The Commission further estimates that broker-dealers will incur
costs to process an affirmative consent for new customers.\733\
Specifically, the Commission estimates that broker-dealers may incur
aggregate one-time and annual costs of approximately $14.4 million
\734\ and $23.2 million,\735\ respectively related to the changes
necessitated by these rule amendments.\736\
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    \733\ The internal hours would likely be performed by a
compliance clerk. Therefore, the estimated internal costs for this
hour burden would be calculated as follows: Compliance Clerk at $63
per hour x 368,311 hours = $23,203,593. See section IV.D.6. of this
release.
    \734\ See section IV.D.6. of this release. ($10,659,600 +
$3,780,000 (outside counsel costs) = $14,439,600).
    \735\ Id. ($23,203,593).
    \736\ In the proposing release, the Commission estimated that
broker-dealers would incur one-time costs of approximately $3.68
million ($2.68 million internal costs and $1.0 million for outside
counsel) and annual costs of approximately $24.6 million. See
Amendments to Financial Responsibility Rules, 72 FR at 12882.
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f. ``Proprietary Accounts'' Under the Commodity Exchange Act
    Some broker-dealers also are registered as futures commission
merchants under the CEA. These firms carry both securities and
commodities accounts for customers. The definition of free credit
balances in paragraph (a)(8) of Rule 15c3-3 does not include funds
carried in commodities accounts that are segregated in accordance with
the requirements of the CEA.\737\ However, regulations promulgated
under the CEA exclude proprietary accounts from the CEA's segregation
requirements.\738\ This exclusion from the segregation requirements
under the CEA has raised a question as to whether a broker-dealer must
treat payables to customers in proprietary commodities accounts as
``free credit balances'' when

performing a customer reserve computation.\739\ For these reasons, the
specific amendment to the definition of the term free credit balances
in paragraph (a)(8) of Rule 15c3-3 clarifies that funds held in a
commodities account meeting the definition of a proprietary account
under CEA regulations are not to be included as free credit balances in
the customer reserve formula.
---------------------------------------------------------------------------

    \737\ 17 CFR 240.15c3-3(a)(8).
    \738\ Rule 1.20 requires a futures commission merchant to
segregate customer funds. See 17 CFR 1.20. Rule 1.3(k) defines the
term customer for this purpose. See 17 CFR 1.3(k). The definition of
customer excludes persons who own or hold a proprietary account as
that term is defined in Rule 1.3(y). See 17 CFR 1.3(y). Generally,
the definition of proprietary account refers to persons who have an
ownership interest in the futures commission merchant. Id.
    \739\ See Part 241-Interpretive Releases Relating to the
Securities Exchange Act of 1934 and General Rules and Regulations
Thereunder, Exchange Act Release No. 9922 (Jan. 2, 1973), 38 FR 1737
(Jan. 18, 1973) (interpreting the credit balance used in Item 1 of
the Rule 15c3-3a formula ``to include the net balance due to
customers in non-regulated commodities accounts reduced by any
deposits of cash or securities with any clearing organization or
clearing broker in connection with the open contracts in such
accounts'').
---------------------------------------------------------------------------

    One commenter requested that the Commission clarify that the
relevant definition of proprietary account for purposes of this
amendment will be the definition contained in 17 CFR 1.3(y).\740\ The
Commission considered this alternative suggested by the commenter.
While Rule 1.3(y) under the CEA currently contains the relevant
definition of proprietary account for the purpose of the amendment, the
definition could be codified in a different rule in the future.
Consequently, the Commission is adopting the final rule amendment to
paragraph (a)(8) of Rule 15c3-3, as proposed. Thus, the final rule does
not include specific references to a specific rule. Rather, the
amendment to paragraph (a)(8) to Rule 15c3-3, as adopted, more
generally refers to a ``proprietary account as that term is defined in
regulations under the Commodity Exchange Act.''
---------------------------------------------------------------------------

    \740\ See SIFMA 2 Letter.
---------------------------------------------------------------------------

    In addition, one commenter stated that, due to the changes to the
swap markets mandated by Title VII of the Dodd-Frank Act, swap accounts
(in addition to commodities accounts) are now subject to customer
protection rules under the CEA. This commenter suggested that the
Commission make it clear that funds in swap accounts also do not
constitute free credit balances, whether those funds are required to be
segregated by rules under the CEA (e.g., cleared swap accounts or
uncleared swap accounts that have opted for segregation) or excepted
from segregation under the CEA (e.g., cleared swaps proprietary
accounts or uncleared swap accounts that have not opted for
segregation). The commenter noted this treatment ``would be consistent
with the treatment of funds in commodities accounts and with the
regulation of swap accounts under the CEA.'' \741\ The Commission
agrees there may be additional accounts under the CEA, as amended by
the Dodd-Frank Act that should explicitly be excluded from the
definition of free credit balances under Rule 15c3-3. However, the
amendments today are designed to clarify the specific question raised
with respect to the treatment of funds in proprietary commodities
accounts under the CEA and, consequently, the suggestions by this
commenter are beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    \741\ Id.
---------------------------------------------------------------------------

    The Commission considered reasonable alternatives in adopting the
final rule amendment. These alternatives included adopting the proposed
rule, with modifications suggested by commenters described above, as
well as leaving the current rule in place without the amendments. The
Commission believes that the adoption of the final rule is the more
appropriate approach at this time because the final rule amendment will
benefit broker-dealers that are registered as futures commission
merchants by eliminating any ambiguity with respect to such accounts
and avoiding situations where they unnecessarily increase reserve
amounts.
    The Commission does not anticipate that the amendments will result
in any costs to broker-dealers and, as funds in certain commodities
accounts are not protected under SIPA, will not expose the SIPC fund to
increased liabilities. Because this amendment is intended to be a
clarification of existing interpretations, broker-dealers are not
expected to incur additional costs against the baseline of current Rule
15c3-3 and its existing interpretations. This clarification is designed
to provide broker-dealers with more certainty as to the Commission's
stated legal requirements.
ii. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
    The amendments to the customer protection rule (Rule 15c3-3)
regarding PAB accounts,\742\ cash deposits at special reserve bank
accounts,\743\ allocation of short positions,\744\ the treatment of
free credit balances,\745\ and the clarification of the treatment of
proprietary accounts under the CEA are designed to protect and preserve
customer property held at broker-dealers.\746\ These protections are
primarily intended to reduce the risks borne by investors.
---------------------------------------------------------------------------

    \742\ See section II.A.2. of this release.
    \743\ See section II.A.3. of this release.
    \744\ See section II.A.4. of this release.
    \745\ See section II.A.5.ii. of this release.
    \746\ See section II.A.6.i. of this release.
---------------------------------------------------------------------------

    In particular, first, the final rule amendment on PAB accounts is
intended to fill a gap in the definition of customer between Rule 15c3-
3 and SIPA, reducing the risk that customers could face losses in the
case of a liquidation of a carrying broker-dealer. The final rule
codifies many of the provisions of the PAIB Letter. The Commission
believes that it is prudent, and will provide greater regulatory
clarity, to incorporate into Rule 15c3-3 specified provisions of the
PAIB Letter. Further, the Commission understands that the relief in the
PAIB Letter has been widely, if not universally, utilized by broker-
dealers that carry customer accounts. Thus, the benefits associated
with codifying specified provisions of the PAIB Letter will continue to
provide SIPA customers with the protections currently provided by
broker-dealers complying with the PAIB Letter. Setting forth these
requirements in a Commission rule will benefit the securities markets
by helping to diminish the risks and incidences of non-compliance.
    Second, the final rule amendments regarding the banks where reserve
deposits may be held are intended to protect customers' cash deposits
by mitigating the risk that the funds in the customer reserve account
will not be readily available to be withdrawn by the broker-dealer.
    Third, the final rule amendments regarding the allocation of
customers' fully paid and excess margin securities to a broker-dealer
short position are designed to enhance the customer protection goals of
Rule 15c3-3, which seek to ensure that broker-dealers do not use
customer assets for proprietary activities.
    Fourth, the final rule amendments regarding the importation of Rule
15c3-2 requirements into paragraph (j)(1) of Rule 15c3-3 and the
elimination of Rule 15c3-2 streamline the regulatory requirements for
broker-dealers. Also, the addition of new paragraph (j)(2) to Rule
15c3-3 is intended to protect a customer's free credit balances from
being swept to products or programs without the appropriate approval,
notice or disclosure.
    Fifth, the final rule amendment establishing that the funds in
certain commodities accounts need not be treated as free credit
balances or other credit balances may enhance efficiency at the broker-
dealers by freeing up cash that may have been required to be

deposited into a broker-dealer's customer reserve account, and
clarifying an ambiguity in Rule 15c3-3.
    By strengthening requirements designed to protect customer assets,
these amendments will mitigate potential exposure to the SIPC fund that
is used to make advances to customers whose securities or cash are
unable to be returned by a failed broker-dealer. To the extent that the
amendments to Rule 15c3-3 achieve this goal, investors might be more
willing to transact business in securities with broker-dealers. The
possible positive effects on investor participation in the securities
markets may promote capital formation as investor assets are able to be
allocated more efficiently across the opportunity set.
    As discussed above, the Commission recognizes that the amendments
to Rule 15c3-3 adopted today may impose certain costs on broker-dealers
that might place a burden on competition among broker-dealers. However,
the Commission is of the opinion that these costs are justified by the
significant benefits described in this economic analysis, as well as in
the discussion of the rule amendments above. Amendments to Rule 15c3-3
should not place a burden on competition for non-carrying broker-
dealers, which are generally small broker-dealers, because the
amendments primarily affect broker-dealers that perform PAB and
customer reserve computations, carry customer accounts, and carry free
credit balances. In addition, for those carrying broker-dealers that
already follow the PAIB Letter, any difference from the baseline with
regard to cost burdens should be marginal. In sum, the costs of
compliance resulting from the requirements in the amendments to Rule
15c3-3 should not impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act in light
of the benefits discussed above.
2. Holding Futures Positions in a Securities Portfolio Margining
Account
i. Economic Analysis
    As discussed in section II.B. of this release, the Commission is
adopting amendments to Rule 15c3-3 to accommodate futures positions in
a securities account that is margined on a portfolio basis. The
amendments revise the definition of free credit balances and other
credit balances in paragraphs (a)(8) and (a)(9) of Rule 15c3-3,
respectively, by expanding these definitions to include funds in a
portfolio margin account relating to certain futures and futures
options positions. Consequently, as part of free credit balances and
other credit balances, these funds will be included as a credit item on
the credit side of the customer reserve formula. The Commission is also
adopting, as proposed, an amendment to Rule 15c3-3a Item 14 that
permits a broker-dealer to include as a debit item, on the debit side
of the customer reserve formula, the amount of customer margin required
and on deposit at a derivatives clearing organization related to
futures positions carried in a portfolio margin account.
    The amendments are designed to provide greater protection to
customers with portfolio margin accounts, through the reserve
requirements of Rule 15c3-3 and SIPA, by requiring a broker-dealer to
include all cash balances (including portfolio margin cash balances) of
its customers' securities accounts in the computation of the customer
reserve. The customer reserve computation under Rule 15c3-3 is designed
to ensure that the funds a broker-dealer owes to customers are
available to be returned to customers in the event the broker-dealer
fails.
    Subsequent to the Commission's proposals, the Dodd-Frank Act
amended the definitions of customer, customer property, and net equity
in section 16 of SIPA to take into account futures and options on
futures held in a portfolio margin account carried as a securities
account pursuant to a Commission-approved portfolio margining
program.\747\ As a result, persons who hold futures positions in a
portfolio margining account carried as a securities account are now
entitled to SIPA protection.
---------------------------------------------------------------------------

    \747\ See Public Law 111-203 Sec.  983.
---------------------------------------------------------------------------

    While the Dodd-Frank Act addressed the protection under SIPA of
futures and futures options held in a securities portfolio margin
account, the Commission's amendments to Rule 15c3-3 and 15c3-3a will
still serve an important purpose. In particular, they complement the
Dodd-Frank SIPA amendments, and will provide additional protections to
customers by requiring broker-dealers to treat these futures positions
in accordance with the segregation requirements in Rules 15c3-3 and
15c3-3a. Consequently, the Commission is adopting the amendments with
modifications to address, in part, comments. As noted above, the
requirements of Rule 15c3-3 and Rule 15c3-3a are designed to enable the
prompt return of customer securities and cash in the event the broker-
dealer falls into financial difficulty or becomes insolvent. The goal
is to place a broker-dealer in a position where it is able to wind down
in an orderly self-liquidation without the need for financial
assistance from SIPC.
    The Commission received six comments on the proposed
amendments.\748\ Three commenters generally supported the
amendments.\749\ One commenter supported the development of rules for
portfolio margining and the Commission's effort to provide greater
legal certainty regarding the SIPA treatment of futures positions in a
portfolio margin account.\750\ This commenter, however, in a subsequent
comment letter, stated that this amendment is no longer necessary in
light of the Dodd-Frank Act amendments, and recommended that the
Commission withdraw it.\751\ Another commenter stated that the
Commission's proposal is premature in that the inclusion of futures in
a portfolio margin account, which is a securities account, would
conflict with the segregation provisions under the CEA\752\ and that
SIPC has not determined that protection should be extended to
futures.\753\ Commenting in 2007 before the adoption of the Dodd-Frank
Act, SIPC stated that the proposed rules seek to extend SIPC protection
to all positions in the portfolio margin account, irrespective of
whether the positions are securities under SIPA or are on deposit in
connection with a securities transaction.\754\
---------------------------------------------------------------------------

    \748\ See SIFMA 2 Letter; CME Letter; SIPC Letter; Citigroup
Letter; American Bar Association Letter; SIFMA 4 Letter.
    \749\ See SIFMA 2 Letter; Citigroup Letter; American Bar
Association Letter.
    \750\ See SIFMA 2 Letter.
    \751\ See SIFMA 4 Letter.
    \752\ See, e.g., 17 CFR 1.20-1.29.
    \753\ See CME Letter; see also SIPC Letter (expressing ``grave
concerns'' about potential conflict between the proposed amendments
and SIPA).
    \754\ See SIPC Letter. SIPC also urged the Commission to
reconsider its adoption of the portfolio margin proposals, stating
that if the changes are in order, the Commission should seek to have
them made by legislative amendment and not rulemaking.
---------------------------------------------------------------------------

    The Commission agrees, in part, with the commenter who stated that
the Dodd-Frank Act SIPA amendments make the Commission's proposed
amendments to Rules 15c3-3 and 15c3-3a unnecessary.\755\ As noted
above, the definitions of customer, customer property, and net equity
in section 16 of SIPA were amended by the Dodd-Frank Act to take into
account futures and options on futures held in a portfolio margin
account carried as a securities account pursuant to a Commission-
approved portfolio margining program.\756\ Consequently, in a

proceeding under SIPA, futures and options on futures positions held in
a portfolio margin account carried as a securities account would be
included in determining a customer's net equity claim.\757\ Therefore,
the proposed amendment relating to the unrealized value of a futures
option is not necessary to achieve the objective of providing SIPA
protection for such positions. As a result, the Commission is modifying
the final rule to delete the proposed language in paragraph (a)(8) of
Rule 15c3-3 that would have treated the unrealized value of a futures
option in a portfolio margin account on the filing date of a SIPA
proceeding as a free credit balance for purposes of Rule 15c3-3.\758\
---------------------------------------------------------------------------

    \755\ See SIFMA 4 Letter.
    \756\ See Public Law 111-203 Sec.  983.
    \757\ Under the Dodd-Frank Act SIPA amendments, a customer's net
equity now includes all positions in futures contracts and options
on futures contracts held in a portfolio margining account carried
as a securities account pursuant to a portfolio margining program
approved by the Commission, including all property collateralizing
such positions, to the extent that such property is not otherwise
included herein. See 15 U.S.C. 78lll(11)(A)(ii). Further, the
amendments provided that a claim for a commodity futures contract
received, acquired, or held in a portfolio margining account
pursuant to a portfolio margining program approved by the Commission
or a claim for a security futures contract, shall be deemed to be a
claim with respect to such contract as of the filing date, and such
claim shall be treated as a claim for cash. See 15 U.S.C. 78lll(11).
    \758\ Specifically, the final rule does not include the proposed
language: ``, and, in the event the broker-dealer is the subject of
a proceeding under SIPA, the market value as of the ``filing date''
as that term is defined in SIPA (15 U.S.C. 78lll(7)) of any long
options on futures contracts.''
---------------------------------------------------------------------------

    While the legislation provides additional certainty with respect to
how futures in a portfolio margin account would be treated in a SIPA
liquidation, the Commission's amendments will require that positions
are subject to the protections of Rule 15c3-3, thus enhancing customer
protection. Therefore, while the Commission has considered the
suggested alternatives in developing the final rule amendments
(including not adopting the amendments), the Commission has determined
that adopting the portfolio margining amendments was a more appropriate
approach in furtherance of enhancing customer protection.
    The Commission requested comment on available metrics to quantify
these benefits and any other benefits a commenter may identify,
including the identification of sources of empirical data that could be
used for such metrics. The Commission did not receive any comments in
response to these requests.
    Current SRO portfolio margin rules permit futures to be held in a
securities portfolio margin account.\759\ However, pending further
regulatory action by the Commission and the CFTC, the ability to
combine securities and futures products into a single portfolio margin
account will be unavailable.\760\ Therefore, under the current baseline
of SRO portfolio margin rules, with the inclusion of only securities
positions in the securities account, this amendment would have no
effect as compared to the baseline until the Commission and CFTC take
such further action with respect to portfolio margining.\761\
---------------------------------------------------------------------------

    \759\ See, e.g., FINRA Rule 4210.
    \760\ See Section 713 of the Dodd-Frank Act. Section 713 of the
Dodd-Frank Act amends the Exchange Act and CEA to facilitate
portfolio margining by allowing cash and securities to be held in a
futures account and futures and options on futures and related
collateral to be held in a securities account by a dually-registered
broker-dealer and futures commission merchant pursuant to an
approved portfolio margin program, subject to certain requirements,
including regulatory action by the Commission and CFTC (pursuant to
an exemption, or by rule or regulation). See generally, A Joint
Report of the SEC and the CFTC on Harmonization of Regulation (Oct.
19, 2009).
    \761\ See generally, A Joint Report of the SEC and the CFTC on
Harmonization of Regulation (Oct. 19, 2009).
---------------------------------------------------------------------------

    The requirements imposed by the portfolio margin amendments will be
elective. The requirements will apply only to broker-dealers choosing
to offer their customers portfolio margin accounts. The Commission
estimates that approximately 35 broker-dealers will elect to offer
their customers portfolio margin accounts that will include futures and
futures options.\762\ The amendment to the definition of free credit
balances in Rule 15c3-3 will require broker-dealers to include in the
reserve formula credit balances related to futures positions in a
portfolio margin account. The amendment to Rule 15c3-3a Item 14 in the
reserve formula will enable broker-dealers to include as a debit item
the amount of customer margin required and on deposit at a derivatives
clearing organization. Accordingly, these amendments will require
changes to the systems broker-dealers use to compute and account for
their reserve requirements. Consistent with the proposing release,\763\
the Commission assumes that the responsibility for updating these
systems will be undertaken by a Senior Programmer.\764\ Therefore, the
Commission estimates that the program and systems changes would result,
on average, in a one-time cost of approximately $36,660 per broker-
dealer.\765\ Thus, the Commission estimates the total one-time cost to
broker-dealers will be approximately $1,283,100.\766\
---------------------------------------------------------------------------

    \762\ This estimate is based on OCUS Report data. This is an
update from the estimate in the proposing release of 33 broker-
dealers. See Amendments to Financial Responsibility Rules, 72 FR at
12883.
    \763\ See Amendments to Financial Responsibility Rules, 72 FR at
12883.
    \764\ The SIFMA 2012 Report as Modified indicates the average
hourly cost of this position is approximately $282. Consistent with
the proposing release, the Commission estimates the Senior
Programmer will spend approximately 130 hours modifying software to
conform it to the requirements of the amendments. See Amendments to
Financial Responsibility Rules, 72 FR at 12883.
    \765\ 130 hours x $282 = $36,660. In the proposing release, the
Commission estimated this cost would be $34,840. See Amendments to
Financial Responsibility Rules, 72 FR at 12883.
    \766\ 35 broker-dealers x $36,660 = $1,283,100. In the proposing
release, the Commission estimated this cost would be $1,149,720. See
Amendments to Financial Responsibility Rules, 72 FR at 12883.
---------------------------------------------------------------------------

    The Commission requested comment on the proposed cost estimates. In
particular, the Commission requested comment on additional costs to
broker-dealers that would arise from the proposals, such as system
costs in addition to those discussed above (e.g., costs associated with
purchasing new software and updates to existing software). The
Commission also requested comment on whether these proposals would
impose costs on other market participants, including broker-dealer
customers. Commenters were asked to identify the metrics and sources of
any empirical data that supported their costs estimates. The Commission
did not receive any comments in response to these requests.
ii. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
    The final rule amendments to Rule 15c3-3 to accommodate futures
positions in a securities account margined on a portfolio basis \767\
should complement the Congressional amendments and provide additional
protections to portfolio margin customers through the strengthened
reserve requirements of Rule 15c3-3. These additional protections may
reduce the risk of loss of collateral to securities customers, promote
participation in the securities markets, and enhance competition and
price discovery. Moreover, these additional protections may make
portfolio margining more attractive to investors. Portfolio margining
may significantly reduce customer margin requirements by offsetting
positions involving securities and futures products, which in turn
reduces the costs of trading such products and enhances efficiency.
Portfolio margining may also promote better price discovery across
securities and futures products by allowing customers to offset a
position assumed in one market with a product traded in

another market. The enhanced efficiencies as a result of increases in
the use of portfolio margin accounts may facilitate capital formation
through the availability of additional capital for customers as a
result of reduced margin costs.
---------------------------------------------------------------------------

    \767\ See section II.B. of this release.
---------------------------------------------------------------------------

    While today's amendments promote efficiency within the securities
markets, the increased costs associated with the rule amendments may
impose a burden on competition among broker-dealers. However, the
Commission is of the opinion that these costs are justified by the
significant benefits described in this economic analysis. In sum, the
costs of compliance resulting from the requirements in the portfolio
margining amendments to Rule 15c3-3 should not impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act in light of the benefits discussed above.
3. Amendments With Respect to Securities Lending and Borrowing and
Repurchase/Reverse Repurchase Transactions
i. Economic Analysis
    The Commission is adopting amendments to Rules 15c3-1 and 17a-11 to
strengthen the financial responsibility of broker-dealers engaging in a
securities lending business. First, the amendment to subparagraph
(c)(2)(iv)(B) of Rule 15c3-1 clarifies that broker-dealers providing
securities lending and borrowing settlement services are deemed, for
purposes of the rule, to be acting as principals and are subject to
applicable capital deductions. Under the amendment, these deductions
could be avoided if a broker-dealer takes certain steps to disclaim
principal liability. Second, the amendment to paragraph (c)(5) of Rule
17a-11 requires a broker-dealer to: (1) File a notice with the
Commission and its 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 its securities lending and repurchase activities to
its DEA in a form acceptable to its DEA.
    Both amendments are intended to strengthen the financial
responsibility of broker-dealers engaged in a securities lending or
repurchase business. The first amendment to subparagraph (c)(2)(iv)(B)
of Rule 15c3-1 will help eliminate the legal uncertainty among
counterparties as to the role played by broker-dealers in such
transactions and clarify the nature of the services that securities
lending intermediaries provide their counterparties.
    Thus, a broker-dealer will be considered a principal unless the
broker-dealer has disclosed the identity of each party to the other,
and the parties have agreed in writing that the obligations of the
broker-dealer do not include a guarantee of performance by the other
party and that in the event of default, neither party shall have the
right of setoff against the obligations, if any, of the broker-dealer.
In addition, this amendment will help avoid ambiguity regarding the
applicability to a particular broker-dealer of the stock loan charges
in the net capital rule.
    In response to comments that standard legal documents currently
used in securities lending transactions provide sufficient legal
certainty with respect to the status of the parties,\768\ the
Commission considered whether to adopt the proposed approach or whether
to rely on existing industry practice. The Commission considered the
alternatives and believes that the rule as adopted appropriately
balances the commenters' objections to the proposal with the
Commission's concerns about stock lending practices, particularly with
regard to the failure of MJK.\769\ In recognition of standard stock
loan agreement templates, the Commission designed the amendment to
accommodate the continued use of these industry model agreements by
incorporating their use into the rule's requirements.
---------------------------------------------------------------------------

    \768\ See section II.C. of this release. See also SIFMA 2
Letter; Citigroup Letter.
    \769\ See section II.C. of this release.
---------------------------------------------------------------------------

    The second amendment to paragraph (c)(5) of Rule 17a-11 will help
identify broker-dealers with highly leveraged non-government securities
lending and borrowing and repo activity.\770\ This new provision
requires that a broker-dealer notify the Commission whenever the total
amount of money payable against all securities loaned or subject to a
repurchase agreement, or the total contract value of all securities
borrowed or subject to a reverse repurchase agreement exceeds 2,500% of
tentative net capital; provided that, for purposes of this leverage
threshold, transactions involving government securities, as defined in
Section 3(a)(42) of the Exchange Act, are excluded from the
calculation.\771\ The notice provision is designed to alert regulators
to a sudden increase in a broker-dealer's stock loan and repo
positions, which could indicate that the broker-dealer is taking on new
or additional risk that it may have limited experience or increased
difficulty in managing. This amendment will assist securities
regulators in monitoring such activities and responding to situations
where a broker-dealer experiences financial difficulty due to a large
securities lending or repo position. This may help prevent significant
losses to the broker-dealer's customers and other broker-dealers, and
reduce systemic financial risk.
---------------------------------------------------------------------------

    \770\ 17 CFR 240.17a-11(c)(5).
    \771\ 15 U.S.C. 78c(a)(42). Government securities generally
present less market risk than other types of securities used in
securities lending and repo transactions. Consequently, they are
excluded from the scope of this rule.
---------------------------------------------------------------------------

    As adopted, new paragraph (c)(5) of Rule 17a-11 also permits a
broker-dealer to report monthly its stock loan and repo activity to its
DEA in a form acceptable to its DEA in lieu of the notices required by
paragraph (c)(5). This approach will provide each DEA with the
flexibility to prescribe how the monthly reports are to be made and
will accommodate a DEA that opts to use the FOCUS report as the
reporting mechanism.\772\ This provision will also accommodate large
broker-dealers that are active in this business and regularly maintain
stock loan and repo balances that exceed the threshold. The Commission
expects that these broker-dealers have experience in managing the risks
associated with these types of transactions and have established
controls to address those risks. Consequently, notice under Rule 17a-11
from these broker-dealers will not be as useful to regulators. On the
other hand, the monthly reports will provide securities regulators with
information useful, for example, to develop trend analysis, if deemed
appropriate. This analysis can be used to identify leverage levels that
are outside the normal trend range and that may be indicative of a
material change in the firm's business model (e.g., taking on higher
levels of leverage, branching into new products, or experiencing
operational or financial difficulties).
---------------------------------------------------------------------------

    \772\ As proposed, the amendment to Rule 17a-11 would have
provided that a broker-dealer that submitted a monthly report of its
stock loan and repo activity to its DEA not be required to file the
Rule 17a-11 notices required by paragraph (c)(5). See Amendments to
Financial Responsibility Rules, 72 FR at 12870.
---------------------------------------------------------------------------

    The Commission requested comment on available metrics to quantify
these benefits and any other benefits a commenter may identify.
Commenters were requested to identify sources of empirical data that
could be used for the metrics they propose. The Commission did not
receive any comments in response to these requests.
    The Commission expects that broker-dealers may incur costs related
to the implementation of the rule

amendments. Using current Rule 15c3-1 and Rule 17a-11 as a baseline,
the Commission expects that some broker-dealers may incur costs in
connection with the implementation of these rule amendments.
    With regard to the amendment to subparagraph (c)(2)(iv)(B) of Rule
15c3-1, the Commission understands that most existing standard
securities lending master agreements in use today already contain
language requiring agent lenders to disclose principals and for
principals to agree not to hold the agents liable for a counterparty
default. Thus, the standard agreement used by the vast majority of
broker-dealers should contain the representations and disclosures
required by the proposed amendment. However, a small percentage of
broker-dealers may need to modify their standard agreements. The
Commission estimates that the total one-time cost to broker-dealers for
this change will be approximately $45,480.\773\
---------------------------------------------------------------------------

    \773\ In the proposing release, the Commission estimated that
the total one-time cost to broker-dealers would be approximately
$62,604. See Amendments to Financial Responsibility Rules, 72 FR at
12884. The internal hours would likely be performed by an in-house
Attorney at $379 per hour, resulting in the estimated internal cost
calculated as follows: 120 hours at $379 per hour = $45,480. See
section IV.D.1. of this release.
---------------------------------------------------------------------------

    The Commission requested comment on the cost estimates. In
particular, the Commission requested comment on additional costs to
broker-dealers that would arise from the proposals, such as costs
arising from making systems changes. The Commission also requested
comment on whether these proposals would impose costs on other market
participants, including broker-dealer customers. Commenters were also
asked to identify the metrics and sources of any empirical data that
support their costs estimates. The Commission did not receive any
comments in response to these requests.
    With regard to the amendment to Rule 17a-11, the Commission
received several suggested alternatives from commenters which
contributed to the modification of the final rule from the proposal.
Three commenters addressed the proposed monthly notification
requirement. They stated that the monthly report in lieu of the
notification should be provided as part of the monthly FOCUS report
many broker-dealers file with their DEA.\774\ The Commission agrees
that the FOCUS report may be an appropriate mechanism for reporting
stock loan and repo positions in lieu of the proposed monthly
notification requirement.\775\ Consequently, the Commission modified
the final rule amendment to delete the phrase ``submits a monthly
report of'' and replace it with the phrase ``reports monthly.'' In
addition, as adopted, in order to provide that the monthly report shall
be sent to a broker-dealer's DEA, the Commission added the phrase ``to
its designated examining authority in a form acceptable'' before ``to
its designated examining authority.'' This approach, as adopted, is
intended to provide each DEA with the flexibility to tailor the
reporting requirements.
---------------------------------------------------------------------------

    \774\ See Abbey National Letter; Citigroup Letter; SIFMA 2
Letter.
    \775\ Carrying broker-dealers are generally required to submit
FOCUS reports on a monthly basis.
---------------------------------------------------------------------------

    Based on FOCUS Report data, the Commission estimates that
approximately one notice per year will be sent pursuant to this
amendment.\776\ Therefore, approximately one broker-dealer per year
will incur costs to prepare and send the notice.\777\ Consequently, the
Commission estimates that the costs to broker-dealers associated with
this requirement will be de minimis.
---------------------------------------------------------------------------

    \776\ This estimate is derived from FOCUS Report data, and
adjusted based on staff experience. This estimate has been updated
from the proposing release estimate of 11. No comments were received
on this estimate.
    \777\ The internal hours would likely be performed by junior
stock loan manager for 10 minutes at $134 per hour x 1 notice =
$22.33. See section IV.D.8. of this release.
---------------------------------------------------------------------------

    In addition, the Commission estimates that six broker-dealers will
choose the option of reporting monthly \778\ and will incur a one-time
cost to update their systems to generate the information for the
report.\779\ The Commission also estimates that these broker-dealers
will incur annual costs generating and filing the monthly reports or
preparing the information to include in monthly FOCUS Reports (as
applicable).\780\ Therefore, the Commission estimates that the total
one-time cost and annual costs to broker-dealers will be approximately
$169,200 \781\ and $9,648 \782\ respectively. The Commission's total
one-time and annual cost estimates have decreased from the proposing
release primarily due to an overall decrease in the number of broker-
dealers.
---------------------------------------------------------------------------

    \778\ This is an update from the proposing release estimate of
21 broker-dealers. See Amendments to Financial Responsibility Rules,
72 FR at 12884.
    \779\ The internal hours would likely be performed by a senior
programmer. Therefore, the estimated internal costs for this hour
burden would be calculated as follows: Senior Programmer for 100
hours at $282 per hour = $28,200. See section IV.D.8. of this
release. This is an update from the proposing release estimate of
$26,800. See Amendments to Financial Responsibility Rules, 72 FR at
12884.
    \780\ The internal hours would likely be performed by a junior
stock loan manager. Therefore, the estimated internal costs for this
hour burden would be calculated as follows: Junior Stock Loan
Manager for 12 hours at $134 per hour = $1,608. See section IV.D.8.
of this release. This is an update from the proposing release
estimate of $2,496 per firm. See Amendments to Financial
Responsibility Rules, 72 FR at 12884.
    \781\ 6 firms x $28,200 = $169,200. This is an update from the
proposing release estimate of $562,800. See Amendments to Financial
Responsibility Rules, 72 FR at 12884.
    \782\ 6 firms x $1,608 = $9,648. This is an update from the
proposing release estimate of $52,416. See Amendments to Financial
Responsibility Rules, 72 FR at 12884.
---------------------------------------------------------------------------

    As noted above, the Commission requested comment on the proposed
cost estimates. In particular, the Commission requested comment on
additional costs to broker-dealers that would arise from the proposals.
The Commission also requested comment on whether these proposals would
impose costs on other market participants, including market
participants active in the securities lending and repurchase markets.
Commenters were asked to identify the metrics and sources of any
empirical data that supported their cost estimates. The Commission did
not receive any comments in response to these requests.
ii. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
    As described above, the amendment to subparagraph (c)(2)(iv)(B) of
Rule 15c3-1 and new paragraph (c)(5) of Rule 17a-11 are designed to
address two areas of concern that emerged from the Commission's
experience with the failure of MJK.\783\ First, broker-dealers with
principal liability in a stock loan transaction may be deemed to be
acting in an agency capacity and therefore not taking appropriate
capital charges. Second, broker-dealers that historically have not been
very active in stock loan activities may rapidly expand their balance
sheets and increase leverage to a level that poses significant
financial risk to the firm and counterparties. Either potential event
could result in significant, adverse consequences for customers and
counterparties of the broker-dealer. For the customers, the fact that
the broker-dealer could avoid taking appropriate capital charges would
imperil the broker-dealer's ability to self-liquidate, thereby impeding
the ability of customers to be promptly paid in full. For the
counterparties, the fact that the broker-dealer could rapidly escalate
its leverage increases the likelihood that the broker-dealer could fail
and its counterparties could

experience, losses of value associated with the rapid unwinding of
positions with the failing broker-dealer.
---------------------------------------------------------------------------

    \783\ See section II.C. of this release.
---------------------------------------------------------------------------

    Overall, the amendments to Rule 15c3-1 and Rule 17a-11 will help
enhance the monitoring of securities lending or repurchase activities
by securities regulators, thereby reducing the effect on customers and
counterparties of the potential impact of a financial collapse of the
broker-dealer.\784\ This will strengthen the securities markets and
make them more attractive to investors, thereby enhancing efficiency
and capital formation. Moreover, the language in the final rule that
provides each DEA with the flexibility to prescribe how the monthly
reports are to be made may enhance efficiencies for broker-dealers by
providing the ability for a DEA to tailor the reporting requirements.
Finally, the costs of compliance with the amendments to Rules 15c3-1
and 17a-11 should not impose a burden on competition not necessary or
appropriate in the furtherance of the purposes of the Exchange Act in
light of the benefits discussed above.
---------------------------------------------------------------------------

    \784\ Id.
---------------------------------------------------------------------------

4. Documentation of Risk Management Procedures
i. Economic Analysis
    As discussed in section II.D. of this release, the Commission is
adopting new paragraph (a)(23) to Rule 17a-3 to require certain broker-
dealers to make and keep current a record documenting the credit,
market, and liquidity risk management controls established and
maintained by certain broker-dealers to assist them in analyzing and
managing the risks associated with their business activities,
including, for example, securities lending and repo transactions, OTC
derivative transactions, proprietary trading, and margin lending.\785\
The amendment will apply only to broker-dealers that have more than
$1,000,000 in aggregate credit items as computed under the customer
reserve formula of Rule 15c3-3, or $20,000,000 in capital including
debt subordinated in accordance with Appendix D to Rule 15c3-1.
---------------------------------------------------------------------------

    \785\ 17 CFR 240.17a-3(a)(23).
---------------------------------------------------------------------------

    These amendments require large broker-dealers to document the
controls they have implemented to address the risks they face as a
result of their business activities. As proposed, the amendment would
have required a broker-dealer to create a record documenting its
``internal risk management controls,'' rather than its market, credit,
and liquidity risk controls. Commenters generally raised concerns with
the proposed amendment stating, for example, that the proposed
documentation of internal management controls over risks arising from
the broker-dealer's business activities was overly broad and
ambiguous.\786\ The Commission considered the proposed approach and, as
discussed above, in part in response to comments, the Commission
narrowed the application of the amendment so that the final rule now
requires the documentation of internal risk management controls
established to manage market, credit, and liquidity risk.\787\ The
final rule benefits firms and their customers by mitigating the risk of
losses associated with a firm's normal activities, while at the same
time placing an increased recordkeeping burden on broker-dealers by
requiring them to document certain risks in writing.
---------------------------------------------------------------------------

    \786\ See E*Trade Letter; Citigroup Letter.
    \787\ See section II.D. of this release.
---------------------------------------------------------------------------

    A well-documented system of internal controls designed to manage
material risk exposures related to market, credit, and liquidity risk
reflects the expectations of a firm's management as to how its business
activities should be conducted in light of such exposures. Written risk
management procedures enable management to better identify, analyze,
and manage the risks inherent in the firm's business activities with a
view to preventing material losses and to review whether the firm's
activities are being conducted in a manner that is consistent with such
procedures and controls. This will likely benefit market participants
and reduce systemic financial risk.
    In addition, by making the documented controls a required record
under Rule 17a-3, a broker-dealer's regulator likely will have better
access to them, as this benefit will only be realized to the extent
that a broker-dealer has existing market, credit, and liquidity risk
management controls in place because the rule does not specify the type
of controls a broker-dealer must establish to manage these risks. It
simply requires documentation of the procedures that the broker-dealer
has established. The final rule amendment will require any such records
of the market, credit, and liquidity risk management controls to be
available to the broker-dealer's regulators so that they can review
whether the broker-dealer is adhering to these controls.
    The Commission requested comment on available metrics to quantify
these benefits and any other benefits a commenter may identify.
Commenters were requested to identify sources of empirical data that
could be used for the metrics they proposed. The Commission did not
receive any comments in response to these requests.
    These amendments apply to a limited number of broker-dealers,
namely, those firms with more than $1 million in customer credits or
$20 million in capital and amend recordkeeping requirements in Rules
17a-3 and 17a-4. Therefore, against the existing baseline of these
current rules, the Commission expects that the requirement will result
in a one-time cost to some of these firms to the extent that they have
established controls that have not been documented. However, since most
firms are expected to be already compliant, the incremental costs are
expected to be small. For example, broker-dealers that are approved to
compute capital using internal models are already subject to Rule 15c3-
4, which requires these firms to establish, document, and maintain a
system of internal risk controls to assist them in managing the risks
associated with its business activities, including market, credit,
leverage, liquidity, legal, and operational risks.\788\ These firms
would most likely incur no or minimal costs to comply with the final
rule. In addition, this rule amendment does not mandate any specific
control, procedure, or policy be established; rather, the Commission is
requiring that a control, procedure, or policy be documented if it is
in place. For these reasons, the Commission estimates that the one-time
hourly burden to meet the requirements of these rules will range from
zero hours for some firms to hundreds of hours for other firms. Taking
this into account, the Commission estimates that the total one-time
cost to broker-dealers to document controls in compliance with this
amendment will be approximately $13,783,700.\789\ The Commission also
estimates that the annual cost to broker-dealers to ensure compliance
with the

amendment to Rule 17a-3 will be approximately $8,356,950.\790\
---------------------------------------------------------------------------

    \788\ 17 CFR 240.15c3-4; 17 CFR 240.15c3-1(a)(7)(iii). Based on
staff experience monitoring broker-dealer risk management
procedures, the internal hours would likely be coordinated by a
broker-dealer's in-house attorney (19,600 hours), working with
operation specialists (24,500 hours), and overseen by an associate
general counsel (4,900 hours). Therefore, the estimated internal
costs for this hour burden would be calculated as follows:
[(Attorney for 19,600 hours at $379 per hour) + (Operations
Specialist for 24,500 hours at $126 per hour) + (Associate General
Counsel for 4,900 hours at $467) = $12,803,700. Broker-dealers are
also expected to incur one-time outside counsel costs of $980,000
for a total one-time cost of $13,783,700. See section IV.D.7. of
this release.
    \789\ See section IV.D.7. of this release. In the proposing
release, the Commission estimated this cost would be approximately
$14,201,990. See Amendments to Financial Responsibility Rules, 72 FR
at 12885.
    \790\ The internal hours would likely be performed by a broker-
dealer's in-house attorney. Therefore, the estimated internal costs
for this hour burden would be calculated as follows: Attorney at
$379 per hour x 22,050 hours = $8,356,950. See section IV.D.7. of
this release.
---------------------------------------------------------------------------

    As noted above, the Commission requested comment on the proposed
cost estimates. In particular, the Commission requested comment on
additional costs to broker-dealers that would arise from the proposals,
such as costs arising from making changes to systems and costs
associated with maintaining these records. The Commission also
requested comment on whether the proposals would impose costs on other
market participants, including broker-dealer customers. Commenters were
also asked to identify the metrics and sources of any empirical data
that support their cost estimates. The Commission did not receive any
comments in response to these requests.
ii. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
    The amendments to Rules 17a-3 and 17a-4 require firms to document
their market, credit, and liquidity risk management controls. The
amendments will help strengthen broker-dealer internal controls.
Documenting internal controls will encourage enhanced consideration of,
and thus a firmer grasp upon, the risks attendant to a broker-dealer's
business activities. This is designed to reduce the risks inherent to
the business of operating as a broker-dealer. The final approach the
Commission has taken with these rule amendments--encouraging effective
internal controls while preserving flexibility--will enhance a broker-
dealer's financial soundness and, consequently, may help to reduce the
likelihood of broker-dealer failures with possible positive effects on
investor participation, competition, and capital formation. The
amendments may also increase efficiencies in broker-dealer examinations
through the ready availability of records for examiners.
    Finally, the Rule 17a-3 and 17a-4 amendments are not expected to
place a burden on competition for small non-carrying broker-dealers
because such firms would not be subject to these amendments.\791\ As
discussed above, there will be some incremental costs to compliance
related to these amendments for carrying broker-dealers but the costs
of compliance should not impose a burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act and
in light of the benefits discussed above.
---------------------------------------------------------------------------

    \791\ The amendments only apply to broker-dealers that have more
than $1,000,000 in aggregate credit items as computed under the
customer reserve formula of Rule 15c3-3, or $20,000,000 in capital
including debt subordinated in accordance with Appendix D to Rule
15c3-1.
---------------------------------------------------------------------------

5. Amendments to the Net Capital Rule
i. Economic Analysis
a. Requirement To Deduct From Net Worth Certain Liabilities or Expenses
Assumed by Third Parties
(I). Summary of Amendments
    The amendments to Rule 15c3-1 add a new paragraph (c)(2)(i)(F)
requiring a broker-dealer to adjust its net worth when calculating net
capital by including any liabilities that are assumed by a third party
if the broker-dealer cannot demonstrate that the third party has the
resources, independent of the broker-dealer's income and assets, to pay
the liabilities. This amendment is intended to assist investors and
regulators by requiring broker-dealers to provide a more accurate
picture of their financial condition. This should help regulators react
more quickly if a broker-dealer experiences financial difficulty and
benefit customers of the troubled broker-dealer as well as its
counterparties.
    The purpose of the requirement in new paragraph (c)(2)(i)(F) of
Rule 15c3-1 is to address the practices of a broker-dealer that raise
concerns when a broker-dealer shifts liabilities to an entity with no
revenue or assets independent of the broker-dealer to inappropriately
increase its reported net capital, by excluding the liability from the
calculation of net worth. The final rule is designed to prohibit a
practice that could misrepresent a broker-dealer's actual financial
condition, mislead the firm's customers, and hamper the ability of
regulators to monitor the firm's financial condition.
    The Commission requested comment on available metrics to quantify
these benefits and any other benefits a commenter may identify.
Commenters were requested to identify sources of empirical data that
could be used for the metrics they proposed. The Commission did not
receive any comments in response to these requests.
(II). Baseline and Incremental Economic Effects
    As discussed in section II.E.1. of this release, the baseline of
this rule amendment is current Rule 15c3-1 and existing guidance and
interpretations. The Commission staff has provided guidance with
respect to the treatment and recording of certain broker-dealer
expenses and liabilities that is consistent with the rule
amendment.\792\ Consequently, as against the current baseline, the
Commission does not expect significant incremental benefits and costs
to the extent that they already comply with existing guidance and
interpretations.\793\
---------------------------------------------------------------------------

    \792\ See, e.g., Third Party Expense Letter; see also FINRA
Notice to Members 03-6, Expense Sharing Agreements.
    \793\ Under this amendment, some broker-dealers may request
permission in writing from their DEA to withdraw capital within one
year of contribution under the rule, resulting in annual costs to
broker-dealers of approximately $144,150 (465 hours x $310 per hour
for a Compliance Attorney). See section IV.D.2. of this release.
---------------------------------------------------------------------------

    While the amendments apply to all broker-dealers, they will impact
only those few that shift liabilities to entities with no revenue or
assets independent of the broker-dealer (i.e., shell corporations) to
boost the broker-dealer's reported net capital. Based on staff
experience in supervising broker-dealer compliance with Rule 15c3-1,
the vast majority of broker-dealers likely either do not seek to
transfer responsibility for their liabilities to a third party or, if
they do so, rely on a third party that has the financial resources--
independent of the assets and revenue of the broker-dealer--to pay the
obligations as they become due. Because of this, it is difficult to
quantify the benefits and costs impact of this rule amendment.
    The Commission conservatively estimates that the amendment may
impact all broker-dealers that do not report any liabilities. FOCUS
Report data, as of December 31, 2011, indicates that approximately 289
broker-dealers report having no liabilities. While this number is
likely at the upper boundary of the total number of broker-dealers
affected by this amendment, the number of broker-dealers reporting no
liabilities likely represents a reasonable sample of broker-dealers on
which to base the cost estimates.
    Requiring these broker-dealers to book liabilities will decrease
the amount of equity capital held by the firms and in some cases may
require them to obtain additional capital. The majority of broker-
dealers reporting no liabilities are introducing broker-dealers that
have a $5,000 minimum net capital requirement, while the reported
average of total liabilities is approximately $491,355 per broker-
dealer. Therefore, conservatively estimating that each of the 289
broker-dealers will have to raise $491,355 in additional capital as
result of the requirement, the total aggregate

amount of additional capital that will need to be raised is $142
million.\794\
---------------------------------------------------------------------------

    \794\ 289 broker-dealers x $491,355 = $142,001,595. This is an
update from the proposing release estimate of 702 broker-dealers
with aggregate liabilities of $280,354 per firm, resulting in an
estimated amount of additional capital that would have to be raised
in the amount of $196,808,508 (702 broker-dealers x $280,354 =
$196,808,508). See Amendments to Financial Responsibility Rules, 72
FR at 12885, n.189 and accompanying text.
---------------------------------------------------------------------------

    Further, relative to the proposing release, the Commission is
revising the cost of capital from approximately 5%, which was
determined based on historical interest rates published by the Federal
Reserve, to 12% as the average cost of equity capital determined using
the capital asset pricing model (``CAPM'').\795\ Therefore, the
Commission conservatively estimates that the total annual cost to
broker-dealers will be approximately $17 million,\796\ which is an
increased estimate relative to the proposing release. For the broker-
dealers to whom this increased estimate applies, the Commission expects
that there would be greater costs imposed. However, the Commission
expects that the benefits outlined above would also accrue to the
customers of these broker-dealers.
---------------------------------------------------------------------------

    \795\ The CAPM is a central model in modern financial theory and
is widely used in applications, such as estimating the cost of
capital for firms and evaluating the performance of managed
portfolios. Based on conventional assumptions and historical stock
price data available on Bloomberg, the Commission estimates a risk-
free rate of 2.5% and an equity risk premium of 7.8%. Using, five-
year, as well as two-year, monthly returns for a sample of listed
broker-dealers, the Commission estimates an adjusted beta of
approximately 1.25.
    \796\ $142,001,595 x 12.25% = $17,395,195. In the proposing
release, the Commission estimated that this cost would be
approximately $10 million. See Amendments to Financial
Responsibilities Rules. 72 FR at 12995.
---------------------------------------------------------------------------

    The Commission requested comment on the proposed cost estimates. In
particular, the Commission requested comment on additional costs to
broker-dealers that would arise from the proposals. The Commission also
requested comment on whether these proposals would impose costs on
other market participants, including broker-dealer customers.
Commenters were also asked to identify the metrics and sources of any
empirical data that support their costs estimates. The Commission
received five comments in response to this request for comment.\797\
---------------------------------------------------------------------------

    \797\ See Beer Letter; Beer 2 Letter; Lowenstein Letter; Levene
Letter; NIBA 2 Letter.
---------------------------------------------------------------------------

    One commenter noted that the Commission has provided no evidence
that the public has been endangered or has been left financially
unprotected as a result of the practice of having another entity book
some or all of a member's liabilities.\798\ This commenter asserted
that the amendment will affect 14% of total member firms and that
member firms may be shut down, sold or merged as an unintended
consequence of the amendment.\799\ The commenter questioned how many
member firms will fail as a result of this proposal.\800\
---------------------------------------------------------------------------

    \798\ See Lowenstein Letter.
    \799\ Id.
    \800\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the true costs of the amendment
should be calculated and verified before a proposed amendment is
offered and that the true costs of these amendments were given little
time, research, and consideration.\801\ This commenter also argued that
the estimated 5% cost of capital has no basis and a firm would be
fortunate to borrow funds for double the estimate of 5%.\802\ This same
commenter also stated that the proposal would require 702 debt-free
introducing broker-dealers to needlessly take on debt of approximately
$280,354.\803\ Another commenter stated that it is unclear and unlikely
how this amendment would achieve any of the desired results and may
conversely impair a firm's ability to continue as a going concern.\804\
None of the commenters provided the Commission with revised cost
estimates.
---------------------------------------------------------------------------

    \801\ See Beer 2 Letter.
    \802\ Id.
    \803\ See Beer Letter; Lowenstein Letter.
    \804\ See Levene Letter.
---------------------------------------------------------------------------

    One commenter stated that if small firms were required to raise
over $300,000 in capital each, there would be the largest dissolution
of small broker-dealers in the history of the regulated securities
industry.\805\ This commenter also stated that the Commission's
estimate of a gross cost of capital of 7.5% (5% + 2.5%) is a totally
unrealistic cost of capital for small broker-dealers and that these
broker-dealers will categorically have costs significantly higher than
7.5%.\806\ Finally, the commenter stated that, until the Commission
convenes a small broker-dealer representative panel to assist it with
establishing such costs, the Commission is speculating on such costs,
and is therefore without adequate information to consider the effects
of such costs and changes on small firms.\807\
---------------------------------------------------------------------------

    \805\ See NIBA 2 Letter.
    \806\ Id.
    \807\ Id.
---------------------------------------------------------------------------

(III). Alternatives
    The Commission considered all comments received \808\ and the
alternative of not adopting the rule, and decided to adopt the
amendments substantially as proposed. In response to the comment
regarding the unrealistic cost of capital,\809\ the Commission has
increased the cost of capital to 12% as an average cost of equity
capital for broker-dealers. As discussed in section II.E.1 of this
release, the baseline of this amendment is current Rule 15c3-1 and
existing guidance and interpretations. The Commission staff has
provided guidance with respect to the treatment and recording of
certain broker-dealer expenses and liabilities that is consistent with
the rule amendment.\810\ Existing broker-dealer recordkeeping rules
require a broker-dealer to record its income and expenses.\811\ For
example, paragraph (a)(2) of Rule 17a-3 requires a broker-dealer to
make and keep current ledgers (or other records) reflecting all assets
and liabilities, income and expense and capital accounts.\812\
Consequently, as against the current baseline, the above estimates are
intended to be conservative. The Commission expects that broker-dealers
will incur costs to comply with this amendment, including costs to
obtain additional capital, only to the extent they are not currently
complying with existing guidance and interpretations.
---------------------------------------------------------------------------

    \808\ See Beer Letter; Beer 2 Letter; Lowenstein Letter; Levene
Letter; NIBA 2 Letter.
    \809\ See NIBA 2 Letter.
    \810\ See, e.g., Third Party Expense Letter; see also FINRA
Notice to Members 03-6, Expense Sharing Agreements.
    \811\ 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \812\ 17 CFR 240.17a-3(a)(2).
---------------------------------------------------------------------------

    In response to comments,\813\ the Commission does not expect
broker-dealers to incur significant costs to comply with this amendment
to the extent that they are appropriately recording their assets and
liabilities under current Commission rules and interpretive guidance,
because these items will already appear on a broker-dealer's balance
sheet and be included in its net capital computation. Consequently, the
rule amendment, as adopted, should not: (1) Cause firms to be
classified as ``a going concern;'' \814\ (2) cause firms to fail,
dissolve, or otherwise close; \815\ (3) impose undue burdens; or (4)
present serious implementation difficulties to firms (small or large)
if they are appropriately recording their assets and liabilities under
current Commission rules and interpretive guidance.\816\ Further, as
stated above, the estimates are intended to be conservative, and
therefore, the Commission expects that the ``true''

costs \817\ that may be incurred by broker-dealers should be less than
the maximum estimated. Therefore, the Commission does not believe a
longer time period for compliance or the formation of a small broker-
dealer advisory cost committee is necessary.\818\
---------------------------------------------------------------------------

    \813\ See Beer Letter; Beer 2 Letter; Lowenstein Letter; Levene
Letter; NIBA 2 Letter.
    \814\ See Levene Letter.
    \815\ See NIBA 2 Letter.
    \816\ See, e.g., Third Party Expense Letter; see also FINRA
Notice to Members 03-6, Expense Sharing Agreements.
    \817\ See Beer 2 Letter.
    \818\ See NIBA 2 Letter.
---------------------------------------------------------------------------

b. Requirement To Subtract From Net Worth Certain Non-Permanent Capital
Contributions
(I). Summary of Amendments
    As discussed in section II.E.2. of this release, the amendment adds
paragraph (c)(2)(i)(G) to Rule 15c3-1, requiring a broker-dealer to
treat as a liability any capital that is contributed under an agreement
giving the investor the option to withdraw it. The rule, as adopted,
also requires that a broker-dealer treat as a liability any capital
contribution that is withdrawn within a year of its contribution unless
the broker-dealer receives permission in writing from its DEA.\819\ The
amendment to Rule 15c3-1 is intended to assist investors and regulators
by requiring broker-dealers to provide a more accurate picture of their
financial condition. This amendment will help regulators react more
quickly if a broker-dealer experiences financial difficulty and
benefits customers of a troubled broker-dealer as well as its
counterparties.
---------------------------------------------------------------------------

    \819\ One commenter suggested that the rule be amended to
explicitly exclude any withdrawals that would fall under paragraph
(e)(4)(iii) of Rule 15c3-1. See American Bar Association Letter. It
is unnecessary to explicitly exclude any withdrawals that would fall
under paragraph (e)(4)(iii) of Rule 15c3-1 because these
requirements will not apply to withdrawals covered by paragraph
(e)(4)(iii) of Rule 15c3-1, namely, withdrawals used to make tax
payments or to pay reasonable compensation to partners. 17 CFR
240.15c3-1(e)(4)(iii). These types of payments are ordinary business
expenditures and do not raise the types of concerns the proposed
rule is designed to address. See Amendments to Financial
Responsibility Rules, 74 FR at12872, n.79.
---------------------------------------------------------------------------

    The Commission requested comment on available metrics to quantify
these benefits and any other benefits a commenter may identify.
Commenters were requested to identify sources of empirical data that
could be used for the metrics they proposed. The Commission did not
receive any comments in response to these requests.
(II). Baseline and Incremental Economic Effects
    As discussed in section II.E.2. of this release, the baseline of
this rule amendment is current Rule 15c3-1 and existing guidance and
interpretations. The Commission estimates that the amendments requiring
broker-dealers to treat certain capital contributions as liabilities
should not result in significant incremental benefits and costs, as
compared to the baseline. Because of existing Commission and staff
guidance regarding the permanency of capital,\820\ broker-dealers
typically do not enter into agreements permitting an owner to withdraw
capital at any time. To the extent some firms may have engaged in this
practice, they may need to raise capital to meet the rule requirement.
---------------------------------------------------------------------------

    \820\ See Net Capital Rule, Exchange Act Release No. 28927 (Feb.
28, 1991). See also Net Capital Requirements for Brokers and Dealers
Exchange Act Release No. 18417 (Jan. 13, 1982), 47 FR 3512 (Jan. 25,
1982). See also Temporary Capital Letter; Study of Unsafe and
Unsound Practices of Broker-Dealers, Report and Recommendations of
the Securities and Exchange Commission, H.R. Doc. No. 92-231 (1971)
(recommending improvement of adequacy and permanency of capital);
and Letter from Nelson Kibler, Assistant Director, Division of
Market Regulation to John Pinto, National Association of Securities
Dealers, Inc. (Sept. 8, 1980).
---------------------------------------------------------------------------

    While the amendments apply to all broker-dealers, they will impact
only the few broker-dealers that provide investors with the option to
withdraw capital at any time or within one year. Because of existing
Commission and staff interpretations related to temporary capital
contributions,\821\ most broker-dealers likely do not accept capital
contributions under agreements permitting the investor to withdraw the
capital at any time or within one year. Therefore, it is difficult to
quantify the cost impact of this rule amendment.
---------------------------------------------------------------------------

    \821\ See Net Capital Rule, Exchange Act Release No. 28927 (Feb.
28, 1991), 56 FR 9124 (Mar. 5, 1991); and Temporary Capital Letter.
---------------------------------------------------------------------------

    Based on staff experience with the treatment of capital
contributions and the application of Rule 15c3-1, the Commission
estimates that no more than $100 million in capital at broker-dealers
is subject to such agreements.\822\ Further, with regard to the
treatment of temporary capital contributions, in the proposing release,
the Commission assumed an incremental cost of capital of 2.5%,\823\ and
estimated that the amendment would result in an annual cost of
approximately $2.5 million.\824\
---------------------------------------------------------------------------

    \822\ See Amendments to Financial Responsibility Rules, 72 FR at
12885.
    \823\ Id. at 12886-12887.
    \824\ $100,000,000 x 2.5% = $2,500,000.
---------------------------------------------------------------------------

    The Commission requested comment on the proposed cost estimates. In
particular, the Commission requested comment on additional costs to
broker-dealers that would arise from the proposals. The Commission also
requested comment on whether these proposals would impose costs on
other market participants, including broker-dealer customers.
Commenters were also asked to identify the metrics and sources of any
empirical data that support their costs estimates.
    The Commission received three comments.\825\ One commenter stated
that the Commission's estimate that no more than $100 million of
capital at broker-dealers is subject to agreements permitting an owner
to withdraw capital at any time greatly underestimates the impact of
the proposed rule.\826\ The commenter stated that the Commission makes
no case for deviating from the already established standards.\827\
Another commenter believed that the proposal would raise its cost of
capital to such an extent that it would be impossible for the firm to
raise capital from unrelated third parties.\828\
---------------------------------------------------------------------------

    \825\ See Chicago Capital Management Letter; SIG Letter; NIBA 2
Letter.
    \826\ See SIG Letter.
    \827\ Id.
    \828\ See Chicago Capital Management Letter.
---------------------------------------------------------------------------

    One commenter stated that the Commission's estimate of a gross cost
of capital of 7.5% (5% + 2.5%) is a totally unrealistic cost of capital
for small broker-dealers and that these broker-dealers will
categorically have costs significantly higher than 7.5%.\829\ Finally,
the commenter stated that, until the Commission convenes a small
broker-dealer representative panel to assist it with establishing such
costs, the Commission is ``speculating'' on such costs, and is
therefore without adequate information to consider the effects of such
costs and changes on small firms.\830\
---------------------------------------------------------------------------

    \829\ See NIBA 2 Letter.
    \830\ Id.
---------------------------------------------------------------------------

    In response to comments,\831\ the Commission is revising this
estimate in the final rule to an estimated cost of capital of
approximately 12%, which is determined as the average cost of equity
capital of broker-dealers using the CAPM. The overall estimated cost of
capital is not incremental to the amendment discussed above regarding
third party liabilities. The estimated cost of capital would be 12% for
a broker-dealer seeking additional equity capital. Therefore, with
regard to the treatment of temporary capital contributions, the
Commission estimates the amendment will result in an annual cost of
approximately $12.0 million,\832\ which is an increased estimate
relative to the proposing release. For the broker-dealers to whom this
increased estimate applies, and who may not be complying with the rule
amendments, the Commission expects that there would be greater costs
imposed. However, the Commission expects that the benefits outlined
above

would also accrue to the customers of these broker-dealers.\833\
---------------------------------------------------------------------------

    \831\ See NIBA 2 Letter.
    \832\ $100,000,000 x 12.25% = $12,250,000.
    \833\ $100,000,000 x 12.25% = $12,250,000.
---------------------------------------------------------------------------

(III). Alternatives
    The Commission considered all comments discussed above and the
alternative of not adopting the rule, and decided to adopt the
amendments substantially as proposed. In response to commenters'
concerns about the impact on capital and the $100 million
estimate,\834\ as discussed above, the final rule amendment is a
codification of existing Commission staff guidance,\835\ and thus
should not represent a change for broker-dealers with respect to
capital withdrawals. Moreover, with respect to commenters' concerns
about obtaining capital,\836\ the rule does not prohibit an investor
from withdrawing capital at any time. Rather, it prohibits a broker-
dealer from treating temporary cash infusions as capital for purposes
of the net capital rule. Finally, the final rule amendment provides a
mechanism for a broker-dealer to apply to its DEA to make a withdrawal
within one year of the capital contribution without triggering the
deduction under certain circumstances.
---------------------------------------------------------------------------

    \834\ See Chicago Capital Management Letter; SIG Letter; NIBA 2
Letter.
    \835\ See Temporary Capital Letter. See also section II.E.2. of
this release.
    \836\ See Chicago Capital Management Letter; SIG Letter; NIBA 2
Letter.
---------------------------------------------------------------------------

    In the final rule, the Commission has increased the estimated cost
of capital from 2.5% to 12%, in response to comments regarding the
unrealistic cost of capital, and because the estimated cost of capital
is not incremental to the estimated cost of capital to the amendment to
Rule 15c3-1 regarding third party liabilities.\837\ The estimated cost
of capital would be 12% for a broker-dealer seeking a loan for any
additional capital. In addition, based on staff experience with the
treatment of capital contributions and for the reasons discussed above,
the Commission continues to believe that the estimate of $100 million
regarding the temporary capital contributions is reasonable.\838\
---------------------------------------------------------------------------

    \837\ See NIBA 2 Letter.
    \838\ See SIG Letter.
---------------------------------------------------------------------------

    Further, the final rule amendments relating to temporary capital
contributions have been revised to clarify that a withdrawal of capital
made within one year of its contribution to the broker-dealer is deemed
to have been intended to be withdrawn within one year, unless the
withdrawal has been approved in writing by the broker-dealer's
DEA.\839\ The Commission made this change to eliminate a potential
ambiguity as to whether a withdrawal of capital within one year could
ever be approved by a broker-dealer's DEA. The final rule amendment
clarifies the intent to provide a mechanism for broker-dealers to apply
for approval to withdraw capital within one year and to be granted such
approval where appropriate.
---------------------------------------------------------------------------

    \839\ See section II.E.2. of this release.
---------------------------------------------------------------------------

    While owners of most broker-dealers have the option of withdrawing
capital, most owners likely do not have agreements that provide the
option of withdrawing capital at any time.\840\ Paragraph (e) of Rule
15c3-1 contains mechanisms to permit a broker-dealer to make capital
withdrawals for specified purposes.\841\ If there is a specific need
for a broker-dealer to seek permission to make a capital withdrawal
within one year of contribution, the final rule already provides a
mechanism for the broker-dealer to seek permission in writing from its
DEA to make such a withdrawal.\842\ Based on the discussion above, the
Commission believes the final cost estimates are appropriate.\843\
---------------------------------------------------------------------------

    \840\ See SIG Letter.
    \841\ See paragraphs (e)(1)(iii)(B) and (e)(4)(iii) of Rule
15c3-1. See also Amendments to Financial Responsibility Rules, 72 FR
at 12872, n.79 (``These requirements would not apply to withdrawals
covered by paragraph (e)(4)(iii) of Rule 15c3-1, namely, withdrawals
used to make tax payments or pay reasonable compensation to
partners. These types of payments are ordinary business expenditures
and do not raise the types of concerns the proposed rule is designed
to address.'')
    \842\ See paragraph (c)(2)(i)(G)(2) of Rule 15c3-1.
    \843\ See NIBA 2 Letter.
---------------------------------------------------------------------------

c. Requirement To Deduct the Amount by Which a Fidelity Bond Exceeds
SRO Limits
    As discussed in section II.E.3. of this release, this amendment
requires broker-dealers to deduct from net capital, with regard to
fidelity bonding requirements prescribed by a broker-dealer's examining
authority, the excess of any deductible amount over the amount
permitted by SRO rules.
    Under SRO rules, certain broker-dealers that do business with the
public or are required to become SIPC members must comply with
mandatory fidelity bonding requirements.\844\ SRO rules typically
permit a broker-dealer to have a deductible provision included in the
bond; however, such rules provide that the deductible must not exceed
certain amounts. With regard to firms that maintain deductible amounts
over certain specified amounts, a number of SRO rules provide that the
broker-dealer must deduct this specified amount from net worth when
calculating net capital under Rule 15c3-1.\845\
---------------------------------------------------------------------------

    \844\ See, e.g., FINRA Rule 4360, CBOE Rule 9.22, and NASDAQ OMX
PHLX Rule 705. SRO fidelity bonding requirements typically contain
agreements covering the following areas: A ``Fidelity'' insuring
clause to indemnify against loss of property through dishonest or
fraudulent acts of employees; an ``On Premises'' agreement insuring
against losses resulting from crimes such as burglary and theft and
from misplacement of property of the insured; an ``In Transit''
clause indemnifying against losses occurring while property is in
transit; a ``Forgery and Alteration'' agreement insuring against
loss due to forgery or alteration of various kinds of negotiable
instruments; and a ``Securities Loss'' clause protecting against
losses incurred through forgery and alteration of securities. Id.
    \845\ See, e.g., FINRA Rule 4360 and CBOE Rule 9.22.
---------------------------------------------------------------------------

    Rule 15c3-1, however, does not specifically reference the SRO
deductible requirements as a charge to net worth, meaning that a
broker-dealer would not be required for the purposes of Commission
rules to show the impact of the deduction in the net capital
computation required by an SRO on the FOCUS Report.\846\ To address the
reporting inconsistency, the Commission is amending Rule 15c3-1 to add
paragraph (c)(2)(xiv), which will require broker-dealers to deduct the
amount specified by rule of the Examining Authority of the broker-
dealer with respect to a requirement to maintain fidelity bond
coverage. This rule amendment will provide consistency in broker-dealer
reporting requirements.\847\
---------------------------------------------------------------------------

    \846\ See 17 CFR 240.17a-5.
    \847\ Conversely, not adopting this rule amendment would have
resulted in continued inconsistency among existing SRO rules and
Rule 15c3-1.
---------------------------------------------------------------------------

    This amendment will also codify in a Commission rule capital
charges that broker-dealers are currently required to take pursuant to
the rules of various SROs. Consequently, any economic effects,
including costs and benefits, should be compared to a baseline of
current practices. The amendment should not impose additional costs on
broker-dealers with respect to the purchasing or carrying of fidelity
bond coverage. Nor will the amendment cause broker-dealers to incur
additional costs in determining or reporting excess deductible amounts
over the deductible permitted. Broker-dealers already make such
determinations under SROs rules, and the manner in which such excesses
are typically reported (i.e., through periodic FOCUS Reports and other
reports) would remain the same.
    The Commission received one comment opposing the fidelity bond
amendment, stating that FINRA Rule 4360 and the Commission's amendment
would result in a de facto increase in minimum net capital requirements
for some broker-dealers.\848\ Any increase in net capital cited by the
commenter

would result from existing SRO rules.\849\ Stated differently, broker-
dealers that are members of an SRO with such a fidelity bonding rule
must already account for the deduction in complying with the net
capital requirements of SROs and nothing in the Commission's amendment
to paragraph (c)(2)(xiv) of Rule 15c3-1 would alter this status quo.
Consequently, while there is currently no deduction required under the
baseline of current Rule 15c3-1 relating to fidelity bond deductibles,
because SRO rules currently require this deduction, the adoption of
this amendment under Rule 15c3-1 should not impose any additional costs
on broker-dealers that they are not already incurring under existing
SRO rules.
---------------------------------------------------------------------------

    \848\ See NIBA 2 Letter.
    \849\ For example, the Commission approved FINRA Rule 4360
through the SRO rule filing process. See Order Approving Proposed
Rule Change to Adopt FINRA Rule 4360 (Fidelity Bonds) in the
Consolidated FINRA Rulebook, Exchange Act Release No. 63961 (Feb.
24, 2011), 76 FR 11542 (Mar. 2, 2011). Pursuant to Section 19(b)(1)
of the Exchange Act, each SRO must file with the Commission any
proposed change in, addition to, or deletion from the rules of the
exchange electronically on a Form 19b-4 through the Electronic Form
19b-4 Filing System, which is a secure Web site operated by the
Commission. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
---------------------------------------------------------------------------

d. Broker-Dealer Solvency Requirement
    As discussed in section II.E.4., the amendment to paragraph (a) of
Rule 15c3-1 states that no broker-dealer shall be ``insolvent'' as that
term is defined under paragraph (c)(16) of the rule. The companion
amendment to paragraph (b)(1) of Rule 17a-11 requires insolvent broker-
dealers to provide notice to regulatory authorities.
    Allowing an insolvent broker-dealer to continue conducting a
securities business during the period of its insolvency,
notwithstanding its net capital position, could jeopardize customers
and other market participants because a broker-dealer that has made an
admission of insolvency, or is otherwise deemed insolvent or entitled
to protection from creditors, does not possess the financial resources
necessary to operate a securities business. Continuing to operate in
such circumstances poses a significant credit risk to counterparties
and to the clearance and settlement system, and, in the event the firm
ends up in a liquidation proceeding under SIPA, may impair the ability
of the SIPA trustee to make the customers of the broker-dealer whole
and satisfy the claims of other creditors out of the assets of the
general estate.\850\
---------------------------------------------------------------------------

    \850\ See Amendments to Financial Responsibility Rules, 72 FR at
12872.
---------------------------------------------------------------------------

    Consequently, the amendment to Rule 15c3-1 benefits the securities
markets, and indirectly, all other market participants, by removing
risks associated with the continued operation of a financially unstable
firm. For example, the amendment will limit the potential that an
insolvent firm would take on new customers and place their assets at
risk. Furthermore, the broker-dealer will not be able to enter into
proprietary transactions with other broker-dealers and place them or
clearing agencies at further risk of counterparty default. The broker-
dealer's existing customers also will benefit from preservation of any
remaining capital of the firm, which could be used to facilitate an
orderly liquidation.
    The amendment to Rule 17a-11 also benefits the securities markets
in that it will provide regulators with the opportunity to more quickly
take steps to protect customers and counterparties at the onset of the
insolvency, including, if appropriate, notifying SIPC of the need to
commence a SIPA liquidation.
    The baseline for this proposed amendment is current Rules 15c3-1
and 17a-11, which currently do not contain requirements to cease
conducting a securities business (or to notify the Commission) if
certain insolvency events were to occur. The amendments generally will
have no impact on broker-dealers when compared to the current baseline.
Should a broker-dealer become subject to an insolvency proceeding, it
will incur the cost of sending notice of that fact to the Commission
and its DEA. The Commission estimated in the PRA that it will occur
approximately two \851\ times a year for all broker-dealers.\852\ For
these reasons, the Commission estimates that any costs arising from
this amendment will be de minimis.
---------------------------------------------------------------------------

    \851\ This estimate is based on the 2012 SIPC Annual Report,
which indicates that over the last ten year-period, the annual
average of new customer protection proceedings was three. A copy of
the 2012 Annual Report is available at http://www.sipc.org/.
    \852\ The internal hours would likely be performed by a
compliance clerk. Therefore, the estimated internal costs for this
hour burden would be calculated as follows: Compliance Clerk at $63
per hour x 20 minutes = $21.00. See section IV.D.8. of this release.
---------------------------------------------------------------------------

    One commenter stated that involuntary bankruptcy proceedings do not
necessarily indicate that the broker-dealer is insolvent, as such
proceedings can be frivolous, malicious, or otherwise lacking in merit,
and noted standard industry forms generally provide a grace period for
a party to such a proceeding to obtain a stay or dismissal before an
event of default is deemed to have occurred. The Commission considered
this alternative approach and notes that if a firm believes that it is
the subject of an unwarranted involuntary bankruptcy proceeding and
that its case will not be dismissed within the 30 day timeframe, as is
the case with existing net capital requirements, pursuant to Rule 15c3-
1(b)(3), the Commission may, upon written application, exempt the
broker-dealer from the requirement.
    In addition, one commenter objected to the amendments as
unnecessary, citing the Rule 15c3-1 prohibition on broker-dealers
effecting securities transactions if their net capital is below certain
minimums.\853\ The commenter stated that the net capital of an
insolvent broker-dealer would, by definition, be below those
minimums.\854\ The Commission considered the commenter's view and the
alternative of not adopting the amendments. The purpose of the
amendment is to address cases where the broker-dealer is subject to an
insolvency event but maintains that it is in compliance with the net
capital rule. Therefore, the Commission is adopting this amendment,
because, while such instances may be rare, an insolvent broker-dealer
could seek the protection of the bankruptcy laws but continue to effect
transactions with the public, potentially jeopardizing customers and
other creditors of the broker-dealer, including counterparties.
---------------------------------------------------------------------------

    \853\ See St. Bernard Financial Services Letter.
    \854\ Id.
---------------------------------------------------------------------------

    As noted above, the Commission requested comment on this cost
estimate. In particular, the Commission requested comment on whether
there would be costs to broker-dealers as a consequence of the
proposal. The Commission also requested comment on whether this
proposal would impose costs on other market participants, including
broker-dealer customers. Commenters were asked to identify the metrics
and sources of any empirical data that supported their costs estimates.
The Commission did not receive any comments in response to these
requests.
e. Amendment To Rule Governing Restrictions of Withdrawals of Capital
    As discussed in section II.E.5. of this release, paragraph (e) of
Rule 15c3-1, which places certain conditions on a broker-dealer when
withdrawing capital,\855\ also allows the Commission to issue an order
temporarily restricting a broker-dealer from withdrawing capital or
making loans or advances to stockholders, insiders, and affiliates

under certain circumstances.\856\ The rule, however, limits such orders
to withdrawals, advances, or loans that, when aggregated with all other
withdrawals, advances, or loans on a net basis during a 30 calendar day
period, exceed 30% of the firm's excess net capital.\857\
---------------------------------------------------------------------------

    \855\ See 17 CFR 240.15c3-1(e).
    \856\ See 17 CFR 240.15c3-1(e)(3).
    \857\ Id.
---------------------------------------------------------------------------

    The Commission has determined that the requirement is difficult to
enforce, as it generally would not be clear when the 30% threshold had
been reached, due to the inherent unreliability of a troubled broker-
dealer's books and records. The Commission considered retaining the 30%
threshold, but determined that a more appropriate approach would be to
eliminate the 30% threshold requirement from the rule, rather than
retain a provision that is difficult to enforce. Consequently, the
Commission proposed, and is adopting, a change to delete this provision
and instead to allow the Commission to restrict all withdrawals,
advances, and loans so long as the other conditions under the rule (all
of which remain unchanged) were met.
    The amendment to paragraph (e) of Rule 15c3-1 benefits the
securities markets by protecting customers and counterparties of a
financially stressed broker-dealer. For example, by prohibiting
unsecured loans to a stockholder or withdrawal of equity capital while
the order is outstanding, the amendment will help to preserve the
assets and liquidity of the broker-dealer and enable the Commission and
its staff, as well as other regulators, to examine the broker-dealer's
financial condition, net capital position, and the risk exposure to the
customers and creditors of the broker-dealer.
    The current rule permitting the Commission to restrict withdrawals
of capital from a financially distressed broker-dealer was adopted in
1991.\858\ This rule is the baseline for purposes of this economic
analysis. When the Commission adopted this paragraph of Rule 15c3-1
more than twenty years ago, the Commission stated that it was intended
to be an emergency provision, applicable only to the most exigent of
circumstances where the continued viability of the broker-dealer
appears to be at stake.\859\ In the ensuing years, the Commission has
only utilized this provision one time.\860\ Based on this experience
with the rule, and the fact that the rule is intended as an emergency
provision only, as compared to the current baseline, the Commission
estimates that the amendment will result in no or de minimis costs to
broker-dealers.
---------------------------------------------------------------------------

    \858\ See Net Capital Rule, Exchange Act Release No. 28927 (Feb.
28, 1991), 56 FR 9124 (Mar. 5, 1991).
    \859\ Net Capital Rule, Exchange Act Release No. 28927, 56 FR
9124, 9128.
    \860\ Order Regarding Withdrawals, Unsecured Loans or Advances
from Refco Securities, LLC and Refco Clearing, LLC, Exchange Act
Release No. 52606 (Oct. 13, 2005).
---------------------------------------------------------------------------

    As noted above, the Commission requested comment on this cost
estimate. The Commission also requested comment on whether the proposal
would impose costs on other market participants. Commenters were asked
to identify the metrics and sources of any empirical data that support
their cost estimates. One commenter supported the amendment but
believed that the rule is intended to protect the capitalization of
large firms while ignoring small firms, and proposed that the
Commission state all the conditions that need to exist for a firm to
withdraw, repay or redeem any amount that does not endanger the firm or
its customers.\861\ The commenter also stated that it opposes
regulation that arbitrarily reduces the value of small broker-dealers
and their competitive position relative to larger broker-dealers. A
second commenter noted that the proposed amendment would impose
additional compliance burdens on broker-dealers and would significantly
limit broker-dealers' flexibility in the event of a liquidity
crisis.\862\
---------------------------------------------------------------------------

    \861\ See NIBA 2 Letter.
    \862\ See Raymond James 2 Letter.
---------------------------------------------------------------------------

    In adopting the final rule, the Commission considered the
alternatives and modifications suggested by commenters. In response to
these comments, the Commission notes that the amendment would eliminate
the 30% threshold from paragraph (e)(3)(i) of Rule 15c3-1, which
relates to the Commission's authority to temporarily restrict
withdrawals of net capital. It cannot impose these restrictions without
concluding that ``such withdrawal, advance or loan may be detrimental
to the financial integrity of the broker or dealer, or may unduly
jeopardize the broker or dealer's ability to repay its customer claims
or other liabilities which may cause a significant impact on the
markets or expose the customers or creditors of the broker or dealer to
loss without taking into account the application of the Securities
Investor Protection Act of 1970.'' \863\ While paragraph (e)(3)(i) of
Rule 15c3-1 would apply to all broker-dealers, the stringent conditions
under which the Commission may exert its authority under the rule to
temporarily restrict a broker-dealer's withdrawals of net capital would
apply to only the circumstances where the continued viability of the
broker-dealer appears to be at stake.\864\ The Commission, however,
agrees with the importance of maintaining flexibility in the context of
ordering restrictions on withdrawals, advances, and loans. Therefore,
the Commission modified the amendment, as adopted, to add language to
paragraph (e)(3)(i) to state (following the phrase ``employee or
affiliate'') that such orders will be issued, ``under such terms and
conditions as the Commission deems necessary or appropriate in the
public interest or consistent with the protection of investors . . .
.'' \865\
---------------------------------------------------------------------------

    \863\ See 17 CFR 240.15c3-1(e)(3)(i).
    \864\ Net Capital Rule, Exchange Act Release No. 28927, 56 FR
9124, 9128.
    \865\ See paragraph (e) of Rule 17a-3, as adopted. See
generally, 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------

    In summary, the Commission does not believe that the deletion of
the 30% threshold will affect the competitiveness or unduly restrict
the ongoing business operations of small broker-dealers as compared to
larger firms. All broker-dealers remain subject to the other notice and
withdrawal limitations on equity capital set forth in paragraphs (e)(1)
and (e)(2) of Rule 15c3-1, which are not the subject of this rule
amendment.
f. Amendment to Rule 15c3-1 Appendix A
    As discussed in section II.E.6.i. of this release, the amendment to
paragraph (b)(1)(vi) of Rule 15c3-1a will make permanent the reduced
net capital requirements that apply to listed option positions in major
market foreign currencies and high-capitalization and non-high-
capitalization diversified indexes in non-clearing option specialist
and market maker accounts. This change will benefit the broker-dealers
that have been calculating charges under a temporary amendment the
Commission originally adopted in 1997.\866\ The temporary amendment
expired on September 1, 1997, subject to extension.\867\ The Commission
staff subsequently issued a no-action letter on January 13, 2000, which
stated that the staff would not recommend enforcement action if broker-
dealers continued to rely on the temporary amendment.\868\ The
Commission

considered whether to keep the amendment temporary but determined that
making the temporary amendment permanent, as proposed, was the more
appropriate alternative because it creates certainty for broker-dealers
relying on the rule.
---------------------------------------------------------------------------

    \866\ See Net Capital Rule, Exchange Act Release No. 38248 (Feb.
6, 1997), 62 FR 6474 (Feb. 12, 1997).
    \867\ See 17 CFR 15c3-1a(b)(1)(iv)(B).
    \868\ Letter from Michael Macchiaroli, Associate Director,
Division of Market Regulation, Commission, to Richard Lewandowski,
Vice President, Regulatory Division, The Chicago Board Options
Exchange, Inc. (Jan. 13, 2000) (stating that the Division of Trading
and Markets ``will not recommend . . . enforcement action if non-
clearing option specialists and market-makers continue to rely on
subparagraph (b)(1)(iv) of Appendix A to Rule 15c3-1 under the
Exchange Act until such time as the Commission has determined
whether it should be extended'').
---------------------------------------------------------------------------

    Because this amendment seeks to match capital requirements with
actual risks, it should not have an adverse impact on the financial
strength of broker-dealers. Moreover, because broker-dealers are
already operating under the temporary relief, which is the current
baseline, the amendment should not result in any costs for broker-
dealers as compared to the current baseline.
    The Commission requested comment on available metrics to quantify
the benefits identified above and any other benefits the commenter may
identify. In addition, the Commission requested comment on whether the
proposal would result in any costs. Commenters were asked to identify
the metrics and sources of any empirical data that support their cost
estimates. The Commission did not receive any comments in response to
these requests.
ii. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
    Rule 15c3-1 is designed to help ensure that a broker-dealer holds
at all times liquid assets sufficient to pay its non-subordinated
liabilities and retain a ``cushion'' of liquid assets used to pay
customers without delay in the event that the broker-dealer fails. For
example, a broker-dealer that inappropriately excludes certain
liabilities when presenting its financial position \869\ or includes
non-permanent capital contributions in its financial statements \870\
distorts the view of the firm's financial condition and undermines the
rule. In either event, such practices jeopardize the broker-dealer's
ability to self-liquidate and promptly pay customers.
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    \869\ See section II.E.1. of this release.
    \870\ See section II.E.2. of this release.
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    The Commission's experience with the broker-dealer financial
responsibility rules, underscored by the 2008 financial crisis,
highlights the effects that the failure of a broker-dealer,
particularly a large carrying broker-dealer, could have on customers
and other market participants. Losses resulting from the disorderly
winding down of a broker-dealer may often undermine the participation
of investors in the U.S. capital markets, with possible negative
effects on capital formation and market efficiency. Thus, it is
imperative that broker-dealers operate in compliance with Rule 15c3-1
and that the Commission takes the necessary steps to help ensure that
broker-dealers are prohibited from engaging in practices that obscure
noncompliance.
    The amendments to Rule 15c3-1 are designed to reduce the risk of a
disorderly failure of a broker-dealer and lessen the potential that
market participants may seek to rapidly withdraw assets and financing
from broker-dealers during a time of market stress. These Rule 15c3-1
amendments may affect efficiency and capital formation through their
positive impact on competition among broker-dealers. Specifically,
markets that are competitive can, all other things equal, be expected
to promote an efficient allocation of capital.\871\
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    \871\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213, 70315 (Nov. 23,
2012).
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    The amendments to Rule 15c3-1--(1) Requiring a broker-dealer to
account for certain liabilities or treat certain capital contributions
as liabilities,\872\ (2) requiring a broker-dealer to deduct certain
fidelity bond deductibles,\873\ (3) requiring an insolvent broker-
dealer to cease conducting a securities business and provide notice
under the amendment to Rule 17a-11,\874\ (4) eliminating the
qualification on Commission orders restricting withdrawals, advances,
and unsecured loans to instances where recent withdrawals, advances or
loans, in the aggregate, exceed 30% of the broker-dealer's excess net
capital,\875\ and (5) making permanent the reduced net capital
requirements under Appendix A for market makers \876\--are consistent
with promoting efficiency, competition, and capital formation in the
market place.
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    \872\ See sections II.E.1. and 2. of this release.
    \873\ See section II.E.3. of this release.
    \874\ See section II.E.4. of this release.
    \875\ See section II.E.5. of this release.
    \876\ See section II.E.6.i. of this release.
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    First, a broker-dealer that fails to include liabilities that
depend on the broker-dealer's assets and revenues and accepts temporary
capital contributions is obscuring its true financial condition. This
also interferes with the process by which regulators monitor the
financial condition of broker-dealers and, thereby, impedes their
ability to take proactive steps to minimize the harm resulting from a
broker-dealer failure to customers, counterparties, and clearing
agencies.
    Second, requiring broker-dealers to take net capital charges for
excess fidelity bond deductibles imposed under SRO rules will promote
efficiency by providing consistency among Rule 15c3-1 and SRO rules.
Because fidelity bond requirements provide a safeguard with regard to
broker-dealer financial responsibility, the amendment will enhance
competition through the operation of more financially sound firms.
    Third, the continued operation of an insolvent broker-dealer or the
withdrawal of capital from a broker-dealer that may jeopardize such
broker-dealer's financial integrity poses financial risk to its
customers, counterparties, and the registered clearing agencies. These
risks increase costs and decrease efficiency of the marketplace.
    Fourth, the elimination of the limitation on Commission orders
restricting capital withdrawals under paragraph (e)(3) of Rule 15c3-1
from a financially troubled broker-dealer will provide greater
protection to customers and counterparties of the firm and registered
clearing agencies. While such orders are expected to be infrequent,
when issued they should lower costs to these entities associated with
having an outstanding obligation from the troubled broker-dealer,
thereby promoting efficiency and facilitating capital formation.
    One commenter expressed concern that the proposed amendments to
Rule 15c3-1 would be particularly burdensome on small broker-dealers,
negatively impacting capital formation for small issuers and increasing
the cost of capital for small broker-dealers.\877\ For example, the
commenter stated that it believed that the proposed changes requiring a
broker-dealer to subtract from net worth certain non-permanent capital
contributions and to deduct from net worth certain liabilities or
expenses assumed by third parties would negatively impact capital
formation for small issuers and increase the cost of capital for small
broker-dealers.\878\
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    \877\ See NIBA 2 Letter.
    \878\ Id.
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    While the Commission is cognizant that the Rule 15c3-1 amendments
may impose burdens on broker-dealers, including non-carrying broker-
dealers, the commenter is treating the amendments as entirely new
additions to the net capital rule. Yet, as discussed

in section II.E. of this release, the Commission has emphasized that
capital contributions to broker-dealers should not be temporary.
Further, the Commission staff has explained that a capital contribution
should be treated as a liability if it is made with the understanding
that such contribution can be withdrawn at the option of the
investor.\879\ Based on the Commission's experience with the
application of Rule 15c3-1, the majority of broker-dealers operate
consistent with past Commission and staff rules and guidance regarding
the nature of capital and, thus, the Rule 15c3-1 amendments should not
represent a substantial change for most broker-dealers. Therefore, the
final rule should not negatively impact capital formation for small
issuers, nor increase the cost of capital for small broker-dealers, to
the extent that these firms already comply with current guidance and
interpretations.\880\ For those firms that will need to raise capital
to comply with the amendments to Rule 15c3-1, the rule amendments
potentially may negatively impact capital formation. However, the
potential costs to some broker-dealers could be offset by the aggregate
increase in capital formation related to heightened confidence in
broker-dealer financial requirements.
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    \879\ See section II.E.2. of this release.
    \880\ See NIBA 2 Letter.
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    Finally, the Commission recognizes that, as discussed above, the
amendments to Rule 15c3-3 adopted today impose certain costs on broker-
dealers that could affect competition among broker-dealers. However,
the Commission is of the opinion that these costs are justified by the
significant benefits described in this economic analysis. In sum, the
costs of compliance resulting from the requirements in the amendments
to Rule 15c3-3 should not impose a burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act in
light of the benefits discussed above.

VI. Final Regulatory Flexibility Analysis

    The Commission proposed amendments to Rules 15c3-1, 15c3-1a, 15c3-
2, 15c3-3, 15c3-3a, 17a-3, 17a-4, and 17a-11 under the Exchange Act. An
Initial Regulatory Flexibility Analysis (``IRFA'') was included in the
proposing release.\881\ This Final Regulatory Flexibility Analysis
(``FRFA'') has been prepared in accordance with the provisions of the
RFA.\882\
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    \881\ See Amendments to Financial Responsibility Rules, 72 FR
12862.
    \882\ 5 U.S.C. 604(a).
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    The Commission requested comment with regard to matters discussed
in the IRFA, including comments with respect to the number of small
entities that may be affected by the proposed rule amendments.\883\ The
Commission also requested that commenters specify the costs of
compliance with the proposed amendments, and suggest alternatives that
would accomplish the goals of the amendments.\884\ The Commission
received one general comment on the IRFA.\885\ In addition, the
Commission received a number of comments regarding the impact on small
entities with respect to specific aspects of the proposed rule
amendments, including comments relating to amendments under Rule 15c3-3
with respect to where special reserve deposits may be held, and
amendments under Rule 15c3-1 relating to the requirement to subtract
from net worth certain liabilities or expenses assumed by third
parties.\886\ The general comment on the IRFA is discussed directly
below. The specific comments are discussed in the applicable sections
below.
---------------------------------------------------------------------------

    \883\ See Amendments to Financial Responsibility Rules, 72 FR at
12888.
    \884\ Id.
    \885\ See Angel Letter.
    \886\ These comments are discussed in the applicable section
below.
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 A. General Issues Raised by Public Comments

    The commenter stated that the Commission should pay ``explicit
attention to regulatory trends in the rest of the world'' because doing
so ``benefits not only small entities (by reducing their regulatory
burden) but all entities, as larger entities can experience more
consistent regulatory procedures around the world.'' \887\ The
commenter suggested that the Commission consider a ``Basel II type
approach to net capital requirements.'' \888\ In response to the
commenter, the Commission notes that the amendments relate to discrete
areas of the broker-dealer financial responsibility rules (i.e., they
do not establish new financial responsibility standards such as would
be the case if the Commission were to adopt a ``Basel II type approach
to net capital requirements.''). As noted above, the commenter's
suggestion is beyond the scope of this rulemaking.\889\
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    \887\ See Angel Letter.
    \888\ Id.
    \889\ The commenter cited the JP Morgan Letter in support of the
suggestion to ``consider regulatory trends in the rest of the
world.'' Id. The JP Morgan Letter recommends that the Commission
adopt a due diligence standard--citing a U.K. regulation--with
respect to the amendments regarding customer reserve account cash
deposits. See JP Morgan Letter. The Commission addresses this
comment above in section V.D.1.i.b.(III) of this release.
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B. Amendments to the Customer Protection Rule

1. Need for and Objectives of the Rule Amendments
    The final rule amends certain provisions of Rule 15c3-3.\890\ The
amendment that requires broker-dealers to perform a PAB reserve
computation is designed to address a disparity between Rule 15c3-3 and
the SIPA, and to incorporate provisions of the PAIB Letter into
Commission rules.\891\ The amendment that will require broker-dealers
to exclude cash deposited at an affiliated bank and cash deposited with
an unaffiliated bank to the extent that the amount exceeds 15% of the
bank's equity capital from being used to meet a broker-dealer's reserve
requirements is designed to avoid the situation where a carrying
broker-dealer's cash deposits constitute a substantial portion of the
bank's deposits.\892\ The amendment that will require broker-dealers to
obtain possession and control of customers' fully paid and excess
margin securities allocated to a short position is designed to address
the fact that Rule 15c3-3 currently permits a broker-dealer to monetize
customer securities, which is contrary to the customer protection goals
of Rule 15c3-3, which seeks to ensure that broker-dealer's do not use
customer assets for proprietary purposes.\893\ The amendment that will
require broker-dealers to provide certain notices and disclosures
before changing the terms and conditions under which the broker-dealer
treats customer free credit balances is intended to help ensure that
the use of customer free credit balances accords with customer
preferences.\894\ The importation of certain provisions of Rule 15c3-2
into Rule 15c3-3 streamlines the customer protection rules and
eliminates irrelevant provisions in Rule 15c3-2 due to Rule 15c3-
3.\895\ The amendments clarifying that funds in certain commodities
accounts are not to be treated as free credit balances or other credit
balances are intended to remove uncertainty with respect to their
treatment under Rule 15c3-3.\896\
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    \890\ 17 CFR 240.15c3-3.
    \891\ See section II.A.2. of this release.
    \892\ See section II.A.3. of this release.
    \893\ See section II.A.4. of this release.
    \894\ See section II.A.5. of this release.
    \895\ Id.
    \896\ See section II.A.6. of this release.
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    The amendments to Rule 15c3-3 are intended to strengthen the
protections afforded to customer assets held at a

broker-dealer. The amendments are designed to minimize the risk that
customer assets will be lost, tied-up in a liquidation proceeding, or
held in a manner that is inconsistent with a customer's expectations.
2. Significant Issues Raised by Public Comment
    The Commission received numerous comments with respect to the
amendment under paragraph (e)(5) of Rule 15c3-3 that will require
broker-dealers to exclude cash deposited at an affiliated bank and cash
deposited with an unaffiliated bank to the extent that the amount
exceeds 15% of the bank's equity capital from being used to meet a
broker-dealer's reserve requirements.\897\ As proposed, new paragraph
(e)(5) of 15c3-3 would have provided that, in determining whether a
broker-dealer maintains the minimum reserve deposits required (customer
and PAB), the broker-dealer must exclude any cash deposited at an
affiliated bank. In addition, the proposed amendment would have
required a broker-dealer to also exclude cash deposited at an
unaffiliated bank to the extent the cash deposited exceeds (1) 50% of
the broker-dealer's excess net capital (based on the broker-dealer's
most recently filed FOCUS Report),\898\ or (2) 10% of the bank's equity
capital (based on the bank's most recently filed Call Report or Thrift
Financial Report).\899\
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    \897\ See section II.A.3. of this release.
    \898\ Under Rule 17a-5 broker-dealers must file FOCUS Reports.
17 CFR 240.17a-5.
    \899\ See Amendments to Financial Responsibility Rules, 72 FR at
12864.
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    With respect to the proposed limits on the amounts that could be
deposited in unaffiliated banks, some commenters argued that the
percentages were too restrictive while other commenters suggested
alternative approaches to the proposed percentage limitations.\900\ One
commenter stated that the percentage thresholds would negatively impact
smaller broker-dealers because these firms would still be required
under the proposed rule to maintain at least two reserve bank accounts
at different banks.\901\ This commenter noted that limiting Rule 15c3-3
deposits at a single bank to 50% of a broker-dealer's excess net
capital could impact 10 to 15% of its broker-dealer customers in that
many of these customers would be required to open accounts at multiple
institutions.\902\ This commenter suggested the Commission consider
higher percentages for cash deposits at large money-centered banks,
since the proposed percentage thresholds would negatively impact small
broker-dealers because they would exceed the 50% of excess net capital
threshold at lower deposit levels.\903\ This commenter also noted that
conducting due diligence and opening new accounts and the ongoing
monitoring and periodic re-evaluation of such additional accounts would
require much more time than the 10 hours originally estimated by the
Commission.\904\ A second commenter concurred with this cost
assessment, stating that the Commission significantly underestimated
the cost of the proposal to smaller firms.\905\
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    \900\ See Deutsche Bank Securities Letter; SIFMA 2 Letter; First
Clearing Letter; ICI Letter; BlackRock Letter.
    \901\ See SIFMA 2 Letter (``[T]he [percentage] tests could
prevent a smaller firm from maintaining reserve account deposits at
any single bank, even though those deposits are relatively small
compared to the size of the bank--e.g., a broker-dealer with excess
net capital of $500,000 could not maintain more than $250,000 in
reserve account cash deposits at any one bank, regardless of the
ratio between such bash deposits and the overall size or equity
capital of the bank.'').
    \902\ Id.
    \903\ Id.; see also SIFMA 4 Letter.
    \904\ See SIFMA 2 Letter.
    \905\ See NIBA 2 Letter.
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    With respect to the use of qualified securities to meet reserve
requirements, one commenter noted that broker-dealers will ``likely
have a significant amount of additional operational and transactional
costs.'' \906\ The commenter believes that ``[w]hile larger broker-
dealers may be able to reallocate existing trading desk, operational,
regulatory reporting and treasury functions to assist in ongoing
maintenance activities, midsized and smaller broker-dealers may be
required to hire additional staff to manage and maintain a securities
portfolio.'' \907\
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    \906\ See JP Morgan Letter.
    \907\ Id. The commenter noted that managing pools of qualified
securities involves various tasks, such as ``monitoring income
collection, redemption processing, marking the securities to market,
collateral substitutions and collateral segregation amongst other
tasks.'' Id.
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    In response to commenters concerns, the Commission has eliminated
the provision that would have excluded the amount of a deposit that
exceeds 50% of the broker-dealer's excess net capital. After review of
the comment letters, the Commission believes that this provision likely
would have disproportionately impacted small and mid-size broker-
dealers when they deposited cash into large commercial banks since they