3235-0435 Supporting Statement - Rule 607 v2

SUPPORTING STATEMENT
Paperwork Reduction Act Information Collection Submission for Rule 607
OMB Control Number 3235-0435
Reinstatement with Change
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

Section 11A of the Securities Exchange Act of 1934 (“Exchange Act”) charges the
Securities and Exchange Commission (“Commission”) with the responsibility to assure that the
national market system develop and operate in accordance with specific goals and objectives. 1
Among the national market system’s goals and objectives are the public availability of quotation
information, fair competition, market efficiency, best execution and disintermediation. The
Commission adopted Rule 11Ac1-3 to advance the statutory directive that the Commission facilitate
the establishment of a national market system for securities.2 Rule 11Ac1-3 requires disclosure on
each new account and on a yearly basis thereafter, on the annual statement, the firm's policies
regarding receipt of payment for order flow from any market makers, exchanges or exchange
members to which it routes customers' order in national market system securities for execution; and
information regarding the aggregate amount of monetary payments, discounts, rebates or reduction
in fees received by the firm over the past year. This rule was later re-numbered as Rule 607 with
the adoption of Regulation NMS, but the information collection requirements of the rule remained
the same: 3
a.

Customer Account Statements. Under Rule 607, no broker or dealer acting as
agent for a customer may effect any transaction in, induce or attempt to induce the
purchase or sale of, or direct orders for purchase or sale of, any NMS stock or a
security authorized for quotation on an automated inter-dealer quotation system
that has the characteristics set forth in section 17B of the Exchange Act 4, unless
such broker or dealer informs such customer, in writing, upon opening a new
account and on an annual basis thereafter, of the following 5:

1

See 15 U.S.C. 78k-1.

2

See Securities Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006
(November 2, 1994).

3

See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37570
(June 29, 2005).

4

15 U.S.C. 78q-2.

5

See 17 CFR 242.607.

b.

i.

the broker's or dealer's policies regarding receipt of payment for
order flow from any broker or dealer, national securities
exchange, national securities association, or exchange member to
which it routes customers' orders for execution, including a
statement as to whether any payment for order flow is received for
routing customer orders and a detailed description of the nature of
the compensation received 6; and

ii.

the broker's or dealer's policies for determining where to
route customer orders that are the subject of payment for order
flow absent specific instructions from customers, including a
description of the extent to which orders can be executed
at prices superior to the national best bid and national best offer. 7

Exemptions. The Commission, upon request or upon its own motion, may
exempt by rule or by order, any broker or dealer or any class of brokers or dealers,
security or class of securities from the requirements of paragraph (a) of this
section with respect to any transaction or class of transactions, either
unconditionally or on specified terms and conditions, if the Commission
determines that such exemption is consistent with the public interest and the
protection of investors. 8

Although described in more detail in this submission, these information collection requirements
were previously submitted and approved in connection with Rule 11Ac1-3 under OMB Control
Number 3235-0435. Commission staff inadvertently and mistakenly discontinued this OMB
Control Number on October 31, 2006, following the re-numbering of Rule 11Ac1-3 as Rule 607,
even though the information collection requirements imposed by Rule 607 remained in place and
unchanged from those imposed by Rule 11Ac1-3. Accordingly, the Commission is requesting,
on an emergency basis, a reinstatement of the previously approved information collection
requirements associated with OMB Control Number 3235-0435.
2.

Purpose and Use of the Information Collection

The information collected pursuant to Rule 607 is necessary to further the above-described
statutory directive to facilitate the establishment of a national market system for securities. 9 The
purpose of the rule is to ensure that customers are adequately apprised of the broker-dealer's order
routing practices with respect to the customer's order, in furtherance of the Commission's statutory
mandate to protect investors.

6

See 17 CFR 242.607(a)(1).

7

See 17 CFR 242.607(a)(2).

8

See 17 CFR 242.607(b).

9

See notes 1 and 2 and associated text supra.
2

3.

Consideration Given to Improved Information Technology

Many broker-dealer firms utilize automated systems that generate confirmations and
account statements for transactions automatically. Assuming a firm generally follows the same
order routing practices for most customer orders, technology may permit the added requirements of
Rule 607 to be implemented electronically. There are no technological or legal obstacles to
reducing the burden.
4.

Duplication

The Commission has sought to effect the new requirements concerning disclosure of
payment for order flow through existing channels; specifically, the account statements already are
required by the rules of the self-regulatory organizations. This reduces the likelihood of duplicative
reporting.
5.

Effects on Small Entities

The Commission believes that Rule 607 impacts small businesses proportionately with
other entities. No methods are used to minimize the burden on small businesses.
6.

Consequences of Not Conducting Collection

The information collected pursuant to Rule 607 is necessary to further the abovedescribed statutory directive to facilitate the establishment of a national market system for
securities. 10 As stated above, the purpose of the rule is to ensure that customers are adequately
apprised of the broker-dealer's order routing practices with respect to the customer's order, in
furtherance of the Commission's statutory mandate to protect investors. In the absence of these
provisions, customers may not be informed fully of the firm's order routing practices.
7.

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

Brokers and dealers are required by law to retain the records and information that are
collected pursuant to Rule 607 for a period of not less than 3 years, the first 2 years in an easily
accessible place. 11 Rule 607 does not affect this existing requirement.
There are no other special circumstances, and this collection is otherwise consistent with
the guidelines in 5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The Commission and staff participate in ongoing dialogue with representatives of various
market participants through public conferences, meetings, and informal exchanges. However,
10

See notes 1 and 2 and associated text supra.

11

See 17 CFR 240.17a-4(b).
3

because the Commission is requesting a reinstatement of a previously approved information
collection on an emergency basis, the Commission has not yet specifically solicited comments on
this information collection. If reinstatement is granted, the Commission will publish a notice
soliciting comments in the Federal Register prior to seeking an extension of the term of the
information collection.
9.

Payment or Gift

Not applicable. No payment or gift is provided to respondents.
10.

Confidentiality

Not Applicable. The information is disseminated to the public for the benefit of public
investors.
11.

Sensitive Questions

Not applicable. No information of a sensitive nature, including Personally Identifiable
Information (PII), is required under this collection of information.
12.

Burden of Information Collection

Rule 607 requires disclosure of a broker dealer's practices concerning payment for order
flow. The disclosures are required to be made on each new customer account and on a yearly
basis thereafter, on the annual statement provided to all customers. The staff estimates that there
are 3,643 active broker-dealers registered with the Commission.12 Broker-dealers must send out
the disclosures required by Rule 607 to all existing customers and to all new customers on an
annual basis. We estimate that there are currently 161,644,654 existing customer accounts and
an average of 21,867,147 new customer accounts opened each year. Thus we estimate a total of
183,511,801 total annual responses will be made to comply with this rule. Based on our current
estimate of 3,643 registered broker-dealers, and by calculating the number of responses/hour per
broker-dealer using the estimates and data from the 2004 PRA submission for Rule 607 and
applying this methodology to the 2019 Focus Reports data, the staff estimates that the average
number of hours necessary for each respondent to comply with Rule 607 is estimated to be 39.714

12

This estimate is based on 2019 Focus Reports received by the Commission.
4

hours annually. 13 This would result in an average aggregated annual burden of 144,678.102
hours.14
Name of
Number of
Type of
Information Respondents Burden
Collection
Rule 607

13.

3,643

3rd Party
Disclosure

Number of
Annual
Responses
Per
Respondent
50,736.3107

Burden
Per
Response
(Seconds)

Annual
Burden Per
Respondent
(Hours)

.00078839 39.714
hours

Total
Annual
Industry
Burden
(Hours)
144,678.102

Costs to Respondents

The Commission does not estimate any costs to respondents.
14.

Cost to Federal Government

Not applicable.
15.

Changes in Burden

The increase in the estimated annual hour burden is attributable to a significant increase
in the number of public customer accounts, which is partially offset by a decrease in the total
number of respondents due to consolidation in the industry. The total number of respondents
(3,643) reflects the estimated number of active brokers and dealers.
There is a change in the total number of hours per respondent, annual responses, and
annual hours requested. The explanation for these changes are due to the availability of more
accurate data to calculate the average number of responses per day. There is a decrease in the
number of respondents from 6,752 to 3,643, as well as an increase in the number of public
customer accounts requiring responses pursuant to Rule 607, from 119,900,000 to 183,511,801.

13

Using the estimates in the 2004 PRA, we calculated the number of responses per brokerdealer as follows: 119,900,000 responses/6,752 broker-dealers = 17,757.7041 responses/brokerdealer. Then we determined the responses per hour: 17,757.7041/14 hours (response
time/broker-dealer) = 1,268.40724 responses/hour for each broker-dealer. Finally, we applied
this same responses per hour estimate to the new data we received from the 2019 Focus
Reports: 183,511,801 (new number of total responses) / 3,643 (new number of broker-dealers) /
1,268.40724 (rate of responses/hour for each broker-dealer) = 39.714227 annual burden hours.
14

39.714 burden hours * 3,643 Participants = 144,678.102 burden hours.
5

Since its last submission of an information collection request for Rule 607, the Commission has
revised its burden estimates, as summarized in this chart:

Type of Burden or
Cost

Total Reporting
Burdens

16.

Annual
Industry
Burden or
Cost

Annual Industry
Burden or Cost
Previously
Approved

Change in
Burden or
Cost

Reason for
Change

94,528

50,150.102
Hours

Change in
Agency
Estimate

144,678.102

Information Collection Planned for Statistical Purposes

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

OMB Expiration Date Display Approval

The Commission is not seeking approval to not display the OMB approval expiration
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.

6