record preservation requirement and is adopting it as proposed.\145\
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    \144\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
    \145\ See paragraph (b)(1)(ii) of Rule 18a-6, as adopted.
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Bills
    Paragraph (b)(3) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all bills receivable or
payable, paid or unpaid, relating to the business of the broker-dealer.
The Commission proposed a parallel requirement in Rule 18a-6 that would
require stand-alone SBSDs and MSBSPs to preserve these types of
bills.\146\ The Commission received no comments on this proposed bill
preservation requirement and is adopting it as proposed.\147\
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    \146\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
    \147\ See paragraph (b)(1)(iii) of Rule 18a-6, as adopted.
---------------------------------------------------------------------------

Communications
    Paragraph (b)(4) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve originals of all
communications received and copies of all communications sent (and any
approvals thereof) by the broker-dealer (including inter-office
memoranda and communications) relating to its business as such,
including all communications which are subject to the rules of a self-
regulatory organization (``SRO'') of which the broker-dealer is a
member regarding communications with the

public.\148\ The term ``communications,'' as used in paragraph (b)(4)
of Rule 17a-4, includes all electronic communications (e.g., emails and
instant messages).\149\ Communications related to security-based swap
activities would be communications relating to the business as such of
a broker-dealer, including a broker-dealer SBSD and MSBSP.
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    \148\ Paragraph (b)(4) of Rule 17a-4 further provides that the
term communications as used in the paragraph includes sales scripts.
    \149\ See, e.g., Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information; Additional Examples Under the Securities Act of 1933,
Securities Exchange Act of 1934, and Investment Company Act of 1940,
Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15,
1996), at n. 32; Reporting Requirements for Brokers or Dealers Under
the Securities Exchange Act of 1934, Exchange Act Release No. 38245
(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997); Books and Records
Requirements for Brokers and Dealers Under the Securities Exchange
Act of 1934, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR
55818, 55825 (Nov. 2, 2001).
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    The Commission had not previously interpreted the term
``communications'' to include telephonic communications. However,
Section 15F(g)(1) of the Exchange Act provides that each registered
SBSD and MSBSP shall maintain daily trading records of the security-
based swaps of the registered SBSD or MSBSP and all related records
(including related cash or forward transactions) and recorded
communications, including electronic mail, instant messages, and
recordings of telephone calls, for such period as may be required by
the Commission by rule or regulation. Therefore, to implement Section
15F(g)(1) of the Exchange Act, the Commission proposed amendments to
the preservation requirement in paragraph (b)(4) of Rule 17a-4 to
require recordings of telephone calls required to be maintained
pursuant to Section 15F(g)(1) of the Exchange Act.\150\ Under this
requirement, a broker-dealer SBSD or MSBSP would be required to
preserve for three years telephone calls that it records to the extent
the recordings are required to be maintained pursuant to Section
15F(g)(1). The Commission proposed communication preservation
requirements for stand-alone and bank SBSDs and MSBSPs that would
parallel those in Rule 17a-4, as proposed to be amended, to further
implement Section 15F(g)(1). The provision applicable to bank SBSDs and
MSBSPs would limit the requirement to communications that relate to the
business of an SBSD or MSBSP.
---------------------------------------------------------------------------

    \150\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213-14.
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    The Commission emphasizes that the Section 15(g)(1) of the Exchange
Act and the new rules requiring the retention of telephone calls do not
establish requirements to record telephone calls. Instead, the rules
require firms to retain recordings of telephone calls that are within
the scope of Section 15(g)(1) of the Exchange Act. Thus, if the firm
records a telephone call voluntarily or for some other reason, it will
need to retain the recording if the call falls within the scope of
Section 15(g)(1) of the Exchange Act. However, a firm's decision not to
record a telephone call that falls within the scope of Section 15(g)(1)
of the Exchange Act will not implicate these new retention
requirements.
    A commenter urged the Commission to apply a one-year retention
requirement as was adopted by the CFTC with respect to retaining
recordings of telephone calls.\151\ In response, the Commission notes
that applying the three-year retention requirement to these recordings
is designed to allow staff examiners access to records they may need to
review the past activities of SBSDs and MSBSPs, given that examinations
are conducted using a risk-based program. In addition, the Commission
believes that a three-year retention period will benefit counterparties
in that it will preserve information that may help support them if, for
example, a dispute arises about a transaction with an SBSD or MSBSP. A
three-year retention period also is consistent with the retention
period applicable to the vast majority of broker-dealer records, as
compared to a one year period. Further, although the CFTC requires
registrants to make and keep records of all oral communications
pertaining to pre-execution trade information, including telephone
calls, the Commission's record retention rule applies only to
recordings of telephone calls, i.e., those voluntarily made by the
registrant.\152\ The Commission is adopting the communications
preservation requirements as proposed.\153\
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    \151\ See SIFMA 9/5/2014 Letter.
    \152\ See 17 CFR 23.202(a)(1) (requiring CFTC-registered swap
dealers and major swap participants to ``make and keep pre-execution
trade information, including, at a minimum, records of all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices, that
lead to the execution of a swap, whether communicated by telephone .
. .'').
    \153\ See paragraph (b)(4) of Rule 17a-4, as amended; paragraphs
(b)(1)(iv) and (b)(2)(ii) of Rule 18a-6, as adopted.
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Trial Balances
    Paragraph (b)(5) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all trial balances,
computations of aggregate indebtedness and net capital (and working
papers in connection therewith), financial statements, branch office
reconciliations, and internal audit working papers relating to the
firm's business as a broker-dealer. The Commission proposed including a
parallel requirement in Rule 18a-6 applicable to stand-alone SBSDs and
MSBSPs.\154\ In contrast to Rule 17a-4, the provision in Rule 18a-6, as
proposed, did not refer to computations of ``aggregate indebtedness''
because the proposed capital rules for stand-alone SBSDs and MSBSPs--
Rules 18a-1 and 18a-2, respectively--did not include such a
calculation.\155\ Further, to account for the capital standard for
stand-alone MSBSPs, the proposed requirement referred to tangible net
worth.\156\ The Commission received no comments on the proposal and
adopted Rules 18a-1 and 18a-2.\157\ Consequently, the Commission is
adopting the trial balance preservation requirements as proposed.\158\
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    \154\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
    \155\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70221-29.
    \156\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70256-57. A broker-dealer MSBSP is subject to the net capital
requirements in Rule 15c3-1.
    \157\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44052-68.
    \158\ See paragraph (b)(1)(v) of Rule 18a-6, as adopted.
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Account Documents
    Paragraph (b)(6) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all guarantees of accounts
and all powers of attorney and other evidence of the granting of any
discretionary authority given in respect of any account as well as
copies of resolutions empowering an agent to act on behalf of a
corporation. The Commission proposed parallel requirements in Rule 18a-
6 for stand-alone and bank SBSDs and MSBSPs to preserve similar types
of records, but only with respect to security-based swap accounts.\159\
For example, bank SBSDs and MSBSPs would not be required to maintain
these records with respect to accounts involving exclusively banking
related services. The Commission received no comments on the proposed
account documentation

preservation requirements and is adopting them as proposed.\160\
---------------------------------------------------------------------------

    \159\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
    \160\ See paragraphs (b)(1)(vi) and (b)(2)(iii) of Rule 18a-6,
as adopted.
---------------------------------------------------------------------------

Written Agreements
    Paragraph (b)(7) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all written agreements (or
copies thereof) entered into by the firm relating to its business as
such, including agreements with respect to any account. The Commission
proposed to amend this paragraph to require the preservation of written
agreements with respect to a security-based swap customer or non-
customer--including governing documents or any document establishing
the terms and conditions of security-based swaps of the customer or
non-customer--with the account records of the customer or non-
customer.\161\ The Commission proposed parallel requirements in Rule
18a-6 for stand-alone and bank SBSDs and MSBSPs. The provision
applicable to bank SBSDs and MSBSPs would limit the preservation
requirement to written agreements relating to the registrant's business
as an SBSD or MSBSP. The Commission received no comments on the
proposed written agreement preservation requirements and is adopting
them substantially as proposed.\162\
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    \161\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214.
    \162\ See paragraph (b)(7) of Rule 17a-4, as amended; paragraphs
(b)(1)(vii) and (b)(2)(iv) of Rule 18a-6, as adopted. The Commission
is adopting the following stylistic and corrective changes: (1)
Replacing ``;'' with ``.'' for each paragraph in Rule 18a-6 for
internal consistency; (2) removing ``as applicable'' in paragraph
(b)(1)(viii) of Rule 18a-6, as adopted, as it is not necessary since
only Part II is referenced in Rule 18a-6, as adopted; (3) replacing
``security-based swap customers'' with ``non-security-based swap
customers'' in paragraph (b)(1)(viii)(B) of Rule 18a-6, as adopted,
to correct an error and for consistency with paragraph (b)(8)(ii) of
Rule 17a-4, as amended; (4) removing ``,'' after ``cost'' in
paragraph (b)(1)(viii)(H) of Rule 18a-6, as adopted, for consistency
with paragraph (b)(8)(ix) of Rule 17a-4, as amended; (5) removing
``;'' after ``and'' in paragraph (b)(1)(viii)(N) of Rule 18a-6, as
adopted, for consistency with paragraph (b)(8)(xvi) of Rule 17a-4,
as amended; (6) removing ``Records which contain'' in paragraph
(b)(2)(v) of Rule 18a-6, as adopted, for clarity; (7) replacing ``;
and'' with ``.'' in paragraph (b)(2)(vii) of Rule 18a-6, as adopted,
for internal consistency.
---------------------------------------------------------------------------

Information Supporting Financial Reports
    Paragraphs (b)(8)(i) through (xv) of Rule 17a-4 require a broker-
dealer, including a broker-dealer SBSD or MSBSP, to preserve records
containing various types of information that support amounts included
in the broker-dealer's FOCUS Report prepared as of the broker-dealer's
audit date and amounts in the annual audited financial statements the
broker-dealer is required to file under Rule 17a-5 or 17a-12, as
applicable. The paragraphs specifically identify the types of
supporting information that must be preserved, including money
balances, securities positions (which will include security-based swap
positions), futures positions, commodity positions, and options
positions, among other things.
    The Commission proposed to: (1) Amend certain of these paragraphs
to require the preservation of the same type of supporting information
required of commodity positions, but for swap positions; (2) add a
paragraph to require a broker-dealer SBSDs to preserve records that
contain detail relating to the calculation of the risk margin amount
under the proposed SBSD capital rules; and (3) add a new paragraph to
require broker-dealer SBSDs to preserve records containing detail
relating to the possession or control requirements in the proposed SBSD
segregation rule.\163\ The Commission proposed requirements in Rule
18a-6 for stand-alone SBSDs and MSBSPs that paralleled the requirements
in paragraphs (b)(8)(i) through (xv) of Rule 17a-4, as proposed to be
amended. Finally, the Commission proposed that bank SBSDs preserve
records containing detail relating to the possession or control
requirements in the proposed SBSD segregation rule (but not any of the
other preservation requirements). The Commission received no comments
on these proposals and has adopted the SBSD capital rules requiring a
risk margin amount calculation and the SBSD segregation rules
prescribing a possession or control requirement.\164\ Consequently, the
Commission is adopting the information supporting financial statement
preservation requirements substantially as proposed.\165\
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    \163\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25214-16. See Capital, Margin, and Segregation Proposing Release,
77 FR at 70221-24, 70278-82 (discussing the proposed risk margin
amount and possession or control requirements respectively).
    \164\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43883-86 (risk margin amount calculation), 43935-38
(possession or control requirement).
    \165\ See paragraph (b)(8) of Rule 17a-4, as amended; paragraphs
(b)(1)(viii) and (b)(2)(v) of Rule 18a-6, as adopted. The adopted
rule text modifies the proposed rule text in the following non-
substantive ways. The Commission proposed to amend paragraph (b)(8)
of Rule 17a-4 to add a reference to proposed Form SBS in the
introductory text after references to certain parts of the FOCUS
Report. It is no longer necessary to include this cross-reference,
because as discussed below, the Commission is revising Part II and
adopting Part IIC of the FOCUS Report instead of adopting Form SBS.
However, non-substantive changes in connection with those revisions
are being made to improve the clarity of paragraph (b)(8); namely,
references to the parts of Form X-17A-5 now read ``Part II or Part
IIA of Form X-17A-5 (Sec.  249.617 of this chapter)'' to improve
readability, and the word ``audited'' is being removed from the
phrase ``annual audited financial statements'' for consistency with
Rules 17a-5 and 18a-7. Paragraph (b)(1)(viii) of Rule 18a-6, as
adopted, reflects the following technical changes from paragraph
(b)(1)(viii) of Rule 18a-6, as proposed to be adopted: (1) Paragraph
(b)(1)(viii) references ``Part II of Form X-17A-5 (Sec.  249.617 of
this chapter)'' instead of ``Part II of Form X-17A-5 (Sec.  249.617
of this chapter), as applicable,'' because there is no need to
reference ``as applicable'' when only one part of Form X-17A-5 is
being referenced; (2) paragraph (b)(1)(viii)(B) refers to ``non-
security-based swap customers'' instead of ``security-based swap
customers'' for consistency with paragraph (b)(8)(ii) of Rule 17a-4,
as amended; (3) paragraph (b)(1)(viii)(H) no longer includes a comma
after the word ``cost'' for consistency with paragraph (b)(8)(ix) of
Rule 17a-4, as amended; and (4) paragraph (b)(1)(viii)(N) no longer
includes a semicolon after the word ``and'' for consistency with
paragraph (b)(8)(xvi), as amended.
---------------------------------------------------------------------------

Rule 15c3-4 Risk Management Records
    OTC derivatives dealers and ANC broker-dealers are subject to risk
management requirements.\166\ In particular, Rule 15c3-4 requires these
broker-dealers to establish, document, and maintain a system of
internal risk management controls to assist in managing the risks
associated with the firm's business activities, including market,
credit, leverage, liquidity, legal, and operational risks. The rule
also requires periodic reviews (which may be performed by internal
audit staff) and annual reviews (which must be conducted by independent
public accountants) of the firm's risk management systems. Paragraph
(b)(10) of Rule 17a-4 requires broker-dealers subject to Rule 15c3-4 to
preserve the records required to be made under the rule and the results
of the periodic reviews required to be conducted under the rule.
---------------------------------------------------------------------------

    \166\ See 17 CFR 240.15c3-4 (``Rule 15c3-4'').
---------------------------------------------------------------------------

    The Commission proposed that nonbank SBSDs and MSBSPs be required
to comply with Rule 15c3-4.\167\ Broker-dealer SBSDs will be subject to
paragraph (b)(10) of Rule 17a-4. The Commission proposed a parallel
provision in Rule 18a-6 to require nonbank SBSDs and MSBSPs to preserve
the same types of records relating to Rule 15c3-4.\168\ The Commission
did not propose that bank SBSDs and MSBSPs comply with Rule 15c3-4
\169\ and thus did not propose a

parallel record preservation requirement for these entities. The
Commission received no comments on these proposals and has adopted the
requirement that nonbank SBSDs and MSBSPs comply with Rule 15c3-4.\170\
Consequently, the Commission is adopting the risk management records
preservation requirements as proposed.\171\
---------------------------------------------------------------------------

    \167\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70250-51, 70256-57.
    \168\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25216.
    \169\ See Section 15F(d)(2)(A) of the Exchange Act (providing
that the Commission may not prescribe rules imposing prudential
requirements on SBSDs and MSBSPs for which there is a prudential
regulator).
    \170\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43906-07.
    \171\ See paragraph (b)(1)(ix) of Rule 18a-6, as adopted.
---------------------------------------------------------------------------

Credit Risk Determinations
    Paragraph (c)(4)(vi)(A) of Sec.  240.15c3-1e (appendix E to Rule
15c3-1) requires an ANC broker-dealer to make and keep current a record
of the basis of its internal credit assessments of counterparties for
purposes of the credit risk charges it must take as part of its net
capital computation. Paragraph (b)(12) of Rule 17a-4 requires an ANC
broker-dealer to preserve these records. A broker-dealer SBSD approved
to use models to compute net capital will be subject to the
recordkeeping provision in paragraph (c)(4)(vi)(A) of appendix E to
Rule 15c3-1 and the corresponding record preservation requirement in
paragraph (b)(12) of Rule 17a-4. The proposed capital rule for SBSDs
included a parallel provision requiring a stand-alone SBSD approved to
use models to make and keep current the same type of record of the
basis of its internal credit assessments of counterparties.\172\
Therefore, the Commission proposed a parallel corresponding record
preservation requirement in Rule 18a-6 for such a stand-alone
SBSD.\173\ The Commission received no comments on the proposal and
adopted the requirement in the capital rule for stand-alone SBSDs to
make and keep current these records.\174\ Consequently, the Commission
is adopting the credit risk determination preservation record
requirement as proposed.\175\
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    \172\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70340.
    \173\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25216-17.
    \174\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44060; paragraph (e)(2)(iii)(F)(2) of Rule 18a-1.
    \175\ See paragraph (b)(1)(x) of Rule 18a-6, as adopted.
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Regulation SBSR
    As discussed above, the Commission has adopted Regulation SBSR,
which assigns the duty to report a security-based swap transaction to a
registered SDR.\176\ The Commission proposed to amend paragraph (b)(14)
of Rule 17a-4 to require that broker-dealers, including broker-dealer
SBSDs and MSBSPs, preserve the information they are required to submit
to a registered SDR under Regulation SBSR.\177\ In addition, the
Commission proposed to include parallel preservation requirements in
Rule 18a-6 for stand-alone and bank SBSDs. The Commission received no
comments on the proposed Regulation SBSR record preservation
requirements and is adopting them as proposed.\178\
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    \176\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 80 FR 14567; Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information, 81
FR 53546.
    \177\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25217.
    \178\ See paragraph (b)(14) of Rule 17a-4, as amended;
paragraphs (b)(1)(xi) and (b)(2)(vi) of Rule 18a-6, as adopted.
---------------------------------------------------------------------------

Records Relating to Business Conduct Standards
    As discussed above, the Commission has adopted Rules 15Fh-1 through
15Fh-6 and Rule 15Fk-1. These rules require, among other things, that
SBSDs and MSBSPs make certain disclosures, provide certain notices, and
make other records. The Commission proposed to amend paragraph (b) of
Rule 17a-4 to add a requirement that broker-dealer SBSDs and MSBSPs
preserve copies of documents, communications, and notices related to
the business conduct and chief compliance officer requirements in Rules
15Fh-1 through 15Fh-6 and Rule 15Fk-1.\179\ In addition, the Commission
proposed to adopt parallel record preservation requirements in Rule
18a-6 for stand-alone and bank SBSDs and MSBSPs. The Commission
received no comments on the proposed business conduct record
preservation requirements and is adopting them as proposed.\180\
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    \179\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25217.
    \180\ See paragraph (b)(15) of Rule 17a-4, as amended;
paragraphs (b)(1)(xii) and (b)(2)(vii) of Rule 18a-6, as adopted.
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    Section 15F(h)(4)(C) of the Exchange Act imposes duties on SBSDs
that act as advisors to special entities. Paragraph (a) of Rule 15Fh-2
defines what it means to act as an advisor to a special entity. If an
SBSD is acting in this capacity, Section 15F(h)(4)(C) and paragraph (b)
of Rule 15Fh-4 require the SBSD to make reasonable efforts to obtain
such information as it considers necessary to make a reasonable
determination that a security-based swap or trading strategy involving
a security-based swap is in the best interests of the special entity.
Section 15F(h)(5)(A) and paragraph (a) of Rule 15Fh-5 require an SBSD
or MSBSP that is acting as a counterparty to a special entity to have a
reasonable basis to believe that the special entity has a ``qualified
independent representative,'' as that term is defined in the rule. The
Commission proposed to amend paragraph (b) of Rule 17a-4 to add a
requirement that broker-dealer SBSDs and MSBSPs preserve records
relating to the determinations made pursuant to Section 15F(h)(4)(C)
and Section 15F(h)(5)(A) of the Exchange Act.\181\ In addition, the
Commission proposed parallel record preservation requirements in Rule
18a-6 for stand-alone and bank SBSDs. The Commission received no
comments on the proposed special entity advisor record preservation
requirements and is adopting them as proposed.\182\
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    \181\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218. As noted above in section II.A.2.a. of this release, on
October 31, 2018, the Commission issued a statement, which set forth
the Commission's position that, for a period of five years from the
Registration Compliance Date for SBSDs and MSBSPs (as defined in
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 80 FR at 48988 and discussed below
in section III.B. of this release), certain actions with respect to
specific provisions of the business conduct standards will not
provide a basis for a Commission enforcement action. See Statement
on Business Conduct Standards, 83 FR at 55486. To the extent SBSDs
and MSBSPs rely on the statement, the Commission encourages them to
maintain records of the written representations described in the
statement until such time as the statement is no longer in force.
    \182\ See paragraph (b)(16) of Rule 17a-4, as amended;
paragraphs (b)(1)(xiii) and (b)(2)(viii) of Rule 18a-6, as adopted.
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Corporate Documents
    Paragraph (d) of Rule 17a-4 requires broker-dealers to preserve
during the life of the enterprise corporate documents such as articles
of incorporation, minute books, and stock certificate books. It also
requires broker-dealers to preserve during the life of the enterprise
registration and licensing information such as all Forms BD, Forms BDW,
and licenses or other documentation showing registration with a
securities regulatory authority. The Commission proposed to amend
paragraph (d) of Rule 17a-4 to add references to proposed Form SBSE-BD
and proposed Form SBSE-W.\183\ These were the registration and
withdrawal of registration forms, respectively, the Commission proposed
for broker-dealer SBSDs and MSBSPs.\184\ The

Commission proposed a parallel requirement in Rule 18a-6 for stand-
alone and bank SBSDs and MSBSPs, except that rule text referred to the
registration forms these entities would use (i.e., Forms SBSE and SBSE-
A, respectively) rather than Form SBSE-BD.\185\
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    \183\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218.
    \184\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 65543
(Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011); see also Cross-Border
Proposing Release, 78 FR 30968.
    \185\ Paragraph (m)(3) of Rule 17a-4, as amended, defines the
term ``securities regulatory authority'' to have the meaning set
forth in paragraph (f)(3) of Rule 17a-3, as amended. Paragraph
(h)(1) of Rule 18a-6, as adopted, defines the term ``securities
regulatory authority'' in the same way as that term is defined in
paragraph (f)(3) of Rule 17a-3, as amended. The Commission proposed
to amend the definition of ``securities regulatory authority'' to
include the CFTC and a prudential regulator to the extent the
prudential regulator oversees entity's security-based swap
activities. The Commission believes the better approach is to
specifically reference the CFTC and the prudential regulator in a
given recordkeeping provision where the inclusion of a reference to
the CFTC or prudential regulator is appropriate given the type of
registrant and the nature of the records. As a result, the
Commission is adding references to the CFTC to paragraph (d) of Rule
17a-4, as amended, and a reference to the CFTC to paragraph (c) of
Rule 18a-6, as adopted.
---------------------------------------------------------------------------

    The Commission received no comments on these proposals and has
adopted the forms.\186\ However, to correct an inadvertent omission,
they now also require preservation of Form SBSE-C (17 CFR
249.1600c).\187\ The registration rule for SBSDs and MSBSPs requires
firms applying to register as an SBSD or MSBSP to file Form SBSE-C
(which contains two separate certifications) in addition to Forms SBSE,
SBSE-A, and/or SBSE-BD.\188\ For these reasons, the Commission is
adopting the corporate document preservation requirements with the
modifications discussed above.\189\
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    \186\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
    \187\ The paragraphs as adopted contain updated cross-references
to the CFR citations for Form SBSE, Form SBSE-A, Form SBSE-BD, and
Form SBE-W (i.e., 17 CFR 249.1600, 17 CFR 249.1600a, 17 CFR
249.1600b, and 17 CFR 249.1601, respectively).
    \188\ See 17 CFR 240.15Fb2-1(a).
    \189\ See paragraph (d) of Rule 17a-4, as amended; paragraph (c)
of Rule 18a-6, as adopted.
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Associated Persons
    As discussed above, paragraph (a)(12) of Rule 17a-3 requires a
broker-dealer, including a broker-dealer SBSD or MSBSP, to make and
keep current records of information about associated persons, and the
Commission is adopting parallel requirements in Rule 18a-5 to require a
stand-alone or bank SBSD or MSBSP to make and keep current the same
types of records.\190\ Paragraph (e)(1) of Rule 17a-4 requires broker-
dealers to maintain and preserve the associated person's records in an
easily accessible place until at least three years after the associated
person's employment and any other connection with the broker-dealer has
terminated. The Commission proposed to include a parallel requirement
in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs to maintain and
preserve their records about associated persons.\191\ The Commission
received no comments on these proposed associated persons record
preservation requirements and is adopting them as proposed.\192\
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    \190\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as
adopted.
    \191\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218.
    \192\ See paragraph (d)(1) of Rule 18a-6, as adopted. Paragraph
(h)(2) of Rule 18a-6, as adopted, defines the term ``associated
person'' to have the same meaning as that term is defined in
paragraph (c) of Rule 18a-5, as adopted.
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Regulatory Authority Reports
    Paragraph (e)(6) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily
accessible place each report that a securities regulatory authority has
requested or required the firm to make and furnish to it pursuant to an
order of settlement, and each regulatory exam report until three years
after the date of the report.\193\ The Commission proposed parallel
record preservation requirements in Rule 18a-6 for stand-alone SBSDs
and MSBSPs to maintain and preserve the same types of reports until
three years after the date of the report.\194\ The Commission proposed
a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs but only
if the reports relate to security-based swap activities. The Commission
received no comments on these proposed regulatory authority reports
preservation requirements and is adopting them as proposed.\195\
---------------------------------------------------------------------------

    \193\ As discussed earlier, paragraph (m)(3) of Rule 17a-4
defines the term ``securities regulatory authority'' to have the
meaning set forth in paragraph (f)(3) of Rule 17a-3, as amended. The
Commission proposed to amend the definition of ``securities
regulatory authority'' to include the CFTC and a prudential
regulator to the extent the prudential regulator oversees security-
based swap activities. The Commission believes the better approach
is to specifically identify the CFTC and prudential regulator in a
given recordkeeping provision where the inclusion of a reference to
the CFTC or prudential regulator is appropriate given the type of
registrant and the nature of the records. See paragraph (f)(3) of
Rule 17a-3, as amended. As a result, the Commission is amending
paragraph (e)(6) of Rule 17a-4 by adding references to reports
requested or required by the CFTC.
    \194\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25218-19.
    \195\ See paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as
adopted. The Commission is replacing the term ``regulatory
authority'' with the term ``securities regulatory authority'' in
paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as adopted. Paragraph
(h)(1) of Rule 18a-6, as adopted, defines the term securities
regulatory authority in the same way as that term is defined in
paragraph (f)(3) of Rule 17a-3, as amended. As noted above, the
Commission proposed to amend the definition of the term ``securities
regulatory authority'' cross-referenced in paragraph (f)(3) of Rule
17a-3 to include the CFTC and prudential regulators but is declining
to do so. In lieu of amending the definition of the term
``securities regulatory authority,'' the Commission is adding
references to reports requested or required by the CFTC to paragraph
(d)(2)(i) of Rule 18a-6, as adopted, and to reports requested or
required by the CFTC or the prudential regulators to paragraph
(d)(2)(ii) of Rule 18a-6, as adopted. The Commission staff consulted
with staff from the prudential regulators and the CFTC in drafting
the final rules discussed in this release, including paragraph
(d)(2)(ii) of Rule 18a-6 (applicable to bank SBSDs and MSBSPs). The
Commission recognizes that a bank SBSD or MSBSP may need to notify
its prudential regulator(s) before furnishing (pursuant to paragraph
(g) of Rule 18a-6) certain records identified in paragraph
(d)(2)(ii) of Rule 18a-6.
---------------------------------------------------------------------------

Compliance, Supervisory, and Procedures Manuals
    Paragraph (e)(7) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily
accessible place each compliance, supervisory, and procedures manual,
including any updates, modifications, and revisions, describing the
policies and practices of the broker-dealer with respect to compliance
with applicable laws and rules and supervision of the activities of
each natural person associated with the broker-dealer until three years
after the termination of the use of the manual. The Commission proposed
a parallel requirement in Rule 18a-6 for stand-alone SBSDs and MSBSPs
to maintain and preserve the same types of compliance, supervisory, and
procedures manuals for the same period of time.\196\ The Commission
proposed a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs
but only if the manuals involve compliance with applicable laws and
rules relating to security-based swap activities. The Commission
received no comments on these proposed compliance, supervisory, and
procedures manual preservation requirements and is adopting them as
proposed.\197\
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    \196\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219.
    \197\ See paragraphs (d)(3)(i) and (ii) of Rule 18a-6, as
adopted.
---------------------------------------------------------------------------

Electronic Storage
    Paragraph (f) of Rule 17a-4 provides that the records a broker-
dealer, including a broker-dealer SBSD or MSBSP, is required to
maintain and preserve under Rules 17a-3 and 17a-4 may be immediately
produced or reproduced on micrographic media or by means of electronic
storage media and be maintained and preserved for the required time in
that form. The use of

electronic storage media is subject to certain conditions, including
that the media must preserve the records exclusively in a manner that
is non-rewriteable and non-erasable (also known as a write once, read
many or ``WORM'').\198\ The Commission proposed including a parallel
record maintenance and preservation requirement in Rule 18a-6, but only
with respect to electronic storage media.\199\ The Commission believes
that SBSDs and MSBSPs that are not dually registered as broker-dealers
would not use micrographic media to maintain and preserve records
because electronic storage media is more technologically advanced and
offers greater flexibility in managing records.\200\
---------------------------------------------------------------------------

    \198\ See paragraph (f)(2)(ii)(A) of Rule 17a-4.
    \199\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219.
    \200\ The Commission believes that most broker-dealers use
electronic storage media rather than micrographic media for the same
reasons.
---------------------------------------------------------------------------

    The Commission received comments that its electronic storage
requirements for SBSDs and MSBSPs, including for broker-dealers dually
registered as SBSDs, should not mandate that the records be preserved
exclusively in a WORM format.\201\ One commenter further urged the
Commission, in any event, ``not to expand the WORM requirement to SBSDs
at this time.'' \202\ The Commission also received comment requesting
that it act on a rule petition filed by several organizations in
November 2017 and harmonize its final rule with the CFTC's
corresponding requirements, which were recently modified to eliminate a
similar WORM requirement.\203\
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    \201\ See, e.g., SIFMA 9/5/2014 Letter; Letter from Walt L.
Lukken, President and Chief Executive Officer, Futures Industry
Association (Nov. 29, 2018) (``FIA Letter'').
    \202\ See, e.g., SIFMA 9/5/2014 Letter.
    \203\ See FIA Letter. The CFTC modified CEA Rule 1.31 to remove
its WORM requirement in May 2017. See Recordkeeping, 82 FR 24479
(May 30, 2017).
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    The Commission's electronic record storage requirements in Rule
17a-4 are based on the ``importance for recordkeeping of ready access,
reliability, and permanence of records.'' \204\ The Commission has
described the recordkeeping requirements in Rules 17a-3 and 17a-4 as
``integral to the Commission's investor protection function because the
preserved records are the primary means of monitoring compliance with
applicable securities laws, including antifraud provisions and
financial responsibility standards.'' \205\ Any modification to the
electronic storage requirements in Rule 17a-4 may raise issues that are
distinct from those raised by stand-alone and bank SBSDs and MSBSPs.
Accordingly, the Commission believes that any change to these
requirements should be addressed in a separate regulatory initiative in
which the Commission intends to consider electronic storage media
issues.
---------------------------------------------------------------------------

    \204\ See Reporting Requirements for Brokers or Dealers Under
the Securities Exchange Act of 1934, Exchange Act Release No. 38245
(Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).
    \205\ Electronic Storage of Broker-Dealer Records, Exchange Act
Release No. 47806 (May 7, 2003), 68 FR 25281 (May 12, 2003).
---------------------------------------------------------------------------

    However, the Commission is clarifying that the WORM requirement
does not mandate the use of a specific type of media. In particular,
the Commission issued guidance in 2003 to clarify that the WORM
requirement can be met using an ``electronic storage system that
prevents the overwriting, erasing or otherwise altering of a record
during its required retention period through the use of integrated
hardware and software control codes.'' \206\ This statement in the
release--because it refers to ``hardware'' control codes--has raised
questions as to whether an electronic storage system that relies
exclusively on software coding to meet the WORM requirement is
permitted under the rule. The Commission is clarifying that a software
solution that prevents the overwriting, erasing, or otherwise altering
of a record during its required retention period would meet the
requirements of the rule. For example, the rule does not require the
use of a specific medium such as optical disk, CD-ROM, or magnetic tape
to meet the WORM requirement.
---------------------------------------------------------------------------

    \206\ Electronic Storage of Broker-Dealer Records, 68 FR 25282.
---------------------------------------------------------------------------

    The Commission recognizes that the entities that may register as
stand-alone or bank SBSDs or MSBSPs may have existing electronic
storage systems that do not meet the WORM requirement and therefore
could incur substantial costs in building a recordkeeping system that
meets this requirement. For these reasons, the Commission is modifying
Rule 18a-6 to eliminate the requirement that the electronic storage
system preserve the records exclusively in a non-rewriteable and non-
erasable format (i.e., a WORM format).\207\ In connection with this
modification, the Commission is eliminating the proposed requirement
that the stand-alone or bank SBSD or MSBSP notify the Commission at
least 90 days before using electronic storage media other than optical
disk technology because this provision is no longer relevant given the
absence of the WORM requirement in the rule as adopted.\208\ The
Commission also is modifying the proposed rule text by replacing the
phrase ``electronic storage media'' throughout paragraph (e) of Rule
18a-6, as adopted, with the phrase ``electronic storage system'' to
further clarify that the final rule does not require the use of a
particular storage media such as optical disk or CD-ROM (as is the case
with Rule 17a-4, as noted above).\209\
---------------------------------------------------------------------------

    \207\ This requirement was in paragraph (e)(2)(ii)(A) of Rule
18a-6, as proposed.
    \208\ This requirement was in paragraph (e)(2)(i) of Rule 18a-6,
as proposed.
    \209\ See paragraph (e) of Rule 18a-6, as adopted. The
Commission also is deleting the phrase ``on any medium acceptable
under Sec.  240.18a-6'' from paragraph (e)(3)(iii) of Rule 18a-6. In
addition, the Commission is also replacing throughout paragraph (e)
references to information placed ``on'' electric storage systems
with references to information placed ``in'' such systems.
---------------------------------------------------------------------------

    The Commission is modifying the provision of the rule that required
the original and duplicate units of the storage media to be serialized
and time-dated to clarify that this must be done if applicable (i.e.,
if the firm uses a storage media such as optical disk or CD-ROM).\210\
The Commission also is modifying the provision of the rule that
required the firm to have available facilities for immediate, easily
readable projection or productions of electronic storage media images
and for producing easily readable images; the final rule instead
provides that the facilities can be for the projection or production of
images or records that are maintained on the electronic storage
system.\211\ This modification is designed to accommodate electronic
storage systems that do not use optical disk or CD-ROM media. Further,
the Commission is modifying the provision of the rule that required the
firm to be ready at all times to immediately provide an facsimile
enlargement which the staff of the Commission may request; the final
rule requires instead that the firm must be ready at all times to
immediately provide in a readable format any record or index stored on
the electronic storage system which the staff of the Commission may
request.\212\
---------------------------------------------------------------------------

    \210\ See paragraph (e)(2)(ii) of Rule 18a-6, as adopted.
    \211\ See paragraph (e)(3)(i) of Rule 18a-6, as adopted.
    \212\ See paragraph (e)(3)(ii) of Rule 18a-6, as adopted.
---------------------------------------------------------------------------

    The elimination of the WORM requirement as the exclusive means of
storing records electronically will provide flexibility to stand-alone
and bank SBSDs and MSBSPs in terms of establishing and maintaining
electronic storage systems and will eliminate a potential conflict with
the requirements of the CFTC. However, eliminating the WORM requirement
does not change the

underlying requirements in Rules 18a-5 and 18a-6 that stand-alone and
bank SBSDs and MSBSPs make and keep certain records, preserve those and
other records for required time periods, and furnish promptly legible,
true, complete, and current copies of records to a representative of
the Commission. A firm's obligation to comply with these requirements
is the same irrespective of whether it stores records in paper form or
electronically and, therefore, a firm that elects to store records
electronically should keep these obligations in mind in designing,
implementing, and maintaining an electronic storage system.
    The Commission also is modifying the final rule to eliminate the
proposed provision that required at least one third party to have
access to and the ability to download information from the electronic
storage media and for that third party to execute an undertaking that
the third party would provide the Commission with the information
necessary download information from the electronic storage media.\213\
This provision was designed to facilitate the Commission's access to
electronically stored records. A commenter stated that this requirement
(along with the WORM requirement) was ``outdated in light of the
changed technological environment.'' \214\ The commenter further stated
that it requires broker-dealers to provide third-party access to firm
systems and client information, which ``needlessly exposes firms to
data leakage and cybersecurity threats.'' As noted above, the
Commission believes that any change to the broker-dealer electronic
storage provisions should be addressed in a separate regulatory
initiative where the Commission intends to consider electronic storage
media issues in a broader context, including with respect to other
market participants. Accordingly, for the purposes of Rule 18a-6, the
Commission believes it is appropriate not to adopt the proposed
requirement.
---------------------------------------------------------------------------

    \213\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25313.
    \214\ See FIA Letter.
---------------------------------------------------------------------------

    Finally, paragraph (e)(3)(v) of Rule 18a-6, as proposed, would
require firms that use an electronic storage system to have an audit
system providing for accountability regarding the inputting of records
to the electronic storage system and inputting of any changes made to
every original and duplicate record.\215\ This provision was modeled on
the audit system requirement prescribed in paragraph (f)(3)(v) of Rule
17a-4. A commenter stated that firms report substantial difficulty
assessing whether they have complied with the audit system requirement
of Rule 17a-4.\216\
---------------------------------------------------------------------------

    \215\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25312.
    \216\ See FIA Letter.
---------------------------------------------------------------------------

    The Commission explained the audit system requirement when it
adopted the electronic storage provisions of Rule 17a-4.\217\ In
particular, the Commission stated that the rule requires an audit
system to be utilized only when records required to be maintained under
Rule 17a-4 are being entered or when any additions to existing records
are made.\218\ Consequently, an audit record is not required when a
record is accessed but cannot be altered by the reader.\219\ The
Commission further stated that, although it was not specifying the
contents of each audit system, data automatically or otherwise stored
(in the computer or in hard copy) regarding inputting of records and
changes to existing records will be part of that system.\220\ The
Commission envisioned that the identities of individuals actually
inputting records and making particular changes, and the identity of
documents changed and the identity of new documents created, are the
kind of information that automatically would be collected pursuant to
the audit system requirements.\221\
---------------------------------------------------------------------------

    \217\ See Reporting Requirements for Brokers or Dealers Under
the Securities Exchange Act of 1934, Exchange Act Release No. 38245
(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997).
    \218\ Id. at 6471.
    \219\ Id.
    \220\ Id. At 6473.
    \221\ Id.
---------------------------------------------------------------------------

    In addition, as part of the 2003 guidance with respect to the WORM
requirement, the Commission stated that the audit system would need to
provide accountability regarding the length of time records are stored
in a non-rewriteable and nonerasable manner.\222\ The Commission
further stated that this should include senior management level
approval of how the system is configured to store records for their
required retention periods in a non-rewriteable and nonerasable
manner.\223\
---------------------------------------------------------------------------

    \222\ Electronic Storage of Broker-Dealer Records, 68 FR 25283.
    \223\ Id.
---------------------------------------------------------------------------

    The audit system requirements of Rule 18a-6 are modeled on the
existing requirements of Rule 17a-4. Consequently, firms can rely on
the Commission's description of the Rule 17a-4 requirements--as set
forth above--for the purposes of Rule 18a-6.
    For the foregoing reasons, the Commission is adopting the
electronic storage requirements with the modifications discussed
above.\224\
---------------------------------------------------------------------------

    \224\ See paragraph (e) of Rule 18a-6, as adopted. The
Commission is also making the following non-substantive changes to
paragraph (e) of Rule 18a-6, as adopted: (1) Inserting the word
``an'' before the phrase ``electronic storage system,'' replacing
the phrase ``as defined in this section'' with the phrase ``as
defined in this paragraph (e),'' and replacing the word ``meet''
with the word ``meets'' in the introductory paragraph; (2) replacing
the phrase ``any digital storage medium or system'' with ``any
digital storage system'' in paragraph (e)(1); (3) inserting the word
``an'' before the phrase ``electronic storage system,'' and deleting
the phrase ``comply with the following instructions'' in paragraph
(e)(2); (4) deleting the phrase ``to any system acceptable under
this paragraph (e) as required by the Commission,'' and adding the
phrase ``into a readable format'' between the words ``download'' and
``indexes'' in paragraph (e)(2)(iii); (5) deleting the proposed text
of paragraphs (e)(2)(i), (e)(2)(ii) introductory text, and
(e)(2)(ii)(A) and re-numbering proposed paragraphs (e)(2)(ii)(B)
through (D) as paragraphs (e)(2)(i) through (iii), respectively; (6)
inserting the word ``an'' before the phrase ``electronic storage
system'' in paragraph (e)(3); (7) replacing the phrase ``to provide,
and immediately provide,'' with the phrase ``to immediately
provide'' in paragraph (e)(3)(ii); (8) deleting the comma after the
word ``original,'' replacing the phrase ``the record'' with the
phrase ``a record,'' and adding the phrase ``the electronic storage
system on'' between the words ``on'' and ``any'' in paragraph
(e)(3)(iii), (9) replacing the word ``media'' with the word
``storage'' in paragraph (e)(3)(iv); (10) deleting the phrase ``The
security-based swap dealer or major security-based swap participant
must,'' capitalizing the word ``Have,'' and adding the word ``the''
before the phrase ``electronic storage system'' in paragraph
(e)(3)(v); and (11) replacing the words ``media'' or ``medium'' with
the word ``system,'' deleting the phrase ``to any acceptable system
under this section,'' replacing the phrase ``to any medium
acceptable under Sec.  240.18a-6'' with ``to a readable format,''
and replacing the phrase ``upon being provided with the appropriate
electronic storage'' with the phrase ``upon being provided with
access to the appropriate electronic storage'' in paragraph
(e)(3)(vii).
---------------------------------------------------------------------------

Prompt Production of Records
    Paragraph (i) of Rule 17a-4 applies when a broker-dealer, including
a broker-dealer SBSD or MSBSP, uses a third party to prepare or
maintain the records required to be maintained and preserved pursuant
to Rules 17a-3 and 17a-4. It requires the third party to file an
undertaking with the Commission stating, among other things, that the
records are the property of the broker-dealer and will be promptly
furnished to the Commission or its designee. Paragraph (j) of Rule 17a-
4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the broker-dealer that
are required to be preserved under Rule 17a-4, or any other records of
the broker-dealer subject to examination under Section 17(b) of the
Exchange Act that are requested by the

representative of the Commission.\225\ The Commission proposed
including parallel requirements in Rule 18a-6 for stand-alone and bank
SBSDs and MSBSPs.\226\ The proposed requirement for these entities to
promptly produce records referenced Section 15F of the Exchange Act
(rather than Section 17(b)).\227\ The Commission received no comments
on these proposed prompt production requirements and is adopting them
as proposed.\228\
---------------------------------------------------------------------------

    \225\ Section 17(b) of the Exchange Act provides, among other
things, that all records of a broker-dealer are subject at any time,
or from time to time, to such reasonable, periodic, special, or
other examinations by representatives of the Commission and the
appropriate regulatory agency of the broker-dealer as the Commission
or the appropriate regulatory agency deems necessary or appropriate
in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act.
    \226\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25219-20.
    \227\ Section 15F(f)(1)(C) of the Exchange Act provides that
SBSDs and MSBSPs shall keep books and records described in sections
15F(f)(1)(B)(i) and (ii) open to inspection and examination by any
representative of the Commission. In addition, Section 15F(j)
imposes duties on SBSDs and MSBSPs with respect to monitoring of
trading, risk management procedures, disclosing information to the
Commission and the prudential regulators, obtaining information,
conflicts of interest, and antitrust considerations. With respect to
disclosing information, Section 15F(j)(3) provides that an SBSD and
MSBSP shall disclose to the Commission and to the prudential
regulator for the SBSD or MSBSP, as applicable, information
concerning: (1) Terms and conditions of its security-based swaps;
(2) security-based swap trading operations, mechanisms, and
practices; (3) financial integrity protections relating to security-
based swaps; and (4) other information relevant to its trading in
security-based swaps.
    \228\ See paragraphs (f) and (g) of Rule 18a-6, as adopted.
---------------------------------------------------------------------------

b. Additional Amendments to Rule 17a-4 and Modifications to Rule 18a-6
    The Commission proposed several amendments to Rule 17a-4 to
eliminate obsolete text, improve readability, and modernize
terminology.\229\ Reference is made throughout Rule 17a-4 to
``members'' of a national securities exchange as a distinct class of
registrant in addition to broker-dealers. The Commission proposed to
remove these references to ``members'' given that the rule applies to
brokers-dealers, which would include members of a national securities
exchange that are brokers-dealers. The rule being adopted in this
document does not remove these references to ``members'' to avoid
confusion as to whether their removal resulted in a substantive change
to the rule.
---------------------------------------------------------------------------

    \229\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25220-21.
---------------------------------------------------------------------------

    The Commission proposed a second global change that would replace
the phrase ``Every broker and dealer'' with ``Every broker or dealer.''
\230\ The Commission also proposed a global change to replace the use
of the word ``shall'' in the rule with the word ``must'' or ``will''
where appropriate.\231\ In paragraph (m) of Rule 17a-4, the Commission
proposed to replace the words ``shall have'' with the word ``has.''
\232\ The Commission also proposed certain stylistic, corrective, and
punctuation amendments to improve the readability of Rule 17a-4.\233\
---------------------------------------------------------------------------

    \230\ The amendments replace the phrase ``Every broker and
dealer'' with the phrase ``Every broker or dealer'' in the following
paragraphs of Rule 17a-4 as proposed to be amended: (a) through (e)
and (j).
    \231\ The amendments replace the word ``shall'' with the word
``must'' or ``will'' in the following paragraphs of Rule 17a-4: (a),
(b) introductory text, (b)(11), (c), (d), (e) introductory text,
(e)(8), (f)(2) and (3), (g), (i), (j), (k)(1), and (l).
    \232\ The amendments replace the phrase ``shall have'' with the
word ``has'' in the following paragraphs of Rule 17a-4: (m)(1)
through (4).
    \233\ The Commission is adopting the following stylistic and
corrective changes to Rule 17a-4: (1) In paragraph (a), replacing
the phrases ``paragraphs Sec.  '' and ``paragraph Sec.  '' with the
symbols ``Sec. Sec.  '' and ``Sec.  '', respectively; (2) adding the
word ``and'' between phrase ``money balance'' and the word
``position'' in paragraph (b)(8)(i) for consistency with paragraph
(b)(8)(ii); (3) replacing the phrase ``Sec.  242.901 et seq. of this
chapter'' with the phrase ``Sec. Sec.  242.901 through 242.909 of
this chapter'' in paragraph (b)(14); (4) replacing the phrase ``out
of the money options'' with the phrase ``out-of-the-money options''
in paragraph (b)(8)(ix); (5) replacing the phrase ``paragraph
(a)(12) of Sec.  240.17a-3'' with the phrase ``Sec.  240.17a-
3(a)(12)'' in paragraph (e)(1); (6) replacing the phrase ``paragraph
(a)(13) of Sec.  240.17a-3'' with the phrase ``Sec.  240.17a-
3(a)(13)'' in paragraph (e)(2); (7) replacing the phrase ``paragraph
(a)(15) of Sec.  240.17a-3'' with the phrase ``Sec.  240.17a-
3(a)(15)'' in paragraph (e)(3); (8) replacing the phrase ``for the
life'' with the phrase ``during the life'' in paragraph (e)(3); (9)
replacing the phrase ``paragraph (a)(14) of Sec.  240.17a-13'' with
``Sec.  240.17a-13(a)(14)'' in paragraph (e)(4); (10) replacing the
phrase ``this paragraph'' with the phrase ``this section'' in
paragraph (f); (11) replacing the phrase ``each index'' with the
phrase ``the index'' in paragraph (f)(3)(iv)(B); (12) replacing the
phrase ``the self-regulatory organizations'' with the phrase ``any
self-regulatory organization'' in paragraph (f)(3)(vi); (13)
replacing the phrase ``Rule 17a-4'' with the phrase ``Sec.  240.17a-
4'' in paragraph (f)(3)(vii); and (14) in paragraph (g), replacing
the phrase ``section 15 of the Securities Exchange Act of 1934 as
amended (48 Stat. 895, 49 Stat. 1377; 15 U.S.C. 78o)'' with the
phrase ``section 15 of the Act (15 U.S.C. 78o).''
---------------------------------------------------------------------------

    Further, as discussed above, the Commission is eliminating the
requirements in current paragraphs (c) and (d) of Rule 17a-3 and, as a
consequence, current paragraphs (e) through (h) have been redesignated
as paragraphs (d) through (g), respectively. The Commission proposed to
amend Rule 17a-4 to make corresponding changes to cross-references to
these paragraphs of Rule 17a-3.
    The Commission proposed amendments to paragraph (b)(8) of Rule 17a-
4 that would replace the phrase ``annual audited financial statements''
with the phrase ``the annual financial statements'' to reflect the
broader range of documents required by Rule 17a-5. Due to the addition
of paragraphs (b)(8)(xiv) and (xvi) to Rule 17a-4, as discussed above,
the Commission proposed to redesignate paragraphs (b)(8)(xiv) and (xv)
as paragraphs (b)(8)(xv) and (xvii), respectively.
    The Commission proposed amendments to paragraph (h) of Rule 17a-4
that would add, after the phrase ``Rule G-9 of the Municipal Securities
Rulemaking Board,'' the phrase ``or any successor rule'' to address the
possibility of a future change in how the MSRB's rules are designated.
    The Commission received no comments on these proposed amendments
and is adopting them substantially as proposed, with the modification
discussed above about retaining references to ``members.'' \234\ The
Commission is also making certain non-substantive modifications to Rule
18a-6 as proposed in addition to those discussed above.\235\
---------------------------------------------------------------------------

    \234\ See Rule 17a-4, as amended. In addition to the differences
discussed above between Rule 17a-4, as proposed to be amended, and
Rule 17a-4, as amended, the Commission is adopting the following
non-substantive changes to Rule 17a-4: (1) Removing the phrase
``including a broker or dealer also registered as a security-based
swap dealer or major security based swap participant under Section
15F(b) of the Act (15 U.S.C. 78x-8(b))'' from the undesignated
introductory paragraph for clarity; (2) removing ``on the schedule''
in paragraph (b)(8)(xiii) for clarity; (3) removing ``or Form SBS''
in paragraph (b)(8)(xiii) as it is no longer applicable; (4) adding
``security-based swap'' before the phrase ``possession or control
requirements'' in paragraph (b)(8)(xiv) for clarity; (5) correcting
references from Sec.  240.18a-4 to Sec.  240.15c3-3 in paragraph
(b)(8)(xiv); (6) replacing ``on Form SBS'' with ``in Part II of Form
X-17A-5''; and (7) replacing ``;'' with ``,'' in paragraphs (b)(14)
and (15) for internal consistency.
    \235\ See Rule 18a-6, as adopted. In particular, the non-
substantive modifications to Rule 18a-6 are: (1) Replacing ``record
maintenance and preservation requirements'' with ``books and records
requirements'' in the undesignated introductory paragraph for
internal consistency; (2) replacing ``;'' with ``.'' for each
paragraph in Rule 18a-6 for internal consistency; (3) replacing
``records required for corporation or partnerships), all Forms SBSE
(Sec.  249.617 of this chapter), Forms SBSE-A, Forms SBSE-W (Sec.
249.617 of this chapter),'' with ``records required for corporations
or partnerships), all Forms SBSE (Sec.  249.617 of this chapter),
all Forms SBSE-A, all Forms SBSE-W (Sec.  249.617 of this
chapter),'' in paragraph (c) for consistency with paragraph (d) of
Rule 17a-4, as amended; (4) pluralize ``production'' to
``productions'' in paragraph (e)(3)(i) for consistency with
paragraph (f)(3)(i) of Rule 17a-4, as amended; (5) removing
quotation marks around ``the undersigned'' in paragraph (e)(3)(vii)
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as
amended; (6) removing ``under the Act'' from paragraph (e)(3)(vii)
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as
amended; (7) adding ``by the registrant'' after the phrase
``arrangements for the downloading of any record required to be
maintained and preserved'' in paragraph (e)(3)(vii) for consistency
with paragraph (f)(3)(vii) of Rule 17a-4, as amended; (8) replacing
``which are requested by a representative of the Commission'' with
``that are requested by a representative of the Commission'' in
paragraph (g) for consistency with paragraph (j) of Rule 17a-4, as
amended.

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B. Reporting

1. Introduction
    The Commission in this document is establishing a reporting program
for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act
that is modeled on the reporting program for broker-dealers in Rule
17a-5. Rule 17a-5 has two main elements: (1) A requirement that broker-
dealers file periodic unaudited reports about their financial and
operational condition using the FOCUS Report form; and (2) a
requirement that broker-dealers annually file financial statements and
certain reports, as well as reports covering those statements and
reports prepared by an independent public accountant registered with
the Public Company Accounting Oversight Board (``PCAOB'') in accordance
with PCAOB standards. The Commission proposed to amend Rule 17a-5 to
account for the security-based swap activities of stand-alone broker-
dealers and to establish a reporting regime for broker-dealer SBSDs and
MSBSPs.\236\ The Commission further proposed new Rule 18a-7 (which was
modeled on Rule 17a-5) to establish a reporting regime for stand-alone
and bank SBSDs and MSBSPs. The Commission is adopting the proposed
amendments to Rule 17a-5 and new Rule 18a-7 with modifications, as
discussed below.
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    \236\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25221-47.
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    A commenter requested clarification as to whether an OTC
derivatives dealer dually registered as an SBSD or MSBSP would be
subject to Rule 17a-5 or instead to new Rule 18a-7.\237\ The
applicability of Rule 17a-5 or 18a-7 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).\238\ 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-5.\239\ Similarly, a broker-dealer, other than an OTC
derivatives dealer, that is also an SBSD (which is subject to Rule
15c3-1) will be subject to Rule 17a-5. 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-5. A stand-alone SBSD (which is
subject to Rule 18a-1) will be subject to Rule 18a-7. Similarly, an
SBSD that is also an OTC derivatives dealer (``OTCDD/SBSD'') (which is
subject to Rule 18a-1) will be subject to Rule 18a-7.\240\ A stand-
alone MSBSP (which is subject to Rule 18a-2) will be subject to Rule
18a-7. Finally, a bank SBSD or MSBSP (which has a prudential regulator)
will be subject to Rule 18a-7.
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    \237\ See Letter from Angie Karna, Managing Director, Nomura
Global Financial Products Inc. (Sept. 10, 2014) (``Nomura Letter'').
    \238\ The undesignated introductory paragraphs to Rules 17a-5
and 18a-7 have been modified to clarify this application of the
rules.
    \239\ Paragraph (p) of Rule 17a-5 provides that an OTC
derivatives dealer may comply with Rule 17a-5 by complying with the
provisions of Rule 17a-12.
    \240\ As discussed in this release, an OTC derivatives dealer
dually registered as an 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 conforming modifications to Rule 18a-7. In
particular, where Rule 18a-7 refers to Rule 18a-9, the Commission
has added the following reference to Rule 17a-13: ``or 240.17a-13,
as applicable.''
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    The Commission is also adopting amendments to the FOCUS Report. The
Commission proposed to create a new part of the FOCUS Report--Form
SBS--to be filed by all types of SBSDs and MSBSPs, while stand-alone
broker-dealers would continue filing FOCUS Report Parts II, IIA, IIB,
or II CSE, as applicable.\241\ After further consideration of the
issue, the Commission believes the best approach is to consolidate Form
SBS and FOCUS Report Parts II, IIB, and II CSE into a single form: The
FOCUS Report Part II. In addition, the Commission believes it is
appropriate to adopt a new form--the FOCUS Report Part IIC--to be filed
by bank SBSDs and MSBSPs rather than Form SBS as was proposed. The
decision to require bank SBSDs and MSBSPs to file a separate form is
based on the more limited information that they will need to provide on
the form (as compared to FOCUS Report Part II filers). Consequently,
broker-dealers that file the FOCUS Report Part II will continue to do
so. ANC broker-dealers and OTC derivatives dealers also will file the
FOCUS Report Part II, as will broker-dealer and stand-alone SBSDs and
MSBSPs. Bank SBSDs and MSBSPs will file the FOCUS Report Part IIC.
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    \241\ The Commission requested comment on whether all broker-
dealers, SBSDs, and MSBSPs should file the same consolidated form.
See Recordkeeping and Reporting Proposing Release, 79 FR at 25235-
25236. The Commission received no comments specifically addressing
this issue.
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    A commenter urged the Commission not to impose ``position reporting
requirements,'' arguing that they are unnecessary in light of the
``transaction reporting requirements'' of Regulation SBSR.\242\ The
Commission disagrees. The reporting requirements are designed to
promote transparency of the financial and operational condition of a
broker-dealer, SBSD, or MSBSP to the Commission and, in the case of a
portion of the annual reports, to the public.\243\ This information
will assist the Commission staff in monitoring these firms and
examining them for compliance with the securities laws. Position
records are of a different nature, and serve a different purpose, than
the transaction data that will be reported pursuant to Regulation SBSR.
Specifically, position records provide an overview of a firm's holdings
at a specific point in time. The commenter states that position
reporting requirements are unnecessary ``for purposes of market
surveillance.'' \244\ However, as discussed above, the recordkeeping
requirements being adopted in this document are designed to elicit
information about the financial and operation condition of the filer.
Market surveillance is not the objective of the requirements. Finally,
the commenter stated that if the Commission does adopt position
reporting requirements, it ``should limit the scope of such
requirements for non-U.S. SBSDs to transactions that are either (i)
cleared on a U.S.-registered clearing agency or derivatives clearing
organization or (ii) opposite a U.S. person counterparty.'' \245\ As
discussed above, the purpose of the reporting requirements is to obtain
information about the financial and operational condition of the filer.
Limiting the requirements to a subset of the filer's positions would
not provide a complete picture of the filer's financial and operational
condition. Moreover, the Commission has proposed in a separate release
additional provisions that are designed to address concerns about the
cross-border application of certain requirements applicable to SBSDs
and MSBSPs.\246\
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    \242\ See Memorandum from the Division of Trading and Markets
regarding a March 25, 2019 meeting with representatives of the
Institute of International Bankers (``IIB 3/25/2019 Meeting'').
    \243\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25221.
    \244\ See IIB 3/25/2019 Meeting.
    \245\ See id.
    \246\ See Cross-Border Application Proposing Release, 84 FR
24206.

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2. Periodic Filing of FOCUS Report
a. Rule 17a-5 and Rule 18a-7
Undesignated Introductory Paragraph
    The Commission proposed amending Rule 17a-5 to add an undesignated
introductory paragraph stating that: (1) The rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP; and (2) a stand-alone
or bank SBSD or MSBSP is subject to the reporting requirements under
proposed Rule 18a-7.\247\ The Commission also proposed amending Rule
17a-5 to remove paragraph (a)(1), which provides that paragraph (a)
shall apply to every broker-dealer registered pursuant to Section 15 of
the Exchange Act, because this text was redundant of the undesignated
introductory paragraph of Rule 17a-5, as proposed to be added.
Similarly, the Commission proposed that Rule 18a-7 have an undesignated
introductory paragraph explaining that the rule applies to an SBSD or
MSBSP that is not dually registered as a broker-dealer (i.e., a stand-
alone or bank SBSD or MSBSP). The Commission received no comments on
the introductory paragraphs but, as discussed above, is modifying them
to clarify which rule (17a-5 or 18a-7) applies to a given type of
entity.\248\ The Commission received no comments on the proposed
amendment to remove paragraph (a)(1) from Rule 17a-5 and is adopting it
as proposed.\249\
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    \247\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25222.
    \248\ See undesignated introductory paragraph of Rule 17a-5, as
amended; undesignated introductory paragraph of Rule 18a-7, as
adopted.
    \249\ See Rule 17a-5, as amended. As a consequence of the
removal of paragraph (a)(1) of Rule 17a-5, paragraphs (a)(2)(i)
through (iv) are redesignated paragraphs (a)(1)(i) through (iv),
respectively. Further, as a consequence of the removal of paragraph
(a)(1), paragraphs (a)(3) through (7) of Rule 17a-5 are redesignated
paragraphs (a)(2) through (6), respectively.
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Requirement To File the FOCUS Report
    Rule 17a-5 requires a broker-dealer, other than an OTC derivatives
dealer, to file FOCUS Report Part II or IIA.\250\ The Commission
proposed amending the rule to require a broker-dealer SBSD or MSBSP to
file proposed Form SBS rather than the FOCUS Report Part II or
IIA.\251\ The Commission also proposed including parallel requirements
in Rule 18a-7 that: (1) Stand-alone SBSDs and MSBSPs be required to
file proposed Form SBS with the Commission or its designee within
seventeen business days after the end of each month; and (2) bank SBSDs
and MSBSPs be required to file Form SBS with the Commission or its
designee within seventeen business days after the end of each calendar
quarter (instead of each month).\252\ The Commission proposed quarterly
financial reporting for bank SBSDs and MSBSPs, instead of monthly
reporting, because the prudential regulators currently require banks to
file reports of financial and operational condition known as ``call
reports'' on a quarterly basis.\253\ Under the proposal, the
information reported by bank SBSDs and MSBSPs on the FOCUS Report Part
IIC largely would be information that banks are required to provide in
the call reports.
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    \250\ Prior to these amendments, the requirement that an OTC
derivatives dealer file FOCUS Report Part IIB was set forth in
paragraph (a) of Rule 17a-12. While an ANC broker-dealer is required
under paragraph (a) of Rule 17a-5 to file FOCUS Report Part II,
FINRA Rule 4521(b) provides that ANC broker-dealers must file
supplemental and alternative reports as may be prescribed by FINRA.
Under this rule, FINRA requires ANC broker-dealers to file FOCUS
Report Part II CSE in lieu of FOCUS Report Part IIA. See also Self-
Regulatory Organizations; New York Stock Exchange, Inc.; Order
Approving Proposed Rule Change to Require Members That Use Appendix
E to Calculate Net Capital to File Supplemental and Alternative
Reports, 70 FR 49349 (Commission approval of amendments to NYSE Rule
418 requiring ANC broker-dealers to file Part II CSE).
    \251\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25222-24.
    \252\ In each case, the stand-alone or bank SBSD or MSBSP needed
to file Form SBS with the Commission or its designee. The reference
to a Commission designee was designed to provide the Commission with
the option of requiring that these registrants file the FOCUS Report
with a third party. Most broker-dealers file the FOCUS Report
directly with their SROs pursuant to plans established by the SROs
under paragraph (a)(3) (formerly paragraph (a)(4)) of Rule 17a-5, as
amended. See Recordkeeping and Reporting Proposing Release, 79 FR at
25223.
    \253\ See Consolidated Reports of Condition and Income for a
Bank with Domestic and Foreign Offices--FFIEC 031 (``FFIEC Form
031'' or ``call report''). See also 12 U.S.C. 161; 12 U.S.C. 324; 12
U.S.C. 1464; 12 U.S.C. 1817.
---------------------------------------------------------------------------

    In response to the Commission's proposal to require bank SBSDs and
MSBSPs to file Form SBS seventeen business days after the end of the
quarter, a commenter requested that it change the deadline to match the
prudential regulators' requirement to file call reports thirty calendar
days after the end of the quarter.\254\ To respond to the commenter's
concerns, as well as to promote harmonization with prudential
regulators' requirements, the Commission is adopting a thirty calendar-
day requirement as requested by the commenter. Since the proposed
seventeen business-day requirement would have corresponded with twenty-
four calendar days (with a conservative assumption of no public
holidays), this will provide administrative relief to bank SBSDs and
MSBSPs by allowing them six additional calendar days to file the FOCUS
Report Part IIC with the Commission.
---------------------------------------------------------------------------

    \254\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    The Commission also proposed amendments to Rule 17a-5 to make
explicit the requirement that the FOCUS Report filed by a stand-alone
broker-dealer or the Form SBS filed by a broker-dealer SBSD or MSBSP
must be ``executed.'' \255\ The Commission proposed parallel
requirements in Rule 18a-7 to require that a Form SBS filed by a stand-
alone or bank SBSD or MSBSP must be executed. The Commission received
no comment on these proposals for executed forms. For the reasons
discussed above, the Commission is adopting the FOCUS Report filing
requirements substantially as proposed.\256\
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    \255\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224. Prior to these amendments, the FOCUS Report Parts II, IIA,
IIB, and II CSE each had a section for the filer to execute the
form.
    \256\ See paragraph (a) of Rule 17a-5, as amended; paragraphs
(a)(1) and (2) of Rule 18a-7, as adopted. References in these
paragraphs to Form SBS are changed to references to the FOCUS Report
Part II and the FOCUS Report Part IIC, respectively. Similarly,
references to Form SBS were also included in paragraphs (a)(1), (3),
and (4), (b)(1), (d)(2)(i) and (iii), and (e)(3) of Rule 17a-5, as
proposed to be amended. The references to proposed Form SBS are not
being adopted and these provisions will continue to refer solely to
the FOCUS Report. As discussed above, the requirement that an OTCDD/
SBSD file the FOCUS Report Part II is prescribed in Rule 18a-7
(rather than 17a-5, as proposed).
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Additional Reporting Requirements for Registrants That Use Models
    Rule 17a-5 requires ANC broker-dealers to file additional reports
on a monthly or quarterly basis with the FOCUS Report.\257\ The
Commission proposed similar reporting requirements in Rule 18a-7 for
stand-alone SBSDs approved to use internal models to compute net
capital.\258\ These entities would be required to file most of the
required documents within 17 business days after the end of each month.
However, to correspond with the timing requirement in the proposed
capital rule for these entities (Rule 18a-1),\259\ they would be
required to file the following reports within seventeen business days
after the end of each calendar quarter (instead of each month): A
report identifying the number of business days for which the actual
daily net trading loss exceeded the corresponding daily value at risk
(``VaR''); and the results of backtesting of all internal models used
to compute allowable capital, indicating the number of backtesting
exceptions.

The Commission received no comment on these additional reporting
proposals for stand-alone SBSDs and has adopted Rule 18a-1.\260\
Consequently, the Commission is adopting the additional reporting
requirements, but with the modification that an OTCDD/SBSD must file
them pursuant to Rule 18a-7 (rather than Rule 17a-5).\261\
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    \257\ See paragraph (a)(5) of Rule 17a-5, as amended.
    \258\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224.
    \259\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70237-40.
    \260\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 44052.
    \261\ See paragraphs (a)(3)(i) through (ix) of Rule 18a-7, as
adopted. As proposed, paragraph (a)(3)(vii) of Rule 18a-7 would have
required a stand-alone SBSD authorized to use internal models to
calculate net capital to report the results of a monthly liquidity
stress test. As discussed above, the Commission is deferring
consideration of the liquidity stress test requirements for these
entities and, therefore, this paragraph is being designated as
``[Reserved].''
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b. FOCUS Report
    As discussed above, the Commission proposed Form SBS as the
reporting form for all categories of SBSDs and MSBSPs. Proposed Form
SBS was modeled on the FOCUS Report, particularly FOCUS Report Part II
CSE. FOCUS Report Part II CSE served as the template for proposed Form
SBS because it was designed to account for the use of internal models
to compute net capital by ANC broker-dealers and elicits more detailed
information about derivatives positions and exposures than FOCUS Report
Parts II and IIA.\262\ Based on staff experience, including experience
monitoring ANC broker-dealers, the Commission anticipates that most
SBSDs will use internal models to compute their net capital.\263\
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    \262\ FOCUS Report Part IIB elicits similar information about
derivatives positions and exposures but otherwise is more limited
than FOCUS Report Part II CSE because OTC derivatives dealers are
permitted to engage only in a narrow range of activities. See 17 CFR
240.3b-12; 17 CFR 240.15a-1. See also Recordkeeping and Reporting
Proposing Release, 79 FR at 25224, n. 440.
    \263\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43959-60.
---------------------------------------------------------------------------

    However, as discussed above, the Commission is not adopting Form
SBS as proposed, but is instead requiring the FOCUS Report Part II to
be filed by nonbank SBSDs and MSBSPs. Further, the Commission is
requiring that bank SBSDs and MSBSPs file FOCUS Report Part IIC (rather
than proposed Form SBS or the FOCUS Report Part II, as amended). The
information that must be provided by SBSDs and MSBSPs is substantively
the same information elicited by proposed Form SBS, except that the
information is now being elicited in FOCUS Report Parts II and IIC.
Accordingly, the Commission is adopting changes to FOCUS Report Part II
and the corresponding instructions to update the form, reflect the
required filers, and account for these firms' derivatives activity.
    Thus, ANC broker-dealers that filed Part II CSE prior to these
amendments and OTC derivatives dealers that filed Part IIB prior to
these amendments instead will be required to file FOCUS Report Part II,
as amended--FOCUS Report Parts II CSE and IIB will be discontinued.
From the perspective of these entities, the information they will be
required to enter into the revised FOCUS Report Part II as compared to
FOCUS Report Parts II CSE and IIB is substantively the same. Similarly,
from the perspective of broker-dealers that were required to file FOCUS
Report Part II prior to these amendments, the information they will be
required to enter into the revised form is substantively the same.\264\
Importantly, there is already significant overlap among the four forms
filed on the eFOCUS system of the Financial Industry Regulatory
Authority (``FINRA''): The FOCUS Report Parts II, IIA, IIB, and II
CSE.\265\ Much of this duplication and overlap between forms is
eliminated by combining the forms into a single revised FOCUS Report
Part II and modifying the form to include the line items that were in
proposed Form SBS.
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    \264\ In addition to the differences between Form SBS, as
proposed to be adopted, and FOCUS Report Part II, as amended, as
discussed below, broker-dealers will note the following general
changes: (1) There are new sections added to the form that these
firms may not be required to complete (e.g., Computation of Tangible
Net Worth, which is required to be completed by stand-alone MSBSPs);
(2) certain lines are worded differently or assigned different line
item numbers (e.g., Pre-Amendment FOCUS Report Part II's ``Money
differences'' (line item numbers 5000, 5010, 5020, and 5030) is
relabeled ``Money suspense and balancing difference'' (line item
numbers 5610, 5610, 6010, and 6012) in FOCUS Report Part II, as
amended); (3) to the extent these entities engage in security-based
swap or swap activities but are not SBSDs or MSBSPs, they will now
have specific line items tailored to these products in which to
input information; and (4) broker-dealers registered as FCMs are
required to complete certain new sections the CFTC added to the
CFTC's Form 1-FR-FCM in 2013. See Enhancing Protections Afforded
Customers and Customer Funds Held by Futures Commission Merchants
and Derivatives Clearing Organizations, 78 FR 68506, 68513 (Nov. 14,
2013); 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)).
    \265\ For example, all of the forms contain a cover page and
contain (with variations): A statement of financial condition, a
computation of net capital, a computation of the net capital
requirement, a statement of income (loss), a statement of changes in
ownership equity, a statement of changes in subordinated
liabilities, and a statement of ownership equity and subordinated
liabilities maturing or proposing to be withdrawn within the next
six months. In addition, all of the forms except FOCUS Report Part
IIA elicit financial and operational data; both FOCUS Report Parts
II and II CSE contain (with variations): A computation for
determination of reserve requirements under Rule 15c3-3, information
for possession or control requirements under Rule 15c3-3, and a
schedule of segregation requirements; and both FOCUS Report Parts
IIB and II CSE contain (with variations): A schedule of aggregate
securities and OTC derivatives positions, a schedule of geographic
distribution of OTC derivatives exposures, a credit concentration
report, and a portfolio summary of OTC derivatives exposures by
internal credit rating.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers registering as an SBSD
or MSBSP will find the consolidation preferable, since rather than
familiarizing themselves with a new form (Form SBS), such dual
registrants can continue to file FOCUS Report Part II, as amended. The
consolidation is also expected to enhance the Commission's supervisory
capacities, since it will be easier to compare different types of
registrants' FOCUS Report responses when they are filing the same form.
    Bank SBSDs and MSBSPs will file FOCUS Report Part IIC, which
elicits more limited information than FOCUS Report Part II. Moreover,
much of the information elicited is already reported by these entities
on their call reports. The Commission believes that bank SBSDs and
MSBSPs will find it simpler to utilize the shorter FOCUS Report Part
IIC, which is tailored to these entities and focuses on their business
as an SBSD or MSBSP. Indeed, bank SBSDs and MSBSPs would have shared
only one section in common with other Form SBS filers (the cover page),
so the vast majority of Form SBS would not have been applicable to
these bank entities.\266\ In addition, the capital and margin
requirements applicable to nonbank SBSDs and MSBSPs--which are the
source of the information input into the revised FOCUS Report Part II--
do not apply to bank SBSDs and MSBSPs. Bank SBSDs and MSBSPs are
instructed to follow FFIEC Form 031's instructions regarding a majority
of the line items on FOCUS Report Part IIC, as adopted, since most of
the sections require these entities to report general financial
information that banks are already required to report on FFIEC Form
031.
---------------------------------------------------------------------------

    \266\ The reporting requirements in Rule 18a-7 and the sections
of the FOCUS Report applicable to bank SBSDs and MSBSPs are more
limited in scope because bank SBSDs and MSBSPs are subject to the
prudential regulators' reporting requirements. Further, the
prudential regulators--rather than the Commission--are responsible
for capital, margin, and other prudential requirements applicable to
bank SBSDs and MSBSPs. For these reasons, the reporting requirements
for bank SBSDs and MSBSPs are tailored to their activities as an
SBSD or an MSBSP (as opposed to their activities as banks).
---------------------------------------------------------------------------

    FOCUS Report Part II, as amended, continues to elicit financial and

operational information about a filer through sections consisting of
uniquely numbered line items.\267\ To the extent a line item number has
already been assigned in FOCUS Report Parts II, IIA, IIB, and/or II
CSE, revised FOCUS Report Part II uses the same line item number.
However, the amended form also includes new lines and corresponding
line items that were proposed in Form SBS and are relevant to security-
based swap and swap activities. These line items are identified by
numbers on revised FOCUS Report Part II with a 5-digit number beginning
with 12000 and generally increasing upward.
---------------------------------------------------------------------------

    \267\ As used in this release, the term ``line'' refers to the
lines in the left column on the FOCUS Report that describe the type
of entries to be made on that line. The term ``line item'' refers to
the fields into which information is entered. For example, Line 1 of
the Statement of Income (Loss) section on revised FOCUS Report Part
II is cash, Line Item 200 is the field to enter the allowable amount
of cash, and Line Item 750 is the field to enter the total amount of
cash.
---------------------------------------------------------------------------

    Proposed Form SBS would have been divided into five parts.\268\
FOCUS Report Part II, as amended, and FOCUS Report Part IIC, as
adopted, are not divided into parts. Dividing the form into parts was a
more useful approach when bank entities would have been required to
file the same form as nonbank entities. However, now that bank SBSDs
and MSBSPs will separately file FOCUS Report Part IIC, there is no
longer a need to subdivide the form into parts based on the type of
registrant (e.g., bank SBSD versus broker-dealer SBSD). In addition,
separate parts are not necessary because the header at the top of each
page of FOCUS Report Parts II and IIC identifies the type of
registrants required to complete that page (as proposed in Form SBS).
Nonetheless, the sections of revised FOCUS Report Part II appear in the
same order as they appeared in proposed Form SBS, so they still follow
the logic used to order the sections in the proposed form.
---------------------------------------------------------------------------

    \268\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25224-36.
---------------------------------------------------------------------------

    The Commission is amending the instructions for FOCUS Report Part
II and adopting instructions for FOCUS Report Part IIC to provide
further guidance on the information to be entered into certain line
items.\269\
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    \269\ See FOCUS Report Part II instructions, as amended; FOCUS
Report Part IIC instructions, as adopted. The amendments to the
instructions include incorporating relevant instructions from
proposed Form SBS into the instructions for FOCUS Report Parts II
and IIC, as well as globally replacing ``non-bank'' with ``nonbank''
for internal consistency.
---------------------------------------------------------------------------

i. Revised FOCUS Report Part II
Cover Page
    The FOCUS Report Parts II, IIA, IIB, and II CSE prior to these
amendments (collectively and individually, the ``Pre-Amendment FOCUS
Reports'') include a cover page that elicits basic information about
the reporting firm. Proposed Form SBS included a cover page largely in
the same format as the cover page in Pre-Amendment FOCUS Report Part
II, but with modifications to account for the additional registrants
required to file the form.\270\ The Commission is adopting the cover
page in proposed Form SBS by retaining the existing cover page in FOCUS
Report Part II, as amended, with non-substantive changes largely to
account for the additional registrants required to use this form
(stand-alone broker-dealers, ANC broker-dealers, OTC derivatives
dealers, and broker-dealer and stand-alone SBSDs and MSBSPs) and in
response to comment.\271\
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    \270\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25225.
    \271\ See FOCUS Report Part II, as amended, Cover Page. The
following changes are being made: (1) The line soliciting firms to
check the type of registrant filing the form is updated to reflect
that bank SBSDs and MSBSPs will not be required to file this part of
the FOCUS Report Part II; (2) in response to commenters' requests to
more explicitly address OTC derivatives dealers, the option is added
to check a box if the respondent is an OTC derivatives dealer (see,
e.g., Nomura Letter); (3) in response to comment that Form SBS, as
proposed to be adopted, did not reference foreign SBSDs or foreign
MSBSPs, a line is added asking firms if the filer is a U.S. person
(see SIFMA 9/5/2014 Letter); (4) a line is added asking whether the
filer is authorized to use models to compute capital as a way to
check that the firm is completing the correct net capital section in
the form; (5) a typographical error is corrected so that the
officer's title under the signature line matches the officer's title
under the line for the signing officer to print his or her name; and
(6) the date field is made more flexible by specifying ``2___''
instead of ``20__.''
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Statement of Financial Condition
    The Pre-Amendment FOCUS Reports have a Statement of Financial
Condition section that elicits detail about filers' assets,
liabilities, and ownership equity. Proposed Form SBS similarly had a
Statement of Financial Condition section largely modeled on the
parallel section in Pre-Amendment FOCUS Report Part II CSE.\272\ The
Commission received a number of comments on this proposed section and
has modified it in response to these comments.
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    \272\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226-27.
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    First, a commenter suggested that Lines 8 through 10 on the assets
side of the Statement of Financial Condition section (which elicited
details about securities, including security-based swaps, commodities,
and swaps positions) should be simplified and consolidated into a
single line item.\273\ As discussed below, the revised FOCUS Report
Part II elicits details about these positions in other sections of the
form. Accordingly, the Commission is consolidating these lines into
Line 9 (Total net securities, commodities, and swaps positions) and
making a corresponding modification in Line 24 of the liability side of
the section (Total net securities, commodities, and swaps
positions).\274\
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    \273\ See, e.g., SIFMA 9/5/2014 Letter.
    \274\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Lines 8 and 22.
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    Second, the Statement of Financial Condition section of proposed
Form SBS required filers to report the amount of certain assets and
liabilities that were includable in the broker-dealer customer reserve
formula, the proposed SBSD reserve formula, and a catch-all ``other''
section in which information about assets and liabilities related to
segregation requirements under the CEA would be entered if the filer is
also registered with the CFTC.\275\ Given that Commission and CEA
segregation requirements are the most widely applicable segregation
requirements for FOCUS Report filers, the Commission is consolidating
the reporting of these amounts into single lines to the extent
applicable.\276\
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    \275\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227.
    \276\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Lines 3A1, 3B1, 3C1, 3D1 (receivables), 17A
(bank loans payable), 19A1, 19B1, 19C1, 19D1, and 19E1 (payables).
Further, the Commission has adopted the SBSD segregation
requirements that will generate amounts includable in these line
items. See Capital, Margin, and Segregation Adopting Release, 84 FR
at 43930-43.
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    Third, the Statement of Financial Condition section of proposed
Form SBS required filers to report information about payables due to
securities customers and non-customers, security-based swap customers
and non-customers, and swap customers and non-customers.\277\ A
commenter suggested simplifying the form by deleting payables to
security-based swap and swap customers and non-customers from the
Statement of Financial Condition and capturing this information in the
schedule that elicits detail on derivatives positions.\278\ The
Commission agrees and has deleted these line items from this section
and, instead, requires the information to be reported in Schedule 1 to
FOCUS Report Part II, as amended.\279\ Similarly,

the commenter noted the imbalance of requiring the reporting of other
derivatives payables on the liabilities side of the balance sheet, but
not requiring the reporting of other derivatives receivable on the
assets side of the balance sheet.\280\ The Commission agrees and filers
no longer must report other derivatives payable on the Statement of
Financial Condition section and instead will report this information on
Schedule 1 to FOCUS Report Part II, as amended.\281\
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    \277\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227.
    \278\ See SIFMA 9/5/2014 Letter.
    \279\ See FOCUS Report Part II, as amended, Statement of
Financial Condition, Schedule 1--Aggregate Securities, Commodities,
and Swaps Positions.
    \280\ See, e.g., SIFMA 9/5/2014 Letter.
    \281\ See FOCUS Report Part II, as amended, Schedule 1--
Aggregate Securities, Commodities, and Swaps Positions.
---------------------------------------------------------------------------

    Fourth, the Statement of Financial Condition section of proposed
Form SBS directed filers to report ownership equity from sole
proprietorships, partnerships, corporations, and limited partners. The
Commission is adding a reference to ``members'' in Line 29 of the
Statement of Financial Condition in FOCUS Report Part II, as amended,
instead of solely referencing ``limited partners.'' This change
recognizes the legal structure of limited liability companies as well.
    Fifth, lines are being added to the assets and liabilities sides of
the Statement of Financial Condition for filers to report excess cash
collateral pledged on derivative transactions (Lines 6 and 21 on FOCUS
Report Part II, as amended). On the assets side, a broker-dealer or
SBSD will report cash collateral posted to a counterparty that exceeds
the amount of variation margin the firm has posted to cover current
exposure. On the liability side, the broker-dealer or SBSD will report
cash collateral posted from a counterparty that is in excess of the
amount of variation margin the counterparty is required to post to
cover current exposure. The addition of these lines requires firms to
report the specific amounts on the asset side that are allowable and
non-allowable assets. Establishing unique lines to report this
information will avoid firms reporting the amounts in other lines that
are not specifically tailored to present the information, which--based
on staff experience--has resulted in firms reporting the information on
several different lines. For the foregoing reasons, the Statement of
Financial Condition section in proposed Form SBS is being adopted by
retaining the parallel section in FOCUS Report Part II, as amended,
with the modifications discussed above and certain other
modifications.\282\ This section is required to be completed by stand-
alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs.
---------------------------------------------------------------------------

    \282\ See FOCUS Report Part II, as amended, Statement of
Financial Condition. The following non-substantive changes are being
made: (1) A line item is added for firms to report non-allowable
cash (e.g., petty or restricted cash); (2) the note on the second
page of the Statement of Financial Condition clarifies that ``Stand-
alone MSBSPs should only complete the Allowable and Total columns''
(emphasis added); this sentence is also added to the instructions
for the Statement of Financial Condition; (3) an obsolete accounting
reference is updated globally (including on Line 15E, which was
proposed as Line 14E) to accurately reflect ``ASC 860'' instead of
``SFAS 140''; and (4) the instructions are updated to reflect the
changes discussed in this section.
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Computation of Net Capital
    The Pre-Amendment FOCUS Reports have a Computation of Net Capital
section. Proposed Form SBS included two sections: One to be completed
by SBSDs authorized to use internal models to compute net capital under
the proposed capital requirements and the other to be completed by
filers not authorized to use internal models for this purpose.\283\ The
Commission has adopted capital requirements for nonbank SBSDs under
which certain firms may be authorized to use internal models to compute
net capital.\284\
---------------------------------------------------------------------------

    \283\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25227-28.
    \284\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43898-905.
---------------------------------------------------------------------------

    The Computation of Net Capital section for filers authorized to use
models was largely modeled on the parallel section in Pre-Amendment
FOCUS Report Part II CSE. The section in proposed Form SBS had a line
for filers to report their contractual securities commitments because
this line appeared on the Computation of Net Capital section in Pre-
Amendment FOCUS Report Part II.\285\ However, this line item does not
apply to filers authorized to use models and is removing it from the
section.\286\
---------------------------------------------------------------------------

    \285\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25228.
    \286\ The FOCUS Report instructions clarify that contractual
securities commitments not accounted for in the firm's VaR model
will continue to be accounted for in residual marketable securities
(Line Item 3665). See FOCUS Report Part II instructions, as amended.
---------------------------------------------------------------------------

    In addition, a commenter requested that the Computation of Net
Capital section for filers authorized to use internal models account
for firms approved to use the Basel 2.5 framework to compute market
risk deductions.\287\ The Commission agrees and has added new Line 10
that elicits detail about market risk deductions computed under the
Basel 2.5 framework.\288\ This will provide the Commission and other
relevant securities regulators with greater detail about the components
of the firms' calculations.
---------------------------------------------------------------------------

    \287\ See Email from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (May 10, 2018)
(``SIFMA 5/10/2018 Email'').
    \288\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Authorized to Use Models), Line 10. For firms not
using the Basel 2.5 framework, the calculations are consolidated
into Line 9 and the subsequent lines are renumbered accordingly.
---------------------------------------------------------------------------

    For the foregoing reasons, the Computation of Net Capital section
for filers authorized to use models in Form SBS is being adopted by
adding that section to FOCUS Report Part II, as amended, with the
modifications discussed above and certain other modifications.\289\
This section is required to be completed by stand-alone broker-dealers
and broker-dealer and stand-alone SBSDs and MSBSPs authorized to use
internal models to compute net capital.
---------------------------------------------------------------------------

    \289\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Authorized to Use Models). The following change is
being made: Line 11 now refers to ``certain counterparties'' instead
of ``commercial end user counterparties'' for consistency with Rules
15c3-1 and 18a-1, as adopted. See paragraph (a)(7) of Rule 15c3-1;
paragraph (a)(2) Rule 18a-1, as adopted.
---------------------------------------------------------------------------

    The Computation of Net Capital section in proposed Form SBS for
filers not authorized to use models was largely the same as the
parallel section in Pre-Amendment FOCUS Report Part II. The Commission
received no comment on this section. However, the Commission is adding
new Line 9.C.8., titled ``Risk-based haircuts computed under 17 CFR
240.15c3-1a or 17 CFR 240.18a-1a'' and updating the instructions to
FOCUS Report Part II accordingly. This change is intended to provide a
specific line to report this information. The staff has observed that
because the form currently does not have a unique line to enter the
information, firms enter the information on several different lines.
The Commission is also adopting non-substantive modifications to
promote clarity.\290\ This section is required to be completed by
stand-alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs not authorized to use internal models to compute net capital.
---------------------------------------------------------------------------

    \290\ See FOCUS Report Part II, as amended, Computation of Net
Capital (Filer Not Authorized to Use Models). The following change
is being made: Line 12 now clarifies in parentheses that Line 12 is
equal to the ``sum of Lines 9A through 9E, 10, and 11.''
---------------------------------------------------------------------------

Computation of Minimum Regulatory Capital Requirements
    The Pre-Amendment FOCUS Reports have a Computation of Minimum

Regulatory Capital Requirements section in which a broker-dealer inputs
the calculation of its minimum net capital requirement. Proposed Form
SBS included two such sections: One to be completed by broker-dealer
SBSDs and MSBSPs and the other to be completed by stand-alone
SBSDs.\291\ Proposed Form SBS included these separate sections because
the proposed minimum net capital computation applicable to a broker-
dealer SBSD differs from the computation applicable to a stand-alone
SBSD. The section for broker-dealer SBSDs was largely modeled on the
parallel section in Pre-Amendment FOCUS Report Part II used by broker-
dealers. The section for stand-alone SBSDs was a substantially scaled
down version of that section reflecting the simpler calculation these
entities would perform under the proposed nonbank SBSD capital rule
(Rule 18a-1). The Commission received no comment on either of the
proposed sections and has adopted capital requirements for nonbank
SBSDs under which these firms will need to calculate a minimum net
capital requirement.\292\ However, because an OTCDD/SBSD will be
subject to Rule 18a-1, the Computation of Minimum Regulatory Capital
Requirements sections have been modified to indicate that an OTCDD/SBSD
must complete the simpler section that will also be used by stand-alone
SBSDs. Consequently, these sections in proposed Form SBS are being
adopted with this modification and additional non-substantive
modifications by retaining the parallel section in FOCUS Report Part
II, as amended, to be used by stand-alone broker-dealers, broker-dealer
SBSDs (other than OTCDD/SBSDs), and broker-dealer MSBSPs, and adding
the section for stand-alone SBSDs and OTCDD/SBSDs.\293\
---------------------------------------------------------------------------

    \291\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25229.
    \292\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-906.
    \293\ See FOCUS Report Part II, as amended, Computation of
Minimum Regulatory Capital Requirements (Broker-Dealer) and
Computation of Minimum Regulatory Capital Requirements (Non-Broker-
Dealer SBSD). The following changes are being made: (1) Because Line
4 appeared twice in the broker-dealer version in Form SBS, as
proposed to be adopted, the second Line 4 is renumbered Line 5 and
the subsequent lines are renumbered accordingly; (2) in the broker-
dealer version, Line 5Bi titled ``Minimum CFTC net capital
requirement'' adds ``(if applicable)'' to the end of the line to
clarify that not all firms will need to complete this line; (3) to
reflect the staggered implementation of the risk margin amount
computation in the nonbank SBSD capital rule, Line 5 refers
generally to the percentage of the risk margin amount computed under
the net capital rule rather than specifically referencing ``8%'' of
the risk margin amount; (4) in the broker-dealer version, the sub-
section titled ``Computation of Aggregate Indebtedness'' adds ``(If
Applicable)'' to the end of the title to clarify that not all firms
will need to complete this sub-section; (5) in the broker-dealer
version, for clarity and for consistency with Pre-Amendment FOCUS
Report Part II, Line 10 now reads ``Total aggregate indebtedness
liabilities from Statement of Financial Condition (Item 1760)''
instead of ``Total liabilities from Statement of Financial Condition
(Item 1760)''; (6) in the stand-alone SBSD version, the title of the
Computation of Minimum Regulatory Capital Requirements section
clarifies that it applies to a ``non-broker-dealer SBSD'' instead of
to any ``non-broker-dealer''; (7) in the stand-alone SBSD version,
Line 7 corrects a cross-reference to read ``(greater of Lines 5 and
6)'' rather than ``(greater of Lines 4 and 5)''; (8) in the stand-
alone SBSD version, Line 9 corrects a cross-reference so that it
refers to ``Line 7'' instead of ``Line 6''; and (9) the instructions
for the broker-dealer version correct a cross-reference to CFTC
Regulation 1.17 so that it refers to ``8%'' (instead of ``4%'') of
the amount required to be segregated pursuant to the CEA. See 17 CFR
1.17(a)(1)(i)(B).
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Computation of Tangible Net Worth
    The Commission's proposed capital requirement for stand-alone
MSBSPs and broker-dealer MSBSPs in Rule 18a-2 was a tangible net worth
test.\294\ Accordingly, proposed Form SBS included a Computation of
Tangible Net Worth section to be completed by stand-alone MSBSPs and
broker-dealer MSBSPs.\295\ The Commission received no comment on this
section. However, the Commission ultimately adopted Rule 18a-2 to apply
solely to stand-alone MSBSPs (i.e., not to broker-dealer MSBSPs, which
are subject to Rule 15c3-1).\296\ Accordingly, the Computation of
Tangible Net Worth section in proposed Form SBS is being adopted as an
addition to the FOCUS Report Part II with the modification that it
applies only to stand-alone MSBSPs.\297\
---------------------------------------------------------------------------

    \294\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70256-57.
    \295\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25230.
    \296\ See Rule 18a-2, as adopted.
    \297\ See FOCUS Report Part II, as amended, Computation of
Tangible Net Worth.
---------------------------------------------------------------------------

Statement of Income (Loss) or Statement of Comprehensive Income
    The Pre-Amendment FOCUS Reports have a Statement of Income (Loss)
section in which filers enter information about revenues and expenses.
In 2012, the Commission approved a FINRA rule change to adopt Form SSOI
(Supplemental Statement of Income), which elicits more detailed
information about revenues and expenses.\298\ Proposed Form SBS
included a Statement of Income (Loss) section modeled on the more
detailed Form SSOI to simplify the filings broker-dealers would need to
make with the Commission and their designated examining authority
(``DEA'').\299\
---------------------------------------------------------------------------

    \298\ See Self-Regulatory Organizations; FINRA; Notice of Filing
of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified By Amendment No. 2, Adopting FINRA
Rule 4524 (Supplemental FOCUS Information) and Proposed
Supplementary Schedule to the Statement of Income (Loss) Page of
FOCUS Reports, Exchange Act Release No. 66364 (Feb. 9, 2012), 77 FR
8938 (Feb. 15, 2012).
    \299\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25229-30.
---------------------------------------------------------------------------

    The Commission proposed to incorporate Form SSOI into the Statement
of Income (Loss) section of proposed Form SBS. The Commission
understands, however, that firms sometimes are required to disclose
their FOCUS Reports to third parties for commercial reasons,
potentially raising privacy concerns. The Commission further
understands that the income information disclosed in Form SSOI is
highly proprietary, given the level of detail required to be disclosed
in the form. Moreover, the Commission already has access to the
information in Form SSOI. Consequently, the Commission believes that it
is not necessary to incorporate all the Form SSOI elements into the
Statement of Income (Loss).\300\
---------------------------------------------------------------------------

    \300\ The Commission renamed this section of the form in 2018.
See Disclosure Update and Simplification, Exchange Act Release No.
83875 (Aug. 17, 2018), 83 FR 50148 (Oct. 4, 2018).
---------------------------------------------------------------------------

    The Commission recently amended the Statement of Income (Loss)
sections in FOCUS Report Parts II, IIA, and IIB to elicit information
about comprehensive income and rename the sections ``Statement of
Income (Loss) or Statement of Comprehensive Income.'' \301\
Accordingly, the Statement of Income (Loss) in proposed Form SBS is
being adopted by retaining the Statement of Income (Loss) or Statement
of Comprehensive Income section in FOCUS Report Part II, as amended.
However, the Commission is adding a new line--Line 3--to the Statement
of Income (Loss) or Statement of Comprehensive Income, as amended. This
line elicits information about gains or losses from derivatives trading
that was elicited on Line Item 3926 on Form SSOI and FOCUS Report Part
II CSE. The Commission is also adopting several other non-substantive
modifications to this section of FOCUS Report Part II.\302\ The
Statement of

Income (Loss) or Statement of Comprehensive Income must be completed by
stand-alone broker-dealers and broker-dealer and stand-alone SBSDs and
MSBSPs.
---------------------------------------------------------------------------

    \301\ See id.
    \302\ See revised FOCUS Report Part II, as amended, Statement of
Income (Loss) or Statement of Comprehensive Income. The following
changes are made: (1) On Line 5, ``Profit or losses from
underwriting and selling groups'' is replaced with ``Gains or losses
from underwriting and selling groups'' for consistency with the
terminology used in Lines 2 and 3; (2) on Line 10, ``Commodities
revenue'' is replaced with ``Gains or losses on commodities'' for
consistency with the terminology used in Lines 1 through 5; (3) in
the instructions for this section, ``brokers'' is globally replaced
with ``broker-dealers''; (4) Line 36 is updated to read ``Net income
(current month only) before comprehensive income and provision for
federal income taxes'' (emphasis added) in response to broker-
dealers' requests for clarification after the adoption of the
Commission's Disclosure Update and Simplification release; (5) in
the instructions for this section, the instruction for ``principal
transaction including unrealized gains and losses'' is not included
because it does not correspond with a specific line of this section;
and (6) the Statement of Income (Loss) or Statement of Comprehensive
Income section also contains non-substantive punctuation changes.
---------------------------------------------------------------------------

Capital Withdrawals and Capital Withdrawals--Recap
    The Pre-Amendment FOCUS Report Parts II, IIB, and II CSE have a
Capital Withdrawal section and a Capital Withdrawals--Recap section
that elicit details about filers' ownership equity and subordinated
liabilities maturing or proposed to be withdrawn within the next six
months, and accruals which have not been deducted in the computation of
net capital. Proposed Form SBS had these two sections, which were
largely modeled on the parallel sections in Pre-Amendment FOCUS Report
Parts II and II CSE.\303\ The Commission received no comment on these
sections and has adopted capital requirements for nonbank SBSDs under
which these firms will be subject to a net capital requirement.\304\
Consequently, the Commission is adopting these sections in proposed
Form SBS by retaining the parallel sections in FOCUS Report Part II, as
amended, with certain non-substantive modifications.\305\ These
sections are required to be completed by stand-alone broker-dealers,
stand-alone SBSDs, and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \303\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \304\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-906.
    \305\ See FOCUS Report Part II, as amended, Capital Withdrawals
and Capital Withdrawals--Recap. The following changes are being
made: (1) For internal consistency and to avoid confusion with the
schedules at the end of revised FOCUS Report Part II, the text at
the bottom of the Capital Withdrawals section now refers to ``This
section'' instead of ``The schedule''; (2) for internal consistency
with Lines 1A and 1A2 in the Capital Withdrawals--Recap section
which reference LLCs, the title for the Statement of Changes in
Ownership Equity subsection now references LLCs in the parenthetical
``(sole proprietorship, partnership, LLC or corporation)''; (3) Line
1A in the Statement of Changes in Ownership Equity subsection
replaces ``Net income (loss)'' with ``Net income (loss) or
comprehensive income (loss), as applicable'' for consistency with
the references to net income and comprehensive income in the
remainder of the FOCUS Report, as amended in the Commission's 2018
Disclosure Update and Simplification release; and (4) Line 1B in the
Statement of Changes in Ownership Equity subsection titled
``Additions (including non-conforming capital of)'' is assigned Line
Item 4263 (for consistency with Pre-Amendment FOCUS Report Part II)
instead of 4262. Pre-Amendment FOCUS Report Part II assigns
``Additions (including non-conforming capital of)'' the number 4263,
while FOCUS Report Part II CSE assigns ``Additions (including non-
conforming capital of)'' the number 4262). Since the form being
adopted in this release is FOCUS Report Part II, it is preferable to
be more consistent with Pre-Amendment FOCUS Report Part II than
FOCUS Report Part II CSE.
---------------------------------------------------------------------------

Financial and Operational Data
    The Pre-Amendment FOCUS Report Part II CSE included a Financial and
Operational Data section that elicited detail about filers' operations,
including operational deductions from capital and potential operational
charges not deducted from capital. Proposed Form SBS had a Financial
and Operational Data section modeled largely on the parallel section in
Pre-Amendment FOCUS Report Part II CSE.\306\ The Commission received no
comment on this proposed section and has adopted capital requirements
for nonbank SBSDs under which these firms will need to calculate a
minimum net capital requirement.\307\ Consequently, the Commission is
adopting this section in proposed Form SBS by retaining the parallel
section in FOCUS Report Part II, as amended, with non-substantive
changes for clarity.\308\ The section must be completed by stand-alone
broker-dealers, stand-alone SBSDs, and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \306\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25226.
    \307\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43883-86.
    \308\ See FOCUS Report Part II, as amended, Financial and
Operational Data. The following changes are being made: (1) For
internal consistency and to avoid confusion with the schedules at
the end of revised FOCUS Report Part II, this section is no longer
referred to as a ``schedule;'' and (2) the word ``mailed'' is
replaced with ``sent'' on Line 5 and the corresponding instructions
to reflect that customer confirmations can be emailed in addition to
mailed.