benefits of the proposal with respect to bank SBSDs and bank MSBSPs.
The Commission requests data to assess the costs and benefits of the
proposals for bank SBSDs and bank MSBSPs.
6. Notification Requirements
    As discussed above,\1369\ the Commission is proposing certain
notification requirements for SBSDs and MSBSPs that are, in general,
modeled on existing notification provisions that apply to broker-
dealers pursuant to Rule 17a-11. As discussed below, the Commission has
utilized its experience with broker-dealers utilizing Rule 17a-11 to
prepare cost estimates of certain compliance-related expenses.\1370\ As
with the other proposals being considered, the Commission believes that
the vast majority of the economic effects associated with registering
as an SBSD or MSBSP would stem from the capital, margin, and
segregation rules that the Commission proposed pursuant to Title VII of
the Dodd-Frank Act.\1371\
---------------------------------------------------------------------------

    \1369\ See supra section II.C.1.
    \1370\ See infra section V.E.
    \1371\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70276.
---------------------------------------------------------------------------

a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs
    A broker-dealer SBSD would be required to notify the Commission
when it fails to make a deposit in its security-based swap customer
account, as required by proposed Rule 18a-4.\1372\ An ANC broker-dealer
would be required to give immediate notice to the Commission if a
liquidity stress test it performs indicates an insufficient amount of
liquidity reserve.\1373\ Finally, broker-dealer MSBSPs would be
required to notify the Commission when their level of tangible net
worth fell below $20 million.\1374\
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    \1372\ See paragraph (f) of Rule 17a-11, as proposed to be
amended.
    \1373\ See paragraph (e) of Rule 17a-11, as proposed to be
amended.
    \1374\ See paragraph (b)(6) of Rule 17a-11, as proposed to be
amended.
---------------------------------------------------------------------------

    Outside of certain compliance-related costs, discussed below, the
Commission does not believe that the notification requirements would
have an economic impact.\1375\ In each case, the notification
requirement would be incidental to a related underlying substantive
obligation that would be the primary source of economic impact.
---------------------------------------------------------------------------

    \1375\ See infra section V.E.
---------------------------------------------------------------------------

    As discussed above in section V.C.1. of this release, the
Commission believes that the proposed amendments to Rule 17a-11 would
result in improving the Commission and DEA oversight of broker-dealer
SBSDs and broker-dealer MSBSPs' security-based swap activities,
including activities and financial conditions that suggest a material
level of risk to the firm.
    The Commission requests comment about its analysis of the costs and
benefits of the proposal with respect to broker-dealer SBSDs and
broker-dealer MSBSPs. The Commission requests data to assess the costs
and benefits of the proposals for broker-dealer SBSDs and broker-dealer
MSBSPs.
b. Stand-Alone SBSDs, Stand-Alone MSBSP's, Bank SBSDs, and Bank MSBSPs
    The Commission is proposing to establish notification requirements
in Rule 18a-8 for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs that are modeled closely upon the requirements
applicable to broker-dealers. First, the Commission is proposing to
include a net capital deficiency and tentative net capital deficiency
notification requirement in paragraph (a)(1) of proposed Rule 18a-8
applicable to stand-alone SBSDs that is modeled on the notification
requirements applicable to broker-dealers, over-the-counter derivatives
dealers, and ANC broker-dealers that appear in paragraph (a) of Rule
17a-11, as proposed to be amended.\1376\ Furthermore, a stand-alone
MSBSP would be required to notify the Commission when it fails to
maintain a positive tangible net worth.\1377\ The Commission is also
proposing to include ``early warning'' notification requirements in
paragraph (b) of proposed Rule 18a-8 that would be applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled after the relevant
early warning provisions applicable to broker-dealers in paragraph (b)
of Rule 17a-11, as proposed to be amended.\1378\ The Commission also is
proposing a requirement for a stand-alone SBSD to notify the Commission
in the event of the discovery of a material weakness, as is required
for broker-dealers under paragraph (d) of Rule 17a-11, as proposed to
be amended.\1379\ Moreover, the proposed requirement for a stand-alone
SBSD to notify the Commission if it fails to make a required deposit in
its security-based swap customer reserve account is modeled on a
similar proposed requirement applicable to broker-dealers for failure
to make a required deposit into a security-based swap customer
account.\1380\
---------------------------------------------------------------------------

    \1376\ Compare paragraph (a)(1) of proposed Rule 18a-8, with
paragraph (a) of Rule 17a-11, as proposed to be amended.
    \1377\ See paragraph (a)(2) of proposed Rule 18a-8.
    \1378\ Compare paragraph (b) of proposed Rule 18a-8, with
paragraphs (b)(3), (b)(4), and (b)(6) of Rule 17a-11, as proposed to
be amended.
    \1379\ Compare paragraph (e) of proposed Rule 18a-8, with
paragraph (d) of Rule 17a-11, as proposed to be amended. The
Commission notes that paragraph (d) of Rule 17a-11, as proposed to
be amended, also requires notification of the discovery of a
``material inadequacy'' to an over-the-counter derivatives dealer.
    \1380\ Compare paragraph (g) of proposed Rule 18a-8, with
paragraph (f) of Rule 17a-11, as proposed to be amended.
---------------------------------------------------------------------------

    The proposed requirement for a bank SBSD, bank MSBSP, stand-alone
SBSD, and stand-alone MSBSP to notify the Commission in the event that
it fails to make and keep current its required books and records is
modeled on a similar requirement for broker-dealers.\1381\ The proposed
requirement for stand-alone ANC SBSDs to notify the Commission of an
insufficient level of liquidity reserves is modeled after a similar
requirement for ANC broker-dealer SBSDs.\1382\
---------------------------------------------------------------------------

    \1381\ Compare paragraph (d) of proposed Rule 18a-8, with
paragraph (c) Rule 17a-11, as proposed to be amended.
    \1382\ Compare paragraph (f) of proposed Rule 18a-8, with
paragraph (e) Rule 17a-11, as proposed to be amended.
---------------------------------------------------------------------------

    With respect to bank SBSDs and bank MSBSPs, the Commission is
proposing to include a notification requirement in proposed Rule 18a-8
that would require these entities to give the Commission notice when
they file an adjustment of its reported capital category with its
prudential regulator by transmitting a

copy of the notice to the Commission.\1383\
---------------------------------------------------------------------------

    \1383\ See supra section II.C.2. See also paragraph (c) of
proposed Rule 18a-8.
---------------------------------------------------------------------------

    In general, the Commission preliminarily believes most of the costs
stemming from the notification proposals would arise from preparing and
filing the notices.\1384\
---------------------------------------------------------------------------

    \1384\ See infra section V.E.
---------------------------------------------------------------------------

    These notices serve an important role in the context of the
reporting and recordkeeping rules for broker-dealers, broker-dealer
SBSDs, broker-dealer MSBSPs, stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs because they serve to alert the Commission
to the fact that certain events are occurring at a registrant that are
highly relevant to the registrant's overall ability to continue to meet
its obligations to customers and counterparties. For example, a report
of a capital deficiency would alert the Commission to the fact that a
registrant may lack sufficient capital to continue to operate its
business and meet its obligations to customers and counterparties. The
notification requirements are thus critical to helping the Commission
fulfill its statutory responsibility to monitor whether SBSDs and
MSBSPs are operating in compliance with the Exchange Act and the rules
thereunder.\1385\
---------------------------------------------------------------------------

    \1385\ See 15 U.S.C. 78o-10(f).
---------------------------------------------------------------------------

    In order to aid its analysis, the Commission generally requests
comment about the general costs and benefits of the Rule 17a-11, as
proposed to be amended, and proposed Rule 18a-8. The Commission
requests data to evaluate the costs and benefits of the proposals.
7. Quarterly Securities Count
    As discussed in greater detail above,\1386\ the Commission is also
proposing to establish a securities count program for SBSDs under
sections 15F and 17(a) of the Exchange Act that is modeled on Rule 17a-
13's securities count program for broker-dealers. More specifically,
stand-alone SBSDs would be subject to proposed Rule 18a-9. For reasons
explained above, proposed Rule 18a-9 would not apply to stand-alone
MSBSPs, bank SBSDs, or bank MSBSPs.\1387\
---------------------------------------------------------------------------

    \1386\ See supra section II.D.1.
    \1387\ Id.
---------------------------------------------------------------------------

    Paragraph (b) of Rule 17a-13 prescribes the requirement to perform
a quarterly securities count and specifies the steps a broker-dealer
must take in performing a count. Paragraph (c) of Rule 17a-13
prescribes the timing of the count, permitting a broker-dealer to
perform the securities count on a rolling basis throughout the quarter
as opposed to all in one day. Paragraph (d) of Rule 17a-13 provides
that the examination, count, verification, and comparison performed
under the rule must be done by persons whose regular duties do not
require them to have direct responsibility for the proper care and
protection of the securities or the making or preservation of the
subject records. Proposed Rule 18a-9 applies substantially all the same
affirmative obligations to stand-alone SBSDs that apply to broker-
dealers under Rule 17a-13.\1388\
---------------------------------------------------------------------------

    \1388\ Compare proposed Rule 18a-9, with 17 CFR 240.17a-13.
Proposed Rule 18a-9 omits the exemptions from applicability of the
rule that appear in paragraphs (a)(1), (a)(2), (a)(3), and (e) of
Rule 17a-13 because those exemptions relate to broker-dealer-
specific functions and broker-dealer registration status. See 17 CFR
240.17a-13(a) and (e).
---------------------------------------------------------------------------

    As was discussed above,\1389\ Rule 17a-13, the model for proposed
Rule 18a-9, arose in the aftermath of the 1967-1970 securities industry
crisis where deficiencies in broker-dealers' internal controls and
procedures for, among other things, failing to adequately check and
count securities, created a serious ``paper work crisis'' in the
securities markets.\1390\ The Commission preliminarily believes that
instituting a parallel provision could help to avoid a similar problem
for stand-alone SBSDs. Moreover, the Commission preliminarily believes
that to the extent a stand-alone SBSD has not invested in the
technology necessary to help ensure that it can accurately track and
safeguard securities, the proposed rule will require such investments
to be made,\1391\ which could improve the quality of such tracking and
safeguarding.
---------------------------------------------------------------------------

    \1389\ See supra section II.D.1.
    \1390\ Id.
    \1391\ See infra section V.E.
---------------------------------------------------------------------------

    The Commission preliminarily believes most of the negative economic
effects stemming from the securities count proposal would arise from
regulatory and compliance costs. The Commission believes that the costs
involved, and any larger economic effects, should be similar to those
associated with Rule 17a-13 and would be related primarily to the
development and maintenance of internal procedures and controls and the
investment in technology.\1392\
---------------------------------------------------------------------------

    \1392\ Id.
---------------------------------------------------------------------------

    The Commission generally requests comment about its analysis of the
general costs and benefits of the proposed securities count rules for
stand-alone SBSDs. The Commission requests data to assess the costs and
benefits of the proposals for the stand-alone SBSDs.

D. Impact on Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act provides that whenever the
Commission engages in rulemaking under the Exchange Act and is required
to consider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\1393\ In addition,
section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact such rules
would have on competition.\1394\ Section 23(a)(2) of the Exchange Act
also prohibits the Commission from adopting any rule that would impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\1395\ As stated above, the Commission
believes that the recordkeeping, reporting, notification, and
securities count rules and rule amendments being proposed today
address, among other things, the documentation, reporting, and evidence
of compliance with the capital, margin, and segregation rules. Thus,
the Commission believes that these rules, by their nature, will have a
more limited economic impact as compared to the Commission's capital,
margin, and segregation proposals.\1396\ Thus, while the Commission
would expect that the adoption of these proposed rules and rule
amendments, and their attendant benefits and costs, would affect
competition, efficiency, and capital formation, the Commission
preliminarily believes that such impact will be more limited than the
impact from the capital, margin, and segregation proposals. In most
instances, the Commission believes the costs will consist of the
implementation-related costs of the proposed rules and rule amendments
and the benefits will be those that stem from enabling the Commission
to evaluate whether SBSDs and MSBSPs are in compliance with the
financial responsibility rules governing security-based swap
activities. The Commission

requests comment on its analysis and underlying assumptions in this
regard.
---------------------------------------------------------------------------

    \1393\ See 15 U.S.C. 78c(f).
    \1394\ See 15 U.S.C. 78w(a)(2).
    \1395\ Id.
    \1396\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------

    In the aggregate, the proposed recordkeeping, reporting, and
notification rules would be an integral part of the proposed financial
responsibility rules governing security-based swaps. The rules are
designed to provide greater regulatory transparency into the business
activities of these firms and to assist the Commission and other
regulators in reviewing and monitoring compliance with the capital,
margin, and segregation requirements. In general, the Commission
believes that the proposals would thus help ensure that firms that
engage in security-based swap activity do so in a financially
responsible manner. The Commission further believes that the proposed
rules and rule amendments, by improving its ability to monitor the
financial condition of these registrants, could contribute to
confidence in the market and willingness of market participants to
engage in activities. It is the Commission staff's experience that
greater confidence in a market promotes greater participation, leading
to increased competition and efficiency, which have a positive effect
on capital formation in the security-based swap market.
    The Commission is cognizant, however, that it must be sensitive to
the costs and burdens imposed by its rules. For example, overly
restrictive or costly recordkeeping requirements could reduce the
willingness of firms to engage in such trading. This could, in turn,
increase transaction costs for market participants and contribute to
less liquidity in the market. Even if the cost of overly restrictive
recordkeeping, reporting, notification, and securities count
requirements were shouldered only by those market participants that are
subject to them, the excess compliance costs incurred would not be
available for potentially more efficient uses, which thereby could
distort capital allocation and, in turn, adversely affect capital
formation. The Commission preliminarily believes the proposed
recordkeeping, reporting, securities count, and notification proposals
are unlikely to materially increase the barriers to entry in this
market.
    As described in more detail above, broker-dealers historically have
not participated in a significant way in security-based swap trading,
in part, because the existing broker-dealer capital requirements make
it relatively costly to conduct these activities in broker-dealers. As
stated above, the Commission estimates that approximately seventeen
broker-dealers will register as SBSDs or MSBSPs and approximately
twenty-five registered broker-dealers will be engaged in security-based
swap activities but would not be required to register as an SBSD or
MSBSP.\1397\ In addition, a broker-dealer may elect to register an
affiliated entity as an SBSD or MSBSP, instead of registering the
broker-dealer itself as an SBSD or MSBSP. A market participant
unaffiliated with a broker-dealer, including a bank, which conducts
security-based swap activity in the U.S. may also register as an SBSD
or MSBSP. As stated above, the Commission estimates that approximately
thirty-four such entities will register as SBSDs or MSBSPs.\1398\ As
discussed above, as of April 1, 2013, there were 4,545 broker-dealers
registered with the Commission.
---------------------------------------------------------------------------

    \1397\ See supra section IV.C.
    \1398\ Id.
---------------------------------------------------------------------------

    To the extent that the proposed rules are burdensome or costly,
they may impact the incentives of market participants in terms of
whether they seek to register as SBSDs or MSBSPs. If fewer firms
register, this could adversely impact competition and the overall
efficiency of the U.S. capital markets as fewer firms will conduct
security-based swap activities in the U.S. For example, excessive costs
could discourage firms from engaging in security-based swap trading,
which would reduce competition among market participants, thereby
leading to lower liquidity, impeded price discovery, and higher
transaction costs, all of which are characteristics of reduced levels
of efficiency in the market. Moreover, it is possible that cost
increases could lead to certain broker-dealers ceasing to engage in
security-based swap trading, which could then reduce competition and
impose inefficiency costs on the security-based swap marketplace. At
the same time, these market participants may seek to conduct the
security-based swap business in jurisdictions where regulations are, or
are perceived to be, less burdensome.
    In order to assist its evaluation of the proposed rules and rule
amendments' effects on efficiency, competition, and capital formation,
the Commission requests comment. Commenters are asked to be as specific
as possible in identifying those rule proposals that are particularly
beneficial or problematic, as the case may be, and in identifying
alternative approaches or other ways in which the harmful effect(s) of
the proposals can be ameliorated or eliminated.

E. Implementation Considerations

    The proposed new rules and rule amendments, as discussed above,
would impose certain implementation burdens and related costs on SBSDs
and MSBSPs, as well as broker-dealers. These costs may include start-up
costs, including personnel and other costs, such as technology costs,
to comply with the proposed new rules and rule amendments. The
Commission understands that entities that will engage in security-based
swap transactions currently incur costs during their normal business
activities and the proposed new rules would impose incremental costs.
While they are not negligible, the Commission preliminarily believes,
as discussed above, that they are unlikely to materially increase
costs.
    Based on section IV.D. of this release, the Commission has
estimated the related costs of these implementation requirements for
SBSDs, MSBSPs, and broker-dealers.\1399\ The Commission estimates for
all SBSDs and MSBSPs, these initial implementation costs to be
approximately $10 million and the ongoing costs of implementation to be
approximately $9 million, as summarized in more detail below.\1400\
---------------------------------------------------------------------------

    \1399\ See section IV.D. of this release (discussing total
initial and annual recordkeeping and reporting burdens of the
proposed rules and rule amendments).
    \1400\ The Commission has also proposed technical amendments
which it estimates will not impose material additional costs.
---------------------------------------------------------------------------

    Rule 17a-3, which requires broker-dealers to make and keep current
certain records, would be amended to account for security-based swap
activities of broker-dealers, including broker-dealer SBSDs and broker-
dealer MSBSPs.\1401\ The Commission is also proposing to add new
provisions to Rule 17a-3 that would relate to the recently proposed
margin requirements applicable to SBSDs.\1402\ Across all types of
broker-dealers, including broker-dealers not registered as SBSDs or
MSBSPs, the requirements are estimated to impose a one-time and annual
aggregate cost of

approximately $925,360\1403\ and $282,807, respectively.\1404\
---------------------------------------------------------------------------

    \1401\ See, e.g., paragraph (a)(1) of Rule 17a-3, as proposed to
be amended (proposed addition of information that must be included
in security-based swap purchase and sale blotters).
    \1402\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274 (proposed margin requirements applicable to SBSDs).
    \1403\ 3,440 hours x $269/hour national hourly rate for a
compliance manager = $925,360. See supra section IV.D.1. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-3). The $269 per hour
figure for a compliance manager is from SIFMA's Management &
Professional Earnings in the Securities Industry 2012, as modified
by Commission staff to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \1404\ 4,489 hours x $63/hour national hourly rate for a
compliance clerk = $282,807. See supra section IV.D.1. (PRA estimate
of the total initial and annual recordkeeping and reporting burden
for proposed amendments to Rule 17a-3). The $63 per hour figure for
a compliance clerk is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
---------------------------------------------------------------------------

    The Commission is proposing new Rule 18a-5--which is modeled on
Rule 17a-3, as proposed to be amended--to require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.\1405\ The Commission estimates that proposed
Rule 18a-5 would result in total initial industry cost of $2,848,260 to
SBSDs and MSBSPs not registered as broker-dealers.\1406\ On an annual
basis, the Commission estimates that proposed Rule 18a-5 would result
in $890,475 of total industry costs to SBSDs and MSBSPs not registered
as broker-dealers.\1407\
---------------------------------------------------------------------------

    \1405\ See supra section II.A.2.a. (describing proposed Rule
18a-5).
    \1406\ (10,540 hours x $269/hour national hourly rate for a
compliance manager) + $13,000 in external costs = $2,848,260. See
supra section IV.D.1. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed Rule 18a-5).
    \1407\ (13,175 hours x $63/hour national hourly rate for a
compliance clerk) + $60,450 in external costs = $890,475. See supra
section IV.D.1. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed Rule 18a-5).
---------------------------------------------------------------------------

    As discussed above, the Commission is proposing amendments to Rule
17a-4 to account for the security-based swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, as
well as certain largely non-substantive technical amendments.\1408\ The
Commission estimates that the proposed amendments to Rule 17a-4 would
result in a total initial industry cost of $1,167,452 to broker-
dealers.\1409\ On an annual basis, the Commission estimates that the
proposed amendments to Rule 17a-4 would result in $174,388 of total
annual aggregate industry costs to broker-dealers.\1410\
---------------------------------------------------------------------------

    \1408\ See supra section II.A.3.a.
    \1409\ 3,718 hours x $314/hour national hourly rate for a senior
database administrator = $1,167,452. See supra section IV.D.2. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-4). The $314 per hour
figure for a senior database administrator is from SIFMA's
Management & Professional Earnings in the Securities Industry 2012,
as modified by Commission staff to account for an 1,800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.
    \1410\ (1,716 hours x $63/hour national hourly rate for a
compliance clerk) + $66,280 in external costs = $174,388. See supra
section IV.D.2. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed amendments to Rule
17a-4).
---------------------------------------------------------------------------

    The Commission is proposing new Rule 18a-6--modeled on Rule 17a-4,
as proposed to be amended--to establish record preservation
requirements for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs. The Commission estimates proposed Rule 18a-6 would result
in $4,054,996 of initial costs to the industry \1411\ and $1,038,660 of
annual costs to the industry.\1412\
---------------------------------------------------------------------------

    \1411\ 12,914 hours x $314/hour national hourly rate for a
senior database administrator = $4,054,996.
    \1412\ (9,780 hours x $63/hour national hourly rate for a
compliance clerk) + (38 hours x $379/hour for national hourly rate
for an attorney) + $204,078 in external costs = $1,038,660.
---------------------------------------------------------------------------

    As stated above, the Commission is proposing to amend Rule 17a-5,
to require broker-dealer SBSDs and broker-dealer MSBSPs to file
proposed Form SBS, instead of a particular part of the FOCUS
Report.\1413\ The Commission is also proposing amendments to Rule 17a-5
to require additional information about the broker-dealer's security-
based swap activity in the financial report filed by broker-
dealers,\1414\ and to require ANC broker-dealers to report to the
Commission the results of the liquidity stress test on a monthly
basis.\1415\ The Commission estimates that the amendments to Rule 17a-5
would result in an initial total cost of $158,710 to broker-
dealers.\1416\ On an annual basis, the Commission estimates that the
amendments to Rule 17a-5 would result in $1,089,450 of total annual
costs to broker-dealers.\1417\
---------------------------------------------------------------------------

    \1413\ See supra section II.B.2.b.
    \1414\ Compare, e.g., FOCUS Report Part II CSE, Statement of
Financial Condition, Line 22, with Form SBS, Statement of Financial
Condition, Line 22.
    \1415\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
    \1416\ 590 hours x $269/hour national hourly rate for a
compliance manager = $158,710. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5). The majority of costs
that broker-dealers would incur as a result of the amendments to
Rule 17a-5 are expected to result from the additional information
elicited in Form SBS, as compared to the FOCUS Report. Because
broker-dealers would be required to file Form SBS on an ongoing
basis, it is characterized as an annual cost, rather than an initial
cost.
    \1417\ 4,050 hours x $269/hour national hourly rate for a
compliance manager = $1,089,450. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5).
---------------------------------------------------------------------------

    The Commission is proposing Rule 18a-7 to provide reporting
requirements for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs that are analogous to the reporting requirements proposed
for broker-dealer SBSDs and broker-dealer MSBSPs. Proposed Rule 18a-7
would also require stand-alone SBSDs and stand-alone MSBSPs to file
with the Commission an audited annual report, as described above.\1418\
The Commission estimates that proposed Rule 18a-7 would result in an
initial industry cost of $777,410.\1419\ The Commission estimates that
proposed Rule 18a-7 would result in an annual industry cost of
$5,500,693.24.\1420\
---------------------------------------------------------------------------

    \1418\ See supra section II.B.3. (filing of annual audited
reports and other reports).
    \1419\ 2,890 hours x $269/hour national hourly rate for a
compliance manager = $777,410. See supra section IV.D.3. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed amendments to Rule 17a-5 and proposed Rule 18a-
7). The majority of costs SBSDs and MSBSPs would incur as a result
of proposed Rule 18a-7 is expected to result from the information
elicited in Form SBS and the required annual audit. Because the
additional information in the Form SBS and the annual audit would be
required on an ongoing basis, the Commission is characterizing them
as ongoing costs.
    \1420\ (3,978 hours x $63/hour national hourly rate for a
compliance clerk) + $5,250,079 in external costs = $5,500,693. See
supra section IV.D.3. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for proposed amendments to Rule
17a-5 and proposed Rule 18a-7).
---------------------------------------------------------------------------

    As described in more detail above, the Commission is proposing to
establish notification requirements to require SBSDs and MSBSPs to
timely notify the Commission of potential problems at these
registrants.\1421\ The Commission is proposing to amend Rule 17a-11 to
add certain notification requirements for broker-dealer SBSDs and
broker-dealer MSBSPs. In the aggregate, the Commission expects the
proposed amendments to Rule 17a-11 to result in an annual industry cost
of $29,859 to broker-dealer SBSDs and broker-dealer MSBSPs.\1422\
---------------------------------------------------------------------------

    \1421\ See supra section II.C.2. (proposed amendments to Rule
17a-11 and proposed Rule 18a-7).
    \1422\ (100 hours +10 hours + 1 hour) x $269/hour national
hourly rate for a compliance manager = $29,859. See supra section
IV.D.4. (PRA estimate of the total initial and annual recordkeeping
and reporting burden for proposed amendments to Rule 17a-11 and
proposed Rule 18a-8).
---------------------------------------------------------------------------

    The Commission is also proposing Rule 18a-8 to establish reporting
requirements for stand-alone SBSDs and

stand-alone MSBSPs that are analogous to the reporting requirements for
broker-dealer SBSDs and broker-dealer MSBSPs, as well as a separate
notification requirement for bank SBSDs and bank MSBSPs. The Commission
expects that proposed Rule 18a-8 would result in an annual industry
cost of $1,237 to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs.\1423\
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    \1423\ 4.6 hours x $269/hour national hourly rate for a
compliance manager = $1,237. See supra section IV.D.4. (PRA estimate
of the total initial and annual recordkeeping and reporting burden
for proposed amendments to Rule 17a-11 and proposed Rule 18a-8).
---------------------------------------------------------------------------

    Proposed Rule 18a-9, which is modeled on Rule 17a-13, would require
stand-alone SBSDs to establish a securities count program.\1424\ The
Commission estimates that proposed Rule 18a-9 would impose an initial
industry-wide cost of $76,725\1425\ and an industry-wide annual cost of
$113,400 per year.\1426\
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    \1424\ See supra section II.D.
    \1425\ 225 hours x $341/hour national hourly rate for a senior
operations manager = $76,725. See supra section IV.D.5. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed Rule 18a-9). The $341 per hour figure for a
senior operations manager is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
    \1426\ 900 hours x $126/hour national hourly rate for an
operations specialist = $113,400. See supra section IV.D.5. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for proposed Rule 18a-9). The $126 per hour figure for an
operations specialist is from SIFMA's Management & Professional
Earnings in the Securities Industry 2012, as modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
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VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1427\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \1428\ of the Administrative
Procedure Act,\1429\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small entities''.\1430\ Section 605(b) of the RFA
states that this requirement shall not apply to any proposed rule or
proposed rule amendment, which, if adopted, would not have a
significant economic impact on a substantial number of small
entities.\1431\
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    \1427\ See 5 U.S.C. 601 et seq.
    \1428\ See 5 U.S.C. 603(a).
    \1429\ See 5 U.S.C. 551 et seq.
    \1430\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
See Statement of Management on Internal Accounting Control, Exchange
Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
    \1431\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\1432\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\1433\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\1434\ Under the
standards adopted by the Small Business Administration, small entities
in the finance and insurance industry include the following: (1) for
entities in credit intermediation and related activities,\1435\ firms
with $175 million or less in assets; (2) for non-depository credit
intermediation and certain other activities,\1436\ firms with $7
million or less in annual receipts; (3) for entities in financial
investments and related activities,\1437\ firms with $7 million or less
in annual receipts; (4) for insurance carriers and entities in related
activities,\1438\ firms with $7 million or less in annual receipts; and
(5) for funds, trusts, and other financial vehicles,\1439\ firms with
$7 million or less in annual receipts.\1440\
---------------------------------------------------------------------------

    \1432\ See 17 CFR 240.0-10(a).
    \1433\ See 17 CFR 240.17a-5(d).
    \1434\ See 17 CFR 240.0-10(c).
    \1435\ Including commercial banks, savings institutions, credit
unions, firms involved in other depository credit intermediation,
credit card issuing, sales financing, consumer lending, real estate
credit, and international trade financing.
    \1436\ Including firms involved in secondary market financing,
all other non-depository credit intermediation, mortgage and
nonmortgage loan brokers, financial transactions processing, reserve
and clearing house activities, and other activities related to
credit intermediation.
    \1437\ Including firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities.
    \1438\ Including direct life insurance carriers, direct health
and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities.
    \1439\ Including pension funds, health and welfare funds, other
insurance funds, open-end investment funds, trusts, estates, and
agency accounts, real estate investment trusts, and other financial
vehicles.
    \1440\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    Based on available information about the security-based swap
market, the market, while broad in scope, is largely dominated by
entities such as those that would be covered by the SBSD and MSBSP
definitions. Subject to certain exceptions, section 3(a)(71)(A) of the
Exchange Act defines security-based swap dealer to mean any person who:
(1) holds itself out as a dealer in security-based swaps; (2) makes a
market in security-based swaps; (3) regularly enters into security-
based swaps with counterparties as an ordinary course of business for
its own account; or (4) engages in any activity causing it to be
commonly known in the trade as a dealer or market maker in security-
based swaps. Section 3(a)(67)(A) of the Exchange Act defines major
security-based swap participant to be any person: (1) who is not an
SBSD; and (2) who maintains a substantial position in security-based
swaps for any of the major security-based swap categories, as such
categories are determined by the Commission, excluding both positions
held for hedging or mitigating commercial risk and positions maintained
by any employee benefit plan (or any contract held by such a plan) as
defined in paragraphs (3) and (32) of section 3 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary
purpose of hedging or mitigating any risk directly associated with the
operation of the plan; whose outstanding security-based swaps create
substantial counterparty exposure that could have serious adverse
effects on the financial stability of the U.S. banking system or
financial markets; or that is a financial entity that is highly
leveraged relative to the amount of capital such entity holds and that
is not subject to capital requirements established by an appropriate
federal banking regulator;

and maintains a substantial position in outstanding security-based
swaps in any major security-based swap category, as such categories are
determined by the Commission.\1441\
---------------------------------------------------------------------------

    \1441\ See also Further Definition of ``Swap Dealer,''
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major
Security-Based Swap Participant'' and ``Eligible Contract
Participant'', 77 FR 30743 (``The SEC continues to believe that the
types of entities that would engage in more than a de minimis amount
of dealing activity involving security-based swaps--which generally
would be major banks--would not be `small entities' for purposes of
the RFA. Similarly, the SEC continues to believe that the types of
entities that may have security-based swap positions above the level
required to be a `major security-based swap participant' would not
be a `small entity' for purposes of the RFA. Accordingly, the SEC
certifies that the final rules defining `security-based swap dealer'
or `major security-based swap participant' would not have a
significant economic impact on a substantial number of small
entities for purposes of the RFA.'').
---------------------------------------------------------------------------

    Based on feedback from industry participants about the security-
based swap markets, entities that will qualify as SBSDs and MSBSPs,
whether registered broker-dealers or not, will likely exceed the
thresholds defining ``small entities'' set out above. Thus, it is
unlikely that the requirements applicable to SBSD and MSBSPs that would
be established under the proposed amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11, and proposed new Rules 18a-5, 18a-6, 18a-7 and 18a-8
and 18a-9, would have a significant economic impact on any small
entity.
    The Commission estimates that there are approximately 735 broker-
dealers that were ``small'' for the purposes Rule 0-10.\1442\ The
amendments to Rules 17a-3, 17a-4, and 17a-5 relating to making and
keeping records that include details about security-based swaps and
swaps and reporting information about security-based swaps and swaps
would apply to all broker-dealers with such positions. These proposed
amendments, therefore, would apply to all ``small'' broker-dealers in
that they would be subject to the requirements in the proposed
amendments. It is likely, however, that these proposed amendments would
have no, or little, impact on ``small'' broker-dealers, since most, if
not all, of these firms generally would not hold these types of
positions. In addition, the technical amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11 would apply to all broker-dealers, including broker-
dealers that are small. However, these amendments would have no impact
on broker-dealers, including ``small'' broker-dealers, because they
would not establish new substantive requirements.
---------------------------------------------------------------------------

    \1442\ This estimate is based on the number of small broker-
dealers as of December 31, 2012.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that the
proposed amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11, and new
Rules 18a-5 through 18a-9, would not have a significant economic impact
on any small entity for purposes of the RFA.
    The Commission encourages written comments regarding this
certification. The Commission requests that commenters describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.

VII. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of
1996,\1443\ a rule is considered ``major'' where, if adopted, it
results or is likely to result in: (1) an annual effect on the economy
of $100 million or more (either in the form of an increase or a
decrease); (2) a major increase in costs or prices for consumers or
individual industries; or (3) significant adverse effect on
competition, investment, or innovation. The Commission requests comment
on the potential impact of the proposed rule on the economy on an
annual basis, any potential increase in costs or prices for consumers
or individual industries, and any potential effect on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their view to the extent
possible.
---------------------------------------------------------------------------

    \1443\ See Contract with America Advancement Act of 1996, Public
Law 104-121, 110 Stat. 847 (1996) (codified in various sections of
titles 5 and 15 of the U.S. Code, and as a note to 5 U.S.C. 601).
---------------------------------------------------------------------------

VIII. Statutory Basis and Text of the Proposed Amendments and New Rules

    The Commission is proposing to revise Rules 17a-3, 17a-4, 17a-5,
and 17a-11 under the Exchange Act (17 CFR 240.17a-3, 17 CFR 240.17a-4,
17 CFR 240.17a-5, and 17 CFR 240.17a-11), proposing to revise Rule 18a-
1 under the Exchange Act (17 CFR 240.18a-1) [as proposed at 77 FR
70214, Nov. 23, 2012], and proposing to add new Rules 18a-5, 18a-6,
18a-7, and 18a-8 under the Exchange Act (17 CFR 240.18a-5, 17 CFR
240.18a-6, 17 CFR 240.18a-7, and 17 CFR 240.18a-8), and FOCUS Report
Form SBS (17 CFR 249.617) pursuant to the authority conferred by the
Exchange Act, including sections 15F, 17, 23(a) and 36.\1444\
---------------------------------------------------------------------------

    \1444\ 15 U.S.C. 78o 10, 78q, 78w(a), and 78mm.
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 240 and 249

    Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.

Text of the Amendments

    For the reasons set out in the preamble, the Commission proposes to
revise Title 17, Chapter II, of the Code of Federal Regulations as
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The general authority citation for part 240 is revised to read, in
part, as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise
noted.
* * * * *
0
2. Section 240.17a-3 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraphs (a) introductory text, (a)(1), (a)(3),
(a)(4)(vi), (a)(4)(vii), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9),
(a)(10), (a)(11), (a)(12)(i) introductory text, (a)(12)(i)(A),
(a)(12)(i)(E), (a)(12)(i)(F), (a)(12)(i)(G), (a)(12)(i)(H);
0
d. Removing the undesignated proviso paragraph at the end of paragraph
(a)(12)(i);
0
e. Adding a note at the end of paragraph (a)(12)(i);
0
f. Revising paragraph (a)(12)(ii);
0
g. In paragraphs (a)(16)(ii)(A) and (B), removing the phrase ``shall
mean'' and adding in its place ``means'';
0
h. In paragraphs (a)(17)(i)(A), (B), (C) and (D), (a)(18), (a)(19),
(a)(20) and (a)(22), removing ``member,'' wherever it appears;
0
i. In paragraphs (a)(17)(i)(A) and (B)(1), (a)(18)(i), and (a)(19)(i),
removing the word ``shall'' and adding in its place ``must'' wherever
it appears;
0
j. In paragraphs (a)(17)(i)(C) and (D), removing the word ``shall'' and
adding in its place ``will'' wherever it appears;
0
k. Adding paragraphs (a)(24), (a)(25), (a)(26), (a)(27), (a)(28),
(a)(29), and (a)(30);
0
l. Revising paragraph (b);
0
m. Removing paragraphs (c) and (d);
0
n. Redesignating paragraphs (e), (f), (g), and (h) as (c), (d), (e),
and (f), respectively; and

0
o. Revising newly redesignated paragraphs (c), (d), (e), (f)(2),
(f)(3), and (f)(4).
    The additions and revisions read as follows:

Sec.  240.17a-3  Records to be made by certain brokers and dealers.

    Section 240.17a-3 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the books and records requirements under Sec.  240.18a-5.
    (a) Every broker or dealer must make and keep current the following
books and records relating to its business:
    (1) Blotters (or other records of original entry) containing an
itemized daily record of all purchases and sales of securities
(including security-based swaps), all receipts and deliveries of
securities (including certificate numbers), all receipts and
disbursements of cash and all other debits and credits. Such records
must show the account for which each such purchase or sale was
effected, the name and amount of securities, the unit and aggregate
purchase or sale price (if any), the trade date, and the name or other
designation of the person from whom such securities were purchased or
received or to whom sold or delivered. For security-based swaps, such
records must also show, for each purchase or sale, the type of
security-based swap, the reference security, index, or obligor, the
date and time of execution, the effective date, the termination or
maturity date, the notional amount, the unique transaction identifier,
and the unique counterparty identifier.
    (2) * * *
    (3) Ledger accounts (or other records) itemizing separately as to
each cash, margin, or security-based swap account of every customer and
of such broker or dealer and partners thereof, all purchases, sales,
receipts and deliveries of securities (including security-based swaps)
and commodities for such account, and all other debits and credits to
such account; and, in addition, for a security-based swap, the type of
security-based swap, the reference security, index, or obligor, the
date and time of execution, the effective date, the termination or
maturity date, the notional amount, the unique transaction identifier,
and the unique counterparty identifier.
    (4) * * *
    (vi) All long and all short securities record differences arising
from the examination, count, verification, and comparison pursuant to
Sec. Sec.  240.17a-5, 240.17a-12, and 240.17a-13 (by date of
examination, count, verification, and comparison showing for each
security the number of long or short count differences); and
    (vii) Repurchase and reverse repurchase agreements.
    (5) A securities record or ledger reflecting separately for each:
    (i) Security, other than a security-based swap, as of the clearance
dates all ``long'' or ``short'' positions (including securities in
safekeeping and securities that are the subjects of repurchase or
reverse repurchase agreements) carried by such broker or dealer for its
account or for the account of its customers or partners, or others, and
showing the location of all securities long and the offsetting position
to all securities short, including long security count differences and
short security count differences classified by the date of the physical
count and verification in which they were discovered, and in all cases
the name or designation of the account in which each position is
carried.
    (ii) Security-based swap, the reference security, index, or
obligor, the unique transaction identifier, the unique counterparty
identifier, whether it is a ``long'' or ``short'' position in the
security-based swap, whether the security-based swap is cleared or not
cleared, and if cleared, identification of the clearing agency where
the security-based swap is cleared.
    (6)(i) A memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security,
except for the purchase or sale of a security-based swap, whether
executed or unexecuted.
    (A) The memorandum must show the terms and conditions of the order
or instructions and of any modification or cancellation thereof, the
account for which entered, the time the order was received, the time of
entry, the price at which executed, the identity of each associated
person, if any, responsible for the account, the identity of any other
person who entered or accepted the order on behalf of the customer, or,
if a customer entered the order on an electronic system, a notation of
that entry, and, to the extent feasible, the time of execution or
cancellation. The memorandum need not show the identity of any person,
other than the associated person responsible for the account, who may
have entered or accepted the order if the order is entered into an
electronic system that generates the memorandum and if that system is
not capable of receiving an entry of the identity of any person other
than the responsible associated person; in that circumstance, the
broker or dealer must produce upon request by a representative of a
securities regulatory authority a separate record which identifies each
other person. An order entered pursuant to the exercise of
discretionary authority by the broker or dealer, or associated person
thereof, must be so designated. The term instruction must include
instructions between partners and employees of a broker or dealer. The
term time of entry means the time when the broker or dealer transmits
the order or instruction for execution.
    (B) The memorandum need not be made as to a purchase, sale or
redemption of a security on a subscription way basis directly from or
to the issuer, if the broker or dealer maintains a copy of the
customer's or non-customer's subscription agreement regarding a
purchase, or a copy of any other document required by the issuer
regarding a sale or redemption.
    (ii) A memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security-
based swap, whether executed or unexecuted. The memorandum must show
the terms and conditions of the order or instructions and of any
modification or cancellation thereof; the account for which entered;
the time the order was received; the time of entry; the price at which
executed; the identity of each associated person, if any, responsible
for the account; the identity of any other person who entered or
accepted the order on behalf of the customer, or, if a customer entered
the order on an electronic system, a notation of that entry; and, to
the extent feasible, the time of cancellation, if applicable. The
memorandum also must include the type of the security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier. An order entered pursuant to the exercise of discretionary
authority must be so designated.
    (7)(i) A memorandum of each purchase or sale of a security, other
than for the purchase or sale of a security-based swap, for the account
of the broker or dealer showing the price and, to the extent feasible,
the time of

execution; and, in addition, where the purchase or sale is with a
customer other than a broker or dealer, a memorandum of each order
received, showing the time of receipt; the terms and conditions of the
order and of any modification thereof; the account for which it was
entered; the identity of each associated person, if any, responsible
for the account; the identity of any other person who entered or
accepted the order on behalf of the customer, or, if a customer entered
the order on an electronic system, a notation of that entry. The
memorandum need not show the identity of any person other than the
associated person responsible for the account who may have entered the
order if the order is entered into an electronic system that generates
the memorandum and if that system is not capable of receiving an entry
of the identity of any person other than the responsible associated
person. In that circumstance, the broker or dealer must produce upon
request by a representative of a securities regulatory authority a
separate record that identifies each other person. An order with a
customer other than a broker or dealer entered pursuant to the exercise
of discretionary authority by the broker or dealer, or associated
person thereof, must be so designated.
    (ii) A memorandum of each purchase or sale of a security-based swap
for the account of the broker or dealer showing the price; and, in
addition, where the purchase or sale is with a customer other than a
broker or dealer, a memorandum of each order received, showing the time
of receipt; the terms and conditions of the order and of any
modification thereof; the account for which it was entered; the
identity of any other person who entered or accepted the order on
behalf of the customer, or, if a customer entered the order on an
electronic system, a notation of that entry. The memorandum must also
include the type of security-based swap, the reference security, index,
or obligor, the date and time of execution, the effective date, the
termination or maturity date, the notional amount, the unique
transaction identifier, and the unique counterparty identifier. An
order entered pursuant to the exercise of discretionary authority must
be so designated.
    (8)(i) With respect to a security other than a security-based swap,
copies of confirmations of all purchases and sales of securities,
including all repurchase and reverse repurchase agreements, and copies
of notices of all other debits and credits for securities, cash and
other items for the account of customers and partners of such broker or
dealer.
    (ii) With respect to a security-based swap, copies of the security-
based swap trade acknowledgement and verification made in compliance
with Sec.  240.15Fi-1 [previously proposed at 76 FR 3859, Jan. 21,
2011].
    (9) A record with respect to each cash, margin, and security-based
swap account with such broker or dealer indicating, as applicable:
    (i) The name and address of the beneficial owner of such account,
    (ii) Except with respect to exempt employee benefit plan securities
as defined in Sec.  240.14a-1(d), but only to the extent such
securities are held by employee benefit plans established by the issuer
of the securities, whether or not the beneficial owner of securities
registered in the name of such brokers or dealers, or a registered
clearing agency or its nominee objects to disclosure of his or her
identity, address, and securities positions to issuers,
    (iii) In the case of a margin account, the signature of such owner;
Provided, That, in the case of a joint account or an account of a
corporation, such records are required only in respect of the person or
persons authorized to transact business for such account, and
    (iv) In the case of a security-based swap account, a record of the
unique counterparty identifier, the name and address of such
counterparty, and the signature of each person authorized to transact
business in the security-based swap account.
    (10) A record of all puts, calls, spreads, straddles, and other
options in which such broker or dealer has any direct or indirect
interest or which such broker or dealer, has granted or guaranteed,
containing, at least, an identification of the security, and the number
of units involved. An OTC derivatives dealer must also keep a record of
all eligible OTC derivative instruments as defined in Sec.  240.3b-13
in which the OTC derivatives dealer has any direct or indirect interest
or which it has written or guaranteed, containing, at a minimum, an
identification of the security or other instrument, the number of units
involved, and the identity of the counterparty.
    (11) A record of the proof of money balances of all ledger accounts
in the form of trial balances and a record of the computation of
aggregate indebtedness and net capital, as of the trial balance date,
pursuant to Sec.  240.15c3-1. The computation need not be made by any
broker or dealer unconditionally exempt from Sec.  240.15c3-1 by
paragraph Sec.  240.15c3-1(b)(1) or (b)(3). Such trial balances and
computations must be prepared currently at least once a month.
    (12)(i) A questionnaire or application for employment executed by
each associated person (as defined in paragraph (f)(4) of this section)
of the broker or dealer, which questionnaire or application must be
approved in writing by an authorized representative of the broker or
dealer and must contain at least the following information with respect
to the associated person:
    (A) The associated person's name, address, social security number,
and the starting date of the associated person's employment or other
association with the broker or dealer;
* * * * *
    (E) A record of any denial, suspension, expulsion, or revocation of
membership or registration of any broker or dealer with which the
associated person was associated in any capacity when such action was
taken;
    (F) A record of any permanent or temporary injunction entered
against the associated person or any broker or dealer with which the
associated person was associated in any capacity at the time such
injunction was entered;
    (G) A record of any arrest or indictment for any felony, or any
misdemeanor pertaining to securities, commodities, banking, insurance
or real estate (including, but not limited to, acting or being
associated with a broker or dealer, investment company, investment
adviser, futures sponsor, bank, or savings and loan association),
fraud, false statements or omissions, wrongful taking of property,
bribery, forgery, counterfeiting, or extortion, and the disposition of
the foregoing; and
    (H) A record of any other name or names by which the associated
person has been known or which the associated person has used.
    Note to paragraph (a)(12)(i). Provided, however, that if such
associated person has been registered as a registered representative of
such broker or dealer with, or the associated person's employment has
been approved by a self-regulatory organization, then retention of a
full, correct, and complete copy of any and all applications for such
registration or approval will be deemed to satisfy the requirements of
this paragraph.
    (ii) A record listing every associated person of the broker or
dealer which shows, for each associated person, every office of the
broker or dealer, where the associated person regularly conducts the
business of handling funds or securities or effecting any transactions
in, or inducing or attempting to induce the

purchase or sale of any security for the broker or dealer and the
Central Registration Depository number, if any, and every internal
identification number or code assigned to that person by the broker or
dealer.
* * * * *
    (24) A report of the results of the monthly liquidity stress test,
a record of the assumptions underlying the liquidity stress test, and
the liquidity funding plan required under Sec.  240.15c3-1(f), if
applicable.
    (25) A record of the daily calculation of the amount of equity and,
if applicable, the margin amount for each account of a counterparty
required under Sec.  240.18a-3(c) [previously proposed at 77 FR 70214,
Nov. 23, 2012].
    (26) A record of compliance with possession or control requirements
under Sec.  240.18a-4(b) [previously proposed at 77 FR 70214, Nov. 23,
2012].
    (27) A record of the reserve computation required under Sec.
240.18a-4(c) [previously proposed at 77 FR 70214, Nov. 23, 2012].
    (28) A record of each security-based swap transaction that is not
verified under Sec.  240.15Fi-1 [previously proposed at 76 FR 3859,
Jan. 21, 2011] within five business days of execution that includes, at
a minimum, the unique transaction identifier and unique counterparty
identifier.
    (29) A record that demonstrates the broker or dealer has complied
with the business conduct standards as required under Sec.  240.15Fh-6
[previously proposed at 76 FR 42396, July 18, 2011].
    (30) A record that demonstrates the broker or dealer has complied
with the business conduct standards as required under Sec.  240.15Fh-1
through Sec.  240.15Fh-5 and Sec.  240.15Fk-1 [previously proposed at
76 FR 42396, July 18, 2011].
    (b) A broker or dealer registered pursuant to Section 15 of the Act
(15 U.S.C. 78o), that introduces accounts on a fully-disclosed basis,
is not required to make or keep such records of transactions cleared
for such broker or dealer as are made and kept by a clearing broker or
dealer pursuant to the requirements of Sec. Sec.  240.17a-3 and 17a-4.
Nothing herein contained will be deemed to relieve such broker or
dealer from the responsibility that such books and records be
accurately maintained and preserved as specified in Sec. Sec.  240.17a-
3 and 17a-4.
    (c) For purposes of transactions in municipal securities by
municipal securities brokers and municipal securities dealers,
compliance with Rule G-8 of the Municipal Securities Rulemaking Board
or any successor rule will be deemed to be in compliance with this
section.
    (d) Security futures products. The provisions of this section will
not apply to security futures product transactions and positions in a
futures account (as that term is defined in Sec.  240.15c3-3(a)(15));
provided, that the Commodity Futures Trading Commission's recordkeeping
rules apply to those transactions and positions.
    (e) Every broker or dealer must make and keep current, as to each
office, the books and records described in paragraphs (a)(1), (a)(6),
(a)(7), (a)(12), (a)(17), (a)(18)(i), (a)(19), (a)(20), (a)(21), and
(a)(22) of this section.
    (f) * * *
    (1) * * *
    (2) The term principal means any individual registered with a
registered national securities association as a principal or branch
manager of a broker or dealer or any other person who has been
delegated supervisory responsibility over associated persons by the
broker or dealer.
    (3) The term securities regulatory authority means the Commission,
any self-regulatory organization, or any securities commission (or any
agency or office performing like functions) of the States; the
Commodities Futures Trading Commission and a prudential regulator to
the extent the prudential regulator oversees security-based swap
activities.
    (4) The term associated person means a ``person associated with a
broker or dealer'' or ``person associated with a security-based swap
dealer or major security-based swap participant'' as defined in
sections 3(a)(18) and 3(a)(70) of the Act (15 U.S.C. 78c(a)(18) and
(a)(70)) respectively, but will not include persons whose functions are
solely clerical or ministerial.
* * * * *
0
3. Section 240.17a-4 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraphs (a), (b) introductory text, (b)(1), (b)(3),
(b)(4), (b)(5), (b)(7), (b)(8) introductory text, (b)(8)(i), (b)(8)(v),
(b)(8)(vi), (b)(8)(vii), (b)(8)(viii), and (b)(8)(xiii);
0
d. Adding paragraph (b)(8)(xvi);
0
e. Redesignating paragraph (b)(8)(xv) as paragraph (b)(8)(xvii);
0
f. Redesignating paragraph (b)(8)(xiv) as paragraph (b)(8)(xv);
0
g. Adding new paragraph (b)(8)(xiv);
0
h. Revising newly redesignated paragraph (b)(8)(xv);
0
i. In paragraph (b)(11), removing the word ``shall'' and adding in its
place ``must'';
0
j. Adding paragraphs (b)(14), (b)(15), and (b)(16);
0
k. Revising paragraphs (c), (d), (e) introductory text, and (e)(1),
(e)(2), (e)(3), and (e)(4);
0
l. In paragraphs (e)(6), (e)(7), and (e)(8), removing ``member,''
wherever it appears;
0
m. In the last sentence of paragraph (e)(8), removing the word
``shall'' and adding in its place ``must'';
0
n. In paragraph (f) introductory text, removing the word ``paragraph,''
and adding in its place ``section'';
0
o. In paragraphs (f)(2) introductory text, (f)(2)(i), (f)(2)(ii)(D),
and (f)(3) introductory text, removing ``member, broker, or dealer''
and adding in its place ``broker or dealer'' wherever it appears;
0
p. In paragraph (f)(3)(ii), removing ``member, broker or dealer'' and
adding in its place ``broker or dealer'';
0
q. In paragraphs (f)(3)(iv)(A), (f)(3)(v) introductory text,
(f)(3)(v)(A), and (f)(3)(vi), removing ``member, broker, or dealer''
and adding in its place ``broker or dealer'' wherever it appears;
0
r. In paragraphs (f)(2) introductory text, (f)(3) introductory text,
and (f)(3)(vii), removing the word ``shall'' and adding in its place
``must'';
0
s. In paragraph (f)(3)(iv)(B), removing ``each index.'' and adding in
its place ``the index.'';
0
t. In paragraph (f)(3)(vi), removing the phrase ``the self-regulatory
organizations'' and adding in its place ``any self-regulatory
organization'';
0
u. Revising paragraphs (f)(3)(vii) and (g);
0
v. In paragraph (h), adding the phrase ``or any successor rule'' after
the word ``Board''.
0
w. In paragraph (i), removing ``member,'' wherever it appears, in the
first sentence removing the phrase ``such outside entity shall'' and
adding in its place ``such outside entity must'', and in the last
sentence removing the phrase ``Agreement with an outside entity shall''
and adding in its place ``Agreement with an outside entity will'';
0
x. In paragraph (j), removing ``member,'' wherever it appears, removing
the phrase ``broker and dealer'' and adding in its place ``broker or
dealer'', and removing the word ``shall'' and adding in its place
``must'';
0
y. In paragraph (k)(1), removing ``member,'' before ``broker or
dealer'', and removing the word ``shall'' and adding in its place
``must'' wherever it appears;
0
z. In paragraph (k)(2), removing ``member,'';
0
aa. In paragraph (l) removing ``member,'' wherever it appears, and

removing the phrase Sec.  240.17a-3(g) and adding in its place Sec.
240.17a-3(e);
0
bb. Revising paragraph (m)(1) through (m)(4); and
0
cc. Adding paragraph (m)(5).
    The additions and revisions read as follows:

Sec.  240.17a-4  Records to be preserved by certain brokers and
dealers.

    Section 240.17a-4 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the record maintenance and preservation requirements under
Sec.  240.18a-6.
    (a) Every broker or dealer subject to Sec.  240.17a-3 must preserve
for a period of not less than six years, the first two years in an
easily accessible place, all records required to be made pursuant to
Sec. Sec.  240.17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22),
and analogous records created pursuant to Sec.  240.17a-3(d).
    (b) Every broker or dealer subject to Sec.  240.17a-3 must preserve
for a period of not less than three years, the first two years in an
easily accessible place:
    (1) All records required to be made pursuant to Sec.  240.17a-
3(a)(4), (a)(6), (a)(7), (a)(8), (a)(9), (a)(10), (a)(11), (a)(16),
(a)(18), (a)(19), (a)(20), (a)(24), (a)(25), (a)(26), (a)(27), (a)(28),
(a)(29), and (a)(30), and analogous records created pursuant to Sec.
240.17a-3(e).
    (2) * * *
    (3) All bills receivable or payable (or copies thereof), paid or
unpaid, relating to the business of such, broker or dealer, as such.
    (4) Originals of all communications received and copies of all
communications sent (and any approvals thereof) by the broker or dealer
(including inter-office memoranda and communications) relating to its
business as such, including all communications which are subject to
rules of a self-regulatory organization of which the broker or dealer
is a member regarding communications with the public. As used in this
paragraph (b)(4), the term communications includes sales scripts and
recordings of telephone calls required to be maintained pursuant to
section 15F(g)(1) of the Act (15 U.S.C. 78o-10(g)(1)).
    (5) All trial balances, computations of aggregate indebtedness and
net capital (and working papers in connection therewith), financial
statements, branch office reconciliations, and internal audit working
papers, relating to the business of such broker or dealer, as such.
    (6) * * *
    (7) All written agreements (or copies thereof) entered into by such
broker or dealer relating to its business as such, including agreements
with respect to any account. Written agreements with respect to a
security-based swap customer or non-customer, including governing
documents or any document establishing the terms and conditions of the
customer's or non-customer's securities-based swaps must be maintained
with the customer's or non-customer's account records.
    (8) Records which contain the following information in support of
amounts included in the report prepared as of the audit date on Form X-
17A-5 (Sec.  249.617 of this chapter) Part II, or Part IIA or Part IIB,
or Form SBS (Sec.  249.617 of this chapter), as applicable, and in the
annual financial statements required by Sec.  240.17a-5(d) and Sec.
240.17a-12(b):
    (i) Money balance and position, long or short, including
description, quantity, price, and valuation of each security including
contractual commitments in customers' accounts, in cash and fully
secured accounts, partly secured accounts, unsecured accounts, and in
securities accounts payable to customers;
* * * * *
    (v) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in customers' and non-customers' accounts;
    (vi) Description of futures commodity contracts or swaps, contract
value on trade date, market value, gain or loss, and liquidating equity
or deficit in trading and investment accounts;
    (vii) Description, money balance, quantity, price, and valuation of
each spot commodity, and swap position or commitments in customers' and
non-customers' accounts;
    (viii) Description, money balance, quantity, price, and valuation
of each spot commodity, and swap position or commitments in trading and
investment accounts;
* * * * *
    (xiii) Detail relating to information for possession or control
requirements under Sec.  240.15c3-3 and reported on the schedule in
Part II or IIA of Form X-17A-5, or Form SBS (Sec.  249.617 of this
chapter), as applicable;
    (xiv) Detail relating to information for possession or control
requirements under Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov.
23, 2012] and reported on Form SBS (Sec.  249.617 of this chapter);
    (xv) Detail of all items, not otherwise substantiated, which are
charged or credited in the Computation of Net Capital pursuant to Sec.
240.15c3-1, such as cash margin deficiencies, deductions related to
securities values and undue concentration, aged securities differences,
and insurance claims receivable;
    (xvi) Detail relating to the calculation of the risk margin amount
pursuant to Sec.  240.15c3-1(c)(16); and
* * * * *
    (14) A copy of information required to be reported under Regulation
SBSR Sec.  242.901 et seq. of this chapter;
    (15) Copies of documents, communications, disclosures, and notices
related to business conduct standards as required under Sec.  240.15Fh-
1 through Sec.  240.15Fh-6 and Sec.  240.15Fk-1 [as proposed at 76 FR
42396, July 18, 2011];
    (16) Copies of documents used to make a reasonable determination
with respect to special entities, including information relating to the
financial status, the tax status, the investment or financing
objectives of the special entity as required under section 15F(h)(4)(C)
and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and (5)(A)).
    (c) Every broker or dealer subject to Sec.  240.17a-3 must preserve
for a period of not less than six years after the closing of any
customer's account any account cards or records which relate to the
terms and conditions with respect to the opening and maintenance of the
account.
    (d) Every broker or dealer subject to Sec.  240.17a-3 must preserve
during the life of the enterprise and of any successor enterprise all
partnership articles or, in the case of a corporation, all articles of
incorporation or charter, minute books, and stock certificate books
(or, in the case of any other form of legal entity, all records such as
articles of organization or formation, and minute books used for a
purpose similar to those records required for corporations or
partnerships), all Forms BD (Sec.  249.501 of this chapter), all Forms
BDW (Sec.  249.501a of this chapter), all Forms SBSE-BD (Sec.  249.617
of this chapter), all Forms SBSE-W (Sec.  249.617 of this chapter), all
amendments to these forms, all licenses or other documentation showing
the registration of the broker or dealer with any securities regulatory
authority.
    (e) Every broker or dealer subject to Sec.  240.17a-3 must maintain
and preserve in an easily accessible place:

    (1) All records required under Sec.  240.17a-3(a)(12) until at
least three years after the associated person's employment and any
other connection with the broker or dealer has terminated.
    (2) All records required under Sec.  240.17a-3(a)(13) until at
least three years after the termination of employment or association of
those persons required by Sec.  240.17f-2 to be fingerprinted.
    (3) All records required pursuant to Sec.  240.17a-3(a)(15) during
the life of the enterprise.
    (4) All records required pursuant to Sec.  240.17a-3(a)(14) for
three years.
* * * * *
    (f) * * *
    (3) * * *
    (vii) For every broker or dealer exclusively using electronic
storage media for some or all of its record preservation under this
section, at least one third party (the undersigned), who has access to
and the ability to download information from the broker's or dealer's
electronic storage media to any acceptable medium under this section,
must file with the designated examining authority for the broker or
dealer the following undertakings with respect to such records:
    The undersigned hereby undertakes to furnish promptly to the U.S.
Securities and Exchange Commission (``Commission''), its designees or
representatives, any self-regulatory organization of which it is a
member, or any State securities regulator having jurisdiction over the
broker or dealer, upon reasonable request, such information as deemed
necessary by the staffs of the Commission, any self-regulatory
organization of which it is a member, or any State securities regulator
having jurisdiction over the broker or dealer to download information
kept on the broker's or dealer's electronic storage media to any medium
acceptable under Sec.  240.17a-4. Furthermore, the undersigned hereby
undertakes to take reasonable steps to provide access to information
contained on the broker's or dealer's electronic storage media,
including, as appropriate, arrangements for the downloading of any
record required to be maintained and preserved by the broker or dealer
pursuant to Sec. Sec.  240.17a-3 and 17a-4 in a format acceptable to
the staffs of the Commission, any self-regulatory organization of which
it is a member, or any State securities regulator having jurisdiction
over the broker or dealer. Such arrangements will provide specifically
that in the event of a failure on the part of a broker or dealer to
download the record into a readable format and after reasonable notice
to the broker or dealer, upon being provided with the appropriate
electronic storage medium, the undersigned will undertake to do so, as
the staffs of the Commission, any self-regulatory organization of which
it is a member, or any State securities regulator having jurisdiction
over the broker or dealer may request.
    (g) If a person who has been subject to Sec.  240.17a-3 ceases to
transact a business in securities directly with others than members of
a national securities exchange, or ceases to transact a business in
securities through the medium of a member of a national securities
exchange, or ceases to be registered pursuant to section 15 of the Act
(15 U.S.C. 78o) such person must, for the remainder of the periods of
time specified in this section, continue to preserve the records which
it theretofore preserved pursuant to this section.
* * * * *
    (m) * * *
    (1) The term office has the meaning set forth in Sec.  240.17a-
3(f)(1).
    (2) The term principal has the meaning set forth in Sec.  240.17a-
3(f)(2).
    (3) The term securities regulatory authority has the meaning set
forth in Sec.  240.17a-3(f)(3).
    (4) The term associated person has the meaning set forth in Sec.
240.17a-3(f)(4).
    (5) The term business as such includes the business as a security-
based swap dealer or major security-based swap participant with respect
to a broker or dealer that is registered under section 15F of the Act
(15 U.S.C. 78o-10) as a security-based swap dealer or major security-
based swap participant.
0
4. Section 240.17a-5 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Revising paragraph (a) introductory text and removing paragraph
(a)(1);
0
d. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), (a)(6), and
(a)(7) as paragraphs (a)(1) (a)(2), (a)(3), (a)(4), (a)(5), and (a)(6),
respectively;
0
e. Revising newly redesignated paragraphs (a)(1) introductory text,
(a)(1)(ii), (a)(1)(iii), and (a)(1)(iv);
0
f. Adding paragraph (a)(1)(v);
0
g. In newly redesignated paragraphs (a)(2) and (a)(6), removing the
word ``shall'' and adding in its place ``will'';
0
h. Revising newly redesignated paragraphs (a)(3), (a)(4), and (a)(5);
0
i. Revising paragraph (b)(1);
0
j. In paragraphs (b)(3), (b)(4), and (b)(5), removing the word
``shall'' and adding in its place ``will'' wherever it appears;
0
k. In paragraphs (c)(1) introductory text, (c)(2), (c)(2)(i), and
(c)(2)(ii) removing the word ``shall'' and adding in its place ``must''
wherever it appears;
0
l. Revising paragraph (c)(3);
0
m. In paragraph (c)(4)(iii), removing the word ``shall'' and adding in
its place ``must'' where it appears;
0
n. In paragraph (c)(5)(i)(C), adding ``(c)(2)'' before ``(iv)'';
0
o. In paragraph (c)(5)(iii)(C), removing the word ``Home'' and adding
in its place ``home'' wherever it appears;
0
p. Revising paragraphs (d)(1)(i)(B)(1), (d)(1)(i)(B)(2), (d)(2)(i),
(d)(2)(ii), (d)(2)(iii), (d)(3)(i)(A)(4), (d)(3)(i)(A)(5),
(d)(3)(i)(C);
0
q. In paragraph (d)(3)(ii), adding the phrase ``Sec.  240.18a-4,''
after the phrase ``Sec.  240.17a-13,'';
0
r. Revising paragraphs (d)(3)(iii), (e)(1)(ii), (e)(2), and (e)(3);
0
s. Revising paragraphs (f)(2)(ii)(E) and (f)(2)(ii)(F);
0
t. In the fifth sentence of paragraph (f)(3)(v)(B), adding the word
``the'' before the phrase ``independent public accountant does not
agree'';
0
u. Revising paragraphs (g)(2)(i), (g)(2)(ii), (h), and note to
paragraph (h);
0
v. Revising paragraphs (i)(3)(iii)(A) and (i)(3)(iii)(B), and (i)(4);
0
w. Removing and reserving paragraph (j);
0
x. In paragraph (k) introductory text, removing the word ``shall'' and
adding in its place ``must'' wherever it appears, and removing the
phrase ``Market Regulation'', and adding tin its place ``Trading and
Markets'';
0
y. In paragraph (l), removing the phrase ``Securities Exchange Act of
1934'', and adding in its place ``Act,'' and removing the word
``shall'' and adding in its place ``must'';
0
z. In paragraph (m)(1), removing the word ``shall'' and adding in its
place ``must'';
0
aa. In paragraph (m)(2), removing ``(48 Stat. 882; 15 U.S.C. 78c)'' and
``(78 Stat. 565; 15 U.S.C. 78c)'' and adding in their place ``(15
U.S.C. 78c)'' and ``(15 U.S.C. 78c)'', respectively;
0
bb. In paragraph (m)(4), removing the phrase ``shall'' and adding in
its place ``will'';
0
cc. In paragraph (n)(2), removing the word ``shall'' and adding in its
place ``must''; and
0
dd. Revising paragraph (o).
    The additions and revisions read as follows:

Sec.  240.17a-5  Reports to be made by certain brokers and dealers.

    Section 240.17a-5 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a

security-based swap dealer or major security-based swap participant
under section 15F(b) of the Act (15 U.S.C. 78o-8(b)). A security-based
swap dealer or major security-based swap participant registered under
section 15F(b) of the Act that is not also registered as a broker or
dealer under section 15(b) of the Act is subject to the reporting
requirements under Sec.  240.18a-7.
    (a) Monthly and Quarterly Reports.
    (1) Filing of Reports
    (i) * * *
    (ii) Every broker or dealer subject to this paragraph (a) who
clears transactions or carries customer accounts and that is not
registered as a security-based swap dealer or major security-based swap
participant under section 15F of the Act (15 U.S.C. 78o-10) must file
with the Commission an executed Part II of Form X-17A-5 (Sec.  249.617
of this chapter) within 17 business days after the end of the calendar
quarter and within 17 business days after the end of the fiscal year of
the broker or dealer where that date is not the end of a calendar
quarter. Certain of such brokers or dealers must file with the
Commission an executed Part IIA in lieu thereof if the nature of their
business is limited as described in the instructions to Part II of Form
X-17A-5 (Sec.  249.617 of this chapter).
    (iii) Every broker or dealer that neither clears transactions nor
carries customer accounts and that is not registered as a security-
based swap dealer or major security-based swap participant under
section 15F of the Act (15 U.S.C. 78o-10) must file with the Commission
an executed Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter)
within 17 business days after the end of each calendar quarter and
within 17 business days after the end of the fiscal year of the broker
or dealer where that date is not the end of a calendar quarter.
    (iv) Every broker or dealer that is registered as a security-based
swap dealer or major security-based swap participant under section 15F
of the Act (15 U.S.C. 78o-10) must file with the Commission an executed
Form SBS (Sec.  249.617 of this chapter) within 17 business days after
the end of each month.
    (v) Upon receiving written notice from the Commission or the
examining authority designated pursuant to section 17(d) of the Act (15
U.S.C. 78q(d)) (``designated examining authority''), a broker or dealer
who receives such notice must file with the Commission on a monthly
basis, or at such times as will be specified, an executed Part II or
Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter), or an
executed Form SBS (Sec.  249.617 of this chapter), and such other
financial or operational information as will be required by the
Commission or the designated examining authority.
    (2) The reports provided for in this paragraph (a) that must be
filed with the Commission will be considered filed when received at the
Commission's principal office in Washington, DC, and the regional
office of the Commission for the region in which the broker or dealer
has its principal place of business. All reports filed pursuant to this
paragraph (a) will be deemed to be confidential.
    (3) The provisions of paragraph (a)(1) of this section will not
apply to a member of a national securities exchange or a registered
national securities association if said exchange or association
maintains records containing the information required by Part I, Part
II, or Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter) or Form
SBS (Sec.  249.617 of this chapter), as to such member, and transmits
to the Commission a copy of the applicable parts of Form X-17A-5 (Sec.
249.617 of this chapter) or Form SBS (Sec.  249.617 of this chapter) as
to such member, pursuant to a plan, the procedures and provisions of
which have been submitted to and declared effective by the Commission.
Any such plan filed by a national securities exchange or a registered
national securities association may provide that when a member is also
a member of one or more national securities exchanges, or of one or
more national securities exchanges and a registered national securities
association, the information required to be submitted with respect to
any such member may be submitted by only one specified national
securities exchange or registered national securities association. For
the purposes of this section, a plan filed with the Commission by a
national securities exchange or a registered national securities
association will not become effective unless the Commission, having due
regard for the fulfillment of the Commission's duties and
responsibilities under the provisions of the Act, declares the plan to
be effective. Further, the Commission, in declaring any such plan
effective, may impose such terms and conditions relating to the
provisions of the plan and the period of its effectiveness as may be
deemed necessary or appropriate in the public interest, for the
protection of investors, or to carry out the Commission's duties and
responsibilities under the Act.
    (4) Every broker or dealer subject to this paragraph (a) must file
Form Custody (Sec.  249.639 of this chapter) with its designated
examining authority within 17 business days after the end of each
calendar quarter and within 17 business days after the end of the
fiscal year of the broker or dealer where that date is not the end of a
calendar quarter. The designated examining authority must maintain the
information obtained through the filing of Form Custody and must
promptly transmit that information to the Commission at such time as it
transmits the applicable part of Form X-17A-5 (Sec.  249.617 of this
chapter), or Form SBS (Sec.  249.617 of this chapter) as required in
paragraph (a)(2) of this section.
    (5) Each broker or dealer that computes certain of its capital
charges in accordance with Sec.  240.15c3-1e must file the following
additional reports with the Commission:
    (i) For each product for which the broker or dealer calculates a
deduction for market risk other than in accordance with Sec.  240.15c3-
1e(b)(1) or (b)(3), the product category and the amount of the
deduction for market risk within 17 business days after the end of the
month;
    (ii) A graph reflecting, for each business line, the daily intra-
month VaR within 17 business days after the end of the month;
    (iii) The aggregate value at risk for the broker or dealer within
17 business days after the end of the month;
    (iv) For each product for which the broker or dealer uses scenario
analysis, the product category and the deduction for market risk within
17 business days after the end of the month;
    (v) Credit risk information on derivatives exposures within 17
business days after the end of the month, including:
    (A) Overall current exposure;
    (B) Current exposure (including commitments) listed by counterparty
for the 15 largest exposures;
    (C) The ten largest commitments listed by counterparty;
    (D) The broker's or dealer's maximum potential exposure listed by
counterparty for the 15 largest exposures;
    (E) The broker's or dealer's aggregate maximum potential exposure;
    (F) A summary report reflecting the broker's or dealer's current
and maximum potential exposures by credit rating category; and
    (G) A summary report reflecting the broker's or dealer's current
exposure for each of the top ten countries to which the broker or
dealer is exposed (by residence of the main operating group of the
counterparty);

    (vi) Regular risk reports supplied to the broker's or dealer's
senior management in the format described in the application;
    (vii) The results of the liquidity stress test required by Sec.
240.15c3-1(f) within 17 business days after the end of the month;
    (viii) A report identifying the number of business days for which
the actual daily net trading loss exceeded the corresponding daily VaR
within 17 business days after the end of each calendar quarter; and
    (ix) The results of backtesting of all internal models used to
compute allowable capital, including VaR and credit risk models,
indicating the number of backtesting exceptions within 17 business days
after the end of the calendar quarter.
* * * * *
    (b) * * *
    (1) If a broker or dealer holding any membership interest in a
national securities exchange or registered national securities
association ceases to be a member in good standing of such exchange or
association, such broker or dealer must, within two business days after
such event, file with the Commission Part II or Part IIA of Form X-17A-
5 (Sec.  249.617 of this chapter) or Form SBS (Sec.  249.617 of this
chapter) as determined by the standards set forth in paragraphs (a)(1)
(ii), (iii), and (iv) of this section as of the date of such event. The
report must be filed at the Commission's principal office in
Washington, DC, and with the regional office of the Commission for the
region in which the broker or dealer has its principal place of
business: Provided, however, That such report need not be made or filed
if the Commission, upon written request or upon its own motion, exempts
such broker or dealer, either unconditionally or on specified terms and
conditions, from such requirement: Provided, further, That the
Commission may, upon request of the broker or dealer, grant extensions
of time for filing the report specified herein for good cause shown.
* * * * *
    (c) * * *
    (3) Unaudited statements to be furnished. Unaudited statements
dated 6 months from the date of the audited statements required to be
furnished by paragraphs (c)(1) and (c)(2) of this section must be
furnished within 65 days after the date of the unaudited statements.
The unaudited statements may be furnished 70 days after that time limit
has expired if the broker or dealer sends them with the next mailing of
the broker's or dealer's quarterly customer statements of account. In
that case, the broker or dealer must include a statement in that
mailing of the amount of the broker's or dealer's net capital and its
required net capital in accordance with Sec.  240.15c3-1, as of a
fiscal month end that is within the 75-day period immediately preceding
the date the statements are sent to customers. The unaudited statements
must contain the information specified in paragraphs (c)(2)(i) and
(c)(2)(ii) of this section.
* * * * *
    (d) * * *
    (1) * * *
    (i) * * *
    (B)(1) If the broker or dealer did not claim it was exempt from
Sec.  240.15c3-3 throughout the most recent fiscal year or the broker
or dealer is subject to Sec.  240.18a-4 [as proposed at 77 FR 70214,
Nov. 23, 2012], a compliance report as described in paragraph (d)(3) of
this section executed by the person who makes the oath or affirmation
under paragraph (e)(2) of this section; or
    (2) If the broker or dealer did claim it was exempt from Sec.
240.15c3-3 throughout the most recent fiscal year and the broker or
dealer is not subject Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov.
23, 2012], an exemption report as described in paragraph (d)(4) of this
section executed by the person who makes the oath or affirmation under
paragraph (e)(2) of this section;
* * * * *
    (2) * * *
    (i) A Statement of Financial Condition, a Statement of Income, a
Statement of Cash Flows, a Statement of Changes in Stockholders' or
Partners' or Sole Proprietor's Equity, and a Statement of Changes in
Liabilities Subordinated to Claims of General Creditors. The statements
must be prepared in accordance with U.S. generally accepted accounting
principles and must be in a format that is consistent with the
statements contained in Form X-17A-5 (Sec.  249.617 of this chapter)
Part II, Part IIA or Form SBS (Sec.  249.617 of this chapter), as
applicable. If the Statement of Financial Condition filed in accordance
with instructions to Form X-17A-5, Part II, Part IIA, or Form SBS, as
applicable, is not consolidated, a summary of financial data, including
the assets, liabilities, and net worth or stockholders' equity, for
subsidiaries not consolidated in the applicable Part II, Part IIA, or
Form SBS Statement of Financial Condition as filed by the broker or
dealer must be included in the notes to the financial statements
reported on by the independent public accountant.
    (ii) Supporting schedules that include, from Part II or Part IIA of
Form X-17A-5 (Sec.  249.617 of this chapter), or Form SBS (Sec.
249.617 of this chapter), as applicable, including a Computation of Net
Capital under Sec.  240.15c3-1, a Computation for Determination of the
Reserve Requirements under Exhibit A of Sec.  240.15c3-3, and, if
applicable, under Exhibit A of Sec.  240.18a-4 [as proposed at 77 FR
70214, Nov. 23, 2012], and Information Relating to the Possession or
Control Requirements under Sec.  240.15c3-3, and, if applicable, under
Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012].
    (iii) If either the Computation of Net Capital under Sec.
240.15c3-1 or the Computation for Determination of the Reserve
Requirements Under Exhibit A of Sec.  240.15c3-3, or, if applicable
Exhibit A of Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov. 23,
2012] in the financial report is materially different from the
corresponding computation in the most recent Part II or Part IIA of
Form X-17A-5 (Sec.  249.617 of this chapter) or Form SBS (Sec.  249.617
of this chapter), as applicable, filed by the broker or dealer pursuant
to paragraph (a) of this section, a reconciliation, including
appropriate explanations, between the computation in the financial
report and the computation in the most recent Part II or Part IIA of
Form X-17A-5 or Form SBS (Sec.  249.617 of this chapter), as
applicable, filed by the broker or dealer. If no material differences
exist, a statement so indicating must be included in the financial
report.
* * * * *
    (3) * * *
    (i) * * *
    (A) * * *
    (4) The broker or dealer was in compliance with Sec. Sec.
240.15c3-1, 240.15c3-3(e) and, if applicable, 240.18a-4(c) [as proposed
at 77 FR 70214, Nov. 23, 2012] as of the end of the most recent fiscal
year; and
    (5) The information the broker or dealer used to state whether it
was in compliance with Sec. Sec.  240.15c3-1, 240.15c3-3(e) and, if
applicable, 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012]
was derived from the books and records of the broker or dealer.
* * * * *
    (C) If applicable, a description of an instance of non-compliance
with Sec. Sec.  240.15c3-1, 240.15c3-3(e) or, if applicable, 240.18a-
4(c) [as proposed at 77 FR 70214, Nov. 23, 2012] as of the end of the
most recent fiscal year.
* * * * *

    (iii) The broker or dealer is not permitted to conclude that its
Internal Control Over Compliance was effective during the most recent
fiscal year if there were one or more material weaknesses in its
Internal Control Over Compliance during the most recent fiscal year.
The broker or dealer is not permitted to conclude that its Internal
Control Over Compliance was effective as of the end of the most recent
fiscal year if there were one or more material weaknesses in its
internal control as of the end of the most recent fiscal year. A
material weakness is a deficiency, or a combination of deficiencies, in
Internal Control Over Compliance such that there is a reasonable
possibility that non-compliance with Sec. Sec.  240.15c3-1, 240.15c3-
3(e) or 240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012] will
not be prevented or detected on a timely basis or that non-compliance
to a material extent with Sec.  240.15c3-3, except for paragraph (e),
Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012], except for
paragraph (c), Sec.  240.17a-13 or any Account Statement Rule will not
be prevented or detected on a timely basis. A deficiency in Internal
Control Over Compliance exists when the design or operation of a
control does not allow the management or employees of the broker or
dealer, in the normal course of performing their assigned functions, to
prevent or detect on a timely basis non-compliance with Sec.  240.15c3-
1, Sec.  240.15c3-3, Sec.  240.17a-13, Sec.  240.18a-4 [as proposed at
77 FR 70214, Nov. 23, 2012], or any Account Statement Rule.
* * * * *
    (e) * * *
    (1) * * *
    (ii) A broker or dealer that files an annual report under paragraph
(d) of this section that is not covered by a report prepared by an
independent public accountant must include in the oath or affirmation
required by paragraph (e)(2) of this section a statement of the facts
and circumstances relied upon as a basis for exemption from the
requirement that the annual report filed under paragraph (d) of this
section be covered by reports prepared by an independent public
accountant.
    (2) The broker or dealer must attach to each of the confidential
and non-confidential portions of the annual reports separately bound
under paragraph (e)(3) of this section a complete and executed Part III
of Form X-17A-5 (Sec.  249.617 of this chapter). The oath or
affirmation made in Part III of Form X-17A-5 must be made before a
person duly authorized to administer such oaths or affirmations. If the
broker or dealer is a sole proprietorship, the oath or affirmation must
be made by the proprietor; if a partnership, by a general partner; if a
corporation, by a duly authorized officer; or if a limited liability
company or limited liability partnership, by the chief executive
officer, chief financial officer, manager, managing member, or those
members vested with management authority for the limited liability
company or limited liability partnership.
    (3) The annual reports filed under paragraph (d) of this section
are not confidential, except that, if the Statement of Financial
Condition in a format that is consistent with Form X-17A-5 (Sec.
249.617 of this chapter), Part II, Part IIA or Form SBS (Sec.  249.617
of this chapter) is bound separately from the balance of the annual
reports filed under paragraph (d) of this section, and each page of the
balance of the annual reports is stamped ``confidential,'' then the
balance of the annual reports will be deemed confidential to the extent
permitted by law. However, the annual reports, including the
confidential portions, will be available for official use by any
official or employee of the U. S. or any State, by national securities
exchanges and registered national securities associations of which the
broker or dealer filing such a report is a member, by the Public
Company Accounting Oversight Board, and by any other person if the
Commission authorizes disclosure of the annual reports to that person
as being in the public interest. Nothing contained in this paragraph
may be construed to be in derogation of the rules of any registered
national securities association or national securities exchange that
give to customers of a broker or dealer the right, upon request to the
broker or dealer, to obtain information relative to its financial
condition.
* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (E) A representation that the independent public accountant has
undertaken the items enumerated in paragraphs (g)(1) and (2) of this
section.
    (F) Except as provided in paragraph (f)(2)(iii) of this section, a
representation that the broker or dealer agrees to allow
representatives of the Commission or its designated examining
authority, if requested in writing for purposes of an examination of
the broker or dealer, to review the audit documentation associated with
the reports of the independent public accountant filed under paragraph
(d)(1)(i)(C) of this section. For purposes of this paragraph, ``audit
documentation'' has the meaning provided in standards of the Public
Company Accounting Oversight Board. The Commission anticipates that, if
requested, it will accord confidential treatment to all documents it
may obtain from an independent public accountant under this paragraph
to the extent permitted by law.
* * * * *
    (g) * * *
    (2)(i) To prepare an independent public accountant's report based
on an examination of the statements required under paragraphs
(d)(3)(i)(A)(2) through (5) of this section in the compliance report
required to be filed by the broker or dealer under paragraph
(d)(1)(i)(B)(1) of this section in accordance with standards of the
Public Company Accounting Oversight Board; or
    (ii) To prepare an independent public accountant's report based on
a review of the statements required under paragraphs (d)(4)(i) through
(iii) of this section in the exemption report required to be filed by
the broker or dealer under paragraph (d)(1)(i)(B)(2) of this section,
in accordance with standards of the Public Company Accounting Oversight
Board.
    (h) Notification of non-compliance or material weakness. If, during
the course of preparing the independent public accountant's reports
required under paragraph (d)(1)(i)(C) of this section, the independent
public accountant determines that the broker or dealer is not in
compliance with Sec.  240.15c3-1, Sec.  240.15c3-3, Sec.  240.17a-13,
or Sec.  240.18a-4 [as proposed at 77 FR 70214, Nov. 23, 2012] or any
rule of the designated examining authority of the broker or dealer that
requires account statements to be sent to the customers of the broker
or dealer, as applicable, or the independent public accountant
determines that any material weaknesses (as defined in paragraph
(d)(3)(iii) of this section) exist, the independent public accountant
must immediately notify the chief financial officer of the broker or
dealer of the nature of the non-compliance or material weakness. If the
notice from the accountant concerns an instance of non-compliance that
would require a broker or dealer to provide a notification under Sec.
240.15c3-1, Sec.  240.15c3-3, or Sec.  240.17a-11, or if the notice
concerns a material weakness, the broker or dealer must provide a
notification in accordance with Sec.  240.15c3-1, Sec.  240.15c3-3, or
Sec.  240.17a-11, as applicable, and provide a copy of the notification
to the independent public accountant. If the independent public
accountant does not receive the

notification within one business day, or if the independent public
accountant does not agree with the statements in the notification, then
the independent public accountant must notify the Commission and the
designated examining authority within one business day. The report from
the accountant must, if the broker or dealer failed to file a
notification, describe any instances of non-compliance that required a
notification under Sec. Sec.  240.15c3-1, 240.15c3-3, or 240.17a-11, or
any material weaknesses. If the broker or dealer filed a notification,
the report from the accountant must detail the aspects of the
notification of the broker or dealer with which the accountant does not
agree.
    Note to paragraph (h). The attention of the broker or dealer and
the independent public accountant is called to the fact that under
Sec.  240.17a-11(a)(1), among other things, a broker or dealer whose
net capital declines below the minimum required pursuant to Sec.
240.15c3-1 must give notice of such deficiency that same day in
accordance with Sec.  240.17a-11(h) and the notice must specify the
broker or dealer's net capital requirement and its current amount of
net capital. The attention of the broker or dealer and accountant also
is called to the fact that under Sec.  240.15c3-3(i), if a broker or
dealer shall fail to make a reserve bank account or special account
deposit, as required by Sec.  240.15c3-3, the broker or dealer must
immediately notify the Commission and the regulatory authority for the
broker or dealer, which examines such broker or dealer as to financial
responsibility and must promptly thereafter confirm such notification
in writing.
* * * * *
    (i) * * *
    (3) * * *
    (iii)(A) The opinion of the independent public accountant with
respect to the statements required under paragraphs (d)(3)(i)(A)(2)
through (5) of this section in the compliance report required under
paragraph (d)(1)(i)(B)(1) of this section; or
    (B) The conclusion of the independent public accountant with
respect to the statements required under paragraphs (d)(4)(i) through
(iii) of this section in the exemption report required under paragraph
(d)(1)(i)(B)(2) of this section.
    (4) Exceptions. Any matters to which the independent public
accountant takes exception must be clearly identified, the exceptions
must be specifically and clearly stated, and, to the extent
practicable, the effect of each such exception on any related items
contained in the annual reports required under paragraph (d) of this
section must be given.
* * * * *
    (j) [Reserved].
* * * * *
    (o) Filing requirements. For purposes of filing requirements as
described in this section, filing will be deemed to have been
accomplished upon receipt at the Commission's principal office in
Washington, DC, with duplicate originals simultaneously filed at the
locations prescribed in the particular paragraph of this section which
is applicable.
* * * * *
0
5. Section 240.17a-11 is amended by:
0
a. Revising the heading;
0
b. Adding an undesignated introductory paragraph;
0
c. Removing paragraph (a);
0
d. Redesignating paragraphs (b), (c), (d), (e), (f), (g), (h), and (i)
as paragraphs (a), (b), (c), (d), (g), (h), (i), and (j), respectively;
0
e. Revising newly redesignated paragraphs (a)(1), (a)(2), and paragraph
(b) introductory text;
0
f. Adding paragraph (b)(6);
0
g. Revising newly redesignated paragraphs (c) and (d);
0
h. Adding paragraphs (e) and (f); and
0
i. Revising newly redesignated paragraphs (g), (h), (i), and (j).
    The revisions and additions read as follows:

Sec.  240.17a-11  Notification provisions for brokers and dealers.

    Section 240.17a-11 applies to a broker or dealer registered under
section 15(b) of the Act (15 U.S.C. 78o(b)), including a broker or
dealer also registered as a security-based swap dealer or major
security-based swap participant under section 15F(b) of the Act (15
U.S.C. 78o-8(b)). A security-based swap dealer or major security-based
swap participant registered under section 15F(b) of the Act that is not
also registered as a broker or dealer under section 15(b) of the Act is
subject to the notification requirements under Sec.  240.18a-8.
    (a)(1) Every broker or dealer whose net capital declines below the
minimum amount required pursuant to Sec.  240.15c3-1, or is insolvent
as that term is defined in Sec.  240.15c3-1(c)(16), must give notice of
such deficiency that same day in accordance with paragraph (h) of this
section. The notice must specify the broker or dealer's net capital
requirement and its current amount of net capital. If a broker or
dealer is informed by its designated examining authority or the
Commission that it is, or has been, in violation of Sec.  240.15c3-1
and the broker or dealer has not given notice of the capital deficiency
under this section, the broker or dealer, even if it does not agree
that it is, or has been, in violation of Sec.  240.15c3-1, must give
notice of the claimed deficiency, which notice may specify the broker's
or dealer's reasons for its disagreement.
    (2) In addition to the requirements of paragraph (b)(1) of this
section, an OTC derivatives dealer or broker or dealer permitted to
compute net capital pursuant to the alternative method of Sec.
240.15c3-1e must also provide notice if its tentative net capital falls
below the minimum amount required pursuant to Sec.  240.15c3-1. The
notice must specify the dealer's tentative net capital requirements,
and current amount of net capital and tentative net capital, of the OTC
derivatives dealer or the broker or dealer permitted to compute net
capital pursuant to the alternative method of Sec.  240.15c3-1e.
    (b) Every broker or dealer must send notice promptly (but within 24
hours) after the occurrence of the events specified in paragraph
(b)(1), (b)(2), (b)(3) or (b)(4) of this section in accordance with
paragraph (h) of this section:
* * * * *
    (6) If the broker or dealer is registered as a major security-based
swap participant and the level of tangible net worth of the broker or
dealer falls below $20 million.
    (c) Every broker or dealer that fails to make and keep current the
books and records required by Sec.  240.17a-3, must give notice of this
fact that same day in accordance with paragraph (h) of this section,
specifying the books and records which have not been made or which are
not current. The broker or dealer must also transmit a report in
accordance with paragraph (h) of this section within 48 hours of the
notice stating what the broker or dealer has done or is doing to
correct the situation.
    (d) Whenever any broker or dealer discovers, or is notified by an
independent public accountant under Sec.  240.17a-12(i)(2), of the
existence of any material inadequacy as defined in Sec.  240.17a-
12(h)(2), or whenever any broker or dealer discovers, or is notified by
an independent public accountant under Sec.  240.17a-5(h), of the
existence of any material weakness as defined in Sec.  240.17a-
5(d)(3)(iii), the broker or dealer must:
    (1) Give notice, in accordance with paragraph (h) of this section,
of the material inadequacy or material weakness within 24 hours of the

discovery or notification of the material inadequacy or material
weakness; and
    (2) Transmit a report in accordance with paragraph (h) of this
section, within 48 hours of the notice stating what the broker or
dealer has done or is doing to correct the situation.
    (e) A broker or dealer that has been authorized by the Commission
to compute net capital pursuant to Sec.  240.15c3-1e must give
immediate notice in writing in accordance with paragraph (h) of this
section if a liquidity stress test conducted pursuant to Sec.
240.15c3-1(f) indicates that the amount of liquidity reserve is
insufficient.
    (f) If a broker-dealer registered with the Commission as a
security-based swap dealer under section 15F(b) of the Act (15 U.S.C.
78o-10(b)) fails to make in its special account for the exclusive
benefit of security-based swap customers a deposit, as required by
Sec.  240.18a-4(c) [as proposed at 77 FR 70214, Nov. 23, 2012], the
broker-dealer must give immediate notice in writing in accordance with
paragraph (h) of this section.
    (g) Every national securities exchange or national securities
association that learns that a broker or dealer has failed to send
notice or transmit a report as required by this section, even after
being advised by the securities exchange or the national securities
association to send notice or transmit a report, must immediately give
notice of such failure in accordance with paragraph (h) of this
section.
    (h) Every notice or report required to be given or transmitted by
this section must be given or transmitted to the principal office of
the Commission in Washington, DC, the regional office of the Commission
for the region in which the broker or dealer has its principal place of
business, the designated examining authority of which such broker or
dealer is a member, and the Commodity Futures Trading Commission if the
broker or dealer is registered as a futures commission merchant with
such Commission. For the purposes of this section, ``notice'' must be
given or transmitted by facsimile transmission. The report required by
paragraphs (c) or (d)(2) of this section may be transmitted by
overnight delivery.
    (i) Other notice provisions relating to the Commission's financial
responsibility or reporting rules are contained in Sec.  240.15c3-1,
Sec.  240.15c3-1d, Sec.  240.15c3-3, Sec.  240.17a-5, and Sec.
240.17a-12.
    (j) The provisions of this section will not apply to a broker or
dealer registered pursuant to section 15(b)(11)(A) of the Act (15
U.S.C. 78o(b)(11)(A)) that is not a member of either a national
securities exchange pursuant to section 6(a) of the Act (15 U.S.C.
78f(a)) or a national securities association registered pursuant to
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).
* * * * *
0
6. Section 240.18a-1 [as proposed at 77 FR 70214, Nov. 23, 2012] is
revised by adding paragraph (c)(1)(x) to read as follows:

Sec.  240.18a-1  Net capital requirements for security-based swap
dealers for which there is not a prudential regulator.

* * * * *
    (c) * * *
    (1) * * *
    (x)(A) Deducting the market value of all short securities
differences (which shall include securities positions reflected on the
securities record which are not susceptible to either count or
confirmation) unresolved after discovery in accordance with the
following schedule:

------------------------------------------------------------------------
                                                             Number of
                                                           business days
                     Differences\1\                            after
                                                             discovery
------------------------------------------------------------------------
25 percent..............................................               7
50 percent..............................................              14
75 percent..............................................              21
100 percent.............................................              28
------------------------------------------------------------------------
\1\ Percentage of market value of short securities differences.

    (B) Deducting the market value of any long securities differences,
where such securities have been sold by the broker or dealer before
they are adequately resolved, less any reserves established therefor;
    (C) The designated examining authority for a broker or dealer may
extend the periods in (x)(A) of this section for up to 10 business days
if it finds that exceptional circumstances warrant an extension.
* * * * *
0
7. Sections 240.18a-5 through 240.18a-9 are added to read as follows:

Sec.  240.18a-5  Records to be made by certain security-based swap
dealers and major security-based swap participants.

    Section 240.18a-5 applies to a security-based swap dealer or major
security-based swap participant registered under section 15F(b) of the
Act (15 U.S.C. 78o-8(b)) that is not also registered as a broker or
dealer under section 15(b) of the Act (15 U.S.C. 78o(b)). A broker or
dealer registered under section 15(b) of the Act, including a broker or
dealer registered as a security-based swap dealer or major security-
based swap participant under section 15F(b) of the Act, is subject to
the books and records requirements under Sec.  240.17a-3.
    (a) This paragraph applies only to security-based swap dealers and
major security-based swap participants registered under section 15F of
the Act (15 U.S.C. 78o-10) for which there is no prudential regulator.
Each such security-based swap dealer and major security-based swap
participant subject to this paragraph must make and keep the following
books and records:
    (1) Blotters (or other records of original entry) containing an
itemized daily record of all purchases and sales of securities
(including security-based swaps), all receipts and deliveries of
securities (including certificate numbers), all receipts and
disbursements of cash and all other debits and credits. Such records
must show the account for which each such purchase or sale was
effected, the name and amount of securities, the unit and aggregate
purchase or sale price, if any, the trade date, and the name or other
designation of the person from whom purchased or received or to whom
sold or delivered. For security-based swaps, such records must also
show, for each purchase or sale, the type of security-based swap, the
reference security, index, or obligor, the date and time of execution,
the effective date, the termination or maturity date, the notional
amount, the unique transaction identifier, and the unique counterparty
identifier.
    (2) Ledgers (or other records) reflecting all assets and
liabilities, income and expense, and capital accounts.
    (3) Ledger accounts (or other records) itemizing separately as to
each account for every customer or non-customer of such security-based
swap dealer or major security-based swap participant, all purchases and
sales, receipts and deliveries of securities and commodities for such
account and all other debits and credits to such account, and in
addition, in the case of security-based swaps, ledger accounts (or
other records) itemizing separately, the type of security-based swap,
the reference security, index, or obligor, the date and time of
execution, the effective date, the termination or maturity date, the
notional amount, the unique transaction identifier, and the unique
counterparty identifier.
    (4) A securities record or ledger reflecting separately for each:
    (i) Security, other than a security-based swap, as of the clearance
dates all ``long'' or ``short'' positions (including securities in
safekeeping and securities that are the subject of repurchase or

reverse repurchase agreements) carried by such security-based swap
dealer or major security-based swap participant for its account or the
account of its customers and showing the locations of all securities
long and the offsetting position to all securities short, including
long security count differences and short security count differences
classified by the date of the physical count and verification in which
they were discovered, and, in all cases, the name or designation of the
account in which each position is carried.
    (ii) Security-based swap, the reference security, index, or
obligor, the unique transaction identifier, the unique counterparty
identifier, whether it is a ``long'' or ``short'' position in the
security-based swap, whether the security-based swap is cleared or not
cleared, and if cleared, identification of the clearing agency where
the security-based swap is cleared.
    (5) A memorandum of each purchase or sale of a security-based swap
for the account of the security-based swap dealer or major security-
based swap participant showing the price. The memorandum must also
include the type of security-based swap, the reference security, index,
or obligor, the date and time of execution, the effective date, the
termination or maturity date, the notional amount, the unique
transaction identifier, and the unique counterparty identifier. An
order entered pursuant to the exercise of discretionary authority must
be so designated.
    (6) With respect to a security other than a security-based swap,