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Computation for Determination of Customer Reserve Requirements
    Pre-Amendment FOCUS Report Parts II and II CSE have a Computation
for Determination of Reserve Requirements section that elicited detail
about filers' customer reserve computation under the broker-dealer
customer protection rule (Rule 15c3-3). Proposed Form SBS had a
Computation for Determination of Customer Reserve Requirements section
modeled largely on the parallel section in Pre-Amendment FOCUS Report
Part II CSE.\309\ The Commission received no comment on this section in
proposed Form SBS and is adopting it by retaining the parallel section
in FOCUS Report Part II, as amended, with non-substantive changes for
clarity.\310\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
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    \309\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \310\ See FOCUS Report Part II, as amended, Computation for
Determination of Customer Reserve Requirements. To avoid confusion
between the customer and security-based swap customer reserve
requirements, this section is retitled ``Computation for
Determination of Customer Reserve Requirements'' (emphasis added),
and the instructions are updated accordingly. In addition, in
response to commenters, the section includes a clarification that
the notes referenced in this section appear in 17 CFR 240.15c3-3a
(Rule 15c3-3a) (Exhibit A to Rule 15c3-3). See SIFMA 9/5/2014
Letter.
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Possession or Control for Customers
    Pre-Amendment FOCUS Report Parts II and II CSE have an Information
for Possession or Control Requirements section that elicits detail
about securities kept in possession or control for customers under Rule
15c3-3. Proposed Form SBS had a Possession or Control for Customers
section modeled on the parallel section in Pre-Amendment FOCUS Report
Part II CSE.\311\ The Commission received no comment on this section of
proposed Form SBS and is adopting it by retaining the parallel section
in FOCUS Report Part II, as amended, with non-substantive changes for
clarity.\312\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
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    \311\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \312\ See FOCUS Report Part II, as amended, Possession or
Control for Customers. To avoid confusion between the customer and
security-based swap customer possession and control requirements,
this section is retitled ``Possession or Control for Customers,''
and the instructions are updated accordingly.
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Computation for Determination of PAB Requirements
    In 2013, the Commission amended Rule 15c3-3 to establish PAB
reserve bank account requirements under which a broker-dealer must
perform a reserve account calculation with respect to broker-dealer
clients that is similar to the calculation for customers discussed
above.\313\ Proposed Form SBS included a Computation for Determination
of PAB Requirements section for filers to

input this calculation.\314\ The Commission received no comment on this
proposed section of Form SBS and is adding it to FOCUS Report Part II,
as amended, with non-substantive changes for clarity.\315\ The section
must be completed by stand-alone broker-dealers and broker-dealer SBSDs
and MSBSPs.
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    \313\ See Financial Responsibility Rules for Broker-Dealers, 78
FR at 51903. Paragraph (a)(16) of Rule 15c3-3 defines ``PAB
account'' as ``a proprietary securities account of a broker or
dealer (which includes a foreign broker or dealer, or a foreign bank
acting as a broker or dealer) other than a delivery-versus-payment
account or a receipt-versus-payment account.'' The paragraph further
provides that the ``term does not include an account that has been
subordinated to the claims of creditors of the carrying broker or
dealer.''
    \314\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \315\ See revised FOCUS Report Part II, as amended, Computation
for Determination of PAB Requirements. In addition, in response to
commenters, the section includes a clarification that the notes
referenced in this section appear in Exhibit A to Rule 15c3-3 (Rule
15c3-3a). See SIFMA 9/5/2014 Letter.
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Claiming an Exemption From Rule 15c3-3
    Pre-Amendment FOCUS Report Part II has a section for broker-dealers
claiming an exemption from Rule 15c3-3 to identify the paragraph of the
rule upon which the firm's exemption is based. Proposed Form SBS had a
similar section modeled on the parallel section in Pre-Amendment FOCUS
Report Part II.\316\ The Commission received no comment on this section
of proposed Form SBS and is adopting it by retaining the parallel
section in FOCUS Report Part II, as amended, with non-substantive
changes for clarity and accuracy.\317\ This section must be completed
by stand-alone broker-dealers and broker-dealer SBSDs and MSBSPs
claiming an exemption from Rule 15c3-3.
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    \316\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \317\ See FOCUS Report Part II, as amended, Claiming an
Exemption from Rule 15c3-3. The following changes are being made:
(1) The instruction to ``check one only'' is replaced with ``check
all that apply'' as a firm can claim more than one exemption from
Rule 15c3-3; (2) the incorrect references to paragraphs
``(k)(2)(A)'' and ``(k)(2)(B)'' of Rule 15c3-3 are replaced with
correct references to paragraphs (k)(2)(i) and (ii) of Rule 15c3-3;
and (3) due to the inadvertent omission of instructions regarding
this section, the instructions to FOCUS Report Part II, as amended,
are updated to direct stand-alone broker-dealers, broker-dealer
SBSDs, and broker-dealer MSBSPs that are claiming an exemption from
Rule 15c3-3 to complete this section.
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Computation for Determination of Security-Based Swap Customer Reserve
Requirements
    The Commission's proposed segregation requirements for SBSDs in
Rule 18a-4 required them to maintain a security-based swap customer
reserve account and to determine the amount kept in the account using
the formula in 17 CFR 240.18a-4a (Exhibit A to Rule 18a-4).\318\
Accordingly, proposed Form SBS had a section titled ``Computation for
Determination of the Amount to be Maintained in the Special Reserve
Account for the Exclusive Benefit of Security-Based Swap Customers'' in
which an SBSD would enter its security-based swap reserve account
calculation.\319\ The Commission received no comment on this section.
However, the final segregation rules codified the security-based swap
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule
18a-4 to apply to stand-alone SBSDs.\320\ Consequently, the Commission
is adopting the section in proposed Form SBS by adding it to FOCUS
Report Part II, as amended, with non-substantive changes for
consistency internally and with Rules 15c3-3 and 18a-4.\321\ The
modifications also include an instruction that the section must be
completed by stand-alone broker-dealers in addition to broker-dealer
SBSDs and MSBSPs.
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    \318\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70282-87.
    \319\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
    \320\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
    \321\ See FOCUS Report Part II, as amended, Computation for
Determination of Security-Based Swap Customer Reserve Requirements.
The following changes are being made: (1) References to Rule 18a-4
are removed from the section's title, line items, and instructions
to accurately reflect that the security-based swap customer reserve
requirement adopted by the Commission is located in Rules 15c3-3 and
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the
Commission); (2) the parenthetical ``(See Note A)'' is added to Line
1 for consistency with Line 1 of the Computation for Determination
of Customer Reserve Requirements section in revised FOCUS Report
Part II, and in response to commenters, the section includes a
clarification that the notes referenced in this section appear in
Exhibit B to Rule 15c3-3 or Exhibit A to Rule 18a-4, as applicable
(see SIFMA 9/5/2014 Letter); and (3) in Lines 24 and 26, ``Reserve
Bank Account(s)'' is replaced with ``Reserve Account(s)'' for
consistency with paragraph (a)(9) of Rule 18a-4, as adopted (see
paragraph (a)(9) of Rule 18a-4, as adopted).
---------------------------------------------------------------------------

Possession or Control for Security-Based Swap Customers
    The Commission's proposed segregation requirements for SBSDs in
Rule 18a-4 required them to maintain possession or control over excess
security collateral.\322\ Accordingly, proposed Form SBS had a section
titled ``Information for Possession or Control Requirements Under Rule
18a-4'' that elicits detail about excess securities collateral kept in
possession or control for customers under proposed Rule 18a-4.\323\ The
Commission received no comment on this section of proposed Form SBS.
However, the final segregation rules codified the security-based swap
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule
18a-4 to apply to stand-alone SBSDs.\324\ Consequently, the Commission
is adopting the section in proposed Form SBS by adding it to FOCUS
Report Part II, as amended, with non-substantive changes for
consistency internally and with Rules 15c3-3 and 18a-4.\325\ The
modifications also include an instruction that the section must be
completed by stand-alone broker-dealers in addition to broker-dealer
SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \322\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70278-82.
    \323\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231.
    \324\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
    \325\ See FOCUS Report Part II, as amended, Possession or
Control for Security-Based Swap Customers. References to Rule 18a-4
are removed from the section's title, line items, and instructions
in order to accurately reflect that the possession or control
requirements adopted by the Commission are located in Rules 15c3-3
and 18a-4 (instead of solely in Rule 18a-4 as initially proposed by
the Commission).
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Claiming an Exemption From Rule 18a-4
    As adopted, Rule 18a-4 applies to stand-alone and bank SBSDs and to
OTCDD/SBSDs.\326\ In addition, the final rule exempts these SBSDs from
its requirements of if the SBSD meets certain conditions, including
that the SBSD does not clear security-based swap transactions for other
persons, provides notice to the counterparty regarding the right to
segregate initial margin at an independent third-party custodian, and
discloses in writing that any collateral received by the SBSD for non-
cleared security-based swaps will not be subject to a segregation
requirement and regarding how a claim of the counterparty for the
collateral would be treated in a bankruptcy or other formal liquidation
proceeding of the SBSD. In light of these modifications to the rule
from the proposal (which did not provide an exemption), the Commission
is adding a line item to the FOCUS Report Part II for a stand-alone
SBSD or OTCDD/SBSD to indicate whether the firm is claiming an
exemption from Rule 18a-4.\327\
---------------------------------------------------------------------------

    \326\
    \327\ See FOCUS Report Part II, as amended, Claiming an
Exemption from Rule 18a-4.
---------------------------------------------------------------------------

Sections Completed by FCMs
    FCMs are required to periodically file Form 1-FR-FCM with the CFTC
and their designated SRO.\328\ The form elicits financial and
operational information about an FCM. To account

for broker-dealers that are dually registered as FCMs, Pre-Amendment
FOCUS Report Parts II and II CSE incorporate, in substantially the same
format, most of the sections in Form 1-FR-FCM. A broker-dealer dually
registered as an FCM was permitted to file Pre-Amendment FOCUS Report
Part II or II CSE (as applicable) with the CFTC and its designated SRO
rather than Form 1-FR-FCM.\329\
---------------------------------------------------------------------------

    \328\ See 17 CFR 1.10. See also Form 1-FR-FCM, available at
http://www.nfa.futures.org/NFA-registration/templates-and-forms/form1FR-fcm.HTML.
    \329\ See 17 CFR 1.10(h) (allowing broker-dealers to file the
FOCUS Report instead of Form 1-FR-FCM so long as all information
required to be furnished on and submitted with Form 1-FR-FCM is
provided with the FOCUS Report).
---------------------------------------------------------------------------

    Proposed Form SBS contained the following sections from Form 1-FR-
FCM in order to permit dual registrants to file Form SBS (rather than
Form 1-FR-FCM) with the CFTC and its designated SRO: (1) A Computation
of CFTC Minimum Net Capital Requirement; (2) a Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges; (3) a Statement of Cleared Swaps Customer
Segregation Requirements and Funds in Cleared Swaps Customer Accounts
under Section 4d(f) of the CEA; (4) a Statement of Segregation
Requirements and Funds in Segregation for Customers' Dealer Options
Accounts; (5) a Statement of Secured Amounts and Funds Held in Separate
Accounts for Foreign Futures and Foreign Options Customers Pursuant to
CFTC Regulation 30.7 (and Foreign Futures and Foreign Options Secured
Amounts Summary); and (6) a Statement of Secured Amounts and Funds Held
in Separate Accounts for Foreign Futures and Foreign Options Customers
Pursuant to CFTC Regulation 30.7 (and Funds Deposited in Separate CFTC
Regulation 30.7 Accounts) (17 CFR 30.7).\330\ The Commission received
no comment on these sections of proposed Form SBS and is adopting them
by retaining or adding them to FOCUS Report Part II, as amended, with
non-substantive changes.\331\ These sections will be filed by broker-
dealers that are dually registered with the CFTC as FCMs. The
Commission believes that this will promote harmonization with CFTC
requirements.
---------------------------------------------------------------------------

    \330\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25232-33.
    \331\ See FOCUS Report Part II, as amended, Computation of CFTC
Minimum Capital Requirements, Statement of Segregation Requirements
and Funds in Segregation for Customers Trading on U.S. Commodity
Exchanges, Statement of Cleared Swaps Customer Segregation
Requirements and Funds in Cleared Swaps Customer Accounts under
Section 4d(f) of the Commodity Exchange Act, Statement of
Segregation Requirements and Funds in Segregation for Customers'
Dealer Options Accounts, Statement of Secured Amounts and Funds Held
in Separate Accounts for Foreign Futures and Foreign Options
Customers Pursuant to CFTC Regulation 30.7, Statement of Secured
Amounts and Funds Held in Separate Accounts for Foreign Futures and
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The
following non-substantive changes were made: (1) The parenthetical
``(under)'' is added to Line 16 of the Statement of Segregation
Requirements and Funds in Segregation for Customers Trading on U.S.
Commodity Exchanges for consistency with the language used in Form
1-FR-FCM; and (2) instead of using the placeholder line item number
``9999'', the line item numbers recently assigned in FINRA's eFOCUS
system are used for the following lines: Lines 15 and 16 in the
Statement of Segregation Requirements and Funds in Segregation for
Customers Trading on U.S. Commodity Exchanges, Lines 15 and 16 in
the Statement of Cleared Swaps Customer Segregation Requirements and
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the
Commodity Exchange Act, Lines 1 through 7 in the Statement of
Secured Amounts and Funds Held in Separate Accounts for Foreign
Futures and Foreign Options Customers Pursuant to CFTC Regulation
30.7, and Lines 9 through 11 in the Statement of Secured Amounts and
Funds Held in Separate Accounts for Foreign Futures and Foreign
Options Customers Pursuant to CFTC Regulation 30.7.
---------------------------------------------------------------------------

Defined Terms in the Schedules to FOCUS Reports Parts II and IIC
    Pre-Amendment FOCUS Report Part II CSE has schedules that elicit
information about derivatives positions, counterparties, and exposures.
Proposed Form SBS included four schedules that were modeled largely on
the schedules to Pre-Amendment FOCUS Report Part II CSE. As discussed
in detail below, the Commission is adopting the schedules to proposed
Form SBS by adding all four of them to FOCUS Report Part II, as
amended, and including one of them in FOCUS Report Part IIC, as
adopted. As proposed, the schedules contained the following common
terms that were defined in the proposed instructions to Form SBS: (1)
``gross replacement value'', also referred to as ``gross replacement
value--receivable''; (2) ``gross replacement value--payables''; (3)
``net replacement value''; (4) ``current net exposure''; (5) ``total
exposure''; and (6) ``margin collected.'' \332\ For the sake of
clarity, the term ``total exposure'' is revised to the term ``current
net and potential exposure'' in FOCUS Report Part II, as amended, and
FOCUS Report Part IIC, as adopted, and in the instructions to the
forms.\333\ The definition of the term is not revised. The Commission
received no comment on the remaining terms and their definitions and is
adopting them as proposed.\334\
---------------------------------------------------------------------------

    \332\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25233-34.
    \333\ See FOCUS Report Part II as amended; instructions to FOCUS
Report Part II, as amended.
    \334\ See instructions to FOCUS Report Part II, as amended,
Definitions; instructions to FOCUS Report Part IIC, as adopted,
Definitions.
---------------------------------------------------------------------------

Schedule 1 to FOCUS Report Part II
    Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Aggregate Securities and OTC Derivatives Positions'' that required
ANC broker-dealers to report the month-end gross replacement value of
aggregate long and short positions in various categories of financial
instruments held by the firm.\335\ Schedule 1 to proposed Form SBS was
modeled largely on this schedule but instead of including a single line
for derivatives, it required filers to enter the aggregate long and
short positions for cleared and non-cleared: (1) Debt security-based
swaps (other than credit default swaps); (2) equity security-based
swaps; (3) credit default security-based swaps; and (4) other security-
based swaps.\336\ It required the same information with respect to
mixed swaps and the following categories of swaps: (1) interest rate
swaps; (2) foreign exchange swaps; (3) commodity swaps; (4) debt index
swaps (other than credit default swaps); (5) equity index swaps; (6)
credit default swaps; and (7) other swaps.
---------------------------------------------------------------------------

    \335\ Pre-Amendment FOCUS Report Part IIB has a similar
schedule.
    \336\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25234.
---------------------------------------------------------------------------

    A commenter raised concerns about the practicality of reporting
exposures to these subcategories of financial instruments, including
the potential that firms will interpret them differently.\337\ The
Commission believes it is important to record separately amounts
attributable to security-based swaps, mixed swaps, and swaps given the
Commission's supervisory responsibilities regarding these products. The
Commission further believes, however, that requiring reporting of the
exposures to the subcategories of instruments could lead to
inconsistent reporting across filers, which, in turn, could diminish
the utility of receiving this information in terms of comparing firms.
Accordingly, Schedule 1 to the FOCUS Report Part II, as amended,
elicits the amounts attributable to cleared and non-cleared security-
based swaps, mixed swaps, and swaps, and includes definitions for these
products in the instructions, but no longer elicits information
regarding the sub-categories. The Commission also received comment that
``bought'' and ``sold'' could help clarify the

schedule,\338\ and in response the columns in Schedule 1 to FOCUS
Report Part II, as amended, are relabeled ``long/bought'' and ``short/
sold'' and the instructions are updated accordingly.
---------------------------------------------------------------------------

    \337\ See Memorandum from the Division of Trading and Markets
regarding an April 30, 2015 meeting with representatives of the
Securities Industry and Financial Markets Association (May 5, 2015)
(``SIFMA 4/30/2015 Meeting'').
    \338\ See, e.g., SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    The details in Schedule 1 may be of increased value to examiners if
the totals in the schedule (Line Items 8370 and 8371) match the amounts
reported for total securities, commodities, and swap positions in the
Statement of Financial Condition (Line Items 12024 and 12044).
Accordingly, the ``Other securities and commodities'' and ``Securities
with no ready market'' lines are moved up to Lines 12 and 13 (instead
of Lines 16 and 17) in Schedule 1 so that they can be included in the
subtotal for ``Total net securities and spot commodities.'' In
addition, Schedule 1 now elicits ``Counterparty netting'' and ``Cash
collateral netting'' and includes these amounts in the subtotal for
``Total derivative receivables and payables.'' Consequently, the totals
on Schedule 1, titled ``Total net securities, commodities, and swaps
positions,'' are now equal to the sum of ``Total net securities and
spot commodities'' and ``Total derivative receivables and payables.''
\339\
---------------------------------------------------------------------------

    \339\ For clarity and accuracy, the total line now reads ``Total
net securities, commodities, and swaps positions (sum of Lines 14
and 21)'' instead of ``Total (sum of Lines 1-17).'' A commenter
requested additional detail regarding firms' hedging activities. See
Levin Letter. The final rule does not require the linking of hedges
as requested by the commenter. However, because the Commission
believes that it would be difficult to identify and pair product
hedges and therefore report hedges, the Commission believes that
linking the totals in Schedule 1 to the lines on the Statement of
Financial Condition will provide examiners with additional detail
about filers' securities and derivatives positions that partially
addresses the concerns underlying this comment.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting Schedule 1 to
proposed Form SBS by adding it to FOCUS Report Part II, as amended,
with the modifications discussed above.\340\ Schedule 1 must be
completed by stand-alone broker-dealers and stand-alone and broker-
dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \340\ See FOCUS Report Part II, as amended, Schedule 1--
Aggregate Securities, Commodities, and Swaps Positions.
---------------------------------------------------------------------------

Schedule 2 to FOCUS Report Part II
    Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Credit-Concentration Report for Fifteen Largest Net Exposures in
Derivatives'' that requires ANC broker-dealers to provide details about
the fifteen counterparties to which they have the largest credit
exposures in derivatives.\341\ Schedule 2 to proposed Form SBS had two
tables that were modeled largely on this schedule.\342\ The first table
would require the filer to identify in the first column the fifteen
counterparties to which the firm had the largest current net exposure,
in order from the largest to the smallest current net exposure. The
second table would require the filer to identify in the first column
the fifteen counterparties to which the firm had the largest total
exposure, in order from the largest to the smallest total exposure.
---------------------------------------------------------------------------

    \341\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Credit-Concentration Report for Twenty Largest Current Net
Exposures.''
    \342\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25234-35.
---------------------------------------------------------------------------

    A commenter raised concerns about the potential ramifications if
counterparties obtained this information and disagreed with the
internal credit rating assigned to them.\343\ The Commission
acknowledges that firms may be required to disclose the FOCUS Report
Part II to counterparties and other third parties for commercial
reasons, and that this could cause internal credit ratings to be
disclosed to the rated entity. The disclosure of this information or
the potential disclosure of the information to the rated entity could
negatively affect the integrity of the filer's credit risk function.
For example, it could give firms an incentive to assign a higher
internal credit rating than warranted to avoid negatively affecting its
relationship with a counterparty and potentially losing that entity's
business. Accordingly, the Commission is modifying the table so that it
continues to require counterparty identifiers but no longer elicits the
internal credit rating assigned to a particular counterparty. This
information is available to Commission staff through its monitoring and
examination programs.
---------------------------------------------------------------------------

    \343\ See SIFMA 4/30/2015 Meeting.
---------------------------------------------------------------------------

    For the foregoing reasons, Commission is adopting Schedule 2 to
proposed Form SBS by adding it to FOCUS Report Part II, as amended,
with the modification discussed above.\344\ Schedule 2 must be
completed by stand-alone broker-dealers that are authorized to
calculate net capital using internal models and all stand-alone and
broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \344\ See FOCUS Report Part II, as amended, Schedule 2--Credit
Concentration Report for Fifteen Largest Exposures in Derivatives.
---------------------------------------------------------------------------

Schedule 3 to FOCUS Report Part II
    Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Portfolio Summary of OTC Derivatives Exposures by Internal Credit
Rating'' that required ANC broker-dealers to provide details about
their aggregate credit exposures to counterparties grouped by the
internal credit rating assigned to the counterparty.\345\ Schedule 3 to
proposed Form SBS had a table modeled on this schedule.\346\ The table
would require the filer to set forth its internal credit rating scale
in the left hand column. For each notch in the rating scale, the filer
would need to provide detail about aggregate amounts of exposures and
collateral collected from the counterparties rated at that notch. The
Commission received no comment on Schedule 3 to proposed Form SBS and
is adopting it by adding the schedule to FOCUS Report Part II, as
amended.\347\ Schedule 3 must be completed by stand-alone broker-
dealers that are authorized to calculate net capital using internal
models and all stand-alone and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \345\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Portfolio Summary of OTC Derivatives Exposures'' that elicits the
credit rating category of the counterparty.
    \346\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
    \347\ See FOCUS Report Part II, as amended, Schedule 3--
Portfolio Summary of Derivatives Exposures by Internal Credit
Rating.
---------------------------------------------------------------------------

Schedule 4 to FOCUS Report Part II
    Pre-Amendment FOCUS Report Part II CSE has a schedule titled
``Geographic Distribution of Derivatives Exposures for Ten Largest
Countries'' that required ANC broker-dealers to provide details about
their OTC derivatives exposures grouped by country.\348\ Schedule 4 to
proposed Form SBS included two tables modeled on this schedule.\349\
The first table would require the filer to identify in the left column
the ten largest countries in terms of the filer's aggregate current net
exposure to counterparties located in the country, in order from the
largest to the smallest current net exposure amounts. The second table
would require the filer to identify in the left column the ten largest
countries in terms of the filer's total exposure to counterparties
located in the country, in order from the largest to the smallest total
exposure amounts. The Commission received no comment on Schedule 4 and
is adopting it by adding the schedule to the FOCUS Report Part II, as
amended.\350\ Schedule 4 must be completed by stand-alone broker-
dealers

that are authorized to calculate net capital using internal models and
all stand-alone and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \348\ Pre-Amendment FOCUS Report Part IIB has a schedule titled
``Geographic Distribution of OTC Derivatives Exposures'' that
elicits the top ten country exposures by residence of main operating
company.
    \349\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
    \350\ See FOCUS Report Part II, as amended, Schedule 4--
Geographic Distribution of Derivatives Exposures for Ten Largest
Countries.
---------------------------------------------------------------------------

ii. FOCUS Report Part IIC
    As discussed above, the Commission is requiring bank SBSDs and
MSBSPs to report certain general financial information on new FOCUS
Report Part IIC to facilitate monitoring these registrants' financial
condition. The Commission's reporting requirements for bank SBSDs and
MSBSPs generally are designed to be tailored specifically to their
activities as an SBSD or an MSBSP. Accordingly, FOCUS Report Part IIC,
as adopted, is based on FFIEC Form 031, which most banks are required
to file on a quarterly basis.\351\ FFIEC Form 031 elicits financial and
operational information about a bank that is entered into uniquely
numbered line items.
---------------------------------------------------------------------------

    \351\ See 12 U.S.C. 161; 12 U.S.C. 324; 12 U.S.C. 1464; 12
U.S.C. 1817. FFIEC Form 031 is available at http://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201303_f.pdf.
---------------------------------------------------------------------------

    FOCUS Report Part IIC, as adopted, requires bank SBSDs and MSBSPs
to report certain information they already report on FFIEC Form 031.
Specifically, it includes: (1) A Balance Sheet section that largely
mirrors Schedule RC to FFIEC Form 031; (2) a Regulatory Capital section
that is a scaled-down version of Schedule RC-R to FFIEC Form 031; and
(3) an Income Statement section that is a scaled-down version of
Schedule RI to FFIEC Form 031. If the same line appears in both FFIEC
Form 031 and FOCUS Report Part IIC, as adopted, the same line item
number is used in both forms, except that the FOCUS Report Part IIC
line item ends with an additional ``b'' character.\352\
---------------------------------------------------------------------------

    \352\ For example, Line Item 0081 on FFIEC Form 031 is Line Item
0081b on FOCUS Report Part IIC. The letter ``b'' is added because
some of the line items on FFIEC Form 031 are already assigned to
other lines in the FOCUS Report.
---------------------------------------------------------------------------

    One commenter pointed out that not all banks file FFIEC Form 031,
noting that U.S. branches and agencies of foreign banks file FFIEC Form
002.\353\ The Commission acknowledges that there are multiple types of
FFIEC reporting forms, but modeled the FOCUS Report Part IIC on the
form it believes most bank SBSDs and MSBSPs will use. FFIEC Form 031 is
filed by banks with both domestic and foreign offices, while FFIEC Form
041 is filed by banks with domestic offices only. All of the line items
that appear on FOCUS Report Part IIC, as adopted, appear on both FFIEC
Form 031 and FFIEC Form 041, except for three line items which do not
apply to FFIEC Form 041 filers.\354\
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    \353\ See SIFMA 9/5/2014 Letter. The commenter also noted that
foreign bank SBSDs generally report financial information to their
home jurisdiction in accordance with the International Financial
Reporting Standards rather than U.S. Generally Accepted Accounting
Principles. See id. However, these firms likely also file FFIEC Form
002, which is required to be prepared using U.S. Generally Accepted
Accounting Principles. The FFIEC Form 002 instructions are available
at http://www.ffiec.gov/PDF/FFIEC_forms/FFIEC002_201409_i.pdf.
    \354\ Line Items 2200, 6631, and 6636 regarding foreign office
deposits do not apply to FFIEC Form 041 filers, because they do not
have foreign branches. Line Item 1395 regarding Tier 3 capital does
not apply to FFIEC Form 041 filers, because they are not required to
compute Tier 3 capital.
---------------------------------------------------------------------------

    In addition to the sections drawn from FFIEC Form 031, FOCUS Report
Part IIC, as adopted, includes sections for: (1) A Computation for
Determination of Security-Based Swap Customer Reserve Requirements; (2)
Possession or Control for Security-Based Swap Customers; and (3)
Schedule 1--Aggregate Security-Based Swap and Swap Positions. Finally,
the Commission is adopting instructions for FOCUS Report Part IIC,
which closely track the instructions for proposed Form SBS and FOCUS
Report Part II, as amended.\355\
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    \355\ In addition to removing references to entities that will
not file FOCUS Report Part IIC and removing references to sections
and schedules that are not part of FOCUS Report Part IIC, the
following change is made to FOCUS Report Part IIC's general
instructions: The instruction ``Money amounts should be expressed in
whole dollars.'' is deleted because this instruction does not appear
in the instructions accompanying FFIEC Form 031. Additional changes
to FOCUS Report Part IIC's instructions that relate to specific
sections of the form are discussed in this release's discussion of
the applicable section.
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Cover Page
    As discussed above, proposed Form SBS included a cover page modeled
largely on the cover page to Pre-Amendment FOCUS Report Part II.\356\
The Commission received no comment on the proposed cover page and is
adopting it in FOCUS Report Part IIC with non-substantive changes
largely to account for the fact that FOCUS Report Part IIC will only be
filed by bank SBSDs and MSBSPs.\357\
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    \356\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25225.
    \357\ See FOCUS Report Part IIC, Cover Page. The following
changes are being made: (1) The line soliciting firms to check the
type of registrant filing the form is shortened to only reflect the
registrants required to file FOCUS Report Part IIC (bank SBSDs and
MSBSPs); (2) in response to comment that proposed Form SBS did not
reference foreign SBSDs or foreign MSBSPs, a line is added asking
firms whether the filer is a U.S. person (see SIFMA 9/5/2014
Letter); (3) the line soliciting firms to check the reason the firm
is filing FOCUS Report Part IIC is shortened to only reflect the
range of reasons bank SBSDs and MSBSPs would file the report: at the
special request by the Commission, pursuant to Rule 18a-7, or other;
(4) the line soliciting firms to ``Check here if respondent is
filing an audited report'' is removed, because bank SBSDs and MSBSPs
are not required to file annual reports with the Commission (see 17
CFR 240.18a-7(c)(1)(i)); (5) a typographical error is corrected so
the officer's title printed under the signature line matches the
officer's title printed under the line for the signing officer to
write out his or her name; and (6) a typographical error in the
instructions is corrected so that the ``Official use'' line
references line item 33 instead of 31.
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Balance Sheet
    A bank must report details about its assets, liabilities, and
equity capital on Schedule RC to FFIEC Form 031. Schedule RC also
includes a Memoranda section that elicits information about the bank's
external auditors and fiscal year end. Proposed Form SBS had a Balance
Sheet section to be completed by bank SBSDs and MSBSPs.\358\ The lines
and line items in this section were the same as in Schedule RC to FFIEC
Form 031, except that it did not include line items from the Memoranda
section. The Commission received no comment on this proposed section
and is adopting it in FOCUS Report Part IIC with non-substantive
changes for consistency with Schedule RC to FFIEC Form 031.\359\ This
section must be completed by bank SBSDs and MSBSPs.
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    \358\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231.
    \359\ See FOCUS Report Part IIC, Balance Sheet (Information As
Reported On FFIEC Form 031--Schedule RC). The following changes are
being made: (1) Lines 4B, 4C, 13A1, 13A2, 13B1, and 13B2 are
indented so their corresponding line items are not included in the
Totals column; (2) on Line 8, the word ``Investment'' is replaced
with ``Investments''; (3) on Line 23, the Line Item number ``3828b''
is replaced with ``3838b''; (4) in the instructions, clarification
is added that ``FFIEC Instructions'' refers to ``instructions
accompanying FFIEC Form 031''; and (5) because the instructions
direct filers to prepare this section in accordance with the FFIEC
Instructions, the following sentence is deleted: ``In addition, the
data reported on this section should only be updated quarterly.''
---------------------------------------------------------------------------

Regulatory Capital
    The prudential regulators are responsible for administering capital
requirements for bank SBSDs and MSBSPs. A bank must report details
about its regulatory capital on Schedule RC-R to FFIEC Form 031.
Schedule RC-R also includes a Memoranda section that elicits detail
about derivatives. Proposed Form SBS similarly included a regulatory
capital section to be completed by bank SBSDs and MSBSPs.\360\ The
lines and line items in this section were largely the same as in
Schedule RC-R to FFIEC Form 031. More specifically, the proposed
section required banks to enter the total amounts of the components of
bank regulatory capital (i.e., total Tier 1, Tier 2, or Tier 3 capital)
and other summary measures, rather than requiring the level

of detail required by the prudential regulators on Schedule RC-R. The
Commission received no comment on this proposed section and is adopting
it in FOCUS Report Part II, with non-substantive changes for
consistency with Schedule RC-R to FFIEC Form 031.\361\ This section
must be completed by bank SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \360\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25231-32.
    \361\ See FOCUS Report Part IIC, Regulatory Capital (Information
As Reported On FFIEC Form 031--Schedule RC-R). The following changes
are being made; (1) on Line 7, the phrase ``Total assets for
leverage capital purposes'' is replaced with ``Total assets for the
leverage ratio'' and line item number ``L138b'' is replaced with
``A224b''; (2) on Lines 8 through 10, the same line item numbers are
assigned to Columns A and B; and (3) because the instructions direct
filers to prepare this section in accordance with the FFIEC
Instructions, the following sentence is deleted: ``In addition, the
data reported on this section should only be updated quarterly.''
---------------------------------------------------------------------------

Income Statement
    A bank must report details about its income or loss and expenses on
Schedule RI to FFIEC Form 031. Schedule RI also includes a Memoranda
section that elicits further details about the bank's income or loss.
Proposed Form SBS included an income statement section to be completed
by bank SBSDs and MSBSPs.\362\ The proposed income statement section
included some--but not all--of the line items on Schedule RI. More
specifically, to focus the reporting on summary information and
information relevant to securities and derivatives activities, the
proposed income statement section included only line items from
Schedule RI that require the entry of: (1) Total amounts for categories
of income, expense, and loss; (2) details about gains and losses on
securities positions; (3) details about trading revenues; and (4)
details about gains and losses on derivatives. The Commission received
no comment on the proposed income statement section and is adopting it
in FOCUS Report Part IIC with minor non-substantive changes.\363\ This
section must be completed by bank SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \362\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25232.
    \363\ See FOCUS Report Part IIC, Income Statement (Information
As Reported On FFIEC Form 031--Schedule RI). The following changes
are being made: (1) In FOCUS Report Part IIC, the parentheticals
instructing filers which lines to total are deleted from Lines 9,
9F, and 9G, because one of these parentheticals contained an
inaccurate cross-reference and this change preserves flexibility in
case FFIEC Form 031's lines are renumbered in the future; and (2)
because the instructions direct filers to prepare this section in
accordance with the FFIEC Instructions, the following sentence is
deleted: ``In addition, the data reported on this section should
only be updated quarterly.''
---------------------------------------------------------------------------

Computation for Determination of Security-Based Swap Customer Reserve
Requirements
    As discussed above, FOCUS Report Part II, as amended, includes a
section for broker-dealers and stand-alone SBSDs to provide a
computation of their security-based swap customer reserve requirements.
Proposed Form SBS would have required bank SBSDs to complete an
identical section.\364\ The Commission received no comment on applying
this section to bank SBSDs and is adopting it in FOCUS Report Part IIC
with non-substantive changes for consistency internally and with Rules
15c3-3 and 18a-4.\365\
---------------------------------------------------------------------------

    \364\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
    \365\ See FOCUS Report Part IIC, Computation for Determination
of Security-Based Swap Customer Reserve Requirements. The following
non-substantive changes are being made: (1) References to Rule 18a-4
are removed from the section's title, line items, and instructions
to accurately reflect that the security-based swap customer reserve
requirement adopted by the Commission is located in Rules 15c3-3 and
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the
Commission); (2) to improve clarity, the form and instructions
reflect that the section is titled ``Computation for Determination
of Security-Based Swap Customer Reserve Requirements'' instead of
``Computation for Determination of the Amount to be Maintained in
the Special Account for the Exclusive Benefit of Security-Based Swap
Customers--Rule 18a-4, Exhibit A''; (3) the section's heading and
instructions are updated to state that a stand-alone SBSD exempt
from Rule 18a-4 is not required to complete this section to reflect
that paragraph (f) of Rule 18a-4, as amended, provides an exemption
from the rule for certain bank SBSDs; (4) the parenthetical ``(See
Note A)'' is added to Line 1 for consistency with Line 1 of the
Computation for Determination of Customer Reserve Requirements
section in revised FOCUS Report Part II, and, in response to
commenters, the section includes a clarification that the notes
referenced in this section appear in Exhibit A to Rule 18a-4 (see
SIFMA 9/5/2014 Letter); (5) in response to comment received, Lines
20 and 21 now correctly cross-reference ``Line 19'' instead of
``Line 21'' (See SIFMA 9/5/2014 Letter); (6) in Lines 23 and 25,
``Reserve Bank Account(s)'' is replaced with ``Reserve Account(s)''
for consistency with paragraph (a)(9) of Rule 18a-4; and (7) to
eliminate extraneous text, the following sentence is deleted from
the instructions: ``The term `security-based swap customer' is
defined in 17 CFR 240.18a-4.''
---------------------------------------------------------------------------

Possession or Control for Security-Based Swap Customers
    As discussed above, FOCUS Report Part II, as amended, includes a
section in which broker-dealers and stand-alone SBSDs enter information
related to possession or control for security-based swap customers.
Proposed Form SBS required bank SBSDs to complete an identical
section.\366\ The Commission received no comment on applying this
section to bank SBSDs and is adopting it in FOCUS Report Part IIC with
non-substantive changes for consistency internally and with Rules 15c3-
3 and 18a-4.\367\
---------------------------------------------------------------------------

    \366\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230-31.
    \367\ See FOCUS Report Part IIC, Possession or Control for
Security-Based Swap Customers. The following changes are being made:
(1) References to Rule 18a-4 are removed from the section's title,
line items, and instructions to accurately reflect that the
possession or control requirements adopted by the Commission is
located in Rules 15c3-3 and 18a-4 (instead of solely in Rule 18a-4
as initially proposed by the Commission); (2) to improve clarity,
the form and instructions reflect that the section is titled
``Possession or Control for Security-Based Swap Customers'' instead
of ``Information for Possession or Control Requirements under Rule
18a-4''; and (3) the section's heading and instructions are updated
to state that a stand-alone SBSD exempt from Rule 18a-4 is not
required to complete this section to reflect that paragraph (f) of
Rule 18a-4, as amended, provides an exemption from the rule for
certain bank SBSDs.
---------------------------------------------------------------------------

Claiming an Exemption From Rule 18a-4
    As discussed above, Rule 18a-4, as adopted, exempts bank SBSDs from
the requirements of the rule if the SBSD meets certain conditions.\368\
In light of this modification to the rule from the proposal (which did
not provide an exemption), the Commission is adding a line item to the
FOCUS Report Part IIC for a bank SBSD to indicate whether the firm is
claiming an exemption from Rule 18a-4.\369\
---------------------------------------------------------------------------

    \368\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35.
    \369\ See FOCUS Report Part IIC, Claiming an Exemption from Rule
18a-4.
---------------------------------------------------------------------------

Schedule 1 to FOCUS Report Part IIC
    As discussed above, FOCUS Report Part II, as amended, includes a
Schedule 1 that elicits details about filers' aggregate long and short
positions in various categories of financial instruments, including
sub-categories of security-based swaps and swaps. Proposed Form SBS
would have required bank SBSDs and MSBSPs to complete a similar but
more truncated version of this section.\370\ The Commission received no
comment on applying this truncated version of the schedule to bank
SBSDs and MSBSPs. However, as discussed above, the Commission did
receive comment on the practicality of reporting exposures to
subcategories of security-based swaps and swaps, including the
potential that firms will interpret them differently.\371\ Accordingly,
the Commission is modifying the proposed schedule for bank SBSDs and
MSBSPs so that it no longer elicits details regarding the sub-
categories of security-based swaps and swaps. As discussed above, the
Commission also received comment suggesting that references to ``long''
and ``short'' positions in security-based

swaps, mixed swaps, and swaps \372\ should be changed to references to
``long/bought'' and ``short/sold'' positions. The Commission agrees and
is making this modification.
---------------------------------------------------------------------------

    \370\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25235.
    \371\ See SIFMA 4/30/2015 Meeting.
    \372\ See id.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting the
requirement that bank SBSDs and MSBSPs must complete a truncated
version of Schedule 1 by including it in FOCUS Report Part IIC, as
adopted, with the modifications discussed above.
3. Filing of Annual Audited Financial Reports and Other Reports
    Rule 17a-5 generally requires a broker-dealer to, among other
things, annually file reports audited by a PCAOB-registered independent
public accountant, disclose certain financial information to customers,
and notify the Commission of a change of accountant. The rule also
requires the independent public accountant to notify the broker-dealer
if the accountant determines that the broker-dealer is not in
compliance with certain broker-dealer financial responsibility rules or
that a ``material weakness,'' as defined in paragraph (d)(3)(iii) of
the rule, exists. As discussed above, the Commission is amending Rule
17a-5 so that it is applicable to broker-dealer SBSDs, other than
OTCDD/SBSDs, and broker-dealer MSBSPs. With respect to stand-alone
SBSDs and MSBSPs and OTCDD/SBSDs, the Commission is adopting in new
Rule 18a-7 many requirements that parallel requirements in Rule 17a-5,
as amended. However, Rule 18a-7 does not include a parallel requirement
for every requirement in Rule 17a-5.\373\ Further, the requirements in
Rule 18a-7 relating to the filing of annual audited reports and other
reports do not apply to bank SBSDs and MSBSPs (as discussed above, bank
SBSDs and MSBSPs are subject to requirements to file FOCUS Report Part
IIC on a quarterly basis).
---------------------------------------------------------------------------

    \373\ The Commission did not propose in Rule 18a-7 (and is not
adopting) a requirement that is parallel to the exemption report
requirement in paragraph (d)(4) of Rule 17a-5 because this provision
would not apply to stand-alone SBSDs and MSBSPs. Rule 18a-7 also
does not include requirements that parallel the requirements in
paragraphs (d)(6) and (e)(4) of Rule 17a-5, as amended, requiring
broker-dealers to file certain reports with the Securities Investor
Protection Corporation (``SIPC'') because stand-alone SBSDs and
MSBSPs and OTCDD/SBSDs will not be members of SIPC. In addition,
Rule 18a-7 does not include a requirement that parallels the
requirement for a broker-dealer, other than an OTC derivatives
dealer, to file Form Custody with the firm's DEA. Additional
differences between Rule 18-7 and Rule 17a-5 are discussed below.
---------------------------------------------------------------------------

a. Amendments to Rule 17a-5 and Adoption of Rule 18a-7
Liquidity Stress Test Reports
    The Commission proposed that broker-dealers (including broker-
dealer SBSDs) and stand-alone SBSDs authorized to use internal models
to compute net capital be subject to liquidity stress test
requirements.\374\ Consequently, the Commission proposed to amend Rule
17a-5 and include in proposed Rule 18a-7 a parallel provision to
require these entities to file a monthly report with the Commission
containing the results of the liquidity stress test.\375\ As
consideration of the proposed liquidity stress test requirements is
being deferred,\376\ the Commission is deferring consideration of these
related reporting requirements.\377\
---------------------------------------------------------------------------

    \374\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70252-70254.
    \375\ See Recordkeeping and Reporting Release, 79 FR at 25237.
    \376\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
    \377\ See paragraph (a)(5)(vii) of Rule 17a-5, as amended;
paragraph (a)(3)(vii) of Rule 18a-7, as adopted. The proposed
reporting requirements would have been set forth in these
paragraphs, which instead are being designated ``[Reserved].''
---------------------------------------------------------------------------

Customer Statements
    Paragraph (c) of Rule 17a-5 requires, among other things, that
certain broker-dealers annually send their customers audited statements
that must include (along with other information) a statement of
financial condition (with appropriate notes), a footnote with
information about the firm's net capital, and, if applicable,
information about any material weaknesses in the firm's internal
control over compliance with certain broker-dealer financial
responsibility rules identified in the most recent reports of the
firm's auditor. In addition, this paragraph requires these broker-
dealers to send their customers unaudited statements dated six months
after the date of the audited statements that must include (along with
other information) a statement of financial condition and a footnote
containing information about the firm's net capital. Under paragraph
(c)(5) of Rule 17a-5, a broker-dealer is exempt from sending the
statements to customers if the broker-dealer, among other things, semi-
annually sends its customers a financial disclosure statement that
includes, among other things, information regarding the firm's net
capital and a statement that the audited and unaudited statements are
available at no charge on the broker-dealer's website and by calling a
toll-free number to request a paper copy of the statements. Broker-
dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be
subject to these requirements and therefore will need to send the
audited and unaudited statements to their customers, including
security-based swap customers. However, these firms will be permitted
to take advantage of the exemption described above.\378\
---------------------------------------------------------------------------

    \378\ See the broad definition of ``customer'' in paragraph
(c)(4) of Rule 17a-5.
---------------------------------------------------------------------------

    The Commission proposed in Rule 18a-7 that stand-alone SBSDs and
MSBSPs be required to disclose on their websites (rather than send
paper copies) information that is similar to the information broker-
dealers are required to send to customers.\379\ The proposal required
stand-alone SBSDs and MSBSPs to disclose on their websites an audited
statement of financial condition with appropriate notes within ten
business days after the date the firm is required to file its audited
annual reports with the Commission. In addition, it required a stand-
alone SBSD (but not an MSBSP) to disclose on its website at the same
time: (1) A statement of the amount of the firm's net capital and
required net capital and other information, if applicable, related to
the firm's net capital; and (2) if, in connection with the firm's most
recent annual reports, the report of the independent public accountant
identified one or more material weaknesses, a copy of the report.
Further, the proposal required stand-alone SBSDs and MSBSPs to disclose
on their websites unaudited statements containing the same information
as the audited statement discussed above within 30 calendar days of the
date of the unaudited statements. Finally, it required stand-alone
SBSDs and MSBSPs to make a paper copy of the information required to be
disclosed on their websites available at no charge upon request of the
customer and to maintain a toll-free number to receive such requests.
The Commission received no comments on these customer disclosure
proposals and is adopting them with the modification that an OTCDD/SBSD
will be subject to these requirements pursuant to Rule 18a-7 (rather
than Rule 17a-5).\380\
---------------------------------------------------------------------------

    \379\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 25237-38.
    \380\ See paragraph (b) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

Annual Reports
    Paragraph (d) of Rule 17a-5 requires broker-dealers, among other
things, to file with the Commission annual reports consisting of a
financial report and either a compliance report or an

exemption report, as well as reports that are prepared by an
independent public accountant registered with the PCAOB covering the
financial report and the compliance report or the exemption report in
accordance with standards of the PCAOB. The financial report must
contain financial statements, including, among others, a statement of
financial condition, a statement of income, and a statement of cash
flows and also must contain, as applicable, supporting schedules
consisting of a computation of net capital under Rule 15c3-1, a
computation of the reserve requirements under Rule 15c3-3, and
information relating to the possession or control requirements under
Rule 15c3-3. Generally, broker-dealers that maintain custody of
customer securities and/or cash (and, therefore, do not claim an
exemption from Rule 15c3-3) must file the compliance report. The report
must contain statements about the broker-dealer's internal control over
compliance with Rules 15c3-1, 15c3-3, 17a-13, and SRO customer account
statement rules as well as statements as to whether the firm was in
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 (the
customer reserve account requirement) as of the end of the firm's
fiscal year. The exemption report must contain statements about the
broker-dealer's claimed exemption from Rule 15c3-3.
    The Commission proposed amending paragraph (d) of Rule 17a-5 to
require a broker-dealer that was subject to proposed Rule 18a-4 (i.e.,
a broker-dealer SBSD) \381\ to: (1) File the compliance report and
related report of the independent public accountant covering the
compliance report (i.e., the firm could not file the exemption report
even if it claimed an exemption from Rule 15c3-3); and (2) incorporate
the possession or control and customer reserve requirements of the
proposed SBSD segregation rule into the financial report supporting
schedules and the compliance report.\382\
---------------------------------------------------------------------------

    \381\ As noted above, the Commission proposed that Rule 18a-4,
the SBSD segregation rule, apply to all SBSDs, but, in response to
comment, adopted security-based swap segregation requirements for
broker-dealers, including broker-dealer SBSDs, in paragraph (p) of
the broker-dealer segregation rule, Rule 15c3-3. As a result, the
Commission is modifying the cross references in paragraph (d) of
Rule 17a-5 to reflect the placement of the customer protection
requirements for broker-dealer SBSDs in paragraph (p) of Rule 15c3-3
rather than in paragraph (b) of Rule 18a-4 as proposed.
    \382\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25238-40.
---------------------------------------------------------------------------

    The Commission also proposed parallel annual reporting requirements
in proposed new Rule 18a-7 for stand-alone SBSDs and MSBSPs. The
proposals required stand-alone SBSDs and MSBSPs to annually file with
the Commission a financial report. In addition, they required stand-
alone SBSDs to file a compliance report that contained statements about
the firm's compliance with the proposed SBSD capital and segregation
rules and statements about the firm's internal control over compliance
with those rules and the proposed SBSD securities count rule. Further,
the proposals required stand-alone SBSDs and MSBSPs to file reports of
an independent public accountant covering the financial report and the
compliance report.
    The final segregation rule for stand-alone SBSDs, bank SBSDs, and
OTCDD/SBSDs (Rule 18a-4) establishes an exemption from its requirements
if the firm meets certain conditions.\383\ Consequently, the Commission
is modifying the proposed annual reports provisions in Rule 18a-7 to
require a stand-alone SBSD or OTCDD/SBSD that is operating under the
exemption from Rule 18a-4 to file an exemption report instead of the
compliance report.\384\ The exemption report for stand-alone SBSDs and
OTCDD/SBSDs is modeled on the existing exemption report for broker-
dealers. In the report, the SBSD must state that it met the exemptive
provisions in Rule 18a-4 throughout the most recent fiscal year without
exception or with one or more exceptions. If applicable, the firm will
need to briefly describe the nature of each exception and the
approximate dates the exception existed. In addition, the stand-alone
SBSD or OTCDD/SBSD will need to file a report of its independent public
accountant covering the exemption report. Permitting these firms to
file the exemption report in lieu of the compliance report should
reduce the costs of the audit and will result in a report that aligns
more closely with their activities (i.e., operating under the
exemption).
---------------------------------------------------------------------------

    \383\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4). The final
segregation requirements for broker-dealer SBSDs, other than OTCDD/
SBSDs, do not contain a similar exemption.
    \384\ See paragraphs (c)(1)(i)(B)(2) and (c)(4) of Rule 18a-7,
as adopted.
---------------------------------------------------------------------------

    Finally, a commenter requested that the Commission permit the
independent public accountant to adhere to generally accepted auditing
standards (``GAAS'') rather than PCAOB standards. The commenter stated
that: (1) This would promote consistency with other U.S. regulators;
(2) the PCAOB standards are ``almost identical'' to GAAS; and (3) using
GAAS would be the lowest cost alternative.\385\ The commenter also
stated that the Commission should eliminate the PCAOB standards'
applicability to audited compliance and exemption reports, because the
requirement provides a ``non-existent benefit'' in light of existing
Commission regulations and Commission and FINRA staff examinations.
---------------------------------------------------------------------------

    \385\ See Email from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (Feb. 7, 2019)
(``SIFMA 2/7/2019 Email'').
---------------------------------------------------------------------------

    In response, the Commission first notes that the requirement that
broker-dealer annual financial statements be certified by a PCAOB-
registered independent public accountant is consistent with the
requirements imposed by the Exchange Act.\386\ Moreover, as noted
above, this requirement applies to all broker-dealers that must file
certified annual reports. Further, the PCAOB has issued attestation
standards specific to the examination of compliance reports and the
review of exemption reports.\387\ Consequently, the Commission does not
believe it would be appropriate to amend Rule 17a-5 to permit broker-
dealers subject to that rule to file annual reports that are not
certified by a PCAOB-registered accountant because the firm is dually
registered as an SBSD. Additionally, the Commission does not believe it
would be appropriate to have the financial reports audited under PCAOB
standards and the compliance or exemption report (as applicable)
examined or reviewed, respectively, under GAAS.
---------------------------------------------------------------------------

    \386\ See Section 17(e)(1)(A) of the Exchange Act (as amended by
Pub. L. 107-204, section 205(c)(2) (2002)).
    \387\ See PCAOB, Attestation Standard No. 1, Examination
Engagements Regarding Compliance Reports of Brokers and Dealers, and
Attestation Standard No. 2, Review Engagements Regarding Exemption
Reports of Brokers and Dealers.
---------------------------------------------------------------------------

    However, the Commission believes it would be appropriate to permit
SBSDs and MSBSPs subject to Rule 18a-7 to file annual reports that are
certified by independent public accountants that are not registered
with the PCAOB. Stand-alone SBSDs and MSBSPs are not subject to a
statutory requirement that their financial statements filed with the
Commission be certified by a PCAOB-registered accountant, and the
audits of these entities will not be subject to the PCAOB's examination
and enforcement authority. While an OTC derivatives dealer (as a
broker-dealer) is subject to the statutory requirement, an OTCDD/SBSD
will be subject to the same net capital rule (Rule 18a-1) and the same
reporting rule (Rule 18a-7) as a stand-alone SBSD. The Commission
believes an OTCDD/SBSD should be treated

similarly to a stand-alone SBSD because they are both subject to the
same capital rule. Further, Rule 17a-12, the OTC derivatives dealer
reporting rule, does not require that the auditor of an OTC derivatives
dealer's annual audited financial statements be registered with the
PCAOB or that the audit be conducted in accordance with standards of
the PCAOB.\388\ Accordingly, the Commission believes that stand-alone
SBSDs and MSBSPs and OTCDD/SBSDs should have the option to engage an
independent public accountant that is not registered with the PCAOB,
and that the independent public accountant engaged by the firm should
have the option to use either GAAS in the United States or PCAOB
standards.\389\
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    \388\ Paragraph (b) of Rule 17a-12 provides that the statements
must be audited by ``a certified public accountant,'' paragraph (f)
provides that the accountant must be independent, and paragraph
(h)(1) provides that the audit must be ``made in accordance with
U.S. Generally Accepted Auditing Standards.''
    \389\ See Section 17(e)(1)(A) of the Exchange Act. See also
Section 17(e)(1)(C) of the Exchange Act (providing the Commission
with exemptive authority with respect to Section 17(e)(1)(A) of the
Exchange Act).
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    For these reasons, the Commission is adopting the proposed annual
reports requirements with the modifications that stand-alone SBSDs and
OTCDD/SBSDs operating under the exemption from Rule 18a-4 will be
required to file the exemption report instead of the compliance report,
that stand-alone SBSDs and MSBSPs and OTCDD/SBSDs may engage an
independent public accountant that is not registered with the PCAOB,
and that the accountant must undertake, as part of the engagement, to
prepare its reports based on an examination or review, as applicable,
of the reports prepared by the broker-dealer in accordance with GAAS in
the United States or PCAOB standards.\390\ In addition, the Commission
made a number of non-substantive modifications to paragraph (d) of Rule
17a-5,\391\ as proposed to be amended, and paragraph (c) of Rule 18a-7,
as proposed to be adopted.\392\
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    \390\ See paragraph (d) of Rule 17a-5, amended; paragraphs (c),
(e), and (f) of Rule 18a-7, as adopted.
    \391\ Proposed references to Rule 18a-4 in paragraph (d) of Rule
17a-5 are changed to Rule 15c3-3 because--as discussed above--the
segregation requirements for broker-dealer SBSDs are codified in
Rule 15c3-3. Proposed references to Form SBS are changed to the
FOCUS Report because--as discussed above--that will be the financial
reporting form for SBSDs and MSBSPs. Paragraph (d)(2)(iii) of Rule
17a-5, as amended, also contains the following non-substantive
differences from the paragraph as proposed to be amended: (1)
Replacing the word ``either'' with ``any of'' in paragraph
(d)(2)(iii) because the paragraph references more than two
computations; and (2) replacing the word ``the'' with ``Customer''
in the phrase ``Computation for Determination of the Reserve
Requirements Under Exhibit A of Sec.  240.15c3-3'' for consistency
with FOCUS Report Parts II and III.
    \392\ Proposed references to Form SBS are changed to the FOCUS
Report. In addition, the final rule refers to ``the Computation of
Tangible Net Worth under Sec.  240.18a-2'' instead of the ``the
Computation for Determination of Tangible Net Worth under Sec.
240.18a-2.'' Further, the final rule refers to ``a Computation for
Determination of Security-Based Swap Customer Reserve Requirements
under Exhibit A of Sec.  240.18a-4)'' instead of ``a Computation for
Determination of the Reserve Requirements under Exhibit A of Sec.
240.18a-4.'' Finally, the final rule refers to ``Possession or
Control for Security-Based Swap Customers under Sec.  240.18a-4''
instead of ``Information Relating to the Possession or Control
Requirements under Sec.  240.18a-4.''
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Timing and Location of Filing
    Paragraph (d)(5) of Rule 17a-5 provides that a broker-dealer,
broker-dealer SBSD, other than an OTCDD/SBSD, and broker-dealer MSBSP
must file the annual reports with the Commission not more than sixty
calendar days after the end of the firm's fiscal year. Paragraph (d)(6)
of Rule 17a-5 requires that the broker-dealer file the annual reports:
(1) At the office of the Commission for the region where the broker-
dealer has its principal place of business; (2) at the Commission's
principal office in Washington, DC; (3) at the principal office of the
broker-dealer's DEA; and (4) with SIPC. The Commission proposed
parallel filing requirements in Rule 18a-7 for stand-alone SBSDs and
MSBSPs, except that these entities would need to file the annual
reports solely with the Commission.\393\ Broker-dealers, including OTC
derivatives dealers, currently may file their annual reports
electronically.\394\ The Commission is amending paragraph (d)(6) of
Rule 17a-5 to provide broker-dealers, including broker-dealer SBSDs and
MSBSPs the option to file the annual reports with the Commission
electronically. In addition, the Commission is modifying paragraph
(c)(6) of Rule 18a-7 to provide this option to stand-alone SBSDs,
OTCDD/SBSDs, and stand-alone MSBSPs. For these reasons, the Commission
is adopting the proposed requirements regarding the timing and location
of the filings with these modifications.\395\
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    \393\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25240. Stand-alone SBSDs and MSBSPs would not be members of SIPC
and would not have a DEA.
    \394\ See https://www.sec.gov/divisions/marketreg/electronic-filing-broker-dealer-annual-reports.htm.
    \395\ See paragraphs (c)(5) and (6) of Rule 18a-7, as adopted.
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Nature and Form of the Reports
    Paragraph (e) of Rule 17a-5, among other things: (1) Requires the
broker-dealer to attach a notarized oath or affirmation to the
financial reports; (2) provides that the annual reports are not
confidential, except that the broker-dealer can request confidentiality
for all parts of the annual reports other than the statement of
financial condition and related accountant's report; and (3) requires a
broker-dealer to file certain additional reports with SIPC. FOCUS
Report Part III serves as the cover sheet for the annual reports and
provides a template for the broker-dealer to execute the oath or
affirmation. Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-
dealer MSBSPs will be subject to these requirements, as amended. The
Commission proposed amendments to paragraph (e) of Rule 17a-5 and
parallel nature and form of the reports requirements in Rule 18a-7 for
stand-alone SBSDs and MSBSPs.\396\
---------------------------------------------------------------------------

    \396\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25240-41.
---------------------------------------------------------------------------

    More specifically, the Commission proposed amending paragraph (e)
of Rule 17a-5 to remove the text of the oath or affirmation because the
text is set forth in FOCUS Report Part III as well. The Commission
received no comment on this aspect of the proposal. However, to avoid
confusion as to whether this change would result in a new substantive
requirement, the Commission has determined to retain the text of the
oath or affirmation in paragraph (e)(2) of Rule 17a-5 and to include it
in paragraph (d)(1) of Rule 18a-7.
    Paragraph (e)(4)(i) of Rule 17a-5 requires a broker-dealer to file
with SIPC ``a report on the SIPC annual general assessment
reconciliation or exclusion from membership forms that contains such
information and is in such format as determined by SIPC by rule and
approved by the Commission.'' SIPC's rule (SIPC Rule 600, ``Rules
Relating to Supplemental Report of SIPC Membership'') was approved by
the Commission on March 14, 2016.\397\
---------------------------------------------------------------------------

    \397\ See Securities Investor Protection Corporation, Release
No. SIPA-175 (Mar. 14, 2016), 81 FR 14372 (Mar. 17, 2016).
---------------------------------------------------------------------------

    Under paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers are
required to file the report with the Commission pursuant to the
requirements in that paragraph (which prescribes the information that
must be included in, and the format of, the report). However, under
paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers were no longer
required to do so after SIPC adopted its rule under paragraph (e)(4)(i)
of Rule 17a-5 and the rule was approved by the Commission. Therefore,
for fiscal years that ended on or after April 30, 2016,

when SIPC's rule became effective, paragraph (e)(4)(ii) of Rule 17a-5
became moot. As a consequence, the Commission is making the technical
amendment to paragraph (e)(4) of Rule 17a-5 to eliminate paragraph
(e)(4)(ii). As amended, paragraph (e)(4) of Rule 17a-5 provides that:
``The broker or dealer must file with SIPC a report on the SIPC annual
general assessment reconciliation or exclusion from membership forms
that contains such information and is in such format as determined by
SIPC by rule and approved by the Commission.'' A broker-dealer is not
required to also file the report with the Commission. There is no
parallel provision in Rule 17a-12, the reporting rule for OTC
derivatives dealers,\398\ or in Rule 18a-7, because these entities are
not (or will not) be members of SIPC.
---------------------------------------------------------------------------

    \398\ Paragraph (p) of Rule 17a-5 provides that an OTC
derivatives dealer may comply with Rule 17a-5 by complying with Rule
17a-12.
---------------------------------------------------------------------------

    In addition, the Commission proposed a number of changes to FOCUS
Report Part III, which before these amendments was the cover page to be
attached to a broker-dealer's annual reports, to accommodate its use by
OTC derivatives dealers and stand-alone SBSDs and MSBSPs.\399\ The
Commission also proposed amending FOCUS Report Part III to address
amendments made to Rule 17a-5 in 2013.\400\ Further, the Commission
proposed a number of non-substantive changes to FOCUS Report Part
III.\401\ The Commission received no comments on these proposed
requirements and is adopting them.\402\ However, the Commission is
making several non-substantive changes to the original proposal to
improve the clarity of FOCUS Report Part III.\403\ The Commission is
also making several non-substantive changes to the checklist on the
second page of FOCUS Report Part III.\404\
---------------------------------------------------------------------------

    \399\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241, n. 689. The Commission's EDGAR system will be updated to
reflect the amendments to FOCUS Report Part III.
    \400\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 2524, n. 690. See also Broker-Dealer Reports, 78 FR 51910.
    \401\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241, n. 691.
    \402\ See paragraph (e) of Rule 17a-5, as amended; paragraph (d)
of Rule 18a-7, as adopted; FOCUS Report Part III, as amended.
References in the paragraphs to ``Form SBS'' are changed to the
``FOCUS Report'' and references to ``Rule 18a-4'' in paragraph (e)
of Rule 17a-5 are changed to ``Rule 15c3-3.''
    \403\ The following non-substantive changes to the rule were
made. The title of the facing page was changed from ``Audited Annual
Report'' to ``Annual Reports'' to more accurately reflect that
multiple reports are filed with the facing page, and not all of
these reports are audited. For the same reason, ``report'' is
replaced with ``filing'' or ``reports'', as applicable, in the
phrases ``Report for the period beginning _____and ending _____,''
``PCAOB-registered independent public accountant whose opinion is
contained in this report'', and ``This report** contains.''
Similarly, because not all the accountant-prepared documents filed
with the facing page are opinions, the word ``opinion'' is replaced
with ``reports'' in the phrases ``PCAOB-registered independent
public accountant whose opinion is contained in this report'' and
``Claims for exemption from the requirement that the annual report
be covered by the opinion of a PCAOB-registered independent public
accountant must be supported by a statement of facts and
circumstances relied on as the basis of the exemption.'' For further
confirmation of the PCAOB-registered accountant's identity, a field
was added to identify the accountant's PCAOB registration number (if
applicable). This information is publicly available on the PCAOB's
website. In the ``Type of Registrant'' section, the ``OTC
derivatives dealer'' checkbox is replaced with a ``Check here if
respondent is an OTC derivatives dealer'' for consistency with FOCUS
Report Part II, and to clarify that an OTC derivatives dealer is a
type of broker-dealer. To simplify text and improve accuracy, ``Name
and Telephone Number of'' is removed from the phrase ``Name and
Telephone Number of Person to Contact with Regard to this Filing.''
The language in the oath or affirmation is updated for consistency
with the language in the oath or affirmation in paragraph (e)(2) of
Rule 17a-5 and paragraph (d)(1) of Rule 18a-7.
    \404\ The following amendments were made to the checklist. The
line item for the facing page is deleted because the checklist is
part of the facing page, so a firm filling out the checklist is also
necessarily filling out the facing page. In new line item (e),
``Statement of changes in stockholders' equity or partners' or sole
proprietor's capital'' is replaced with ``Statement of changes in
stockholders' or partners' or sole proprietor's equity'' to match
the language used in paragraph (d)(2)(i) of Rule 17a-5, paragraph
(b)(2) of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7.
``Notes to consolidated statement of financial condition'' and
``Notes to consolidated financial statements'' are added to the
checklist as new line items (b) and (g), respectively, because they
are required by paragraph (d)(2)(i) of Rule 17a-5, paragraph (b)(2)
of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7. The line
items titled ``Computation of net capital under 17 CFR 240.15c3-1''
and ``Computation of net capital under 17 CFR 240.18a-1'' are
consolidated into a single new line item (h). Because the security-
based swap reserve requirements are now included in both Rule 15c3-3
(governing broker-dealers) and Rule 18a-4 (governing SBSDs), cross-
references to Rule 15c3-3 are added to new line items (k) and (n).
To clarify that proposed line item (o) includes both the customer
and PAB reserve requirements, new line item (l) is added requiring a
computation for determination of PAB requirements under Exhibit A of
Sec.  240.15c3-3. In addition, for added clarity about which line
items apply to securities instead of security-based swaps, the
phrase ``reserve requirements'' is replaced with ``customer reserve
requirements'' in new line item (j) and ``possession or control
requirements'' is replaced with ``possession or control requirements
for customers'' in new line item (m). Proposed line items (n)
through (r) are consolidated into new line item (o) which better
matches the language used in paragraph (d)(2)(iii) of Rule 17a-5,
paragraph (b)(4) of Rule 17a-12, and paragraph (c)(2)(iii) of Rule
18a-7. In new line item (p), ``A reconciliation between the audited
and unaudited Statements of Financial Condition with respect to
methods of consolidation'' is replaced with ``Summary of financial
data for subsidiaries not consolidated in the statement of financial
condition'' to better match the language used in paragraph (d)(2)(i)
of Rule 17a-5 and paragraph (b)(2) of Rule 17a-12. In line item (s),
a reference to Rule 18a-7 is added to reflect that an exemption
report can be filed pursuant this rule in addition to pursuant to
Rule 17a-5. In line item (q), the phrase ``in accordance with 17 CFR
240.17a-5, 17 CFR 240.17a-12, or 17 CFR 240.18a-7, as applicable''
is added after ``Oath or affirmation.'' Proposed line item (u), ``A
copy of the SIPC Supplemental Report'' is removed from the
checklist, because for fiscal years that end on or after April 30,
2016, the supplemental report is filed only with SIPC (and not with
the Commission). See 17 CFR 240.17a-5(e)(4); Securities Investor
Protection Corporation, File No. SIPC-2015-01 (Mar. 14, 2016), 81 FR
14372 (Mar. 17, 2016); Letter from SIPC to All Broker-Dealers
including those that pay SIPC assessments and those that claim
exclusion from SIPC membership regarding SIPC Series 600 Rules (Apr.
29, 2016). In line item (w), a reference to Rule 18a-7 is added to
reflect that an exemption report can be filed pursuant this rule in
addition to pursuant to Rule 17a-5. Proposed line items (z), (aa),
and (dd) are consolidated into new line item (u), which better
matches the language used in paragraph (f)(1) of Rule 17a-5,
paragraph (b) of Rule 17a-12, and paragraph (f)(1) of Rule 18a-7.
The checklist also includes new line item (t), titled ``Independent
public accountant's report based on an examination of the statement
of financial condition'' to account for a firm's ability to request
confidential treatment for the financial statements but not the
statement of financial condition. Proposed line items (bb) and (ee)
are consolidated into new line item (v), which now reads
``Independent public accountant's report based on an examination of
certain statements in the compliance report under 17 CFR 240.17a-5
or 17 CFR 240.18a-7, as applicable'' to better reflect the language
used in paragraph (g)(2)(i) of Rule 17a-5 and paragraph (f)(2)(i) of
Rule 18a-7. Line item (x) is added for supplemental reports on
applying agreed-upon procedures, in accordance with Rule 17a-5 (with
respect to ANC broker-dealers) and Rule 17a-12 (with respect to OTC
derivatives dealers). Throughout the checklist, the articles ``A''
and ``An'' are deleted as unnecessary and for internal consistency.
In addition, line items are renumbered as needed due to insertions
or deletions, and proposed line item (v) is moved to the end of the
checklist as line item (y).
---------------------------------------------------------------------------

Qualification of the Independent Public Accountant
    As noted above, a broker-dealer is required to file with the
Commission a report of a PCAOB-registered independent public accountant
covering the annual reports. Paragraph (f) of Rule 17a-5: (1)
Prescribes certain minimum qualifications for the independent public
accountant; (2) requires the broker-dealer to file with the Commission
a statement concerning the accountant; and (3) requires the broker-
dealer to file a notice when replacing the accountant. Broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be subject
to these requirements. The Commission proposed to include in Rule 18a-7
parallel independent public accountant qualifications, statement, and
notice requirements for stand-alone SBSDs and MSBSPs.\405\ The
Commission is modifying these requirements to conform them to the
modifications discussed above pursuant to which a

stand-alone SBSD or MSBSP as well as an OTCDD/SBSD may engage an
independent public accountant that is not registered with the PCAOB.
The Commission received no other comments related to these proposed
accountant qualification requirements and is adopting them with the
modification discussed above.\406\
---------------------------------------------------------------------------

    \405\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25241-43.
    \406\ See paragraph (e) of Rule 18a-7, as adopted. The
modification deletes the phrase ``and the independent public
accountant must be registered with the Public Company Accounting
Oversight Board'' from the text of the final rule.
---------------------------------------------------------------------------

Engagement of the Independent Public Accountant
    Paragraph (g) of Rule 17a-5 provides that the independent public
accountant engaged by the broker-dealer to provide the reports covering
the annual reports must, as part of the engagement, undertake to
prepare the following reports, as applicable, in accordance with PCAOB
standards: (1) A report based on an examination of the financial
report; and (2) either a report based on an examination of certain
statements in the compliance report or a report based on a review of
the statements in the exemption report. Broker-dealer SBSDs, other than
OTCDD/SBSDs, and broker-dealer MSBSPs will be subject to these
requirements. The Commission proposed parallel engagement of accountant
requirements in Rule 18a-7 for stand-alone SBSDs and MSBSPs.\407\ The
Commission is modifying these requirements to conform them to the
modifications discussed above pursuant to which a stand-alone SBSD or
MSBSP as well as an OTCDD/SBSD may engage an independent public
accountant that is not registered with the PCAOB and the accountant may
use GAAS in the United States or PCAOB standards. The Commission
received no other comments related to these proposed requirements and
is adopting them with the modification discussed above and with one
additional modification.\408\ As discussed above, the final segregation
rule for stand-alone SBSDs, OTCDD/SBSDs, and bank SBSDs includes an
exemption from the rule's requirements if firm meets certain
conditions.\409\ Consequently, the Commission is requiring a stand-
alone SBSD or OTCDD/SBSD that is exempt from the segregation rule to
file the exemption report instead of the compliance report.
Accordingly, a stand-alone SBSD or OTCDD/SBSD that is exempt from the
segregation rule must engage the independent public accountant to
perform a review of the firm's exemption report instead of an
examination of the compliance report.\410\
---------------------------------------------------------------------------

    \407\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25243.
    \408\ See paragraph (f) of Rule 18a-7, as adopted.
    \409\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4).
    \410\ See paragraph (f)(2)(ii) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

Notification of Non-Compliance or Material Weakness
    Paragraph (h) of Rule 17a-5 requires the independent public
accountant engaged to prepare reports covering a broker-dealer's annual
reports to provide the broker-dealer with a notification if, during the
course of preparing its reports, the accountant discovers the firm is
not in compliance with Rule 15c3-1, 15c3-3, 17a-13, or SRO customer
account statement rules, or if the accountant determines that any
material weaknesses exist. If the notification from the accountant
concerns an occurrence that requires the broker-dealer to provide
notification to the Commission (e.g., under Rule 17a-11), the broker-
dealer must provide the accountant with a copy of the notification sent
to the Commission. If the accountant does not receive the copy of the
notification within one business day, or if the accountant disagrees
with the statements in the notification, the accountant must notify the
Commission and the broker-dealer's DEA within one business day.\411\
Broker-dealer SBSDs, OTCDD/SBSDs, and broker-dealer MSBSPs will be
subject to these requirements.
---------------------------------------------------------------------------

    \411\ The Commission proposed to amend paragraph (h) of Rule
17a-5 to add references to the proposed SBSD segregation rule (Rule
18a-4) so that the notification requirements would be triggered if
the accountant discovered a broker-dealer SBSD was not in compliance
with that rule. As discussed above, the broker-dealer SBSD
segregation requirements are being codified in Rule 15c3-3 (which is
already referenced in paragraph (h) of Rule 17a-5). Therefore, these
proposed amendments are not being adopted. However, the note to
paragraph (h) of Rule 17a-5 refers to the ``special reserve
account'' instead of ``special account'' as proposed, for internal
consistency with Rules 15c3-3 and 18a-4, as adopted.
---------------------------------------------------------------------------

    The Commission proposed parallel notification requirements in Rule
18a-7 for stand-alone SBSDs and MSBSPs and their independent public
accountants.\412\ The proposed notification requirements for stand-
alone SBSDs would be triggered if the independent public accountant
discovers the firm is not in compliance with the proposed SBSD capital,
segregation, or security-count rules or that a material weakness
exists. The proposed notification requirements for stand-alone MSBSPs
would be triggered if the independent public accountant discovers the
firm is not in compliance with the proposed MSBSP capital rule. The
Commission received no comment on these proposed notification
requirements and is adopting them with the modification that an OTCDD/
SBSD will be subject to these requirements pursuant to Rule 18a-7
(rather than Rule 17a-5).\413\
---------------------------------------------------------------------------

    \412\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25243-44.
    \413\ See paragraph (g) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

Reports of the Independent Public Accountant
    Paragraph (i) of Rule 17a-5 prescribes requirements for the reports
of the independent public accountant covering the broker-dealer's
annual reports, including: (1) Technical requirements; (2) required
representations; (3) the opinions or conclusions to be expressed in the
accountant's reports; and (4) requirements related to matters to which
the accountant takes exception. Broker-dealer SBSDs, other than OTCDD/
SBSDs, and broker-dealer MSBSPs will be subject to these requirements.
The Commission proposed parallel requirements in Rule 18a-7 for stand-
alone SBSDs and MSBSPs.\414\ The Commission is modifying these
requirements to conform them to the modifications discussed above
pursuant to which a stand-alone SBSD or MSBSP as well as an OTCDD/SBSD
also registered as an OTC derivatives dealer may engage an independent
public accountant that is not registered with the PCAOB and the
accountant may use GAAS in the United States or PCAOB standards. The
Commission received no other comments related to these proposed
requirements regarding reports of the independent accountant and is
adopting them as proposed.\415\
---------------------------------------------------------------------------

    \414\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25245.
    \415\ See paragraph (h) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

Notification of Change of Fiscal Year
    Paragraph (n)(1) of Rule 17a-5 requires a broker-dealer to notify
the Commission and its DEA of a change of its fiscal year. Paragraph
(n)(2) requires that the notice contain a detailed explanation for the
reasons for the change and requires that changes in the filing period
for the annual reports must be approved in writing by the broker-
dealer's DEA. Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-
dealer MSBSPs will be subject to these requirements. The Commission
proposed a parallel notification of a change of fiscal year requirement
in Rule 18a-7 for stand-alone SBSDs and MSBSPs, except that under the
proposal, the Commission (rather than the DEA) must approve a change in
the

filing period for the annual reports.\416\ The Commission received no
comments on these proposed requirements regarding notification of a
change of fiscal year and is adopting them with the modification that
an OTCDD/SBSD will be subject to these requirements pursuant to Rule
18a-7 (rather than Rule 17a-5). \417\
---------------------------------------------------------------------------

    \416\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25245.
    \417\ See paragraph (i) of Rule 18a-7, as adopted. As proposed,
these requirements were in paragraph (j) of Rule 18a-7. Paragraph
(i) of the rule contained a provision under which the Commission
could grant extensions and exemptions from the filing requirements
in the rule. On further consideration, the Commission believes this
provision is unnecessary and is not adopting it. No commenters
addressed it.
---------------------------------------------------------------------------

Filing Requirements
    Paragraph (o) of Rule 17a-5 provides that a filing pursuant to the
rule is deemed to be accomplished when it is received by the
Commission's principal office with duplicates filed simultaneously at
the locations prescribed in particular paragraphs of Rule 17a-5.
Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs
will be subject to this requirement. The Commission proposed a parallel
filing requirement in proposed Rule 18a-7 for stand-alone and bank
SBSDs and MSBSPs.\418\ The Commission received no comment on these
proposed filing requirements and is adopting them with the modification
that an OTCDD/SBSD will be subject to these requirements pursuant to
Rule 18a-7 (rather than Rule 17a-5).\419\
---------------------------------------------------------------------------

    \418\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25245.
    \419\ See paragraph (j) of Rule 18a-7, as adopted. As proposed,
this requirement was in paragraph (k) of Rule 18a-7, but for the
reasons discussed above it is being adopted in paragraph (j).
---------------------------------------------------------------------------

b. Additional Amendments to Rule 17a-5 and Modifications to Rule 18a-7
    The Commission proposed several amendments to Rule 17a-5 to
eliminate obsolete text, improve readability, and to modernize
terminology.\420\ The Commission also proposed to redesignate certain
paragraphs in Rule 17a-5 as a consequence of the proposal to delete
other paragraphs in Rule 17a-5. The Commission received no comment on
these amendments or redesignations and is adopting them as
substantially as proposed.\421\
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    \420\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246.
    \421\ In addition to the differences discussed above between
Rule 17a-5, as proposed to be amended, and Rule 17a-5, as amended,
the Commission is adopting the following non-substantive changes to
Rule 17a-5: (1) Replacing ``Each broker or dealer that computes
certain of its capital charges in accordance with'' with ``Broker-
dealers that have been authorized by the Commission to compute net
capital pursuant to'' to clarify in paragraph (a)(5) that ANC
broker-dealers must file additional reports ``with the Commission'';
(2) replacing ``VaR'' with ``value at risk'' in paragraph (a)(5)(ii)
for consistency with paragraph (a)(3)(ii) of Rule 18a-6, as adopted;
(3) replacing ``broker or dealer's'' with ``broker's or dealer's''
in paragraphs (a)(5)(v)(D)-(G); (4) adding ``within 17 business days
after the end of the month'' in paragraph (a)(5)(vi) for clarity
regarding the timing of the risk reports and consistency with
paragraph (a)(3)(vi) of Rule 18a-6, as adopted; (5) replacing
``from'' with ``after'' in paragraph (c)(3) for consistency with
paragraph (b)(2) of Rule 18a-7, as adopted; (6) adding ``to'' after
the phrase ``the broker or dealer is not subject'' in paragraph
(d)(1)(i)(B)(2) for internal consistency; (7) removing ``as
applicable, including'' and adding ``Information Relating to the''
after the phrases ``Possession or Control'' in paragraph (d)(2)(ii)
for clarity and consistency with 17 CFR 240.17a-5(d)(2)(ii); (8)
replacing references to Sec.  240.18a-4(c) with Sec.  240.15c3-
3(p)(3) in paragraphs (d)(3)(i)(A)(4) and (5), (d)(3)(i)(C), and
(d)(3)(iii); (9) adding ``identified'' to paragraph (d)(3)(i)(B) for
consistency with paragraph (c)(3)(i)(B) Rule 18a-7, as adopted; (10)
removing references to ``members'' as a distinct class of registrant
in addition to a ``broker'' or ``dealer'' in paragraph (e)(3) of
Rule 17a-5; and (11) for internal consistency, the phrase ``shall
fail'' is replaced with ``fails'' in the note to paragraph (h).
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    The Commission proposed amending paragraph (a)(4) of Rule 17a-5 to
specify that a DEA ``must promptly transmit that information'' obtained
through the filing of Form Custody, instead of merely requiring that
the DEA ``transmit the information'' obtained through the Form Custody
filing.\422\ The Commission received no comment on this amendment and
is adopting it as proposed. The Commission also proposed changes to the
structuring of paragraph (a)(5) of Rule 17a-5, which requires certain
ANC reports to be filed.\423\ The Commission received no comment on
this reorganization and is adopting it as proposed.
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    \422\ See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246.
    \423\ See paragraph (a)(5) of Rule 17a-5, as proposed to be
amended. See also Recordkeeping and Reporting Proposing Release, 79
FR at 25246-47.
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    The Commission also made additional modifications to the text of
Rule 18a-7 as proposed.\424\
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    \424\ In particular, the Commission is adopting the following
non-substantive modifications to proposed Rule 18a-7: (1) Replacing
``must file an executed Part II of Form X-17A-5 (Sec.  249.617 of
this chapter) with the Commission or its designee'' with ``must file
with the Commission or its designee Part II of Form X-17A-5 (Sec.
249.617 of this chapter)'' in paragraph (a)(1) for consistency with
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (2) replacing ``must
file an executed Part IIC of Form X-17A-5 (Sec.  249.617 of this
chapter) with the Commission or its designee'' with ``must file with
the Commission or its designee Part IIC of Form X-17A-5 (Sec.
249.617 of this chapter)'' in paragraph (a)(2) for consistency with
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (3) adding
``additional reports with the Commission'' at the end of paragraph
(a)(3) for clarity; (4) adding ``in the format described in the
application'' before the phrase ``within 17 business days after the
end of the month'' in paragraph (a)(3)(vi) for consistency with
paragraph (a)(5)(vi) of Rule 17a-5, as amended; (5) removing ``,''
after ``VaR'' in paragraph (a)(3)(ix) for consistency with paragraph
(a)(5)(ix) of Rule 17a-5, as amended; (6) removing the phrase
``required by Sec.  240.18a-7(d)'' from paragraph (b)(2)(v) to
eliminate an incorrect cross-reference to this paragraph; (6)
removing ``a model approved pursuant to'' after the phrase ``in
accordance with'' in paragraph (a)(3)(i) for consistency with
paragraph (a)(5)(i) of Rule 17a-5; (7) removing ``otherwise'' from
paragraph (c)(1)(i) for consistency with paragraph (d)(1)(i)(B)(1)
of Rule 17a-5, as amended; (8) replacing ``request for a change
should'' with ``request for a change must'' in paragraph (c)(1)(ii)
for clarity; (9) replacing ``is not required to'' with ``need not''
in paragraph (c)(1)(iii) for consistency with paragraph (d)(1)(iii)
of Rule 17a-5, as amended; (10) removing ``including'' before the
phrase ``a Computation of Net Capital'' in paragraph (c)(2)(ii) for
clarity; (11) adding ``Information Relating to the'' before the
phrase ``Possession or Control'' in paragraph (c)(2)(ii) for
consistency with of 17 CFR 240.17a-5(d)(2)(ii); (12) replacing
``filed 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 recently filed
report, or if no material differences exist, a statement so
indicating must be included in the financial report.'' with ``filed
by the registrant 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 of Form X-17A-5 filed by the registrant. If no
material differences exist, a statement so indicating must be
included in the financial report.'' in paragraph (c)(2)(iii) for
consistency with paragraph (d)(2)(iii) of Rule 17a-5, as amended;
(13) adding ``as of the end of the most recent fiscal year; and'' to
the end of paragraph (c)(3)(i)(A)(4) for consistency with paragraph
(d)(3)(i)(A)(4) of Rule 17a-5, as amended; (14) replacing ``The
information used to assert compliance with Sec. Sec.  240.18a-1 and
240.18a-4(c) was derived from the books and records of the security-
based swap dealer; and'' with ``The information the security-based
swap dealer used to state whether it was in compliance with
Sec. Sec.  240.18a-1, 240.18a-4(c), and, if 240.18a-4(c) was derived
from the books and records of the security-based swap dealer.'' in
paragraph (c)(3)(i)(A)(5) for consistency with paragraph
(d)(3)(i)(A)(5) of Rule 17a-5, as amended; (15) replacing ``60''
with ``sixty (60)'' in paragraph (c)(5) for consistency with
paragraph (d)(5) of Rule 17a-5, as amended; (16) removing ``(d)(2)''
from the third sentence of paragraph (d)(2) for consistency with
paragraph (e)(3) of Rule 17a-5, as amended; (17) replacing ``of this
chapter. In addition, the accountant'' with ``of this chapter, and
the independent public accountant'' in paragraph (e)(1) for
consistency with paragraph (f)(1) of Rule 17a-5, as amended; (18)
replacing ``Such statement must'' with ``The statement must'' in
paragraph (e)(2) for consistency with paragraph (f)(2) of Rule 17a-
5, as amended; (19) replacing ``a notice which must'' with ``a
notice that must'' in paragraph (e)(3) for consistency with
paragraph (f)(3) of Rule 17a-5, as amended; (20) adding ``,'' after
``Sec.  240.18a-8'' in the second sentence of paragraph (g)(1) for
consistency with paragraph (h) of Rule 17a-5, as amended; and (21)
removing ``and'' at the end of paragraph (h)(3)(i) for consistency
with paragraph (i)(3)(i) of Rule 17a-5, as amended.
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C. Notification

1. Introduction
    After considering the anticipated business activities of SBSDs and
MSBSPs, the Commission proposed a notification program for these
registrants under Sections 15F and 17(a) of the Exchange Act modeled on
the

notification program for broker-dealers codified in Rule 17a-11. Rule
17a-11 specifies the circumstances under which a broker-dealer must
notify the Commission and other regulators about its financial or
operational condition, as well as the form of the notice. Rule 17a-11
is being amended to account for the security-based swap activities of
entities subject to its requirements and new Rule 18a-8--which is
modeled on Rule 17a-11--is being adopted to establish reporting
requirements for SBSDs and MSBSPs that will not be subject to Rule 17a-
11. Rule 18a-8 does not include a parallel requirement for every
requirement in Rule 17a-11.\425\
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    \425\ The Commission did not propose to include certain Rule
17a-11 notification requirements in Rule 18a-8 because they are not
relevant to stand-alone and bank SBSDs and MSBSPs. See Recordkeeping
and Reporting Proposing Release, 79 FR at 25247, n. 773.
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    As is the case with Rules 17a-5 and 18a-7, the applicability of
Rule 17a-11 or 18a-8 will depend on whether the firm is subject to the
capital requirements of Rule 15c3-1 (in which case Rule 17a-5 will
apply), is subject to the capital requirements of Rules 18a-1 or 18a-2
(in which case Rule 18a-7 will apply), or has a prudential regulator
(in which case Rule 18a-7 will apply).\426\ Therefore, a stand-alone
broker-dealer, including a stand-alone OTC derivatives dealer, (which
is subject to Rule 15c3-1) will continue to be subject to Rule 17a-11.
Similarly, a broker-dealer SBSD, other than an OTCDD/SBSD, (which is
subject to Rule 15c3-1) will be subject to Rule 17a-11. A broker-
dealer, including an OTC derivatives dealer, that is also an MSBSP
(which is subject to Rule 15c3-1), will be subject to Rule 17a-11. A
stand-alone SBSD (which is subject to Rule 18a-1) will be subject to
Rule 18a-8. Similarly, an OTCDD/SBSD (which is subject to Rule 18a-1)
will be subject to Rule 18a-8.\427\ A stand-alone MSBSP (which is
subject to Rule 18a-2) will be subject to Rule 18a-8. Finally, a bank
SBSD or MSBSP (which has a prudential regulator) will be subject to
Rule 18a-8.\428\
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    \426\ The undesignated introductory paragraphs to Rules 17a-11
and 18a-8 have been modified to clarify this application of the
rules.
    \427\ An OTCDD/SBSD is subject to Rules 17a-3, 17a-4, 17a-13,
18a-1, 18a-4, 18a-7, and 18a-8 rather than Rules 18a-5, 18a-6, 18a-
9, 15c3-1, 15c3-3, 17a-5, and 17a-11, respectively. As a result, the
Commission has made a conforming modification to Rule 18a-8. In
particular, where Rule 18a-8 refers to Rule 18a-5, the Commission
has added the following reference to Rule 17a-3: ``or Sec.  240.17a-
3, as applicable.''
    \428\ The notification requirements for bank SBSDs and MSBSPs
are substantially narrower in scope than the notification
requirements for broker-dealer and stand-alone SBSDs and MSBSPs.
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2. Amendments to Rule 17a-11 and New Rule 18a-8
Undesignated Introductory Paragraph
    The Commission proposed that an undesignated introductory paragraph
be added to Rule 17a-11, explaining that the rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP.\429\ Further, the
Commission proposed to delete paragraph (a) of Rule 17a-11, which
provides that the rule shall apply to every broker-dealer registered
pursuant to Section 15 of the Exchange Act. This text would be
redundant given the proposed undesignated introductory paragraph.
Similarly, the Commission proposed that Rule 18a-8 have an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not registered as a broker-dealer.\430\ The note further
explained that a broker-dealer that is dually registered as an SBSD or
MSBSP is subject to the notification requirements under Rule 17a-11.
The Commission received no comments on the introductory paragraphs but,
as discussed above, is modifying them to clarify which rule (17a-11 or
18a-8) applies to a given type of entity.
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    \429\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247-48.
    \430\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25247-48.
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Failure To Meet Minimum Capital Requirements
    Rule 17a-11 requires a broker-dealer to notify the Commission if
the firm discovers or is informed by the Commission or its DEA that its
net capital has declined below the minimum amount required under Rule
15c3-1.\431\ Further, a broker-dealer registered as an OTC derivatives
dealer also must provide notice if its tentative net capital falls
below the minimum amount required under Rule 15c3-1. Broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be subject
to these existing notification requirements, as applicable. The
Commission proposed parallel capital notification requirements in Rule
18a-8 for stand-alone SBSDs and MSBSPs.\432\ The Commission received no
comment on these notification provisions and has adopted the capital
rules for nonbank SBSDs and MSBSPs.\433\ The Commission is adopting the
failure to meet minimum capital requirements notification provisions as
proposed with the modification that an OTCDD/SBSD will be subject to
these requirements pursuant to Rule 18a-7 (rather than Rule 17a-
5).\434\
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    \431\ See paragraph (a) of Rule 17a-11, as amended.
    \432\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25248.
    \433\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-908.
    \434\ See paragraphs (a)(1)(i) and (ii) and (a)(2) of Rule 18a-
8, as adopted.
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Early Warning of Potential Capital or Model Problem
    Rule 17a-11 specifies five events that trigger a requirement that a
broker-dealer send notice promptly (within twenty-four hours) to the
Commission.\435\ These notices are designed to provide the Commission
with ``early warning'' that the broker-dealer may experience financial
difficulty.\436\ Broker-dealer SBSDs, other than OTCDD/SBSDs, and
broker-dealer MSBSPs will be required to comply with these existing
notification requirements. The Commission proposed parallel early
warning notification requirements in Rule 18a-8 for stand-alone SBSDs
and MSBSPs.\437\ The Commission received no comment on these early
warning provisions and is adopting them with the modification that an
OTCDD/SBSD will be subject to these requirements pursuant to Rule 18a-7
(rather than Rule 17a-5).\438\
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    \435\ See paragraph (b) of Rule 17a-11, as amended.
    \436\ The Commission proposed a new notification requirement
applicable to broker-dealer MSBSPs that would require a broker-
dealer MSBSP to notify the Commission when its level of tangible net
worth falls below $20 million. Rule 18a-2, as adopted, does not
apply to broker-dealer MSBSPs. Accordingly, the Commission is not
adopting this requirement.
    \437\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25248-49.
    \438\ See paragraphs (b)(1) through (4) of Rule 18a-8, as
adopted. In addition, the Commission is making the following non-
substantive change to paragraph (b) of Rule 17a-11, as adopted:
Replacing ``paragraph (b)(1), (b)(2), (b)(3) or (b)(4)'' with
``paragraph (b)(1), (2), (3), (4), or (5)'' to correct an
inadvertent omission.
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Notice of Adjustment of Reported Capital Category
    Prudential regulators have established five capital categories that
are used to describe a bank's capital strength: Well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.\439\ The definition
of each capital category is based on capital measures under the bank
capital standard and other factors.\440\ A bank is required to notify
its appropriate prudential regulator of adjustments to the bank's
capital category that would put the bank into a lower capital category
from the category previously assigned to it. Following the notice, the

prudential regulator determines whether the bank needs to adjust its
capital category.\441\ The Commission proposed to include a
notification requirement in Rule 18a-8 that requires a bank SBSD to
give notice to the Commission when it files an adjustment of reported
capital category with its prudential regulator by transmitting a copy
of the notice to the Commission.\442\ The Commission received no
comment on this provision and for the reasons discussed in the
proposing release is adopting it as proposed.\443\
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    \439\ See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 208.43.
    \440\ See id.
    \441\ See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 325.102(c).
    \442\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25249.
    \443\ See paragraph (c) of Rule 18a-8, as adopted.
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Failure To Make and Keep Current Books and Records
    Rule 17a-11 requires a broker-dealer that fails to make and keep
current the books and records required under Rule 17a-3 to notify the
Commission of this fact on the same day that the failure arises.\444\
In addition, a broker-dealer is required to report to the Commission
within forty-eight hours of the original notice a report stating what
the broker or dealer has done or is doing to correct the situation.
Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs
will be required to comply with these existing notification
requirements. The Commission proposed a parallel books and records
notification requirement in Rule 18a-8 for stand-alone and bank SBSDs
and MSBSPs.\445\ The Commission received no comment on this provision
and is adopting it with the modification that an OTCDD/SBSD will be
subject to these requirements pursuant to Rule 18a-7 (rather than Rule
17a-5).\446\
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    \444\ See paragraph (c) of Rule 17a-11, as amended.
    \445\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25249-50.
    \446\ See paragraph (d) of Rule 18a-8, as adopted.
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Material Weakness
    Rule 17a-11 requires a broker-dealer to provide notification about
a material weakness as that term is defined in Rule 17a-5.\447\
Specifically, the rule provides that, whenever a broker-dealer
discovers or is notified by an independent public accountant of a
material weakness as defined in Rule 17a-5, the broker-dealer must: (1)
Give notice to the Commission within twenty-four hours of the discovery
or notification of the material weakness; and (2) transmit a report
within forty-eight hours of the notice stating what the broker-dealer
has done or is doing to correct the situation. Broker-dealer SBSDs,
other than OTCDD/MSPSPs, and broker-dealer MSBSPs will be required to
comply with these existing notification requirements. The Commission
proposed a parallel material weakness notification requirement in Rule
18a-8 applicable to stand-alone SBSDs.\448\ The Commission received no
comment on this provision and is adopting it with the modification that
an OTCDD/SBSD will be subject to these requirements pursuant to Rule
18a-7 (rather than Rule 17a-5).\449\
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    \447\ See paragraph (d) of Rule 17a-11, as amended (defining
``material weakness'').
    \448\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25250.
    \449\ See paragraph (e) of Rule 18a-8, as adopted.
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Insufficient Liquidity Reserve
    The Commission proposed that broker-dealers (including broker-
dealer SBSDs) and stand-alone SBSDs authorized to use internal models
to compute net capital be subject to liquidity stress test
requirements.\450\ Consequently, the Commission proposed that these
types of broker-dealers and stand-alone SBSDs give immediate notice in
writing if the liquidity stress test indicates that the amount of the
firm's liquidity reserve is insufficient.\451\ As consideration of the
proposed liquidity stress test requirements is being deferred,\452\ the
Commission is deferring consideration of these related notification
requirements.\453\
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    \450\ Capital, Margin, and Segregation Proposing Release, 77 FR
at 70252-54.
    \451\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25250-51.
    \452\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
    \453\ See paragraph (e) of Rule 17a-11, as amended; paragraph
(f) of Rule 18a-8, as adopted. The proposed notification
requirements would have been set forth in these paragraphs, which
instead are being designated ``[Reserved].''
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Failure To Make a Required Reserve Deposit
    Paragraph (i) of Rule 15c3-3 requires a broker-dealer to notify the
Commission and its DEA if it fails to make a required deposit into its
customer reserve account under Rule 15c3-3. Since a broker-dealer SBSD
was required to maintain a separate reserve account for its security-
based swap customers under Rule 18a-4, as proposed, the Commission
proposed a new notification requirement in Rule 17a-11 that would be
triggered if a broker-dealer SBSD fails to make a required deposit into
its special account for the exclusive benefit of security-based swap
customers.\454\ The Commission also proposed a parallel reserve account
notification requirement in Rule 18a-8 applicable to stand-alone SBSDs
and bank SBSDs. The Commission received no comment on these
notification provisions and has adopted security-based swap customer
segregation requirements.\455\ The Commission is adopting the proposed
notification requirements for the reasons discussed in the proposing
release with certain modifications.\456\ In particular, the security-
based swap reserve requirement applicable to broker-dealers, including
broker-dealer SBSDs (other than OTCDD/SBSDs), is codified in Rule 15c3-
3 and is expanded to apply to stand-alone broker-dealers engaged in
security-based swap activities. Accordingly, the Commission is adopting
requirements that stand-alone broker-dealers and SBSDs must provide
notice if they fail to make a required security-based swap customer
reserve deposit.\457\
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    \454\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
    \455\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43930-43.
    \456\ See paragraph (f) of Rule 17a-11, as amended; paragraph
(g) of Rule 18a-8, as adopted.
    \457\ Because the reserve requirements for broker-dealers, other
than OTCDD/SBSDs, are codified in paragraph (p) of Rule 15c3-3,
paragraph (f) of Rule 17a-11, as amended, refers to Rule 15c3-3
instead of Rule 18a-4. Finally, paragraph (f) of Rule 17a-11, as
amended, and paragraph (g) of Rule 18a-8, as adopted, refer to the
``special reserve account'' instead of ``special account'' as
proposed, for internal consistency with Rules 15c3-3 and 18a-4.
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Manner of Notification
    Rule 17a-11 specifies how and to whom the notices and reports
required by the rule must be transmitted. Broker-dealers, broker-dealer
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be
required to give notice or transmit the notices and reports, including
the proposed new notices, pursuant to these existing requirements.\458\
The Commission proposed to amend this paragraph to no longer permit
notice by telegraphic transmission, and instead to only allow notice by
facsimile transmission.\459\ The change was proposed in light of the
fact that telegrams are no longer widely used in the United
States,\460\ and that Commission staff no longer receive Rule 17a-11
notices by telegram.\461\ The

Commission received no comment on this revision but believes it would
be appropriate to further modernize the rule by amending it to permit
the notices to be sent by email. Accordingly, the rule, as amended,
provides in pertinent part that the notice section must be given or
transmitted to the principal office of the Commission 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, or to an email
address provided on the Commission's website.\462\ This modification to
provide for notification by email is based on the notification
provision in recently adopted Rule 18a-10 and is designed to provide a
simpler and more efficient process for sending the notifications (i.e.,
via email).\463\ Consequently, a broker-dealer will be able to transmit
a notification required pursuant to Rule 17a-11 using an email address
provided on the Commission's website and designated for the purpose of
receiving such notifications.
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    \458\ As discussed above, current paragraph (g) of Rule 17a-11
(containing the existing manner of notification requirements for
broker-dealers) was redesignated as paragraph (h).
    \459\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
    \460\ See Tom Standage, No Morse, L.A. Times, Feb. 8, 2006, at
B15 (noting that Western Union discontinued its telegram services
effective January 27, 2006).
    \461\ The Commission's website provides instructions on how to
send the Rule 17a-11 notifications by facsimile transmission. The
instructions are available at https://www.sec.gov/divisions/marketreg/bdnotices.htm. Notifications sent to the Commission's
headquarters pursuant to the instructions are converted to PDFs and
sent to an email box that is monitored by Commission staff.
    \462\ See paragraph (h) of Rule 17a-11, as amended.
    \463\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43943-46 (adopting Rule 18a-10).
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    The Commission proposed a parallel manner of notification
requirement in Rule 18a-8.\464\ The Commission received no comment on
this provision but is modifying Rule 18a-8 to provide that the notice
must be given or transmitted to the principal office of the Commission
in Washington, DC and the regional office of the Commission for the
region in which the SBSD or MSBSP has its principal place of business,
or to an email address provided on the Commission's website.\465\
Consequently, SBSDs and MSBSPs also will be permitted to transmit a
notification required pursuant to Rule 18a-8 using an email address
provided on the Commission's website and designated for the purpose of
receiving such notifications.
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    \464\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25251.
    \465\ See paragraph (h) of Rule 18a-8, as amended. As discussed
below, the Commission is amending the email notification provision
in paragraph (e) of Rule 18a-10 to align it with this modification
to paragraph (h) of Rule 18a-8.
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