[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Rules and Regulations]
[Pages 68550-68733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20678]
[[Page 68549]]
Vol. 84
Monday,
No. 241
December 16, 2019
Part II
Securities and Exchange Commission
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17 CFR Parts 200, 240, and 249
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Final Rule
Federal Register / Vol. 84 , No. 241 / Monday, December 16, 2019 /
Rules and Regulations
[[Page 68550]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 240, and 249
[Release No. 34-87005; 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
AGENCY: Securities and Exchange Commission.
ACTION: Final 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 adopting 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 making substituted compliance available with
respect to recordkeeping, reporting, and notification requirements
under Section 15F of the Exchange Act and the rules thereunder.
DATES:
Effective date: February 14, 2020.
Compliance date: The compliance dates are discussed in section
III.B. of this release.
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, Deputy Associate Director, at (202)
551-5522; Joseph I. Levinson, Senior Special Counsel, at (202) 551-
5598; Raymond A. Lombardo, Assistant Director, at (202) 551-5755;
Timothy C. Fox, Branch Chief, at (202) 551-5687; Valentina Minak Deng,
Special Counsel, at (202) 551-5778; Rose Russo Wells, Special Counsel,
at (202) 551-5527; or Abraham Jacob, Special Counsel, at (202) 551-
5583; 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. Final 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 FOCUS Report
3. Filing of Annual Audited Financial Reports and Other Reports
C. Notification
1. Introduction
2. Amendments to Rule 17a-11 and New Rule 18a-8
3. Additional Amendments to Rule 17a-11 and Modifications to
Rule 18a-8
D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
1. Introduction
2. Rule 18a-9
E. Alternative Compliance Mechanisms
1. Limited Alternative Compliance Mechanism--Rules 17a-3 and
18a-5
2. Full Alternative Compliance Mechanism--Rule 18a-10
F. Cross-Border Application and Availability of Substituted
Compliance
1. Cross-Border Application of Recordkeeping and Reporting
Requirements
2. Availability of Substituted Compliance in Connection With
Recordkeeping and Reporting Requirements
G. Amendments to Rule 18a-1
H. Delegation of Authority
III. Explanation of Dates
A. Effective Date
B. Compliance Date
C. Effect on Existing Commission Exemptive Relief
D. Application to Substituted Compliance
IV. Paperwork Reduction Act
A. Summary of Collections of Information Under the Rule
Amendments and New Rules
1. Amendments to Rule 17a-3 and New Rule 18a-5
2. Amendments to Rule 17a-4 and New Rule 18a-6
3. Amendments to Rule 17a-5 and New Rule 18a-7
4. Amendments to Rule 17a-11 and New Rule 18a-8
5. Amendments to Rule 17a-12
6. New Rule 18a-9
7. Amendments to Rule 18a-10
8. Amendments to Rule 3a71-6
B. Use of Information
C. Respondents
D. Total Initial and Annual Recordkeeping and Reporting Burden
1. Amendments to Rule 17a-3 and New Rule 18a-5
2. Amendments to Rule 17a-4 and New Rule 18a-6
3. Amendments to Rule 17a-5 and New Rule 18a-7
4. Amendments to Rule 17a-11 and New Rule 18a-8
5. Amendments to Rule 17a-12
6. New Rule 18a-9
7. Amendments to Rule 18a-10
8. Amendments to Rule 3a71-6
E. Collection of Information Is Mandatory
F. Confidentiality
G. Retention Period for Recordkeeping Requirements
V. Economic Analysis
A. Introduction
B. Baseline of Economic Analysis
1. Available Data From the Security-Based Swap Market
2. Security-Based Swap Market: Market Participants and Activity
3. Existing Regulation of OTC Derivatives Market Participants
and Broker-Dealers
C. Analysis of the Adopted Program and Alternatives
1. Benefits of Recordkeeping, Reporting, Notification, and
Securities Count Requirements
2. Costs of the Recordkeeping, Reporting, Notification, and
Securities Count Requirements
3. Economic Effects of the Approach to Recordkeeping, Reporting,
Notification, and Securities Count Requirements
4. Cross-Border Application and Substituted Compliance
D. Impact on Efficiency, Competition, and Capital Formation
E. Alternatives to the Adopted Recordkeeping, Reporting,
Notification, and Securities Count Rules
VI. Other Matters
VII. Regulatory Flexibility Act Certification
VIII. Statutory Basis
I. Background
Title VII of the Dodd-Frank Act (``Title VII'') established a new
regulatory framework for the U.S. over-the-counter (``OTC'')
derivatives markets.\1\ Section 764 of the Dodd-Frank Act added Section
15F to the Exchange Act.\2\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting and recordkeeping for
SBSDs and MSBSPs. Section 15F(f)(1)(A)
[[Page 68551]]
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. Section
15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential
regulator \3\ (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.\4\
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.
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. Finally, Section 15F(i)(2) of the
Exchange Act provides that the Commission shall adopt rules governing
documentation standards for SBSDs and MSBSPs.
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\1\ See Public Law 111-203, 701 through 774. The Dodd-Frank Act
assigns primary responsibility for the oversight of the U.S. OTC
derivatives markets to the Commission and the Commodity Futures
Trading Commission (``CFTC''). 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) and a
``major security-based swap participant'' as defined in Section
3(a)(67). The CFTC has oversight authority with respect to a
``swap'' as defined in Section 1(a)(47) of the Commodity Exchange
Act (``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 these terms 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); 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).
\2\ 15 U.S.C. 78o-10 (``Section 15F of the Exchange Act'' or
``Section 15F'').
\3\ The term ``prudential regulator'' is defined in Section
1(a)(39) of the CEA (7 U.S.C. 1(a)(39)) and that definition is
incorporated by reference in Section 3(a)(74) of the Exchange Act.
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 dealer, or major
swap participant if the entity is directly supervised by that
agency.
\4\ A nonbank SBSD or 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.
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Section 17(a)(1) of the Exchange Act provides the Commission with
authority to adopt rules requiring broker-dealers--which would include
broker-dealer SBSDs and 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.\5\ The
Commission anticipates that a number of broker-dealers will register as
SBSDs.\6\ The Commission expects that some broker-dealers that are not
registered as SBSDs or MSBSPs (``stand-alone broker-dealers'')
nonetheless will engage in security-based swap and swap activities.\7\
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\5\ See 15 U.S.C. 78q(a)(1) (``Section 17 of the Exchange Act''
or ``Section 17''). 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.
\6\ 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.
\7\ In this release, the term ``broker-dealer'' includes an OTC
derivatives dealer unless otherwise noted. See 17 CFR 240.3b-12
(defining the term ``OTC derivatives dealer''). Consequently, the
terms ``stand-alone broker-dealer,'' ``broker-dealer SBSD,'' and
``broker-dealer MSBSP'' include entities that are OTC derivatives
dealers unless otherwise noted.
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In April 2014, the Commission proposed recordkeeping, reporting,
and notification requirements applicable to SBSDs and 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.\8\ The
proposed requirements were modeled on existing broker-dealer
requirements.\9\ The Commission received a number of comments in
response to these proposals.\10\ Separately, the Commission proposed
rules governing the cross-border treatment of recordkeeping and
reporting requirements with respect to SBSDs and MSBSPs.\11\ The
Commission received comments in response to these cross-border
proposals as well.\12\ The Commission carefully considered the comments
received on the proposals described above and, as discussed below, made
modifications in light of the comments in crafting final rules and
amendments.
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\8\ See Recordkeeping and Reporting Proposing Release; Capital
Rule for Certain Security-Based Swap Dealers, Exchange Act Release
No. 71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014)
(``Recordkeeping and Reporting Proposing Release'').
\9\ See id. at 25196-97 (providing the rationale for modeling
the proposed requirements on the relevant broker-dealer
requirements).
\10\ The comment letters are available at https://www.sec.gov/comments/s7-05-14/s70514.shtml.
\11\ 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 (May 23, 2013) (``Cross-Border Proposing
Release'').
\12\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
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In this document, the Commission is amending certain existing rules
and adopting new rules. In particular, the Commission is amending
existing rules 17 CFR 240.17a-3 (``Rule 17a-3''), 17 CFR 240.17a-4
(``Rule 17a-4''), 17 CFR 240.17a-5 (``Rule 17a-5''), and 17 CFR
240.17a-11 (``Rule 17a-11''), and adopting new rules 17 CFR 240.18a-5
(``Rule 18a-5''), 17 CFR 240.18a-6 (``Rule 18a-6''), 17 CFR 240.18a-7
(``Rule 18a-7''), 17 CFR 240.18a-8 (``Rule 18a-8''), and 17 CFR
240.18a-9 (``Rule 18a-9''). The amendments and new rules establish
recordkeeping, reporting, and notification requirements for SBSDs and
MSBSPs and securities count requirements for stand-alone SBSDs
(collectively ``recordkeeping and reporting requirements''). The
amendments to Rules 17a-3 and 17a-4 also establish additional
recordkeeping requirements applicable to stand-alone broker-dealers to
the extent they engage in security-based swap or swap activities. The
Commission also is adopting largely technical amendments to Rules 17a-
3, 17a-4, 17a-5, and 17a-11 as well as a conforming amendment to
existing rule 17 CFR 240.17a-12 (``Rule 17a-12'').\13\ Further, the
Commission is adopting amendments to Parts II and III of the Financial
and Operational Combined Uniform Single Report (``FOCUS Report''),\14\
and adopting Part IIC of the FOCUS Report. Part II of the FOCUS Report,
as amended, and Part IIC of the FOCUS Report, as adopted, will be used
by registrants to report financial and operational information. Part
III of the FOCUS Report will accompany the annual reports that certain
of the registrants will file. The Commission also is amending existing
rule 17 CFR 240.3a71-6 (``Rule 3a71-6'') with respect to the cross-
border application of the recordkeeping and reporting rules and the
availability of substituted compliance.
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\13\ The amendments to Rule 17a-12 replace the phrase ``Part
IIB'' with the phrase ``Part II'' each time it appears in the rule,
thereby requiring OTC derivatives dealers to file FOCUS Report Part
II, as amended, instead of FOCUS Report Part IIB.
\14\ The FOCUS Report is also known as Form X-17A-5.
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On June 21, 2019, the Commission adopted, among other requirements,
capital and margin requirements for nonbank SBSDs and MSBSPs and
segregation requirements for SBSDs.\15\
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As discussed below, these capital, margin, and segregation requirements
are integrated into the recordkeeping and reporting requirements being
adopted in this document. Moreover, at the same time that the
Commission adopted the capital, margin, and segregation requirements,
the Commission adopted an alternative compliance mechanism (17 CFR
240.18a-10 ``Rule 18a-10'').\16\ The Commission is amending Rule 18a-10
in this document to incorporate recordkeeping and reporting
requirements into its provisions. The Commission also is amending an
SBSD capital rule (17 CFR 240.18a-1 ``Rule 18a-1'').
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\15\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 43872
(Aug. 22, 2019) (``Capital, Margin, and Segregation Adopting
Release'').
\16\ See Capital, Margin, and Segregation Adopting Release at
43943-46.
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The Commission staff consulted with staff from the prudential
regulators and the CFTC in drafting these final rules and
amendments.\17\ In addition, relevant CFTC rules were considered as
part of this rulemaking effort.\18\
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\17\ See Section 712(a)(2) of the Dodd-Frank Act.
\18\ 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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II. Final Rules and Rule Amendments
A. Recordkeeping
1. Introduction
The Commission is adopting a recordkeeping program for SBSDs and
MSBSPs under Sections 15F and 17(a) of the Exchange Act that is modeled
on the recordkeeping requirements for broker-dealers as set forth in
Rules 17a-3 and 17a-4. Under this recordkeeping program, broker-dealer
SBSDs and MSBSPs--as broker-dealers--will be subject to Rules 17a-3 and
17a-4.\19\ The Commission is adopting amendments to these rules to
implement the recordkeeping requirements mandated under the Dodd-Frank
Act with respect to broker-dealer SBSDs and MSBSPs and to account for
the security-based swap and swap activities of stand-alone broker-
dealers.
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\19\ A commenter requested clarification as to whether an OTC
derivatives dealer dually registered as an SBSD or MSBSP would be
subject to Rules 17a-3 and 17a-4, as amended, or Rules 18a-5 and
18a-6. An OTC derivatives dealer dually registered as an SBSD or
MSBSP is subject to Rules 17a-3 and 17a-4 (rather than Rules 18a-5
and 18a-6). The undesignated introductory paragraphs to Rules 17a-3,
17a-4, 18a-5, and 18a-6 have been modified to clarify this
application of the rules. In addition, as explained further below,
an OTC derivatives dealer dually registered as an SBSD will be
subject to Rules 18a-1, 18a-4, 18a-7, 18a-8, and 17a-13 rather than
15c3-1, 15c3-3, 17a-5, 17a-11, and Rules 18a-9. As a result, the
Commission has made the following conforming modifications to Rules
17a-3, 17a-4, 18a-7, and 18a-8: (1) Where Rules 17a-3 and 17a-4
refer to Rules 17a-5 or 17a-12, the Commission has added references
to Rule 18a-7; (2) where Rules 17a-3 and 17a-4 refer to Rule 15c3-1,
the Commission has added references to Rule 18a-1, if appropriate;
and (3) where Rules 17a-3 and 17a-4 refer to Rule 15c3-3, the
Commission has added references to Rule 18a-4.
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Stand-alone and bank SBSDs and MSBSPs will be subject to Rules 18a-
5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively,
as amended. Rules 18a-5 and 18a-6 do 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
either not expected or not permitted to be conducted by stand-alone and
bank SBSDs and MSBSPs. Further, the recordkeeping requirements
applicable to bank SBSDs and MSBSPs are more limited in scope because:
(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 the firm's
business as an SBSD or MSBSP; (2) bank SBSDs and MSBSPs are subject to
recordkeeping requirements applicable to banks with respect to their
banking activities; and (3) the prudential regulators--rather than the
Commission--are responsible for capital, margin, and other prudential
requirements applicable to bank SBSDs and MSBSPs. For these reasons,
the recordkeeping requirements for bank SBSDs and MSBSPs are tailored
more specifically to their security-based swap activities as an SBSD or
MSBSP.
2. Records To Be Made and Kept Current
The Commission is adopting amendments to Rule 17a-3 to account for
the security-based swap and swap activities of broker-dealers,
including broker-dealer SBSDs and MSBSPs.\20\ The Commission is
adopting Rule 18a-5--which is modeled on Rule 17a-3, as amended--to
require stand-alone and bank SBSDs and MSBSPs to make and keep current
certain records.\21\ As stated above, Rule 18a-5 does not include a
parallel requirement for every requirement in Rule 17a-3.\22\ Paragraph
(a) of Rule 18a-5 contains one set of recordkeeping requirements
applicable to stand-alone SBSDs and MSBSPs, and paragraph (b) of Rule
18a-5 contains a separate set of recordkeeping requirements applicable
to bank SBSDs and MSBSPs that are more limited in scope.
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\20\ Broker-dealer SBSDs and MSBSPs are required to make and
keep current all the records required to be made and kept current by
broker-dealers under Rule 17a-3, as amended, plus the additional
records required specifically of an SBSD or MSBSP.
\21\ See Rule 18a-5, as adopted. Paragraphs (a) and (b) of Rule
18a-5 now read ``make and keep current'' instead of ``make and
keep'' as proposed, to clarify the implicit requirement that a
firm's records should be current. This language is consistent with
Rule 17a-3, as amended, on which Rule 18a-5 is modeled.
\22\ The Commission did not propose to include in Rule 18a-5
requirements that would parallel those set forth in paragraphs
(a)(4), (13) through (16), (19), and (20) of Rule 17a-3. See
Recordkeeping and Reporting Proposing Release, 79 FR at 25200, n.
67.
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A commenter urged the Commission to harmonize its recordkeeping
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping
requirements for swap dealers and major swap participants to the
maximum extent possible, with the goal of permitting firms to utilize a
single recordkeeping system for swap and security-based swap
transactions and positions.\23\ As discussed in more detail below in
section II.E.1. of this release, in response to the comment and to
promote harmonization with CFTC requirements, the Commission is
adopting a limited alternative compliance mechanism in Rules 17a-3 and
18a-5.\24\ In particular, an SBSD or MSBSP that also is registered with
the CFTC as a swap dealer or major swap participant may comply with the
recordkeeping requirements of the CEA and the rules thereunder in lieu
of the requirements (discussed below) to make and keep current trade
blotters, customer account ledgers, and stock records solely with
respect to information required to be included in those records
regarding security-based swap transactions and positions if the SBSD or
MSBSP meets certain conditions. The conditions include,
[[Page 68553]]
among other things, that the SBSD or MSBSP preserves all of the data
elements necessary to create a trade blotter, customer account ledger,
or stock record reflecting security-based swap and swap transactions
and positions and upon request promptly furnishes to representatives of
the Commission such a trade blotter, customer account ledger, or stock
record that includes security-based swap and swap transactions and
positions in the format required by Rule 17a-3 or 18a-5, as applicable.
This provision will permit an SBSD or MSBSP that also is registered
with the CFTC as a swap dealer or major swap participant to maintain a
single recordkeeping system for security-based swap and swap
transactions and positions in accordance with the CFTC's rules with
respect to these required records.
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\23\ See Letter from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (Sept. 5,
2014) (``SIFMA 9/5/2014 Letter'').
\24\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. As discussed in more detail below in
section II.E.2. of this release, the Commission also is amending
Rule 18a-10. Rule 18a-10 establishes a full alternative compliance
mechanism that will permit certain stand-alone SBSDs that are
registered as swap dealers and that predominantly engage in a swaps
business to elect to comply with the capital, margin, and
segregation requirements of the CEA and the CFTC's rules in lieu of
complying with the capital, margin, and segregation requirements of
the Commission's rules. The Commission is amending Rule 18a-10 in
this document to permit firms that will operate under Rule 18a-10 to
elect to comply with the recordkeeping and reporting requirements of
the CEA and the CFTC's rules in lieu of complying with Rules 18a-5,
18a-6, 18a-7, 18a-8, and 18a-9. Consequently, a stand-alone SBSD
that qualifies to use the full alternative compliance mechanism of
Rule 18a-10 can comply with the recordkeeping requirements of the
CEA and the CFTC's rules in lieu of complying with the requirements
of Rule 18a-5.
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Rules 17a-3 and 18a-5 require broker-dealers, SBSDs, and MSBSPs to
make and keep current daily trading records, ledger accounts, a
securities record, memoranda of brokerage orders, and/or memoranda of
proprietary trades that include certain data elements with respect to
security-based swap transactions.\25\ The data elements are: (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 scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's unique
identification code (collectively, the ``transaction data
elements'').\26\
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\25\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), and
(a)(7)(ii) of Rule 17a-3, as amended; paragraphs (a)(1) and (3),
(a)(4)(ii), (a)(5), (b)(1) and (2), (b)(3)(ii), and (b)(4) and (5)
of Rule 18a-5, as adopted.
\26\ See paragraphs (a)(1) and (3), (a)(5)(ii), and (a)(6) of
Rule 17a-3, as amended; paragraphs (a)(1) and (3) through (5) and
(b)(1) through (5) of Rule 18a-5, as adopted.
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As proposed, the counterparty's unique identification code data
element was the unique counterparty identifier.\27\ Commenters
suggested that the Commission replace the requirement to record the
unique counterparty identifier with a requirement to record the
counterparty's legal entity identifier (``LEI'').\28\ One commenter
further stated that the Commission should allow firms to use different
counterparty identifiers for internal purposes provided that they are
able to translate their internal counterparty identifiers into the
standard LEI convention.\29\
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\27\ See, e.g., Recordkeeping and Reporting Proposing Release,
79 FR at 25201.
\28\ See SIFMA 9/5/2014 Letter; Letter from Senator Carl Levin,
Chairman of Permanent Subcommittee on Investigations, U.S. Senate
(July 3, 2014) (``Levin Letter'').
\29\ See SIFMA 9/5/2014 Letter.
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For the sake of consistency with previously adopted Commission
rules, the Commission is replacing the requirement to record the unique
counterparty identifier throughout Rule 17a-3, as amended, and Rule
18a-5, as adopted, with a requirement to use the counterparty's unique
identification code (``UIC''), as defined in Regulation SBSR.\30\ In
particular, Regulation SBSR requires market participants--including
broker-dealers, SBSDs, and MSBSPs--to report certain data elements to
security-based swap data repositories (``SDRs''). One of the required
data elements is a UIC, which Rule 900 of Regulation SBSR defines as
``a unique identification code assigned to a person, unit of a person,
product, or transaction.'' \31\ SDRs must use UICs assigned by an
internationally recognized standards-setting system (``IRSS'') if an
IRSS has been recognized by the Commission and issues that type of
UIC.\32\ In the release adopting Regulation SBSR, the Commission
recognized the Global Legal Entity Identifier System (``GLEIS'')--which
is responsible for issuing LEIs--as an IRSS that satisfies the
requirements of Rule 903 of Regulation SBSR.\33\ Under Rule 903, if an
IRSS recognized by the Commission has assigned a UIC to a person, unit
of a person, or product, each SDR must employ that UIC for reporting
purposes under Regulation SBSR, and SDR participants must obtain such
UICs for use under Regulation SBSR. Although a firm may use different
counterparty identifiers for internal purposes, the firm's records
compiled pursuant to the recordkeeping rules being adopted in this
document must record the counterparty's UIC. To date, LEIs are the only
specific type of UIC that must be used under Regulation SBSR.\34\
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\30\ 17 CFR 242.900-242.909. See Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Exchange Act
Release No. 74244 (Feb. 11, 2015), 80 FR 14563 at 14631-14632 (Mar.
19, 2015).
\31\ See 17 CFR 242.900(qq).
\32\ See 17 CFR 242.903 (``Rule 903'').
\33\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 80 FR at 14631-32.
\34\ While the Commission to date has only recognized the GLEIS
as an IRSS, the rules being adopted in this document do not preclude
the use of UICs issued by any other organization that is recognized
as an IRSS in the future.
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In addition to that modification, the final requirements modify the
transaction data elements by replacing the data elements ``the
termination or maturity date'' and ``the notional amount'' with the
data elements ``the scheduled termination date'' and ``the notional
amount(s) and the currenc(ies) in which the notional amount(s) is
expressed'', respectively. This aligns the terminology identifying the
data elements with the terminology used in Regulation SBSR.\35\
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\35\ See 17 CFR 242.901 (``Rule 901''); Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information,
Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug.
12, 2016).
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The Commission stated when proposing the recordkeeping requirements
that ``[w]here 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.'' \36\ The following data element requirements being adopted
in this document use the same terminology as Rule 901 of Regulation
SBSR: (1) The date and time of execution; (2) the effective date; (3)
the scheduled termination date; and (4) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed. The
Commission clarifies that for these data elements registrants may
record the same information provided pursuant to the requirements of
Rule 901 to satisfy the related requirements of Rules 17a-3, as
amended, and 18a-5, as adopted.
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\36\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
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Finally, a commenter urged the Commission to provide firms with the
flexibility to keep the proposed required trade blotters, general
ledgers, ledgers for customer accounts, and stock record (discussed
below) in various formats without mandating a particular format as long
as all required information is kept and accessible to the
Commission.\37\ For example, with respect to the stock record, the
commenter urged the Commission to provide SBSDs and MSBSPs flexibility
in the manner in which they create records for security-based swap
transactions and not mandate a detailed specified format (particularly
with respect to tracking collateral received and pledged), provided
that all required information is recorded and retained and can be
pulled together upon request to create something that recognizably
[[Page 68554]]
would be a record of the firm's security-based swap transactions.
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\37\ See SIFMA 9/5/2014 Letter.
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These types of records are fundamental business records that a
prudent company should make and retain in the ordinary course to
document and track, among other things, its operations, financial
account balances and transactions, asset and liability accounts, and
custodial positions. The daily creation of these records builds an
historical audit trail that can be used to reconstruct the sequence of
transactions and changes in balances and positions, and to reconcile
with third-party accounts. Having the records in place also can assist
a firm account for transactions, balances, and positions if data feeds
or other information systems that feed into the records are disrupted.
Moreover, broker-dealers have been required to make and retain these
types of records for their securities business and transactions for
many years, and the Commission does not believe that doing so imposes a
great burden. Further, based on staff experience, the Commission
believes that creating a daily record of this information will
facilitate the prompt production of the materials necessary for
examinations and the oversight of broker-dealers, SBSDs, and MSBSPs.
For these reasons, as discussed below, the Commission is adopting the
requirements substantially as proposed. However, except for the general
ledger, the firm can utilize the limited alternative compliance
mechanism with respect to these records as they pertain to security-
based swap and swap transactions and positions if the conditions of the
limited alternative compliance mechanism are met.\38\
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\38\ Certain stand-alone SBSDs may qualify to use the full
alternative compliance mechanism of Rule 18a-10, in which case they
may comply with the recordkeeping requirements of the CEA and the
CFTC's rules in lieu of complying with the requirements of Rule 18a-
5.
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a. Amendments to Rule 17a-3 and New Rule 18a-5
Undesignated Introductory Paragraph
The Commission proposed adding an undesignated introductory
paragraph to Rule 17a-3 explaining that the rule applies to a broker-
dealer, including a broker-dealer dually registered with the Commission
as an SBSD or MSBSP.\39\ The paragraph further explained that an SBSD
or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD or MSBSP, or bank SBSD or MSBSP) is subject to the
books and records requirements in proposed Rule 18a-5. Similarly,
proposed Rule 18a-5 included an undesignated introductory paragraph
explaining that the rule applies to an SBSD or MSBSP that is not dually
registered as a broker-dealer and that a broker-dealer that is dually
registered as an SBSD or MSBSP is subject to the books and records
requirements in Rule 17a-3. The Commission received no comments on the
proposed undesignated introductory paragraphs and is adopting them with
non-substantive modifications to clarify which rule (17a-3 or 18a-5)
applies to a given type of entity.\40\
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\39\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
\40\ See undesignated introductory paragraph of Rule 17a-3, as
amended; undesignated introductory paragraph of Rule 18a-5, as
adopted.
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Trade Blotters
Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and
keep current trade blotters (or other records of original entry)
containing an itemized daily record of all transactions in securities,
all receipts and deliveries of securities, all receipts and
disbursements of cash, and all other debits and credits. The Commission
proposed to amend this paragraph to require that the trade blotters of
broker-dealers, including broker-dealer SBSDs and MSBSPs, contain
specific information about security-based swaps, including by recording
specific transaction data elements.\41\ The Commission proposed to
include parallel trade blotter requirements in Rule 18a-5 to apply to
stand-alone and bank SBSDs and MSBSPs.
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\41\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
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As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed trade blotters in
various formats without mandating a particular format as long as all
required information is kept and accessible to the Commission.\42\ For
the reasons discussed above, the Commission does not believe this would
be appropriate. However, the Commission clarifies that a firm can
create two separate trade blotters (one for security-based swaps and
one for other types of positions). Moreover, as discussed in more
detail below in section II.E.1. of this release, to promote
harmonization with CFTC requirements and increase flexibility, an SBSD
or MSBSP that is also registered as a swap dealer or major swap
participant may opt to use the limited alternative compliance mechanism
with respect to these records as they pertain to security-based swap
and swap transactions and positions.\43\ For these reasons, the
Commission is adopting the trade blotter requirements substantially as
proposed.\44\
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\42\ See SIFMA 9/5/2014 Letter.
\43\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted.
\44\ See paragraph (a)(1) of Rule 17a-3, as amended; paragraphs
(a)(1) and (b)(1) of Rule 18a-5, as adopted. These paragraphs
require that the trade blotters (or other records of original entry)
include the following transaction data elements: (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
scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's UIC. As
discussed above, these data elements were modified from the proposal
to require the counterparty's UIC and to conform to Rule 901.
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General Ledger
Paragraph (a)(2) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and MSBSPs, to make and keep current ledgers (or
other records) reflecting all assets and liabilities, income and
expense and capital accounts. 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. The Commission proposed a parallel provision in
Rule 18a-5 requiring stand-alone SBSDs and MSBSPs to make and keep
current the same types of general ledgers.\45\
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\45\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201-02.
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As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed general ledger in
various formats as long as all required information is kept and
accessible to the Commission.\46\ For the reasons discussed above, the
Commission does not believe this would be appropriate. Moreover, as
discussed above, the Commission does not believe it would be
appropriate to apply the limited alternative compliance mechanism for
this record because the information that must be recorded in a general
ledger is broader than security-based swap information.\47\ For this
reason, the Commission is adopting the general ledger requirement as
proposed.\48\
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\46\ See SIFMA 9/5/2014 Letter.
\47\ However, a stand-alone SBSD that qualifies to use the full
alternative compliance mechanism of Rule 18a-10 may comply with the
recordkeeping requirements of the CEA and the CFTC's rules in lieu
of complying with the requirements of Rule 18a-5.
\48\ See paragraph (a)(2) of Rule 18a-5, as adopted.
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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
[[Page 68555]]
commodities transactions in customer and non-customer cash and margin
accounts. The Commission proposed to amend this paragraph to require
that broker-dealers, including broker-dealer SBSDs and MSBSPs, make and
keep current ledger accounts (or other records) that record specific
security-based swap transaction data elements.\49\ The Commission
proposed in Rule 18a-5 that stand-alone SBSDs and MSBSPs be required to
make and keep current the same types of ledgers (or other records).
However, the proposed rule text did not refer to ``cash and margin
accounts'' because these types of accounts involve activities that may
not be undertaken by stand-alone SBSDs and MSBSPs because they are not
registered as broker-dealers. The Commission proposed in Rule 18a-5
that bank SBSDs and MSBSPs 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.
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\49\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202.
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As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed ledgers for customer
accounts in various formats as long as all required information is kept
and accessible to the Commission.\50\ For the reasons discussed above,
the Commission does not believe this would be appropriate. However, as
discussed in more detail below in section II.E.1. of this release, to
promote harmonization with CFTC requirements and provide additional
flexibility, an SBSD or MSBSP that is also registered as a swap dealer
or major swap participant may opt to use the limited alternative
compliance mechanism with respect to these ledgers as they pertain to
security-based swap and swap transactions and positions.\51\ For these
reasons, the Commission is adopting the ledger account requirements
substantially as proposed.\52\
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\50\ See SIFMA 9/5/2014 Letter.
\51\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that
qualifies to use the full alternative compliance mechanism of Rule
18a-10 may comply with the recordkeeping requirements of the CEA and
the CFTC's rules in lieu of complying with the requirements of Rule
18a-5.
\52\ See paragraph (a)(3) of Rule 17a-3, as amended; paragraphs
(a)(3) and (b)(2) of Rule 18a-5, as adopted. These paragraphs
require that the ledgers include the following transaction data
elements: (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 scheduled termination date; (6) the
notional amount(s) and the currenc(ies) in which the notional
amount(s) is expressed; (7) the unique transaction identifier; and
(8) the counterparty's UIC. As discussed above, these data elements
were modified from the proposal to require the counterparty's UIC
and to conform to Rule 901.
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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''). 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. The Commission proposed to amend this paragraph to require
that the securities record of broker-dealers, including broker-dealer
SBSDs and MSBSPs, specifically account for security-based swap activity
by reflecting separately for each security-based swap certain of the
transaction data elements and other information.\53\ In addition, the
Commission proposed parallel securities record requirements in Rule
18a-5 for stand-alone and bank SBSDs and MSBSPs. However, the
requirements for bank SBSDs and MSBSPs were limited to positions
related to their business as an SBSD or MSBSP.
---------------------------------------------------------------------------
\53\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202.
---------------------------------------------------------------------------
As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed stock record in various
formats as long as all required information is kept and accessible to
the Commission.\54\ For the reasons discussed above, the Commission
does not believe this would be appropriate. However, as discussed in
more detail below in section II.E.1. of this release, to promote
harmonization with CFTC requirements and increase flexibility, an SBSD
or MSBSP that is also registered as a swap dealer or major swap
participant may opt to use the limited alternative compliance mechanism
with respect to the stock record as it pertains to security-based swap
and swap transactions and positions.\55\ The Commission also clarifies
that the requirement as adopted does not necessarily require the use of
two separate stock records (i.e., one for securities and one for
security-based swaps); instead, a broker-dealer SBSD may elect to use a
single stock record that incorporates all of its securities customers,
including security-based swap customers.
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\54\ See SIFMA 9/5/2014 Letter.
\55\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that
qualifies to use the full alternative compliance mechanism of Rule
18a-10 may comply with the recordkeeping requirements of the CEA and
the CFTC's rules in lieu of complying with the requirements of Rule
18a-5.
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A commenter stated that the Commission should replace the terms
``long'' and ``short'' in the proposed requirements with ``bought'' and
``sold,'' respectively.\56\ The commenter explained that the former two
terms were ``not really applicable'' to security-based swaps. The
Commission agrees and the final amendment and rule use the terms
``bought'' and ``sold.'' For the reasons discussed above, the
Commission is adopting the stock record requirements with this
modification but otherwise substantially as proposed.\57\
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\56\ See SIFMA 9/5/2014 Letter.
\57\ See paragraph (a)(5)(ii) of Rule 17a-3, as amended;
paragraphs (a)(4) and (b)(3) of Rule 18a-5, as adopted. These
paragraphs require a securities record or ledger reflecting
separately for each security-based swap the following transaction
data elements: (1) The reference security, index, or obligor; (2)
the unique transaction identifier; and (3) the counterparty's UIC.
As discussed above, these data elements were modified from the
proposal to require the counterparty's UIC and to conform to Rule
901. The broker-dealer stock record requirement for securities other
than security-based swaps that pre-existed these amendments is being
preserved in paragraph (a)(5)(i) of Rule 17a-3, as amended.
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Memoranda of Brokerage Orders
Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security.
The memorandum must show the terms and conditions of each brokerage
order. The Commission proposed to amend this paragraph to require
broker-dealers, including broker-dealer SBSDs and 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.\58\ Further, the rule
required that certain of the security-based swap transaction data
elements be documented in the memorandum. The Commission proposed a
parallel provision in Rule 18a-5 for bank SBSDs and MSBSPs. The
Commission did not propose a parallel provision for stand-alone SBSDs
and MSBSPs because these registrants are not permitted to engage in the
business of effecting brokerage orders in security-based swaps without
registering as a broker-dealer or a bank.\59\
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\58\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202-03.
\59\ Generally, persons engaged in brokerage activities are
required to register as brokers under Section 15 of the Exchange
Act. However, Section 3(a)(4) of the Exchange Act permits banks to
engage in certain limited securities brokerage activities. See also
17 CFR 247.100-781 (joint Commission and the Federal Reserve rules
establishing further exemptions permitting banks to engage in
certain securities brokerage activities without registering as a
broker-dealer). Consequently, a bank SBSD or 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 Rule 18a-5 would apply.
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[[Page 68556]]
A commenter expressed general support for the proposed requirements
but asked the Commission to confirm that the order ticket requirement
only applies when there are in fact orders received for execution
(i.e., where the orders are potentially executed on a security-based
swap execution facility), and not where there is a negotiation that
results in a transaction without any executable order or other
instruction given.\60\ Furthermore, the commenter also asked the
Commission to confirm that no order ticket needs to be created by the
broker-dealer or its affiliated SBSD when a registered broker-dealer
acts as an agent in connection with negotiated transactions between an
affiliated SBSD and its customers without any executable order being
received. In response, the Commission clarifies that the firm must
receive an executable order or other instruction to trigger the
memorandum requirement (i.e., an order or instruction that the broker-
dealer, SBSD, or MSBSP has agreed to execute on behalf of the
counterparty). Consequently, preliminary negotiations or responding to
questions about a potential transaction alone do not trigger the
recordkeeping requirement. For these reasons, the Commission is
adopting these requirements substantially as proposed.\61\
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\60\ See SIFMA 9/5/2014 Letter.
\61\ See paragraph (a)(6)(ii) of Rule 17a-3, as amended;
paragraph (b)(4) of Rule 18a-5, as adopted. These paragraphs require
that the memorandum include the following security-based swap
transaction data elements: (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 scheduled termination
date; (6) the notional amount(s) and the currenc(ies) in which the
notional amount(s) is expressed; (7) the unique transaction
identifier; and (8) the counterparty's UIC. As discussed above,
these data elements were modified from the proposals to require the
counterparty's UIC and to conform to Rule 901. The broker-dealer
memorandum requirement for securities other than security-based
swaps that pre-existed these amendments is being preserved in
paragraph (a)(6)(i) of Rule 17a-3, as amended.
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Memoranda of Proprietary Orders
Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each purchase and sale for the account of
the broker-dealer. Generally, this paragraph 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
proposed to amend this paragraph to require the terms of security-based
swap transactions to be documented as well.\62\ In addition, the
Commission proposed parallel memorandum requirements in Rule 18a-5 for
stand-alone and bank SBSDs and MSBSPs, but only with respect to
security-based swap transactions. The Commission received no comment
that specifically addressed these proposed requirements and is adopting
them substantially as proposed.\63\
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\62\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25203-04.
\63\ See paragraph (a)(7)(ii) of Rule 17a-3, as amended;
paragraphs (a)(5) and (b)(4) of Rule 18a-5, as adopted. These
paragraphs require that the memorandum include the following
security-based swap transaction data elements: (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
scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's UIC. As
discussed above, these data elements were modified from the
proposals to require the counterparty's UIC and to conform to Rule
901. The broker-dealer memorandum requirement for securities (other
than security-based swaps) that pre-existed these amendments is
being preserved in paragraph (a)(7)(i) of Rule 17a-3, as amended.
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Confirmations
Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to keep
copies of all trade confirmations. In addition, the Commission has
adopted rules that require 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.\64\ In particular, Rule 15Fi-2 requires SBSDs and
MSBSPs to promptly verify the accuracy of, or otherwise dispute with
their counterparties, the terms of trade acknowledgments they receive.
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\64\ See 17 CFR 240.15Fi-2 (``Rule 15Fi-2''); see also Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39807 (June 17,
2016).
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The Commission proposed to amend paragraph (a)(8) of Rule 17a-3 to
require that broker-dealers, including broker-dealer SBSDs and MSBSPs,
make and keep current copies of the security-based swap trade
acknowledgments and verifications made pursuant to Rule 15Fi-2.\65\ The
Commission also proposed in Rule 18a-5 that stand-alone SBSDs and
MSBSPs make and keep current copies of: (1) Confirmations of all
purchases or sales of securities that are not security-based swaps; and
(2) security-based swap trade acknowledgments and verifications made
pursuant to Rule 15Fi-2. The Commission further proposed parallel
confirmation requirements in Rule 18a-5 for bank SBSDs and MSBSPs.
However, the requirement to make and keep current copies of
confirmations of all purchases and sales of securities that are not
security-based swaps would be limited to transactions that related to
their business as an SBSD or MSBSP.
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\65\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204.
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A commenter stated that the Commission should not require a bank
SBSD or MSBSP to make and keep current copies of all confirmations of
all purchases and sales of securities (other than security-based swaps)
or, in the alternative, the Commission should narrowly interpret when
securities transactions are ``related to the business'' of a bank as an
SBSD or MSBSP.\66\ The Commission disagrees that confirmations should
not be made for transactions when the security is not a security-based
swap. A confirmation of any securities transaction that occurs within a
security-based swap account will assist examiners in reviewing all the
activities in the account and whether the firm is acting in accordance
with applicable securities laws. The Commission notes, however, that a
bank SBSD or MSBSP must make and keep current copies of confirmations
relating to transactions in securities, other than security-based
swaps, only if the transaction relates to its business as an SBSD or
MSBSP. Consequently, the final requirements do not apply to a security
transaction that relates solely to the bank acting as a bank and not as
an SBSD or MSBSP. For these reasons, the Commission is adopting the
requirements as proposed.\67\
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\66\ See SIFMA 9/5/2014 Letter.
\67\ See paragraph (a)(8)(ii) of Rule 17a-3, as amended;
paragraphs (a)(6) and (b)(6) of Rule 18a-5, as adopted. The broker-
dealer confirmation requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in
paragraph (a)(8)(i) of Rule 17a-3, as amended.
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Accountholder Information
Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make a
record for each securities accountholder that contains certain
information about the person. The Commission proposed to amend this
paragraph to require broker-dealers, including broker-dealer SBSDs and
MSBSPs, to record certain information with respect to security-
[[Page 68557]]
based swap accountholders.\68\ The Commission proposed parallel
requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs
with respect to recording the information about security-based swap
accountholders.
---------------------------------------------------------------------------
\68\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204.
---------------------------------------------------------------------------
A commenter stated that it is not common practice in the swaps
market to obtain signatures of persons authorized to transact business
on behalf of a counterparty in a swap account and recommended instead
that broker-dealers, SBSDs, and MSBSPs be permitted to satisfy this
requirement by establishing policies and procedures relating to
counterparty trade authorization.\69\ It is a prudent business practice
for financial institutions to formalize relationships with their
counterparties and to take orders from individuals only if they are
authorized to enter into transactions on behalf of the counterparty.
This provides greater legal certainty in terms of enforcing the rights
of the financial institution and its counterparty. Obtaining the
signatures of persons authorized to transact on behalf of the
counterparty is one way to promote these objectives, but the Commission
agrees with the commenter that it is not the only way. Maintaining a
record of persons authorized to transact on behalf of the counterparty
such as a copy of a corporate resolution granting the person such
authority is another way. Consequently, the Commission is modifying the
text of the final rules so that the means of establishing a record of
the authorization of each person to whom the counterparty has granted
authority to transact business in the security-based swap account are
not limited to obtaining signatures of such persons. In particular, the
final rules provide that, for each security-based swap account, the
broker-dealer, SBSD, or MSBSP must make and retain a record of the
authorization of each person the counterparty has granted authority to
transact business in the security-based swap account. This record could
be, for example, a signature of the person, a copy of the corporate
resolution of the counterparty granting the person authority to trade
on its behalf, or a communication from the counterparty identifying the
person as having been granted authority to act on its behalf. In
addition to promoting the objectives described above, this record will
assist Commission staff in examining whether a given transaction has
been appropriately authorized.
---------------------------------------------------------------------------
\69\ See SIFMA 9/5/2014 Letter.
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Another commenter raised concerns about disclosures to the
Commission regarding clients, associated persons, or other such persons
arising from confidentiality requirements under the local laws of
certain non-U.S. jurisdictions.\70\ The Commission understands that
some foreign laws and regulations may limit or prevent disclosure of
customer information to the Commission. These types of restrictions may
include privacy laws, which generally restrict disclosure of certain
identifying information about a natural person or entity, and so-called
``blocking statutes'' (including secrecy laws) that prevent the
disclosure of information relating to third parties and/or foreign
governments. In response, the Commission notes that it has proposed in
a separate release additional provisions that are designed to address
concerns about the cross-border application of certain requirements
that will be or have been proposed to be applicable to SBSDs and
MSBSPs.\71\ For the foregoing reasons, the Commission is adopting the
accountholder requirements with the modifications discussed above.\72\
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\70\ See SIFMA 9/5/2014 Letter; Letter from Institute of
International Bankers and Securities Industry and Financial Markets
Association (June 21, 2018) (``IIB/SIFMA 6/21/2018 Letter'').
\71\ See Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements,
Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 14,
2019) (``Cross-Border Application Proposing Release'').
\72\ See paragraph (a)(8)(iv) of Rule 17a-3, as amended;
paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted. These
paragraphs require that SBSDs and MSBSPs record for each security-
based swap account the counterparty's UIC, along with other
information. For the reasons discussed above, the ``unique
counterparty identifier'' transaction data element in the proposed
requirement was replaced with the counterparty's UIC. The broker-
dealer accountholder requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in
paragraphs (a)(1)(i) through (iii) of Rule 17a-3, as amended.
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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. The Commission did not
propose to amend this paragraph to account for security-based swaps. In
addition, because the records required under this paragraph are not
specific to security-based swaps, the Commission did not propose to
include an analogous provision applicable to bank SBSDs and MSBSPs.
However, in order to facilitate the monitoring of the financial
condition of stand-alone SBSDs and MSBSPs, the Commission proposed a
parallel provision in Rule 18a-5 applicable to these entities.\73\ One
commenter expressed support for this proposed requirement.\74\ The
Commission is adopting the options position recordkeeping requirement
as proposed.\75\
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\73\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204-05.
\74\ See SIFMA 9/5/2014 Letter.
\75\ See paragraph (a)(8) of Rule 18a-5, as adopted.
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Trial Balances and Computation of Net Capital
Paragraph (a)(11) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and 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 certain records relating to the computation of aggregate
indebtedness and net capital under the broker-dealer net capital
rule.\76\ The Commission did not propose that bank SBSDs and MSBSPs
make similar records as the prudential regulators administer the
capital requirements applicable to these entities.\77\ The Commission
did propose a parallel requirement in Rule 18a-5 for stand-alone SBSDs
and MSBSPs to facilitate the review and monitoring of their financial
condition and their compliance with the regulatory capital requirements
in proposed Rules 18a-1 and 18a-2, respectively.\78\ One commenter
noted the importance of including recordkeeping and reporting
requirements with respect to trial balances and the computation of net
capital.\79\ The Commission has adopted capital requirements for stand-
alone SBSDs and MSBSPs in Rules 18a-1 and 18a-2, respectively.\80\
Consequently, the Commission is adopting the trial balances and
computation of net capital recordkeeping requirement for stand-alone
SBSDs and MSBSPs as proposed.\81\
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\76\ The broker-dealer net capital rule is codified at 17 CFR
240.15c3-1 (``Rule 15c3-1'').
\77\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205.
\78\ 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 70241, 70217-57 (Nov.
23, 2012) (``Capital, Margin, and Segregation Proposing Release'')
(proposing Rules 18a-1 and 18a-2).
\79\ See SIFMA 9/5/2014 Letter. The commenter also made
substantive recommendations concerning the proposed net capital
requirements for SBSDs and MSBSPs that are beyond the scope of this
release.
\80\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-908.
\81\ See paragraph (a)(9) of Rule 18a-5, as adopted.
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[[Page 68558]]
Associated Persons
Paragraph (a)(12) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and MSBSPs, to make and keep current a
questionnaire or application for employment for each associated person
that contains information about the associated person (the
``questionnaire requirement'') as well other information about
associated persons. The Commission proposed parallel requirements in
Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs.\82\ Further, the
Commission proposed 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 in Section 3(a)(70) of the Exchange Act. The
Commission proposed a parallel definition in Rule 18a-5. However, the
proposed Rule 18a-5 definition was more limited as applied to bank
SBSDs and MSBSPs in that it covered persons whose activities relate to
the conduct of the bank's business as an SBSD or MSBSP.
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\82\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205.
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Commenters requested that the Commission limit the proposed
questionnaire requirement for stand-alone and bank SBSDs and MSBSPs to
associated persons who effect or are involved in effecting security-
based swaps on the firm's behalf.\83\ The Commission agrees with the
comments. The questionnaire requirement, as proposed, was designed to
provide a basis for assessing compliance with Section 15F(b)(6) of the
Exchange Act and a related rule thereunder.\84\ Both the statute and
the rule (Rule 15Fb6-2) apply to associated persons who effect or are
involved in effecting security-based swaps on behalf of the SBSD or
MSBSP.\85\ Accordingly, the Commission is narrowing the scope of the
questionnaire requirement in Rule 18a-5 for stand-alone and bank SBSDs
and MSBSPs so that it applies only with respect to associated persons
who effect or are involved in effecting security-based swaps on the
firm's behalf.\86\
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\83\ See, e.g., SIFMA 9/5/2014 Letter; IIB/SIFMA 6/21/2018
Letter.
\84\ See 17 CFR 15Fb6-2 (``Rule 15Fb6-2'').
\85\ Section 15F(b)(6) of the Exchange Act provides that it
shall be unlawful for an SBSD or MSBSP to permit any associated
person of the SBSD or MSBSP who is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on its behalf, if the SBSD or MSBSP knows, or in the
exercise of reasonable care should have known, of the statutory
disqualification, except to the extent otherwise provided by rule,
regulation, or order of the Commission. Rule 15Fb6-2: (1) Prohibits
an SBSD or MSBSP from acting as an SBSD or MSBSP unless it has
certified electronically that it neither knows, nor in the exercise
of reasonable care should have known, that any person associated
with the SBSD or MSBSP ``who effects or is involved in effecting
security-based swaps on behalf of the [SBSD] or [MSBSP] is subject
to a statutory disqualification''; and (2) requires the Chief
Compliance Officer (or his or her designee) of the SBSD or MSBSP to
review and sign the questionnaire or application for employment
executed by every associated person who is a natural person and who
effects or is involved in effecting security-based swaps on the
SBSD's or MSBSP's behalf, and that this questionnaire or application
shall serve as the basis for a background check of the associated
person to verify that the person is not subject to a statutory
disqualification.
\86\ See paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as
adopted. The Commission is also modifying paragraph (b)(8)(i) of
Rule 18a-5 as proposed to eliminate the phrase ``whose activities
relate to the business of the security-based swap dealer or major
security-based swap participant.'' As discussed above, the
Commission proposed this limitation on the scope of the
questionnaire or application for employment to address bank SBSDs
and MSBSPs. This limitation is no longer necessary in light of the
final rule's limitation to an associated person ``who effects or is
involved in effecting security-based swaps on the security-based
swap dealer's or major security-based swap participant's behalf.''
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A commenter also requested that the Commission modify the proposal
for foreign SBSDs and MSBSPs so that the questionnaire requirement does
not apply to associated persons who effect or are involved in effecting
security-based swap transactions with non-U.S. persons or foreign
branches.\87\ As noted above, the questionnaire requirement is intended
to support the substantive prohibition in Section 15F(b)(6) of the
Exchange Act and the related certification and background check
requirements in Rule 15Fb6-2. The Commission recognizes, however, as
noted by the commenters, that there may be situations in which an SBSD
or MSBSP is prohibited by applicable non-U.S. law from receiving,
creating, or maintaining records with respect to certain of the
information that needs to be recorded pursuant to the questionnaire
requirement. Consequently, the Commission has proposed in a separate
release additional provisions in Rule 18a-5 that would address
situations where the law of a non-U.S. jurisdiction in which an
associated person is employed or located may prohibit a stand-alone or
bank SBSD or MSBSP from receiving, or creating or maintaining a record
of, any of the information mandated by the questionnaire
requirement.\88\
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\87\ See SIFMA 9/5/2014 Letter.
\88\ See Cross-Border Application Proposing Release, 84 FR at
24206.
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Finally, for the sake of clarity, the Commission emphasizes that
these associated person recordkeeping requirements apply to natural
persons and not to legal entities that may be associated persons. For
the reasons stated above, the Commission is adopting the associated
person recordkeeping requirements with the modifications discussed
above.\89\
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\89\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as
adopted.
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Liquidity Stress Test
In 2012, the Commission proposed liquidity stress test requirements
for entities that are or would be authorized to use internal models to
compute net capital; namely, certain stand-alone broker-dealers (``ANC
broker-dealers'') as well as certain broker-dealer and stand-alone
SBSDs.\90\ Consequently, the Commission proposed that these entities be
required to make and keep current certain records relating to the
liquidity stress test requirements, if applicable.\91\ The Commission
has deferred consideration of the proposed liquidity stress test
requirements.\92\ Accordingly, the Commission is deferring
consideration of the related recordkeeping requirements.\93\
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\90\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70252-54.
\91\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205-06.
\92\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
\93\ Paragraph (a)(24) of Rule 17a-3, as proposed; paragraph
(a)(11) of Rule 18a-5, as proposed. The proposed recordkeeping
requirements would have been set forth in these paragraphs. Since
the publication of the recordkeeping and reporting proposing
release, a new paragraph (a)(24) has been adopted by the Commission.
See Form CRS Relationship Summary; Amendments to Form ADV, Exchange
Act Release No. 86032 (June 5, 2019), 84 FR 33492, (July 12, 2019);
17 CFR 240.17a-3(a)(24). Paragraph (a)(11) of Rule 18a-5 is being
designated as ``[Reserved].''
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Account Equity and Margin Calculations
The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs and MSBSPs to make and keep current a record of the daily
calculations that would be required under the proposed margin rule for
non-cleared security-based swaps--Rule 18a-3.\94\ The Commission
proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs and
MSBSPs. A commenter expressed support for the proposal \95\ and the
Commission has adopted Rule 18a-3 requiring the daily calculations.\96\
For the reasons discussed in the proposing release, the
[[Page 68559]]
Commission is adopting daily calculation recordkeeping requirements
substantially as proposed.\97\
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\94\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25206-07. See also Capital, Margin, and Segregation Proposing
Release, 77 FR at 70261-63 (proposing Rule 18a-3, requiring, among
other things, that nonbank SBSDs perform two daily calculations for
each security-based swap account (the equity in the account and a
margin amount) and nonbank MSBSPs to perform one daily calculation
(the equity in the account)).
\95\ See SIFMA 9/5/2014 Letter.
\96\ Capital, Margin, and Segregation Adopting Release, 84 FR at
43909-17.
\97\ See paragraph (a)(25) of Rule 17a-3, as amended; paragraph
(a)(12) of Rule 18a-5, as adopted. As proposed, these paragraphs
referred to the ``amount of equity'' in the account and the ``margin
amount.'' Rule 18a-3, as adopted, refers instead to the ``current
exposure'' and ``initial margin amount.'' Consequently, the
paragraphs of the recordkeeping rules as adopted refer to the
``current exposure'' and ``initial margin amount.''
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Possession or Control Requirements
The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of compliance with the
possession or control requirements in the proposed segregation rule for
SBSDs--Rule 18a-4.\98\ The Commission proposed a parallel requirement
in Rule 18a-5 for stand-alone SBSDs. A commenter supported the proposal
\99\ and the Commission has adopted Rule 18a-4 prescribing possession
or control requirements.\100\ For the reasons discussed in the
proposing release, the Commission is adopting the security-based swap
possession or control recordkeeping requirements substantially as
proposed.\101\
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\98\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25207. See also Capital, Margin, and Segregation Proposing Release,
77 FR at 70278-82 (proposing Rule 18a-4 requiring, among other
things, that SBSDs maintain possession or control over excess
securities collateral).
\99\ See SIFMA 9/5/2014 Letter.
\100\ Capital, Margin, and Segregation Adopting Release, 84 FR
at 43930-44.
\101\ See paragraph (a)(26) of Rule 17a-3, as amended;
paragraphs (a)(13) and (b)(9) of Rule 18a-5, as adopted. The
Commission proposed that Rule 18a-4 apply to all SBSDs, but in
response to comment adopted security-based swap segregation
requirements for broker-dealers, including broker-dealer SBSDs, in
the broker-dealer segregation rule, which is codified at 17 CFR
240.15c3-3 (``Rule 15c3-3''). As a result, the Commission is
modifying the cross references in paragraph (a)(26) of Rule 17a-3 to
reflect the placement of the customer protection requirements for
broker-dealer SBSDs in paragraph (p) of Rule 15c3-3 rather than in
paragraph (b) of Rule 18a-4 as proposed. Paragraphs (a)(13) and
(b)(9) of Rule 18a-5, as adopted, which apply to stand-alone and
bank SBSDs, respectively, are not affected by this change.
---------------------------------------------------------------------------
Customer Reserve Account Requirements
The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of security-based swap
reserve account computations pursuant to proposed Rule 18a-4.\102\ The
Commission proposed a parallel requirement in Rule 18a-5 for stand-
alone SBSDs. A commenter expressed support for the proposal \103\ and
the Commission has amended Rule 15c3-3 and adopted Rule 18a-4 to
prescribe security-based swap reserve account requirements.\104\ For
the reasons discussed in the proposing release, the Commission is
adopting the security-based swap customer reserve account recordkeeping
requirements substantially as proposed.\105\
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\102\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25207-08.
\103\ See SIFMA 9/5/2014 Letter.
\104\ Capital, Margin, and Segregation Adopting Release, 84 FR
at 43938-42.
\105\ See paragraph (a)(27) of Rule 17a-3, as amended;
paragraphs (a)(14) and (b)(10) of Rule 18a-5, as adopted. Because
the segregation requirements were codified in Rules 15c3-3 and 18a-
4, the Commission is modifying the cross references in new paragraph
(a)(27) of Rule 17a-3 to new paragraph (p) of Rule 15c3-3 rather
than in paragraph (b) of new Rule 18a-4 as proposed. Paragraphs
(a)(14) and (b)(10) of Rule 18a-5 are not affected by this change.
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Unverified Transactions
It is prudent practice for counterparties to promptly confirm the
terms of executed OTC derivatives transactions.\106\ The Commission
adopted Rule 15Fi-2 to promote this practice. As discussed above, Rule
15Fi-2 requires, among other things, that SBSDs and MSBSPs provide
trade acknowledgments containing the details of security-based swap
transactions and promptly verify the accuracy of, or otherwise dispute
with their counterparties, the terms of trade acknowledgments they
receive. To promote compliance with then proposed Rule 15Fi-2 and the
risk management practices of SBSDs and MSBSPs, the Commission proposed
to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 that
would require these entities to make and keep current a record of each
security-based swap trade acknowledgment that is not verified within
five business days of execution.\107\ While the Commission did not
prescribe a timeframe for security-based swap trade acknowledgments to
be verified, paragraph (e) of Rule 15Fi-2 requires procedures
reasonably designed to obtain ``prompt verification.''
---------------------------------------------------------------------------
\106\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39807.
\107\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25208.
---------------------------------------------------------------------------
A commenter urged the Commission not to establish a rigid threshold
of five business days and suggested that the Commission ``enter into a
constructive dialogue with interested constituencies to establish best
practices for trade verification.''\108\ The requirement to make a
record of security-based swap trade acknowledgments not verified within
five business days is not intended to establish a maximum timeframe
within which verification should be obtained pursuant to Rule 15Fi-2.
Instead, it is designed to require SBSDs and MSBSPs to make a record of
the transactions that have gone unverified for a significant length of
time, as the delay in obtaining verification may indicate, for example,
the existence of a disagreement with the counterparty as to the terms
of the transaction. The Commission believes that five business days
represents an appropriate amount of time to wait before requiring a
record to be made. This timeframe is designed to strike an appropriate
balance in terms of a time period that is not too short and would
capture information that is not relevant to Rule15Fi-2 or that is too
long and would not promote compliance with Rule 15Fi-2. For these
reasons, the Commission is adopting the unverified transaction
recordkeeping requirements substantially as proposed.\109\
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\108\ See SIFMA 9/5/2014 Letter.
\109\ See paragraph (a)(28) of Rule 17a-3, as amended;
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as adopted. For the
reasons discussed above, the Commission modified the proposed rule
text in these paragraphs to replace the requirement to record the
``unique counterparty identifier'' with the counterparty's UIC. See
paragraph (a)(28) of Rule 17a-3, as proposed to be amended;
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as proposed to be
adopted.
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Finally, the Commission has previously noted that in complying with
the trade acknowledgement and verification requirements, policies and
procedures reasonably designed to ensure prompt verification of a
transaction may include policies and procedures under which an SBSD or
MSBSP relies on its counterparty's negative affirmation to the terms of
a trade acknowledgment. The Commission has stated that those policies
and procedures generally should require the SBSD or MSBSP to document
its counterparty's agreement to rely on negative affirmation.\110\ As
such, transactions verified by negative affirmation do not need to be
recorded as unverified under Rules 17a-3 and 18a-5.
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\110\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39820.
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Records Relating to Business Conduct Standards
The Commission has adopted rules to establish business conduct and
chief compliance officer requirements for SBSDs and MSBSPs.\111\ The
[[Page 68560]]
requirements in these rules address (among other things):
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\111\ See 17 CFR 240.15Fh-1 (``Rule 15Fh-1''); 17 CFR 240.15Fh-2
(``Rule 15Fh-2''); 17 CFR 240.15Fh-3 (``Rule 15Fh-3''); 17 CFR
240.15Fh-4 (``Rule 15Fh-4''); 17 CFR 240.15Fh-5 (``Rule 15Fh-5'');
17 CFR 240.15Fh-6 (``Rule 15Fh-6''); 17 CFR 240.15Fk-1 (``Rule 15Fk-
1''). See also Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 2016).
---------------------------------------------------------------------------
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 from engaging in
certain ``pay to play'' activities; and
Certain minimum requirements relating to chief compliance
officers.
To promote compliance with these then-proposed requirements, the
Commission proposed to amend Rule 17a-3 and include parallel provisions
in Rule 18a-5 that would require all SBSDs to make and keep current a
record that demonstrates their compliance with Rule 15Fh-6 (regarding
political contributions by certain SBSDs).\112\ In addition, the
Commission proposed to amend Rule 17a-3 and include parallel provisions
in Rule 18a-5 to require that all SBSDs and MSBSPs make and keep
current a record that demonstrates their compliance with Rules 15Fh-1
through 15Fh-5 and Rule 15Fk-1, as applicable.\113\ These recordkeeping
requirements would require covered firms to keep supporting documents
evidencing their compliance with the business conduct and chief
compliance officer requirements; 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 the disclosures or
representations.
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\112\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25208.
\113\ Paragraph (b)(2) of Rule 15Fk-1 requires chief compliance
officers of SBSDs and MSBSPs to take reasonable steps to ensure that
the registrant establishes, maintains, and reviews written policies
and procedures reasonably designed to achieve compliance with the
Exchange Act and the rules and regulations thereunder relating to
its business as an SBSD or MSBSP.
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A commenter asked the Commission to confirm that the proposed
requirements would not create additional recordkeeping obligations with
respect to the business conduct standards,\114\ particularly with
respect to the requirements relating to compliance with such
requirements.\115\ The commenter also generally stated that the
Commission should not adopt additional recordkeeping rules relating to
the pay-to-play provisions set forth in the Commission's business
conduct release.\116\
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\114\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42396.
\115\ See SIFMA 9/5/2014 Letter.
\116\ See id. See also Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR
29960.
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In response to the commenter's concern, the Commission notes that
the proposed recordkeeping requirements were not intended to add
additional substantive business conduct or pay-to-play requirements.
The relevant substantive requirements are prescribed in the business
conduct and pay-to-play rules; the recordkeeping requirements are
designed to require records of compliance with those already existing
substantive requirements. The Commission acknowledges, however, that
they would impose new requirements to document a registrant's
compliance with several of the substantive business conduct and pay-to-
play requirements as well as new requirements to provide written
documentation where the business conduct and pay-to-play rules allowed
for oral disclosure. These proposed documentation requirements were
designed to assist Commission examiners in reviewing compliance with
the business conduct and pay-to-play requirements, and the anticipated
additional burdens they will impose on registrants are discussed below
in Sections IV and V. For these reasons, the Commission is adopting the
business conduct standards recordkeeping requirements substantially as
proposed.\117\
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\117\ See paragraph (a)(30) of Rule 17a-3, as amended;
paragraphs (a)(17) and (b)(13) of Rule 18a-5, as adopted. For the
sake of clarity, the rules as adopted require ``[a] record
documenting'' compliance with the business conduct standards, as
opposed to ``[a] record that demonstrates'' such compliance as
proposed. In addition, because Rule 15Fh-6 applies only to SBSDs,
and not to MSBSPs, the Commission is removing the proposed reference
to MSBSPs in paragraphs (a)(16) and (b)(12) of Rule 18a-5. On
October 31, 2018, it issued a statement setting forth the
Commission's position that, for a period of five years from the
Registration Compliance Date for SBSDs and MSBSPs (as defined in
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 80 FR at 48988 and discussed below
in section III.B. of this release), certain actions with respect to
specific provisions of the business conduct standards will not
provide a basis for a Commission enforcement action. See Commission
Statement on Certain Provisions of Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 84511 (Oct. 31, 2018), 83 FR
55486 (Nov. 6, 2018) (``Statement on Business Conduct Standards'').
To the extent SBSDs and MSBSPs rely on the statement, the Commission
encourages them to maintain records of the written representations
described in the statement until such time as the statement is no
longer in force.
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b. Additional Amendments to Rule 17a-3 and Modifications to Rule 18a-5
The Commission proposed several amendments to Rule 17a-3 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission received no comments addressing these
proposed amendments and, as discussed below, is adopting them
substantially as proposed.
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 proposed 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.\118\ The rule being adopted does not
remove these references to ``members'' to avoid confusion as to whether
their removal resulted in a substantive change to the rule.
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\118\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25209.
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The Commission is adopting a global change to replace the word
``shall'' in the rule with the word ``must'' or ``will'' where
appropriate.\119\ Similarly, when defining terms, the Commission is
replacing the phrase ``shall mean'' with the word ``means.'' \120\ The
Commission is also adopting certain stylistic, corrective, and
punctuation amendments to improve the rule's readability.\121\ The
Commission is
[[Page 68561]]
simplifying the text in paragraph (a) of Rule 17a-3 to state that Rule
17a-3 applies to ``every broker or dealer,'' since the newly adopted
undesignated introductory paragraph already provides sufficient detail
as to the types of registrants to which the rule applies.\122\ In
recognition of the fact that broker-dealers may execute orders for non-
customers, the Commission is amending 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.\123\
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\119\ The amendments replace the word ``shall'' with the word
``must'' or ``will'' in the following paragraphs of Rule 17a-3, as
amended: (a) Introductory text, (a)(6)(i)(A), (a)(7)(i), (a)(10) and
(11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i), (a)(19)(i),
(b), (d), (e), and (f).
\120\ The amendments replace the phrase ``shall mean'' with the
word ``means'' in the following paragraphs of Rule 17a-3, as
amended: (a)(6)(i)(A) and (a)(16)(ii)(A) and (B).
\121\ The Commission is adopting the following stylistic and
corrective changes to Rule 17a-3, as 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'' 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''; (11) replacing the superfluous ``or'' with a
comma in the phrase ``wrongful taking of property or bribery'' in
paragraph (a)(12)(i)(G); (12) clarifying in paragraph (a)(1) that
the unit and aggregate purchase or sale price, if any includes the
financial terms for security-based swaps; (13) replacing ``,'' with
``;'' after the phrase ``a notation of that entry'' in paragraph
(a)(6)(i)(A) for consistency with 17 CFR 240.17a-3(a)(6)(i)(A) and
paragraph (b)(4) of Rule 18a-5, as adopted; (14) replacing ``In the
case of'' with ``For each'' in paragraph (a)(9)(iv) for consistency
with paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted; (15)
adding quotation marks around the term ``associated person'' in
paragraph (a)(12)(i) for consistency with paragraph (a)(12)(i) of
Rule 17a-3 and paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as
adopted; (16) replacing ``or any broker or dealer'' with ``, or any
broker, dealer, security-based swap dealer or major security-based
swap participant'' in paragraph (a)(12)(i)(F) for consistency with
paragraphs (a)(10)(i)(F) and (b)(8)(i)(F) of Rule 18a-5, as adopted;
(17) adding ``, or'' after the phrase ``wrongful taking of
property'' in paragraph (a)(12)(i)(G) for consistency with paragraph
(a)(12)(i)(G) of Rule 17a-3 and paragraphs (a)(10)(i)(G) and
(b)(8)(i)(G) of Rule 18a-5, as adopted; (18) replacing ``17 CFR
240.17a-3'' with ``this section'' in paragraph (b)(v); and (19)
replacing ``Sec. Sec. 240.17a-3 and 17a-4'' with ``this section and
Sec. 240.17a-4'' in paragraph (b).
\122\ See undesignated introductory paragraph of Rule 17a-3, as
amended.
\123\ See paragraph (a)(6) of Rule 17a-3, as amended.
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The Commission is restructuring paragraph (a)(11) of Rule 17a-3 to
eliminate paragraphs (a)(11)(i) and (ii).\124\ Under these amendments,
the text formerly located in paragraph (a)(11)(i) of Rule 17a-3 is set
forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as
amended, and the text of paragraph (a)(11)(ii) has been deleted from
the rule. The Commission proposed 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 entities enumerated in the
paragraph with the term ``a self-regulatory organization.'' \125\ The
Commission is amending the paragraph substantially as proposed but
adding the phrase ``a registered national securities association or a
registered national securities exchange'' rather than the term ``a
self-regulatory organization'' in order to more accurately reflect the
nature of the entities listed in the paragraph prior to these
amendments. The Commission is also redesignating this paragraph as
paragraph (a)(12)(i)(I) of Rule 17a-3.
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\124\ See paragraph (a)(11) of Rule 17a-3, as amended.
\125\ See paragraph (a)(12) of Rule 17a-3, as amended.
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As discussed in more detail in section II.E.1. of this release, the
Commission is adopting a limited alternative compliance mechanism in
Rules 17a-3 and 18a-5.\126\ The provisions of the limited alternative
compliance mechanism are in paragraph (b) of Rule 17a-3 and in
paragraph (c) of Rule 18a-5. As a result, the Commission is
redesignating paragraphs (b) through (g) of Rule 17a-5 as paragraphs
(c) through (g) and is redesignating proposed paragraph (c) of Rule
18a-5 as paragraph (d).
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\126\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted.
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The Commission also is amending paragraph (b) of Rule 17a-3 (and,
as mentioned above, is redesignating it as paragraph (c)). Paragraph
(b)(1) was designed to avoid duplication so that an introducing broker-
dealer will not be required 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, and the Commission is deleting it
accordingly. 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 eliminating the outdated capital standard reference.\127\ The
Commission is also deleting paragraph (b)(2), as it would be redundant
of paragraph (b) of Rule 17a-3, as amended.
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\127\ Paragraph (c) of Rule 17a-3, as amended, provides that 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. Sec. 240.17a-3 and 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. Sec. 240.17a-3 and 240.17a-4.
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The Commission is deleting paragraphs (c) and (d) of Rule 17a-3.
Paragraph (c) 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 no longer
appropriate.\128\ 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 their issuance. This exception was adopted
in 1953 to reduce the burden and expense of making accounting entries
for these transactions. The burden associated with these accounting
entries is no longer significant in light of the technological advances
in recordkeeping systems since 1953.\129\ In addition, the removal of
this exception will affect only a small number of transactions. As a
consequence of the removal of paragraphs (c) and (d) from Rule 17a-3,
paragraphs (e), (f), (g), and (h) are being redesignated as paragraphs
(d), (e), (f), and (g), respectively.
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\128\ 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.
\129\ 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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Paragraph (e) of Rule 17a-3 references Municipal Securities
Rulemaking Board (``MSRB'') Rule G-8 and states that compliance with
that rule will be deemed to be compliance with this section. The
Commission is adding the phrase ``or any successor rule'' to the
reference to Rule G-8 so that the reference does not become superseded
over time.
The Commission also made a number of non-substantive modifications
to the text of Rule 18a-5 in addition to the modifications discussed
above in section II.A.2.a. of this release.\130\
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\130\ In particular, the Commission made the following changes
to Rule 18a-5, as adopted: (1) Removing ``such'' from the phrase
``Each such security-based swap dealer'' in paragraph (a) for
consistency with paragraph (b) of Rule 18a-5, as adopted; (2)
replacing ``if any contract price'' with ``if any (including the
financial terms for security-based swaps)'' in paragraph (a)(1) for
consistency with paragraph (b)(1) of Rule 18a-5, as adopted; (3)
adding ``such securities were'' before the phrase ``purchase or
received or to whom sold or delivered'' in paragraphs (a)(1) and
(b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as
amended; (4) replacing ``purchase or sale'' with ``transactions'' in
the third sentence of paragraphs (a)(1) and (b)(1) for consistency
with paragraph (a)(1) of Rule 17a-3, as amended; (5) replacing ``the
termination or maturity date'' with ``the scheduled termination
date'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and (4)
for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (6)
replacing the phrase ``the notional amount'' with ``the notional
amount(s) and the currenc(ies) in which the notional amount(s) is
expressed'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and
(4) for consistency with paragraph (a)(1) of Rule 17a-3, as amended;
(7) adding ``counterparty's'' before the phrase ``legal entity
identifier'' in paragraphs (a)(1), (3), (5), and (15) and (b)(1),
(2), (4), and (11) for consistency with paragraph (a)(1) of Rule
17a-3, as amended; (8) removing ``,'' after ``expense'' in paragraph
(a)(2) for consistency with paragraph (a)(2) of Rule 17a-3, as
amended; (9) adding ``(including security-based swaps) after the
phrase ``deliveries of securities'' in paragraphs (a)(3) and (b)(2)
for consistency with paragraph (a)(3) of Rule 17a-3, as amended;
(10) replacing ``,'' with ``;'' after the phrase ``all other debits
and credits to such account'' in paragraph (a)(3) for consistency
with paragraph (a)(3) of Rule 17a-3, as amended; (11) replacing ``in
the case of security-based swap'' with ``for a security-based
swaps'' in paragraph (a)(3) for consistency with paragraph (a)(3) of
Rule 17a-3, as amended, and paragraph (b)(2) of Rule 18a-5, as
adopted; (12) removing ``ledger accounts (or other records)
itemizing separately,'' in paragraph (a)(3) for consistency with
paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (b)(2) of
Rule 18a-5, as adopted; (13) replacing ``subject'' with ``subjects''
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (14) adding ``for'' before the phrase ``the account of its
customers'' in paragraph (a)(4)(i) for consistency with paragraph
(a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule
18a-5, as adopted; (15) replacing ``locations'' with ``location'' in
paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule
17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (16) removing the ``,'' after the phrase ``in all cases''
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (17) replacing ``Sec. 240.15Fi-1'' with ``Sec. 240.15Fi-
2'' in paragraphs (a)(6) and (15) and (b)(11) to reflect a change in
reference; (18) replacing ``security-based swap dealer, major
security-based swap participant'' with ``security-based swap dealer
or major security-based swap participant'' in paragraphs (a)(10)(ii)
and (b)(8)(ii) for grammatical correctness and internal consistency;
(19) removing ``,'' after ``Sec. 240.15Fh-5'' in paragraph (a)(17)
for consistency with paragraph (a)(30) of Rule 17a-3, as amended,
and paragraph (b)(13) of Rule 18a-5, as adopted; (20) replacing ``a
security-based swap dealer or a major security based swap
participant'' with ``such'' in paragraph (b)(1) for clarity; (21)
replacing ``if any (includes the contract price for security-based
swaps)'' with ``(if any, including the financial terms for security-
based swaps)'' in paragraph (b)(1) for consistency with paragraph
(a)(1) of Rule 17a-3, as amended; (22) replacing ``and in addition,
for security-based swaps'' with ``and in addition, for a security-
based swap'' in paragraph (b)(2) for consistency with paragraph
(a)(3) of Rule 17a-3, as amended, and paragraph (a)(3) of Rule 18a-
5, as adopted; (23) replacing ``the time of cancellation, if
applicable'' with ``the time of execution or cancellation'' in
paragraph (b)(4) for consistency with paragraph (a)(6)(i)(A) in Rule
17a-3, as adopted; (24) changing the fourth sentence in paragraph
(b)(4) to read ``An order entered pursuant to the exercise of
discretionary authority by the security-based swap dealer or major
security-based swap participant, or associated person thereof, must
be so designated.'' for consistency with paragraph (a)(6)(i)(A) in
Rule 17a-3, as adopted; (25) adding a citation to 15 U.S.C.
78c(a)(70) to paragraph (c)(1) for internal consistency; (26)
replacing ``The term, as to a person supervised by a prudential
regulator,'' in paragraph (c)(2) with ``The term associated person,
as to an entity supervised by a prudential regulator'' to clarify
that the term referenced in the paragraph is ``associated person'';
(27) adding parentheses around the phrase ``if any, including the
financial terms for security-based swaps'' in paragraph (b)(1) for
consistency with paragraph (a)(1) of Rule 17a-3, as amended; (28)
replacing ``will'' with ``does'' in paragraph (h)(4) of Rule 17a-3,
as amended, for consistency with Section 3(a)(70) of the Exchange
Act; and (29) consolidating paragraphs (a)(19) and (b)(15) and
designating it paragraph (c) and redesignating paragraph (c) as
paragraph (d).
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[[Page 68562]]
3. Record Maintenance and Preservation Requirements
Rule 17a-4 requires a broker-dealer to preserve certain types of
records if it makes or receives them. The rule also prescribes the time
period that 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 adopting amendments to Rule 17a-4
that are designed to account for the security-based swap activities of
broker-dealers, including broker-dealer SBSDs and MSBSPs.\131\ The
Commission also is adopting a number of largely technical amendments to
Rule 17a-4. The Commission is adopting Rule 18a-6--which is modeled on
Rule 17a-4, as amended--to establish record maintenance and
preservation requirements for stand-alone and bank SBSDs and MSBSPs.
Rule 18a-6 does not include a parallel requirement for every
requirement in Rule 17a-4.\132\ In addition, the recordkeeping
requirements in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more
limited in scope than the requirements in the rule applicable to stand-
alone SBSDs and MSBSPs.
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\131\ Broker-dealer SBSDs and MSBSPs are subject to all the
record maintenance and preservation requirements applicable to
broker-dealers under Rule 17a-4, as amended, plus the additional
requirements specifically applicable only to SBSDs and MSBSPs.
\132\ The Commission did not propose to include in Rule 18a-6
requirements that would parallel the requirements in paragraphs
(b)(11), (g), (h), (k), and (l) of Rule 17a-4, as amended. These
requirements relate to activities that would not be relevant to
stand-alone SBSDs or MSBSPs. Other requirements in Rule 17a-4, as
amended, not included as parallel requirements in Rule 18a-6, as
adopted, are discussed below.
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a. Rule 17a-4 and Rule 18a-6
Undesignated Introductory Paragraph
The Commission proposed adding an undesignated introductory
paragraph to Rule 17a-4 explaining that the rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP, while a stand-alone or
bank SBSD or MSBSP is subject to Rule 18a-6.\133\ Similarly, the
Commission proposed an undesignated introductory paragraph to Rule 18a-
6 explaining that the rule would apply to a stand-alone or bank SBSD or
MSBSP, while a broker-dealer SBSD or MSBSP is subject to Rule 17a-4.
The Commission received no comments on the proposed undesignated
introductory paragraphs to Rules 17a-4 and 18a-6 and is adopting them
with non-substantive modifications to clarify which rule (17a-4 or 18a-
6) applies to a given type of entity.\134\
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\133\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25211.
\134\ See undesignated introductory paragraph of Rule 17a-4, as
amended; undesignated introductory paragraph of Rule 18a-6, as
adopted.
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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'').\135\ Consequently, under this
existing requirement, broker-dealer SBSDs and MSBSPs are required to
preserve for six years the same categories of records as stand-alone
broker-dealers. As discussed above, paragraphs (a) and (b) of Rule 18a-
5 contain certain recordkeeping requirements that parallel existing
requirements in Rule 17a-3, as amended. Under these parallel
requirements, stand-alone and bank SBSDs and MSBSPs must make and keep
current certain categories of records that broker-dealers must maintain
pursuant to the six year preservation requirement in Rule 17a-4.
Consequently, as proposed, paragraphs (a)(1) and (2) of Rule 18a-6
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.\136\ The Commission received no comments on
[[Page 68563]]
paragraphs (a)(1) and (2) of proposed Rule 18a-6 and is adopting them
as proposed.\137\
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\135\ Specifically, the six-year preservation requirement
applies to records required under paragraphs (a)(1) through (3),
(5), (21), and (22) of Rule 17a-3, as amended.
\136\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25211-12.
\137\ See paragraphs (a)(1) and (2) of Rule 18a-6, as adopted.
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Three Year Preservation Requirement for Certain Rule 17a-3 and Rule
18a-5 Records
Paragraph (b)(1) 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'').\138\ The Commission did not propose to amend or change
any of the existing cross-references to Rule 17a-3 in paragraph (b)(1)
of Rule 17a-4. The Commission did, however, propose adding cross-
references to certain new paragraphs that are being added to Rule 17a-3
to address security-based swap activities of broker-dealers, including
broker-dealer SBSDs and MSBSPs.\139\ As discussed above, paragraphs (a)
and (b) of Rule 18a-5 require stand-alone and bank SBSDs and MSBSPs
make and keep current certain categories of records that broker-dealers
must maintain pursuant to the three year preservation requirement, as
amended to incorporate the new records relating to security-based swap
activities. Consequently, as proposed, paragraphs (b)(1) and (2) of
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. The Commission received no
comments on these proposed preservation requirements and is adopting
them substantially as proposed.\140\
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\138\ Specifically, paragraph (b)(1) of Rule 17a-4 applies the
three-year preservation requirement to the records required to be
made and kept current under paragraphs (a)(4), (6) through (10),
(16), and (18) through (20) and (e) of Rule 17a-3, as amended. Prior
to these amendments, Rule 17a-4 did not cross-reference paragraph
(a)(11) of Rule 17a-3. The Commission is correcting this omission by
adding a cross reference to paragraph (a)(11) of Rule 17a-3 in
paragraph (b)(1) of Rule 17a-4, as amended. This requires 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 requirement.
\139\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25212.
\140\ See paragraph (b)(1) of Rule 17a-4, as amended; paragraphs
(b)(1) and (2) of Rule 18a-6, as adopted. The Commission is adopting
the following stylistic and corrective changes: (1) Removing the
reference to paragraph (a)(24) of Rule 17a-3 since that paragraph is
not being adopted as proposed; (2) replacing ``made pursuant to
paragraphs Sec. 240.18a-5(a)(1), (a)(2), (a)(3), and (a)(4)'' with
``made pursuant to Sec. 240.18a-5(a)(1) through (4)'' in paragraph
(a)(1) of Rule 18a-6, as adopted, for grammatical correctness; (3)
replacing ``made pursuant to paragraphs Sec. 240.18a-5(b)(1),
(b)(2), and (b)(3)'' with ``made pursuant to Sec. 240.18a-5(b)(1)
through (3)'' in paragraph (a)(2) of Rule 18a-6, as adopted, for
grammatical correctness; (4) replacing ``;'' with ``.'' for each
paragraph in Rule 18a-6, as adopted, for internal consistency; (5)
removing ``as applicable'' in paragraph (b)(1)(viii) of Rule 18a-6,
as adopted, as it is not necessary since only Part II is referenced
in Rule 18a-6, as adopted; (6) replacing ``security-based swap
customers'' with ``non-security-based swap customers'' in paragraph
(b)(1)(viii)(B) of Rule 18a-6, as adopted, to correct an error and
for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended;
(7) removing ``,'' after ``cost'' in paragraph (b)(1)(viii)(H) of
Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(ix) of
Rule 17a-4, as amended; (8) removing ``;'' after ``and'' in
paragraph (b)(1)(viii)(N) of Rule 18a-6, as adopted, for consistency
with paragraph (b)(8)(xvi) of Rule 17a-4, as amended; (9) removing
``Records which contain'' in paragraph (b)(2)(v) of Rule 18a-6, as
adopted, for clarity; and (10) replacing ``; and'' with ``.'' in
paragraph (b)(2)(vii) of Rule 18a-6, as adopted, for internal
consistency.
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Three Year Preservation Requirement for Certain Other Records
Paragraphs (b)(2) through (13) of Rule 17a-4 also provide 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. These are not categories of records a broker-
dealer is required to make and keep current under Rule 17a-3 but rather
types of records that a broker-dealer may make or receive in the
ordinary course of business. As discussed in more detail below, the
Commission proposed to amend certain of the provisions in paragraphs
(b)(2) through (13) of Rule 17a-4 to account for security-based swaps
and to require that broker-dealers, including broker-dealer SBSDs and
MSBSPs, preserve certain additional records related to security-based
swap activities.\141\ Further, as discussed below, the Commission
proposed requirements in paragraph (b) of Rule 18a-6 that would require
stand-alone and bank SBSDs and MSBSPs to preserve similar records.
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\141\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25212-13.
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In addition, the categories of records identified in paragraphs
(b)(3) through (5) and (7) of Rule 17a-4 must be retained only if they
relate to the broker-dealer's business as such (i.e., business as a
broker-dealer). Security-based swap activities of a broker-dealer that
is not registered as an SBSD or MSBSP are 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 MSBSP, the Commission proposed to amend Rule 17a-4 to clarify
that the business as such of these entities would include the firm's
business as an SBSD or MSBSP.\142\ The Commission received no comment
on the proposed definition and is adopting it substantially as
proposed.\143\
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\142\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
\143\ See paragraph (m)(5) of Rule 17a-4, as amended. The
definition as adopted is shorter than proposed to improve clarity
and now reads: ``[t]he term business as such includes security-based
swap activity.''
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Bank Records
Paragraph (b)(2) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all check books, bank
statements, cancelled checks, and cash reconciliations. The Commission
did not propose to amend this paragraph to specifically account for
security-based swaps. However, the Commission did propose a parallel
requirement in Rule 18a-6 applicable to stand-alone SBSDs and
MSBSPs.\144\ The Commission received no comments on this proposed bank
record preservation requirement and is adopting it as proposed.\145\
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\144\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
\145\ See paragraph (b)(1)(ii) of Rule 18a-6, as adopted.
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Bills
Paragraph (b)(3) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all bills receivable or
payable, paid or unpaid, relating to the business of the broker-dealer.
The Commission proposed a parallel requirement in Rule 18a-6 that would
require stand-alone SBSDs and MSBSPs to preserve these types of
bills.\146\ The Commission received no comments on this proposed bill
preservation requirement and is adopting it as proposed.\147\
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\146\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
\147\ See paragraph (b)(1)(iii) of Rule 18a-6, as adopted.
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Communications
Paragraph (b)(4) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, 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 the rules of a self-
regulatory organization (``SRO'') of which the broker-dealer is a
member regarding communications with the
[[Page 68564]]
public.\148\ The term ``communications,'' as used in paragraph (b)(4)
of Rule 17a-4, includes all electronic communications (e.g., emails and
instant messages).\149\ Communications related to security-based swap
activities would be communications relating to the business as such of
a broker-dealer, including a broker-dealer SBSD and MSBSP.
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\148\ Paragraph (b)(4) of Rule 17a-4 further provides that the
term communications as used in the paragraph includes sales scripts.
\149\ 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; 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, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR
55818, 55825 (Nov. 2, 2001).
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The Commission had not previously interpreted the term
``communications'' to include telephonic communications. However,
Section 15F(g)(1) of the Exchange Act provides that each registered
SBSD and MSBSP shall maintain daily trading records of the security-
based swaps of the registered SBSD or 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. Therefore, to implement Section
15F(g)(1) of the Exchange Act, the Commission proposed amendments to
the preservation requirement in paragraph (b)(4) of Rule 17a-4 to
require recordings of telephone calls required to be maintained
pursuant to Section 15F(g)(1) of the Exchange Act.\150\ Under this
requirement, a broker-dealer SBSD or MSBSP would be required to
preserve for three years telephone calls that it records to the extent
the recordings are required to be maintained pursuant to Section
15F(g)(1). The Commission proposed communication preservation
requirements for stand-alone and bank SBSDs and MSBSPs that would
parallel those in Rule 17a-4, as proposed to be amended, to further
implement Section 15F(g)(1). The provision applicable to bank SBSDs and
MSBSPs would limit the requirement to communications that relate to the
business of an SBSD or MSBSP.
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\150\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213-14.
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The Commission emphasizes that the Section 15(g)(1) of the Exchange
Act and the new rules requiring the retention of telephone calls do not
establish requirements to record telephone calls. Instead, the rules
require firms to retain recordings of telephone calls that are within
the scope of Section 15(g)(1) of the Exchange Act. Thus, if the firm
records a telephone call voluntarily or for some other reason, it will
need to retain the recording if the call falls within the scope of
Section 15(g)(1) of the Exchange Act. However, a firm's decision not to
record a telephone call that falls within the scope of Section 15(g)(1)
of the Exchange Act will not implicate these new retention
requirements.
A commenter urged the Commission to apply a one-year retention
requirement as was adopted by the CFTC with respect to retaining
recordings of telephone calls.\151\ In response, the Commission notes
that applying the three-year retention requirement to these recordings
is designed to allow staff examiners access to records they may need to
review the past activities of SBSDs and MSBSPs, given that examinations
are conducted using a risk-based program. In addition, the Commission
believes that a three-year retention period will benefit counterparties
in that it will preserve information that may help support them if, for
example, a dispute arises about a transaction with an SBSD or MSBSP. A
three-year retention period also is consistent with the retention
period applicable to the vast majority of broker-dealer records, as
compared to a one year period. Further, although the CFTC requires
registrants to make and keep records of all oral communications
pertaining to pre-execution trade information, including telephone
calls, the Commission's record retention rule applies only to
recordings of telephone calls, i.e., those voluntarily made by the
registrant.\152\ The Commission is adopting the communications
preservation requirements as proposed.\153\
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\151\ See SIFMA 9/5/2014 Letter.
\152\ See 17 CFR 23.202(a)(1) (requiring CFTC-registered swap
dealers and major swap participants to ``make and keep pre-execution
trade information, including, at a minimum, records of all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices, that
lead to the execution of a swap, whether communicated by telephone .
. .'').
\153\ See paragraph (b)(4) of Rule 17a-4, as amended; paragraphs
(b)(1)(iv) and (b)(2)(ii) of Rule 18a-6, as adopted.
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Trial Balances
Paragraph (b)(5) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, 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. The Commission proposed including a
parallel requirement in Rule 18a-6 applicable to stand-alone SBSDs and
MSBSPs.\154\ In contrast to Rule 17a-4, the provision in Rule 18a-6, as
proposed, did not refer to computations of ``aggregate indebtedness''
because the proposed capital rules for stand-alone SBSDs and MSBSPs--
Rules 18a-1 and 18a-2, respectively--did not include such a
calculation.\155\ Further, to account for the capital standard for
stand-alone MSBSPs, the proposed requirement referred to tangible net
worth.\156\ The Commission received no comments on the proposal and
adopted Rules 18a-1 and 18a-2.\157\ Consequently, the Commission is
adopting the trial balance preservation requirements as proposed.\158\
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\154\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
\155\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70221-29.
\156\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70256-57. A broker-dealer MSBSP is subject to the net capital
requirements in Rule 15c3-1.
\157\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44052-68.
\158\ See paragraph (b)(1)(v) of Rule 18a-6, as adopted.
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Account Documents
Paragraph (b)(6) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, 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 as well as
copies of resolutions empowering an agent to act on behalf of a
corporation. The Commission proposed parallel requirements in Rule 18a-
6 for stand-alone and bank SBSDs and MSBSPs to preserve similar types
of records, but only with respect to security-based swap accounts.\159\
For example, bank SBSDs and MSBSPs would not be required to maintain
these records with respect to accounts involving exclusively banking
related services. The Commission received no comments on the proposed
account documentation
[[Page 68565]]
preservation requirements and is adopting them as proposed.\160\
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\159\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
\160\ See paragraphs (b)(1)(vi) and (b)(2)(iii) of Rule 18a-6,
as adopted.
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Written Agreements
Paragraph (b)(7) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all written agreements (or
copies thereof) entered into by the firm relating to its business as
such, including agreements with respect to any account. The Commission
proposed to amend this paragraph to require the preservation of 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 security-based swaps of the customer or
non-customer--with the account records of the customer or non-
customer.\161\ The Commission proposed parallel requirements in Rule
18a-6 for stand-alone and bank SBSDs and MSBSPs. The provision
applicable to bank SBSDs and MSBSPs would limit the preservation
requirement to written agreements relating to the registrant's business
as an SBSD or MSBSP. The Commission received no comments on the
proposed written agreement preservation requirements and is adopting
them substantially as proposed.\162\
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\161\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
\162\ See paragraph (b)(7) of Rule 17a-4, as amended; paragraphs
(b)(1)(vii) and (b)(2)(iv) of Rule 18a-6, as adopted. The Commission
is adopting the following stylistic and corrective changes: (1)
Replacing ``;'' with ``.'' for each paragraph in Rule 18a-6 for
internal consistency; (2) removing ``as applicable'' in paragraph
(b)(1)(viii) of Rule 18a-6, as adopted, as it is not necessary since
only Part II is referenced in Rule 18a-6, as adopted; (3) replacing
``security-based swap customers'' with ``non-security-based swap
customers'' in paragraph (b)(1)(viii)(B) of Rule 18a-6, as adopted,
to correct an error and for consistency with paragraph (b)(8)(ii) of
Rule 17a-4, as amended; (4) removing ``,'' after ``cost'' in
paragraph (b)(1)(viii)(H) of Rule 18a-6, as adopted, for consistency
with paragraph (b)(8)(ix) of Rule 17a-4, as amended; (5) removing
``;'' after ``and'' in paragraph (b)(1)(viii)(N) of Rule 18a-6, as
adopted, for consistency with paragraph (b)(8)(xvi) of Rule 17a-4,
as amended; (6) removing ``Records which contain'' in paragraph
(b)(2)(v) of Rule 18a-6, as adopted, for clarity; (7) replacing ``;
and'' with ``.'' in paragraph (b)(2)(vii) of Rule 18a-6, as adopted,
for internal consistency.
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Information Supporting Financial Reports
Paragraphs (b)(8)(i) through (xv) of Rule 17a-4 require a broker-
dealer, including a broker-dealer SBSD or MSBSP, 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 17a-12, as
applicable. The paragraphs specifically identify the types of
supporting information that must be preserved, including money
balances, securities positions (which will include security-based swap
positions), futures positions, commodity positions, and options
positions, among other things.
The Commission proposed to: (1) Amend certain of these paragraphs
to require the preservation of the same type of supporting information
required of commodity positions, but for swap positions; (2) add a
paragraph to require a broker-dealer SBSDs to preserve records that
contain detail relating to the calculation of the risk margin amount
under the proposed SBSD capital rules; and (3) add a new paragraph to
require broker-dealer SBSDs to preserve records containing detail
relating to the possession or control requirements in the proposed SBSD
segregation rule.\163\ The Commission proposed requirements in Rule
18a-6 for stand-alone SBSDs and MSBSPs that paralleled the requirements
in paragraphs (b)(8)(i) through (xv) of Rule 17a-4, as proposed to be
amended. Finally, the Commission proposed that bank SBSDs preserve
records containing detail relating to the possession or control
requirements in the proposed SBSD segregation rule (but not any of the
other preservation requirements). The Commission received no comments
on these proposals and has adopted the SBSD capital rules requiring a
risk margin amount calculation and the SBSD segregation rules
prescribing a possession or control requirement.\164\ Consequently, the
Commission is adopting the information supporting financial statement
preservation requirements substantially as proposed.\165\
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\163\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214-16. See Capital, Margin, and Segregation Proposing Release,
77 FR at 70221-24, 70278-82 (discussing the proposed risk margin
amount and possession or control requirements respectively).
\164\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43883-86 (risk margin amount calculation), 43935-38
(possession or control requirement).
\165\ See paragraph (b)(8) of Rule 17a-4, as amended; paragraphs
(b)(1)(viii) and (b)(2)(v) of Rule 18a-6, as adopted. The adopted
rule text modifies the proposed rule text in the following non-
substantive ways. The Commission proposed to amend paragraph (b)(8)
of Rule 17a-4 to add a reference to proposed Form SBS in the
introductory text after references to certain parts of the FOCUS
Report. It is no longer necessary to include this cross-reference,
because as discussed below, the Commission is revising Part II and
adopting Part IIC of the FOCUS Report instead of adopting Form SBS.
However, non-substantive changes in connection with those revisions
are being made to improve the clarity of paragraph (b)(8); namely,
references to the parts of Form X-17A-5 now read ``Part II or Part
IIA of Form X-17A-5 (Sec. 249.617 of this chapter)'' to improve
readability, and the word ``audited'' is being removed from the
phrase ``annual audited financial statements'' for consistency with
Rules 17a-5 and 18a-7. Paragraph (b)(1)(viii) of Rule 18a-6, as
adopted, reflects the following technical changes from paragraph
(b)(1)(viii) of Rule 18a-6, as proposed to be adopted: (1) Paragraph
(b)(1)(viii) references ``Part II of Form X-17A-5 (Sec. 249.617 of
this chapter)'' instead of ``Part II of Form X-17A-5 (Sec. 249.617
of this chapter), as applicable,'' because there is no need to
reference ``as applicable'' when only one part of Form X-17A-5 is
being referenced; (2) paragraph (b)(1)(viii)(B) refers to ``non-
security-based swap customers'' instead of ``security-based swap
customers'' for consistency with paragraph (b)(8)(ii) of Rule 17a-4,
as amended; (3) paragraph (b)(1)(viii)(H) no longer includes a comma
after the word ``cost'' for consistency with paragraph (b)(8)(ix) of
Rule 17a-4, as amended; and (4) paragraph (b)(1)(viii)(N) no longer
includes a semicolon after the word ``and'' for consistency with
paragraph (b)(8)(xvi), as amended.
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Rule 15c3-4 Risk Management Records
OTC derivatives dealers and ANC broker-dealers are subject to risk
management requirements.\166\ In particular, Rule 15c3-4 requires these
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. The rule
also requires periodic reviews (which may be performed by internal
audit staff) and annual reviews (which must be conducted by independent
public accountants) of the firm's risk management systems. Paragraph
(b)(10) of Rule 17a-4 requires broker-dealers subject to Rule 15c3-4 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.
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\166\ See 17 CFR 240.15c3-4 (``Rule 15c3-4'').
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The Commission proposed that nonbank SBSDs and MSBSPs be required
to comply with Rule 15c3-4.\167\ Broker-dealer SBSDs will be subject to
paragraph (b)(10) of Rule 17a-4. The Commission proposed a parallel
provision in Rule 18a-6 to require nonbank SBSDs and MSBSPs to preserve
the same types of records relating to Rule 15c3-4.\168\ The Commission
did not propose that bank SBSDs and MSBSPs comply with Rule 15c3-4
\169\ and thus did not propose a
[[Page 68566]]
parallel record preservation requirement for these entities. The
Commission received no comments on these proposals and has adopted the
requirement that nonbank SBSDs and MSBSPs comply with Rule 15c3-4.\170\
Consequently, the Commission is adopting the risk management records
preservation requirements as proposed.\171\
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\167\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70250-51, 70256-57.
\168\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25216.
\169\ See Section 15F(d)(2)(A) of the Exchange Act (providing
that the Commission may not prescribe rules imposing prudential
requirements on SBSDs and MSBSPs for which there is a prudential
regulator).
\170\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43906-07.
\171\ See paragraph (b)(1)(ix) of Rule 18a-6, as adopted.
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Credit Risk Determinations
Paragraph (c)(4)(vi)(A) of Sec. 240.15c3-1e (appendix E to Rule
15c3-1) requires an ANC broker-dealer to make and keep current a record
of the basis of its internal credit assessments of counterparties for
purposes of the credit risk charges it must take as part of its net
capital computation. Paragraph (b)(12) of Rule 17a-4 requires an ANC
broker-dealer to preserve these records. A broker-dealer SBSD approved
to use models to compute net capital will be subject to the
recordkeeping provision in paragraph (c)(4)(vi)(A) of appendix E to
Rule 15c3-1 and the corresponding record preservation requirement in
paragraph (b)(12) of Rule 17a-4. The proposed capital rule for SBSDs
included a parallel provision requiring a stand-alone SBSD approved to
use models to make and keep current the same type of record of the
basis of its internal credit assessments of counterparties.\172\
Therefore, the Commission proposed a parallel corresponding record
preservation requirement in Rule 18a-6 for such a stand-alone
SBSD.\173\ The Commission received no comments on the proposal and
adopted the requirement in the capital rule for stand-alone SBSDs to
make and keep current these records.\174\ Consequently, the Commission
is adopting the credit risk determination preservation record
requirement as proposed.\175\
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\172\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70340.
\173\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25216-17.
\174\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44060; paragraph (e)(2)(iii)(F)(2) of Rule 18a-1.
\175\ See paragraph (b)(1)(x) of Rule 18a-6, as adopted.
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Regulation SBSR
As discussed above, the Commission has adopted Regulation SBSR,
which assigns the duty to report a security-based swap transaction to a
registered SDR.\176\ The Commission proposed to amend paragraph (b)(14)
of Rule 17a-4 to require that broker-dealers, including broker-dealer
SBSDs and MSBSPs, preserve the information they are required to submit
to a registered SDR under Regulation SBSR.\177\ In addition, the
Commission proposed to include parallel preservation requirements in
Rule 18a-6 for stand-alone and bank SBSDs. The Commission received no
comments on the proposed Regulation SBSR record preservation
requirements and is adopting them as proposed.\178\
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\176\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 80 FR 14567; Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information, 81
FR 53546.
\177\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25217.
\178\ See paragraph (b)(14) of Rule 17a-4, as amended;
paragraphs (b)(1)(xi) and (b)(2)(vi) of Rule 18a-6, as adopted.
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Records Relating to Business Conduct Standards
As discussed above, the Commission has adopted Rules 15Fh-1 through
15Fh-6 and Rule 15Fk-1. These rules require, among other things, that
SBSDs and MSBSPs make certain disclosures, provide certain notices, and
make other records. The Commission proposed to amend paragraph (b) of
Rule 17a-4 to add a requirement that broker-dealer SBSDs and MSBSPs
preserve copies of documents, communications, and notices related to
the business conduct and chief compliance officer requirements in Rules
15Fh-1 through 15Fh-6 and Rule 15Fk-1.\179\ In addition, the Commission
proposed to adopt parallel record preservation requirements in Rule
18a-6 for stand-alone and bank SBSDs and MSBSPs. The Commission
received no comments on the proposed business conduct record
preservation requirements and is adopting them as proposed.\180\
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\179\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25217.
\180\ See paragraph (b)(15) of Rule 17a-4, as amended;
paragraphs (b)(1)(xii) and (b)(2)(vii) of Rule 18a-6, as adopted.
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Section 15F(h)(4)(C) of the Exchange Act imposes duties on SBSDs
that act as advisors to special entities. Paragraph (a) of Rule 15Fh-2
defines what it means to act as an advisor to a special entity. If an
SBSD is acting in this capacity, Section 15F(h)(4)(C) and paragraph (b)
of Rule 15Fh-4 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.
Section 15F(h)(5)(A) and paragraph (a) of Rule 15Fh-5 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 a ``qualified
independent representative,'' as that term is defined in the rule. The
Commission proposed to amend paragraph (b) of Rule 17a-4 to add a
requirement that broker-dealer SBSDs and 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.\181\ In addition, the
Commission proposed parallel record preservation requirements in Rule
18a-6 for stand-alone and bank SBSDs. The Commission received no
comments on the proposed special entity advisor record preservation
requirements and is adopting them as proposed.\182\
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\181\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218. As noted above in section II.A.2.a. of this release, on
October 31, 2018, the Commission issued a statement, which set forth
the Commission's position that, for a period of five years from the
Registration Compliance Date for SBSDs and MSBSPs (as defined in
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 80 FR at 48988 and discussed below
in section III.B. of this release), certain actions with respect to
specific provisions of the business conduct standards will not
provide a basis for a Commission enforcement action. See Statement
on Business Conduct Standards, 83 FR at 55486. To the extent SBSDs
and MSBSPs rely on the statement, the Commission encourages them to
maintain records of the written representations described in the
statement until such time as the statement is no longer in force.
\182\ See paragraph (b)(16) of Rule 17a-4, as amended;
paragraphs (b)(1)(xiii) and (b)(2)(viii) of Rule 18a-6, as adopted.
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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. 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. The Commission proposed to amend
paragraph (d) of Rule 17a-4 to add references to proposed Form SBSE-BD
and proposed Form SBSE-W.\183\ These were the registration and
withdrawal of registration forms, respectively, the Commission proposed
for broker-dealer SBSDs and MSBSPs.\184\ The
[[Page 68567]]
Commission proposed a parallel requirement in Rule 18a-6 for stand-
alone and bank SBSDs and MSBSPs, except that rule text referred to the
registration forms these entities would use (i.e., Forms SBSE and SBSE-
A, respectively) rather than Form SBSE-BD.\185\
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\183\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218.
\184\ 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); see also Cross-Border
Proposing Release, 78 FR 30968.
\185\ Paragraph (m)(3) of Rule 17a-4, as amended, defines the
term ``securities regulatory authority'' to have the meaning set
forth in paragraph (f)(3) of Rule 17a-3, as amended. Paragraph
(h)(1) of Rule 18a-6, as adopted, defines the term ``securities
regulatory authority'' in the same way as that term is defined in
paragraph (f)(3) of Rule 17a-3, as amended. The Commission proposed
to amend the definition of ``securities regulatory authority'' to
include the CFTC and a prudential regulator to the extent the
prudential regulator oversees entity's security-based swap
activities. The Commission believes the better approach is to
specifically reference the CFTC and the prudential regulator in a
given recordkeeping provision where the inclusion of a reference to
the CFTC or prudential regulator is appropriate given the type of
registrant and the nature of the records. As a result, the
Commission is adding references to the CFTC to paragraph (d) of Rule
17a-4, as amended, and a reference to the CFTC to paragraph (c) of
Rule 18a-6, as adopted.
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The Commission received no comments on these proposals and has
adopted the forms.\186\ However, to correct an inadvertent omission,
they now also require preservation of Form SBSE-C (17 CFR
249.1600c).\187\ The registration rule for SBSDs and MSBSPs requires
firms applying to register as an SBSD or MSBSP to file Form SBSE-C
(which contains two separate certifications) in addition to Forms SBSE,
SBSE-A, and/or SBSE-BD.\188\ For these reasons, the Commission is
adopting the corporate document preservation requirements with the
modifications discussed above.\189\
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\186\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
\187\ The paragraphs as adopted contain updated cross-references
to the CFR citations for Form SBSE, Form SBSE-A, Form SBSE-BD, and
Form SBE-W (i.e., 17 CFR 249.1600, 17 CFR 249.1600a, 17 CFR
249.1600b, and 17 CFR 249.1601, respectively).
\188\ See 17 CFR 240.15Fb2-1(a).
\189\ See paragraph (d) of Rule 17a-4, as amended; paragraph (c)
of Rule 18a-6, as adopted.
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Associated Persons
As discussed above, paragraph (a)(12) of Rule 17a-3 requires a
broker-dealer, including a broker-dealer SBSD or MSBSP, to make and
keep current records of information about associated persons, and the
Commission is adopting parallel requirements in Rule 18a-5 to require a
stand-alone or bank SBSD or MSBSP to make and keep current the same
types of records.\190\ Paragraph (e)(1) of Rule 17a-4 requires broker-
dealers to maintain and preserve the associated person's 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. The Commission proposed to include a parallel requirement
in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs to maintain and
preserve their records about associated persons.\191\ The Commission
received no comments on these proposed associated persons record
preservation requirements and is adopting them as proposed.\192\
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\190\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as
adopted.
\191\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218.
\192\ See paragraph (d)(1) of Rule 18a-6, as adopted. Paragraph
(h)(2) of Rule 18a-6, as adopted, defines the term ``associated
person'' to have the same meaning as that term is defined in
paragraph (c) of Rule 18a-5, as adopted.
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Regulatory Authority Reports
Paragraph (e)(6) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, 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.\193\ The Commission proposed parallel
record preservation requirements in Rule 18a-6 for stand-alone SBSDs
and MSBSPs to maintain and preserve the same types of reports until
three years after the date of the report.\194\ The Commission proposed
a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs but only
if the reports relate to security-based swap activities. The Commission
received no comments on these proposed regulatory authority reports
preservation requirements and is adopting them as proposed.\195\
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\193\ As discussed earlier, paragraph (m)(3) of Rule 17a-4
defines the term ``securities regulatory authority'' to have the
meaning set forth in paragraph (f)(3) of Rule 17a-3, as amended. The
Commission proposed to amend the definition of ``securities
regulatory authority'' to include the CFTC and a prudential
regulator to the extent the prudential regulator oversees security-
based swap activities. The Commission believes the better approach
is to specifically identify the CFTC and prudential regulator in a
given recordkeeping provision where the inclusion of a reference to
the CFTC or prudential regulator is appropriate given the type of
registrant and the nature of the records. See paragraph (f)(3) of
Rule 17a-3, as amended. As a result, the Commission is amending
paragraph (e)(6) of Rule 17a-4 by adding references to reports
requested or required by the CFTC.
\194\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218-19.
\195\ See paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as
adopted. The Commission is replacing the term ``regulatory
authority'' with the term ``securities regulatory authority'' in
paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as adopted. Paragraph
(h)(1) of Rule 18a-6, as adopted, defines the term securities
regulatory authority in the same way as that term is defined in
paragraph (f)(3) of Rule 17a-3, as amended. As noted above, the
Commission proposed to amend the definition of the term ``securities
regulatory authority'' cross-referenced in paragraph (f)(3) of Rule
17a-3 to include the CFTC and prudential regulators but is declining
to do so. In lieu of amending the definition of the term
``securities regulatory authority,'' the Commission is adding
references to reports requested or required by the CFTC to paragraph
(d)(2)(i) of Rule 18a-6, as adopted, and to reports requested or
required by the CFTC or the prudential regulators to paragraph
(d)(2)(ii) of Rule 18a-6, as adopted. The Commission staff consulted
with staff from the prudential regulators and the CFTC in drafting
the final rules discussed in this release, including paragraph
(d)(2)(ii) of Rule 18a-6 (applicable to bank SBSDs and MSBSPs). The
Commission recognizes that a bank SBSD or MSBSP may need to notify
its prudential regulator(s) before furnishing (pursuant to paragraph
(g) of Rule 18a-6) certain records identified in paragraph
(d)(2)(ii) of Rule 18a-6.
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Compliance, Supervisory, and Procedures Manuals
Paragraph (e)(7) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily
accessible place each compliance, supervisory, and procedures manual,
including any updates, modifications, and revisions, 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. The Commission proposed
a parallel requirement in Rule 18a-6 for stand-alone SBSDs and MSBSPs
to maintain and preserve the same types of compliance, supervisory, and
procedures manuals for the same period of time.\196\ The Commission
proposed a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs
but only if the manuals involve compliance with applicable laws and
rules relating to security-based swap activities. The Commission
received no comments on these proposed compliance, supervisory, and
procedures manual preservation requirements and is adopting them as
proposed.\197\
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\196\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219.
\197\ See paragraphs (d)(3)(i) and (ii) of Rule 18a-6, as
adopted.
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Electronic Storage
Paragraph (f) of Rule 17a-4 provides that the records a broker-
dealer, including a broker-dealer SBSD or MSBSP, is required to
maintain and preserve under Rules 17a-3 and 17a-4 may be immediately
produced or reproduced on micrographic media or by means of electronic
storage media and be maintained and preserved for the required time in
that form. The use of
[[Page 68568]]
electronic storage media is subject to certain conditions, including
that the media must preserve the records exclusively in a manner that
is non-rewriteable and non-erasable (also known as a write once, read
many or ``WORM'').\198\ The Commission proposed including a parallel
record maintenance and preservation requirement in Rule 18a-6, but only
with respect to electronic storage media.\199\ The Commission 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.\200\
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\198\ See paragraph (f)(2)(ii)(A) of Rule 17a-4.
\199\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219.
\200\ The Commission believes that most broker-dealers use
electronic storage media rather than micrographic media for the same
reasons.
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The Commission received comments that its electronic storage
requirements for SBSDs and MSBSPs, including for broker-dealers dually
registered as SBSDs, should not mandate that the records be preserved
exclusively in a WORM format.\201\ One commenter further urged the
Commission, in any event, ``not to expand the WORM requirement to SBSDs
at this time.'' \202\ The Commission also received comment requesting
that it act on a rule petition filed by several organizations in
November 2017 and harmonize its final rule with the CFTC's
corresponding requirements, which were recently modified to eliminate a
similar WORM requirement.\203\
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\201\ See, e.g., SIFMA 9/5/2014 Letter; Letter from Walt L.
Lukken, President and Chief Executive Officer, Futures Industry
Association (Nov. 29, 2018) (``FIA Letter'').
\202\ See, e.g., SIFMA 9/5/2014 Letter.
\203\ See FIA Letter. The CFTC modified CEA Rule 1.31 to remove
its WORM requirement in May 2017. See Recordkeeping, 82 FR 24479
(May 30, 2017).
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The Commission's electronic record storage requirements in Rule
17a-4 are based on the ``importance for recordkeeping of ready access,
reliability, and permanence of records.'' \204\ The Commission has
described the recordkeeping requirements in Rules 17a-3 and 17a-4 as
``integral to the Commission's investor protection function because the
preserved records are the primary means of monitoring compliance with
applicable securities laws, including antifraud provisions and
financial responsibility standards.'' \205\ Any modification to the
electronic storage requirements in Rule 17a-4 may raise issues that are
distinct from those raised by stand-alone and bank SBSDs and MSBSPs.
Accordingly, the Commission believes that any change to these
requirements should be addressed in a separate regulatory initiative in
which the Commission intends to consider electronic storage media
issues.
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\204\ See Reporting Requirements for Brokers or Dealers Under
the Securities Exchange Act of 1934, Exchange Act Release No. 38245
(Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).
\205\ Electronic Storage of Broker-Dealer Records, Exchange Act
Release No. 47806 (May 7, 2003), 68 FR 25281 (May 12, 2003).
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However, the Commission is clarifying that the WORM requirement
does not mandate the use of a specific type of media. In particular,
the Commission issued guidance in 2003 to clarify that the WORM
requirement can be met using an ``electronic storage system that
prevents the overwriting, erasing or otherwise altering of a record
during its required retention period through the use of integrated
hardware and software control codes.'' \206\ This statement in the
release--because it refers to ``hardware'' control codes--has raised
questions as to whether an electronic storage system that relies
exclusively on software coding to meet the WORM requirement is
permitted under the rule. The Commission is clarifying that a software
solution that prevents the overwriting, erasing, or otherwise altering
of a record during its required retention period would meet the
requirements of the rule. For example, the rule does not require the
use of a specific medium such as optical disk, CD-ROM, or magnetic tape
to meet the WORM requirement.
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\206\ Electronic Storage of Broker-Dealer Records, 68 FR 25282.
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The Commission recognizes that the entities that may register as
stand-alone or bank SBSDs or MSBSPs may have existing electronic
storage systems that do not meet the WORM requirement and therefore
could incur substantial costs in building a recordkeeping system that
meets this requirement. For these reasons, the Commission is modifying
Rule 18a-6 to eliminate the requirement that the electronic storage
system preserve the records exclusively in a non-rewriteable and non-
erasable format (i.e., a WORM format).\207\ In connection with this
modification, the Commission is eliminating the proposed requirement
that the stand-alone or bank SBSD or MSBSP notify the Commission at
least 90 days before using electronic storage media other than optical
disk technology because this provision is no longer relevant given the
absence of the WORM requirement in the rule as adopted.\208\ The
Commission also is modifying the proposed rule text by replacing the
phrase ``electronic storage media'' throughout paragraph (e) of Rule
18a-6, as adopted, with the phrase ``electronic storage system'' to
further clarify that the final rule does not require the use of a
particular storage media such as optical disk or CD-ROM (as is the case
with Rule 17a-4, as noted above).\209\
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\207\ This requirement was in paragraph (e)(2)(ii)(A) of Rule
18a-6, as proposed.
\208\ This requirement was in paragraph (e)(2)(i) of Rule 18a-6,
as proposed.
\209\ See paragraph (e) of Rule 18a-6, as adopted. The
Commission also is deleting the phrase ``on any medium acceptable
under Sec. 240.18a-6'' from paragraph (e)(3)(iii) of Rule 18a-6. In
addition, the Commission is also replacing throughout paragraph (e)
references to information placed ``on'' electric storage systems
with references to information placed ``in'' such systems.
---------------------------------------------------------------------------
The Commission is modifying the provision of the rule that required
the original and duplicate units of the storage media to be serialized
and time-dated to clarify that this must be done if applicable (i.e.,
if the firm uses a storage media such as optical disk or CD-ROM).\210\
The Commission also is modifying the provision of the rule that
required the firm to have available facilities for immediate, easily
readable projection or productions of electronic storage media images
and for producing easily readable images; the final rule instead
provides that the facilities can be for the projection or production of
images or records that are maintained on the electronic storage
system.\211\ This modification is designed to accommodate electronic
storage systems that do not use optical disk or CD-ROM media. Further,
the Commission is modifying the provision of the rule that required the
firm to be ready at all times to immediately provide an facsimile
enlargement which the staff of the Commission may request; the final
rule requires instead that the firm must be ready at all times to
immediately provide in a readable format any record or index stored on
the electronic storage system which the staff of the Commission may
request.\212\
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\210\ See paragraph (e)(2)(ii) of Rule 18a-6, as adopted.
\211\ See paragraph (e)(3)(i) of Rule 18a-6, as adopted.
\212\ See paragraph (e)(3)(ii) of Rule 18a-6, as adopted.
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The elimination of the WORM requirement as the exclusive means of
storing records electronically will provide flexibility to stand-alone
and bank SBSDs and MSBSPs in terms of establishing and maintaining
electronic storage systems and will eliminate a potential conflict with
the requirements of the CFTC. However, eliminating the WORM requirement
does not change the
[[Page 68569]]
underlying requirements in Rules 18a-5 and 18a-6 that stand-alone and
bank SBSDs and MSBSPs make and keep certain records, preserve those and
other records for required time periods, and furnish promptly legible,
true, complete, and current copies of records to a representative of
the Commission. A firm's obligation to comply with these requirements
is the same irrespective of whether it stores records in paper form or
electronically and, therefore, a firm that elects to store records
electronically should keep these obligations in mind in designing,
implementing, and maintaining an electronic storage system.
The Commission also is modifying the final rule to eliminate the
proposed provision that required at least one third party to have
access to and the ability to download information from the electronic
storage media and for that third party to execute an undertaking that
the third party would provide the Commission with the information
necessary download information from the electronic storage media.\213\
This provision was designed to facilitate the Commission's access to
electronically stored records. A commenter stated that this requirement
(along with the WORM requirement) was ``outdated in light of the
changed technological environment.'' \214\ The commenter further stated
that it requires broker-dealers to provide third-party access to firm
systems and client information, which ``needlessly exposes firms to
data leakage and cybersecurity threats.'' As noted above, the
Commission believes that any change to the broker-dealer electronic
storage provisions should be addressed in a separate regulatory
initiative where the Commission intends to consider electronic storage
media issues in a broader context, including with respect to other
market participants. Accordingly, for the purposes of Rule 18a-6, the
Commission believes it is appropriate not to adopt the proposed
requirement.
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\213\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25313.
\214\ See FIA Letter.
---------------------------------------------------------------------------
Finally, paragraph (e)(3)(v) of Rule 18a-6, as proposed, would
require firms that use an electronic storage system to have an audit
system providing for accountability regarding the inputting of records
to the electronic storage system and inputting of any changes made to
every original and duplicate record.\215\ This provision was modeled on
the audit system requirement prescribed in paragraph (f)(3)(v) of Rule
17a-4. A commenter stated that firms report substantial difficulty
assessing whether they have complied with the audit system requirement
of Rule 17a-4.\216\
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\215\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25312.
\216\ See FIA Letter.
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The Commission explained the audit system requirement when it
adopted the electronic storage provisions of Rule 17a-4.\217\ In
particular, the Commission stated that the rule requires an audit
system to be utilized only when records required to be maintained under
Rule 17a-4 are being entered or when any additions to existing records
are made.\218\ Consequently, an audit record is not required when a
record is accessed but cannot be altered by the reader.\219\ The
Commission further stated that, although it was not specifying the
contents of each audit system, data automatically or otherwise stored
(in the computer or in hard copy) regarding inputting of records and
changes to existing records will be part of that system.\220\ The
Commission envisioned that the identities of individuals actually
inputting records and making particular changes, and the identity of
documents changed and the identity of new documents created, are the
kind of information that automatically would be collected pursuant to
the audit system requirements.\221\
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\217\ See 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).
\218\ Id. at 6471.
\219\ Id.
\220\ Id. At 6473.
\221\ Id.
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In addition, as part of the 2003 guidance with respect to the WORM
requirement, the Commission stated that the audit system would need to
provide accountability regarding the length of time records are stored
in a non-rewriteable and nonerasable manner.\222\ The Commission
further stated that this should include senior management level
approval of how the system is configured to store records for their
required retention periods in a non-rewriteable and nonerasable
manner.\223\
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\222\ Electronic Storage of Broker-Dealer Records, 68 FR 25283.
\223\ Id.
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The audit system requirements of Rule 18a-6 are modeled on the
existing requirements of Rule 17a-4. Consequently, firms can rely on
the Commission's description of the Rule 17a-4 requirements--as set
forth above--for the purposes of Rule 18a-6.
For the foregoing reasons, the Commission is adopting the
electronic storage requirements with the modifications discussed
above.\224\
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\224\ See paragraph (e) of Rule 18a-6, as adopted. The
Commission is also making the following non-substantive changes to
paragraph (e) of Rule 18a-6, as adopted: (1) Inserting the word
``an'' before the phrase ``electronic storage system,'' replacing
the phrase ``as defined in this section'' with the phrase ``as
defined in this paragraph (e),'' and replacing the word ``meet''
with the word ``meets'' in the introductory paragraph; (2) replacing
the phrase ``any digital storage medium or system'' with ``any
digital storage system'' in paragraph (e)(1); (3) inserting the word
``an'' before the phrase ``electronic storage system,'' and deleting
the phrase ``comply with the following instructions'' in paragraph
(e)(2); (4) deleting the phrase ``to any system acceptable under
this paragraph (e) as required by the Commission,'' and adding the
phrase ``into a readable format'' between the words ``download'' and
``indexes'' in paragraph (e)(2)(iii); (5) deleting the proposed text
of paragraphs (e)(2)(i), (e)(2)(ii) introductory text, and
(e)(2)(ii)(A) and re-numbering proposed paragraphs (e)(2)(ii)(B)
through (D) as paragraphs (e)(2)(i) through (iii), respectively; (6)
inserting the word ``an'' before the phrase ``electronic storage
system'' in paragraph (e)(3); (7) replacing the phrase ``to provide,
and immediately provide,'' with the phrase ``to immediately
provide'' in paragraph (e)(3)(ii); (8) deleting the comma after the
word ``original,'' replacing the phrase ``the record'' with the
phrase ``a record,'' and adding the phrase ``the electronic storage
system on'' between the words ``on'' and ``any'' in paragraph
(e)(3)(iii), (9) replacing the word ``media'' with the word
``storage'' in paragraph (e)(3)(iv); (10) deleting the phrase ``The
security-based swap dealer or major security-based swap participant
must,'' capitalizing the word ``Have,'' and adding the word ``the''
before the phrase ``electronic storage system'' in paragraph
(e)(3)(v); and (11) replacing the words ``media'' or ``medium'' with
the word ``system,'' deleting the phrase ``to any acceptable system
under this section,'' replacing the phrase ``to any medium
acceptable under Sec. 240.18a-6'' with ``to a readable format,''
and replacing the phrase ``upon being provided with the appropriate
electronic storage'' with the phrase ``upon being provided with
access to the appropriate electronic storage'' in paragraph
(e)(3)(vii).
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Prompt Production of Records
Paragraph (i) of Rule 17a-4 applies when a broker-dealer, including
a broker-dealer SBSD or MSBSP, uses a third party to prepare or
maintain the records required to be maintained and preserved pursuant
to Rules 17a-3 and 17a-4. It requires the third party to file an
undertaking with the Commission stating, among other things, that the
records are the property of the broker-dealer and will be promptly
furnished to the Commission or its designee. Paragraph (j) of Rule 17a-
4 requires a broker-dealer, including a broker-dealer SBSD or 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
[[Page 68570]]
representative of the Commission.\225\ The Commission proposed
including parallel requirements in Rule 18a-6 for stand-alone and bank
SBSDs and MSBSPs.\226\ The proposed requirement for these entities to
promptly produce records referenced Section 15F of the Exchange Act
(rather than Section 17(b)).\227\ The Commission received no comments
on these proposed prompt production requirements and is adopting them
as proposed.\228\
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\225\ 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.
\226\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219-20.
\227\ 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. In addition, Section 15F(j)
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. 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.
\228\ See paragraphs (f) and (g) of Rule 18a-6, as adopted.
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b. Additional Amendments to Rule 17a-4 and Modifications to Rule 18a-6
The Commission proposed several amendments to Rule 17a-4 to
eliminate obsolete text, improve readability, and modernize
terminology.\229\ Reference is made throughout Rule 17a-4 to
``members'' of a national securities exchange as a distinct class of
registrant in addition to broker-dealers. The Commission proposed 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. The rule being adopted in this
document does not remove these references to ``members'' to avoid
confusion as to whether their removal resulted in a substantive change
to the rule.
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\229\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25220-21.
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The Commission proposed a second global change that would replace
the phrase ``Every broker and dealer'' with ``Every broker or dealer.''
\230\ The Commission also proposed a global change to replace the use
of the word ``shall'' in the rule with the word ``must'' or ``will''
where appropriate.\231\ In paragraph (m) of Rule 17a-4, the Commission
proposed to replace the words ``shall have'' with the word ``has.''
\232\ The Commission also proposed certain stylistic, corrective, and
punctuation amendments to improve the readability of Rule 17a-4.\233\
---------------------------------------------------------------------------
\230\ The amendments 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) through (e)
and (j).
\231\ The amendments replace the word ``shall'' with the word
``must'' or ``will'' in the following paragraphs of Rule 17a-4: (a),
(b) introductory text, (b)(11), (c), (d), (e) introductory text,
(e)(8), (f)(2) and (3), (g), (i), (j), (k)(1), and (l).
\232\ The amendments replace the phrase ``shall have'' with the
word ``has'' in the following paragraphs of Rule 17a-4: (m)(1)
through (4).
\233\ The Commission is adopting the following stylistic and
corrective changes to Rule 17a-4: (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) for consistency with paragraph
(b)(8)(ii); (3) replacing the phrase ``Sec. 242.901 et seq. of this
chapter'' with the phrase ``Sec. Sec. 242.901 through 242.909 of
this chapter'' in paragraph (b)(14); (4) replacing the phrase ``out
of the money options'' with the phrase ``out-of-the-money options''
in paragraph (b)(8)(ix); (5) replacing the phrase ``paragraph
(a)(12) of Sec. 240.17a-3'' with the phrase ``Sec. 240.17a-
3(a)(12)'' in paragraph (e)(1); (6) replacing the phrase ``paragraph
(a)(13) of Sec. 240.17a-3'' with the phrase ``Sec. 240.17a-
3(a)(13)'' in paragraph (e)(2); (7) replacing the phrase ``paragraph
(a)(15) of Sec. 240.17a-3'' with the phrase ``Sec. 240.17a-
3(a)(15)'' in paragraph (e)(3); (8) replacing the phrase ``for the
life'' with the phrase ``during the life'' in paragraph (e)(3); (9)
replacing the phrase ``paragraph (a)(14) of Sec. 240.17a-13'' with
``Sec. 240.17a-13(a)(14)'' in paragraph (e)(4); (10) replacing the
phrase ``this paragraph'' with the phrase ``this section'' in
paragraph (f); (11) replacing the phrase ``each index'' with the
phrase ``the index'' in paragraph (f)(3)(iv)(B); (12) replacing the
phrase ``the self-regulatory organizations'' with the phrase ``any
self-regulatory organization'' in paragraph (f)(3)(vi); (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, the Commission is eliminating the
requirements in current paragraphs (c) and (d) of Rule 17a-3 and, as a
consequence, current paragraphs (e) through (h) have been redesignated
as paragraphs (d) through (g), respectively. The Commission proposed to
amend Rule 17a-4 to make corresponding changes to cross-references to
these paragraphs of Rule 17a-3.
The Commission proposed amendments to paragraph (b)(8) of Rule 17a-
4 that 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 addition
of paragraphs (b)(8)(xiv) and (xvi) to Rule 17a-4, as discussed above,
the Commission proposed to redesignate paragraphs (b)(8)(xiv) and (xv)
as paragraphs (b)(8)(xv) and (xvii), respectively.
The Commission proposed amendments to paragraph (h) of Rule 17a-4
that 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.
The Commission received no comments on these proposed amendments
and is adopting them substantially as proposed, with the modification
discussed above about retaining references to ``members.'' \234\ The
Commission is also making certain non-substantive modifications to Rule
18a-6 as proposed in addition to those discussed above.\235\
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\234\ See Rule 17a-4, as amended. In addition to the differences
discussed above between Rule 17a-4, as proposed to be amended, and
Rule 17a-4, as amended, the Commission is adopting the following
non-substantive changes to Rule 17a-4: (1) Removing the phrase
``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. 78x-8(b))'' from the undesignated
introductory paragraph for clarity; (2) removing ``on the schedule''
in paragraph (b)(8)(xiii) for clarity; (3) removing ``or Form SBS''
in paragraph (b)(8)(xiii) as it is no longer applicable; (4) adding
``security-based swap'' before the phrase ``possession or control
requirements'' in paragraph (b)(8)(xiv) for clarity; (5) correcting
references from Sec. 240.18a-4 to Sec. 240.15c3-3 in paragraph
(b)(8)(xiv); (6) replacing ``on Form SBS'' with ``in Part II of Form
X-17A-5''; and (7) replacing ``;'' with ``,'' in paragraphs (b)(14)
and (15) for internal consistency.
\235\ See Rule 18a-6, as adopted. In particular, the non-
substantive modifications to Rule 18a-6 are: (1) Replacing ``record
maintenance and preservation requirements'' with ``books and records
requirements'' in the undesignated introductory paragraph for
internal consistency; (2) replacing ``;'' with ``.'' for each
paragraph in Rule 18a-6 for internal consistency; (3) replacing
``records required for corporation or partnerships), all Forms SBSE
(Sec. 249.617 of this chapter), Forms SBSE-A, Forms SBSE-W (Sec.
249.617 of this chapter),'' with ``records required for corporations
or partnerships), all Forms SBSE (Sec. 249.617 of this chapter),
all Forms SBSE-A, all Forms SBSE-W (Sec. 249.617 of this
chapter),'' in paragraph (c) for consistency with paragraph (d) of
Rule 17a-4, as amended; (4) pluralize ``production'' to
``productions'' in paragraph (e)(3)(i) for consistency with
paragraph (f)(3)(i) of Rule 17a-4, as amended; (5) removing
quotation marks around ``the undersigned'' in paragraph (e)(3)(vii)
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as
amended; (6) removing ``under the Act'' from paragraph (e)(3)(vii)
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as
amended; (7) adding ``by the registrant'' after the phrase
``arrangements for the downloading of any record required to be
maintained and preserved'' in paragraph (e)(3)(vii) for consistency
with paragraph (f)(3)(vii) of Rule 17a-4, as amended; (8) replacing
``which are requested by a representative of the Commission'' with
``that are requested by a representative of the Commission'' in
paragraph (g) for consistency with paragraph (j) of Rule 17a-4, as
amended.
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[[Page 68571]]
B. Reporting
1. Introduction
The Commission in this document is establishing a reporting program
for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act
that is modeled on the reporting program for broker-dealers in Rule
17a-5. Rule 17a-5 has two main elements: (1) A requirement that broker-
dealers file periodic unaudited reports about their financial and
operational condition using the FOCUS Report form; and (2) a
requirement that broker-dealers annually file financial statements and
certain reports, as well as reports covering those statements and
reports prepared by an independent public accountant registered with
the Public Company Accounting Oversight Board (``PCAOB'') in accordance
with PCAOB standards. The Commission proposed to amend Rule 17a-5 to
account for the security-based swap activities of stand-alone broker-
dealers and to establish a reporting regime for broker-dealer SBSDs and
MSBSPs.\236\ The Commission further proposed new Rule 18a-7 (which was
modeled on Rule 17a-5) to establish a reporting regime for stand-alone
and bank SBSDs and MSBSPs. The Commission is adopting the proposed
amendments to Rule 17a-5 and new Rule 18a-7 with modifications, as
discussed below.
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\236\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25221-47.
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A commenter requested clarification as to whether an OTC
derivatives dealer dually registered as an SBSD or MSBSP would be
subject to Rule 17a-5 or instead to new Rule 18a-7.\237\ The
applicability of Rule 17a-5 or 18a-7 will depend on whether the firm is
subject to the capital requirements of Rule 15c3-1 (in which case Rule
17a-5 will apply), is subject to the capital requirements of Rules 18a-
1 or 18a-2 (in which case Rule 18a-7 will apply), or has a prudential
regulator (in which case Rule 18a-7 will apply).\238\ Therefore, a
stand-alone broker-dealer, including a stand-alone OTC derivatives
dealer, (which is subject to Rule 15c3-1) will continue to be subject
to Rule 17a-5.\239\ Similarly, a broker-dealer, other than an OTC
derivatives dealer, that is also an SBSD (which is subject to Rule
15c3-1) will be subject to Rule 17a-5. A broker-dealer, including an
OTC derivatives dealer, that is also an MSBSP (which is subject to Rule
15c3-1) will be subject to Rule 17a-5. A stand-alone SBSD (which is
subject to Rule 18a-1) will be subject to Rule 18a-7. Similarly, an
SBSD that is also an OTC derivatives dealer (``OTCDD/SBSD'') (which is
subject to Rule 18a-1) will be subject to Rule 18a-7.\240\ A stand-
alone MSBSP (which is subject to Rule 18a-2) will be subject to Rule
18a-7. Finally, a bank SBSD or MSBSP (which has a prudential regulator)
will be subject to Rule 18a-7.
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\237\ See Letter from Angie Karna, Managing Director, Nomura
Global Financial Products Inc. (Sept. 10, 2014) (``Nomura Letter'').
\238\ The undesignated introductory paragraphs to Rules 17a-5
and 18a-7 have been modified to clarify this application of the
rules.
\239\ Paragraph (p) of Rule 17a-5 provides that an OTC
derivatives dealer may comply with Rule 17a-5 by complying with the
provisions of Rule 17a-12.
\240\ As discussed in this release, an OTC derivatives dealer
dually registered as an SBSD is subject to Rules 17a-3, 17a-4, 17a-
13, 18a-1, 18a-4, 18a-7, and 18a-8 rather than Rules 18a-5, 18a-6,
18a-9, 15c3-1, 15c3-3, 17a-5, and 17a-11, respectively. As a result,
the Commission has made conforming modifications to Rule 18a-7. In
particular, where Rule 18a-7 refers to Rule 18a-9, the Commission
has added the following reference to Rule 17a-13: ``or 240.17a-13,
as applicable.''
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The Commission is also adopting amendments to the FOCUS Report. The
Commission proposed to create a new part of the FOCUS Report--Form
SBS--to be filed by all types of SBSDs and MSBSPs, while stand-alone
broker-dealers would continue filing FOCUS Report Parts II, IIA, IIB,
or II CSE, as applicable.\241\ After further consideration of the
issue, the Commission believes the best approach is to consolidate Form
SBS and FOCUS Report Parts II, IIB, and II CSE into a single form: The
FOCUS Report Part II. In addition, the Commission believes it is
appropriate to adopt a new form--the FOCUS Report Part IIC--to be filed
by bank SBSDs and MSBSPs rather than Form SBS as was proposed. The
decision to require bank SBSDs and MSBSPs to file a separate form is
based on the more limited information that they will need to provide on
the form (as compared to FOCUS Report Part II filers). Consequently,
broker-dealers that file the FOCUS Report Part II will continue to do
so. ANC broker-dealers and OTC derivatives dealers also will file the
FOCUS Report Part II, as will broker-dealer and stand-alone SBSDs and
MSBSPs. Bank SBSDs and MSBSPs will file the FOCUS Report Part IIC.
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\241\ The Commission requested comment on whether all broker-
dealers, SBSDs, and MSBSPs should file the same consolidated form.
See Recordkeeping and Reporting Proposing Release, 79 FR at 25235-
25236. The Commission received no comments specifically addressing
this issue.
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A commenter urged the Commission not to impose ``position reporting
requirements,'' arguing that they are unnecessary in light of the
``transaction reporting requirements'' of Regulation SBSR.\242\ The
Commission disagrees. The reporting requirements are designed to
promote transparency of the financial and operational condition of a
broker-dealer, SBSD, or MSBSP to the Commission and, in the case of a
portion of the annual reports, to the public.\243\ This information
will assist the Commission staff in monitoring these firms and
examining them for compliance with the securities laws. Position
records are of a different nature, and serve a different purpose, than
the transaction data that will be reported pursuant to Regulation SBSR.
Specifically, position records provide an overview of a firm's holdings
at a specific point in time. The commenter states that position
reporting requirements are unnecessary ``for purposes of market
surveillance.'' \244\ However, as discussed above, the recordkeeping
requirements being adopted in this document are designed to elicit
information about the financial and operation condition of the filer.
Market surveillance is not the objective of the requirements. Finally,
the commenter stated that if the Commission does adopt position
reporting requirements, it ``should limit the scope of such
requirements for non-U.S. SBSDs to transactions that are either (i)
cleared on a U.S.-registered clearing agency or derivatives clearing
organization or (ii) opposite a U.S. person counterparty.'' \245\ As
discussed above, the purpose of the reporting requirements is to obtain
information about the financial and operational condition of the filer.
Limiting the requirements to a subset of the filer's positions would
not provide a complete picture of the filer's financial and operational
condition. Moreover, the Commission has proposed in a separate release
additional provisions that are designed to address concerns about the
cross-border application of certain requirements applicable to SBSDs
and MSBSPs.\246\
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\242\ See Memorandum from the Division of Trading and Markets
regarding a March 25, 2019 meeting with representatives of the
Institute of International Bankers (``IIB 3/25/2019 Meeting'').
\243\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25221.
\244\ See IIB 3/25/2019 Meeting.
\245\ See id.
\246\ See Cross-Border Application Proposing Release, 84 FR
24206.
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[[Page 68572]]
2. Periodic Filing of FOCUS Report
a. Rule 17a-5 and Rule 18a-7
Undesignated Introductory Paragraph
The Commission proposed amending Rule 17a-5 to add an undesignated
introductory paragraph stating that: (1) The rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP; and (2) a stand-alone
or bank SBSD or MSBSP is subject to the reporting requirements under
proposed Rule 18a-7.\247\ The Commission also proposed amending Rule
17a-5 to remove paragraph (a)(1), which provides that paragraph (a)
shall apply to every broker-dealer registered pursuant to Section 15 of
the Exchange Act, because this text was redundant of the undesignated
introductory paragraph of Rule 17a-5, as proposed to be added.
Similarly, the Commission proposed that Rule 18a-7 have an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not dually registered as a broker-dealer (i.e., a stand-
alone or bank SBSD or MSBSP). The Commission received no comments on
the introductory paragraphs but, as discussed above, is modifying them
to clarify which rule (17a-5 or 18a-7) applies to a given type of
entity.\248\ The Commission received no comments on the proposed
amendment to remove paragraph (a)(1) from Rule 17a-5 and is adopting it
as proposed.\249\
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\247\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25222.
\248\ See undesignated introductory paragraph of Rule 17a-5, as
amended; undesignated introductory paragraph of Rule 18a-7, as
adopted.
\249\ See Rule 17a-5, as amended. As a consequence of the
removal of paragraph (a)(1) of Rule 17a-5, paragraphs (a)(2)(i)
through (iv) are redesignated paragraphs (a)(1)(i) through (iv),
respectively. Further, as a consequence of the removal of paragraph
(a)(1), paragraphs (a)(3) through (7) of Rule 17a-5 are redesignated
paragraphs (a)(2) through (6), respectively.
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Requirement To File the FOCUS Report
Rule 17a-5 requires a broker-dealer, other than an OTC derivatives
dealer, to file FOCUS Report Part II or IIA.\250\ The Commission
proposed amending the rule to require a broker-dealer SBSD or MSBSP to
file proposed Form SBS rather than the FOCUS Report Part II or
IIA.\251\ The Commission also proposed including parallel requirements
in Rule 18a-7 that: (1) Stand-alone SBSDs and MSBSPs be required to
file proposed Form SBS with the Commission or its designee within
seventeen business days after the end of each month; and (2) bank SBSDs
and MSBSPs be required to file Form SBS with the Commission or its
designee within seventeen business days after the end of each calendar
quarter (instead of each month).\252\ The Commission proposed quarterly
financial reporting for bank SBSDs and 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.\253\ Under the proposal, the
information reported by bank SBSDs and MSBSPs on the FOCUS Report Part
IIC largely would be information that banks are required to provide in
the call reports.
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\250\ Prior to these amendments, the requirement that an OTC
derivatives dealer file FOCUS Report Part IIB was set forth in
paragraph (a) of Rule 17a-12. While an ANC broker-dealer is required
under paragraph (a) of Rule 17a-5 to file FOCUS Report Part II,
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 FOCUS
Report Part II CSE in lieu of 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).
\251\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25222-24.
\252\ In each case, the stand-alone or bank SBSD or MSBSP needed
to file Form SBS with the Commission or its designee. The reference
to a Commission designee was designed to provide the Commission with
the option of requiring that these registrants file the FOCUS Report
with a third party. Most broker-dealers file the FOCUS Report
directly with their SROs pursuant to plans established by the SROs
under paragraph (a)(3) (formerly paragraph (a)(4)) of Rule 17a-5, as
amended. See Recordkeeping and Reporting Proposing Release, 79 FR at
25223.
\253\ 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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In response to the Commission's proposal to require bank SBSDs and
MSBSPs to file Form SBS seventeen business days after the end of the
quarter, a commenter requested that it change the deadline to match the
prudential regulators' requirement to file call reports thirty calendar
days after the end of the quarter.\254\ To respond to the commenter's
concerns, as well as to promote harmonization with prudential
regulators' requirements, the Commission is adopting a thirty calendar-
day requirement as requested by the commenter. Since the proposed
seventeen business-day requirement would have corresponded with twenty-
four calendar days (with a conservative assumption of no public
holidays), this will provide administrative relief to bank SBSDs and
MSBSPs by allowing them six additional calendar days to file the FOCUS
Report Part IIC with the Commission.
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\254\ See SIFMA 9/5/2014 Letter.
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The Commission also proposed amendments to Rule 17a-5 to make
explicit the requirement that the FOCUS Report filed by a stand-alone
broker-dealer or the Form SBS filed by a broker-dealer SBSD or MSBSP
must be ``executed.'' \255\ The Commission proposed parallel
requirements in Rule 18a-7 to require that a Form SBS filed by a stand-
alone or bank SBSD or MSBSP must be executed. The Commission received
no comment on these proposals for executed forms. For the reasons
discussed above, the Commission is adopting the FOCUS Report filing
requirements substantially as proposed.\256\
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\255\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224. Prior to these amendments, the FOCUS Report Parts II, IIA,
IIB, and II CSE each had a section for the filer to execute the
form.
\256\ See paragraph (a) of Rule 17a-5, as amended; paragraphs
(a)(1) and (2) of Rule 18a-7, as adopted. References in these
paragraphs to Form SBS are changed to references to the FOCUS Report
Part II and the FOCUS Report Part IIC, respectively. Similarly,
references to Form SBS were also included in paragraphs (a)(1), (3),
and (4), (b)(1), (d)(2)(i) and (iii), and (e)(3) of Rule 17a-5, as
proposed to be amended. The references to proposed Form SBS are not
being adopted and these provisions will continue to refer solely to
the FOCUS Report. As discussed above, the requirement that an OTCDD/
SBSD file the FOCUS Report Part II is prescribed in Rule 18a-7
(rather than 17a-5, as proposed).
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Additional Reporting Requirements for Registrants That Use Models
Rule 17a-5 requires ANC broker-dealers to file additional reports
on a monthly or quarterly basis with the FOCUS Report.\257\ The
Commission proposed similar reporting requirements in Rule 18a-7 for
stand-alone SBSDs approved to use internal models to compute net
capital.\258\ These entities would be required to file most of the
required documents within 17 business days after the end of each month.
However, to correspond with the timing requirement in the proposed
capital rule for these entities (Rule 18a-1),\259\ they 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 the 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.
[[Page 68573]]
The Commission received no comment on these additional reporting
proposals for stand-alone SBSDs and has adopted Rule 18a-1.\260\
Consequently, the Commission is adopting the additional reporting
requirements, but with the modification that an OTCDD/SBSD must file
them pursuant to Rule 18a-7 (rather than Rule 17a-5).\261\
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\257\ See paragraph (a)(5) of Rule 17a-5, as amended.
\258\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224.
\259\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70237-40.
\260\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44052.
\261\ See paragraphs (a)(3)(i) through (ix) of Rule 18a-7, as
adopted. As proposed, paragraph (a)(3)(vii) of Rule 18a-7 would have
required a stand-alone SBSD authorized to use internal models to
calculate net capital to report the results of a monthly liquidity
stress test. As discussed above, the Commission is deferring
consideration of the liquidity stress test requirements for these
entities and, therefore, this paragraph is being designated as
``[Reserved].''
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b. FOCUS Report
As discussed above, the Commission proposed Form SBS as the
reporting form for all categories of SBSDs and MSBSPs. Proposed Form
SBS was modeled on the FOCUS Report, particularly FOCUS Report Part II
CSE. FOCUS Report Part II CSE served as the template for proposed Form
SBS because it was designed to account for the use of internal models
to compute net capital by ANC broker-dealers and elicits more detailed
information about derivatives positions and exposures than FOCUS Report
Parts II and IIA.\262\ 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.\263\
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\262\ FOCUS Report Part IIB elicits similar information about
derivatives positions and exposures but otherwise is more limited
than FOCUS Report Part II CSE because OTC derivatives dealers are
permitted to engage only in a narrow range of activities. See 17 CFR
240.3b-12; 17 CFR 240.15a-1. See also Recordkeeping and Reporting
Proposing Release, 79 FR at 25224, n. 440.
\263\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43959-60.
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However, as discussed above, the Commission is not adopting Form
SBS as proposed, but is instead requiring the FOCUS Report Part II to
be filed by nonbank SBSDs and MSBSPs. Further, the Commission is
requiring that bank SBSDs and MSBSPs file FOCUS Report Part IIC (rather
than proposed Form SBS or the FOCUS Report Part II, as amended). The
information that must be provided by SBSDs and MSBSPs is substantively
the same information elicited by proposed Form SBS, except that the
information is now being elicited in FOCUS Report Parts II and IIC.
Accordingly, the Commission is adopting changes to FOCUS Report Part II
and the corresponding instructions to update the form, reflect the
required filers, and account for these firms' derivatives activity.
Thus, ANC broker-dealers that filed Part II CSE prior to these
amendments and OTC derivatives dealers that filed Part IIB prior to
these amendments instead will be required to file FOCUS Report Part II,
as amended--FOCUS Report Parts II CSE and IIB will be discontinued.
From the perspective of these entities, the information they will be
required to enter into the revised FOCUS Report Part II as compared to
FOCUS Report Parts II CSE and IIB is substantively the same. Similarly,
from the perspective of broker-dealers that were required to file FOCUS
Report Part II prior to these amendments, the information they will be
required to enter into the revised form is substantively the same.\264\
Importantly, there is already significant overlap among the four forms
filed on the eFOCUS system of the Financial Industry Regulatory
Authority (``FINRA''): The FOCUS Report Parts II, IIA, IIB, and II
CSE.\265\ Much of this duplication and overlap between forms is
eliminated by combining the forms into a single revised FOCUS Report
Part II and modifying the form to include the line items that were in
proposed Form SBS.
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\264\ In addition to the differences between Form SBS, as
proposed to be adopted, and FOCUS Report Part II, as amended, as
discussed below, broker-dealers will note the following general
changes: (1) There are new sections added to the form that these
firms may not be required to complete (e.g., Computation of Tangible
Net Worth, which is required to be completed by stand-alone MSBSPs);
(2) certain lines are worded differently or assigned different line
item numbers (e.g., Pre-Amendment FOCUS Report Part II's ``Money
differences'' (line item numbers 5000, 5010, 5020, and 5030) is
relabeled ``Money suspense and balancing difference'' (line item
numbers 5610, 5610, 6010, and 6012) in FOCUS Report Part II, as
amended); (3) to the extent these entities engage in security-based
swap or swap activities but are not SBSDs or MSBSPs, they will now
have specific line items tailored to these products in which to
input information; and (4) broker-dealers registered as FCMs are
required to complete certain new sections the CFTC added to the
CFTC's Form 1-FR-FCM in 2013. See Enhancing Protections Afforded
Customers and Customer Funds Held by Futures Commission Merchants
and Derivatives Clearing Organizations, 78 FR 68506, 68513 (Nov. 14,
2013); 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)).
\265\ For example, all of the forms contain a cover page and
contain (with variations): A statement of financial condition, a
computation of net capital, a computation of the net capital
requirement, a statement of income (loss), a statement of changes in
ownership equity, a statement of changes in subordinated
liabilities, and a statement of ownership equity and subordinated
liabilities maturing or proposing to be withdrawn within the next
six months. In addition, all of the forms except FOCUS Report Part
IIA elicit financial and operational data; both FOCUS Report Parts
II and II CSE contain (with variations): A computation for
determination of reserve requirements under Rule 15c3-3, information
for possession or control requirements under Rule 15c3-3, and a
schedule of segregation requirements; and both FOCUS Report Parts
IIB and II CSE contain (with variations): A schedule of aggregate
securities and OTC derivatives positions, a schedule of geographic
distribution of OTC derivatives exposures, a credit concentration
report, and a portfolio summary of OTC derivatives exposures by
internal credit rating.
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The Commission believes that broker-dealers registering as an SBSD
or MSBSP will find the consolidation preferable, since rather than
familiarizing themselves with a new form (Form SBS), such dual
registrants can continue to file FOCUS Report Part II, as amended. The
consolidation is also expected to enhance the Commission's supervisory
capacities, since it will be easier to compare different types of
registrants' FOCUS Report responses when they are filing the same form.
Bank SBSDs and MSBSPs will file FOCUS Report Part IIC, which
elicits more limited information than FOCUS Report Part II. Moreover,
much of the information elicited is already reported by these entities
on their call reports. The Commission believes that bank SBSDs and
MSBSPs will find it simpler to utilize the shorter FOCUS Report Part
IIC, which is tailored to these entities and focuses on their business
as an SBSD or MSBSP. Indeed, bank SBSDs and MSBSPs would have shared
only one section in common with other Form SBS filers (the cover page),
so the vast majority of Form SBS would not have been applicable to
these bank entities.\266\ In addition, the capital and margin
requirements applicable to nonbank SBSDs and MSBSPs--which are the
source of the information input into the revised FOCUS Report Part II--
do not apply to bank SBSDs and MSBSPs. Bank SBSDs and MSBSPs are
instructed to follow FFIEC Form 031's instructions regarding a majority
of the line items on FOCUS Report Part IIC, as adopted, since most of
the sections require these entities to report general financial
information that banks are already required to report on FFIEC Form
031.
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\266\ The reporting requirements in Rule 18a-7 and the sections
of the FOCUS Report applicable to bank SBSDs and MSBSPs are more
limited in scope because bank SBSDs and MSBSPs are subject to the
prudential regulators' reporting requirements. Further, the
prudential regulators--rather than the Commission--are responsible
for capital, margin, and other prudential requirements applicable to
bank SBSDs and MSBSPs. For these reasons, the reporting requirements
for bank SBSDs and MSBSPs are tailored to their activities as an
SBSD or an MSBSP (as opposed to their activities as banks).
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FOCUS Report Part II, as amended, continues to elicit financial and
[[Page 68574]]
operational information about a filer through sections consisting of
uniquely numbered line items.\267\ To the extent a line item number has
already been assigned in FOCUS Report Parts II, IIA, IIB, and/or II
CSE, revised FOCUS Report Part II uses the same line item number.
However, the amended form also includes new lines and corresponding
line items that were proposed in Form SBS and are relevant to security-
based swap and swap activities. These line items are identified by
numbers on revised FOCUS Report Part II with a 5-digit number beginning
with 12000 and generally increasing upward.
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\267\ As used in this release, the term ``line'' refers to the
lines in the left column on the FOCUS Report 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 Income (Loss) section on revised FOCUS Report Part
II is cash, Line Item 200 is the field to enter the allowable amount
of cash, and Line Item 750 is the field to enter the total amount of
cash.
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Proposed Form SBS would have been divided into five parts.\268\
FOCUS Report Part II, as amended, and FOCUS Report Part IIC, as
adopted, are not divided into parts. Dividing the form into parts was a
more useful approach when bank entities would have been required to
file the same form as nonbank entities. However, now that bank SBSDs
and MSBSPs will separately file FOCUS Report Part IIC, there is no
longer a need to subdivide the form into parts based on the type of
registrant (e.g., bank SBSD versus broker-dealer SBSD). In addition,
separate parts are not necessary because the header at the top of each
page of FOCUS Report Parts II and IIC identifies the type of
registrants required to complete that page (as proposed in Form SBS).
Nonetheless, the sections of revised FOCUS Report Part II appear in the
same order as they appeared in proposed Form SBS, so they still follow
the logic used to order the sections in the proposed form.
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\268\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224-36.
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The Commission is amending the instructions for FOCUS Report Part
II and adopting instructions for FOCUS Report Part IIC to provide
further guidance on the information to be entered into certain line
items.\269\
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\269\ See FOCUS Report Part II instructions, as amended; FOCUS
Report Part IIC instructions, as adopted. The amendments to the
instructions include incorporating relevant instructions from
proposed Form SBS into the instructions for FOCUS Report Parts II
and IIC, as well as globally replacing ``non-bank'' with ``nonbank''
for internal consistency.
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i. Revised FOCUS Report Part II
Cover Page
The FOCUS Report Parts II, IIA, IIB, and II CSE prior to these
amendments (collectively and individually, the ``Pre-Amendment FOCUS
Reports'') include a cover page that elicits basic information about
the reporting firm. Proposed Form SBS included a cover page largely in
the same format as the cover page in Pre-Amendment FOCUS Report Part
II, but with modifications to account for the additional registrants
required to file the form.\270\ The Commission is adopting the cover
page in proposed Form SBS by retaining the existing cover page in FOCUS
Report Part II, as amended, with non-substantive changes largely to
account for the additional registrants required to use this form
(stand-alone broker-dealers, ANC broker-dealers, OTC derivatives
dealers, and broker-dealer and stand-alone SBSDs and MSBSPs) and in
response to comment.\271\
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\270\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25225.
\271\ See FOCUS Report Part II, as amended, Cover Page. The
following changes are being made: (1) The line soliciting firms to
check the type of registrant filing the form is updated to reflect
that bank SBSDs and MSBSPs will not be required to file this part of
the FOCUS Report Part II; (2) in response to commenters' requests to
more explicitly address OTC derivatives dealers, the option is added
to check a box if the respondent is an OTC derivatives dealer (see,
e.g., Nomura Letter); (3) in response to comment that Form SBS, as
proposed to be adopted, did not reference foreign SBSDs or foreign
MSBSPs, a line is added asking firms if the filer is a U.S. person
(see SIFMA 9/5/2014 Letter); (4) a line is added asking whether the
filer is authorized to use models to compute capital as a way to
check that the firm is completing the correct net capital section in
the form; (5) a typographical error is corrected so that the
officer's title under the signature line matches the officer's title
under the line for the signing officer to print his or her name; and
(6) the date field is made more flexible by specifying ``2___''
instead of ``20__.''
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Statement of Financial Condition
The Pre-Amendment FOCUS Reports have a Statement of Financial
Condition section that elicits detail about filers' assets,
liabilities, and ownership equity. Proposed Form SBS similarly had a
Statement of Financial Condition section largely modeled on the
parallel section in Pre-Amendment FOCUS Report Part II CSE.\272\ The
Commission received a number of comments on this proposed section and
has modified it in response to these comments.
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\272\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226-27.
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First, a commenter suggested that Lines 8 through 10 on the assets
side of the Statement of Financial Condition section (which elicited
details about securities, including security-based swaps, commodities,
and swaps positions) should be simplified and consolidated into a
single line item.\273\ As discussed below, the revised FOCUS Report
Part II elicits details about these positions in other sections of the
form. Accordingly, the Commission is consolidating these lines into
Line 9 (Total net securities, commodities, and swaps positions) and
making a corresponding modification in Line 24 of the liability side of
the section (Total net securities, commodities, and swaps
positions).\274\
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\273\ See, e.g., SIFMA 9/5/2014 Letter.
\274\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Lines 8 and 22.
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Second, the Statement of Financial Condition section of proposed
Form SBS required filers to report the amount of certain assets and
liabilities that were includable in the broker-dealer customer reserve
formula, the proposed SBSD reserve formula, and a catch-all ``other''
section in which information about assets and liabilities related to
segregation requirements under the CEA would be entered if the filer is
also registered with the CFTC.\275\ Given that Commission and CEA
segregation requirements are the most widely applicable segregation
requirements for FOCUS Report filers, the Commission is consolidating
the reporting of these amounts into single lines to the extent
applicable.\276\
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\275\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227.
\276\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Lines 3A1, 3B1, 3C1, 3D1 (receivables), 17A
(bank loans payable), 19A1, 19B1, 19C1, 19D1, and 19E1 (payables).
Further, the Commission has adopted the SBSD segregation
requirements that will generate amounts includable in these line
items. See Capital, Margin, and Segregation Adopting Release, 84 FR
at 43930-43.
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Third, the Statement of Financial Condition section of proposed
Form SBS required filers to report information about payables due to
securities customers and non-customers, security-based swap customers
and non-customers, and swap customers and non-customers.\277\ A
commenter suggested simplifying the form by deleting payables to
security-based swap and swap customers and non-customers from the
Statement of Financial Condition and capturing this information in the
schedule that elicits detail on derivatives positions.\278\ The
Commission agrees and has deleted these line items from this section
and, instead, requires the information to be reported in Schedule 1 to
FOCUS Report Part II, as amended.\279\ Similarly,
[[Page 68575]]
the commenter noted the imbalance of requiring the reporting of other
derivatives payables on the liabilities side of the balance sheet, but
not requiring the reporting of other derivatives receivable on the
assets side of the balance sheet.\280\ The Commission agrees and filers
no longer must report other derivatives payable on the Statement of
Financial Condition section and instead will report this information on
Schedule 1 to FOCUS Report Part II, as amended.\281\
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\277\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227.
\278\ See SIFMA 9/5/2014 Letter.
\279\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Schedule 1--Aggregate Securities, Commodities,
and Swaps Positions.
\280\ See, e.g., SIFMA 9/5/2014 Letter.
\281\ See FOCUS Report Part II, as amended, Schedule 1--
Aggregate Securities, Commodities, and Swaps Positions.
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Fourth, the Statement of Financial Condition section of proposed
Form SBS directed filers to report ownership equity from sole
proprietorships, partnerships, corporations, and limited partners. The
Commission is adding a reference to ``members'' in Line 29 of the
Statement of Financial Condition in FOCUS Report Part II, as amended,
instead of solely referencing ``limited partners.'' This change
recognizes the legal structure of limited liability companies as well.
Fifth, lines are being added to the assets and liabilities sides of
the Statement of Financial Condition for filers to report excess cash
collateral pledged on derivative transactions (Lines 6 and 21 on FOCUS
Report Part II, as amended). On the assets side, a broker-dealer or
SBSD will report cash collateral posted to a counterparty that exceeds
the amount of variation margin the firm has posted to cover current
exposure. On the liability side, the broker-dealer or SBSD will report
cash collateral posted from a counterparty that is in excess of the
amount of variation margin the counterparty is required to post to
cover current exposure. The addition of these lines requires firms to
report the specific amounts on the asset side that are allowable and
non-allowable assets. Establishing unique lines to report this
information will avoid firms reporting the amounts in other lines that
are not specifically tailored to present the information, which--based
on staff experience--has resulted in firms reporting the information on
several different lines. For the foregoing reasons, the Statement of
Financial Condition section in proposed Form SBS is being adopted by
retaining the parallel section in FOCUS Report Part II, as amended,
with the modifications discussed above and certain other
modifications.\282\ This section is required to be completed by stand-
alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs.
---------------------------------------------------------------------------
\282\ See FOCUS Report Part II, as amended, Statement of
Financial Condition. The following non-substantive changes are being
made: (1) A line item is added for firms to report non-allowable
cash (e.g., petty or restricted cash); (2) the note on the second
page of the Statement of Financial Condition clarifies that ``Stand-
alone MSBSPs should only complete the Allowable and Total columns''
(emphasis added); this sentence is also added to the instructions
for the Statement of Financial Condition; (3) an obsolete accounting
reference is updated globally (including on Line 15E, which was
proposed as Line 14E) to accurately reflect ``ASC 860'' instead of
``SFAS 140''; and (4) the instructions are updated to reflect the
changes discussed in this section.
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Computation of Net Capital
The Pre-Amendment FOCUS Reports have a Computation of Net Capital
section. Proposed Form SBS included two sections: One to be completed
by SBSDs authorized to use internal models to compute net capital under
the proposed capital requirements and the other to be completed by
filers not authorized to use internal models for this purpose.\283\ The
Commission has adopted capital requirements for nonbank SBSDs under
which certain firms may be authorized to use internal models to compute
net capital.\284\
---------------------------------------------------------------------------
\283\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227-28.
\284\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43898-905.
---------------------------------------------------------------------------
The Computation of Net Capital section for filers authorized to use
models was largely modeled on the parallel section in Pre-Amendment
FOCUS Report Part II CSE. The section in proposed Form SBS had a line
for filers to report their contractual securities commitments because
this line appeared on the Computation of Net Capital section in Pre-
Amendment FOCUS Report Part II.\285\ However, this line item does not
apply to filers authorized to use models and is removing it from the
section.\286\
---------------------------------------------------------------------------
\285\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25228.
\286\ The FOCUS Report instructions clarify that contractual
securities commitments not accounted for in the firm's VaR model
will continue to be accounted for in residual marketable securities
(Line Item 3665). See FOCUS Report Part II instructions, as amended.
---------------------------------------------------------------------------
In addition, a commenter requested that the Computation of Net
Capital section for filers authorized to use internal models account
for firms approved to use the Basel 2.5 framework to compute market
risk deductions.\287\ The Commission agrees and has added new Line 10
that elicits detail about market risk deductions computed under the
Basel 2.5 framework.\288\ This will provide the Commission and other
relevant securities regulators with greater detail about the components
of the firms' calculations.
---------------------------------------------------------------------------
\287\ See Email from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (May 10, 2018)
(``SIFMA 5/10/2018 Email'').
\288\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Authorized to Use Models), Line 10. For firms not
using the Basel 2.5 framework, the calculations are consolidated
into Line 9 and the subsequent lines are renumbered accordingly.
---------------------------------------------------------------------------
For the foregoing reasons, the Computation of Net Capital section
for filers authorized to use models in Form SBS is being adopted by
adding that section to FOCUS Report Part II, as amended, with the
modifications discussed above and certain other modifications.\289\
This section is required to be completed by stand-alone broker-dealers
and broker-dealer and stand-alone SBSDs and MSBSPs authorized to use
internal models to compute net capital.
---------------------------------------------------------------------------
\289\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Authorized to Use Models). The following change is
being made: Line 11 now refers to ``certain counterparties'' instead
of ``commercial end user counterparties'' for consistency with Rules
15c3-1 and 18a-1, as adopted. See paragraph (a)(7) of Rule 15c3-1;
paragraph (a)(2) Rule 18a-1, as adopted.
---------------------------------------------------------------------------
The Computation of Net Capital section in proposed Form SBS for
filers not authorized to use models was largely the same as the
parallel section in Pre-Amendment FOCUS Report Part II. The Commission
received no comment on this section. However, the Commission is adding
new Line 9.C.8., titled ``Risk-based haircuts computed under 17 CFR
240.15c3-1a or 17 CFR 240.18a-1a'' and updating the instructions to
FOCUS Report Part II accordingly. This change is intended to provide a
specific line to report this information. The staff has observed that
because the form currently does not have a unique line to enter the
information, firms enter the information on several different lines.
The Commission is also adopting non-substantive modifications to
promote clarity.\290\ This section is required to be completed by
stand-alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs not authorized to use internal models to compute net capital.
---------------------------------------------------------------------------
\290\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Not Authorized to Use Models). The following change
is being made: Line 12 now clarifies in parentheses that Line 12 is
equal to the ``sum of Lines 9A through 9E, 10, and 11.''
---------------------------------------------------------------------------
Computation of Minimum Regulatory Capital Requirements
The Pre-Amendment FOCUS Reports have a Computation of Minimum
[[Page 68576]]
Regulatory Capital Requirements section in which a broker-dealer inputs
the calculation of its minimum net capital requirement. Proposed Form
SBS included two such sections: One to be completed by broker-dealer
SBSDs and MSBSPs and the other to be completed by stand-alone
SBSDs.\291\ Proposed Form SBS included these separate sections because
the proposed minimum net capital computation applicable to a broker-
dealer SBSD differs from the computation applicable to a stand-alone
SBSD. The section for broker-dealer SBSDs was largely modeled on the
parallel section in Pre-Amendment FOCUS Report Part II used by broker-
dealers. The section for stand-alone SBSDs was a substantially scaled
down version of that section reflecting the simpler calculation these
entities would perform under the proposed nonbank SBSD capital rule
(Rule 18a-1). The Commission received no comment on either of the
proposed sections and has adopted capital requirements for nonbank
SBSDs under which these firms will need to calculate a minimum net
capital requirement.\292\ However, because an OTCDD/SBSD will be
subject to Rule 18a-1, the Computation of Minimum Regulatory Capital
Requirements sections have been modified to indicate that an OTCDD/SBSD
must complete the simpler section that will also be used by stand-alone
SBSDs. Consequently, these sections in proposed Form SBS are being
adopted with this modification and additional non-substantive
modifications by retaining the parallel section in FOCUS Report Part
II, as amended, to be used by stand-alone broker-dealers, broker-dealer
SBSDs (other than OTCDD/SBSDs), and broker-dealer MSBSPs, and adding
the section for stand-alone SBSDs and OTCDD/SBSDs.\293\
---------------------------------------------------------------------------
\291\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25229.
\292\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-906.
\293\ See FOCUS Report Part II, as amended, Computation of
Minimum Regulatory Capital Requirements (Broker-Dealer) and
Computation of Minimum Regulatory Capital Requirements (Non-Broker-
Dealer SBSD). The following changes are being made: (1) Because Line
4 appeared twice in the broker-dealer version in Form SBS, as
proposed to be adopted, the second Line 4 is renumbered Line 5 and
the subsequent lines are renumbered accordingly; (2) in the broker-
dealer version, Line 5Bi titled ``Minimum CFTC net capital
requirement'' adds ``(if applicable)'' to the end of the line to
clarify that not all firms will need to complete this line; (3) to
reflect the staggered implementation of the risk margin amount
computation in the nonbank SBSD capital rule, Line 5 refers
generally to the percentage of the risk margin amount computed under
the net capital rule rather than specifically referencing ``8%'' of
the risk margin amount; (4) in the broker-dealer version, the sub-
section titled ``Computation of Aggregate Indebtedness'' adds ``(If
Applicable)'' to the end of the title to clarify that not all firms
will need to complete this sub-section; (5) in the broker-dealer
version, for clarity and for consistency with Pre-Amendment FOCUS
Report Part II, Line 10 now reads ``Total aggregate indebtedness
liabilities from Statement of Financial Condition (Item 1760)''
instead of ``Total liabilities from Statement of Financial Condition
(Item 1760)''; (6) in the stand-alone SBSD version, the title of the
Computation of Minimum Regulatory Capital Requirements section
clarifies that it applies to a ``non-broker-dealer SBSD'' instead of
to any ``non-broker-dealer''; (7) in the stand-alone SBSD version,
Line 7 corrects a cross-reference to read ``(greater of Lines 5 and
6)'' rather than ``(greater of Lines 4 and 5)''; (8) in the stand-
alone SBSD version, Line 9 corrects a cross-reference so that it
refers to ``Line 7'' instead of ``Line 6''; and (9) the instructions
for the broker-dealer version correct a cross-reference to CFTC
Regulation 1.17 so that it refers to ``8%'' (instead of ``4%'') of
the amount required to be segregated pursuant to the CEA. See 17 CFR
1.17(a)(1)(i)(B).
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Computation of Tangible Net Worth
The Commission's proposed capital requirement for stand-alone
MSBSPs and broker-dealer MSBSPs in Rule 18a-2 was a tangible net worth
test.\294\ Accordingly, proposed Form SBS included a Computation of
Tangible Net Worth section to be completed by stand-alone MSBSPs and
broker-dealer MSBSPs.\295\ The Commission received no comment on this
section. However, the Commission ultimately adopted Rule 18a-2 to apply
solely to stand-alone MSBSPs (i.e., not to broker-dealer MSBSPs, which
are subject to Rule 15c3-1).\296\ Accordingly, the Computation of
Tangible Net Worth section in proposed Form SBS is being adopted as an
addition to the FOCUS Report Part II with the modification that it
applies only to stand-alone MSBSPs.\297\
---------------------------------------------------------------------------
\294\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70256-57.
\295\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230.
\296\ See Rule 18a-2, as adopted.
\297\ See FOCUS Report Part II, as amended, Computation of
Tangible Net Worth.
---------------------------------------------------------------------------
Statement of Income (Loss) or Statement of Comprehensive Income
The Pre-Amendment FOCUS Reports have a Statement of Income (Loss)
section in which filers enter information about revenues and expenses.
In 2012, the Commission approved a FINRA rule change to adopt Form SSOI
(Supplemental Statement of Income), which elicits more detailed
information about revenues and expenses.\298\ Proposed Form SBS
included a Statement of Income (Loss) section modeled on the more
detailed Form SSOI to simplify the filings broker-dealers would need to
make with the Commission and their designated examining authority
(``DEA'').\299\
---------------------------------------------------------------------------
\298\ See Self-Regulatory Organizations; FINRA; 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).
\299\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25229-30.
---------------------------------------------------------------------------
The Commission proposed to incorporate Form SSOI into the Statement
of Income (Loss) section of proposed Form SBS. The Commission
understands, however, that firms sometimes are required to disclose
their FOCUS Reports to third parties for commercial reasons,
potentially raising privacy concerns. The Commission further
understands that the income information disclosed in Form SSOI is
highly proprietary, given the level of detail required to be disclosed
in the form. Moreover, the Commission already has access to the
information in Form SSOI. Consequently, the Commission believes that it
is not necessary to incorporate all the Form SSOI elements into the
Statement of Income (Loss).\300\
---------------------------------------------------------------------------
\300\ The Commission renamed this section of the form in 2018.
See Disclosure Update and Simplification, Exchange Act Release No.
83875 (Aug. 17, 2018), 83 FR 50148 (Oct. 4, 2018).
---------------------------------------------------------------------------
The Commission recently amended the Statement of Income (Loss)
sections in FOCUS Report Parts II, IIA, and IIB to elicit information
about comprehensive income and rename the sections ``Statement of
Income (Loss) or Statement of Comprehensive Income.'' \301\
Accordingly, the Statement of Income (Loss) in proposed Form SBS is
being adopted by retaining the Statement of Income (Loss) or Statement
of Comprehensive Income section in FOCUS Report Part II, as amended.
However, the Commission is adding a new line--Line 3--to the Statement
of Income (Loss) or Statement of Comprehensive Income, as amended. This
line elicits information about gains or losses from derivatives trading
that was elicited on Line Item 3926 on Form SSOI and FOCUS Report Part
II CSE. The Commission is also adopting several other non-substantive
modifications to this section of FOCUS Report Part II.\302\ The
Statement of
[[Page 68577]]
Income (Loss) or Statement of Comprehensive Income must be completed by
stand-alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs.
---------------------------------------------------------------------------
\301\ See id.
\302\ See revised FOCUS Report Part II, as amended, Statement of
Income (Loss) or Statement of Comprehensive Income. The following
changes are made: (1) On Line 5, ``Profit or losses from
underwriting and selling groups'' is replaced with ``Gains or losses
from underwriting and selling groups'' for consistency with the
terminology used in Lines 2 and 3; (2) on Line 10, ``Commodities
revenue'' is replaced with ``Gains or losses on commodities'' for
consistency with the terminology used in Lines 1 through 5; (3) in
the instructions for this section, ``brokers'' is globally replaced
with ``broker-dealers''; (4) Line 36 is updated to read ``Net income
(current month only) before comprehensive income and provision for
federal income taxes'' (emphasis added) in response to broker-
dealers' requests for clarification after the adoption of the
Commission's Disclosure Update and Simplification release; (5) in
the instructions for this section, the instruction for ``principal
transaction including unrealized gains and losses'' is not included
because it does not correspond with a specific line of this section;
and (6) the Statement of Income (Loss) or Statement of Comprehensive
Income section also contains non-substantive punctuation changes.
---------------------------------------------------------------------------
Capital Withdrawals and Capital Withdrawals--Recap
The Pre-Amendment FOCUS Report Parts II, IIB, and II CSE have a
Capital Withdrawal section and a Capital Withdrawals--Recap section
that elicit details about filers' ownership equity and subordinated
liabilities maturing or proposed to be withdrawn within the next six
months, and accruals which have not been deducted in the computation of
net capital. Proposed Form SBS had these two sections, which were
largely modeled on the parallel sections in Pre-Amendment FOCUS Report
Parts II and II CSE.\303\ The Commission received no comment on these
sections and has adopted capital requirements for nonbank SBSDs under
which these firms will be subject to a net capital requirement.\304\
Consequently, the Commission is adopting these sections in proposed
Form SBS by retaining the parallel sections in FOCUS Report Part II, as
amended, with certain non-substantive modifications.\305\ These
sections are required to be completed by stand-alone broker-dealers,
stand-alone SBSDs, and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\303\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\304\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-906.
\305\ See FOCUS Report Part II, as amended, Capital Withdrawals
and Capital Withdrawals--Recap. The following changes are being
made: (1) For internal consistency and to avoid confusion with the
schedules at the end of revised FOCUS Report Part II, the text at
the bottom of the Capital Withdrawals section now refers to ``This
section'' instead of ``The schedule''; (2) for internal consistency
with Lines 1A and 1A2 in the Capital Withdrawals--Recap section
which reference LLCs, the title for the Statement of Changes in
Ownership Equity subsection now references LLCs in the parenthetical
``(sole proprietorship, partnership, LLC or corporation)''; (3) Line
1A in the Statement of Changes in Ownership Equity subsection
replaces ``Net income (loss)'' with ``Net income (loss) or
comprehensive income (loss), as applicable'' for consistency with
the references to net income and comprehensive income in the
remainder of the FOCUS Report, as amended in the Commission's 2018
Disclosure Update and Simplification release; and (4) Line 1B in the
Statement of Changes in Ownership Equity subsection titled
``Additions (including non-conforming capital of)'' is assigned Line
Item 4263 (for consistency with Pre-Amendment FOCUS Report Part II)
instead of 4262. Pre-Amendment FOCUS Report Part II assigns
``Additions (including non-conforming capital of)'' the number 4263,
while FOCUS Report Part II CSE assigns ``Additions (including non-
conforming capital of)'' the number 4262). Since the form being
adopted in this release is FOCUS Report Part II, it is preferable to
be more consistent with Pre-Amendment FOCUS Report Part II than
FOCUS Report Part II CSE.
---------------------------------------------------------------------------
Financial and Operational Data
The Pre-Amendment FOCUS Report Part II CSE included a Financial and
Operational Data section that elicited detail about filers' operations,
including operational deductions from capital and potential operational
charges not deducted from capital. Proposed Form SBS had a Financial
and Operational Data section modeled largely on the parallel section in
Pre-Amendment FOCUS Report Part II CSE.\306\ The Commission received no
comment on this proposed section and has adopted capital requirements
for nonbank SBSDs under which these firms will need to calculate a
minimum net capital requirement.\307\ Consequently, the Commission is
adopting this section in proposed Form SBS by retaining the parallel
section in FOCUS Report Part II, as amended, with non-substantive
changes for clarity.\308\ The section must be completed by stand-alone
broker-dealers, stand-alone SBSDs, and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\306\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\307\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43883-86.
\308\ See FOCUS Report Part II, as amended, Financial and
Operational Data. The following changes are being made: (1) For
internal consistency and to avoid confusion with the schedules at
the end of revised FOCUS Report Part II, this section is no longer
referred to as a ``schedule;'' and (2) the word ``mailed'' is
replaced with ``sent'' on Line 5 and the corresponding instructions
to reflect that customer confirmations can be emailed in addition to
mailed.
---------------------------------------------------------------------------
Computation for Determination of Customer Reserve Requirements
Pre-Amendment FOCUS Report Parts II and II CSE have a Computation
for Determination of Reserve Requirements section that elicited detail
about filers' customer reserve computation under the broker-dealer
customer protection rule (Rule 15c3-3). Proposed Form SBS had a
Computation for Determination of Customer Reserve Requirements section
modeled largely on the parallel section in Pre-Amendment FOCUS Report
Part II CSE.\309\ The Commission received no comment on this section in
proposed Form SBS and is adopting it by retaining the parallel section
in FOCUS Report Part II, as amended, with non-substantive changes for
clarity.\310\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\309\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\310\ See FOCUS Report Part II, as amended, Computation for
Determination of Customer Reserve Requirements. To avoid confusion
between the customer and security-based swap customer reserve
requirements, this section is retitled ``Computation for
Determination of Customer Reserve Requirements'' (emphasis added),
and the instructions are updated accordingly. In addition, in
response to commenters, the section includes a clarification that
the notes referenced in this section appear in 17 CFR 240.15c3-3a
(Rule 15c3-3a) (Exhibit A to Rule 15c3-3). See SIFMA 9/5/2014
Letter.
---------------------------------------------------------------------------
Possession or Control for Customers
Pre-Amendment FOCUS Report Parts II and II CSE have an Information
for Possession or Control Requirements section that elicits detail
about securities kept in possession or control for customers under Rule
15c3-3. Proposed Form SBS had a Possession or Control for Customers
section modeled on the parallel section in Pre-Amendment FOCUS Report
Part II CSE.\311\ The Commission received no comment on this section of
proposed Form SBS and is adopting it by retaining the parallel section
in FOCUS Report Part II, as amended, with non-substantive changes for
clarity.\312\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\311\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\312\ See FOCUS Report Part II, as amended, Possession or
Control for Customers. To avoid confusion between the customer and
security-based swap customer possession and control requirements,
this section is retitled ``Possession or Control for Customers,''
and the instructions are updated accordingly.
---------------------------------------------------------------------------
Computation for Determination of PAB Requirements
In 2013, the Commission amended Rule 15c3-3 to establish PAB
reserve bank account requirements under which a broker-dealer must
perform a reserve account calculation with respect to broker-dealer
clients that is similar to the calculation for customers discussed
above.\313\ Proposed Form SBS included a Computation for Determination
of PAB Requirements section for filers to
[[Page 68578]]
input this calculation.\314\ The Commission received no comment on this
proposed section of Form SBS and is adding it to FOCUS Report Part II,
as amended, with non-substantive changes for clarity.\315\ The section
must be completed by stand-alone broker-dealers and broker-dealer SBSDs
and MSBSPs.
---------------------------------------------------------------------------
\313\ See Financial Responsibility Rules for Broker-Dealers, 78
FR at 51903. Paragraph (a)(16) of Rule 15c3-3 defines ``PAB
account'' as ``a proprietary securities account of a broker or
dealer (which includes a foreign broker or dealer, or a foreign bank
acting as a broker or dealer) other than a delivery-versus-payment
account or a receipt-versus-payment account.'' The paragraph further
provides that the ``term does not include an account that has been
subordinated to the claims of creditors of the carrying broker or
dealer.''
\314\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\315\ See revised FOCUS Report Part II, as amended, Computation
for Determination of PAB Requirements. In addition, in response to
commenters, the section includes a clarification that the notes
referenced in this section appear in Exhibit A to Rule 15c3-3 (Rule
15c3-3a). See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------
Claiming an Exemption From Rule 15c3-3
Pre-Amendment FOCUS Report Part II has a section for broker-dealers
claiming an exemption from Rule 15c3-3 to identify the paragraph of the
rule upon which the firm's exemption is based. Proposed Form SBS had a
similar section modeled on the parallel section in Pre-Amendment FOCUS
Report Part II.\316\ The Commission received no comment on this section
of proposed Form SBS and is adopting it by retaining the parallel
section in FOCUS Report Part II, as amended, with non-substantive
changes for clarity and accuracy.\317\ This section must be completed
by stand-alone broker-dealers and broker-dealer SBSDs and MSBSPs
claiming an exemption from Rule 15c3-3.
---------------------------------------------------------------------------
\316\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
\317\ See FOCUS Report Part II, as amended, Claiming an
Exemption from Rule 15c3-3. The following changes are being made:
(1) The instruction to ``check one only'' is replaced with ``check
all that apply'' as a firm can claim more than one exemption from
Rule 15c3-3; (2) the incorrect references to paragraphs
``(k)(2)(A)'' and ``(k)(2)(B)'' of Rule 15c3-3 are replaced with
correct references to paragraphs (k)(2)(i) and (ii) of Rule 15c3-3;
and (3) due to the inadvertent omission of instructions regarding
this section, the instructions to FOCUS Report Part II, as amended,
are updated to direct stand-alone broker-dealers, broker-dealer
SBSDs, and broker-dealer MSBSPs that are claiming an exemption from
Rule 15c3-3 to complete this section.
---------------------------------------------------------------------------
Computation for Determination of Security-Based Swap Customer Reserve
Requirements
The Commission's proposed segregation requirements for SBSDs in
Rule 18a-4 required them to maintain a security-based swap customer
reserve account and to determine the amount kept in the account using
the formula in 17 CFR 240.18a-4a (Exhibit A to Rule 18a-4).\318\
Accordingly, proposed Form SBS had a section titled ``Computation for
Determination of the Amount to be Maintained in the Special Reserve
Account for the Exclusive Benefit of Security-Based Swap Customers'' in
which an SBSD would enter its security-based swap reserve account
calculation.\319\ The Commission received no comment on this section.
However, the final segregation rules codified the security-based swap
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule
18a-4 to apply to stand-alone SBSDs.\320\ Consequently, the Commission
is adopting the section in proposed Form SBS by adding it to FOCUS
Report Part II, as amended, with non-substantive changes for
consistency internally and with Rules 15c3-3 and 18a-4.\321\ The
modifications also include an instruction that the section must be
completed by stand-alone broker-dealers in addition to broker-dealer
SBSDs and MSBSPs.
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\318\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70282-87.
\319\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
\320\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
\321\ See FOCUS Report Part II, as amended, Computation for
Determination of Security-Based Swap Customer Reserve Requirements.
The following changes are being made: (1) References to Rule 18a-4
are removed from the section's title, line items, and instructions
to accurately reflect that the security-based swap customer reserve
requirement adopted by the Commission is located in Rules 15c3-3 and
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the
Commission); (2) the parenthetical ``(See Note A)'' is added to Line
1 for consistency with Line 1 of the Computation for Determination
of Customer Reserve Requirements section in revised FOCUS Report
Part II, and in response to commenters, the section includes a
clarification that the notes referenced in this section appear in
Exhibit B to Rule 15c3-3 or Exhibit A to Rule 18a-4, as applicable
(see SIFMA 9/5/2014 Letter); and (3) in Lines 24 and 26, ``Reserve
Bank Account(s)'' is replaced with ``Reserve Account(s)'' for
consistency with paragraph (a)(9) of Rule 18a-4, as adopted (see
paragraph (a)(9) of Rule 18a-4, as adopted).
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Possession or Control for Security-Based Swap Customers
The Commission's proposed segregation requirements for SBSDs in
Rule 18a-4 required them to maintain possession or control over excess
security collateral.\322\ Accordingly, proposed Form SBS had a section
titled ``Information for Possession or Control Requirements Under Rule
18a-4'' that elicits detail about excess securities collateral kept in
possession or control for customers under proposed Rule 18a-4.\323\ The
Commission received no comment on this section of proposed Form SBS.
However, the final segregation rules codified the security-based swap
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule
18a-4 to apply to stand-alone SBSDs.\324\ Consequently, the Commission
is adopting the section in proposed Form SBS by adding it to FOCUS
Report Part II, as amended, with non-substantive changes for
consistency internally and with Rules 15c3-3 and 18a-4.\325\ The
modifications also include an instruction that the section must be
completed by stand-alone broker-dealers in addition to broker-dealer
SBSDs and MSBSPs.
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\322\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70278-82.
\323\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231.
\324\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
\325\ See FOCUS Report Part II, as amended, Possession or
Control for Security-Based Swap Customers. References to Rule 18a-4
are removed from the section's title, line items, and instructions
in order to accurately reflect that the possession or control
requirements adopted by the Commission are located in Rules 15c3-3
and 18a-4 (instead of solely in Rule 18a-4 as initially proposed by
the Commission).
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Claiming an Exemption From Rule 18a-4
As adopted, Rule 18a-4 applies to stand-alone and bank SBSDs and to
OTCDD/SBSDs.\326\ In addition, the final rule exempts these SBSDs from
its requirements of if the SBSD meets certain conditions, including
that the SBSD does not clear security-based swap transactions for other
persons, provides notice to the counterparty regarding the right to
segregate initial margin at an independent third-party custodian, and
discloses in writing that any collateral received by the SBSD for non-
cleared security-based swaps will not be subject to a segregation
requirement and regarding how a claim of the counterparty for the
collateral would be treated in a bankruptcy or other formal liquidation
proceeding of the SBSD. In light of these modifications to the rule
from the proposal (which did not provide an exemption), the Commission
is adding a line item to the FOCUS Report Part II for a stand-alone
SBSD or OTCDD/SBSD to indicate whether the firm is claiming an
exemption from Rule 18a-4.\327\
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\326\
\327\ See FOCUS Report Part II, as amended, Claiming an
Exemption from Rule 18a-4.
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Sections Completed by FCMs
FCMs are required to periodically file Form 1-FR-FCM with the CFTC
and their designated SRO.\328\ The form elicits financial and
operational information about an FCM. To account
[[Page 68579]]
for broker-dealers that are dually registered as FCMs, Pre-Amendment
FOCUS Report Parts II and II CSE incorporate, in substantially the same
format, most of the sections in Form 1-FR-FCM. A broker-dealer dually
registered as an FCM was permitted to file Pre-Amendment FOCUS Report
Part II or II CSE (as applicable) with the CFTC and its designated SRO
rather than Form 1-FR-FCM.\329\
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\328\ 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.
\329\ 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).
---------------------------------------------------------------------------
Proposed Form SBS contained the following sections from Form 1-FR-
FCM in order to permit dual registrants to file Form SBS (rather than
Form 1-FR-FCM) with the CFTC and its designated SRO: (1) A Computation
of CFTC Minimum Net Capital Requirement; (2) a Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges; (3) a Statement of Cleared Swaps Customer
Segregation Requirements and Funds in Cleared Swaps Customer Accounts
under Section 4d(f) of the CEA; (4) a Statement of Segregation
Requirements and Funds in Segregation for Customers' Dealer Options
Accounts; (5) a Statement of Secured Amounts and Funds Held in Separate
Accounts for Foreign Futures and Foreign Options Customers Pursuant to
CFTC Regulation 30.7 (and Foreign Futures and Foreign Options Secured
Amounts Summary); and (6) a Statement of Secured Amounts and Funds Held
in Separate Accounts for Foreign Futures and Foreign Options Customers
Pursuant to CFTC Regulation 30.7 (and Funds Deposited in Separate CFTC
Regulation 30.7 Accounts) (17 CFR 30.7).\330\ The Commission received
no comment on these sections of proposed Form SBS and is adopting them
by retaining or adding them to FOCUS Report Part II, as amended, with
non-substantive changes.\331\ These sections will be filed by broker-
dealers that are dually registered with the CFTC as FCMs. The
Commission believes that this will promote harmonization with CFTC
requirements.
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\330\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25232-33.
\331\ See FOCUS Report Part II, as amended, Computation of CFTC
Minimum Capital Requirements, Statement of Segregation Requirements
and Funds in Segregation for Customers Trading on U.S. Commodity
Exchanges, Statement of Cleared Swaps Customer Segregation
Requirements and Funds in Cleared Swaps Customer Accounts under
Section 4d(f) of the Commodity Exchange Act, Statement of
Segregation Requirements and Funds in Segregation for Customers'
Dealer Options Accounts, Statement of Secured Amounts and Funds Held
in Separate Accounts for Foreign Futures and Foreign Options
Customers Pursuant to CFTC Regulation 30.7, Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
following non-substantive changes were made: (1) The parenthetical
``(under)'' is added to Line 16 of the Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges for consistency with the language used in Form
1-FR-FCM; and (2) instead of using the placeholder line item number
``9999'', the line item numbers recently assigned in FINRA's eFOCUS
system are used for the following lines: Lines 15 and 16 in the
Statement of Segregation Requirements and Funds in Segregation for
Customers Trading on U.S. Commodity Exchanges, Lines 15 and 16 in
the 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 through 7 in the Statement of
Secured Amounts and Funds Held in Separate Accounts for Foreign
Futures and Foreign Options Customers Pursuant to CFTC Regulation
30.7, and Lines 9 through 11 in the Statement of Secured Amounts and
Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to CFTC Regulation 30.7.
---------------------------------------------------------------------------
Defined Terms in the Schedules to FOCUS Reports Parts II and IIC
Pre-Amendment FOCUS Report Part II CSE has schedules that elicit
information about derivatives positions, counterparties, and exposures.
Proposed Form SBS included four schedules that were modeled largely on
the schedules to Pre-Amendment FOCUS Report Part II CSE. As discussed
in detail below, the Commission is adopting the schedules to proposed
Form SBS by adding all four of them to FOCUS Report Part II, as
amended, and including one of them in FOCUS Report Part IIC, as
adopted. As proposed, the schedules contained the following common
terms that were defined in the proposed instructions to Form SBS: (1)
``gross replacement value'', also referred to as ``gross replacement
value--receivable''; (2) ``gross replacement value--payables''; (3)
``net replacement value''; (4) ``current net exposure''; (5) ``total
exposure''; and (6) ``margin collected.'' \332\ For the sake of
clarity, the term ``total exposure'' is revised to the term ``current
net and potential exposure'' in FOCUS Report Part II, as amended, and
FOCUS Report Part IIC, as adopted, and in the instructions to the
forms.\333\ The definition of the term is not revised. The Commission
received no comment on the remaining terms and their definitions and is
adopting them as proposed.\334\
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\332\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25233-34.
\333\ See FOCUS Report Part II as amended; instructions to FOCUS
Report Part II, as amended.
\334\ See instructions to FOCUS Report Part II, as amended,
Definitions; instructions to FOCUS Report Part IIC, as adopted,
Definitions.
---------------------------------------------------------------------------
Schedule 1 to FOCUS Report Part II
Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Aggregate Securities and OTC Derivatives Positions'' that required
ANC broker-dealers to report the month-end gross replacement value of
aggregate long and short positions in various categories of financial
instruments held by the firm.\335\ Schedule 1 to proposed Form SBS was
modeled largely on this schedule but instead of including a single line
for derivatives, it required filers 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.\336\ It required the same information with respect to
mixed swaps 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.
---------------------------------------------------------------------------
\335\ Pre-Amendment FOCUS Report Part IIB has a similar
schedule.
\336\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25234.
---------------------------------------------------------------------------
A commenter raised concerns about the practicality of reporting
exposures to these subcategories of financial instruments, including
the potential that firms will interpret them differently.\337\ The
Commission believes it is important to record separately amounts
attributable to security-based swaps, mixed swaps, and swaps given the
Commission's supervisory responsibilities regarding these products. The
Commission further believes, however, that requiring reporting of the
exposures to the subcategories of instruments could lead to
inconsistent reporting across filers, which, in turn, could diminish
the utility of receiving this information in terms of comparing firms.
Accordingly, Schedule 1 to the FOCUS Report Part II, as amended,
elicits the amounts attributable to cleared and non-cleared security-
based swaps, mixed swaps, and swaps, and includes definitions for these
products in the instructions, but no longer elicits information
regarding the sub-categories. The Commission also received comment that
``bought'' and ``sold'' could help clarify the
[[Page 68580]]
schedule,\338\ and in response the columns in Schedule 1 to FOCUS
Report Part II, as amended, are relabeled ``long/bought'' and ``short/
sold'' and the instructions are updated accordingly.
---------------------------------------------------------------------------
\337\ See Memorandum from the Division of Trading and Markets
regarding an April 30, 2015 meeting with representatives of the
Securities Industry and Financial Markets Association (May 5, 2015)
(``SIFMA 4/30/2015 Meeting'').
\338\ See, e.g., SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------
The details in Schedule 1 may be of increased value to examiners if
the totals in the schedule (Line Items 8370 and 8371) match the amounts
reported for total securities, commodities, and swap positions in the
Statement of Financial Condition (Line Items 12024 and 12044).
Accordingly, the ``Other securities and commodities'' and ``Securities
with no ready market'' lines are moved up to Lines 12 and 13 (instead
of Lines 16 and 17) in Schedule 1 so that they can be included in the
subtotal for ``Total net securities and spot commodities.'' In
addition, Schedule 1 now elicits ``Counterparty netting'' and ``Cash
collateral netting'' and includes these amounts in the subtotal for
``Total derivative receivables and payables.'' Consequently, the totals
on Schedule 1, titled ``Total net securities, commodities, and swaps
positions,'' are now equal to the sum of ``Total net securities and
spot commodities'' and ``Total derivative receivables and payables.''
\339\
---------------------------------------------------------------------------
\339\ For clarity and accuracy, the total line now reads ``Total
net securities, commodities, and swaps positions (sum of Lines 14
and 21)'' instead of ``Total (sum of Lines 1-17).'' A commenter
requested additional detail regarding firms' hedging activities. See
Levin Letter. The final rule does not require the linking of hedges
as requested by the commenter. However, because the Commission
believes that it would be difficult to identify and pair product
hedges and therefore report hedges, the Commission believes that
linking the totals in Schedule 1 to the lines on the Statement of
Financial Condition will provide examiners with additional detail
about filers' securities and derivatives positions that partially
addresses the concerns underlying this comment.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission is adopting Schedule 1 to
proposed Form SBS by adding it to FOCUS Report Part II, as amended,
with the modifications discussed above.\340\ Schedule 1 must be
completed by stand-alone broker-dealers and stand-alone and broker-
dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\340\ See FOCUS Report Part II, as amended, Schedule 1--
Aggregate Securities, Commodities, and Swaps Positions.
---------------------------------------------------------------------------
Schedule 2 to FOCUS Report Part II
Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Credit-Concentration Report for Fifteen Largest Net Exposures in
Derivatives'' that requires ANC broker-dealers to provide details about
the fifteen counterparties to which they have the largest credit
exposures in derivatives.\341\ Schedule 2 to proposed Form SBS had two
tables that were modeled largely on this schedule.\342\ The first table
would require the filer to identify in the first column the fifteen
counterparties to which the firm had the largest current net exposure,
in order from the largest to the smallest current net exposure. The
second table would require the filer to identify in the first column
the fifteen counterparties to which the firm had the largest total
exposure, in order from the largest to the smallest total exposure.
---------------------------------------------------------------------------
\341\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Credit-Concentration Report for Twenty Largest Current Net
Exposures.''
\342\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25234-35.
---------------------------------------------------------------------------
A commenter raised concerns about the potential ramifications if
counterparties obtained this information and disagreed with the
internal credit rating assigned to them.\343\ The Commission
acknowledges that firms may be required to disclose the FOCUS Report
Part II to counterparties and other third parties for commercial
reasons, and that this could cause internal credit ratings to be
disclosed to the rated entity. The disclosure of this information or
the potential disclosure of the information to the rated entity could
negatively affect the integrity of the filer's credit risk function.
For example, it could give firms an incentive to assign a higher
internal credit rating than warranted to avoid negatively affecting its
relationship with a counterparty and potentially losing that entity's
business. Accordingly, the Commission is modifying the table so that it
continues to require counterparty identifiers but no longer elicits the
internal credit rating assigned to a particular counterparty. This
information is available to Commission staff through its monitoring and
examination programs.
---------------------------------------------------------------------------
\343\ See SIFMA 4/30/2015 Meeting.
---------------------------------------------------------------------------
For the foregoing reasons, Commission is adopting Schedule 2 to
proposed Form SBS by adding it to FOCUS Report Part II, as amended,
with the modification discussed above.\344\ Schedule 2 must be
completed by stand-alone broker-dealers that are authorized to
calculate net capital using internal models and all stand-alone and
broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\344\ See FOCUS Report Part II, as amended, Schedule 2--Credit
Concentration Report for Fifteen Largest Exposures in Derivatives.
---------------------------------------------------------------------------
Schedule 3 to FOCUS Report Part II
Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Portfolio Summary of OTC Derivatives Exposures by Internal Credit
Rating'' that required ANC broker-dealers to provide details about
their aggregate credit exposures to counterparties grouped by the
internal credit rating assigned to the counterparty.\345\ Schedule 3 to
proposed Form SBS had a table modeled on this schedule.\346\ The table
would require the filer to set forth its internal credit rating scale
in the left hand column. For each notch in the rating scale, the filer
would need to provide detail about aggregate amounts of exposures and
collateral collected from the counterparties rated at that notch. The
Commission received no comment on Schedule 3 to proposed Form SBS and
is adopting it by adding the schedule to FOCUS Report Part II, as
amended.\347\ Schedule 3 must be completed by stand-alone broker-
dealers that are authorized to calculate net capital using internal
models and all stand-alone and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\345\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Portfolio Summary of OTC Derivatives Exposures'' that elicits the
credit rating category of the counterparty.
\346\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
\347\ See FOCUS Report Part II, as amended, Schedule 3--
Portfolio Summary of Derivatives Exposures by Internal Credit
Rating.
---------------------------------------------------------------------------
Schedule 4 to FOCUS Report Part II
Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Geographic Distribution of Derivatives Exposures for Ten Largest
Countries'' that required ANC broker-dealers to provide details about
their OTC derivatives exposures grouped by country.\348\ Schedule 4 to
proposed Form SBS included two tables modeled on this schedule.\349\
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 order from the
largest to the smallest current net exposure amounts. The second table
would require the filer to identify in the left column the ten largest
countries in terms of the filer's total exposure to counterparties
located in the country, in order from the largest to the smallest total
exposure amounts. The Commission received no comment on Schedule 4 and
is adopting it by adding the schedule to the FOCUS Report Part II, as
amended.\350\ Schedule 4 must be completed by stand-alone broker-
dealers
[[Page 68581]]
that are authorized to calculate net capital using internal models and
all stand-alone and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------
\348\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Geographic Distribution of OTC Derivatives Exposures'' that
elicits the top ten country exposures by residence of main operating
company.
\349\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
\350\ See FOCUS Report Part II, as amended, Schedule 4--
Geographic Distribution of Derivatives Exposures for Ten Largest
Countries.
---------------------------------------------------------------------------
ii. FOCUS Report Part IIC
As discussed above, the Commission is requiring bank SBSDs and
MSBSPs to report certain general financial information on new FOCUS
Report Part IIC to facilitate monitoring these registrants' financial
condition. The Commission's reporting requirements for bank SBSDs and
MSBSPs generally are designed to be tailored specifically to their
activities as an SBSD or an MSBSP. Accordingly, FOCUS Report Part IIC,
as adopted, is based on FFIEC Form 031, which most banks are required
to file on a quarterly basis.\351\ FFIEC Form 031 elicits financial and
operational information about a bank that is entered into uniquely
numbered line items.
---------------------------------------------------------------------------
\351\ See 12 U.S.C. 161; 12 U.S.C. 324; 12 U.S.C. 1464; 12
U.S.C. 1817. FFIEC Form 031 is available at http://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201303_f.pdf.
---------------------------------------------------------------------------
FOCUS Report Part IIC, as adopted, requires bank SBSDs and MSBSPs
to report certain information they already report on FFIEC Form 031.
Specifically, it includes: (1) A Balance Sheet section that largely
mirrors Schedule RC to FFIEC Form 031; (2) a 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. If the same line appears in both FFIEC
Form 031 and FOCUS Report Part IIC, as adopted, the same line item
number is used in both forms, except that the FOCUS Report Part IIC
line item ends with an additional ``b'' character.\352\
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\352\ For example, Line Item 0081 on FFIEC Form 031 is Line Item
0081b on FOCUS Report Part IIC. The letter ``b'' is added because
some of the line items on FFIEC Form 031 are already assigned to
other lines in the FOCUS Report.
---------------------------------------------------------------------------
One commenter pointed out that not all banks file FFIEC Form 031,
noting that U.S. branches and agencies of foreign banks file FFIEC Form
002.\353\ The Commission acknowledges that there are multiple types of
FFIEC reporting forms, but modeled the FOCUS Report Part IIC on the
form it believes most bank SBSDs and MSBSPs will use. FFIEC Form 031 is
filed by banks with both domestic and foreign offices, while FFIEC Form
041 is filed by banks with domestic offices only. All of the line items
that appear on FOCUS Report Part IIC, as adopted, appear on both FFIEC
Form 031 and FFIEC Form 041, except for three line items which do not
apply to FFIEC Form 041 filers.\354\
---------------------------------------------------------------------------
\353\ See SIFMA 9/5/2014 Letter. The commenter also noted that
foreign bank SBSDs generally report financial information to their
home jurisdiction in accordance with the International Financial
Reporting Standards rather than U.S. Generally Accepted Accounting
Principles. See id. However, these firms likely also file FFIEC Form
002, which is required to be prepared using U.S. Generally Accepted
Accounting Principles. The FFIEC Form 002 instructions are available
at http://www.ffiec.gov/PDF/FFIEC_forms/FFIEC002_201409_i.pdf.
\354\ Line Items 2200, 6631, and 6636 regarding foreign office
deposits do not apply to FFIEC Form 041 filers, because they do not
have foreign branches. Line Item 1395 regarding Tier 3 capital does
not apply to FFIEC Form 041 filers, because they are not required to
compute Tier 3 capital.
---------------------------------------------------------------------------
In addition to the sections drawn from FFIEC Form 031, FOCUS Report
Part IIC, as adopted, includes sections for: (1) A Computation for
Determination of Security-Based Swap Customer Reserve Requirements; (2)
Possession or Control for Security-Based Swap Customers; and (3)
Schedule 1--Aggregate Security-Based Swap and Swap Positions. Finally,
the Commission is adopting instructions for FOCUS Report Part IIC,
which closely track the instructions for proposed Form SBS and FOCUS
Report Part II, as amended.\355\
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\355\ In addition to removing references to entities that will
not file FOCUS Report Part IIC and removing references to sections
and schedules that are not part of FOCUS Report Part IIC, the
following change is made to FOCUS Report Part IIC's general
instructions: The instruction ``Money amounts should be expressed in
whole dollars.'' is deleted because this instruction does not appear
in the instructions accompanying FFIEC Form 031. Additional changes
to FOCUS Report Part IIC's instructions that relate to specific
sections of the form are discussed in this release's discussion of
the applicable section.
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Cover Page
As discussed above, proposed Form SBS included a cover page modeled
largely on the cover page to Pre-Amendment FOCUS Report Part II.\356\
The Commission received no comment on the proposed cover page and is
adopting it in FOCUS Report Part IIC with non-substantive changes
largely to account for the fact that FOCUS Report Part IIC will only be
filed by bank SBSDs and MSBSPs.\357\
---------------------------------------------------------------------------
\356\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25225.
\357\ See FOCUS Report Part IIC, Cover Page. The following
changes are being made: (1) The line soliciting firms to check the
type of registrant filing the form is shortened to only reflect the
registrants required to file FOCUS Report Part IIC (bank SBSDs and
MSBSPs); (2) in response to comment that proposed Form SBS did not
reference foreign SBSDs or foreign MSBSPs, a line is added asking
firms whether the filer is a U.S. person (see SIFMA 9/5/2014
Letter); (3) the line soliciting firms to check the reason the firm
is filing FOCUS Report Part IIC is shortened to only reflect the
range of reasons bank SBSDs and MSBSPs would file the report: at the
special request by the Commission, pursuant to Rule 18a-7, or other;
(4) the line soliciting firms to ``Check here if respondent is
filing an audited report'' is removed, because bank SBSDs and MSBSPs
are not required to file annual reports with the Commission (see 17
CFR 240.18a-7(c)(1)(i)); (5) a typographical error is corrected so
the officer's title printed under the signature line matches the
officer's title printed under the line for the signing officer to
write out his or her name; and (6) a typographical error in the
instructions is corrected so that the ``Official use'' line
references line item 33 instead of 31.
---------------------------------------------------------------------------
Balance Sheet
A bank must report details about its assets, liabilities, and
equity capital on Schedule RC to FFIEC Form 031. Schedule RC also
includes a Memoranda section that elicits information about the bank's
external auditors and fiscal year end. Proposed Form SBS had a Balance
Sheet section to be completed by bank SBSDs and MSBSPs.\358\ The lines
and line items in this section were the same as in Schedule RC to FFIEC
Form 031, except that it did not include line items from the Memoranda
section. The Commission received no comment on this proposed section
and is adopting it in FOCUS Report Part IIC with non-substantive
changes for consistency with Schedule RC to FFIEC Form 031.\359\ This
section must be completed by bank SBSDs and MSBSPs.
---------------------------------------------------------------------------
\358\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231.
\359\ See FOCUS Report Part IIC, Balance Sheet (Information As
Reported On FFIEC Form 031--Schedule RC). The following changes are
being made: (1) Lines 4B, 4C, 13A1, 13A2, 13B1, and 13B2 are
indented so their corresponding line items are not included in the
Totals column; (2) on Line 8, the word ``Investment'' is replaced
with ``Investments''; (3) on Line 23, the Line Item number ``3828b''
is replaced with ``3838b''; (4) in the instructions, clarification
is added that ``FFIEC Instructions'' refers to ``instructions
accompanying FFIEC Form 031''; and (5) because the instructions
direct filers to prepare this section in accordance with the FFIEC
Instructions, the following sentence is deleted: ``In addition, the
data reported on this section should only be updated quarterly.''
---------------------------------------------------------------------------
Regulatory Capital
The prudential regulators are responsible for administering capital
requirements for bank SBSDs and MSBSPs. A bank must report details
about its regulatory capital on Schedule RC-R to FFIEC Form 031.
Schedule RC-R also includes a Memoranda section that elicits detail
about derivatives. Proposed Form SBS similarly included a regulatory
capital section to be completed by bank SBSDs and MSBSPs.\360\ The
lines and line items in this section were largely the same as in
Schedule RC-R to FFIEC Form 031. More specifically, the proposed
section required banks to enter the total amounts of the components of
bank regulatory capital (i.e., total Tier 1, Tier 2, or Tier 3 capital)
and other summary measures, rather than requiring the level
[[Page 68582]]
of detail required by the prudential regulators on Schedule RC-R. The
Commission received no comment on this proposed section and is adopting
it in FOCUS Report Part II, with non-substantive changes for
consistency with Schedule RC-R to FFIEC Form 031.\361\ This section
must be completed by bank SBSDs and MSBSPs.
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\360\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231-32.
\361\ See FOCUS Report Part IIC, Regulatory Capital (Information
As Reported On FFIEC Form 031--Schedule RC-R). The following changes
are being made; (1) on Line 7, the phrase ``Total assets for
leverage capital purposes'' is replaced with ``Total assets for the
leverage ratio'' and line item number ``L138b'' is replaced with
``A224b''; (2) on Lines 8 through 10, the same line item numbers are
assigned to Columns A and B; and (3) because the instructions direct
filers to prepare this section in accordance with the FFIEC
Instructions, the following sentence is deleted: ``In addition, the
data reported on this section should only be updated quarterly.''
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Income Statement
A bank must report details about its income or loss and expenses on
Schedule RI to FFIEC Form 031. Schedule RI also includes a Memoranda
section that elicits further details about the bank's income or loss.
Proposed Form SBS included an income statement section to be completed
by bank SBSDs and MSBSPs.\362\ The proposed income statement section
included some--but not all--of the line items on Schedule RI. More
specifically, to focus the reporting on summary information and
information relevant to securities and derivatives activities, the
proposed income statement section included only line items from
Schedule RI that require the entry of: (1) Total amounts for categories
of income, expense, and loss; (2) details about gains and losses on
securities positions; (3) details about trading revenues; and (4)
details about gains and losses on derivatives. The Commission received
no comment on the proposed income statement section and is adopting it
in FOCUS Report Part IIC with minor non-substantive changes.\363\ This
section must be completed by bank SBSDs and MSBSPs.
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\362\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25232.
\363\ See FOCUS Report Part IIC, Income Statement (Information
As Reported On FFIEC Form 031--Schedule RI). The following changes
are being made: (1) In FOCUS Report Part IIC, the parentheticals
instructing filers which lines to total are deleted from Lines 9,
9F, and 9G, because one of these parentheticals contained an
inaccurate cross-reference and this change preserves flexibility in
case FFIEC Form 031's lines are renumbered in the future; and (2)
because the instructions direct filers to prepare this section in
accordance with the FFIEC Instructions, the following sentence is
deleted: ``In addition, the data reported on this section should
only be updated quarterly.''
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Computation for Determination of Security-Based Swap Customer Reserve
Requirements
As discussed above, FOCUS Report Part II, as amended, includes a
section for broker-dealers and stand-alone SBSDs to provide a
computation of their security-based swap customer reserve requirements.
Proposed Form SBS would have required bank SBSDs to complete an
identical section.\364\ The Commission received no comment on applying
this section to bank SBSDs and is adopting it in FOCUS Report Part IIC
with non-substantive changes for consistency internally and with Rules
15c3-3 and 18a-4.\365\
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\364\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
\365\ See FOCUS Report Part IIC, Computation for Determination
of Security-Based Swap Customer Reserve Requirements. The following
non-substantive changes are being made: (1) References to Rule 18a-4
are removed from the section's title, line items, and instructions
to accurately reflect that the security-based swap customer reserve
requirement adopted by the Commission is located in Rules 15c3-3 and
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the
Commission); (2) to improve clarity, the form and instructions
reflect that the section is titled ``Computation for Determination
of Security-Based Swap Customer Reserve Requirements'' instead of
``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''; (3) the section's heading and
instructions are updated to state that a stand-alone SBSD exempt
from Rule 18a-4 is not required to complete this section to reflect
that paragraph (f) of Rule 18a-4, as amended, provides an exemption
from the rule for certain bank SBSDs; (4) the parenthetical ``(See
Note A)'' is added to Line 1 for consistency with Line 1 of the
Computation for Determination of Customer Reserve Requirements
section in revised FOCUS Report Part II, and, in response to
commenters, the section includes a clarification that the notes
referenced in this section appear in Exhibit A to Rule 18a-4 (see
SIFMA 9/5/2014 Letter); (5) in response to comment received, Lines
20 and 21 now correctly cross-reference ``Line 19'' instead of
``Line 21'' (See SIFMA 9/5/2014 Letter); (6) in Lines 23 and 25,
``Reserve Bank Account(s)'' is replaced with ``Reserve Account(s)''
for consistency with paragraph (a)(9) of Rule 18a-4; and (7) to
eliminate extraneous text, the following sentence is deleted from
the instructions: ``The term `security-based swap customer' is
defined in 17 CFR 240.18a-4.''
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Possession or Control for Security-Based Swap Customers
As discussed above, FOCUS Report Part II, as amended, includes a
section in which broker-dealers and stand-alone SBSDs enter information
related to possession or control for security-based swap customers.
Proposed Form SBS required bank SBSDs to complete an identical
section.\366\ The Commission received no comment on applying this
section to bank SBSDs and is adopting it in FOCUS Report Part IIC with
non-substantive changes for consistency internally and with Rules 15c3-
3 and 18a-4.\367\
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\366\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
\367\ See FOCUS Report Part IIC, Possession or Control for
Security-Based Swap Customers. The following changes are being made:
(1) References to Rule 18a-4 are removed from the section's title,
line items, and instructions to accurately reflect that the
possession or control requirements adopted by the Commission is
located in Rules 15c3-3 and 18a-4 (instead of solely in Rule 18a-4
as initially proposed by the Commission); (2) to improve clarity,
the form and instructions reflect that the section is titled
``Possession or Control for Security-Based Swap Customers'' instead
of ``Information for Possession or Control Requirements under Rule
18a-4''; and (3) the section's heading and instructions are updated
to state that a stand-alone SBSD exempt from Rule 18a-4 is not
required to complete this section to reflect that paragraph (f) of
Rule 18a-4, as amended, provides an exemption from the rule for
certain bank SBSDs.
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Claiming an Exemption From Rule 18a-4
As discussed above, Rule 18a-4, as adopted, exempts bank SBSDs from
the requirements of the rule if the SBSD meets certain conditions.\368\
In light of this modification to the rule from the proposal (which did
not provide an exemption), the Commission is adding a line item to the
FOCUS Report Part IIC for a bank SBSD to indicate whether the firm is
claiming an exemption from Rule 18a-4.\369\
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\368\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35.
\369\ See FOCUS Report Part IIC, Claiming an Exemption from Rule
18a-4.
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Schedule 1 to FOCUS Report Part IIC
As discussed above, FOCUS Report Part II, as amended, includes a
Schedule 1 that elicits details about filers' aggregate long and short
positions in various categories of financial instruments, including
sub-categories of security-based swaps and swaps. Proposed Form SBS
would have required bank SBSDs and MSBSPs to complete a similar but
more truncated version of this section.\370\ The Commission received no
comment on applying this truncated version of the schedule to bank
SBSDs and MSBSPs. However, as discussed above, the Commission did
receive comment on the practicality of reporting exposures to
subcategories of security-based swaps and swaps, including the
potential that firms will interpret them differently.\371\ Accordingly,
the Commission is modifying the proposed schedule for bank SBSDs and
MSBSPs so that it no longer elicits details regarding the sub-
categories of security-based swaps and swaps. As discussed above, the
Commission also received comment suggesting that references to ``long''
and ``short'' positions in security-based
[[Page 68583]]
swaps, mixed swaps, and swaps \372\ should be changed to references to
``long/bought'' and ``short/sold'' positions. The Commission agrees and
is making this modification.
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\370\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
\371\ See SIFMA 4/30/2015 Meeting.
\372\ See id.
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For the foregoing reasons, the Commission is adopting the
requirement that bank SBSDs and MSBSPs must complete a truncated
version of Schedule 1 by including it in FOCUS Report Part IIC, as
adopted, with the modifications discussed above.
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. The rule also
requires the independent public accountant to notify the broker-dealer
if the accountant determines that the broker-dealer is not in
compliance with certain broker-dealer financial responsibility rules or
that a ``material weakness,'' as defined in paragraph (d)(3)(iii) of
the rule, exists. As discussed above, the Commission is amending Rule
17a-5 so that it is applicable to broker-dealer SBSDs, other than
OTCDD/SBSDs, and broker-dealer MSBSPs. With respect to stand-alone
SBSDs and MSBSPs and OTCDD/SBSDs, the Commission is adopting in new
Rule 18a-7 many requirements that parallel requirements in Rule 17a-5,
as amended. However, Rule 18a-7 does not include a parallel requirement
for every requirement in Rule 17a-5.\373\ Further, the requirements in
Rule 18a-7 relating to the filing of annual audited reports and other
reports do not apply to bank SBSDs and MSBSPs (as discussed above, bank
SBSDs and MSBSPs are subject to requirements to file FOCUS Report Part
IIC on a quarterly basis).
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\373\ The Commission did not propose in Rule 18a-7 (and is not
adopting) a requirement that is parallel to the exemption report
requirement in paragraph (d)(4) of Rule 17a-5 because this provision
would not apply to stand-alone SBSDs and MSBSPs. Rule 18a-7 also
does not include requirements that parallel the requirements in
paragraphs (d)(6) and (e)(4) of Rule 17a-5, as amended, requiring
broker-dealers to file certain reports with the Securities Investor
Protection Corporation (``SIPC'') because stand-alone SBSDs and
MSBSPs and OTCDD/SBSDs will not be members of SIPC. In addition,
Rule 18a-7 does not include a requirement that parallels the
requirement for a broker-dealer, other than an OTC derivatives
dealer, to file Form Custody with the firm's DEA. Additional
differences between Rule 18-7 and Rule 17a-5 are discussed below.
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a. Amendments to Rule 17a-5 and Adoption of Rule 18a-7
Liquidity Stress Test Reports
The Commission proposed that broker-dealers (including broker-
dealer SBSDs) and stand-alone SBSDs authorized to use internal models
to compute net capital be subject to liquidity stress test
requirements.\374\ Consequently, the Commission proposed to amend Rule
17a-5 and include in proposed Rule 18a-7 a parallel provision to
require these entities to file a monthly report with the Commission
containing the results of the liquidity stress test.\375\ As
consideration of the proposed liquidity stress test requirements is
being deferred,\376\ the Commission is deferring consideration of these
related reporting requirements.\377\
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\374\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70252-70254.
\375\ See Recordkeeping and Reporting Release, 79 FR at 25237.
\376\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
\377\ See paragraph (a)(5)(vii) of Rule 17a-5, as amended;
paragraph (a)(3)(vii) of Rule 18a-7, as adopted. The proposed
reporting requirements would have been set forth in these
paragraphs, which instead are being designated ``[Reserved].''
---------------------------------------------------------------------------
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 (along with other information) a statement of
financial condition (with appropriate notes), a footnote with
information about the firm's net capital, and, if applicable,
information about any material weaknesses in the firm's internal
control over compliance with certain broker-dealer financial
responsibility rules identified in the most recent reports of the
firm's auditor. In addition, this paragraph requires these broker-
dealers to send their customers unaudited statements dated six months
after the date of the audited statements that must include (along with
other information) a statement of financial condition and a footnote
containing information about the firm's net capital. Under paragraph
(c)(5) of Rule 17a-5, a broker-dealer is exempt from sending the
statements to customers if the broker-dealer, among other things, semi-
annually sends its customers a financial disclosure statement that
includes, among other things, information regarding the firm's net
capital and a statement that the audited and unaudited statements are
available at no charge on the broker-dealer's website and by calling a
toll-free number to request a paper copy of the statements. Broker-
dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be
subject to these requirements and therefore will need to send the
audited and unaudited statements to their customers, including
security-based swap customers. However, these firms will be permitted
to take advantage of the exemption described above.\378\
---------------------------------------------------------------------------
\378\ See the broad definition of ``customer'' in paragraph
(c)(4) of Rule 17a-5.
---------------------------------------------------------------------------
The Commission proposed in Rule 18a-7 that stand-alone SBSDs and
MSBSPs be required to disclose on their websites (rather than send
paper copies) information that is similar to the information broker-
dealers are required to send to customers.\379\ The proposal required
stand-alone SBSDs and MSBSPs to disclose on their websites 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. In addition, it required a stand-
alone SBSD (but not an MSBSP) to disclose on its website 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; and (2) if, in connection with the firm's most
recent annual reports, the report of the independent public accountant
identified one or more material weaknesses, a copy of the report.
Further, the proposal required stand-alone SBSDs and MSBSPs to disclose
on their websites unaudited statements containing the same information
as the audited statement discussed above within 30 calendar days of the
date of the unaudited statements. Finally, it required stand-alone
SBSDs and MSBSPs to make a paper copy of the information required to be
disclosed on their websites available at no charge upon request of the
customer and to maintain a toll-free number to receive such requests.
The Commission received no comments on these customer disclosure
proposals and is adopting them with the modification that an OTCDD/SBSD
will be subject to these requirements pursuant to Rule 18a-7 (rather
than Rule 17a-5).\380\
---------------------------------------------------------------------------
\379\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 25237-38.
\380\ See paragraph (b) of Rule 18a-7, as adopted.
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Annual Reports
Paragraph (d) of Rule 17a-5 requires broker-dealers, among other
things, to file with the Commission annual reports consisting of a
financial report and either a compliance report or an
[[Page 68584]]
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. The financial report must
contain financial statements, including, among others, a statement of
financial condition, a statement of income, and a statement of cash
flows and 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. Generally, broker-dealers that maintain custody of
customer securities and/or cash (and, therefore, do not claim an
exemption from Rule 15c3-3) must file the compliance report. The report
must contain statements about the broker-dealer's internal control over
compliance with Rules 15c3-1, 15c3-3, 17a-13, and SRO customer account
statement rules as well as statements as to whether the firm was in
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 (the
customer reserve account requirement) as of the end of the firm's
fiscal year. The exemption report must contain statements about the
broker-dealer's claimed exemption from Rule 15c3-3.
The Commission proposed amending paragraph (d) of Rule 17a-5 to
require a broker-dealer that was subject to proposed Rule 18a-4 (i.e.,
a broker-dealer SBSD) \381\ to: (1) File the compliance report and
related report of the independent public accountant covering the
compliance report (i.e., the firm could not file the exemption report
even if it claimed an exemption from Rule 15c3-3); and (2) incorporate
the possession or control and customer reserve requirements of the
proposed SBSD segregation rule into the financial report supporting
schedules and the compliance report.\382\
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\381\ As noted above, the Commission proposed that Rule 18a-4,
the SBSD segregation rule, apply to all SBSDs, but, in response to
comment, adopted security-based swap segregation requirements for
broker-dealers, including broker-dealer SBSDs, in paragraph (p) of
the broker-dealer segregation rule, Rule 15c3-3. As a result, the
Commission is modifying the cross references in paragraph (d) of
Rule 17a-5 to reflect the placement of the customer protection
requirements for broker-dealer SBSDs in paragraph (p) of Rule 15c3-3
rather than in paragraph (b) of Rule 18a-4 as proposed.
\382\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25238-40.
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The Commission also proposed parallel annual reporting requirements
in proposed new Rule 18a-7 for stand-alone SBSDs and MSBSPs. The
proposals required stand-alone SBSDs and MSBSPs to annually file with
the Commission a financial report. In addition, they required stand-
alone SBSDs to file a compliance report that contained statements about
the firm's compliance with the proposed SBSD capital and segregation
rules and statements about the firm's internal control over compliance
with those rules and the proposed SBSD securities count rule. Further,
the proposals required stand-alone SBSDs and MSBSPs to file reports of
an independent public accountant covering the financial report and the
compliance report.
The final segregation rule for stand-alone SBSDs, bank SBSDs, and
OTCDD/SBSDs (Rule 18a-4) establishes an exemption from its requirements
if the firm meets certain conditions.\383\ Consequently, the Commission
is modifying the proposed annual reports provisions in Rule 18a-7 to
require a stand-alone SBSD or OTCDD/SBSD that is operating under the
exemption from Rule 18a-4 to file an exemption report instead of the
compliance report.\384\ The exemption report for stand-alone SBSDs and
OTCDD/SBSDs is modeled on the existing exemption report for broker-
dealers. In the report, the SBSD must state that it met the exemptive
provisions in Rule 18a-4 throughout the most recent fiscal year without
exception or with one or more exceptions. If applicable, the firm will
need to briefly describe the nature of each exception and the
approximate dates the exception existed. In addition, the stand-alone
SBSD or OTCDD/SBSD will need to file a report of its independent public
accountant covering the exemption report. Permitting these firms to
file the exemption report in lieu of the compliance report should
reduce the costs of the audit and will result in a report that aligns
more closely with their activities (i.e., operating under the
exemption).
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\383\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4). The final
segregation requirements for broker-dealer SBSDs, other than OTCDD/
SBSDs, do not contain a similar exemption.
\384\ See paragraphs (c)(1)(i)(B)(2) and (c)(4) of Rule 18a-7,
as adopted.
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Finally, a commenter requested that the Commission permit the
independent public accountant to adhere to generally accepted auditing
standards (``GAAS'') rather than PCAOB standards. The commenter stated
that: (1) This would promote consistency with other U.S. regulators;
(2) the PCAOB standards are ``almost identical'' to GAAS; and (3) using
GAAS would be the lowest cost alternative.\385\ The commenter also
stated that the Commission should eliminate the PCAOB standards'
applicability to audited compliance and exemption reports, because the
requirement provides a ``non-existent benefit'' in light of existing
Commission regulations and Commission and FINRA staff examinations.
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\385\ See Email from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (Feb. 7, 2019)
(``SIFMA 2/7/2019 Email'').
---------------------------------------------------------------------------
In response, the Commission first notes that the requirement that
broker-dealer annual financial statements be certified by a PCAOB-
registered independent public accountant is consistent with the
requirements imposed by the Exchange Act.\386\ Moreover, as noted
above, this requirement applies to all broker-dealers that must file
certified annual reports. Further, the PCAOB has issued attestation
standards specific to the examination of compliance reports and the
review of exemption reports.\387\ Consequently, the Commission does not
believe it would be appropriate to amend Rule 17a-5 to permit broker-
dealers subject to that rule to file annual reports that are not
certified by a PCAOB-registered accountant because the firm is dually
registered as an SBSD. Additionally, the Commission does not believe it
would be appropriate to have the financial reports audited under PCAOB
standards and the compliance or exemption report (as applicable)
examined or reviewed, respectively, under GAAS.
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\386\ See Section 17(e)(1)(A) of the Exchange Act (as amended by
Pub. L. 107-204, section 205(c)(2) (2002)).
\387\ See PCAOB, Attestation Standard No. 1, Examination
Engagements Regarding Compliance Reports of Brokers and Dealers, and
Attestation Standard No. 2, Review Engagements Regarding Exemption
Reports of Brokers and Dealers.
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However, the Commission believes it would be appropriate to permit
SBSDs and MSBSPs subject to Rule 18a-7 to file annual reports that are
certified by independent public accountants that are not registered
with the PCAOB. Stand-alone SBSDs and MSBSPs are not subject to a
statutory requirement that their financial statements filed with the
Commission be certified by a PCAOB-registered accountant, and the
audits of these entities will not be subject to the PCAOB's examination
and enforcement authority. While an OTC derivatives dealer (as a
broker-dealer) is subject to the statutory requirement, an OTCDD/SBSD
will be subject to the same net capital rule (Rule 18a-1) and the same
reporting rule (Rule 18a-7) as a stand-alone SBSD. The Commission
believes an OTCDD/SBSD should be treated
[[Page 68585]]
similarly to a stand-alone SBSD because they are both subject to the
same capital rule. Further, Rule 17a-12, the OTC derivatives dealer
reporting rule, does not require that the auditor of an OTC derivatives
dealer's annual audited financial statements be registered with the
PCAOB or that the audit be conducted in accordance with standards of
the PCAOB.\388\ Accordingly, the Commission believes that stand-alone
SBSDs and MSBSPs and OTCDD/SBSDs should have the option to engage an
independent public accountant that is not registered with the PCAOB,
and that the independent public accountant engaged by the firm should
have the option to use either GAAS in the United States or PCAOB
standards.\389\
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\388\ Paragraph (b) of Rule 17a-12 provides that the statements
must be audited by ``a certified public accountant,'' paragraph (f)
provides that the accountant must be independent, and paragraph
(h)(1) provides that the audit must be ``made in accordance with
U.S. Generally Accepted Auditing Standards.''
\389\ See Section 17(e)(1)(A) of the Exchange Act. See also
Section 17(e)(1)(C) of the Exchange Act (providing the Commission
with exemptive authority with respect to Section 17(e)(1)(A) of the
Exchange Act).
---------------------------------------------------------------------------
For these reasons, the Commission is adopting the proposed annual
reports requirements with the modifications that stand-alone SBSDs and
OTCDD/SBSDs operating under the exemption from Rule 18a-4 will be
required to file the exemption report instead of the compliance report,
that stand-alone SBSDs and MSBSPs and OTCDD/SBSDs may engage an
independent public accountant that is not registered with the PCAOB,
and that the accountant must undertake, as part of the engagement, to
prepare its reports based on an examination or review, as applicable,
of the reports prepared by the broker-dealer in accordance with GAAS in
the United States or PCAOB standards.\390\ In addition, the Commission
made a number of non-substantive modifications to paragraph (d) of Rule
17a-5,\391\ as proposed to be amended, and paragraph (c) of Rule 18a-7,
as proposed to be adopted.\392\
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\390\ See paragraph (d) of Rule 17a-5, amended; paragraphs (c),
(e), and (f) of Rule 18a-7, as adopted.
\391\ Proposed references to Rule 18a-4 in paragraph (d) of Rule
17a-5 are changed to Rule 15c3-3 because--as discussed above--the
segregation requirements for broker-dealer SBSDs are codified in
Rule 15c3-3. Proposed references to Form SBS are changed to the
FOCUS Report because--as discussed above--that will be the financial
reporting form for SBSDs and MSBSPs. Paragraph (d)(2)(iii) of Rule
17a-5, as amended, also contains the following non-substantive
differences from the paragraph as proposed to be amended: (1)
Replacing the word ``either'' with ``any of'' in paragraph
(d)(2)(iii) because the paragraph references more than two
computations; and (2) replacing the word ``the'' with ``Customer''
in the phrase ``Computation for Determination of the Reserve
Requirements Under Exhibit A of Sec. 240.15c3-3'' for consistency
with FOCUS Report Parts II and III.
\392\ Proposed references to Form SBS are changed to the FOCUS
Report. In addition, the final rule refers to ``the Computation of
Tangible Net Worth under Sec. 240.18a-2'' instead of the ``the
Computation for Determination of Tangible Net Worth under Sec.
240.18a-2.'' Further, the final rule refers to ``a Computation for
Determination of Security-Based Swap Customer Reserve Requirements
under Exhibit A of Sec. 240.18a-4)'' instead of ``a Computation for
Determination of the Reserve Requirements under Exhibit A of Sec.
240.18a-4.'' Finally, the final rule refers to ``Possession or
Control for Security-Based Swap Customers under Sec. 240.18a-4''
instead of ``Information Relating to the Possession or Control
Requirements under Sec. 240.18a-4.''
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Timing and Location of Filing
Paragraph (d)(5) of Rule 17a-5 provides that a broker-dealer,
broker-dealer SBSD, other than an OTCDD/SBSD, and broker-dealer MSBSP
must file the annual reports with the Commission not more than sixty
calendar days after the end of the firm's fiscal year. Paragraph (d)(6)
of Rule 17a-5 requires that the broker-dealer 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. The Commission proposed
parallel filing requirements in Rule 18a-7 for stand-alone SBSDs and
MSBSPs, except that these entities would need to file the annual
reports solely with the Commission.\393\ Broker-dealers, including OTC
derivatives dealers, currently may file their annual reports
electronically.\394\ The Commission is amending paragraph (d)(6) of
Rule 17a-5 to provide broker-dealers, including broker-dealer SBSDs and
MSBSPs the option to file the annual reports with the Commission
electronically. In addition, the Commission is modifying paragraph
(c)(6) of Rule 18a-7 to provide this option to stand-alone SBSDs,
OTCDD/SBSDs, and stand-alone MSBSPs. For these reasons, the Commission
is adopting the proposed requirements regarding the timing and location
of the filings with these modifications.\395\
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\393\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25240. Stand-alone SBSDs and MSBSPs would not be members of SIPC
and would not have a DEA.
\394\ See https://www.sec.gov/divisions/marketreg/electronic-filing-broker-dealer-annual-reports.htm.
\395\ See paragraphs (c)(5) and (6) of Rule 18a-7, as adopted.
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Nature and Form of the Reports
Paragraph (e) of Rule 17a-5, among other things: (1) Requires the
broker-dealer to attach a notarized oath or affirmation to the
financial reports; (2) provides that the annual reports are not
confidential, except that the broker-dealer can request confidentiality
for all parts of the annual reports other than the statement of
financial condition and related accountant's report; and (3) requires a
broker-dealer to file certain additional reports with SIPC. FOCUS
Report Part III serves as the cover sheet for the annual reports and
provides a template for the broker-dealer to execute the oath or
affirmation. Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-
dealer MSBSPs will be subject to these requirements, as amended. The
Commission proposed amendments to paragraph (e) of Rule 17a-5 and
parallel nature and form of the reports requirements in Rule 18a-7 for
stand-alone SBSDs and MSBSPs.\396\
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\396\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25240-41.
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More specifically, the Commission proposed amending paragraph (e)
of Rule 17a-5 to remove the text of the oath or affirmation because the
text is set forth in FOCUS Report Part III as well. The Commission
received no comment on this aspect of the proposal. However, to avoid
confusion as to whether this change would result in a new substantive
requirement, the Commission has determined to retain the text of the
oath or affirmation in paragraph (e)(2) of Rule 17a-5 and to include it
in paragraph (d)(1) of Rule 18a-7.
Paragraph (e)(4)(i) of Rule 17a-5 requires a broker-dealer to file
with SIPC ``a report on the SIPC annual general assessment
reconciliation or exclusion from membership forms that contains such
information and is in such format as determined by SIPC by rule and
approved by the Commission.'' SIPC's rule (SIPC Rule 600, ``Rules
Relating to Supplemental Report of SIPC Membership'') was approved by
the Commission on March 14, 2016.\397\
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\397\ See Securities Investor Protection Corporation, Release
No. SIPA-175 (Mar. 14, 2016), 81 FR 14372 (Mar. 17, 2016).
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Under paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers are
required to file the report with the Commission pursuant to the
requirements in that paragraph (which prescribes the information that
must be included in, and the format of, the report). However, under
paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers were no longer
required to do so after SIPC adopted its rule under paragraph (e)(4)(i)
of Rule 17a-5 and the rule was approved by the Commission. Therefore,
for fiscal years that ended on or after April 30, 2016,
[[Page 68586]]
when SIPC's rule became effective, paragraph (e)(4)(ii) of Rule 17a-5
became moot. As a consequence, the Commission is making the technical
amendment to paragraph (e)(4) of Rule 17a-5 to eliminate paragraph
(e)(4)(ii). As amended, paragraph (e)(4) of Rule 17a-5 provides that:
``The broker or dealer must file with SIPC a report on the SIPC annual
general assessment reconciliation or exclusion from membership forms
that contains such information and is in such format as determined by
SIPC by rule and approved by the Commission.'' A broker-dealer is not
required to also file the report with the Commission. There is no
parallel provision in Rule 17a-12, the reporting rule for OTC
derivatives dealers,\398\ or in Rule 18a-7, because these entities are
not (or will not) be members of SIPC.
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\398\ Paragraph (p) of Rule 17a-5 provides that an OTC
derivatives dealer may comply with Rule 17a-5 by complying with Rule
17a-12.
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In addition, the Commission proposed a number of changes to FOCUS
Report Part III, which before these amendments was the cover page to be
attached to a broker-dealer's annual reports, to accommodate its use by
OTC derivatives dealers and stand-alone SBSDs and MSBSPs.\399\ The
Commission also proposed amending FOCUS Report Part III to address
amendments made to Rule 17a-5 in 2013.\400\ Further, the Commission
proposed a number of non-substantive changes to FOCUS Report Part
III.\401\ The Commission received no comments on these proposed
requirements and is adopting them.\402\ However, the Commission is
making several non-substantive changes to the original proposal to
improve the clarity of FOCUS Report Part III.\403\ The Commission is
also making several non-substantive changes to the checklist on the
second page of FOCUS Report Part III.\404\
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\399\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241, n. 689. The Commission's EDGAR system will be updated to
reflect the amendments to FOCUS Report Part III.
\400\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 2524, n. 690. See also Broker-Dealer Reports, 78 FR 51910.
\401\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241, n. 691.
\402\ See paragraph (e) of Rule 17a-5, as amended; paragraph (d)
of Rule 18a-7, as adopted; FOCUS Report Part III, as amended.
References in the paragraphs to ``Form SBS'' are changed to the
``FOCUS Report'' and references to ``Rule 18a-4'' in paragraph (e)
of Rule 17a-5 are changed to ``Rule 15c3-3.''
\403\ The following non-substantive changes to the rule were
made. The title of the facing page was changed from ``Audited Annual
Report'' to ``Annual Reports'' to more accurately reflect that
multiple reports are filed with the facing page, and not all of
these reports are audited. For the same reason, ``report'' is
replaced with ``filing'' or ``reports'', as applicable, in the
phrases ``Report for the period beginning _____and ending _____,''
``PCAOB-registered independent public accountant whose opinion is
contained in this report'', and ``This report** contains.''
Similarly, because not all the accountant-prepared documents filed
with the facing page are opinions, the word ``opinion'' is replaced
with ``reports'' in the phrases ``PCAOB-registered independent
public accountant whose opinion is contained in this report'' and
``Claims for exemption from the requirement that the annual report
be covered by the opinion of a PCAOB-registered independent public
accountant must be supported by a statement of facts and
circumstances relied on as the basis of the exemption.'' For further
confirmation of the PCAOB-registered accountant's identity, a field
was added to identify the accountant's PCAOB registration number (if
applicable). This information is publicly available on the PCAOB's
website. In the ``Type of Registrant'' section, the ``OTC
derivatives dealer'' checkbox is replaced with a ``Check here if
respondent is an OTC derivatives dealer'' for consistency with FOCUS
Report Part II, and to clarify that an OTC derivatives dealer is a
type of broker-dealer. To simplify text and improve accuracy, ``Name
and Telephone Number of'' is removed from the phrase ``Name and
Telephone Number of Person to Contact with Regard to this Filing.''
The language in the oath or affirmation is updated for consistency
with the language in the oath or affirmation in paragraph (e)(2) of
Rule 17a-5 and paragraph (d)(1) of Rule 18a-7.
\404\ The following amendments were made to the checklist. The
line item for the facing page is deleted because the checklist is
part of the facing page, so a firm filling out the checklist is also
necessarily filling out the facing page. In new line item (e),
``Statement of changes in stockholders' equity or partners' or sole
proprietor's capital'' is replaced with ``Statement of changes in
stockholders' or partners' or sole proprietor's equity'' to match
the language used in paragraph (d)(2)(i) of Rule 17a-5, paragraph
(b)(2) of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7.
``Notes to consolidated statement of financial condition'' and
``Notes to consolidated financial statements'' are added to the
checklist as new line items (b) and (g), respectively, because they
are required by paragraph (d)(2)(i) of Rule 17a-5, paragraph (b)(2)
of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7. The line
items titled ``Computation of net capital under 17 CFR 240.15c3-1''
and ``Computation of net capital under 17 CFR 240.18a-1'' are
consolidated into a single new line item (h). Because the security-
based swap reserve requirements are now included in both Rule 15c3-3
(governing broker-dealers) and Rule 18a-4 (governing SBSDs), cross-
references to Rule 15c3-3 are added to new line items (k) and (n).
To clarify that proposed line item (o) includes both the customer
and PAB reserve requirements, new line item (l) is added requiring a
computation for determination of PAB requirements under Exhibit A of
Sec. 240.15c3-3. In addition, for added clarity about which line
items apply to securities instead of security-based swaps, the
phrase ``reserve requirements'' is replaced with ``customer reserve
requirements'' in new line item (j) and ``possession or control
requirements'' is replaced with ``possession or control requirements
for customers'' in new line item (m). Proposed line items (n)
through (r) are consolidated into new line item (o) which better
matches the language used in paragraph (d)(2)(iii) of Rule 17a-5,
paragraph (b)(4) of Rule 17a-12, and paragraph (c)(2)(iii) of Rule
18a-7. In new line item (p), ``A reconciliation between the audited
and unaudited Statements of Financial Condition with respect to
methods of consolidation'' is replaced with ``Summary of financial
data for subsidiaries not consolidated in the statement of financial
condition'' to better match the language used in paragraph (d)(2)(i)
of Rule 17a-5 and paragraph (b)(2) of Rule 17a-12. In line item (s),
a reference to Rule 18a-7 is added to reflect that an exemption
report can be filed pursuant this rule in addition to pursuant to
Rule 17a-5. In line item (q), the phrase ``in accordance with 17 CFR
240.17a-5, 17 CFR 240.17a-12, or 17 CFR 240.18a-7, as applicable''
is added after ``Oath or affirmation.'' Proposed line item (u), ``A
copy of the SIPC Supplemental Report'' is removed from the
checklist, because for fiscal years that end on or after April 30,
2016, the supplemental report is filed only with SIPC (and not with
the Commission). See 17 CFR 240.17a-5(e)(4); Securities Investor
Protection Corporation, File No. SIPC-2015-01 (Mar. 14, 2016), 81 FR
14372 (Mar. 17, 2016); Letter from SIPC to All Broker-Dealers
including those that pay SIPC assessments and those that claim
exclusion from SIPC membership regarding SIPC Series 600 Rules (Apr.
29, 2016). In line item (w), a reference to Rule 18a-7 is added to
reflect that an exemption report can be filed pursuant this rule in
addition to pursuant to Rule 17a-5. Proposed line items (z), (aa),
and (dd) are consolidated into new line item (u), which better
matches the language used in paragraph (f)(1) of Rule 17a-5,
paragraph (b) of Rule 17a-12, and paragraph (f)(1) of Rule 18a-7.
The checklist also includes new line item (t), titled ``Independent
public accountant's report based on an examination of the statement
of financial condition'' to account for a firm's ability to request
confidential treatment for the financial statements but not the
statement of financial condition. Proposed line items (bb) and (ee)
are consolidated into new line item (v), which now reads
``Independent public accountant's report based on an examination of
certain statements in the compliance report under 17 CFR 240.17a-5
or 17 CFR 240.18a-7, as applicable'' to better reflect the language
used in paragraph (g)(2)(i) of Rule 17a-5 and paragraph (f)(2)(i) of
Rule 18a-7. Line item (x) is added for supplemental reports on
applying agreed-upon procedures, in accordance with Rule 17a-5 (with
respect to ANC broker-dealers) and Rule 17a-12 (with respect to OTC
derivatives dealers). Throughout the checklist, the articles ``A''
and ``An'' are deleted as unnecessary and for internal consistency.
In addition, line items are renumbered as needed due to insertions
or deletions, and proposed line item (v) is moved to the end of the
checklist as line item (y).
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Qualification of the Independent Public Accountant
As noted above, a broker-dealer is required to file with the
Commission a report of a PCAOB-registered independent public accountant
covering the annual reports. 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 accountant. Broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be subject
to these requirements. The Commission proposed to include in Rule 18a-7
parallel independent public accountant qualifications, statement, and
notice requirements for stand-alone SBSDs and MSBSPs.\405\ The
Commission is modifying these requirements to conform them to the
modifications discussed above pursuant to which a
[[Page 68587]]
stand-alone SBSD or MSBSP as well as an OTCDD/SBSD may engage an
independent public accountant that is not registered with the PCAOB.
The Commission received no other comments related to these proposed
accountant qualification requirements and is adopting them with the
modification discussed above.\406\
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\405\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241-43.
\406\ See paragraph (e) of Rule 18a-7, as adopted. The
modification deletes the phrase ``and the independent public
accountant must be registered with the Public Company Accounting
Oversight Board'' from the text of the final rule.
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Engagement of the Independent Public Accountant
Paragraph (g) of Rule 17a-5 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 statements in the exemption report. Broker-dealer SBSDs, other than
OTCDD/SBSDs, and broker-dealer MSBSPs will be subject to these
requirements. The Commission proposed parallel engagement of accountant
requirements in Rule 18a-7 for stand-alone SBSDs and MSBSPs.\407\ The
Commission is modifying these requirements to conform them to the
modifications discussed above pursuant to which a stand-alone SBSD or
MSBSP as well as an OTCDD/SBSD may engage an independent public
accountant that is not registered with the PCAOB and the accountant may
use GAAS in the United States or PCAOB standards. The Commission
received no other comments related to these proposed requirements and
is adopting them with the modification discussed above and with one
additional modification.\408\ As discussed above, the final segregation
rule for stand-alone SBSDs, OTCDD/SBSDs, and bank SBSDs includes an
exemption from the rule's requirements if firm meets certain
conditions.\409\ Consequently, the Commission is requiring a stand-
alone SBSD or OTCDD/SBSD that is exempt from the segregation rule to
file the exemption report instead of the compliance report.
Accordingly, a stand-alone SBSD or OTCDD/SBSD that is exempt from the
segregation rule must engage the independent public accountant to
perform a review of the firm's exemption report instead of an
examination of the compliance report.\410\
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\407\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25243.
\408\ See paragraph (f) of Rule 18a-7, as adopted.
\409\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4).
\410\ See paragraph (f)(2)(ii) of Rule 18a-7, as adopted.
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Notification of Non-Compliance or Material Weakness
Paragraph (h) of Rule 17a-5 requires the independent public
accountant engaged to prepare reports covering a broker-dealer's annual
reports to provide the broker-dealer with a notification if, during the
course of preparing its reports, the accountant discovers the firm is
not in compliance with Rule 15c3-1, 15c3-3, 17a-13, or SRO customer
account statement rules, or if the accountant determines that any
material weaknesses exist. If the notification from the accountant
concerns an occurrence that requires the broker-dealer to provide
notification to the Commission (e.g., under Rule 17a-11), the broker-
dealer must provide the accountant with a copy of the notification sent
to the Commission. If the accountant does not receive the copy of the
notification within one business day, or if the accountant disagrees
with the statements in the notification, the accountant must notify the
Commission and the broker-dealer's DEA within one business day.\411\
Broker-dealer SBSDs, OTCDD/SBSDs, and broker-dealer MSBSPs will be
subject to these requirements.
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\411\ The Commission proposed to amend paragraph (h) of Rule
17a-5 to add references to the proposed SBSD segregation rule (Rule
18a-4) so that the notification requirements would be triggered if
the accountant discovered a broker-dealer SBSD was not in compliance
with that rule. As discussed above, the broker-dealer SBSD
segregation requirements are being codified in Rule 15c3-3 (which is
already referenced in paragraph (h) of Rule 17a-5). Therefore, these
proposed amendments are not being adopted. However, the note to
paragraph (h) of Rule 17a-5 refers to the ``special reserve
account'' instead of ``special account'' as proposed, for internal
consistency with Rules 15c3-3 and 18a-4, as adopted.
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The Commission proposed parallel notification requirements in Rule
18a-7 for stand-alone SBSDs and MSBSPs and their independent public
accountants.\412\ The proposed notification requirements for stand-
alone SBSDs would be triggered if the independent public accountant
discovers the firm is not in compliance with the proposed SBSD capital,
segregation, or security-count rules or that a material weakness
exists. The proposed notification requirements for stand-alone MSBSPs
would be triggered if the independent public accountant discovers the
firm is not in compliance with the proposed MSBSP capital rule. The
Commission received no comment on these proposed notification
requirements and is adopting them with the modification that an OTCDD/
SBSD will be subject to these requirements pursuant to Rule 18a-7
(rather than Rule 17a-5).\413\
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\412\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25243-44.
\413\ See paragraph (g) of Rule 18a-7, as adopted.
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Reports of the Independent Public Accountant
Paragraph (i) of Rule 17a-5 prescribes requirements for the reports
of the independent public accountant covering the broker-dealer's
annual reports, including: (1) Technical requirements; (2) required
representations; (3) the opinions or conclusions to be expressed in the
accountant's reports; and (4) requirements related to matters to which
the accountant takes exception. Broker-dealer SBSDs, other than OTCDD/
SBSDs, and broker-dealer MSBSPs will be subject to these requirements.
The Commission proposed parallel requirements in Rule 18a-7 for stand-
alone SBSDs and MSBSPs.\414\ The Commission is modifying these
requirements to conform them to the modifications discussed above
pursuant to which a stand-alone SBSD or MSBSP as well as an OTCDD/SBSD
also registered as an OTC derivatives dealer may engage an independent
public accountant that is not registered with the PCAOB and the
accountant may use GAAS in the United States or PCAOB standards. The
Commission received no other comments related to these proposed
requirements regarding reports of the independent accountant and is
adopting them as proposed.\415\
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\414\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25245.
\415\ See paragraph (h) of Rule 18a-7, as adopted.
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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. 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. Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-
dealer MSBSPs will be subject to these requirements. The Commission
proposed a parallel notification of a change of fiscal year requirement
in Rule 18a-7 for stand-alone SBSDs and MSBSPs, except that under the
proposal, the Commission (rather than the DEA) must approve a change in
the
[[Page 68588]]
filing period for the annual reports.\416\ The Commission received no
comments on these proposed requirements regarding notification of a
change of fiscal year and is adopting them with the modification that
an OTCDD/SBSD will be subject to these requirements pursuant to Rule
18a-7 (rather than Rule 17a-5). \417\
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\416\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25245.
\417\ See paragraph (i) of Rule 18a-7, as adopted. As proposed,
these requirements were in paragraph (j) of Rule 18a-7. Paragraph
(i) of the rule contained a provision under which the Commission
could grant extensions and exemptions from the filing requirements
in the rule. On further consideration, the Commission believes this
provision is unnecessary and is not adopting it. No commenters
addressed it.
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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 particular paragraphs of Rule 17a-5.
Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs
will be subject to this requirement. The Commission proposed a parallel
filing requirement in proposed Rule 18a-7 for stand-alone and bank
SBSDs and MSBSPs.\418\ The Commission received no comment on these
proposed filing requirements and is adopting them with the modification
that an OTCDD/SBSD will be subject to these requirements pursuant to
Rule 18a-7 (rather than Rule 17a-5).\419\
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\418\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25245.
\419\ See paragraph (j) of Rule 18a-7, as adopted. As proposed,
this requirement was in paragraph (k) of Rule 18a-7, but for the
reasons discussed above it is being adopted in paragraph (j).
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b. Additional Amendments to Rule 17a-5 and Modifications to Rule 18a-7
The Commission proposed several amendments to Rule 17a-5 to
eliminate obsolete text, improve readability, and to modernize
terminology.\420\ The Commission also proposed to redesignate certain
paragraphs in Rule 17a-5 as a consequence of the proposal to delete
other paragraphs in Rule 17a-5. The Commission received no comment on
these amendments or redesignations and is adopting them as
substantially as proposed.\421\
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\420\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246.
\421\ In addition to the differences discussed above between
Rule 17a-5, as proposed to be amended, and Rule 17a-5, as amended,
the Commission is adopting the following non-substantive changes to
Rule 17a-5: (1) Replacing ``Each broker or dealer that computes
certain of its capital charges in accordance with'' with ``Broker-
dealers that have been authorized by the Commission to compute net
capital pursuant to'' to clarify in paragraph (a)(5) that ANC
broker-dealers must file additional reports ``with the Commission'';
(2) replacing ``VaR'' with ``value at risk'' in paragraph (a)(5)(ii)
for consistency with paragraph (a)(3)(ii) of Rule 18a-6, as adopted;
(3) replacing ``broker or dealer's'' with ``broker's or dealer's''
in paragraphs (a)(5)(v)(D)-(G); (4) adding ``within 17 business days
after the end of the month'' in paragraph (a)(5)(vi) for clarity
regarding the timing of the risk reports and consistency with
paragraph (a)(3)(vi) of Rule 18a-6, as adopted; (5) replacing
``from'' with ``after'' in paragraph (c)(3) for consistency with
paragraph (b)(2) of Rule 18a-7, as adopted; (6) adding ``to'' after
the phrase ``the broker or dealer is not subject'' in paragraph
(d)(1)(i)(B)(2) for internal consistency; (7) removing ``as
applicable, including'' and adding ``Information Relating to the''
after the phrases ``Possession or Control'' in paragraph (d)(2)(ii)
for clarity and consistency with 17 CFR 240.17a-5(d)(2)(ii); (8)
replacing references to Sec. 240.18a-4(c) with Sec. 240.15c3-
3(p)(3) in paragraphs (d)(3)(i)(A)(4) and (5), (d)(3)(i)(C), and
(d)(3)(iii); (9) adding ``identified'' to paragraph (d)(3)(i)(B) for
consistency with paragraph (c)(3)(i)(B) Rule 18a-7, as adopted; (10)
removing references to ``members'' as a distinct class of registrant
in addition to a ``broker'' or ``dealer'' in paragraph (e)(3) of
Rule 17a-5; and (11) for internal consistency, the phrase ``shall
fail'' is replaced with ``fails'' in the note to paragraph (h).
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The Commission proposed amending 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.\422\ The Commission received no comment on this amendment and
is adopting it as proposed. The Commission also proposed changes to the
structuring of paragraph (a)(5) of Rule 17a-5, which requires certain
ANC reports to be filed.\423\ The Commission received no comment on
this reorganization and is adopting it as proposed.
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\422\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246.
\423\ See paragraph (a)(5) of Rule 17a-5, as proposed to be
amended. See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246-47.
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The Commission also made additional modifications to the text of
Rule 18a-7 as proposed.\424\
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\424\ In particular, the Commission is adopting the following
non-substantive modifications to proposed Rule 18a-7: (1) Replacing
``must file an executed Part II of Form X-17A-5 (Sec. 249.617 of
this chapter) with the Commission or its designee'' with ``must file
with the Commission or its designee Part II of Form X-17A-5 (Sec.
249.617 of this chapter)'' in paragraph (a)(1) for consistency with
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (2) replacing ``must
file an executed Part IIC of Form X-17A-5 (Sec. 249.617 of this
chapter) with the Commission or its designee'' with ``must file with
the Commission or its designee Part IIC of Form X-17A-5 (Sec.
249.617 of this chapter)'' in paragraph (a)(2) for consistency with
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (3) adding
``additional reports with the Commission'' at the end of paragraph
(a)(3) for clarity; (4) adding ``in the format described in the
application'' before the phrase ``within 17 business days after the
end of the month'' in paragraph (a)(3)(vi) for consistency with
paragraph (a)(5)(vi) of Rule 17a-5, as amended; (5) removing ``,''
after ``VaR'' in paragraph (a)(3)(ix) for consistency with paragraph
(a)(5)(ix) of Rule 17a-5, as amended; (6) removing the phrase
``required by Sec. 240.18a-7(d)'' from paragraph (b)(2)(v) to
eliminate an incorrect cross-reference to this paragraph; (6)
removing ``a model approved pursuant to'' after the phrase ``in
accordance with'' in paragraph (a)(3)(i) for consistency with
paragraph (a)(5)(i) of Rule 17a-5; (7) removing ``otherwise'' from
paragraph (c)(1)(i) for consistency with paragraph (d)(1)(i)(B)(1)
of Rule 17a-5, as amended; (8) replacing ``request for a change
should'' with ``request for a change must'' in paragraph (c)(1)(ii)
for clarity; (9) replacing ``is not required to'' with ``need not''
in paragraph (c)(1)(iii) for consistency with paragraph (d)(1)(iii)
of Rule 17a-5, as amended; (10) removing ``including'' before the
phrase ``a Computation of Net Capital'' in paragraph (c)(2)(ii) for
clarity; (11) adding ``Information Relating to the'' before the
phrase ``Possession or Control'' in paragraph (c)(2)(ii) for
consistency with of 17 CFR 240.17a-5(d)(2)(ii); (12) replacing
``filed pursuant to paragraph (a) of this section, a reconciliation,
including appropriate explanations, between the computation in the
financial report and the computation in the most recently filed
report, or if no material differences exist, a statement so
indicating must be included in the financial report.'' with ``filed
by the registrant 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 of Form X-17A-5 filed by the registrant. If no
material differences exist, a statement so indicating must be
included in the financial report.'' in paragraph (c)(2)(iii) for
consistency with paragraph (d)(2)(iii) of Rule 17a-5, as amended;
(13) adding ``as of the end of the most recent fiscal year; and'' to
the end of paragraph (c)(3)(i)(A)(4) for consistency with paragraph
(d)(3)(i)(A)(4) of Rule 17a-5, as amended; (14) replacing ``The
information used to assert compliance with Sec. Sec. 240.18a-1 and
240.18a-4(c) was derived from the books and records of the security-
based swap dealer; and'' with ``The information the security-based
swap dealer used to state whether it was in compliance with
Sec. Sec. 240.18a-1, 240.18a-4(c), and, if 240.18a-4(c) was derived
from the books and records of the security-based swap dealer.'' in
paragraph (c)(3)(i)(A)(5) for consistency with paragraph
(d)(3)(i)(A)(5) of Rule 17a-5, as amended; (15) replacing ``60''
with ``sixty (60)'' in paragraph (c)(5) for consistency with
paragraph (d)(5) of Rule 17a-5, as amended; (16) removing ``(d)(2)''
from the third sentence of paragraph (d)(2) for consistency with
paragraph (e)(3) of Rule 17a-5, as amended; (17) replacing ``of this
chapter. In addition, the accountant'' with ``of this chapter, and
the independent public accountant'' in paragraph (e)(1) for
consistency with paragraph (f)(1) of Rule 17a-5, as amended; (18)
replacing ``Such statement must'' with ``The statement must'' in
paragraph (e)(2) for consistency with paragraph (f)(2) of Rule 17a-
5, as amended; (19) replacing ``a notice which must'' with ``a
notice that must'' in paragraph (e)(3) for consistency with
paragraph (f)(3) of Rule 17a-5, as amended; (20) adding ``,'' after
``Sec. 240.18a-8'' in the second sentence of paragraph (g)(1) for
consistency with paragraph (h) of Rule 17a-5, as amended; and (21)
removing ``and'' at the end of paragraph (h)(3)(i) for consistency
with paragraph (i)(3)(i) of Rule 17a-5, as amended.
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C. Notification
1. Introduction
After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission proposed a notification program for these
registrants under Sections 15F and 17(a) of the Exchange Act modeled on
the
[[Page 68589]]
notification program for broker-dealers codified in Rule 17a-11. 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 of the notice. Rule 17a-11
is being amended to account for the security-based swap activities of
entities subject to its requirements and new Rule 18a-8--which is
modeled on Rule 17a-11--is being adopted to establish reporting
requirements for SBSDs and MSBSPs that will not be subject to Rule 17a-
11. Rule 18a-8 does not include a parallel requirement for every
requirement in Rule 17a-11.\425\
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\425\ The Commission did not propose to include certain Rule
17a-11 notification requirements in Rule 18a-8 because they are not
relevant to stand-alone and bank SBSDs and MSBSPs. See Recordkeeping
and Reporting Proposing Release, 79 FR at 25247, n. 773.
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As is the case with Rules 17a-5 and 18a-7, the applicability of
Rule 17a-11 or 18a-8 will depend on whether the firm is subject to the
capital requirements of Rule 15c3-1 (in which case Rule 17a-5 will
apply), is subject to the capital requirements of Rules 18a-1 or 18a-2
(in which case Rule 18a-7 will apply), or has a prudential regulator
(in which case Rule 18a-7 will apply).\426\ Therefore, a stand-alone
broker-dealer, including a stand-alone OTC derivatives dealer, (which
is subject to Rule 15c3-1) will continue to be subject to Rule 17a-11.
Similarly, a broker-dealer SBSD, other than an OTCDD/SBSD, (which is
subject to Rule 15c3-1) will be subject to Rule 17a-11. A broker-
dealer, including an OTC derivatives dealer, that is also an MSBSP
(which is subject to Rule 15c3-1), will be subject to Rule 17a-11. A
stand-alone SBSD (which is subject to Rule 18a-1) will be subject to
Rule 18a-8. Similarly, an OTCDD/SBSD (which is subject to Rule 18a-1)
will be subject to Rule 18a-8.\427\ A stand-alone MSBSP (which is
subject to Rule 18a-2) will be subject to Rule 18a-8. Finally, a bank
SBSD or MSBSP (which has a prudential regulator) will be subject to
Rule 18a-8.\428\
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\426\ The undesignated introductory paragraphs to Rules 17a-11
and 18a-8 have been modified to clarify this application of the
rules.
\427\ An OTCDD/SBSD is subject to Rules 17a-3, 17a-4, 17a-13,
18a-1, 18a-4, 18a-7, and 18a-8 rather than Rules 18a-5, 18a-6, 18a-
9, 15c3-1, 15c3-3, 17a-5, and 17a-11, respectively. As a result, the
Commission has made a conforming modification to Rule 18a-8. In
particular, where Rule 18a-8 refers to Rule 18a-5, the Commission
has added the following reference to Rule 17a-3: ``or Sec. 240.17a-
3, as applicable.''
\428\ The notification requirements for bank SBSDs and MSBSPs
are substantially narrower in scope than the notification
requirements for broker-dealer and stand-alone SBSDs and MSBSPs.
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2. Amendments to Rule 17a-11 and New Rule 18a-8
Undesignated Introductory Paragraph
The Commission proposed that an undesignated introductory paragraph
be added to Rule 17a-11, explaining that the rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP.\429\ Further, the
Commission proposed 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. This text would be
redundant given the proposed undesignated introductory paragraph.
Similarly, the Commission proposed that Rule 18a-8 have an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not registered as a broker-dealer.\430\ The note further
explained that a broker-dealer that is dually registered as an SBSD or
MSBSP is subject to the notification requirements under Rule 17a-11.
The Commission received no comments on the introductory paragraphs but,
as discussed above, is modifying them to clarify which rule (17a-11 or
18a-8) applies to a given type of entity.
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\429\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247-48.
\430\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247-48.
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Failure To Meet Minimum Capital Requirements
Rule 17a-11 requires a broker-dealer to notify the Commission if
the firm discovers or is informed by the Commission or its DEA that its
net capital has declined below the minimum amount required under Rule
15c3-1.\431\ Further, a broker-dealer registered as an OTC derivatives
dealer also must provide notice if its tentative net capital falls
below the minimum amount required under Rule 15c3-1. Broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be subject
to these existing notification requirements, as applicable. The
Commission proposed parallel capital notification requirements in Rule
18a-8 for stand-alone SBSDs and MSBSPs.\432\ The Commission received no
comment on these notification provisions and has adopted the capital
rules for nonbank SBSDs and MSBSPs.\433\ The Commission is adopting the
failure to meet minimum capital requirements notification provisions as
proposed with the modification that an OTCDD/SBSD will be subject to
these requirements pursuant to Rule 18a-7 (rather than Rule 17a-
5).\434\
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\431\ See paragraph (a) of Rule 17a-11, as amended.
\432\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25248.
\433\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-908.
\434\ See paragraphs (a)(1)(i) and (ii) and (a)(2) of Rule 18a-
8, as adopted.
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Early Warning of Potential Capital or Model Problem
Rule 17a-11 specifies five events that trigger a requirement that a
broker-dealer send notice promptly (within twenty-four hours) to the
Commission.\435\ These notices are designed to provide the Commission
with ``early warning'' that the broker-dealer may experience financial
difficulty.\436\ Broker-dealer SBSDs, other than OTCDD/SBSDs, and
broker-dealer MSBSPs will be required to comply with these existing
notification requirements. The Commission proposed parallel early
warning notification requirements in Rule 18a-8 for stand-alone SBSDs
and MSBSPs.\437\ The Commission received no comment on these early
warning provisions and is adopting them with the modification that an
OTCDD/SBSD will be subject to these requirements pursuant to Rule 18a-7
(rather than Rule 17a-5).\438\
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\435\ See paragraph (b) of Rule 17a-11, as amended.
\436\ The Commission proposed a new notification requirement
applicable to broker-dealer MSBSPs that would require a broker-
dealer MSBSP to notify the Commission when its level of tangible net
worth falls below $20 million. Rule 18a-2, as adopted, does not
apply to broker-dealer MSBSPs. Accordingly, the Commission is not
adopting this requirement.
\437\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25248-49.
\438\ See paragraphs (b)(1) through (4) of Rule 18a-8, as
adopted. In addition, the Commission is making the following non-
substantive change to paragraph (b) of Rule 17a-11, as adopted:
Replacing ``paragraph (b)(1), (b)(2), (b)(3) or (b)(4)'' with
``paragraph (b)(1), (2), (3), (4), or (5)'' to correct an
inadvertent omission.
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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.\439\ The definition
of each capital category is based on capital measures under the bank
capital standard and other factors.\440\ A bank is required to notify
its appropriate prudential regulator of adjustments to the bank's
capital category that would put the bank into a lower capital category
from the category previously assigned to it. Following the notice, the
[[Page 68590]]
prudential regulator determines whether the bank needs to adjust its
capital category.\441\ The Commission proposed to include a
notification requirement in Rule 18a-8 that requires a bank SBSD 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.\442\ The Commission received no
comment on this provision and for the reasons discussed in the
proposing release is adopting it as proposed.\443\
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\439\ See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 208.43.
\440\ See id.
\441\ See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 325.102(c).
\442\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25249.
\443\ See paragraph (c) of Rule 18a-8, as adopted.
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Failure To Make and Keep Current Books and Records
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.\444\
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.
Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs
will be required to comply with these existing notification
requirements. The Commission proposed a parallel books and records
notification requirement in Rule 18a-8 for stand-alone and bank SBSDs
and MSBSPs.\445\ The Commission received no comment on this provision
and is adopting it with the modification that an OTCDD/SBSD will be
subject to these requirements pursuant to Rule 18a-7 (rather than Rule
17a-5).\446\
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\444\ See paragraph (c) of Rule 17a-11, as amended.
\445\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25249-50.
\446\ See paragraph (d) of Rule 18a-8, as adopted.
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Material Weakness
Rule 17a-11 requires a broker-dealer to provide notification about
a material weakness as that term is defined in Rule 17a-5.\447\
Specifically, the rule 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. Broker-dealer SBSDs,
other than OTCDD/MSPSPs, and broker-dealer MSBSPs will be required to
comply with these existing notification requirements. The Commission
proposed a parallel material weakness notification requirement in Rule
18a-8 applicable to stand-alone SBSDs.\448\ The Commission received no
comment on this provision and is adopting it with the modification that
an OTCDD/SBSD will be subject to these requirements pursuant to Rule
18a-7 (rather than Rule 17a-5).\449\
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\447\ See paragraph (d) of Rule 17a-11, as amended (defining
``material weakness'').
\448\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25250.
\449\ See paragraph (e) of Rule 18a-8, as adopted.
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Insufficient Liquidity Reserve
The Commission proposed that broker-dealers (including broker-
dealer SBSDs) and stand-alone SBSDs authorized to use internal models
to compute net capital be subject to liquidity stress test
requirements.\450\ Consequently, the Commission proposed that these
types of broker-dealers and stand-alone SBSDs give immediate notice in
writing if the liquidity stress test indicates that the amount of the
firm's liquidity reserve is insufficient.\451\ As consideration of the
proposed liquidity stress test requirements is being deferred,\452\ the
Commission is deferring consideration of these related notification
requirements.\453\
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\450\ Capital, Margin, and Segregation Proposing Release, 77 FR
at 70252-54.
\451\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25250-51.
\452\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
\453\ See paragraph (e) of Rule 17a-11, as amended; paragraph
(f) of Rule 18a-8, as adopted. The proposed notification
requirements would have been set forth in these paragraphs, which
instead are being designated ``[Reserved].''
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Failure To Make a Required Reserve Deposit
Paragraph (i) of Rule 15c3-3 requires a broker-dealer to notify the
Commission and its DEA if it fails to make a required deposit into its
customer reserve account under Rule 15c3-3. Since a broker-dealer SBSD
was required to maintain a separate reserve account for its security-
based swap customers under Rule 18a-4, as proposed, the Commission
proposed a new notification requirement in Rule 17a-11 that would be
triggered if a broker-dealer SBSD fails to make a required deposit into
its special account for the exclusive benefit of security-based swap
customers.\454\ The Commission also proposed a parallel reserve account
notification requirement in Rule 18a-8 applicable to stand-alone SBSDs
and bank SBSDs. The Commission received no comment on these
notification provisions and has adopted security-based swap customer
segregation requirements.\455\ The Commission is adopting the proposed
notification requirements for the reasons discussed in the proposing
release with certain modifications.\456\ In particular, the security-
based swap reserve requirement applicable to broker-dealers, including
broker-dealer SBSDs (other than OTCDD/SBSDs), is codified in Rule 15c3-
3 and is expanded to apply to stand-alone broker-dealers engaged in
security-based swap activities. Accordingly, the Commission is adopting
requirements that stand-alone broker-dealers and SBSDs must provide
notice if they fail to make a required security-based swap customer
reserve deposit.\457\
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\454\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
\455\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
\456\ See paragraph (f) of Rule 17a-11, as amended; paragraph
(g) of Rule 18a-8, as adopted.
\457\ Because the reserve requirements for broker-dealers, other
than OTCDD/SBSDs, are codified in paragraph (p) of Rule 15c3-3,
paragraph (f) of Rule 17a-11, as amended, refers to Rule 15c3-3
instead of Rule 18a-4. Finally, paragraph (f) of Rule 17a-11, as
amended, and paragraph (g) of Rule 18a-8, as adopted, refer to the
``special reserve account'' instead of ``special account'' as
proposed, for internal consistency with Rules 15c3-3 and 18a-4.
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Manner of Notification
Rule 17a-11 specifies how and to whom the notices and reports
required by the rule must be transmitted. Broker-dealers, broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be
required to give notice or transmit the notices and reports, including
the proposed new notices, pursuant to these existing requirements.\458\
The Commission proposed to amend this paragraph to no longer permit
notice by telegraphic transmission, and instead to only allow notice by
facsimile transmission.\459\ The change was proposed in light of the
fact that telegrams are no longer widely used in the United
States,\460\ and that Commission staff no longer receive Rule 17a-11
notices by telegram.\461\ The
[[Page 68591]]
Commission received no comment on this revision but believes it would
be appropriate to further modernize the rule by amending it to permit
the notices to be sent by email. Accordingly, the rule, as amended,
provides in pertinent part that the notice section must be given or
transmitted to the principal office of the Commission 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, or to an email
address provided on the Commission's website.\462\ This modification to
provide for notification by email is based on the notification
provision in recently adopted Rule 18a-10 and is designed to provide a
simpler and more efficient process for sending the notifications (i.e.,
via email).\463\ Consequently, a broker-dealer will be able to transmit
a notification required pursuant to Rule 17a-11 using an email address
provided on the Commission's website and designated for the purpose of
receiving such notifications.
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\458\ As discussed above, current paragraph (g) of Rule 17a-11
(containing the existing manner of notification requirements for
broker-dealers) was redesignated as paragraph (h).
\459\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
\460\ 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).
\461\ The Commission's website provides instructions on how to
send the Rule 17a-11 notifications by facsimile transmission. The
instructions are available at https://www.sec.gov/divisions/marketreg/bdnotices.htm. Notifications sent to the Commission's
headquarters pursuant to the instructions are converted to PDFs and
sent to an email box that is monitored by Commission staff.
\462\ See paragraph (h) of Rule 17a-11, as amended.
\463\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43943-46 (adopting Rule 18a-10).
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The Commission proposed a parallel manner of notification
requirement in Rule 18a-8.\464\ The Commission received no comment on
this provision but is modifying Rule 18a-8 to provide that the notice
must be given or transmitted to the principal office of the Commission
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,
or to an email address provided on the Commission's website.\465\
Consequently, SBSDs and MSBSPs also will be permitted to transmit a
notification required pursuant to Rule 18a-8 using an email address
provided on the Commission's website and designated for the purpose of
receiving such notifications.
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\464\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
\465\ See paragraph (h) of Rule 18a-8, as amended. As discussed
below, the Commission is amending the email notification provision
in paragraph (e) of Rule 18a-10 to align it with this modification
to paragraph (h) of Rule 18a-8.
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For these reasons, the Commission is adopting the manner of
notification requirements with the modification discussed above and
with the modification that an OTCDD/SBSD will be subject to these
requirements pursuant to Rule 18a-7 (rather than Rule 17a-5).
3. Additional Amendments to Rule 17a-11 and Modifications to Rule 18a-
8.
The Commission proposed several amendments to Rule 17a-11 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission proposed a global change to Rule 17a-11
that replaced the use of the word ``shall'' in the rule with the word
``must'' or ``will'' where appropriate.\466\ The Commission also
proposed certain stylistic, corrective, and punctuation amendments to
improve the readability of Rule 17a-11.\467\ The Commission received no
comment on these amendments and is adopting them as proposed.
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\466\ The 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) and (2), (b), (c), (g), (h),
and (j). See Rule 17a-11, as proposed to be amended.
\467\ The Commission proposed the following stylistic and
corrective changes to Rule 17a-11: (1) Replacing the phrase ``this
Sec. 240.17a-11'' with the phrase ``this section'' in paragraph
(a)(1); (2) replacing the phrase ``Every broker or dealer who'' with
the phrase ``Every broker or dealer that'' in paragraph (c); (3)
replacing the phrase ``such discovery or notification of the
material inadequacy or the material weakness'' with the phrase ``the
discovery or notification of the material inadequacy or material
weakness'' in paragraph (d)(1); and (4) removing the U.S.C.
citations from paragraph (j) since the rule already cites to the
applicable section of the Exchange Act.
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As a consequence of the deletion of paragraph (a), paragraphs (b)
through (e) of Rule 17a-11 were redesignated paragraphs (a) through
(d), respectively. Further, the Commission is adding two new
notification provisions to Rule 17a-11 that are codified in paragraphs
(e) and (f) of the rule, as amended. As a consequence of the deletion
of paragraph (a) and the addition of the two new provisions, paragraphs
(f) through (i) were redesignated paragraphs (g) through (j),
respectively. Similarly, due to the addition and deletion of various
paragraphs, the Commission made a global change that replaced the
cross-references to ``paragraph (g)'' of Rule 17a-11 with ``paragraph
(h)'' of Rule 17a-11.\468\ The Commission received no comment on these
revisions and is adopting them as proposed.
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\468\ The amendments replace the phrase ``paragraph (g)'' with
the phrase ``paragraph (h)'' in the following paragraphs of Rule
17a-11, as amended: (a)(1), (b), (c), (d)(1) and (2), and (g). See
Rule 17a-11, as amended.
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Prior to these amendments, paragraph (f) of Rule 17a-11 made
reference to a ``member'' of a national securities exchange as a
distinct class of registrant in addition to a ``broker'' and
``dealer.'' The Commission proposed to remove this reference to a
``member'' given that the rule applies to broker-dealers, which would
include a member of a national securities exchange that is a broker-
dealer (and as discussed above, proposed to redesignate paragraph (f)
as paragraph (g)).\469\ The Commission received no comment on this
revision and is adopting it as proposed.
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\469\ See paragraph (g) of Rule 17a-11, as proposed to be
amended.
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Prior to these amendments, paragraph (f) of Rule 17a-11 contained a
reference to the notices required under ``paragraphs (b), (c), (d), or
(e)'' of Rule 17a-11. The Commission proposed to replace the quoted
language with a reference to ``this section'' (and as discussed above,
proposed to redesignate paragraph (f) as paragraph (g)).\470\ The
proposed change incorporated all the notices required under Rule 17a-
11, including notices that are required under the new security-based
swap customer reserve account notification requirement. The Commission
received no comment on this revision and is adopting it as
proposed.\471\
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\470\ See paragraph (g) of Rule 17a-11, as proposed to be
amended.
\471\ See paragraph (g) of Rule 17a-11, as amended.
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Finally, prior to these amendments, paragraph (h) contained
references to ``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).'' The
Commission proposed amending the references to state, ``Sec. 240.15c3-
1, Sec. 240.15c3-1d, Sec. 240.15c3-3, Sec. 240.17a-5, and Sec.
240.17a-12.'' \472\ This amendment corrected certain cross-references
that are outdated due to the recently adopted amendments to some of
these rules.\473\ It also eliminated cross-references to specific
paragraphs in the event of future amendments to these cross-referenced
rules. The Commission received no comment on this amendment and is
adopting it as proposed.\474\
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\472\ See paragraph (i) of Rule 17a-11, as proposed to be
amended.
\473\ See Broker-Dealer Reports, 78 FR 51910; Financial
Responsibility Rules for Broker-Dealers, 78 FR 51824.
\474\ See paragraph (i) of Rule 17a-11, as amended.
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The Commission also made certain non-substantive modifications to
Rule 18a-8.\475\
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\475\ The non-substantive modifications to Rule 18a-8, as
adopted, are: (1) Adding ``of such deficiency'' after the phrase
``must give notice'' in paragraph (a)(1)(i) and (ii) and (a)(2) for
consistency with paragraph (a)(1) of Rule 17a-11, as amended; (2)
removing ``as appropriate'' after the phrase ``its current amount of
tentative net capital'' in paragraph (a)(1)(ii) for clarity; (3)
adding a ``,'' after the phrase ``with paragraph (h) of this
section'' in paragraph (e)(2) for consistency with paragraph (d)(2)
of Rule 17a-11, as amended; and (4) adding ``for which there is no
prudential regulator'' after the phrase ``If a security-based swap
dealer'' in paragraph (g) for clarity.
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[[Page 68592]]
D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
1. Introduction
The Commission proposed a securities count program for stand-alone
SBSDs under Section 15F of the Exchange Act that is modeled on the
securities count program for broker-dealers codified in Rule 17a-
13.\476\ Rule 17a-13 requires certain broker-dealers (generally,
broker-dealers that hold customer 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. Broker-dealer SBSDs, including OTCDD/SBSDs, and
broker-dealer MSBSPs will be subject to Rule 17a-13.\477\ Consequently,
they must comply with the existing securities count requirements in the
rule with respect to security-based swaps.
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\476\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25252-54.
\477\ The undesignated introductory paragraph to Rule 18a-9 has
been modified to clarify this application of the rules. The Dodd-
Frank Act amended the definition of ``security'' in Section 3(a)(10)
of the Exchange Act to include a security-based swap. 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 section III.C. of this release.
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Stand-alone SBSDs will be subject to Rule 18a-9, which is modeled
on Rule 17a-13. Rule 18a-9 does not include a parallel requirement for
every requirement in Rule 17a-13.\478\ In addition, Rule 18a-9 does not
apply to stand-alone MSBSPs because the customer protection rationale
for Rule 17a-13 and Rule 18a-9 is not as pertinent to stand-alone
MSBSPs. For example, the Commission 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.
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\478\ The Commission is not including in Rule 18a-9, as adopted,
provisions that would parallel the provisions in paragraphs (a)(1),
(2), and (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. The Commission believes that SBSDs will not limit
their activities to the types of activities in which the exempt
broker-dealers engage.
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2. Rule 18a-9
Undesignated Introductory Paragraph
The Commission proposed that Rule 18a-9 have an undesignated
introductory paragraph explaining that the rule applies only to a
stand-alone SBSD.\479\ The note further explained that a broker-dealer,
including a broker-dealer SBSD, is subject to the securities count
requirements under Rule 17a-13.\480\ The Commission received no
comments on this proposed introductory paragraph and is adopting it
with modifications to clarify which rule (17a-13 or 18a-9) applies to a
given type of entity.\481\
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\479\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25253.
\480\ See id.
\481\ See undesignated introductory paragraph of Rule 18a-9, as
adopted.
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Requirement To Perform a Securities Count
Paragraph (b) of Rule 17a-13 requires a quarterly securities count
and specifies the steps a broker-dealer must take in performing the
count. 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,\482\ 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.
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\482\ See section III.C. of this release.
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The Commission proposed parallel securities count requirements in
Rule 18a-9 that mirrored the requirements in paragraph (b) of Rule 17a-
13.\483\ Consequently, a stand-alone SBSD would be required to perform
a securities count each quarter following steps that are identical to
the steps specified in paragraph (b) of Rule 17a-13.\484\ Moreover, a
securities count needed to be performed no sooner than two months after
the last count and no later than four months after the last count.\485\
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\483\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25253-54.
\484\ See paragraph (a) of Rule 18a-9, as proposed to be
adopted.
\485\ See id.
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Stand-alone SBSDs may have limited activities. The Commission
believes, however, that stand-alone SBSDs will likely hold securities
in a proprietary capacity and as hedges or collateral related to their
swaps activity, and therefore are susceptible to the same risks as
broker-dealers if securities are not counted and verified. This is the
same reason that OTC derivatives dealers are not exempt from performing
quarterly securities counts even though they also conduct a more
limited business than traditional broker-dealers.
The Commission acknowledges that security-based swaps are not held
in depositories or at other types of custodians. Instead, they are
documented in contractual agreements. In order to meet the requirements
of Rules 17a-13 and 18a-9, as applicable, a broker-dealer and SBSD
generally will need to account for or verify its open security-based
swap transactions. The method of doing so could involve steps to
confirm open transactions reflected in the firm's books and records
with securities clearing agencies or counterparties. The Commission is
adopting this requirement as proposed.\486\
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\486\ See paragraph (a) of Rule 18a-9, as adopted.
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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 of unresolved differences 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. This permits a broker-dealer to perform
the securities count on a rolling basis throughout the quarter as
opposed to performing it all at once.\487\ The Commission proposed a
parallel securities count requirement in Rule 18a-8.\488\ Consequently,
a stand-alone SBSD could perform the securities count as of a date
certain or on a cyclical basis subject to conditions that
[[Page 68593]]
are identical to the conditions in paragraph (c) of Rule 17a-13. The
Commission received no comment on this provision and is adopting it as
proposed.\489\
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\487\ 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.
\488\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25254.
\489\ See paragraph (b) of Rule 18a-9, as adopted.
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Separation of Duties
Paragraph (d) of Rule 17a-13 provides that the examination, count,
verification, and comparison shall be made or supervised by persons
whose regular duties do not require them to have direct responsibility
for the proper care and protection of the securities or the making or
preservation of the subject records. Thus, the rule requires a
separation of duties as a control to promote the integrity of the
securities count process. The Commission proposed a parallel separation
of duties requirement in Rule 18a-9 that mirrored the requirement in
paragraph (d) of Rule 17a-13.\490\ Consequently, a stand-alone SBSD was
required 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.\491\ The Commission
received no comment on this provision and is adopting it as
proposed.\492\
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\490\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25254.
\491\ See paragraph (c) of Rule 18a-9, as proposed to be
adopted.
\492\ See paragraph (c) of Rule 18a-9, as adopted. Paragraph (d)
of Rule 18a-9, as proposed to be adopted, would have mirrored
paragraph (f) of Rule 17a-13, but the Commission is not adopting
that provision.
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E. Alternative Compliance Mechanisms
A commenter urged the Commission to harmonize its recordkeeping
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping
requirements for swap dealers and major swap participants to the
maximum extent possible with the goal of permitting firms to utilize a
single recordkeeping system for security-based swaps and swaps.\493\ In
response to the comment and to promote harmonization with CFTC
requirements, the Commission--as discussed below--is adopting a limited
alternative compliance mechanism in Rules 17a-3 and 18a-5 and amending
Rule 18a-10 to add recordkeeping and reporting requirements to the full
alternative compliance mechanism provided by that rule.\494\
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\493\ See SIFMA 9/5/2014 Letter. See also Recordkeeping and
Reporting Proposing Release, 79 FR at 25198, 25209 (seeking comment
on whether there are provisions in the CFTC's recordkeeping and
reporting rules for swap dealers and major swap participants that
the Commission should consider with respect to the rules for SBSDs
and MSBSPs).
\494\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43943-46 (adopting Rule 18a-10, which provides an alternative
compliance mechanism for certain SBSDs with respect to capital,
margin, and segregation requirements).
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1. Limited Alternative Compliance Mechanism--Rules 17a-3 and 18a-5
Under the limited alternative compliance mechanism, an SBSD or
MSBSP may comply with the recordkeeping requirements of the CEA and the
rules thereunder applicable to swap dealers and major swap participants
in lieu of complying with the requirements in Rules 17a-3 and 18a-5 to
make and keep current trade blotters, customer account ledgers, and
stock records solely with respect to information required to be
included in these records regarding security-based swap transactions
and positions if the SBSD or MSBSP:
is registered as an SBSD or MSBSP pursuant to Section 15F
of the Exchange Act;
is registered as a swap dealer or major swap participant
pursuant to section 4s of the Commodity Exchange Act and the rules
thereunder;
is subject to 17 CFR 23.201-202, 17 CFR 23.402, and 17 CFR
23.501 (the ``CFTC's Books and Records Rules'') with respect to its
swap-related books and records;
preserves all of the data elements necessary to create the
records required by paragraphs (a)(1), (3), and (5) of Rule 17a-3;
paragraphs (a)(1), (3), and (4) of Rule 18a-5; or paragraphs (b)(1)
through (3) of Rule 18a-5, as applicable, as they pertain to security-
based swap and swap transactions and positions;
upon request furnishes promptly to representatives of the
Commission the records required by paragraphs (a)(1), (3), and (5) of
Rule 17a-3; paragraphs (a)(1), (3), and (4) of Rule 18a-5; or
paragraphs (b)(1) through (3) of Rule 18a-5, as applicable, as they
pertain to security-based swap and swap transactions and positions, as
well as the records required by the CFTC's Books and Records Rules, as
they pertain to security-based swap and swap transactions and
positions, in the format applicable to that category of record as set
forth in Rule 17a-3 or Rule 18a-5, as applicable; and
provides notice of its intent to utilize the limited
alternative compliance mechanism by notifying the Commission in
writing, both at the principal office of the Commission in Washington,
DC and at the regional office of the Commission for the region in which
the registrant has its principal place of business, and, if the
registrant is a broker-dealer, by notifying in writing the registrant's
DEA.\495\
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\495\ See paragraph (b) of Rule 17a-3, as amended, and paragraph
(c) of Rule 18a-5, as adopted.
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These records must be maintained for the retention period and in
the manner specified for that category of record in Rule 17a-4 or 18a-
6, as applicable.
The first three prongs of the limited alternative compliance
mechanism identify the entities that may use it; that is, entities that
are registered with the Commission as an SBSD or MSBSP and with the
CFTC as a swap dealer or major swap participant and are subject to the
recordkeeping requirements of the CFTC with respect to its swap-related
books and records. The fourth and fifth prongs set forth the
substantive requirements of the limited alternative compliance
mechanism: (1) That the registrant preserve the data elements necessary
to create the relevant required records as they pertain to security-
based swap and swap transactions and positions, regardless of format;
and (2) that the registrant provide those data elements as they pertain
to security-based swap and swap transactions and positions in the
format required by Commission rules upon request by a representative of
the Commission. In effect, these two requirements taken together mean
that a firm will not be required to create a trade blotter, customer
account ledger, or stock record reflecting security-based swap
transactions and positions formatted pursuant to the Commission's rules
each day, but instead only when requested to do so by Commission staff.
This should promote harmonization with CFTC requirements because firms
will be able to create the daily records for both security-based swap
and swap transactions and positions in the format required by the CFTC.
For example, firms will not have to create on a daily basis two sets of
trade blotters for security-based swap and swap transactions and
positions: one in the Commission's required format and the other in the
CFTC's required format.
The limited alternative compliance mechanism applies only to the
provisions of Rules 17a-3 and 18a-5 that were specifically referenced
by the commenter as appropriate for ``harmonization,'' \496\ with the
exception of the general ledger requirements in paragraph (a)(2) of
Rules 17a-3 and 18a-5. Consequently, the limited alternative compliance
mechanism may be applied to: (1) The trade blotter requirements in
paragraph (a)(1) of Rule 17a-3, as amended, and paragraphs
[[Page 68594]]
(a)(1) and (b)(1) of Rule 18a-5, as adopted; (2) the customer account
ledger requirements of paragraph (a)(3) of Rule 17a-3, as amended, and
paragraphs (a)(3) and (b)(2) of Rule 18a-5, as adopted; and (3) the
stock record requirements of paragraph (a)(5)(ii) of Rule 17a-3, as
amended, and paragraphs (a)(4) and (b)(3) of Rule 18a-5, as adopted.
The Commission does not believe it would be appropriate to apply the
limited alternative compliance mechanism to the general ledger
requirements in paragraph (a)(2) of Rules 17a-3 and 18a-5 because the
information that must be recorded in a general ledger is not limited to
security-based swap and swap information. In particular, the general
ledger must include information reflecting all assets and liabilities,
income and expense, and capital accounts in order to facilitate
examinations of the firm's overall financial condition and solvency.
The Commission believes that the substantive requirements of the
remaining provisions identified by the commenter as applied to
security-based swap and swap transactions and positions are
sufficiently similar to their counterparts in the CFTC's Books and
Records Rules to make use of the limited alternative compliance
mechanism appropriate. The Commission emphasizes that the limited
alternative compliance mechanism applies solely to the books and
records requirements with respect to security-based swap and swap
transactions and positions, and does not extend to any books and
records requirements for other types of transactions and positions. For
other types of transactions and positions, the SBSD or MSBSP must make
and keep current a trade blotter, customer account ledger, and stock
record in the format required by Rule 17a-3 or 18a-5 as applicable.
---------------------------------------------------------------------------
\496\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------
The commenter seeking harmonization with the CFTC's requirements
also stated that the Commission should permit bank SBSDs and MSBSPs to
satisfy the Commission's recordkeeping requirements by complying with
recordkeeping rules established by their prudential regulator, stating
that ``[s]uch rules should be supplemented with additional requirements
only to the extent that such additional obligations are necessary for
the Commission to fulfill its regulatory oversight of bank SBSDs and
MSBSPs.'' \497\ Based largely on its consultations with the prudential
regulators regarding their recordkeeping and reporting requirements,
the Commission believes that the final amendments and rules being
adopted in this document achieve this objective by specifically
addressing a bank's activities as an SBSD or an MSBSP and only those
activities. In particular, the rules being adopted in this document for
bank SBSDs and MSBSPs are focused solely on documenting or requiring
the reporting of information relating to engaging in security-based
swap activities as opposed to the more traditional banking activities
addressed by prudential regulators' existing recordkeeping and
reporting requirements. In addition, as discussed above in section
II.B.2. of this release, the Commission is adopting a reporting form
for bank SBSDs and MSBSPs (the FOCUS Report Part IIC) that elicits
information that largely is drawn from the call reports banks must file
with the prudential regulators. In this way, the Commission has
harmonized its reporting requirements for bank SBSDs and MSBSPs with
the reporting requirements of the prudential regulators.
---------------------------------------------------------------------------
\497\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------
2. Full Alternative Compliance Mechanism--Rule 18a-10
The Commission adopted the full alternative compliance mechanism in
Rule 18a-10.\498\ Rule 18a-10 permits certain SBSDs that are registered
as swap dealers and that predominantly engage in a swaps business to
elect to comply with the capital, margin, and segregation requirements
of the CEA and the CFTC's rules in lieu of complying with the capital,
margin, and segregation requirements of Rules 18a-1, 18a-3, and 18a-
4.\499\ The Commission is amending Rule 18a-10 in this document to
permit firms that will operate under Rule 18a-10 to elect to comply
with the recordkeeping and reporting requirements of the CEA and the
CFTC's rules in lieu of complying with Rules 18a-5, 18a-6, 18a-7, 18a-
8, and 18a-9.
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\498\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43943-46.
\499\ The full alternative compliance mechanism of Rule 18a-10
is not available to a nonbank SBSD that is also registered as a
broker-dealer, including a broker-dealer that is an OTC derivatives
dealer. In theory, a bank SBSD could use the full alternative
compliance mechanism of Rule 18a-10 if it met the required
conditions. However, the Commission does not expect that these
entities would choose to do so. See Capital, Margin, and Segregation
Adopting Release, 84 FR at 43944 n. 707.
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Paragraph (a) of Rule 18a-10 sets forth the conditions that an SBSD
must meet to operate under the full alternative compliance mechanism.
The Commission is amending the preface of paragraph (a) to reference
recordkeeping and reporting requirements of the CEA and the CFTC's
rules as well as Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in order
to add these requirements to the full alternative compliance
mechanism.\500\ The conditions for operating under the full alternative
compliance mechanism are set forth in paragraphs (a)(1) through (5) of
Rule 18a-10. Paragraphs (a)(1) through (3) of Rule 18a-10 provide that
the firm must be registered with the Commission as an SBSD, must not be
registered with the Commission as a broker-dealer (including an OTC
derivatives dealer), and must be registered with the CFTC as a swap
dealer. Paragraph (a)(4) of Rule 18a-10 provides that the SBSD must be
exempt from the segregation requirements of Rule 18a-4. Paragraph
(a)(5) of Rule 18a-10 provides that the aggregate gross notional amount
of the firm's outstanding security-based swap positions must not exceed
the lesser of two thresholds as of the most recently ended quarter of
the firm's fiscal year.\501\ The thresholds are: (1) The maximum fixed-
dollar gross notional amount of open security-based swaps specified in
paragraph (f) of the rule (``maximum fixed-dollar threshold''); and (2)
10% of the combined aggregate gross notional amount of the firm's open
security-based swap and swap positions. The amount of the maximum
fixed-dollar threshold is $250 billion for a transitional period of
three years and will then drop to $50 billion unless the Commission, by
order: (1) Maintains the maximum fixed-dollar amount at $250 billion
for an additional period of time or indefinitely after the 3-year
transition period ends; or (2) lowers it to an amount that is less than
$250 billion but greater than $50 billion.\502\ Other than the
amendment to the preface of paragraph (a) discussed above, the
Commission is not amending the conditions set forth in paragraphs
(a)(1) through (5) of Rule 18a-10. In addition, the Commission is not
amending paragraph (f) of Rule 18a-10 (specifying the maximum fixed-
dollar threshold).
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\500\ As amended, the preface to paragraph (a) of Rule 18a-10
provides that a security-based swap dealer may comply with capital,
margin, segregation, recordkeeping, and reporting requirements of
the Commodity Exchange Act and chapter I of title 17 of the Code of
Federal Regulations applicable to swap dealers in lieu of complying
with Sec. Sec. 240.18a-1 and 240.18a-3 through 240.18a-9.
\501\ The gross notional amount is based on the notional amounts
of the firm's security-based swaps and swaps that are outstanding as
of the quarter end. It is not based on transaction volume during the
quarter.
\502\ See paragraphs (f)(1)(i) and (ii) of Rule 18a-10, as
adopted.
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Paragraph (b) of Rule 18a-10 sets forth requirements for a firm
that is
[[Page 68595]]
operating pursuant to the rule. Paragraph (b)(1) provides, in pertinent
part, that the firm must comply with the capital, margin, and
segregation requirements of the CEA and the CFTC's rules applicable to
swap dealers. The Commission is amending paragraph (b)(1) to reference
recordkeeping and reporting requirements of the CEA and the CFTC's
rules to add these requirements to this provision.\503\ Consequently, a
firm that is subject to Rule 18a-10 must comply with applicable
capital, margin, segregation, recordkeeping, and reporting requirements
of the CEA and the CFTC's rules and a failure to comply with one or
more of those rules will constitute a failure to comply with Rule 18a-
10.
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\503\ As amended, paragraph (b)(1) of Rule 18a-10 provides that
compliance with capital, margin, segregation, recordkeeping, and
reporting requirements of the Commodity Exchange Act and chapter I
of title 17 of the Code of Federal Regulations applicable to swap
dealers and treat security-based swaps or collateral related to
security-based swaps as swaps or collateral related to swaps, as
applicable, pursuant to those requirements to the extent the
requirements do not specifically address security-based swaps or
collateral related to security-based swaps.
---------------------------------------------------------------------------
Paragraph (b)(1) also provides, in pertinent part, that the firm
must treat security-based swaps and related collateral pursuant of the
CEA and the CFTC's rules to the extent the requirements do not
specifically address security-based swaps and related collateral. This
provision is designed to ensure that security-based swaps and related
collateral do not fall into a ``regulatory gap'' with respect to an
SBSD operating under the full alternative compliance mechanism. Under a
CFTC no-action letter, if a capital, margin, segregation,
recordkeeping, or reporting requirement applicable to a swap or
collateral related to a swap is silent as to a security-based swap or
collateral related to a security-based swap, the nonbank SBSD must
treat the security-based swap or collateral related to the security-
based swap pursuant to the requirement applicable to the swap or
collateral related to the swap.\504\
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\504\ See, e.g., Letter from Eileen T. Flaherty, Director,
Division of Swap Dealer and Intermediary Oversight, and Jeffrey M.
Bandman, Acting Director, Division of Clearing and Risk, CFTC, to
Mary P. Johannes, Senior Director, ISDA (Aug. 23, 2016) (providing
no-action relief to swap dealers and major swap participants with
respect to the CFTC's margin rules for non-cleared swaps pursuant to
which these entities can portfolio margin non-cleared swaps with
non-cleared security-based swaps, provided, among other conditions,
the security-based swaps shall be treated as if they were swaps for
all applicable provisions of the CFTC's margin rules).
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The Commission is making clarifying amendments to paragraph (b)(1)
of Rule 18a-10 to provide that the firm must treat a security-based
swap or collateral related to a security-based swap as a swap or
collateral related to a swap, as applicable, if the CEA or the CFTC's
rules do not specifically address a security-based swap or collateral
related to a security-based swap.\505\
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\505\ The amendments adding the recordkeeping and reporting
requirements to paragraph (b)(1) and making the clarification
discussed above result in the paragraph providing that compliance
with capital, margin, segregation, recordkeeping, and reporting
requirements of the Commodity Exchange Act and chapter I of title 17
of the Code of Federal Regulations applicable to swap dealers and
treat security-based swaps or collateral related to security-based
swaps as swaps or collateral related to swaps, as applicable,
pursuant to those requirements to the extent the requirements do not
specifically address security-based swaps or collateral related to
security-based swaps.
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The amendments to Rule 18a-10 being adopted in this document will
require a firm operating under the rule to treat security-based swaps
and related collateral pursuant to the recordkeeping and reporting
requirements of the CEA and the CFTC's rules as if they were swaps or
related collateral to the extent those requirements do not specifically
address security-based swaps and related collateral. For example, if
the recordkeeping and reporting requirements of the CEA and CFTC's
rules do not address a security-based swap transaction, the firm will
need to treat it as a swap transaction for the purposes of the
recordkeeping and reporting requirements that apply to swap
transactions.
Paragraph (b)(2) of Rule 18a-10 requires the firm to provide a
written disclosure to its counterparties after it begins operating
pursuant to the rule. The disclosure must be provided before the first
transaction with the counterparty after the firm begins operating
pursuant to the rule. The disclosure must notify the counterparty that
the firm is complying with the applicable capital, margin, and
segregation requirements of the CEA and the CFTC's rules in lieu of
complying with Rules 18a-1, 18a-3, and 18a-4. The Commission is
amending paragraph (b)(2) to reference the recordkeeping and reporting
requirements of the CEA and the CFTC's rules as well as Rules 18a-5,
18a-6, 18a-7, 18a-8, and 18a-9 in order to add these requirements to
the disclosure requirement.\506\
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\506\ As amended, paragraph (b)(2) of Rule 18a-10 provides that
an SBSD must disclose in writing to each counterparty to a security-
based swap before entering into the first transaction with the
counterparty after the date the SBSD begins operating under this
section that the SBSD is operating under this section and is
therefore complying with the applicable capital, margin,
segregation, recordkeeping, and reporting requirements of the
Commodity Exchange Act and the rules promulgated by the Commodity
Futures Trading Commission thereunder in lieu of complying with the
capital, margin, segregation, recordkeeping, and reporting
requirements promulgated by the Commission in Sec. Sec. 240.18a-1,
240.18a-3, 240.18a-4; 240.18a-5, 240.18a-6, 240.18a-7, 240.18a-8,
and 240.18a-9.
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Paragraph (b)(3) of Rule 18a-10 requires the SBSD to immediately
notify the Commission and the CFTC in writing if it fails to meet a
condition in paragraph (a) of the rule. The Commission is making a non-
substantive amendment to paragraph (b)(3) because--as discussed next--
new paragraph (b)(4) is being added to the rule.\507\ As discussed
above in section II.C. of this release, 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 of the notice. Stand-alone and bank SBSDs and MSBSPs
are subject to Rule 18a-8, which is modeled on Rule 17a-11. Rule 18a-8
is designed to provide the Commission with the ability to take
effective proactive steps to respond when a stand-alone or bank SBSD is
experiencing or likely to experience financial difficulty.\508\
However, an SBSD operating under Rule 18a-10 may comply with the
notification requirements of the CFTC's rules in lieu of complying with
Rule 18a-8. Therefore, in order to retain a requirement that the SBSD
provide notice to the Commission if it is experiencing or likely to
experience financial difficulty, the Commission is adding paragraph
(b)(4) to Rule 18a-10. This paragraph provides that an SBSD operating
pursuant to Rule 18a-10 must simultaneously notify the Commission if
the firm is required to send a notice concerning its capital, books and
records, liquidity, margin operations, or segregation operations to the
CFTC by transmitting to the Commission a copy of the notice being sent
to the CFTC.\509\
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\507\ The non-substantive amendment removes the period at the
end of the paragraph and in its place adds the text: ``; and.''
\508\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247.
\509\ See paragraph (b)(4) of Rule 18a-10, as amended. See,
e.g., 17 CFR 1.12 (CFTC) (maintenance of minimum financial
requirements by futures commission merchants and introducing
brokers).
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In addition, as discussed in section II.A.3.a. of this release,
paragraph (j) of Rule 17a-4 requires a broker-dealer 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
[[Page 68596]]
requested by the representative of the Commission. Paragraph (g) of
Rule 18a-6 prescribes a parallel prompt production requirement for
stand-alone and bank SBSDs and MSBSPs. However, an SBSD operating under
Rule 18a-10 may comply with the record preservation requirements of the
CFTC's rules in lieu of complying with Rule 18a-6. Therefore, in order
to retain a requirement that the SBSD furnish records promptly to the
Commission, paragraph (b)(5) is being added to Rule 18a-10. This
paragraph provides that the SBSD must furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the SBSD that are required to be preserved
under the CEA and CFTC's rules applicable to swap dealers, or any other
records of the SBSD subject to examination pursuant to Section 15F of
the Exchange Act that are requested by a representative of the
Commission.
Paragraph (c) of Rule 18a-10 addresses the situation in which a
firm fails to comply with a condition in paragraph (a) of the rule and,
therefore, no longer qualifies to operate pursuant to the rule. The
paragraph provides that a firm in that circumstance must begin
complying with Rules 18a-1, 18a-3, and 18a-4 no later than either: (1)
Two months after the end of the month in which the firm failed to meet
the condition in paragraph (a); or (2) after a longer period of time as
granted by the Commission by order subject to any conditions imposed by
the Commission. The Commission is amending the preface to paragraph (c)
to reference Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in order to
add these rules to the compliance requirement.\510\
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\510\ As amended, the preface to paragraph (c) of Rule 18a-10
reads: ``A security-based swap dealer that fails to meet one or more
of the conditions specified in paragraph (a) of this section must
begin complying with Sec. Sec. 240.18a-1 and 240.18a-3 through
240.18a-9 no later than:.''
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Paragraph (d) of Rule 18a-10 addresses how a firm would elect to
operate pursuant to the rule. Under paragraph (d)(1), a firm can make
the election as part of the process of applying to register as an SBSD.
In this case, the firm must provide written notice to the Commission
and the CFTC during the registration process of its intent to operate
pursuant to the rule. Upon being registered as an SBSD, the firm can
begin complying with Rule 18a-10, provided it meets the conditions in
paragraph (a) of the rule. Under paragraph (d)(2) of Rule 18a-10, an
SBSD can make the election after the firm has been registered as an
SBSD. In this case, paragraph (d)(2)(i) provides that the firm must
provide written notice to the Commission and the CFTC of its intent to
operate pursuant to the rule. In addition, paragraph (d)(2)(ii)
provides that the firm must continue to comply with Rules 18a-1, 18a-3,
and 18a-4 for two months after the end of the month in which the firm
provides the notice or for a shorter period of time as granted by the
Commission by order subject to any conditions imposed by the
Commission. The Commission is amending the preface to paragraph
(d)(2)(ii) to reference Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in
order to add these rules to the compliance requirement.\511\
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\511\ As amended, paragraph (d)(2)(ii) of Rule 18a-10 provides:
``Continue to comply with Sec. Sec. 240.18a-1 and 240.18a-3 through
240.18a-9 for at least:.''
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As discussed above, paragraph (b)(3) requires a firm operating
pursuant to the rule to immediately notify the Commission and the CFTC
in writing if the SBSD fails to meet a condition in paragraph (a).
Further, paragraphs (d)(1) and (2) require a firm to provide written
notice to the Commission and the CFTC of its intent to operate pursuant
to the rule. Paragraph (e) of Rule 18a-10 provides that the notices
required by the rule must be sent by facsimile transmission to the
principal office of the Commission and the regional office of the
Commission for the region in which the security-based swap dealer has
its principal place of business or to an email address to be specified
separately, and to the principal office of the CFTC in a manner
consistent with the notification requirements of the CFTC. The
paragraph also requires that notices include a brief summary of the
reason for the notice and contact information for an individual who can
provide further information about the matter that is the subject of the
notice (emphasis added). The Commission is amending paragraph (e) of
Rule 18a-10 to provide that the notice must be sent by facsimile
transmission to the principal office of the Commission and the regional
office of the Commission for the region in which the security-based
swap dealer has its principal place of business or to an email address
provided on the Commission's website, and to the principal office of
the CFTC in a manner consistent with the notification requirements of
the CFTC. This amendment is intended to clarify the location of the
email address for firms that choose to send the notice via email.
F. Cross-Border Application and Availability of Substituted Compliance
1. Cross-Border Application of Recordkeeping and Reporting Requirements
In the 2013 cross-border proposing release, the Commission
preliminarily interpreted the Title VII requirements associated with
registration to apply generally to the activities of registered
entities.\512\ In reaching that preliminary conclusion, the Commission
did not concur with the views of certain commenters that the Title VII
requirements should not apply to the foreign security-based swap
activities of registered entities, stating that such a view could be
difficult to reconcile with, among other things, the statutory language
describing the requirements applicable to SBSDs.\513\ The Commission
further preliminarily identified the recordkeeping and reporting
requirements as entity-level requirements, rather than requirements
specifically applicable to particular transactions. Entity-level
requirements primarily address concerns relating to the entity as a
whole, with a particular focus on safety and soundness of the entity to
reduce systemic risk in the U.S. financial system. The Commission
accordingly proposed to apply the entity-level requirements on a firm-
wide basis to address risks to the SBSD as a whole. The Commission did
not propose any exception from the application of the entity-level
requirements to SBSDs.\514\
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\512\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39825, n.191 (citing Cross-Border
Proposing Release, 78 FR at 30986).
\513\ See Cross-Border Proposing Release, 78 FR at 30986.
\514\ See Cross-Border Proposing Release, 78 FR at 31011. The
Commission similarly expressed the preliminary view that MSBSPs
should be required to adhere to the entity-level requirements. See
id. at 31035.
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A commenter expressed the view that requirements with respect to
daily trading records and confirmations should be deemed transaction-
level, on the grounds that the application and enforcement of these
requirements will be addressed at the transaction level, and for
consistency with the CFTC's approach.\515\ After considering the
commenter's concerns, the Commission continues to believe that the
entirety of the recordkeeping and reporting requirements--including
requirements addressing daily trading records and confirmations--
appropriately are considered entity-level requirements.\516\
[[Page 68597]]
If the Commission treated its recordkeeping requirements as
transaction-based requirements, and then excluded certain transactions
from its recordkeeping requirements, it would not be able to
effectively regulate and examine registrants. Not only would the
Commission have an incomplete picture of registrants' transactions if
other jurisdictions did not require records regarding the excluded
transactions, but this approach would create logistical complexities
when comparing records kept in different formats. These concerns about
an incomplete picture of a registrant's business are exacerbated by the
possibility that a registrant would not keep records of excluded
transactions because its jurisdiction does not regulate either the
transaction (e.g., exclusions for certain security-based swap products
or for certain transactions) or the entity. For these reasons, the
Commission is treating recordkeeping and reporting requirements as
entity-level requirements.
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\515\ See SIFMA 9/5/2014 Letter.
\516\ The Commission also believes that treating these
requirements as entity-level requirements is necessary or
appropriate to help prevent the evasion of the particular provisions
of the Exchange Act that were added by the Dodd-Frank Act and
prophylactically will help ensure that the purposes of those
provisions of the Dodd-Frank Act are not undermined.
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2. Availability of Substituted Compliance in Connection With
Recordkeeping and Reporting Requirements
a. Existing Substituted Compliance Rule
In 2013, the Commission proposed to make substituted compliance
potentially available in connection with the requirements applicable to
foreign SBSDs pursuant to Section 15F of the Exchange Act, other than
the registration requirements applicable to dealers. Because the
recordkeeping and reporting requirements being adopted are grounded in
Section 15F, substituted compliance generally would have been available
for those requirements under the proposal.\517\ Upon a Commission
substituted compliance determination, a person would be able to satisfy
relevant recordkeeping or reporting requirements by substituting
compliance with corresponding requirements under a foreign regulatory
system.
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\517\ See Cross-Border Proposing Release, 78 FR at 30968, 31085.
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The Commission subsequently adopted Rule 3a71-6, which provides
that substituted compliance is available with respect to the
Commission's business conduct requirements, and (rather than addressing
all requirements under Section 15F of the Exchange Act) reserved the
issue as to whether substituted compliance also would be available in
connection with other requirements under that statute.\518\ Rule 3a71-6
was amended to make substituted compliance available with respect to
the Commission's trade acknowledgment and verification
requirements,\519\ and to make it available with respect to capital and
margin requirements.\520\
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\518\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR 29960. See
also Cross-Border Proposing Release, 78 FR at 31207.
\519\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 30143-44.
\520\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43946-50.
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b. Amendments to Final Rule
A commenter requested that the Commission permit a foreign SBSD or
MSBSP to satisfy its recordkeeping requirements by complying with
recordkeeping rules established by its foreign regulator, provided the
Commission determines such rules impose requirements comparable to
Commission rules.\521\ Another commenter stated that ``[t]he Commission
should allow non-U.S. SBSDs to satisfy any public disclosure
requirements through substituted compliance.'' \522\ The Commission
agrees with the commenters and is amending Rule 3a71-6 to provide
foreign SBSDs and MSBSPs with the potential to utilize substituted
compliance with comparable foreign requirements to satisfy Section 15F
of the Exchange Act and Exchange Act Rules 18a-5, 18a-6, 18a-7, 18a-8,
and 18a-9 thereunder.\523\
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\521\ See SIFMA 9/5/2014 Letter. See also Letter from Kyle
Brandon, Managing Director and Director of Research, Securities
Industry and Financial Markets Association (Jan. 13, 2015) (``SIFMA
1/13/2015 Letter'').
\522\ See IIB 3/25/2019 Meeting.
\523\ See paragraph (d)(6) of Rule 3a71-6, as amended. Rule
3a71-6 provides that substituted compliance is potentially available
in connection with the business conduct requirements for foreign
MSBSPs and SBSDs. This decision reflects the fact that the business
conduct standards apply to MSBSPs and SBSDs, and recognizes that the
market efficiency goals that underpin substituted compliance also
can apply when substituted compliance is granted to MSBSPs. See
Business Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 81 FR at 30076. This same
reasoning applies with respect to the Commission's recordkeeping and
reporting requirements and Rule 3a71-6, as amended, provides that
substituted compliance is also potentially available to foreign
MSBSPs (in addition to foreign SBSDs) with respect to Section 15F of
the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9, as
applicable.
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A commenter requested that foreign branches of U.S. banks (i.e.,
registered bank SBSDs that engage in dealing activity through foreign
branches) be eligible for substituted compliance with respect to
recordkeeping and reporting requirements classified as transaction-
level requirements.\524\ As discussed above, the Commission does not
believe it would be appropriate to the treat the recordkeeping and
reporting requirements as transaction-level requirements. In addition,
the Commission has previously stated its belief that substituted
compliance should not be available to registered entities that are U.S.
persons.\525\
---------------------------------------------------------------------------
\524\ See SIFMA 9/5/2014 Letter.
\525\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30077.
---------------------------------------------------------------------------
In amending Rule 3a71-6, the Commission concludes that the
principles associated with substituted compliance for the business
conduct, trade acknowledgment and verification, and capital and margin
requirements in large part similarly apply to these recordkeeping and
reporting requirements. Accordingly, except as discussed below, the
revised substituted compliance rule applies to Section 15F of the
Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder
in the same manner as it applies to the business conduct, trade
acknowledgment and verification, and capital and margin requirements.
i. Basis for Substituted Compliance in Connection With the
Recordkeeping and Reporting Requirements
In light of the global nature of the security-based swap market and
the prevalence of cross-border transactions within that market, there
is the potential that the application of the Title VII recordkeeping
and reporting requirements may lead to requirements that are
duplicative of or in conflict with applicable foreign requirements,
even when the two sets of requirements implement similar goals and lead
to similar results. Those results have the potential to disrupt
existing business relationships, and, more generally, to reduce
competition and market efficiency.\526\
---------------------------------------------------------------------------
\526\ See generally Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR
at 30073-74 (addressing the basis for making substituted compliance
available in the context of the business conduct requirements).
---------------------------------------------------------------------------
To address those effects, the Commission concludes that under
certain circumstances it may be appropriate to allow for the
possibility of substituted compliance whereby foreign SBSDs and MSBSPs
may satisfy Section 15F of the Exchange Act and Rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9 thereunder by complying with
[[Page 68598]]
comparable foreign requirements. Allowing for the possibility of
substituted compliance in this manner may help achieve the benefits of
these recordkeeping and reporting requirements in a way that helps
avoid regulatory duplication or conflict and hence promotes market
efficiency, enhances competition, and facilitates a well-functioning
global security-based swap market. Accordingly, Rule 3a71-6 is amended
to identify the recordkeeping and reporting requirements of Section 15F
of the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9
thereunder as being eligible for substituted compliance.\527\
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\527\ See paragraph (d) of Rule 3a71-6, as adopted. Paragraph
(a)(1) of Rule 3a71-6 provides that the Commission may,
conditionally or unconditionally, by order, make a determination
with respect to a foreign financial regulatory system that
compliance with specified requirements under that foreign financial
system by a registered SBSD and/or registered MSBSP, or class
thereof, may satisfy the corresponding requirements identified in
paragraph (d) of the rule that would otherwise apply.
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ii. Comparability Criteria, and Consideration of Related Requirements
The Commission will endeavor to take a holistic approach in
determining the comparability of foreign requirements for substituted
compliance purposes, focusing on regulatory outcomes as a whole rather
than on requirement-by-requirement similarity.\528\ The Commission's
comparability assessments associated with Section 15F of the Exchange
Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder
accordingly will consider whether, in the Commission's view, the
foreign regulatory system achieves regulatory outcomes that are
comparable to the regulatory outcomes associated with these
recordkeeping and reporting requirements. However, paragraph (a)(2)(i)
of Rule 3a71-6 provides that the Commission's substituted compliance
determination will take into account factors that the Commission
determines appropriate, such as, for example the scope and objectives
of the relevant foreign regulatory requirements, as well as the
effectiveness of the supervisory compliance program administered, and
the enforcement authority exercised, by a foreign financial regulatory
authority or authorities in such system to support its oversight of
such foreign security-based swap entity (or class thereof) or of the
activities of such security-based swap entity (or class thereof).
---------------------------------------------------------------------------
\528\ See, e.g., Business Conduct Standards for Security-Based
Swap Dealers and Major Security-Based Swap Participants, 81 FR at
30078-79.
---------------------------------------------------------------------------
In reviewing applications, the Commission may determine to conduct
its comparability analyses regarding the recordkeeping and reporting
requirements in conjunction with comparability analyses regarding other
Exchange Act requirements in connection with SBSDs and MSBSPs.
Accordingly, depending on the applicable facts and circumstances, the
comparability assessment associated with the recordkeeping and
reporting requirements may constitute part of a broader assessment of
the foreign regulatory system's risk mitigation requirements, and the
applicable comparability assessments may be conducted at the level of
those risk mitigation requirements as a whole.
Commenters generally requested additional guidance regarding the
criteria the Commission would consider when making a substituted
compliance determination.\529\ Such criteria have been set forth in the
final rule as discussed below. The Commission's recordkeeping,
reporting, notification, and security count requirements reflect and
support prudent business practices and accountability of registrants
and have facilitated the ability of securities regulators to review and
monitor compliance with securities laws. The Commission's recordkeeping
and reporting requirements are integral to the ability of the
Commission and other securities regulators to effectively examine and
inspect regulated firms' compliance with the applicable securities
laws.\530\ More specifically, the records that firms are required to
preserve can be reviewed by Commission staff and other securities
regulators to monitor compliance with applicable securities laws.\531\
Similarly, FOCUS Reports are used to determine which firms are engaged
in various securities-related activities, and how economic events and
government policies might affect segments of the securities
industry.\532\
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\529\ See, e.g., Letter from Catherine T. Dixon, Chair, Federal
Regulation of Securities Committee, American Bar Association (Oct.
2, 2013); Letter from Americans for Financial Reform (Aug. 22,
2013); Letter from Futures and Options Association (Aug. 21, 2013).
\530\ 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 at 22917, 22921 (The Commission's recordkeeping 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''. ``Investor
protection depends on the examination process, which, in turn,
relies on the records that broker-dealers are required to make and
maintain.''); FOCUS Reporting System; Requirements for Financial
Reporting, Exchange Act Release No. 17534 (Feb. 11, 1981), 46 FR
13205, 13205 (Feb. 20, 1981) (``The FOCUS Report is one of the
primary means of monitoring the financial and operational condition
of brokers and dealers and enforcing the financial responsibility
rules'').
\531\ 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 at 22917.
\532\ See FOCUS Reporting System; Requirements for Financial
Reporting, 46 FR at 13205.
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The Commission's recordkeeping and reporting requirements are also
important for protecting customers against the risks involved in having
their securities held by a third party.\533\ A failure to maintain
accurate, accessible, and true records may lead to situations where a
firm cannot account for customer property or its own assets.\534\
Similarly, the Commission's reporting requirements promote transparency
of the financial and operational condition of broker-dealers to the
Commission, the firm's DEA, and, in the case of a portion of the annual
reports, to the public.\535\
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\533\ See Study of Unsafe and Unsound Practices of Brokers and
Dealers at 6 (the Commission's 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'').
\534\ 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 at 22919 (``A failure to maintain accurate, accessible, and true
records may lead to situations where a firm cannot account for
customer property or its own assets. For these reasons, the
Commission's broker-dealer recordkeeping requirements are an
important part of managing systemic risk in the industry.'').
\535\ See section II.B.1. of this release.
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In light of these considerations, paragraph (d)(6) of Rule 3a71-6
states that prior to making a substituted compliance determination
regarding SBSD and MSBSP recordkeeping and reporting requirements, the
Commission intends to consider (in addition to any conditions imposed),
whether the foreign financial regulatory system's required records and
reports, the timeframes for recording or reporting information, the
accounting standards governing the records and reports, and the
required format of the records and reports are comparable to applicable
provisions arising under the Act and its rules and regulations and
would permit the Commission to examine and inspect regulated firms'
compliance with the applicable securities laws.
A commenter stated that a Commission substituted compliance
determination should not be a
[[Page 68599]]
prerequisite for a foreign bank SBSD to comply with ``home-country''
financial recordkeeping and reporting requirements in lieu of the
Commission's requirements.\536\ The commenter referred to this approach
as ``Automatic Substituted Compliance'' for foreign bank SBSDs. Rule
3a71-6 does not provide ``automatic'' substituted compliance for any
type of registrant. Moreover, as discussed above, the Commission
preliminarily interpreted the Title VII requirements associated with
registration to apply generally to the activities of registered
entities.\537\ Further, in reaching that preliminary conclusion, the
Commission did not concur with the views of certain commenters that the
Title VII requirements should not apply to the foreign security-based
swap activities of registered entities, stating that such a view could
be difficult to reconcile with, among other things, the statutory
language describing the requirements applicable to SBSDs.\538\ The
Commission believes that it is appropriate to evaluate the substance of
a foreign regulatory system to which substituted compliance would apply
before granting substituted compliance to an entity. An ``automatic''
substituted compliance regime would be contrary to this view, as it
would permit a foreign bank SBSD to comply with local requirements
without any analyses by the Commission as to whether those requirements
were comparable to the Commission's requirements. Therefore, the
Commission does not believe the approach suggested by the commenter
would be appropriate.
---------------------------------------------------------------------------
\536\ See IIB 3/25/2019 Meeting.
\537\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39825, n.191 (citing Cross-Border
Proposing Release, 78 FR at 30986).
\538\ See Cross-Border Proposing Release, 78 FR at 30986.
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The same commenter stated that the Commission should allow a
foreign stand-alone SBSD to satisfy financial recordkeeping and
reporting requirements through substituted compliance if the SBSD
qualifies for substituted compliance with respect to the Commission's
capital and margin requirements for SBSDs.\539\ The commenter referred
to this approach as ``One-Step Substituted Compliance.'' The Commission
does not believe that a positive substituted compliance determination
with respect to nonbank SBSD capital and margin requirements should
automatically result in a positive substituted compliance determination
with respect to SBSD recordkeeping and reporting requirements. Once
again, the Commission believes that it is appropriate to evaluate the
substance of each foreign regulatory system to which substituted
compliance would apply before granting substituted compliance to an
entity. As discussed above, the recordkeeping and reporting
requirements are integral to the ability of the Commission and other
securities regulators to effectively examine and inspect regulated
firms' compliance with the applicable securities laws, including
capital and margin requirements. Therefore, the Commission will need to
analyze a jurisdiction's recordkeeping and reporting requirements to
determine whether they would permit the Commission to examine and
inspect regulated firms' compliance with the applicable securities laws
in a manner comparable to its examinations and inspections for firms
subject to the recordkeeping and reporting requirements specified in
Section 15F of the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8,
and 18a-9.
---------------------------------------------------------------------------
\539\ See IIB 3/25/2019 Meeting.
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However, as discussed above, in reviewing substituted compliance
applications, the Commission may conduct its comparability analyses
regarding the recordkeeping and reporting requirements in conjunction
with comparability analyses regarding other Exchange Act requirements
that promote risk management in connection with SBSDs and MSBSPs. Thus,
the Commission's comparability analyses regarding the recordkeeping and
reporting requirements could be made in conjunction with comparability
analyses regarding capital and margin requirements.
Finally, this commenter also stated that, if substituted compliance
is not available with respect to a disclosure requirement, ``the
Commission should limit the application of such public disclosure
requirements to SBSDs that are not otherwise subject to a public
disclosure regime.'' \540\ For example, the commenter argues that
paragraph (b)(7) of Rule 18a-7, as proposed, ``could require a
standalone SBSD that is a public reporting company to publish material,
non-public information every six months, rather than on an annual basis
on Form 20-F.'' \541\ Form 20-F, however, requires the public
disclosure of substantially more information than will be required by
Rule 18a-7, which requires relatively little information to be publicly
disclosed. Moreover, Rule 18a-7 will require the disclosure of
information such as a firm's net capital computation that may not be
required under other disclosure regimes. For these reasons, the
Commission is not adopting the commenter's proposed approach.
---------------------------------------------------------------------------
\540\ See IIB 3/25/2019 Meeting.
\541\ See IIB 3/25/2019 Meeting.
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G. Amendments to Rule 18a-1
Paragraph (e) of appendix E to Rule 15c3-1 establishes a non-
exclusive list of circumstances under which the Commission may restrict
the business of an ANC broker-dealer, including when the firm fails to
meet the reporting requirements set forth in Rule 17a-5 or an event
specified in Rule 17a-11 occurs. The Commission proposed a parallel
provision in Rule 18a-1 to apply to a stand-alone SBSD authorized to
use models.\542\ The circumstances in proposed Rule 18a-1 under which
the Commission could have restricted the stand-alone SBSD's business
included that the firm failed to meet a proposed reporting requirement
or an event in the proposed notification rule for SBSDs occurs. The
Commission adopted the provision in Rule 18a-1 under which the
Commission may restrict the business of a stand-alone SBSD or OTCDD/
SBSD authorized to use models.\543\ However, in the final rule, the
circumstances under which the Commission can restrict a firm's business
did not include that the firm fails to meet a reporting requirement or
an event in the notification rule for SBSDs occurs. As the SBSD
reporting and notification rules are being adopted in this document,
the Commission is amending Rule 18a-1 to add the these circumstances to
those listed in the rule under which the Commission may restrict the
business of a stand-alone SBSD or OTCDD/SBSD authorized to use models:
(1) The SBSD fails to meet the reporting requirements set forth in Rule
18a-7; or (2) any event specified in Rule 18a-8 occurs.\544\
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\542\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70240, 70338.
\543\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44058-59.
\544\ See paragraphs (d)(9)(iii)(A) and (B) of Rule 18a-1, as
amended.
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H. Delegation of Authority
In recognition of the adoption in this document of recordkeeping,
reporting, and notification requirements for SBSDs and 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 in accordance
with the Dodd-Frank Act, the Commission is amending its rule governing
delegations of authority to the Director of the Division of Trading and
Markets (``Division'').
[[Page 68600]]
Because OTC derivatives dealers will be required to file FOCUS
Report Part II instead of FOCUS Report Part IIB, the reference to FOCUS
Report Part IIB is being changed to FOCUS Report Part II. Specifically,
paragraph (a)(65) of 17 CFR 200.30-3 (``Rule 30-3'') is being amended
to delegate authority to the Division to authorize the issuance of
orders requiring OTC derivatives dealers to file FOCUS Report Part II
instead of FOCUS Report Part IIB. In addition, due to re-numbering of
paragraphs as a result of these amendments, paragraph (a)(30) of Rule
30-3 is amended to cross-reference paragraph (a)(3) instead of
paragraph (a)(4) of Rule 17a-5. Finally, paragraph (a)(65)'s cross-
reference to Rule 17a-12 is corrected to read ``Sec. 240.17a-
12(a)(1)(ii)'' instead of ``Sec. 240.17a-12(a)(ii),'' \545\ and
paragraph (a)(5)'s cross-reference to Rule 17a-5 is corrected to read
``Sec. 240.17a-5(m)(3) of this chapter (Rule 17a-5(m)(3))'' instead of
``Rule 17a-5(1)(3) (Sec. 240.17a-5(1)(3) of this chapter).'' These
delegations of authority are intended to preserve Commission resources
and increase the effectiveness and efficiency of the Commission's
oversight of compliance with the financial responsibility rules.
Nevertheless, the Division may submit matters to the Commission for its
consideration, as it deems appropriate.
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\545\ See paragraph (a)(65)(i) of Rule 30-3 under the Exchange
Act, as amended.
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Administrative Law Matters
The Commission finds, in accordance with the Administrative
Procedure Act (``APA''),\546\ that these amendments relate solely to
agency organization, procedure, or practice, and do not relate to a
substantive rule. Accordingly, the provisions of the APA regarding
notice of rulemaking, opportunity for public comment, and publication
of the amendment prior to its effective date are not applicable. For
the same reason, and because this amendment does not substantively
affect the rights or obligations of non-agency parties, the provisions
of the Small Business Regulatory Enforcement Fairness Act,\547\ are not
applicable. Additionally, the provisions of the Regulatory Flexibility
Act, which apply only when notice and comment are required by the APA
or other law,\548\ are not applicable. Further, because this amendment
imposes no new burdens on private persons, the Commission does not
believe that the amendment will have any anti-competitive effects for
purposes of Section 23(a)(2) of the Exchange Act.\549\ Finally, this
amendment does not contain any collection of information requirements
as defined by the Paperwork Reduction Act of 1980, as amended.
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\546\ See 5 U.S.C. 553(b)(3)(A).
\547\ See 5 U.S.C. 804(3)(C).
\548\ See 5 U.S.C. 603.
\549\ See 15 U.S.C. 78w(a)(2).
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III. Explanation of Dates
A. Effective Date
These final rules will be effective 60 days following publication
of this release in the Federal Register.
B. Compliance Date
The compliance date for the rules being adopted in this document,
other than the amendments to Rule 3a71-6 discussed below, will be 18
months after the effective date of any final rules originally proposed
in May 2019 addressing the cross-border application of certain
security-based swap requirements.\550\ As set forth recently in the
release adopting capital, margin, and segregation requirements, this
compliance date will also be the compliance date for SBSD and MSBSP
registration requirements (the ``Registration Compliance Date'').\551\
The Commission believes the compliance date provided in this release,
which will be in excess of 18 months, will allow sufficient time to
prepare for and come into compliance with the new recordkeeping and
reporting requirements.
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\550\ The Commission proposed rules on May 10, 2019 which
include rules and/or guidance regarding security-based swap
transactions ``arranged, negotiated, or executed'' by personnel
located in the United States, the cross-border scope of the SBSD de
minimis exception, the certification and opinion of counsel
requirement of Rule 15Fb2-1, the questionnaire and application
requirement of Rule 18a-5, and the cross-border application of the
statutory disqualification prohibition within Section 15F(b)(6) of
the Exchange Act. See Cross-Border Application Proposing Release, 84
FR at 24206.
\551\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43954-57. Moreover, as explained in that release, the
Registration Compliance Date will also be the compliance date for
(1) nonbank SBSD and MSBSP capital and margin requirements; (2) SBSD
and MSBSP segregation requirements; (3) SBSD and MSBSP business
conduct and chief compliance officer requirements; and (4) SBSD and
MSBSP trade acknowledgement and verification requirements. See also
Business Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 81 FR at 30081; see also Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
81 FR 39807.
---------------------------------------------------------------------------
A commenter asked to delay cross-border application of the
Commission's recordkeeping and reporting rules with respect to home
jurisdiction regulations that have not yet been finalized, as a
preferable solution to requiring foreign firms to build the
technological, operational, and compliance systems required to comply
with U.S. law for a short, interim period if the home jurisdiction is
ultimately deemed comparable for substituted compliance purposes.\552\
The commenter's concerns should be mitigated by the extended compliance
date applicable to the rules being adopted in this document. The
Commission believes that such a delay would not be appropriate because
a comprehensive set of records will be integral to the Commission's
ability to exercise its regulatory responsibilities once these firms
are registered.\553\ In addition, as discussed below in section III.D.
of this release, to address concerns that the compliance date could be
before substituted compliance determinations are made, the Commission
would consider substituted compliance requests that are submitted prior
to the compliance date.
---------------------------------------------------------------------------
\552\ See SIFMA 9/5/2014 Letter.
\553\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25197 (``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.'').
---------------------------------------------------------------------------
Finally, one commenter stated that SBSDs and MSBSPs will require
adequate time following registration to begin complying with
substantive Title VII requirements, since considerable resources will
be needed to amend recordkeeping systems and documentation processes
between finalization of recordkeeping and documentation rules and the
initial compliance dates for those rules.\554\ Regarding the
Commission's policy statement on the sequencing of final rules
governing security-based swaps,\555\ another commenter suggested
grouping rulemakings into two categories in terms of the applicable
compliance date.\556\ In response, the Commission notes that it has
coordinated the compliance dates
[[Page 68601]]
for the Commission's: (1) SBSD and MSBSP registration requirements; (2)
nonbank SBSD and MSBSP capital and margin requirements; (3) SBSD and
MSBSP segregation requirements; (4) SBSD and MSBSP recordkeeping and
reporting requirements; (5) SBSD and MSBSP business conduct and chief
compliance officer requirements; (6) SBSD and MSBSP trade
acknowledgement and verification requirements; and (7) statutory
disqualification process. The Commission also does not believe it would
be appropriate to delay the compliance date for the Commission's
recordkeeping rules beyond the compliance date for the rules
establishing the registration process for SBSDs and MSBSPs, because
this would undermine the Commission's ability to effectively regulate
and supervise registrants.
---------------------------------------------------------------------------
\554\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Public Policy and Advocacy, Securities Industry and
Financial Markets Association (Aug. 13, 2012) (``SIFMA 8/13/2012
Letter''). See also Memorandum from Richard E. Grant, Office of
Commissioner Michael S. Piwowar, regarding an email from Sarah A.
Miller, Chief Executive Officer, Institute of International Bankers
(Nov. 16, 2016) (``IIB 11/16/2016 Letter'').
\555\ See Statement of General Policy on the Sequencing of the
Compliance Dates for Final Rules Applicable to Security-Based Swaps
Adopted Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 2012).
Comments on the sequencing policy statement which are relevant to
the Commission's recordkeeping and reporting requirements are
available at http://www.sec.gov/comments/s7-05-12/s70512.shtml.
\556\ See Letter from Chris Barnard (Aug. 13, 2012).
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C. Effect on Existing Commission Exemptive Relief
On July 1, 2011, the Commission issued an order granting, among
other things, temporary exemptive relief from compliance with certain
recordkeeping and reporting provisions of the Exchange Act that would
have applied to the security-based swap activities of registered
broker-dealers due to the expansion of the Exchange Act definition of
``security'' to include security-based swaps.\557\ The compliance dates
of this release implicate the expiration of this temporary exemptive
relief related to registered broker-dealer recordkeeping and reporting
requirements.
---------------------------------------------------------------------------
\557\ See Order Granting Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revisions of the Definition of ``Security'' to Encompass Security-
Based Swaps, Exchange Act Release No. 64795 (July 1, 2011), 76 FR
39927 (July 7, 2011) (``Exchange Act Exemptive Order'').
---------------------------------------------------------------------------
With regard to the recordkeeping and reporting obligations of
registered broker-dealers, the Exchange Act Exemptive Order provided
limited exemptions for registered broker-dealers, subject to certain
conditions and limitations, from compliance with Sections 17(a) and
17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and
17a-13 (collectively, ``the Recordkeeping Provision Exemptions'') in
connection with security-based swaps solely to the extent the
provisions or rules did not apply to the broker-dealer's security-based
swap positions or activities as of July 15, 2011.\558\ The Exchange Act
Exemptive Order also provided that, until such time as the underlying
exemptive relief expires, no contract entered into on or after July 16,
2011 shall be void or considered voidable by reason of Section 29(b) of
the Exchange Act because any person that is a party to the contract
violated a provision of the Exchange Act for which the Commission
provided exemptive relief in the Exchange Act Exemptive Order
(``Section 29(b) Exemption).\559\ The Recordkeeping Provision
Exemptions are scheduled to expire on the compliance date for any final
rules regarding recordkeeping and reporting requirements for SBSDs and
MSBSPs.\560\ Accordingly, all the Recordkeeping Provision Exemptions,
together with the portion of the Section 29(b) Exemption that relates
to the Exchange Act provisions for which the Commission provided
exemptive relief in the Recordkeeping Provision Exemptions, will expire
upon the compliance date set forth in section III.B. of this release.
---------------------------------------------------------------------------
\558\ See Exchange Act Exemptive Order at 39938-39.
\559\ See Exchange Act Exemptive Order at 39940.
\560\ The Recordkeeping Provision Exemptions originally were set
to expire on the compliance date for any final rules further
defining the terms ``security-based swap'' and ``eligible contract
participant.'' See Exchange Act Exemptive Order at 39938-39. In the
final rules further defining the term ``security-based swap,'' the
Commission extended this expiration date to February 13, 2013. See
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR at 48304. On February 7, 2013, the
Commission extended the expiration date until February 11, 2014. See
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,
10220 (Feb. 13, 2013). On February 5, 2014, the Commission further
extended the expiration date until the compliance date set forth in
any recordkeeping and reporting rules for SBSDs and MSBSPs. See
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. 71485 (Feb. 5, 2014), 79 FR 7731,
7734 (Feb. 10, 2014) (``Exchange Act Exemption Extension Order'').
---------------------------------------------------------------------------
In addition, the Commission also has provided an exemption from the
``dealer'' registration requirements of Section 15(a)(1) of the
Exchange Act, and the other requirements of the Exchange Act and the
rules and regulations thereunder that apply to a dealer that is not
registered with the Commission, solely in connection with dealing
activities involving security-based swaps with counterparties that meet
the definition of eligible contract participant as set forth in Section
1a(12) of the CEA as in effect on July 20, 2010 (``Dealer
Exemptions'').\561\ The Dealer Exemptions are scheduled to expire on
the later of the compliance dates set forth in any final rules
regarding capital, margin, and segregation requirements for SBSDs and
MSBSPs and any final rules regarding recordkeeping and reporting
requirements for SBSDs and MSBSPs \562\ As noted in section III.B. of
this release, both relevant compliance dates will be 18 months after
the effective date of any final rules addressing the cross-border
application of certain security-based swap requirements or the
Registration Compliance Date. Accordingly, all of the Dealer
Exemptions, together with the portion of the Section 29(b) Exemption
that relates to the Exchange Act provisions for which the Commission
provided exemptive relief in the Dealer Exemptions, will expire upon
the Registration Compliance Date.
---------------------------------------------------------------------------
\561\ See Exchange Act Exemptive Order at 39939.
\562\ The Dealer Exemptions originally were set to expire on the
compliance date for any final rules further defining the terms
``security-based swap'' and ``eligible contract participant.'' See
Exchange Act Exemptive Order at 39938, 39940. In the final rules
further defining the term ``security-based swap,'' the Commission
extended this expiration date to February 13, 2013. See Further
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR at 48304. On February 7, 2013, the Commission
again extended the expiration date until February 11, 2014. See
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, 78 FR at 10220. On February 5, 2014, the Commission further
extended the expiration date until the later of the compliance dates
set forth in any final rules regarding capital, margin, and
segregation requirements for SBSDs and MSBSPs and any final rules
regarding recordkeeping and reporting requirements for SBSDs and
MSBSPs. See Exchange Act Exemption Extension Order at 7734-35.
---------------------------------------------------------------------------
Finally, the Commission has provided an exemption from the
``broker'' registration requirements of Section 15(a)(1) of the
Exchange Act, and the other requirements of the Exchange Act and the
rules and regulations thereunder that apply to a broker that is not
registered with the Commission, solely in connection with broker
activities involving security-based swaps (``Broker Exemptions'').\563\
The Broker Exemptions are scheduled to expire on the later of the
compliance dates set forth in any final rules regarding capital,
margin, and segregation requirements for SBSDs and MSBSPs and any final
rules regarding recordkeeping and reporting requirements for SBSDs and
MSBSPs.\564\
[[Page 68602]]
However, the Commission has stated that an entity that meets the
definition of ``security-based swap execution facility'' in Section
3(a)(77) of the Exchange Act also would meet the definition of
``broker'' in Section 3(a)(4) of the Act.\565\ The Commission also has
granted temporary exemptions from the registration requirements for
security-based swap execution facilities in Section 3D(a)(1) of the
Exchange Act and from certain disclosure requirements in Section 3D(c)
of the Exchange Act (``SB SEF Exemptions'').\566\ The SB SEF Exemptions
will expire on the earliest compliance date set forth in any of the
final rules regarding registration of security-based swap execution
facilities.\567\ The Commission recognizes that market participants who
currently rely on the SB SEF Exemptions pending the Commission's
finalization of registration rules for security-based swap execution
facilities may also currently rely on the Broker Exemptions. The
Commission therefore finds that it is necessary and appropriate in the
public interest and consistent with the protection of investors to
extend the Broker Exemptions, insofar as they apply to persons and
activities subject to the SB SEF Exemptions, until the expiration date
for the SB SEF Exemptions.\568\
---------------------------------------------------------------------------
\563\ See Exchange Act Exemptive Order at 39939.
\564\ The Broker Exemptions originally were set to expire on the
compliance date for any final rules further defining the terms
``security-based swap'' and ``eligible contract participant.'' See
Exchange Act Exemptive Order at 39938, 39940. In the final rules
further defining the term ``security-based swap,'' the Commission
extended this expiration date to February 13, 2013. See Further
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR at 48304. On February 7, 2013, the Commission
again extended the expiration date until February 11, 2014. See
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, 78 FR at 10220. On February 5, 2014, the Commission further
extended the expiration date until the later of the compliance dates
set forth in any final rules regarding capital, margin, and
segregation requirements for SBSDs and MSBSPs and any final rules
regarding recordkeeping and reporting requirements for SBSDs and
MSBSPs. See Exchange Act Exemption Extension Order at 7734-35.
\565\ Registration and Regulation of Security-Based Swap
Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011),
76 FR 10948, 10959 (Feb. 28, 2011).
\566\ See Temporary Exemptions and Other Temporary Relief,
Together with Information on Compliance Dates for New Provisions of
the Securities Exchange Act of 1934 Applicable to Security-Based
Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287,
36292-93, 36306 (June 22, 2011).
\567\ See id.
\568\ See 15 U.S.C. 78mm.
---------------------------------------------------------------------------
Accordingly, solely for purposes of the Exchange Act Exemption
Extension Order as it relates to exemption from the ``broker''
registration requirements of Section 15(a)(1) of the Exchange Act and
the other requirements of the Exchange Act and the rules and
regulations thereunder that apply to a broker that is not registered
with the Commission, and solely in connection with the operation of a
facility for the trading or processing of security-based swaps that is
not currently registered as a national securities exchange or as a
security-based swap execution facility (``SB SEF Broker Exemptions''),
the compliance date is the expiration date of the SB SEF Exemptions.
Similarly, solely for purposes of the Exchange Act Exemption Extension
Order as it relates to the portion of the Section 29(b) Exemption that
relates to the Exchange Act provisions for which the Commission
provided exemptive relief in the SB SEF Broker Exemptions, the
compliance date set forth in this release is the expiration date of the
SB SEF Exemptions. All other portions of the Broker Exemptions,
together with the portion of the Section 29(b) Exemption that relates
to the Exchange Act provisions for which the Commission provided
exemptive relief in these other portions of the Broker Exemptions, will
expire upon the Registration Compliance Date.
D. Application to Substituted Compliance
For the amendments to Rule 3a71-6 being adopted in this release to
provide foreign SBSDs and MSBSPs with the potential to utilize
substituted compliance with comparable foreign requirements to satisfy
Section 15F of the Exchange Act and new Exchange Act Rules 18a-5, 18a-
6, 18a-7, 18a-8, and 18a-9, consistent with the other rules adopted in
this document, the Commission is adopting an effective date of 60 days
following publication in the Federal Register. There will be no
separate compliance date in connection with that rule amendment, as the
rule does not impose obligations upon entities. As discussed above,
SBSDs and MSBSPs will not be required to comply with the recordkeeping
and reporting requirements until they are registered, and the
registration requirement for those entities will not be triggered until
a number of regulatory benchmarks have been met.
In practice, the Commission recognizes that if the requirements of
a foreign regime are comparable to Title VII requirements, and the
other prerequisites to substituted compliance also have been satisfied,
then it may be appropriate to permit an SBSD or MSBSP to rely on
substituted compliance commencing at the time that entity is registered
with the Commission. Accordingly, to address commenters' concerns that
the compliance date could be before substituted compliance
determinations are made, the Commission would consider substituted
compliance requests that are submitted prior to the compliance date for
its recordkeeping and reporting requirements.
IV. Paperwork Reduction Act
Certain provisions of the rule amendments and new rules being
adopted in this release contain a new ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\569\ The Commission submitted the rule amendments and new
rules to the Office of Management and Budget (``OMB'') for review and
approval in accordance with the PRA.\570\ The Commission's earlier PRA
assessments have been revised to reflect the modifications to the rules
and amendments from those that were proposed, as well as additional
information and data now available to the Commission.\571\ 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 and OMB control numbers for the collections
of information are:
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\569\ See 44 U.S.C. 3501 et seq.
\570\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
\571\ The hourly rates use for internal professionals used
throughout this section IV. of the release are taken from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified to account for an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead, in addition to SIFMA's Office Salaries in
the Securities Industry 2013, modified by Commission staff to
account for an 1800-hour work-year and inflation, and multiplied by
2.93 to account for bonuses, firm size, employee benefits, and
overhead.
----------------------------------------------------------------------------------------------------------------
OMB control
Rule Rule title No.
----------------------------------------------------------------------------------------------------------------
Rule 17a-3.......................... Records to be made by certain exchange members, brokers 3235-0033
and dealers.
Rule 17a-4.......................... Records to be preserved by certain exchange members, 3235-0279
brokers and dealers.
Rule 17a-5.......................... Reports to be made by certain brokers and dealers......... 3235-0123
[[Page 68603]]
Rule 17a-11......................... Notification provisions for brokers and dealers........... 3235-0085
Rule 17a-12......................... Reports to be made by certain OTC derivatives dealers..... 3235-0498
Rule 18a-5.......................... Records to be made by certain security-based swap dealers 3235-0745
and major security-based swap participants.
Rule 18a-6.......................... Records to be preserved by certain security-based swap 3235-0751
dealers and major security-based swap participants.
Rule 18a-7.......................... Reports to be made by certain security-based swap dealers 3235-0749
and major security-based swap participants.
Rule 18a-8.......................... Notification provisions for security-based swap dealers 3235-0750
and major security-based swap participants.
Rule 18a-9.......................... Quarterly security counts to be made by certain security- 3235-0752
based swap dealers.
Rule 18a-10......................... Alternative compliance mechanism for security-based swap 3235-0702
dealers that are registered as swap dealers and have
limited security-based swap activities.
Rule 3a71-6......................... Substituted compliance for security-based swap dealers and 3235-0715
major security-based swap participants.
----------------------------------------------------------------------------------------------------------------
A. Summary of Collections of Information Under the Rule Amendments and
New Rules
1. Amendments to Rule 17a-3 and New Rule 18a-5
Rule 17a-3 requires a broker-dealer to make and keep current
certain records. The Commission is amending this rule to account for
the security-based swap and swap activities of broker-dealers,
including broker-dealer SBSDs and MSBSPs. With respect to stand-alone
SBSDs and MSBSPs, and bank SBSDs and MSBSPs, the Commission is adopting
new Rule 18a-5--which is modeled on Rule 17a-3, as amended--to require
these registrants to make and keep current certain records.\572\ Rule
18a-5 does not include a parallel requirement for every requirement in
Rule 17a-3. Paragraph (a) of Rule 18a-5 contains recordkeeping
requirements for stand-alone SBSDs and MSBSPs, and paragraph (b)
contains recordkeeping requirements for bank SBSDs and MSBSPs that are
more limited in scope. The amendments to Rule 17a-3 and new Rule 18a-5
establish a number of new collections of information, as summarized in
the table below.
---------------------------------------------------------------------------
\572\ See Rule 18a-5, as adopted.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-model Non-model Model
Stand-alone broker-dealer ANC broker- Broker-dealer stand-alone stand[dash]alone Bank SBSDs Stand-alone
broker-dealers SBSDs dealer SBSDs MSBSPs SBSDs SBSDs 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-customer accounts................ * 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)
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 of net capital................. .............. .............. .............. .............. 18a-5(a)(9) 18a-5(a)(9) .............. 18a-5(a)(9)
Associated person's employment application.................... .............. .............. .............. .............. 18a-5(a)(10) 18a-5(a)(10) 18a-5(b)(8) 18a-5(a)(10)
Account equity and margin calculations under Rule 18a-3....... .............. 17a-3(a)(25) 17a-3(a)(25) 17a-3(a)(25) 18a-5(a)(12) 18a-5(a)(12) .............. 18a-5(a)(12)
Possession or control requirements for security-based swap 17a-3(a)(26) 17a-3(a)(26) 17a-3(a)(26) 17a-3(a)(26) 18a-5(a)(13) 18a-5(a)(13) 18a-5(b)(9) ..............
customers....................................................
Security-based swap customer reserve requirements............. 17a-3(a)(27) 17a-3(a)(27) 17a-3(a)(27) 17a-3(a)(27) 18a-5(a)(14) 18a-5(a)(14) 18a-5(b)(10) ..............
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 business conduct requirements................. .............. 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)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Commission is amending these pre-existing paragraphs of Rule 17a-3 to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.
A commenter urged the Commission to harmonize its recordkeeping
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping
requirements for swap dealers and major swap participants to the
maximum extent possible, with the goal of permitting firms to utilize a
single recordkeeping system for swaps and security-based swaps.\573\ As
discussed in more detail above, in response to the comment and to
promote harmonization with CFTC requirements, the Commission is
adopting a limited alternative compliance mechanism in Rules 17a-3 and
18a-5.\574\ In particular, an SBSD or MSBSP that also is registered
with the CFTC as a swap dealer or major swap participant may comply
with the recordkeeping requirements of the CEA and the rules thereunder
applicable to swap dealers and major swap participants in lieu of
complying with the requirements in Rules 17a-3 and 18a-5 to make and
keep current trade blotters, customer account ledgers, and stock
records
[[Page 68604]]
solely with respect to information required to be included in these
records regarding security-based swap transactions and positions if the
SBSD or MSBSP meets certain conditions. The conditions include, among
other things, that the SBSD or MSBSP preserves all of the data elements
necessary to create these records as they pertain to security-based
swap and swap transactions and upon request promptly furnishes to
representatives of the Commission such records that includes security-
based swap and swap transactions and positions in the format required
by Rule 17a-3 or 18a-5, as applicable. This provision will permit an
SBSD or MSBSP that also is registered with the CFTC as a swap dealer or
major swap participant to maintain a single recordkeeping system for
security-based swap and swap transactions and positions in accordance
with the CFTC's rules with respect to these required records.
---------------------------------------------------------------------------
\573\ See SIFMA 9/5/2014 Letter.
\574\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted.
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2. Amendments to Rule 17a-4 and New Rule 18a-6
Rule 17a-4 requires a broker-dealer to preserve certain records if
it makes or receives them and prescribes the time period and the manner
in which records must be preserved. The Commission is amending this
rule to account for the security-based swap and swap activities of
broker-dealers, including broker-dealer SBSDs and MSBSPs. With respect
to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs,
the Commission is adopting new Rule 18a-6--which is modeled on Rule
17a-4, as amended. Rule 18a-6 does not include a parallel requirement
for every requirement in Rule 17a-4, and the recordkeeping requirements
in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more limited in
scope than the requirements in the rule applicable to stand-alone SBSDs
and MSBSPs. As discussed above, the records a broker-dealer, including
a broker-dealer SBSD or MSBSP, is required to maintain and preserve
under Rules 17a-3 and 17a-4 may be maintained and preserved by means of
electronic storage media. The use of electronic storage media is
subject to certain conditions, including that the media must preserve
the records exclusively in a non-rewriteable and non-erasable format.
In response to comment, the Commission is modifying Rule 18a-6 to
eliminate the requirement that the electronic storage system preserve
the records exclusively in a non-rewriteable and non-erasable
format.\575\ The amendments to Rule 17a-4 and new Rule 18a-6 establish
a number of new collections of information, as summarized in the table
below.
---------------------------------------------------------------------------
\575\ See Rule 18a-6, as adopted.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-model Non-model
Stand-alone broker-dealer ANC broker- Broker-dealer stand-alone Model stand- Bank SBSDs Stand-alone
broker-dealers SBSDs dealer SBSDs MSBSPs SBSDs alone SBSDs MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Records to be preserved for a period of not less than 6 years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters.................................................. .............. .............. .............. .............. 18a-6(a)(1) 18a-6(a)(1) 18a-6(a)(2) 18a-6(a)(1)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(1) 5(a)(1) 5(b)(1) 5(a)(1)
General ledger.................................................. .............. .............. .............. .............. 18a-6(a)(1) 18a-6(a)(1) .............. 18a-6(a)(1)
citing 18a- citing 18a- citing 18a-
5(a)(2) 5(a)(2) 5(a)(2)
Ledgers for customer and non-customer accounts.................. .............. .............. .............. .............. 18a-6(a)(1) 18a-6(a)(1) 18a-6(a)(2) 18a-6(a)(1)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(3) 5(a)(3) 5(b)(2) 5(a)(3)
Stock record.................................................... .............. .............. .............. .............. 18a-6(a)(1) 18a-6(a)(1) 18a-6(a)(2) 18a-6(a)(1)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(4) 5(a)(4) 5(b)(3) 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-
5(b)(4)
Memoranda of proprietary orders................................. .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(b)(1)(i) (b)(1)(i) (b)(2)(i) (b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(5) 5(a)(5) 5(b)(5) 5(a)(5)
Confirmations................................................... .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(b)(1)(i) (b)(1)(i) (b)(2)(i) (b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(6) 5(a)(6) 5(b)(6) 5(a)(6)
Accountholder information....................................... .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(b)(1)(i) (b)(1)(i) (b)(2)(i) (b)(1)(i)
citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(7) 5(a)(7) 5(b)(7) 5(a)(7)
Options positions............................................... .............. .............. .............. .............. 18a-6 18a-6 .............. 18a-6
(b)(1)(i) (b)(1)(i) (b)(1)(i)
citing 18a- citing 18a- citing 18a-
5(a)(8) 5(a)(8) 5(a)(8)
Trial balances and computation of net capital................... 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 .............. 18a-6
citing 17a- citing 17a- citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(1)(i)
3(a)(11) 3(a)(11) 3(a)(11) 3(a)(11) citing 18a- citing 18a- citing 18a-
5(a)(9) 5(a)(9) 5(a)(9)
Account equity and margin calculations under new Rule 18a-3..... .............. 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 .............. 18a-6
citing 17a- citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(1)(i)
3(a)(25) 3(a)(25) 3(a)(25) citing 18a- citing 18a- citing 18a-
5(a)(12) 5(a)(12) 5(a)(12)
[[Page 68605]]
Possession or control requirements for security-based swap 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 18a-6 ..............
customers...................................................... citing 17a- citing 17a- citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(2)(i)
3(a)(26) 3(a)(26) 3(a)(26) 3(a)(26) citing 18a- citing 18a- citing 18a-
5(a)(13) 5(a)(13) 5(b)(9)
Security-based swap customer reserve requirements............... 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 18a-6 ..............
citing 17a- citing 17a- citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(2)(i)
3(a)(27) 3(a)(27) 3(a)(27) 3(a)(27) citing 18a- citing 18a- citing 18a-
5(a)(14) 5(a)(14) 5(b)(10)
Unverified transactions......................................... .............. 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 18a-6 18a-6
citing 17a- citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(2)(i) (b)(1)(i)
3(a)(28) 3(a)(28) 3(a)(28) citing 18a- citing 18a- citing 18a- citing 18a-
5(a)(15) 5(a)(15) 5(b)(11) 5(a)(15)
Political contributions......................................... .............. 17a-4(b)(1) 17a-4(b)(1) .............. 18a-6 18a-6 18a-6 ..............
citing 17a- citing 17a- (b)(1)(i) (b)(1)(i) (b)(2)(i)
3(a)(29) 3(a)(29) citing 18a- citing 18a- citing 18a-
5(a)(16) 5(a)(16) 5(b)(12)
Compliance with business conduct requirements................... .............. 17a-4(b)(1) 17a-4(b)(1) 17a-4(b)(1) 18a-6 18a-6 18a-6 18a-6
citing citing citing (b)(1)(i) (b)(1)(i) (b)(2)(i) (b)(1)(i)
17a[dash]3(a)( 17a[dash]3(a)( 17a[dash]3(a)( citing 18a- citing 18a- citing 18a- citing 18a-
30) 30) 30) 5(a)(17) 5(a)(17) 5(b)(13) 5(a)(17)
Bank records.................................................... .............. .............. .............. .............. 18a-6 18a-6 .............. 18a-6
(b)(1)(ii) (b)(1)(ii) (b)(1)(ii)
Bills........................................................... .............. .............. .............. .............. 18a-6 18a-6 .............. 18a-6
(b)(1)(iii) (b)(1)(iii) (b)(1)(iii)
Communications.................................................. 17a-4(b)(4)* 17a-4(b)(4)* 17a-4(b)(4)* 17a-4(b)(4)* 18a-6 18a-6 18a-6 18a-6
(b)(1)(iv) (b)(1)(iv) (b)(2)(ii) (b)(1)(iv)
Trial balances.................................................. .............. .............. .............. .............. 18a-6 18a-6 .............. 18a-6
(b)(1)(v) (b)(1)(v) (b)(1)(v)
Account documents............................................... .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(b)(1)(vi) (b)(1)(vi) (b)(2)(iii) (b)(1)(vi)
Written agreements.............................................. 17a-4(b)(7)* 17a-4(b)(7)* 17a-4(b)(7)* 17a-4(b)(7)* 18a-6 18a-6 18a-6 18a-6
(b)(1)(vii) (b)(1)(vii) (b)(2)(iv) (b)(1)(vii)
Information supporting financial reports........................ 17a-4(b)(8)* 17a-4(b)(8)* 17a-4(b)(8)* 17a-4(b)(8)* 18a-6 18a-6 18a-6 18a-6
(b)(1)(viii) (b)(1)(viii) (b)(2)(v) (b)(1)(viii)
Rule 15c3-4 risk management records (OTC derivatives dealers .............. .............. .............. .............. 18a-6 18a-6 .............. 18a-6
only).......................................................... (b)(1)(ix) (b)(1)(ix) (b)(1)(ix)
Credit risk determinations...................................... .............. .............. .............. .............. .............. 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 18a-6 18a-6 18a-6
(b)(1)(xi) (b)(1)(xi) (b)(2)(vi) (b)(1)(xi)
Records relating to business conduct standards.................. .............. 17a-4(b)(15) 17a-4(b)(15) 17a-4(b)(15) 18a-6 18a-6 18a-6 18a-6
(b)(1)(xii) (b)(1)(xii) (b)(2)(vii) (b)(1)(xii)
Special entity documents........................................ .............. 17a-4(b)(16) 17a-4(b)(16) 17a-4(b)(16) 18a-6 18a-6 18a-6 18a-6
(b)(1)(xiii) (b)(1)(xiii) (b)(2)(viii) (b)(1)(xiii)
Associated person's employment application...................... .............. .............. .............. .............. 18a-6(d)(1) 18a-6(d)(1) 18a-6(d)(1) 18a-6(d)(1)
Regulatory authority reports.................................... .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(d)(2)(i) (d)(2)(i) (d)(2)(ii) (d)(2)(i)
Compliance, supervisory, and procedures manuals................. .............. .............. .............. .............. 18a-6 18a-6 18a-6 18a-6
(d)(3)(i) (d)(3)(i) (d)(3)(ii) (d)(3)(i)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Commission is amending these pre-existing paragraphs of Rule 17a-4 to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.
3. Amendments to Rule 17a-5 and New Rule 18a-7
Rule 17a-5, the broker-dealer reporting rule, requires, among other
things, that broker-dealers file periodic unaudited reports about their
financial and operational condition using the FOCUS Report form; and
that broker-dealers annually file financial statements and certain
reports, as well as reports covering those statements and reports
prepared by an independent public accountant registered with the PCAOB,
in accordance with PCAOB standards.
Rule 17a-5 is being amended to account for the security-based swap
activities of entities subject to its requirements and new Rule 18a-7--
which is modeled on Rule 17a-5; is being adopted to establish reporting
requirements for SBSDs and MSBSPs that will not be subject to Rule 17a-
5.\576\ A stand-alone broker-dealer, including a stand-alone OTC
derivatives dealer, will continue to be subject to Rule 17a-5.\577\
Similarly, a broker-dealer, other than an
[[Page 68606]]
OTC derivatives dealer, that is also an SBSD will be subject to Rule
17a-5. A broker-dealer, including an OTC derivatives dealer, that is
also an MSBSP will be subject to Rule 17a-5. A stand-alone SBSD will be
subject to Rule 18a-7. Similarly, an SBSD that is also an OTC
derivatives dealer will be subject to Rule 18a-7. A stand-alone MSBSP
will be subject to Rule 18a-7. Finally, a bank SBSD or MSBSP will be
subject to Rule 18a-7.
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\576\ See section II.B.3.a. of this release (discussing the
requirement to file annual reports and the qualifications of
independent public accountants).
\577\ Paragraph (p) of Rule 17a-5 provides that an OTC
derivatives dealer may comply with Rule 17a-5 by complying with the
provisions of Rule 17a-12.
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4. Amendments to Rule 17a-11 and New Rule 18a-8
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. The Commission is amending Rule 17a-11 to account for the
security-based swap activities of broker-dealers.\578\ The Commission
is adopting new Rule 18a-8--which is modeled on Rule 17a-11, as
amended--to establish notification requirements for stand-alone SBSDs
and MSBSPs, and bank SBSDs and MSBSPs.\579\ The amendments to Rule 17a-
11 and new Rule 18a-8 establish a number of new collections of
information, as summarized in the table below.
---------------------------------------------------------------------------
\578\ See paragraph (f) of Rule 17a-11, as amended.
\579\ See Rule 18a-8, as adopted.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-SBSD/ Non-model Model Non-model
MSBSP broker- broker-dealer ANC broker- Broker-dealer stand[dash]alone stand-alone Bank SBSDs Stand-alone
dealers SBSDs dealer SBSDs MSBSPs SBSDs SBSDs MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net capital below minimum..................................... .............. .............. .............. .............. 18a-8 18a-8 .............. ..............
(a)(1)(i) (a)(1)(i)
Tentative net capital below minimum........................... .............. .............. .............. .............. 18a-8 .............. .............. ..............
(a)(1)(ii)
Tangible net worth below minimum.............................. .............. .............. .............. .............. ................ .............. .............. 18a-8
(a)(2)
Early warning of net capital.................................. .............. .............. .............. .............. 18a-8(b)(1) 18a-8(b)(1) .............. ..............
Early warning of tentative net capital........................ .............. .............. .............. .............. 18a-8 .............. .............. ..............
(b)(2)
Early warning of tangible net worth........................... .............. .............. .............. .............. ................ .............. .............. 18a-8(b)(3)
Backtesting exception......................................... .............. .............. .............. .............. 18a-8(b)(4) .............. .............. ..............
Notice of adjustment of reported capital category............. .............. .............. .............. .............. ................ .............. 18a-8(c) ..............
Failure to make and keep current books and records............ .............. .............. .............. .............. 18a-8(d) 18a-8(d) 18a-8(d) 18a-8(d)
Material weakness............................................. .............. .............. .............. .............. 18a-8(e) 18a-8(e) .............. ..............
Failure to make a required special reserve deposit............ 17a-11(f) 17a-11(f) 17a-11(f) .............. 18a-8(g) 18a-8(g) 18a-8(g) ..............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5. Amendments to Rule 17a-12
The amendments to Rule 17a-12, the OTC derivatives dealer reporting
rule,\580\ require OTC derivatives dealers to file FOCUS Report Part
II, as amended, instead of FOCUS Report Part IIB by replacing the
phrase ``Part II'' with the phrase ``Part IIB'' each time it appears in
the rule.\581\
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\580\ OTC derivatives dealers dually registered as SBSDs are
subject to the reporting requirements of Rule 18a-7.
\581\ OTC derivatives dealers dually registered as SBSDs or
MSBSPs will also file FOCUS Report Part II.
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6. New Rule 18a-9
The Commission is adopting new Rule 18a-9, which is modeled on Rule
17a-13, to 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. Rule 18a-9 does not include a parallel requirement
for every requirement in Rule 17a-13.\582\ In addition, Rule 18a-9 does
not apply to stand-alone MSBSPs because the customer protection
rationale for Rules 17a-13 and 18a-9 is not as pertinent to stand-alone
MSBSPs.
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\582\ The Commission is not including in Rule 18a-9, as adopted,
provisions that would parallel the provisions in paragraphs (a)(1),
(2), and (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. The Commission believes that SBSDs will not limit
their activities to the types of activities in which the exempt
broker-dealers engage.
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7. Amendments to Rule 18a-10
Rule 18a-10 permits certain SBSDs that are registered as swap
dealers and that predominantly engage in a swaps business to elect to
comply with the capital, margin, and segregation requirements of the
CEA and the CFTC's rules in lieu of complying with the capital, margin,
and segregation requirements of Rules 18a-1, 18a-3, and 18a-4.\583\ The
Commission is amending Rule 18a-10 to permit firms that will operate
under the rule to elect to comply with the recordkeeping and reporting
requirements of the CEA and the CFTC's rules in lieu of complying with
Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.\584\
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\583\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43943-46.
\584\ See Rule 18a-10, as amended.
---------------------------------------------------------------------------
As discussed above, 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 of
the notice. Stand-alone and bank SBSDs and MSBSPs are subject to Rule
18a-8, which is modeled on Rule 17a-11 and is designed to provide the
Commission with the ability to take effective proactive steps to
respond when a firm is experiencing or likely to experience financial
difficulty.\585\ A stand-alone SBSD operating under Rule 18a-10,
however, may comply with the notification requirements of the CFTC's
rules in lieu of complying with Rule 18a-8. In order to retain a
requirement that the SBSD provide notice to the Commission if it is
experiencing or likely to experience financial difficulty, the
Commission is
[[Page 68607]]
adding paragraph (b)(4) to Rule 18a-10. This paragraph provides that
the SBSD must simultaneously notify the Commission if the firm is
required to send a notice concerning its capital, books and records,
liquidity, margin operations, or segregation operations to the CFTC by
transmitting to the Commission a copy of the notice being sent to the
CFTC.\586\
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\585\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247.
\586\ See paragraph (b)(4) of Rule 18a-10, as amended.
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8. Amendments to Rule 3a71-6
In May 2016, the Commission adopted Rule 3a71-6 to provide that
foreign SBSDs and MSBSPs could satisfy applicable business conduct
requirements under Section 15F by complying with comparable regulatory
requirements of a foreign jurisdiction, subject to certain conditions.
The Commission is amending Rule 3a71-6 to provide foreign SBSDs and
MSBSPs with the option to apply for substituted compliance to satisfy
the recordkeeping and reporting requirements of Section 15F of the
Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9
thereunder.\587\
---------------------------------------------------------------------------
\587\ See paragraph (d)(6) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------
B. Use of Information
Rules 17a-3 and 17a-4, as amended, and new Rules 18a-5 and 18a-6
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.\588\ Thus, the collections of information under the
amendments to Rules 17a-3 and 17a-4, and new Rules 18a-5 and 18a-6, are
expected to facilitate the examinations of broker-dealers, SBSDs, and
MSBSPs.
---------------------------------------------------------------------------
\588\ See, e.g., Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, 66 FR at 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)).
---------------------------------------------------------------------------
Rules 17a-5, 17a-11, 17a-12, and 18a-10, as amended, and new Rules
18a-7 and 18a-8 are designed to promote compliance with the financial
responsibility requirements for broker-dealers, SBSDs, and MSBSPs,
facilitate regulators' oversight and examinations of such firms, and
promote transparency of their financial condition and operation.
Rule 18a-9 is designed to promote an SBSD's custody of securities
and accurate accounting for securities.
The Commission plans to use the information collected pursuant to
Rule 3a71-6, as amended, to evaluate requests for substituted
compliance determinations with respect to the recordkeeping and
reporting requirements applicable to foreign SBSDs and MSBSPs.
C. Respondents
The Commission estimated the number of respondents in the proposing
release. The Commission received no comment on these estimates and
continues to believe they are appropriate. However, the Commission is
updating its estimated number of broker-dealers to reflect the number
of broker-dealers registered with the Commission as of December 31,
2018 (instead of April 1, 2013 as reflected in the proposing release),
and is revising the number of respondents with respect to certain
rules, as discussed below, to reflect the amendments to Rule 18a-10.
The following chart summarizes the Commission's estimated number of
respondents:
[GRAPHIC] [TIFF OMITTED] TR16DE19.000
Consistent with prior releases, based on available data regarding
the single-name CDS 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.\589\ 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.
---------------------------------------------------------------------------
\589\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR at 48990. 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 at 30727.
---------------------------------------------------------------------------
The Commission estimates there will be one broker-dealer FCM MSBSP
for the purposes of calculating PRA
[[Page 68608]]
burdens, in recognition that broker-dealer MSBSPs and stand-alone
MSBSPs are subject to different burdens under the new and amended rules
in certain instances.\590\ However, 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,\591\ but not in the business of effecting
security-based swap transactions \592\ or commodities, securities
futures products, or swaps \593\ and yet involved in enough security-
based swap transactions to be required to register as an MSBSP.\594\
---------------------------------------------------------------------------
\590\ 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 at 65814.
\591\ See Section 3(a)(4) of the Exchange Act.
\592\ See Section 3(a)(71) of the Exchange Act.
\593\ See 7 U.S.C. 1a(28).
\594\ See Section 3(a)(67) of the Exchange Act.
---------------------------------------------------------------------------
Consistent with prior releases, the Commission estimates that 50 or
fewer entities ultimately may be required to register with the
Commission as SBSDs, and 16 broker-dealers will likely seek to register
as SBSDs.\595\ The Commission believes that all 16 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.\596\
---------------------------------------------------------------------------
\595\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43959; Recordkeeping and Reporting Proposing Release, 79 FR at
25260.
\596\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR at 79002.
---------------------------------------------------------------------------
Because many of the dealers that currently engage in OTC
derivatives activities are banks, the Commission estimates that
approximately 75% of the 34 non-broker-dealer SBSDs will register as
bank SBSDs (i.e., 25 firms), and the remaining 25% will register as
stand-alone SBSDs (i.e., 9 firms).\597\ The Commission believes that
none of the bank SBSDS will register as FCMs, because of the burden
associated with complying with three different supervisors' regulatory
requirements.\598\ However, the Commission cannot precisely estimate
how many of the nine stand-alone SBSDs will register as FCMs. The
Commission anticipates that entities that want to clear security-based
swaps for others may also want to clear swaps for others and,
therefore, may need to register as FCMs.\599\ The Commission also
anticipates that some stand-alone SBSDs that deal in non-cleared
security-based swaps will generally seek exemption from the omnibus
segregation requirements in Rule 18a-4. In order to qualify for the
exemption, these firms cannot clear security-based swap transactions
for others. The Commission believes that stand-alone SBSDs that seek
this exemption and thus will not clear security-based swaps for others
likely also would not clear swaps for others, which obviates the need
for these SBSDs to register as an FCM.\600\ For purposes of developing
paperwork burden estimates in connection with the recently adopted
capital, margin, and segregation requirements, the Commission estimated
six of nine stand-alone SBSDs would avail themselves of the exemption
under paragraph (f) of Rule 18a-4.\601\ Consistent with that estimate,
the Commission estimates that the remaining three of the nine stand-
alone SBSDs will also be registered as FCMs.
---------------------------------------------------------------------------
\597\ The Commission does not anticipate that any firms will be
dually registered as a broker-dealer and a bank.
\598\ The Commission understands that affiliates of banks
(rather than banks) register as FCMs.
\599\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR at 79002.
\600\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44025.
\601\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43959.
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Of the nine stand-alone SBSDs, the Commission estimates that, based
on its experience with ANC broker-dealers and OTC derivatives dealers,
four of the nine stand-alone SBSDs will apply to operate as stand-alone
SBSDs which will use internal models to compute net capital under Rule
18a-1.\602\ This estimate has been reduced from six in the proposing
release \603\ to account for the adoption of Rule 18a-10, which will
enable stand-alone SBSDs to elect the full alternative compliance
mechanism and comply with certain CFTC rules in lieu of Commission
rules, including recordkeeping and reporting rules. Finally, in the
proposing release, the Commission estimated that three stand-alone
SBSDs would not apply to use models.\604\ This estimate has been
modified from three to two in the final release to account for the
nonbank SBSDs that will elect the full alternative compliance mechanism
under Rule 18a-10.
---------------------------------------------------------------------------
\602\ 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.
\603\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25260.
\604\ See id.
---------------------------------------------------------------------------
Of the 16 broker-dealer FCM SBSDs, the Commission estimates that
ten firms will operate as ANC broker-dealer SBSDs, which use internal
models to compute net capital under Rule 15c3-1.\605\
---------------------------------------------------------------------------
\605\ Currently, 5 broker-dealers are registered as ANC broker-
dealers. The Commission has previously estimated that all current
and future ANC broker-dealers will also register as SBSDs. See
Recordkeeping and Reporting Proposing Release; Capital Rule for
Certain Security-Based Swap Dealers, 79 FR at 25261.
---------------------------------------------------------------------------
As of December 31, 2018, there were 3,764 broker-dealers registered
with the Commission. The Commission estimates that 25 registered
broker-dealers will be engaged in security-based swap activities but
will 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.\606\ 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.\607\
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. The existing financial responsibility
requirements make it more costly to conduct these activities in a
broker-dealer than in an unregulated entity. As a result, security-
based swap activities are mostly concentrated in affiliates of broker-
dealers, not broker-dealers themselves.\608\
---------------------------------------------------------------------------
\606\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43960; Recordkeeping and Reporting Proposing Release, 79 FR at
25261.
\607\ See Section 761 of the Dodd-Frank Act (amending definition
of ``security'' in Section 3 of the Exchange Act).
\608\ See International Swaps and Derivatives Association
(``ISDA''), Margin Survey 2015 (Aug. 2015) (``ISDA Margin Survey
2015''), available at http://www2.isda.org/attachment/Nzc4MQ==/Margin%20survey%202015%20FINAL.pdf. The ISDA Margin Survey is
conducted annually to examine the state of collateral use and
management among derivatives dealers and end-users. The appendix to
the survey lists firms that responded to the survey, including
broker-dealers. See id.
---------------------------------------------------------------------------
Finally, for purposes of estimating the number of respondents with
respect to the amendments to Rule 3a71-6, applications for substituted
compliance may be filed by foreign financial authorities, or by non-
U.S. SBSDs or
[[Page 68609]]
MSBSPs. Consistent with prior estimates, the Commission staff expects
that there may be approximately 22 non-U.S. entities that may
potentially register as SBSDs.\609\ Potentially, all such non-U.S.
SBSDs, or some subset thereof, may seek to rely on substituted
compliance in connection with the requirements adopted in this
document.\610\ For purposes of this PRA, however, consistent with prior
estimates, the Commission estimates that three of these security-based
swap entities will submit such applications in connection with the
Commission's recordkeeping, reporting, and notification
requirements.\611\
---------------------------------------------------------------------------
\609\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39832.
\610\ It is possible that some subset of MSBSPs will be non-U.S.
MSBSPs and seek to rely on substituted compliance. See Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
81 FR at 39832.
\611\ See id. at 38392.
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D. Total Initial and Annual Recordkeeping and Reporting Burden
1. Amendments to Rule 17a-3 and New Rule 18a-5
The amendments to Rule 17a-3 and new Rule 18a-5 will impose
collection of information requirements that result in initial and
annual burdens for broker-dealers, SBSDs, and MSBSPs. The Commission
estimates that these amendments to Rule 17a-3 will impose the following
initial and annual burdens: \612\
---------------------------------------------------------------------------
\612\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii),
(a)(7)(ii), (a)(8)(ii), (a)(9)(iv), and (a)(25) through (30) of Rule
17a-3, as amended.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
New security-based swap records. Per firm: 70 hours Per firm: 42
Industry: 2,940 hours.
hours.. Industry: 1,764
hours.
New burdens applicable to broker- Per firm: 60 hours Per firm: 75
dealer SBSDs and MSBSPs.. Industry: 1,020 hours.
hours.. Industry: 1,275
hours.
New burdens applicable to broker- Per firm: 20 hours Per firm: 25
dealer SBSDs. Industry: 320 hours.
hours.. Industry: 400
hours.
---------------------------------------
Total--Amendments to Rule Industry: 4,280 Industry: 3,439
17a-3. hours.. hours.
------------------------------------------------------------------------
The Commission estimates that new Rule 18a-5 will impose the
following initial and annual burdens: \613\
---------------------------------------------------------------------------
\613\ See paragraphs (a)(1) through (10) and (12) through (17)
and (b)(1) through (13) of Rule 18a-5, as adopted.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Burdens applicable to stand- Per firm: 260 Per firm: 325
alone SBSDs and MSBSPs. hours and $1,000. hours and $4,650.
Industry: 2,600 Industry: 3,250
hours and $10,000. hours and
$46,500.
Burdens applicable to stand- Per firm: 60 hours Per firm: 75
alone SBSDs. Industry: 360 hours.
hours. Industry: 450
hours.
Burdens applicable to bank SBSDs Per firm: 200 Per firm: 250
and MSBSPs. hours. hours.
Industry: 5,000 Industry: 6,250
hours. hours.
Burdens applicable to bank SBSDs Per firm: 60 hours Per firm: 75
Industry: 1,500 hours.
hours. Industry: 1,875
hours.
---------------------------------------
Total--New Rule 18a-5....... Industry: 9,460 Industry: 11,825
hours and $10,000. hours and
$46,500.
------------------------------------------------------------------------
Estimated Hours and Costs of Amendments to Rule 17a-3
In the proposing release, the Commission estimated that many of the
amendments to Rule 17a-3 are not expected to impose an initial
burden.\614\ The Commission received no comment on these estimates and
continues to believe they are appropriate.
---------------------------------------------------------------------------
\614\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25262-63.
---------------------------------------------------------------------------
The Commission is amending Rule 17a-3 to require broker-dealers to
make and keep current various records for security-based swaps.\615\
The Commission estimates that these amendments will impose on each
broker-dealer that engages in security-based swap activities an initial
burden of 70 hours and an ongoing burden of approximately ten minutes
per business day, or 42 hours per year.\616\ The Commission estimates
that there are 42 respondents.\617\ Thus, the Commission estimates that
the amendments will add to the industry an estimated initial burden of
2,940 hours \618\ and an ongoing burden of 1,764 hours per year.\619\
---------------------------------------------------------------------------
\615\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii),
(a)(7)(ii), (a)(8)(ii), (a)(9)(iv), and (a)(26) and (27) of Rule
17a-3, as amended.
\616\ (10 minutes per business day / 60 minutes per hour) x 251
business days per year = 42 hours per year. There were 251 business
days in 2018.
\617\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 stand-
alone broker-dealers engaged in security-based swap activities = 42
broker-dealers engaged in security-based swap activities.
\618\ 70 hours per year x 42 broker-dealers engaged in security-
based swap activities = 2,940 hours per year. These internal hours
likely will be performed by a compliance manager.
\619\ 42 hours per year x 42 broker-dealers engaged in security-
based swap activities = 1,764 hours per year. These internal hours
likely will be performed by a compliance clerk.
---------------------------------------------------------------------------
The amendments to Rule 17a-3 require three additional types of
records to be made and kept current by broker-dealer SBSDs and
MSBSPs.\620\ Because the burden to run the applicable calculation or
comply with the
[[Page 68610]]
applicable standard is accounted for in the PRA estimates for Rules
18a-3, 15Fi-2, 15Fh-1 through 15Fh-5, and 15Fk-1,\621\ 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 amended,
will impose an initial burden of 60 hours per firm and an ongoing
annual burden of 75 hours per firm. The Commission estimates that there
are 17 respondents (16 broker-dealer SBSDs and 1 broker-dealer MSBSP),
adding to the industry an initial burden of 1,020 hours \622\ and an
ongoing burden of 1,275 hours per year.\623\
---------------------------------------------------------------------------
\620\ See paragraphs (a)(25), (28), and (30) of Rule 17a-3, as
amended (adopting recordkeeping requirements for Rule 18a-3
calculations, unverified transactions, and compliance with business
conduct requirements, respectively).
\621\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43963; Trade Acknowledgment and Verification of Security-Based
Swap Transactions, 81 FR at 39807; Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR at 42443-48.
\622\ 60 hours x 17 broker-dealer SBSDs and MSBSPs = 1,020
hours. These internal hours likely will be performed by a compliance
manager.
\623\ 75 hours per year x 17 broker-dealer SBSDs and MSBSPs =
1,275 hours per year. These internal hours likely will be performed
by a compliance clerk.
---------------------------------------------------------------------------
The amendments to Rule 17a-3 require one additional type of record
to be made and kept current by broker-dealer SBSDs.\624\ Because the
burden to run the applicable calculation or comply with the applicable
standard is accounted for in the PRA estimate for Rule 15Fh-6,\625\ the
burden imposed by this requirement is the requirement to make and keep
current a written record of these tasks. The Commission estimates that
new paragraph (a)(29) of Rule 17a-3 will impose an initial burden of 20
hours per firm and an ongoing annual burden of 25 hours per firm. The
Commission estimates that there are 16 broker-dealer SBSDs, adding to
the industry an initial burden of 320 hours \626\ and an ongoing burden
of 400 hours per year.\627\
---------------------------------------------------------------------------
\624\ See paragraph (a)(29) of Rule 17a-3, as amended (political
contributions).
\625\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
\626\ 20 hours x 16 broker-dealer SBSDs = 320 hours. These
internal hours likely will be performed by a compliance manager.
\627\ 25 hours per year x 16 broker-dealer SBSDs = 400 hours per
year. These internal hours likely will be performed by a compliance
clerk.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for the amendments to Rule 17a-3. However, the
estimated initial burden for Rule 17a-3 is increased to reflect that
the requirements to make and keep possession or control and special
reserve account computation records now apply to all broker-dealers
engaged in security-based swap activities (instead of just broker-
dealer SBSDs).\628\ Other than this change, the Commission continues to
believe its hour and cost burden estimates for the amendments to Rule
17a-3 are appropriate.
---------------------------------------------------------------------------
\628\ See Rule 17a-3, as amended (paragraph (a)(26) (compliance
with Rule 15c3-3(p) possession or control requirements); paragraph
(a)(27) (Rule 15c3-3(p) reserve account computations)).
---------------------------------------------------------------------------
Estimated Hours and Costs of New Rule 18a-5
The Commission estimates that new Rule 18a-5 will cause a stand-
alone SBSD or 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 10 respondents (6
stand-alone SBSDs and 4 stand-alone MSBSPs), resulting in an estimated
industry-wide initial burden of $10,000 \629\ and an industry-wide
ongoing burden of $46,500 per year.\630\
---------------------------------------------------------------------------
\629\ $1,000 x 10 stand-alone SBSDs and MSBSPs = $10,000.
\630\ $4,650 per year x 10 stand-alone SBSDs and MSBSPs =
$46,500 per year.
---------------------------------------------------------------------------
New Rule 18a-5 is not expected to increase the initial and ongoing
dollar costs that bank SBSDs and MSBSPs incur to purchase recordkeeping
system software and for equipment and systems development. Banks are
already subject to recordkeeping requirements by their prudential
regulators,\631\ so they should already own or have established the
requisite recordkeeping system software. Although bank SBSDs and 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.
---------------------------------------------------------------------------
\631\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR
219.21 through 219.24 (Federal Reserve); 12 CFR 344.4 (FDIC).
---------------------------------------------------------------------------
New Rule 18a-5 requires 13 types of records to be made and kept
current by stand-alone SBSDs and MSBSPs.\632\ New Rule 18a-5 imposes
the burden to make and keep current these records, but does not require
the firm to perform the underlying task.\633\ Therefore, after
consideration of the estimated burdens under Rule 17a-3, as amended,
the Commission estimates that these 13 paragraphs will impose on each
firm an initial burden of 260 hours and an ongoing annual burden of 325
hours. The Commission estimates that there are 10 respondents (6 stand-
alone SBSDs and 4 stand-alone MSBSPs), resulting in an estimated
industry-wide initial burden of 2,600 hours \634\ and an industry-wide
ongoing annual burden of 3,250 hours.\635\
---------------------------------------------------------------------------
\632\ See Rule 18a-5, as adopted (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) (Rule 18a-3
calculations); paragraph (a)(15) (unverified transactions);
paragraph (a)(17) (compliance with business conduct standards)).
\633\ In estimating the burden associated with Rules 18a-5 and
18a-6, as adopted, the Commission recognizes that entities that will
register stand-alone SBSDs and 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 assumes that
these entities currently keep no records when it estimates the PRA
burden for these entities.
\634\ 260 hours x 10 stand-alone SBSDs and MSBSPs = 2,600 hours.
These internal hours likely will be performed by a compliance
manager.
\635\ 325 hours per year x 10 stand-alone SBSDs and MSBSPs =
3,250 hours per year. These internal hours likely will be performed
by a compliance clerk.
---------------------------------------------------------------------------
New Rule 18a-5 requires three types of records to be made and kept
current by stand-alone SBSDs.\636\ Because the burden to run the
applicable calculation or comply with the applicable standard is
accounted for in the PRA estimates for Rules 18a-4 and 15Fh-6,\637\ 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 these three paragraphs will impose an initial burden of 60 hours
per firm and an ongoing annual burden of 75 hours per firm. The
Commission estimates that there are 6 stand-alone SBSDs, resulting in
an industry-wide initial burden of 360 hours \638\ and an industry-wide
ongoing burden of 450 hours per year.\639\
---------------------------------------------------------------------------
\636\ See Rule 18a-5, as adopted (paragraph (a)(13) (compliance
with Rule 18a-4 possession or control requirements); paragraph
(a)(14) (Rule 18a-4 reserve account computations); and paragraph
(a)(16) (political contributions)).
\637\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43964-67; Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
\638\ 60 hours x 6 stand-alone SBSDs = 360 hours. These internal
hours likely will be performed by a compliance manager.
\639\ 75 hours per year x 6 stand-alone SBSDs = 450 hours per
year. These internal hours likely will be performed by a compliance
clerk.
---------------------------------------------------------------------------
New Rule 18a-5 requires ten types of records to be made and kept
current by bank SBSDs and MSBSPs, all of which are limited to the
firm's business as an SBSD or MSBSP.\640\ New Rule 18a-5
[[Page 68611]]
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 amended,
the Commission estimates that these ten paragraphs will 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 there are 25
respondents (25 bank SBSDs and no bank MSBSPs), resulting in an
estimated industry-wide initial burden of 5,000 hours \641\ and an
industry-wide ongoing burden of 6,250 hours per year.\642\
---------------------------------------------------------------------------
\640\ See Rule 18a-5, as adopted (paragraph (b)(1) (trade
blotters); paragraph (b)(2) (ledgers for customer and non-customer
accounts); 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 business conduct
requirements)).
\641\ 200 hours x 25 bank SBSDs = 5,000 hours. These internal
hours likely will be performed by a compliance manager.
\642\ 250 hours per year x 25 bank SBSDs = 6,250 hours per year.
These internal hours likely will be performed by a compliance clerk.
---------------------------------------------------------------------------
New Rule 18a-5 requires 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.\643\ Because the burden to run the applicable calculation
or comply with the applicable standard is accounted for in the PRA
estimates for Rules 18a-4 and 15Fh-6,\644\ 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 these three
paragraphs will impose an initial burden of 60 hours per firm and an
ongoing annual burden of 75 hours per firm. The Commission estimates
that there are 25 bank SBSDs, resulting in an industry-wide initial
burden of 1,500 hours \645\ and an industry-wide ongoing burden of
1,875 hours per year.\646\
---------------------------------------------------------------------------
\643\ See Rule 18a-5, as adopted (paragraph (b)(9) (compliance
with Rule 18a-4 possession or control requirements); paragraph
(b)(10) (Rule 18a-4 reserve account computations); and paragraph
(b)(12) (political contributions)).
\644\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43964-67; Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
\645\ 60 hours x 25 bank SBSDs = 1,500 hours. These internal
hours likely will be performed by a compliance manager.
\646\ 75 hours per year x 25 bank SBSDs = 1,875 hours per year.
These internal hours likely will be performed by a compliance clerk.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for new Rule 18a-5 and continues to believe they are
appropriate.
Estimated Hours and Costs of the Limited Alternative Compliance
Mechanism
As discussed above, the Commission is adopting the limited
alternative compliance mechanism. The registrant's obligation to
preserve these records will continue for the retention period specified
for that category of record as set forth in Rule 17a-4 or Rule 18a-6,
as applicable.
The Commission believes that registrants who choose to use the
limited alternative compliance mechanism will incur lower costs and
hour burdens, especially with respect to initial compliance burdens,
than they would pursuant to the standard compliance requirements.
Indeed, were that not the case, registrants would be unlikely to use
the limited alternative compliance mechanism. However, for purposes of
this Paperwork Reduction Act analysis, the Commission is making the
conservative estimate that no firms will utilize the limited
alternative compliance mechanism.
2. Amendments to Rule 17a-4 and New Rule 18a-6
The amendments to Rule 17a-4 and new Rule 18a-6 impose collection
of information requirements that will result in initial and ongoing
burdens for broker-dealers, SBSDs, MSBSPs, and certain third-party
custodians. The Commission estimates that the amendments to Rule 17a-4
will impose the following initial and annual burdens: \647\
---------------------------------------------------------------------------
\647\ See paragraphs (b)(1) and (4), (b)(8)(v) through (viii)
and (xvi), and (b)(14), (15), and (16) of Rule 17a-4, as amended
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Recorded telephone calls........ Per firm: 13 hours Per firm: 6 hours
Industry: 221 and $2,000.
hours. Industry: 102
hours and
$34,000.
New burdens applicable to all Per firm: 65 hours Per firm: 30 hours
broker-dealers. Industry: 2,730 and $600.
hours. Industry: 1,260
hours and
$25,200.
New burdens applicable to broker- Per firm: 65 hours Per firm: 30 hours
dealer SBSDs and MSBSPs. Industry: 1,105 and $600.
hours. Industry: 510
hours and
$10,200.
New burdens applicable to broker- Per firm: 13 hours Per firm: 6 hours
dealer SBSDs. Industry: 208 and $120.
hours. Industry: 96 hours
and $1,920.
---------------------------------------
Total--Amendments to Rule Industry: 4,264 Industry: 1,968
17a-4. hours. hours and
$40,720.
------------------------------------------------------------------------
The Commission estimates that new Rule 18a-6 will impose the
following initial and annual burdens: \648\
---------------------------------------------------------------------------
\648\ See paragraphs (a)(1) and (2), (b)(1)(i) through (xiii),
(b)(2)(i) through (viii), (c), (d)(1), (d)(2)(i) and (ii), (d)(3)(i)
and (ii), and (f) of Rule 18a-6, as adopted.
------------------------------------------------------------------------
Burden Initial burden Annual 'Burden
------------------------------------------------------------------------
Burdens applicable to stand- Per firm: 364 Per firm: 280
alone SBSDs and MSBSPs. hours. hours and $5,720.
Industry: 3,640 Industry: 2,800
hours. hours and
$57,200.
Burdens applicable to stand- Per firm: 44 hours Per firm: 30 hours
alone SBSDs. Industry: 264 and $360.
hours. Industry: 180
hours and $2,160.
Burdens applicable to model Per firm: 18 hours Per firm: 10 hours
stand-alone SBSDs. Industry: 72 hours and $120.
Industry: 40 hours
and $480.
[[Page 68612]]
Burdens applicable to bank SBSDs Per firm: 247 Per firm: 190
and MSBSPs. hours. hours and $4,520.
Industry: 6,175 Industry: 4,750
hours. hours and
$113,000.
Burdens applicable to bank SBSDs Per firm: 57 hours Per firm: 40 hours
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. Industry: 0 hours. Industry: 35
hours.
---------------------------------------
Total--New Rule 18a-6....... Industry: 11,576 Industry: 8,805
hours. hours and
$184,840.
------------------------------------------------------------------------
Estimated Hours and Costs of Amendments to Rule 17a-4
In the proposing release, the Commission estimated that many of the
amendments to Rule 17a-4 are not expected to impose an initial
burden.\649\ The Commission received no comment on these estimates and
continues to believe they are appropriate.
---------------------------------------------------------------------------
\649\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25266.
---------------------------------------------------------------------------
The Commission is amending Rule 17a-4 to require broker-dealer
SBSDs and MSBSPs to retain telephone calls that are already recorded
and are related to the broker-dealer SBSD's and broker-dealer MSBSP's
business as such.\650\ Because the retention of telephonic recordings
is only required if the broker-dealer SBSD or broker-dealer MSBSP
voluntarily chooses to record, the Commission's burden estimate does
not include the cost of recording phone calls. Therefore, the burdens
imposed by the amendment will be to provide adequate physical space and
computer hardware and software for storage. The Commission estimates
that the amendment will impose an initial burden of 13 hours per firm.
The Commission estimates that there are 17 respondents (16 broker-
dealer SBSDs and 1 broker-dealer MSBSP), resulting in an estimated
industry-wide initial burden of 221 hours.\651\
---------------------------------------------------------------------------
\650\ See paragraph (b)(4) of Rule 17a-4, as amended.
\651\ 13 hours x 17 broker-dealer SBSDs and MSBSPs = 221 hours.
These internal hours likely will be performed by a senior database
administrator.
---------------------------------------------------------------------------
The Commission estimates that each firm will incur an annual burden
of approximately 6 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 17 respondents (16 broker-dealer SBSDs and 1
broker-dealer MSBSP), resulting in an estimated industry-wide ongoing
annual cost of 102 hours \652\ and $34,000.\653\
---------------------------------------------------------------------------
\652\ 6 hours x 17 broker-dealer SBSDs and MSBSPs = 102 hours.
These internal hours likely will be performed by a compliance clerk.
\653\ $2,000 x 17 broker-dealer SBSDs and MSBSPs = $34,000.
---------------------------------------------------------------------------
The amendments to Rule 17a-4 add five types of records to be
preserved by broker-dealers.\654\ Because the burden to create these
records is already accounted for in the PRA estimates for Rule 17a-3,
Rule 15c3-1, or Regulation SBSR,\655\ the Commission estimates that
these amendments will impose an initial burden of 65 hours per firm and
an ongoing annual burden of 30 hours and $600 per firm.\656\ The
Commission estimates that there are 42 respondents--16 broker-dealer
SBSDs, 1 broker-dealer MSBSP, and 25 stand-alone broker-dealers engaged
in security-based swap activities.\657\ Thus, these amendments will add
to the industry an estimated initial burden of 2,730 hours \658\ and an
ongoing annual burden of 1,260 hours \659\ and $25,200.\660\
---------------------------------------------------------------------------
\654\ See Rule 17a-4, as amended (paragraph (b)(1) (cross-
referencing paragraph (a)(26) of Rule 17a-3, as amended (compliance
with possession or control requirements for security-based swap
customers); paragraph (a)(27) of Rule 17a-3, as amended (Rule 18a-4
reserve account computations)); paragraph (b)(8)(v) through (viii)
(identifying information about swaps); paragraph (b)(8)(xvi) (risk
margin calculation); and paragraph (b)(14) (Regulation SBSR
information)).
\655\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3 (Oct.
19, 2016), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68827501; Commission, Supporting Statement
for the Paperwork Reduction Act Information Collection Submission
for Rule 15c3-1 (May 26, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=74206901;
Regulation SBSR--Reporting and Dissemination of Security-Based Swap
Information, 81 FR 53545.
\656\ Unless otherwise noted, the estimates for this rule
consider the burden of providing adequate physical space and
computer hardware and software for storage, preserving these records
for the requisite time period, and producing them when requested.
\657\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 stand-
alone broker-dealers engaged in security-based swap activities = 42
broker-dealers engaged in security-based swap activities.
\658\ 65 hours x 42 respondents = 2,730 hours. These internal
hours likely will be performed by a senior database administrator.
\659\ 30 hours per year x 42 respondents = 1,260 hours per year.
These internal hours likely will be performed by a compliance clerk.
\660\ $600 x 42 respondents = $25,200.
---------------------------------------------------------------------------
The amendments to Rule 17a-4 add five types of records to be
preserved by broker-dealer SBSDs and MSBSPs.\661\ Because the burden to
create these records is accounted for in the PRA estimates for Rule
17a-3 or for Rules 15Fh-1 through 15Fh-5 and 15Fk-1,\662\ the
Commission estimates that these amendments will impose an initial
burden of 65 hours per firm and an ongoing annual burden of 30 hours
and $600 per firm. The Commission estimates that there are 17
respondents (16 broker-dealer SBSDs and 1 broker-dealer MSBSP), adding
to the industry an initial burden of 1,105 hours \663\ and an ongoing
annual burden of 510 hours \664\ and $10,200.\665\
---------------------------------------------------------------------------
\661\ See Rule 17a-4, as amended (paragraph (b)(1), cross-
referencing paragraph (a)(25) of Rule 17a-3, as amended (Rule 18a-3
calculations); paragraph (b)(1), cross-referencing paragraph (a)(28)
of Rule 17a-3, as amended (unverified transactions); paragraph
(b)(1), cross-referencing paragraph (a)(30) of Rule 17a-3, as
amended (compliance with business conduct standards); paragraph
(b)(15) (documents and notices related to the business conduct
standards); and paragraph (b)(16) (special entity documents).
\662\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3;
section IV.D.1. of this release; Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 81 FR at 29959.
\663\ 65 hours x 17 broker-dealer SBSDs and MSBSPs = 1,105
hours. These internal hours likely will be performed by a senior
database administrator.
\664\ 30 hours per year x 17 broker-dealer SBSDs and MSBSPs =
510 hours per year. These internal hours likely will be performed by
a compliance clerk.
\665\ $600 x 17 broker-dealer SBSDs and MSBSPs = $10,200.
---------------------------------------------------------------------------
The amendments to Rule 17a-4 add one type of record to be preserved
by broker-dealer SBSDs.\666\ Because the burden to create this record
is accounted for in the PRA estimate for
[[Page 68613]]
Rule 17a-3, as amended,\667\ the Commission estimates that the
amendment will impose an initial burden of 13 hours per firm and an
ongoing annual burden of 6 hours and $120 per firm. The Commission
estimates that there are 16 broker-dealer SBSDs, adding to the industry
an initial burden of 208 hours,\668\ and an ongoing annual burden of 96
hours \669\ and $1,920.\670\
---------------------------------------------------------------------------
\666\ See paragraph (b)(1) of Rule 17a-4, as amended (cross-
referencing paragraph (a)(29) of Rule 17a-3, as amended (political
contributions)).
\667\ See section IV.D.1. of this release.
\668\ 13 hours x 16 broker-dealer SBSDs = 208 hours. These
internal hours likely will be performed by a senior database
administrator.
\669\ 6 hours per year x 16 broker-dealer SBSDs = 96 hours per
year. These internal hours likely will be performed by a compliance
clerk.
\670\ $120 x 16 broker-dealer SBSDs = $1,920.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for the amendments to Rule 17a-4. However, the
estimated burden for Rule 17a-4 is increased to reflect that the
requirements to make and keep possession or control and special reserve
account computation records now apply to all broker-dealers engaged in
security-based swap activities (instead of just broker-dealer
SBSDs).\671\ Other than this change, the Commission continues to
believe its hour and cost burden estimates for the amendments to Rule
17a-3 are appropriate.
---------------------------------------------------------------------------
\671\ See paragraph (b)(1) of Rule 17a-3, as amended (cross-
referencing paragraph (a)(26) (compliance with Rule 15c3-3(p)
possession or control requirements); paragraph (a)(27) (Rule 15c3-
3(p) reserve account computations)).
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Estimated Hours and Costs of New Rule 18a-6
New Rule 18a-6 requires 27 types of records to be preserved by
stand-alone SBSDs and MSBSPs.\672\ The Commission estimates that the
record preservation requirements applicable to stand-alone SBSDs and
MSBSPs will impose an initial burden of 364 hours \673\ and an ongoing
annual burden of 280 hours and $5,720 per firm. The Commission
estimates that there are 10 respondents (6 stand-alone SBSDs and 4
stand-alone MSBSPs), resulting in an estimated industry-wide initial
burden of 3,640 hours,\674\ and an industry-wide ongoing annual burden
of 2,800 hours \675\ and $57,200.\676\
---------------------------------------------------------------------------
\672\ See Rule 18a-6, as adopted (paragraph (a)(1), cross-
referencing paragraph (a)(1) of Rule 18a-5, as adopted (trade
blotters); paragraph (a)(1), cross-referencing paragraph (a)(2) of
Rule 18a-5, as adopted (general ledgers); paragraph (a)(1), cross-
referencing paragraph (a)(3) of Rule 18a-5, as adopted (ledgers of
customer and non-customer accounts); paragraph (a)(1), cross-
referencing paragraph (a)(4) of Rule 18a-5, as adopted (stock
record); paragraph (b)(1)(i), cross-referencing paragraph (a)(5) of
Rule 18a-5, as adopted (memoranda of proprietary orders); paragraph
(b)(1)(i), cross-referencing paragraph (a)(6) of Rule 18a-5, as
adopted (confirmations); paragraph (b)(1)(i), cross-referencing
paragraph (a)(7) of Rule 18a-5, as adopted (accountholder
information); paragraph (b)(1)(i), cross-referencing paragraph
(a)(8) of Rule 18a-5, as adopted (options positions); paragraph
(b)(1)(i), cross-referencing paragraph (a)(9) of Rule 18a-5, as
adopted (trial balances and computation of net capital); paragraph
(b)(1)(i), cross-referencing paragraph (a)(12) of Rule 18a-5, as
adopted (Rule 18a-3 calculations); paragraph (b)(1)(i), cross-
referencing paragraph (a)(15) of Rule 18a-5, as adopted (unverified
transactions); paragraph (b)(1)(i), cross-referencing paragraph
(a)(17) of Rule 18a-5, as adopted (compliance with 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)). Unless otherwise noted, new Rule 18a-6 does not require
firms to create records or perform the underlying task, so the
estimates for this rule consider the burden of providing adequate
physical space and computer hardware and software for storage,
preserving these records for the requisite time period, and
producing them when requested.
\673\ The Commission believes that any initial dollar cost
associated with Rule 18a-6, as adopted, is already accounted for in
the PRA estimate for Rule 18a-5, as adopted, which includes the cost
of recordkeeping system software.
\674\ 364 hours x 10 stand-alone SBSDs and MSBSPs = 3,640 hours.
These internal hours likely will be performed by a senior database
administrator.
\675\ 280 hours per year x 10 stand-alone SBSDs and MSBSPs =
2,800hours per year. These internal hours likely will be performed
by a compliance clerk.
\676\ $5,720 per year x 10 stand-alone SBSDs and MSBSPs =
$57,200 per year.
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New Rule 18a-6 requires three types of records to be preserved by
stand-alone SBSDs.\677\ The Commission estimates that the relevant
portions of paragraph (b)(1)(i) of new Rule 18a-6 will impose an
initial burden of 44 hours per firm,\678\ and an ongoing annual burden
of 30 hours and $360 per firm. The Commission estimates that there are
6 stand-alone SBSDs, resulting in an industry-wide initial burden of
264 hours \679\ and an industry-wide ongoing annual burden of 180 hours
\680\ and $2,160.\681\
---------------------------------------------------------------------------
\677\ See paragraph (b)(1)(i) of Rule 18a-6, as adopted (cross-
referencing paragraph (a)(13) of Rule 18a-5, as adopted (compliance
with Rule 18a-4 possession or control requirements); paragraph
(a)(14) of Rule 18a-5, as adopted (Rule 18a-4 reserve account
computations); and paragraph (a)(16) of Rule 18a-5, as adopted
(political contributions)). The burden to create these records is
accounted for in the PRA estimate for new Rule 18a-5. See section
IV.D.1. of this release.
\678\ The Commission believes that any initial dollar cost
associated with Rule 18a-6, as adopted, is already accounted for in
the PRA estimate for Rule 18a-5, as adopted, which includes the cost
of recordkeeping system software.
\679\ 44 hours x 6 stand-alone SBSDs = 264 hours. These internal
hours likely will be performed by a senior database administrator.
\680\ 30 hours per year x 6 stand-alone SBSDs = 180 hours per
year. These internal hours likely will be performed by a compliance
clerk.
\681\ $360 per year x 6 stand-alone SBSDs = $2,160 per year.
---------------------------------------------------------------------------
New Rule 18a-6 requires one type of record to be preserved by
stand-alone SBSDs authorized to use models to compute capital.\682\ The
Commission estimates that paragraph (b)(1)(x) will impose an initial
burden of 18 hours \683\ and an ongoing annual burden of ten hours and
$120 per stand-alone SBSD authorized to use models. The Commission
estimates that there are 4 stand-alone SBSDs authorized to use models
to compute capital, resulting in an industry-wide initial burden of 72
hours \684\ and an industry-wide ongoing annual burden of 40 hours
\685\ and $480.\686\
---------------------------------------------------------------------------
\682\ See Rule 18a-6, as adopted (paragraph (b)(1)(x) (credit
risk determinations)). The burden of actually performing the
underlying task and creating the written record is already accounted
for in the PRA estimate for Rule 18a-1. See Capital, Margin, and
Segregation Adopting Release, 84 FR at 43961-63.
\683\ The Commission believes that any initial dollar cost
associated with new Rule 18a-6 is already accounted for in the PRA
estimate for Rule 18a-5, as adopted, which includes the cost of
recordkeeping system software.
\684\ 18 hours x 4 model stand-alone SBSDs = 72 hours. These
internal hours likely will be performed by a senior database
administrator.
\685\ 10 hours per year x 4 model stand-alone SBSDs = 40 hours
per year. These internal hours likely will be performed by a
compliance clerk.
\686\ $120 per year x 4 model stand-alone SBSDs = $480 per year.
---------------------------------------------------------------------------
New Rule 18a-6 requires 18 types of records to be preserved by bank
SBSDs and MSBSPs, all of which are limited to the firm's business as an
SBSD or MSBSP.\687\ After consideration of the
[[Page 68614]]
similar burdens imposed by Rule 17a-4, as amended, the Commission
estimates that new Rule 18a-6 will impose on bank SBSDs and MSBSPs an
initial burden of 247 hours per firm \688\ and an ongoing burden of 190
hours and $4,520 per firm. The Commission estimates that there are 25
respondents (25 bank SBSDs and no bank MSBSPs), resulting in an
estimated industry-wide initial burden of 6,175 hours \689\ and an
industry-wide ongoing annual burden of 4,750 hours \690\ and
$113,000.\691\
---------------------------------------------------------------------------
\687\ See Rule 18a-6, as adopted (paragraph (a)(2), cross-
referencing paragraph (b)(1) of Rule 18a-5, as adopted (trade
blotters); paragraph (a)(2), cross-referencing paragraph (b)(2) of
Rule 18a-5, as adopted (ledgers of security-based swap customers and
non-customers); paragraph (a)(2), cross-referencing paragraph (b)(3)
of Rule 18a-5, as adopted (stock records); paragraph (b)(2)(i),
cross-referencing paragraph (b)(4) of Rule 18a-5, as adopted
(memoranda of brokerage orders); paragraph (b)(2)(i), cross-
referencing paragraph (b)(5) of Rule 18a-5, as adopted (memoranda of
proprietary orders); paragraph (b)(2)(i), cross-referencing
paragraph (b)(6) of Rule 18a-5, as adopted (confirmations);
paragraph (b)(2)(i), cross-referencing paragraph (b)(7) of Rule 18a-
5, as adopted (accountholder information); paragraph (b)(2)(i),
cross-referencing paragraph (b)(11) of Rule 18a-5, as adopted
(unverified transactions); paragraph (b)(2)(i), cross-referencing
paragraph (b)(13) of Rule 18a-5, as adopted (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)).
\688\ The Commission believes that any initial dollar cost
associated with Rule 18a-6, as adopted, is already accounted for in
the PRA estimate for Rule 18a-5, as adopted, which includes the cost
of recordkeeping system software.
\689\ 247 hours x 25 bank SBSDs = 6,175 hours. These internal
hours likely will be performed by a senior database administrator.
\690\ 190 hours per year x 25 bank SBSDs = 4,750 hours per year.
These internal hours likely will be performed by a compliance clerk.
\691\ $4,520 per year x 25 bank SBSDs = $113,000 per year.
---------------------------------------------------------------------------
New Rule 18a-6 requires four types of records to be preserved by
bank SBSDs, all of which are limited to the firm's business as an
SBSD.\692\ The Commission estimates that paragraphs (b)(2)(i) and (v)
of new Rule 18a-6 will impose an initial burden of 57 hours per firm
\693\ and an ongoing annual burden of 40 hours and $480 per firm. The
Commission estimates that there are 25 bank SBSDs, resulting in an
industry-wide initial burden of 1,425 hours \694\ and an industry-wide
ongoing annual burden of 1,000 hours \695\ and $12,000.\696\
---------------------------------------------------------------------------
\692\ See Rule 18a-6, as adopted (paragraph (b)(2)(i), cross-
referencing paragraph (b)(9) (compliance with Rule 18a-4 possession
or control requirements) of Rule 18a-5, as adopted; paragraph
(b)(2)(i), cross-referencing paragraph (b)(10) (Rule 18a-4 reserve
account computations) of Rule 18a-5, as adopted; paragraph
(b)(2)(i), cross-referencing paragraph (b)(12) (political
contributions) of Rule 18a-5, as adopted; and paragraph (b)(2)(v)
(Rule 18a-4 reserve account computations)). The burden to perform
the underlying task or create these records is accounted for in the
PRA estimates for new Rules 18a-4 and 18a-5. See Capital, Margin,
and Segregation Adopting Release, 84FR at 43964-67; section IV.D.1.
of this release.
\693\ The Commission believes that any initial dollar cost
associated with new Rule 18a-6 is already accounted for in the PRA
estimate for Rule 18a-5, as adopted, which includes the cost of
recordkeeping system software.
\694\ 57 hours x 25 bank SBSDs = 1,425 hours. These internal
hours likely will be performed by a compliance manager and a senior
database administrator.
\695\ 40 hours per year x 25 bank SBSDs = 1,000 hours per year.
These internal hours likely will be performed by a compliance clerk.
\696\ $480 per year x 25 bank SBSDs = $12,000 per year.
---------------------------------------------------------------------------
Paragraph (f) of new Rule 18a-6 requires 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.\697\ 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 35 non-broker-dealer SBSDs and non-broker-
dealer MSBSPs will retain a third-party custodian, resulting in
approximately 17.5 written undertakings. The Commission estimates that
paragraph (f) of new Rule 18a-6 will impose an ongoing annual burden of
2 hours per written undertaking, resulting in an industry-wide ongoing
burden of 35 hours per year.\698\
---------------------------------------------------------------------------
\697\ See paragraph (f) of Rule 18a-6, as adopted.
\698\ 2 hours per year x 17.5 written undertakings = 35 hours
per year. These internal hours likely will be performed by an
attorney.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for new Rule 18a-6 and continues to believe they are
appropriate.
3. Amendments to Rule 17a-5 and New Rule 18a-7
The amendments to Rule 17a-5 and new Rule 18a-7 will impose
collection of information requirements that result in annual burdens
for broker-dealers, SBSDs, and MSBSPs. The Commission estimates that
the amendments to Rule 17a-5 will impose the following initial and
annual burdens: \699\
---------------------------------------------------------------------------
\699\ See paragraph (a)(1)(ii) of Rule 17a-5, as amended.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
FOCUS Report Part II (ANC broker- Per firm: 25 hours Per firm: 228
dealer SBSDs). Industry: 250 hours.
hours. Industry: 2,280
hours.
FOCUS Report Part II (non-model Per firm: 50 hours Per firm: 240
broker-dealer SBSDs). Industry: 300 hours.
hours. Industry: 1,440
hours.
FOCUS Report Part II (broker- Per firm: 35 hours Per firm: 204
dealer MSBSPs). Industry: 35 hours hours.
Industry: 204
hours.
FOCUS Report Part II (stand- Per firm: 20 hours Per firm: 120
alone broker-dealers engaged in Industry: 500 hours.
security-based swap activities). hours. Industry: 3,000
hours.
---------------------------------------
Total--Amendments to Rule Industry: 1,085 Industry: 6,924
17a-5. hours. hours.
------------------------------------------------------------------------
The Commission estimates that Rule 18a-7 will impose the following
initial and annual burdens: \700\
---------------------------------------------------------------------------
\700\ See paragraphs (a)(1) through (3), (b), (c), (d), (e),
(f), and (i) of Rule 18a-7, as adopted.
------------------------------------------------------------------------
Burden Initial burden Annual burden
------------------------------------------------------------------------
Additional ANC reports.......... Per firm: 0 hours. Per firm: 120
Industry: 0 hours. hours.
Industry: 480
hours.
Customer statements............. Per firm: 10 hours Per firm: 1 hours.
Industry: 100 Industry: 10
hours. hours.
Annual report (stand-alone SBSDs Per firm: 0 hours. Per firm: 70 hours
not exempt from Rule 18a-4). Industry: 0 hours. and $6.70.
Industry: 0 hours
and $0.
Annual report (stand-alone SBSDs Per firm: 0 hours. Per firm: 17 hours
exempt from Rule 18a-4). Industry: 0 hours. and $6.70.
Industry: 102
hours and $40.2.
[[Page 68615]]
Annual report (stand-alone Per firm: 0 hours. Per firm: 10 hours
MSBSPs). Industry: 0 hours. and $6.70.
Industry: 40 hours
and $26.80.
Statement regarding accountant.. Per firm: 10 hours Per firm: 2 hours
Industry: 100 and 50[cent].
hours. Industry: 20 hours
and $5.00.
Engagement of accountant (stand- Per firm: 0 hours. Per firm:
alone SBSDs not exempt from Industry: 0 hours. $450,000.
Rule 18a-4). Industry: $0.
Engagement of accountant (stand- Per firm: 0 hours. Per firm:
alone SBSDs exempt from Rule Industry: 0 hours. $303,000.
18a-4). Industry:
$1,818,000.
Engagement of accountant (stand- Per firm: 0 hours. Per firm:
alone MSBSPs). Industry: 0 hours. $300,000.
Industry:
$1,200,000.
Notice of change of fiscal year. Per firm: 0 hours. Per firm: 1 hour
Industry: 0 hours. and 50[cent].
Industry: 1 hour
and 50[cent].
FOCUS Report Part II (stand- Per firm: 160 Per firm: 192
alone SBSDs). hours. hours.
Industry: 960 Industry: 1,152
hours. hours.
FOCUS Report Part II (stand- Per firm: 40 hours Per firm: 48
alone MSBSPs). Industry: 160 hours.
hours. Industry: 192
hours.
FOCUS Report Part IIC (bank Per firm: 36 hours Per firm: 16
SBSDs). Industry: 900 hours.
hours. Industry: 400
hours.
---------------------------------------
Total--New Rule 18a-7....... Industry: 2,220 Industry: 2,397
hours. hours and
$3,018,072.5.
------------------------------------------------------------------------
Estimated Hours and Costs of Amendments to Rule 17a-5
In the proposing release, the Commission estimated that many of the
amendments to Rule 17a-5 are not expected to impose an initial
burden.\701\ The Commission received no comment on these estimates and
continues to believe they are appropriate.
---------------------------------------------------------------------------
\701\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25270. The Commission does not estimate a change in the burden
associated with the new lines added to the FOCUS Report, as compared
with Form SBS in the proposing release, because the addition of new
lines is offset by the deletion of other lines, such as the deletion
of lines in the Statement of Income (Loss) or Statement of
Comprehensive Income, as Applicable. In addition, many of the new
lines are not so much new burdens as different burdens, since in the
absence of these new lines, firms would still be required to report
this same information, except that it would be reported on a
different line. For example, in the Statement of Financial
Condition, excess cash collateral pledged on derivative transactions
(Line 6) is currently reported under other assets (Line 15).
---------------------------------------------------------------------------
Paragraph (a)(1)(ii) of Rule 17a-5, as amended, will require
broker-dealer SBSDs and MSBSPs to file FOCUS Report Part II, as
amended, monthly instead of filing the applicable part of the FOCUS
Report quarterly.\702\ Part II, Part IIA, and Part II CSE of the FOCUS
Report each impose a different burden on respondents due to their
varying lengths and calculations, so the burden of filing FOCUS Report
Part II, as amended, depends on which part of the FOCUS Report the firm
is currently required to file.
---------------------------------------------------------------------------
\702\ See paragraph (a)(1)(ii) of Rule 17a-5, as amended.
---------------------------------------------------------------------------
ANC broker-dealer SBSDs will be required to file FOCUS Report Part
II, as amended, instead of FOCUS Report Part II CSE. Although FOCUS
Report Part II, as amended, is modeled on Part II CSE, the burden on
ANC broker-dealer SBSDs will increase, because ANC broker-dealer SBSDs
will be required to complete additional sections and line items
eliciting more detail about their security-based swap and swap
activities.\703\ In consideration of these additional requirements, the
Commission estimates that the requirement for ANC broker-dealer SBSDs
to file FOCUS Report Part II, as amended, every month will add an
initial burden of 25 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 of 250 hours
\704\ and an ongoing burden of 2,280 hours per year.\705\
---------------------------------------------------------------------------
\703\ ANC broker-dealer SBSDs will be required to complete the
following new sections: (1) Computation for Determination of
Security-Based Swap Customer Reserve Requirements; (2) Possession or
Control for Security-Based Swap Customers; (3) Schedule 1--Aggregate
Securities, Commodities, and Swaps Positions; and (4) Schedule 4--
Geographic Distribution of Derivatives Exposures for Ten Largest
Countries.
\704\ 25 hours x 10 ANC broker-dealer SBSDs = 250 hours. These
internal hours likely will be performed by a compliance manager.
\705\ 228 hours per year x 10 ANC broker-dealer SBSDs = 2,280
hours per year. These internal hours likely will be performed by a
compliance manager.
---------------------------------------------------------------------------
Non-model broker-dealer SBSDs will be required to file FOCUS Report
Part II, as amended, instead of Part II or Part IIA of the FOCUS
Report. 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 FOCUS Report Part II, as amended, the burden
on non-model broker-dealer SBSDs will increase (but not as much as for
ANC broker-dealer SBSDs), because non-model broker-dealer SBSDs will be
required to file monthly instead of quarterly and will complete
additional sections and line items eliciting more detail about their
security-based swap and swap activities.\706\ In consideration of these
additional requirements, the Commission estimates that the
[[Page 68616]]
requirement for non-model broker-dealer SBSDs to file FOCUS Report Part
II, as amended, every month will add an initial burden of 50 hours per
firm and an ongoing annual burden of 240 hours per firm. The Commission
estimates that there are 6 non-model broker-dealer SBSDs, adding to the
industry an initial burden of 300 hours \707\ and an ongoing burden of
1,440 hours per year.\708\
---------------------------------------------------------------------------
\706\ Non-model broker-dealer SBSDs will 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 Security-Based
Swap Customer Reserve Requirements; (5) Possession or Control for
Security-Based Swap Customers; (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 will
be required to file the following sections not included on Pre-
Amendment FOCUS Report Part II, but which the CFTC already requires
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)(1)(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 FOCUS Report Part II, as amended.
\707\ 50 hours x 6 non-model broker-dealer SBSDs = 300 hours.
These internal hours likely will be performed by a compliance
manager.
\708\ 240 hours per year x 6 non-model broker-dealer SBSDs =
1,440 hours per year. These internal hours likely will be performed
by a compliance manager.
---------------------------------------------------------------------------
Broker-dealer MSBSPs will be required to file FOCUS Report Part II,
as amended, instead of Part II or Part IIA of the FOCUS Report. 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
FOCUS Report Part II, as amended, the burden on broker-dealer MSBSPs
will increase (but not as much as for broker-dealer SBSDs), because
broker-dealer MSBSPs will be required to file monthly instead of
quarterly and will complete additional sections and line items
eliciting more detail about their security-based swap and swap
activities.\709\ In consideration of these additional requirements, the
Commission estimates that the requirement for broker-dealer MSBSPs to
file FOCUS Report Part II, as amended, every month will add an initial
burden of 35 hours per firm and an ongoing annual burden of 204 hours
per firm. The Commission estimates that there will be one broker-dealer
MSBSP, meaning that the estimated burden on the industry will be the
same as for a single broker-dealer MSBSP.
---------------------------------------------------------------------------
\709\ Broker-dealer MSBSPs will 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; and (4) Schedule 1--Aggregate Securities, Commodities,
and Swaps Positions. In addition, broker-dealer MSBSPs also
registered as FCMs will be required to file the following sections
not included on Pre-Amendment FOCUS Report Part II, but which the
CFTC already requires 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)(1)(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 FOCUS Report Part II, as amended.
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Stand-alone non-model broker-dealers that engage in security-based
swap activities will be required to file FOCUS Report Part II, as
amended, instead of the currently existing FOCUS Report Part II.
Although sections of Part II are also found in FOCUS Report Part II, as
amended, the burden on stand-alone non-model broker-dealers engaged in
security-based swap activities will increase, because stand-alone non-
model broker-dealers will be required to complete additional line items
eliciting more detail about their security-based swap and swap
activities.\710\ In consideration of these additional requirements, the
Commission estimates that the requirement for stand-alone non-model
broker-dealers engaged in security-based swap activities to file FOCUS
Report Part II, as amended, will add an initial burden of 20 hours per
firm and an ongoing annual burden of 120 hours per firm. The Commission
estimates that there are 25 stand-alone non-model broker-dealers
engaged in security-based swap activities, adding to the industry an
initial burden of 500 hours \711\ and an ongoing burden of 3,000 hours
per year.\712\
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\710\ Stand-alone non-model broker-dealers that engage in
security-based swap activities will be required to complete the
following new sections: (1) Computation for Determination of PAB
Requirements; (2) Computation for Determination of Security-Based
Swap Customer Reserve Requirements; (3) Possession or Control for
Security-Based Swap Customers; and (4) Schedule 1--Aggregate
Securities, Commodities, and Swaps Positions. In addition, non-model
broker-dealer SBSDs also registered as FCMs will be required to file
the following sections not included on Pre-Amendment FOCUS Report
Part II, but which the CFTC already requires 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)(1)(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 FOCUS Report Part
II, as amended.
\711\ 20 hours x 25 stand-alone non-model broker-dealers engaged
in security-based swap activities = 500 hours. These internal hours
likely will be performed by a compliance manager.
\712\ 120 hours per year x 25 stand-alone non-model broker-
dealers engaged in security-based swap activities = 3,000 hours per
year. These internal hours likely will be performed by a compliance
manager.
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The Commission received no comments regarding its hour and cost
burden estimates for new Rule 17a-5 and continues to believe they are
appropriate. However, the estimated burden for Rule 17a-5 is decreased
to reflect that stand-alone non-model broker-dealers are no longer
required to complete Schedules 2 through 4 of the FOCUS Report. Other
than this change, the Commission continues to believe its hour and cost
burden estimates for the amendments to Rule 17a-5 are appropriate.
Estimated Hours and Costs of New Rule 18a-7
New Rule 18a-7, which is modeled on Rule 17a-5, as amended, will
require non-broker-dealer SBSDs and non-broker-dealer MSBSPs to satisfy
certain reporting requirements.\713\
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\713\ See Rule 18a-7, as adopted.
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New Rule 18a-7 will require stand-alone SBSDs authorized to use
models to compute capital to periodically file certain additional
reports relating to their use of internal models to calculate net
capital.\714\ 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,\715\ the Commission estimates that paragraph
(a)(3) of new Rule 18a-7 will impose an annual burden of 120 hours per
model stand-alone SBSD. The Commission estimates that there are 4 model
stand-alone SBSDs, resulting in an industry-wide ongoing burden of 480
hours per year.\716\
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\714\ See paragraph (a)(3) of Rule 18a-7, as adopted.
\715\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5 (May 26, 2017),
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=74209001 (4 hours per monthly report x 12
months per year + 8 hours per quarterly report x 4 quarters per year
+ 40 hours per annual report = 120 hours per year).
\716\ 120 hours per year x 4 model stand-alone SBSDs = 480 hours
per year. These internal hours likely would be performed by a
compliance manager.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to
disclose certain financial statements on their
[[Page 68617]]
internet websites.\717\ 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 website,\718\ 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 new Rule 18a-7
will impose an initial burden of ten hours per firm and an annual
burden of one hour per firm. The Commission estimates that there are 10
respondents (6 stand-alone SBSDs and 4 stand-alone MSBSPs), resulting
in an industry-wide initial burden of 100 hours \719\ and an industry-
wide ongoing burden of 10 hours per year.\720\
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\717\ See paragraph (b) of Rule 18a-7, as adopted. The
Commission does not anticipate a dollar cost to establish a website
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 website. 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).
\718\ 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, as amended and paragraph (b) of
Rule 18a-7, as adopted.
\719\ 10 hours x 10 stand-alone SBSDs and MSBSPs = 100 hours.
These internal hours likely would be performed by a compliance
manager.
\720\ 1 hour per year x 10 stand-alone SBSDs and MSBSPs = 10
hours per year. These internal hours likely would be performed by a
compliance clerk.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file
with the Commission an annual report consisting of certain financial
reports, and attach to the financial report an oath or
affirmation.\721\ Based on the Commission staff's experience with the
burden imposed by current Rule 17a-5's annual reports requirement and
related postage costs,\722\ the Commission estimates that paragraphs
(c) and (d) of new Rule 18a-7 will impose on stand-alone MSBSPs an
annual burden of 10 hours and $6.70 per firm. The Commission estimates
that there are 4 stand-alone MSBSPs, resulting in an industry-wide
ongoing burden of 40 hours \723\ and $26.80 per year.\724\ In the
proposing release, the Commission estimated that many of the amendments
to Rule 17a-5 are not expected to impose an initial burden.\725\ The
Commission received no comment on these estimates and continues to
believe they are appropriate.
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\721\ See paragraphs (c) and (d) of Rule 18a-7, as adopted.
\722\ As of May 2018, a priority mail flat rate envelope costs
$6.70, based on costs obtained on the U.S. Postal Service website,
available at www.usps.gov. Firms that file electronically will not
incur this cost.
\723\ 10 hours per year x 4 stand-alone MSBSPs = 40 hours per
year. These internal hours likely would be performed by a senior
accountant.
\724\ $6.70 per year x 4 stand-alone MSBSPs = $26.80 per year.
\725\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25270.
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Stand-alone SBSDs not exempt from Rule 18a-4 will be required to
include a compliance report with their annual reports.\726\ Thus, after
consideration of the Supporting Statement accompanying the most recent
extension of Rule 17a-5, which estimates that each compliance report
takes approximately 60 hours to prepare,\727\ the Commission estimates
that paragraphs (c) and (d) of new Rule 18a-7 will impose an annual
burden of 70 hours and $6.70 per stand-alone SBSD that files a
compliance report. The Commission estimates that there are no stand-
alone SBSDs that will file a compliance report, resulting in an
industry-wide ongoing burden of 0 hours \728\ and $0 per year.\729\
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\726\ See paragraph (c)(1)(i)(B) of Rule 18a-7, as adopted.
\727\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5.
\728\ 70 hours per year x 2 stand-alone SBSDs = 210 hours per
year. These internal hours likely would be performed by a senior
accountant.
\729\ $6.70 per year x 2 stand-alone SBSDs = $20.10 per year.
Firms that file electronically will not incur this cost. As
discussed above, the Commission estimates that of the 9 stand-alone
SBSDs, 6 will avail themselves of the exemption from Rule 18a-4, and
the remaining 3 will be registered as FCMs. The Commission also
believes that the three stand-alone SBSDs that are registered as
FCMs will also elect to avail themselves of the full alternative
compliance mechanism. Consequently, the Commission estimates that
there will be no stand-alone SBSDs not exempt from Rule 18a-4. See
section IV.C of this release.
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Stand-alone SBSDs exempt from Rule 18a-4 will be required to
include an exemption report with their annual reports.\730\ Thus, after
consideration of the Supporting Statement accompanying the most recent
extension of Rule 17a-5, which estimates that each exemption report
takes approximately 7 hours to prepare,\731\ the Commission estimates
that paragraphs (c) and (d) of new Rule 18a-7 will impose an annual
burden of 17 hours and $6.70 per stand-alone SBSD that files an
exemption report. The Commission estimates that there are 6 stand-alone
SBSDs that will file an exemption report, resulting in an industry-wide
ongoing burden of 102 hours \732\ and $40.20 per year.\733\
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\730\ See paragraph (c)(1)(i)(B) of Rule 18a-7, as adopted.
\731\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5.
\732\ 17 hours per year x 6 stand-alone SBSDs = 102 hours per
year. These internal hours likely would be performed by a senior
accountant.
\733\ $6.70 per year x 6 stand-alone SBSDs = $40.20 per year.
Firms that file electronically will not incur this cost.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file a
statement regarding the independent public accountant engaged to audit
the firm's annual reports.\734\ In addition to postage costs, the
Supporting Statement accompanying the most recent extension of Rule
17a-5 estimates that the parallel requirement in Rule 17a-5 will 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 may require renegotiating the carrying
broker-dealer's agreement with its independent public accountant.\735\
Consistent with that Supporting Statement, the Commission estimates
that paragraph (e) of new Rule 18a-7 will impose an initial burden of
ten hours per firm and an annual burden of 2 hours and 50 cents per
firm.\736\ The Commission estimates that there are 10 respondents (6
stand-alone SBSDs and 4 stand-alone MSBSPs), resulting in an industry-
wide initial burden of 100 hours \737\ and an industry-wide ongoing
burden of 20 hours \738\ and $5.00 per year.\739\
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\734\ See paragraph (e) of Rule 18a-7, as adopted.
\735\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5.
\736\ It currently costs 50 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, available at http://pe.usps.com/text/dmm300/Notice123.htm#_c011 (last visited May 10,
2018).
\737\ 10 hours x 13 stand-alone SBSDs and MSBSPs = 130 hours.
These internal hours likely would be performed by a senior
accountant.
\738\ 2 hours per year x 10 stand-alone SBSDs and MSBSPs = 20
hours per year. These internal hours likely would be performed by a
compliance clerk.
\739\ $0.50 per year x 10 stand-alone SBSDs and MSBSPs = $5.00
per year.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to engage
an independent public accountant to provide reports covering the firm's
annual reports.\740\ As discussed above, the Commission is modifying
the provisions of Rule 18a-7 to allow stand-alone SBSDs and MSBSPs, as
well as an SBSD also registered as an OTC derivatives dealer, to engage
an independent public accountant that is not registered with the PCAOB,
and to permit the accountant to use GAAS in the United States or PCAOB
[[Page 68618]]
standards.\741\ The Supporting Statement accompanying the most recent
extension of Rule 17a-5 estimates that it will 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.\742\ Stand-alone MSBSPs are not required to file a compliance
or exemption report, while stand-alone SBSDs will be required to retain
an independent public accountant to review their compliance report (if
they are not exempt from Rule 18a-4) or exemption report (if they are
exempt from Rule 18a-4).
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\740\ See paragraph (f) of Rule 18a-7, as adopted.
\741\ See section II.B.3.a. of this release (discussing the
requirement to file annual reports and the qualifications of
independent public accountants).
\742\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-5.
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Therefore, the Commission estimates that paragraph (f) of new Rule
18a-7 will impose an annual cost of $300,000 on each stand-alone MSBSP.
The Commission estimates that there are 4 stand-alone MSBSPs, resulting
in an industry-wide ongoing burden of $1,200,000 per year.\743\ The
Commission estimates that paragraph (f) of new Rule 18a-7 will impose
on stand-alone SBSDs exempt from Rule 18a-4 an annual cost of $303,000
per firm,\744\ since both their financial statements and exemption
report will need to be audited. The Commission estimates that there are
6 stand-alone SBSDs exempt from Rule 18a-4, resulting in an industry-
wide ongoing burden of $1,818,000 per year.\745\ The Commission
estimates that paragraph (f) of new Rule 18a-7 will impose on stand-
alone SBSDs not exempt from Rule 18a-4 an annual cost of $450,000 per
firm,\746\ since both their financial statements and compliance report
will need to be audited. The Commission estimates that there are no
stand-alone SBSDs not exempt from Rule 18a-4, resulting in an industry-
wide ongoing burden of $0 per year.\747\
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\743\ $300,000 per year x 4 stand-alone MSBSPs = $1,200,000 per
year.
\744\ $300,000 per year (financial statements) + $3,000 per year
(exemption report) = $303,000 per year.
\745\ $303,000 per year x 6 stand-alone SBSDs = $1,818,000 per
year.
\746\ $300,000 per year (financial statements) + $150,000 per
year (compliance report) = $450,000 per year.
\747\ $450,000 per year x 0 stand-alone SBSDs = $0 per year. As
discussed above, the Commission estimates that of the 9 stand-alone
SBSDs, 6 will avail themselves of the exemption from Rule 18a-4, and
the remaining 3 will be registered as FCMs. The Commission also
believes that the three stand-alone SBSDs that are registered as
FCMs will also elect to avail themselves of the full alternative
compliance mechanism. Consequently, the Commission estimates that
there will be no stand-alone SBSDs not exempt from Rule 18a-4. See
section IV.C of this release.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to notify
the Commission of a change in fiscal year.\748\ 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
1 hour to prepare and file with the Commission,\749\ the Commission
estimates that paragraph (i) of new Rule 18a-7 will impose a burden of
1 hour and 50 cents on a firm planning to change its fiscal year. The
Commission estimates that each year, 1 firm will change its fiscal
year, such that the estimated burden on the industry will be 1 hour and
50 cents per year.
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\748\ See paragraph (i) of Rule 18a-7, as adopted.
\749\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-11
(July 24, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=75553601.
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New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file
FOCUS Report Part II, as amended, monthly,\750\ and will require bank
SBSDs and MSBSPs to file new FOCUS Report Part IIC quarterly.\751\
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\750\ See paragraph (a)(1) of Rule 18a-7, as adopted.
\751\ See paragraph (a)(2) of Rule 18a-7, as adopted.
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Stand-alone SBSDs will be required to file FOCUS Report Part II, as
amended, on a monthly basis.\752\ FOCUS Report Part II, as amended,
includes eleven sections and four schedules applicable to stand-alone
SBSDs.\753\ Stand-alone SBSDs dually registered as FCMs will be
required to complete five additional sections, all of which the CFTC
already requires FCMs to file as part of Form 1-FR-FCM.\754\ In
consideration of these additional requirements, the Commission
estimates that the requirement for stand-alone SBSDs to file FOCUS
Report Part II, as amended, every month will 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 6 stand-alone SBSDs,
resulting in an industry-wide initial burden of 960 hours \755\ and an
industry-wide ongoing burden of 1,152 hours per year.\756\
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\752\ See paragraph (a)(1) of Rule 18a-7, as adopted.
\753\ Stand-alone SBSDs will 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 Security-
Based Swap Customer Reserve Requirements; (11) Possession or Control
for Security-Based Swap Customers; (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.
\754\ Stand-alone SBSDs also registered as FCMs will 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 five sections, since the CFTC
already requires FCMs to file these five sections on a monthly basis
(17 CFR 1.10(b)(1)(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 FOCUS Report Part II, as amended.
\755\ 160 hours x 6 stand-alone SBSDs = 960 hours. These
internal hours likely would be performed by a senior compliance
manager.
\756\ 192 hours per year x 6 stand-alone SBSDs = 1,152 hours per
year. These internal hours likely would be performed by a senior
compliance manager.
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Stand-alone MSBSPs will be required to file FOCUS Report Part II,
as amended, on a monthly basis.\757\ FOCUS Report Part II, as amended,
includes three sections and four schedules applicable to stand-alone
MSBSPs.\758\ Stand-alone MSBSPs dually registered as FCMs will be
required to complete five additional sections, all of which the CFTC
already requires FCMs to file as part of Form 1-FR-FCM.\759\ In
[[Page 68619]]
consideration of these additional requirements, the Commission
estimates that the requirement for stand-alone MSBSPs to file FOCUS
Report Part II, as amended, every month will impose an initial burden
of 40 hours per firm and an ongoing annual burden of 48 hours per firm.
The Commission estimates that there are 4 stand-alone MSBSPs, resulting
in an industry-wide initial burden of 160 hours \760\ and an industry-
wide ongoing burden of 192 hours per year.\761\
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\757\ See paragraph (a)(1) of Rule 18a-7, as adopted.
\758\ Stand-alone MSBSPs will 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.
\759\ Stand-alone MSBSPs also registered as FCMs will 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)(1)(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 FOCUS Report Part II, as amended.
\760\ 40 hours x 4 stand-alone MSBSPs = 160 hours. These
internal hours likely will be performed by a senior compliance
manager.
\761\ 48 hours per year x 4 stand-alone MSBSPs = 192 hours per
year. These internal hours likely will be performed by a senior
compliance manager.
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Bank SBSDs will be required to file new FOCUS Report Part IIC on a
quarterly basis.\762\ New FOCUS Report Part IIC includes five sections
and one schedule applicable to bank SBSDs.\763\ The Commission does not
expect new FOCUS Report Part IIC 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 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 will need to transpose
this information from FFIEC Form 031 to FOCUS Report Part IIC).
Although bank SBSDs dually registered as FCMs will be required to
complete five additional sections, the CFTC already requires FCMs to
file these schedules on Form 1-FR-FCM.\764\ In consideration of these
additional requirements, the Commission estimates that the requirement
for bank SBSDs to file FOCUS Report Part IIC quarterly will impose an
initial burden of 36 hours per firm and an ongoing annual burden of 16
hours per firm. The Commission estimates that there are 25 bank SBSDs,
resulting in an industry-wide initial burden of 900 hours \765\ and an
industry-wide ongoing burden of 400 hours per year.\766\
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\762\ See paragraph (a)(2) of Rule 18a-7, as adopted.
\763\ Bank SBSDs will 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 Security-Based Swap Customer
Reserve Requirements; (5) Possession or Control for Security-Based
Swap Customers; and (6) Schedule 1--Aggregate Security-Based Swap
and Swap Positions.
\764\ Bank SBSDs also registered as FCMs will 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)(1)(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 FOCUS Report Part II, as amended.
\765\ 36 hours x 25 bank SBSDs = 900 hours. These internal hours
likely will be performed by a senior compliance manager.
\766\ 16 hours per year x 25 bank SBSDs = 400 hours per year.
These internal hours likely will be performed by a senior compliance
manager.
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Bank MSBSPs will be required to file new FOCUS Report Part IIC on a
quarterly basis.\767\ New FOCUS Report Part IIC includes three sections
and one schedule applicable to bank MSBSPs.\768\ Bank MSBSPs dually
registered as FCMs will be required to complete five additional
sections, all of which the CFTC already requires FCMs to file as part
of Form 1-FR-FCM.\769\ 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.\770\
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\767\ See paragraph (a)(2) of Rule 18a-7, as adopted.
\768\ Bank MSBSPs will 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--Aggregate Security-Based Swap and Swap Positions.
\769\ Bank MSBSPs also registered as FCMs will 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)(1)(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 FOCUS Report Part II, as amended.
\770\ The Commission estimates that the requirement for bank
MSBSPs to file FOCUS Report Part IIC quarterly will impose an
initial burden of 16 hours per firm and an ongoing annual burden of
8 hours per firm.
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The Commission received no comments regarding its hour and cost
burden estimates for new Rule 18a-7 and continues to believe they are
appropriate.
4. Amendments to Rule 17a-11 and New Rule 18a-8
The amendments to Rule 17a-11 and new Rule 18a-8 will impose
collection of information requirements that result in annual burdens
for broker-dealers, SBSDs, MSBSPs, and national securities exchanges
and national securities associations. The Commission estimates that
Rule 17a-11, as amended, will impose the following initial and annual
burdens: \771\
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\771\ See paragraphs (f) and (g) of Rule 17a-11, as amended.
------------------------------------------------------------------------
Burden Annual burden
------------------------------------------------------------------------
New notice of failure to deposit in Rule Per notice: 1 hour.
15c3-3(p) account. Industry: 100 hours.
New notices filed by exchanges and national Per notice: 1 hour.
securities associations. Industry: 5 hours.
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Total--Amendments to Rule 17a-11....... Industry: 105 hours.
------------------------------------------------------------------------
[[Page 68620]]
The Commission estimates that new Rule 18a-8 will impose an annual
burden of 4.6 hours per year.
Estimated Hours and Costs of Amendments to Rule 17a-11
The Commission is adopting paragraph (f) to Rule 17a-11, which will
require broker-dealers engaged in security-based swap activities to
notify the Commission if they fail to make a deposit required under
paragraph (p) of Rule 15c3-3.\772\ Because the burden to calculate the
reserve amount is already accounted for in the PRA estimate for Rule
15c3-3,\773\ the burden imposed by paragraph (f) of Rule 17a-11, as
amended, is the requirement to notify the Commission when the firm
fails to act in accordance with paragraph (p) of Rule 15c3-3. Given the
similarity of this new requirement to the current requirements of Rule
17a-11, the Commission estimates that each required notice will take
one hour to prepare and file.\774\ Based on Commission experience with
the number of notices filed under current Rule 17a-11,\775\ the
Commission estimates that 100 notices will be filed each year under
paragraph (f) of Rule 17a-11, as amended, resulting in an industry-wide
ongoing burden of 100 hours per year.\776\
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\772\ See paragraph (f) of Rule 17a-11, as amended.
\773\ See Capital, Margin, and Segregation Adopting Release,
84FR at 43964-67.
\774\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\775\ See id. (noting that in 2016, the Commission received
approximately 253 notices under Rule 17a-11).
\776\ 100 notices per year x 1 hour per notice = 100 hours per
year. These internal hours likely will be performed by a compliance
manager.
---------------------------------------------------------------------------
The Commission is redesignating current paragraph (f) of Rule 17a-
11 as paragraph (g) and requiring a broker-dealer's national securities
exchange or national securities association 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 as it currently requires).\777\ Thus, these
entities will be subject to new burdens to file a delinquent broker-
dealer's notices under new paragraph (f) (failure to deposit in Rule
15c3-3(p) account). After considering the similar preexisting Rule 17a-
11 requirement, the Commission estimates that each required notice will
take one hour to prepare and file.\778\ Based on Commission experience
with the number of notices currently filed by these entities, the
Commission estimates that five notices will be filed pursuant to the
amendment to paragraph (g) of Rule 17a-11, as amended, resulting in an
estimated industry-wide ongoing burden of five hours per year.\779\
---------------------------------------------------------------------------
\777\ See paragraph (g) of Rule 17a-11, as amended.
\778\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\779\ 5 notices per year x 1 hour per notice = 5 hours per year.
These internal hours likely will be performed by a compliance
manager.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for the amendments to Rule 17a-11 and continues to
believe they are appropriate.
Estimated Hours and Costs of New Rule 18a-8
New Rule 18a-8 will require non-broker-dealer SBSDs and non-broker-
dealer MSBSPs to notify the Commission of certain indicia of their
financial condition.\780\ The Commission estimates that each Rule 18a-8
notice will take approximately 55 minutes to prepare and file, in
contrast to its estimate that a Rule 17a-11 notice will take one hour
to prepare and file,\781\ because stand-alone SBSDs and MSBSPs do not
have a DEA with which to file a copy of the Rule 17a-11 notice and bank
SBSDs and MSBSPs are not required to file the Rule 17a-11 notice with
their prudential regulator.\782\
---------------------------------------------------------------------------
\780\ See Rule 18a-8, as adopted.
\781\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-11.
\782\ Compare paragraph (h) of Rule 17a-11, as amended, with
paragraph (h) of Rule 18a-8, as adopted.
---------------------------------------------------------------------------
The Commission estimates that it will 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 3,582 possible
respondents--3,764 registered broker-dealers, minus approximately 182
broker-dealers registered pursuant to Section 15(b)(11)(A) of the
Exchange Act.\783\ In contrast, the Commission estimates that there
will be 35 non-broker-dealer SBSDs and non-broker-dealer MSBSPs (25
bank SBSDs, 6 stand-alone SBSDs, and 4 stand-alone MSBSPs). Assuming
that each of the 5 Rule 18a-8 notices takes 55 minutes to prepare and
file, the Commission estimates new Rule 18a-8 will result in an
industry-wide ongoing burden of 4.6 hours per year.\784\
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\783\ Rule 17a-11 does not apply to a broker-dealer registered
pursuant to Section 15(b)(11)(A) of the Exchange Act that is not a
member of either a national securities exchange or a national
securities association. See paragraph (j) of Rule 17a-11, as
amended. The Commission estimates that there are approximately 3,582
broker-dealers subject to Rule 17a-11 after consulting with SIPC
(3,764 registered broker-dealers--approximately 182 broker-dealers
registered pursuant to Section 15(b)(11)(A) of the Exchange Act =
3,711 Rule 17a-11 respondents).
\784\ 5 notices per year x (55 minutes per notice / 60 minutes
per hour) = 4.6 hours per year. These internal hours likely will be
performed by a compliance manager.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for new Rule 18a-8 and continues to believe they are
appropriate.
5. Amendments to Rule 17a-12
Rule 17a-12, as amended, will require OTC derivatives dealers to
file FOCUS Report Part II, as amended, instead of FOCUS Report Part
IIB. This is not so much a new burden as a different burden, since in
the absence of this amendment these firms would be required to file
FOCUS Report Part IIB instead. The new lines on FOCUS Report Part II,
as amended, will generally not be applicable to OTC derivatives
dealers. Some new lines on FOCUS Report Part II, as amended, require
similar types of information as FOCUS Report Part IIB, but may be
phrased in a different way.\785\ Other new lines on FOCUS Report Part
II, as amended, may require additional detail regarding information
that was already required to be reported on FOCUS Report Part IIB.\786\
Still other new lines on FOCUS Report Part II, as amended, require
information that the OTC derivative dealers are already required to
calculate pursuant to another Exchange Act rule.\787\ Finally, some new
line items on FOCUS Report Part II, as amended, are not applicable to
OTC derivatives dealers and therefore will not be completed by these
firms.\788\
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\785\ Compare, e.g., FOCUS Report Part IIB, Schedule VI--
Aggregate Securities and Commodities Positions, Line 2 (U.S.
Government agency), with FOCUS Report Part II, as amended, Schedule
1--Aggregate Securities, Commodities, and Swaps Positions, Line 2
(U.S. government agency and U.S. government sponsored enterprises).
\786\ Compare, e.g., FOCUS Report Part IIB, Schedule VI--
Aggregate Securities and Commodities Positions, Line 2 (U.S.
Government agency), with FOCUS Report Part II, as amended, Schedule
1--Aggregate Securities, Commodities, and Swaps Positions, Lines 2A-
2B (requesting a break-out of the portion of U.S. government agency
and U.S. government sponsored enterprises attributable to mortgage-
backed securities and debt securities).
\787\ See, e.g., FOCUS Report Part II, as amended, Computation
of Minimum Regulatory Capital Requirements (Broker-Dealer), Line 9A
(soliciting the filer's net capital in excess of 120% of the firm's
minimum net capital requirement).
\788\ See, e.g., FOCUS Report Part II, as amended, Computation
of Minimum Regulatory Capital Requirements (Non-Broker-Dealer SBSD).
---------------------------------------------------------------------------
Although FOCUS Report Part II, as amended, is partially modeled on
Part
[[Page 68621]]
IIB, the initial burden on OTC derivatives dealers is expected to
increase, so that firms can analyze revised FOCUS Report Part II.
However, once firms have analyzed FOCUS Report Part II, as amended, the
amendments to Rule 17a-12 are not expected to change the estimated
ongoing burden imposed by Rule 17a-12. The Commission estimates that
Rule 17a-12, as amended, will impose on each OTC derivative dealers an
initial burden of 20 hours. The Commission estimates that there are 4
respondents, resulting in an estimated industry-wide initial burden of
80 hours.\789\ The Commission estimates that Rule 17a-12, as amended,
will not change the estimated ongoing burden imposed by Rule 17a-12.
---------------------------------------------------------------------------
\789\ 20 hours x 4 OTC derivatives dealers = 80 hours. These
internal hours likely will be performed by a compliance manager.
---------------------------------------------------------------------------
6. New Rule 18a-9
New Rule 18a-9, which is modeled on Rule 17a-13, will require
stand-alone SBSDs to establish a securities count program.\790\ As
explained below, the Commission estimates that new Rule 18a-9 will
impose an industry-wide initial burden of 225 hours and an industry-
wide ongoing burden of 900 hours per year.
---------------------------------------------------------------------------
\790\ See Rule 18a-9, as adopted.
---------------------------------------------------------------------------
The current approved PRA estimate for Rule 17a-13 estimates a
securities count program imposes an average ongoing cost of 100 hours
per year.\791\ The Commission is using this estimate, and therefore
estimates that new Rule 18a-9 will impose an ongoing annual burden of
100 hours per stand-alone SBSD. The Commission estimates that there are
6 stand-alone SBSDs, resulting in an estimated industry-wide ongoing
burden of 600 hours per year.\792\
---------------------------------------------------------------------------
\791\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-13
(Feb. 28, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=7182940.
\792\ 100 hours per year x 6 stand-alone SBSDs = 600 hours per
year. These internal hours likely will be performed by an operations
specialist.
---------------------------------------------------------------------------
The Commission also estimates that new Rule 18a-9 will impose an
initial burden of 25 hours per firm. The records required by new Rule
18a-9 should already be recorded by the systems implemented under new
Rules 18a-5 and 18a-6, and accordingly, the resulting initial burden is
largely already accounted for under these rules.\793\ However, the
Commission estimates that the initial cost to establish procedures for
conducting the securities count program, including identifying the
persons involved in the program, will create an initial burden of
approximately 25 hours per stand-alone SBSD, or 150 hours for the
estimated 6 stand-alone SBSDs.\794\
---------------------------------------------------------------------------
\793\ However, the Commission assumes that stand-alone SBSDs and
MSBSPs do not currently have a securities count program in place.
\794\ 25 hours x 6 stand-alone SBSDs = 150 hours. These internal
hours likely will be performed by a senior operations manager.
---------------------------------------------------------------------------
The Commission received no comments regarding its hour and cost
burden estimates for new Rule 18a-9 and continues to believe they are
appropriate.
7. Amendments to Rule 18a-10
Rule 18a-10, as amended, contains an alternative compliance
mechanism pursuant to which a stand-alone SBSD that is registered as a
swap dealer and predominantly engages in a swaps business may elect to
comply with the recordkeeping and reporting requirements of the CEA and
the CFTC's rules in lieu of complying with Rules 18a-5, 18a-6, 18a-7,
18a-8, and 18a-9.\795\ The Commission estimates that 3 stand-alone
SBSDs will elect to operate under Rule 18a-10. These respondents were
included in the proposing release in other collections of information
(Rule 18a-5, Rule 18a-6, Rule 18a-7, Rule 18a-8, and Rule 18a-9, as
proposed), and have been moved to the information collection for new
Rule 18a-10.\796\
---------------------------------------------------------------------------
\795\ See Rule 18a-10, as amended.
\796\ See supra section IV.C.
---------------------------------------------------------------------------
The Commission estimates the paperwork burden associated with
transmitting to the Commission a copy of the notice required by
paragraph (b)(4) of Rule 18a-10, as amended, to be 5 minutes for a
stand-alone SBSD operating under Rule 18a-10. The Commission further
estimates that it will receive one notice from a single submitting SBSD
per year. The Commission is basing this estimate on the smaller pool of
possible respondents, as compared with new Rule 18a-8.\797\
---------------------------------------------------------------------------
\797\ See supra section IV.D.4.
---------------------------------------------------------------------------
Assuming that the single Rule 18a-10 notice takes 5 minutes to
transmit to the Commission, the Commission estimates Rule 18a-10, as
amended, will result in an industry-wide ongoing burden of 0.083 hours
per year.\798\
---------------------------------------------------------------------------
\798\ 1 notice per year x (5 minutes per notice / 60 minutes per
hour) = 0.0833 hours per year. These internal hours likely will be
performed by a compliance manager.
---------------------------------------------------------------------------
8. Amendments to Rule 3a71-6
Rule 3a71-6, as amended, will require submission of certain
information to the Commission to the extent foreign SBSDs or MSBSPs
elect to request a substituted compliance determination with respect to
the Title VII recordkeeping and reporting requirements. The Commission
expects that foreign SBSDs and MSBSPs will seek to rely on substituted
compliance upon registration, and that it is likely that the majority
of such requests will be made during the first year following the
effective date of this amendment. Requests will not be necessary with
regard to applicable rules and regulations of a foreign jurisdiction
that have previously been the subject of a substituted compliance
determination in connection with the applicable rules.
The Commission expects that the majority of substituted compliance
applications will be submitted by foreign authorities, and that very
few substituted compliance requests will come from SBSDs or MSBSPs. For
purposes of this assessment, the Commission estimates that three SBSDs
or MSBSPs will submit such applications in connection with the
Commission's recordkeeping and reporting requirements.\799\ After
consideration of the release adopting Rule 3a71-6, the Commission
estimates that the total paperwork burden incurred by such entities
associated with preparing and submitting a request for a substituted
compliance determination in connection with the recordkeeping and
reporting requirements will be approximately 240 hours, plus $240,000
for the services of outside professionals for all 3 requests.\800\
---------------------------------------------------------------------------
\799\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
See also Trade Acknowledgment and Verification of Security-Based
Swap Transactions, 81 FR at 39382; Capital, Margin, and Segregation
Adopting Release, 84 FR at 43960.
\800\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30097
(``The Commission estimates that the total one-time paperwork burden
incurred by such entities associated with preparing and submitting a
request for a substituted compliance determination in connection
with the business conduct requirements will be approximately 240
hours, plus $240,000 for the services of outside professionals for
all three requests''). The Commission further stated that in
practice those amounts may overestimate the costs of requests
pursuant to Rule 3a71-6 as adopted, as such requests would solely
address the business conduct requirements, rather than the broader
proposed scope of substituted compliance set forth in the Cross-
Border Proposing Release. See id. at 30097, n. 1583. To the extent
that an SBSD submits substituted compliance requests in connection
with the business conduct requirements, the trade acknowledgment and
verification requirements, the capital and margin requirements, and
the recordkeeping and reporting requirements, the Commission
believes that the paperwork burden associated with the requests
would be greater than that associated with a narrower request, given
the need for more information regarding the comparability of the
relevant rules and the adequacy of the associated supervision and
enforcement practices. In the Commission's view, however, the burden
associated with such a combined request would not exceed the prior
estimate. See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39833, n. 258.
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[[Page 68622]]
The Commission received no comments regarding its hour and cost
burden estimates for Rule 3a71-6, as amended, and continues to believe
they are appropriate.
E. Collection of Information Is Mandatory
The collections of information pursuant to the rule amendments and
new rules, being adopted, are mandatory, as applicable, for broker-
dealers, SBSDs, MSBSPs, certain third-party custodians, and NSEs and
NSAs. Compliance with the collection of information requirements
associated with Rule 3a71-6, regarding the availability of substituted
compliance, is mandatory for all foreign financial authorities, foreign
SBSDs, or foreign MSBSPs that seek a substituted compliance
determination.
F. Confidentiality
The broker-dealer and stand-alone SBSD and 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.\801\ Subject to certain exceptions,\802\ if there are material
weaknesses, the accountant's report on the compliance report must be
made available for customers' inspection and, consequently, it will not
be deemed confidential.\803\ Subject to certain exceptions,\804\ a
broker-dealer must furnish to its customers its unaudited financial
statements,\805\ 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.\806\
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\801\ See paragraph (e)(3) of Rule 17a-5, as amended; paragraph
(d)(2) of Rule 18a-7, as adopted.
\802\ See paragraph (c)(1)(i) through (iii) of Rule 17a-5, as
amended.
\803\ See paragraph (c)(2)(iv) of Rule 17a-5, as amended.
\804\ See paragraph (c)(1)(i) through (iii) of Rule 17a-5, as
amended.
\805\ See paragraph (c)(3) of Rule 17a-5, as amended.
\806\ See paragraph (c)(2)(i) of Rule 17a-5, as amended.
---------------------------------------------------------------------------
Stand-alone SBSDs and MSBSPs must also make publicly available on
their websites 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.\807\ A stand-alone SBSD will
also be required to disclose on its website 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; \808\ 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.\809\
---------------------------------------------------------------------------
\807\ See paragraph (b) of Rule 18a-7, as adopted.
\808\ See paragraph (b)(1)(ii) of Rule 18a-7, as adopted.
\809\ See paragraphs (b)(1)(iii) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------
The forms that the Commission has adopted for use by applicants for
registration as SBSDs or MSBSPs provides for applicants to notify the
Commission regarding intended reliance on substituted compliance.\810\
The Commission generally will make requests for substituted compliance
determinations public, subject to requests for confidential treatment
being submitted pursuant to any applicable provisions governing
confidentiality under the Exchange Act.\811\
---------------------------------------------------------------------------
\810\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 80 FR at 49049.
\811\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No.
72372 (June 25, 2014, 79 FR 47278, 47359 (Aug. 12, 2014).
---------------------------------------------------------------------------
With respect to the other information collected under the rule
amendments and new rules being adopted, the firm can request the
confidential treatment of the information.\812\ If such a confidential
treatment request is made, the Commission anticipates that it will keep
the information confidential subject to the provisions of applicable
law.\813\
---------------------------------------------------------------------------
\812\ See 17 CFR 200.83. Information regarding requests for
confidential treatment of information submitted to the Commission is
available at http://www.sec.gov/foia/howfo2.htm#privacy.
\813\ 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 amended, specifies the required retention periods
for a broker-dealer.\814\ New Rule 18a-6 specifies the required
retention periods for non-broker-dealer SBSDs and non-broker-dealer
MSBSPs.\815\ Many of the required records must be retained for three
years; certain other records must be retained for longer periods.\816\
---------------------------------------------------------------------------
\814\ See Rule 17a-4, as amended.
\815\ See Rule 18a-6, as adopted.
\816\ See Rule 17a-4, as amended; Rule 18a-6, as adopted.
---------------------------------------------------------------------------
V. Economic Analysis
A. Introduction
The Commission is sensitive to the costs and benefits of its rules.
The following economic analysis presents the costs and benefits--
including the effects on efficiency, competition, and capital
formation--that will result from the new recordkeeping, reporting,
notification, and securities count rules for stand-alone SBSDs, stand-
alone MSBSPs, bank SBSDs, and bank MSBSPs and from the amendments to
Rules 17a-3, 17a-4, 17a-5, 17a-11 and 17a-12 with respect to firms that
are registered as broker-dealers. The costs and benefits of adopting
these new rules and rule 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 amending Rules
17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 to establish recordkeeping,
reporting, and notification requirements for broker-dealers, including
broker-dealer SBSDs and MSBSPs to account for their security-based swap
activities. Pursuant to Section 15F of the Exchange Act, the Commission
is adopting 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. Further, pursuant to Sections 15F
and 17(a) of the Exchange Act, the Commission is amending FOCUS Report
Part II that consolidates proposed Form SBS and existing FOCUS Report
Parts II, IIB, and II CSE that will be filed by nonbank SBSDs, nonbank
MSBSPs, stand-alone broker-dealers, and stand-alone OTC derivatives
dealers to report financial information. The Commission is adopting
FOCUS Report Part IIC for bank SBSDs and MSBSPs to report their
financial information because these entities will be required to
provide more limited information relative to other SBSDs and MSBSPs.
The Commission believes these rules and rule amendments will help
regulators
[[Page 68623]]
determine whether relevant market participants comply with the recently
adopted capital, margin, and segregation requirements.\817\
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\817\ See Capital, Margin, and Segregation Adopting Release, 84
FR 43872.
---------------------------------------------------------------------------
As discussed above, the Commission is establishing limited and full
alternative compliance mechanisms. The limited alternative compliance
mechanism in Rules 17a-3 and 18a-5 will allow an SBSD or MSBSP that
also is registered with the CFTC as a swap dealer or major swap
participant to comply with the requirements to make and keep certain
current trade blotters, customer account ledgers, and stock records
solely with respect to required information regarding security-based
swaps by complying with the requirements of the CEA and the rules
thereunder applicable to swap dealers and major swap participants if
the SBSD or MSBSP meets certain conditions.\818\
---------------------------------------------------------------------------
\818\ See Rule 17a-3, as amended, and Rule 18a-5, as adopted.
See also discussion in section II.E.1. of this release.
---------------------------------------------------------------------------
The Commission is amending the full alternative compliance
mechanism in existing Rule 18a-10 that permits certain SBSDs that are
registered as swap dealers and that predominantly engage in a swaps
business to elect to comply with the capital, margin, and segregation
requirements of the CEA and the CFTC's rules in lieu of complying with
the capital, margin, and segregation requirements in Rules 18a-1, 18a-
3, and 18a-4. The amendments to Rule 18a-10 will permit firms that will
operate under Rule 18a-10 to elect to comply with the recordkeeping and
reporting requirements of the CEA and the CFTC's rules in lieu of
complying with Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.\819\ The
Commission believes the availability of the alternative compliance
mechanisms will promote harmonization with CFTC requirements and reduce
compliance costs for eligible SBSDs and MSBSPs.
---------------------------------------------------------------------------
\819\ See Rule 18a-10, as amended. See also discussion in
section II.E.2. of this release.
---------------------------------------------------------------------------
Additionally, as discussed above, the Commission is amending Rule
3a71-6 to provide non-U.S. stand-alone SBSDs and non-U.S. stand-alone
MSBSPs with the potential to utilize substituted compliance with
comparable foreign requirements to satisfy the recordkeeping and
reporting requirements of Section 15F of the Exchange Act and Rules
18a-5, 18a-6, 18a-7, 18a-8 and 18a-9 thereunder.\820\ The Commission
believes that allowing for the possibility of substituted compliance
will help achieve the benefits of the recordkeeping and reporting
requirements being adopted in this document in a manner that avoids the
costs that non-U.S. stand-alone SBSDs and non-U.S. stand-alone MSBSPs
would have to bear due to regulatory duplication or conflict.
---------------------------------------------------------------------------
\820\ See section II.F.2. of this release.
---------------------------------------------------------------------------
The sections below present an overview of the security-based swap
market, a discussion of the general costs and benefits of the adopted
recordkeeping and reporting requirements, and a discussion of the costs
and benefits of each amendment and new rule. The Economic Analysis also
includes a discussion of the potential effects of the rule amendments
and new rules on competition, efficiency, and capital formation. Where
possible, the Commission has attempted to quantify the costs, benefits,
and effects on efficiency, competition, and capital formation expected
to result from adopting these rules. At times, however, the Commission
is unable to quantify the economic effects because, as explained in
detail below, it lacks the information necessary to provide a
reasonable estimate, and in those instances, the discussion of the
economic effects of the rule or amendment is qualitative in nature.
B. Baseline of Economic Analysis
To assess the economic impact of the final rules described in this
release, the Commission employs as a baseline the security-based swap
market as it exists at the time of this release, including applicable
rules that the Commission already has adopted but excluding rules that
the Commission has proposed but not yet finalized. The baseline for
analysis includes the statutory provisions that currently govern the
security-based swap market pursuant to the Dodd-Frank Act and rules
adopted in the Commission's intermediary definitions release,\821\
cross-border release,\822\ SDR registration release,\823\ security-
based swap entity registration release,\824\ Regulation SBSR release
and amendments,\825\ U.S. activity release,\826\ business conduct
release,\827\ and trade acknowledgment release \828\ as these statutes
and final rules--even if compliance is not yet required--are part of
the existing regulatory landscape that market participants expect to
govern their security-based swap activity.
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\821\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30597.
\822\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, 79 FR 47278.
\823\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14438 (Mar. 19, 2015).
\824\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR 48964.
\825\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 80 FR 14563. See also Regulation
SBSR--Reporting and Dissemination of Security-Based Swap
Information, 81 FR 53546.
\826\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office of an
Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016).
\827\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR 29960.
\828\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR 39808.
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Additionally, the baseline includes any recordkeeping and reporting
rules currently applicable to participants in the security-based swap
market including applicable rules previously adopted by the
Commission,\829\ but excludes the rules and rule amendments addressed
in this release. With respect to the minor amendments to Rules 17a-3,
17a-4, 17a-5, 17a-11, and 17a-12, the baseline for purposes of this
economic analysis is the current recordkeeping and reporting regime for
broker-dealers under such rules.
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\829\ The Commission has temporarily excluded security-based
swaps from the definition of ``security.'' See section III.C. of
this release. Thus, for purposes of the Commission's baseline
analysis for broker-dealers, security-based swap activities will be
excluded.
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The following sections provide an overview of aspects of the
security-based swap market that are likely to be most affected by the
amendments being adopted in this document, as well as elements of the
current market structure, such as central clearing and platform
trading, that are likely to determine the scope of transactions that
will be covered by them.
1. Available Data From the Security-Based Swap Market
The Commission's understanding of the market is informed, in part,
by available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data limit the extent
to which it is possible to quantitatively characterize the market.\830\
Since these data do not
[[Page 68624]]
cover the entire market, the Commission has analyzed market activity
using a sample of transactions data that includes only certain segments
of the market. The Commission believes, however, that the data
underlying this analysis provides reasonably comprehensive information
regarding single-name credit default swap (``CDS'') transactions and
the composition of the participants in the single-name CDS market.
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\830\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters, both in letters and in meetings with Commission staff,
and knowledge and expertise of Commission staff.
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Specifically, the analysis of the current state of the security-
based swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2008 to 2017. Although the definition
of security-based swaps is not limited to single-name CDS,\831\ single-
name CDS contracts make up a majority of security-based swaps, and the
Commission believes that the single-name CDS data are sufficiently
representative of the market to inform our analysis of the current
security-based swap market. According to data published by the Bank for
International Settlements (``BIS''), the global notional amount
outstanding in single-name CDS was approximately $4.6 trillion,\832\ in
multi-name index CDS was approximately $4.4 trillion, and in multi-
name, non-index CDS was approximately $343 billion.\833\ The total
gross market value outstanding in single-name CDS was approximately
$130 billion, and in multi-name CDS instruments was approximately $174
billion.\834\ The global notional amount outstanding in equity forwards
and swaps as of December 2017 was $3.21 trillion, with total gross
market value of $197 billion.\835\
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\831\ While other repositories may collect data on transactions
in total return swaps on equity and debt, the Commission does not
currently have access to such data for these products (or other
products that are security-based swaps). Additionally, the
Commission explains below that data related to single-name CDS
provides reasonably comprehensive information for the purpose of
this analysis.
\832\ The global notional amount outstanding represents the
total face amount used to calculate payments under outstanding
contracts. The gross market value is the cost of replacing all open
contracts at current market prices.
\833\ See BIS, Semi-annual OTC derivatives statistics at
December 2017, Table 10.1, available at https://www.bis.org/statistics/d10_1.pdf (accessed May 18, 2018).
\834\ See id.
\835\ These totals include swaps and security-based swaps, as
well as products that are excluded from the definition of ``swap,''
such as certain equity forwards. See OTC, equity-linked derivatives
statistics, Table D8, available at https://www.bis.org/statistics/d8.pdf (accessed May 18, 2018). For the purposes of this analysis,
the Commission assumes that multi-name index CDS are not narrow-
based index CDS and therefore, do not fall within the security-based
swap definition. See 15 U.S.C. 78c(a)(68)(A); see also Further
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR 48208. The Commission also assumes that all
instruments reported as equity forwards and swaps are security-based
swaps, potentially resulting in underestimation of the proportion of
the security-based swap market represented by single-name CDS.
Therefore, when measured on the basis of gross notional outstanding
single-name CDS contracts appear to constitute roughly 59% of the
security-based swap market. Although the BIS data reflects the
global OTC derivatives market, and not just the U.S. market, the
Commission has no reason to believe that these ratios differ
significantly in the U.S. market
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The Commission further notes that the data available from TIW does
not encompass those CDS transactions that both: (i) Do not involve U.S.
counterparties; \836\ and (ii) are based on non-U.S. reference
entities. Notwithstanding this limitation, the TIW single-name CDS data
should provide sufficient information to permit the Commission to
identify the types of market participants active in the security-based
swap market and the general pattern of dealing within that market.\837\
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\836\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This physical address
is designated the registered office location by TIW. When an account
reports a registered office location, the Commission has assumed
that the registered office location reflects the place of domicile
for the fund or account. When an account does not report a
registered office location, the Commission has assumed that the
settlement country reported by the investment adviser or parent
entity to the fund or account is the place of domicile. Thus, for
purposes of this analysis, the Commission has classified accounts as
``U.S. counterparties'' when they have reported a registered office
location in the United States. The Commission notes, however, that
this classification is not necessarily identical in all cases to the
definition of U.S. person under Rule 3a71-3(a)(4).
\837\ The challenges the Commission faces in estimating measures
of current market activity stem, in part, from the absence of
comprehensive reporting requirements for security-based swap market
participants. The Commission has adopted rules regarding trade
reporting, data elements, and public reporting for security-based
swaps that are designed to, when fully implemented, provide the
Commission with additional measures of market activity that will
allow us to better understand and monitor activity in the security-
based swap market. See Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information, 81 FR 53545.
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2. Security-Based Swap Market: Market Participants and Activity
The final rules and rule amendments will apply regulatory
requirements to security-based swap market participants. The following
sections provide information about the security-based swap market,
focusing on the subset of participants likely to incur recordkeeping
and reporting requirements as a result of these rules and rule
amendments and the activities that would be subject to these
requirements.
a. Security-Based Swap Dealers
Security-based swap activity is concentrated in a relatively small
number of dealers, which already represent a small percentage of all
market participants active in the security-based swap market. Based on
an analysis of the 2017 single-name CDS data, the Commission's earlier
estimates of the number of entities likely to register as security-
based swap dealers remain largely unchanged. Of the approximately 50
entities that the Commission estimates might register as security-based
swap dealers, the Commission believes that it is reasonable to expect
22 to be non-U.S. persons.
Many of these dealers are already subject to other regulatory
frameworks under U.S. law based on their role as intermediaries or on
the volume of their positions in other products, such as swaps. Persons
who will register as SBSDs and MSBSPs are likely also to be engaged in
swap activity, which is subject to regulation by the CFTC.\838\ This
overlap reflects the relationship between single-name CDS contracts,
which are security-based swaps, and index CDS contracts, which may be
swaps or security-based swaps. A single-name CDS contract covers
default events for a single reference entity or reference security.
Index CDS contracts and related products make payouts that are
contingent on the default of index components and allow participants in
these instruments to gain exposure to the credit risk of the basket of
reference entities that comprise the index, which is a function of the
credit risk of the index components. A default event for a reference
entity that is an index component will result in payoffs on both
single-name CDS written on the reference entity and index CDS written
on indices that contain the reference entity. Because of this
relationship between the payoffs of single-name CDS and index CDS
products, prices of these
[[Page 68625]]
products depend upon one another,\839\ creating hedging opportunities
across these markets.
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\838\ See section II. of this release. See also Application of
Certain Title VII Requirements to Security-Based Swap Transactions
Connected with a Non-U.S. Person's Dealing Activity That Are
Arranged, Negotiated, or Executed by Personnel Located in a U.S.
Branch or Office or in a U.S. Branch or Office of an Agent, Exchange
Act Release No. 74834 (Apr. 29, 2015), 80 FR 27444, 27458 (May 13,
2015); Registration Process for Security-Based Swap Dealers and
Major Security-Based Swap Participants, 80 FR at 49000.
\839\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., George Casella and Roger L. Berger,
Statistical Inference 171 (2002).
---------------------------------------------------------------------------
These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff's
analysis of approximately 4,358 TIW accounts that participated in the
market for single-name CDS in 2017 revealed that approximately 2,936 of
those accounts, or 67%, also participated in the market for index CDS.
Of the accounts that participated in both markets, data regarding
transactions in 2017 suggests that, contingent upon an account
transacting in notional volume of index CDS in the top third of
accounts, the probability of the same account landing in the top third
of accounts in terms of single-name CDS notional volume is
approximately 38%; by contrast, the probability of the same account
landing in the bottom third of accounts in terms of single-name CDS
notional volume is only 5.4%.
The CFTC has adopted recordkeeping and reporting requirements that
apply to registered swap dealers. The Commission estimates that
approximately 46 of the 50 expected security-based swap dealers will be
dually registered with the CFTC and therefore be subject to CFTC
requirements.\840\ Accordingly, the recordkeeping baseline for entities
that are currently registered with the CFTC as swap dealers or major
swap participants includes the activities related to compliance with
the CFTC's recordkeeping and reporting requirements for swaps.
---------------------------------------------------------------------------
\840\ 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, 77 FR 20128 (Apr. 3,
2012).
---------------------------------------------------------------------------
Additionally, based on an analysis of TIW data and filings with the
Commission, the Commission estimates that 16 market participants that
will register as security-based swap dealers have already registered
with the Commission as broker-dealers and are thus subject to Exchange
Act and FINRA requirements applicable to such entities. As the
Commission discusses below, some registered dealers may also be subject
to similar requirements in one or more foreign jurisdictions.
Finally, the Commission also notes that it has adopted rules for
the registration of security-based swap dealers and major security-
based swap participants, although market participants are not yet
required to comply with those rules. Thus, there are not yet any
security-based swap dealers or major security-based swap participants
registered with the Commission.
b. Security-Based Swap Market Activity
As already noted, firms that act as dealers play a central role in
the security-based swap market. Based on an analysis of 2017 single-
name CDS data in TIW, accounts of those firms that are likely to exceed
the security-based swap dealer de minimis thresholds and trigger
registration requirements intermediated transactions with a gross
notional amount of approximately $2.9 trillion, approximately 55% of
which was intermediated by the top five dealer accounts.\841\
---------------------------------------------------------------------------
\841\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2017 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------
These dealers transact with hundreds or thousands of
counterparties. Approximately 21% of accounts of firms expected to
register as security-based dealers and observable in TIW have entered
into security-based swaps with over 1,000 unique counterparty accounts
as of year-end 2017.\842\ Another 25% of these accounts transacted with
500 to 1,000 unique counterparty accounts; 29% transacted with 100 to
500 unique accounts; and 25% of these accounts intermediated security-
based swaps with fewer than 100 unique counterparties in 2017. The
median dealer account transacted with 495 unique accounts (with an
average of approximately 570 unique accounts). Non-dealer
counterparties transacted almost exclusively with these dealers. The
median non-dealer counterparty transacted with two dealer accounts
(with an average of approximately three dealer accounts) in 2017.
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\842\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission may infer that entities
and financial groups may transact with at least as many
counterparties as the largest of their accounts.
---------------------------------------------------------------------------
Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to TIW between January 2008 and December 2017, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty. Figure 2 also shows that the portion of the notional
volume of North American corporate single-name CDS represented by
interdealer transactions has remained fairly constant through 2015
before falling from approximately 72% in 2015 to approximately 40% in
2017. This fall corresponds to the availability of clearing to non-
dealers. Interdealer transactions continue to represent a significant
fraction of trading activity, even as notional volume has declined over
the past ten years,\843\ from more than $6 trillion in 2008 to less
than $700 billion in 2017.\844\
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\843\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
\844\ This estimate is lower than the gross notional amount of
$4.6 trillion noted above as it includes only the subset of single-
name CDS referencing North American corporate documentation.
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[[Page 68626]]
[GRAPHIC] [TIFF OMITTED] TR16DE19.001
The high level of interdealer trading activity reflects the central
position of a small number of dealers, each of which intermediates
trades with many hundreds of counterparties. While the Commission is
unable to quantify the current level of trading costs for single-name
CDS, these dealers appear to enjoy market power as a result of their
small number and the large proportion of order flow that they privately
observe.
Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data that the
Commission analyzed was between counterparties domiciled in the United
States and counterparties domiciled abroad, as shown in Figure 3 below.
Using the self-reported registered office location of the TIW accounts
as a proxy for domicile, the Commission estimates that only 12% of the
global transaction volume by notional volume between 2008 and 2017 was
between two U.S.-domiciled counterparties, compared to 49% entered into
between one U.S.-domiciled counterparty and a foreign-domiciled
counterparty and 39% entered into between two foreign-domiciled
counterparties.\845\
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\845\ For purposes of this discussion, the Commission has
assumed that the registered office location reflects the place of
domicile for the fund or account, but this domicile does not
necessarily correspond to the location of an entity's sales or
trading desk. See Security-Based Swap Transactions Connected With a
Non-U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office of an
Agent; Security-Based Swap Dealer De Minimis Exception, 81 FR at
8607, n. 83.
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If the Commission instead considers the number of cross-border
transactions from the perspective of the domicile of the corporate
group (e.g., by classifying a foreign bank branch or foreign subsidiary
of a U.S. entity as domiciled in the United States), the percentages
shift significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to
34%, and to 51% for transactions entered into between a U.S.-domiciled
counterparty and a foreign-domiciled counterparty. By contrast, the
proportion of activity between two foreign-domiciled counterparties
drops from 39% to 15%. This change in respective shares based on
different classifications suggests that the activity of foreign
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts
for a higher percentage of security-based swap activity than U.S.
subsidiaries of foreign firms and U.S. branches of foreign banks. It
also demonstrates that financial groups based in the United States are
involved in an overwhelming majority (approximately 85%) of all
reported transactions in North American corporate single-name CDS.
Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS. Of the 2017 transactions on North American corporate
single-name CDS between two ISDA-recognized dealers and their branches
or affiliates, 94% of transaction notional volume involved at least one
account of an entity with a U.S. parent. The Commission notes, in
addition, that a majority of North American corporate single-name CDS
transactions occur in the interdealer
[[Page 68627]]
market or between dealers and foreign non-dealers, with the remaining
portion of the market consisting of transactions between dealers and
U.S.-person non-dealers. Specifically, 60% of North American corporate
single-name CDS transactions involved either two ISDA-recognized
dealers or an ISDA-recognized dealer and a foreign non-dealer.
Approximately 39% of such transactions involved an ISDA-recognized
dealer and a U.S.-person non-dealer.
[GRAPHIC] [TIFF OMITTED] TR16DE19.002
c. Participation of Banks and Broker-Dealers
A high degree of concentration is equally prevalent in derivatives
activity within the U.S. banking system: According to the OCC, at the
end of the fourth quarter of 2017, 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 89.4% of
the total banking industry notional amounts and 85.9% of industry net
current credit exposure.\846\ This concentration largely appears to
reflect the fact that larger entities are well-capitalized and
therefore possess competitive advantages in engaging in dealing
activities by providing potential counterparties with adequate
assurances of financial performance.\847\
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\846\ See OCC, Quarterly Report on Bank Trading and Derivatives
Activities, Fourth Quarter 2017(available at https://www.occ.treas.gov/topics/capital-markets/financial-markets/derivatives/pub-derivatives-quarterly-qtr4-2017.pdf).
\847\ 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 Definitions of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'', 77
FR at 30739-42.
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Other than OTC derivatives dealers, which are subject to
significant limitations on their activities, broker-dealers
historically have not participated in a significant way in security-
based swap trading.
---------------------------------------------------------------------------
\848\ This column reflects the number of participants who are
also trading for their own accounts.
Table 1--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap Market Through a Registered Investment
Adviser, an Unregistered Investment Adviser, or Directly as a Transacting Agent, From November 2006 Through December 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Account holders by type Number Represented by a registered
investment adviser
Represented by an
unregistered investment
adviser
Participant is transacting
agent \848\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds............................. 3,857 1,973 51% 1,859 48% 25 1%
DFA Special Entities...................... 1,319 1,262 96% 37 3% 20 2%
Registered Investment Companies........... 1,159 1,082 93% 73 6% 4 0%
Banks (non-ISDA-recognized dealers)....... 349 20 6% 8 2% 321 92%
[[Page 68628]]
Insurance Companies....................... 301 196 65% 34 11% 71 24%
ISDA-Recognized Dealers................... 91 0 0% 0 0% 91 100%
Foreign Sovereigns........................ 83 63 76% 3 4% 17 20%
Non-Financial Corporations................ 75 52 69% 4 5% 19 25%
Finance Companies......................... 20 11 55% 0 0% 9 45%
Other/Unclassified........................ 5,883 3,745 64% 1,887 32% 251 4%
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All................................... 13,137 8,404 64% 3,905 30% 828 6%
--------------------------------------------------------------------------------------------------------------------------------------------------------
3. Existing Regulation of OTC Derivatives Market Participants and
Broker-Dealers
As discussed above, the adopted rules and amendments will apply to
various different entities that the Commission anticipates will
register as SBSDs or MSBSPs, including stand-alone firms, banks, and
registered broker-dealers. In addition, the adopted amendments will
also apply to certain stand-alone broker-dealers that do not register
as an SBSD or MSBSP but nonetheless still engage in security-based swap
transactions. For all of these entities, the economic baseline includes
the reports and records these firms currently generate in the ordinary
course of their business and in anticipation of regulatory reporting
requirements, such as Regulation SBSR's requirement for SBSDs and
MSBSPs to report each security-based swap transaction to a registered
SDR \849\ and to establish, maintain, and enforce written policies and
procedures that are designed to ensure compliance with security-based
swap transaction reporting obligations.\850\ Because compliance with
registration rules for SBSDs and MSBSPs is not yet required,\851\
however, there are no entities of any type currently registered as
SBSDs or MSBSPs and the Commission can only arrive at an estimate of
the number and type of these registrants based on an analysis of the
2017 single-name CDS data.\852\
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\849\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 81 FR 53545. While the Commission
recognizes that SBSDs and MSBSPs are not yet required to comply with
Regulation SBSR, the Commission nevertheless believes that these
firms have invested in reporting infrastructure in anticipation of
future regulatory reporting requirements.
\850\ See id.
\851\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR 48964.
\852\ See section V.B.2.a. of this release for the Commission's
estimates of the potential number of registrants based on an
analysis of the 2017 single-name CDS data.
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Below, the Commission summarizes, based on available information,
the current recordkeeping, reporting, notification, and securities
count practices of these various entities, including those practices
that are required by regulation and those that have been independently
adopted by the entities.
a. Stand-Alone SBSDs and MSBSPs
Certain firms that are neither banks nor broker-dealers that
participate in the market for security-based swaps will register with
the Commission as stand-alone SBSDs and MSBSPs. The Commission believes
that firms engaged in the security-based swap market currently produce,
as part of their ordinary business practices, financial reports such as
a balance sheet and a quarterly and year-end income statement that are
included in the financial reporting requirements the Commission is
adopting in this document. Such firms may not, however, produce annual
audited financial statements, as required under the adopted rules. The
Commission also believes that firms engaged in the security-based swap
business currently maintain records documenting the firms' derivatives
positions to facilitate, among other things, effective risk management.
The Commission expects that these firms maintain these records for the
duration for which they hold a given position and for some period of
time thereafter. Moreover, the Commission believes that firms that
eventually register with the Commission as SBSDs or as MSBSPs will
likely create transaction records to submit to registered SDRs as a
result of their anticipated reporting obligations under Regulation SBSR
and will likely have order management systems in place to record
information that is required to be submitted under Regulation SBSR.
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 presently
incur in the ordinary course of business. As noted above, the
Commission believes that these firms, however, maintain some records
documenting their business activities as a matter of routine business
practice and maintain some transaction records in anticipation of their
reporting obligations under Regulation SBSR. Any new costs imposed by
the new rules should be incremental to the costs currently being
incurred by these entities.
b. Bank SBSDs and MSBSPs
In addition to stand-alone SBSDs and MSBSPs, the Commission expects
certain banks to register as SBSDs and MSBSPs. The economic baseline
for banks that participate in the security-based swap market includes
the existing recordkeeping, record retention, reporting, and
notification requirements that are imposed on banks by their relevant
prudential regulator as well as the reports and records these firms
currently generate in the ordinary course of their business.
Prudential regulators already subject banks to recordkeeping and
retention requirements.\853\ In addition, banks must file financial
statements and supporting schedules known as ``call reports'' with
their prudential regulator.\854\ The Commission believes that the most
common form of call report for a bank that will register as an SBSD or
MSBSP is FFIEC Form 031.\855\ Like the FOCUS Report, FFIEC Form 031
elicits financial and operational information about a bank, which is
entered into uniquely numbered line
[[Page 68629]]
items. A bank must report details about its assets, liabilities, and
equity capital on Schedule RC to FFIEC Form 031.\856\ A bank must also
report details about its regulatory capital on Schedule RC-R to FFIEC
Form 031.\857\ The information elicited on Schedule RC-R is designed to
facilitate an analysis of the bank's regulatory capital. A bank must
report details about its income (loss) and expenses on Schedule RI to
FFIEC Form 031.\858\
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\853\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR
219.21 through 219.24 (FDIC); 12 CFR 344.4 (FDIC).
\854\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12
U.S.C. 1464.
\855\ FFIEC Form 031 is filed by banks with domestic and foreign
offices, which the Commission believes will characterize most bank
SBSDs.
\856\ 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.
\857\ 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.
\858\ See FFIEC Form 031, Schedule RI, Income Statement, Lines
1-14. Schedule RI also has a ``Memoranda'' section that elicits
further detail about income (loss). See FFIEC Form 031, Schedule RI,
Income Statement, Memoranda, Lines 1-14.
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The Commission has estimated the cost of the existing
recordkeeping, record retention, reporting, and notification
requirements that are applicable to nationally chartered banks under
existing regulations issued by the OCC. The Commission arrived at the
estimate by examining PRA collections to which national banks are
subject and selecting those that are analogous to the recordkeeping,
record retention, reporting, and notification rules the Commission is
adopting herein.\859\ 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.\860\ The Commission estimates that national banks
currently incur annual costs of $55,982,398 to comply with the OCC's
financial reporting, notification and recordkeeping rules.\861\ 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 new rules. Nonetheless,
these cost estimates may help provide context and cost ranges with
respect to the nationally chartered banks impacted by the Commission's
new rules.
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\859\ 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. Given that different
banks comply with different prudential regulations, the Commission
recognizes that the estimate based on OCC regulations represents one
estimate of the costs imposed on banks by currently applicable
recordkeeping, record retention, reporting and notification
requirements.
\860\ 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.
\861\ 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 OMB. See the chart below
for a representation of the calculation methodology:
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c. Broker-Dealers, SBSD Broker-Dealers, and MSBSP Broker-Dealers
As noted above, the Commission expects some broker-dealers to
register as broker-dealer SBSDs or broker-dealer MSBSPs, while other
broker-dealers engaging in security-based swap transactions may be
subject to regulation as stand-alone broker dealers. A broker-dealer
that engages in security-based swap activities is currently subject to
existing regulatory requirements, including capital, margin,
segregation, recordkeeping, reporting, notification, and securities
count requirements.\862\ Specifically, the existing broker-dealer
capital requirements make it relatively costly for broker-dealers to
conduct security-based swap activities in broker-dealers.\863\ Instead
of occurring at broker-dealers, security-based swap dealing activity is
currently mostly concentrated in entities that are affiliated with
broker-dealers, but not in broker-dealers themselves.\864\
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\862\ OTC derivatives dealers are a special class of broker-
dealers that are exempt from certain broker-dealer requirements,
including membership in an SRO, regular broker-dealer margin rules,
and application of SIPA. OTC derivatives dealers are subject to
special requirements, including limitations on the scope of their
securities activities, specific internal risk management control
systems, recordkeeping obligations, and reporting responsibilities.
They are also subject to alternative net capital treatment. See 17
CFR 240.15a-1.
\863\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70217-257.
\864\ See ISDA Margin Survey 2015.
----------------------------------------------------------------------------------------------------------------
Annual hourly Compensation
Reporting/recordkeeping industry rate (per Estimated
burden 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 41,317
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 Associations..... 61,362 30 1,840,860
Notice or Application for Capital Distributions................. 546 79 43,134
Annual Stress Test Rule and Stress Test Reporting Templates..... 73,876 79 5,836,204
Recordkeeping and Disclosure Provisions Associated with Stress 16,120 30 483,600
Testing Guidance...............................................
-----------------------------------------------
Total Costs................................................. .............. .............. 55,982,398
----------------------------------------------------------------------------------------------------------------
As of December 31, 2018, there were 3,764 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.\865\ The Commission estimates that as
of December 31, 2018, ten broker-dealers dominated the
[[Page 68630]]
broker-dealer industry, holding over half of all the capital held by
broker-dealers.\866\
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\865\ See Broker-Dealer Reports, 78 FR at 51967.
\866\ Using data from FOCUS Reports filed by broker-dealers in
2018, total aggregate capital summed across 3,764 broker-dealer was
$391,515 million of which the ten largest broker-dealers totaled
$206,736 million, or 52.8%. This is consistent with estimates
previous reported by the Commission. See Broker-Dealer Reports, 78
FR at 51968.
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Broker-dealers registered with the Commission are currently subject
to recordkeeping, reporting, notification, and securities count
requirements. The baseline for the economic analysis for registered
broker-dealers includes Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12
as they existed prior to these amendments as well as any reports and
records these firms currently generate in the ordinary course of their
business. Below, the Commission discusses the obligations these
existing rules currently place on registered broker-dealers.
i. Existing Rules 17a-3 and 17a-4
The Commission is adopting amendments to Rules 17a-3 and 17a-4 to
establish additional recordkeeping requirements for broker-dealer
SBSDs, broker-dealer MSBSPs,\867\ and broker-dealers that conduct
security-based swap activities but are not registered as SBSDs.\868\
Under existing Rule 17a-3, broker-dealers must make and keep certain
books and records. The Commission estimates that Rule 17a-3 currently
imposes $218,361,917 of annual costs on broker-dealers.\869\ Rule 17a-4
currently 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 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 $86,220,558 of
annual costs on broker-dealers.\870\
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\867\ See section II.A.2. of this release.
\868\ The amendments to the recordkeeping and reporting rules
will apply to all broker-dealers that conduct security-based swap
activities. The de minimis exception applies solely to registration
as an SBSD. See 17 CFR 240.3a71-2(a)(1).
\869\ (2,763,612 hours x $63 per hour national hourly rate for a
compliance clerk) + $44,254,361 in external costs = $218,361,917.
See Commission, Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-3 (Mar 9, 2017),
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=72125401.
\870\ (1,042,866 hours x $63 per hour national hourly rate for a
compliance clerk) + $20,520,000 in external costs = $86,220,058. See
Commission, Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-4 (Oct. 19, 2016),
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68823501.
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ii. Existing 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 amendments to Rule 17a-5 is the broker-dealer financial reporting
requirements as they exist prior to the amendments being adopted in
this document. The Commission estimates that current Rule 17a-5 imposes
$140,225,396 of annual costs on broker-dealers.\871\
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\871\ (353,509 hours x $269 per hour national hourly rate for a
compliance manager) + $45,131,475 in external costs = $140,225,396.
See Supporting Statement for the Paperwork Reduction Act Information
Collection Submission for Rule 17a-5 (May. 26, 2017), available at
https://www.reginfo.gov/public/do/DownloadDocument?objectID=74209001.
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Rule 17a-5 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.\872\ In addition to these two main elements, a
few other aspects of Rule 17a-5 are described below.
---------------------------------------------------------------------------
\872\ See id. These requirements are described in more detail
below.
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a. Periodic Reports
Broker-dealers periodically report information about their
financial and operational condition on 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.\873\
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\873\ A broker-dealer that holds customer funds or securities
completes and files FOCUS Report Part II. A broker-dealer that does
not hold customer funds or securities completes and files FOCUS
Report Part IIA. An OTC derivatives dealer completes and files FOCUS
Report Part IIB. An ANC broker-dealer completes and files FOCUS
Report Part II CSE.
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b. Annual Audited Reports and Related Notifications
Under paragraphs (d) and (g) of 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
accountant, disclose certain financial information to customers, notify
the Commission of a change of accountant, and notify the Commission of
a change in its fiscal year.\874\ Paragraph (h) of Rule 17a-5 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 determines that any material weakness exists.
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\874\ 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.
---------------------------------------------------------------------------
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. Under
paragraph (c)(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-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 website home page and
maintains a toll-free number that customers can call to request a copy
of the statement.
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. The reports
contain information related to the ANC broker-dealers' use of internal
models to calculate market and credit risk charges when computing net
capital.
iii. Existing 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 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. The
Commission estimates that current Rule 17a-11 imposes $90,115 of annual
costs on broker-dealers in the aggregate.\875\
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\875\ 335 hours x $269 per hour national hourly rate for a
compliance manager = $90,115. See Supporting Statement for the
Paperwork Reduction Act Information Collection Submission for Rule
17a-11 (Jul. 28, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=75553601.
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[[Page 68631]]
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.
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 notify the Commission when its tentative net
capital falls below the minimum required for these types of broker-
dealers. 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. These
notices are designed to provide the Commission with an ``early
warning'' that the broker-dealer may experience financial
difficulty.\876\ The events triggering the early warning notification
requirements are:
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\876\ See Early Warning Rule, Exchange Act Release No. 32586
(July 7, 1993), 58 FR 37655 (July 13, 1993).
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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;\877\
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\877\ See paragraph (c)(1) of Rule 17a-11. 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 paragraph (a)(1)(i) of Rule 15c3-1. Consequently,
requiring notification when a broker-dealer has a 12-to-1 aggregate
indebtedness to net capital ratio provides notice before the firm
reaches the minimum 15-to-1 requirement.
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The computation of a broker-dealer which has elected to
use the alternative standard of calculating net capital under Rule
15c3-1 shows that the firm's net capital is less than 5% of aggregate
debit items computed in accordance with Exhibit A of Rule 15c3-3;\878\
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\878\ See paragraph (c)(2) of Rule 17a-11. 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
paragraph (a)(1)(i) of Rule 15c3-1. 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;\879\
---------------------------------------------------------------------------
\879\ See paragraph (c)(2) of Rule 17a-11.
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With respect to an OTC derivatives dealer, the occurrence
of the fourth and each subsequent backtesting exception under 17 CFR
240.15c3-1f (appendix F of Rule 15c3-1) during any 250 business days
measurement period.\880\
---------------------------------------------------------------------------
\880\ See paragraph (c)(4) of Rule 17a-11.
---------------------------------------------------------------------------
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. The notice must specify the books and records which have not
been made or which are not current. 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.
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. 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.\881\
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\881\ See also Broker-Dealer Reports, 78 FR at 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 using
the concept of material weakness in Rule 18a-7.
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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.
iv. Existing Rule 17a-12
The Commission is adopting amendments to Rule 17a-12 to require OTC
derivatives dealers to file revised FOCUS Report Part II instead of
FOCUS Report Part IIB as required by current Rule 17a-12.\882\ The
baseline for this economic analysis with respect to amendments to Rule
17a-12 is current Rule 17a-12. The Commission estimates that current
Rule 17a-12 imposes an annual burden of $568,320 in the aggregate.\883\
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\882\ See section IV.A.5. of this release.
\883\ 1,080 hours x $269 per hour national hourly rate for a
compliance manager = $290,520 aggregate compliance costs per year
and $277,800 aggregate reporting costs per year. See Supporting
Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 17a-12/Form X-17A-5 Part IIB (Feb. 5, 2019),
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=88964601.
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4. Regulation SBSR
Regulation SBSR implements requirements for regulatory reporting
and public dissemination of security-based swap transactions set forth
in Title VII of the Dodd-Frank Act. Regulation SBSR assigns the
reporting side \884\ the obligation of reporting primary and secondary
trade information about the transaction to a registered SDR or to the
Commission, in the event that there is no registered SDR to accept the
report.\885\
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\884\ Rule 901(a) of Regulation SBSR establishes a reporting
hierarchy that specifies the side that has the duty to report a
security-based swap to a registered SDR. This entity refers to the
``reporting side.'' See Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information, 80 FR at 14566-67.
\885\ In addition, any security-based swap that is accepted for
clearing by a registered clearing agency having its principal place
of business in the United States must be reported to a registered
SDR, regardless of the registration status or U.S. person status of
the counterparties and regardless of where the transaction is
executed. See id. at 14568.
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Based on historical data the Commission estimated that 300 entities
would be required to report transaction information under Regulation
SBSR,\886\ including all 50 potential registered SBSDs and all 5
potential registered MSBSPs. As a result of the Regulation SBSR
reporting hierarchy, the Commission expected all these SBSDs and MSBSPs
to incur reporting obligations because at least one of these 55
potential registrants appeared on either side of the majority of
security-based swap transactions.\887\
---------------------------------------------------------------------------
\886\ See id. at 14674.
\887\ See id.
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The Commission believes that SBSDs and MSBSPs will have incurred
three categories of costs to comply with Regulation SBSR. First, they
would likely have had to establish and maintain an internal order
management system (``OMS'') capable of capturing relevant security-
based swap transaction information in order for it to be reported.
Second, they would have had to implement reporting mechanisms.
[[Page 68632]]
Third, given that manual processes would likely have been incapable of
capturing and reporting the numerous data elements relating to
security-based swaps required by Regulation SBSR, SBSDs and MSBSPs
would have had to establish an appropriate compliance program and
support for operating any OMS and reporting mechanism capable of
reporting data within the timeframe set forth by Regulation SBSR.\888\
---------------------------------------------------------------------------
\888\ See id. at 14701.
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To the extent that the same or similar information is needed to
comply with the recordkeeping and reporting rules being adopted in this
document, market participants can use the infrastructure already in
place in anticipation of Regulation SBSR to comply with their
recordkeeping and reporting obligations under the current rulemaking.
Consistent with prior releases, the Commission believes that once a
respondent's reporting infrastructure and compliance systems are in
place the marginal burden of reporting transactions would be de minimis
when compared to the costs of putting those systems in place and
maintaining them over time.\889\ Thus the changes implemented in
anticipation of compliance with Regulation SBSR are likely to
substantially reduce certain compliance related burdens emanating from
the recordkeeping, reporting, notification, and securities count rules
and rule amendments being adopted in this document. As a result, the
Commission's estimates of these burdens \890\ should be viewed as an
upper bound of the potential costs of these rules and rule amendments.
---------------------------------------------------------------------------
\889\ See id. at 14702.
\890\ See section IV.E. of this release.
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5. Global Regulatory Efforts
The global security-based swap market is highly interconnected and
highly concentrated.\891\ This interconnectedness allows U.S. market
participants to use security-based swaps as a tool for sharing
financial and commercial risks and to access liquidity across
jurisdictional boundaries.\892\ However, these opportunities for risk
sharing also represent channels for risk transmission to the U.S.
financial system: Because dealers facilitate the majority of security-
based swap transactions, with bilateral relationships that extend to
potentially thousands of counterparties, deficiencies in SBSD records
and reports may have outcomes that affect a large number of
counterparties and have potentially significant cross-border
implications.\893\
---------------------------------------------------------------------------
\891\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, 81 FR 8598. See also Application of ``Security-
Based Swap Dealer'' and ``Major Security-Based Swap Participant''
Definitions to Cross-Border Security-Based Swap Activities, 79 FR at
47283.
\892\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, 81 FR 8598. See also Application of ``Security-
Based Swap Dealer'' and ``Major Security-Based Swap Participant''
Definitions to Cross-Border Security-Based Swap Activities, 79 FR at
47283.
\893\ See id.
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In 2009, the G20 Leaders--whose membership includes the United
States, 18 other countries, and the European Union (``EU'')--addressed
global improvements in the OTC derivatives markets. They expressed
their view on a variety of issues relating to OTC derivatives
contracts. In subsequent summits, the G20 Leaders have returned to OTC
derivatives regulatory reform and encouraged international consultation
in developing standards for these markets.\894\
---------------------------------------------------------------------------
\894\ See, e.g., G20 Leaders' Final Declaration para. 24 (Nov.
2011), available at https://g20.org/wp-content/uploads/2014/12/Declaration_eng_Cannes.pdf.
---------------------------------------------------------------------------
Many SBSDs will likely already be subject to foreign regulation of
their security-based swap activities that are similar to regulations
that may apply to them pursuant to Title VII, even if the relevant
foreign jurisdictions do not classify certain market participants as
``dealers'' for regulatory purposes. Some of these regulations may
duplicate, and in some cases conflict with, certain elements of the
Title VII regulatory framework including the recordkeeping and
reporting rules being adopted in this document.
C. Analysis of the Adopted Program and Alternatives
In determining appropriate recordkeeping, reporting, notification,
and securities count requirements, the Commission assessed and
considered a number of different costs and benefits, and the
determinations it has made may have a variety of economic consequences
for the relevant firms, markets, and the financial system as a whole.
As an initial matter, the recordkeeping, reporting, notification, and
securities count rules and rule amendments being adopted in this
document represent the manner in which SBSDs and MSBSPs will document,
report, and retain evidence of their compliance with, among other
things, the Commission's 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 rules.
With respect to the likely benefits of the adopted rules and
amendments, the recordkeeping, reporting, notification, and securities
count requirements are broadly intended to facilitate effective
oversight of SBSD and MSBSPs. Requiring registered firms to comply with
recordkeeping and reporting rules should help ensure more effective
regulatory oversight. The new rules and rule amendments should further
help the Commission determine whether an SBSD or MSBSP is operating in
compliance with the Exchange Act and the rules thereunder.
The Commission further believes that the required annual audit of
nonbank SBSDs' and nonbank MSBSPs' financial statements and the public
availability of firms' Statement of Financial Condition will provide
customers and counterparties access to financial information that will
permit them to better assess the financial condition of firms. While it
is difficult to quantify the extent to which lack of information about
the financial conditions of other market participants reduces
willingness to participate in the security-based swap market, 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 new rules and rule amendments. These costs include the costs
of complying with the new rules and rule amendments, for example one-
time and ongoing financial reporting costs, and costs associated with
ongoing record maintenance. To the extent that costs associated with
the new rules and amendments arise from complying with the new
requirements, these costs are discussed below in section V.C.2. of this
release.
The Commission believes that the new rules and rule amendments will
require improvements in technology to meet minimum standards for
recordkeeping and reporting. SBSDs and MSBSPs that do not have the
technology to store and maintain the information required by the new
rules and rule amendments will likely need to invest in technology.
While investments in new technology will entail costs for SBSDs and
MSBSPs, these technological investments may generate benefits for
financial markets at large by helping
[[Page 68633]]
regulators to more effectively track trading and risk exposure in
security-based swaps. Moreover, to the extent that improvements in
technology required by the rule and rule amendments also enable SBSDs
and MSBSPs to more effectively track their trading and risk exposure in
security-based swaps, the cost of these improvements for these entities
may be partially offset.
In addition, the rules being adopted in this document, 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 multiple
jurisdictions. For example, intermediaries operating in other
jurisdictions could be advantaged relative to U.S. competitors if
corresponding requirements are not established in other jurisdictions
or if the Commission's rules are substantially more stringent and
costly than corresponding requirements in other jurisdictions. This
could affect the ability 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 or perform market-facing
activities using personnel located in the United States. Accordingly,
the reporting, recordkeeping, notification, and security count
requirements for security-based swaps being adopted in this document
could entail substantial differences in the costs of compliance between
the U.S. and foreign jurisdictions and could therefore have
international implications in terms of the extent of market
participation in U.S. versus non-U.S. jurisdictions.\895\
---------------------------------------------------------------------------
\895\ 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 at 31034.
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In certain instances it is difficult to quantify the potential
benefits and costs of the new rules and rule amendments. 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.
The Commission does not have comprehensive information about 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
new rules and rules amendments on these firms. With regard to entities
that are currently regulated by the Commission and that are likely to
be affected by the rules and rule amendments being adopted in this
document, 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 estimate of these costs.\896\
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\896\ See section V.C.2. of this release.
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The benefits and costs of each adopted rule and amendment, as well
as the reasonable alternatives, are discussed in further detail below.
1. Benefits of Recordkeeping, Reporting, Notification, and Securities
Count Requirements
a. Requirements To Make and Keep Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-3)
The Commission is amending existing Rule 17a-3 to account for
security-based swap activities of broker-dealers, including broker-
dealer SBSDs and MSBSPs.\897\ The Commission believes that the
amendments to Rule 17a-3 will generate valuable information that will
assist the Commission to improve the regulatory oversight and
documentation of the security-based swap activities of stand-alone
broker-dealers, broker-dealer SBSDs and MSBSPs. For example, requiring
these firms to record the UIC of the counterparties in their security-
based swap transactions will assist the Commission in accurately
determining which parties are involved in the specific security-based
swap transactions and will thereby improve the Commission's analysis of
the firms' credit and counterparty risk exposures as well as assist in
the accurate determination of the firms' aggregate financial exposure
to the related parties.
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\897\ See, e.g., paragraph (a)(1) of Rule 17a-3, as amended
(addition of information that must be included in security-based
swap purchase and sale blotters). See also section II.A.2. of this
release for a discussion of the specific requirements in the
amendments.
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As noted above in section II.A.2. of this release, in practice, the
Commission's adoption of a requirement to use UICs for the purposes of
Rules 17a-3 and 18a-5 means that until such time as the Commission
recognizes any other IRSS, registrants will be required to use LEIs as
requested by commenters.\898\ As the Commission noted in the Regulation
SBSR adopting release, requiring the use of UICs will provide a
streamlined way of reporting, disseminating, and interpreting security-
based swap information.\899\ The Commission believes Rules 17a-3 and
18a-5 will require few entities that are not already required to obtain
UICs under Regulation SBSR to obtain UICs.\900\
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\898\ While the Commission to date has only recognized the GLEIS
as an IRSS, the rules being adopted in this document do not preclude
the use of UICs issued by any other organization that is recognized
as an IRSS in the future.
\899\ Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, 80 FR 14563.
\900\ See section V.B.4. of this release.
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The records generated as a result of amendments to Rule 17a-3 will
also constitute an important means of determining compliance of market
participants with securities laws such as the capital, margin, and
segregation rules applicable to SBSDs and MSBSPs. The amendments to
Rule 17a-3 will therefore facilitate more effective oversight and
surveillance of the participants in and the market for security-based
swaps.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-5)
The Commission is adopting new Rule 18a-5--which is modeled on Rule
17a-3, as amended--to require stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs to make and keep current certain
records.\901\ As with Rule 17a-3, under Rule 18a-5, firms are required
to document specific attributes of their security-based swap
transactions (e.g., the contract price of the security-based swap; the
type of security-based swap; the reference security, index or obligor
etc.). However, not all of the provisions of Rule 17a-3 are being
included as part of 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 MSBSPs not dually registered as a broker-dealer. Similarly,
and as described above, the new requirements that apply to bank SBSDs
and MSBSPs under new Rule 18a-5 are more limited than the new
requirements that apply to stand-alone SBSDs and MSBSPs under the same
rule because the Commission's authority under Section 15F(f)(1)(B)(i)
of the Exchange Act is limited to activities related to their business
as an SBSD or MSBSP and because banks are already subject to the
existing recordkeeping requirements from prudential regulators who are
responsible for capital, margin, and
[[Page 68634]]
other prudential requirements applicable to bank SBSDs and MSBSPs.
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\901\ See section II.A.2.a. of this release (describing Rule
18a-5, as adopted).
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The Commission believes that new Rule 18a-5 will provide for
improved regulatory oversight of the security-based swap activities of
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. As
with the records generated by broker-dealer SBSDs and MSBSPs under the
amendments to Rule 17a-3, records generated as a result of new Rule
18a-5 will also constitute an important means of determining compliance
of non-broker-dealer SBSDs and MSBSPs with securities laws such as the
capital, margin, and segregation rules applicable to SBSDs and MSBSPs
and will facilitate the Commission's regulation of the security-based
swap market.\902\
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\902\ See section V.C.1.a.i. of this release.
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b. Requirements To Preserve Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-4)
The Commission is adopting amendments to existing Rule 17a-4--which
contains requirements for broker-dealers subject to Rule 17a-3 to
preserve certain types of records required to be made and kept current
under Rule 17a-3 and prescribes the duration for which and the manner
in which these records must be preserved--to account for the security-
based swap activities of broker-dealers, including broker-dealer SBSDs
and MSBSPs, as well as certain non-substantive amendments.
For example, and as discussed above,\903\ the Commission is
adopting amendments to certain provisions in paragraph (b) of existing
Rule 17a-4 to account for security-based swap transactions, and is
adopting amendments that require broker-dealers, including broker-
dealer SBSDs and MSBSPs, to preserve certain additional records related
to security-based swap activities. Further, the Commission is amending
the preservation requirement in paragraph (b)(4) of existing 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
establishes a requirement to preserve for three years telephone calls
that a covered firm chooses to record to the extent that the calls are
required to be maintained pursuant to Section 15F(g)(1) of the Exchange
Act.
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\903\ See section II.A.3.a. of this release (discussing
paragraph (b) of Rule 17a-4, as amended).
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The Commission believes that by keeping current, preserving and
ensuring ready access to the records required under Rule 17a-3, as
amended, the amendments to Rule 17a-4 will support the benefits
emanating from the amendments to Rule 17a-3. These benefits primarily
include improving the Commission's regulatory oversight by ensuring its
ability to monitor and review documentation of the security-based swap
activities of stand-alone broker-dealers, broker-dealer SBSDs and
MSBSPs.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-6)
With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs, the Commission is adopting new Rule 18a-6 to establish
record preservation requirements for these categories of potential
registrants. New Rule 18a-6 is modeled on the record preservation
requirements of Rule 17a-4, as amended, but contains modifications to
account for the differences applicable to stand-alone SBSDs, stand-
alone MSBSPs, bank SBSDs and MSBSPs consistent with their anticipated
business activities related to security-based swaps.\904\ Many, but not
all, of the same record preservation requirements that are applicable
to broker-dealer SBSDs and MSBSPs under the amendments to Rule 17a-4
will also apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs under new Rule 18a-6. For example, analogous to
paragraph (a) of Rule 17a-4, as amended \905\ paragraph (a) of new Rule
18a-6 requires 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.\906\
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\904\ See section II.A.3.a. of this release (discussing Rule
17a-4, as amended, and Rule 18a-6, as adopted).
\905\ See id. (discussing Rule 17a-4 record retention
requirements).
\906\ See id. (discussing requirements for stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs and MSBSPs to maintain and preserve
records).
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In response to comments received to the proposing release, the
Commission is modifying Rule 18a-6 to eliminate the requirement that
the electronic storage system preserve records exclusively in a non-
rewriteable and non-erasable format.\907\ The Commission believes that
the removal of these requirements will reduce the likelihood that
stand-alone or banks SBSDs and MSBSPs will need to maintain an extra
set of records, and avoid the associated costs of maintaining those
extra records, in order to comply with the rule.\908\ For SBSDs and
MSBSPs that are also registered with the CFTC as swap dealers and major
swap participants, these modifications to the rule will also eliminate
a potential conflict with the requirements of the CFTC.
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\907\ See section II.A.3.a. of this release (discussing Rule
18a-6 electronic storage requirements).
\908\ The costs to implement an electronic storage system to
preserve records in a non-rewriteable and non-erasable format may be
substantial. In April 2018, SIFMA reported the results of anonymous
survey of a group of its members about the costs of implementing
such a system. Of the 25 respondents, 16 firms had implemented such
a system in the previous three years at an average cost of $6
million with several firms reporting costs in excess of $25 million.
See Petition for Rulemaking to Amend Exchange Act Rule 17a-4(f)--
Addendum (available at: https://www.sec.gov/rules/petitions/2018/ptn4-713-addendum.pdf).
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The Commission believes that by keeping current, preserving, and
ensuring ready access to the records required under new Rule 18a-5, new
Rule 18a-6 will support the benefits stemming from new Rule 18a-5
without increasing the costs associated with keeping records. These
benefits primarily include improving the Commission's regulatory
oversight by ensuring its ability to monitor and review documentation
of the security-based swap activities of non-broker-dealer SBSDs and
MSBSPs.
c. Reporting
The Commission is adopting amendments to existing Rule 17a-5--which
contains requirements for broker-dealers to file periodic unaudited
reports containing information about their financial and operational
condition and for broker-dealers to file annual financial statements,
certain reports and a report covering these financial statements and
reports prepared by an independent public accountant registered with
the PCAOB in accordance with PCOAB standards \909\--to account for the
security-based swap activities of broker-dealers, including broker-
dealer SBSDs and MSBSPs, as well as certain non-substantive amendments.
Further, the Commission is adopting new Rule 18a-7--which is modeled on
Rule 17a-5, as amended--to establish reporting requirements for stand-
alone SBSDs, SBSDs also registered as OTC derivatives dealers, stand-
alone MSBSPs, bank SBSDs, and bank MSBSPs. The Commission believes that
the economic effects associated with the new reporting requirements
will depend upon the nature of the filings that potential registrants
make today based upon their current registration status (e.g., broker-
dealer vs. non-broker-dealer).
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\909\ See section II.B.2. of this release (discussing Rule 17a-5
reporting requirements).
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[[Page 68635]]
i. Stand-Alone Broker-Dealers (Amendments to Rule 17a-5)
As described above, under these rules and rule amendments, stand-
alone broker-dealers (including stand-alone OTC derivatives dealers and
stand-alone ANC broker-dealers) that engage in security-based swap
activities but that do not register with the Commission as an SBSD or
MSBSP will be required to complete revised FOCUS Report Part II.\910\
FOCUS Report Part II, as amended, largely retains the structure and
line items of the FOCUS Report Part II that existed prior to these
amendments, but also includes new line items and schedules tailored
specifically to security-based swap activities.\911\ It also largely
elicits the same information as FOCUS Report Parts IIB and II CSE.\912\
Consequently, broker-dealers that filed the FOCUS Report Part II prior
to these amendments, ANC broker-dealers that filed the FOCUS Report
Part II CSE, and OTC derivatives dealers that filed the FOCUS Report
Part IIB will need to enter into the FOCUS Report Part II, as amended,
substantively the same information as was required of them prior to
these amendments.
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\910\ See id. (discussing broker-dealer SBSDs' and broker-dealer
MSBSPs' use of revised FOCUS Report Part II).
\911\ See section II.B.1. of this release.
\912\ See id.
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The Commission believes that the information elicited from stand-
alone broker-dealers on their security-based swap activities will
assist the Commission and the DEAs of these entities to examine them
more effectively. The reporting requirements for stand-alone broker-
dealers on account of their security-based swap related activities are
also expected to promote transparency of the financial and operational
condition of these entities to the Commission.
ii. Broker-Dealer SBSDs and MSBSPs (Amendments to Rule 17a-5)
The Commission has designed FOCUS Report Part II, as amended, to
elicit the information that it believes it needs to effectively oversee
the financial condition of broker-dealer SBSDs and MSBSPs. The
Commission has carefully considered FOCUS Report Part II, as amended,
in light of its experience with broker-dealer regulation and in
relation to its new statutory responsibilities under Section 15F of the
Exchange Act. The Commission believes that the information elicited in
FOCUS Report Part II, as amended, will promote compliance of the
relevant regulated entities with Rules 15c3-1 and 15c3-3 and will
assist the Commission, SROs, state securities regulators and the
regulated entities' DEAs in conducting effective examinations of these
entities. Additionally, the broker-dealer SBSD and broker-dealer MSBSP
reporting requirements related to their security-based swap activities
should promote transparency of the financial and operational condition
of the broker-dealer to the Commission and the firms' DEA. This may, in
turn, improve the Commission's ability to value the relevant
registrants' security-based swap exposures and assist the Commission in
assessing these entities' compliance with rules related to capital
requirements.
iii. Stand-Alone SBSDs and MSBSPs (New Rule 18a-7)
As described in more detail above,\913\ stand-alone SBSDs and
MSBSPs will be required to file FOCUS Report Part II, as amended, with
the Commission or its designee on a monthly basis.\914\ With respect to
their security-based swap activities, stand-alone SBSDs and MSBSPs are
required to report information similar to that required of broker-
dealer SBSDs. However, these entities are not required to complete the
sections applicable only to broker-dealers.
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\913\ See section II.B.2. of this release.
\914\ The Commission estimates that 9 of the approximately 50
entities that it anticipates to register with the Commission as
SBSDs will be stand-alone SBSDs.
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In addition, stand-alone MSBSPs will be required to complete a
simpler Computation of Tangible Net Worth, compared to the much longer
and more complex Computation of Net Capital and Computation of Minimum
Regulatory Capital Requirements sections that stand-alone SBSDs are
required to complete.\915\ Moreover, stand-alone MSBSPs will not be
required to complete the sections in FOCUS Report Part II, as amended,
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 Rule 18a-4.\916\ Furthermore,
stand-alone MSBSPs will not be required to complete and file a number
of sections of FOCUS Report Part II, as amended, that relate to the
operational data related to the firm; specifically, they will not be
required to complete and file the Capital Withdrawals, Capital
Withdrawals Recap, and the Financial and Operational Data sections of
FOCUS Report Part II, as amended.\917\ The Commission therefore
believes that the economic effects associated with the reporting
requirements on stand-alone MSBSPs will be significantly less than the
economic effects of the reporting requirements on stand-alone SBSDs.
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\915\ Compare FOCUS Report Part II, as amended, Computation of
Tangible Net Worth, with FOCUS Report Part II, as amended,
Computation of Net Capital (Filer Authorized to Use Models) and
FOCUS Report Part II, as amended, Computation of Minimum Regulatory
Capital Requirements (Non-Broker-Dealer SBSD).
\916\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44071-76.
\917\ See FOCUS Report Part II, as amended, Capital Withdrawals,
Capital Withdrawals--Recap, and Financial and Operational Data.
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In addition, stand-alone SBSDs and MSBSPs will be required to
generate and file their financial report and, in the case of stand-
alone SBSDs, compliance report or exemption report, with the Commission
on an annual basis.\918\ While the Commission expects that stand-alone
SBSDs and MSBSPs currently prepare financial statements that encompass
their security-based swap activity, under the new rules, these entities
will be required to prepare a financial report in a format consistent
with FOCUS Report Part II, as amended, which includes numerous entries,
computations, and schedules that a stand-alone SBSD may not currently
prepare as a part of its business practices.
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\918\ See paragraph (c) of Rule 18a-7, as adopted.
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For stand-alone SBSDs approved to use models, there will be a
number of additional monthly and quarterly reporting requirements,
independent of those on FOCUS Report Part II, as amended.\919\ The
additional reports required of stand-alone SBSDs approved to use models
are modeled on parallel reporting requirements for ANC broker-
dealers.\920\ Consequently, stand-alone SBSDs approved to use models
will be required to file the same types of additional reports relating
to their use of internal models as ANC broker-dealers, including ANC
broker-dealer SBSDs.
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\919\ See section II.B.3.a. of this release. See also paragraph
(a)(3) of Rule 18a-7, as adopted.
\920\ Compare paragraph (a)(3) of Rule 18a-7, as adopted, with
paragraph (a)(5) of Rule 17a-5, as amended.
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The Commission believes that using the new reporting requirements
will help the Commission to evaluate whether stand-alone SBSDs and
MSBSPs are operating in compliance with the Exchange Act and the rules
thereunder. The Commission also believes that the availability of FOCUS
Report Part II, as amended, will greatly enhance the Commission's
ability to oversee the financial condition of the relevant registrants,
and that the public
[[Page 68636]]
availability of a firm's audited Statement of Financial Condition and
net capital computations will facilitate the public's evaluation of the
firm's financial health.
In response to comments received to the proposing release, the
Commission is modifying Rule 18a-7 so that stand-alone SBSDs and
MSBSPs, as well as SBSDs also registered as an OTC derivatives dealers,
may engage an independent public accountant that is not registered with
the PCAOB, and that the accountant may prepare its reports in
accordance with GAAS in the United States or PCAOB standards.\921\ The
Commission estimates that of the 9 stand-alone SBSDs, 3 will make use
of the full alternative compliance mechanism.\922\ The Commission
estimates that of the 5 MSBSPs, one will also be registered as an FCM.
As with Commission registered broker-dealers, CFTC-registered FCMs are
required to use independent accountants that are registered with the
PCAOB.\923\
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\921\ See section II.B.3.a. of this release for a discussion of
why the Commission believes this option is appropriate for stand-
alone SBSDs and MSBSPs but not for SBSDs and MSBSPs that are also
registered as broker-dealers.
\922\ See section IV.C. of this release.
\923\ See 17 CFR 1.16(b).
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The Commission estimates that there will be 6 stand-alone SBSDs and
4 MSBSPs that may engage an independent public accountant as a result
of Rule 18a-7.\924\ The Commission estimates the total cost to these 10
entities to engage an accountant as required by Rule 18a-7 to be
$3,018,000.\925\ Providing these options to these types of SBSDs and
MSBSPs will not change the requirement to engage an independent public
accountant but will increase the number of accountants that could
potentially be hired. The Commission believes this could result in
lower costs to this group of firms.
---------------------------------------------------------------------------
\924\ See section IV.C of this release.
\925\ ($300,000 per stand-alone MSBSP x 4) + $303,000 per stand-
alone SBSD exempt from Rule 18a-4 x 6) = $3,018,000. See section
IV.D.3. of this release (PRA estimate of the total initial and
annual recordkeeping and reporting burden for amendments to Rule
17a-5, as amended, and Rule 18a-7, as adopted).
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iv. Bank SBSDs and MSBSPs (New Rule 18a-7)
As described above,\926\ bank SBSDs and MSBSPs will be required to
periodically complete and file FOCUS Report Part IIC with the
Commission. Relative to what broker-dealer SBSDs, broker-dealer MSBSPs,
stand-alone SBSDs, and stand-alone MSBSPs will report in FOCUS Report
Part II, as amended, bank SBSDs and MSBSPs will report less information
on FOCUS Report Part IIC because FOCUS Report Part IIC is tailored
specifically to a bank's activities as an SBSD or an MSBSP. Further,
FOCUS Report Part IIC elicits financial information that largely
derives from the information that banks already report on the call
reports that they file with their prudential regulators.\927\ Finally,
unlike broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs and
MSBSPs, bank SBSDs and MSBSPs will not be required to complete and file
an annual audited financial report because this set of potential
registrants are currently subject to the reporting requirements
administered by their prudential regulators. These reporting
requirements include filing of annual audited financial reports.
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\926\ See section II.B.2. of this release.
\927\ See section II.B.2.b.ii. of this release. See also 12
U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12 U.S.C. 1464.
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Consistent with the directive in Section 15F(f) of the Exchange
Act, bank SBSDs and MSBSPs will also be required to report, in FOCUS
Report Part IIC, details relating to their security-based swap
activities. To this end bank SBSDs and MSBSPs will be required to
create and maintain additional relevant details about their security-
based swap positions. In relation to reporting details about bank
SBSDs' or bank MSBSPs' security-based swap positions, the Commission
has limited the number of schedules required to be completed and filed
by these entities in FOCUS Report Part IIC to one schedule that elicits
details about their security-based swap positions. This schedule is
also largely derived from the banks' call report.
The Commission believes that the reporting requirements for bank
SBSDs and MSBSPs will help the Commission and other regulators ensure
that registrants follow applicable capital, margin, and segregation
rules. The Commission believes that such capital, margin, and
segregation rules are an integral part of ensuring that security-based
swap activity is conducted in a financially responsible manner.
d. Notification Requirements
i. Broker-Dealer SBSDs and MSBSPs (Amendments to Rule 17a-11)
The Commission is adopting amendments to existing Rule 17a-11--
which 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--to account for the security-based swap activities of broker-
dealer SBSDs and MSBSPs.\928\ Specifically, a broker-dealer SBSD will
be required to notify the Commission when it fails to make a deposit in
its security-based swap customer account.\929\
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\928\ See paragraphs (b)(5), (e), and (f) of Rule 17a-11, as
amended.
\929\ See paragraph (f) of Rule 17a-11, as amended.
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The Commission believes that the amendments to Rule 17a-11 will
result in improving 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.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-8)
The Commission is adopting new Rule 18a-8--which is modeled on Rule
17a-11, as amended--to establish notification requirements for stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.\930\ New
Rule 18a-8 is modeled closely upon the requirements applicable to
broker-dealer SBSDs and MSBSPs. For example, the Commission has
included a net capital deficiency and tentative net capital deficiency
notification requirement in paragraph (a)(1) of 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
amended.\931\ The Commission has also included ``early warning''
notification requirements in paragraph (b) of Rule 18a-8 that will be
applicable to stand-alone SBSDs and MSBSPs and that are modeled after
the relevant early warning provisions applicable to broker-dealers in
paragraph (b) of Rule 17a-11, as amended.\932\ Likewise, the
requirement for a bank SBSD, bank MSBSP, stand-alone SBSD, or 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.\933\
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\930\ See Rule 18a-8, as adopted.
\931\ Compare paragraph (a)(1) of Rule 18a-8, as adopted, with
paragraph (a) of Rule 17a-11, as amended.
\932\ Compare paragraph (b) of Rule 18a-8, with paragraph (b) of
Rule 17a-11, as amended.
\933\ Compare paragraph (d) of Rule 18a-8, as adopted, with
paragraph (c) Rule 17a-11, as amended.
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These notification requirements serve an important role in the
context of the reporting and recordkeeping rules for broker-dealer
SBSDs, broker-dealer
[[Page 68637]]
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 will alert the Commission to the fact that a registrant may
lack sufficient capital to continue to operate its business and to 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.\934\
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\934\ See 15 U.S.C. 78o-10(f).
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e. Quarterly Securities Count Requirement for Stand-Alone SBSDs (New
Rule 18a-9)
As discussed in greater detail above,\935\ the Commission is
establishing 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 will be subject to new Rule 18a-9. For reasons explained
above, new Rule 18a-9 will not apply to stand-alone MSBSPs, bank SBSDs,
or bank MSBSPs.\936\ Rule 18a-9 applies substantially all the same
affirmative obligations to stand-alone SBSDs that apply to broker-
dealers under Rule 17a-13.\937\
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\935\ See section II.D.1. of this release.
\936\ See id.
\937\ Compare Rule 18a-9, as adopted, with Rule 17a-13. Rule
18a-9 omits the exemptions from applicability of the rule that
appear in paragraphs (a)(1) through (3) and (e) of Rule 17a-13
because those exemptions relate to broker-dealer-specific functions
and broker-dealer registration status.
---------------------------------------------------------------------------
As discussed in the Recordkeeping and Reporting Proposing Release,
Rule 17a-13, the model for 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,
adequately checking and counting securities created a serious
``paperwork crisis'' in the securities markets.\938\ The Commission
believes that instituting a parallel provision will help to avoid a
similar problem for stand-alone SBSDs. Moreover, the Commission
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 rule will require such investments to be
made,\939\ which could improve the quality of such tracking and
safeguarding.
---------------------------------------------------------------------------
\938\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247.
\939\ See section V.C.2. of this release.
---------------------------------------------------------------------------
2. Costs of the Recordkeeping, Reporting, Notification, and Securities
Count Requirements
Compliance with the new rules and rule amendments will impose
certain implementation-related costs on SBSDs and MSBSPs, as well as on
stand-alone broker-dealers engaged in security-based swap activities.
These costs may include start-up costs, including other costs such as
those related to personnel and technology. The Commission understands
that entities that engage in security-based swap transactions currently
already incur costs during their normal business activities and that
the new rules and rule amendments will impose incremental costs on such
entities. While these incremental costs are not negligible, the
Commission believes that they are unlikely to be material.
Based on section IV.D. of this release, the Commission has
estimated the implementation-related costs of the new rules and rule
amendments for SBSDs, MSBSPs, and stand-alone broker-dealers that
engage in security-based swap activities.\940\ The Commission estimates
that across all potential SBSDs and MSBSP registrants including stand-
alone broker dealers that engage in security-based swap transactions,
the initial implementation costs are approximately $10 million and the
ongoing annual costs of implementation are approximately $9 million.
---------------------------------------------------------------------------
\940\ See section IV.D. of this release (discussing total
initial and annual recordkeeping and reporting burdens of the new
rules and rule amendments).
---------------------------------------------------------------------------
The following is a breakdown of the estimates of the costs imposed
by the different rules and rule amendments being adopted in this
document on each of the affected parties.\941\
---------------------------------------------------------------------------
\941\ The Commission is also adopting technical amendments which
it estimates will not impose material additional costs.
---------------------------------------------------------------------------
a. Requirements To Make and Keep Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-3)
Amendments to Rule 17a-3 are estimated to impose a one-time initial
cost of approximately $1,151,320 \942\ and an annual ongoing cost of
approximately $216,657 \943\ across the entire industry that includes
broker-dealer SBSDs, broker-dealer MSBSPs and stand-alone broker-
dealers engaged in security-based swap activities.
---------------------------------------------------------------------------
\942\ 4,280 hours x $269 per hour national hourly rate for a
compliance manager = $1,151,320. See section IV.D.1. of this release
(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 the Securities
Industry and Financial Market Association (``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.
\943\ 3,439 hours x $63 per hour national hourly rate for a
compliance clerk = $216,657. See section IV.D.1. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for 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.
---------------------------------------------------------------------------
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-5)
The Commission estimates that new Rule 18a-5 will result in a total
initial industry cost of $2,554,740 for non-broker-dealer SBSDs and
MSBSPs.\944\ On an ongoing annual basis, the Commission estimates that
new Rule 18a-5 will result in $791,475 of total industry costs for non-
broker-dealer SBSDs and MSBSPs.\945\
---------------------------------------------------------------------------
\944\ (9,460 hours x $269 per hour national hourly rate for a
compliance manager) + $10,000 in external costs = $2,554,740. See
section IV.D.1. of this release (PRA estimate of the total initial
and annual recordkeeping and reporting burden for Rule 18a-5, as
adopted).
\945\ (11,825 hours x $63 per hour national hourly rate for a
compliance clerk) + $46,500 in external costs = $791,475. See
section IV.D.1. of this release (PRA estimate of the total initial
and annual recordkeeping and reporting burden for Rule 18a-5, as
adopted).
---------------------------------------------------------------------------
The Commission believes that requiring non-broker-dealer SBSDs and
MSBSPs to comply with more limited recordkeeping requirements relative
to broker-dealer SBSDs and MSBSPs, in keeping with the former entities'
more restricted SBS-related business activities, will reduce compliance
costs for these entities without compromising the effectiveness of the
regulatory oversight achieved by the adopted rules.
Additionally, the Commission has attempted to reduce compliance
burdens and to allow firms subject to Rule 18a-5 to take advantage of
potential efficiencies by basing new Rule 18a-5 upon existing Rule 17a-
3 rather 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
[[Page 68638]]
which new Rule 18a-5 is modeled. Greater familiarity with the rule
should reduce compliance burdens and costs for these entities. However,
the Commission does acknowledge that with respect to entities not so
affiliated, this approach is much less likely to ease compliance
burdens.
b. Requirements To Preserve Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-4)
The Commission estimates that the amendments to Rule 17a-4 will
result in a total initial industry cost of $1,338,896 to broker-
dealers.\946\ On an ongoing annual basis, the Commission estimates that
the amendments to Rule 17a-4 will result in $164,704 in industry costs
to broker-dealers.\947\
---------------------------------------------------------------------------
\946\ 4,264 hours x $314 per hour national hourly rate for a
senior database administrator = $1,338,896. See section IV.D.2. of
this release (PRA estimate of the total initial and annual
recordkeeping and reporting burden for 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 a
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead.
\947\ (1,968 hours x $63 per hour national hourly rate for a
compliance clerk) + $40,720 in external costs = $164,704. See
section IV.D.2. of this release (PRA estimate of the total initial
and annual recordkeeping and reporting burden for amendments to Rule
17a-4, as amended).
---------------------------------------------------------------------------
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-6)
The Commission estimates that new Rule 18a-6 will result in
$3,634,864 in terms of initial costs to the industry \948\ and $750,615
in terms of annual ongoing costs to the industry.\949\
---------------------------------------------------------------------------
\948\ 11,576 hours x $314 per hour national hourly rate for a
senior database administrator = $3,634,864.
\949\ (8,770 hours x $63 per hour national hourly rate for a
compliance clerk) + (35 hours x $379 per hour for national hourly
rate for an attorney) + $184,840 in external costs = $750,615.
---------------------------------------------------------------------------
c. Reporting Requirements
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-5)
The Commission anticipates that there may be additional costs
associated with stand-alone broker dealers, broker-dealer SBSDs or
broker-dealer MSBSPs completing and filing the annual reports required
under paragraph (d) of Rule 17a-5, as amended. For example, the
amendments will increase the cost of completing the annual compliance
report filed by a broker-dealer SBSD because the compliance report for
such firms will include statements about the firms' compliance with
Rule 18a-4, the customer segregation rule that will apply to broker-
dealer SBSDs.\950\ Similarly, an ANC broker-dealer that currently files
FOCUS Report Part II CSE and that registers with the Commission as an
SBSD or MSBSP will experience a marginal impact on its reporting
obligations due to new line items and schedules tailored to
specifically elicit details about security-based swap activities.\951\
---------------------------------------------------------------------------
\950\ See section II.B.3.a. of this release.
\951\ See id.
---------------------------------------------------------------------------
The Commission also anticipates that the cost of auditing the
annual reports filed by stand-alone broker-dealers, broker-dealer SBSDs
and MSBSPs will rise.\952\ 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 of their
annual reports.\953\ The Commission believes the additional required
components of the financial report and the compliance report will
increase the costs of ongoing compliance as well as those of the annual
audit for these entities.
---------------------------------------------------------------------------
\952\ See id.
\953\ See section II.B.1. of this release.
---------------------------------------------------------------------------
However, the Commission believes that overall the additional costs
imposed by the amendments will be insubstantial because the FOCUS
Report Part II, as amended, largely retains the same structure as it
existed prior to the amendments. This will reduce uncertainty and avoid
additional compliance costs that could stem from devising an entirely
new reporting form and rules. Furthermore, the scope of the additional
information--generally related to the firms' security-based swap
activities--requested in FOCUS Report Part II, as amended, is
circumscribed by what broker-dealer SBSDs and MSBSPs report currently
in FOCUS Report Part II, Part II CSE, or Part IIB. The Commission
believes that the economic effects associated with the requirement to
file FOCUS Report Part II, as amended, will accordingly be
circumscribed by the relevant registrants' current reporting
obligations.
The Commission estimates that the amendments to Rule 17a-5 will
result in an initial total cost of $291,865 to broker-dealers.\954\ On
an ongoing annual basis, the Commission estimates that the amendments
to Rule 17a-5 will result in total costs of $1,862,556 per year to
broker-dealers.\955\
---------------------------------------------------------------------------
\954\ 1,085 hours x $269 per hour national hourly rate for a
compliance manager = $291,865. See section IV.D.3. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for amendments to Rule 17a-5, as amended). The
majority of costs that broker-dealers will incur as a result of the
amendments to Rule 17a-5, as amended, are expected to result from
the additional information required in FOCUS Report Part II, as
amended, as compared to the parts of the FOCUS Report currently
being filed by broker-dealers. Because broker-dealers (other than
broker-dealers required to file Part IIA) will be required to file
FOCUS Report Part II, as amended, on an ongoing basis, it is
characterized as an annual cost, rather than an initial cost.
\955\ 6,924 hours x $269 per hour national hourly rate for a
compliance manager = $ 1,862,556. See section IV.D.3. of this
release (PRA estimate of the total initial and annual recordkeeping
and reporting burden for amendments to Rule 17a-5, as amended).
---------------------------------------------------------------------------
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-7)
New Rule 18a-7 as adopted will require stand-alone SBSDs and MSBSPs
to file FOCUS Report Part II, as amended, with the Commission or its
designee on a monthly basis. Given that stand-alone SBSDs and MSBSPs
are not broker-dealers, these firms do not have experience filing the
FOCUS Report, and thus reporting on FOCUS Report Part II, as amended,
could represent a significant undertaking for them.
Relative to the information these firms generate now, FOCUS Report
Part II, as amended, likely elicits greater detail about the
registrants' security-based swap positions. In order to be able to
provide the security-based swap information elicited by FOCUS Report
Part II, as amended, registrants will need to have the requisite
additional details regarding their security-based swap positions. While
the Commission expects that stand-alone SBSDs and MSBSPs currently
prepare financial statements that encompass their security-based swap
activity, reporting on FOCUS Report Part II, as amended, may require
these firms to establish new systems that facilitate their reporting of
the required information. While these upgrades are likely to entail
costs for firms, firms may also use these upgrades towards more
efficiently tracking their trading and security-based swap exposures.
Moreover, since many of the entities that the Commission expects
will register as stand-alone SBSDs and MSBSPs are currently not
regulated, they are likely to be unaccustomed to completing and filing
detailed reports with financial regulators. Therefore the Commission
anticipates that stand-alone SBSDs and MSBSPs will bear substantial
costs in connection with completing and filing FOCUS Report Part II, as
amended.
Rule 18a-7 as adopted further requires stand-alone SBSDs to
generate and file their financial report and their
[[Page 68639]]
compliance report or exemption report with the Commission on an annual
basis. The compliance report contains several statements and
descriptions related to the firms' compliance with the financial
responsibility rules. The exemption report contains several statements
regarding the firms' exemption from Rule 18a-4. These details will be
entirely new for most stand-alone SBSD registrants. Finally, Rule 18a-7
requires stand-alone SBSDs and MSBSPs to file an annual audited report
with the Commission. Stand-alone SBSDs and MSBSPs will be required to
hire an independent public accountant to perform the audit and to
prepare the annual audit report. The Commission is modifying Rule 18a-7
to permit stand-alone SBSDs and MSBSPs the option to engage an
independent public accountant that is not registered with the PCAOB,
and to permit the accountant to use GAAS in the United States or PCAOB
Standards.\956\
---------------------------------------------------------------------------
\956\ See section II.B.3.a. of this release (discussing the
requirement to file annual reports and the qualifications of
independent public accountants).
---------------------------------------------------------------------------
The Commission believes that this will entail compliance-related
costs for these entities. Specifically, the Commission believes that
stand-alone SBSDs approved to use models may incur compliance costs
related to, among other things, preparing and filing the additional
reports that will be required under the new rules. The Commission
estimates that all stand-alone MSBSPs will incur costs stemming from
the requirement to engage an auditor. 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 will not be required to file the compliance report or the
exemption report. The Commission believes the additional reports that
stand-alone SBSDs approved to use models will be required to file with
the Commission will give rise to less substantial compliance costs
relative to the other costs generated by the reporting requirements.
This is the case because the additional reporting obligations for
stand-alone SBSDs approved to use models 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 SBSDs
approved to use models will incur the majority of the costs associated
with these internal models in designing and operating the models
themselves rather than in filing the reports arising from these models.
While the Commission understands that stand-alone SBSDs and MSBSPs
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 and MSBSPs may be affiliated with, or be
part of, a larger financial firm that contains a broker-dealer, thus
providing a source of experience with the FOCUS Report that is internal
to the firm and reducing compliance-related costs. Moreover, the
accounting and legal communities are familiar with the FOCUS Report so
the Commission believes that this familiarity should mitigate the
compliance costs for stand-alone SBSDs and MSBSPs insofar as they have
access to external assistance that has experience with the FOCUS
Report. At the same time, the Commission acknowledges that there may be
stand-alone SBSDs and MSBSPs affiliated with, for example, FCMs, and
such firms would conceivably benefit from rules based upon or similar
to CFTC rules.
Furthermore, the information required to be reported by bank SBSDs
and MSBSPs on the FOCUS Report Part IIC largely would be information
that banks are already required to provide in call reports. Thus, the
Commission does not believe that FOCUS Report Part IIC will require
substantial additional effort to complete.\957\
---------------------------------------------------------------------------
\957\ Whenever possible, the Commission has adopted the same
line item numbers as are used for the call report (but appended with
the letter ``b'' in FOCUS Report Part IIC) to facilitate a bank
SBSD's or bank MSBSP's use of data from the call report.
---------------------------------------------------------------------------
The Commission estimates that Rule 18a-7 will result in an initial
industry cost of $597,180.\958\ The Commission further estimates that
Rule 18a-7 will result in an ongoing annual industry cost of
$3,169,083.50.\959\
---------------------------------------------------------------------------
\958\ 2,220 hours x $269 per hour national hourly rate for a
compliance manager = $597,180. See section IV.D.3. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for amendments to Rule 17a-5, as amended, and Rule
18a-7, as adopted). The majority of the costs that SBSDs and MSBSPs
will incur as a result of Rule 18a-7 are expected to result from the
requirements to elicit information in Form SBS and to conduct an
annual audit. Because the additional information in the Form SBS and
the annual audit will be required on an ongoing basis, the
Commission is characterizing them as sources of ongoing costs.
\959\ (2,397 hours x $63 per hour national hourly rate for a
compliance clerk) + $3,018,072.5 in external costs = $3,169,083.50.
See section IV.D.3. of this release (PRA estimate of the total
initial and annual recordkeeping and reporting burden Rule 18a-7, as
adopted).
---------------------------------------------------------------------------
d. Notification Requirements
The Commission believes that costs of the notification requirement
will be incidental to the related underlying substantive obligation.
i. Broker-Dealer MSBSPs and Stand-Alone Broker-Dealers (Amendments to
Rule 17a-11)
The Commission believes that most of the costs stemming from the
notification requirements contained in amendments to Rule 17a-11 will
arise from preparing and filing the notices. In the aggregate, the
Commission estimates the amendments to Rule 17a-11 to result in an
ongoing annual industry cost of $28,245 to broker-dealer SBSDs and
MSBSPs.\960\
---------------------------------------------------------------------------
\960\ (105 hours) x $269 per hour national hourly rate for a
compliance manager = $28,245. See section IV.D.4. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for amendments to Rule 17a-11, as amended, and Rule
18a-8, as adopted).
---------------------------------------------------------------------------
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs
(New Rule 18a-8)
The Commission estimates that the notification requirements
contained in new Rule 18a-8 for non-broker-dealer SBSDs and MSBSPs will
result in an ongoing annual industry-wide costs of $1,237.\961\
---------------------------------------------------------------------------
\961\ 4.6 hours x $269 per hour national hourly rate for a
compliance manager = $1,237. See section IV.D.4. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for amendments to Rule 17a-11, as amended, and Rule
18a-8, as adopted).
---------------------------------------------------------------------------
e. Quarterly Securities Count Requirement (New Rule 18a-9)
The Commission believes that the costs and any larger economic
effects associated with new Rule 18a-9 should be similar to the costs
associated with existing Rule 17a-13 on which new Rule 18a-9 is
modeled. These costs will primarily be related to the development and
maintenance of internal procedures and controls and the investment in
technology. The Commission estimates that Rule 18a-9 will impose an
initial industry-wide cost of $51,150 \962\ and an industry-wide
ongoing annual cost of $75,600.\963\
---------------------------------------------------------------------------
\962\ 150 hours x $341 per hour national hourly rate for a
senior operations manager = $51,150. See section IV.D.5. of this
release (PRA estimate of the total initial and annual recordkeeping
and reporting burden for 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.
\963\ 600 hours x $126 per hour national hourly rate for an
operations specialist = $75,600. See section IV.D.5. of this release
(PRA estimate of the total initial and annual recordkeeping and
reporting burden for Rule 18a-9). The $126 per hour figure for an
operations specialist is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
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[[Page 68640]]
3. Economic Effects of the Approach to Recordkeeping, Reporting,
Notification, and Securities Count Requirements
In addition to the costs and benefits of the specific rules and
amendments discussed above, certain economic effects arise from the
Commission's overall approach in adopting recordkeeping, reporting,
notification, and securities count requirements. Generally, the new
requirements being adopted in this document are based upon the existing
comprehensive system of recordkeeping, reporting, notification, and
securities count rules applicable to broker-dealers, as modified to
capture and document the security-based swap activities of broker-
dealers, SBSDs, and MSBSPs. As discussed in Section II. above, the
current broker-dealer recordkeeping, reporting, notification, and
securities count requirements served as the template for the new rules
and rule amendments for several reasons. The financial markets in which
entities expected to register as SBSDs and MSBSPs operate are similar
to the financial markets in which broker-dealers currently operate in
that the markets are driven in significant part by dealers that buy and
sell on a regular basis and take principal risk.
The Commission believes that adopting a similar regulatory approach
for similar markets is likely to mitigate the cost borne by market
participants. Broker-dealers and third-party service providers that
assist broker-dealers in meeting their recordkeeping, reporting, and
notification requirements are familiar with Commission recordkeeping,
reporting, and notification rules for broker-dealers. To the extent
that these entities become subject to these final rules or provide
services to entities that become subject to these final rules,
consistency with the existing recordkeeping, reporting, and
notification requirements for broker-dealers will likely reduce the
costs associated with compliance with these rules. The Commission
believes that these efficiencies could be realized even by firms that
are not currently registered as broker-dealers given that some of the
new registrants will 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. However, the
Commission acknowledges that these reductions in compliance costs may
be much more limited for firms that are not currently broker-dealers
and are not affiliated with broker-dealers.
In addition, Commission staff consulted with staff from fellow
regulators regarding the new rules and rule amendments, as those
regulators may have analogous regulations. The Commission believes the
final rules may benefit security-based swap markets by applying
recordkeeping and reporting requirements that are consistent with
similar requirements in other jurisdictions. In considering whether
there were other practicable regulatory alternatives, the Commission
also examined existing rules of the prudential regulators. For example,
the OCC has promulgated rules governing recordkeeping and confirmation
requirements for securities transactions effected by national
banks.\964\ 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 amended, as well as with paragraph (b)(7) of Rule
18a-5.\965\ Consistency with prudential regulators' requirements may
mitigate compliance burdens for bank SBSDs and MSBSPs that become
subject to the adopted rules.
---------------------------------------------------------------------------
\964\ See 12 CFR 12.3.
\965\ Compare 12 CFR 12.3(a), with paragraph (a)(6) of Rule 17a-
3, as amended, and paragraph (b)(7) of Rule 18a-5, as adopted.
---------------------------------------------------------------------------
The Commission also believes the new rules and rule amendments
herein are broadly consistent with the approach taken by the CFTC. The
CFTC's final rules were modeled on existing rules promulgated by both
the CFTC and the Commission.\966\ As noted above,\967\ entities that
are active participants in the security-based swap market also tend to
be active participants in the CFTC-regulated swap market, and the
Commission estimated that approximately 35 of the 50 expected SBSDs
will be dually registered with the CFTC and therefore be subject to
CFTC recordkeeping, reporting, and notification requirements.
---------------------------------------------------------------------------
\966\ See CFTC, Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules, 77 FR at 20171 (stating
swap dealer and major swap participant rules are modeled on existing
rules as well as those of the Commission).
\967\ See section V.B.2.a. of this release.
---------------------------------------------------------------------------
The recordkeeping rules the Commission is adopting are similar to
those of the CFTC in terms of their level of prescriptiveness. For
example, paragraph (a)(1) of existing Rule 17a-3 sets forth the
requirement that a broker-dealer make and keep current a trade blotter,
while paragraphs (a)(1) and (b)(1) of Rule 18a-5 include parallel
blotter requirements for stand-alone SBSDs and MSBSPs and bank-SBSDs
and bank-MSBSPs respectively.\968\ In comparison, the CFTC's rule 202
(``Daily Trading Records''), which corresponds to the Commission's
Rules 17a-3 and 18a-5, prescribes that swap dealers and major swap
participants must make and keep trade execution records that are very
similar to the records required to be made and kept by Rules 17a-3 and
18a-5.\969\ Because the Commission is adopting requirements that are
similar to CFTC requirements, entities that are already registered with
the CFTC may experience relatively lower costs to become compliant with
the adopted rules.
---------------------------------------------------------------------------
\968\ See section II.A.2.a. of this release.
\969\ See 17 CFR 23.202(a)(2) (Rule 202).
---------------------------------------------------------------------------
Further, as the Commission has noted in other releases, regulatory
consistency can also reduce the likelihood of regulatory arbitrage. The
new requirements applicable to stand-alone SBSDs and MSBSPs seek to
regulate these firms' security-based swap activity in a manner
consistent with the regulation of security-based swap activities
conducted at broker-dealers and at banks, while reflecting the business
model of such entities.\970\ As a result, the final rules mitigate the
risk that bank SBSDs and MSBSPs restructure their activities in order
to take advantage of differences in prudential regulators'
recordkeeping and reporting requirements and those adopted by the
Commission.
---------------------------------------------------------------------------
\970\ In this regard, the Commission notes the new rules exclude
a number of recordkeeping requirements for bank SBSDs and 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.
---------------------------------------------------------------------------
The Commission believes that applying consistent requirements
across all entities that engage in security-based swap activity will
facilitate competition between these entities on similar terms insofar
as firms operating in different jurisdictions will incur similar
compliance costs. 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 security-based
swap business should also be subject to an appropriately circumscribed
set of regulations.
[[Page 68641]]
In response to a commenter's concerns regarding harmonization with
the CFTC's recordkeeping requirements as well as to promote
harmonization with CFTC requirements,\971\ the Commission is also
adopting a limited alternative compliance mechanism that--subject to
certain requirements \972\--allows registrants to employ a single
recordkeeping system for swap and security-based swap transactions and
positions and to follow a single set of recordkeeping requirements
while helping to ensure that the requisite records are promptly
available to the Commission staff in a format that readily permits
examination. The limited alternative compliance mechanism could thereby
ease compliance burdens--particularly initial burdens--for registrants
that have already devoted substantial resources towards complying with
the CFTC's recordkeeping requirements for swap transactions and
positions and will not be required to incur afresh the costs of the
recordkeeping system software needed to comply with the Commission's
new recordkeeping requirements for security-based swap transactions and
positions. The limited alternative compliance mechanism should also
afford the relevant registrants greater flexibility in the manner in
which they record security-based swap transactions and positions.\973\
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\971\ See Nomura Letter.
\972\ See section II.A.1. of this release.
\973\ See section II.A.2. of this release. As stated above,
however, the Commission is making the conservative estimate that no
firms will use the limited alternative compliance mechanism.
However, the Commission believes that providing the limited
alternative compliance mechanism could ease compliance burdens for
some firms already registered with the CFTC.
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Finally, the Commission is amending the full alternative compliance
mechanism in existing Rule 18a-10 that permits certain SBSDs that are
registered as swap dealers and that predominantly engage in a swaps
business to elect to comply with the capital, margin, and segregation
requirements of the CEA and the CFTC's rules in lieu of complying with
the capital, margin, and segregation requirements in Rules 18a-1, 18a-
3, and 18a-4. The amendments to Rule 18a-10 will permit firms that will
operate under Rule 18a-10 to elect to comply with the recordkeeping and
reporting requirements of the CEA and the CFTC's rules in lieu of
complying with Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9. The
Commission believes the availability of the full alternative compliance
mechanism will promote harmonization with CFTC requirements and reduce
compliance costs for eligible SBSDs and MSBSPs. The Commission
estimates that in the absence of the full alternative compliance
mechanism, the initial industry compliance costs could be as much as
$827,715 higher and the ongoing annual industry compliance could be as
much as $1,292,637 higher.\974\
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\974\ This estimate is based on the Commission's estimate that 3
stand-alone SBSDs will take advantage of the full alternative
compliance mechanism. See section IV.D.7 of this release. The
increase in initial industry compliance costs in the absence of full
alternative compliance for Rules 18a-5, 18a-6, 18a-7, 18a-8, and
18a-9 are $261,240, $395,640, $145,260, $0.00, and $25,575,
respectively. The corresponding increases in ongoing compliance
costs are $89,550, $79,088, $1,114,549, $0.00, and $9,450,
respectively. See section IV.D.1. through section IV.D.4. and
section IV.D.6. of this release.
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4. Cross-Border Application and Substituted Compliance
As discussed above,\975\ the Commission treats the adopted
recordkeeping and reporting requirements as entity-level requirements.
Entity-level requirements apply to all the security-based swap
transactions of the registered entity regardless of the U.S. person
status of the entity or the U.S. person status of the entity's
counterparty to any particular transactions. The Commission believes
that the concentration of global security-based swap activity within a
small group of large entities makes entity level regulation--thereby
not exempting certain transactions from the recordkeeping, reporting,
notification, and securities count requirements being adopted in this
document--critical to advancing the policy objectives of Title VII.
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\975\ See section II.F.1. of this release.
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Classifying security-based swap recordkeeping and reporting
requirements as entity-level requirements may facilitate and strengthen
Commission oversight of registered SBSDs and enhance compliance with
the full range of obligations under Federal securities laws and
Commission rules regardless of the location of counterparties or
personnel. Title VII security-based swap recordkeeping and reporting
requirements may enhance the Commission's ability to evaluate foreign
SBSDs and MSBSPs' records for evidence of market manipulation or other
abusive practices within the United States. Moreover, since the
marginal cost of keeping daily trading records and confirmations is
likely to be low for SBSDs and MSBSPs, the Commission does not believe
that the savings associated with limited application of these
requirements to a subset of an SBSD's or MSBSP's transactions is likely
to be high.
In considering the scope of the entities that will be included
within the ambit of the new recordkeeping, reporting, notification, and
securities count requirements being adopted in this document, the
Commission is aware that market participants may respond to entity-
level requirements by restructuring their business or exiting markets
to reduce the likelihood of incurring an obligation to register with
the Commission. Compliance with the recordkeeping and reporting
requirements will increase costs for SBSDs and MSBSPs, including those
that are non-U.S. persons. To the extent that foreign SBSDs and MSBSPs
have market power, they may pass the costs of these requirements
through to U.S. persons in the form of higher transaction costs.
Furthermore, to the extent that non-U.S. persons avoid transacting with
U.S. persons to avoid registration requirements, U.S. persons may
implicitly bear the costs of compliance through reduced access to
liquidity provided by non-U.S. persons.\976\
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\976\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, 79 FR at 47343.
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Given that security-based swap markets are global and the
Commission expects registered SBSDs and MSBSPs to transact across
multiple jurisdictions, some registered SBSDs may be subject to
duplicative or mutually conflicting recordkeeping and reporting
requirements in multiple foreign jurisdictions. This may impede the
entry of foreign SBSDs and MSBSPs into the U.S. security-based swap
market, disrupt existing business relationships, and, more generally,
reduce competition and market efficiency. As discussed above, the
Commission is amending Rule 3a71-6 to provide non-U.S. SBSDs and non-
U.S. MSBSPs with the potential to utilize substituted compliance with
comparable foreign requirements to satisfy the recordkeeping and
reporting requirements of Section 15F of the Exchange Act and Rules
18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder.\977\
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\977\ See section II.F.2. of this release.
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Allowing for the possibility of substituted compliance is expected
to help achieve the benefits of the recordkeeping and reporting
requirements being adopted in this document in a manner that avoids the
costs that foreign registrants would have
[[Page 68642]]
to bear due to regulatory duplication or conflict. A substituted
compliance determination could thus preserve the access of foreign
registrants into U.S. security-based swap markets and hence promote
market efficiency and enhance competition therein while also generally
facilitating a well-functioning global security-based swap market.
Further, as the availability of substituted compliance lowers the
potential costs to non-U.S. SBSDs and non-U.S. MSBSPs of complying with
the rules being adopted in this document, the costs of completing
security-based swap transactions may be lower, relative to the case
where substituted compliance is not available and counterparties,
including non-dealer counterparties, may bear lower transactions costs
as a result. At the same time, the process of making substituted
compliance requests may cause foreign registrants to incur additional
costs of applying for a substituted compliance determination. These
substituted compliance requests will be made on a voluntary basis, and
foreign registrants will only make such requests when the anticipated
costs of relying on substituted compliance are lower than the costs of
complying directly with the final rules being adopted in this document.
Further, after a substituted compliance determination is made, foreign
registrants will choose substituted compliance only if their expected
private benefits from participating in U.S. security-based swap markets
exceed expected private costs, including any conditions the Commission
may attach to the substituted compliance determination.
The Commission also recognizes that these costs and the overall
economic effects of allowing substituted compliance for the final
recordkeeping and reporting rules will depend on, among other things:
Whether and to what extent substituted compliance requests will be
granted for jurisdictions in which some of the most active foreign
registrants are currently regulated and supervised; the costs of
potential relocation, business restructuring, or direct compliance by
foreign registrants that may be denied substituted compliance requests;
the relevant information required to demonstrate consistency between
the foreign regulatory requirements and the Commission's recordkeeping
and reporting rules; the relevant information required to demonstrate
the adequacy of the foreign regime's compliance and enforcement
mechanisms; the fraction of foreign registrants in a given jurisdiction
that may choose to make substituted compliance requests; and whether
substituted compliance determinations for subsequent applications are
more likely to be granted after an initial affirmative substituted
compliance determination for the first applicant from a given
jurisdiction. Nevertheless, the potential for the duplication of
recordkeeping and reporting compliance costs on foreign registrants may
be more significant in cases where the foreign jurisdictions'
regulatory regimes impose less stringent recordkeeping and reporting
requirements than the requirements being adopted in this document or
when other prerequisites for substituted compliance have not been
satisfied. The Commission thus recognizes that there will be limits to
the availability of substituted compliance, including the possibility
that substituted compliance may be permitted with regard to some
requirements and not with regard to others, or that, in certain
circumstances, substituted compliance may not be permitted with respect
to any requirements of a particular jurisdiction.
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. 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.\978\ 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.
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\978\ See 15 U.S.C. 78w(a)(2).
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In the aggregate, the recordkeeping, reporting, and notification
rules are an integral part of the financial responsibility rules
governing security-based swaps which, in turn, are part of the
regulatory regime for OTC derivatives markets established by Title VII
of the Dodd Frank Act. As stated above, the Commission believes that
the recordkeeping, reporting, notification, and securities count rules
and rule amendments being adopted in this document 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 rules.\979\
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\979\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43968-44040.
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Similarly, while the Commission expects that the adoption of these
rules and rule amendments, and their attendant benefits and costs, will
affect competition, efficiency, and capital formation, the Commission
believes that such impact will be more limited than the impact from the
capital, margin, and segregation rules. In most instances, the
Commission believes the costs of the new rules and rule amendments will
be implementation-related and the benefits will 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's belief that the costs of the rule and rule
amendments will be implementation-related is supported by the results
of a broker-dealer survey conducted prior to the finalization of the
OTC derivatives rules.\980\ According to this survey even though the
majority, i.e., 57.5% of surveyed broker-dealers, stated that they
expected to be ``highly impacted'' by the regulation of OTC derivatives
markets under Title VII of the Dodd Frank Act,\981\ the specific areas
that were anticipated as representing top operational challenges were
all implementation-related. Thus, the majority, i.e., 61.9% of surveyed
broker-dealers, indicated that their top anticipated challenge from
Title VII regulations for OTC derivatives markets was ``documenting
compliance with suitability requirements when making recommendations to
counterparties'' followed by 59.5%, who cited the ``need for subject
matter expertise to derivatives and the disclosure obligations set
forth in the CFTC's recently proposed rules.'' In terms of the areas
that the survey respondents anticipated would represent the most
significant operational challenges emerging from the Dodd-Frank Act,
45.3% indicated ``regulatory inquiries and exams'' followed by 35.7%
for
[[Page 68643]]
``trade reporting'' and 19% for ``disclosures and reporting
requirements.''
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\980\ See Harvard Law School Forum on Corporate Governance and
Financial Regulation, Broker-Dealers Respond to Dodd-Frank and FINRA
(Oct. 8, 2011), available at https://corpgov.law.harvard.edu/2011/10/08/broker-dealers-respond-to-dodd-frank-and-finra/.
\981\ The survey considered the following specific initiatives
of the Dodd-Frank Act: (1) The uniform fiduciary standard; (2) the
Volcker Rule regulating proprietary trading under Dodd-Frank Title
VI and (iii) the regulation of the OTC derivatives markets under
Title VII of the Dodd-Frank Act.
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The rules are designed to provide greater regulatory transparency
into the business activities of firms that engage in security-based
swap activities and to assist the Commission and other regulators in
reviewing and determining compliance with the capital, margin, and
segregation requirements. As the Commission has discussed in its
associated release,\982\ the capital, margin, and segregation
requirements have the potential to enhance efficiency and capital
formation in financial markets through their impact on competition. In
general, the Commission believes that the new rules and rule amendments
will thus help ensure that firms that engage in security-based swap
activities do so in a financially responsible manner. The Commission
further believes that the new rules and rule amendments, by improving
its ability to monitor the financial condition of the relevant
registrants, could increase the willingness of market participants that
value regulatory oversight of the security-based swap market to engage
in security-based swap activities. Additional participation in the
security-based swap market could lead to increased competition between
suppliers of security-based swap liquidity and increased efficiency,
through both lower transactions costs and reduced search costs. These,
in turn, may have a positive effect on capital formation, to the extent
that they improve opportunities for risk sharing using security-based
swaps.
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\982\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44033-40.
---------------------------------------------------------------------------
The Commission is cognizant, however, that it must be sensitive to
the costs and burdens imposed by its rules on both individual firms and
financial markets as a whole. For example, overly restrictive or costly
recordkeeping requirements could reduce the willingness of firms to
engage in security-based swap trading. This could, in turn, increase
transaction costs for market participants and dampen liquidity in the
market. Even if the costs of overly restrictive recordkeeping,
reporting, notification, and securities count requirements were
shouldered only by those market participants that are subject to them,
the regulations will impose additional costs on capital markets at
large since the resources used to comply with the regulations will not
be available for potentially more efficient uses, thereby distorting
capital allocation and, in turn, adversely affecting capital formation.
Similarly, the additional costs of the new recordkeeping, reporting,
securities count, and notification requirements could represent
barriers to entry for potential market participants; however, the
Commission believes that these rules and rule amendments are unlikely
to increase the barriers to entry in this market in a material way.
Notwithstanding this belief, the Commission has taken steps, where
appropriate, to reduce compliance costs for some SBSDs and MSBSPs by
establishing the limited and full alternative compliance mechanisms.
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.\983\ Thus, from among the 3,893 stand-alone broker-dealers
registered with the Commission as of December 31, 2017, the Commission
estimates that approximately twenty-five (or only 0.62%) will be
engaged in security-based swap activities while not being required to
register as SBSDs or MSBSPs.\984\
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\983\ See section IV.C. of this release.
\984\ See id.
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To the extent that the new rules or rule amendments are burdensome
or costly, they may induce market participants to scale back their
activities or exposures to avoid incurring the obligation to register
as SBSDs or MSBSPs. This reduction in scale could adversely impact
competition between liquidity suppliers 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 increased costs could lead certain market
participants to cease engaging altogether in security-based swap
trading or to restructure their activities in ways that allow them to
avoid registration with the Commission and entity-level requirements
under Title VII.
The Commission is particularly cognizant of the impacts of
restructuring in financial markets that are global in scope.
Competitive disparities in regulations across different jurisdictions
coupled with SBSDs' flexibility to restructure their businesses and
operations may result in market fragmentation.\985\ The outcome of such
restructuring could be a large pool of security-based swap liquidity
consisting of transactions that are carried out by unregistered non-
U.S.-person dealers with non-U.S.-person counterparties using personnel
outside of the United States and a smaller pool consisting of
transactions involving U.S. persons or using personnel located in a
U.S. branch or office. Such fragmentation could make it more difficult
for U.S. persons to find liquidity in the United States, and those U.S.
persons that might otherwise use security-based swaps to hedge
financial and commercial risks may reduce their hedging activity and
assume an inefficient amount of risk, or engage in precautionary
savings by accumulating capital to mitigate the effects of market
risks, which would inhibit capital formation. The Commission notes,
however, that the type of restructuring necessary to avoid counting
security-based swap dealing activity towards de minimis thresholds
which will trigger requirements to register as an SBSD will likely be
costly for non-U.S. persons,\986\ and these costs may reduce the
likelihood that non-U.S. persons restructure in response to the
requirements being adopted in this release. In particular, to the
extent that the costs of restructuring are larger than the costs of
complying with Commission recordkeeping, reporting, and notification
rules, they may reduce the likelihood of market fragmentation and the
associated impacts on competition, efficiency, and capital formation
that might otherwise result from counterparties seeking to avoid
complying with these rules.
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\985\ Analysis of TIW data shows that 79.5% of North American
corporate single-name CDS transactions in 2014 involved either two
ISDA-recognized dealers or an ISDA-recognized dealer and a non-U.S.-
person non-dealer. The Commission believes that restructuring as a
response to competitive disparities stemming from Title VII
regulation is more likely to occur within this subset of the market
because these dealers currently operate from locations throughout
the world and enjoy a volume of business that is more likely to make
such restructuring profitable.
\986\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, 81 FR at 8633.
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In addition to the competitive effects of compliance burdens
discussed above, the approach to substituted compliance may impact
competition between U.S. and non-U.S. entities. Substituted compliance
for recordkeeping and reporting requirements may reduce burdens for
foreign SBSDs and MSBSPs and may promote competition if it reduces the
likelihood that foreign SBSDs and MSBSPs exit the U.S. security-based
swap market. Moreover, substituted compliance could improve efficiency
by reducing the potential that a fragmented market develops, in which
[[Page 68644]]
U.S. persons cannot easily access liquidity provided by foreign SBSDs
and MSBSPs.
E. Alternatives to the Adopted 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 new rules
and rule amendments it is adopting in this document, 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.
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 requirements that apply
to each participant. For example, since a stand-alone MSBSP is not
subject to a minimum net capital requirement under the capital rules
applicable to SBSDs and MSBSPs (it is subject to a positive tangible
net worth standard instead),\987\ it may be unduly burdensome to
require stand-alone MSBSPs to calculate and report in FOCUS Report Part
II, as amended, the amount of net capital they hold. Hence, while the
Commission considered this approach, the Commission believes that such
an approach would be confusing and unduly burdensome for firms required
to complete and file FOCUS Report Part II, as amended, and would
introduce significant compliance challenges beyond those imposed by the
new rules and rule amendments.
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\987\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43906-08.
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Another alternative to the new rules and rule amendments the
Commission is adopting 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 likely have
the advantage of being less costly, as the firm would be more able to
bring recordkeeping practices at its subsidiaries into conformity with
existing recordkeeping practices at the parent. 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 believes these similarities argue for a
consistent regulatory approach.\988\ In addition, as discussed above,
the objectives of these broker-dealer requirements are similar to the
objectives underlying the new rules and rule amendments regarding
security-based swaps.\989\
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\988\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43881 (stating a similar rationale for basing the proposed
capital, margin, and segregation requirements for SBSDs on the
broker-dealer capital, margin, and segregation requirements).
\989\ See section I of this release.
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The Commission considered modifying the electronic storage
requirements in Rule 17a-4 to remove the requirement that the
electronic storage system preserve records exclusively in a non-
rewriteable and non-erasable format similar to the modification made to
Rule 18a-6 in response to comments that it received. The Commission
concluded that any such modification to Rule 17a-4 would affect a large
number of broker-dealers that are not likely to register either as
SBSDs or MSBSPs and may raise issues that are distinct from those
raised by stand-alone or bank SBSDs and MSBSPs. Accordingly, the
Commission believes that any change to these requirements should be
addressed in a separate rulemaking.\990\
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\990\ See section II.A.3.a. of this release.
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The Commission has also considered alternatives to the financial
reporting rules being adopted. For example, with respect to bank SBSDs
and 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 FOCUS Report Part IIC, but Rule 18a-7(a)
is designed to lower burdens that bank SBSDs and MSBSPs may face to
meet reporting requirements by aligning certain Commission reporting
requirements with requirements these entities already face because they
are subject to prudential regulators' reporting requirements. While
FOCUS Report Part IIC seeks certain specific transaction and position
data regarding bank SBSDs' and bank MSBSPs' security-based swap
activities, the other required financial data in FOCUS Report Part IIC
for bank SBSDs and MSBSPs are likely readily available because these
come directly from the filings these firms are already required to make
with their respective prudential regulators.\991\
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\991\ See section II.B.2.b.ii. of this release.
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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 60 days
of the end of the fiscal year.\992\ The Commission believes that the
information elicited by FOCUS Report Part II, as amended, should assist
the Commission and the firms' DEAs to conduct effective examinations of
broker-dealer SBSDs and MSBSPs. The broker-dealer SBSD and broker-
dealer MSBSP reporting requirements should promote transparency of the
financial and operational condition of these entities to both the
Commission and the public.
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\992\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 81 FR 91252, 91276 (Dec. 16, 2016) (discussion of
proposed CFTC Regulation 23.105).
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The Commission has also considered alternatives to the notification
and securities count rules.\993\ An alternative to the notification
rule would be to not have such a rule, or to have fewer events give
rise to the requirement for a notification. Similarly, with respect to
the quarterly securities count rule, the Commission believes the
alternative would be to specify a less frequent count or to omit
altogether the requirement for securities count.
---------------------------------------------------------------------------
\993\ See section II.D.1. of this release (summarizing rationale
underlying Rule 17a-13).
---------------------------------------------------------------------------
The Commission adopted the notification and securities count rules
because it believes that the rules are an appropriate component of its
oversight of the financial responsibility of firms engaged in the
security-based swap business. The broker-dealer recordkeeping,
reporting, notification, and securities count requirements are part of
the broker-dealer financial responsibility rules.\994\ The financial
responsibility rules are designed to work together to establish a
comprehensive regulatory program designed to promote the prudent
[[Page 68645]]
operation of broker-dealers and the safeguarding of customer securities
and funds held by broker-dealers. In this regard, the notification and
securities count rules (in conjunction with the recordkeeping and
reporting rules) are designed to promote compliance with the capital,
margin, and segregation requirements for broker-dealers. The
recordkeeping, reporting, notification, and securities count
requirements applicable to SBSDs and MSBSPs, along with the 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 recordkeeping,
reporting, notification, and securities count requirements applicable
to SBSDs and MSBSPs are designed to promote compliance with the
capital, margin, and segregation requirements applicable to SBSDs and
MSBSPs. Omitting such rules would create regulatory disparities between
broker-dealers, banks, stand-alone SBSDs, and stand-alone MSBSPs. For
these reasons, the Commission believes that alternative approaches
would not be as effective in helping to ensure compliance with the
capital, margin, and segregation requirements applicable to SBSDs and
MSBSPs.
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\994\ See 17 CFR 240.3a40-1.
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VI. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
Pursuant to the Congressional Review Act,\995\ the Office of
Information and Regulatory Affairs has designated these rules as ``[not
a major rule],'' as defined by 5 U.S.C. 804(2).
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\995\ 5 U.S.C. 801 et seq.
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VII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \996\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Pursuant to Section 605(b) of the RFA,\997\ the
Commission certified in the Proposing Release and the Cross-Border
Proposing Release that the proposed amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11 and new Rules 3a71-6 and 18a-5 through 18a-9 would
not have a significant economic impact on any ``small entity'' \998\
for purposes of the RFA.\999\
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\996\ See 5 U.S.C. 601 et seq.
\997\ See 5 U.S.C. 605(b).
\998\ 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 17 CFR 240.0-10 (``Rule 0-
10''). See Statement of Management on Internal Accounting Control,
Exchange Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4,
1982).
\999\ See Recordkeeping and Reporting Proposing Release; Capital
Rule for Certain Security-Based Swap Dealers, 79 FR at 25296-25297;
Cross-Border Proposing Release, 78 FR at 31204-31205.
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\1000\ 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 paragraph (d) of Rule
17a-5, 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.\1001\
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\1000\ See 17 CFR 240.0-10(a).
\1001\ See 17 CFR 240.0-10(c).
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Based on available information about the security-based swap
market, the market, while broad in scope, is largely dominated by
entities such as those that will be covered by the SBSD and MSBSP
definitions. Based on feedback from industry participants about the
security-based swap markets, the Commission continues to believe that
(1) 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 large financial institutions--would not be ``small
entities'' for purposes of the RFA; \1002\ and (2) the types of
entities that may have security-based swap positions above the level
required to register as ``major security-based swap participants''
would not be ``small entities'' for purposes of the RFA. Thus, the
Commission believes that it is unlikely that the requirements
applicable to SBSDs and MSBSPs that are being established under the
amendments to Rules 3a71-6, 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 and
new Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9, will have a
significant economic impact on any small entity.
---------------------------------------------------------------------------
\1002\ The amendments are discussed in detail in section II of
this release. The Commission discusses the economic impact,
including the compliance costs and burdens, of the amendments in
sections IV and V of this release.
---------------------------------------------------------------------------
The Commission estimates that as of December 31, 2018 there are
approximately 996 broker-dealers that are ``small'' for the purposes
Rule 0-10. While 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 will apply to all broker-dealers with
such positions, it is unlikely that these amendments will have any
impact on small broker-dealers, since most, if not all, of these firms
generally do not hold these types of positions. In addition, the
technical amendments to Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12
will apply to all broker-dealers, including broker-dealers that are
small. However, these amendments will have no impact on broker-dealers,
including small broker-dealers, because they will not establish new
substantive requirements.
For the foregoing reasons, the Commission certifies that the
amendments to Rules 3a71-6, 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 and
new Rules 18a-5 through 18a-9, will not have a significant economic
impact on a substantial number of small entities for purposes of the
RFA.
VIII. Statutory Basis
The Commission is revising Rules 30-3, 17a-3, 17a-4, 17a-5, 17a-11,
17a-12, and 3a71-6 under the Exchange Act (17 CFR 200.30-3, 17 CFR
240.17a-3, 17 CFR 240.17a-4, 17 CFR 240.17a-5, 17 CFR 240.17a-11, 17
CFR 240.17a-12, and 17 CFR 240.3a71-6), Part II of Form X-17A-5 and the
instructions thereto (17 CFR 249.617), and Part III of Form X-17A-5 (17
CFR 249.617), and adding new Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-
9 under the Exchange Act (17 CFR 240.18a-5, 17 CFR 240.18a-6, 17 CFR
240.18a-7, 17 CFR 240.18a-8, and 17 CFR 240.18a-9), and Part IIC of
Form X-17A-5 and the instructions thereto (17 CFR 249.617) pursuant to
the authority conferred by the Exchange Act, including Sections 15F,
17, and 23(a).
List of Subjects
17 CFR Part 200
Administrative practice and procedure, Authority delegations
(Government agencies), Civil rights, Classified information, Conflicts
of interest, Environmental impact
[[Page 68646]]
statements, Equal employment opportunity, Federal buildings and
facilities, Freedom of information, Government securities, Organization
and functions (Government agencies), Privacy, Reporting and
recordkeeping requirements, Sunshine Act.
17 CFR Part 240
Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 249
Brokers, Recordkeeping and reporting requirements, Securities.
Text of Rules and Rule Amendments
For the reasons set out in the preamble, the Commission is amending
title 17, chapter II, of the Code of Federal Regulations as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
Subpart A--Organization and Program Management
0
1. The authority citation for part 200, subpart A, continues to read in
part as follows:
Authority: 15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1,
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et
seq., unless otherwise noted.
* * * * *
Section 200.30-3 is also issued under 15 U.S.C. 78b, 78d, 78f,
78k-1, 78q, 78s, and 78eee.
* * * * *
0
2. Section 200.30-3 is amended by revising paragraphs (a)(5) and (30)
and (a)(65)(i) to read as follows:
Sec. 200.30 3 Delegation of authority to Director of Division of
Trading and Markets.
* * * * *
(a) * * *
(5) Pursuant to Sec. 240.17a-5(m)(3) of this chapter (Rule 17a-
5(m)(3)), to consider applications by brokers and dealers for
exemptions from, and extension of time within which to file, reports
required by Sec. 240.17a-5 of this chapter (Rule 17a-5) and to grant,
and to authorize the issuance of orders denying, such applications,
provided such applicant is advised of his right to have such denial
reviewed by the Commission.
* * * * *
(30) Pursuant to section 17(a) of the Act, 15 U.S.C. 78q, to
approve amendments to the plans which are consistent with the reporting
structure of Sec. Sec. 240.17a-5(a)(2) and 240.17a-10(b) of this
chapter (Rules 17a-5(a)(2) and 17a-10(b)) filed by self-regulatory
organizations pursuant to Sec. Sec. 240.17a-5(a)(3) and 240.17a-10(b)
of this chapter (Rules 17a-5(a)(3) and 17a-10(b)).
* * * * *
(65) * * *
(i) To authorize the issuance of orders requiring over-the-counter
(OTC) derivatives dealers to file, pursuant to Sec. 240.17a-
12(a)(1)(ii) of this chapter, monthly, or at least at such times as
shall be specified, Part II of Form X-17A-5 (Sec. 249.617 of this
chapter) and such other financial and operational information as shall
be specified.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
3. The general authority citation for part 240 continues 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, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 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; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
4. Amend Sec. 240.3a71-6 by adding paragraph (d)(6) to read as
follows:
Sec. 240.3a71-6 Substituted compliance for security-based swap
dealers and major security-based swap participants.
* * * * *
(d) * * *
(6) Recordkeeping and reporting. The recordkeeping and reporting
requirements of Section 15F of the Act (15 U.S.C. 78o-10) and
Sec. Sec. 240.18a-5 through 240.18a-9; provided, however, that prior
to making such a substituted compliance determination the Commission
intends to consider (in addition to any conditions imposed), whether
the foreign financial regulatory system's required records and reports,
the timeframes for recording or reporting information, the accounting
standards governing the records and reports, and the required format of
the records and reports are comparable to applicable provisions arising
under the Act and its rules and regulations and would permit the
Commission to examine and inspect regulated firms' compliance with the
applicable securities laws.
0
5. Amend Sec. 240.17a-3 by:
0
a. Adding introductory text;
0
b. Revising paragraphs (a) introductory text, (a)(1) and (3),
(a)(4)(vi) and (vii), (a)(5) through (11), (a)(12)(i) introductory
text, and (a)(12)(i)(A) and (E) through (H);
0
c. Removing the undesignated paragraph following paragraph (a)(12)(i);
0
d. Adding paragraph (a)(12)(i)(I);
0
e. Revising paragraph (a)(12)(ii);
0
f. In paragraphs (a)(16)(ii)(A) and (B), removing the phrase ``shall
mean'' and adding in its place ``means'';
0
g. In paragraphs (a)(17)(i)(A) and (a)(17)(i)(B)(1), removing the word
``shall'' and adding in its place ``must'' wherever it appears;
0
h. In paragraphs (a)(17)(i)(C) and (D), removing the word ``shall'' and
adding in its place ``will'' wherever it appears;
0
i. In paragraphs (a)(18)(i) and (a)(19)(i), removing the word
``shall'' and adding in its place ``must'' wherever it appears;
0
j. Adding paragraphs (a)(25) through (30);
0
k. Revising paragraphs (b) through (g); and
0
l. Removing paragraph (h).
The additions and revisions read as follows:
Sec. 240.17a-3 Records to be made by certain exchange members,
brokers and dealers.
This section applies to the following types of entities: A member
of a national securities exchange who transacts a business in
securities directly with others than members of a national securities
exchange; a broker or dealer who transacts a business in securities
through the medium of a member of a national securities exchange; a
broker or dealer, including an OTC derivatives dealer as that term is
defined in Sec. 240.3b-12, registered pursuant to section 15 of the
Act (15 U.S.C. 78o); a security-based swap dealer registered pursuant
to section 15F of the Act (15 U.S.C. 78o-10) that is also a broker or
dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act; and a major security-based swap participant
registered pursuant to section 15F of the Act that is also a broker or
dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act. Section 240.18a-5 (rather than this section)
applies to the following types of entities: A security-based swap
dealer registered pursuant to section 15F of the Act that is not also a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; and a major security-based swap
participant registered pursuant to section 15F of the Act that is not
also a broker or dealer, including an OTC
[[Page 68647]]
derivatives dealer, registered pursuant to section 15 of the Act.
(a) Every member of a national securities exchange who transacts a
business in securities directly with others than members of a national
securities exchange, every broker or dealer who transacts a business in
securities through the medium of any such member, and every broker or
dealer registered pursuant to section 15 of the Act (15 U.S.C. 78o)
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 (including the financial terms for
security-based swaps), 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 transaction, the type of security-
based swap, the reference security, index, or obligor, the date and
time of execution, the effective date, the scheduled termination date,
the notional amount(s) and the currenc(ies) in which the notional
amount(s) is expressed, the unique transaction identifier, and the
counterparty's unique identification code.
* * * * *
(3) Ledger accounts (or other records) itemizing separately as to
each cash, margin, or security-based swap account of every customer and
of such member, 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
scheduled termination date, the notional amount(s) and the currenc(ies)
in which the notional amount(s) is expressed, the unique transaction
identifier, and the counterparty's unique identification code.
(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, 240.17a-13, and 240.18a-7, as
applicable (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 member, 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 counterparty's unique
identification code, whether it is a ``bought'' or ``sold'' 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
member, 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 member, broker or dealer, or associated
person thereof, must be so designated. The term instruction must
include instructions between partners and employees of a member, broker
or dealer. The term time of entry means the time when the member,
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 member, 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 scheduled termination, the notional amount(s)
and the currenc(ies) in which the notional amount(s) is expressed, the
unique transaction identifier, and the counterparty's unique
identification code. 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 member, broker or dealer showing the price and, to the extent
feasible, the time of execution; and, in addition, where the purchase
or sale is with a customer other than a broker or dealer,
[[Page 68648]]
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 the circumstance in the preceding
sentence, the member, 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 member, broker or dealer entered pursuant to the exercise of
discretionary authority by the member, 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 member, 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
scheduled termination date, the notional amount(s) and the currenc(ies)
in which the notional amount(s) is expressed, the unique transaction
identifier, and the counterparty's unique identification code. 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 member,
broker or dealer.
(ii) With respect to a security-based swap, copies of the security-
based swap trade acknowledgment and verification made in compliance
with Sec. 240.15Fi-2.
(9) A record with respect to each cash, margin, and security-based
swap account with such member, 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 members, 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) For each security-based swap account, a record of the unique
identification code of such counterparty, the name and address of such
counterparty, and a record of the authorization of each person the
counterparty has granted authority to transact business in the
security-based swap account.
(10) A record of all puts, calls, spreads, straddles, and other
options in which such member, broker or dealer has any direct or
indirect interest or which such member, 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 or Sec. 240.18a-1, as applicable. The
computation need not be made by any member, broker or dealer
unconditionally exempt from Sec. 240.15c3-1 pursuant to Sec.
240.15c3-1(b)(1) or (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 that term is defined in paragraph (g)(4) of
this section of the member, broker or dealer, which questionnaire or
application must be approved in writing by an authorized representative
of the member, 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 member, broker or dealer;
* * * * *
(E) A record of any denial, suspension, expulsion, or revocation of
membership or registration of any member, 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 member, 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, 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.
(I) Provided, however, that if such associated person has been
registered as a registered representative of such member, broker or
dealer with, or the associated person's employment has been approved by
a registered national securities association or a registered national
securities exchange, 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 (a)(12)(i).
(ii) A record listing every associated person of the member, broker
or dealer
[[Page 68649]]
which shows, for each associated person, every office of the member,
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 purchase or sale of any
security for the member, broker or dealer and the Central Registration
Depository number, if any, and every internal identification number or
code assigned to that person by the member, broker or dealer.
* * * * *
(25) A record of the daily calculation of the current exposure and,
if applicable, the initial margin amount for each account of a
counterparty required under Sec. 240.18a-3(c).
(26) A record of compliance with possession or control requirements
under Sec. 240.15c3-3(p)(2).
(27) A record of the reserve computation required under Sec.
240.15c3-3(p)(3).
(28) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-2 within five business days of execution
that includes, at a minimum, the unique transaction identifier and the
counterparty's unique identification code.
(29) A record documenting that the broker or dealer has complied
with the business conduct standards as required under Sec. 240.15Fh-6.
(30) A record documenting that the broker or dealer has complied
with the business conduct standards as required under Sec. Sec.
240.15Fh-1 through 240.15Fh-5 and 240.15Fk-1.
* * * * *
(b) A broker or dealer may comply with the recordkeeping
requirements of the Commodity Exchange Act and chapter I of this title
applicable to swap dealers and major swap participants in lieu of
complying with paragraphs (a)(1), (3), and (5) of this section solely
with respect to required information regarding security-based swap
transactions and positions if:
(1) The broker or dealer is registered as a security-based swap
dealer or major security-based swap participant pursuant to section 15F
of the Act (15 U.S.C. 78o-10);
(2) The broker or dealer is registered as a swap dealer or major
swap participant pursuant to section 4s of the Commodity Exchange Act
and chapter I of this title;
(3) The broker or dealer is subject to 17 CFR 23.201, 23.202,
23.402, and 23.501 with respect to its swap-related books and records;
(4) The broker or dealer preserves all of the data elements
necessary to create the records required by paragraphs (a)(1), (3), and
(5) of this section as they pertain to security-based swap and swap
transactions and positions;
(5) The broker or dealer upon request furnishes promptly to
representatives of the Commission the records required by paragraphs
(a)(1), (3), and (5) of this section as well as the records required by
17 CFR 23.201, 23.202, 23.402, and 23.501 as they pertain to security-
based swap and swap transactions and positions in the format applicable
to that category of record as set forth in this section; and
(6) The broker or dealer provides notice of its intent to utilize
this paragraph (b) by notifying in writing the Commission, both at the
principal office of the Commission in Washington, DC, and at the
regional office of the Commission for the region in which the
registrant has its principal place of business, as well as by notifying
in writing the registrant's designated examining authority.
(c) A member of a national securities exchange, or 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 member,
broker or dealer as are made and kept by a clearing broker or dealer
pursuant to the requirements of this section and Sec. 240.17a-4.
Nothing in this paragraph (c) will be deemed to relieve such member,
broker or dealer from the responsibility that such books and records be
accurately maintained and preserved as specified in this section and
Sec. 240.17a-4.
(d) 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.
(e) 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.
(f) Every member, broker or dealer must make and keep current, as
to each office, the books and records described in paragraphs (a)(1),
(6), (7), (12), and (17), (a)(18)(i), and (a)(19) through (22) of this
section.
(g) When used in this section:
(1) The term office means any location where one or more associated
persons regularly conduct 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.
(2) The term principal means any individual registered with a
registered national securities association as a principal or branch
manager of a member, broker or dealer or any other person who has been
delegated supervisory responsibility over associated persons by the
member, 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.
(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 (70) of the Act (15 U.S.C. 78c(a)(18) and (70))
respectively, but does not include persons whose functions are solely
clerical or ministerial.
* * * * *
0
6. Amend Sec. 240.17a-4 by:
0
a. Adding introductory text;
0
b. Revising paragraphs (a), (b) introductory text, (b)(1), (3) through
(5), and (7), (b)(8) introductory text, (b)(8)(i), (v) through (viii),
and (xii) through (xv);
0
c. Adding paragraphs (b)(8)(xvi) and (xvii);
0
d. Revising paragraph (b)(9);
0
e. In paragraph (b)(11), removing the word ``shall'' and adding in its
place the word ``must'';
0
f. Revising paragraphs (b)(12) and (13);
0
g. Adding paragraphs (b)(14) through (16);
0
h. Revising paragraphs (c), (d), (e) introductory text, and (e)(1)
through (4) and (6);
0
i. In the last sentence of paragraph (e)(8), removing the word
``shall'' and adding in its place the word ``must'';
0
j. In paragraph (f) introductory text, removing the word ``paragraph,''
and adding in its place the word ``section'';
0
k. In paragraphs (f)(2) introductory text and (f)(3) introductory text,
removing the word ``shall'' and adding in its place the word ``must'';
0
l. In paragraph (f)(3)(iv)(B), removing the phrase ``each index.'' and
adding in its place the phrase ``the index.'';
0
m. In paragraph (f)(3)(vi), removing the phrase ``the self-regulatory
organizations'' and adding in its place the phrase ``any self-
regulatory organization'';
[[Page 68650]]
0
n. Revising paragraphs (f)(3)(vii) and (g);
0
o. In paragraph (h), adding the phrase ``or any successor rule'' after
the word ``Board'';
0
p. Revising paragraph (i) and removing the undesignated paragraph
following paragraph (i);
0
q. In paragraph (j), removing the word ``shall'' and adding in its
place the word ``must'';
0
r. In paragraph (k)(1), removing the word ``shall'' and adding in its
place the word ``must'' wherever it appears;
0
s. In paragraph (l), removing ``Sec. 240.17a-3(g)'' and adding in its
place ``Sec. 240.17a-3(e)'';
0
t. Revising paragraphs (m)(1) through (4); and
0
u. Adding paragraph (m)(5).
The additions and revisions read as follows:
Sec. 240.17a-4 Records to be preserved by certain exchange members,
brokers and dealers.
This section applies to the following types of entities: A member
of a national securities exchange who transacts a business in
securities directly with others than members of a national securities
exchange; a broker or dealer who transacts a business in securities
through the medium of a member of a national securities exchange; a
broker or dealer, including an OTC derivatives dealer as that term is
defined in Sec. 240.3b-12, registered pursuant to section 15 of the
Act (15 U.S.C. 78o); a security-based swap dealer registered pursuant
to section 15F of the Act (15 U.S.C. 78o-10) that is also a broker or
dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act; and a major security-based swap participant
registered pursuant to section 15F of the Act that is also a broker or
dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act. Section 240.18a-6 (rather than this section)
applies to the following types of entities: A security-based swap
dealer registered pursuant to section 15F of the Act that is not also a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; and a major security-based swap
participant registered pursuant to section 15F of the Act that is not
also a broker or dealer, including an OTC derivatives dealer,
registered pursuant to section 15 of the Act.
(a) Every member, broker or dealer subject to Sec. 240.17a-3 must
preserve for a period of not less than 6 years, the first two years in
an easily accessible place, all records required to be made pursuant to
Sec. 240.17a-3(a)(1) through (3), (5), and (21) and (22), and
analogous records created pursuant to Sec. 240.17a-3(d).
(b) Every member, 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), (6) through (11), (16), (18) through (20), and (25) through
(30), and analogous records created pursuant to Sec. 240.17a-3(e).
* * * * *
(3) All bills receivable or payable (or copies thereof), paid or
unpaid, relating to the member, broker or dealer's business as such.
(4) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the member, 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
member, 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 member, broker or dealer's business as such.
* * * * *
(7) All written agreements (or copies thereof) entered into by such
member, 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 security-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 fiscal year end on
Part II or IIA of Form X-17A-5 (Sec. 249.617 of this chapter), as
applicable, and in the annual financial statements filed with the
Commission required by Sec. 240.17a-5(d), Sec. 240.17a-12(b), or
Sec. 240.18a-7(c), as applicable:
(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;
* * * * *
(xii) Description, settlement date, contract amount, quantity,
market price, and valuation for each aged failed to deliver requiring a
charge in the Computation of Net Capital pursuant to Sec. 240.15c3-1
or Sec. 240.18a-1, as applicable;
(xiii) Detail relating to information for possession or control
requirements under Sec. 240.15c3-3 or Sec. 240.18a-4, as applicable
and reported in Part II or IIA of Form X-17A-5 (Sec. 249.617 of this
chapter), as applicable;
(xiv) Detail relating to information for security-based swap
possession or control requirements under Sec. 240.15c3-3 or Sec.
240.18a-4, as applicable, and reported in Part II or IIA of Form X-17A-
5 (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 or Sec. 240.18a-1, as applicable, 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)(17) or Sec. 240.18a-1(c)(6), as
applicable; and
(xvii) Other schedules which are specifically prescribed by the
Commission as necessary to support information reported as required by
Sec. Sec. 240.17a-5, 240.17a-12, and 240.18a-7, as applicable.
[[Page 68651]]
(9) The records required to be made pursuant to Sec. 240.15c3-
3(d)(5) and (o) or Sec. 240.18a-4, as applicable.
* * * * *
(12) The records required to be made pursuant to Sec. 240.15c3-
1e(c)(4)(vi) or Sec. 240.18a-1(e)(2)(iii)(F)(2), as applicable.
(13) The written policies and procedures the broker-dealer
establishes, documents, maintains, and enforces to assess
creditworthiness for the purpose of Sec. 240.15c3-1(c)(2)(vi)(E),
(c)(2)(vi)(F)(1) and (2), and (c)(2)(vi)(H) or Sec. 240.18a-
1(c)(1)(vi)(2), as applicable.
(14) A copy of information required to be reported under Sec. Sec.
242.901 through 242.909 of this chapter (Regulation SBSR).
(15) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. Sec.
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
(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 member, 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 member, 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. 249.1600b of this chapter), all Forms SBSE-C (Sec.
249.1600c of this chapter), all Forms SBSE-W (Sec. 249.1601 of this
chapter), all amendments to these forms, and all licenses or other
documentation showing the registration of the member, broker or dealer
with any securities regulatory authority or the Commodity Futures
Trading Commission.
(e) Every member, broker or dealer subject to Sec. 240.17a-3 must
maintain and preserve in an easily accessible place:
(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 member, 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.
* * * * *
(6) Each report which a securities regulatory authority or the
Commodity Futures Trading Commission has requested or required the
member, broker or dealer to make and furnish to it pursuant to an order
or settlement, and each securities regulatory authority, Commodity
Futures Trading Commission, or prudential regulator examination report
until three years after the date of the report.
* * * * *
(f) * * *
(3) * * *
(vii) For every member, 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 member's,
broker's or dealer's electronic storage media to any acceptable medium
under this section, must file with the designated examining authority
for the member, 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 member, 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 member, broker or dealer to download information kept on the
member's, 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 member's, 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 member, broker or dealer pursuant to
Sec. Sec. 240.17a-3 and 240.17a-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 member, broker or dealer. Such arrangements
will provide specifically that in the event of a failure on the part
of a member, 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 member, 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.
* * * * *
(i)(1) If the records required to be maintained and preserved
pursuant to the provisions of Sec. Sec. 240.17a-3 and 240.17a-4 are
prepared or maintained by an outside service bureau, depository, bank
which does not operate pursuant to Sec. 240.17a-3(b)(2), or other
recordkeeping service on behalf of the member, broker or dealer
required to maintain and preserve such records, such outside entity
must file with the Commission a written undertaking in form acceptable
to the Commission, signed by a duly authorized person, to the effect
that such records are the property of the member, broker or dealer
required to maintain and preserve such records and will be surrendered
promptly on request of the member, broker or dealer and including the
following provision:
With respect to any books and records maintained or preserved on
behalf of [BD], 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.
(2) Agreement with an outside entity will not relieve such member,
broker or dealer from the responsibility to prepare
[[Page 68652]]
and maintain records as specified in this section or in Sec. 240.17a-
3.
* * * * *
(m) * * *
(1) The term office has the meaning set forth in Sec. 240.17a-
3(g)(1).
(2) The term principal has the meaning set forth in Sec. 240.17a-
3(g)(2).
(3) The term securities regulatory authority has the meaning set
forth in Sec. 240.17a-3(g)(3).
(4) The term associated person has the meaning set forth in Sec.
240.17a-3(g)(4).
(5) The term business as such includes security-based swap
activity.
* * * * *
0
7. Section 240.17a-5 is amended by:
0
a. Adding introductory text;
0
b. Revising paragraph (a) heading and removing paragraph (a)(1);
0
c. Redesignating paragraphs (a)(2) through (7) as paragraphs (a)(1)
through (6);
0
d. Revising newly redesignated paragraphs (a)(1)(ii) through (iv) and
(a)(2) through (5);
0
e. In newly redesignated paragraph (a)(6), removing the word ``shall''
and adding in its place the word ``will'' wherever it appears;
0
f. Revising paragraph (b)(1);
0
g. In paragraphs (b)(3) through (5), removing the word ``shall'' and
adding in its place the word ``will'' wherever it appears;
0
h. In paragraphs (c)(1) and (2), removing the word ``shall'' and adding
in its place the word ``must'' wherever it appears;
0
i. Revising paragraph (c)(3);
0
j. In paragraph (c)(4)(iii), removing the word ``shall'' and adding in
its place the word ``must'';
0
k. Designate the undesignated paragraph following paragraph (c)(4)(iii)
as paragraph (c)(4)(iv);
0
l. In paragraph (c)(5)(iii)(C), removing the word ``Home'' and adding
in its place the word ``home'' wherever it appears;
0
m. In paragraph (d)(1)(i) introductory text, removing ``(d)(1)(iv)''
and adding ``(iv)'' in its place and adding ``(15 U.S.C. 78o)'' after
the phrase ``section 15 of the Act'';
0
n. Revising paragraphs (d)(1)(i)(B), (d)(2)(i) through (iii),
(d)(3)(i)(A)(4) and (5), (d)(3)(i)(B) and (C), (d)(3)(iii), (d)(6),
(e)(1)(ii), and (e)(2) through (4);
0
o. In the fifth sentence of paragraph (f)(3)(v)(B), adding the word
``the'' before the phrase ``independent public accountant does not
agree'';
0
p. Revising the note to paragraph (h);
0
q. In paragraph (k) introductory text, removing the word ``shall'' and
adding in its place the word ``must'' wherever it appears and removing
the phrase ``Market Regulation'' and adding in its place the phrase
``Trading and Markets'';
0
r. In paragraph (l), removing ``(1)'' and ``(2)'', removing the phrase
``Securities Exchange Act of 1934'' and adding in its place the word
``Act'', and removing the word ``shall'' and adding in its place the
word ``must'';
0
s. In paragraph (m)(1), removing the word ``shall'' and adding in its
place the word ``must'';
0
t. 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)'';
0
u. In paragraph (m)(4), removing the word ``shall'' and adding in its
place the word ``will'';
0
v. In paragraph (n)(2), removing the word ``shall'' and adding in its
place the word ``must'';
0
and
0
w. Revising paragraph (o).
The additions and revisions read as follows:
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
This section applies to the following types of entities: Except as
provided in this introductory text, a broker or dealer, including an
OTC derivatives dealer as that term is defined in Sec. 240.3b-12
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a broker
or dealer, other than an OTC derivatives dealer, registered pursuant to
section 15 of the Act that is also a security-based swap dealer
registered pursuant to section 15F of the Act (15 U.S.C. 78o-10); and a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act that is also a major-security-based
swap participant registered pursuant to section 15F of the Act. Section
240.18a-7 (rather than this section) applies to the following types of
entities: A security-based swap dealer registered pursuant to section
15F of the Act that is not also a broker or dealer, other than an OTC
derivatives dealer, registered pursuant to section 15 of the Act; a
security-based swap dealer registered pursuant to section 15F of the
Act that is also an OTC derivatives dealer; and a major security-based
swap participant registered pursuant to section 15F of the Act that is
not also a broker or dealer, including an OTC derivatives dealer,
registered pursuant to section 15 of the Act.
(a) Monthly and quarterly reports--(1) * * *
(ii) Every broker or dealer subject to this paragraph (a) who
clears transactions or carries customer accounts and 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 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) 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), 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), 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) as to such
member,
[[Page 68653]]
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) as required in paragraph (a)(2) of this section.
(5) Broker-dealers that have been authorized by the Commission to
compute net capital pursuant to 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 (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 value at risk 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);
(vi) Regular risk reports supplied to the broker's or dealer's
senior management in the format described in the application, within 17
business days after the end of the month;
(vii) [Reserved]
(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) as determined by the standards set
forth in paragraphs (a)(1)(ii) through (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 after the date of the audited statements required to be
furnished by paragraphs (c)(1) and (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 (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. 240.15c3-3(p), 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 to Sec. 240.15c3-3(p), 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) * * *
[[Page 68654]]
(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 Part II or Part IIA of Form X-17A-5 (Sec.
249.617 of this chapter), as applicable. If the Statement of Financial
Condition filed in accordance with instructions to Part II or Part IIA
of Form X-17A-5 (Sec. 249.617 of this chapter), 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 or Part IIA 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), a Computation of Net
Capital under Sec. 240.15c3-1, a Computation for Determination of
Customer Reserve Requirements under Sec. 240.15c3-3a (Exhibit A of
Sec. 240.15c3-3), a Computation for Determination of PAB Requirements
under Exhibit A of Sec. 240.15c3-3, a Computation for Determination of
Security-Based Swap Customer Reserve Requirements under Sec. 240.15c3-
3b (Exhibit B of Sec. 240.15c3-3), Information Relating to the
Possession or Control Requirements for Customers under Sec. 240.15c3-
3, and Information Relating to the Possession or Control Requirements
for Security-Based Swap Customers under Sec. 240.15c3-3, as
applicable.
(iii) If any of the Computation of Net Capital under Sec.
240.15c3-1, the Computation for Determination of Customer Reserve
Requirements Under Exhibit A of Sec. 240.15c3-3, or the Computation
for Determination of Security-Based Swap Customer Reserve Requirements
under Exhibit B of Sec. 240.15c3-3, as applicable, 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), 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, 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, 240.15c3-3(p)(3) 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, 240.15c3-3(p)(3) was derived from the books and records of
the broker or dealer.
(B) If applicable, a description of each identified material
weakness in the Internal Control Over Compliance of the broker or
dealer during the most recent fiscal year.
(C) If applicable, a description of an instance of non-compliance
with Sec. 240.15c3-1, Sec. 240.15c3-3(e), or, if applicable, Sec.
240.15c3-3(p)(3) as of the end of the most recent fiscal year.
* * * * *
(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. 240.15c3-1, Sec. 240.15c3-
3(e), or Sec. 240.15c3-3(p)(3) 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. 240.15c3-3(p), except for
paragraph (p)(3), 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, or Sec. 240.17a-13, or any Account Statement
Rule.
* * * * *
(6) Filing of annual reports. The annual reports must be filed with
the Commission at the regional office of the Commission for the region
in which the broker or dealer has its principal place of business and
to the Commission's principal office in Washington, DC, or the annual
reports may be filed with the Commission electronically in accordance
with directions provided on the Commission's website. The annual
reports must also be filed at the principal office of the designated
examining authority for the broker or dealer and with the Securities
Investor Protection Corporation (``SIPC'') if the broker or dealer is a
member of SIPC. Copies of the reports must be provided to all self-
regulatory organizations of which the broker or dealer is a member,
unless the self-regulatory organization by rule waives the requirement
in this paragraph (d)(6).
* * * * *
(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 the financial report an
oath or affirmation that, to the best knowledge and belief of the
person making the oath or affirmation:
(i) The financial report is true and correct; and
(ii) Neither the broker or dealer, nor any partner, officer,
director, or equivalent person, as the case may be, has any proprietary
interest in any account classified solely as that of a customer. The
oath or affirmation 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
[[Page 68655]]
confidential, except that, if the Statement of Financial Condition in a
format that is consistent with Part II or Part IIA of Form X-17A-5
(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
(e)(3) 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.
(4) The broker or dealer must file with SIPC a report on the SIPC
annual general assessment reconciliation or exclusion from membership
forms that contains such information and is in such format as
determined by SIPC by rule and approved by the Commission.
* * * * *
(h) * * *
Note 1 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 fails to make a reserve bank account or
special reserve 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.
* * * * *
(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
8. Section 240.17a-11 is amended by:
0
a. Adding introductory text;
0
b. Removing paragraph (a);
0
c. Redesignating paragraphs (b) through (i) as paragraphs (a) through
(d) and (g) through (j);
0
d. Revising newly redesignated paragraphs (a), (b) introductory text,
(c), and (d);
0
e. Adding new reserved paragraph (e) and paragraph (f); and
0
f. Revising newly redesignated paragraphs (g) through (j).
The revisions and additions read as follows:
Sec. 240.17a-11 Notification provisions for brokers and dealers.
This section applies to the following types of entities: Except as
provided in this introductory text, a broker or dealer, including an
OTC derivatives dealer as that term is defined in Sec. 240.3b-12,
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a broker
or dealer, other than an OTC derivatives dealer, registered pursuant to
section 15 of the Act that is also a security-based swap dealer
registered pursuant to section 15F of the Act (15 U.S.C. 78o-10); and a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act that is also a major-security-based
swap participant registered pursuant to section 15F of the Act. Section
240.18a-8 (rather than this section) applies to the following types of
entities: A security-based swap dealer registered pursuant to section
15F of the Act that is not also a broker or dealer, other than an OTC
derivatives dealer, registered pursuant to section 15 of the Act; a
security-based swap dealer registered pursuant to section 15F of the
Act that is also an OTC derivatives dealer; and a major security-based
swap participant registered pursuant to section 15F of the Act that is
not also a broker or dealer, including an OTC derivatives dealer,
registered pursuant to section 15 of the Act.
(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 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 paragraphs
(b)(1) through (5) of this section in accordance with paragraph (h) of
this section:
* * * * *
(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
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
[[Page 68656]]
what the broker or dealer has done or is doing to correct the
situation.
(e) [Reserved]
(f) If a broker-dealer fails to make in its special reserve account
for the exclusive benefit of security-based swap customers a deposit,
as required by Sec. 240.15c3-3(p), 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 and the regional office of the
Commission for the region in which the broker or dealer has its
principal place of business, or to an email address provided on the
Commission's website, and to the designated examining authority of
which such broker or dealer is a member, and to the Commodity Futures
Trading Commission (CFTC) if the broker or dealer is registered as a
futures commission merchant with the CFTC. The report required by
paragraph (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. Sec. 240.15c3-
1, 240.15c3-1d, 240.15c3-3, 240.17a-5, and 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)).
Sec. 240.17a-12 [Amended]
0
9. Section 240.17a-12 is amended by removing ``Part IIB'' and adding in
its place ``Part II'' each time it appears.
0
10. Section 240.18a-1 is amended by adding paragraphs (d)(9)(iii)(A)
and (B) to read as follows:
Sec. 240.18a-1 Net capital requirements for security-based swap
dealers for which there is not a prudential regulator.
* * * * *
(d) * * *
(9) * * *
(iii) * * *
(A) The security-based swap dealer fails to meet the reporting
requirements set forth in Sec. 240.18a-7;
(B) Any event specified in Sec. 240.18a-8 occurs;
* * * * *
0
11. Section 240.18a-5 is 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.
This section applies to the following types of entities: A
security-based swap dealer registered pursuant to section 15F of the
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, including
an OTC derivatives dealer as that term is defined in Sec. 240.3b-12,
registered pursuant to section 15 of the Act (15 U.S.C. 78o); and a
major security-based swap participant registered pursuant to section
15F of the Act that is not also a broker or dealer, including an OTC
derivatives dealer, registered pursuant to section 15 of the Act.
Section 240.17a-3 (rather than this section) applies to the following
types of entities: A member of a national securities exchange who
transacts a business in securities directly with others than members of
a national securities exchange; a broker or dealer who transacts a
business in securities through the medium of a member of a national
securities exchange; a broker or dealer, including an OTC derivatives
dealer, registered pursuant to section 15 of the Act; a security-based
swap dealer registered pursuant to section 15F of the Act that is also
a broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; and a major security-based swap
participant registered pursuant to section 15F of the Act that is also
a broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act.
(a) This paragraph (a) applies only to security-based swap dealers
and major security-based swap participants registered under section 15F
of the Act for which there is no prudential regulator. Each security-
based swap dealer and major security-based swap participant subject to
this paragraph (a) must make and keep current 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 (including the financial terms for
security-based swaps), 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 transaction, the type of security-
based swap, the reference security, index, or obligor, the date and
time of execution, the effective date, the scheduled termination date,
the notional amount(s) and the currenc(ies) in which the notional
amount(s) is expressed, the unique transaction identifier, and the
counterparty's unique identification code.
(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 (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
scheduled termination date, the notional amount(s) and the currenc(ies)
in which the notional amount(s) is expressed, the unique transaction
identifier, and the counterparty's unique identification code.
(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 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
[[Page 68657]]
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 counterparty's unique
identification code, whether it is a ``bought'' or ``sold'' 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
scheduled termination date, the notional amount(s) and the currenc(ies)
in which the notional amount(s) is expressed, the unique transaction
identifier, and the counterparty's unique identification code. 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 acknowledgment and verification made in compliance with Sec.
240.15Fi-2.
(7) For each security-based swap account, a record of the unique
identification code of such counterparty, the name and address of such
counterparty, and a record of the authorization of each person the
counterparty has granted authority 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, 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 (d) of this
section) of the security-based swap dealer or major security-based swap
participant who effects or is involved in effecting security-based
swaps on the security-based swap dealer's or major security-based swap
participant's behalf, 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 or 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) [Reserved]
(12) A record of the daily calculation of the current exposure and,
if applicable, the initial margin amount for each account of a
counterparty required under Sec. 240.18a-3(c).
(13) A record of compliance with possession or control requirements
under Sec. 240.18a-4(b).
(14) A record of the reserve computation required under Sec.
240.18a-4(c).
(15) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-2 within five business days of execution
that includes, at a minimum, the unique transaction identifier and the
counterparty's unique identification code.
(16) A record documenting that the security-based swap dealer has
complied with the business conduct standards as required under Sec.
240.15Fh-6.
(17) A record documenting that the security-based swap dealer or
major security-based swap participant has complied with the business
conduct standards as required under Sec. Sec. 240.15Fh-1 through
240.15Fh-5 and 240.15Fk-1.
(18) [Reserved]
(b) This paragraph (b) applies only to security-based swap dealers
and major security-based swap participants registered under section 15F
of the Act for which there is a prudential regulator. Each security-
based swap dealer and major security-based swap participant subject to
this paragraph (b) must make and keep current the following books and
records:
[[Page 68658]]
(1) For security-based swaps and any other positions related to the
firm's business as such, 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, including the financial terms for
security-based swaps), 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 transaction, the type of security-
based swap, the reference security, index, or obligor, the date and
time of execution, the effective date, the scheduled termination date,
the notional amount(s) and the currenc(ies) in which the notional
amount(s) is expressed, the unique transaction identifier, and the
counterparty's unique identification code.
(2) Ledger accounts (or other records) itemizing separately as to
each account for every security-based swap customer or non-customer of
such security-based swap dealer or major security-based swap
participant, 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 scheduled termination date, the
notional amount(s) and the currenc(ies) in which the notional amount(s)
is expressed, the unique transaction identifier, and the counterparty's
unique identification code.
(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 counterparty's unique
identification code, whether it is a ``bought'' or ``sold'' 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 execution or cancellation. 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 scheduled termination date, the notional
amount(s) and the currenc(ies) in which the notional amount(s) is
expressed, the unique transaction identifier, and the counterparty's
unique identification code. An order entered pursuant to the exercise
of discretionary authority by the security-based swap dealer or major
security-based swap participant, or associated person thereof, must be
so designated. The term instruction must include instructions between
partners and employees of a security-based swap dealer or major
security-based swap participant. The term time of entry means the time
when the security-based swap dealer or major security-based swap
participant transmits the order or instruction for execution.
(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
scheduled termination date, the notional amount(s) and the currenc(ies)
in which the notional amount(s) is expressed, the unique transaction
identifier, and the counterparty's unique identification code. 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 acknowledgment and verification
made in compliance with Sec. 240.15Fi-2.
(7) For each security-based swap account, a record of the
counterparty's unique identification code, the name and address of such
counterparty, and a record of the authorization of each person the
counterparty has granted authority 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 who effects or is involved in effecting security-based
swaps on the security-based swap dealer's or major security-based swap
participant's behalf, 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
[[Page 68659]]
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 or 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).
(10) A record of the reserve computation required under Sec.
240.18a-4(c).
(11) A record of each security-based swap transaction that is not
verified under Sec. 240.15Fi-2 within five business days of execution
that includes, at a minimum, the unique transaction identifier and the
counterparty's unique identification code.
(12) A record documenting that the security-based swap dealer has
complied with the business conduct standards as required under Sec.
240.15Fh-6.
(13) A record documenting that 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.
(14) [Reserved]
(c) A security-based swap dealer or major security-based swap
participant may comply with the recordkeeping requirements of the
Commodity Exchange Act and chapter I of this title applicable to swap
dealers and major swap participants in lieu of complying with
paragraphs (a)(1), (3), and (4) or paragraphs (b)(1) through (3) of
this section, as applicable, solely with respect to required
information regarding security-based swap transactions and positions
if:
(1) The security-based swap dealer or major security-based swap
participant is registered as a security-based swap dealer or major
security-based swap participant pursuant to section 15F of the Act;
(2) The security-based swap dealer or major security-based swap
participant is registered as a swap dealer or major swap participant
pursuant to section 4s of the Commodity Exchange Act and chapter I of
this title;
(3) The security-based swap dealer or major security-based swap
participant is subject to 17 CFR 23.201, 23.202, 23.402, and 23.501
with respect to its swap-related books and records;
(4) The security-based swap dealer or major security-based swap
participant preserves all of the data elements necessary to create the
records required by paragraphs (a)(1), (3), and (4) or paragraphs
(b)(1) through (3) of this section, as applicable, as they pertain to
security-based swap and swap transactions and positions;
(5) The security-based swap dealer or major security-based swap
participant upon request furnishes promptly to representatives of the
Commission the records required by paragraphs (a)(1), (3), and (4) or
paragraphs (b)(1) through (3) of this section, as applicable, as well
as the records required by 17 CFR 23.201, 23.202, 23.402, and 23.501 as
they pertain to security-based swap and swap transactions and positions
in the format applicable to that category of record as set forth in
this section; and
(6) The security-based swap dealer or major security-based swap
participant provides notice of its intent to utilize this paragraph (c)
by notifying in writing the Commission, both at the principal office of
the Commission in Washington, DC and at the regional office of the
Commission for the region in which the registrant has its principal
place of business.
(d)(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 that term is defined in section
3(a)(70) of the Act (15 U.S.C. 78c(a)(70)).
(2) The term associated person, as to an entity 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.
0
12. Section 240.18a-6 is added to read as follows:
Sec. 240.18a-6 Records to be preserved by certain security-based
swap dealers and major security-based swap participants.
This section applies to the following types of entities: A
security-based swap dealer registered pursuant to section 15F of the
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, including
an OTC derivatives dealer as that term is defined in Sec. 240.3b-12,
registered pursuant to section 15 of the Act (15 U.S.C. 78o); and a
major security-based swap participant registered pursuant to section
15F of the Act that is not also a broker or dealer, including an OTC
derivatives dealer, registered pursuant to section 15 of the Act.
Section 240.17a-4 (rather than this section) applies to the following
types of entities: A member of a national securities exchange who
transacts a business in securities directly with others than members of
a national securities exchange; a broker or dealer who transacts a
business in securities through the medium of a member of a national
securities exchange; a broker or dealer, including an OTC derivatives
dealer, registered pursuant to section 15 of the Act; a security-based
swap dealer registered pursuant to section 15F of the Act that is also
a broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; and a major security-based swap
participant registered pursuant to section 15F of the Act that is also
a broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act.
(a)(1) Every security-based swap dealer and major security-based
swap participant for which there is no prudential regulator must
preserve for a period not less than six years, the first two years in
an easily accessible place,
[[Page 68660]]
all records required to be made pursuant to Sec. 240.18a-5(a)(1)
through (4).
(2) Every security-based swap dealer and major security-based swap
participant for which there is a prudential regulator 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 Sec.
240.18a-5(b)(1) through (3).
(b)(1) Every security-based swap dealer and major security-based
swap participant for which there is no prudential regulator must
preserve for a period of not less than three years, the first two years
in an easily accessible place:
(i) All records required to be made pursuant to Sec. 240.18a-
5(a)(5) through (9) and (12) through (17).
(ii) All check books, bank statements, cancelled checks, and cash
reconciliations.
(iii) All bills receivable or payable (or copies thereof), paid or
unpaid, relating to the business of such security-based swap dealer or
major security-based swap participant, as such.
(iv) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the security-based
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as such.
As used in this paragraph (b)(1)(iv), the term ``communications''
includes sales scripts and recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1)).
(v) All trial balances and computations of net capital or tangible
net worth requirements (and working papers in connection therewith), as
applicable, financial statements, branch office reconciliations, and
internal audit working papers, relating to the business of such
security-based swap dealer or major security-based swap participant as
such.
(vi) All guarantees of security-based swap accounts and all powers
of attorney and other evidence of the granting of any discretionary
authority given in respect of any security-based swap account, and
copies of resolutions empowering an agent to act on behalf of a
corporation.
(vii) All written agreements (or copies thereof) entered into by
such security-based swap dealer or major security-based swap
participant relating to its business as such, including agreements with
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or
any document establishing the terms and conditions of the customer's or
non-customer's security-based swaps must be maintained with the
customer's or non-customer's account records.
(viii) Records which contain the following information in support
of amounts included in the report prepared as of the audit date on Part
II of Form X-17A-5 (Sec. 249.617 of this chapter) and in annual
financial statements required by Sec. 240.18a-7(d):
(A) Money balance and position, long or short, including
description, quantity, price, and valuation of each security, including
contractual commitments, in security-based swap customers' accounts, in
fully secured accounts, partly secured accounts, unsecured accounts,
and in securities accounts payable to security-based swap customers;
(B) Money balance and position, long or short, including
description, quantity, price, and valuation of each security, including
contractual commitments, in security-based swap non-customers'
accounts, in fully secured accounts, partly secured accounts, unsecured
accounts, and in security-based swap accounts payable to non-security-
based swap customers;
(C) Position, long or short, including description, quantity,
price, and valuation of each security, including contractual
commitments, included in the Computation of Net Capital as commitments,
securities owned, securities owned not readily marketable, and other
investments owned not readily marketable;
(D) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in customers' and non-customers' accounts;
(E) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss and liquidating equity
or deficit in trading and investment accounts;
(F) Description, money balance, quantity, price, and valuation of
each spot commodity and swap position or commitments in customers' and
non-customers' accounts;
(G) Description, money balance, quantity, price, and valuation of
each spot commodity and swap position or commitments in trading and
investment accounts;
(H) Number of shares, description of security, exercise price,
cost, and market value of put and call options, including short out of
the money options having no market or exercise value, showing listed
and unlisted put and call options separately;
(I) Quantity, price, and valuation of each security underlying the
haircut for undue concentration made in the Computation of Net Capital
pursuant to Sec. 240.18a-1;
(J) Description, quantity, price, and valuation of each security
and commodity position or contractual commitment, long or short, in
each joint account in which the security-based swap dealer or major
security-based swap participant has an interest, including each
participant's interest and margin deposit;
(K) Description, settlement date, contract amount, quantity, market
price, and valuation for each aged failed to deliver requiring a charge
in the Computation of Net Capital pursuant to Sec. 240.18a-1;
(L) Detail relating to information for possession or control
requirements under Sec. 240.18a-4 and reported on Part II of Form X-
17A-5 (Sec. 249.617 of this chapter);
(M) Detail of all items, not otherwise substantiated, which are
charged or credited in the Computation of Net Capital pursuant to
Sec. Sec. 240.18a-1 and 240.18a-2, such as cash margin deficiencies,
deductions related to securities values and undue concentration, aged
securities differences, and insurance claims receivable;
(N) Detail relating to the calculation of the risk margin amount
pursuant to Sec. 240.18a-1(c)(6); and
(O) Other schedules which are specifically prescribed by the
Commission as necessary to support information reported as required by
Sec. 240.18a-7.
(ix) The records required to be made pursuant to Sec. 240.15c3-4
and the results of the periodic reviews conducted pursuant to Sec.
240.15c3-4(d).
(x) The records required to be made pursuant to Sec. 240.18a-
1(e)(2)(iv)(F)(1) and (2).
(xi) A copy of information required to be reported under Sec. Sec.
242.901 through 242.909 of this chapter (Regulation SBSR).
(xii) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. Sec.
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
(xiii) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, and the investment or financing
objectives of the special entity as required under sections
15F(h)(4)(C) and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and
(5)(A)).
[[Page 68661]]
(2) Every security-based swap dealer and major security-based swap
participant for which there is a prudential regulator must preserve for
a period of not less than three years, the first two years in an easily
accessible place:
(i) All records required to be made pursuant to Sec. 240.18a-
5(b)(4) through (7) and (9) through (13).
(ii) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the security-based
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as a
security-based swap dealer or major security-based swap participant. As
used in this paragraph (b)(2)(ii), the term ``communications'' includes
sales scripts and recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1)).
(iii) All guarantees of security-based swap accounts and all powers
of attorney and other evidence of the granting of any discretionary
authority given in respect of any security-based swap account, and
copies of resolutions empowering an agent to act on behalf of a
corporation.
(iv) All written agreements (or copies thereof) entered into by
such security-based swap dealer or major security-based swap
participant relating to its business as a security-based swap dealer or
major security-based swap participant, including agreements with
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or
any document establishing the terms and conditions of the customer's or
non-customer's security-based swaps, must be maintained with the
customer's or non-customer's account records.
(v) Detail relating to information for possession or control
requirements under Sec. 240.18a-4 and reported on Part IIC of Form X-
17A-5 (Sec. 249.617 of this chapter) that is in support of amounts
included in the report prepared as of the audit date on Part IIC of
Form X-17A-5 (Sec. 249.617 of this chapter) and in the registrant's
annual reports required by Sec. 240.18a-7(c).
(vi) A copy of information required to be reported under Regulation
SBSR (Sec. Sec. 242.901 through 242.909 of this chapter).
(vii) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec. Sec.
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
(viii) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, and the investment or financing
objectives of the special entity as required under sections
15F(h)(4)(C) and (5)(A) of the Act.
(c) Every security-based swap dealer and major security-based swap
participant subject to this section 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
SBSE (Sec. 249.1600 of this chapter), all Forms SBSE-A (Sec.
249.1600a of this chapter), all Forms SBSE-C (Sec. 249.1600c of this
chapter), all Forms SBSE-W (Sec. 249.1601 of this chapter), all
amendments to these forms, and all licenses or other documentation
showing the registration of the security-based swap dealer or major
security-based swap participant with any securities regulatory
authority or the Commodity Futures Trading Commission.
(d) Every security-based swap dealer and major security-based swap
participant subject to this section must maintain and preserve in an
easily accessible place:
(1) All records required under Sec. 240.18a-5(a)(10) or (b)(8)
until at least three years after the associated person's employment and
any other connection with the security-based swap dealer or major
security-based swap participant has terminated.
(2)(i) For security-based swap dealers and major security-based
swap participants for which there is not a prudential regulator, each
report which a securities regulatory authority or the Commodity Futures
Trading Commission has requested or required the security-based swap
dealer or major security-based swap participant to make and furnish to
it pursuant to an order or settlement, and each securities regulatory
authority or Commodity Futures Trading Commission examination report
until three years after the date of the report.
(ii) For security-based swap dealers and major security-based swap
participants for which there is a prudential regulator, each report
related to security-based swap activities which a securities regulatory
authority, the Commodity Futures Trading Commission, or a prudential
regulator has requested or required the security-based swap dealer or
major security-based swap participant to make and furnish to it
pursuant to an order or settlement, and each securities regulatory
authority, Commodity Futures Trading Commission, or prudential
regulator examination report until three years after the date of the
report.
(3)(i) For security-based swap dealers and major security-based
swap participants for which there is not a prudential regulator, each
compliance, supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the security-based swap dealer or major security-based
swap participant with respect to compliance with applicable laws and
rules, and supervision of the activities of each natural person
associated with the security-based swap dealer or major security-based
swap participant until three years after the termination of the use of
the manual.
(ii) For security-based swap dealers and major security-based swap
participants for which there is a prudential regulator, each
compliance, supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the security-based swap dealer or major security-based
swap participant with respect to compliance with applicable laws and
rules relating to security-based swap activities, and supervision of
the activities of each natural person associated with the security-
based swap dealer or major security-based swap participant until three
years after the termination of the use of the manual.
(e) The records required to be maintained and preserved pursuant to
Sec. Sec. 240.18a-5 and 240.18a-6 may be immediately produced or
reproduced by means of an electronic storage system (as defined in this
paragraph (e)) that meets the conditions set forth in this paragraph
(e) and be maintained and preserved for the required time in that form.
(1) For purposes of this section, the term electronic storage
system means any digital storage system that meets the applicable
conditions set forth in this paragraph (e).
(2) If an electronic storage system is used by a security-based
swap dealer or major security-based swap participant, it must:
[[Page 68662]]
(i) Verify automatically the quality and accuracy of the electronic
storage system recording process;
(ii) If applicable, serialize the original and duplicate units of
the storage media, and time-date for the required period of retention
the information placed in such electronic storage system; and
(iii) Have the capacity to readily download into a readable format
indexes and records preserved in the electronic storage system.
(3) If a security-based swap dealer or major security-based swap
participant uses an electronic storage system, it must:
(i) At all times have available, for examination by the staff of
the Commission, facilities for immediate, easily readable projection or
production of records or images maintained on the electronic storage
system and for producing easily readable representations of those
records or images.
(ii) Be ready at all times to immediately provide in a readable
format any record or index stored on the electronic storage system
which the staff of the Commission may request.
(iii) Store separately from the original a duplicate copy of a
record stored on the electronic storage system for the time required.
(iv) Organize and index accurately all information maintained on
both original and any duplicate storage system.
(A) At all times, a security-based swap dealer or major security-
based swap participant must be able to have such indexes available for
examination by the staff of the Commission.
(B) Each index must be duplicated and the duplicate copies must be
stored separately from the original copy of each index.
(C) Original and duplicate indexes must be preserved for the time
required for the indexed records.
(v) Have in place an audit system providing for accountability
regarding inputting of records required to be maintained and preserved
pursuant to Sec. Sec. 240.18a-5 and 240.18a-6 to the electronic
storage system and inputting of any changes made to every original and
duplicate record maintained and preserved thereby.
(A) At all times the security-based swap dealer or major security-
based swap participant must be able to have the results of such audit
system available for examination by the staff of the Commission.
(B) The audit results must be preserved for the time required for
the audited records.
(vi) The security-based swap dealer or major security-based swap
participant must maintain, keep current, and provide promptly upon
request by the staff of the Commission all information necessary to
access records and indexes stored in the electronic storage system; or
place in escrow and keep current a copy of the physical and logical
file format of the electronic storage system, the field format of all
different information types written on the electronic storage system
and the source code, together with the appropriate documentation and
information necessary to access records and indexes.
(f)(1) If the records required to be maintained and preserved
pursuant to the provisions of Sec. Sec. 240.18a-5 and 240.18a-6 are
prepared or maintained by a third party on behalf of the security-based
swap dealer or major security-based swap participant, the third party
must file with the Commission a written undertaking in a form
acceptable to the Commission, signed by a duly authorized person, to
the effect that such records are the property of the security-based
swap dealer or major security-based swap participant and will be
surrendered promptly on request of the security-based swap dealer or
major security-based swap participant and including the following
provision:
With respect to any books and records maintained or preserved on
behalf of [SBSD or MSBSP], the undersigned hereby undertakes to
permit examination of such books and records at any time or from
time to time during business hours by representatives or designees
of the Securities and Exchange Commission, and to promptly furnish
to said Commission or its designee true, correct, complete, and
current hard copies of any or all or any part of such books and
records.
(2) Agreement with an outside entity will not relieve such
security-based swap dealer or major security-based swap participant
from the responsibility to prepare and maintain records as specified in
this section or in Sec. 240.18a-5.
(g) Every security-based swap dealer and major security-based swap
participant subject to this section must furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the security-based swap dealer or major
security-based swap participant that are required to be preserved under
this section, or any other records of the security-based swap dealer or
major security-based swap participant subject to examination or
required to be made or maintained pursuant to section 15F of the Act
that are requested by a representative of the Commission.
(h) When used in this section:
(1) The term securities regulatory authority means the Commission,
any self-regulatory organization, or any securities commission (or any
agency or office performing like functions) of the States.
(2) The term associated person has the meaning set forth in Sec.
240.18a-5(d).
0
13. Section 240.18a-7 is added to read as follows:
Sec. 240.18a-7 Reports to be made by certain security-based swap
dealers and major security-based swap participants.
This section applies to the following types of entities: A
security-based swap dealer registered pursuant to section 15F of the
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, other than
an OTC derivatives dealer as that term is defined in Sec. 240.3b-12,
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a
security-based swap dealer registered pursuant to section 15F of the
Act that is also an OTC derivatives dealer registered pursuant to
section 15 of the Act; and a major security-based swap participant
registered pursuant to section 15F of the Act that is not also a broker
or dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act. Section 240.17a-5 (rather than this section)
applies to the following types of entities: Except as provided above, a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; a broker or dealer, other than an
OTC derivatives dealer, registered pursuant to section 15 of the Act
that is also a security-based swap dealer registered pursuant to
section 15F of the Act; and a broker or dealer, including an OTC
derivatives dealer, registered pursuant to section 15 of the Act that
is also a major-security-based swap participant registered pursuant to
section 15F of the Act.
(a) Filing of reports. (1) Every security-based swap dealer or
major security-based swap participant for which there is no prudential
regulator must file with the Commission or its designee Part II of Form
X-17A-5 (Sec. 249.617 of this chapter) within 17 business days after
the end of each month.
(2) Every security-based swap dealer or major security-based swap
participant for which there is a prudential regulator must file with
the Commission or its designee Part IIC of Form X-17A-5 (Sec. 249.617
of this chapter) within 30 calendar days after the end of each calendar
quarter.
[[Page 68663]]
(3) Security-based swap dealers that have been authorized by the
Commission to compute net capital pursuant to Sec. 240.18a-1(d), must
file the following additional reports with the Commission:
(i) For each product for which the security-based swap dealer
calculates a deduction for market risk other than in accordance with
Sec. 240.18a-1(e)(1)(i) and (iii), the product category and the amount
of the deduction for market risk within 17 business days after the end
of the month;
(ii) A graph reflecting, for each business line, the daily intra-
month value at risk within 17 business days after the end of the month;
(iii) The aggregate value at risk for the security-based swap
dealer within 17 business days after end of the month;
(iv) For each product for which the security-based swap dealer uses
scenario analysis, the product category and the deduction for market
risk within 17 business days after the end of the month;
(v) Credit risk information on security-based swap, mixed swap and
swap exposures, within 17 business days after the end of the month,
including:
(A) Overall current exposure;
(B) Current exposure (including commitments) listed by counterparty
for the 15 largest exposures;
(C) The ten largest commitments listed by counterparty;
(D) The broker's or dealer's maximum potential exposure listed by
counterparty for the 15 largest exposures;
(E) The broker's or dealer's aggregate maximum potential exposure;
(F) A summary report reflecting the broker's or dealer's current
and maximum potential exposures by credit rating category; and
(G) A summary report reflecting the broker's or dealer's current
exposure for each of the top ten countries to which the broker or
dealer is exposed (by residence of the main operating group of the
counterparty);
(vi) Regular risk reports supplied to the security-based swap
dealer's senior management in the format described in the application,
within 17 business days after the end of the month;
(vii) [Reserved]
(viii) A report identifying the number of business days for which
the actual daily net trading loss exceeded the corresponding daily VaR
within 17 business days after the end of each calendar quarter; and
(ix) The results of backtesting of all internal models used to
compute allowable capital, including VaR and credit risk models,
indicating the number of backtesting exceptions within 17 business days
after the end of each calendar quarter.
(b) Customer disclosures. (1) Every security-based swap dealer or
major security-based swap participant for which there is no prudential
regulator must make publicly available on its website within 10
business days after the date the firm is required to file with the
Commission the annual reports pursuant to paragraph (c) of this
section:
(i) A Statement of Financial Condition with appropriate notes
prepared in accordance with U.S. generally accepted accounting
principles which must be audited;
(ii) A statement of the amount of the security-based swap dealer's
net capital and its required net capital, computed in accordance with
Sec. 240.18a-1. Such statement must include summary financial
statements of subsidiaries consolidated pursuant to Sec. 240.18a-1c
(appendix C to Sec. 240.18a-1 (Rule 18a-1)), where material, and the
effect thereof on the net capital and required net capital of the
security-based swap dealer; and
(iii) If, in connection with the most recent annual reports
required under paragraph (c) of this section, the report of the
independent public accountant required under paragraph (c)(1)(i)(C) of
this section covering the report of the security-based swap dealer
required under paragraph (c)(1)(i)(B)(1) of this section identifies one
or more material weaknesses, a copy of the report.
(2) Every security-based swap dealer or major security-based swap
participant for which there is no prudential regulator must make
publicly available on its website unaudited statements as of the date
that is 6 months after the date of the most recent audited statements
filed with the Commission under paragraph (c)(1) of this section. These
reports must be made publicly available within 30 calendar days of the
date of the statements.
(3) The information that is made publicly available pursuant to
paragraphs (b)(1) and (2) of this section must also be made available
in writing, upon request, to any person that has a security-based swap
account. The security-based swap dealer or major security-based swap
participant must maintain a toll-free telephone number to receive such
requests.
(c) Annual reports--(1) Reports required to be filed. (i) Except as
provided in paragraph (c)(1)(iii) of this section, every security-based
swap dealer or major security-based swap participant registered
pursuant to section 15F of the Act for which there is no prudential
regulator must file annually, as applicable:
(A) A financial report as described in paragraph (c)(2) of this
section;
(B)(1) If the security-based swap dealer did not claim it was
exempt from Sec. 240.18a-4 throughout the most recent fiscal year, a
compliance report as described in paragraph (c)(3) of this section
executed by the person who makes the oath or affirmation under
paragraph (d)(1) of this section; or
(2) If the security-based swap dealer did claim it was exempt from
Sec. 240.18a-4 throughout the most recent fiscal year, an exemption
report as described in paragraph (c)(4) of this section executed by the
person who makes the oath or affirmation under paragraph (d)(1) of this
section; and
(C) A report prepared by an independent public accountant, under
the engagement provisions in paragraph (e) of this section, covering
each report required to be filed under paragraphs (c)(1)(i)(A) and (B)
of this section, as applicable.
(ii) The reports required to be filed under this paragraph (c) must
be as of the same fiscal year end each year, unless a change is
approved in writing by the Commission. The original request for a
change must be filed at the Commission's principal office in
Washington, DC. A copy of the written approval must be sent to the
regional office of the Commission for the region in which the security-
based swap dealer or major security-based swap participant has its
principal place of business.
(iii) A security-based swap dealer or major security-based swap
participant succeeding to and continuing the business of another
security-based swap dealer or major security-based swap participant
need not file reports under this paragraph (c) as of a date in the
fiscal year in which the succession occurs if the predecessor security-
based swap dealer or major security-based swap participant has filed
the reports in compliance with this paragraph (c) as of a date in such
fiscal year.
(2) Financial report. The financial report must contain:
(i)(A) A Statement of Financial Condition, a Statement of Income, a
Statement of Cash Flows, a Statement of Changes in Stockholders' or
Partners' or Sole Proprietor's Equity, and Statement of Changes in
Liabilities Subordinated to Claims of General Creditors. The statements
must be prepared in accordance with U.S. generally accepted accounting
principles and must be in a format that is consistent with the
[[Page 68664]]
statements contained in Part II of Form X-17A-5 (Sec. 249.617 of this
chapter).
(B) If there is other comprehensive income in the period(s)
presented, the financial report must contain a Statement of
Comprehensive Income (as defined in Sec. 210.1-02 of this chapter) in
place of a Statement of Income.
(ii) Supporting schedules that include, from Part II of Form X-17A-
5 (Sec. 249.617 of this chapter), a Computation of Net Capital under
Sec. 240.18a-1, a Computation of Tangible Net Worth under Sec.
240.18a-2, a Computation for Determination of Security-Based Swap
Customer Reserve Requirements under Sec. 240.18a-4a (Exhibit A of
Sec. 240.18a-4), and Information Relating to the Possession or Control
Requirements for Security-Based Swap Customers under Sec. 240.18a-4,
as applicable.
(iii) If any of the Computation of Net Capital under Sec. 240.18a-
1, the Computation of Tangible Net Worth under Sec. 240.18a-2, or the
Computation for Determination of Security-Based Swap Customer Reserve
Requirements under Exhibit A of Sec. 240.18a-4 in the financial report
is materially different from the corresponding computation in the most
recent Part II of Form X-17A-5 (Sec. 249.617 of this chapter) filed by
the registrant 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 of Form X-17A-5 filed by the registrant. If no material
differences exist, a statement so indicating must be included in the
financial report.
(3) Compliance report. (i) The compliance report must contain:
(A) Statements as to whether:
(1) The security-based swap dealer has established and maintained
Internal Control Over Compliance as that term is defined in paragraph
(c)(3)(ii) of this section;
(2) The Internal Control Over Compliance of the security-based swap
dealer was effective during the most recent fiscal year;
(3) The Internal Control Over Compliance of the security-based swap
dealer was effective as of the end of the most recent fiscal year;
(4) The security-based swap dealer was in compliance with
Sec. Sec. 240.18a-1 and 240.18a-4(c) as of the end of the most recent
fiscal year; and
(5) The information the security-based swap dealer used to state
whether it was in compliance with Sec. Sec. 240.18a-1 and 240.18a-4(c)
was derived from the books and records of the security-based swap
dealer.
(B) If applicable, a description of each identified material
weakness in the Internal Control Over Compliance of the security-based
swap dealer during the most recent fiscal year.
(C) If applicable, a description of an instance of non-compliance
with Sec. 240.18a-1 or Sec. 240.18a-4(c) as of the end of the most
recent fiscal year.
(ii) The term Internal Control Over Compliance means internal
controls that have the objective of providing the security-based swap
dealer with reasonable assurance that non-compliance with Sec.
240.18a-1, Sec. 240.18a-4(c), Sec. 240.18a-9, or Sec. 240.17a-13, as
applicable, will be prevented or detected on a timely basis.
(iii) The security-based swap dealer is not permitted to conclude
that its Internal Control Over Compliance was effective during the most
recent fiscal year if there were one or more material weaknesses in its
Internal Control Over Compliance during the most recent fiscal year.
The security-based swap dealer is not permitted to conclude that its
Internal Control Over Compliance was effective as of the end of the
most recent fiscal year if there were one or more material weaknesses
in its internal control as of the end of the most recent fiscal year. A
material weakness is a deficiency, or a combination of deficiencies, in
Internal Control Over Compliance such that there is a reasonable
possibility that non-compliance with Sec. 240.18a-1 or Sec. 240.18a-
4(c) will not be prevented, or detected on a timely basis or that non-
compliance to a material extent with Sec. 240.18a-4, except for
paragraph (c), or Sec. 240.18a-9 or Sec. 240.17a-13, as applicable,
will not be prevented or detected on a timely basis. A deficiency in
Internal Control Over Compliance exists when the design or operation of
a control does not allow the management or employees of the security-
based swap dealer in the normal course of performing their assigned
functions, to prevent or detect on a timely basis non-compliance with
Sec. 240.18a-1, Sec. 240.18a-4, Sec. 240.18a-9, or Sec. 240.17a-13,
as applicable.
(4) Exemption report. The exemption report must contain the
following statements made to the best knowledge and belief of the
security-based swap dealer:
(i) A statement that the security-based swap dealer met the
exemption provisions in Sec. 240.18a-4(f) throughout the most recent
fiscal year without exception or that it met the exemption provisions
in Sec. 240.18a-4(f) throughout the most recent fiscal year except as
described under paragraph (c)(4)(ii) of this section; and
(ii) If applicable, a statement that identifies each exception
during the most recent fiscal year in meeting the exemption provisions
in Sec. 240.18a-4(f) and that briefly describes the nature of each
exception and the approximate date(s) on which the exception existed.
(5) Timing of filing. The annual reports must be filed not more
than sixty (60) calendar days after the end of the fiscal year of the
security-based swap dealer or major security-based swap participant.
(6) Location of filing. The annual reports must be filed with the
Commission at the regional office of the Commission for the region in
which the security-based swap dealer or major security-based swap
participant has its principal place of business and the Commission's
principal office in Washington, DC, or the annual reports may be filed
with the Commission electronically in accordance with directions
provided on the Commission's website.
(d) Nature and form of reports. The annual reports filed pursuant
to paragraph (c) of this section must be prepared and filed in
accordance with the following requirements:
(1)(i) The security-based swap dealer or major security-based swap
participant must attach to each of the confidential and non-
confidential portions of the annual reports separately bound under
paragraph (d)(2) of this section a complete and executed Part III of
Form X-17A-5 (Sec. 249.617 of this chapter). The security-based swap
dealer or major security-based swap participant must attach to the
financial report an oath or affirmation that, to the best knowledge and
belief of the person making the oath or affirmation:
(A) The financial report is true and correct; and
(B) Neither the registrant, nor any partner, officer, director, or
equivalent person, as the case may be, has any proprietary interest in
any account classified solely as that of a customer.
(ii) The oath or affirmation must be made before a person duly
authorized to administer such oaths or affirmations. If the security-
based swap dealer or major security-based swap participant is a sole
proprietorship, the oath or affirmation must be made by the proprietor;
if a partnership, by a general partner; if a corporation, by a duly
authorized officer; or if a limited liability company or limited
liability partnership, by the chief executive officer, chief financial
officer, manager, managing member, or those members vested with
management authority for the limited liability company or limited
liability partnership.
[[Page 68665]]
(2) The annual reports filed under paragraph (c) of this section
are not confidential, except that, if the Statement of Financial
Condition is in a format that is consistent with Part II of Form X-17A-
5 (Sec. 249.617 of this chapter), and is bound separately from the
balance of the annual reports filed under paragraph (c) of this
section, and each page of the balance of the annual report is stamped
``confidential,'' then the balance of the annual reports will be deemed
confidential to the extent permitted by law. However, the annual
reports, including the confidential portions, will be available for
official use by any official or employee of the U.S. or any State, and
by any other person if the Commission authorizes disclosure of the
annual reports to that person as being in the public interest. Nothing
contained in this paragraph (d)(2) may be construed to be in derogation
of the right of customers of a security-based swap dealer or major
security-based swap participant, upon request to the security-based
swap dealer or major security-based swap participant, to obtain
information relative to its financial condition.
(e) Independent public accountant--(1) Qualifications of
independent public accountant. The independent public accountant must
be qualified and independent in accordance with Sec. 210.2-01 of this
chapter.
(2) Statement regarding independent public accountant. (i) Every
security-based swap dealer or major security-based swap participant
that is required to file annual reports under paragraph (c) of this
section must file no later than December 10 of each year (or 30 days
after effective date of its registration as a security-based swap
dealer or major security-based swap participant if earlier) a statement
as prescribed in paragraph (e)(2)(ii) of this section with the
Commission's principal office in Washington, DC and the regional office
of the Commission for the region in which its principal place of
business is located. The statement must be dated no later than December
1 (or 20 calendar days after the effective date of its registration as
a security-based swap dealer or major security-based swap participant,
if earlier). If the engagement of an independent public accountant is
of a continuing nature, providing for successive engagements, no
further filing is required. If the engagement is for a single year, or
if the most recent engagement has been terminated or amended, a new
statement must be filed by the required date.
(ii) The statement must be headed ``Statement regarding independent
public accountant under Rule 18a-7(e)(2)'' and must contain the
following information and representations:
(A) Name, address, telephone number and registration number of the
security-based swap dealer or major security-based swap participant.
(B) Name, address, and telephone number of the independent public
accountant.
(C) The date of the fiscal year of the annual reports of the
security-based swap dealer or major security-based swap participant
covered by the engagement.
(D) Whether the engagement is for a single year or is of a
continuing nature.
(E) A representation that the independent public accountant has
undertaken the items enumerated in paragraphs (f)(1) and (2) of this
section.
(3) Replacement of accountant. A security-based swap dealer or
major security-based swap participant must file a notice that must be
received by the Commission's principal office in Washington, DC and the
regional office of the Commission for the region in which its principal
place of business is located not more than 15 business days after:
(i) The security-based swap dealer or major security-based swap
participant has notified the independent public accountant that
provided the reports the security-based swap dealer or major security-
based swap participant filed under paragraph (c)(1)(i)(C) of this
section for the most recent fiscal year that the independent public
accountant's services will not be used in future engagements; or
(ii) The security-based swap dealer or major security-based swap
participant has notified an independent public accountant that was
engaged to provide the reports required under paragraph (c)(1)(i)(C) of
this section that the engagement has been terminated; or
(iii) An independent public accountant has notified the security-
based swap dealer or major security-based swap participant that the
independent public accountant would not continue under an engagement to
provide the reports required under paragraph (c)(1)(i)(C) of this
section; or
(iv) A new independent public accountant has been engaged to
provide the reports required under paragraph (c)(1)(i)(C) of this
section without any notice of termination having been given to or by
the previously engaged independent public accountant.
(v) The notice must include:
(A) The date of notification of the termination of the engagement
or of the engagement of the new independent public accountant, as
applicable; and
(B) The details of any issues arising during the 24 months (or the
period of the engagement, if less than 24 months) preceding the
termination or new engagement relating to any matter of accounting
principles or practices, financial statement disclosure, auditing scope
or procedure, or compliance with applicable rules of the Commission,
which issues, if not resolved to the satisfaction of the former
independent public accountant, would have caused the independent public
accountant to make reference to them in the report of the independent
public accountant. The issues required to be reported include both
those resolved to the former independent public accountant's
satisfaction and those not resolved to the former accountant's
satisfaction. Issues contemplated by this section are those which occur
at the decision-making level--that is, between principal financial
officers of the security-based swap dealer or major security-based swap
participant and personnel of the accounting firm responsible for
rendering its report. The notice must also state whether the
accountant's report filed under paragraph (c)(1)(i)(C) of this section
for any of the past two fiscal years contained an adverse opinion or a
disclaimer of opinion or was qualified as to uncertainties, audit
scope, or accounting principles, and must describe the nature of each
such adverse opinion, disclaimer of opinion, or qualification. The
security-based swap dealer or major security-based swap participant
must also request the former independent public accountant to furnish
the security-based swap dealer or major security-based swap participant
with a letter addressed to the Commission stating whether the
independent public accountant agrees with the statements contained in
the notice of the security-based swap dealer or major security-based
swap participant and, if not, stating the respects in which the
independent public accountant does not agree. The security-based swap
dealer or major security-based swap participant must file three copies
of the notice and the accountant's letter, one copy of which must be
manually signed by the sole proprietor, or a general partner or a duly
authorized corporate, limited liability company, or limited liability
partnership officer or member, as appropriate, and by the independent
public accountant, respectively.
(f) Engagement of the independent public accountant. The
independent public accountant engaged by the security-based swap dealer
or major security-based swap participant to
[[Page 68666]]
provide the reports required under paragraph (c)(1)(i)(C) of this
section must, as part of the engagement, undertake the following, as
applicable:
(1) To prepare an independent public accountant's report based on
an examination of the financial report required to be filed by the
security-based swap dealer or major security-based swap participant
under paragraph (c)(1)(i)(A) of this section in accordance with
generally accepted auditing standards in the United States or the
standards of the Public Company Accounting Oversight Board; and
(2)(i) To prepare an independent public accountant's report based
on an examination of the statements required under paragraphs
(c)(3)(i)(A)(2) through (5) of this section in the compliance report
required to be filed by the security-based swap dealer under paragraph
(c)(1)(i)(B)(1) of this section in accordance with generally accepted
auditing standards in the United States or the 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 (c)(4)(i) through
(ii) of this section in the exemption report required to be filed by
the security-based swap dealer under paragraph (c)(1)(i)(B)(2) of this
section in accordance with generally accepted auditing standards in the
United States or the standards of the Public Company Accounting
Oversight Board.
(g) Notification of non-compliance or material weakness. If, during
the course of preparing the independent public accountant's reports
required under paragraph (c)(1)(i)(C) of this section, the independent
public accountant determines that:
(1) A security-based swap dealer is not in compliance with Sec.
240.18a-1, Sec. 240.18a-4, Sec. 240.18a-9, or Sec. 240.17a-13, as
applicable, or the independent public accountant determines that any
material weaknesses (as defined in paragraph (c)(3)(iii) of this
section) exist, the independent public accountant must immediately
notify the chief financial officer of the security-based swap dealer of
the nature of the non-compliance or material weakness. If the notice
from the accountant concerns an instance of non-compliance that would
require a security-based swap dealer to provide a notification under
Sec. 240.18a-8, or if the notice concerns a material weakness, the
security-based swap dealer must provide a notification in accordance
with Sec. 240.18a-8, as applicable, and provide a copy of the
notification to the independent public accountant. If the independent
public accountant does not receive the notification within one business
day, or if the independent public accountant does not agree with the
statements in the notification, then the independent public accountant
must notify the Commission within one business day. The report from the
accountant must, if the security-based swap dealer failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. 240.18a-8 or any material weakness. If the
security-based swap dealer filed a notification, the report from the
accountant must detail the aspects of the notification of the security-
based swap dealer with which the accountant does not agree; or
(2) A major security-based swap participant is not in compliance
with Sec. 240.18a-2, the independent public accountant must
immediately notify the chief financial officer of the major security-
based swap participant of the nature of the non-compliance. If the
notice from the accountant concerns an instance of non-compliance that
would require a major security-based swap participant to provide a
notification under Sec. 240.18a-8, the major security-based swap
participant must provide a notification in accordance with Sec.
240.18a-8 and provide a copy of the notification to the independent
public accountant. If the independent public accountant does not
receive the notification within one business day, or if the independent
public accountant does not agree with the statements in the
notification, then the independent public accountant must notify the
Commission within one business day. The report from the accountant
must, if the major security-based swap participant failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. 240.18a-8. If the major security-based swap
participant filed a notification, the report from the accountant must
detail the aspects of the notification of the major security-based swap
participant with which the accountant does not agree.
Note 1 to paragraph (g): The attention of the security-based
swap dealer, major security-based swap participant, and the
independent public accountant is called to the fact that under Sec.
240.18a-8(a), among other things, a security-based swap dealer or
major security-based swap participant whose net capital or tangible
net worth, as applicable, declines below the minimum required
pursuant to Sec. 240.18a-1 or Sec. 240.18a-2, as applicable, must
give notice of such deficiency that same day in accordance with
Sec. 240.18a-8(h) and the notice must specify the security-based
swap dealer's net capital requirement and its current amount of net
capital, or the extent of the major security-based swap
participant's failure to maintain positive tangible net worth, as
applicable.
(h) Reports of the independent public accountant required under
paragraph (c)(1)(i)(C) of this section--(1) Technical requirements. The
independent public accountant's reports must:
(i) Be dated;
(ii) Be signed manually;
(iii) Indicate the city and state where issued; and
(iv) Identify without detailed enumeration the items covered by the
reports.
(2) Representations. The independent public accountant's reports
must:
(i) State whether the examinations were made in accordance with
generally accepted auditing standards in the United States or the
standards of the Public Company Accounting Oversight Board; and
(ii) Identify any examination procedures deemed necessary by the
independent public accountant under the circumstances of the particular
case which have been omitted and the reason for their omission.
(iii) Nothing in this section may be construed to imply authority
for the omission of any procedure that independent public accountants
would ordinarily employ in the course of an examination for the purpose
of expressing the opinions required under this section.
(3) Opinion to be expressed. The independent public accountant's
reports must state clearly:
(i) The opinion of the independent public accountant with respect
to the financial report required under paragraph (c)(1)(i)(C) of this
section and the accounting principles and practices reflected in that
report;
(ii) The opinion of the independent public accountant with respect
to the financial report required under paragraph (c)(1)(i)(C) of this
section, as to the consistency of the application of the accounting
principles, or as to any changes in those principles which have a
material effect on the financial statements; and
(iii)(A) The opinion of the independent public accountant with
respect to the statements required under paragraphs (c)(3)(i)(A)(2)
through (5) of this section in the compliance report required under
paragraph (c)(1)(i)(B)(1) of this section; or
(B) The conclusion of the independent public accountant with
respect to the statements required under paragraphs (c)(4)(i) and (ii)
of this section in the exemption report required
[[Page 68667]]
under paragraph (c)(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 (c) of this
section must be given.
(i) Notification of change of fiscal year. (1) In the event any
security-based swap dealer or major security-based swap participant for
which there is no prudential regulator finds it necessary to change its
fiscal year, it must file, with the Commission's principal office in
Washington, DC and the regional office of the Commission for the region
in which the security-based swap dealer or major security-based swap
participant has its principal place of business, a notice of such
change.
(2) Such notice must contain a detailed explanation of the reasons
for the change. Any change in the filing period for the annual reports
must be approved by the Commission.
(j) 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
14. Section 240.18a-8 is added to read as follows:
Sec. 240.18a-8 Notification provisions for security-based swap
dealers and major security-based swap participants.
This section applies to the following types of entities: A
security-based swap dealer registered pursuant to section 15F of the
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, other than
an OTC derivatives dealer as that term is defined in Sec. 240.3b-12,
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a
security-based swap dealer registered pursuant to section 15F of the
Act that is also an OTC derivatives dealer; and a major security-based
swap participant registered pursuant to section 15F of the Act that is
not also a broker or dealer, including an OTC derivatives dealer,
registered pursuant to section 15 of the Act. Section 240.17a-11
(rather than this section) applies to the following types of entities:
Except as provided above, a broker or dealer, including an OTC
derivatives dealer, registered pursuant to section 15 of the Act; a
broker or dealer, other than an OTC derivatives dealer, registered
pursuant to section 15 of the Act that is also a security-based swap
dealer registered pursuant to section 15F of the Act; and a broker or
dealer, including an OTC derivatives dealer, registered pursuant to
section 15 of the Act that is also a major-security-based swap
participant registered pursuant to section 15F of the Act.
(a)(1)(i) Every security-based swap dealer for which there is no
prudential regulator whose net capital declines below the minimum
amount required pursuant to Sec. 240.18a-1 must give notice of such
deficiency that same day in accordance with paragraph (h) of this
section. The notice must specify the security-based swap dealer's net
capital requirement and its current amount of net capital. If a
security-based swap dealer is informed by the Commission that it is, or
has been, in violation of Sec. 240.18a-1 and the security-based swap
dealer has not given notice of the capital deficiency under this
section, the security-based swap dealer, even if it does not agree that
it is, or has been, in violation of Sec. 240.18a-1, must give notice
of the claimed deficiency, which notice may specify the security-based
swap dealer's reasons for its disagreement.
(ii) Every security-based swap dealer for which there is no
prudential regulator whose tentative net capital declines below the
minimum amount required pursuant to Sec. 240.18a-1 must give notice of
such deficiency that same day in accordance with paragraph (h) of this
section. The notice must specify the security-based swap dealer's
tentative net capital requirement and its current amount of tentative
net capital. If a security-based swap is informed by the Commission
that it is, or has been, in violation of Sec. 240.18a-1 and the
security-based swap dealer has not given notice of the capital
deficiency under this section, the security-based swap dealer, even if
it does not agree that it is, or has been, in violation of Sec.
240.18a-1, must give notice of the claimed deficiency, which notice may
specify the security-based swap dealer's reasons for its disagreement.
(2) Every major security-based swap participant for which there is
no prudential regulator who fails to maintain a positive tangible net
worth pursuant to Sec. 240.18a-2 must give notice of such deficiency
that same day in accordance with paragraph (h) of this section. The
notice must specify the extent to which the firm has failed to maintain
positive tangible net worth. If a major security-based swap participant
is informed by the Commission that it is, or has been, in violation of
Sec. 240.18a-2 and the major security-based swap participant has not
given notice of the capital deficiency under this section, the major
security-based swap participant, even if it does not agree that it is,
or has been, in violation of Sec. 240.18a-2, must give notice of the
claimed deficiency, which notice may specify the major security-based
swap participant's reasons for its disagreement.
(b) Every security-based swap dealer or major security-based swap
participant for which there is no prudential regulator must send notice
promptly (but within 24 hours) after the occurrence of the events
specified in paragraphs (b)(1) through (3) or paragraph (b)(4) of this
section, as applicable, in accordance with paragraph (h) of this
section:
(1) If a computation made by a security-based swap dealer pursuant
to Sec. 240.18a-1 shows that its total net capital is less than 120
percent of the security-based swap dealer's required minimum net
capital;
(2) If a computation made by a security-based swap dealer
authorized by the Commission to compute net capital pursuant to Sec.
240.18a-1(d) shows that its total tentative net capital is less than
120 percent of the security-based swap dealer's required minimum
tentative net capital;
(3) If the level of tangible net worth of a major security-based
swap participant falls below $20 million; and
(4) The occurrence of the fourth and each subsequent backtesting
exception under Sec. 240.18a-1(d)(9) during any 250 business day
measurement period.
(c) Every security-based swap dealer that files a notice of
adjustment of its reported capital category with the Federal Reserve
Board, the Office of the Comptroller of the Currency or the Federal
Deposit Insurance Corporation must give notice of this fact that same
day by transmitting a copy notice of the adjustment of reported capital
category in accordance with paragraph (h) of this section.
(d) Every security-based swap dealer or major security-based swap
participant that fails to make and keep current the books and records
required by Sec. 240.18a-5 or Sec. 240.17a-3, as applicable, must
give notice of this fact that same day in accordance with paragraph (h)
of this section, specifying the books and records which have not been
made or which are not current. The security-based swap dealer or major
security-based swap participant must also transmit a report in
accordance with paragraph (h) of this section within 48 hours of the
notice stating what the security-based swap dealer or major
[[Page 68668]]
security-based swap participant has done or is doing to correct the
situation.
(e) Whenever any security-based swap dealer for which there is no
prudential regulator discovers, or is notified by an independent public
accountant under Sec. 240.18a-7(g), of the existence of any material
weakness, as defined in Sec. 240.18a-7(c)(3)(iii), the security-based
swap dealer must:
(1) Give notice, in accordance with paragraph (h) of this section,
of the material weakness within 24 hours of the discovery or
notification of the material weakness; and
(2) Transmit a report in accordance with paragraph (h) of this
section, within 48 hours of the notice stating what the security-based
swap dealer has done or is doing to correct the situation.
(f) [Reserved]
(g) If a security-based swap dealer fails to make in its special
reserve account for the exclusive benefit of security-based swap
customers a deposit, as required by Sec. 240.18a-4(c), the security-
based swap dealer must give immediate notice in writing in accordance
with paragraph (h) of this section.
(h) Every notice or report required to be given or transmitted by
this section must be given or transmitted to the principal office of
the Commission in Washington, DC and the regional office of the
Commission for the region in which the security-based swap dealer or
major security-based swap participant has its principal place of
business, or to an email address provided on the Commission's website,
and to the Commodity Futures Trading Commission (CFTC) if the security-
based swap dealer or major security-based swap participant is
registered as a futures commission merchant with the CFTC. The report
required by paragraph (d) or (e)(2) of this section may be transmitted
by overnight delivery.
0
15. Section 240.18a-9 is added to read as follows:
Sec. 240.18a-9 Quarterly security counts to be made by certain
security-based swap dealers.
This section applies to a security-based swap dealer registered
pursuant to section 15F of the Act (15 U.S.C. 78o-10) that does not
have a prudential regulator and that is not also a broker or dealer,
including an OTC derivatives dealer as that term is defined in Sec.
240.3b-12, registered pursuant to section 15 of the Act (15 U.S.C.
78o). Section 240.17a-13 (rather than this section) applies to the
following entities (if not exempt under the provisions of Sec.
240.17a-13): A member of a national securities exchange who transacts a
business in securities directly with others than members of a national
securities exchange; a broker or dealer who transacts a business in
securities through the medium of a member of a national securities
exchange; a broker or dealer, including an OTC derivatives dealer,
registered pursuant to section 15 of the Act; a security-based swap
dealer registered pursuant to section 15F of the Act that is also a
broker or dealer, including an OTC derivatives dealer, registered
pursuant to section 15 of the Act; and a major security-based swap
participant that is also a broker or dealer, including an OTC
derivatives dealer, registered pursuant to section 15 of the Act.
(a) Any security-based swap dealer that is subject to the
provisions of this section must at least once in each calendar quarter-
year:
(1) Physically examine and count all securities held including
securities that are the subjects of repurchase or reverse repurchase
agreements;
(2) Account for all securities in transfer, in transit, pledged,
loaned, borrowed, deposited, failed to receive, failed to deliver,
subject to repurchase or reverse repurchase agreements or otherwise
subject to its control or direction but not in its physical possession
by examination and comparison of the supporting detailed records with
the appropriate ledger control accounts;
(3) Verify all securities in transfer, in transit, pledged, loaned,
borrowed, deposited, failed to receive, failed to deliver, subject to
repurchase or reverse repurchase agreements or otherwise subject to its
control or direction but not in its physical possession, where such
securities have been in said status for longer than thirty days;
(4) Compare the results of the count and verification with its
records; and
(5) Record on the books and records of the security-based swap
dealer all unresolved differences setting forth the security involved
and date of comparison in a security count difference account no later
than 7 business days after the date of each required quarterly security
examination, count, and verification in accordance with the
requirements provided in paragraph (b) of this section. Provided,
however, that no examination, count, verification, and comparison for
the purpose of this section is within 2 months of or more than 4 months
following a prior examination, count, verification, and comparison made
under this paragraph (a)(5).
(b) The examination, count, verification, and comparison may be
made either as of a date certain or on a cyclical basis covering the
entire list of securities. In either case the recordation must be
effected within 7 business days subsequent to the examination, count,
verification, and comparison of a particular security. In the event
that an examination, count, verification, and comparison is made on a
cyclical basis, it may not extend over more than 1 calendar quarter-
year, and no security may be examined, counted, verified, or compared
for the purpose of this section within 2 months of or more than 4
months after a prior examination, count, verification, and comparison.
(c) The examination, count, verification, and comparison must be
made or supervised by persons whose regular duties do not require them
to have direct responsibility for the proper care and protection of the
securities or the making or preservation of the subject records.
0
16. Section 240.18a-10 is amended by revising paragraphs (a)
introductory text and (b)(1) through (3), adding paragarphs (b)(4) and
(5), and revising paragraphs (c) introductory text, (d)(2)(ii)
introductory text, and (e) to read as follows:
Sec. 240.18a-10 Alternative compliance mechanism for security-based
swap dealers that are registered as swap dealers and have limited
security-based swap activities.
(a) A security-based swap dealer may comply with capital, margin,
segregation, recordkeeping, and reporting requirements of the Commodity
Exchange Act and chapter I of this title applicable to swap dealers in
lieu of complying with Sec. Sec. 240.18a-1 and 240.18a-3 through
240.18a-9 if:
* * * * *
(b) * * *
(1) Comply with capital, margin, segregation, recordkeeping, and
reporting requirements of the Commodity Exchange Act and chapter I of
this title applicable to swap dealers and treat security-based swaps or
collateral related to security-based swaps as swaps or collateral
related to swaps, as applicable, pursuant to those requirements to the
extent the requirements do not specifically address security-based
swaps or collateral related to security-based swaps;
(2) Disclose in writing to each counterparty to a security-based
swap before entering into the first transaction with the counterparty
after the date the security-based swap dealer begins operating under
this section that the security-based swap dealer is operating under
this section and is therefore complying with the applicable capital,
margin, segregation, recordkeeping, and reporting requirements of the
[[Page 68669]]
Commodity Exchange Act and the rules promulgated by the Commodity
Futures Trading Commission thereunder in lieu of complying with the
capital, margin, segregation, recordkeeping, and reporting requirements
promulgated by the Commission in Sec. Sec. 240.18a-1 and 240.18a-3
through 240.18a-9;
(3) Immediately notify the Commission and the Commodity Futures
Trading Commission in writing if the security-based swap dealer fails
to meet a condition specified in paragraph (a) of this section;
(4) Simultaneously notify the Commission if the security-based swap
dealer is required to send a notice concerning its capital, books and
records, liquidity, margin operations, or segregation operations to the
Commodity Futures Trading Commission by transmitting to the Commission
a copy of the notice being sent to the Commodity Futures Trading
Commission; and
(5) Furnish promptly to a representative of the Commission legible,
true, complete, and current copies of those records of the security-
based swap dealer that are required to be preserved under the Commodity
Exchange Act and chapter I of this title applicable to swap dealers, or
any other records of the security-based swap dealer subject to
examination pursuant to section 15F of the Act (15 U.S.C. 78o-10) that
are requested by a representative of the Commission.
(c) A security-based swap dealer that fails to meet one or more of
the conditions specified in paragraph (a) of this section must begin
complying with Sec. Sec. 240.18a-1 and 240.18a-3 through 240.18a-9 no
later than:
* * * * *
(d) * * *
(2) * * *
(ii) Continue to comply with Sec. Sec. 240.18a-1 and 240.18a-3
through 240.18a-9 for at least:
* * * * *
(e) The notices required by this section must be sent by facsimile
transmission to the principal office of the Commission and the regional
office of the Commission for the region in which the security-based
swap dealer has its principal place of business or to an email address
provided on the Commission's website, and to the principal office of
the Commodity Futures Trading Commission in a manner consistent with
the notification requirements of the Commodity Futures Trading
Commission. The notice must include a brief summary of the reason for
the notice and the contact information of an individual who can provide
further information about the matter that is the subject of the notice.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
17. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
18. Subpart G is amended by revising the heading to read as follows:
Subpart G--Forms for Reports To Be Made by Certain Exchange
Members, Brokers, Dealers, Security-Based Swap Dealers, and Major
Security-Based Swap Participants
* * * * *
0
19. Section 249.617 is revised to read as follows:
Sec. 249.617 Form X-17A-5, information required of certain brokers,
dealers, security-based swap dealers, and major security-based swap
participants pursuant to sections 15F and 17 of the Securities Exchange
Act of 1934 and Sec. Sec. 240.17a-5, 240.17a-10, 240.17a-11, 240.17a-
12, and 240.18a-79 of this chapter, as applicable.
Appropriate parts of Form X-17A-5, as applicable, shall be used by
brokers, dealers, security-based swap dealers, and major security-based
swap participants required to file reports under Sec. Sec. 240.17a-5,
240.17a-10, 240.17a-11, 240.17a-12, and 240.18a-7 of this chapter, as
applicable.
0
20. Part III of Form X-17A-5 (referenced in Sec. 249.617 of this
chapter) is revised to read as follows:
Note: The text of Part III of Form X-17A-5 does not and this
amendment will not appear in the Code of Federal Regulations.
BILLING CODE 8011-01-P
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0
21. Part II of Form X-17A-5 and the instructions thereto (referenced in
Sec. 249.617 of this chapter) are revised to read as follows:
Note: The text of Part II of Form X-17A-5 and the instructions
thereto do not and this amendment will not appear in the Code of
Federal Regulations.
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0
22. Part IIC of Form X-17A-5 and the instructions thereto (referenced
in Sec. 249.617 of this chapter) are added to read as follows:
Note: The text of Part IIC of Form X-17A-5 and the instructions
thereto will not appear in the Code of Federal Regulations.
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By the Commission.
Dated: September 19, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-20678 Filed 12-13-19; 8:45 am]
BILLING CODE 8011-01-C