2013 Rule 19b-5 Justification v2

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 19b-5 and Form PILOT”
A.

Justification
1.

Necessity of Information Collection

The Securities Exchange Act of 1934, as amended (“Act”), 1 sets forth a scheme of selfregulation under which national securities exchanges, national securities associations, and
registered clearing agencies have primary responsibility for regulating their members or
participants. Under this scheme, the Commission's role is primarily one of oversight; the Act
charges the Commission with the responsibility for assuring that each of these self-regulatory
organizations (“SROs”) complies with and advances the policies of the Act. As part of its
oversight responsibilities, the Commission is required to review changes in the rules of the
various SROs.
Section 19(b) of the Act 2 requires each SRO to file with the Commission copies of any
proposed amendment to its constitution, articles of incorporation, bylaws, rules, or similar
instrument or any interpretation of these instruments (collectively, “rule changes”). The
Commission is required to publish notice of any such filing, and when required to approve the
rule change or institute proceedings to determine whether the rule change should be disapproved.
Rule 19b-4 under the Act 3 implements the requirements of Section 19(b) of the Act by requiring
SROs to file their rule changes on Form 19b-4 and by clarifying which actions by SROs must be
filed pursuant to Section 19(b). Rule 19b-4 was adopted in 1975 pursuant to Sections 2, 3, 6,
11A, 15A, 15B, 17, 19, and 23 of the Act.
Rule 19b-5 under the Act 4 provides a temporary exemption from the rule-filing
requirements of Section 19(b) of the Act to SROs wishing to establish and operate pilot trading
systems. Certain provisions of Rule 19b-5 contain collection of information requirements within
the meaning of the Paperwork Reduction Act of 1995 5 through the use of Form PILOT. Rule
19b-5 permits an SRO to develop a pilot trading system and to begin operation of such system
shortly after submitting an initial report on Form PILOT to the Commission. During operation of
the pilot trading system, the SRO must submit quarterly reports of the system’s operation to the
Commission on Form PILOT, as well as timely amendments on Form PILOT describing any
material changes to the system. After two years of operating such pilot trading system under the

1

15 U.S.C. 78a et seq.

2

15 U.S.C. 78s(b).

3

17 CFR 240.19b-4.

4

17 CFR 240.19b-5.

5

44 U.S.C. 3501 et seq.

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exemption afforded by Rule 19b-5, the SRO must submit a rule filing pursuant to Section 19(b)(2)
of the Act 6 in order to obtain permanent approval of the trading system from the Commission.
2.

Purpose and Use of the Information Collection

The purpose of Rule 19b-5 is to provide a temporary exemption from rule-filing
requirements to SROs wishing to begin operation of a pilot trading system. In the absence of this
exemption, an SRO would be required to submit a proposed rule change to the Commission
pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder in order to operate any new trading
system. Section 19(b) of the Act generally requires SROs to file with the Commission copies of
any proposed rule or any proposed change in, addition to, or deletion from the rules of such SRO.
Once a proposed rule change has been filed, the Commission must publish notice of its receipt and
allow an opportunity for the public to comment on it. A proposed rule change may not take effect
unless it is approved by the Commission or is otherwise permitted to become effective under
Section 19(b) of the Act. In order to approve a rule change proposing a new trading system, the
Commission would be required to find that, among other things, such trading system will serve to
promote the public interest and help to remove impediments to a free and open securities market in
accordance with the requirements of Section 6(b)(5) of the Act 7. Further, pursuant to Section 3(f)
of the Act, 8 the Commission would have to consider whether the proposed trading system will, in
addition to the protection of investors, promote efficiency, competition, and capital formation.
Rule 19b-5 permits an SRO to operate a pilot trading system immediately, without requiring
any Commission findings, provided that such system is in compliance with the conditions set forth
in Rule 19b-5. In order for the Commission to maintain an accurate record of all new pilot trading
systems operated by SROs and to determine whether an SRO has properly availed itself of the
exemption afforded by Rule 19b-5, it is necessary that an SRO file a Form PILOT in conjunction
with the operation of a new pilot trading system, providing the Commission with at least 20 days’
notice before commencing operations. In addition, in order for the Commission to determine
whether an SRO operating a pilot trading system pursuant to the exemption afforded by Rule 19b-5
is operating such system in compliance with the Act and is carrying out its statutory oversight
obligations under the Act, it is necessary that an SRO submit quarterly reports of the system’s
operation and amendments describing material changes to the system to the Commission on Form
PILOT. The Commission will review SRO compliance with Rule 19b-5 and other provisions of
the Act through its routine inspections and examinations.
SROs provide information on Form PILOT relating to the operation of their pilot trading
systems. SROs also use Form PILOT to notify the Commission of changes to such systems and to
make quarterly reports of their operations. Without such information, the Commission might not
have sufficient information to ensure that the pilot trading system continued to operate in a manner
consistent with the Act.
6

15 U.S.C. 78s(b)(2).

7

15 U.S.C. 78f(b)(5).

8

15 U.S.C. 78c(f)

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3.

Consideration Given to Information Technology

The compilation and filing of the data required reflects the complexity of the SROs’
businesses. Thus, improved technology would not reduce the burden.
4.

Duplication

Not applicable. The Commission believes that no duplication of the requirements of Rule
19b-5 exists. Additionally, the Commission notes that Rule 17a-1 under the Act 9 currently
contains recordkeeping requirements for SROs. Although Rule 19b-5 does not create new
recordkeeping obligations for SROs, paragraph (e)(9) of Rule 19b-510 reiterates the SROs’ existing
recordkeeping obligations under Rule 17a-1.
5.

Effect on Small Entities

Not applicable. The SROs who are required to respond to the collection of information
are not small businesses.
6.

Consequences of Not Conducting Collection

Rule 19b-5 requires that information describing a pilot trading system be filed prior to
operation of such system and that subsequent information regarding the system be provided on a
quarterly basis thereafter and whenever any material change is made to the system. Any less
frequent collection of this information would impede the Commission’s ability to fulfill its statutory
obligations to maintain fair and orderly markets and protect investors.
7.

Inconsistencies With Guidelines in 5 CFR 1320.5(d)(2)

The information collection is consistent with the general information collection
guidelines imposed for public protection as set forth in 5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

Rule 19b-5 and Form PILOT were adopted after appropriate public notice and comment.
9.

Payment or Gift

Not applicable. No payments or gifts are required to be made or are made to respondents.

9

17 CFR 240.17a-1.

10

17 CFR 240.19b-5(e)(9).

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10.

Confidentiality

The information required by Rule 19b-5 is available only for examination by the
Commission, other agencies of the federal government, and state securities authorities. Subject to
the provisions of the Freedom of Information Act (“FOIA”), 11 and the Commission’s rules
thereunder, the Commission will not generally publish or make available information contained in
any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation of, or in
connection with an examination or inspection of the books and records of any person or any other
investigation.
11.

Sensitive Questions

Not applicable. No questions of a sensitive nature are involved.
12.

Burden of Information Collection

The Commission estimates that the reporting burden for each SRO that files an initial report on
Form PILOT prior to operating a pilot trading system would be approximately 24 hours, including 16
hours of professional legal work and 8 hours of clerical work. The Commission estimates that the related
cost to an SRO to complete an initial report on Form PILOT would be $6,488. This estimated related
cost is broken down as follows:
16 hours of in-house professional legal work at $379/hr12
8 hours of clerical work at $53/hr13

$ 6,064
$ 424
$ 6,488

The Commission estimates that the reporting burden for each SRO filing a quarterly report on
Form PILOT upon commencing to operate a pilot trading system would be approximately 3 hours,
including 2 hours of professional legal work and 1 hour of clerical work. The Commission estimates that
the related cost to an SRO to complete a quarterly report on Form PILOT would be $811. This estimated
related cost is broken down as follows:
2 hours of in-house professional legal work at $379/hr
1 hour of clerical work at $53/hr

$ 758
$ 53
$ 811

11

5 U.S.C. 522.

12

$379/hour figure for an Attorney is from the SIFMA’s Management & Professional Earnings in
the Securities Industry 2012, modified by Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead.

13

$53/hour figure for a General Clerk is from the SIFMA’s Office Salaries in the Securities
Industry 2012, modified by Commission staff to account for an 1800-hour work-year and
multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead.

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Each respondent would file 4 quarterly reports on Form PILOT per year, for an annual reporting
burden of 12 hours (4 filings at 3 hours per filing) and at a related cost of $3,244 (4 filings at $811 per
filing).
The Commission estimates that the reporting burden for each SRO filing a notice of a material
systems change on Form PILOT upon commencing to operate a pilot trading system would be
approximately 3 hours, including 2 hours of professional legal work and 1 hour of clerical work. The
Commission estimates that the related cost to an SRO to complete a notice of a material systems change
on Form PILOT would be $811. This estimated related cost is broken down as follows:
2 hours of in-house professional legal work at $379/hr
1 hour of clerical work at $53/hr

$ 758
$ 53
$ 811

The Commission estimates that an SRO operating a pilot trading system would file 2
notices of material systems changes on Form PILOT per year, for an annual burden of 6 hours (2
filings at 3 hours per filing) and at an annual related cost of $1,622 (2 filings at $811 per filing).
There are currently 17 SROs which may avail themselves of the exemption provided by
Rule 19b-5. The Commission anticipates receiving as many as three (3) proposals to operate pilot
trading systems filed as initial reports on Form PILOT each year. The Commission has estimated
that the resultant aggregate reporting burden to all respondents in a year would be 126 hours at a
related total cost of $34,062. These aggregate figures consist of (i) 72 hours for initial reports on
Form PILOT (3 filings each requiring 24 hours of work) at a related cost of $19,464 ($6,488 per
filing multiplied by 3 filings); (ii) 36 hours for quarterly reports on Form PILOT (12 filings each
requiring 3 hours of work) at a related cost of $9,732 ($811 per filing multiplied by 12 filings); and
(iii) 18 hours for notices of material systems changes on Form PILOT (6 filings each requiring 3
hours of work) at a related cost of $4,866 ($811 per filing multiplied by 6 filings).
For the purposes of these estimates, the Commission staff has valued related overhead at 35%
of the value of legal and clerical time combined.
13.

Costs to Respondents

The Commission estimates that the respondents will incur printing, supplies, copying, and postage
expenses of $5,745 for filing initial reports on Form PILOT, $2,868 for filing quarterly reports on Form
PILOT, and $1,434 for filing notices of material systems changes on Form PILOT, for a total of $10,047.
Additionally, the Commission notes that Rule 19b-5 does not in itself impose new
recordkeeping burdens on SROs, though it relies on existing requirements imposed pursuant to
Rule 17a-1 under the Act.

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14.

Costs to Federal Government

The Commission anticipates receiving as many as three initial reports on Form PILOT per year.
The Commission staff estimates that the average annual cost to the Commission of processing the filings
would be $6,663. This aggregate figure includes the following component costs:
3 initial reports on Form PILOT per year
3 hours legal processing time at $235/hr
overhead, including clerical work

$ 705
$ 247
$ 952

12 quarterly reports on Form PILOT per year
12 hours legal processing time at $235/hr
overhead, including clerical work

$ 2,820
$ 987
$ 3,807

6 notices of systems changes on Form PILOT per year
6 hours legal processing time at $235/hr
overhead, including clerical work

$ 1,410
$ 494
$ 1,904

As previously stated, for the purposes of our estimates the Commission staff has valued
related overhead at 35% of the value of legal and clerical time combined.
The Commission notes that, after the two-year exemption provided by Rule 19b-5 from the
requirements to file proposed rule changes under Section 19(b) of the Act has expired for a given
trading system operated by an SRO, the burden to the federal government will remain reduced
because the Commission staff tasked with processing the subsequent proposed rule changes for
such trading system will already be familiar with that system.
15.

Changes in Burden

The decrease in the aggregate dollar cost burden from $38,775 per year to $10,047 was
due to the fact that the prior Paperwork Reduction Act extension erroneously treated the
monetization of internal labor costs of compliance as a separate cost burden. Accordingly, the
revised calculations simply reflect the effort to eliminate double-counting of the same burdens.
The following technical revisions were also made from the prior extension submission: (i)
significantly revised the organization of Section 12 (but not the substance) in an attempt to make
it easier to follow and (ii) removed two outdated references regarding the calculation of overhead
costs.

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16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

We are not requesting authorization to omit the expiration date.

18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.