[Federal Register Volume 79, Number 85 (Friday, May 2, 2014)]
[Proposed Rules]
[Pages 25193-25386]
From the Federal Register Online via the Government Printing 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 rule-comments@sec.gov. 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \111\ See 17 CFR 240.17a-3(a)(5).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \138\ See paragraph (a)(5) of proposed Rule 18a-5.
    \139\ See paragraph (b)(5) of proposed Rule 18a-5.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \332\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, 75 FR 75208.
    \333\ See id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
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    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\
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    \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.
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    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
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    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \626\ See 17 CFR 240.17a-5(a)(6).
    \627\ See id.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \703\ Compare 17 CFR 240.17a-5(f), with paragraph (e) of 
proposed Rule 18a-7.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \793\ See 17 CFR 240.17a-11(c).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \796\ 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.\797\
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \841\ See Broker-Dealer Reports, 78 FR 51910; Financial 
Responsibility Rules for Broker-Dealers, 78 FR 51824.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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 
---------------------------------------------------------------------------
research and resolve promptly stock record differences.\852\

    \852\ Quarterly Securities Counts by Certain Exchange Members, 
Brokers and Dealers, 36 FR 7974.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \856\ See 17 CFR 240.17a-13(b)(1).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \857\ See 17 CFR 240.17a-13(b)(2).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \858\ See 17 CFR 240.17a-13(b)(3).
---------------------------------------------------------------------------

     Compare the results of the count and verification with the 
broker-dealer's records; \859\ and
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \861\ See 17 CFR 240.15c3-1(c)(2)(v).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \868\ See 17 CFR 240.17a-13(d).
    \869\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \872\ See 17 CFR 240.17a-13(f).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \877\ See 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \909\ See id.

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
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    \1092\ See paragraph (d)(2) of Rule 17a-5, as proposed to be 
amended.
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    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1109\ See proposed Rule 18a-7.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1142\ See paragraph (a)(1) of proposed Rule 18a-7.
    \1143\ See paragraph (a)(2) of proposed Rule 18a-7.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
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    \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.
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    \1208\ See 17 CFR 240.17a-3(b)(2).
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    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.
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    \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.
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    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.
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    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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) .
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

[[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\
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    \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\
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    \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).
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    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.
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    \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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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).
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    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.
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    \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\
---------------------------------------------------------------------------

    \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.
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    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\
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    \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\
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    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
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    \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\
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    \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.
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    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1444\ 15 U.S.C. 78o 10, 78q, 78w(a), and 78mm.
---------------------------------------------------------------------------

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