17a-3(d).
---------------------------------------------------------------------------
The Commission proposes to amend paragraphs (a)(1), (a)(3), (a)(5),
(a)(6), (a)(7), (a)(8), and (a)(9) of Rule 17a-3 to include a provision
requiring broker-dealers to make and keep current various records for
security-based swaps.\950\ The Commission estimates that the proposed
amendments to paragraphs (a)(1), (a)(3), (a)(5), (a)(6), (a)(7),
(a)(8), and (a)(9) of Rule 17a-3 would impose on each broker-dealer
that engages in security-based swap activities an initial burden of
thirty hours and an ongoing burden of approximately ten minutes per
business day, or forty-two hours per year.\951\ The Commission
estimates that there are forty-two respondents--sixteen broker-dealer
SBSDs, one broker-dealer MSBSP, and twenty-five non-SBSD/MSBSP broker-
dealers engaged in security-based swap activities.\952\ Thus, these
proposed amendments would add to the industry an estimated initial
burden of 1,260 hours \953\ and an ongoing burden of 1,764 hours per
year.\954\
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\950\ The provision for securities other than security-based
swaps would largely mirror the paragraph's current text. See
paragraphs (a)(1), (a)(3), (a)(5)(i), (a)(6)(i), (a)(7)(i),
(a)(8)(i), and (a)(9)(i) through (iii) of Rule 17a-3, as proposed to
be amended. The provision for security-based swaps would tailor to
security-based swaps the type of records the broker-dealer must make
and keep current. See paragraphs (a)(1), (a)(3), (a)(5)(ii),
(a)(6)(ii), (a)(7)(ii), (a)(8)(ii), and (a)(9)(iv) of Rule 17a-3, as
proposed to be amended.
\951\ (10 minutes/business day/60 minutes/hour) x 251 business
days/year = 42 hours/year. There are 251 non-weekend days in 2013.
The Commission does not include U.S. public holidays in estimating
the number of business days per year, given that many broker-dealers
trading security-based swaps operate internationally.
\952\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 non-
SBSD/MSBSP broker-dealers engaged in security-based swap activities
= 42 broker-dealers engaged in security-based swap activities.
\953\ 30 hours/year x 42 broker-dealers engaged in security-
based swap activities = 1,260 hours/year. These internal hours
likely would be performed by a compliance manager.
\954\ 42 hours/year x 42 broker-dealers engaged in security-
based swap activities = 1,764 hours/year. These internal hours
likely would be performed by a compliance clerk.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-3 would require three
additional types of records to be made and kept current by broker-
dealer SBSDs and broker-dealer MSBSPs.\955\ Because the burden to run
the applicable calculation or comply with the applicable standard is
accounted for in the PRA estimates for proposed Rules 18a-3,\956\ 15Fi-
1,\957\ 15Fh-1 through 15Fh-5, and 15Fk-1,\958\ the burden imposed by
these new requirements is the requirement to make and keep current a
written record of these tasks. The Commission estimates that paragraphs
(a)(25), (a)(28), and (a)(30) of Rule 17a-3, as proposed to be amended,
would impose an initial burden of 60 hours per firm and an ongoing
annual burden of seventy-five hours per firm. The Commission estimates
that there are seventeen respondents (sixteen broker-dealer SBSDs and
one broker-dealer MSBSP), adding to the industry an initial burden of
1,020 hours \959\ and an ongoing burden of 1,275 hours per year.\960\
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\955\ See paragraphs (a)(25), (a)(28), and (a)(30) of Rule 17a-
3, as proposed to be amended (proposing recordkeeping requirements
for Rule 18a-3 calculations, unverified transactions, and compliance
with external business conduct requirements, respectively).
\956\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297.
\957\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3869-3870.
\958\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42443-
42448.
\959\ 60 hours x 17 broker-dealer SBSDs and broker-dealer MSBSPs
= 1,020 hours. These internal hours likely would be performed by a
compliance manager.
\960\ 75 hours/year x 17 broker-dealer SBSDs and broker-dealer
MSBSPs = 1,275 hours/year. These internal hours likely would be
performed by a compliance clerk.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-3 would require three
additional types of records to be made and kept current by broker-
dealer SBSDs.\961\ Because the burden to run the applicable calculation
or comply with the applicable standard is accounted for in the PRA
estimates for proposed Rules 18a-4 \962\ and 15Fh-6,\963\ the burden
imposed by these new requirements is the requirement to make and keep
current a written record of these tasks. The Commission estimates that
paragraphs (a)(26), (a)(27), and (a)(29) of Rule 17a-3, as proposed to
be amended, would impose an initial burden of sixty hours per firm and
an ongoing annual burden of seventy-five hours per firm. The Commission
estimates that there are sixteen broker-dealer SBSDs, adding to the
industry an initial burden of 960 hours \964\ and an ongoing burden of
1,200 hours per year.\965\
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\961\ See Rule 17a-3, as proposed to be amended (paragraph
(a)(26) (compliance with proposed Rule 18a-4 possession or control
requirements); paragraph (a)(27) (proposed Rule 18a-4 reserve
account computations); and paragraph (a)(29) (political
contributions)).
\962\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
\963\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42447.
\964\ 60 hours x 16 broker-dealer SBSDs = 960 hours. These
internal hours likely would be performed by a compliance manager.
\965\ 75 hours/year x 16 broker-dealer SBSDs = 1,200 hours/year.
These internal hours likely would be performed by a compliance
clerk.
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The Commission proposes to add paragraph (a)(24) to Rule 17a-3,
which would require ANC broker-dealers to make and keep current certain
records relating to the firm's monthly liquidity stress test.\966\
Because the burden of actually performing the liquidity stress test and
creating a liquidity funding plan is already accounted for in the PRA
estimate for Rule 15c3-1, as proposed to be amended,\967\ the burden
imposed by paragraph (a)(24) of Rule 17a-3, as proposed to be amended,
is the requirement to make and keep current a written record of these
tasks. The Commission estimates that paragraph (a)(24) would impose on
each ANC broker-dealer an initial burden of twenty hours and an ongoing
burden of twenty-five hours per year. The Commission estimates that
there are ten
[[Page 25264]]
ANC broker-dealers (all of which are assumed to be dually registered as
SBSDs), adding to the industry an initial burden of 200 hours \968\ and
an ongoing burden of 250 hours per year.\969\
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\966\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
\967\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70294.
\968\ 20 hours x 10 ANC broker-dealers = 200 hours. These
internal hours likely would be performed by a compliance manager.
\969\ 25 hours/year x 10 ANC broker-dealers = 250 hours/year.
These internal hours likely would be performed by a compliance
clerk.
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Estimated Hours and Costs of Proposed Rule 18a-5
Dollar Costs. The Commission estimates that proposed Rule 18a-5
would cause a stand-alone SBSD or stand-alone MSBSP to incur an initial
dollar cost of approximately $1,000 to purchase recordkeeping system
software and an ongoing dollar cost of $4,650 per year for associated
equipment and systems development. The Commission estimates that there
are thirteen respondents (nine stand-alone SBSDs and four stand-alone
MSBSPs), resulting in an estimated industry-wide initial burden of
$13,000 \970\ and an industry-wide ongoing burden of $60,450 per
year.\971\
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\970\ $1,000 x 13 stand-alone SBSDs and stand-alone MSBSPs =
$13,000.
\971\ $4,650/year x 13 stand-alone SBSDs and stand-alone MSBSPs
= $60,450/year.
---------------------------------------------------------------------------
Proposed Rule 18a-5 is not expected to increase the initial and
ongoing dollar costs that bank SBSDs and bank MSBSPs incur to purchase
recordkeeping system software and for equipment and systems
development. Banks are already subject to recordkeeping requirements by
the prudential regulators,\972\ so they already own or have established
the requisite recordkeeping system software. Although bank SBSDs and
bank MSBSPs may need to program the software to begin collecting
additional records, the Commission expects these services to be
performed in-house, and these hour burdens are estimated below.
---------------------------------------------------------------------------
\972\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR
219.21 et seq. (Federal Reserve); 12 CFR 344.4 (FDIC).
---------------------------------------------------------------------------
Hour Burden. Proposed Rule 18a-5 would require thirteen types of
records to be made and kept current by stand-alone SBSDs and stand-
alone MSBSPs.\973\ Proposed Rule 18a-5 imposes the burden to make and
keep current these records, but does not require the firm to perform
the underlying task.\974\ Therefore, after consideration of the
estimated burdens under Rule 17a-3, as proposed to be amended, the
Commission estimates that paragraphs (a)(1) through (a)(10), (a)(12),
(a)(15), and (a)(17) of proposed Rule 18a-5 would impose on each firm
an initial burden of 260 hours and an ongoing annual burden of 325
hours. The Commission estimates that there are thirteen respondents
(nine stand-alone SBSDs and four stand-alone MSBSPs), resulting in an
estimated industry-wide initial burden of 3,380 hours \975\ and an
industry-wide ongoing annual burden of 4,225 hours.\976\
---------------------------------------------------------------------------
\973\ See proposed Rule 18a-5 (paragraph (a)(1) (trade
blotters); paragraph (a)(2) (general ledgers); paragraph (a)(3)
(ledgers of customer and non-customer accounts); paragraph (a)(4)
(stock record); paragraph (a)(5) (memoranda of proprietary orders);
paragraph (a)(6) (confirmations); paragraph (a)(7) (accountholder
information); paragraph (a)(8) (options positions); paragraph (a)(9)
(trial balances and computation of net capital); paragraph (a)(10)
(associated person's application); paragraph (a)(12) (proposed Rule
18a-3 calculations); paragraph (a)(15) (unverified transactions);
paragraph (a)(17) (compliance with external business conduct
standards)).
\974\ In estimating the burden associated with proposed Rules
18a-5 and 18a-6, the Commission recognizes that entities that would
register stand-alone SBSDs and stand-alone MSBSPs likely make and
keep some records today as a matter of routine business practice,
but the Commission does not have information about the records that
such entities currently keep. Therefore, the Commission is
estimating the PRA burden for these entities based on the assumption
that they currently keep no records.
\975\ 260 hours x 13 stand-alone SBSDs and stand-alone MSBSPs =
3,380 hours. These internal hours likely would be performed by a
compliance manager.
\976\ 325 hours/year x 13 stand-alone SBSDs and stand-alone
MSBSPs = 4,225 hours/year. These internal hours likely would be
performed by a compliance clerk.
---------------------------------------------------------------------------
Proposed Rule 18a-5 would require three types of records to be made
and kept current by stand-alone SBSDs.\977\ Because the burden to run
the applicable calculation or comply with the applicable standard is
accounted for in the PRA estimates for proposed Rules 18a-4 \978\ and
15Fh-6, \979\ the burden imposed by these new requirements is the
requirement to make and keep current a written record of these tasks.
The Commission estimates that paragraphs (a)(13), (a)(14), and (a)(16)
of proposed Rule 18a-5 would impose an initial burden of sixty hours
per firm and an ongoing annual burden of seventy-five hours per firm.
The Commission estimates that there are nine stand-alone SBSDs,
resulting in an industry-wide initial burden of 540 hours \980\ and an
industry-wide ongoing burden of 675 hours per year.\981\
---------------------------------------------------------------------------
\977\ See proposed Rule 18a-5 (paragraph (a)(13) (compliance
with proposed Rule 18a-4 possession or control requirements);
paragraph (a)(14) (proposed Rule 18a-4 reserve account
computations); and paragraph (a)(16) (political contributions)).
\978\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
\979\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42447.
\980\ 60 hours x 9 stand-alone SBSDs = 540 hours. These internal
hours likely would be performed by a compliance manager.
\981\ 75 hours/year x 9 stand-alone SBSDs = 675 hours/year.
These internal hours likely would be performed by a compliance
clerk.
---------------------------------------------------------------------------
Paragraph (a)(11) of proposed Rule 18a-5 would require ANC stand-
alone SBSDs to make and keep current certain records relating to the
monthly liquidity stress test.\982\ Because the burden of actually
performing the liquidity stress test and creating a liquidity funding
plan is already accounted for in the PRA estimate for proposed Rule
18a-1,\983\ the burden imposed by paragraph (a)(11) of proposed Rule
18a-5 is the requirement to make and keep current a written record of
these tasks. The Commission estimates that paragraph (a)(11) would
impose on each ANC broker-dealer an initial burden of twenty hours and
an ongoing burden of twenty-five hours per year. The Commission
estimates that there are six ANC stand-alone SBSDs, resulting in an
industry-wide initial burden of 120 hours \984\ and an industry-wide
ongoing burden of 150 hours per year.\985\
---------------------------------------------------------------------------
\982\ See paragraph (a)(11) of proposed Rule 18a-5.
\983\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70294.
\984\ 20 hours x 6 ANC stand-alone SBSDs = 120 hours. These
internal hours likely would be performed by a compliance manager.
\985\ 25 hours/year x 6 ANC stand-alone SBSDs = 150 hours/year.
These internal hours likely would be performed by a compliance
clerk.
---------------------------------------------------------------------------
Proposed Rule 18a-5 would require ten types of records to be made
and kept current by bank SBSDs and bank MSBSPs, all of which are
limited to the firm's business as an SBSD or MSBSP.\986\ Proposed Rule
18a-5 imposes the burden to make and keep current these records, but
does not require the firm to perform the underlying task. Therefore,
after consideration of the estimated burdens under Rule 17a-3, as
proposed to be amended, the Commission estimates that paragraphs (b)(1)
through (b)(8), (b)(11), and (b)(13) of proposed Rule 18a-5 would
impose on each firm an initial burden of 200 hours per firm and an
ongoing burden of 250 hours per firm. The Commission estimates that
[[Page 25265]]
there are twenty-five respondents (twenty-five bank SBSDs and no bank
MSBSPs), resulting in an estimated industry-wide initial burden of
5,000 hours \987\ and an industry-wide ongoing burden of 6,250 hours
per year.\988\
---------------------------------------------------------------------------
\986\ See proposed Rule 18a-5 (paragraph (b)(1) (trade
blotters); paragraph (b)(2) (general ledgers); paragraph (b)(3)
(stock record); paragraph (b)(4) (memoranda of brokerage orders);
paragraph (b)(5) (memoranda of proprietary orders); paragraph (b)(6)
(confirmations); paragraph (b)(7) accountholder information);
paragraph (b)(8) (associated person's application); paragraph
(b)(11) (unverified transactions); and paragraph (b)(13) (compliance
with external business conduct requirements)).
\987\ 200 hours x 25 bank SBSDs = 5,000 hours. These internal
hours likely would be performed by a compliance manager.
\988\ 250 hours/year x 25 bank SBSDs = 6,250 hours/year. These
internal hours likely would be performed by a compliance clerk.
---------------------------------------------------------------------------
Proposed Rule 18a-5 would require three types of records to be made
and kept current by bank SBSDs, all of which are limited to the firm's
business as an SBSD.\989\ Because the burden to run the applicable
calculation or comply with the applicable standard is accounted for in
the PRA estimates for proposed Rules 18a-4\990\ and 15Fh-6,\991\ the
burden imposed by these new requirements is the requirement to make and
keep current a written record of these tasks. The Commission estimates
that paragraphs (b)(9), (b)(10), and (b)(12) of proposed Rule 18a-5
would impose an initial burden of sixty hours per firm and an ongoing
annual burden of seventy-five hours per firm. The Commission estimates
that there are twenty-five bank SBSDs, resulting in an industry-wide
initial burden of 1,500 hours\992\ and an industry-wide ongoing burden
of 1,875 hours per year.\993\
---------------------------------------------------------------------------
\989\ See proposed Rule 18a-5 (paragraph (b)(9) (compliance with
proposed Rule 18a-4 possession or control requirements); paragraph
(b)(10) (proposed Rule 18a-4 reserve account computations); and
paragraph (b)(12) (political contributions)).
\990\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
\991\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42447.
\992\ 60 hours x 25 bank SBSDs = 1,500 hours. These internal
hours likely would be performed by a compliance manager.
\993\ 75 hours/year x 25 bank SBSDs = 1,875 hours/year. These
internal hours likely would be performed by a compliance clerk.
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2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
The proposed amendments to Rule 17a-4 and proposed Rule 18a-6 would
impose collection of information requirements that result in initial
and ongoing burdens for broker-dealers, SBSDs, MSBSPs, and certain
third-party custodians. Current Rule 17a-4 imposes an estimated annual
burden of 254 hours per firm and $5,000 and a total industry burden of
1,196,086 hours and $23,545,000.\994\ The Commission estimates that the
proposed amendments to Rule 17a-4 would impose the following initial
and annual burdens:
---------------------------------------------------------------------------
\994\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-4
(Sept. 12, 2013), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=422180&version=0.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Recorded telephone calls Per firm: 13 hours.. Per firm: 6 hours
\995\. Industry: 221 hours. and $2,000
Industry: 102 hours
and $34,000.
New burdens applicable to Per firm: 39 hours.. Per firm: 18 hours
all broker-dealers \996\. Industry: 1,638 and $360
hours. Industry: 756 hours
and $15,120.
New burdens applicable to Per firm: 65 hours.. Per firm: 30 hours
broker-dealer SBSDs and Industry: 1,105 and $600
broker-dealer MSBSPs \997\. hours. Industry: 510 hours
and $10,200.
New burdens applicable to Per firm: 39 hours.. Per firm: 18 hours
broker-dealer SBSDs \998\. Industry: 624 hours. and $360
Industry: 288 hours
and $5,760.
New burdens applicable to Per firm: 13 hours.. Per firm: 6 hours
ANC broker-dealers \999\. Industry: 130 hours. and $120
Industry: 60 hours
and $1,200.
Total--Proposed amendments Industry: 3,718 Industry: 1,716
to Rule 17a-4. hours. hours and $66,280.
------------------------------------------------------------------------
The Commission estimates that proposed Rule 18a-6 would impose the
following initial and annual burdens:
---------------------------------------------------------------------------
\995\ See paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
\996\ See paragraphs (b)(1), (b)(8)(v) through (viii),
(b)(8)(xvi), and (b)(14) of Rule 17a-4, as proposed to be amended.
\997\ See paragraphs (b)(1), (b)(15), and (b)(16) of Rule 17a-4,
as proposed to be amended.
\998\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended.
\999\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Burdens applicable to stand- Per firm: 364 hours. Per firm: 280 hours
alone SBSDs and stand-alone Industry: 4,732 and $5,720.
MSBSPs \1000\. hours. Industry: 3,640
hours and $74,360.
Burdens applicable to stand- Per firm: 44 hours.. Per firm: 30 hours
alone SBSDs \1001\. Industry: 396 hours. and $360.
Industry: 270 hours
and $3,240.
Burdens applicable to ANC Per firm: 31 hours.. Per firm: 20 hours
stand-alone SBSDs \1002\. Industry: 186 hours. and $240.
Industry: 120 hours
and $1,440.
Burdens applicable to bank Per firm: 247 hours. Per firm: 190 hours
SBSDs and bank MSBSPs Industry: 6,175 and $4,520.
\1003\. hours. Industry: 4,750
hours and $113,000.
Burdens applicable to bank Per firm: 57 hours.. Per firm: 40 hours
SBSDs \1004\. Industry: 1,425 and $480.
hours. Industry: 1,000
hours and $12,000.
Burdens applicable to third- Per firm: 0 hours... Per firm: 2 hours.
party custodians \1005\. Industry: 0 hours... Industry: 38 hours.
Total--Proposed Rule 18a-6.. Industry: 12,914 Industry: 9,818
hours. hours and $204,078.
------------------------------------------------------------------------
[[Page 25266]]
Estimated Hours and Costs of Current Rule 17a-4
---------------------------------------------------------------------------
\1000\ See paragraphs (a)(1), (b)(1)(i) through (ix), (b)(1)(xi)
through (xiii), (c), (d)(1), (d)(2)(i), and (d)(3)(i) of proposed
Rule 18a-6.
\1001\ See paragraph (b)(1)(i) of proposed Rule 18a-6.
\1002\ See paragraphs (b)(1)(i) and (b)(1)(x) of proposed Rule
18a-6.
\1003\ See paragraphs (a)(2), (b)(2)(i) through (iv), (b)(2)(vi)
through (viii), (d)(1), (d)(2)(ii), and (d)(3)(ii) of proposed Rule
18a-6.
\1004\ See paragraphs (b)(2)(i) and (b)(2)(v) of proposed Rule
18a-6.
\1005\ See paragraph (f) of proposed Rule 18a-6.
---------------------------------------------------------------------------
The Supporting Statement accompanying the most recent extension of
Rule 17a-4's collection estimates that each registered broker-dealer
spends 254 hours to ensure it is in compliance with Rule 17a-4 and
produce records promptly when required, and $5,000 each year on
physical space and computer hardware and software to store the
requisite documents and information.\1006\ Given that 4,545 broker-
dealers were registered with the Commission as of April 1, 2013,
current Rule 17a-4 creates an estimated industry-wide ongoing annual
cost of 1,154,430 hours \1007\ and $22,725,000.\1008\
---------------------------------------------------------------------------
\1006\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-4.
\1007\ 254 hours/year x 4,545 registered broker-dealers =
1,154,430 hours/year.
\1008\ $5,000/year x 4,545 registered broker-dealers =
$22,725,000/year.
---------------------------------------------------------------------------
Estimated Hours and Costs of Proposed Amendments to Rule 17a-4
Many of the proposed amendments to Rule 17a-4 are not expected to
change the estimated burden imposed by Rule 17a-4. Most of the
additional proposed amendments discussed in section II.A.3.b. of this
release are largely clarifying changes that do not affect the
Commission's burden estimate. Similarly, paragraph (m)(5) of Rule 17a-
4, as proposed to be amended, which adds a definition for business as
such,\1009\ is a clarifying amendment that should not affect the rule's
burden.
---------------------------------------------------------------------------
\1009\ See paragraph (m)(5) of Rule 17a-4, as proposed to be
amended.
---------------------------------------------------------------------------
The Commission believes there is no burden associated with its
proposal that a broker-dealer retain a record of the proof of money
balances of all ledger accounts in the form of trial balances, and a
record of the computation of aggregate indebtedness and net
capital.\1010\ Since Rule 17a-3 requires broker-dealers to make these
records, the Commission understands that it is already industry
practice for broker-dealers to also keep these records. In addition,
Rule 17a-4 already requires broker-dealers to keep records containing
substantially similar information,\1011\ so that the same record would
likely also include the information required by this proposed amendment
to Rule 17a-4.
---------------------------------------------------------------------------
\1010\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended (cross-referencing paragraph (a)(11) of Rule 17a-3, as
proposed to be amended (proof of money balances)).
\1011\ See Rule 17a-4, as proposed to be amended (paragraph
(b)(5) (trial balances, computations of aggregate indebtedness and
net capital); paragraph (b)(8)(i) (money balance and position in
securities accounts payable to customers); paragraph (b)(8)(i)
(money balance and position in securities accounts payable to non-
customers)).
---------------------------------------------------------------------------
The Commission believes there is no burden associated with its
proposal that a security-based swap customer or non-customer's written
agreements be maintained with his or her account records,\1012\ because
the Commission understands that it is already industry practice to keep
written agreements with the relevant person's account records.
---------------------------------------------------------------------------
\1012\ See paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
---------------------------------------------------------------------------
Certain proposed amendments to Rule 17a-4 would require broker-
dealer SBSDs and broker-dealer MSBSPs to retain certain new records but
would no longer require them to retain other records required to be
kept by non-SBSD/MSBSP broker-dealers. Specifically, broker-dealer
SBSDs and broker-dealer MSBSPs must preserve proposed Form SBS instead
of Form X-17A-5,\1013\ possession or control information for security-
based swap customers under proposed Rule 18a-4 instead of under Rule
15c3-3,\1014\ and Forms SBSE-BD and SBSE-W instead of Forms BD and
BDW.\1015\ These proposed amendments are not expected to significantly
change the number of documents that the broker-dealer must preserve,
but simply the type of document that must be preserved--a factor that
is not expected to affect Rule 17a-4's burden.
---------------------------------------------------------------------------
\1013\ See paragraph (b)(8) of Rule 17a-4, as proposed to be
amended.
\1014\ See paragraph (b)(8)(xiv) of Rule 17a-4, as proposed to
be amended.
\1015\ See paragraph (d) of Rule 17a-4, as proposed to be
amended.
---------------------------------------------------------------------------
The Commission proposes to amend paragraph (b)(4) of Rule 17a-4 to
require broker-dealer SBSDs and broker-dealer MSBSPs to retain
telephone calls that have already been recorded and are related to the
broker-dealer SBSD's and broker-dealer MSBSP's security-based swap
business.\1016\ Paragraph (b)(4) of Rule 17a-4, as proposed to be
amended, only requires the retention of telephonic recordings the
broker-dealer SBSD or broker-dealer MSBSP voluntarily chooses to
record, so the Commission's burden estimate does not include the cost
of recording phone calls. Therefore, the burdens imposed by the
proposed amendment would be to provide adequate physical space and
computer hardware and software for storage. The Commission estimates
that the proposed amendment to paragraph (b)(4) of Rule 17a-4 would
impose an initial burden of 13 hours per firm. The Commission estimates
that there are seventeen respondents (sixteen broker-dealer SBSDs and
one broker-dealer MSBSP), resulting in an estimated industry-wide
initial burden of 221 hours.\1017\
---------------------------------------------------------------------------
\1016\ See paragraph (b)(4) of Rule 17a-4, as proposed to be
amended.
\1017\ 13 hours x 17 broker-dealer SBSDs and broker-dealer
MSBSPs = 221 hours. These internal hours likely would be performed
by a senior database administrator.
---------------------------------------------------------------------------
The Commission estimates that each firm would incur an annual
burden of approximately six hours to confirm that telephonic
communications are being retained in accordance with Rule 17a-4, and
approximately $2,000 for server, equipment, and systems development
costs. The Commission estimates that there are seventeen respondents
(sixteen broker-dealer SBSDs and one broker-dealer MSBSP), resulting in
an estimated industry-wide ongoing annual cost of 102 hours \1018\ and
$34,000.\1019\
---------------------------------------------------------------------------
\1018\ 6 hours x 17 broker-dealer SBSDs and broker-dealer MSBSPs
= 102 hours. These internal hours likely would be performed by a
compliance clerk.
\1019\ $2,000 x 17 broker-dealer SBSDs and broker-dealer MSBSPs
= $34,000.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-4 would add three types of
records to be preserved by broker-dealers.\1020\ Because the burden to
create these records is already accounted for in the PRA estimates for
Rule 17a-3,\1021\ Rule 15c3-1,\1022\ or in proposed Regulation
SBSR,\1023\ the burdens imposed by these new requirements are to ensure
there is adequate physical space and computer hardware and software for
storage, ensure these records are preserved for the requisite time
period, and produce them when requested. The Commission estimates that
the proposed amendments to paragraphs (b)(8)(v)-
[[Page 25267]]
(viii) and proposed paragraphs (b)(8)(xvi) and (b)(14) of Rule 17a-4
would impose an initial burden of thirty-nine hours per firm and an
ongoing annual burden of eighteen hours and $360 per firm. The
Commission estimates that there are forty-two respondents--sixteen
broker-dealer SBSDs, one broker-dealer MSBSP, and twenty-five non-SBSD/
MSBSP broker-dealers engaged in security-based swap activities.\1024\
Thus, these proposed amendments would add to the industry an estimated
initial burden of 1,638 hours \1025\ and an ongoing annual burden of
756 hours \1026\ and $15,120.\1027\
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\1020\ See Rule 17a-4, as proposed to be amended (paragraph
(b)(8)(v) through (viii) (identifying information about swaps);
paragraph (b)(8)(xvi) (risk margin calculation); and paragraph
(b)(14) (Regulation SBSR information)).
\1021\ See id. See also Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3.
\1022\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 15c3-1
(July 1, 2010), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=184515&version=1.
\1023\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 75 FR 75246-75250.
\1024\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 non-
SBSD/MSBSP broker-dealers engaged in security-based swap activities
= 42 broker-dealers engaged in security-based swap activities.
\1025\ 39 hours x 42 respondents = 1,638 hours. These internal
hours likely would be performed by a senior database administrator.
\1026\ 18 hours/year x 42 respondents = 756 hours/year. These
internal hours likely would be performed by a compliance clerk.
\1027\ $360 x 42 respondents = $15,120.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-4 would add five types of
records to be preserved by broker-dealer SBSDs and broker-dealer
MSBSPs.\1028\ Because the burden to create these records is accounted
for in the PRA estimates for Rule 17a-3,\1029\ or proposed Rules 15Fh-1
through 15Fh-5 and 15Fk-1,\1030\ the burdens imposed by these proposed
amendments are to ensure there is adequate physical space and computer
hardware and software for storage, ensure these records are preserved
for the requisite time period, and produce them when requested. The
Commission estimates that the proposed amendments to paragraph (b)(1)
and proposed new paragraphs (b)(15) and (b)(16) of Rule 17a-4 would
impose an initial burden of sixty-five hours per firm and an ongoing
annual burden of thirty hours and $600 per firm. The Commission
estimates that there are seventeen respondents (sixteen broker-dealer
SBSDs and one broker-dealer MSBSP), adding to the industry an initial
burden of 1,105 hours\1031\ and an ongoing annual burden of 510 hours
\1032\ and $10,200.\1033\
---------------------------------------------------------------------------
\1028\ See Rule 17a-4, as proposed to be amended (paragraph
(b)(1), cross-referencing paragraph (a)(25) of Rule 17a-3, as
proposed to be amended (proposed Rule 18a-3 calculations); paragraph
(b)(1), cross-referencing paragraph (a)(28) of Rule 17a-3, as
proposed to be amended (unverified transactions); paragraph (b)(1),
cross-referencing paragraph (a)(30) of Rule 17a-3, as proposed to be
amended (compliance with external business conduct standards);
paragraph (b)(15) (documents and notices related to the external
business conduct standards); and paragraph (b)(16) (special entity
documents).
\1029\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3. See
also section IV.D.1. of this release.
\1030\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42443-
42448.
\1031\ 65 hours x 17 broker-dealer SBSDs and broker-dealer
MSBSPs = 1,105 hours. These internal hours likely would be performed
by a senior database administrator.
\1032\ 30 hours/year x 17 broker-dealer SBSDs and broker-dealer
MSBSPs = 510 hours/year. These internal hours likely would be
performed by a compliance clerk.
\1033\ $600 x 17 broker-dealer SBSDs and broker-dealer MSBSPs =
$10,200.
---------------------------------------------------------------------------
The proposed amendments to Rule 17a-4 would add three types of
records to be preserved by broker-dealer SBSDs.\1034\ Because the
burden to create these records is accounted for in the PRA estimate for
Rule 17a-3, as proposed to be amended,\1035\ the burdens imposed by
these new requirements are to ensure there is adequate physical space
and computer hardware and software for storage, ensure these records
are preserved for the requisite time period, and produce them when
requested. The Commission estimates that the proposed amendments to
paragraph (b)(1) of Rule 17a-4 would impose an initial burden of
thirty-nine hours per firm and an ongoing annual burden of eighteen
hours and $360 per firm. The Commission estimates that there are 16
broker-dealer SBSDs, adding to the industry an initial burden of 624
hours\1036\ and an ongoing annual burden of 288 hours\1037\ and
$5,760.\1038\
---------------------------------------------------------------------------
\1034\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended (cross-referencing paragraph (a)(26) of Rule 17a-3, as
proposed to be amended (compliance with proposed Rule 18a-4
possession or control requirements); paragraph (a)(27) of Rule 17a-
3, as proposed to be amended (proposed Rule 18a-4 reserve account
computations); and paragraph (a)(29) of Rule 17a-3, as proposed to
be amended (political contributions)).
\1035\ See section IV.D.1. of this release.
\1036\ 39 hours x 16 broker-dealer SBSDs = 624 hours. These
internal hours likely would be performed by a senior database
administrator.
\1037\ 18 hours/year x 16 broker-dealer SBSDs = 288 hours/year.
These internal hours likely would be performed by a compliance
clerk.
\1038\ $360 x 16 broker-dealer SBSDs = $5,760.
---------------------------------------------------------------------------
Paragraph (b)(1) of Rule 17a-4, as proposed to be amended, would
require ANC broker-dealers to preserve certain records relating to the
firm's monthly liquidity stress test.\1039\ Because the burden to
create this record is accounted for in the PRA estimate for Rule 17a-3,
as proposed to be amended,\1040\ the burdens this new requirement would
impose on ANC broker-dealers are to ensure there is adequate physical
space and computer hardware and software for storage, ensure these
records are preserved for the requisite time period, and produce them
when requested. The Commission estimates that the proposed amendment to
paragraph (b)(1) of Rule 17a-4 would impose an initial burden of
thirteen hours per firm and an ongoing annual burden of six hours and
$120 per firm. The Commission estimates that there are ten ANC broker-
dealers (all of which are assumed to be dually registered as SBSDs),
adding to the industry an initial burden of 130 hours\1041\ and an
ongoing annual burden of sixty hours\1042\ and $1,200.\1043\
---------------------------------------------------------------------------
\1039\ See paragraph (b)(1) of Rule 17a-4, as proposed to be
amended (cross-referencing paragraph (a)(24) of Rule 17a-3, as
proposed to be amended).
\1040\ See section IV.D.1. of this release.
\1041\ 13 hours x 10 ANC broker-dealers = 130 hours. These
internal hours likely would be performed by a compliance manager and
a senior database administrator.
\1042\ 6 hours/year x 10 ANC broker-dealers = 60 hours/year.
These internal hours likely would be performed by a compliance
clerk.
\1043\ $120 x 10 ANC broker-dealers = $1,200.
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Estimated Hours and Costs of Proposed Rule 18a-6
Proposed Rule 18a-6 would require twenty-seven types of records to
be preserved by stand-alone SBSDs and stand-alone MSBSPs.\1044\
Proposed Rule
[[Page 25268]]
18a-6 does not require the firm to create these records or perform the
underlying task, so the burdens imposed by these requirements would be
to provide adequate physical space and computer hardware and software
for storage, preserve these records for the requisite time period, and
produce them when requested.\1045\ The Commission estimates that the
proposed record preservation requirements applicable to stand-alone
SBSDs and stand-alone MSBSPs would impose an initial burden of 364
hours,\1046\ and an ongoing annual burden of 280 hours and $5,720 per
firm. The Commission estimates that there are thirteen respondents
(nine stand-alone SBSDs and four stand-alone MSBSPs), resulting in an
estimated industry-wide initial burden of 4,732 hours,\1047\ and an
industry-wide ongoing annual burden of 3,640 hours\1048\ and
$74,360.\1049\
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\1044\ See proposed Rule 18a-6 (paragraph (a)(1), cross-
referencing paragraph (a)(1) of proposed Rule 18a-5 (trade
blotters); paragraph (a)(1), cross-referencing paragraph (a)(2) of
proposed Rule 18a-5 (general ledgers); paragraph (a)(1), cross-
referencing paragraph (a)(3) of proposed Rule 18a-5 (ledgers of
customer and non-customer accounts); paragraph (a)(1), cross-
referencing paragraph (a)(4) of proposed Rule 18a-5 (stock record);
paragraph (a)(1), cross-referencing paragraph (a)(5) of proposed
Rule 18a-5 (memoranda of proprietary orders); paragraph (a)(1),
cross-referencing paragraph (a)(6) of proposed Rule 18a-5
(confirmations); paragraph (a)(1), cross-referencing paragraph
(a)(7) of proposed Rule 18a-5 (accountholder information); paragraph
(a)(1), cross-referencing paragraph (a)(8) of proposed Rule 18a-5
(options positions); paragraph (a)(1), cross-referencing paragraph
(a)(9) of proposed Rule 18a-5 (trial balances and computation of net
capital); paragraph (a)(1), cross-referencing paragraph (a)(12) of
proposed Rule 18a-5 (proposed Rule 18a-3 calculations); paragraph
(a)(1), cross-referencing paragraph (a)(15) of proposed Rule 18a-5
(unverified transactions); paragraph (a)(1), cross-referencing
paragraph (a)(17) of proposed Rule 18a-5 (compliance with external
business conduct standards); paragraph (b)(1)(ii) (bank records);
paragraph (b)(1)(iii) (bills); paragraph (b)(1)(iv)
(communications); paragraph (b)(1)(v) (trial balances); paragraph
(b)(1)(vi) (account documents); paragraph (b)(1)(vii) (written
agreements); paragraph (b)(1)(viii) (information supporting
financial reports); paragraph (b)(1)(ix) (Rule 15c3-4 risk
management records); paragraph (b)(1)(xi) (Regulation SBSR
information); paragraph (b)(1)(xii) (records relating to business
conduct standards); paragraph (b)(1)(xiii) (special entity
documents); paragraph (c) (corporate documents); paragraph (d)(1)
(associated person's employment application); paragraph (d)(2)(i)
(regulatory authority reports); and paragraph (d)(3)(i) (compliance,
supervisory, and procedures manuals)).
\1045\ See supra note 974.
\1046\ The Commission believes that any initial dollar cost
associated with proposed Rule 18a-6 is already accounted for in the
PRA estimate for proposed Rule 18a-5, which includes the cost of
recordkeeping system software.
\1047\ 364 hours x 13 stand-alone SBSDs and stand-alone MSBSPs =
4,732 hours. These internal hours likely would be performed by a
senior database administrator.
\1048\ 280 hours/year x 13 stand-alone SBSDs and stand-alone
MSBSPs = 3,640 hours/year. These internal hours likely would be
performed by a compliance clerk.
\1049\ $5,720/year x 13 stand-alone SBSDs and stand-alone MSBSPs
= $74,360/year.
---------------------------------------------------------------------------
Proposed Rule 18a-6 would require three types of records to be
preserved by stand-alone SBSDs.\1050\ Because the burden to create
these records is accounted for in the PRA estimate for proposed Rule
18a-5,\1051\ the burdens imposed by these requirements are to ensure
there is adequate physical space and computer hardware and software for
storage, ensure these records are preserved for the requisite time
period, and produce them when requested. The Commission estimates that
the relevant portions of paragraph (b)(1)(i) of proposed Rule 18a-6
would impose an initial burden of forty-four hours per firm,\1052\ and
an ongoing annual burden of thirty hours and $360 per firm. The
Commission estimates that there are nine stand-alone SBSDs, resulting
in an industry-wide initial burden of 396 hours\1053\ and an industry-
wide ongoing annual burden of 270 hours\1054\ and $3,240.\1055\
---------------------------------------------------------------------------
\1050\ See paragraph (b)(1)(i) of proposed Rule 18a-6 (cross-
referencing paragraph (a)(13) of proposed Rule 18a-5 (compliance
with proposed Rule 18a-4 possession or control requirements);
paragraph (a)(14) of proposed Rule 18a-5 (proposed Rule 18a-4
reserve account computations); and paragraph (a)(16) of proposed
Rule 18a-5 (political contributions)).
\1051\ See section IV.D.1. of this release.
\1052\ The Commission believes that any initial dollar cost
associated with proposed Rule 18a-6 is already accounted for in the
PRA estimate for proposed Rule 18a-5, which includes the cost of
recordkeeping system software.
\1053\ 44 hours x 9 stand-alone SBSDs = 396 hours. These
internal hours likely would be performed by a senior database
administrator.
\1054\ 30 hours/year x 9 stand-alone SBSDs = 270 hours/year.
These internal hours likely would be performed by a compliance
clerk.
\1055\ $360/year x 9 stand-alone SBSDs = $3,240/year.
---------------------------------------------------------------------------
Proposed Rule 18a-6 would require two types of records to be
preserved by ANC stand-alone SBSDs.\1056\ Because the burden of
actually performing the underlying task and creating the written record
is already accounted for in the PRA estimates for proposed Rules 18a-1
\1057\ and 18a-5,\1058\ the burden is the requirement to preserve these
records for at least three years. The Commission estimates that
paragraph (b)(1)(x) and paragraph (b)(1)(i)'s cross-reference to
paragraph (a)(11) of proposed Rule 18a-5 would impose an initial burden
of thirty-one hours \1059\ and an ongoing annual burden of twenty hours
and $240 per ANC stand-alone SBSD. The Commission estimates that there
are six ANC stand-alone SBSDs, resulting in an industry-wide initial
burden of 186 hours \1060\ and an industry-wide ongoing annual burden
of 120 hours \1061\ and $1,440.\1062\
---------------------------------------------------------------------------
\1056\ See proposed Rule 18a-6 (paragraph (b)(1)(i), cross-
referencing paragraph (a)(11) of proposed Rule 18a-5 (liquidity
stress test); and paragraph (b)(1)(x) (credit risk determinations)).
\1057\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70294.
\1058\ See section IV.D.1. of this release.
\1059\ The Commission believes that any initial dollar cost
associated with proposed Rule 18a-6 is already accounted for in the
PRA estimate for proposed Rule 18a-5, which includes the cost of
recordkeeping system software.
\1060\ 31 hours x 6 ANC stand-alone SBSDs = 186 hours. These
internal hours likely would be performed by a senior database
administrator.
\1061\ 20 hours/year x 6 ANC stand-alone SBSDs = 120 hours/year.
These internal hours likely would be performed by a compliance
clerk.
\1062\ $240/year x 6 ANC stand-alone SBSDs = $1,440/year.
---------------------------------------------------------------------------
Proposed Rule 18a-6 would require eighteen types of records to be
preserved by bank SBSDs and bank MSBSPs, all of which are limited to
the firm's business as an SBSD or MSBSP.\1063\ Proposed Rule 18a-6 does
not require the firm to create these records or perform the underlying
task, so the burdens imposed by these requirements are to ensure there
is adequate physical space and computer hardware and software for
storage, ensure these records are preserved for the requisite time
period, and produce them when requested. Therefore, after consideration
of the similar burdens imposed by Rule 17a-4, as proposed to be
amended, the Commission estimates that proposed Rule 18a-6 would impose
on bank SBSDs and bank MSBSPs an initial burden of 247 hours per firm
\1064\ and an ongoing burden of 190 hours and $4,520 per firm. The
Commission estimates that there are twenty-five respondents (twenty-
five bank SBSDs and no bank MSBSPs), resulting in an estimated
industry-wide initial burden of 6,175 hours \1065\ and an industry-wide
ongoing annual burden of 4,750 hours \1066\ and $113,000.\1067\
---------------------------------------------------------------------------
\1063\ See proposed Rule 18a-6 (paragraph (a)(2), cross-
referencing paragraph (b)(1) of proposed Rule 18a-5 (trade
blotters); paragraph (a)(2), cross-referencing paragraph (b)(2) of
proposed Rule 18a-5 (ledgers of security-based swap customers and
non-customers); paragraph (a)(2), cross-referencing paragraph (b)(3)
of proposed Rule 18a-5 (stock records); paragraph (b)(2)(i), cross-
referencing paragraph (b)(4) of proposed Rule 18a-5 (memoranda of
brokerage orders); paragraph (b)(2)(i), cross-referencing paragraph
(b)(5) of proposed Rule 18a-5 (memoranda of proprietary orders);
paragraph (b)(2)(i), cross-referencing paragraph (b)(6) of proposed
Rule 18a-5 (confirmations); paragraph (b)(2)(i), cross-referencing
paragraph (b)(7) of proposed Rule 18a-5 (accountholder information);
paragraph (b)(2)(i), cross-referencing paragraph (b)(11) of proposed
Rule 18a-5 (unverified transactions); paragraph (b)(2)(i), cross-
referencing paragraph (b)(13) of proposed Rule 18a-5 (compliance
with external business conduct requirements); paragraph (b)(2)(ii)
(communications); paragraph (b)(2)(iii) (account documents);
paragraph (b)(2)(iv) (written agreements); paragraph (b)(2)(vi)
(Regulation SBSR information); paragraph (b)(2)(vii) (records
relating to business conduct standards); paragraph (b)(2)(viii)
(special entity documents); paragraph (d)(1) (associated person's
employment application); paragraph (d)(2)(ii) (regulatory authority
reports); paragraph (d)(3)(ii) (compliance, supervisory, and
procedures manuals)).
\1064\ The Commission believes that any initial dollar cost
associated with proposed Rule 18a-6 is already accounted for in the
PRA estimate for proposed Rule 18a-5, which includes the cost of
recordkeeping system software.
\1065\ 247 hours x 25 bank SBSDs = 6,175 hours. These internal
hours likely would be performed by a senior database administrator.
\1066\ 190 hours/year x 25 bank SBSDs = 4,750 hours/year. These
internal hours likely would be performed by a compliance clerk.
\1067\ $4,520/year x 25 bank SBSDs = $113,000/year.
---------------------------------------------------------------------------
Proposed Rule 18a-6 would require four types of records to be
preserved by bank SBSDs, all of which are limited to the firm's
business as an SBSD.\1068\ Because the burden to perform the underlying
task or create these records is accounted for in the PRA estimates
[[Page 25269]]
for proposed Rule 18a-4 \1069\ and Rule 18a-5, as proposed to be
amended,\1070\ the burdens imposed by these new requirements are to
ensure there is adequate physical space and computer hardware and
software for storage, ensure these records are preserved for the
requisite time period, and produce them when requested. The Commission
estimates that paragraphs (b)(9), (b)(10), and (b)(12) of proposed Rule
18a-6 would impose an initial burden of fifty-seven hours per firm
\1071\ and an ongoing annual burden of forty hours and $480 per firm.
The Commission estimates that there are twenty-five bank SBSDs,
resulting in an industry-wide initial burden of 1,425 hours \1072\ and
an industry-wide ongoing annual burden of 1,000 hours \1073\ and
$12,000.\1074\
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\1068\ See proposed Rule 18a-6 (paragraph (b)(2)(i), cross-
referencing paragraph (b)(9) (compliance with proposed Rule 18a-4
possession or control requirements) of proposed Rule 18a-5;
paragraph (b)(2)(i), cross-referencing paragraph (b)(10) (proposed
Rule 18a-4 reserve account computations) of proposed Rule 18a-5;
paragraph (b)(2)(i), cross-referencing paragraph (b)(12) (political
contributions) of proposed Rule 18a-5; and paragraph (b)(2)(v)
(proposed Rule 18a-4 reserve account computations)).
\1069\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
\1070\ See section IV.D.1. of this release.
\1071\ The Commission believes that any initial dollar cost
associated with proposed Rule 18a-6 is already accounted for in the
PRA estimate for proposed Rule 18a-5, which includes the cost of
recordkeeping system software.
\1072\ 57 hours x 25 bank SBSDs = 1,425 hours. These internal
hours likely would be performed by a compliance manager and a senior
database administrator.
\1073\ 40 hours/year x 25 bank SBSDs = 1,000 hours/year. These
internal hours likely would be performed by a compliance clerk.
\1074\ $480/year x 25 bank SBSDs = $12,000/year.
---------------------------------------------------------------------------
Paragraph (f) of proposed Rule 18a-6 would require third-party
custodians for non-broker-dealer SBSDs and non-broker-dealer MSBSPs to
file with the Commission a written undertaking and surrender the SBSD
or MSBSP's records upon the Commission's request.\1075\ The obligation
to provide documents upon the Commission's request does not impose a
new burden, since this requirement merely changes the respondent's
identity rather than adding to the quantity of burdens. Thus, the
burden is the requirement to prepare and file a written undertaking.
The Commission estimates that 50% of the thirty-eight non-broker-dealer
SBSDs and non-broker-dealer MSBSPs would retain a third-party
custodian, resulting in nineteen written undertakings. The Commission
estimates paragraph (f) of proposed Rule 18a-6 would impose an ongoing
annual burden of two hours per written undertaking, resulting in an
industry-wide ongoing burden of thirty-eight hours per year.\1076\
---------------------------------------------------------------------------
\1075\ See paragraph (f) of proposed Rule 18a-6.
\1076\ 2 hours/year x 19 written undertakings = 38 hours/year.
These internal hours likely would be performed by an attorney.
---------------------------------------------------------------------------
3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
The proposed amendments to Rule 17a-5 and proposed Rule 18a-7 would
impose collection of information requirements that result in annual
time burdens for broker-dealers, SBSDs, and MSBSPs. The Commission
estimates that the proposed amendments to Rule 17a-5 would impose the
following initial and annual burdens:
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Liquidity stress test \1077\ Per firm: 0 hours... Per firm: 12 hours.
Industry: 0 hours... Industry: 120 hours.
Form SBS (ANC broker-dealer Per firm: 25 hours.. Per firm: 228 hours.
SBSDs) \1078\. Industry: 250 hours. Industry: 2,280
hours.
Form SBS (non-model broker- Per firm: 50 hours.. Per firm: 240 hours.
dealer SBSDs) \1079\. Industry: 300 hours. Industry: 1,440
hours.
Form SBS (broker-dealer Per firm: 40 hours.. Per firm: 210 hours.
MSBSPs) \1080\. Industry: 40 hours.. Industry: 210 hours.
Total--Proposed amendments Industry: 590 hours. Industry: 4,050
to Rule 17a-5. hours.
------------------------------------------------------------------------
The Commission estimates that proposed Rule 18a-7 would impose the
following initial and annual burdens:
---------------------------------------------------------------------------
\1077\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
\1078\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended.
\1079\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended.
\1080\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Additional ANC reports Per firm: 0 hours... Per firm: 132 hours.
\1081\. Industry: 0 hours... Industry: 792 hours.
Customer statements \1082\.. Per firm: 10 hours.. Per firm: 1 hours.
Industry: 130 hours. Industry: 13 hours.
Annual report (stand-alone Per firm: 0 hours... Per firm: 70 hours
SBSDs) \1083\. Industry: 0 hours... and $5.60
Industry: 630 hours
and $50.40.
Annual report (stand-alone Per firm: 0 hours... Per firm: 10 hours
MSBSPs) \1084\. Industry: 0 hours... and $5.60.
Industry: 40 hours
and $22.40.
Statement regarding Per firm: 10 hours.. Per firm: 2 hours
accountant \1085\. Industry: 130 hours. and 46.
Industry: 26 hours
and $5.98.
Engagement of accountant Per firm: 0 hours... Per firm: $450,000.
(stand-alone SBSDs) \1086\. Industry: 0 hours... Industry:
$4,050,000.
Engagement of accountant Per firm: 0 hours... Per firm: $300,000.
(stand-alone MSBSPs) \1087\. Industry: 0 hours... Industry:
$1,200,000.
Notice of change of fiscal Per firm: 0 hours... Per firm: 1 hour and
year \1088\. Industry: 0 hours... 46.
Industry: 1 hour and
46.
Form SBS (stand-alone SBSDs) Per firm: 160 hours. Per firm: 192 hours.
\1089\. Industry: 1,440 Industry: 1,728
hours. hours.
Form SBS (stand-alone Per firm: 40 hours.. Per firm: 48 hours.
MSBSPs) \1090\. Industry: 160 hours. Industry: 192 hours.
[[Page 25270]]
Form SBS (bank SBSDs) \1091\ Per firm: 36 hours.. Per firm: 16 hours.
Industry: 900 hours. Industry: 400 hours.
Total--Proposed Rule 18a-7.. Industry: 2,890 Industry: 3,978
hours. hours and
$5,250,079.24.
------------------------------------------------------------------------
Estimated Hours and Costs of Proposed Amendments to Rule 17a-5
---------------------------------------------------------------------------
\1081\ See paragraph (a)(3) of proposed Rule 18a-7.
\1082\ See paragraph (b) of proposed Rule 18a-7.
\1083\ See paragraphs (c) and (d) of proposed Rule 18a-7.
\1084\ See paragraphs (c) and (d) of proposed Rule 18a-7.
\1085\ See paragraph (e) of proposed Rule 18a-7.
\1086\ See paragraph (f) of proposed Rule 18a-7.
\1087\ See paragraph (f) of proposed Rule 18a-7.
\1088\ See paragraph (j) of proposed Rule 18a-7.
\1089\ See paragraph (a)(1) of proposed Rule 18a-7.
\1090\ See paragraph (a)(1) of proposed Rule 18a-7.
\1091\ See paragraph (a)(2) of proposed Rule 18a-7.
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No Change in Estimated Burden. Many of the proposed amendments to
Rule 17a-5 are not expected to change the estimated burden imposed by
Rule 17a-5. Most of the additional proposed amendments discussed in
section II.B.3.b. of this release are clarifying changes that should
not affect the Commission's burden estimate.
The Commission is proposing that the financial report prepared by
Form SBS filers include statements and supporting schedules from
proposed Form SBS instead of from Form X-17A-5.\1092\ This is not so
much a new burden as a different burden, since in the absence of this
proposed amendment, these firms would be required to file statements
and supporting schedules from Form X-17A-5 instead. In addition, the
burden of preparing these statements and supporting schedules is
already accounted for in the PRA burden for proposed Form SBS
(discussed below).
---------------------------------------------------------------------------
\1092\ See paragraph (d)(2) of Rule 17a-5, as proposed to be
amended.
---------------------------------------------------------------------------
The Commission does not estimate an additional burden associated
with its proposal that the compliance report include statements as to a
broker-dealer SBSD's compliance with proposed Rule 18a-4,\1093\ because
the burden to comply with proposed Rule 18a-4 is largely already
accounted for in the PRA estimate for proposed Rule 18a-4.\1094\ To the
extent that the burden is not already accounted for in the PRA estimate
for proposed Rule 18a-4, the Commission believes that broker-dealer
SBSDs and broker-dealer MSBSPs would already have a system in place for
confirming compliance with proposed Rule 18a-4, in accordance with best
practices. In addition, the Commission believes that the sixteen
broker-dealers expected to register as SBSDs should already have
procedures in place for confirming compliance since they are already
required to confirm compliance with analogous Rule 15c3-3 (which Rule
18a-4 is modeled on).
---------------------------------------------------------------------------
\1093\ See paragraph (d)(3) of Rule 17a-5, as proposed to be
amended.
\1094\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
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The Commission is proposing to amend Rule 17a-5 to require that
broker-dealers attach Part III of Form X-17A-5 to the annual
report.\1095\ However, the Commission does not expect this amendment to
increase Rule 17a-5's burden, since broker-dealers currently file Part
III with their audited annual report pursuant to staff guidance and
Rule 617.\1096\
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\1095\ See paragraph (e)(2) of Rule 17a-5, as proposed to be
amended.
\1096\ See 17 CFR 249.617; Commission, Division of Trading and
Markets, Broker-Dealer Notices and Reports, available at http://www.sec.gov/divisions/marketreg/bdnotices.htm. In addition, Part III
of Form X-17A-5, as proposed to be amended, would add a reference to
Rule 17a-12, which applies to OTC derivatives dealers. Rule 17a-12
does not explicitly require OTC derivatives dealers to complete Part
III of Form X-17A-5, but this proposed amendment to Part III of Form
X-17A-5 is not expected to result in a burden increase since all
[four] OTC derivatives dealers already voluntarily file Part III
with their audited annual reports.
---------------------------------------------------------------------------
Liquidity Stress Test. The Commission proposes to add paragraph
(a)(5)(vii) to Rule 17a-5, which would require ANC broker-dealers to
file the results of the firm's monthly liquidity stress test with the
Commission.\1097\ Because the burden of actually performing the
liquidity stress test and creating a liquidity funding plan is already
accounted for in the PRA estimate for the proposed amendments to Rule
15c3-1,\1098\ the burden imposed by proposed paragraph (a)(5)(vii) is
the requirement to file a copy of the results with the Commission. The
Commission estimates that paragraph (a)(5)(vii) to Rule 17a-5, as
proposed to be amended, would impose an annual burden of twelve hours
per ANC broker-dealer.\1099\ The Commission estimates that there are
ten ANC broker-dealers (all of which are assumed to be dually
registered as SBSDs), resulting in an industry-wide ongoing burden of
120 hours per year.\1100\
---------------------------------------------------------------------------
\1097\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
\1098\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70294.
\1099\ 1 hour/filing x 12 months/year = 12 hours/year. These
internal hours likely would be performed by a compliance manager.
\1100\ 12 hours/year x 10 ANC broker-dealers = 120 hours/year.
These internal hours likely would be performed by a compliance
manager.
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Proposed Form SBS. Paragraph (a)(1)(iv) of Rule 17a-5, as proposed
to be amended, would require broker-dealer SBSDs and broker-dealer
MSBSPs to file proposed Form SBS monthly instead of filing the
applicable part of Form X-17A-5 quarterly.\1101\ Part II, Part IIA, and
Part II CSE of Form X-17A-5 each impose a different burden on
respondents due to their varying lengths and calculations, so the
burden of filing proposed Form SBS depends on which part of Form X-17A-
5 the firm is currently required to file.
---------------------------------------------------------------------------
\1101\ Compare 17 CFR 240.17a-5(a)(3)(ii) and (iii), with
paragraph (a)(4)(iv) of Rule 17a-5, as proposed to be amended.
---------------------------------------------------------------------------
ANC broker-dealer SBSDs would be required to file proposed Form SBS
instead of Part II CSE of Form X-17A-5. Although proposed Form SBS is
modeled on Part II CSE, the burden on ANC broker-dealer SBSDs would
increase, because ANC broker-dealer SBSDs would file monthly instead of
quarterly and would complete additional sections and line items
eliciting more detail about their security-based swap and swap
activities.\1102\ In consideration of these additional requirements,
the Commission estimates that the requirement for ANC broker-dealer
SBSDs to file proposed Form SBS every month would add an initial burden
of twenty-five hours per firm and an ongoing annual burden of 228 hours
per firm. The Commission estimates that there are ten ANC broker-dealer
SBSDs, adding to the industry an initial burden
[[Page 25271]]
of 250 hours\1103\ and an ongoing burden of 2,280 hours per year.\1104\
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\1102\ ANC broker-dealer SBSDs would be required to complete the
following new sections: (1) Computation for Determination of the
Amount to be Maintained in the Special Account for the Exclusive
Benefit of Security-Based Swap Customers--Rule 18a-4, Appendix A;
(2) Information for Possession or Control Requirements under Rule
18a-4; (3) Schedule 1--Aggregate Securities, Commodities, and Swaps
Positions; and (4) Schedule 4--Geographic Distribution of
Derivatives Exposures for Ten Largest Countries.
\1103\ 25 hours x 10 ANC broker-dealer SBSDs = 250 hours. These
internal hours likely would be performed by a compliance manager.
\1104\ 228 hours/year x 10 ANC broker-dealer SBSDs = 2,280
hours/year. These internal hours likely would be performed by a
compliance manager.
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Non-model broker-dealer SBSDs would be required to file proposed
Form SBS instead of Part II or Part IIA of Form X-17A-5. Given that
SBSDs are expected to be larger and relatively sophisticated firms, the
Commission assumes that all non-model broker-dealer SBSDs are carrying
firms that file Part II. Although sections of Part II are also found in
proposed Form SBS, the burden on non-model broker-dealer SBSDs would
increase (but not as much as for ANC broker-dealer SBSDs), because non-
model broker-dealer SBSDs would file monthly instead of quarterly and
would complete additional sections and line items eliciting more detail
about their security-based swap and swap activities.\1105\ In
consideration of these additional requirements, the Commission
estimates that the requirement for non-model broker-dealer SBSDs to
file proposed Form SBS every month would add an initial burden of fifty
hours per firm and an ongoing annual burden of 240 hours per firm. The
Commission estimates that there are six non-model broker-dealer SBSDs,
adding to the industry an initial burden of 300 hours\1106\ and an
ongoing burden of 1,440 hours per year.\1107\
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\1105\ Non-model broker-dealer SBSDs would be required to
complete the following new sections: (1) Financial and Operational
Data--Operational Deductions from Capital--Note A; (2) Financial and
Operational Data--Potential Operational Charges Not Deducted from
Capital--Note B; (3) Computation for Determination of PAB
Requirements; (4) Computation for Determination of the Amount to be
Maintained in the Special Account for the Exclusive Benefit of
Security-Based Swap Customers--Rule 18a-4, Appendix A; (5)
Information for Possession or Control Requirements under Rule 18a-4;
(6) Schedule 1--Aggregate Securities, Commodities, and Swaps
Positions; (7) Schedule 2--Credit Concentration Report for Fifteen
Largest Current Exposures in Derivatives; (8) Schedule 3--Portfolio
Summary of Derivatives Exposures by Internal Credit Rating; and (9)
Schedule 4--Geographic Distribution of Derivatives Exposures for Ten
Largest Countries. In addition, non-model broker-dealer SBSDs also
registered as FCMs would be required to file the following sections
not included on Part II, but which the CFTC already requires or has
proposed to require FCMs to file as part of Form 1-FR-FCM: (1)
Computation of CFTC Minimum Capital Requirement; (2) Statement of
Segregation Requirements and Funds in Segregation for Customers
Trading on U.S. Commodity Exchanges; (3) Statement of Cleared Swaps
Customer Segregation Requirements and Funds in Cleared Swaps
Customer Accounts under Section 4d(f) of the Commodity Exchange Act;
(4) Statement of Segregation Requirements and Funds in Segregation
for Customers' Dealer Options Accounts; and (5) Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
Commission does not estimate a burden for these 5 sections from Form
1-FR-FCM, since the CFTC already requires FCMs to file these 5
sections on a monthly basis (17 CFR 1.10(b)(i)), and therefore, the
hourly burden is already accounted for in the PRA estimate for the
CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does not
anticipate that FCMs will be required to file both the CFTC's Form
1-FR-FCM and the Commission's proposed Form SBS.
\1106\ 50 hours x 6 non-model broker-dealer SBSDs = 300 hours.
These internal hours likely would be performed by a compliance
manager.
\1107\ 240 hours/year x 6 non-model broker-dealer SBSDs = 1,440
hours/year. These internal hours likely would be performed by a
compliance manager.
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Broker-dealer MSBSPs would be required to file proposed Form SBS
instead of Part II or Part IIA of Form X-17A-5. Given that MSBSPs are
expected to be larger and relatively sophisticated firms, the
Commission assumes that broker-dealer MSBSPs are carrying firms that
file Part II. Although sections of Part II are also found in proposed
Form SBS, the burden on broker-dealer MSBSPs would increase (but not as
much as for broker-dealer SBSDs), because broker-dealer MSBSPs would
file monthly instead of quarterly and would complete additional
sections and line items eliciting more detail about their security-
based swap and swap activities.\1108\ In consideration of these
additional requirements, the Commission estimates that the requirement
for broker-dealer MSBSPs to file proposed Form SBS every month would
add an initial burden of forty hours per firm and an ongoing annual
burden of 210 hours per firm. The Commission estimates that there would
be one broker-dealer MSBSP, such that the estimated burden on the
industry would be the same as for a single broker-dealer MSBSP.
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\1108\ Broker-dealer MSBSPs would be required to complete the
following new sections: (1) Computation of Tangible Net Worth (which
is only 3 lines long); (2) Financial and Operational Data--
Operational Deductions from Capital--Note A; (3) Financial and
Operational Data--Potential Operational Charges Not Deducted from
Capital--Note B; (4) Computation for Determination of PAB
Requirements; (5) Schedule 1--Aggregate Securities, Commodities, and
Swaps Positions; (6) Schedule 2--Credit Concentration Report for
Fifteen Largest Exposures in Derivatives; (7) Schedule 3--Portfolio
Summary of Derivatives Exposures by Internal Credit Rating; and (8)
Schedule 4--Geographic Distribution of Derivatives Exposures for Ten
Largest Countries. In addition, broker-dealer MSBSPs also registered
as FCMs would be required to file the following sections not
included on Part II, but which the CFTC already requires or has
proposed to require FCMs to file as part of Form 1-FR-FCM: (1)
Computation of CFTC Minimum Capital Requirement; (2) Statement of
Segregation Requirements and Funds in Segregation for Customers
Trading on U.S. Commodity Exchanges; (3) Statement of Cleared Swaps
Customer Segregation Requirements and Funds in Cleared Swaps
Customer Accounts under Section 4d(f) of the Commodity Exchange Act;
(4) Statement of Segregation Requirements and Funds in Segregation
for Customers' Dealer Options Accounts; and (5) Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
Commission does not estimate a burden for these 5 sections from Form
1-FR-FCM, since the CFTC already requires FCMs to file these 5
sections on a monthly basis (17 CFR 1.10(b)(i)), and therefore, the
hourly burden is already accounted for in the PRA estimate for the
CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does not
anticipate that FCMs will be required to file both the CFTC's Form
1-FR-FCM and the Commission's proposed Form SBS.
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Estimated Hours and Costs of Proposed Rule 18a-7
Proposed Rule 18a-7, which is modeled on Rule 17a-5, as proposed to
be amended, would require non-broker-dealer SBSDs and non-broker-dealer
MSBSPs to satisfy certain reporting requirements.\1109\
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\1109\ See proposed Rule 18a-7.
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Additional ANC reports. Paragraph (a)(3) of proposed Rule 18a-7
would require ANC stand-alone SBSDs to periodically file certain
additional reports relating to their use of internal models to
calculate net capital.\1110\ After consideration of the Supporting
Statement accompanying the most recent extension of Rule 17a-5, which
estimates that the requirement to file additional ANC reports imposes a
burden of 120 hours per respondent,\1111\ as well as the proposal to
amend Rule 17a-5 to require ANC broker-dealers to file the results of
their monthly liquidity stress tests with the additional ANC
reports,\1112\ the Commission estimates that paragraph (a)(3) of
proposed Rule 18a-7 would impose an annual burden of 132 hours per ANC
stand-alone SBSD.\1113\ The Commission estimates that there are six ANC
stand-alone SBSDs, resulting in an industry-wide ongoing burden of 792
hours per year.\1114\
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\1110\ See paragraph (a)(3) of proposed Rule 18a-7.
\1111\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5 (4 hours/monthly
report x 12 months/year + 8 hours/quarterly report x 4 quarters/year
+ 40 hours/annual report = 120 hours/year).
\1112\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
\1113\ 120 hours/year + 1 hour/liquidity stress test filing x 12
months/year = 132 hours/year. These internal hours likely would be
performed by a compliance manager.
\1114\ 132 hours/year x 6 ANC stand-alone SBSDs = 792 hours/
year. These internal hours likely would be performed by a compliance
manager.
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Customer Statements. Paragraph (b) of proposed Rule 18a-7 would
require stand-alone SBSDs and stand-alone MSBSPs to disclose certain
financial statements on their Internet Web
[[Page 25272]]
sites.\1115\ After consideration of the Supporting Statement
accompanying the most recent extension of Rule 17a-5, which requires
similar disclosures by mail instead of on the firm's Web site,\1116\
the Commission staff's experience with burden estimates for similar
collections of information, and the estimated initial web development
costs, the Commission estimates that paragraph (b) of proposed Rule
18a-7 would impose an initial burden of ten hours per firm and an
annual burden of one hour per firm. The Commission estimates that there
are thirteen respondents (nine stand-alone SBSDs and four stand-alone
MSBSPs), resulting in an industry-wide initial burden of 130 hours
\1117\ and an industry-wide ongoing burden of thirteen hours per
year.\1118\
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\1115\ See paragraph (b) of proposed Rule 18a-7. The Commission
does not anticipate a dollar cost to establish a Web site and a
toll-free number under this paragraph, because the Commission
believes firms that are large enough to register as an SBSD or MSBSP
already maintain a toll-free number for their customers and already
have an Internet Web site. See Broker-Dealer Exemption from Sending
Certain Financial Information to Customers, Exchange Act Release No.
48272 (Aug. 1, 2003), 68 FR 46446, 46450 (Aug. 6, 2003).
\1116\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5. See section
II.B.3.a. of this release for a discussion of the similarities
between paragraph (c) of Rule 17a-5 and paragraph (b) of proposed
Rule 18a-7.
\1117\ 10 hours x 13 stand-alone SBSDs and stand-alone MSBSPs =
130 hours. These internal hours likely would be performed by a
compliance manager.
\1118\ 1 hour/year x 13 stand-alone SBSDs and stand-alone MSBSPs
= 13 hours/year. These internal hours likely would be performed by a
compliance clerk.
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Annual Reports. Paragraph (c) of proposed Rule 18a-7 would require
stand-alone SBSDs and stand-alone MSBSPs to file with the Commission an
annual report consisting of certain financial reports.\1119\ In
addition, paragraph (d) of proposed Rule 18a-7 requires the filing firm
to attach Part III of Form X-17A-5 to the annual report.\1120\ Part III
must include an oath or affirmation, which implicitly requires a senior
officer or a trusted delegate to review the annual report. Based on the
Commission staff's experience with the burden imposed by current Rule
17a-5's annual report requirement and related postage costs,\1121\ the
Commission estimates that paragraphs (c) and (d) of proposed Rule 18a-7
would impose on stand-alone MSBSPs an annual burden of ten hours and
$5.60 per firm. The Commission estimates that there are four stand-
alone MSBSPs, resulting in an industry-wide ongoing burden of forty
hours \1122\ and $22.40 per year.\1123\
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\1119\ See paragraph (c) of proposed Rule 18a-7.
\1120\ See paragraph (d) of proposed Rule 18a-7.
\1121\ As of May 2013, a priority mail flat rate envelope costs
$5.60, based on costs obtained on the U.S. Postal Service Web site
at www.usps.gov.
\1122\ 10 hours/year x 4 stand-alone MSBSPs = 40 hours/year.
These internal hours likely would be performed by a senior
accountant.
\1123\ $5.60/year x 4 stand-alone MSBSPs = $22.40/year.
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Unlike stand-alone MSBSPs, stand-alone SBSDs would be required to
include a compliance report with their annual reports.\1124\ Thus,
after consideration of the Commission's recent release adopting
amendments to Rule 17a-5, which estimates that each compliance report
takes approximately sixty hours to prepare,\1125\ the Commission
estimates that paragraphs (c) and (d) of proposed Rule 18a-7 would
impose an annual burden of seventy hours and $5.60 per stand-alone
SBSD. The Commission estimates that there are nine stand-alone SBSDs,
resulting in an industry-wide ongoing burden of 630 hours \1126\ and
$50.40 per year. \1127\
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\1124\ See paragraph (c)(1)(i)(B) of proposed Rule 18a-7.
\1125\ See Broker-Dealer Reports, 78 FR 51960.
\1126\ 70 hours/year x 9 stand-alone SBSDs = 630 hours/year.
These internal hours likely would be performed by a senior
accountant.
\1127\ $5.60/year x 9 stand-alone SBSDs = $50.40/year.
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Statement regarding Independent Public Accountant. Paragraph (e) of
proposed Rule 18a-7 would require stand-alone SBSDs and stand-alone
MSBSPs to file a statement regarding the independent public accountant
engaged to audit the firm's annual reports.\1128\ In addition to
postage costs, the Commission's recent release estimates that the
parallel requirement in Rule 17a-5 would impose a two-hour burden on
each introducing broker-dealer to file an updated statement, and a more
significant ten-hour burden on each carrying broker-dealer, since the
changes would require renegotiating the carrying broker-dealer's
agreement with its independent public accountant.\1129\ Consistent with
that release, the Commission estimates that paragraph (e) of proposed
Rule 18a-7 would impose an initial burden of ten hours per firm and an
annual burden of two hours and 46 cents per firm.\1130\ The Commission
estimates that there are thirteen respondents (nine stand-alone SBSDs
and four stand-alone MSBSPs), resulting in an industry-wide initial
burden of 130 hours \1131\ and an industry-wide ongoing burden of
twenty-six hours \1132\ and $5.98 per year.\1133\
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\1128\ See paragraph (e) of proposed Rule 18a-7.
\1129\ See Broker-Dealer Reports, 78 FR 51962.
\1130\ It currently costs 46 cents to send a one ounce retail
domestic first-class letter through the U.S. Postal Service. See
U.S. Postal Service, First-Class Mail, https://www.usps.com/ship/first-class.htm (last visited Oct. 25, 2013).
\1131\ 10 hours x 13 stand-alone SBSDs and stand-alone MSBSPs =
130 hours. These internal hours likely would be performed by a
senior accountant.
\1132\ 2 hours/year x 13 stand-alone SBSDs and stand-alone
MSBSPs = 26 hours/year. These internal hours likely would be
performed by a compliance clerk.
\1133\ 46/year x 13 stand-alone SBSDs and stand-alone MSBSPs =
$5.98/year.
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Engagement of the Independent Public Accountant. Paragraph (f) of
proposed Rule 18a-7 would require stand-alone SBSDs and stand-alone
MSBSPs to engage an independent public accountant to provide reports
covering the firm's annual reports.\1134\ The Commission's recent
release adopting amendments to Rule 17a-5 estimates that it would cost
each carrying firm $300,000 to retain an independent public accountant
to audit its financial statements and $150,000 to examine its
compliance report.\1135\ Given that SBSDs and MSBSPs are expected to be
larger and relatively sophisticated firms, the Commission assumes that
they are carrying firms that would incur the $300,000 cost to audit
their financial statements. However, since only stand-alone SBSDs are
required to file a compliance report,\1136\ only they (and not stand-
alone MSBSPs) would be required to retain an independent public
accountant to review their compliance reports.
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\1134\ See paragraph (f) of proposed Rule 18a-7.
\1135\ See Broker-Dealer Reports, 78 FR 51963.
\1136\ See paragraph (c)(1)(i)(B) of proposed Rule 18a-7.
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Therefore, the Commission estimates that paragraph (f) of proposed
Rule 18a-7 would impose an annual cost of $300,000 on each stand-alone
MSBSP. The Commission estimates that there are four stand-alone MSBSPs,
resulting in an industry-wide ongoing burden of $1,200,000 per
year.\1137\ The Commission estimates that paragraph (f) of proposed
Rule 18a-7 would impose on stand-alone SBSDs an annual cost of $450,000
per firm,\1138\ since both their financial statements and compliance
report would need to be audited. The Commission estimates that there
are nine stand-alone SBSDs, resulting in an industry-wide ongoing
burden of $4,050,000 per year.\1139\
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\1137\ $300,000/year x 4 stand-alone MSBSPs = $1,200,000/year.
\1138\ $300,000/year (financial statements) + $150,000/year
(compliance report) = $450,000/year.
\1139\ $450,000/year x 9 stand-alone SBSDs = $4,050,000/year.
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Notice of Change in Fiscal Year. Paragraph (j) of proposed Rule
18a-7 would require stand-alone SBSDs and stand-alone MSBSPs to notify
the Commission of a change in fiscal
[[Page 25273]]
year.\1140\ Based on the Commission staff's experience with the
parallel requirement under Rule 17a-5, and the Supporting Statement
accompanying the most recent extension of Rule 17a-11, which estimates
that each financial notice takes approximately one hour to prepare and
file with the Commission,\1141\ the Commission estimates that paragraph
(j) of proposed Rule 18a-7 would impose a burden of one hour and 46
cents on a firm planning to change its fiscal year. The Commission
estimates that each year, one firm will change its fiscal year, such
that the estimated burden on the industry would be one hour and 46
cents per year.
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\1140\ See paragraph (j) of proposed Rule 18a-7.
\1141\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-11
(June 29, 2012), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=332313&version=1.
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Proposed Form SBS. Proposed Rule 18a-7 would require stand-alone
SBSDs and stand-alone MSBSPs to file proposed Form SBS monthly,\1142\
and would require bank SBSDs and bank MSBSPs to file proposed Form SBS
quarterly.\1143\ Stand-alone SBSDs and stand-alone MSBSPs would be
required to complete more sections of proposed Form SBS than bank SBSDs
and bank MSBSPs, and would therefore experience a greater burden.
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\1142\ See paragraph (a)(1) of proposed Rule 18a-7.
\1143\ See paragraph (a)(2) of proposed Rule 18a-7.
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Stand-alone SBSDs would be required to file proposed Form SBS on a
monthly basis.\1144\ Proposed Form SBS includes eleven sections and
five schedules applicable to stand-alone SBSDs.\1145\ Stand-alone SBSDs
dually registered as FCMs would be required to complete five additional
sections, all of which the CFTC already requires or has proposed to
require FCMs to file as part of Form 1-FR-FCM.\1146\ In consideration
of these additional requirements, the Commission estimates that the
requirement for stand-alone SBSDs to file proposed Form SBS every month
would impose an initial burden of 160 hours per firm and an ongoing
annual burden of 192 hours per firm. The Commission estimates that
there are nine stand-alone SBSDs, resulting in an industry-wide initial
burden of 1,440 hours \1147\ and an industry-wide ongoing burden of
1,728 hours per year.\1148\
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\1144\ See paragraph (a)(1) of proposed Rule 18a-7.
\1145\ Stand-alone SBSDs would be required to complete the
following sections and schedules: (1) Statement of Financial
Condition; (2) either Computation of Net Capital (Filer Authorized
to Use Models) or Computation of Net Capital (Filer Not Authorized
to Use Models); (3) Computation of Minimum Regulatory Capital
Requirements (Non-Broker-Dealer); (4) Statement of Income (Loss);
(5) Capital Withdrawals; (6) Capital Withdrawals--Recap; (7)
Financial and Operational Data; (8) Financial and Operational Data--
Operational Deductions from Capital--Note A; (9) Financial and
Operational Data--Potential Operational Charges Not Deducted from
Capital--Note B; (10) Computation for Determination of the Amount to
be Maintained in the Special Account for the Exclusive Benefit of
Security-Based Swap Customers--Rule 18a-4, Appendix A; (11)
Information for Possession or Control Requirements under Rule 18a-4;
(12) Schedule 1--Aggregate Securities, Commodities, and Swaps
Positions; (13) Schedule 2--Credit Concentration Report for Fifteen
Largest Exposures in Derivatives; (14) Schedule 3--Portfolio Summary
of Derivatives Exposures by Internal Credit Rating; and (15)
Schedule 4 -Geographic Distribution of Derivatives Exposures for Ten
Largest Countries.
\1146\ Stand-alone SBSDs also registered as FCMs would be
required to file the following sections: (1) Computation of CFTC
Minimum Capital Requirement; (2) Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges; (3) Statement of Cleared Swaps Customer
Segregation Requirements and Funds in Cleared Swaps Customer
Accounts under Section 4d(f) of the Commodity Exchange Act; (4)
Statement of Segregation Requirements and Funds in Segregation for
Customers' Dealer Options Accounts; and (5) Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
Commission does not estimate a burden for these 5 sections, since
the CFTC already requires FCMs to file these 5 sections on a monthly
basis (17 CFR 1.10(b)(i)), and therefore, the hourly burden is
already accounted for in the PRA estimate for the CFTC's Rule 1.10
(1 CFR 1.10). In addition, the Commission does not anticipate that
FCMs will be required to file both the CFTC's Form 1-FR-FCM and the
Commission's proposed Form SBS.
\1147\ 160 hours x 9 stand-alone SBSDs = 1,440 hours. These
internal hours likely would be performed by a senior compliance
manager.
\1148\ 192 hours/year x 9 stand-alone SBSDs = 1,728 hours/year.
These internal hours likely would be performed by a senior
compliance manager.
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Stand-alone MSBSPs would be required to file proposed Form SBS on a
monthly basis.\1149\ Proposed Form SBS includes three sections and five
schedules applicable to stand-alone MSBSPs.\1150\ Stand-alone MSBSPs
dually registered as FCMs would be required to complete five additional
sections, all of which the CFTC already requires or has proposed to
require FCMs to file as part of Form 1-FR-FCM.\1151\ In consideration
of these additional requirements, the Commission estimates that the
requirement for stand-alone MSBSPs to file proposed Form SBS every
month would impose an initial burden of forty hours per firm and an
ongoing annual burden of sixty hours per firm. The Commission estimates
that there are four stand-alone MSBSPs, resulting in an industry-wide
initial burden of 160 hours \1152\ and an industry-wide ongoing burden
of 192 hours per year.\1153\
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\1149\ See paragraph (a)(1) of proposed Rule 18a-7.
\1150\ Stand-alone MSBSPs would be required to complete the
following sections and schedules: (1) Statement of Financial
Condition; (2) Computation of Tangible Net Worth; (3) Statement of
Income (Loss); (4) Schedule 1--Aggregate Securities, Commodities,
and Swaps Positions; (5) Schedule 2--Credit Concentration Report for
Fifteen Largest Exposures in Derivatives; (6) Schedule 3--Portfolio
Summary of Derivatives Exposures by Internal Credit Rating; and (7)
Schedule 4 -Geographic Distribution of Derivatives Exposures for Ten
Largest Countries.
\1151\ Stand-alone MSBSPs also registered as FCMs would be
required to file the following sections: (1) Computation of CFTC
Minimum Capital Requirement; (2) Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges; (3) Statement of Cleared Swaps Customer
Segregation Requirements and Funds in Cleared Swaps Customer
Accounts under Section 4d(f) of the Commodity Exchange Act; (4)
Statement of Segregation Requirements and Funds in Segregation for
Customers' Dealer Options Accounts; and (5) Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
Commission does not estimate a burden for these 5 sections, since
the CFTC already requires FCMs to file these 5 sections on a monthly
basis (17 CFR 1.10(b)(i)), and therefore, the hourly burden is
already accounted for in the PRA estimate for the CFTC's Rule 1.10
(1 CFR 1.10). In addition, the Commission does not anticipate that
FCMs will be required to file both the CFTC's Form 1-FR-FCM and the
Commission's proposed Form SBS.
\1152\ 40 hours x 4 stand-alone MSBSPs = 160 hours. These
internal hours likely would be performed by a senior compliance
manager.
\1153\ 48 hours/year x 4 stand-alone MSBSPs = 192 hours/year.
These internal hours likely would be performed by a senior
compliance manager.
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Bank SBSDs would be required to file proposed Form SBS on a
quarterly basis.\1154\ Proposed Form SBS includes five sections and one
schedule applicable to bank SBSDs.\1155\ The Commission does not expect
proposed Form SBS to impose a significant burden on bank SBSDs, because
two of the five sections require the firm to file calculations already
computed in accordance with proposed Rule 18a-3, and the other three
sections either mirror or are scaled down versions of schedules to
FFIEC Form 031, which banks are already required to file with their
prudential regulator (although they would need to transpose this
information from FFIEC Form 031 to Form SBS). Although bank SBSDs
dually registered as FCMs would be required to complete 5 additional
sections, the CFTC already requires or has proposed to require FCMs to
file these schedules on Form 1-FR-
[[Page 25274]]
FCM.\1156\ In consideration of these additional requirements, the
Commission estimates that the requirement for bank SBSDs to file
proposed Form SBS quarterly would impose an initial burden of 36 hours
per firm and an ongoing annual burden of sixteen hours per firm. The
Commission estimates that there are twenty-five bank SBSDs, resulting
in an industry-wide initial burden of 900 hours\1157\ and an industry-
wide ongoing burden of 400 hours per year.\1158\
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\1154\ See paragraph (a)(2) of proposed Rule 18a-7.
\1155\ Bank SBSDs would be required to complete the following
sections and schedules: (1) Balance Sheet (Information as Reported
on FFIEC Form 031--Schedule RC); (2) Regulatory Capital (Information
as Reported on FFIEC Form 031--Schedule RC-R); (3) Income Statement
(Information as Reported on FFIEC Form 031--Schedule RI); (4)
Computation for Determination of the Amount to be Maintained in the
Special Account for the Exclusive Benefit of Security-Based Swap
Customers--Rule 18a-4, Appendix A; (5) Information for Possession or
Control Requirements under Rule 18a-4; and (6) Schedule 1 -
Derivative Positions.
\1156\ Bank SBSDs also registered as FCMs would be required to
file the following sections: (1) Computation of CFTC Minimum Capital
Requirement; (2) Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Commodity Exchanges; (3)
Statement of Cleared Swaps Customer Segregation Requirements and
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the
Commodity Exchange Act; (4) Statement of Segregation Requirements
and Funds in Segregation for Customers' Dealer Options Accounts; and
(5) Statement of Secured Amounts and Funds Held in Separate Accounts
for Foreign Futures and Foreign Options Customers Pursuant to CFTC
Regulation 30.7. The Commission does not estimate a burden for these
5 sections, since the CFTC already requires FCMs to file these 5
sections on a monthly basis (17 CFR 1.10(b)(i)), and therefore, the
hourly burden is already accounted for in the PRA estimate for the
CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does not
anticipate that FCMs will be required to file both the CFTC's Form
1-FR-FCM and the Commission's proposed Form SBS.
\1157\ 36 hours x 25 bank SBSDs = 900 hours. These internal
hours likely would be performed by a senior compliance manager.
\1158\ 16 hours/year x 25 bank SBSDs = 400 hours/year. These
internal hours likely would be performed by a senior compliance
manager.
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Bank MSBSPs would be required to file proposed Form SBS on a
quarterly basis.\1159\ Proposed Form SBS includes three sections and
one schedule applicable to bank MSBSPs.\1160\ Bank MSBSPs dually
registered as FCMs would be required to complete five additional
sections, all of which the CFTC already requires or has proposed to
require FCMs to file as part of Form 1-FR-FCM.\1161\ However, the
Commission does not expect any banks to register with the Commission as
MSBSPs and therefore does not anticipate these requirements to impose
an additional burden.\1162\
---------------------------------------------------------------------------
\1159\ See paragraph (a)(2) of proposed Rule 18a-7.
\1160\ Bank MSBSPs would be required to complete the following
sections and schedules: (1) Balance Sheet (Information as Reported
on FFIEC Form 031--Schedule RC); (2) Regulatory Capital (Information
as Reported on FFIEC Form 031--Schedule RC-R); (3) Income Statement
(Information as Reported on FFIEC Form 031--Schedule RI); and (4)
Schedule 1 -Derivative Positions.
\1161\ Bank MSBSPs also registered as FCMs would be required to
file the following sections: (1) Computation of CFTC Minimum Capital
Requirement; (2) Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Commodity Exchanges; (3)
Statement of Cleared Swaps Customer Segregation Requirements and
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the
Commodity Exchange Act; (4) Statement of Segregation Requirements
and Funds in Segregation for Customers' Dealer Options Accounts; and
(5) Statement of Secured Amounts and Funds Held in Separate Accounts
for Foreign Futures and Foreign Options Customers Pursuant to CFTC
Regulation 30.7. The Commission does not estimate a burden for these
5 sections, since the CFTC already requires FCMs to file these 5
sections on a monthly basis (17 CFR 1.10(b)(i)), and therefore, the
hourly burden is already accounted for in the PRA estimate for the
CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does not
anticipate that FCMs will be required to file both the CFTC's Form
1-FR-FCM and the Commission's proposed Form SBS.
\1162\ The Commission estimates that the requirement for bank
MSBSPs to file proposed Form SBS quarterly would impose an initial
burden of 16 hours per firm and an ongoing annual burden of 8 hours
per firm.
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4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
The proposed amendments to Rule 17a-11 and proposed Rule 18a-8
would impose collection of information requirements that result in
annual time burdens for broker-dealers, SBSDs, and MSBSPs. Current Rule
17a-11 imposes an estimated annual burden of 1 hour per firm and a
total industry burden of 443 hours.\1163\ The Commission estimates that
the proposed amendments to Rule 17a-11 would impose the following
initial and annual burdens:
---------------------------------------------------------------------------
\1163\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1164\ See paragraph (e) of Rule 17a-11, as proposed to be
amended.
\1165\ See paragraph (f) of Rule 17a-11, as proposed to be
amended.
\1166\ See paragraph (g) of Rule 17a-11, as proposed to be
amended.
------------------------------------------------------------------------
Burden Annual burden
------------------------------------------------------------------------
New notice of insufficient liquidity Per notice: 1 hour
reserve \1164\. Industry: 1 hour.
New notice of failure to deposit in Rule Per notice: 1 hour
18a-4 account \1165\. Industry: 100 hours.
New notices filed by exchanges and Per notice: 1 hour
national securities associations \1166\. Industry: 10 hours.
Total--Proposed amendments to Rule 17a-11. Industry: 111 hours.
------------------------------------------------------------------------
The Commission estimates that proposed Rule 18a-8 would impose an
annual burden of 4.6 hours per year.
Estimated Ongoing Hours and Costs of Current Rule 17a-11
In the Supporting Statement accompanying the most recent extension
of Rule 17a-11's collection, the Commission estimates that it takes one
hour to prepare and file a notice required under Rule 17a-11.\1167\
Given that 443 Rule 17a-11 notices were filed in 2012, current Rule
17a-11 creates an estimated industry-wide ongoing burden of 443 hours
per year.\1168\
---------------------------------------------------------------------------
\1167\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1168\ 1 hour/notice x 443 notices/year = 443 hours/year. These
internal hours likely would be performed by a compliance manager.
---------------------------------------------------------------------------
Estimated Hours and Costs of Proposed Amendments to Rule 17a-11
The Commission proposes to add paragraph (b)(6) to Rule 17a-11,
which would require broker-dealer MSBSPs to notify the Commission if
their tangible net worth falls below $20 million.\1169\ Because the
burden of actually calculating the firm's tangible net worth is already
accounted for in the PRA estimate for proposed Rule 18a-2,\1170\ the
burden imposed by paragraph (b)(6) of Rule 17a-11, as proposed to be
amended, is the requirement to notify the Commission when the firm's
tangible net worth falls to a certain level. However, the Commission
does not expect to receive any notices under this provision, since the
Commission expects only one broker-dealer MSBSP, which would already be
subject to the more stringent net capital requirements applicable to
broker-dealers. Thus, the Commission does not expect paragraph (b)(6)
of Rule 17a-11, as proposed to be amended, to impose an additional
burden.
---------------------------------------------------------------------------
\1169\ See paragraph (b)(6) of Rule 17a-11, as proposed to be
amended.
\1170\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70290.
---------------------------------------------------------------------------
The Commission proposes to add paragraph (e) to Rule 17a-11, which
would require ANC broker-dealers to notify the Commission if the
monthly liquidity stress test indicates that the firm's liquidity
reserve is insufficient.\1171\ Because the burden of actually
performing the liquidity stress test is already accounted for in the
PRA estimate for Rule 15c3-1,\1172\ the burden imposed by paragraph (e)
of Rule 17a-11, as proposed to be amended, is the requirement to notify
the Commission of certain adverse test results. Given the similarity in
the rules, the Commission estimates that each required notice would
take one hour to prepare and
[[Page 25275]]
file.\1173\ The Commission does not expect to receive many notices
under paragraph (e) of Rule 17a-11, given that it did not receive any
Rule 17a-11 notices from ANC broker-dealers in 2012. However, since the
Commission estimates that 4 additional firms will register as ANC
broker-dealers, the Commission estimates that one notice per year would
be filed under paragraph (e) of Rule 17a-11, resulting in an industry-
wide ongoing burden of one hour per year.\1174\
---------------------------------------------------------------------------
\1171\ See paragraph (e) of Rule 17a-11, as proposed to be
amended.
\1172\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70294.
\1173\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1174\ 1 notice/year x 1 hour/notice = 1 hour/year. This
internal hour likely would be performed by a compliance manager.
---------------------------------------------------------------------------
The Commission proposes to add paragraph (f) to Rule 17a-11, which
requires broker-dealer SBSDs to notify the Commission if they fail to
make a deposit required under proposed Rule 18a-4.\1175\ Because the
burden to calculate the reserve amount is already accounted for in the
PRA estimate for proposed Rule 18a-4,\1176\ the burden imposed by
paragraph (f) of Rule 17a-11, as proposed to be amended, is the
requirement to notify the Commission when the firm fails to act in
accordance with proposed Rule 18a-4. Given the similarity in the rules,
the Commission estimates that each required notice would take one hour
to prepare and file.\1177\ Based on Commission experience with the
number of notices filed under current Rule 17a-11,\1178\ the Commission
estimates that 100 notices would be filed each year under paragraph (f)
of Rule 17a-11, as proposed to be amended, resulting in an industry-
wide ongoing burden of 100 hours per year.\1179\
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\1175\ See paragraph (f) of Rule 17a-11, as proposed to be
amended.
\1176\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70297-70299.
\1177\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1178\ See id. (noting that in 2011, the Commission received
approximately 465 notices under Rule 17a-11).
\1179\ 100 notices/year x 1 hour/notice = 100 hours/year. These
internal hours likely would be performed by a compliance manager.
---------------------------------------------------------------------------
The Commission proposes to redesignate paragraph (f) of Rule 17a-11
as paragraph (g) and to require a broker-dealer's national securities
exchange (``NSE'') or national securities association (``NSA'') to
notify the Commission if it learns that the broker-dealer failed to
provide a notice required under any paragraph of Rule 17a-11 (instead
of just paragraphs (b) through (e) of Rule 17a-11).\1180\ Thus, NSEs
and NSAs would be subject to new burdens to file a delinquent broker-
dealer's notices under new paragraphs (e) (liquidity stress test) and
(f) (failure to deposit in Rule 18a-4 account). After considering the
similar Rule 17a-11 requirement, the Commission estimates that each
required notice would take one hour to prepare and file.\1181\ Based on
Commission experience with the number of notices currently filed by
NSEs and NSAs, the Commission estimates that ten notices would be filed
pursuant to the amendment to paragraph (g) of Rule 17a-11, as proposed
to be amended, resulting in an estimated industry-wide ongoing burden
of 10 hours per year.\1182\
---------------------------------------------------------------------------
\1180\ See paragraph (g) of Rule 17a-11, as proposed to be
amended.
\1181\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1182\ 10 notices/year x 1 hour/notice = 10 hours/year. These
internal hours likely would be performed by a compliance manager.
---------------------------------------------------------------------------
Estimated Hours and Costs of Proposed Rule 18a-8
Proposed Rule 18a-8 would require non-broker-dealer SBSDs and non-
broker-dealer MSBSPs to notify the Commission of certain indicia of
their financial condition.\1183\ The Commission estimates that each
Rule 18a-8 notice would take approximately fifty-five minutes to
prepare and file, in contrast to its estimate that a Rule 17a-11 notice
would take one hour to prepare and file,\1184\ because stand-alone
SBSDs and stand-alone MSBSPs do not have a DEA with which to file a
copy of the Rule 17a-11 notice and bank SBSDs and bank MSBSPs are not
required to file the Rule 17a-11 notice with their prudential
regulator.\1185\
---------------------------------------------------------------------------
\1183\ See proposed Rule 18a-8.
\1184\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\1185\ Compare paragraph (h) of Rule 17a-11, as proposed to be
amended, with paragraph (h) proposed Rule 18a-8.
---------------------------------------------------------------------------
The Commission estimates that it would receive approximately five
Rule 18a-8 notices per year, based on the substantially smaller pool of
possible respondents, as compared with current Rule 17a-11. Under
current Rule 17a-11, there are approximately 4,327 possible
respondents--4,545 registered broker-dealers, minus 218 broker-dealers
registered pursuant to section 15(b)(11)(A) of the Exchange Act.\1186\
In contrast, the Commission estimates that there would be thirty-eight
non-broker-dealer SBSDs and non-broker-dealer MSBSPs (twenty-five bank
SBSDs, nine stand-alone SBSDs, and four stand-alone MSBSPs). Assuming
that each of the five Rule 18a-8 notices takes fifty-five minutes to
prepare and file, the Commission estimates proposed Rule 18a-8 would
result in an industry-wide ongoing burden of 4.6 hours per year.\1187\
---------------------------------------------------------------------------
\1186\ Rule 17a-11 does not apply to a broker-dealer registered
pursuant to section 15(b)(11)(A) of the Exchange Act (15 U.S.C.
78o(b)(11)(A)) that is not a member of either a national securities
exchange or a national securities association. See paragraph (j) of
Rule 17a-11, as proposed to be amended. The Commission estimates
that there are approximately 4,327 broker-dealers subject to Rule
17a-11 after consulting with the National Futures Association (4,545
registered broker-dealers--218 broker-dealers registered pursuant to
section 15(b)(11)(A) of the Exchange Act = 4,327 Rule 17a-11
respondents).
\1187\ 5 notices/year x (55 minutes/notice/60 minutes/hour) =
4.6 hours/year. These internal hours likely would be performed by a
compliance manager.
---------------------------------------------------------------------------
5. Proposed Rule 18a-9
Proposed Rule 18a-9, which is modeled on Rule 17a-13, would require
stand-alone SBSDs to establish a securities count program.\1188\ As
explained below, the Commission estimates that proposed Rule 18a-9
would impose an industry-wide initial burden of 225 hours and an
industry-wide ongoing burden of 900 hours per year.
---------------------------------------------------------------------------
\1188\ See proposed Rule 18a-9.
---------------------------------------------------------------------------
The current approved PRA estimate for Rule 17a-13 estimates a
securities count program imposes an average ongoing cost of 100 hours
per year.\1189\ The Commission is using this estimate, and therefore
estimates that proposed Rule 18a-9 would impose an ongoing annual
burden of 100 hours per stand-alone SBSD. The Commission estimates that
there are nine stand-alone SBSDs, resulting in an estimated industry-
wide ongoing burden of 900 hours per year.\1190\
---------------------------------------------------------------------------
\1189\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-13 (May
3, 2011), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=245864&version=1.
\1190\ 100 hours/year x 9 stand-alone SBSDs = 900 hours/year.
These internal hours likely would be performed by an operations
specialist.
---------------------------------------------------------------------------
The Commission also estimates that proposed Rule 18a-9 would impose
an initial burden of twenty-five hours per firm. The records required
by proposed Rule 18a-9 should already be recorded by the systems
implemented under proposed Rules 18a-5 and 18a-6, and accordingly, the
resulting initial burden is largely already accounted for under these
rules.\1191\ However, the Commission estimates that the initial cost to
establish procedures for conducting the securities count
[[Page 25276]]
program, including identifying the persons involved in the program,
would create an initial burden of approximately twenty-five hours per
stand-alone SBSD, or 225 hours for the estimated nine stand-alone
SBSDs.\1192\
---------------------------------------------------------------------------
\1191\ However, the Commission assumes that stand-alone SBSDs
and stand-alone MSBSPs do not currently have a securities count
program in place.
\1192\ 25 hours x 9 stand-alone SBSDs = 225 hours. These
internal hours likely would be performed by a senior operations
manager.
---------------------------------------------------------------------------
E. Collection of Information Is Mandatory
The collections of information pursuant to the proposed amendments
and new rules are mandatory, as applicable, for broker-dealers, SBSDs,
and MSBSPs.
F. Confidentiality
The broker-dealer annual reports filed with the Commission are not
confidential, except that if the statement of financial condition is
bound separately from the balance of the annual reports, and each page
of the balance of the annual reports is stamped ``confidential,'' then
the balance of the annual reports shall be deemed confidential to the
extent permitted by law.\1193\ Subject to certain exceptions,\1194\ if
there are material weaknesses, the accountant's report on the
compliance report must be made available for customers' inspection and,
consequently, it would not be deemed confidential.\1195\ Subject to
certain exceptions,\1196\ a broker-dealer must furnish to its customers
its unaudited financial statements,\1197\ and must provide annually a
balance sheet with appropriate notes prepared in accordance with
generally accepted accounting principles and which must be audited if
the broker-dealer is required to file audited financial statements with
the Commission.\1198\
---------------------------------------------------------------------------
\1193\ See paragraph (e)(3) of Rule 17a-5, as proposed to be
amended.
\1194\ See paragraph (c)(1)(i) through (iii) of Rule 17a-5, as
proposed to be amended.
\1195\ See paragraph (c)(2)(iv) of Rule 17a-5, as proposed to be
amended.
\1196\ See paragraph (c)(1)(i)-(iii) of Rule 17a-5, as proposed
to be amended.
\1197\ See paragraph (c)(3) of Rule 17a-5, as proposed to be
amended.
\1198\ See paragraph (c)(2)(i) of Rule 17a-5, as proposed to be
amended.
---------------------------------------------------------------------------
The stand-alone SBSD and stand-alone MSBSP annual reports filed
with the Commission are not confidential, except that if the statement
of financial condition is bound separately from the balance of the
annual reports, and each page of the balance of the annual reports is
stamped ``confidential,'' then the balance of the annual reports shall
be deemed confidential to the extent permitted by law.\1199\ Stand-
alone SBSDs and stand-alone MSBSPs must also make publicly available on
their Web sites audited and unaudited financial statements, and also
make these documents available in writing, upon request, to any person
that has a security-based swap account.\1200\ A stand-alone SBSD would
also be required to disclose on its Web site at the same time: (1) a
statement of the amount of the firm's net capital and required net
capital and other information, if applicable, related to the firm's net
capital;\1201\ and (2) if, in connection with the firm's most recent
annual reports, the report of the independent public accountant
identifies one or more material weaknesses, a copy of the report.\1202\
---------------------------------------------------------------------------
\1199\ See paragraph (d)(2) of proposed Rule 18a-7.
\1200\ See paragraph (b) of proposed Rule 18a-7.
\1201\ See paragraph (b)(1)(ii) of proposed Rule 18a-7.
\1202\ See paragraphs (b)(1)(iii) of proposed Rule 18a-7.
---------------------------------------------------------------------------
With respect to the other information collected under the proposed
amendments and proposed rules, the firm can request the confidential
treatment of the information.\1203\ If such a confidential treatment
request is made, the Commission anticipates that it will keep the
information confidential subject to applicable law.\1204\
---------------------------------------------------------------------------
\1203\ See 17 CFR 200.83. Information regarding requests for
confidential treatment of information submitted to the Commission is
available on the Commission's Web site at http://www.sec.gov/foia/howfo2.htm#privacy.
\1204\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------
G. Retention Period for Recordkeeping Requirements
Rule 17a-4, as proposed to be amended, specifies the required
retention periods for a broker-dealer.\1205\ Proposed Rule 18a-6
specifies the required retention periods for non-broker-dealer SBSDs
and non-broker-dealer MSBSPs.\1206\ Many of the required records must
be retained for three years; certain other records must be retained for
longer periods.\1207\
---------------------------------------------------------------------------
\1205\ See Rule 17a-4, as proposed to be amended.
\1206\ See proposed Rule 18a-6.
\1207\ See Rule 17a-4, as proposed to be amended; proposed Rule
18a-6.
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H. Request for Comment
Pursuant to 44 U.S.C. 3306(c)(2)(B), the Commission requests
comment on the proposed collections of information in order to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collections of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology.
In addition, the Commission requests comment, including empirical
data in support of comments, in response to the following questions:
1. The Commission does not expect any banks to register with the
Commission as MSBSPs. Is this expectation correct? If not, please
provide a suggested estimate and empirical support for it.
2. The Commission estimates that 26 FCMs will register with the
Commission as SBSDs or MSBSPs--16 broker-dealer SBSDs, 9 stand-alone
SBSDs, and 1 broker-dealer MSBSP. Is this estimate accurate? If so,
provide empirical support for the Commission's estimate. If not, please
provide a suggested estimate and empirical support for it.
3. The Commission believes that broker-dealers do not rely on
paragraph (b)(2) of Rule 17a-3, which exempts from Rule 17a-3
transactions cleared by a bank if the bank keeps the requisite records
for the broker-dealer.\1208\ Is this correct? If not, please provide
the estimated burden associated with the Commission's proposal to
eliminate paragraph (b)(2) of Rule 17a-3.
---------------------------------------------------------------------------
\1208\ See 17 CFR 240.17a-3(b)(2).
---------------------------------------------------------------------------
4. Do stand-alone SBSDs and stand-alone MSBSPs already have record
making, record preservation, and reporting systems in place? If so,
please identify them so they can be taken into account in the
Commission's burden estimates under proposed Rules 18a-5 through 18a-9.
5. The Commission believes there is no burden associated with its
proposed amendment to paragraph (b)(1) of Rule 17a-4, which would add a
cross-reference to paragraph (a)(11) of Rule 17a-3, as proposed to be
amended (regarding proof of money balances). Is this estimate
reasonable? Explain why or why not.
Persons submitting comments on the collection of information
requirements should direct their comments to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and
[[Page 25277]]
should also send a copy of their comments to Kevin M. O'Neill, Deputy
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, and refer to File No. S7-05-14. OMB is
required to make a decision concerning the collections of information
between thirty and sixty days after publication of this document in the
Federal Register; therefore, comments to OMB are best assured of having
full effect if OMB receives them within thirty days of this
publication. Requests for the materials submitted to OMB by the
Commission with regard to these collections of information should be in
writing, refer to File No. S7-05-14, and be submitted to the Securities
and Exchange Commission, Records Management, Office of Filings and
Information Services, 100 F Street, NE., Washington, DC 20549.
V. Economic Analysis
A. Introduction
The Commission is sensitive to the costs and benefits of its rules.
Some of these costs and benefits stem from statutory mandates, while
others are affected by the discretion exercised in implementing the
mandates. The following economic analysis seeks to identify and
consider the benefits and costs--including the effects on efficiency,
competition, and capital formation--that would result from the proposed
new recordkeeping, reporting, notification, and securities count rules
for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs
and from the proposed amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-
11. The costs and benefits considered in proposing these new rules and
amendments are discussed below and have informed the policy choices
described throughout this release.
As discussed more fully in section II. above, pursuant to sections
15F and 17(a) of the Exchange Act, the Commission is proposing to amend
Rules 17a-3, 17a-4, 17a-5, and 17a-11 to establish recordkeeping,
reporting, and notification requirements for broker-dealer SBSDs and
broker-dealer MSBSPs to account for their security-based swap
activities.\1209\ Pursuant to section 15F(f) of the Exchange Act, the
Commission is proposing new Rules 18a-5 through 18a-9 to establish
recordkeeping, reporting, and notification requirements for stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, and securities
count requirements for stand-alone SBSDs. Finally, pursuant to sections
15F(f) and 17(a) of the Exchange Act, the Commission is proposing new
Form SBS that would be used by all types of SBSDs and MSBSPs to report
financial information and, in the case of broker-dealer SBSDs and
broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB,
or Part II CSE of the FOCUS Report. The Commission believes these
proposed rules and rule amendments will help regulators determine
whether relevant market participants comply with the proposed capital,
margin, and segregation requirements.\1210\ Additionally, the
Commission is proposing technical amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11, which will apply to all registered broker-dealers.
---------------------------------------------------------------------------
\1209\ In addition, paragraph (a)(5) of Rule 17a-5, as proposed
to be amended, and paragraph (e) of Rule 17a-11, as proposed to be
amended, would require ANC broker-dealers to make additional reports
related to the liquidity stress test conducted pursuant to paragraph
(f) of Rule 15c3-1. The Commission is also proposing certain other
amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11, as discussed
above.
\1210\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------
With regard to the proposed rules and rule amendments relating to
security-based swap recordkeeping and reporting, the baseline for the
economic analysis is the OTC derivatives markets as they exist today.
The baseline includes any recordkeeping and reporting rules currently
applicable to participants in the OTC derivatives market including
applicable rules previously adopted by the Commission \1211\ but
excluding the rules proposed here. The current OTC derivatives market
participants and the current reporting and recordkeeping regimes for
those entities are discussed more fully below. With respect to the
proposed technical amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11,
the baseline for purposes of this economic analysis is the current
recordkeeping and reporting regime for broker-dealers under such
rules.\1212\
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\1211\ The Commission notes that it has temporarily excluded
security-based swaps from the definition of ``security.'' See Order
Granting Temporary Exemptions under the Securities Exchange Act of
1934 in Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, 76 FR 39927; Order Extending Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, 78 FR 10218 (extending
exemptive relief through February 11, 2014). Thus, for purposes of
the Commission's baseline analysis for broker-dealers, security-
based swap activities would be excluded.
\1212\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4; 17 CFR 240.17a-5;
17 CFR 240.17a-11.
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While the Commission does not have comprehensive information on the
U.S. OTC derivatives markets, the Commission is using the limited data
currently available in considering the effects of the proposals.\1213\
The Commission requests that commenters identify sources of data and
information as well as provide data and information to assist the
Commission in analyzing the economic consequences of the proposed
rules. The Commission also requests comment on all aspects of this
initial economic analysis, including on whether the analysis has: (1)
identified all benefits and costs, including all effects on efficiency,
competition, and capital formation; (2) given due consideration to each
benefit and cost, including each effect on efficiency, competition, and
capital formation; and (3) identified and considered reasonable
alternatives to the proposed new rules and rule amendments.
---------------------------------------------------------------------------
\1213\ Information that is available for the purposes of this
economic analysis includes an analysis of the market for single-name
credit default swaps performed by the Commission's Division of
Economic and Risk Analysis (f/k/a the ``Division of Risk, Strategy,
and Financial Innovation''). See Memorandum from Commission's
Division of Risk, Strategy, and Financial Innovation to File (Mar.
15, 2012), available at http://www.sec.gov/comments/s7-39-10/s73910-154.pdf (``CDS Data Analysis'').
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The sections below present an overview of the OTC derivatives
markets, a discussion of the general costs and benefits of the proposed
recordkeeping and reporting requirements, and a discussion of the costs
and benefits of each proposed amendment and new rule. The Economic
Analysis also includes a discussion of the potential effects of the
proposed amendments and new rules on competition, efficiency, and
capital formation. The final section of the Economic Analysis consists
of a discussion of implementation considerations.
B. Baseline of Economic Analysis
1. OTC Derivatives Market
As stated above, to assess the costs and benefits of these rules, a
baseline must be established against which the rules may be evaluated.
For the purposes of this economic analysis, the baseline is the OTC
derivatives markets \1214\ as they exist today, including applicable
rules adopted by the Commission but excluding the rules
[[Page 25278]]
proposed here.\1215\ The markets as they exist today are dominated,
both globally and domestically, by a small number of firms, generally
entities affiliated with or within large commercial banks.\1216\
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\1214\ OTC derivatives may include forwards, swaps, and options
on foreign exchange, and interest rate, equity, and commodity
derivatives.
\1215\ The baseline, however, for the proposed amendments to
Rules 17a-3, 17a-4, 17a-5, and 17a-11 is the current recordkeeping
and reporting regime for broker-dealers under these rules.
\1216\ See, e.g., Bank for International Settlements (``BIS''),
Statistical Release: OTC derivatives statistics at end-June 2013
(November 2013), available at http://www.bis.org/publ/otc_hy1311.pdf. See also ISDA Margin Survey 2012.
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The OTC derivatives markets have been described as opaque because,
for example, transaction-level data about OTC derivatives trading
generally is not publicly available.\1217\ This economic analysis is
supported, where possible, by data currently available to the
Commission from the Depository Trust & Clearing Corporation Trade
Information Warehouse (``DTCC-TIW''). This evaluation takes into
account data regarding the security-based swap market and especially
data regarding the activity--including activity that may be suggestive
of dealing behavior--of participants in the single-name credit default
swap market.\1218\ While a large segment of the security-based swap
market is comprised of credit default swaps, these derivatives do not
comprise the entire security-based swap market.
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\1217\ See Orice M. Williams, Director, Financial Markets and
Community Investment, General Accountability Office, Systemic Risk:
Regulatory Oversight and Recent Initiatives to Address Risk Posed by
Credit Default Swaps, GAO-09-397T, 2, 5, 27 (Mar. 2009), available
at http://www.gao.gov/new.items/d09397t.pdf. See also Robert E.
Litan, The Brookings Institution, The Derivatives Dealers' Club and
Derivatives Market Reform: A Guide for Policy Makers, Citizens and
Other Interested Parties 15-20 (Apr. 7, 2010), available at http://
www.brookings.edu/~/media/research/files/papers/2010/4/
07%20derivatives%20litan/0407--derivatives--litan.pdf; Security-
Based Swap Data Repository Registration, Duties, and Core
Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR
77306, 77354 (Dec. 10, 2010); International Organization of
Securities Commissions, The Credit Default Swap Market, Report FR05/
12 (June 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD385.pdf (stating although the amount of public
information on credit default swaps has increased over recent years,
the credit default swap market is still quite opaque).
\1218\ See CDS Data Analysis.
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Available information about the global OTC derivatives markets
suggests that swap transactions, in contrast to security-based swap
transactions, dominate trading activities, notional amounts, and market
values.\1219\ For example, the BIS estimates that the total notional
amounts outstanding and gross market value of global OTC derivatives
were over $693 trillion and $20.2 trillion, respectively, as of the end
of June 2013.\1220\ Of these totals, the BIS estimates that foreign
exchange contracts, interest rate contracts, and commodity contracts
comprised approximately 95% of the total notional amount and 93% of the
gross market value.\1221\ Credit default swaps, including index credit
default swaps, comprised approximately 3.5% of the total notional
amount and 3.6% of the gross market value. Equity-linked contracts,
including forwards, swaps, and options, comprised approximately an
additional 1.0% of the total notional amount and 3.5% of the gross
market value.\1222\
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\1219\ See BIS Statistical Release: OTC derivatives statistics
at end-June 2013 (reflecting data reported by central banks in
thirteen countries: Australia, Belgium, Canada, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the
United Kingdom, and the U.S.).
\1220\ Id. at 5.
\1221\ Id.
\1222\ Id. Similarly, the OCC has found that interest rate
products comprised 81% of the total notional amount of OTC
derivatives held by bank dealers whereas credit derivative contracts
comprised 5%. See OCC, Quarterly Report on Bank Trading and
Derivatives Activities, Third Quarter 2013, available at http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq313.pdf.
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Security-based swaps represent a relatively small subset of the
overall global OTC derivatives market.\1223\ Consistent with the
Commission's authority over this subset of the OTC derivatives
market,\1224\ the recordkeeping, reporting, and notification
requirements under proposed Rules 18a-5 through 18a-9 would apply only
to those firms that participate in the security-based swap markets
(although some of these firms may be dually-registered with the CFTC or
the prudential regulators and thus may be subject to the recordkeeping
and reporting rules of the CFTC and the prudential regulators governing
swaps generally).\1225\ In addition, although the proposed
recordkeeping, reporting, and notification requirements apply to all
security-based swaps, not just single-name credit default swaps, the
data on single-name credit default swaps are currently sufficiently
representative of the market to help inform this economic analysis
because when measured by notional value, single-name credit default
swaps account for 95% of all SBS transactions.\1226\ The majority of
these single-name credit default swaps, both in terms of aggregate
total notional amount and total volume by product type reference
corporate and sovereign entities.\1227\
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\1223\ For example, as of the end of June, 2013, BIS reports
that the global notional amount outstanding of OTC derivatives was
$692,908 billion. Interest rate contracts, which generally are not
security-based swaps, comprised approximately 83.31% of the overall
OTC derivatives market. Foreign exchange contracts, another type of
OTC derivative which generally is not a security-based swap,
comprised another 11.69% of the overall derivatives market. See BIS
Statistical Release: OTC derivatives statistics at end-June 2013, p.
5.
\1224\ See 15 U.S.C. 78o-10(f)(1) and (2).
\1225\ See, e.g., Swap Data Recordkeeping and Reporting
Requirements: Pre-Enactment and Transition Swaps (Final Rule), 77 FR
35200 (June 12, 2012); Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules; Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3,
2012).
\1226\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30636. See also Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208.
\1227\ Data compiled by the Commission's Division of Economic
and Risk Analysis on credit default transactions from the DTCC-TIW
from January 1, 2011 through December 31, 2011. See Capital, Margin,
and Segregation Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital for Broker-
Dealers, 77 FR 70301.
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While the number of transactions in single-name credit default
swaps is larger than the number of index credit default swaps, the
aggregate total notional amount of index credit default swaps exceeds
the notional amount of single-name credit default swaps.\1228\ For
example, the total aggregate notional amount for single-name credit
default swaps was $6.2 trillion, while the aggregate total notional
amount for index credit default swaps was $16.8 trillion over the
sample period of January 1, 2011 through December 31, 2011. For the
same sample period, however, single-name credit default swaps totaled
69% of transactional volume, while index credit default swaps comprised
31% of the total transactional volume.\1229\ The majority of trades in
both notional amount and volume for both single-name and index credit
default swaps over the 2011 sample period were new trades in contrast
to assignments, increases, terminations or exits.\1230\ The analysis of
the 2011 data further shows that, as measured by total notional amount
and total volume, the majority of single-name and index credit default
contracts have a tenor of five years.\1231\ In addition, the data from
the sample period indicates that the geographical distribution of
counterparties' parent country domiciles in single name
[[Page 25279]]
contracts are concentrated in the U.S., United Kingdom, and
Switzerland.\1232\
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\1228\ Id. This data also shows the average mean and median
single-name and index credit default swap notional transaction size
is $6.47 million and $4.12 million, and $39.22 million and $14.25
million, respectively.
\1229\ Id.
\1230\ Id.
\1231\ Id.
\1232\ Id.
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As described more fully in the CDS Data Analysis,\1233\ based on
2011 transaction data, Commission staff identified entities currently
transacting in the credit default swap market that may register as
SBSDs by analyzing various criteria of their dealing activity. The
results suggest that there is currently a high degree of concentration
of potential dealing activity in the single-name credit default swap
market. For example, using the criterion that dealers are likely to
transact with many counterparties who themselves are not dealers, the
analysis of the 2011 data shows that only 28 out of 1,084 market
participants have three or more counterparties that themselves are not
recognized as dealers by ISDA.\1234\ In addition, the analysis suggests
that dealers appear, based on the percentage of trades between buyer
and seller principals, in the majority of all trades on either one or
both sides in single-name and index credit default swaps.\1235\
Additionally, according to the OCC, at the end of the first quarter of
2012, derivatives activity in the U.S. banking system continues to be
dominated by a small group of large financial institutions. Four large
commercial banks represent 93% of the total banking industry notional
amounts and 81% of industry net current credit exposure.\1236\
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\1233\ See CDS Data Analysis.
\1234\ Id. at Table 3c. The analysis of this transaction data is
imperfect as a tool for identifying dealing activity, given that the
presence or absence of dealing activity ultimately turns upon the
relevant facts and circumstances of an entity's security-based swap
transactions, as informed by the dealer-trader distinction. Criteria
based on the number of an entity's counterparties that are not
recognized as dealers nonetheless appear to be useful for
identifying apparent dealing activity in the absence of full
analysis of the relevant facts and circumstances, given that
engaging in security-based swap transactions with non-dealers would
be consistent with the conduct of seeking to profit by providing
liquidity to others, as anticipated by the dealer-trader
distinction. See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30599 (discussing the dealer-trader distinction).
\1235\ See CDS Data Analysis.
\1236\ See OCC, Quarterly Report on Bank Trading and Derivatives
Activities, Third Quarter 2013, p.1.
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This concentration to a large extent appears to reflect the fact
that those larger entities are well-capitalized and therefore possess
competitive advantages in engaging in OTC security-based swap dealing
activities by providing potential counterparties with adequate
assurances of financial performance.\1237\ Also, the high barriers to
entry indicate that only a limited number of entities conduct business
in this space.
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\1237\ See, e.g., Craig Pirrong, Rocket Science, Default Risk
and The Organization of Derivatives Markets, Working Paper 17-18
(2006), available at http://www.cba.uh.edu/spirrong/Derivorg1.pdf
(noting that counterparties seek to reduce risk of default by
engaging in credit derivative transactions with well-capitalized
firms). See also Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30739-30742.
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Other than OTC derivatives dealers, which are subject to
significant limitations on their activities, broker-dealers
historically have not participated in a significant way in security-
based swap trading for at least two reasons. First, because the
Exchange Act has not previously defined security-based swaps as
``securities,'' they have not been required to be traded through
registered broker-dealers.\1238\ And second, a broker-dealer engaging
in security-based swap activities is currently subject to existing
regulatory requirements, including capital, margin, segregation,
recordkeeping, reporting, notification, and securities count
requirements. Specifically, the existing broker-dealer capital
requirements make it relatively costly to conduct these activities in
broker-dealers.\1239\ Instead of occurring at broker-dealers, security-
based swap activities are currently mostly concentrated in entities
that are affiliated with broker-dealers, but not in broker-dealers
themselves.\1240\
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\1238\ See 15 U.S.C. 78c(a)(10) and (a)(68) (defining
``security'' and ``security-based swap'', respectively).
\1239\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257.
\1240\ See ISDA Margin Survey 2012.
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End users enter into OTC derivatives transactions to take
investment positions or to hedge commercial and financial risk. These
non-dealer end users of OTC derivatives are, for example, commercial
companies, governmental entities, financial institutions, and
investment vehicles.\1241\ Available data suggests that the largest end
users of credit default swaps are, in descending order, hedge funds,
asset managers, and banks, which may have a commercial need to hedge
their credit exposures against a wide variety of entities or may take
an active view on credit risk.\1242\ Based on the available data, the
Commission further estimates that these end users currently participate
in the security-based swap markets on a very limited basis.\1243\
Finally, this baseline will be further discussed in the applicable
sections of the release below.
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\1241\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital for Broker-Dealers, 77 FR 70302.
\1242\ See CDS Data Analysis.
\1243\ Id.
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Request for Comment
The Commission generally requests comment about its preliminary
estimates of the scale and composition of the OTC derivatives market,
including the relative size of the security-based swap segment of that
market. The Commission also requests comment on the Commission's
understanding of which entities are engaged in the OTC derivatives
market, as well as the business practices of broker-dealer, bank, and
stand-alone SBSDs and MSBSPs currently engaged in the OTC derivatives
markets. In addition, the Commission requests that commenters provide
data and sources of data to quantify:
1. The average daily and annual volume of OTC derivatives
transactions;
2. The volume of transactions in each class of OTC derivatives
(e.g., interest rate swaps, index credit default swaps, single-name
credit default swaps, currency swaps, commodity swaps, and equity-based
swaps);
3. The total notional amount of all pending swap transactions;
4. The total gross exposure of all pending swap transactions;
5. The total notional amount of all pending security-based swap
transactions;
6. The total gross exposure of all pending security-based swap
transactions;
7. The types and numbers of dealers in OTC derivatives (e.g.,
banks, broker-dealers, unregulated entities);
8. The types and numbers of dealers in OTC derivatives that engage
in both a swap and security-based swap business;
9. The types and numbers of dealers in OTC derivatives that engage
only in a swap business;
10. The types and numbers of dealers in OTC derivatives that engage
only in a security-based swap business;
11. The current recordkeeping practices with respect to security-
based swap and swap transactions;
12. The current reporting practices with respect to swap
transactions;
13. The current securities count practices with respect to OTC
derivatives participants; and
14. The current financial reporting practices of OTC derivatives
participants.
[[Page 25280]]
2. OTC Derivatives Market Participants and Broker-Dealers
The Commission has not promulgated final registration rules for
SBSDs and MSBSPs. Therefore, there are no entities currently registered
as SBSDs or MSBSPs. As discussed above, the Commission anticipates that
certain entities (stand-alone firms, banks, and registered broker-
dealers) may register as SBSDs or MSBSPs, but the number and type of
these registrants is uncertain. Below, the Commission has summarized
the current recordkeeping practices of these entities, although as
noted below, the Commission does not have information regarding the
practices of some of these entities. The Commission also has provided
below an overview of the entities registered with the Commission as
broker-dealers.
a. Stand-Alone SBSDs and Stand-Alone MSBSPs
Currently, there are firms that are neither banks nor broker-
dealers that participate in the market for security-based swaps. For
these firms, the economic baseline would be the reports and records
these firms currently generate in the ordinary course of their
business. The Commission believes that firms engaged in the security-
based swap market would produce financial reports that are included in
the financial reports it is proposing, such as a balance sheet and an
income statement quarterly and at year end, as a part of ordinary
prudent business practices. Such firms may not, however, produce annual
audited financial statements. The Commission also believes that firms
engaged in the security-based swap business would need, as a matter of
prudent business practice, to maintain records documenting the firm's
derivatives positions. Further, the Commission would expect that these
firms would maintain these records for the duration they held a given
position and for some period of time thereafter. However, the
Commission does not believe that these firms would necessarily have any
regulatory reporting activities. In sum, the baseline for nonbank and
non-broker-dealer firms would be the recordkeeping, record retention,
and financial reporting activities (if any) those firms currently
undertake. Given that the Commission has not previously regulated these
firms, the Commission does not have information regarding the
recordkeeping and reporting costs these nonbank and non-broker-dealer
firms would presently incur in the ordinary course of business.
Moreover, while the Commission has estimated the current costs of
recordkeeping and reporting for broker-dealer and banks below, the
Commission does not believe these nonbank and non-broker-dealer firms
are currently subject to analogous recordkeeping and reporting
requirements. As noted above, the Commission believes that these firms
would, however, as a matter of routine business practice maintain some
records documenting their business activities. Any new costs imposed by
the proposed rules would be incremental to costs currently being
incurred by these entities. In order to help the Commission assess the
costs associated with the proposed recordkeeping and reporting
requirements, and the extent to which the proposed recordkeeping and
reporting rules add costs above those already incurred by these firms
in the ordinary course of business, the Commission requests comment.
Specific cost estimates would be particularly helpful to the
Commission's analysis.
b. Bank Security-Based Swap Dealers and Bank Major Security-Based Swap
Participants
Banks are already subject to recordkeeping and retention
requirements by the prudential regulators.\1244\ In addition, banks
must file financial statements and supporting schedules known as ``call
reports'' with their prudential regulator.\1245\ The Commission
believes that the most common form of call report for a bank that would
register as an SBSD or MSBSP is FFIEC Form 031.\1246\ Like the FOCUS
Report, FFIEC Form 031 elicits financial and operational information
about a bank, which is entered into uniquely numbered line items. A
bank must report detail about its assets, liabilities, and equity
capital on Schedule RC to FFIEC Form 031.\1247\ A bank must report
detail about its regulatory capital on Schedule RC-R to FFIEC Form
031.\1248\ The information elicited on Schedule RC-R is designed to
facilitate an analysis of the bank's regulatory capital. A bank must
report detail about its income (loss) and expenses on Schedule RI to
FFIEC Form 031.\1249\
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\1244\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR
219.21 et seq. (FDIC); 12 CFR 344.4 (FDIC).
\1245\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12
U.S.C. 1464.
\1246\ FFIEC Form 031 is filed by banks with domestic and
foreign offices, which the Commission believes will characterize
most bank SBSDs.
\1247\ See FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-
29. Schedule RC also has a ``Memoranda'' section that which elicits
information about bank's external auditors and fiscal year end date.
See FFIEC Form 031, Schedule RC, Balance Sheet, Memoranda, Lines 1-
2.
\1248\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Lines 1-62. Schedule RC-R also has a ``Memoranda'' section that
elicits detail about derivatives. See FFIEC Form 031, Schedule RC-R,
Regulatory Capital, Memoranda, Lines 1-2.
\1249\ See FFIEC Form 031, Schedule RI, Income Statement, Lines
1-14. Schedule RI also has a ``Memoranda'' section that elicits
further detail about income (loss). See FFIEC Form 031, Schedule RI,
Income Statement, Memoranda, Lines 1-14.
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The Commission has estimated the cost of the existing
recordkeeping, record retention, reporting, and notification
requirements that are applicable to nationally chartered banks under
existing regulations issued by the OCC. The Commission arrived at the
estimate by examining the universe of existing PRA collections to which
national banks are subject and selecting those collections which
represent regulations that are analogous to the recordkeeping, record
retention, reporting, and notification rules the Commission is
proposing herein.\1250\ The Commission then estimated that reporting
burdens generate approximately $79/hour of cost for national banks and
that recordkeeping burdens generate approximately $30/hour of cost for
national banks.\1251\ The Commission estimates that national banks
currently incur $54,120,368 of costs to comply with the OCC's financial
reporting, notification and recordkeeping rules.\1252\ The OCC's rules
generally relate to banking activities, not securities and security-
based swap activities. The Commission thus recognizes that some of the
costs reflected in the OCC's rules may not be analogous to costs that
may be imposed by the Commission's proposed rules. Nonetheless, these
cost estimates may help provide context and cost ranges with respect to
the nationally chartered banks impacted by the Commission's proposed
rules.
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\1250\ PRA collections for OCC-regulated national banks,
together with PRA collections for other federal regulatory agency
rules, are available at www.reginfo.gov/public/do/PRAMain.
\1251\ This assumption is derived from OCC staff's description
of the hourly costs it estimates in connection with Paperwork
Reduction Act burdens. For the purposes of this Economic Analysis,
the Commission assumes that reporting burdens will be performed 5%
by clerical staff at $20 an hour, 10% by managerial or technical
staff at $40 an hour, 55% by senior management at $80 an hour, and
30% by legal counsel at $100 an hour, which, in the aggregate,
equals $79 an hour. The Commission assumes that recordkeeping
burdens will be performed 70% by clerical staff at $20 an hour, 20%
by managerial or technical staff at $40 an hour, and 10% by senior
management at $80 an hour, which in the aggregate, equals $30 an
hour.
\1252\ The Commission derived the estimates of the hourly burden
associated with these OCC rules from the number of hours approved
for information collection purposes by the Office of Management and
Budget. See the chart below for a representation of the calculation
methodology:
[[Page 25281]]
----------------------------------------------------------------------------------------------------------------
Annual hourly Compensation Estimated
Reporting/recordkeeping industry burden rate (per hour) annual cost
----------------------------------------------------------------------------------------------------------------
Interagency Call Report (FFIEC 031 and 041)............... 406,141 $79 $32,085,139
Foreign Branch Call Report (FFIEC 041).................... 4,651 79 367,429
Country Exposure Report (FFIEC 009)....................... 8,384 79 662,336
Exchange Act Disclosures Reported to the OCC.............. 523 79 32,785
Recordkeeping Requirements for Securities Transactions.... 6,944 30 208,320
Disclosure of Financial and Other Information............. 669 79 52,851
Interagency Guidance on Asset Securitization Activities... 778 30 23,340
Advanced Capital Adequacy Framework Reporting............. 137,500 79 10,862,500
Liquidity Risk Report..................................... 43,992 79 3,475,368
General Reporting and Recordkeeping by Savings 61,362 30 1,840,860
Associations.............................................
Notice or Application for Capital Distributions........... 546 79 43,134
Annual Stress Test Rule and Stress Test Reporting 73,876 79 5,836,204
Templates................................................
Recordkeeping and Disclosure Provisions Associated with 16,120 30 483,600
Stress Testing Guidance..................................
Total Costs........................................... ................ ................ 55,614,969
----------------------------------------------------------------------------------------------------------------
c. Entities Registered as Broker-Dealers
As of April 1, 2013, there were 4,545 broker-dealers registered
with the Commission. The broker-dealers registered with the Commission
vary significantly in terms of their size, business activities, and the
complexity of their operations.\1253\ The Commission has previously
estimated that as of December 31, 2011, nine broker-dealers dominate
the broker-dealer industry, holding over half of all capital held by
broker-dealers.\1254\ However, other than OTC derivatives dealers,
which are subject to significant limitations on their activities,
broker-dealers historically have not participated in a significant way
in security-based swap trading.\1255\
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\1253\ See Broker-Dealer Reports, 78 FR 51967.
\1254\ See Broker-Dealer Reports, 78 FR 51968.
\1255\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70302.
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i. Rules 17a-3 and 17a-4
The Commission is proposing amendments to Rules 17a-3 and 17a-4 to
establish additional recordkeeping requirements for broker-dealer
SBSDs, broker-dealer MSBSPs,\1256\ and broker-dealers that conduct
security-based swap activities but are not registered as SBSDs.\1257\
The baseline for this economic analysis with respect to the proposed
amendments to Rules 17a-3 and 17a-4 is the broker-dealer recordkeeping
regime as it exists today.
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\1256\ See section II.A.2. of this release.
\1257\ The proposed amendments to the recordkeeping and
reporting rules would apply to all broker-dealers that conduct
security-based swap activities. The de minimis exception provided in
Exchange Act Rule 3a71-2 applies solely to registration as an SBSD.
See 17 CFR 240.3a71-2(a)(1) .
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Under current Rule 17a-3, broker-dealers must make and keep certain
books and records.\1258\ The Commission estimates that current Rule
17a-3 imposes $191,858,085 of annual costs on broker-dealers.\1259\
Current Rule 17a-4 requires that firms preserve the records made and
kept under Rule 17a-3, as well as additional records, including written
agreements, communications relating to its business as such, and
records reflecting inputs into the FOCUS Report. The rule also
establishes retention periods for all records required to be made under
Rule 17a-3 and required to be preserved under Rule 17a-4, along with
storage media requirements for those firms that preserve records
electronically. The Commission estimates that current Rule 17a-4
imposes $95,454,090 of annual costs on broker-dealers.\1260\
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\1258\ See 17 CFR 240.17a-3.
\1259\ (2,449,755 hours x $63/hour national hourly rate for a
compliance clerk) + $37,523,520 in external costs = $191,858,085.
See supra section IV.D.1. (PRA estimate of the total initial and
annual recordkeeping and reporting burden for current Rule 17a-3).
\1260\ (1,154,430 hours x $63/hour national hourly rate for a
compliance clerk) + $22,725,000 in external costs = $95,454,090. See
supra section IV.D.2. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for current Rule 17a-4).
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ii. Rule 17a-5
The existing broker-dealer financial reporting requirements appear
in Rule 17a-5. The baseline for this economic analysis with respect to
the proposed amendments to Rules 17a-5 is the broker-dealer financial
reporting requirements as they exist today (as recently amended). The
Commission estimates that current Rule 17a-5 imposes $210,776,086 of
annual costs on broker-dealers.\1261\
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\1261\ (734,294 hours x $269/hour national hourly rate for a
compliance manager) + $13,251,000 in external costs = $210,776,086.
See supra section IV.D.3. (PRA estimate of the total initial and
annual recordkeeping and reporting burden for current Rule 17a-5).
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Rule 17a-5, as recently amended, has two main elements: (1) broker-
dealers must file periodic unaudited reports containing information
about their financial and operational condition on a FOCUS Report; and
(2) broker-dealers must annually file financial statements and certain
reports and a report covering the financial statements and reports
prepared by an independent public accountant registered with the PCAOB
in accordance with PCAOB standards.\1262\ In addition to these two main
elements, a few other aspects of Rule 17a-5 are described below.
---------------------------------------------------------------------------
\1262\ Id. These requirements are described in more detail
below.
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a. Periodic Reports
Broker-dealers periodically report information about their
financial and operational condition on the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE. Each version of the report is designed
for a particular type of broker-dealer and the information to be
reported is tailored to the type of broker-dealer. Specifically: (1) a
broker-dealer that does not hold customer funds or securities completes
and files the FOCUS Report Part IIA; (2) a broker-dealer that holds
customer funds or securities completes and files the FOCUS Report Part
II; (3) an OTC derivatives dealer completes and files the FOCUS Report
Part IIB; and (4) an ANC broker-dealer completes and files the FOCUS
Report Part II CSE. The FOCUS Report Part II CSE elicits the most
detailed information of the four versions, including the most detail
about a firm's derivatives activities.
b. Annual Audited Reports and Related Notifications
Under the recently adopted amendments to Rule 17a-5, a broker-
dealer is required to, among other things, annually file reports with
the Commission that are audited by a PCAOB-registered independent
public
[[Page 25282]]
accountant, disclose certain financial information to customers, notify
the Commission of a change of accountant, and notify the Commission of
its DEA's approval of a change in its fiscal year.\1263\ The recent
rule amendments also require the independent public accountant to
notify the broker-dealer if the accountant discovers an instance of
non-compliance with certain broker-dealer rules or determines that any
material weakness exists.\1264\
---------------------------------------------------------------------------
\1263\ See 17 CFR 240.17a-5(d), (g), and (n)(1). Paragraph
(n)(2) of Rule 17a-5 requires that the notice contain a detailed
explanation for the reasons for the change and requires that changes
in the filing period for the annual reports be approved in writing
by the broker-dealer's DEA.1
\1264\ See Broker-Dealer Reports, 78 FR 51910.
---------------------------------------------------------------------------
c. Customer Statements
Paragraph (c) of Rule 17a-5 requires, among other things, that
certain broker-dealers annually send their customers audited and
unaudited statements regarding their financial condition. A broker-
dealer is exempt from sending the statement of financial condition to
customers if the broker-dealer, among other things: (1) sends its
customers semi-annual statements relating to the firm's net capital
and, if applicable, the identification of any material weaknesses; and
(2) makes the statement of financial condition described above
available on the broker-dealer's Web site home page and maintains a
toll-free number that customers can call to request a copy of the
statement.\1265\
---------------------------------------------------------------------------
\1265\ See 17 CFR 240.17a-5(c)(5).
---------------------------------------------------------------------------
d. Additional ANC Broker-Dealer Reports
Paragraph (a)(6) of Rule 17a-5 requires ANC broker-dealers to
periodically file certain reports with the Commission.\1266\ The
reports contain information related to the ANC broker-dealer's use of
internal models to calculate market and credit risk charges when
computing net capital.\1267\
---------------------------------------------------------------------------
\1266\ See 17 CFR 240.17a-5(a)(6).
\1267\ Id.
---------------------------------------------------------------------------
iii. Rule 17a-11
The existing broker-dealer notice requirements are contained in
Rule 17a-11. The baseline for this economic analysis with respect to
the proposed amendments to Rule 17a-11 is the broker-dealer
notification requirements as they exist today. Rule 17a-11 specifies
the circumstances under which a broker-dealer must notify the
Commission and other securities regulators about its financial or
operational condition, as well as the form that the notice must
take.\1268\ The Commission estimates that current Rule 17a-11 imposes
$119,167 of annual costs on broker-dealers in the aggregate.\1269\
---------------------------------------------------------------------------
\1268\ See 17 CFR 240.17a-11.
\1269\ 443hours x $269/hour national hourly rate for a
compliance manager = $119,167. See supra section IV.D.4. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for current Rule 17a-11).
---------------------------------------------------------------------------
a. Failure to Meet Minimum Capital Requirements
Paragraph (b) of Rule 17a-11 requires a broker-dealer to notify the
Commission if the firm's net capital or, if applicable, tentative net
capital declines below the minimum amount required under Rule 15c3-
1.\1270\ Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives
dealer or an ANC broker-dealer to also notify the Commission when its
tentative net capital falls below the minimum required for these types
of broker-dealers.\1271\
---------------------------------------------------------------------------
\1270\ See 17 CFR 240.17a-11(b).
\1271\ See 17 CFR 240.17a-11(b)(2).
---------------------------------------------------------------------------
b. Early Warning of Potential Capital or Model Problem
Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives dealer
or an ANC broker-dealer to also notify the Commission when its
tentative net capital falls below the minimum required for these types
of broker-dealers.\1272\ Paragraph (c) of Rule 17a-11 specifies four
events that, if they occur, trigger a requirement that a broker-dealer
send notice promptly (but within twenty-four hours) to the
Commission.\1273\ These notices are designed to provide the Commission
with ``early warning'' that the broker-dealer may experience financial
difficulty.\1274\ The events triggering the early warning notification
requirements are:
---------------------------------------------------------------------------
\1272\ Id.
\1273\ See 17 CFR 240.17a-11(c).
\1274\ See Early Warning Rule, Securities Exchange Act Release
No. 32586 (July 7, 1993), 58 FR 37655 (July 13, 1993).
---------------------------------------------------------------------------
The computation of a broker-dealer subject to the
aggregate indebtedness standard of Rule 15c3-1 shows that the firm's
aggregate indebtedness is in excess of 1,200% of its net capital;
\1275\
---------------------------------------------------------------------------
\1275\ See 17 CFR 240.17a-11(c)(1). As discussed above, for
certain types of broker-dealers, the minimum net capital requirement
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 15-to-1 aggregate indebtedness to
net capital ratio. See 17 CFR 240.15c3-1(a)(1)(i). Consequently,
requiring notification when a broker-dealer has a 12-to-1 aggregate
indebtedness to net capital ratio provides notice before the firm
reaches the minimum 15-to-1 requirement.
---------------------------------------------------------------------------
The computation of a broker-dealer which has elected to
use the alternative standard of calculating net capital under Rule
15c3-1 shows that the firm's net capital is less than 5% of aggregate
debit items computed in accordance with Appendix A of Rule 15c3-
3;\1276\
---------------------------------------------------------------------------
\1276\ See 17 CFR 240.17a-11(c)(2). As discussed above, for
certain types of broker-dealers, the minimum net capital requirement
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 2% of aggregate debit items ratio.
See 17 CFR 240.15c3-1(a)(1)(ii). Consequently, requiring
notification when a broker-dealer has net capital equal to 5% of
aggregate debit items provides notice before the firm reaches the 2%
minimum requirement.
---------------------------------------------------------------------------
A broker-dealer's net capital computation shows that its
total net capital is less than 120% of its required minimum level of
net capital or of its required minimum level of tentative net capital,
in the case of an OTC derivatives dealer; \1277\
---------------------------------------------------------------------------
\1277\ See 17 CFR 240.17a-11(c)(3).
---------------------------------------------------------------------------
With respect to an OTC derivatives dealer, the occurrence
of the fourth and each subsequent backtesting exception under Appendix
F of Rule 15c3-1 during any 250 business day measurement period.\1278\
---------------------------------------------------------------------------
\1278\ See 17 CFR 240.17a-11(c)(4).
---------------------------------------------------------------------------
c. Failure to Make and Keep Current Books and Records
Paragraph (d) of Rule 17a-11 requires a broker-dealer that fails to
make and keep current the books and records required under Rule 17a-3
to notify the Commission of this fact on the same day that the failure
arises.\1279\ The notice must specify the books and records which have
not been made or which are not current.\1280\ A broker-dealer is
required to report to the Commission within 48 hours of the original
notice what the broker or dealer has done or is doing to correct the
situation.\1281\
---------------------------------------------------------------------------
\1279\ See 17 CFR 240.17a-11(d).
\1280\ Id.
\1281\ Id.
---------------------------------------------------------------------------
d. Material Weakness
Paragraph (e) of Rule 17a-11 requires a broker-dealer to provide
notification about a material weakness as that term is defined in Rule
17a-5.\1282\ Specifically, paragraph (e) provides that, whenever a
broker-dealer discovers or is notified by an independent public
accountant of a material weakness as defined in Rule 17a-5, the broker-
dealer must: (1) give notice to the Commission within twenty-four hours
of the discovery or notification of the material weakness; and (2)
transmit a report within forty-eight hours of the notice indicating
what the broker-dealer has done or is doing to correct the
situation.\1283\
---------------------------------------------------------------------------
\1282\ See 17 CFR 240.17a-11(e). See also 17 CFR 240.17a-5(g).
\1283\ See 17 CFR 240.17a-11(e)(1) and (2). See also Broker-
Dealer Reports, 78 FR 51939 (discussing amendment of material
weakness standard in Rule 17a-5). As discussed above in section
II.B.3.a. of this release, the Commission is proposing to use the
concept of material weakness in proposed Rule 18a-7.
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[[Page 25283]]
e. Failure to Make a Required Reserve Deposit
An additional broker-dealer notification is required under Exchange
Act Rule 15c3-3, rather than Rule 17a-11. Specifically, under paragraph
(i) of Rule 15c3-3, a broker-dealer is required to notify the
Commission and its DEA if it fails to make a required deposit into its
customer reserve account under Rule 15c3-3.\1284\
---------------------------------------------------------------------------
\1284\ See 17 CFR 240.15c3-3(i).
---------------------------------------------------------------------------
C. Analysis of the Proposed Program and Alternatives
1. Overview--The Proposed Recordkeeping, Reporting, Notification, and
Securities Count Program
Generally, the proposed recordkeeping, reporting, notification, and
securities count requirements are intended to update the recordkeeping,
reporting, notification, and securities count requirements for broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to
account for their security-based swap activities. The proposal is also
intended to establish recordkeeping, reporting, and notification
requirements for SBSDs and MSBSPs that are not registered as broker-
dealers as well as a securities count requirement for stand-alone
SBSDs. The recordkeeping, reporting, notification, and securities count
rules being proposed are based upon the comprehensive system of
recordkeeping, reporting, notification, and securities count rules
applicable to broker-dealers, as proposed to be modified to capture and
document the security-based swap activities of broker-dealers, SBSDs,
and MSBSPs. The recordkeeping, reporting, notification, and securities
count rules and rule amendments being proposed today represent the
manner in which SBSDs and MSBSPs will document, report, and retain
evidence of their compliance with, among other things, the previously
proposed capital, margin, and segregation rules. The Commission
believes that these rules, by their nature, will have a more limited
economic impact as compared to the Commission's capital, margin, and
segregation proposals.\1285\
---------------------------------------------------------------------------
\1285\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------
In proposing these requirements, the Commission is considering both
the potential benefits of improving the oversight, transparency, risk
documentation and management of security-based swap activities, and the
potential costs to firms, the financial markets, and the U.S. financial
system if broker-dealers, SBSDs, and MSBSPs are required to comply with
the proposed rules.
The Commission notes that there are certain instances when it is
difficult to quantify the potential benefits and costs of the proposed
rules. For example, firms that choose to register in some capacity as
an SBSD or MSBSP may not currently be subject to Commission, CFTC, or
prudential regulation. For these firms, the Commission is not certain
of such firms' current recordkeeping, reporting, notification, and
securities count practices with respect to their security-based swap
activities and thus it is difficult to reliably gauge the economic
effect of the proposed rules and rules amendments on these firms. With
regard to other classes of regulated entities, the Commission staff's
experience with broker-dealers under the existing recordkeeping,
reporting, notification, and securities count rules gives it a better
understanding of the compliance-related costs (such as those related to
retaining attorneys, accountants, and other professionals) and in such
cases the Commission has prepared below a summary of its preliminary
estimate of those costs.\1286\
---------------------------------------------------------------------------
\1286\ See infra section V.E.
---------------------------------------------------------------------------
As discussed in section II. of the release, the current broker-
dealer recordkeeping, reporting, notification, and securities count
requirements serve as the template for the proposals for several
reasons. The financial markets in which SBSDs and MSBSPs are expected
to operate are similar to the financial markets in which broker-dealers
operate in that they are driven in significant part by dealers that buy
and sell on a regular basis and that take principal risk. The
Commission believes it should take a similar regulatory approach for
similar markets.
The Commission also believes that in order to prevent regulatory
arbitrage, and to help ensure appropriate accountability and oversight,
security-based swap activity should be regulated in a similar manner
irrespective of whether it is conducted by, for example, a broker-
dealer or stand-alone SBSD. The proposals applicable to stand-alone
SBSDs and stand-alone MSBSPs seek to regulate these firms' security-
based swap activity consistent with the regulation of security-based
swap activities conducted at broker-dealers, while reflecting the
business model of such entities.\1287\ The Commission is seeking to
provide all security-based swap activity, irrespective of the entity
within which such activity is conducted, a level regulatory playing
field while being cognizant of the fact that firms with a more limited
business should also be subject to an appropriately circumscribed set
of regulations.
---------------------------------------------------------------------------
\1287\ In this regard, the Commission notes the proposal
excludes a number of recordkeeping requirements for bank SBSDs and
bank MSBSPs. As discussed above in section I. of this release,
section 15F(f)(1)(B) of the Exchange Act requires such institutions
to keep only those books and records of all activities related to
the conduct of business as an SBSD or MSBSP.
---------------------------------------------------------------------------
Moreover, the rules ultimately adopted, in conjunction with other
requirements established under the Dodd-Frank Act, could have a
substantial impact on international commerce and the relative
competitive position of intermediaries operating in various, or
multiple, jurisdictions. In particular, intermediaries operating in the
U.S. and in other jurisdictions could be advantaged or disadvantaged if
corresponding requirements are not established in other jurisdictions
or if the Commission's rules are substantially more or less stringent
than corresponding requirements in other jurisdictions. This could,
among other potential impacts, affect the propensity of intermediaries
and other market participants based in the U.S. to participate in non-
U.S. markets and the propensity of non-U.S.-based intermediaries and
other market participants to participate in U.S. markets. Accordingly,
substantial differences between the U.S. and foreign jurisdictions in
the costs of complying with the requirements established under the
Dodd-Frank Act, including the reporting, recordkeeping, notification,
and security count requirements for security-based swaps between U.S.
and foreign jurisdictions, could have international implications.\1288\
---------------------------------------------------------------------------
\1288\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
Registration of Security-Based Dealers and Major Security-Based Swap
Participants, 78 FR 31034.
---------------------------------------------------------------------------
The Commission also preliminarily believes that there are cost and
compliance benefits to be realized by utilizing an existing, well-known
set of rules as a starting point. The Commission notes that the broker-
dealer recordkeeping, notification, securities count, and reporting
requirements have existed for many years and have facilitated the
accountability and oversight of broker-dealers. From the perspective of
trying to minimize
[[Page 25284]]
regulatory costs and compliance concerns, the Commission would expect
that broker-dealer SBSDs and broker-dealer MSBSPs would already be
familiar with the structure and content of the recordkeeping and
reporting requirements. The Commission believes that these compliance
and cost benefits could be realized even by firms that are not
currently registered as broker-dealers given that some of the new
registrants would likely be part of larger financial firms that have a
broker-dealer affiliate, thus providing a source of in-house experience
with the Commission's broker-dealer rules. Even for those firms that
have no source of such in-house expertise, the Commission expects that
starting with the existing broker-dealer rules should require less
expenditure than if the Commission created entirely new rules given
that outside expertise with the current broker-dealer rules is readily
available. Notwithstanding this belief, the Commission acknowledges
that its proposals would likely still require new expenditures for
these firms. In order to aid its analysis, the Commission requests
comment on the use of the existing broker-dealer rules as a model. The
Commission also requests comment on whether there are other existing
rule sets that would be more appropriate.
In determining appropriate recordkeeping, reporting, notification,
and securities count requirements, the Commission assesses and
considers a number of different costs and benefits, and the
determinations it ultimately makes can have a variety of economic
consequences for the relevant firms, markets, and the financial system
as a whole. The recordkeeping, reporting, notification, and securities
count requirements in particular are broadly intended to facilitate
effective oversight and improve internal risk management via requiring
robust internal procedures for creating and retaining records central
to the conduct of business as an SBSD or MSBSP. Requiring registered
firms to comply with recordkeeping and reporting rules should help
ensure more effective regulatory oversight. The proposed rules would
help the Commission determine whether an SBSD or MSBSP is operating in
compliance with the Exchange Act and the rules thereunder.
The Commission also believes that the proposed rules could promote
technology improvements. Those SBSDs and MSBSPs that do not have the
technology to store and maintain the information required by the
proposed rules will need to invest in technology. The technology
improvements could help SBSDs and MSBSPs, particularly those that
conducted the security-based swap business outside of any regulated
entity, more effectively track their trading and risk exposure in
security-based swaps. To the extent that these firms can better track
their risk, this should help them better manage risk.
The Commission also believes that the required annual audit of
nonbank SBSDs' and nonbank MSBSPs' financial statements and the public
availability of firms' Statement of Financial Condition would permit
customers and counterparties to have access to financial information
that would permit them to better assess the financial condition of the
firm. While it is difficult to quantify the current level of market
confidence in the security-based swap marketplace, the Commission
staff's experience is that market participants' willingness to engage
in activities increases when such participants are better able to
understand the financial condition of other market participants and
counterparties.
The Commission also recognizes that there will be costs associated
with the proposal. Those costs include the costs of complying with the
proposed rules, one-time and ongoing financial reporting costs, and
costs associated with ongoing record maintenance.
2. Alternatives to the Proposed Recordkeeping, Reporting, Notification,
and Securities Count Rules
The Commission recognizes that there may be other appropriate
approaches to establishing recordkeeping, reporting, and notification
requirements. In the course of preparing and considering the rules it
is proposing today, Commission staff reviewed and analyzed analogous
rule sets utilized by the Commission's fellow federal regulators, with
a view towards determining whether there may be other practicable
alternatives. In a number of instances, Commission staff also consulted
with staff from its fellow regulators regarding the proposals herein.
The Commission believes the proposals herein are broadly consistent
with the approach taken by the CFTC. The CFTC's proposed and ultimately
final rules were modeled on an existing set of the rules.\1289\ For
existing broker-dealers and firms affiliated with existing broker-
dealers, the Commission believes that starting with an existing and
known set of rules offers practical benefits for both the regulator and
the regulated entities, as compared with starting with a wholly new set
of rules. The Commission acknowledges that the benefits of this
approach would be much more limited for firms such as stand-alone
entities that are not currently broker-dealers and are not affiliated
with broker-dealers.
---------------------------------------------------------------------------
\1289\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20171 (stating swap dealer and major
swap participant rules are modeled on existing rules as well as
those of the Commission).
---------------------------------------------------------------------------
Although it is not possible to precisely compare rule sets across
agencies, the Commission believes that the recordkeeping rules it is
proposing are similar to those of the CFTC in terms of their level of
prescriptiveness. For example, paragraph (a)(1) of Rule 17a-3 sets
forth the requirement that a broker-dealer make and keep current a
trade blotter. The Commission is also proposing very similar provisions
in paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5, designed to
apply, respectively, to stand-alone SBSDs and stand-alone MSBSPs, as
well as bank SBSDs and bank MSBSPs. Paragraph (a)(2) of the
corresponding CFTC rule, Rule 202 (``Daily Trading Records''),
prescribes that swap dealers and major swap participants shall make and
keep trade execution records that are very similar.\1290\
---------------------------------------------------------------------------
\1290\ See 17 CFR 23.202(a)(2).
---------------------------------------------------------------------------
In considering whether there were other practicable regulatory
alternatives, the Commission also examined rules of the prudential
regulators. For example, the OCC has rules governing recordkeeping and
confirmation requirements for securities transactions effected by
national banks.\1291\ Paragraph (a)(1) of the OCC rule governing the
record that a national bank effecting securities transactions for
customers must maintain, Rule 12.3, appears broadly consistent with
paragraph (a)(6) of Rule 17a-3, as proposed to be amended, as well as
with paragraph (b)(7) of proposed Rule 18a-5.\1292\
---------------------------------------------------------------------------
\1291\ See 12 CFR 12.3.
\1292\ Compare 12 CFR 12.3(a), with paragraph (a)(6) of Rule
17a-3, as proposed to be amended, and paragraph (b)(7) of proposed
Rule 18a-5.
---------------------------------------------------------------------------
The Commission considered regulatory approaches outside of those
utilized by other regulators. One alternative would be for all SBSDs
and MSBSPs to keep and report the same records and other financial
reports. While technically possible and arguably simpler to implement
and administer, the Commission does not believe such a requirement
would be justified given the different capital, margin, and segregation
proposals that would apply
[[Page 25285]]
to each participant. For example, since a stand-alone MSBSP would not
be subject to a minimum net capital requirement under the proposed
capital rules that would be applicable to SBSDs and MSBSPs (it would be
subject to a positive tangible net worth standard instead),\1293\ it
may be unduly burdensome to require stand-alone MSBSPs to calculate and
report in Form SBS the amount of net capital it holds. Hence, while the
Commission considered such a simpler approach, the Commission
preliminarily believes that such an approach would be confusing and
unduly burdensome for firms required to complete and file Form SBS and
would introduce significant compliance challenges beyond those imposed
by the proposed rules and rule amendments.
---------------------------------------------------------------------------
\1293\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------
Another alternative to the rules the Commission is proposing would
be rules that are less prescriptive. Under such rules, detailed record
production and retention requirements could be replaced by more general
references to the types of information the firm needs to document and
retain for examination purposes. This approach could promote a
consistent view and management of recordkeeping and reporting
obligations within a large financial firm that has numerous
subsidiaries. This approach would also have the advantage of likely
being less costly, as the firm would be more able to conform its
existing recordkeeping practices at the parent and the subsidiaries.
While this approach has its benefits, the financial markets and
transactions in which SBSDs and MSBSPs are expected to operate and
engage in, respectively, are similar to the financial markets and
transactions in which broker-dealers operate, and the Commission
preliminarily believes these similarities argue for a consistent
regulatory approach.\1294\ In addition, as discussed above, the
objectives of these broker-dealer requirements are similar to the
objectives underlying the proposals regarding securities-based
swaps.\1295\ Notwithstanding its preliminary analysis of the issue, the
Commission requests comment on whether there are existing alternative
rule sets that could provide such a model, and the appropriateness of
those alternatives relative to what the Commission has proposed.
---------------------------------------------------------------------------
\1294\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70216 (stating a similar rationale for basing the proposed capital,
margin, and segregation requirements for SBSDs on the broker-dealer
capital, margin, and segregation requirements).
\1295\ See supra section I.
---------------------------------------------------------------------------
The Commission has also considered alternatives to the financial
reporting rules being proposed. For example, with respect to bank SBSDs
and bank MSBSPs, one alternative would be to permit these firms to use
the existing financial reports made with their respective prudential
regulators. This approach would allow the firms to avoid creating and
filing an additional financial report with the Commission, and would
likely result in fewer compliance-related costs. The Commission is
aware of the burdens and costs associated with preparing an additional
regulatory submission such as Form SBS, but the proposal is designed to
ameliorate those burdens. Thus, while proposed Form SBS seeks specific
transaction and position data regarding bank SBSDs' and bank MSBSPs'
security-based swap activities, the other required financial data in
Form SBS for bank SBSDs and bank MSBSPs come directly from the filings
these firms currently make with their respective prudential
regulators.\1296\ The Commission invites comment on whether there are
other ways of obtaining information regarding bank SBSDs' and bank
MSBSPs' security-based swaps transactions and positions that would be
less costly or burdensome and that would also facilitate Commission
oversight of the transactions, positions, and financial condition of
these firms.
---------------------------------------------------------------------------
\1296\ See supra section II.B.2.b.
---------------------------------------------------------------------------
The Commission has also considered alternative financial reporting
arrangements for stand-alone SBSDs or stand-alone MSBSPs. For example,
the Commission is aware that the CFTC proposed that stand-alone swap
dealers and stand-alone major swap participants be required to submit
monthly unaudited financial statements within 17 business days of the
end of the month, as well as GAAP financial statements within 90 days
of the end of the fiscal year.\1297\ The CFTC did not prescribe any
additional forms such as what the Commission is proposing with Form
SBS. The Commission preliminarily believes that that the information
elicited by Form SBS should assist the Commission and the firms' DEAs
to conduct effective examinations of broker-dealer SBSDs and broker-
dealer MSBSPs. The broker-dealer SBSD and broker-dealer MSBSP reporting
requirements would promote transparency of the financial and
operational condition of the broker-dealer SBSD or broker-dealer MSBSP
to the Commission and to the public. In order to aid its analysis of
whether there are other more appropriate alternatives relative to what
it has proposed, the Commission requests comment.
---------------------------------------------------------------------------
\1297\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 76 FR 27813 (discussion of proposed CFTC Regulation
23.106).
---------------------------------------------------------------------------
The Commission has also considered alternatives to the notification
and securities count proposals.\1298\ An alternative to the proposed
notification proposal would be to not have such a rule, or to have
fewer events give rise to notification. Similarly, with respect to the
quarterly securities count proposal, the Commission believes the
alternative would be to specify a less frequent count or to omit a
requirement for securities count.
---------------------------------------------------------------------------
\1298\ See supra section II.D.1. (summarizing rationale
underlying Rule 17a-13).
---------------------------------------------------------------------------
The Commission has proposed the notification and securities count
proposals because it preliminarily believes that the rules are an
appropriate component of its oversight of the financial responsibility
of firms engaged in a security-based swap business. The broker-dealer
recordkeeping, reporting, notification, and security count requirements
are part of the broker-dealer financial responsibility rules.\1299\ The
financial responsibility rules are designed to work together to
establish a comprehensive regulatory program designed to promote the
prudent operation of broker-dealers and the safeguarding of customer
securities and funds held by broker-dealers. In this regard, the
notification and securities count proposals (in conjunction with the
recordkeeping and reporting proposals) are designed to promote
compliance with the capital, margin, and segregation requirements for
broker-dealers. The proposed recordkeeping, reporting, notification,
and securities count requirements applicable to SBSDs and MSBSPs along
with the proposed capital, margin, and segregation requirements for
these registrants, are designed to establish a comprehensive financial
responsibility program for SBSDs and MSBSPs. Like the broker-dealer
rules, the proposed recordkeeping, reporting, notification, and
securities count requirements applicable to SBSDs and MSBSPs are
designed to promote compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs. Omitting such
proposals would create regulatory
[[Page 25286]]
disparities between broker-dealers, banks, and stand-alone SBSDs and
stand-alone MSBSPs. For these reasons, the Commission preliminarily
believes that alternative approaches would not be as effective in
helping to ensure compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs. However, in
order to assist its analysis of the proposed notification and
securities count proposals, as well whether there are more appropriate
alternatives, the Commission requests comment.
---------------------------------------------------------------------------
\1299\ See 17 CFR 240.3a40-1.
---------------------------------------------------------------------------
3. Requirements To Make and Keep Records
a. Rule 17a-3, as Proposed To Be Amended
Rule 17a-3 is proposed to be amended to account for security-based
swap activities of broker-dealers, including broker-dealer SBSDs and
broker-dealer MSBSPs.\1300\ The Commission is also proposing to add new
provisions to Rule 17a-3 that would relate to its recently proposed
capital, margin, and segregation requirements applicable to SBSDs and
MSBSPs.\1301\
---------------------------------------------------------------------------
\1300\ See, e.g., paragraph (a)(1) of Rule 17a-3, as proposed to
be amended (proposed addition of information that must be included
in security-based swap purchase and sale blotters).
\1301\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274 (proposed margin requirements applicable to SBSDs).
---------------------------------------------------------------------------
In addition, as discussed above, the Commission has proposed
amendments to Rule 15c3-1 that would establish liquidity stress test
requirements for ANC broker-dealers.\1302\ The Commission is proposing
to amend Rule 17a-3 to include a requirement that ANC broker-dealers
make and keep current a report of the results of the monthly liquidity
stress test, a record of the assumptions underlying the liquidity
stress test, and the liquidity funding plan required under the proposed
amendments to Rule 15c3-1.\1303\
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\1302\ See paragraph (f) of Rule 15c3-1, as proposed to be
amended. See also Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
\1303\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
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The Commission would also add new provisions to Rule 17a-3 that are
designed to create a record of the broker-dealer's compliance with
business conduct standards that the Commission proposed pursuant to
Exchange Act section 15F(h), and with the designated compliance officer
requirement in Exchange Act section 15F(k) and Rule 15Fk-1.\1304\
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\1304\ See, e.g., paragraphs (a)(28) through (a)(30) of Rule
17a-3, as proposed to be amended. See also Business Conduct
Standards for Security-Based Swap Dealers and Major Security-Based
Swap Participants, 76 FR 42396.
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The Commission is also proposing some changes that are designed to
eliminate obsolete or rarely used provisions of Rule 17a-3.\1305\ For
example, the Commission is proposing to remove references in the rule
to ``members,'' as a distinct class of registrant in addition to
brokers and dealers.\1306\ These references are redundant because the
rule applies to brokers and dealers, which would include ``members'' of
a national securities exchange since all such members are also broker-
dealers.
---------------------------------------------------------------------------
\1305\ See supra section II.A.2.b. (describing additional
proposed amendments to Rule 17a-3).
\1306\ See, e.g., paragraph (a)(3) of Rule 17a-3, as proposed to
be amended.
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Generally, the Commission would not expect the proposed changes to
Rule 17a-3 to have a material economic effect, although as analyzed
below the Commission does expect that there will be costs related to
complying with the proposed rules.\1307\ In order to assist its
analysis the Commission generally requests comment about the general
costs and benefits of the proposed rules. The Commission requests data
to assess the costs and benefits of the proposals described above.
---------------------------------------------------------------------------
\1307\ See infra section V.E.
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b. Proposed Rule 18a-5
The Commission is proposing new Rule 18a-5--which is modeled on
Rule 17a-3, as proposed to be amended--to require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.\1308\ Not all of the provisions of Rule 17a-3
would be imported into proposed Rule 18a-5 because some of Rule 17a-3's
provisions relate to activities that are not expected or permitted of
stand-alone SBSDs and stand-alone MSBSPs. Further, and as described
above,\1309\ the proposed requirements for bank SBSDs and bank MSBSPs,
which would be included in paragraph (b) of proposed Rule 18a-5, are
more limited than the proposed requirements that would apply to stand-
alone SBSDs and stand-alone MSBSPs, which would be included in
paragraph (a) of proposed Rule 18a-5. More limited requirements would
apply to bank SBSDs and bank MSBSPs because the Commission's authority
under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities
related to their business as an SBSD or MSBSP,\1310\ banks are already
subject to the existing recordkeeping requirements from prudential
regulators, and the prudential regulators are responsible for capital,
margin, and other prudential requirements applicable to bank SBSDs and
bank MSBSPs.
---------------------------------------------------------------------------
\1308\ See supra section II.A.2.a. (describing proposed Rule
18a-5).
\1309\ Id.
\1310\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
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The Commission believes proposed Rule 18a-5 would provide improved
regulatory oversight of the security-based swap activities of stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. For
reasons discussed above, the Commission preliminarily believes that the
approach it has taken with respect to Rule 18a-5--basing it upon an
existing rule (Rule 17a-3)--is a better approach than starting with a
wholly new rule. The Commission believes that many non-broker-dealer
SBSDs and non-broker-dealer MSBSPs will be affiliates of broker-dealers
that already have familiarity with Rule 17a-3 upon which proposed Rule
18a-5 is modeled. Greater familiarity with the rule should ease
compliance burdens and costs for those firms. The Commission
acknowledges that with respect to firms not so affiliated, this
approach would seem much less likely to ease compliance burdens. In
order to aid the Commission's analysis of the effects on these
unaffiliated firms, and whether there are better alternatives, the
Commission requests comment.
As discussed in section V.C.1., above, the Commission believes that
the proposed requirements to make and keep records could improve the
regulatory oversight, risk documentation, and risk management of
security-based swap activities.
The proposed requirements to make and keep records could also
create costs to firms.\1311\ These increased costs may cause firms to
cease participating in the market, thereby potentially reducing
efficiency due to loss of competition. In order to inform its analysis
of the costs and benefits involved with the proposals, the Commission
requests comment. Data to evaluate the costs and benefits of proposed
Rule 18a-5 would be particularly useful to the Commission's analysis.
---------------------------------------------------------------------------
\1311\ See infra section V.E. (discussing implementation
considerations).
---------------------------------------------------------------------------
c. Request for Comment on Recordkeeping Provisions
The Commission also requests data to evaluate the impact of the
proposals against the baseline. In addition, the
[[Page 25287]]
Commission requests comment in response to the following questions:
1. In general terms, would the proposed rules result in effective
documentation of the security-based swap transactions of broker-
dealers, broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs? Please explain.
2. In general, would the proposed rules and rule amendments impact
the capital of entities that would need to register as SBSDs or MSBSPs?
For example, would the costs involved negatively impact the
availability of funding to conduct the security-based swap activities?
If so, what would be the extent of the impact to these entities?
3. How important is it that the recordkeeping and reporting rules
for SBSDs and MSBSPs be analogous to the existing recordkeeping and
reporting requirements for broker-dealers? How valuable or worthwhile
are the benefits involved with this approach? How costly is such an
approach?
4. To what extent would the proposed regulatory requirements impact
the amount of liquidity provided for or required by security-based swap
market participants, and to what extent will that affect the funding
cost for the financial sector in particular and the economy in general?
Please quantify.
5. Do the proposed record-making requirements provide a reasonable
and workable solution for broker-dealers, SBSDs and MSBSPs? Please
explain. Are there preferable alternatives? If so, describe those
alternatives. Please specifically address why such alternatives are
preferable and the nature to which they fulfill the Commission's need
to ensure that the financial responsibility requirements applicable to
broker-dealers, broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs are followed.
6. If an SBSD or MSBP currently already has sufficient technology
to track its trading and risk exposure in security-based swaps, what
additional costs, if any, would arise from the proposed rules?
4. Requirements To Preserve Records
As discussed above,\1312\ Rule 17a-4 requires a broker-dealer to
preserve certain types of records.\1313\ The rule also prescribes the
time periods these records and the records required to be made and kept
current under Rule 17a-3 must be preserved and the manner in which they
must be preserved.\1314\ The Commission is proposing amendments to Rule
17a-4 to account for the security-based swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, as
well as certain technical amendments. With respect to stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission
is proposing new Rule 18a-6--modeled on Rule 17a-4, as proposed to be
amended--to establish record preservation requirements for stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.
---------------------------------------------------------------------------
\1312\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
\1313\ See 17 CFR 240.17a-5(b).
\1314\ See 17 CFR 240.17a-5(a) and 240.17a-5(b)(1). Generally,
the three year and six year retention periods in Rule 17a-4 track
the self-regulatory organization requirements and certain State
regulations that were in effect prior to the adoption of the
National Securities Market Improvements Act of 1996, and they
largely represent a codification of prudent recordkeeping practices
of many broker-dealers. Books and Records Requirements for Brokers
and Dealers Under the Securities Exchange Act of 1934, 66 FR 55819;
National Securities Market Improvements Act of 1996, Public Law 104-
290, 104 Stat. 3416 (1996).
---------------------------------------------------------------------------
a. Rule 17a-4, as Proposed To Be Amended
As described above,\1315\ paragraph (a) of Rule 17a-4 provides that
broker-dealers subject to Rule 17a-3 must preserve for a period of not
less than six years, the first two in an easily accessible place,
certain records required to be made and kept current under Rule 17a-3.
---------------------------------------------------------------------------
\1315\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
---------------------------------------------------------------------------
Three-Year Preservation Requirement for Rule 17a-3 Records
As discussed above,\1316\ paragraph (b)(1) of Rule 17a-4 provides
that broker-dealers must preserve for at least three years, the first
two in an easily accessible place,\1317\ certain records required to be
made and kept current under Rule 17a-3.\1318\ The Commission is
proposing to add cross-references to certain new paragraphs that would
be added to Rule 17a-3 to address security-based swap activities of
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs.
---------------------------------------------------------------------------
\1316\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
\1317\ The Commission has stated that ``Rule 17a-4 seeks to
address the tension between the need for quick production of
specific records and the volume of records generated on a daily
basis, by requiring that more current records be retained in an
``easily accessible place,'' which the Commission has not defined.
See Commission Guidance to Broker-Dealers on the Use of Electronic
Storage Media under the Electronic Signatures in Global and National
Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR 22916.
\1318\ See 17 CFR 240.17a-4(b)(1).
---------------------------------------------------------------------------
The Commission preliminarily believes that the majority of the
economic effects, ranging from firm-specific costs to effects on the
overall security-based swap market, will be associated with the
requirement that broker-dealers, including broker-dealer SBSDs and
broker-dealer MSBSPs, make and keep current certain records as set
forth in Rule 17a-3, as proposed to be amended. However, in order to
assist it in considering the full range of costs and any economic
effects associated with the proposed recordkeeping rules, the
Commission requests data to assess the costs and benefits of the
proposals.
Three-Year Preservation Requirement for Certain Other Records Made or
Received
Paragraph (b) of Rule 17a-4 also provides that broker-dealers must
preserve for a period of not less than three years, the first two in an
easily accessible place, other categories of records if the broker-
dealer makes or receives the record.\1319\ As discussed above,\1320\
the Commission is proposing amendments to these provisions in paragraph
(b) of Rule 17a-4 to account for security-based swaps, and is proposing
amendments that would require broker-dealers, including broker-dealer
SBSDs and broker-dealer MSBSPs, to preserve certain additional records
related to security-based swap activities. For example, the Commission
is proposing to amend the preservation requirement in paragraph (b)(4)
of Rule 17a-4 to include ``recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the [Exchange] Act.'' The
amendment would establish a preservation period for recorded telephonic
communications that have been recorded and relate to security-based
swap activity.
---------------------------------------------------------------------------
\1319\ See 17 CFR 240.17a-4(b)(2) through (12).
\1320\ See supra section II.A.3.a. (discussing paragraph (b) of
Rule 17a-4, as proposed to be amended).
---------------------------------------------------------------------------
As discussed above in section V.C.1. of this release, the
Commission believes that the proposed amendments to Rule 17a-4 will
result in benefits of improving the regulatory oversight, risk
documentation, and risk management of security-based swap activities.
The Commission anticipates that there will also be costs related to the
proposal.\1321\ The Commission believes that the majority of the costs
incurred by broker-dealer SBSDs and broker-dealer MSBSPs relating to
recorded telephone
[[Page 25288]]
calls would enhance the internal controls and procedures relating the
treatment of security-based swap-related telephone calls recorded by
the firm. The Commission requests comment on the costs or benefits that
may accrue in connection with the proposal.
---------------------------------------------------------------------------
\1321\ See infra section V.E. (discussing implementation
considerations).
---------------------------------------------------------------------------
b. Proposed Rule 18a-6
As described above, Rule 18a-6 is modeled on the retention
requirements of Rule 17a-4, but modified to account for differences
applicable to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs.\1322\
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\1322\ See supra section II.A.3.a. (discussing proposed
amendments to Rules 17a-4 and 18a-6).
---------------------------------------------------------------------------
Six-Year Preservation Requirement
The Commission proposes that many, but not all, of the same
recordkeeping requirements that would be applicable to broker-dealer
SBSDs and broker-dealer MSBSPs under the proposed amendments to Rule
17a-4 would also apply to stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs under proposed Rule 18a-6.
Paragraph (a) of Rule 18a-6 would require that certain records
required to be created and maintained under Rule 18a-5 be preserved for
a period of not less than six years, the first two in an easily
accessible place. Further, paragraph (a)(1) of proposed Rule 18a-6
would apply to stand-alone SBSDs and stand-alone MSBSPs. Paragraph
(a)(2) of proposed Rule 18a-6 would apply to bank SBSDs and bank
MSBSPs.
Three-Year Preservation Requirement for Other Rule 18a-5 Records
As discussed above,\1323\ paragraphs (a) and (b) of proposed Rule
18a-5 would require stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs to make and keep current records that are modeled on
the records required to be made and kept under Rule 17a-3. Paragraph
(b)(1) of proposed Rule 18a-6 would require that records required to be
made by stand-alone SBSDs and stand-alone MSBSPs under Rule 18a-5, be
retained for three years, the first two years in an easily accessible
place. Paragraph (b)(2) of proposed Rule 18a-6 would establish a three-
year record retention period for certain delineated records, as well as
the records required to be made by bank SBSDs and bank MSBSPs under
Rule 18a-5.
---------------------------------------------------------------------------
\1323\ See supra section II.A.2.a. (discussing paragraphs (a)
and (b) of proposed Rule 18a-5).
---------------------------------------------------------------------------
Three-Year Preservation Requirement for Certain Other Records Made or
Received
The Commission is also proposing in paragraph (b) of Rule 18a-6
that stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs
must preserve for a period of not less than three years, the first two
years in an easily accessible place, other categories of records if the
SBSD or MSBSP makes or receives the record.\1324\
---------------------------------------------------------------------------
\1324\ See supra section II.A.3.a. (discussing provision-by-
provision retention provisions in Rules 17a-4 and proposed Rule 18a-
6).
---------------------------------------------------------------------------
As discussed below, the Commission preliminarily believes that
there will be costs stemming from the requirement that stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs make and keep
current certain records as set forth in proposed Rule 18a-5.\1325\ As
further discussed below, the Commission preliminarily believes that the
requirement to retain these records, once made and kept current, should
represent a marginal cost to registrants.\1326\
---------------------------------------------------------------------------
\1325\ See infra section V.E.
\1326\ Id.
---------------------------------------------------------------------------
In order to assist its evaluation of the costs and benefits, as
well as any larger economic effects associated with the proposal, the
Commission requests comment.
5. Reporting
As stated above, Rule 17a-5 has two main elements: (1) a
requirement that broker-dealers file periodic unaudited reports
containing information about their financial and operational condition
on a FOCUS Report; and (2) a requirement that broker-dealers annually
file financial statements and certain reports and a report covering the
financial statements and reports prepared by an independent public
accountant registered with the PCAOB in accordance with PCAOB
standards.\1327\
---------------------------------------------------------------------------
\1327\ Id. These requirements are described in more detail
below.
---------------------------------------------------------------------------
The reporting program codified in Rule 17a-5 is designed, among
other things, to promote compliance with Rules 15c3-1 and 15c3-3 and to
assist the Commission, SROs, and state securities regulators in
conducting effective examinations of broker-dealers. Those publicly
available broker-dealer reporting requirements, such as the statement
of financial condition, would promote transparency of the financial and
operational condition of the broker-dealer to the Commission, the
firm's DEA, and to the public.
The Commission preliminarily believes that the economic effects
associated with the new reporting requirements would depend upon the
nature of the filings such registrants make today based upon their
registration status (e.g., broker-dealer vs. non-broker-dealer). The
Commission preliminarily believes that the majority of the economic
effects associated with the Title VII rulemakings will stem from the
requirements relating to capital, margin, and segregation \1328\ as
compared to the proposed rules in the instant rulemaking.
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\1328\ For example, the Commission anticipates substantial
economic costs to arise as a result of the capital, margin, and
segregation requirements that have been proposed to apply to SBSDs
and MSBSPs. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers,77 FR
70299-70328.
---------------------------------------------------------------------------
The Commission is cognizant, however, that the proposed reporting
requirements could create costs to firms, and indirectly to the
financial markets. For example, the Commission recognizes that there
will be new compliance and audit costs associated with the required
financial report and compliance report. While the Commission is aware
of these costs, section 15F(f) of the Exchange Act provides the
Commission with authority to require each registered SBSD to make a
report regarding, among other things, the financial condition of the
firm. The Commission believes that it would be impractical to monitor
the financial condition of SBSDs without periodic financial reports,
including annual audited reports, that elicit detail about these firms'
security-based swap activities.
The Commission notes that it has proposed steps to minimize costs
where appropriate and consistent with its statutory mandate. For
example and as described in more detail below,\1329\ for stand-alone
SBSDs, the Commission would not require the filing of several of the
reports that are required to be filed by broker-dealers, such as the
Form Custody or the information filed with SIPC by broker-
dealers.\1330\ Further, the decision to model Form SBS on the current
FOCUS Report was made in part to reduce the uncertainty and additional
compliance costs that would stem from devising an entirely new
reporting form and rules. While the Commission understands that stand-
alone SBSDs may not currently be registered as broker-dealers and thus
may not currently be filing the FOCUS Report (and thus have no
familiarity with it), many stand-alone SBSDs may be affiliated with or
part of a larger
[[Page 25289]]
financial firm that contains a broker-dealer, thus providing a source
of experience, internal to the firm, with the FOCUS Report which in
turn may reduce the compliance-related costs. Moreover, the accounting
and legal communities are familiar with the FOCUS Report, so the
Commission preliminarily believes that this familiarity should mitigate
the compliance costs for stand-alone SBSDs insofar as outside
assistance is well-versed with the FOCUS Report. At the same time, the
Commission acknowledges that there may be stand-alone SBSDs affiliated
with, for example, FCMs, and those firms would conceivably benefit from
rules based upon or similar to CFTC rules.
---------------------------------------------------------------------------
\1329\ See supra section II.B.2.b.
\1330\ See 17 CFR 240.17a-5(a)(4) and (e)(4).
---------------------------------------------------------------------------
In order to aid its analysis of the economic effects relating to
the proposed reporting requirements, the Commission requests comment.
Comments setting forth specific costs related to the proposed reporting
requirements, as well as benefits, would be particularly helpful to the
Commission's analysis.
a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs
Form SBS
As described above,\1331\ broker-dealer SBSDs and broker-dealer
MSBSPs would file proposed Form SBS instead of a particular version of
the FOCUS Report. An ANC broker-dealer that currently files FOCUS Part
II CSE that registers with the Commission as an SBSD or MSBSP would
experience the smallest marginal impact on its reporting obligations.
This is the case because proposed Form SBS is modeled upon Part II CSE,
but includes additional line items and sections to elicit more detail
about security-based swap and swap activities.\1332\ Similarly, for
dealers currently registered as OTC derivatives dealers, to the extent
these firms decide to register as broker-dealer SBSDs or broker-dealer
MSBSPs, the Commission preliminarily believes that the burdens involved
would be similarly modest to those encountered by the ANC broker-
dealers because Part IIB of the FOCUS Report contains many similar line
items as Part II CSE.\1333\
---------------------------------------------------------------------------
\1331\ See supra section II.B.2. (discussing broker-dealer
SBSDs' and broker-dealer MSBSPs' use of proposed Form SBS).
\1332\ Id.
\1333\ See supra section II.B.2.b.
---------------------------------------------------------------------------
The information elicited by Form SBS from the ANC broker-dealers
and OTC derivatives dealers that decide to register as broker-dealer
SBSDs or broker-dealer MSBSPs should assist the Commission and the
firms' DEAs to conduct effective examinations of broker-dealer SBSDs
and broker-dealer MSBSPs. The broker-dealer SBSD and broker-dealer
MSBSP reporting requirements would promote transparency of the
financial and operational condition of the broker-dealer SBSD or
broker-dealer MSBSP to the Commission and to the public.
With respect to the economic effects associated with this aspect of
the proposal, the Commission preliminarily believes that the scope of
additional information requested in Form SBS, generally related to the
firms' security-based swap activities, is relatively circumscribed
relative to what these registrants report in Part II CSE or Part IIB of
the FOCUS Report.
With respect to broker-dealers that currently do not file FOCUS
Part II CSE or FOCUS Part IIB, the Commission believes the economic
impact and, more specifically, the costs associated with complying with
new Form SBS, may be more substantial. This is the case because, as
described above,\1334\ Form SBS elicits much of the same information as
FOCUS Part II CSE and FOCUS Part IIB, but includes additional line
items and sections to elicit more detail about security-based swap and
swap activities. Accordingly, for those firms not currently filing
FOCUS Part II CSE or FOCUS Part IIB, there will be a greater change, in
terms of the amount of information that will be elicited on the form.
These firms may incur greater compliance-related costs.
---------------------------------------------------------------------------
\1334\ See supra section II.B.2.
---------------------------------------------------------------------------
The Commission has carefully considered Form SBS in light of its
experience with broker-dealer regulation and in relation to its new
statutory responsibilities under section 15F of the Exchange Act and
preliminarily believes that Form SBS would promote compliance with
Rules 15c3-1 and 15c3-3 and to assist the Commission, SROs, and state
securities regulators in conducting effective examinations of broker-
dealer SBSDs and broker-dealer MSBSPs. The proposed broker-dealer SBSD
and broker-dealer MSBSP reporting requirements would promote
transparency of the financial and operational condition of the broker-
dealer to the Commission, the firm's DEA, and to the public.
The Commission has designed Form SBS to elicit the information that
it believes it needs to effectively oversee the financial condition of
broker-dealer SBSDs and broker-dealer MSBSPs. To aid its analysis of
whether there are parts of Form SBS that could be curtailed or
eliminated in order to lessen compliance-related costs, the Commission
requests comment. To the extent that commenters believe that
information the Commission has proposed to elicit is unnecessary,
specific reasons for such a view would be particularly helpful.
Moreover, if commenters object to certain sections of Form SBS,
specific estimates of the costs to comply with those sections would
also aid the Commission's analysis of regulatory necessity. Finally, in
order to help it consider and evaluate the full range of effects
associated with the proposal, the Commission requests data to assess
the costs and benefits of the proposals with respect to the various
classes of registrants (e.g., Part IIA filers, Part II filers, Part IIB
filers, and Part II CSE filers).
Audited Annual Reports
As discussed below, the Commission anticipates that there may be
costs associated with broker-dealer SBSDs or broker-dealer MSBSPs
completing and filing the annual reports required under paragraph (d)
of Rule 17a-5.\1335\ Currently, as described in more detail above,
broker-dealers are required to file on an annual basis a financial
report that includes many parts of the FOCUS Report in a format
consistent with the version of FOCUS Report filed by the broker-
dealer.\1336\ The proposed amendments to the financial report would
include additional information about the broker-dealer's security-based
swap activity not included in the financial report currently filed by
broker-dealer.\1337\ Moreover, the proposal would increase the cost of
completing the annual compliance report filed by a broker-dealer SBSD
because the compliance report for such firms would include statements
about the firm's compliance with proposed Rule 18a-4, the proposed
customer segregation rule that would apply to broker-dealer
SBSDs.\1338\
---------------------------------------------------------------------------
\1335\ See infra section V.E. (relating to implementation
considerations).
\1336\ See 17 CFR 240.17a-5(d)(2).
\1337\ Compare, e.g., FOCUS Report Part II CSE, Statement of
Financial Condition, Line 4, with Form SBS, Statement of Financial
Condition, Line 4.
\1338\ See supra section II.B.3.a.; see infra section V.E.
---------------------------------------------------------------------------
The Commission also anticipates that the cost to audit the annual
reports filed by broker-dealer SBSDs or broker-dealer MSBSPs would
rise.\1339\ Currently, and as described in more detail above, broker-
dealers are required to engage a PCAOB-registered independent public
accountant to conduct an annual audit
[[Page 25290]]
of the broker-dealer's annual reports.\1340\ The Commission believes
the additional required components to the financial report and the
compliance report would increase the costs of ongoing compliance as
well as the annual audit.
---------------------------------------------------------------------------
\1339\ Id.
\1340\ See supra section II.B.1.
---------------------------------------------------------------------------
Liquidity Stress Test
As discussed above,\1341\ the Commission has proposed amendments to
Rule 15c3-1 that would establish liquidity stress test requirements for
ANC broker-dealers, which would include ANC broker-dealer SBSDs.\1342\
Under the proposed liquidity stress test requirements, ANC broker-
dealers would be required, among other things, to: (1) Perform a
liquidity stress test at least monthly that takes into account certain
assumed conditions lasting for 30 consecutive days; and (2) maintain at
all times liquidity reserves based on the results of the liquidity
stress test comprised of unencumbered cash or U.S. government
securities.\1343\ The proposed liquidity stress test requirement is
designed to provide an additional level of protection against
disruptions in the firm's ability to obtain funding for a firm with
significant proprietary positions in securities or derivatives.\1344\
---------------------------------------------------------------------------
\1341\ See supra section II.A.2.a.
\1342\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254. See also paragraph (f) of Rule 15c3-1, as proposed to
be amended.
\1343\ Id.
\1344\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70314.
---------------------------------------------------------------------------
The Commission is proposing that ANC broker-dealers report to the
Commission the results of the liquidity stress test on a monthly
basis.\1345\ The Commission has discussed the economic effects
associated with the liquidity stress test requirement and requested
comment on those effects.\1346\ As discussed below, the Commission
preliminarily believes that paragraph (a)(5)(vii) of Rule 17a-5 would
create a cost to file the report, but that such costs would not
materially contribute to the economic effects associated with the
liquidity stress test proposal.\1347\
---------------------------------------------------------------------------
\1345\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
\1346\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70314.
\1347\ See infra section V.E.
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As discussed above in section V.C.1. of this release, above, the
Commission believes that the proposed reporting requirements will
result in benefits of improving the oversight, transparency, and
accountability of security-based swap activities.
In order to help it consider and evaluate the full range of effects
associated with the proposal, the Commission requests comment on the
anticipated benefits and costs of this portion of the proposed rule
changes. Quantitative and qualitative data would be particularly useful
to the Commission in helping it evaluate the proposals.
b. Stand-Alone SBSDs
Form SBS
As described in more detail above,\1348\ stand-alone SBSDs would be
required to file Form SBS with the Commission or its designee on a
monthly basis.\1349\ Given that stand-alone SBSDs are not broker-
dealers, these firms would not have experience filing the FOCUS Report,
and thus reporting on Form SBS could represent a significant
undertaking. While the Commission expects that stand-alone SBSDs
currently prepare financial statements that encompass their security-
based swap activity, the reporting on Form SBS may require that firms
establish new systems that facilitate the reporting of the required
information.\1350\ Relative to what these firms generate now, Form SBS
would likely elicit greater detail about the registrant's security-
based swap positions, which in turn would require the registrants to
have additional details about the firm's security-based swap positions
in order to be able to provide the security-based swap information
elicited by Form SBS. Since many of the entities that the Commission
expects will register as stand-alone SBSDs are currently not regulated,
they are likely to be unaccustomed to completing and filing detailed
reports with financial regulators. Therefore, and as discussed below,
the Commission anticipates that stand-alone SBSDs will bear substantial
costs in connection with completing and filing Form SBS.\1351\
---------------------------------------------------------------------------
\1348\ See supra section II.B.2.
\1349\ The Commission estimates that nine of the approximately
fifty entities that it anticipates to register with the Commission
as SBSDs will be stand-alone SBSDs.
\1350\ For example, stand-alone SBSDs would be required to
submit computations relating to the firm's level of net capital, net
capital required, and amount required to be held in the special
reserve account for the exclusive benefit of security-based swap
customers. See supra section II.B.2.
\1351\ See infra section V.E.
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Audited Annual Reports
In addition, stand-alone SBSDs would be required to generate and
file its financial report and compliance report with the Commission on
an annual basis.\1352\ While the Commission expects that stand-alone
SBSDs currently prepare financial statements that encompass their
security-based swap activity, under the proposed rules, stand-alone
SBSDs would be required to prepare a financial report in a format
consistent with Form SBS, which includes numerous entries,
computations, and schedules that a stand-alone SBSD may not prepare on
its own accord. The compliance report would contain several statements
and descriptions related to the firm's compliance with the financial
responsibility rules that would be entirely new for most stand-alone
SBSD registrants. Stand-alone SBSDs would be required to hire a PCAOB-
registered independent public accountant to prepare an audit report
covering annual reports. As explained below, the Commission estimates
that all stand-alone SBSDs would incur compliance-related costs
engaging a PCAOB-registered accountant to perform the audit.\1353\
---------------------------------------------------------------------------
\1352\ See paragraph (c) of proposed Rule 18a-7.
\1353\ See infra section V.E.
---------------------------------------------------------------------------
Stand-Alone ANC SBSD Reporting Requirements
For stand-alone ANC SBSDs, there would be a number of additional
monthly and quarterly reporting requirements, independent of those on
Form SBS.\1354\ The additional stand-alone ANC SBSD reports are modeled
on parallel reporting requirements for ANC broker-dealers.\1355\
Consequently, stand-alone ANC SBSDs would be required to file the same
types of additional reports relating to their use of internal models
and liquidity stress tests as ANC broker-dealers, including ANC broker-
dealer SBSDs.
---------------------------------------------------------------------------
\1354\ See supra section II.B.3.a. See also paragraph (a)(3) of
proposed Rule 18a-7.
\1355\ Compare paragraph (a)(3) of proposed Rule 18a-7, with
paragraph (a)(5) of Rule 17a-5, as proposed to be amended.
---------------------------------------------------------------------------
As discussed below, the Commission preliminarily believes that
stand-alone ANC SBSDs may incur compliance costs related to, among
other things, preparing and filing the additional reports that would be
required under the proposed rules.\1356\ The Commission believes the
additional reports that stand-alone ANC SBSDs would be required to file
with the Commission would give rise to less substantial
[[Page 25291]]
compliance costs relative to the other costs under the proposal because
the additional reporting obligations for such firms are relatively few
and are generally closely related to their use of internal models
approved by the Commission to calculate market and credit risk. Stand-
alone ANC SBSDs would incur the majority of costs associated with these
internal models in designing and operating the models themselves rather
than the reports arising from these models.
---------------------------------------------------------------------------
\1356\ See infra section V.E. See also paragraph (a)(3) of
proposed Rule 18a-7.
---------------------------------------------------------------------------
The Commission also preliminarily believes that utilizing the new
reporting requirements would have the benefit of helping the Commission
evaluate whether a stand-alone SBSD is operating in compliance with the
Exchange Act and the rules thereunder. For stand-alone SBSDs that
previously did not produce detailed financial statements, the proposal
could require these firms to upgrade their technology to store and
maintain the information they need to report on Form SBS. These
upgrades would likely entail costs for the firms, discussed below, but
also possibly help these firms more efficiently track their trading and
risk exposure in security-based swaps.\1357\ The Commission also
preliminarily believes that the availability of Form SBS will greatly
enhance the Commission's ability to oversee the financial condition of
these registrants, and the public availability of a firm's audited
Statement of Financial Condition and net capital computations will
facilitate the public's evaluation of the financial health of a
registrant.
---------------------------------------------------------------------------
\1357\ See infra section V.E.
---------------------------------------------------------------------------
In order to assist its evaluation of any potential economic effects
associated with the proposals, the Commission requests data to help it
evaluate the costs and benefits commenters believe would result.
c. Stand-Alone MSBSPs
The Commission preliminarily believes the economic impact
associated with the proposed reporting requirements on stand-alone
MSBSPs would be significantly less than the effects upon stand-alone
SBSDs. As with stand-alone SBSDs, the reporting requirement would be an
entirely new obligation for stand-alone MSBSPs. However, there would be
a number of important differences between the reporting requirements of
stand-alone MSBSPs as compared to stand-alone SBSDs.
Form SBS
First, stand-alone MSBSPs would be required to complete a simpler
Computation of Tangible Net Worth, compared to the much longer and
complex Computation of Net Capital and Computation of Minimum
Regulatory Capital Requirements sections in Part 1 of the form that
stand-alone SBSDs are required to complete.\1358\ The Commission
believes that stand-alone SBSDs and stand-alone MSBSPs will incur costs
completing those parts of Form SBS that are applicable to such
entities, as discussed below.\1359\ Moreover, stand-alone SBSDs would
not be required to complete the sections in Part 1 of Form SBS that
require firms to compute the amount that must be maintained in the
security-based swap customer reserve account or the section relating to
information for the possession or control requirements for security-
based swap customers because stand-alone MSBSPs generally will not be
subject to those requirements under proposed Rule 18a-4.\1360\
Furthermore, stand-alone MSBSPs would not be required to complete and
file a number of sections of Part 1 of the form that relate to the
operational data related to the firm; specifically, they would not be
required to complete and file the Capital Withdrawals, Capital
Withdrawals Recap, and the Financial and Operational Data sections of
Form SBS.\1361\
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\1358\ Compare Form SBS, Computation of Tangible Net Worth, with
Form SBS, Computation of Net Capital (Filer Authorized to Use
Models) and Form SBS, Computation of Minimum Regulatory Capital
Requirements (Non-Broker-Dealer).
\1359\ See infra section V.E.
\1360\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288.
\1361\ See Form SBS, Capital Withdrawals, Capital Withdrawals
Recap, and Financial and Operational Data.
---------------------------------------------------------------------------
Audited Annual Reports
Stand-alone MSBSPs would be required to comply with the proposed
requirements relating to the preparation, auditing, and filing of the
annual reports.\1362\ As discussed below, the Commission estimates that
all stand-alone MSBSPs would incur costs stemming from the requirement
to engage a PCAOB-registered auditor.\1363\ The Commission anticipates
that stand-alone MSBSPs will incur fewer costs in complying with these
requirements as compared to stand-alone SBSDs because stand-alone
MSBSPs would not be required to file the compliance report or the
exemption report.
---------------------------------------------------------------------------
\1362\ See supra section II.B.3.a.
\1363\ See infra section V.E.
---------------------------------------------------------------------------
As discussed above in section V.C.1. of this release, the
Commission believes that the proposed reporting requirements for stand-
alone MSBSPs will result in benefits by improving the regulatory
oversight of security-based swap activities. The Commission also
recognizes that the proposed reporting requirements would create costs.
Preliminarily, the Commission believes most of these costs would be
compliance-related, as discussed in more detail below.\1364\ In order
to help it consider and evaluate the full range of costs and larger
economic effects, if any, associated with the proposed requirement for
stand-alone MSBSPs to complete and submit Form SBS, and to submit
annual audited financial statements, the Commission requests comment.
Data to assess the costs and benefits of the reporting requirements
that would apply to stand-alone MSBSPs would be particularly useful.
---------------------------------------------------------------------------
\1364\ See infra section V.E.
---------------------------------------------------------------------------
d. Bank SBSDs and Bank MSBSPs
As described above,\1365\ bank SBSDs and bank MSBSPs would also
have to periodically complete and file Form SBS with the Commission.
However, relative to broker-dealer SBSDs, broker-dealer MSBSPs, stand-
alone SBSDs, and stand-alone MSBSPs, banks would report less
information on Form SBS. The financial information bank SBSDs and bank
MSBSPs would provide in Part 2 of the Form is based on the ``call
report'' banks file with the prudential regulators.\1366\ Bank SBSDs
and bank MSBSPs would also report, in Part 5 of Form SBS, information
relating to their security-based swap activities, consistent with the
directive in section 15F(f) of the Exchange Act. Bank SBSDs and bank
MSBSPs would also be required to report on change of fiscal year, as
well as if the registrant changes accountants. However, bank SBSDs and
bank MSBSPs would not be required to complete and file the audited
financial report. The Commission has limited the number of schedules
that would be required to be completed and filed by bank SBSDs and bank
MSBSPs within Part 5 of Form SBS to one schedule that elicits detailed
information about the firm's security-based swap positions. This
requirement in Part 5 would require the bank SBSD or bank MSBSP to
create and maintain additional details about the firm's security-based
swap positions in order to be able to disclose the necessary detail on
Form SBS.
---------------------------------------------------------------------------
\1365\ See supra section II.B.2.
\1366\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12
U.S.C. 1464.
---------------------------------------------------------------------------
As discussed in more detail below, the Commission preliminarily
believes that bank SBSDs and bank MSBSPs will
[[Page 25292]]
incur compliance costs related to reporting the information that would
be required on Form SBS.\1367\ However, the Commission has limited the
number of schedules to be reported in Part 5 to one schedule that is
generally derived from the bank SBSD's or bank MSBSP's call report.
Thus, the Commission does not believe Part 2 would require substantial
additional effort to complete.\1368\
---------------------------------------------------------------------------
\1367\ See infra section V.E.
\1368\ Whenever possible, the Commission has proposed the same
line item numbers as are used for the call report (but appended with
the letter ``b'' in Form SBS) to facilitate a bank SBSD's or bank
MSBSP's use of data from the call report.
---------------------------------------------------------------------------
The Commission preliminarily believes the reporting requirements
for bank SBSDs and bank MSBSPs would help ensure that registrants
follow applicable capital, margin, and segregation rules. The
Commission believes that such capital, margin, and segregation rules
are an integral part to ensuring that security-based swap activity is
conducted in a financially responsible manner.
The Commission requests comment about its analysis of the costs and
benefits of the proposal with respect to bank SBSDs and bank MSBSPs.
The Commission requests data to assess the costs and benefits of the
proposals for bank SBSDs and bank MSBSPs.
6. Notification Requirements
As discussed above,\1369\ the Commission is proposing certain
notification requirements for SBSDs and MSBSPs that are, in general,
modeled on existing notification provisions that apply to broker-
dealers pursuant to Rule 17a-11. As discussed below, the Commission has
utilized its experience with broker-dealers utilizing Rule 17a-11 to
prepare cost estimates of certain compliance-related expenses.\1370\ As
with the other proposals being considered, the Commission believes that
the vast majority of the economic effects associated with registering
as an SBSD or MSBSP would stem from the capital, margin, and
segregation rules that the Commission proposed pursuant to Title VII of
the Dodd-Frank Act.\1371\
---------------------------------------------------------------------------
\1369\ See supra section II.C.1.
\1370\ See infra section V.E.
\1371\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70276.
---------------------------------------------------------------------------
a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs
A broker-dealer SBSD would be required to notify the Commission
when it fails to make a deposit in its security-based swap customer
account, as required by proposed Rule 18a-4.\1372\ An ANC broker-dealer
would be required to give immediate notice to the Commission if a
liquidity stress test it performs indicates an insufficient amount of
liquidity reserve.\1373\ Finally, broker-dealer MSBSPs would be
required to notify the Commission when their level of tangible net
worth fell below $20 million.\1374\
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\1372\ See paragraph (f) of Rule 17a-11, as proposed to be
amended.
\1373\ See paragraph (e) of Rule 17a-11, as proposed to be
amended.
\1374\ See paragraph (b)(6) of Rule 17a-11, as proposed to be
amended.
---------------------------------------------------------------------------
Outside of certain compliance-related costs, discussed below, the
Commission does not believe that the notification requirements would
have an economic impact.\1375\ In each case, the notification
requirement would be incidental to a related underlying substantive
obligation that would be the primary source of economic impact.
---------------------------------------------------------------------------
\1375\ See infra section V.E.
---------------------------------------------------------------------------
As discussed above in section V.C.1. of this release, the
Commission believes that the proposed amendments to Rule 17a-11 would
result in improving the Commission and DEA oversight of broker-dealer
SBSDs and broker-dealer MSBSPs' security-based swap activities,
including activities and financial conditions that suggest a material
level of risk to the firm.
The Commission requests comment about its analysis of the costs and
benefits of the proposal with respect to broker-dealer SBSDs and
broker-dealer MSBSPs. The Commission requests data to assess the costs
and benefits of the proposals for broker-dealer SBSDs and broker-dealer
MSBSPs.
b. Stand-Alone SBSDs, Stand-Alone MSBSP's, Bank SBSDs, and Bank MSBSPs
The Commission is proposing to establish notification requirements
in Rule 18a-8 for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs that are modeled closely upon the requirements
applicable to broker-dealers. First, the Commission is proposing to
include a net capital deficiency and tentative net capital deficiency
notification requirement in paragraph (a)(1) of proposed Rule 18a-8
applicable to stand-alone SBSDs that is modeled on the notification
requirements applicable to broker-dealers, over-the-counter derivatives
dealers, and ANC broker-dealers that appear in paragraph (a) of Rule
17a-11, as proposed to be amended.\1376\ Furthermore, a stand-alone
MSBSP would be required to notify the Commission when it fails to
maintain a positive tangible net worth.\1377\ The Commission is also
proposing to include ``early warning'' notification requirements in
paragraph (b) of proposed Rule 18a-8 that would be applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled after the relevant
early warning provisions applicable to broker-dealers in paragraph (b)
of Rule 17a-11, as proposed to be amended.\1378\ The Commission also is
proposing a requirement for a stand-alone SBSD to notify the Commission
in the event of the discovery of a material weakness, as is required
for broker-dealers under paragraph (d) of Rule 17a-11, as proposed to
be amended.\1379\ Moreover, the proposed requirement for a stand-alone
SBSD to notify the Commission if it fails to make a required deposit in
its security-based swap customer reserve account is modeled on a
similar proposed requirement applicable to broker-dealers for failure
to make a required deposit into a security-based swap customer
account.\1380\
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\1376\ Compare paragraph (a)(1) of proposed Rule 18a-8, with
paragraph (a) of Rule 17a-11, as proposed to be amended.
\1377\ See paragraph (a)(2) of proposed Rule 18a-8.
\1378\ Compare paragraph (b) of proposed Rule 18a-8, with
paragraphs (b)(3), (b)(4), and (b)(6) of Rule 17a-11, as proposed to
be amended.
\1379\ Compare paragraph (e) of proposed Rule 18a-8, with
paragraph (d) of Rule 17a-11, as proposed to be amended. The
Commission notes that paragraph (d) of Rule 17a-11, as proposed to
be amended, also requires notification of the discovery of a
``material inadequacy'' to an over-the-counter derivatives dealer.
\1380\ Compare paragraph (g) of proposed Rule 18a-8, with
paragraph (f) of Rule 17a-11, as proposed to be amended.
---------------------------------------------------------------------------
The proposed requirement for a bank SBSD, bank MSBSP, stand-alone
SBSD, and stand-alone MSBSP to notify the Commission in the event that
it fails to make and keep current its required books and records is
modeled on a similar requirement for broker-dealers.\1381\ The proposed
requirement for stand-alone ANC SBSDs to notify the Commission of an
insufficient level of liquidity reserves is modeled after a similar
requirement for ANC broker-dealer SBSDs.\1382\
---------------------------------------------------------------------------
\1381\ Compare paragraph (d) of proposed Rule 18a-8, with
paragraph (c) Rule 17a-11, as proposed to be amended.
\1382\ Compare paragraph (f) of proposed Rule 18a-8, with
paragraph (e) Rule 17a-11, as proposed to be amended.
---------------------------------------------------------------------------
With respect to bank SBSDs and bank MSBSPs, the Commission is
proposing to include a notification requirement in proposed Rule 18a-8
that would require these entities to give the Commission notice when
they file an adjustment of its reported capital category with its
prudential regulator by transmitting a
[[Page 25293]]
copy of the notice to the Commission.\1383\
---------------------------------------------------------------------------
\1383\ See supra section II.C.2. See also paragraph (c) of
proposed Rule 18a-8.
---------------------------------------------------------------------------
In general, the Commission preliminarily believes most of the costs
stemming from the notification proposals would arise from preparing and
filing the notices.\1384\
---------------------------------------------------------------------------
\1384\ See infra section V.E.
---------------------------------------------------------------------------
These notices serve an important role in the context of the
reporting and recordkeeping rules for broker-dealers, broker-dealer
SBSDs, broker-dealer MSBSPs, stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs because they serve to alert the Commission
to the fact that certain events are occurring at a registrant that are
highly relevant to the registrant's overall ability to continue to meet
its obligations to customers and counterparties. For example, a report
of a capital deficiency would alert the Commission to the fact that a
registrant may lack sufficient capital to continue to operate its
business and meet its obligations to customers and counterparties. The
notification requirements are thus critical to helping the Commission
fulfill its statutory responsibility to monitor whether SBSDs and
MSBSPs are operating in compliance with the Exchange Act and the rules
thereunder.\1385\
---------------------------------------------------------------------------
\1385\ See 15 U.S.C. 78o-10(f).
---------------------------------------------------------------------------
In order to aid its analysis, the Commission generally requests
comment about the general costs and benefits of the Rule 17a-11, as
proposed to be amended, and proposed Rule 18a-8. The Commission
requests data to evaluate the costs and benefits of the proposals.
7. Quarterly Securities Count
As discussed in greater detail above,\1386\ the Commission is also
proposing to establish a securities count program for SBSDs under
sections 15F and 17(a) of the Exchange Act that is modeled on Rule 17a-
13's securities count program for broker-dealers. More specifically,
stand-alone SBSDs would be subject to proposed Rule 18a-9. For reasons
explained above, proposed Rule 18a-9 would not apply to stand-alone
MSBSPs, bank SBSDs, or bank MSBSPs.\1387\
---------------------------------------------------------------------------
\1386\ See supra section II.D.1.
\1387\ Id.
---------------------------------------------------------------------------
Paragraph (b) of Rule 17a-13 prescribes the requirement to perform
a quarterly securities count and specifies the steps a broker-dealer
must take in performing a count. Paragraph (c) of Rule 17a-13
prescribes the timing of the count, permitting a broker-dealer to
perform the securities count on a rolling basis throughout the quarter
as opposed to all in one day. Paragraph (d) of Rule 17a-13 provides
that the examination, count, verification, and comparison performed
under the rule must be done by persons whose regular duties do not
require them to have direct responsibility for the proper care and
protection of the securities or the making or preservation of the
subject records. Proposed Rule 18a-9 applies substantially all the same
affirmative obligations to stand-alone SBSDs that apply to broker-
dealers under Rule 17a-13.\1388\
---------------------------------------------------------------------------
\1388\ Compare proposed Rule 18a-9, with 17 CFR 240.17a-13.
Proposed Rule 18a-9 omits the exemptions from applicability of the
rule that appear in paragraphs (a)(1), (a)(2), (a)(3), and (e) of
Rule 17a-13 because those exemptions relate to broker-dealer-
specific functions and broker-dealer registration status. See 17 CFR
240.17a-13(a) and (e).
---------------------------------------------------------------------------
As was discussed above,\1389\ Rule 17a-13, the model for proposed
Rule 18a-9, arose in the aftermath of the 1967-1970 securities industry
crisis where deficiencies in broker-dealers' internal controls and
procedures for, among other things, failing to adequately check and
count securities, created a serious ``paper work crisis'' in the
securities markets.\1390\ The Commission preliminarily believes that
instituting a parallel provision could help to avoid a similar problem
for stand-alone SBSDs. Moreover, the Commission preliminarily believes
that to the extent a stand-alone SBSD has not invested in the
technology necessary to help ensure that it can accurately track and
safeguard securities, the proposed rule will require such investments
to be made,\1391\ which could improve the quality of such tracking and
safeguarding.
---------------------------------------------------------------------------
\1389\ See supra section II.D.1.
\1390\ Id.
\1391\ See infra section V.E.
---------------------------------------------------------------------------
The Commission preliminarily believes most of the negative economic
effects stemming from the securities count proposal would arise from
regulatory and compliance costs. The Commission believes that the costs
involved, and any larger economic effects, should be similar to those
associated with Rule 17a-13 and would be related primarily to the
development and maintenance of internal procedures and controls and the
investment in technology.\1392\
---------------------------------------------------------------------------
\1392\ Id.
---------------------------------------------------------------------------
The Commission generally requests comment about its analysis of the
general costs and benefits of the proposed securities count rules for
stand-alone SBSDs. The Commission requests data to assess the costs and
benefits of the proposals for the stand-alone SBSDs.
D. Impact on Efficiency, Competition, and Capital Formation
Section 3(f) of the Exchange Act provides that whenever the
Commission engages in rulemaking under the Exchange Act and is required
to consider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\1393\ In addition,
section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact such rules
would have on competition.\1394\ Section 23(a)(2) of the Exchange Act
also prohibits the Commission from adopting any rule that would impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\1395\ As stated above, the Commission
believes that the recordkeeping, reporting, notification, and
securities count rules and rule amendments being proposed today
address, among other things, the documentation, reporting, and evidence
of compliance with the capital, margin, and segregation rules. Thus,
the Commission believes that these rules, by their nature, will have a
more limited economic impact as compared to the Commission's capital,
margin, and segregation proposals.\1396\ Thus, while the Commission
would expect that the adoption of these proposed rules and rule
amendments, and their attendant benefits and costs, would affect
competition, efficiency, and capital formation, the Commission
preliminarily believes that such impact will be more limited than the
impact from the capital, margin, and segregation proposals. In most
instances, the Commission believes the costs will consist of the
implementation-related costs of the proposed rules and rule amendments
and the benefits will be those that stem from enabling the Commission
to evaluate whether SBSDs and MSBSPs are in compliance with the
financial responsibility rules governing security-based swap
activities. The Commission
[[Page 25294]]
requests comment on its analysis and underlying assumptions in this
regard.
---------------------------------------------------------------------------
\1393\ See 15 U.S.C. 78c(f).
\1394\ See 15 U.S.C. 78w(a)(2).
\1395\ Id.
\1396\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------
In the aggregate, the proposed recordkeeping, reporting, and
notification rules would be an integral part of the proposed financial
responsibility rules governing security-based swaps. The rules are
designed to provide greater regulatory transparency into the business
activities of these firms and to assist the Commission and other
regulators in reviewing and monitoring compliance with the capital,
margin, and segregation requirements. In general, the Commission
believes that the proposals would thus help ensure that firms that
engage in security-based swap activity do so in a financially
responsible manner. The Commission further believes that the proposed
rules and rule amendments, by improving its ability to monitor the
financial condition of these registrants, could contribute to
confidence in the market and willingness of market participants to
engage in activities. It is the Commission staff's experience that
greater confidence in a market promotes greater participation, leading
to increased competition and efficiency, which have a positive effect
on capital formation in the security-based swap market.
The Commission is cognizant, however, that it must be sensitive to
the costs and burdens imposed by its rules. For example, overly
restrictive or costly recordkeeping requirements could reduce the
willingness of firms to engage in such trading. This could, in turn,
increase transaction costs for market participants and contribute to
less liquidity in the market. Even if the cost of overly restrictive
recordkeeping, reporting, notification, and securities count
requirements were shouldered only by those market participants that are
subject to them, the excess compliance costs incurred would not be
available for potentially more efficient uses, which thereby could
distort capital allocation and, in turn, adversely affect capital
formation. The Commission preliminarily believes the proposed
recordkeeping, reporting, securities count, and notification proposals
are unlikely to materially increase the barriers to entry in this
market.
As described in more detail above, broker-dealers historically have
not participated in a significant way in security-based swap trading,
in part, because the existing broker-dealer capital requirements make
it relatively costly to conduct these activities in broker-dealers. As
stated above, the Commission estimates that approximately seventeen
broker-dealers will register as SBSDs or MSBSPs and approximately
twenty-five registered broker-dealers will be engaged in security-based
swap activities but would not be required to register as an SBSD or
MSBSP.\1397\ In addition, a broker-dealer may elect to register an
affiliated entity as an SBSD or MSBSP, instead of registering the
broker-dealer itself as an SBSD or MSBSP. A market participant
unaffiliated with a broker-dealer, including a bank, which conducts
security-based swap activity in the U.S. may also register as an SBSD
or MSBSP. As stated above, the Commission estimates that approximately
thirty-four such entities will register as SBSDs or MSBSPs.\1398\ As
discussed above, as of April 1, 2013, there were 4,545 broker-dealers
registered with the Commission.
---------------------------------------------------------------------------
\1397\ See supra section IV.C.
\1398\ Id.
---------------------------------------------------------------------------
To the extent that the proposed rules are burdensome or costly,
they may impact the incentives of market participants in terms of
whether they seek to register as SBSDs or MSBSPs. If fewer firms
register, this could adversely impact competition and the overall
efficiency of the U.S. capital markets as fewer firms will conduct
security-based swap activities in the U.S. For example, excessive costs
could discourage firms from engaging in security-based swap trading,
which would reduce competition among market participants, thereby
leading to lower liquidity, impeded price discovery, and higher
transaction costs, all of which are characteristics of reduced levels
of efficiency in the market. Moreover, it is possible that cost
increases could lead to certain broker-dealers ceasing to engage in
security-based swap trading, which could then reduce competition and
impose inefficiency costs on the security-based swap marketplace. At
the same time, these market participants may seek to conduct the
security-based swap business in jurisdictions where regulations are, or
are perceived to be, less burdensome.
In order to assist its evaluation of the proposed rules and rule
amendments' effects on efficiency, competition, and capital formation,
the Commission requests comment. Commenters are asked to be as specific
as possible in identifying those rule proposals that are particularly
beneficial or problematic, as the case may be, and in identifying
alternative approaches or other ways in which the harmful effect(s) of
the proposals can be ameliorated or eliminated.
E. Implementation Considerations
The proposed new rules and rule amendments, as discussed above,
would impose certain implementation burdens and related costs on SBSDs
and MSBSPs, as well as broker-dealers. These costs may include start-up
costs, including personnel and other costs, such as technology costs,
to comply with the proposed new rules and rule amendments. The
Commission understands that entities that will engage in security-based
swap transactions currently incur costs during their normal business
activities and the proposed new rules would impose incremental costs.
While they are not negligible, the Commission preliminarily believes,
as discussed above, that they are unlikely to materially increase
costs.
Based on section IV.D. of this release, the Commission has
estimated the related costs of these implementation requirements for
SBSDs, MSBSPs, and broker-dealers.\1399\ The Commission estimates for
all SBSDs and MSBSPs, these initial implementation costs to be
approximately $10 million and the ongoing costs of implementation to be
approximately $9 million, as summarized in more detail below.\1400\
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\1399\ See section IV.D. of this release (discussing total
initial and annual recordkeeping and reporting burdens of the
proposed rules and rule amendments).
\1400\ The Commission has also proposed technical amendments
which it estimates will not impose material additional costs.
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Rule 17a-3, which requires broker-dealers to make and keep current
certain records, would be amended to account for security-based swap
activities of broker-dealers, including broker-dealer SBSDs and broker-
dealer MSBSPs.\1401\ The Commission is also proposing to add new
provisions to Rule 17a-3 that would relate to the recently proposed
margin requirements applicable to SBSDs.\1402\ Across all types of
broker-dealers, including broker-dealers not registered as SBSDs or
MSBSPs, the requirements are estimated to impose a one-time and annual
aggregate cost of
[[Page 25295]]
approximately $925,360\1403\ and $282,807, respectively.\1404\
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\1401\ See, e.g., paragraph (a)(1) of Rule 17a-3, as proposed to
be amended (proposed addition of information that must be included
in security-based swap purchase and sale blotters).
\1402\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274 (proposed margin requirements applicable to SBSDs).
\1403\ 3,440 hours x $269/hour national hourly rate for a
compliance manager = $925,360. See supra section IV.D.1. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-3). The $269 per hour
figure for a compliance manager is from SIFMA's Management &
Professional Earnings in the Securities Industry 2012, as modified
by Commission staff to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
\1404\ 4,489 hours x $63/hour national hourly rate for a
compliance clerk = $282,807. See supra section IV.D.1. (PRA estimate
of the total initial and annual recordkeeping and reporting burden
for proposed amendments to Rule 17a-3). The $63 per hour figure for
a compliance clerk is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
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The Commission is proposing new Rule 18a-5--which is modeled on
Rule 17a-3, as proposed to be amended--to require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.\1405\ The Commission estimates that proposed
Rule 18a-5 would result in total initial industry cost of $2,848,260 to
SBSDs and MSBSPs not registered as broker-dealers.\1406\ On an annual
basis, the Commission estimates that proposed Rule 18a-5 would result
in $890,475 of total industry costs to SBSDs and MSBSPs not registered
as broker-dealers.\1407\
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\1405\ See supra section II.A.2.a. (describing proposed Rule
18a-5).
\1406\ (10,540 hours x $269/hour national hourly rate for a
compliance manager) + $13,000 in external costs = $2,848,260. See
supra section IV.D.1. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed Rule 18a-5).
\1407\ (13,175 hours x $63/hour national hourly rate for a
compliance clerk) + $60,450 in external costs = $890,475. See supra
section IV.D.1. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed Rule 18a-5).
---------------------------------------------------------------------------
As discussed above, the Commission is proposing amendments to Rule
17a-4 to account for the security-based swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, as
well as certain largely non-substantive technical amendments.\1408\ The
Commission estimates that the proposed amendments to Rule 17a-4 would
result in a total initial industry cost of $1,167,452 to broker-
dealers.\1409\ On an annual basis, the Commission estimates that the
proposed amendments to Rule 17a-4 would result in $174,388 of total
annual aggregate industry costs to broker-dealers.\1410\
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\1408\ See supra section II.A.3.a.
\1409\ 3,718 hours x $314/hour national hourly rate for a senior
database administrator = $1,167,452. See supra section IV.D.2. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-4). The $314 per hour
figure for a senior database administrator is from SIFMA's
Management & Professional Earnings in the Securities Industry 2012,
as modified by Commission staff to account for an 1,800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.
\1410\ (1,716 hours x $63/hour national hourly rate for a
compliance clerk) + $66,280 in external costs = $174,388. See supra
section IV.D.2. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed amendments to Rule
17a-4).
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The Commission is proposing new Rule 18a-6--modeled on Rule 17a-4,
as proposed to be amended--to establish record preservation
requirements for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs. The Commission estimates proposed Rule 18a-6 would result
in $4,054,996 of initial costs to the industry \1411\ and $1,038,660 of
annual costs to the industry.\1412\
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\1411\ 12,914 hours x $314/hour national hourly rate for a
senior database administrator = $4,054,996.
\1412\ (9,780 hours x $63/hour national hourly rate for a
compliance clerk) + (38 hours x $379/hour for national hourly rate
for an attorney) + $204,078 in external costs = $1,038,660.
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As stated above, the Commission is proposing to amend Rule 17a-5,
to require broker-dealer SBSDs and broker-dealer MSBSPs to file
proposed Form SBS, instead of a particular part of the FOCUS
Report.\1413\ The Commission is also proposing amendments to Rule 17a-5
to require additional information about the broker-dealer's security-
based swap activity in the financial report filed by broker-
dealers,\1414\ and to require ANC broker-dealers to report to the
Commission the results of the liquidity stress test on a monthly
basis.\1415\ The Commission estimates that the amendments to Rule 17a-5
would result in an initial total cost of $158,710 to broker-
dealers.\1416\ On an annual basis, the Commission estimates that the
amendments to Rule 17a-5 would result in $1,089,450 of total annual
costs to broker-dealers.\1417\
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\1413\ See supra section II.B.2.b.
\1414\ Compare, e.g., FOCUS Report Part II CSE, Statement of
Financial Condition, Line 22, with Form SBS, Statement of Financial
Condition, Line 22.
\1415\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
\1416\ 590 hours x $269/hour national hourly rate for a
compliance manager = $158,710. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5). The majority of costs
that broker-dealers would incur as a result of the amendments to
Rule 17a-5 are expected to result from the additional information
elicited in Form SBS, as compared to the FOCUS Report. Because
broker-dealers would be required to file Form SBS on an ongoing
basis, it is characterized as an annual cost, rather than an initial
cost.
\1417\ 4,050 hours x $269/hour national hourly rate for a
compliance manager = $1,089,450. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5).
---------------------------------------------------------------------------
The Commission is proposing Rule 18a-7 to provide reporting
requirements for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs that are analogous to the reporting requirements proposed
for broker-dealer SBSDs and broker-dealer MSBSPs. Proposed Rule 18a-7
would also require stand-alone SBSDs and stand-alone MSBSPs to file
with the Commission an audited annual report, as described above.\1418\
The Commission estimates that proposed Rule 18a-7 would result in an
initial industry cost of $777,410.\1419\ The Commission estimates that
proposed Rule 18a-7 would result in an annual industry cost of
$5,500,693.24.\1420\
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\1418\ See supra section II.B.3. (filing of annual audited
reports and other reports).
\1419\ 2,890 hours x $269/hour national hourly rate for a
compliance manager = $777,410. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5 and proposed Rule 18a-
7). The majority of costs SBSDs and MSBSPs would incur as a result
of proposed Rule 18a-7 is expected to result from the information
elicited in Form SBS and the required annual audit. Because the
additional information in the Form SBS and the annual audit would be
required on an ongoing basis, the Commission is characterizing them
as ongoing costs.
\1420\ (3,978 hours x $63/hour national hourly rate for a
compliance clerk) + $5,250,079 in external costs = $5,500,693. See
supra section IV.D.3. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed amendments to Rule
17a-5 and proposed Rule 18a-7).
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As described in more detail above, the Commission is proposing to
establish notification requirements to require SBSDs and MSBSPs to
timely notify the Commission of potential problems at these
registrants.\1421\ The Commission is proposing to amend Rule 17a-11 to
add certain notification requirements for broker-dealer SBSDs and
broker-dealer MSBSPs. In the aggregate, the Commission expects the
proposed amendments to Rule 17a-11 to result in an annual industry cost
of $29,859 to broker-dealer SBSDs and broker-dealer MSBSPs.\1422\
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\1421\ See supra section II.C.2. (proposed amendments to Rule
17a-11 and proposed Rule 18a-7).
\1422\ (100 hours +10 hours + 1 hour) x $269/hour national
hourly rate for a compliance manager = $29,859. See supra section
IV.D.4. (PRA estimate of the total initial and annual recordkeeping
and reporting burden for proposed amendments to Rule 17a-11 and
proposed Rule 18a-8).
---------------------------------------------------------------------------
The Commission is also proposing Rule 18a-8 to establish reporting
requirements for stand-alone SBSDs and
[[Page 25296]]
stand-alone MSBSPs that are analogous to the reporting requirements for
broker-dealer SBSDs and broker-dealer MSBSPs, as well as a separate
notification requirement for bank SBSDs and bank MSBSPs. The Commission
expects that proposed Rule 18a-8 would result in an annual industry
cost of $1,237 to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs.\1423\
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\1423\ 4.6 hours x $269/hour national hourly rate for a
compliance manager = $1,237. See supra section IV.D.4. (PRA estimate
of the total initial and annual recordkeeping and reporting burden
for proposed amendments to Rule 17a-11 and proposed Rule 18a-8).
---------------------------------------------------------------------------
Proposed Rule 18a-9, which is modeled on Rule 17a-13, would require
stand-alone SBSDs to establish a securities count program.\1424\ The
Commission estimates that proposed Rule 18a-9 would impose an initial
industry-wide cost of $76,725\1425\ and an industry-wide annual cost of
$113,400 per year.\1426\
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\1424\ See supra section II.D.
\1425\ 225 hours x $341/hour national hourly rate for a senior
operations manager = $76,725. See supra section IV.D.5. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed Rule 18a-9). The $341 per hour figure for a
senior operations manager is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
\1426\ 900 hours x $126/hour national hourly rate for an
operations specialist = $113,400. See supra section IV.D.5. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed Rule 18a-9). The $126 per hour figure for an
operations specialist is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
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VI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \1427\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \1428\ of the Administrative
Procedure Act,\1429\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small entities''.\1430\ Section 605(b) of the RFA
states that this requirement shall not apply to any proposed rule or
proposed rule amendment, which, if adopted, would not have a
significant economic impact on a substantial number of small
entities.\1431\
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\1427\ See 5 U.S.C. 601 et seq.
\1428\ See 5 U.S.C. 603(a).
\1429\ See 5 U.S.C. 551 et seq.
\1430\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
See Statement of Management on Internal Accounting Control, Exchange
Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
\1431\ See 5 U.S.C. 605(b).
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\1432\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\1433\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\1434\ Under the
standards adopted by the Small Business Administration, small entities
in the finance and insurance industry include the following: (1) for
entities in credit intermediation and related activities,\1435\ firms
with $175 million or less in assets; (2) for non-depository credit
intermediation and certain other activities,\1436\ firms with $7
million or less in annual receipts; (3) for entities in financial
investments and related activities,\1437\ firms with $7 million or less
in annual receipts; (4) for insurance carriers and entities in related
activities,\1438\ firms with $7 million or less in annual receipts; and
(5) for funds, trusts, and other financial vehicles,\1439\ firms with
$7 million or less in annual receipts.\1440\
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\1432\ See 17 CFR 240.0-10(a).
\1433\ See 17 CFR 240.17a-5(d).
\1434\ See 17 CFR 240.0-10(c).
\1435\ Including commercial banks, savings institutions, credit
unions, firms involved in other depository credit intermediation,
credit card issuing, sales financing, consumer lending, real estate
credit, and international trade financing.
\1436\ Including firms involved in secondary market financing,
all other non-depository credit intermediation, mortgage and
nonmortgage loan brokers, financial transactions processing, reserve
and clearing house activities, and other activities related to
credit intermediation.
\1437\ Including firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities.
\1438\ Including direct life insurance carriers, direct health
and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities.
\1439\ Including pension funds, health and welfare funds, other
insurance funds, open-end investment funds, trusts, estates, and
agency accounts, real estate investment trusts, and other financial
vehicles.
\1440\ See 13 CFR 121.201.
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Based on available information about the security-based swap
market, the market, while broad in scope, is largely dominated by
entities such as those that would be covered by the SBSD and MSBSP
definitions. Subject to certain exceptions, section 3(a)(71)(A) of the
Exchange Act defines security-based swap dealer to mean any person who:
(1) holds itself out as a dealer in security-based swaps; (2) makes a
market in security-based swaps; (3) regularly enters into security-
based swaps with counterparties as an ordinary course of business for
its own account; or (4) engages in any activity causing it to be
commonly known in the trade as a dealer or market maker in security-
based swaps. Section 3(a)(67)(A) of the Exchange Act defines major
security-based swap participant to be any person: (1) who is not an
SBSD; and (2) who maintains a substantial position in security-based
swaps for any of the major security-based swap categories, as such
categories are determined by the Commission, excluding both positions
held for hedging or mitigating commercial risk and positions maintained
by any employee benefit plan (or any contract held by such a plan) as
defined in paragraphs (3) and (32) of section 3 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary
purpose of hedging or mitigating any risk directly associated with the
operation of the plan; whose outstanding security-based swaps create
substantial counterparty exposure that could have serious adverse
effects on the financial stability of the U.S. banking system or
financial markets; or that is a financial entity that is highly
leveraged relative to the amount of capital such entity holds and that
is not subject to capital requirements established by an appropriate
federal banking regulator;
[[Page 25297]]
and maintains a substantial position in outstanding security-based
swaps in any major security-based swap category, as such categories are
determined by the Commission.\1441\
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\1441\ See also Further Definition of ``Swap Dealer,''
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major
Security-Based Swap Participant'' and ``Eligible Contract
Participant'', 77 FR 30743 (``The SEC continues to believe that the
types of entities that would engage in more than a de minimis amount
of dealing activity involving security-based swaps--which generally
would be major banks--would not be `small entities' for purposes of
the RFA. Similarly, the SEC continues to believe that the types of
entities that may have security-based swap positions above the level
required to be a `major security-based swap participant' would not
be a `small entity' for purposes of the RFA. Accordingly, the SEC
certifies that the final rules defining `security-based swap dealer'
or `major security-based swap participant' would not have a
significant economic impact on a substantial number of small
entities for purposes of the RFA.'').
---------------------------------------------------------------------------
Based on feedback from industry participants about the security-
based swap markets, entities that will qualify as SBSDs and MSBSPs,
whether registered broker-dealers or not, will likely exceed the
thresholds defining ``small entities'' set out above. Thus, it is
unlikely that the requirements applicable to SBSD and MSBSPs that would
be established under the proposed amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11, and proposed new Rules 18a-5, 18a-6, 18a-7 and 18a-8
and 18a-9, would have a significant economic impact on any small
entity.
The Commission estimates that there are approximately 735 broker-
dealers that were ``small'' for the purposes Rule 0-10.\1442\ The
amendments to Rules 17a-3, 17a-4, and 17a-5 relating to making and
keeping records that include details about security-based swaps and
swaps and reporting information about security-based swaps and swaps
would apply to all broker-dealers with such positions. These proposed
amendments, therefore, would apply to all ``small'' broker-dealers in
that they would be subject to the requirements in the proposed
amendments. It is likely, however, that these proposed amendments would
have no, or little, impact on ``small'' broker-dealers, since most, if
not all, of these firms generally would not hold these types of
positions. In addition, the technical amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11 would apply to all broker-dealers, including broker-
dealers that are small. However, these amendments would have no impact
on broker-dealers, including ``small'' broker-dealers, because they
would not establish new substantive requirements.
---------------------------------------------------------------------------
\1442\ This estimate is based on the number of small broker-
dealers as of December 31, 2012.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission certifies that the
proposed amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11, and new
Rules 18a-5 through 18a-9, would not have a significant economic impact
on any small entity for purposes of the RFA.
The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.
VII. Small Business Regulatory Enforcement Fairness Act
Under the Small Business Regulatory Enforcement Fairness Act of
1996,\1443\ a rule is considered ``major'' where, if adopted, it
results or is likely to result in: (1) an annual effect on the economy
of $100 million or more (either in the form of an increase or a
decrease); (2) a major increase in costs or prices for consumers or
individual industries; or (3) significant adverse effect on
competition, investment, or innovation. The Commission requests comment
on the potential impact of the proposed rule on the economy on an
annual basis, any potential increase in costs or prices for consumers
or individual industries, and any potential effect on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their view to the extent
possible.
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\1443\ See Contract with America Advancement Act of 1996, Public
Law 104-121, 110 Stat. 847 (1996) (codified in various sections of
titles 5 and 15 of the U.S. Code, and as a note to 5 U.S.C. 601).
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VIII. Statutory Basis and Text of the Proposed Amendments and New Rules
The Commission is proposing to revise Rules 17a-3, 17a-4, 17a-5,
and 17a-11 under the Exchange Act (17 CFR 240.17a-3, 17 CFR 240.17a-4,
17 CFR 240.17a-5, and 17 CFR 240.17a-11), proposing to revise Rule 18a-
1 under the Exchange Act (17 CFR 240.18a-1) [as proposed at 77 FR
70214, Nov. 23, 2012], and proposing to add new Rules 18a-5, 18a-6,
18a-7, and 18a-8 under the Exchange Act (17 CFR 240.18a-5, 17 CFR
240.18a-6, 17 CFR 240.18a-7, and 17 CFR 240.18a-8), and FOCUS Report
Form SBS (17 CFR 249.617) pursuant to the authority conferred by the
Exchange Act, including sections 15F, 17, 23(a) and 36.\1444\
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\1444\ 15 U.S.C. 78o 10, 78q, 78w(a), and 78mm.
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List of Subjects in 17 CFR Parts 240 and 249
Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.
Text of the Amendments
For the reasons set out in the preamble, the Commission proposes to
revise Title 17, Chapter II, of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The general authority citation for part 240 is revised to read, in
part, as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise
noted.
* * * * *
0
2. Section 240.17a-3 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraphs (a) introductory text, (a)(1), (a)(3),
(a)(4)(vi), (a)(4)(vii), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9),
(a)(10), (a)(11), (a)(12)(i) introductory text, (a)(12)(i)(A),
(a)(12)(i)(E), (a)(12)(i)(F), (a)(12)(i)(G), (a)(12)(i)(H);
0
d. Removing the undesignated proviso paragraph at the end of paragraph
(a)(12)(i);
0
e. Adding a note at the end of paragraph (a)(12)(i);
0
f. Revising paragraph (a)(12)(ii);
0
g. In paragraphs (a)(16)(ii)(A) and (B), removing the phrase ``shall
mean'' and adding in its place ``means'';
0
h. In paragraphs (a)(17)(i)(A), (B), (C) and (D), (a)(18), (a)(19),
(a)(20) and (a)(22), removing ``member,'' wherever it appears;
0
i. In paragraphs (a)(17)(i)(A) and (B)(1), (a)(18)(i), and (a)(19)(i),
removing the word ``shall'' and adding in its place ``must'' wherever
it appears;
0
j. In paragraphs (a)(17)(i)(C) and (D), removing the word ``shall'' and
adding in its place ``will'' wherever it appears;
0
k. Adding paragraphs (a)(24), (a)(25), (a)(26), (a)(27), (a)(28),
(a)(29), and (a)(30);
0
l. Revising paragraph (b);
0
m. Removing paragraphs (c) and (d);
0
n. Redesignating paragraphs (e), (f), (g), and (h) as (c), (d), (e),
and (f), respectively; and
[[Page 25298]]
0
o. Revising newly redesignated paragraphs (c), (d), (e), (f)(2),
(f)(3), and (f)(4).
The additions and revisions read as follows:
Sec. 240.17a-3 Records to be made by certain brokers and dealers.
Section 240.17a-3 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the books and records requirements under Sec. 240.18a-5.
(a) Every broker or dealer must make and keep current the following
books and records relating to its business:
(1) Blotters (or other records of original entry) containing an
itemized daily record of all purchases and sales of securities
(including security-based swaps), all receipts and deliveries of
securities (including certificate numbers), all receipts and
disbursements of cash and all other debits and credits. Such records
must show the account for which each such purchase or sale was
effected, the name and amount of securities, the unit and aggregate
purchase or sale price (if any), the trade date, and the name or other
designation of the person from whom such securities were purchased or
received or to whom sold or delivered. For security-based swaps, such
records must also show, for each purchase or sale, the type of
security-based swap, the reference security, index, or obligor, the
date and time of execution, the effective date, the termination or
maturity date, the notional amount, the unique transaction identifier,
and the unique counterparty identifier.
(2) * * *
(3) Ledger accounts (or other records) itemizing separately as to
each cash, margin, or security-based swap account of every customer and
of such broker or dealer and partners thereof, all purchases, sales,
receipts and deliveries of securities (including security-based swaps)
and commodities for such account, and all other debits and credits to
such account; and, in addition, for a security-based swap, the type of
security-based swap, the reference security, index, or obligor, the
date and time of execution, the effective date, the termination or
maturity date, the notional amount, the unique transaction identifier,
and the unique counterparty identifier.
(4) * * *
(vi) All long and all short securities record differences arising
from the examination, count, verification, and comparison pursuant to
Sec. Sec. 240.17a-5, 240.17a-12, and 240.17a-13 (by date of
examination, count, verification, and comparison showing for each
security the number of long or short count differences); and
(vii) Repurchase and reverse repurchase agreements.
(5) A securities record or ledger reflecting separately for each:
(i) Security, other than a security-based swap, as of the clearance
dates all ``long'' or ``short'' positions (including securities in
safekeeping and securities that are the subjects of repurchase or
reverse repurchase agreements) carried by such broker or dealer for its
account or for the account of its customers or partners, or others, and
showing the location of all securities long and the offsetting position
to all securities short, including long security count differences and
short security count differences classified by the date of the physical
count and verification in which they were discovered, and in all cases
the name or designation of the account in which each position is
carried.
(ii) Security-based swap, the reference security, index, or
obligor, the unique transaction identifier, the unique counterparty
identifier, whether it is a ``long'' or ``short'' position in the
security-based swap, whether the security-based swap is cleared or not
cleared, and if cleared, identification of the clearing agency where
the security-based swap is cleared.
(6)(i) A memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security,
except for the purchase or sale of a security-based swap, whether
executed or unexecuted.
(A) The memorandum must show the terms and conditions of the order
or instructions and of any modification or cancellation thereof, the
account for which entered, the time the order was received, the time of
entry, the price at which executed, the identity of each associated
person, if any, responsible for the account, the identity of any other
person who entered or accepted the order on behalf of the customer, or,
if a customer entered the order on an electronic system, a notation of
that entry, and, to the extent feasible, the time of execution or
cancellation. The memorandum need not show the identity of any person,
other than the associated person responsible for the account, who may
have entered or accepted the order if the order is entered into an
electronic system that generates the memorandum and if that system is
not capable of receiving an entry of the identity of any person other
than the responsible associated person; in that circumstance, the
broker or dealer must produce upon request by a representative of a
securities regulatory authority a separate record which identifies each
other person. An order entered pursuant to the exercise of
discretionary authority by the broker or dealer, or associated person
thereof, must be so designated. The term instruction must include
instructions between partners and employees of a broker or dealer. The
term time of entry means the time when the broker or dealer transmits
the order or instruction for execution.
(B) The memorandum need not be made as to a purchase, sale or
redemption of a security on a subscription way basis directly from or
to the issuer, if the broker or dealer maintains a copy of the
customer's or non-customer's subscription agreement regarding a
purchase, or a copy of any other document required by the issuer
regarding a sale or redemption.
(ii) A memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security-
based swap, whether executed or unexecuted. The memorandum must show
the terms and conditions of the order or instructions and of any
modification or cancellation thereof; the account for which entered;
the time the order was received; the time of entry; the price at which
executed; the identity of each associated person, if any, responsible
for the account; the identity of any other person who entered or
accepted the order on behalf of the customer, or, if a customer entered
the order on an electronic system, a notation of that entry; and, to
the extent feasible, the time of cancellation, if applicable. The
memorandum also must include the type of the security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier. An order entered pursuant to the exercise of discretionary
authority must be so designated.
(7)(i) A memorandum of each purchase or sale of a security, other
than for the purchase or sale of a security-based swap, for the account
of the broker or dealer showing the price and, to the extent feasible,
the time of
[[Page 25299]]
execution; and, in addition, where the purchase or sale is with a
customer other than a broker or dealer, a memorandum of each order
received, showing the time of receipt; the terms and conditions of the
order and of any modification thereof; the account for which it was
entered; the identity of each associated person, if any, responsible
for the account; the identity of any other person who entered or
accepted the order on behalf of the customer, or, if a customer entered
the order on an electronic system, a notation of that entry. The
memorandum need not show the identity of any person other than the
associated person responsible for the account who may have entered the
order if the order is entered into an electronic system that generates
the memorandum and if that system is not capable of receiving an entry
of the identity of any person other than the responsible associated
person. In that circumstance, the broker or dealer must produce upon
request by a representative of a securities regulatory authority a
separate record that identifies each other person. An order with a
customer other than a broker or dealer entered pursuant to the exercise
of discretionary authority by the broker or dealer, or associated
person thereof, must be so designated.
(ii) A memorandum of each purchase or sale of a security-based swap
for the account of the broker or dealer showing the price; and, in
addition, where the purchase or sale is with a customer other than a
broker or dealer, a memorandum of each order received, showing the time
of receipt; the terms and conditions of the order and of any
modification thereof; the account for which it was entered; the
identity of any other person who entered or accepted the order on
behalf of the customer, or, if a customer entered the order on an
electronic system, a notation of that entry. The memorandum must also
include the type of security-based swap, the reference security, index,
or obligor, the date and time of execution, the effective date, the
termination or maturity date, the notional amount, the unique
transaction identifier, and the unique counterparty identifier. An
order entered pursuant to the exercise of discretionary authority must
be so designated.
(8)(i) With respect to a security other than a security-based swap,
copies of confirmations of all purchases and sales of securities,
including all repurchase and reverse repurchase agreements, and copies
of notices of all other debits and credits for securities, cash and
other items for the account of customers and partners of such broker or
dealer.
(ii) With respect to a security-based swap, copies of the security-
based swap trade acknowledgement and verification made in compliance
with Sec. 240.15Fi-1 [previously proposed at 76 FR 3859, Jan. 21,
2011].
(9) A record with respect to each cash, margin, and security-based
swap account with such broker or dealer indicating, as applicable:
(i) The name and address of the beneficial owner of such account,
(ii) Except with respect to exempt employee benefit plan securities
as defined in Sec. 240.14a-1(d), but only to the extent such
securities are held by employee benefit plans established by the issuer
of the securities, whether or not the beneficial owner of securities
registered in the name of such brokers or dealers, or a registered
clearing agency or its nominee objects to disclosure of his or her
identity, address, and securities positions to issuers,
(iii) In the case of a margin account, the signature of such owner;
Provided, That, in the case of a joint account or an account of a
corporation, such records are required only in respect of the person or
persons authorized to transact business for such account, and
(iv) In the case of a security-based swap account, a record of the
unique counterparty identifier, the name and address of such
counterparty, and the signature of each person authorized to transact
business in the security-based swap account.
(10) A record of all puts, calls, spreads, straddles, and other
options in which such broker or dealer has any direct or indirect
interest or which such broker or dealer, has granted or guaranteed,
containing, at least, an identification of the security, and the number
of units involved. An OTC derivatives dealer must also keep a record of
all eligible OTC derivative instruments as defined in Sec. 240.3b-13
in which the OTC derivatives dealer has any direct or indirect interest
or which it has written or guaranteed, containing, at a minimum, an
identification of the security or other instrument, the number of units
involved, and the identity of the counterparty.
(11) A record of the proof of money balances of all ledger accounts
in the form of trial balances and a record of the computation of
aggregate indebtedness and net capital, as of the trial balance date,
pursuant to Sec. 240.15c3-1. The computation need not be made by any
broker or dealer unconditionally exempt from Sec. 240.15c3-1 by
paragraph Sec. 240.15c3-1(b)(1) or (b)(3). Such trial balances and
computations must be prepared currently at least once a month.
(12)(i) A questionnaire or application for employment executed by
each associated person (as defined in paragraph (f)(4) of this section)
of the broker or dealer, which questionnaire or application must be
approved in writing by an authorized representative of the broker or
dealer and must contain at least the following information with respect
to the associated person:
(A) The associated person's name, address, social security number,
and the starting date of the associated person's employment or other
association with the broker or dealer;
* * * * *
(E) A record of any denial, suspension, expulsion, or revocation of
membership or registration of any broker or dealer with which the
associated person was associated in any capacity when such action was
taken;
(F) A record of any permanent or temporary injunction entered
against the associated person or any broker or dealer with which the
associated person was associated in any capacity at the time such
injunction was entered;
(G) A record of any arrest or indictment for any felony, or any
misdemeanor pertaining to securities, commodities, banking, insurance
or real estate (including, but not limited to, acting or being
associated with a broker or dealer, investment company, investment
adviser, futures sponsor, bank, or savings and loan association),
fraud, false statements or omissions, wrongful taking of property,
bribery, forgery, counterfeiting, or extortion, and the disposition of
the foregoing; and
(H) A record of any other name or names by which the associated
person has been known or which the associated person has used.
Note to paragraph (a)(12)(i). Provided, however, that if such
associated person has been registered as a registered representative of
such broker or dealer with, or the associated person's employment has
been approved by a self-regulatory organization, then retention of a
full, correct, and complete copy of any and all applications for such
registration or approval will be deemed to satisfy the requirements of
this paragraph.
(ii) A record listing every associated person of the broker or
dealer which shows, for each associated person, every office of the
broker or dealer, where the associated person regularly conducts the
business of handling funds or securities or effecting any transactions
in, or inducing or attempting to induce the
[[Page 25300]]
purchase or sale of any security for the broker or dealer and the
Central Registration Depository number, if any, and every internal
identification number or code assigned to that person by the broker or
dealer.
* * * * *
(24) A report of the results of the monthly liquidity stress test,
a record of the assumptions underlying the liquidity stress test, and
the liquidity funding plan required under Sec. 240.15c3-1(f), if
applicable.
(25) A record of the daily calculation of the amount of equity and,
if applicable, the margin amount for each account of a counterparty
required under Sec. 240.18a-3(c) [previously proposed at 77 FR 70214,
Nov. 23, 2012].
(26) A record of compliance with possession or control requirements
under Sec. 240.18a-4(b) [previously proposed at 77 FR 70214, Nov. 23,
2012].
(27) A record of the reserve computation required under Sec.
240.18a-4(c) [previously proposed at 77 FR 70214, Nov. 23, 2012].
(28) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-1 [previously proposed at 76 FR 3859,
Jan. 21, 2011] within five business days of execution that includes, at
a minimum, the unique transaction identifier and unique counterparty
identifier.
(29) A record that demonstrates the broker or dealer has complied
with the business conduct standards as required under Sec. 240.15Fh-6
[previously proposed at 76 FR 42396, July 18, 2011].
(30) A record that demonstrates the broker or dealer has complied
with the business conduct standards as required under Sec. 240.15Fh-1
through Sec. 240.15Fh-5 and Sec. 240.15Fk-1 [previously proposed at
76 FR 42396, July 18, 2011].
(b) A broker or dealer registered pursuant to Section 15 of the Act
(15 U.S.C. 78o), that introduces accounts on a fully-disclosed basis,
is not required to make or keep such records of transactions cleared
for such broker or dealer as are made and kept by a clearing broker or
dealer pursuant to the requirements of Sec. Sec. 240.17a-3 and 17a-4.
Nothing herein contained will be deemed to relieve such broker or
dealer from the responsibility that such books and records be
accurately maintained and preserved as specified in Sec. Sec. 240.17a-
3 and 17a-4.
(c) For purposes of transactions in municipal securities by
municipal securities brokers and municipal securities dealers,
compliance with Rule G-8 of the Municipal Securities Rulemaking Board
or any successor rule will be deemed to be in compliance with this
section.
(d) Security futures products. The provisions of this section will
not apply to security futures product transactions and positions in a
futures account (as that term is defined in Sec. 240.15c3-3(a)(15));
provided, that the Commodity Futures Trading Commission's recordkeeping
rules apply to those transactions and positions.
(e) Every broker or dealer must make and keep current, as to each
office, the books and records described in paragraphs (a)(1), (a)(6),
(a)(7), (a)(12), (a)(17), (a)(18)(i), (a)(19), (a)(20), (a)(21), and
(a)(22) of this section.
(f) * * *
(1) * * *
(2) The term principal means any individual registered with a
registered national securities association as a principal or branch
manager of a broker or dealer or any other person who has been
delegated supervisory responsibility over associated persons by the
broker or dealer.
(3) The term securities regulatory authority means the Commission,
any self-regulatory organization, or any securities commission (or any
agency or office performing like functions) of the States; the
Commodities Futures Trading Commission and a prudential regulator to
the extent the prudential regulator oversees security-based swap
activities.
(4) The term associated person means a ``person associated with a
broker or dealer'' or ``person associated with a security-based swap
dealer or major security-based swap participant'' as defined in
sections 3(a)(18) and 3(a)(70) of the Act (15 U.S.C. 78c(a)(18) and
(a)(70)) respectively, but will not include persons whose functions are
solely clerical or ministerial.
* * * * *
0
3. Section 240.17a-4 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraphs (a), (b) introductory text, (b)(1), (b)(3),
(b)(4), (b)(5), (b)(7), (b)(8) introductory text, (b)(8)(i), (b)(8)(v),
(b)(8)(vi), (b)(8)(vii), (b)(8)(viii), and (b)(8)(xiii);
0
d. Adding paragraph (b)(8)(xvi);
0
e. Redesignating paragraph (b)(8)(xv) as paragraph (b)(8)(xvii);
0
f. Redesignating paragraph (b)(8)(xiv) as paragraph (b)(8)(xv);
0
g. Adding new paragraph (b)(8)(xiv);
0
h. Revising newly redesignated paragraph (b)(8)(xv);
0
i. In paragraph (b)(11), removing the word ``shall'' and adding in its
place ``must'';
0
j. Adding paragraphs (b)(14), (b)(15), and (b)(16);
0
k. Revising paragraphs (c), (d), (e) introductory text, and (e)(1),
(e)(2), (e)(3), and (e)(4);
0
l. In paragraphs (e)(6), (e)(7), and (e)(8), removing ``member,''
wherever it appears;
0
m. In the last sentence of paragraph (e)(8), removing the word
``shall'' and adding in its place ``must'';
0
n. In paragraph (f) introductory text, removing the word ``paragraph,''
and adding in its place ``section'';
0
o. In paragraphs (f)(2) introductory text, (f)(2)(i), (f)(2)(ii)(D),
and (f)(3) introductory text, removing ``member, broker, or dealer''
and adding in its place ``broker or dealer'' wherever it appears;
0
p. In paragraph (f)(3)(ii), removing ``member, broker or dealer'' and
adding in its place ``broker or dealer'';
0
q. In paragraphs (f)(3)(iv)(A), (f)(3)(v) introductory text,
(f)(3)(v)(A), and (f)(3)(vi), removing ``member, broker, or dealer''
and adding in its place ``broker or dealer'' wherever it appears;
0
r. In paragraphs (f)(2) introductory text, (f)(3) introductory text,
and (f)(3)(vii), removing the word ``shall'' and adding in its place
``must'';
0
s. In paragraph (f)(3)(iv)(B), removing ``each index.'' and adding in
its place ``the index.'';
0
t. In paragraph (f)(3)(vi), removing the phrase ``the self-regulatory
organizations'' and adding in its place ``any self-regulatory
organization'';
0
u. Revising paragraphs (f)(3)(vii) and (g);
0
v. In paragraph (h), adding the phrase ``or any successor rule'' after
the word ``Board''.
0
w. In paragraph (i), removing ``member,'' wherever it appears, in the
first sentence removing the phrase ``such outside entity shall'' and
adding in its place ``such outside entity must'', and in the last
sentence removing the phrase ``Agreement with an outside entity shall''
and adding in its place ``Agreement with an outside entity will'';
0
x. In paragraph (j), removing ``member,'' wherever it appears, removing
the phrase ``broker and dealer'' and adding in its place ``broker or
dealer'', and removing the word ``shall'' and adding in its place
``must'';
0
y. In paragraph (k)(1), removing ``member,'' before ``broker or
dealer'', and removing the word ``shall'' and adding in its place
``must'' wherever it appears;
0
z. In paragraph (k)(2), removing ``member,'';
0
aa. In paragraph (l) removing ``member,'' wherever it appears, and
[[Page 25301]]
removing the phrase Sec. 240.17a-3(g) and adding in its place Sec.
240.17a-3(e);
0
bb. Revising paragraph (m)(1) through (m)(4); and
0
cc. Adding paragraph (m)(5).
The additions and revisions read as follows:
Sec. 240.17a-4 Records to be preserved by certain brokers and
dealers.
Section 240.17a-4 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the record maintenance and preservation requirements under
Sec. 240.18a-6.
(a) Every broker or dealer subject to Sec. 240.17a-3 must preserve
for a period of not less than six years, the first two years in an
easily accessible place, all records required to be made pursuant to
Sec. Sec. 240.17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22),
and analogous records created pursuant to Sec. 240.17a-3(d).
(b) Every broker or dealer subject to Sec. 240.17a-3 must preserve
for a period of not less than three years, the first two years in an
easily accessible place:
(1) All records required to be made pursuant to Sec. 240.17a-
3(a)(4), (a)(6), (a)(7), (a)(8), (a)(9), (a)(10), (a)(11), (a)(16),
(a)(18), (a)(19), (a)(20), (a)(24), (a)(25), (a)(26), (a)(27), (a)(28),
(a)(29), and (a)(30), and analogous records created pursuant to Sec.
240.17a-3(e).
(2) * * *
(3) All bills receivable or payable (or copies thereof), paid or
unpaid, relating to the business of such, broker or dealer, as such.
(4) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the broker or dealer
(including inter-office memoranda and communications) relating to its
business as such, including all communications which are subject to
rules of a self-regulatory organization of which the broker or dealer
is a member regarding communications with the public. As used in this
paragraph (b)(4), the term communications includes sales scripts and
recordings of telephone calls required to be maintained pursuant to
section 15F(g)(1) of the Act (15 U.S.C. 78o-10(g)(1)).
(5) All trial balances, computations of aggregate indebtedness and
net capital (and working papers in connection therewith), financial
statements, branch office reconciliations, and internal audit working
papers, relating to the business of such broker or dealer, as such.
(6) * * *
(7) All written agreements (or copies thereof) entered into by such
broker or dealer relating to its business as such, including agreements
with respect to any account. Written agreements with respect to a
security-based swap customer or non-customer, including governing
documents or any document establishing the terms and conditions of the
customer's or non-customer's securities-based swaps must be maintained
with the customer's or non-customer's account records.
(8) Records which contain the following information in support of
amounts included in the report prepared as of the audit date on Form X-
17A-5 (Sec. 249.617 of this chapter) Part II, or Part IIA or Part IIB,
or Form SBS (Sec. 249.617 of this chapter), as applicable, and in the
annual financial statements required by Sec. 240.17a-5(d) and Sec.
240.17a-12(b):
(i) Money balance and position, long or short, including
description, quantity, price, and valuation of each security including
contractual commitments in customers' accounts, in cash and fully
secured accounts, partly secured accounts, unsecured accounts, and in
securities accounts payable to customers;
* * * * *
(v) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in customers' and non-customers' accounts;
(vi) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in trading and investment accounts;
(vii) Description, money balance, quantity, price, and valuation of
each spot commodity, and swap position or commitments in customers' and
non-customers' accounts;
(viii) Description, money balance, quantity, price, and valuation
of each spot commodity, and swap position or commitments in trading and
investment accounts;
* * * * *
(xiii) Detail relating to information for possession or control
requirements under Sec. 240.15c3-3 and reported on the schedule in
Part II or IIA of Form X-17A-5, or Form SBS (Sec. 249.617 of this
chapter), as applicable;
(xiv) Detail relating to information for possession or control
requirements under Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov.
23, 2012] and reported on Form SBS (Sec. 249.617 of this chapter);
(xv) Detail of all items, not otherwise substantiated, which are
charged or credited in the Computation of Net Capital pursuant to Sec.
240.15c3-1, such as cash margin deficiencies, deductions related to
securities values and undue concentration, aged securities differences,
and insurance claims receivable;
(xvi) Detail relating to the calculation of the risk margin amount
pursuant to Sec. 240.15c3-1(c)(16); and
* * * * *
(14) A copy of information required to be reported under Regulation
SBSR Sec. 242.901 et seq. of this chapter;
(15) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. 240.15Fh-
1 through Sec. 240.15Fh-6 and Sec. 240.15Fk-1 [as proposed at 76 FR
42396, July 18, 2011];
(16) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, the investment or financing
objectives of the special entity as required under section 15F(h)(4)(C)
and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and (5)(A)).
(c) Every broker or dealer subject to Sec. 240.17a-3 must preserve
for a period of not less than six years after the closing of any
customer's account any account cards or records which relate to the
terms and conditions with respect to the opening and maintenance of the
account.
(d) Every broker or dealer subject to Sec. 240.17a-3 must preserve
during the life of the enterprise and of any successor enterprise all
partnership articles or, in the case of a corporation, all articles of
incorporation or charter, minute books, and stock certificate books
(or, in the case of any other form of legal entity, all records such as
articles of organization or formation, and minute books used for a
purpose similar to those records required for corporations or
partnerships), all Forms BD (Sec. 249.501 of this chapter), all Forms
BDW (Sec. 249.501a of this chapter), all Forms SBSE-BD (Sec. 249.617
of this chapter), all Forms SBSE-W (Sec. 249.617 of this chapter), all
amendments to these forms, all licenses or other documentation showing
the registration of the broker or dealer with any securities regulatory
authority.
(e) Every broker or dealer subject to Sec. 240.17a-3 must maintain
and preserve in an easily accessible place:
[[Page 25302]]
(1) All records required under Sec. 240.17a-3(a)(12) until at
least three years after the associated person's employment and any
other connection with the broker or dealer has terminated.
(2) All records required under Sec. 240.17a-3(a)(13) until at
least three years after the termination of employment or association of
those persons required by Sec. 240.17f-2 to be fingerprinted.
(3) All records required pursuant to Sec. 240.17a-3(a)(15) during
the life of the enterprise.
(4) All records required pursuant to Sec. 240.17a-3(a)(14) for
three years.
* * * * *
(f) * * *
(3) * * *
(vii) For every broker or dealer exclusively using electronic
storage media for some or all of its record preservation under this
section, at least one third party (the undersigned), who has access to
and the ability to download information from the broker's or dealer's
electronic storage media to any acceptable medium under this section,
must file with the designated examining authority for the broker or
dealer the following undertakings with respect to such records:
The undersigned hereby undertakes to furnish promptly to the U.S.
Securities and Exchange Commission (``Commission''), its designees or
representatives, any self-regulatory organization of which it is a
member, or any State securities regulator having jurisdiction over the
broker or dealer, upon reasonable request, such information as deemed
necessary by the staffs of the Commission, any self-regulatory
organization of which it is a member, or any State securities regulator
having jurisdiction over the broker or dealer to download information
kept on the broker's or dealer's electronic storage media to any medium
acceptable under Sec. 240.17a-4. Furthermore, the undersigned hereby
undertakes to take reasonable steps to provide access to information
contained on the broker's or dealer's electronic storage media,
including, as appropriate, arrangements for the downloading of any
record required to be maintained and preserved by the broker or dealer
pursuant to Sec. Sec. 240.17a-3 and 17a-4 in a format acceptable to
the staffs of the Commission, any self-regulatory organization of which
it is a member, or any State securities regulator having jurisdiction
over the broker or dealer. Such arrangements will provide specifically
that in the event of a failure on the part of a broker or dealer to
download the record into a readable format and after reasonable notice
to the broker or dealer, upon being provided with the appropriate
electronic storage medium, the undersigned will undertake to do so, as
the staffs of the Commission, any self-regulatory organization of which
it is a member, or any State securities regulator having jurisdiction
over the broker or dealer may request.
(g) If a person who has been subject to Sec. 240.17a-3 ceases to
transact a business in securities directly with others than members of
a national securities exchange, or ceases to transact a business in
securities through the medium of a member of a national securities
exchange, or ceases to be registered pursuant to section 15 of the Act
(15 U.S.C. 78o) such person must, for the remainder of the periods of
time specified in this section, continue to preserve the records which
it theretofore preserved pursuant to this section.
* * * * *
(m) * * *
(1) The term office has the meaning set forth in Sec. 240.17a-
3(f)(1).
(2) The term principal has the meaning set forth in Sec. 240.17a-
3(f)(2).
(3) The term securities regulatory authority has the meaning set
forth in Sec. 240.17a-3(f)(3).
(4) The term associated person has the meaning set forth in Sec.
240.17a-3(f)(4).
(5) The term business as such includes the business as a security-
based swap dealer or major security-based swap participant with respect
to a broker or dealer that is registered under section 15F of the Act
(15 U.S.C. 78o-10) as a security-based swap dealer or major security-
based swap participant.
0
4. Section 240.17a-5 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraph (a) introductory text and removing paragraph
(a)(1);
0
d. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), (a)(6), and
(a)(7) as paragraphs (a)(1) (a)(2), (a)(3), (a)(4), (a)(5), and (a)(6),
respectively;
0
e. Revising newly redesignated paragraphs (a)(1) introductory text,
(a)(1)(ii), (a)(1)(iii), and (a)(1)(iv);
0
f. Adding paragraph (a)(1)(v);
0
g. In newly redesignated paragraphs (a)(2) and (a)(6), removing the
word ``shall'' and adding in its place ``will'';
0
h. Revising newly redesignated paragraphs (a)(3), (a)(4), and (a)(5);
0
i. Revising paragraph (b)(1);
0
j. In paragraphs (b)(3), (b)(4), and (b)(5), removing the word
``shall'' and adding in its place ``will'' wherever it appears;
0
k. In paragraphs (c)(1) introductory text, (c)(2), (c)(2)(i), and
(c)(2)(ii) removing the word ``shall'' and adding in its place ``must''
wherever it appears;
0
l. Revising paragraph (c)(3);
0
m. In paragraph (c)(4)(iii), removing the word ``shall'' and adding in
its place ``must'' where it appears;
0
n. In paragraph (c)(5)(i)(C), adding ``(c)(2)'' before ``(iv)'';
0
o. In paragraph (c)(5)(iii)(C), removing the word ``Home'' and adding
in its place ``home'' wherever it appears;
0
p. Revising paragraphs (d)(1)(i)(B)(1), (d)(1)(i)(B)(2), (d)(2)(i),
(d)(2)(ii), (d)(2)(iii), (d)(3)(i)(A)(4), (d)(3)(i)(A)(5),
(d)(3)(i)(C);
0
q. In paragraph (d)(3)(ii), adding the phrase ``Sec. 240.18a-4,''
after the phrase ``Sec. 240.17a-13,'';
0
r. Revising paragraphs (d)(3)(iii), (e)(1)(ii), (e)(2), and (e)(3);
0
s. Revising paragraphs (f)(2)(ii)(E) and (f)(2)(ii)(F);
0
t. In the fifth sentence of paragraph (f)(3)(v)(B), adding the word
``the'' before the phrase ``independent public accountant does not
agree'';
0
u. Revising paragraphs (g)(2)(i), (g)(2)(ii), (h), and note to
paragraph (h);
0
v. Revising paragraphs (i)(3)(iii)(A) and (i)(3)(iii)(B), and (i)(4);
0
w. Removing and reserving paragraph (j);
0
x. In paragraph (k) introductory text, removing the word ``shall'' and
adding in its place ``must'' wherever it appears, and removing the
phrase ``Market Regulation'', and adding tin its place ``Trading and
Markets'';
0
y. In paragraph (l), removing the phrase ``Securities Exchange Act of
1934'', and adding in its place ``Act,'' and removing the word
``shall'' and adding in its place ``must'';
0
z. In paragraph (m)(1), removing the word ``shall'' and adding in its
place ``must'';
0
aa. In paragraph (m)(2), removing ``(48 Stat. 882; 15 U.S.C. 78c)'' and
``(78 Stat. 565; 15 U.S.C. 78c)'' and adding in their place ``(15
U.S.C. 78c)'' and ``(15 U.S.C. 78c)'', respectively;
0
bb. In paragraph (m)(4), removing the phrase ``shall'' and adding in
its place ``will'';
0
cc. In paragraph (n)(2), removing the word ``shall'' and adding in its
place ``must''; and
0
dd. Revising paragraph (o).
The additions and revisions read as follows:
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
Section 240.17a-5 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a
[[Page 25303]]
security-based swap dealer or major security-based swap participant
under section 15F(b) of the Act (15 U.S.C. 78o-8(b)). A security-based
swap dealer or major security-based swap participant registered under
section 15F(b) of the Act that is not also registered as a broker or
dealer under section 15(b) of the Act is subject to the reporting
requirements under Sec. 240.18a-7.
(a) Monthly and Quarterly Reports.
(1) Filing of Reports
(i) * * *
(ii) Every broker or dealer subject to this paragraph (a) who
clears transactions or carries customer accounts and that is not
registered as a security-based swap dealer or major security-based swap
participant under section 15F of the Act (15 U.S.C. 78o-10) must file
with the Commission an executed Part II of Form X-17A-5 (Sec. 249.617
of this chapter) within 17 business days after the end of the calendar
quarter and within 17 business days after the end of the fiscal year of
the broker or dealer where that date is not the end of a calendar
quarter. Certain of such brokers or dealers must file with the
Commission an executed Part IIA in lieu thereof if the nature of their
business is limited as described in the instructions to Part II of Form
X-17A-5 (Sec. 249.617 of this chapter).
(iii) Every broker or dealer that neither clears transactions nor
carries customer accounts and that is not registered as a security-
based swap dealer or major security-based swap participant under
section 15F of the Act (15 U.S.C. 78o-10) must file with the Commission
an executed Part IIA of Form X-17A-5 (Sec. 249.617 of this chapter)
within 17 business days after the end of each calendar quarter and
within 17 business days after the end of the fiscal year of the broker
or dealer where that date is not the end of a calendar quarter.
(iv) Every broker or dealer that is registered as a security-based
swap dealer or major security-based swap participant under section 15F
of the Act (15 U.S.C. 78o-10) must file with the Commission an executed
Form SBS (Sec. 249.617 of this chapter) within 17 business days after
the end of each month.
(v) Upon receiving written notice from the Commission or the
examining authority designated pursuant to section 17(d) of the Act (15
U.S.C. 78q(d)) (``designated examining authority''), a broker or dealer
who receives such notice must file with the Commission on a monthly
basis, or at such times as will be specified, an executed Part II or
Part IIA of Form X-17A-5 (Sec. 249.617 of this chapter), or an
executed Form SBS (Sec. 249.617 of this chapter), and such other
financial or operational information as will be required by the
Commission or the designated examining authority.
(2) The reports provided for in this paragraph (a) that must be
filed with the Commission will be considered filed when received at the
Commission's principal office in Washington, DC, and the regional
office of the Commission for the region in which the broker or dealer
has its principal place of business. All reports filed pursuant to this
paragraph (a) will be deemed to be confidential.
(3) The provisions of paragraph (a)(1) of this section will not
apply to a member of a national securities exchange or a registered
national securities association if said exchange or association
maintains records containing the information required by Part I, Part
II, or Part IIA of Form X-17A-5 (Sec. 249.617 of this chapter) or Form
SBS (Sec. 249.617 of this chapter), as to such member, and transmits
to the Commission a copy of the applicable parts of Form X-17A-5 (Sec.
249.617 of this chapter) or Form SBS (Sec. 249.617 of this chapter) as
to such member, pursuant to a plan, the procedures and provisions of
which have been submitted to and declared effective by the Commission.
Any such plan filed by a national securities exchange or a registered
national securities association may provide that when a member is also
a member of one or more national securities exchanges, or of one or
more national securities exchanges and a registered national securities
association, the information required to be submitted with respect to
any such member may be submitted by only one specified national
securities exchange or registered national securities association. For
the purposes of this section, a plan filed with the Commission by a
national securities exchange or a registered national securities
association will not become effective unless the Commission, having due
regard for the fulfillment of the Commission's duties and
responsibilities under the provisions of the Act, declares the plan to
be effective. Further, the Commission, in declaring any such plan
effective, may impose such terms and conditions relating to the
provisions of the plan and the period of its effectiveness as may be
deemed necessary or appropriate in the public interest, for the
protection of investors, or to carry out the Commission's duties and
responsibilities under the Act.
(4) Every broker or dealer subject to this paragraph (a) must file
Form Custody (Sec. 249.639 of this chapter) with its designated
examining authority within 17 business days after the end of each
calendar quarter and within 17 business days after the end of the
fiscal year of the broker or dealer where that date is not the end of a
calendar quarter. The designated examining authority must maintain the
information obtained through the filing of Form Custody and must
promptly transmit that information to the Commission at such time as it
transmits the applicable part of Form X-17A-5 (Sec. 249.617 of this
chapter), or Form SBS (Sec. 249.617 of this chapter) as required in
paragraph (a)(2) of this section.
(5) Each broker or dealer that computes certain of its capital
charges in accordance with Sec. 240.15c3-1e must file the following
additional reports with the Commission:
(i) For each product for which the broker or dealer calculates a
deduction for market risk other than in accordance with Sec. 240.15c3-
1e(b)(1) or (b)(3), the product category and the amount of the
deduction for market risk within 17 business days after the end of the
month;
(ii) A graph reflecting, for each business line, the daily intra-
month VaR within 17 business days after the end of the month;
(iii) The aggregate value at risk for the broker or dealer within
17 business days after the end of the month;
(iv) For each product for which the broker or dealer uses scenario
analysis, the product category and the deduction for market risk within
17 business days after the end of the month;
(v) Credit risk information on derivatives exposures within 17
business days after the end of the month, including:
(A) Overall current exposure;
(B) Current exposure (including commitments) listed by counterparty
for the 15 largest exposures;
(C) The ten largest commitments listed by counterparty;
(D) The broker's or dealer's maximum potential exposure listed by
counterparty for the 15 largest exposures;
(E) The broker's or dealer's aggregate maximum potential exposure;
(F) A summary report reflecting the broker's or dealer's current
and maximum potential exposures by credit rating category; and
(G) A summary report reflecting the broker's or dealer's current
exposure for each of the top ten countries to which the broker or
dealer is exposed (by residence of the main operating group of the
counterparty);
[[Page 25304]]
(vi) Regular risk reports supplied to the broker's or dealer's
senior management in the format described in the application;
(vii) The results of the liquidity stress test required by Sec.
240.15c3-1(f) within 17 business days after the end of the month;
(viii) A report identifying the number of business days for which
the actual daily net trading loss exceeded the corresponding daily VaR
within 17 business days after the end of each calendar quarter; and
(ix) The results of backtesting of all internal models used to
compute allowable capital, including VaR and credit risk models,
indicating the number of backtesting exceptions within 17 business days
after the end of the calendar quarter.
* * * * *
(b) * * *
(1) If a broker or dealer holding any membership interest in a
national securities exchange or registered national securities
association ceases to be a member in good standing of such exchange or
association, such broker or dealer must, within two business days after
such event, file with the Commission Part II or Part IIA of Form X-17A-
5 (Sec. 249.617 of this chapter) or Form SBS (Sec. 249.617 of this
chapter) as determined by the standards set forth in paragraphs (a)(1)
(ii), (iii), and (iv) of this section as of the date of such event. The
report must be filed at the Commission's principal office in
Washington, DC, and with the regional office of the Commission for the
region in which the broker or dealer has its principal place of
business: Provided, however, That such report need not be made or filed
if the Commission, upon written request or upon its own motion, exempts
such broker or dealer, either unconditionally or on specified terms and
conditions, from such requirement: Provided, further, That the
Commission may, upon request of the broker or dealer, grant extensions
of time for filing the report specified herein for good cause shown.
* * * * *
(c) * * *
(3) Unaudited statements to be furnished. Unaudited statements
dated 6 months from the date of the audited statements required to be
furnished by paragraphs (c)(1) and (c)(2) of this section must be
furnished within 65 days after the date of the unaudited statements.
The unaudited statements may be furnished 70 days after that time limit
has expired if the broker or dealer sends them with the next mailing of
the broker's or dealer's quarterly customer statements of account. In
that case, the broker or dealer must include a statement in that
mailing of the amount of the broker's or dealer's net capital and its
required net capital in accordance with Sec. 240.15c3-1, as of a
fiscal month end that is within the 75-day period immediately preceding
the date the statements are sent to customers. The unaudited statements
must contain the information specified in paragraphs (c)(2)(i) and
(c)(2)(ii) of this section.
* * * * *
(d) * * *
(1) * * *
(i) * * *
(B)(1) If the broker or dealer did not claim it was exempt from
Sec. 240.15c3-3 throughout the most recent fiscal year or the broker
or dealer is subject to Sec. 240.18a-4 [as proposed at 77 FR 70214,
Nov. 23, 2012], a compliance report as described in paragraph (d)(3) of
this section executed by the person who makes the oath or affirmation
under paragraph (e)(2) of this section; or
(2) If the broker or dealer did claim it was exempt from Sec.
240.15c3-3 throughout the most recent fiscal year and the broker or
dealer is not subject Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov.
23, 2012], an exemption report as described in paragraph (d)(4) of this
section executed by the person who makes the oath or affirmation under
paragraph (e)(2) of this section;
* * * * *
(2) * * *
(i) A Statement of Financial Condition, a Statement of Income, a
Statement of Cash Flows, a Statement of Changes in Stockholders' or
Partners' or Sole Proprietor's Equity, and a Statement of Changes in
Liabilities Subordinated to Claims of General Creditors. The statements
must be prepared in accordance with U.S. generally accepted accounting
principles and must be in a format that is consistent with the
statements contained in Form X-17A-5 (Sec. 249.617 of this chapter)
Part II, Part IIA or Form SBS (Sec. 249.617 of this chapter), as
applicable. If the Statement of Financial Condition filed in accordance
with instructions to Form X-17A-5, Part II, Part IIA, or Form SBS, as
applicable, is not consolidated, a summary of financial data, including
the assets, liabilities, and net worth or stockholders' equity, for
subsidiaries not consolidated in the applicable Part II, Part IIA, or
Form SBS Statement of Financial Condition as filed by the broker or
dealer must be included in the notes to the financial statements
reported on by the independent public accountant.
(ii) Supporting schedules that include, from Part II or Part IIA of
Form X-17A-5 (Sec. 249.617 of this chapter), or Form SBS (Sec.
249.617 of this chapter), as applicable, including a Computation of Net
Capital under Sec. 240.15c3-1, a Computation for Determination of the
Reserve Requirements under Exhibit A of Sec. 240.15c3-3, and, if
applicable, under Exhibit A of Sec. 240.18a-4 [as proposed at 77 FR
70214, Nov. 23, 2012], and Information Relating to the Possession or
Control Requirements under Sec. 240.15c3-3, and, if applicable, under
Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012].
(iii) If either the Computation of Net Capital under Sec.
240.15c3-1 or the Computation for Determination of the Reserve
Requirements Under Exhibit A of Sec. 240.15c3-3, or, if applicable
Exhibit A of Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23,
2012] in the financial report is materially different from the
corresponding computation in the most recent Part II or Part IIA of
Form X-17A-5 (Sec. 249.617 of this chapter) or Form SBS (Sec. 249.617
of this chapter), as applicable, filed by the broker or dealer pursuant
to paragraph (a) of this section, a reconciliation, including
appropriate explanations, between the computation in the financial
report and the computation in the most recent Part II or Part IIA of
Form X-17A-5 or Form SBS (Sec. 249.617 of this chapter), as
applicable, filed by the broker or dealer. If no material differences
exist, a statement so indicating must be included in the financial
report.
* * * * *
(3) * * *
(i) * * *
(A) * * *
(4) The broker or dealer was in compliance with Sec. Sec.
240.15c3-1, 240.15c3-3(e) and, if applicable, 240.18a-4(c) [as proposed
at 77 FR 70214, Nov. 23, 2012] as of the end of the most recent fiscal
year; and
(5) The information the broker or dealer used to state whether it
was in compliance with Sec. Sec. 240.15c3-1, 240.15c3-3(e) and, if
applicable, 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012]
was derived from the books and records of the broker or dealer.
* * * * *
(C) If applicable, a description of an instance of non-compliance
with Sec. Sec. 240.15c3-1, 240.15c3-3(e) or, if applicable, 240.18a-
4(c) [as proposed at 77 FR 70214, Nov. 23, 2012] as of the end of the
most recent fiscal year.
* * * * *
[[Page 25305]]
(iii) The broker or dealer is not permitted to conclude that its
Internal Control Over Compliance was effective during the most recent
fiscal year if there were one or more material weaknesses in its
Internal Control Over Compliance during the most recent fiscal year.
The broker or dealer is not permitted to conclude that its Internal
Control Over Compliance was effective as of the end of the most recent
fiscal year if there were one or more material weaknesses in its
internal control as of the end of the most recent fiscal year. A
material weakness is a deficiency, or a combination of deficiencies, in
Internal Control Over Compliance such that there is a reasonable
possibility that non-compliance with Sec. Sec. 240.15c3-1, 240.15c3-
3(e) or 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012] will
not be prevented or detected on a timely basis or that non-compliance
to a material extent with Sec. 240.15c3-3, except for paragraph (e),
Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012], except for
paragraph (c), Sec. 240.17a-13 or any Account Statement Rule will not
be prevented or detected on a timely basis. A deficiency in Internal
Control Over Compliance exists when the design or operation of a
control does not allow the management or employees of the broker or
dealer, in the normal course of performing their assigned functions, to
prevent or detect on a timely basis non-compliance with Sec. 240.15c3-
1, Sec. 240.15c3-3, Sec. 240.17a-13, Sec. 240.18a-4 [as proposed at
77 FR 70214, Nov. 23, 2012], or any Account Statement Rule.
* * * * *
(e) * * *
(1) * * *
(ii) A broker or dealer that files an annual report under paragraph
(d) of this section that is not covered by a report prepared by an
independent public accountant must include in the oath or affirmation
required by paragraph (e)(2) of this section a statement of the facts
and circumstances relied upon as a basis for exemption from the
requirement that the annual report filed under paragraph (d) of this
section be covered by reports prepared by an independent public
accountant.
(2) The broker or dealer must attach to each of the confidential
and non-confidential portions of the annual reports separately bound
under paragraph (e)(3) of this section a complete and executed Part III
of Form X-17A-5 (Sec. 249.617 of this chapter). The oath or
affirmation made in Part III of Form X-17A-5 must be made before a
person duly authorized to administer such oaths or affirmations. If the
broker or dealer is a sole proprietorship, the oath or affirmation must
be made by the proprietor; if a partnership, by a general partner; if a
corporation, by a duly authorized officer; or if a limited liability
company or limited liability partnership, by the chief executive
officer, chief financial officer, manager, managing member, or those
members vested with management authority for the limited liability
company or limited liability partnership.
(3) The annual reports filed under paragraph (d) of this section
are not confidential, except that, if the Statement of Financial
Condition in a format that is consistent with Form X-17A-5 (Sec.
249.617 of this chapter), Part II, Part IIA or Form SBS (Sec. 249.617
of this chapter) is bound separately from the balance of the annual
reports filed under paragraph (d) of this section, and each page of the
balance of the annual reports is stamped ``confidential,'' then the
balance of the annual reports will be deemed confidential to the extent
permitted by law. However, the annual reports, including the
confidential portions, will be available for official use by any
official or employee of the U. S. or any State, by national securities
exchanges and registered national securities associations of which the
broker or dealer filing such a report is a member, by the Public
Company Accounting Oversight Board, and by any other person if the
Commission authorizes disclosure of the annual reports to that person
as being in the public interest. Nothing contained in this paragraph
may be construed to be in derogation of the rules of any registered
national securities association or national securities exchange that
give to customers of a broker or dealer the right, upon request to the
broker or dealer, to obtain information relative to its financial
condition.
* * * * *
(f) * * *
(2) * * *
(ii) * * *
(E) A representation that the independent public accountant has
undertaken the items enumerated in paragraphs (g)(1) and (2) of this
section.
(F) Except as provided in paragraph (f)(2)(iii) of this section, a
representation that the broker or dealer agrees to allow
representatives of the Commission or its designated examining
authority, if requested in writing for purposes of an examination of
the broker or dealer, to review the audit documentation associated with
the reports of the independent public accountant filed under paragraph
(d)(1)(i)(C) of this section. For purposes of this paragraph, ``audit
documentation'' has the meaning provided in standards of the Public
Company Accounting Oversight Board. The Commission anticipates that, if
requested, it will accord confidential treatment to all documents it
may obtain from an independent public accountant under this paragraph
to the extent permitted by law.
* * * * *
(g) * * *
(2)(i) To prepare an independent public accountant's report based
on an examination of the statements required under paragraphs
(d)(3)(i)(A)(2) through (5) of this section in the compliance report
required to be filed by the broker or dealer under paragraph
(d)(1)(i)(B)(1) of this section in accordance with standards of the
Public Company Accounting Oversight Board; or
(ii) To prepare an independent public accountant's report based on
a review of the statements required under paragraphs (d)(4)(i) through
(iii) of this section in the exemption report required to be filed by
the broker or dealer under paragraph (d)(1)(i)(B)(2) of this section,
in accordance with standards of the Public Company Accounting Oversight
Board.
(h) Notification of non-compliance or material weakness. If, during
the course of preparing the independent public accountant's reports
required under paragraph (d)(1)(i)(C) of this section, the independent
public accountant determines that the broker or dealer is not in
compliance with Sec. 240.15c3-1, Sec. 240.15c3-3, Sec. 240.17a-13,
or Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012] or any
rule of the designated examining authority of the broker or dealer that
requires account statements to be sent to the customers of the broker
or dealer, as applicable, or the independent public accountant
determines that any material weaknesses (as defined in paragraph
(d)(3)(iii) of this section) exist, the independent public accountant
must immediately notify the chief financial officer of the broker or
dealer of the nature of the non-compliance or material weakness. If the
notice from the accountant concerns an instance of non-compliance that
would require a broker or dealer to provide a notification under Sec.
240.15c3-1, Sec. 240.15c3-3, or Sec. 240.17a-11, or if the notice
concerns a material weakness, the broker or dealer must provide a
notification in accordance with Sec. 240.15c3-1, Sec. 240.15c3-3, or
Sec. 240.17a-11, as applicable, and provide a copy of the notification
to the independent public accountant. If the independent public
accountant does not receive the
[[Page 25306]]
notification within one business day, or if the independent public
accountant does not agree with the statements in the notification, then
the independent public accountant must notify the Commission and the
designated examining authority within one business day. The report from
the accountant must, if the broker or dealer failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. Sec. 240.15c3-1, 240.15c3-3, or 240.17a-11, or
any material weaknesses. If the broker or dealer filed a notification,
the report from the accountant must detail the aspects of the
notification of the broker or dealer with which the accountant does not
agree.
Note to paragraph (h). The attention of the broker or dealer and
the independent public accountant is called to the fact that under
Sec. 240.17a-11(a)(1), among other things, a broker or dealer whose
net capital declines below the minimum required pursuant to Sec.
240.15c3-1 must give notice of such deficiency that same day in
accordance with Sec. 240.17a-11(h) and the notice must specify the
broker or dealer's net capital requirement and its current amount of
net capital. The attention of the broker or dealer and accountant also
is called to the fact that under Sec. 240.15c3-3(i), if a broker or
dealer shall fail to make a reserve bank account or special account
deposit, as required by Sec. 240.15c3-3, the broker or dealer must
immediately notify the Commission and the regulatory authority for the
broker or dealer, which examines such broker or dealer as to financial
responsibility and must promptly thereafter confirm such notification
in writing.
* * * * *
(i) * * *
(3) * * *
(iii)(A) The opinion of the independent public accountant with
respect to the statements required under paragraphs (d)(3)(i)(A)(2)
through (5) of this section in the compliance report required under
paragraph (d)(1)(i)(B)(1) of this section; or
(B) The conclusion of the independent public accountant with
respect to the statements required under paragraphs (d)(4)(i) through
(iii) of this section in the exemption report required under paragraph
(d)(1)(i)(B)(2) of this section.
(4) Exceptions. Any matters to which the independent public
accountant takes exception must be clearly identified, the exceptions
must be specifically and clearly stated, and, to the extent
practicable, the effect of each such exception on any related items
contained in the annual reports required under paragraph (d) of this
section must be given.
* * * * *
(j) [Reserved].
* * * * *
(o) Filing requirements. For purposes of filing requirements as
described in this section, filing will be deemed to have been
accomplished upon receipt at the Commission's principal office in
Washington, DC, with duplicate originals simultaneously filed at the
locations prescribed in the particular paragraph of this section which
is applicable.
* * * * *
0
5. Section 240.17a-11 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Removing paragraph (a);
0
d. Redesignating paragraphs (b), (c), (d), (e), (f), (g), (h), and (i)
as paragraphs (a), (b), (c), (d), (g), (h), (i), and (j), respectively;
0
e. Revising newly redesignated paragraphs (a)(1), (a)(2), and paragraph
(b) introductory text;
0
f. Adding paragraph (b)(6);
0
g. Revising newly redesignated paragraphs (c) and (d);
0
h. Adding paragraphs (e) and (f); and
0
i. Revising newly redesignated paragraphs (g), (h), (i), and (j).
The revisions and additions read as follows:
Sec. 240.17a-11 Notification provisions for brokers and dealers.
Section 240.17a-11 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the notification requirements under Sec. 240.18a-8.
(a)(1) Every broker or dealer whose net capital declines below the
minimum amount required pursuant to Sec. 240.15c3-1, or is insolvent
as that term is defined in Sec. 240.15c3-1(c)(16), must give notice of
such deficiency that same day in accordance with paragraph (h) of this
section. The notice must specify the broker or dealer's net capital
requirement and its current amount of net capital. If a broker or
dealer is informed by its designated examining authority or the
Commission that it is, or has been, in violation of Sec. 240.15c3-1
and the broker or dealer has not given notice of the capital deficiency
under this section, the broker or dealer, even if it does not agree
that it is, or has been, in violation of Sec. 240.15c3-1, must give
notice of the claimed deficiency, which notice may specify the broker's
or dealer's reasons for its disagreement.
(2) In addition to the requirements of paragraph (b)(1) of this
section, an OTC derivatives dealer or broker or dealer permitted to
compute net capital pursuant to the alternative method of Sec.
240.15c3-1e must also provide notice if its tentative net capital falls
below the minimum amount required pursuant to Sec. 240.15c3-1. The
notice must specify the dealer's tentative net capital requirements,
and current amount of net capital and tentative net capital, of the OTC
derivatives dealer or the broker or dealer permitted to compute net
capital pursuant to the alternative method of Sec. 240.15c3-1e.
(b) Every broker or dealer must send notice promptly (but within 24
hours) after the occurrence of the events specified in paragraph
(b)(1), (b)(2), (b)(3) or (b)(4) of this section in accordance with
paragraph (h) of this section:
* * * * *
(6) If the broker or dealer is registered as a major security-based
swap participant and the level of tangible net worth of the broker or
dealer falls below $20 million.
(c) Every broker or dealer that fails to make and keep current the
books and records required by Sec. 240.17a-3, must give notice of this
fact that same day in accordance with paragraph (h) of this section,
specifying the books and records which have not been made or which are
not current. The broker or dealer must also transmit a report in
accordance with paragraph (h) of this section within 48 hours of the
notice stating what the broker or dealer has done or is doing to
correct the situation.
(d) Whenever any broker or dealer discovers, or is notified by an
independent public accountant under Sec. 240.17a-12(i)(2), of the
existence of any material inadequacy as defined in Sec. 240.17a-
12(h)(2), or whenever any broker or dealer discovers, or is notified by
an independent public accountant under Sec. 240.17a-5(h), of the
existence of any material weakness as defined in Sec. 240.17a-
5(d)(3)(iii), the broker or dealer must:
(1) Give notice, in accordance with paragraph (h) of this section,
of the material inadequacy or material weakness within 24 hours of the
[[Page 25307]]
discovery or notification of the material inadequacy or material
weakness; and
(2) Transmit a report in accordance with paragraph (h) of this
section, within 48 hours of the notice stating what the broker or
dealer has done or is doing to correct the situation.
(e) A broker or dealer that has been authorized by the Commission
to compute net capital pursuant to Sec. 240.15c3-1e must give
immediate notice in writing in accordance with paragraph (h) of this
section if a liquidity stress test conducted pursuant to Sec.
240.15c3-1(f) indicates that the amount of liquidity reserve is
insufficient.
(f) If a broker-dealer registered with the Commission as a
security-based swap dealer under section 15F(b) of the Act (15 U.S.C.
78o-10(b)) fails to make in its special account for the exclusive
benefit of security-based swap customers a deposit, as required by
Sec. 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012], the
broker-dealer must give immediate notice in writing in accordance with
paragraph (h) of this section.
(g) Every national securities exchange or national securities
association that learns that a broker or dealer has failed to send
notice or transmit a report as required by this section, even after
being advised by the securities exchange or the national securities
association to send notice or transmit a report, must immediately give
notice of such failure in accordance with paragraph (h) of this
section.
(h) Every notice or report required to be given or transmitted by
this section must be given or transmitted to the principal office of
the Commission in Washington, DC, the regional office of the Commission
for the region in which the broker or dealer has its principal place of
business, the designated examining authority of which such broker or
dealer is a member, and the Commodity Futures Trading Commission if the
broker or dealer is registered as a futures commission merchant with
such Commission. For the purposes of this section, ``notice'' must be
given or transmitted by facsimile transmission. The report required by
paragraphs (c) or (d)(2) of this section may be transmitted by
overnight delivery.
(i) Other notice provisions relating to the Commission's financial
responsibility or reporting rules are contained in Sec. 240.15c3-1,
Sec. 240.15c3-1d, Sec. 240.15c3-3, Sec. 240.17a-5, and Sec.
240.17a-12.
(j) The provisions of this section will not apply to a broker or
dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *
0
6. Section 240.18a-1 [as proposed at 77 FR 70214, Nov. 23, 2012] is
revised by adding paragraph (c)(1)(x) to read as follows:
Sec. 240.18a-1 Net capital requirements for security-based swap
dealers for which there is not a prudential regulator.
* * * * *
(c) * * *
(1) * * *
(x)(A) Deducting the market value of all short securities
differences (which shall include securities positions reflected on the
securities record which are not susceptible to either count or
confirmation) unresolved after discovery in accordance with the
following schedule:
------------------------------------------------------------------------
Number of
business days
Differences\1\ after
discovery
------------------------------------------------------------------------
25 percent.............................................. 7
50 percent.............................................. 14
75 percent.............................................. 21
100 percent............................................. 28
------------------------------------------------------------------------
\1\ Percentage of market value of short securities differences.
(B) Deducting the market value of any long securities differences,
where such securities have been sold by the broker or dealer before
they are adequately resolved, less any reserves established therefor;
(C) The designated examining authority for a broker or dealer may
extend the periods in (x)(A) of this section for up to 10 business days
if it finds that exceptional circumstances warrant an extension.
* * * * *
0
7. Sections 240.18a-5 through 240.18a-9 are added to read as follows:
Sec. 240.18a-5 Records to be made by certain security-based swap
dealers and major security-based swap participants.
Section 240.18a-5 applies to a security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act (15 U.S.C. 78o-8(b)) that is not also registered as a broker or
dealer under section 15(b) of the Act (15 U.S.C. 78o(b)). A broker or
dealer registered under section 15(b) of the Act, including a broker or
dealer registered as a security-based swap dealer or major security-
based swap participant under section 15F(b) of the Act, is subject to
the books and records requirements under Sec. 240.17a-3.
(a) This paragraph applies only to security-based swap dealers and
major security-based swap participants registered under section 15F of
the Act (15 U.S.C. 78o-10) for which there is no prudential regulator.
Each such security-based swap dealer and major security-based swap
participant subject to this paragraph must make and keep the following
books and records:
(1) Blotters (or other records of original entry) containing an
itemized daily record of all purchases and sales of securities
(including security-based swaps), all receipts and deliveries of
securities (including certificate numbers), all receipts and
disbursements of cash and all other debits and credits. Such records
must show the account for which each such purchase or sale was
effected, the name and amount of securities, the unit and aggregate
purchase or sale price, if any, the trade date, and the name or other
designation of the person from whom purchased or received or to whom
sold or delivered. For security-based swaps, such records must also
show, for each purchase or sale, the type of security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier.
(2) Ledgers (or other records) reflecting all assets and
liabilities, income and expense, and capital accounts.
(3) Ledger accounts (or other records) itemizing separately as to
each account for every customer or non-customer of such security-based
swap dealer or major security-based swap participant, all purchases and
sales, receipts and deliveries of securities and commodities for such
account and all other debits and credits to such account, and in
addition, in the case of security-based swaps, ledger accounts (or
other records) itemizing separately, the type of security-based swap,
the reference security, index, or obligor, the date and time of
execution, the effective date, the termination or maturity date, the
notional amount, the unique transaction identifier, and the unique
counterparty identifier.
(4) A securities record or ledger reflecting separately for each:
(i) Security, other than a security-based swap, as of the clearance
dates all ``long'' or ``short'' positions (including securities in
safekeeping and securities that are the subject of repurchase or
[[Page 25308]]
reverse repurchase agreements) carried by such security-based swap
dealer or major security-based swap participant for its account or the
account of its customers and showing the locations of all securities
long and the offsetting position to all securities short, including
long security count differences and short security count differences
classified by the date of the physical count and verification in which
they were discovered, and, in all cases, the name or designation of the
account in which each position is carried.
(ii) Security-based swap, the reference security, index, or
obligor, the unique transaction identifier, the unique counterparty
identifier, whether it is a ``long'' or ``short'' position in the
security-based swap, whether the security-based swap is cleared or not
cleared, and if cleared, identification of the clearing agency where
the security-based swap is cleared.
(5) A memorandum of each purchase or sale of a security-based swap
for the account of the security-based swap dealer or major security-
based swap participant showing the price. The memorandum must also
include the type of security-based swap, the reference security, index,
or obligor, the date and time of execution, the effective date, the
termination or maturity date, the notional amount, the unique
transaction identifier, and the unique counterparty identifier. An
order entered pursuant to the exercise of discretionary authority must
be so designated.
(6) With respect to a security other than a security-based swap,
copies of confirmations of all purchases and sales of securities. With
respect to a security-based swap, copies of the security-based swap
trade acknowledgement and verification made in compliance with Sec.
240.15Fi-1 [as proposed at 76 FR 3859, Jan. 21, 2011].
(7) For each security-based swap account, a record of the unique
counterparty identifier, the name and address of such counterparty, and
the signature of each person authorized to transact business in the
security-based swap account.
(8) A record of all puts, calls, spreads, straddles and other
options in which such security-based swap dealer or major security-
based swap participant has any direct or indirect interest or which
such security-based swap dealer or major security-based swap
participant has granted or guaranteed, containing, at least, an
identification of the security, and the number of units involved.
(9) A record of the proof of money balances of all ledger accounts
in the form of trial balances, and a record of the computation of net
capital or tangible net worth, as applicable, as of the trial balance
date, pursuant to Sec. 240.18a-1 or Sec. 240.18a-2 [as proposed at 77
FR 70214, Nov. 23, 2012], respectively. Such trial balances and
computations must be prepared currently at least once per month.
(10)(i) A questionnaire or application for employment executed by
each ``associated person'' (as defined in paragraph (c) of this
section) of the security-based swap dealer or major security-based swap
participant which questionnaire or application must be approved in
writing by an authorized representative of the security-based swap
dealer or major security-based swap participant and must contain at
least the following information with respect to the associated person:
(A) The associated person's name, address, social security number,
and the starting date of the associated person's employment or other
association with the security-based swap dealer or major security-based
swap participant;
(B) The associated person's date of birth;
(C) A complete, consecutive statement of all the associated
person's business connections for at least the preceding ten years,
including whether the employment was part-time or full-time;
(D) A record of any denial of membership or registration, and of
any disciplinary action taken, or sanction imposed, upon the associated
person by any federal or state agency, or by any national securities
exchange or national securities association, including any finding that
the associated person was a cause of any disciplinary action or had
violated any law;
(E) A record of any denial, suspension, expulsion or revocation of
membership or registration of any broker, dealer, security-based swap
dealer or major security-based swap participant with which the
associated person was associated in any capacity at the time such
action was taken;
(F) A record of any permanent or temporary injunction entered
against the associated person, or any broker, dealer, security-based
swap dealer or major security-based swap participant with which the
associated person was associated in any capacity at the time such
injunction was entered;
(G) A record of any arrest or indictment for any felony, or any
misdemeanor pertaining to securities, commodities, banking, insurance
or real estate (including, but not limited to, acting or being
associated with a broker or dealer, security-based swap dealer, major
security-based swap participant, investment company, investment
adviser, futures sponsor, bank, or savings and loan association),
fraud, false statements or omissions, wrongful taking of property or
bribery, forgery, counterfeiting or extortion, and the disposition of
the foregoing; and
(H) A record of any other name or names by which the associated
person has been known or which the associated person has used.
(ii) A record listing every associated person of the security-based
swap dealer, major security-based swap participant which shows, for
each associated person, every office of the security-based swap dealer
or major security-based swap participant where the associated person
regularly conducts the business of handling funds or securities or
effecting any transactions in, or inducing or attempting to induce the
purchase or sale of any security, for the security-based swap dealer or
major security-based swap participant and the Central Registration
Depository number, if any, and every internal identification number or
code assigned to that person by the security-based swap dealer or major
security-based swap participant.
(11) A report of the results of the monthly liquidity stress test,
a record of the assumptions underlying the liquidity stress test, and
the liquidity funding plan required under Sec. 240.18a-1(f) [as
proposed at 77 FR 70214, Nov. 23, 2012], if applicable.
(12) A record of the daily calculation of the amount of equity and,
if applicable, the margin amount for each account of a counterparty
required under Sec. 240.18a-3(c) [as proposed at 77 FR 70214, Nov. 23,
2012].
(13) A record of compliance with possession or control requirements
under Sec. 240.18a-4(b) [as proposed at 77 FR 70214, Nov. 23, 2012].
(14) A record of the reserve computation required under Sec.
240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012].
(15) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-1 [as proposed at 76 FR 3859, Jan. 21,
2011] within five business days of execution that includes, at a
minimum, the unique transaction identifier and unique counterparty
identifier.
(16) A record that demonstrates the security-based swap dealer or
major security-based swap participant has complied with the business
conduct standards as required under Sec. 240.15Fh-6 [as proposed at 76
FR 42396, July 18, 2011].
(17) A record that demonstrates the security-based swap dealer or
major security-based swap participant has
[[Page 25309]]
complied with the business conduct standards as required under Sec.
240.15Fh-1 through Sec. 240.15Fh-5, and Sec. 240.15Fk-1 [as proposed
at 76 FR 42396, July 18, 2011].
(b) This paragraph applies only to security-based swap dealers and
major security-based swap participants registered under section 15F of
the Act (15 U.S.C. 78o-10) for which there is a prudential regulator.
Each security-based swap dealer and major security-based swap
participant subject to this paragraph must make and keep the following
books and records:
(1) For security-based swaps and any other positions related to the
firm's business as a security-based swap dealer or a major security-
based swap participant, blotters (or other records of original entry)
containing an itemized daily record of all purchases and sales of
securities (including security-based swaps), all receipts and
deliveries of securities (including certificate numbers), all receipts
and disbursements of cash and all other debits and credits. Such
records must show, the account for which each such purchase and sale
was effected, the name and amount of securities, the unit and aggregate
purchase or sale price, if any (includes the contract price for
security-based swaps), the trade date, and the name or other
designation of the person from whom purchased or received or to whom
sold or delivered. For security-based swaps, such records must also
show, for each purchase and sale, the type of security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier.
(2) Ledger accounts (or other records) itemizing separately as to
each account for every security-based swap customer or non-customer and
of such security-based swap dealer or major security-based swap
participant, all purchases, sales, receipts and deliveries of
securities and commodities for such account and all other debits and
credits to such account, and in addition, for security-based swaps, the
type of security-based swap, the reference security, index, or obligor,
the date and time of execution, the effective date, the termination or
maturity date, the notional amount, the unique transaction identifier,
and the unique counterparty identifier.
(3) For security-based swaps and any securities positions related
to the firm's business as a security-based swap dealer or a major
security-based swap participant, a securities record or ledger
reflecting separately for each:
(i) Security, other than a security-based swap, as of the clearance
dates all ``long'' or ``short'' positions (including securities in
safekeeping and securities that are the subjects of repurchase or
reverse repurchase agreements) carried by such security-based swap
dealer or major security-based swap participant for its account or for
the account of its customers and showing the location of all securities
long and the offsetting position to all securities short, including
long security count differences and short security count differences
classified by the date of the physical count and verification in which
they were discovered, and in all cases the name or designation of the
account in which each position is carried.
(ii) Security-based swap, the reference security, index, or
obligor, the unique transaction identifier, the unique counterparty
identifier, whether it is a ``long'' or ``short'' position in the
security-based swap, whether the security-based swap is cleared or not
cleared, and if cleared, identification of the clearing agency where
the security-based swap is cleared.
(4) A memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security-
based swap, whether executed or unexecuted. The memorandum must show
the terms and conditions of the order or instructions and of any
modification or cancellation thereof; the account for which entered;
the time the order was received; the time of entry; the price at which
executed; the identity of each associated person, if any, responsible
for the account; the identity of any other person who entered or
accepted the order on behalf of the customer, or, if a customer entered
the order on an electronic system, a notation of that entry; and, to
the extent feasible, the time of cancellation, if applicable. The
memorandum also must include the type of the security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier. An order entered pursuant to the exercise of discretionary
authority must be so designated.
(5) A memorandum of each purchase or sale of a security-based swap
for the account of the security-based swap dealer or major security-
based swap participant showing the price. The memorandum must also
include the type of security-based swap, the reference security, index,
or obligor, the date and time of execution, the effective date, the
termination or maturity date, the notional amount, the unique
transaction identifier, and the unique counterparty identifier. An
order entered pursuant to the exercise of discretionary authority must
be so designated.
(6) With respect to a security other than a security-based swap,
copies of confirmations of all purchases and sales of securities
related to the business of a security-based swap dealer or major
security-based swap participant. With respect to a security-based swap,
copies of the security-based swap trade acknowledgement and
verification made in compliance with Sec. 240.15Fi-1 [as proposed at
76 FR 3859, Jan. 21, 2011].
(7) For each security-based swap account, a record of the unique
counterparty identifier, the name and address of such counterparty, and
the signature of each person authorized to transact business in the
security-based swap account.
(8)(i) A questionnaire or application for employment executed by
each ``associated person'' (as defined in paragraph (c) of this
section) of the security-based swap dealer or major security-based swap
participant whose activities relate to the business of the security-
based swap dealer or major security-based swap participant, which
questionnaire or application must be approved in writing by an
authorized representative of the security-based swap dealer or major
security-based swap participant and must contain at least the following
information with respect to the associated person:
(A) The associated person's name, address, social security number,
and the starting date of the associated person's employment or other
association with the security-based swap dealer or major security-based
swap participant;
(B) The associated person's date of birth;
(C) A complete, consecutive statement of all the associated
person's business connections for at least the preceding ten years,
including whether the employment was part-time or full-time;
(D) A record of any denial of membership or registration, and of
any disciplinary action taken, or sanction imposed, upon the associated
person by any federal or state agency, or by any national securities
exchange or national securities association, including any finding that
the associated person was a cause of any disciplinary action or had
violated any law;
(E) A record of any denial, suspension, expulsion or revocation of
membership or registration of any
[[Page 25310]]
broker, dealer, security-based swap dealer or major security-based swap
participant with which the associated person was associated in any
capacity at the time such action was taken;
(F) A record of any permanent or temporary injunction entered
against the associated person, or any broker, dealer, security-based
swap dealer or major security-based swap participant with which the
associated person was associated in any capacity at the time such
injunction was entered;
(G) A record of any arrest or indictment for any felony, or any
misdemeanor pertaining to securities, commodities, banking, insurance
or real estate (including, but not limited to, acting or being
associated with a broker or dealer, security-based swap dealer, major
security-based swap participant, investment company, investment
adviser, futures sponsor, bank, or savings and loan association),
fraud, false statements or omissions, wrongful taking of property or
bribery, forgery, counterfeiting or extortion, and the disposition of
the foregoing; and
(H) A record of any other name or names by which the associated
person has been known or which the associated person has used.
(ii) A record listing every associated person of the security-based
swap dealer, major security-based swap participant which shows, for
each associated person, every office of the security-based swap dealer
or major security-based swap participant where the associated person
regularly conducts the business of handling funds or securities or
effecting any transactions in, or inducing or attempting to induce the
purchase or sale of any security, for the security-based swap dealer or
major security-based swap participant and every internal identification
number or code assigned to that person by the security-based swap
dealer or major security-based swap participant.
(9) A record of compliance with possession or control requirements
under Sec. 240.18a-4(b) [as proposed at 77 FR 70214, Nov. 23, 2012].
(10) A record of the reserve computation required under Sec.
240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012].
(11) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-1 [as proposed at 76 FR 3859, Jan. 21,
2011] within five business days of execution that includes, at a
minimum, the unique transaction identifier and unique counterparty
identifier.
(12) A record that demonstrates the security-based swap dealer or
major security-based swap participant has complied with the business
conduct standards as required under Sec. 240.15Fh-6 [as proposed at 76
FR 42396, July 18, 2011].
(13) A record that demonstrates the security-based swap dealer or
major security-based swap participant has complied with the business
conduct standards as required under Sec. 240.15Fh-1 through Sec.
240.15Fh-5 and Sec. 240.15Fk-1 [as proposed at 76 FR 42396, July 18,
2011].
(c)(1) The term associated person means for purposes of this
section a ``person associated with a security-based swap dealer or
major security-based swap participant'' as defined under section
3(a)(70) of the Act.
(2) The term, as to a person supervised by a prudential regulator,
includes only those persons whose activities relate to its business as
a security-based swap dealer or major security-based swap participant.
Sec. 240.18a-6 Records to be preserved by certain security-based swap
dealers and major security-based swap participants.
Section 240.18a-6 applies to a security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act (15 U.S.C. 78o-10(b)) that is not also registered as a broker or
dealer under section 15(b) of the Act (15 U.S.C. 78o(b)). A broker or
dealer registered under section 15(b) of the Act, including a broker or
dealer registered as a security-based swap dealer or major security-
based swap participant under section 15F(b) of the Act, is subject to
the record maintenance and preservation requirements under Sec.
240.17a-4.
(a)(1) Every security-based swap dealer or major security-based
swap participant subject to Sec. 240.18a-5(a) must preserve for a
period not less than six years, the first two years in an easily
accessible place, all records required to be made pursuant to
paragraphs Sec. 240.18a-5(a)(1), (a)(2), (a)(3), and (a)(4).
(2) Every security-based swap dealer or major security-based swap
participant subject to Sec. 240.18a-5(b) must preserve for a period
not less than six years, the first two years in an easily accessible
place, all records required to be made pursuant to paragraphs Sec.
240.18a-5(b)(1), (b)(2), and (b)(3).
(b)(1) Every security-based swap dealer and major security-based
swap participant subject to Sec. 240.18a-5(a) must preserve for a
period of not less than three years, the first two years in an easily
accessible place:
(i) All records required to be made pursuant to Sec. Sec. 240.18a-
5(a)(5), (a)(6), (a)(7), (a)(8), (a)(9), (a)(11), (a)(12), (a)(13),
(a)(14), (a)(15), (a)(16), and (a)(17);
(ii) All check books, bank statements, cancelled checks and cash
reconciliations;
(iii) All bills receivable or payable (or copies thereof), paid or
unpaid, relating to the business of such security-based swap dealer or
major security-based swap participant, as such;
(iv) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the security-based
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as such.
As used in this paragraph (b)(1)(iv), the term communications includes
sales scripts and recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1));
(v) All trial balances and computations of net capital or tangible
net worth requirements (and working papers in connection therewith), as
applicable, financial statements, branch office reconciliations, and
internal audit working papers, relating to the business of such
security-based swap dealer or major security-based swap participant as
such;
(vi) All guarantees of security-based swap accounts and all powers
of attorney and other evidence of the granting of any discretionary
authority given in respect of any security-based swap account, and
copies of resolutions empowering an agent to act on behalf of a
corporation.
(vii) All written agreements (or copies thereof) entered into by
such security-based swap dealer or major security-based swap
participant relating to its business as such, including agreements with
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or
any document establishing the terms and conditions of the customer's or
non-customer's securities-based swaps must be maintained with the
customer's or non-customer's account records.
(viii) Records which contain the following information in support
of amounts included in the report prepared as of the audit date on Form
SBS (Sec. 249.617 of this chapter) and in annual audited financial
statements required by Sec. 240.18a-7(d):
(A) Money balance and position, long or short, including
description, quantity, price, and valuation of each security including
contractual commitments in security-based swap
[[Page 25311]]
customers' accounts, in fully secured accounts, partly secured
accounts, unsecured accounts, and in securities accounts payable to
security-based swap customers;
(B) Money balance and position, long or short, including
description, quantity, price, and valuation of each security including
contractual commitments in security-based swap non-customers' accounts,
in fully secured accounts, partly secured accounts, unsecured accounts,
and in security-based swap accounts payable to security-based swap
customers;
(C) Position, long or short, including description, quantity, price
and valuation of each security including contractual commitments
included in the Computation of Net Capital as commitments, securities
owned, securities owned not readily marketable, and other investments
owned not readily marketable;
(D) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in customers' and non-customers' accounts;
(E) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss and liquidating equity
or deficit in trading and investment accounts;
(F) Description, money balance, quantity, price, and valuation of
each spot commodity, and swap position or commitments in customers' and
non-customers' accounts;
(G) Description, money balance, quantity, price, and valuation of
each spot commodity, and swap position or commitments in trading and
investment accounts;
(H) Number of shares, description of security, exercise price,
cost, and market value of put and call options including short out of
the money options having no market or exercise value, showing listed
and unlisted put and call options separately;
(I) Quantity, price, and valuation of each security underlying the
haircut for undue concentration made in the Computation for Net
Capital;
(J) Description, quantity, price, and valuation of each security
and commodity position or contractual commitment, long or short, in
each joint account in which the security-based swap dealer or major
security-based swap participant has an interest, including each
participant's interest and margin deposit;
(K) Description, settlement date, contract amount, quantity, market
price, and valuation for each aged failed to deliver requiring a charge
in the Computation of Net Capital pursuant to Sec. 240.18a-1 [as
proposed at 77 FR 70214, Nov. 23, 2012];
(L) Detail relating to information for possession or control
requirements under Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov.
23, 2012] and reported on Form SBS (Sec. 249.617 of this chapter);
(M) Detail of all items, not otherwise substantiated, which are
charged or credited in the Computation of Net Capital pursuant to Sec.
240.18a-1 and Sec. 240.18a-2 [as proposed at 77 FR 70214, Nov. 23,
2012], such as cash margin deficiencies, deductions related to
securities values and undue concentration, aged securities differences,
and insurance claims receivable;
(N) Detail relating to the calculation of the risk margin amount
pursuant to Sec. 240.18a-1(c)(6) [as proposed at 77 FR 70214, Nov. 23,
2012]; and;
(O) Other schedules which are specifically prescribed by the
Commission as necessary to support information reported as required by
Sec. 240.18a-7;
(ix) The records required to be made pursuant to Sec. 240.15c3-4
and the results of the periodic reviews conducted pursuant to Sec.
240.15c3-4(d);
(x) The records required to be made pursuant to Sec. 240.18a-
1(e)(2)(iv)(F)(1) and (2) [as proposed at 77 FR 70214, Nov. 23, 2012];
(xi) A copy of information required to be reported under Regulation
SBSR Sec. 242.901 et seq. of this chapter;
(xii) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. 240.15Fh-
1 through Sec. 240.15Fh-6 and Sec. 240.15Fk-1 [as proposed at 76 FR
42396, July 18, 2011];
(xiii) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, the investment or financing
objectives of the special entity as required under section 15F(h)(4)(C)
and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and (5)(A)).
(2) Every security-based swap dealer and major security-based swap
participant subject to Sec. 240.18a-5(b) must preserve for a period of
not less than three years, the first two years in an easily accessible
place:
(i) All records required to be made pursuant to Sec. 240.18a-
5(b)(4), (b)(5), (b)(6), (b)(7), (b)(9), (b)(10), (b)(11), (b)(12), and
(b)(13).
(ii) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the security-based
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as a
security-based swap dealer or major security-based swap dealer. As used
in this paragraph (b)(2)(ii), the term communications includes sales
scripts and recordings of telephone calls required to be maintained
pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-10(g)(1)).
(iii) All guarantees of security-based swap accounts and all powers
of attorney and other evidence of the granting of any discretionary
authority given in respect of any security-based swap account, and
copies of resolutions empowering an agent to act on behalf of a
corporation.
(iv) All written agreements (or copies thereof) entered into by
such security-based swap dealer or major security-based swap
participant relating to its business as a security-based swap dealer or
major security-based swap participant, including agreements with
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or
any document establishing the terms and conditions of the customer's or
non-customer's securities-based swaps must be maintained with the
customer's or non-customer's account records.
(v) Records which contain detail relating to information for
possession or control requirements under Sec. 240.18a-4 [as proposed
at 77 FR 70214, Nov. 23, 2012] and reported on Form SBS (Sec. 249.617
of this chapter) that is in support of amounts included in the report
prepared as of the audit date on Form SBS (Sec. 249.617 of this
chapter) and in annual audited financial statements required by Sec.
240.18a-7(d).
(vi) A copy of information required to be reported under Regulation
SBSR Sec. 242.901 et seq. of this chapter;
(vii) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. 240.15Fh-
1 through Sec. 240.15Fh-6 and Sec. 240.15Fk-1 [as proposed at 76 FR
42396, July 18, 2011]; and
(viii) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, the investment or financing
objectives of the special entity as required under sections
15F(h)(4)(C) and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and
(5)(A)).
(c) Every security-based swap dealer and major security-based swap
participant subject to Sec. 240.18a-5(a)
[[Page 25312]]
must preserve during the life of the enterprise and of any successor
enterprise all partnership articles or, in the case of a corporation,
all articles of incorporation or charter, minute books and stock
certificate books (or, in the case of any other form of legal entity,
all records such as articles of organization or formation, and minute
books used for a purpose similar to those records required for
corporation or partnerships), all Forms SBSE (Sec. 249.617 of this
chapter), Forms SBSE-A, Forms SBSE-W (Sec. 249.617 of this chapter),
all amendments to these forms, all licenses or other documentation
showing the registration of the security-based swap dealer or major
security-based swap participant with any securities regulatory
authority.
(d) Every security-based swap dealer and major security-based swap
participant subject to Sec. 240.18a-5 must maintain and preserve in an
easily accessible place:
(1) All records required under Sec. 240.18a-5(a)(10) or (b)(8)
until at least three years after the associated person's employment and
any other connection with the security-based swap dealer or major
security-based swap participant has terminated.
(2)(i) For security-based swap dealers and major security-based
swap participants for which there is not a prudential regulator, each
report which a regulatory authority has requested or required the
security-based swap dealer or major security-based swap participant to
make and furnish to it pursuant to an order or settlement, and each
regulatory authority examination report until three years after the
date of the report.
(ii) For security-based swap dealers and major security-based swap
participants for which there is a prudential regulator, each report
related to security-based swap activities which a regulatory authority
has requested or required the security-based swap dealer or major
security-based swap participant to make and furnish to it pursuant to
an order or settlement, and each regulatory authority examination
report until three years after the date of the report.
(3)(i) For security-based swap dealers and major security-based
swap participants for which there is not a prudential regulator, each
compliance, supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the security-based swap dealer or major security-based
swap participant with respect to compliance with applicable laws and
rules, and supervision of the activities of each natural person
associated with the security-based swap dealer or major security-based
swap participant until three years after the termination of the use of
the manual.
(ii) For security-based swap dealers and major security-based swap
participants for which there is a prudential regulator, each
compliance, supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the security-based swap dealer or major security-based
swap participant with respect to compliance with applicable laws and
rules relating to security-based swap activities, and supervision of
the activities of each natural person associated with the security-
based swap dealer or major security-based swap participant until three
years after the termination of the use of the manual.
(e) The records required to be maintained and preserved pursuant to
Sec. Sec. 240.18a-5 and 240.18a-6 may be immediately produced or
reproduced by means of ``electronic storage media'' (as defined in this
section) that meet the conditions set forth in this paragraph and be
maintained and preserved for the required time in that form.
(1) For purposes of this section, the term electronic storage media
means any digital storage medium or system that meets the applicable
conditions set forth in this paragraph (e).
(2) If electronic storage media is used by a security-based swap
dealer or major security-based swap participant, it must comply with
the following requirements:
(i) If employing any electronic storage media other than optical
disk technology (including CD-ROM), the security-based swap dealer or
major security-based swap participant must notify the Commission at
least 90 days prior to employing such storage media. The security-based
swap dealer or major security-based swap participant must provide its
own representation or one from the storage medium vendor or other third
party with appropriate expertise that the selected storage media meets
the conditions set forth in this paragraph (e)(2).
(ii) The electronic storage media must:
(A) Preserve the records exclusively in a non-rewritable, non-
erasable format;
(B) Verify automatically the quality and accuracy of the storage
media recording process;
(C) Serialize the original and, if applicable, duplicate units of
storage media, and time-date for the required period of retention the
information placed on such electronic storage media; and
(D) Have the capacity to readily download indexes and records
preserved on the electronic storage media to any medium acceptable
under this paragraph (e) as required by the Commission.
(3) If a security-based swap dealer or major security-based swap
participant uses electronic storage media, it must:
(i) At all times have available, for examination by the staff of
the Commission, facilities for immediate, easily readable projection or
productions of electronic storage media images and for producing easily
readable images;
(ii) Be ready at all times to provide, and immediately provide, any
facsimile enlargement which the staff of the Commission may request;
(iii) Store separately from the original, a duplicate copy of the
record stored on any medium acceptable under Sec. 240.18a-6 for the
time required; and
(iv) Organize and index accurately all information maintained on
both original and any duplicate storage media.
(A) At all times, a security-based swap dealer or major security-
based swap participant must be able to have such indexes available for
examination by the staff of the Commission.
(B) Each index must be duplicated and the duplicate copies must be
stored separately from the original copy of each index.
(C) Original and duplicate indexes must be preserved for the time
required for the indexed records.
(v) The security-based swap dealer or major security-based swap
participant must have in place an audit system providing for
accountability regarding inputting of records required to be maintained
and preserved pursuant to Sec. Sec. 240.18a-5 and 240.18a-6 to
electronic storage media and inputting of any changes made to every
original and duplicate record maintained and preserved thereby.
(A) At all times the security-based swap dealer or major security-
based swap participant must be able to have the results of such audit
system available for examination by the staff of the Commission.
(B) The audit results must be preserved for the time required for
the audited records.
(vi) The security-based swap dealer or major security-based swap
participant must maintain, keep current, and provide promptly upon
request by the staff of the Commission all information necessary to
access records and indexes stored on the electronic storage media; or
place in escrow and keep current a
[[Page 25313]]
copy of the physical and logical file format of the electronic storage
media, the field format of all different information types written on
the electronic storage media and the source code, together with the
appropriate documentation and information necessary to access records
and indexes.
(vii) For every security-based swap dealer or major security-based
swap participant exclusively using electronic storage media for some or
all of its record preservation under this section, at least one third
party (``the undersigned''), who has access to and the ability to
download information from the security-based swap dealer's or major
security-based swap participant's electronic storage media to any
acceptable medium under this section, must file with the Commission the
following undertakings with respect to such records:
The undersigned hereby undertakes to furnish promptly to the U.S.
Securities and Exchange Commission (``Commission''), its designees or
representatives, upon reasonable request, such information as is deemed
necessary by the staff of the Commission, to download information kept
on the security-based swap dealer's or major security-based swap
participant's electronic storage media to any medium acceptable under
Sec. 240.18a-6 under the Act.
Furthermore, the undersigned hereby undertakes to take reasonable
steps to provide access to information contained on the security-based
swap dealer's or major security-based swap participant's electronic
storage media, including, as appropriate, arrangements for the
downloading of any record required to be maintained and preserved
pursuant to Sec. Sec. 240.18a-5 and 240.18a-6 under the Act in a
format acceptable to the staff of the Commission. Such arrangements
will provide specifically that in the event of a failure on the part of
a security-based swap dealer or major security-based swap participant
to download the record into a readable format and after reasonable
notice to the security-based swap dealer or major security-based swap
participant, upon being provided with the appropriate electronic
storage medium, the undersigned will undertake to do so, as the staff
of the Commission may request.
(f) If the records required to be maintained and preserved pursuant
to the provisions of Sec. Sec. 240.18a-5 and 240.18a-6 are prepared or
maintained by a third party on behalf of the security-based swap dealer
or major security-based swap participant, the third party must file
with the Commission a written undertaking in form acceptable to the
Commission, signed by a duly authorized person, to the effect that such
records are the property of the security-based swap dealer or major
security-based swap participant and will be surrendered promptly on
request of the security-based swap dealer or major security-based swap
participant and including the following provision:
With respect to any books and records maintained or preserved on
behalf of [SBSD or MSBSP], the undersigned hereby undertakes to permit
examination of such books and records at any time or from time to time
during business hours by representatives or designees of the Securities
and Exchange Commission, and to promptly furnish to said Commission or
its designee true, correct, complete, and current hard copy of any or
all or any part of such books and records.
Agreement with an outside entity will not relieve such security-
based swap dealer or major security-based swap participant from the
responsibility to prepare and maintain records as specified in this
section or in Sec. 240.18a-5.
(g) Every security-based swap dealer and major security-based swap
participant subject to this section must furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the security-based swap dealer or major
security-based swap participant that are required to be preserved under
this section, or any other records of the security-based swap dealer or
major security-based swap participant subject to examination or
required to be made or maintained pursuant to section 15F of the Act
(15 U.S.C. 78o-10), which are requested by a representative of the
Commission.
(h) When used in this section:
(1) The term securities regulatory authority means the Commission,
any self-regulatory organization, or any securities commission (or any
agency or office performing like functions) of the States; the
Commodities Futures Trading Commission and a prudential regulator to
the extent the prudential regulator oversees security-based swap
activities.
(2) The term associated person has the meaning set forth in Sec.
240.18a-5(c).
Sec. 240.18a-7 Reports to be made by certain security-based swap
dealers and major security-based swap participants.
Section 240.18a-7 applies to a security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act (15 U.S.C. 78o-8(b)) that is not also registered as a broker or
dealer under section 15(b) of the Act (15 U.S.C. 78o(b)). A broker or
dealer registered under section 15(b) of the Act, including a broker or
dealer registered as a security-based swap dealer or major security-
based swap participant under section 15F(b) of the Act, is subject to
the reporting requirements under Sec. 240.17a-5.
(a)(1) Every security-based swap dealer or major security-based
swap participant for which there is no prudential regulator must file
an executed Form SBS with the Commission or its designee within 17
business days after the end of each month.
(2) Every security-based swap dealer or major security-based swap
participant for which there is a prudential regulator must file an
executed Form SBS with the Commission or its designee within 17
business days after the end of each calendar quarter.
(3) Security-based swap dealers that have been authorized by the
Commission to compute net capital pursuant to Sec. 240.18a-1(d) [as
proposed at 77 FR 70214, Nov. 23, 2012], must file the following:
(i) For each product for which the security-based swap dealer
calculates a deduction for market risk other than in accordance with a
model approved pursuant to Sec. Sec. 240.18a-1(e)(1)(i) and (iii) [as
proposed at 77 FR 70214, Nov. 23, 2012], the product category and the
amount of the deduction for market risk within 17 business days after
the end of the month;
(ii) A graph reflecting, for each business line, the daily intra-
month value at risk within 17 business days after the end of the month;
(iii) The aggregate value at risk for the security-based swap
dealer within 17 business days after end of the month;
(iv) For each product for which the security-based swap dealer uses
scenario analysis, the product category and the deduction for market
risk within 17 business days after the end of the month;
(v) Credit risk information on security-based swap, mixed swap and
swap exposures, within 17 business days after the end of the month,
including:
(A) Overall current exposure;
(B) Current exposure (including commitments) listed by counterparty
for the 15 largest exposures;
(C) The ten largest commitments listed by counterparty;
(D) The broker's or dealer's maximum potential exposure listed by
[[Page 25314]]
counterparty for the 15 largest exposures;
(E) The broker's or dealer's aggregate maximum potential exposure;
(F) A summary report reflecting the broker's or dealer's current
and maximum potential exposures by credit rating category; and
(G) A summary report reflecting the broker's or dealer's current
exposure for each of the top ten countries to which the broker or
dealer is exposed (by residence of the main operating group of the
counterparty);
(vi) Regular risk reports supplied to the security-based swap
dealer's senior management within 17 business days after the end of the
month;
(vii) The results of the liquidity stress test required by Sec.
240.18a-1(f) [as proposed at 77 FR 70214, Nov. 23, 2012] within 17
business days after the end of the month;
(viii) A report identifying the number of business days for which
the actual daily net trading loss exceeded the corresponding daily VaR
within 17 business days after the end of each calendar quarter; and
(ix) The results of backtesting of all internal models used to
compute allowable capital, including VaR, and credit risk models,
indicating the number of backtesting exceptions within 17 business days
after the end of each calendar quarter.
(b) Customer Disclosures
(1) Every security-based swap dealer or major security-based swap
participant for which there is no prudential regulator must make
publicly available on its Web site within 10 business days after the
date the firm is required to file with the Commission the annual
reports pursuant to paragraph (c) of this section:
(i) A Statement of Financial Condition with appropriate notes
prepared in accordance with U.S. generally accepted accounting
principles which must be audited;
(ii) A statement of the amount of the security-based swap dealer's
net capital and its required net capital, computed in accordance with
Sec. 240.18a-1 [as proposed at 77 FR 70214, Nov. 23, 2012]. Such
statement must include summary financial statements of subsidiaries
consolidated pursuant to Appendix C of Sec. 240.18a-1 [as proposed at
77 FR 70214, Nov. 23, 2012], where material, and the effect thereof on
the net capital and required net capital of the security-based swap
dealer; and
(iii) If, in connection with the most recent annual reports
required under paragraph (c) of this section, the report of the
independent public accountant required under paragraph (c)(1)(i)(C) of
this section covering the report of the security-based swap dealer
required under paragraph (c)(1)(i)(B) of this section identifies one or
more material weaknesses, a copy of the report.
(2) Every security-based swap dealer or major security-based swap
participant for which there is no prudential regulator must make
publicly available on its Web site unaudited statements as of the date
that is 6 months after the date of the most recent audited statements
filed with the Commission under paragraph (c)(1) of this section. These
reports must be made publicly available within 30 calendar days of the
date of the statements.
(3) The information that is made publicly available pursuant to
paragraphs (b)(1) and (2) of this section must also be made available
in writing, upon request, to any person that has a security-based swap
account. The security-based swap dealer or major security-based swap
participant must maintain a toll-free telephone number to receive such
requests.
(c) Annual reports. (1)(i) Except as otherwise provided in
paragraph (c)(1)(iii) of this section, every security-based swap dealer
or major security-based swap participant for which there is no
prudential regulator registered under section 15F of the Act (15 U.S.C.
78o-10) must file annually, as applicable:
(A) A financial report as described in paragraph (c)(2) of this
section;
(B) For a security-based swap dealer, a compliance report as
described in paragraph (c)(3) of this section; and
(C) A report prepared by an independent public accountant, under
the engagement provisions in paragraph (e) of this section, covering
each report required to be filed under paragraphs (c)(1)(i)(A) and (B)
of this section, as applicable.
(ii) The reports required to be filed under this paragraph (c) must
be as of the same fiscal year end each year, unless a change is
approved in writing by the Commission. The original request for a
change should be filed at the Commission's principal office in
Washington, DC. A copy of the written approval must be sent to the
regional office of the Commission for the region in which the security-
based swap dealer or major security-based swap participant has its
principal place of business.
(iii) A security-based swap dealer or major security-based swap
participant succeeding to and continuing the business of another
security-based swap dealer or major security-based swap participant is
not required to file reports under this paragraph (c) as of a date in
the fiscal year in which the succession occurs if the predecessor
security-based swap dealer or major security-based swap participant has
filed the reports in compliance with this paragraph (c) as of a date in
such fiscal year.
(2) Financial report. The financial report must contain:
(i) A Statement of Financial Condition, a Statement of Income, a
Statement of Cash Flows, a Statement of Changes in Stockholders' or
Partners' or Sole Proprietor's Equity, and Statement of Changes in
Liabilities Subordinated to Claims of General Creditors. The statements
must be prepared in accordance with U.S. generally accepted accounting
principles and must be in a format that is consistent with the
statements contained in Form SBS (Sec. 249.617 of this chapter).
(ii) Supporting schedules that include, from Form SBS (Sec.
249.617 of this chapter), including a Computation of Net Capital under
Sec. 240.18a-1 [as proposed at 77 FR 70214, Nov. 23, 2012], the
Computation for Determination of Tangible Net Worth under Sec.
240.18a-2 [as proposed at 77 FR 70214, Nov. 23, 2012], a Computation
for Determination of the Reserve Requirements under Exhibit A of Sec.
240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012], and Information
Relating to the Possession or Control Requirements Under Sec. 240.18a-
4 [as proposed at 77 FR 70214, Nov. 23, 2012], as applicable.
(iii) If either the Computation of Net Capital under Sec. 240.18a-
1 [as proposed at 77 FR 70214, Nov. 23, 2012], the Computation for
Determination of Tangible Net Worth under Sec. 240.18a-2 [as proposed
at 77 FR 70214, Nov. 23, 2012] or the Computation for Determination of
the Reserve Requirements under Sec. 240.18a-4 [as proposed at 77 FR
70214, Nov. 23, 2012] in the financial report is materially different
from the corresponding computation in the most recent Form SBS (Sec.
249.617 of this chapter) filed pursuant to paragraph (a) of this
section, a reconciliation, including appropriate explanations, between
the computation in the financial report and the computation in the most
recently filed report, or if no material differences exist, a statement
so indicating must be included in the financial report.
(3) Compliance report. (i) The compliance report must contain:
(A) Statements as to whether:
(1) The security-based swap dealer has established and maintained
Internal Control Over Compliance as that term is defined in paragraph
(c)(3)(ii) of this section;
[[Page 25315]]
(2) The Internal Control Over Compliance of the security-based swap
dealer was effective during the most recent fiscal year;
(3) The Internal Control Over Compliance of the security-based swap
dealer was effective as of the end of the most recent fiscal year;
(4) The security-based swap dealer was in compliance with
Sec. Sec. 240.18a-1 and 240.18a-4(c) [as proposed at 77 FR 70214, Nov.
23, 2012];
(5) The information used to assert compliance with Sec. Sec.
240.18a-1 and 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012]
was derived from the books and records of the security-based swap
dealer; and
(B) If applicable, a description of each identified material
weakness in the Internal Control Over Compliance of the security-based
swap dealer during the most recent fiscal year;
(C) If applicable, a description of an instance of non-compliance
with Sec. Sec. 240.18a-1 or 240.18a-4 [as proposed at 77 FR 70214,
Nov. 23, 2012] as of the end of the most recent fiscal year.
(ii) The term Internal Control Over Compliance means internal
controls that have the objective of providing the security-based swap
dealer with reasonable assurance that non-compliance with Sec. Sec.
240.18a-1, 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012], or
240.18a-9 will be prevented or detected on a timely basis.
(iii) The security-based swap dealer is not permitted to conclude
that its Internal Control Over Compliance was effective during the most
recent fiscal year if there were one or more material weaknesses in its
Internal Control Over Compliance during the most recent fiscal year.
The security-based swap dealer is not permitted to conclude that its
Internal Control Over Compliance was effective as of the end of the
most recent fiscal year if there were one or more material weaknesses
in its internal control as of the end of the most recent fiscal year. A
material weakness is a deficiency, or a combination of deficiencies, in
Internal Control Over Compliance such that there is a reasonable
possibility that non-compliance with Sec. Sec. 240.18a-1 or 240.18a-
4(c) [as proposed at 77 FR 70214, Nov. 23, 2012] will not be prevented,
or detected on a timely basis or that non-compliance to a material
extent with Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23,
2012], except for paragraph (c), or Sec. 240.18a-9 will not be
prevented or detected on a timely basis. A deficiency in Internal
Control Over Compliance exists when the design or operation of a
control does not allow the management or employees of the security-
based swap dealer in the normal course of performing their assigned
functions, to prevent or detect on a timely basis non-compliance with
Sec. 240.18a-1,Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23,
2012], or Sec. 240.18a-9.
(4) The annual reports must be filed not more than 60 calendar days
after the end of the fiscal year of the security-based swap dealer or
major security-based swap participant.
(5) The annual reports must be filed at the regional office of the
Commission for the region in which the security-based swap dealer or
major security-based swap participant has its principal place of
business and the Commission's principal office in Washington, DC.
(d) Nature and form of reports. The annual reports filed pursuant
to paragraph (c) of this section must be prepared and filed in
accordance with the following requirements:
(1) The security-based swap dealer or major security-based swap
participant must attach to each of the confidential and non-
confidential portions of the annual reports separately bound under
paragraph (e)(2) of this section a complete and executed Part III of
Form X-17A-5 (Sec. 249.617 of this chapter). The oath or affirmation
made in Part III of Form X-17A-5 must be made before a person duly
authorized to administer such oaths or affirmations. If the security-
based swap dealer or major security-based swap participant is a sole
proprietorship, the oath or affirmation must be made by the proprietor;
if a partnership, by a general partner; if a corporation, by a duly
authorized officer; or if a limited liability company or limited
liability partnership, by the chief executive officer, chief financial
officer, manager, managing member, or those members vested with
management authority for the limited liability company or limited
liability partnership.
(2) The annual reports filed under paragraph (c) of this section
are not confidential, except that, if the Statement of Financial
Condition is in a format that is consistent with Form SBS (Sec.
249.617 of this chapter), and is bound separately from the balance of
the annual reports filed under paragraph (c) of this section, and each
page of the balance of the annual report is stamped ``confidential,''
then the balance of the annual reports will be deemed confidential to
the extent permitted by law. However, the annual reports, including the
confidential portions, will be available for official use by any
official or employee of the U.S. or any State, by the Public Company
Accounting Oversight Board, and by any other person if the Commission
authorizes disclosure of the annual reports to that person as being in
the public interest. Nothing contained in this paragraph (d)(2) may be
construed to be in derogation of the right of customers of a security-
based swap dealer or major security-based swap participant, upon
request to the security-based swap dealer or major security-based swap
participant, to obtain information relative to its financial condition.
(e)(1) Qualifications of independent public accountant. The
independent public accountant must be qualified and independent in
accordance with Sec. 210.2-01 of this chapter. In addition, the
accountant must be registered with the Public Company Accounting
Oversight Board.
(2) Statement regarding independent public accountant. (i) Every
security-based swap dealer or major security-based swap participant
that is required to file annual reports under paragraph (c) of this
section must file no later than December 10 of each year (or 30 days
after effective date of registration as a security-based swap dealer or
major security-based swap participant if earlier) a statement as
prescribed in paragraph (e)(2)(ii) of this section with the
Commission's principal office in Washington, DC and the regional office
of the Commission for the region in which its principal place of
business is located. Such statement must be dated no later than
December 1 (or 20 calendar days after the effective date of its
registration as a security-based swap dealer or major security-based
swap participant, if earlier). If the engagement of an independent
public accountant is of a continuing nature, providing for successive
engagements, no further filing is required. If the engagement is for a
single year, or if the most recent engagement has been terminated or
amended, a new statement must be filed by the required date.
(ii) The statement must be headed ``Statement regarding independent
public accountant under Rule 18a-7(e)(2)'' and must contain the
following information and representations:
(A) Name, address, telephone number and registration number of the
security-based swap dealer or major security-based swap participant;
(B) Name, address, and telephone number of the independent public
accountant;
(C) The date of the fiscal year of the annual reports of the
security-based swap dealer or major security-based swap participant
covered by the engagement;
[[Page 25316]]
(D) Whether the engagement is for a single year or is of a
continuing nature;
(E) A representation that the independent public accountant has
undertaken the items enumerated in paragraphs (f)(1) and (2) of this
section.
(3) Replacement of accountant. A security-based swap dealer or
major security-based swap participant must file a notice which must be
received by the Commission's principal office in Washington, DC and the
regional office of the Commission for the region in which its principal
place of business is located not more than 15 business days after:
(i) The security-based swap dealer or major security-based swap
participant has notified the independent public accountant that
provided the reports the security-based swap dealer or major security-
based swap participant filed under paragraph (c)(1)(i)(C) of this
section for the most recent fiscal year that the independent public
accountant's services will not be used in future engagements; or
(ii) The security-based swap dealer or major security-based swap
participant has notified an independent public accountant that was
engaged to provide the reports required under paragraph (c)(1)(i)(C) of
this section that the engagement has been terminated; or
(iii) An independent public accountant has notified the security-
based swap dealer or major security-based swap participant that the
independent public accountant would not continue under an engagement to
provide the reports required under paragraph (c)(1)(i)(C) of this
section; or
(iv) A new independent public accountant has been engaged to
provide the reports required under paragraph (c)(1)(i)(C) of this
section without any notice of termination having been given to or by
the previously engaged independent public accountant.
(v) The notice must include:
(A) The date of notification of the termination of the engagement
or of the engagement of the new independent public accountant, as
applicable; and
(B) The details of any issues arising during the 24 months (or the
period of the engagement, if less than 24 months) preceding the
termination or new engagement relating to any matter of accounting
principles or practices, financial statement disclosure, auditing scope
or procedure, or compliance with applicable rules of the Commission,
which issues, if not resolved to the satisfaction of the former
independent public accountant, would have caused the independent public
accountant to make reference to them in the report of the independent
public accountant. The issues required to be reported include both
those resolved to the former independent public accountant's
satisfaction and those not resolved to the former accountant's
satisfaction. Issues contemplated by this section are those which occur
at the decision-making level--that is, between principal financial
officers of the security-based swap dealer or major security-based swap
participant and personnel of the accounting firm responsible for
rendering its report. The notice must also state whether the
accountant's report filed under paragraph (c)(1)(i)(C) of this section
for any of the past two fiscal years contained an adverse opinion or a
disclaimer of opinion or was qualified as to uncertainties, audit
scope, or accounting principles, and must describe the nature of each
such adverse opinion, disclaimer of opinion, or qualification. The
security-based swap dealer or major security-based swap participant
must also request the former independent public accountant to furnish
the security-based swap dealer or major security-based swap participant
with a letter addressed to the Commission stating whether the
independent public accountant agrees with the statements contained in
the notice of the security-based swap dealer or major security-based
swap participant and, if not, stating the respects in which the
independent public accountant does not agree. The security-based swap
dealer or major security-based swap participant must file three copies
of the notice and the accountant's letter, one copy of which must be
manually signed by the sole proprietor, or a general partner or a duly
authorized corporate, limited liability company, or limited liability
partnership officer or member, as appropriate, and by the independent
public accountant, respectively.
(f) Engagement of the independent public accountant. The
independent public accountant engaged by the security-based swap dealer
or major security-based swap participant to provide the reports
required under paragraph (c)(1)(i)(C) of this section must, as part of
the engagement, undertake the following, as applicable:
(1) To prepare an independent public accountant's report based on
an examination of the financial report required to be filed by the
security-based swap dealer or major security-based swap participant
under paragraph (c)(1)(i)(A) of this section in accordance with
standards of the Public Company Accounting Oversight Board; and
(2) To prepare an independent public accountant's report based on
an examination of the statements required under paragraphs
(c)(3)(i)(A)(2) through (5) of this section in the compliance report
required to be filed by the security-based swap dealer under paragraph
(c)(1)(i)(B) of this section in accordance with standards of the Public
Company Accounting Oversight Board.
(g) Notification of non-compliance or material weakness. If, during
the course of preparing the independent public accountant's reports
required under paragraph (c)(1)(i)(C) of this section, the independent
public accountant determines that:
(1) A security-based swap dealer is not in compliance with Sec.
240.18a-1, Sec. 240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012],
or Sec. 240.18a-9, or the independent public accountant determines
that any material weaknesses (as defined in paragraph (c)(3)(iii) of
this section) exist, the independent public accountant must immediately
notify the chief financial officer of the security-based swap dealer of
the nature of the non-compliance or material weakness. If the notice
from the accountant concerns an instance of non-compliance that would
require a security-based swap dealer to provide a notification under
Sec. 240.18a-8 or if the notice concerns a material weakness, the
security-based swap dealer must provide a notification in accordance
with Sec. 240.18a-8, as applicable, and provide a copy of the
notification to the independent public accountant. If the independent
public accountant does not receive the notification within one business
day, or if the independent public accountant does not agree with the
statements in the notification, then the independent public accountant
must notify the Commission within one business day. The report from the
accountant must, if the security-based swap dealer failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. 240.18a-8 or any material weakness. If the
security-based swap dealer filed a notification, the report from the
accountant must detail the aspects of the notification of the security-
based swap dealer with which the accountant does not agree; or
(2) A major security-based swap participant is not in compliance
with Sec. 240.18a-2 [as proposed at 77 FR 70214, Nov. 23, 2012], the
independent public accountant must immediately notify the chief
financial officer of the major security-based swap participant of the
nature of the non-compliance. If the notice from the accountant
concerns an instance of non-compliance that would require a major
security-based swap participant to provide a notification under Sec.
240.18a-8, the major security-
[[Page 25317]]
based swap participant must provide a notification in accordance with
Sec. 240.18a-8 and provide a copy of the notification to the
independent public accountant. If the independent public accountant
does not receive the notification within one business day, or if the
independent public accountant does not agree with the statements in the
notification, then the independent public accountant must notify the
Commission within one business day. The report from the accountant
must, if the major security-based swap participant failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. 240.18a-8. If the major security-based swap
participant filed a notification, the report from the accountant must
detail the aspects of the notification of the major security-based swap
participant with which the accountant does not agree.
Note to paragraph (g): The attention of the security-based swap
dealer, major security-based swap participant, and the independent
public accountant is called to the fact that under Sec. 240.18a-8(a),
among other things, a security-based swap dealer or major security-
based swap participant whose net capital or tangible net worth, as
applicable, declines below the minimum required pursuant to Sec.
240.18a-1 or Sec. 240.18a-2 [as proposed at 77 FR 70214, Nov. 23,
2012], as applicable, must give notice of such deficiency that same day
in accordance with Sec. 240.18a-8(h) and the notice must specify the
security-based swap dealer's net capital requirement and its current
amount of net capital, or the extent of the major security-based swap
participant's failure to maintain positive tangible net worth, as
applicable.
(h) Reports of the independent public accountant required under
paragraph (c)(1)(i)(C) of this section.
(1) Technical requirements. The independent public accountant's
reports must:
(i) Be dated;
(ii) Be signed manually;
(iii) Indicate the city and state where issued; and
(iv) Identify without detailed enumeration the items covered by the
reports.
(2) Representations. The independent public accountant's reports
must:
(i) State whether the examinations were made in accordance with
standards of the Public Company Accounting Oversight Board; and
(ii) Identify any examination procedures deemed necessary by the
independent public accountant under the circumstances of the particular
case which have been omitted and the reason for their omission.
(iii) Nothing in this section may be construed to imply authority
for the omission of any procedure that independent public accountants
would ordinarily employ in the course of an examination for the purpose
of expressing the opinions required under this section.
(3) Opinion to be expressed. The independent public accountant's
reports must state clearly:
(i) The opinion of the independent public accountant with respect
to the financial report required under paragraph (c)(1)(i)(C) of this
section and the accounting principles and practices reflected in that
report; and
(ii) The opinion of the independent public accountant with respect
to the financial report required under paragraph (c)(1)(i)(C) of this
section, as to the consistency of the application of the accounting
principles, or as to any changes in those principles which have a
material effect on the financial statements; and
(iii) The opinion of the independent public accountant with respect
to the statements required under paragraphs (c)(3)(i)(A)(2) through (5)
of this section in the compliance report required under paragraph
(c)(1)(i)(B) of this section.
(4) Exceptions. Any matters to which the independent public
accountant takes exception must be clearly identified, the exceptions
must be specifically and clearly stated, and, to the extent
practicable, the effect of each such exception on any related items
contained in the annual reports required under paragraph (c) of this
section must be given.
(i) Extensions and exemptions--on written request of a security-
based swap dealer or major security-based swap participant to the
Commission or on its own motion, the Commission may grant an extension
of time or an exemption from any of the requirements of this section
either unconditionally or on specified terms and conditions.
(j) Notification of change of fiscal year--
(1) In the event any security-based swap dealer or major security-
based swap participant for which there is no prudential regulator finds
it necessary to change its fiscal year, it must file, with the
Commission's principal office in Washington, DC and the regional office
of the Commission for the region in which the security-based swap
dealer or major security-based swap participant has its principal place
of business, a notice of such change.
(2) Such notice must contain a detailed explanation of the reasons
for the change. Any change in the filing period for the annual reports
must be approved by the Commission.
(k) Filing Requirements. For purposes of filing requirements as
described in this section, filing will be deemed to have been
accomplished upon receipt at the Commission's principal office in
Washington, DC, with duplicate originals simultaneously filed at the
locations prescribed in the particular paragraph of this section which
is applicable.
Sec. 240.18a-8 Notification provisions for security-based swap
dealers and major security-based swap participants.
Section 240.18a-8 applies to a security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act (15 U.S.C. 78o-8(b)) that is not also registered as a broker or
dealer under section 15(b) of the Act (15 U.S.C. 78o(b)). A broker or
dealer registered under section 15(b) of the Act (15 U.S.C. 78o(b)),
including a broker or dealer registered as a security-based swap dealer
or major security-based swap participant under section 15F(b) of the
Act (15 U.S.C. 78o-10(b)), is subject to the notification requirements
under Sec. 240.17a-11.
(a)(1)(i) Every security-based swap dealer for which there is no
prudential regulator whose net capital declines below the minimum
amount required pursuant to Sec. 240.18a-1 [as proposed at 77 FR
70214, Nov. 23, 2012] must give notice that same day in accordance with
paragraph (h) of this section. The notice must specify the security-
based swap dealer's net capital requirement and its current amount of
net capital. If a security-based swap dealer is informed by the
Commission that it is, or has been, in violation of Sec. 240.18a-1 [as
proposed at 77 FR 70214, Nov. 23, 2012] and the security-based swap
dealer has not given notice of the capital deficiency under this
section, the security-based swap dealer, even if it does not agree that
it is, or has been, in violation of Sec. 240.18a-1 [as proposed at 77
FR 70214, Nov. 23, 2012], must give notice of the claimed deficiency,
which notice may specify the security-based swap dealer's reasons for
its disagreement.
(ii) Every security-based swap dealer for which there is no
prudential regulator whose tentative net capital declines below the
minimum amount required pursuant to Sec. 240.18a-1 [as proposed at 77
FR 70214, Nov. 23, 2012] must give notice that same day in accordance
with paragraph (h) of this section. The notice must specify the
security-based swap dealer's tentative
[[Page 25318]]
net capital requirement and its current amount of tentative net
capital, as appropriate. If a security-based swap is informed by the
Commission that it is, or has been, in violation of Sec. 240.18a-1 [as
proposed at 77 FR 70214, Nov. 23, 2012] and the security-based swap
dealer has not given notice of the capital deficiency under this
section, the security-based swap dealer, even if it does not agree that
it is, or has been, in violation of Sec. 240.18a-1 [as proposed at 77
FR 70214, Nov. 23, 2012], must give notice of the claimed deficiency,
which notice may specify the security-based swap dealer's reasons for
its disagreement.
(2) Every major security-based swap participant for which there is
no prudential regulator who fails to maintain a positive tangible net
worth pursuant to Sec. 240.18a-2 [as proposed at 77 FR 70214, Nov. 23,
2012] must give notice that same day in accordance with paragraph (h)
of this section. The notice must specify the extent to which the firm
has failed to maintain positive tangible net worth. If a major
security-based swap participant is informed by the Commission that it
is, or has been, in violation of Sec. 240.18a-2 [as proposed at 77 FR
70214, Nov. 23, 2012] and the major security-based swap participant has
not given notice of the capital deficiency under this section, the
major security-based swap participant, even if it does not agree that
it is, or has been, in violation of Sec. 240.18a-2 [as proposed at 77
FR 70214, Nov. 23, 2012], must give notice of the claimed deficiency,
which notice may specify the major security-based swap participant's
reasons for its disagreement.
(b) Every security-based swap dealer or major security-based swap
participant for which there is no prudential regulator must send notice
promptly (but within 24 hours) after the occurrence of the events
specified in paragraphs (b)(1), (b)(2), (b)(3), or (b)(4) of this
section, as applicable, in accordance with paragraph (i) of this
section:
(1) If a computation made by a security-based swap dealer pursuant
to Sec. 240.18a-1 [as proposed at 77 FR 70214, Nov. 23, 2012] shows
that its total net capital is less than 120 percent of the security-
based swap dealer's required minimum net capital;
(2) If a computation made by a security-based swap dealer
authorized by the Commission to compute net capital pursuant to Sec.
240.18a-1(d) [as proposed at 77 FR 70214, Nov. 23, 2012] shows that its
total tentative net capital is less than 120 percent of the security-
based swap dealer's required minimum tentative net capital;
(3) If the level of tangible net worth of a major security-based
swap participant falls below $20 million;
(4) The occurrence of the fourth and each subsequent backtesting
exception under Sec. 240.18a-1(d)(9) [as proposed at 77 FR 70214, Nov.
23, 2012] during any 250 business day measurement period.
(c) Every security-based swap dealer that files a notice of
adjustment of its reported capital category with the Federal Reserve
Board, the Office of the Comptroller of the Currency or the Federal
Deposit Insurance Corporation must give notice of this fact that same
day by transmitting a copy notice of the adjustment of reported capital
category in accordance with paragraph (h) of this section.
(d) Every security-based swap dealer or major security-based swap
participant that fails to make and keep current the books and records
required by Sec. Sec. 240.18a-5 must give notice of this fact that
same day in accordance with paragraph (h) of this section, specifying
the books and records which have not been made or which are not
current. The security-based swap dealer or major security-based swap
participant must also transmit a report in accordance with paragraph
(h) of this section within 48 hours of the notice stating what the
security-based swap dealer or major security-based swap participant has
done or is doing to correct the situation.
(e) Whenever any security-based swap dealer for which there is no
prudential regulator discovers, or is notified by an independent public
accountant under Sec. 240.18a-7(g), of the existence of any material
weakness, as defined in Sec. 240.18a-7(c)(3)(iii), the security-based
swap dealer must:
(1) Give notice, in accordance with paragraph (h) of this section,
of the material weakness within 24 hours of the discovery or
notification of the material weakness; and
(2) Transmit a report in accordance with paragraph (h) of this
section within 48 hours of the notice stating what the security-based
swap dealer has done or is doing to correct the situation.
(f) A security-based swap dealer that has been authorized by the
Commission to compute net capital pursuant to Sec. 240.18a-1(d) [as
proposed at 77 FR 70214, Nov. 23, 2012] must give immediate notice in
writing in accordance with paragraph (h) of this section if a liquidity
stress test conducted pursuant to Sec. 240.18a-1(f) [as proposed at 77
FR 70214, Nov. 23, 2012] indicates that the amount of liquidity reserve
is insufficient.
(g) If a security-based swap dealer fails to make in its special
account for the exclusive benefit of security-based swap customers a
deposit, as required by Sec. 240.18a-4(c) [as proposed at 77 FR 70214,
Nov. 23, 2012], the security-based swap dealer must give immediate
notice in writing in accordance with paragraph (h) of this section.
(h) Every notice or report required to be given or transmitted by
this section must be given or transmitted to the principal office of
the Commission in Washington, DC, the regional office of the Commission
for the region in which the security-based swap dealer or major
security-based swap participant has its principal place of business,
and the Commodity Futures Trading Commission if the security-based swap
dealer or major security-based swap participant is registered as a
futures commission merchant with such Commission. For the purposes of
this section, ``notice'' must be given or transmitted by facsimile
transmission. The report required by paragraphs (d) or (e)(2) of this
section may be transmitted by overnight delivery.
Sec. 240.18a-9 Quarterly security counts to be made by certain
security-based swap dealers.
Section 240.18a-9 applies to a security-based swap dealer
registered under 15F(b) of the Act (15 U.S.C. 78o-8(b)) that is not
also registered as a broker or dealer under section 15(b) of the Act
(15 U.S.C. 78o(b)); provided, however, that this Sec. 240.18a-9 does
not apply to a security-based swap dealer that has a prudential
regulator. A broker or dealer registered under section 15(b) of the
Act, including a broker or dealer registered as a security-based swap
dealer or major security-based swap participant under section 15F(b) of
the Act, is subject to the securities count requirements under Sec.
240.17a-13.
(a) Any security-based swap dealer that is subject to the
provisions of this rule must at least once in each calendar quarter-
year:
(1) Physically examine and count all securities held including
securities that are the subjects of repurchase or reverse repurchase
agreements;
(2) Account for all securities in transfer, in transit, pledged,
loaned, borrowed, deposited, failed to receive, failed to deliver,
subject to repurchase or reverse repurchase agreements or otherwise
subject to its control or direction but not in its physical possession
by examination and comparison of the supporting detailed records with
the appropriate ledger control accounts;
(3) Verify all securities in transfer, in transit, pledged, loaned,
borrowed, deposited, failed to receive, failed to deliver, subject to
repurchase or reverse
[[Page 25319]]
repurchase agreements or otherwise subject to its control or direction
but not in its physical possession, where such securities have been in
said status for longer than thirty days;
(4) Compare the results of the count and verification with its
records; and
(5) Record on the books and records of the security-based swap
dealer all unresolved differences setting forth the security involved
and date of comparison in a security count difference account no later
than 7 business days after the date of each required quarterly security
examination, count, and verification in accordance with the
requirements provided in paragraph (b) of this section. Provided,
however, that no examination, count, verification, and comparison for
the purpose of this section is within 2 months of or more than 4 months
following a prior examination, count, verification, and comparison made
hereunder.
(b) The examination, count, verification, and comparison may be
made either as of a date certain or on a cyclical basis covering the
entire list of securities. In either case the recordation must be
effected within 7 business days subsequent to the examination, count,
verification, and comparison of a particular security. In the event
that an examination, count, verification, and comparison is made on a
cyclical basis, it may not extend over more than 1 calendar quarter-
year, and no security may be examined, counted, verified, or compared
for the purpose of this rule within 2 months of or more than 4 months
after a prior examination, count, verification, and comparison.
(c) The examination, count, verification, and comparison must be
made or supervised by persons whose regular duties do not require them
to have direct responsibility for the proper care and protection of the
securities or the making or preservation of the subject records.
(d) The Commission may, upon written request, exempt from the
provisions of this section, either unconditionally or on specified
terms and conditions, any security-based swap dealer that satisfies the
Commission that it is not necessary in the public interest and for the
protection of investors to subject the particular security-based swap
dealer to certain or all of the provisions of this section, because of
the special nature of its business, the safeguards it has established
for the protection of customers' funds and securities, or such other
reason as the Commission deems appropriate.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
8. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
9. Subpart G is amended by revising the heading to read as follows:
Subpart G--Forms for Reports To Be Made by Certain Exchange
Members, Brokers, Dealers, Security-Based Swap Dealers, and Major
Security-Based Swap Participants
* * * * *
0
10. Section 249.617 is revised to read as follows:
Sec. 249.617 Form X-17A-5 and FOCUS Report Form SBS, information
required of certain brokers, dealers, security-based swap dealers, and
major security-based swap participants pursuant to sections 15F and 17
of the Securities Exchange Act of 1934 and Sec. 240.17a-5, Sec.
240.17a-10 and Sec. 240.17a-11, Sec. 240.17a-12, and Sec. 240.18a-7
of this chapter, as applicable.
Appropriate parts of Form X-17A-5 and FOCUS Report Form SBS, as
applicable, shall be used by brokers, dealers, security-based swap
dealers, and major security-based swap participants required to file
reports under Sec. 240.17a-5, Sec. 240.17a-10, and Sec. 240.17a-11,
Sec. 240.17a-12, and Sec. 240.18a-7 of this chapter, as applicable.
* * * * *
0
11. Part III of Form X-17A-5 (referenced in Sec. 249.617 of this
chapter) is revised to read as follows:
Note: The text of Part III of Form X-17A-5 does not and this
amendment will not appear in the Code of Federal Regulations.
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12. FOCUS Report Form SBS and the instructions thereto (referenced
in Sec. 249.617 of this chapter) are added to read as follows:
Note: The text of FOCUS Report Form SBS and the instructions
thereto will not appear in the Code of Federal Regulations.
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* * * * *
By the Commission.
Date: April 17, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09108 Filed 5-1-14; 8:45 am]
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