Rule 19b-5 2019 supporting stmt

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 (“Exchange Act”), 1 sets forth a
scheme of self-regulation 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 role of the Securities and Exchange
Commission (“SEC”) is primarily one of oversight; the Exchange Act charges the SEC with the
responsibility for assuring that each of these self-regulatory organizations (“SROs”) complies
with and advances the policies of the Exchange Act. As part of its oversight responsibilities, the
SEC is required to review changes in the rules of each SRO.
Section 19(b) of the Exchange Act 2 requires an SRO to file with the SEC a copy 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 SEC 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 Exchange Act 3 implements the requirements of Section 19(b) of the Act by requiring
an SRO to file its rule changes on Form 19b-4 and by clarifying which actions by an SRO must
be filed pursuant to Section 19(b). The SEC adopted Rule 19b-4 in 1975 pursuant to Sections 2,
3C, 6, 11A, 15A, 15B, 17, 17A, and 19 of the Exchange Act and Section 806 of the Payment,
Clearing and Settlement Supervision Act.
Rule 19b-5 under the Exchange Act 4 provides a temporary exemption from the rule-filing
requirements of Section 19(b) of the Exchange Act to an SRO wishing to establish and operate a
pilot trading system. An SRO that seeks to establish a pilot trading system must file a Form PILOT
with the SEC. Certain provisions of Rule 19b-5 and Form PILOT contain collection of
information requirements within the meaning of the Paperwork Reduction Act of 1995. 5 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 SEC. During operation of the pilot
trading system, the SRO must submit quarterly reports of the system’s operation to the SEC 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 exemption afforded by

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

Purpose and Use of the Information Collection

The purpose of Rule 19b-5 is to provide a temporary exemption from the rule-filing
requirements that would otherwise apply to an SRO wishing to operate a pilot trading system. In
the absence of this exemption, an SRO would be required to submit a proposed rule change to the
SEC pursuant to Section 19(b) of the Exchange Act and Rule 19b-4 thereunder in order to operate
any new trading system. Section 19(b) of the Exchange Act generally requires an SRO to file with
the SEC 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 SEC 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 SEC or is otherwise permitted to become effective under
Section 19(b) of the Exchange Act. In order to approve a rule change proposing a new trading
system, the SEC would be required to find that, among other things, the 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 Exchange Act.7 Further, pursuant to
Section 3(f) of the Exchange Act, 8 the SEC would have to consider whether the proposed trading
system would, 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 SEC findings, provided that such system is in compliance with the conditions set forth in Rule
19b-5. For the SEC 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, an SRO must file a Form PILOT in conjunction with the operation of a new pilot
trading system, providing the SEC with at least 20 days’ notice before commencing operations of
the pilot trading system. In addition, for the SEC to determine whether an SRO is operating a pilot
trading system in compliance with the Exchange Act and is carrying out its statutory oversight
obligations under the Exchange Act, the SRO must submit quarterly reports of the system’s
operation and amendments describing material changes to the system to the SEC on Form PILOT.
The SEC will review SRO compliance with Rule 19b-5 and other provisions of the Exchange Act
through its routine inspections and examinations.
An SRO operating a pilot trading system pursuant to Rule 19b-5 also must notify the SEC
on Form PILOT of changes to the pilot trading system and to make quarterly reports of its
operations. Without such information, the SEC might not have sufficient information to ensure that
the pilot trading system continued to operate in a manner consistent with the Exchange 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 information required about a pilot trading system
reflects the complexity of the SROs’ businesses and is read and reviewed by SEC staff. Thus,
improved technology would not reduce the burden.
4.

Duplication

Not applicable. The SEC believes that no duplication of the requirements of Rule 19b-5
exists. Additionally, the SEC notes that Rule 17a-1 under the Exchange Act 9 currently imposes
recordkeeping requirements on SROs. Although Rule 19b-5 does not create new recordkeeping
obligations for SROs, paragraph (e)(9) of Rule 19b-5 10 reiterates the SROs’ existing recordkeeping
obligations under Rule 17a-1.
5.

Effect on Small Entities

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

Consequences of Not Conducting Collection

Rule 19b-5 requires that information describing a pilot trading system be filed prior to the
SRO’s 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 SEC’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)

There are no special circumstances. The information 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 collection of information was published. No public comments were received.
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 SEC, other
agencies of the federal government, and state securities authorities. Subject to the provisions of the
Freedom of Information Act (“FOIA”) 11 and the SEC’s rules thereunder, the SEC generally will not
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

No information of a sensitive nature, including social security numbers, are required
under this collection of information. The information collection includes basic Personally
Identifiable Information that may include name, job title, work address, work telephone number,
and work facsimile number. However, the SEC has determined that the information collection
does not constitute a system of record for purposes of the Privacy Act. Information is not
retrieved by a personal identifier. In accordance with Section 208 of the E-Government Act of
2002, the agency has determined that the information collection does not trigger the Privacy
Impact Assessment requirement. The information collection is collected and maintained in
paper.
12.

Burden of Information Collection

Initial Reports
The SEC anticipates receiving as many as three (3) initial reports on Form PILOT each year. The
SEC estimates that the reporting burden for an SRO that files an initial report on Form PILOT prior to
operating a pilot trading system would be approximately 24 hours (16 hours of professional legal work
and 8 hours of clerical work). Collectively, this would be an aggregate annual burden of 72 hours (3
responses x 24 hours per response) for the three respondents. The Commission estimates that the related
internal compliance cost for an SRO to complete an initial report on Form PILOT would be $7,256,
calculated as follows:
16 hours of in-house professional legal work at $422/hr12
8 hours of clerical work at $63/hr13

$ 6,752
$ 504
$ 7,256

11

5 U.S.C. 522.

12

$422/hour figure for an Attorney is from the SIFMA’s Management & Professional Earnings in
the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation and multiplied by 5.35 to account for bonuses, firm size, employee benefits,
and overhead.

13

$63/hour figure for a General Clerk is from the 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.

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Thus, the aggregate annual internal cost of compliance for all SROs to file initial reports would be
$21,768 ($7,256 x 3).
Quarterly Reports
The SEC anticipates receiving as many as twelve (12) quarterly reports per year, one per quarter
from each of the three estimated respondents. The SEC estimates that the reporting burden for an SRO
that files a quarterly report on Form PILOT would be approximately 3 hours per report (2 hours of
professional legal work and 1 hour of clerical work). Therefore, the collective annual burden would be 36
hours (12 responses x 3 hours per response) for the three respondents. The Commission estimates that the
related annual internal compliance cost for each SRO to file four quarterly reports would be $3,628
($422x2 + $63 = $907; $907 x 4 = $3,628). Thus, the aggregate annual internal cost of compliance for all
SROs to file quarterly reports would be $10,884 ($3,628 x 3).
Material Systems Changes Reports
The SEC anticipates receiving as many as six (6) notices of material systems changes per year,
two notices per each of the three estimated respondents. The SEC estimates that the reporting burden for
an SRO that files a notice of a material systems change on Form PILOT would be approximately 3 hours
per notice (2 hours of professional legal work and 1 hour of clerical work). Therefore, the collective
annual burden would be 18 hours (6 responses x 3 hours per response) for the three respondents.
The Commission estimates that the related annual internal compliance cost for each SRO to file
notices of material systems changes would be $1,814 ($422x2 + $63 = $907; $907 x 2 = $1,814).
Thus, the aggregate annual internal cost of compliance for all SROs to file notices of material
systems changes would be $5,442 ($1,814 x 3).
Summary
There are currently 23 SROs which could avail themselves of the exemption provided by
Rule 19b-5. The SEC estimates that each year, three of these SROs would avail themselves of the
exemption and be required to file Form PILOT. The collective annual time burden for all three
respondents would be 126 hours. As detailed above, this aggregate figure consist of: (i) 72 hours
for initial reports on Form PILOT (one filing for each of the three estimated respondents requiring
24 hours of work per filing); (ii) 36 hours for quarterly reports on Form PILOT (four filings for each
of the three estimated respondents requiring 3 hours of work per filing); and (iii) 18 hours for
notices of material systems changes on Form PILOT (two filings for each of the three estimated
respondents requiring three hours of work per filing). The estimated aggregate annual internal cost
of compliance for all three respondents would be $38,094 ($21,768 + $10,884 + $5,442).14

14

An average of approximately $302.333 per hour.

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Below is a chart summarizing the hour burdens related to Rule 19b-5 and Form PILOT.
Number of
Annual Reponses
Per Respondent
1
4
2

Number of
Respondent Type Respondents
Initial Reports
3
Quarterly Reports 3
Material Systems
3
Changes Reports
Total Annual Burden for All Respondents (Hours)
13.

Time Per
Response
(Hours)
24
3
3

Total Annual
Burden (Hours)
72
36
18
126

Costs to Respondents

The SEC estimates that the three SRO respondents would, in the aggregate, incur printing,
supplies, copying, and postage expenses of $6,101 per year for filing initial reports on Form PILOT,
$3,046 per year for filing quarterly reports on Form PILOT, and $1,523 per year for filing notices of
material systems changes on Form PILOT, for a total annual cost burden of $10,670.
Additionally, the SEC 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 Exchange Act.
Below is a chart summarizing the cost burdens related to Rule 19b-5 and Form PILOT.
Respondent Type Dollar Cost for Printing, Supplies, Copying, and Postage
Initial Reports
$6,101
Quarterly Reports
$3,046
Material Systems
$1,523
Changes Reports
Total Annual Burden for All Respondents (Dollars)
$10,670
14.

Costs to Federal Government

The SEC anticipates receiving up to three initial reports on Form PILOT per year, 12 quarterly
reports on Form PILOT per year, and six notices of system changes on Form PILOT per year. The SEC
estimates that the average annual cost to the SEC of processing all of these filings would be $7,683. This
aggregate figure includes the following component costs:
3 initial reports on Form PILOT per year
3 hours legal processing time at $271/hr
overhead, including clerical work

$ 813
$ 285
$1098

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12 quarterly reports on Form PILOT per year
12 hours legal processing time at $271/hr
overhead, including clerical work

$ 3,252
$ 1,138
$ 4,390

6 notices of systems changes on Form PILOT per year
6 hours legal processing time at $271/hr
overhead, including clerical work

$ 1,626
$ 569
$ 2,195

For the purposes of our estimates the SEC has valued related overhead at 35% of the
value of legal and clerical time combined.
The SEC 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 Exchange Act has expired for
a given trading system operated by an SRO, the SEC staff tasked with processing the subsequent
proposed rule changes for such trading system will already be familiar with that system, which
could reduce the costs to the SEC of processing such proposed rule changes.
15.

Changes in Burden

The estimated burden hours in item #12 did not change. The estimated costs to
respondents in item #13 increased by $623 due to inflation.
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

The SEC requests authorization to omit the expiration date on the electronic version of
the form. Including the expiration date on the electronic version of the form will result in
increased costs, because the need to make changes to the form may not follow the application’s
scheduled version release dates. The OMB control number will be displayed.
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.