2014 8c-1 Supporting Statement (12_18_2013) DGL REVISED

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 8c-1”
A.

JUSTIFICATION
1.

Necessity of Information Collection

Sections 8(a) and (b) of the Securities Exchange Act of 1934 (“Exchange Act”) (15
U.S.C. 78h) authorize the Securities and Exchange Commission (“Commission”) to
prescribe rules and regulations prohibiting, under certain circumstances, the hypothecation,
or the arranging for the hypothecation, of any securities carried for the account of any
customer.1 Exchange Act Rule 8c-1 2 was adopted in 1940 to furnish added protection to
customers against losses incurred as a result of the pledging of customers’ securities as
collateral by members of national securities exchanges and other broker-dealers. Prior to the
adoption of Rule 8c-1, most customer agreements did not prohibit a broker-dealer from
commingling customer securities with its own securities as collateral for loans used by the
firm in its business as a broker-dealer or trader for its own account. In addition, most
customer agreements did not prohibit a broker-dealer from borrowing more on their
customers’ securities than was owed them by the customers. The risk of loss to a customer
whose securities were so used by a broker-dealer that failed was greatly increased.3
Rule 8c-1 generally prohibits a broker-dealer from using its customers’ securities as
collateral to finance its own trading, speculating, or underwriting transactions. More
specifically, Rule 8c-1 states three main principles: (1) a broker-dealer is prohibited from
commingling the securities of different customers as collateral for a loan without the consent
of each customer; (2) a broker-dealer cannot commingle customers’ securities with its own
securities under the same pledge; and (3) a broker-dealer can only pledge its customers’
securities to the extent that customers are in debt to the broker-dealer.4
2.

Purpose and Use of the Information Collection

The information required by Rule 8c-1 is necessary for the execution of the
Commission’s mandate under the Exchange Act to prevent broker-dealers from
hypothecating or arranging for the hypothecation of any securities carried for the account of
any customer under certain circumstances. In addition, the information required by Rule 8c1 provides important investor protections.
3.

Consideration Given to Information Technology

The compilation of this information must be done on an individual basis for each
potential customer. Thus, improved information technology would not reduce the burden.

1

Further statutory authority is found in Section 23(a) of the Exchange Act, 15 USC 78w.

2

17 CFR 240.8c-1.

3

See Securities Exchange Act Release No. 2690 (November 15, 1940).

4

See Securities Exchange Act Release No. 2690 (November 15, 1940); Securities Exchange Act
Release No. 9428 (December 29, 1971).

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4.

Duplication

Not applicable. Although Exchange Act Rule 15c2-1 requires similar information,
combining the notices and consents under Rules 8c-1 and 15c2-1 in the same documents is
not prohibited.
5.

Effect on Small Entities

The requirements under Rule 8c-1 are not unduly burdensome on smaller brokerdealers. Moreover, the requirements prescribed by Rule 8c-1 are those that a prudent
businessperson would keep in the ordinary course of business.
6.

Consequences of Not Conducting Collection

The information collected pursuant to Rule 8c-1 occurs based on individual
transactions. Consequently, there is no way to require less frequent collection without
undermining the purposes of Rule 8c-1.
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 required Federal Register notice with a 60-day comment period soliciting
comments on this information collection was published. No public comments were
received.
9.

Payment or Gift

No payments or gifts were provided to respondents.
10.

Confidentiality

No assurances of confidentiality are provided in the statute or the rule.
11.

Sensitive Questions

Not applicable. No inquiries of a sensitive nature were made. This information
collection does not collect any personal identifiable information.

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12.

Burden of Information Collection

The amount of time required to comply with the rule will vary depending on the
amount of customer securities hypothecated by the broker-dealer. Commission staff
estimates that for each hypothecation, compliance time will take approximately 10 minutes
to create and send notice of hypothecation to the pledgee in accordance with the rule and
approximately 20 minutes to request and process consents from customers to permit
commingling of customer accounts under the same lien.
There are approximately 82 respondents as of year-end 2012 (i.e., broker-dealers that
conducted business with the public, filed Part II of the FOCUS Report, did not claim an exemption
from the Reserve Formula computation, and reported that they had a bank loan during at least one
quarter of the current year). Each respondent makes an estimated 45 annual responses, for an
aggregate total of 3,690 responses per year. 5 Each response takes approximately 0.5 hours to
complete. Thus, the total compliance burden per year is 1,845 burden hours.6
13.

Costs to Respondents

Respondents will not incur any capital, start-up, operational, or maintenance costs. In
addition, respondents should not need to purchase any services with regard to the reporting
requirements.
14.

Costs to Federal Government

Not applicable. Broker-dealers maintain the required records under this rule.
15.

Changes in Burden

Changes in burden are reflective of the most recent data regarding the number of responses
and time required for response. While the response time did not change, the number of
respondents decreased from 111 as of year-end 2009 to 82 as of year-end 2012, resulting in the
aggregate annual burden being reduced by 653 hours. 7
16.

Information Collection Planned for Statistical Purposes

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

Approval to Omit OMB Approval Date

5

82 respondents x 45 annual responses = 3,690 aggregate total of annual responses.

6

3,690 responses x 0.5 hours = 1,845 hours.

7

The 2011 PRA extension noted a total annual burden of 2,498 hours. 2498 hours – 1,845 hours =
653 hours.

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The Commission does not request 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.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

This collection does not involve statistical methods.

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