Rule_17a-11_Supporting_Statement_Version_C[1]

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 17a-11 – Notification Provisions for Brokers and Dealers

A.

JUSTIFICATION
1.

Necessity of Information Collection

In response to an operational crisis in the securities industry between 1967 and 1970, the
Securities and Exchange Commission (“Commission”) adopted Rule 17a-11 (17 CFR 240.17a11) under the Securities Exchange Act of 1934 (“Exchange Act”). 1 Rule 17a-11 requires
broker-dealers that are experiencing financial or operational difficulties to provide notice to the
Commission, the broker-dealer’s designated examining authority (“DEA”), and the Commodity
Futures Trading Commission (“CFTC”) if the broker-dealer is registered with the CFTC as a
futures commission merchant. Rule 17a-11 is an integral part of the Commission’s financial
responsibility program, which enables the Commission, a broker-dealer’s DEA, and, if
applicable, the CFTC, to increase surveillance of a broker-dealer experiencing difficulties and to
obtain any additional information necessary to gauge the broker-dealer’s financial or operational
condition.
Rule 17a-11 requires a broker-dealer to give notice if its net capital declines below
certain levels or of certain other occurrences related to its net capital. Rule 17a-11 also requires
over-the-counter (“OTC”) derivatives dealers and broker-dealers that are permitted to compute
net capital pursuant to Appendix E to Exchange Act Rule 15c3-1 (17 CFR 240.15c3-1e) to give
notice when their tentative net capital drops below certain levels. A broker-dealer must also
provide notice if it has failed to make and keep certain books and records and when it discovers
or is notified by an independent public accountant of the existence of a material inadequacy.
OTC derivatives dealers must also provide notice of the back testing of exceptions identified
pursuant to Appendix F to Rule 15c3-1 (17 CFR 240.15c3-1f).
On July 30, 2013, the Commission adopted amendments to Rule 17a-11 in conjunction
with its amendments to the financial responsibility rules. 2 Specifically, the Commission added
new paragraph (c)(5) to Rule 17a-11 to help identify broker-dealers with highly leveraged nongovernment securities lending and borrowing and repurchase operations. 3 The Commission also
adopted an amendment to the first sentence of paragraph (b)(1) of Rule 17a-11 to require that a
broker-dealer meeting the definition of insolvent must provide immediate notice to the
Commission, the firm’s DEA and, if applicable, the CFTC. 4

1

See Exchange Act Release No. 9268 (July 30, 1971). The Office of Management and Budget (“OMB”)
Control Number is 3235-0085.

2

Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78
FR 51824 (Aug. 21, 2013).

3

See paragraph (c)(5) of Rule 17a-11, as adopted.

4

See paragraph (b)(1) of Rule 17a-11, as adopted.

2.

Purpose and Use of the Information Collection

The information obtained under Rule 17a-11 is used to monitor the financial and
operational condition of a broker-dealer by the Commission staff, by the broker-dealer’s DEA,
and, if applicable, by the CFTC. This information alerts the Commission, the DEA, and, if
applicable, the CFTC, of the need to increase surveillance of the broker-dealer’s financial and
operational condition and to assist the broker-dealer in complying with the Commission’s rules.
No similar information is already available to use or modify for purposes of complying with
Rule 17a-11 because the disclosures required by the rule are unobtainable until the early warning
mechanisms are triggered. Only the most up-to-date information will help the Commission,
DEAs, and the CFTC to monitor broker-dealers experiencing financial or operational difficulties.
The monthly report related to the broker-dealer’s securities borrowed and loan or
securities repurchase/reverse repurchase activity may be filed by a broker-dealer in lieu of the
filing of the required notice under Rule 17a-11(c)(5). The monthly report is designed to enhance
the monitoring of these securities activities by securities regulators.
3.

Consideration Given to Information Technology

Broker-dealers that are required to provide notice under Rule 17a-11 may give or
transmit such notice by telegraphic notice or facsimile transmission. Reports required by Rule
17a-11 may be transmitted by overnight delivery. Certain DEAs have developed systems that
enable them to receive these notices electronically.
4.

Duplication

Duplication of information is not a concern because the reporting requirements are only
applicable to those broker-dealers triggering the early warning mechanisms of Rule 17a-11.
5.

Effect on Small Entities

To the extent that some broker-dealers that are required to give notice under this rule are
small entities, Rule 17a-11 will impact these entities. However, information is collected from
small registered broker-dealers only when they are required to provide notice under Rule 17a-11.
The amendments to paragraph (c)(5) of Rule 17a-11, related to providing notice or
reporting monthly regarding a broker-dealer’s securities lending or repurchase activity, will not
affect any small entities because, based on FOCUS Report data, as of December 31, 2011, the
Commission estimates that none of the broker-dealers that engage in securities lending and
borrowing or securities repurchase and reverse repurchase activity are small entities. The
amendment to paragraph (b)(1) of Rule 17a-11, requiring a broker-dealer to give notice if it is
insolvent, will only apply to small entities to the extent they become insolvent and are required
to give notice.

2

6.

Consequences of Not Conducting Collection

In the absence of the rule, the Commission, DEAs, and, if applicable, the CFTC, would
likely not be promptly alerted to a broker-dealer’s financial or operational problems.
7.

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

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The Commission requested comment on the Paperwork Reduction Act (“PRA”) analysis
in the proposing release in March 2007. 5 The Commission re-opened the comment period in
May 2012. 6 The Commission received one comment addressing the PRA generally.
The commenter specifically stated that the estimates the Commission provided utilized
only the number of broker-dealers that the Commission “justifiably considers to be affected by
the proposals.” 7 The commenter, however, believed that most, if not all, broker-dealers will
spend over 90 hours each analyzing the effects of the rules as implemented, will spend many
more than 90 hours each in implementing procedures and modifying their written supervisory
procedures to comply with the new rules, will spend in excess of 240 hours each in the
monitoring of such rules, and will spend in excess of $15,000 each for outside counsel and
auditor opinions or work product. This commenter did not provide additional detail about the
basis for its view that the Commission’s estimates were too low. The Commission agreed with
the commenter that broker-dealers directly affected by the rule amendments may be required to
implement procedures or modify their written supervisory procedures in order to comply with
the rule amendments. In cases where the final rule amendments required a broker-dealer to
implement or document certain policies and procedures, these hour burdens were included in the
final PRA hour estimates discussed in the adopting release. Consequently, the Commission
addressed the commenter’s concerns that directly relate to the collections of information in the
PRA section of the adopting release.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

5

See Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 55431
(Mar. 9, 2007), 72 FR 12862 (Mar. 19, 2007). The Commission re-opened the public comment period on
May 3, 2012.

6

See Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 66910
(May 3, 2012), 77 FR 27150 (May 9, 2012).

7

See letter from Michael Scillia, National Investment Banking Association, to Securities and Exchange
Commission (July 12, 2012), http://www.sec.gov/comments/s7-08-07/s70807-102.pdf.

3

The Commission will generally not publish or make available to any person notices or
reports received pursuant to Rule 17a-11. The Commission believes that information obtained
under Rule 17a-11 relates to a condition report prepared for the use of the Commission, other
federal governmental authorities, and securities industry DEAs responsible for the regulation or
supervision of financial institutions.
11.

Sensitive Questions

Not applicable. No information of a sensitive nature is required.
12.

Burden of Information Collection

Broker-dealers whose net capital declines below certain specified levels or who are
otherwise experiencing financial or operational problems have a reporting burden under Rule
17a-11. In 2011, the Commission received approximately 465 notices under Rule 17a-11. The
Commission estimated that each broker-dealer reporting pursuant to Rule 17a-11 will spend
approximately one hour preparing and transmitting the notice required by Rule 17a-11, resulting
in a total estimated annual reporting burden of 465 hours.
The amendment to paragraph (b)(1) of Rule 17a-11, requiring notice when a brokerdealer becomes subject to certain insolvency events, will result in irregular filings from a small
number of broker-dealers. The Securities Investor Protection Corporation’s 2012 annual report
indicates that the average annual number of broker-dealers which have become subject to a
liquidation proceeding under the Securities Investor Protection Act of 1970 over the last ten
years is two. Using this figure as a basis, the Commission estimates that approximately two
insolvency notices will be sent per year and that a broker-dealer will spend, on average,
approximately ten minutes of employee resources to prepare and send the notice. Therefore, the
Commission estimates that the total annual reporting burden to broker-dealers arising from this
amendment will be approximately 20 minutes. 8
The amendment to paragraph (c)(5) of Rule 17a-11 requires broker-dealers engaged in
securities lending or repurchase activities to either: (1) file a notice with the Commission and
their DEA whenever the total money payable against all securities loaned, subject to a reverse
repurchase agreement or the contract value of all securities borrowed or subject to a repurchase
agreement, exceeds 2,500% of tentative net capital; or, alternatively, (2) report monthly their
securities lending and repurchase activities to their DEA in a form acceptable to their DEA.
As of December 31, 2011, the Commission estimated that approximately one stock
loan/borrow notice would be sent per year. The Commission further estimated that a brokerdealer will spend, on average, approximately ten minutes of employee resources to prepare and
send the notice. Therefore, the Commission estimates that the total annual reporting burden to
broker-dealers arising from this amendment will be approximately ten minutes. 9
8

2 notices x 10 minutes per notice = 20 minutes or .333 hours.

9

1 notice x 10 minutes per notice = 10 minutes or .167 hours.

4

The Commission estimates that, annually, six broker-dealers will submit the monthly
stock loan/borrow report. Each firm will spend, on average, approximately 100 hours of
employee resources updating its systems to generate the information required in the monthly
report. Therefore, the Commission estimates that the total one-time reporting burden to brokerdealers arising from this requirement will be approximately 600 hours. 10 The Commission
estimates each firm will spend, on average, approximately one hour per month (or twelve hours
per year) of employee resources to prepare and send the report or to prepare the information for
the FOCUS report (as required by the firm’s DEA, if applicable). Therefore, the Commission
estimates the total annual reporting burden arising from this section of the amendment will be
approximately 72 hours. 11
Therefore, the total additional annual reporting burden resulting from the amendments is
approximately 273. 12 The total annual reporting burden associated with Rule 17a-11 is
approximately 738. 13
13.

Cost to Respondents

Rule 17a-11 does not impose any costs other than internal labor costs that are associated
with the hour burdens described in Item 12.
14.

Costs to Federal Government

The annual operational costs incurred by the federal government in enforcing compliance
and reviewing the notices required by Rule 17a-11 amount to approximately $9,118. This
amount is based upon the calculation of the value of approximately 193 hours of staff time
devoted to these activities, plus the related overhead expenses. These estimates have been
computed based on the GSA, Guide to Estimating Report Costs (1986).
15.

Changes in Burden

The change in the reporting burden is due to an increase in the annual and one-time hour
burdens, due to the amendments adopted to paragraphs (b)(1) and (c)(5) to Rule 17a-11, as
described in paragraph 12 above.
16.

Information Collection Planned for Statistical Purposes

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

10

6 broker-dealers x 100 hours per firm = 600 hours. The three-year annualized number for this one-time
burden is 200 hours (600 hours/3 years).

11

6 broker-dealers x 12 hours per year = 72 hours.

12

.333 + .167 + 200 + 72 = 272.5

13

465 + 273.

5

17.

Approval to Omit OMB Expiration

The Commission is not seeking approval to omit the OMB 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.

6