dealer's net capital or tentative net capital requirement and its
current amount of net capital or tentative net capital.\784\ As broker-
dealers, dually registered SBSDs and MSBSPs will be required to comply
with the existing notification requirements.
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    \781\ See 17 CFR 240.17a-11(b).
    \782\ See 17 CFR 240.17a-11(b)(1) . Rule 15c3-1 requires broker-
dealers to maintain a minimum level of net capital (meaning highly
liquid capital) at all times. See 17 CFR 240.15c3-1. The rule
requires that a broker-dealer perform two calculations: (1) A
computation of the minimum amount of net capital the broker-dealer
must maintain; and (2) a computation of the amount of net capital
the broker-dealer is maintaining. See 17 CFR 240.15c3-1(a) and
(c)(2). As discussed above in sections II.A. and II.B.2.b. of this
release, the minimum net capital requirement is the greater of a
fixed-dollar amount specified in the rule and an amount determined
by applying one of two financial ratios: The 15-to-1 aggregate
indebtedness to net capital ratio or the 2% of aggregate debit items
ratio. See 17 CFR 240.15c3-1(a).
    \783\ See 17 CFR 240.17a-11(b)(2).
    \784\ See 17 CFR 240.17a-11(b)(1) and (2). As discussed above,
paragraph (b) of Rule 17a-11 would be redesignated paragraph (a).
Further, as discussed below in section II.C.3. of this release, the
Commission is proposing certain technical amendments to the text in
paragraph (b), which would be contained in paragraph (a) of Rule
17a-11, as proposed to be amended.
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    The Commission is proposing to include parallel capital deficiency
notification requirements in proposed Rule 18a-8 applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled on the requirements
in paragraph (b) of Rule 17a-5.\785\ Specifically, paragraph (a)(1)(i)
of proposed Rule 18a-8 would require a stand-alone SBSD to give notice
to the Commission on the same day if the firm's net capital declines
below the minimum amount required pursuant to proposed Rule 18a-1 or if
the Commission informs the stand-alone SBSD that it is or has been in
violation of proposed Rule 18a-1.\786\ The notice would need to specify
the stand-alone SBSD's net capital requirement and its current amount
of net capital.\787\ Further, if the notice is triggered by the
Commission informing the stand-alone SBSD that it is or has been in
violation of proposed Rule 18a-1 and the SBSD disagrees, the SBSD could
specify the reasons for the disagreement in the notice.\788\
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    \785\ Compare 17 CFR 240.17a-11(b), with paragraph (a) of
proposed Rule 18a-8.
    \786\ See paragraph (a)(1)(i) of proposed Rule 18a-8. Proposed
Rule 18a-1--which is modeled on Rule 15c3-1--would specify minimum
net capital requirements for stand-alone SBSDs. See Capital, Margin,
and Segregation Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital Requirements for
Broker-Dealers, 77 FR 70221-70230.
    \787\ See paragraph (a)(1)(i) of proposed Rule 18a-8.
    \788\ See id.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii) of proposed Rule 18a-8 would require a stand-
alone ANC SBSD to give notice to the Commission on the same day if its
tentative net capital declines below the minimum amount required
pursuant to proposed Rule 18a-1 or if the Commission informs the stand-
alone ANC SBSD that is or has been in violation of proposed Rule 18a-
1.\789\ The notice would need to specify the stand-alone ANC SBSD's
tentative net capital requirement and its current amount of tentative
net capital.\790\ Further, if the notice is triggered by the Commission
informing the stand-alone ANC SBSD that it is or has been in violation
of proposed Rule 18a-1 and the SBSD disagrees, the SBSD could specify
the reasons for the disagreement in the notice.\791\
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    \789\ See paragraph (a)(1)(ii) of proposed Rule 18a-8. Proposed
Rule 18a-1 would specify minimum tentative net capital requirements
for stand-alone ANC SBSDs. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
77 FR 70226-70227.
    \790\ See paragraph (a)(1)(ii) of proposed Rule 18a-8.
    \791\ See id.
---------------------------------------------------------------------------

    Paragraph (a)(2) of proposed Rule 18a-8 would require a stand-alone
MSBSP to give notice to the Commission on the same day if it fails to
maintain a positive tangible net worth pursuant to proposed Rule 18a-2
or if the Commission informs the stand-alone MSBSP that it is or has
been in violation of proposed Rule 18a-2.\792\ The notice would need to
specify the extent to which the firm has failed to maintain positive
tangible net worth. Further, if the notice is triggered by the
Commission informing the stand-alone MSBSP that it is or has been in
violation of proposed Rule 18a-2 and the MSBSP disagrees, the MSBSP
could specify the reasons for the disagreement in the notice.
---------------------------------------------------------------------------

    \792\ See paragraph (a)(2) of proposed Rule 18a-8. Proposed Rule
18a-2 would require stand-alone MSBSPs to maintain positive tangible
net worth. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70256-70257. Under proposed Rule 18a-2, tangible net worth would be
defined to mean the stand-alone MSBSP's net worth as determined in
accordance with generally accepted accounting principles in the
U.S., excluding goodwill and other intangible assets. See id.
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Early Warning of Potential Capital or Model Problem
    Paragraph (c) of Rule 17a-11 specifies four events that, if they
occur, trigger a requirement that a broker-dealer send notice promptly
(but within twenty-four hours) to the Commission.\793\ These

notices are designed to provide the Commission with ``early warning''
that the broker-dealer may experience financial difficulty. The events
triggering the early warning notification requirements are:
---------------------------------------------------------------------------

    \793\ See 17 CFR 240.17a-11(c).
---------------------------------------------------------------------------

     The computation of a broker-dealer subject to the
aggregate indebtedness standard of Rule 15c3-1 shows that its aggregate
indebtedness is in excess of 1,200% of its net capital;\794\
---------------------------------------------------------------------------

    \794\ See 17 CFR 240.17a-11(c)(1). As discussed above, the
minimum net capital requirement for certain types of broker-dealers
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 15-to-1 aggregate indebtedness to
net capital ratio. See 17 CFR 240.15c3-1(a)(1)(i). Consequently,
requiring notification when a broker-dealer has a 12-to-1 aggregate
indebtedness to net capital ratio provides notice before the firm
reaches the minimum 15-to-1 requirement.
---------------------------------------------------------------------------

     The computation of a broker-dealer which has elected to
use the alternative standard of calculating net capital under Rule
15c3-1 shows that the firm's net capital is less than 5% of aggregate
debit items computed in accordance with Appendix A of Rule 15c3-3;\795\
---------------------------------------------------------------------------

    \795\ See 17 CFR 240.17a-11(c)(2). As discussed above, the
minimum net capital requirement for certain types of broker-dealers
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 2% of aggregate debit items ratio.
See 17 CFR 240.15c3-1(a)(1)(ii). Consequently, requiring
notification when a broker-dealer has net capital equal to 5% of
aggregate debit items provides notice before the firm reaches the 2%
minimum requirement.
---------------------------------------------------------------------------

     A broker-dealer's net capital computation shows that its
total net capital is less than 120% of its required minimum level of
net capital or of its required minimum level of tentative net capital,
in the case of an OTC derivatives dealer;\796\
---------------------------------------------------------------------------

    \796\ See 17 CFR 240.17a-11(c)(3).
---------------------------------------------------------------------------

     With respect to an OTC derivatives dealer, the occurrence
of the fourth and each subsequent backtesting exception under Appendix
F of Rule 15c3-1 during any 250 business day measurement period.\797\
---------------------------------------------------------------------------

    \797\ See 17 CFR 240.17a-11(c)(4). OTC derivatives dealers (and
ANC broker-dealers) take market risk charges when computing net
capital that are determined using the VaR models instead of applying
standardized haircuts. The amount of the VaR measure computed by the
model must be multiplied by a factor of at least three but
potentially a greater factor based on the number of exceptions to
the measure resulting from quarterly backtesting exercises. A
backtesting exception occurs when the ANC broker-dealer's actual
one-day loss exceeds the amount estimated by its VaR model. Multiple
backtesting exceptions can indicate a problem with the VaR model.
See, e.g., Basel Committee on Banking Supervision, Supervisory
framework for the use of ``backtesting'' in conjunction with the
internal models approach to market risk capital requirements (Jan.
1996), available at http://www.bis.org/publ/bcbs22.pdf (``The
essence of all backtesting efforts is the comparison of actual
trading results with model-generated risk measures. If this
comparison is close enough, the backtest raises no issues regarding
the quality of the risk measurement model. In some cases, however,
the comparison uncovers sufficient differences that problems almost
certainly must exist, either with the model or with the assumptions
of the backtest. In between these two cases is a grey area where the
test results are, on their own, inconclusive.'').
---------------------------------------------------------------------------

    As broker-dealers, dually registered SBSDs and MSBSPs will be
required to comply with the existing notification requirements.\798\
The Commission is proposing to add a new notification requirement in
paragraph (c) applicable to broker-dealer MSBSPs. Specifically,
paragraph (c)(5) of Rule 17a-3, as proposed to be amended, would
require a broker-dealer MSBSP to notify the Commission when its level
of tangible net worth falls below $20 million.\799\
---------------------------------------------------------------------------

    \798\ As discussed above, paragraph (c) of Rule 17a-11 would be
redesignated paragraph (b). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (c), which would be
contained in paragraph (b) of Rule 17a-5, as proposed to be amended.
    \799\ See paragraph (b)(6) of Rule 17a-11, as proposed to be
amended. As discussed above, proposed Rule 18a-2 would require
nonbank MSBSP to maintain a positive tangible net equity. See
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, 77 FR 70256-70257. The Commission,
however, did not propose that a nonbank MSBSP be required to a
minimum amount of positive net equity. See id. The CFTC proposed a
$20 million fixed-dollar ``tangible net equity'' minimum requirement
for swap dealers and major swap participants that are not FCMs and
are not affiliated with a U.S. bank holding company. See Capital
Requirements of Swap Dealers and Major Swap Participants, 78 FR
27827. Further, OTC derivatives dealers are required to maintain
minimum net capital of $20 million. See 17 CFR 240.15c3-1(a)(5). In
addition, the Commission has proposed a $20 million fixed-dollar
minimum net capital requirement for stand-alone SBSDs. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital Requirements
for Broker-Dealers, 77 FR 70221-70227. The proposed $20 million
early warning threshold for broker-dealer MSBSPs is based on these
proposals and requirements.
---------------------------------------------------------------------------

    The Commission also is proposing to include parallel early warning
notification requirements in proposed Rule 18a-8 applicable to stand-
alone SBSDs and stand-alone MSBSPs that are modeled on the requirements
in paragraph (c) of Rule 17a-5.\800\ Specifically, paragraph (b)(1) of
proposed Rule 18a-8 would require a stand-alone SBSD to notify the
Commission promptly (but within twenty-four hours) when the SBSD's net
capital falls below 120% of the SBSD's required minimum tentative net
capital.\801\ Paragraph (b)(2) of proposed Rule 18a-8 would require a
stand-alone ANC SBSD to notify the Commission when the SBSD's tentative
net capital falls below 120% of the SBSD's required minimum net
capital.\802\ Paragraph (b)(3) of proposed Rule 18a-8 would require a
stand-alone MSBSP to notify the Commission when its level of tangible
net worth falls below $20 million.\803\ Finally, paragraph (b)(4) of
proposed Rule 18a-8 would require a stand-alone ANC SBSD to report the
occurrence of the fourth and any subsequent backtesting exception
performed pursuant to paragraph (d) of Rule 18a-1 during any 250
business day measurement period.\804\
---------------------------------------------------------------------------

    \800\ Compare 17 CFR 240.17a-11(c), with paragraph (b) of
proposed Rule 18a-8.
    \801\ See paragraph (b)(1) of proposed Rule 18a-8.
    \802\ See paragraph (b)(2) of proposed Rule 18a-8.
    \803\ See paragraph (b)(3) of proposed Rule 18a-8.
    \804\ See paragraph (b)(4) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Notice of Adjustment of Reported Capital Category
    Prudential regulators have established five capital categories that
are used to describe a bank's capital strength: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.\805\ The definition
of each capital category is based on capital measures under the bank
capital standard and other factors.\806\ A bank is required to notify
its appropriate prudential regulator of adjustments to the bank's
capital category that may have occurred that would put the bank into a
lower capital category from the category previously assigned to it.
Following the notice, the prudential regulator determines whether the
bank needs to adjust its capital category.\807\ Because these notices
may indicate that a bank is in or approaching financial difficulty, the
Commission is proposing to include a notification requirement in
proposed Rule 18a-8 that would require a bank SBSD or a bank MSBSP to
give notice to the Commission when it files an adjustment of reported
capital category with its prudential regulator by transmitting a copy
of the notice to the Commission.\808\
---------------------------------------------------------------------------

    \805\ See 12 CFR 325.103; 12 CFR 6.4; 12 CFR 208.43.
    \806\ See id.
    \807\ See 12 CFR 6.3(c); 12 CFR 208.42(c); 12 CFR 325.102(c).
    \808\ See paragraph (b) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Failure To Make and Keep Current Books and Records
    Paragraph (d) of Rule 17a-11 requires a broker-dealer that fails to
make and keep current the books and records required under Rule 17a-3
to notify the Commission of this fact on the same day that the failure
arises.\809\ The notice must specify the books and records which have
not been made or which are

not current.\810\ In addition, a broker-dealer is required to report to
the Commission within forty-eight hours of the original notice a report
stating what the broker or dealer has done or is doing to correct the
situation.\811\ As broker-dealers, dually registered SBSDs and MSBSPs
will be required to comply with the existing notification requirements
in paragraph (d).\812\
---------------------------------------------------------------------------

    \809\ See 17 CFR 240.17a-11(d).
    \810\ See id.
    \811\ See id.
    \812\ As discussed above, paragraph (d) of Rule 17a-11 would be
redesignated paragraph (c). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain
technical amendments to the text in paragraph (d), which would be
contained in paragraph (c) of Rule 17a-5, as proposed to be amended.
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel books and records
notification requirement in proposed Rule 18a-7 applicable to stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs that is
modeled on the requirement in paragraph (d) of Rule 17a-5.\813\
Specifically, paragraph (d) of proposed Rule 18a-8 would require a
stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP that
fails to make and keep current the books and records required under
proposed Rule 18a-5 to give notice of this fact that same day and
specify in the notice the books and records which have not been made or
which are not current.\814\ Further, these registrants would be
required to transmit a report within 48 hours of the notice stating
what the registrant has done or is doing to correct the situation.\815\
---------------------------------------------------------------------------

    \813\ Compare 17 CFR 240.17a-11(d), with paragraph (d) of
proposed Rule 18a-8.
    \814\ See paragraph (d) of proposed Rule 18a-8. As discussed
above in section II.A.2.a. of this release, proposed Rule 18a-5--
which is modeled on Rule 17a-3--would require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.
    \815\ See paragraph (d) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Material Weakness
    The recently adopted amendments to paragraph (e) of Rule 17a-11
require a broker-dealer to provide notification about a material
weakness as that term is defined in Rule 17a-5.\816\ Specifically,
paragraph (e) provides that, whenever a broker-dealer discovers or is
notified by an independent public accountant of a material weakness as
defined in Rule 17a-5, the broker-dealer must: (1) give notice to the
Commission within twenty-four hours of the discovery or notification of
the material weakness; and (2) transmit a report within forty-eight
hours of the notice stating what the broker-dealer has done or is doing
to correct the situation.\817\ As broker-dealers, dually registered
broker-dealer SBSDs and broker-dealer MSBSPs will be required to comply
with the existing notification requirements in paragraph (e).\818\
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    \816\ See Broker-Dealer Reports, 78 FR 51993. As discussed above
in section II.B.3.a. of this release, under the recently adopted
amendments to Rule 17a-5, the concept of material weakness is used
for the purposes of the compliance report and the report of the
independent public accountant covering the compliance report. See 17
CFR 240.17a-5(d)(3). A material weakness is defined in Rule 17a-5 to
mean a deficiency, or a combination of deficiencies, in Internal
Control Over Compliance (as that term is defined in the rule) such
that there is a reasonable possibility that non-compliance with Rule
15c3-1 or paragraph (e) of Rule 15c3-3 will not be prevented or
detected on a timely basis or that non-compliance to a material
extent with Rule 15c3-3, except for paragraph (e), Rule 17a-13, or
any Account Statement Rule will not be prevented or detected on a
timely basis. See 17 CFR 240.17a-5(d)(3)(iii). The recently amended
rule further provides that a deficiency in Internal Control Over
Compliance exists when the design or operation of a control does not
allow the management or employees of the broker or dealer, in the
normal course of performing their assigned functions, to prevent or
detect on a timely basis non-compliance with Rule 15c3-1, Rule 15c3-
3, Rule.17a-13, or any Account Statement Rule. See id. The term
Internal Control Over Compliance means internal controls that have
the objective of providing the broker-dealer with reasonable
assurance that non-compliance with Rule 15c3-1, Rule 15c3-3, Rule
17a-13, or any Account Statement Rule will be prevented or detected
on a timely basis. See 17 CFR 240.17a-5(d)(3)(ii).
    \817\ See Broker-Dealer Reports, 78 FR 51993. Paragraph (i) of
Rule 17a-12 requires an OTC derivatives dealer to take the same
steps when it discovers or is notified of a material inadequacy as
defined in Rule 17a-12. Rule 17a-12--the reporting rule for OTC
derivatives dealers--is similar to Rule 17a-5. See 17 CFR 240.17a-
12. However, rather than using the concept of material weakness,
Rule 17a-12 uses the concept of material inadequacy. See id. The
Commission replaced the use of material inadequacy with material
weakness in Rule 17a-5 through the recent amendments to the rule,
which were designed, among other things, to (1) increase the focus
of carrying broker-dealers and their independent public accountants
on compliance, and internal control over compliance, with certain
financial and custodial requirements; and (2) strengthen and clarify
broker-dealer audit and reporting requirements in order to
facilitate consistent compliance with these requirements. See
Broker-Dealer Reports, 78 FR 51911. As discussed above in section
II.B.3.a. of this release, the Commission is proposing to use the
concept of material weakness in proposed Rule 18a-7.
    \818\ As discussed above, paragraph (e) of Rule 17a-11 would be
redesignated paragraph (d). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (e), which would be
contained in paragraph (d) of Rule 17a-5, as proposed to be amended.
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel material weakness
notification requirement in proposed Rule 18a-7 applicable to stand-
alone SBSDs that is modeled on paragraph (e) of Rule 17a-11. \819\
Specifically, paragraph (e) of Rule 18a-8 would provide that, whenever
a stand-alone SBSD discovers or is notified by an independent public
accountant of a material weakness as defined in Rule 18a-7, the SBSD
must: (1) give notice to the Commission within twenty-four hours of the
discovery or notification of the material weakness; and (2) transmit a
report within forty-eight hours of the notice indicating what the SBSD
has done or is doing to correct the situation.\820\
---------------------------------------------------------------------------

    \819\ Compare 17 CFR 240.17a-11(e), with paragraph (e) of
proposed Rule 18a-8. As discussed above in section II.B.3.a. of this
release, stand-alone MSBSPs would not be required to file with the
Commission a compliance report or a report of the independent public
accountant covering the compliance report. Consequently, as the
concept of material weakness is used in the context of these
reports, the material weakness notification requirement would not
apply or be relevant to stand-alone MSBSPs. Further, as discussed
above in section II.B.3.a. of this release, bank SBSDs and bank
MSBSPs would not be subject to the requirements in proposed Rule
18a-7 to file annual reports with the Commission. Consequently, the
material weakness notification requirement would not apply or be
relevant to these registrants.
    \820\ See paragraph (e) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Insufficient Liquidity Reserves
    As discussed above in section II.A. of this release, the Commission
has proposed amendments to Rule 15c3-1 that would establish liquidity
stress test requirements for ANC broker-dealers, which would include
ANC broker-dealer SBSDs.\821\ Further, the Commission has proposed
identical liquidity stress test requirements for stand-alone ANC SBSDs
as part of the capital requirements for SBSDs.\822\ Under the proposed
liquidity stress test requirements, ANC broker-dealers, including ANC
broker-dealer SBSDs, and stand-alone ANC SBSDs would be required, among
other things, to: (1) perform a liquidity stress test at least monthly
that takes into account certain assumed conditions lasting for thirty
consecutive days; and (2) maintain at all times liquidity reserves
based on the results of the liquidity stress test comprised of
unencumbered cash or U.S. government securities.\823\
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    \821\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
    \822\ See id.
    \823\ See id.
---------------------------------------------------------------------------

    Given the importance to the health of a financial institution of
maintaining adequate liquidity, the Commission is proposing a new
notification requirement that would apply to ANC broker-dealers,
including ANC broker-dealer SBSDs.\824\ Specifically, paragraph (e) of
Rule 17a-5, as proposed to be amended, would require an ANC broker-
dealer to give immediate notice

in writing if the liquidity stress test conducted pursuant to Rule
15c3-1, as proposed to be amended, indicates that the amount of the
firm's liquidity reserve is insufficient.\825\ The Commission is
proposing to include a parallel liquidity notification requirement in
proposed Rule 18a-8 applicable to stand-alone ANC SBSDs.\826\ The
proposed liquidity notification requirements are designed to provide
the Commission with notice of a liquidity shortfall at an ANC broker-
dealer or stand-alone ANC SBSD that could impair the ability of the
firm to withstand a liquidity crisis.
---------------------------------------------------------------------------

    \824\ See paragraph (e) of Rule 17a-5, as proposed to be
amended. As discussed above, current paragraph (e) of Rule 17a-5
would be redesignated paragraph (d).
    \825\ See paragraph (e) of Rule 17a-11, as proposed to be
amended. Current paragraph (f) of Rule 17a-11 provides that every
national securities exchange or national securities association that
learns that a member broker-dealer has failed to send notice or
transmit a report as required by paragraphs (b), (c), (d), or (e) of
Rule 17a-11, even after being advised by the securities exchange or
the national securities association to send notice or transmit a
report, shall immediately give notice of such failure in accordance
with paragraph (g) of Rule 17a-11. See 17 CFR 240.17a-11(f). As
discussed above, the Commission is proposing to redesignate current
paragraph (f) as paragraph (g). Further, the Commission is proposing
to replace the specific reference to ``paragraphs (b), (c), (d), or
(e)'' of Rule 17a-11 in current paragraph (f) with a reference to
``this section''. This would incorporate all the notices required
under Rule 17a-11, including notices that would be required under
the new liquidity notification requirement. See paragraph (g) of
Rule 17a-11, as proposed to be amended.
    \826\ Compare paragraph (e) of Rule 17a-11, as proposed to be
amended, with paragraph (f) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Failure To Make a Required Reserve Deposit
    As discussed above in section II.A. of this release, Rule 15c3-3
requires a carrying broker-dealer to maintain a reserve of funds or
qualified securities in an account at a bank that is at least equal in
value to the net cash owed to customers, and proposed Rule 18a-4 would
include a parallel requirement with respect to security-based swap
customers applicable to SBSDs, including broker-dealer SBSDs.\827\
Under paragraph (i) of Rule 15c3-3, a broker-dealer is required to
notify the Commission and its DEA if it fails to make a required
deposit into its customer reserve account under Rule 15c3-3.\828\ Since
a broker-dealer SBSD would be required to maintain a separate reserve
account for its security-based swap customers under Rule 18a-4, the
Commission is proposing a new notification requirement in Rule 17a-11
that would be triggered if a broker-dealer fails to make a required
deposit into its security-based swap customer reserve account.\829\ In
addition, the Commission is proposing to include a parallel reserve
account notification requirement in proposed Rule 18a-8 applicable to
stand-alone SBSDs and bank SBSDs.\830\
---------------------------------------------------------------------------

    \827\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70282-70287.
    \828\ See 17 CFR 240.15c3-3(i).
    \829\ See paragraph (f) of Rule 17a-11, as proposed to be
amended. As discussed above, current paragraph (f) of Rule 17a-5
would be redesignated paragraph (g).
    \830\ Compare paragraph (h) of Rule 17a-11, as proposed to be
amended, with paragraph (g) of proposed Rule 18a-8.
---------------------------------------------------------------------------

Manner of Notification
    Paragraph (g) of Rule 17a-11 provides that every notice or report
required to be given or transmitted by the rule shall be given or
transmitted to the principal office of the Commission in Washington,
DC, the regional office of the Commission for the region in which the
broker-dealer has its principal place of business, the DEA of which
such broker-dealer is a member, and the CFTC if the broker-dealer is
registered as an FCM.\831\
---------------------------------------------------------------------------

    \831\ See 17 CFR 240.17a-11(g).
---------------------------------------------------------------------------

    Paragraph (g) further provides that for the purposes of Rule 17a-
11, notice shall be given or transmitted by telegraphic notice or
facsimile transmission and that a report about how the broker-dealer is
addressing a failure to make and keep current books and records or a
material weakness may be transmitted by overnight delivery.\832\ The
Commission is proposing to amend this paragraph to no longer permit
notice by telegraphic transmission, and instead to only allow notice by
facsimile transmission.\833\ This proposal recognizes that telegrams
are no longer widely used in the U.S.,\834\ and that Commission staff
no longer receive Rule 17a-11 notices by telegram. As broker-dealers,
dually registered broker-dealer SBSDs and broker-dealer MSBSPs will be
required to give notice or transmit the notices and reports, including
the proposed new notices, pursuant to the requirements specified in
paragraph (g).\835\
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    \832\ See id.
    \833\ See paragraph (h) of Rule 17a-11, as proposed to be
amended.
    \834\ See Tom Standage, No Morse, L.A. Times, Feb. 8, 2006, at
B15 (noting that Western Union discontinued its telegram services
effective January 27, 2006).
    \835\ As discussed above, paragraph (g) of Rule 17a-11 would be
redesignated paragraph (h). Further, as discussed below in section
II.C.3. of this release, the Commission is proposing certain largely
technical amendments to the text in paragraph (g), which would be
contained in paragraph (h) of Rule 17a-5, as proposed to be amended.
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    The Commission is proposing to include a parallel manner of
notification requirement in proposed Rule 18a-8 that is modeled on
paragraph (g) of Rule 17a-11. \836\ Specifically, paragraph (i) of
proposed Rule 18a-8 would provide that a stand-alone SBSD, stand-alone
MSBSP, bank SBSD, or bank MSBSP required to give notice or transmit a
report under the rule would need to do so in the same manner as a
broker-dealer under paragraph (g) of Rule 17a-11, except there would be
no requirement to give notice or provide a report to a DEA as these
registrants would not have DEAs.\837\
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    \836\ Compare 17 CFR 240.17a-11(g), with paragraph (h) of
proposed Rule 18a-8.
    \837\ See paragraph (h) of proposed Rule 18a-8.
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Request for Comment
    The Commission generally requests comment on the proposed
amendments to Rule 17a-11 and proposed Rule 18a-9. In addition, the
Commission requests comment, including empirical data in support of
comments, in response to the following question:
    1. Should paragraph (f) of Rule 17a-11 be amended to require a
broker-dealer's DEA (in addition to a broker-dealer's national
securities exchange or national securities association) to transmit
notice to the Commission upon learning that a broker-dealer failed to
send notice in accordance with Rule 17a-11? If so, explain why. If not,
explain why not. For example, given the responsibilities of a DEA, is a
DEA more likely to learn if a broker-dealer for which it serves as DEA
has failed to send notice in accordance with Rule 17a-11 than a
national securities exchange or national securities association of
which the broker-dealer is a member? Commenters are asked to provide
information and data about the costs and benefits of requiring the DEA
to provide notice.
    2. Rule 17a-11 is proposed to be amended to include new
notification requirements applicable to broker-dealers (e.g., requiring
notice if the broker-dealer's liquidity stress test indicates that the
amount of its liquidity reserve is insufficient). Consequently, this
would expand the types of instances in which a national securities
exchange or national securities association would be required to give
notice under paragraph (g) of Rule 17a-11, as proposed to be amended,
if the exchange or association learns that a broker-dealer has failed
to do so under Rule 17a-11. Would this expansion materially increase
the number of notices that would need to be sent by national securities
exchanges and national securities associations under Rule 17a-11? If
so, please explain why and quantify the increased burden

resulting from the increased number of notices that would need to be
sent.
3. Additional Proposed Amendments to Rule 17a-11
    The Commission is proposing several amendments to Rule 17a-11 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission is proposing a global change to Rule 17a-11
that would replace the use of the word ``shall'' in the rule with the
word ``must'' or ``will'' where appropriate.\838\ The Commission also
proposes to make certain stylistic, corrective, and punctuation
amendments to improve Rule 17a-11's readability.\839\
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    \838\ The proposed amendments would replace the word ``shall''
with the word ``must'' or ``will'' in the following paragraphs of
Rule 17a-11, as proposed to be amended: (a)(1), (a)(2), (b), (c),
(g), (h), and (j). See Rule 17a-11, as proposed to be amended.
    \839\ The Commission proposes the following stylistic and
corrective changes to Rule 17a-11, as proposed to be amended: (1)
Replacing the phrase ``this Sec.  240.17a-11'' with the phrase
``this section'' in paragraph (a)(1); (2) replacing the phrase
``Every broker or dealer who'' with the phrase ``Every broker or
dealer that'' in paragraph (c); (3) replacing the phrase ``such
discovery or notification of the material inadequacy or the material
weakness'' with the phrase ``the discovery or notification of the
material inadequacy or material weakness'' in paragraph (d)(1); and
(4) removing the U.S.C. citations from paragraph (j) since the rule
already cites to the applicable section of the Exchange Act.
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    As a consequence of the proposed deletion of paragraph (a),
paragraphs (b), (c), (d), and (e) of Rule 17a-11 would be redesignated
paragraphs (a), (b), (c), and (d), respectively. Further, as discussed
above, the Commission is proposing to add two new notification
provisions to Rule 17a-11 that would be codified in paragraphs (e) and
(f) of the rule, as proposed to be amended. As a consequence of the
deletion of paragraph (a) and the addition of the two new provisions,
paragraphs (f), (g), (h), and (i) would be redesignated paragraphs (g),
(h), (i), and (j), respectively. Similarly, due to the proposed
addition and deletion of paragraphs, the Commission is proposing a
global change that would replace the cross-references to ``paragraph
(g)'' of Rule 17a-11 with ``paragraph (h)'' of Rule 17a-11.\840\
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    \840\ The proposed amendments would replace the phrase
``paragraph (g)'' with the phrase ``paragraph (h)'' in the following
paragraphs of Rule 17a-11, as proposed to be amended: (a)(1), (b),
(c), (d)(1), (d)(2), and (g). See Rule 17a-11, as proposed to be
amended.
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    Reference is made in paragraph (g) to a ``member'' of a national
securities exchange as a distinct class of registrant in addition to a
``broker'' and ``dealer''. The Commission is proposing to remove this
reference to a ``member'' given that the rule applies to brokers-
dealers, which would include a member of a national securities exchange
that is a broker-dealer.
    The Commission is also proposing to replace a specific reference to
the notices required under ``paragraphs (b), (c), (d), or (e)'' of Rule
17a-11 in current paragraph (f) with a reference to ``this section''.
This would incorporate all the notices required under Rule 17a-11,
including notices that would be required under the new security-based
swap customer reserve account notification requirement.
    Finally, the Commission proposes to amend paragraph (i) to
reference ``Sec.  240.15c3-1, Sec.  240.15c3-1d, Sec.  240.15c3-3,
Sec.  240.17a-5, and Sec.  240.17a-12'' instead of ``Sec.  240.15c3-
1(a)(6)(iv)(B), Sec.  240.15c3-1(a)(6)(v), Sec.  240.15c3-1(a)(7)(ii),
Sec.  240.15c3-1(c)(2)(x)(B)(1), Sec.  240.15c3-1(e), Sec.  240.15c3-
1d(c)(2), Sec.  240.15c3-3(i), Sec.  240.17a-5(h)(2), and Sec.
240.17a-12(f)(2)''. This proposed amendment corrects certain cross-
references that are outdated due to the recently adopted amendments to
some of these rules.\841\ It also eliminates cross-references to
specific paragraphs in the event of future amendments to these cross-
referenced rules.
---------------------------------------------------------------------------

    \841\ See Broker-Dealer Reports, 78 FR 51910; Financial
Responsibility Rules for Broker-Dealers, 78 FR 51824.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on these additional
proposed amendments to Rule 17a-11, including comment on whether any of
the proposed amendments would result in substantive changes to the
requirements applicable to broker-dealers.

D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences

1. Introduction
    As discussed above, section 764 of the Dodd-Frank Act added section
15F to the Exchange Act.\842\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting and recordkeeping for
SBSDs and MSBSPs.\843\ Further, section 15F(f)(1)(A) provides that
SBSDs and MSBSPs shall make such reports as are required by the
Commission, by rule or regulation, regarding the transactions and
positions and financial condition of the SBSD or MSBSP.\844\ In
addition, section 15F(f)(1)(B)(ii) provides that nonbank SBSDs and
nonbank MSBSPs shall keep books and records in such form and manner and
for such period as may be prescribed by the Commission by rule or
regulation.\845\
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    \842\ See Public Law 111-203, 764; 15 U.S.C. 78o-10.
    \843\ See 15 U.S.C. 78o-10(f)(2).
    \844\ See 15 U.S.C. 78o-10(f)(1)(A).
    \845\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
---------------------------------------------------------------------------

    After considering the anticipated business activities of nonbank
SBSDs, the Commission is proposing to establish a securities count
program for these registrants under sections 15F that is modeled on the
securities count program for broker-dealers codified in Rule 17a-
13.\846\ Rule 17a-13 requires certain broker-dealers (generally,
broker-dealers that hold funds and securities) to examine and count the
securities they physically hold, account for the securities that are
subject to their control or direction but are not in their physical
possession, verify the locations of securities under certain
circumstances, and compare the results of the count and verification
with their records.\847\
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    \846\ See 17 CFR 240.17a-13.
    \847\ See id. As noted in section I. of this release, the Dodd-
Frank Act amended the definition of security in section 3(a)(10) of
the Exchange Act to include a security-based swap. See Public Law
111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference
in Rule 17a-13 to a security in the Exchange Act includes a
security-based swap. The Commission, however, has issued temporary
exemptive relief excluding security-based swaps from the definition
of security to the extent Commission rules did not otherwise apply
specifically to security-based swaps prior to the amendment. See
Order Granting Temporary Exemptions under the Securities Exchange
Act of 1934 in Connection with the Pending Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, 76 FR 39927.
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    Like Rule 17a-11, Rule 17a-13 was adopted in the aftermath of the
securities industry ``paper work'' crisis of 1967-1970.\848\ At that
time, the Commission identified several factors contributing to the
crisis, including, that securities were not checked and counted
frequently enough nor controlled tightly enough.\849\ The Commission
also identified corrective measures to counter these conditions in the
future,\850\ including requiring broker-dealers to conduct quarterly
security counts as part of the effort to eliminate the ``deficiencies
in broker-dealers' internal controls and procedures for safeguarding
securities reflected by material amounts of unresolved security
differences, suspense balances and unverified

transfer items.''\851\ As the Commission stated when proposing Rule
17a-13,
---------------------------------------------------------------------------

    \848\ See Quarterly Securities Counts by Certain Exchange
Members, Brokers and Dealers, Exchange Act Release No. 9140 (Apr.
19, 1971), 36 FR 7974 (Apr. 28, 1971); Net Capital Requirements for
Brokers and Dealers; Amended Rules, Exchange Act Release No. 18417
(Jan. 13, 1982), 47 FR 3512 (Jan. 25, 1982).
    \849\ See Study of Unsafe and Unsound Practices of Brokers and
Dealers at 2.
    \850\ See id. at 3-5.
    \851\ Id. at 30.

    One of a broker-dealer's major functions is that of moving funds
from buyer to seller in exchange for securities. The movement of
these funds and securities is monitored and directed by the books
and records of the broker-dealers involved in the various
transactions. To the extent that a firm's records do not accurately
reflect the movement and location of funds and securities, the
ability of that firm to operate efficiently and even its continued
viability come into question. The insolvency of many broker-dealers
in the past few years is attributable to a large extent to their
loss of operational control. Once a firm's operations reach a
certain level of errors, it is a Herculean task, requiring
extraordinary sums of capital, to reverse the process and to resolve
past errors so that the firm's present records accurately reflect
its position. That part of the broker-dealer's operations dealing
with the movement and location of securities has, in the past, been
subject only to the once-a-year check of the X-17A-5 audit. The
accounting record for the location and movement of securities is the
stock record. The annual audit may disclose differences between
positions reflected in the stock record and the results of a
physical count of securities and verification of securities
positions outside the firm. Many accountants have advised and urged
their clients to make regular periodic box counts, but this advice
has not always been followed. Furthermore, some firms have failed to
---------------------------------------------------------------------------
research and resolve promptly stock record differences.\852\

    \852\ Quarterly Securities Counts by Certain Exchange Members,
Brokers and Dealers, 36 FR 7974.
---------------------------------------------------------------------------

    Rule 17a-13 continues to play an important role today, given the
volume of securities transactions and the resulting movement of
securities between control locations and broker-dealers.

    Under the proposed securities count program for SBSDs, broker-
dealer SBSDs and broker-dealer MSBSPs--as broker-dealers--would be
subject to Rule 17a-13. Consequently, they will be required to comply
with the existing securities count requirements in the rule.
    Stand-alone SBSDs would be subject to proposed Rule 18a-9, which is
modeled on Rule 17a-13. Proposed Rule 18a-9 would not include a
parallel requirement for every requirement in Rules 17a-13.\853\ In
addition, proposed Rule 18a-9 would not apply to stand-alone MSBSPs
because the customer protection rationale for Rule 17a-13 and proposed
Rule 18a-9 is not as pertinent to stand-alone MSBSPs. For example, the
Commission preliminarily does not anticipate that stand-alone MSBSPs
will engage in securities operations involving the movement of funds
and securities from buyer to seller that are as complex as the
operations of dealers in securities such as broker-dealers and SBSDs.
Finally, for the reasons discussed above in section I. of this release,
proposed Rule 18a-9 would not apply to bank SBSDs and bank MSBSPs.
---------------------------------------------------------------------------

    \853\ The Commission is not proposing to include in proposed
Rule 18a-9 provisions that would parallel the provisions in
paragraphs (a)(1), (a)(2), (a)(3), and (e) of Rule 17a-13. These
paragraphs of Rule 17a-13 provide exemptions from complying with
Rule 17a-13 for certain types of broker-dealers. See 17 CFR 240.17a-
13(a)(1), (a)(2), (a)(3), and (e). The Commission preliminarily
believes that SBSDs will not limit their activities to the types of
activities in which the exempt broker-dealers engage. However, the
Commission is requesting comment below on this question.
---------------------------------------------------------------------------

2. Proposed Rule 18a-9
Undesignated Introductory Paragraph
    Proposed Rule 18a-9 contains an undesignated introductory paragraph
explaining that the rule applies only to an SBSD that is not dually
registered as a broker-dealer (i.e., a stand-alone SBSD), provided,
however, that the rule does not apply to an SBSD with a prudential
regulator (i.e., a bank SBSD).\854\ The note further explains that a
broker-dealer, including a broker-dealer that is dually registered as
an SBSD, is subject to the securities count requirements under Rule
17a-13.\855\
---------------------------------------------------------------------------

    \854\ See undesignated introductory paragraph of proposed Rule
18a-9.
    \855\ See id.
---------------------------------------------------------------------------

Requirement To Perform a Securities Count
    Paragraph (b) of Rule 17a-13 prescribes the requirement to perform
a quarterly securities count and specifies the steps a broker-dealer
must take in performing a count. Specifically, it requires a broker-
dealer to at least once in each calendar quarter:
     Physically examine and count all securities held including
securities that are the subjects of repurchase or reverse repurchase
agreements;\856\
---------------------------------------------------------------------------

    \856\ See 17 CFR 240.17a-13(b)(1).
---------------------------------------------------------------------------

     Account for all securities in transfer, in transit,
pledged, loaned, borrowed, deposited, failed to receive, failed to
deliver, subject to repurchase or reverse repurchase agreements or
otherwise subject to the broker-dealer's control or direction but not
in the broker-dealer's physical possession by examination and
comparison of the supporting detail records with the appropriate ledger
control accounts;\857\
---------------------------------------------------------------------------

    \857\ See 17 CFR 240.17a-13(b)(2).
---------------------------------------------------------------------------

     Verify all securities in transfer, in transit, pledge,
loaned, borrowed, deposited, failed to receive, failed to deliver,
subject to repurchase or reverse repurchase agreements or otherwise
subject to the broker-dealer's control or direction but not in the
broker-dealer's physical possession, where such securities have been in
said status for longer than thirty days;\858\
---------------------------------------------------------------------------

    \858\ See 17 CFR 240.17a-13(b)(3).
---------------------------------------------------------------------------

     Compare the results of the count and verification with the
broker-dealer's records; \859\ and
---------------------------------------------------------------------------

    \859\ See 17 CFR 240.17a-13(b)(4).
---------------------------------------------------------------------------

     Record on the books and records of the broker-dealer all
unresolved differences setting forth the security involved and date of
comparison in a security count difference account no later than seven
business days after the date of each required quarterly security
examination, count, and verification in accordance with the
requirements provided in paragraph (c) of the Rule.\860\
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    \860\ See 17 CFR 240.17a-13(b)(5). This paragraph further
provides that no examination, count, verification, and comparison
for the purpose of the rule shall be within two months of or more
than four months following a prior examination, count, verification,
and comparison made hereunder. See id.
---------------------------------------------------------------------------

    In general terms, the rule requires a broker-dealer to physically
examine, count and verify all securities positions (e.g., equities,
corporate bonds, and government securities, and, after the Commission's
exemptive relief expires, security-based swaps), and to compare the
results of the count and verification with the firm's records at least
once each calendar quarter. A securities count difference results when
the count reflects positions different than those reflected in the
firm's books and records. As discussed above in section II.A.2.a. of
this release, a broker-dealer's securities record consists of a
``long'' side and a ``short'' side. The ``long'' side of the record
accounts for the broker-dealer's responsibility as a custodian of
securities and shows, for example, the securities the firm has received
from customers and securities owned by the broker-dealer. The ``short''
side of the record shows where the securities are located such as at a
securities depository. A short securities difference occurs when the
amount of securities on the ``long'' side of the securities record are
greater than the amount of securities on the ``short'' side of the
securities. A long securities difference occurs when the opposite is
true. The rule requires the firm to record on its books and records any
unresolved differences within seven business days after the date of
each required count. The seven business days should be measured from
the date of the commencement of the count. A broker-dealer must take a
capital charge for short securities differences outstanding seven
business

days or more and for long securities differences where the securities
have been sold before they are adequately resolved.\861\
---------------------------------------------------------------------------

    \861\ See 17 CFR 240.15c3-1(c)(2)(v).
---------------------------------------------------------------------------

    The Commission is proposing to include parallel securities count
requirements in proposed Rule 18a-9 that would mirror the requirements
in paragraph (b) of Rule 17a-13.\862\ Consequently, a stand-alone SBSD
would be required to perform a securities count each quarter following
steps specified in paragraph (a) of Rule 18a-9 that are identical to
the steps specified in paragraph (b) of Rule 17a-13.\863\ Moreover, a
securities count would need to be performed no sooner than two months
after the last count and no later than four months after the last
count.\864\
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    \862\ Compare 17 CFR 240.17a-13(b), with paragraph (a) of
proposed Rule 18a-9.
    \863\ See paragraph (a) of proposed Rule 18a-9.
    \864\ See id.
---------------------------------------------------------------------------

Date of the Count
    Paragraph (c) of Rule 17a-13 provides that: (1) The examination,
count, verification, and comparison may be made either as of a date
certain or on a cyclical basis covering the entire list of securities;
(2) in either case the recordation shall be effected within seven
business days subsequent to the examination, count, verification, and
comparison of a particular security; (3) in the event that an
examination, count, verification, and comparison is made on a cyclical
basis, it shall not extend over more than one calendar quarter-year;
and (4) no security shall be examined, counted, verified, or compared
for the purpose of the rule less than two months or more than four
months after a prior examination, count, verification, and
comparison.\865\ This permits a broker-dealer to perform the securities
count on a rolling basis throughout the quarter as opposed to all in
one day. For example, on day one the broker-dealer could perform the
count with respect to securities of ABC Corporation, on day two the
broker-dealer could perform the count with respect to securities of DEF
Corporation, and on day three the broker-dealer could perform the count
with respect to securities of GHI Corporation.
---------------------------------------------------------------------------

    \865\ See 17 CFR 240.17a-13(c).
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel securities count
requirement in proposed Rule 18a-9 that would mirror the requirement in
paragraph (c) of Rule 17a-13.\866\ Consequently, a stand-alone SBSD
could perform the securities count as of a date certain or on a
cyclical basis subject conditions that are identical to the conditions
in paragraph (c) of Rule 17a-13.\867\
---------------------------------------------------------------------------

    \866\ Compare 17 CFR 240.17a-13(c), with paragraph (b) of
proposed Rule 18a-9.
    \867\ See paragraph (b) of proposed Rule 18a-9.
---------------------------------------------------------------------------

Separation of Duties
    Paragraph (d) of Rule 17a-13 provides that the examination, count,
verification, and comparison shall be made or supervised by persons
whose regular duties do not require them to have direct responsibility
for the proper care and protection of the securities or the making or
preservation of the subject records.\868\ Thus, the rule requires a
separation of duties as a control to promote the integrity of the
securities count process.\869\
---------------------------------------------------------------------------

    \868\ See 17 CFR 240.17a-13(d).
    \869\ See id.
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel separation of
duties requirement in proposed Rule 18a-9 that would mirror the
requirement in paragraph (d) of Rule 17a-13.\870\ Consequently, a
stand-alone SBSD would need to assign responsibility for making or
supervising the count to individuals whose regular duties do not
require them to have direct responsibility for the proper care and
protection of the securities or the making or preservation of the
subject records.\871\
---------------------------------------------------------------------------

    \870\ Compare 17 CFR 240.17a-13(d), with paragraph (c) of
proposed Rule 18a-9.
    \871\ See paragraph (c) of proposed Rule 18a-9.
---------------------------------------------------------------------------

Exemptions
    Paragraph (f) of Rule 17a-13 provides that the Commission may, upon
written request, exempt from the provisions of the rule, either
unconditionally or on specified terms and conditions, any broker-dealer
that satisfies the Commission it is not necessary in the public
interest and for the protection of investors to subject the firm to
certain or all of the provisions of the rule, because of the special
nature of the firm's business, the safeguards the firm has established
for the protection of customers' funds and securities, or such other
reason as the Commission deems appropriate.\872\
---------------------------------------------------------------------------

    \872\ See 17 CFR 240.17a-13(f).
---------------------------------------------------------------------------

    The Commission is proposing to include a parallel exemption
provision in proposed Rule 18a-9 that would mirror the provision in
paragraph (f) of Rule 17a-13.\873\ Consequently, a stand-alone SBSD
could seek an exemption from proposed Rule 18a-9 or from a specific
requirement in the rule.\874\ The standard for granting such requests
would be the same standard as is used for granting exemptions from Rule
17a-13.
---------------------------------------------------------------------------

    \873\ Compare 17 CFR 240.17a-13(f), with paragraph (d) of
proposed Rule 18a-9.
    \874\ See paragraph (d) of proposed Rule 18a-9.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on proposed Rule 18a-9.
In addition, the Commission requests comment, including empirical data
in support of comments, in response to the following questions:
    1. Are there any categories of stand-alone SBSDs to which proposed
Rule 18a-9 should not apply? If so, explain why.
    2. Should proposed Rule 18a-9 apply to stand-alone MSBSPs? If so,
explain why. Should proposed Rule 18a-9 apply to bank SBSDs? If so,
explain why. Should proposed Rule 18a-9 apply to bank MSBSPs? If so,
explain why.
    3. How should security-based swaps be treated with respect to the
requirements in Rule 17a-13 and proposed Rule 18a-9 to examine and
count the securities they physically hold, account for the securities
that are subject to their control or direction but are not in their
physical possession, verify the locations of securities under certain
circumstances, and compare the results of the count and verification
with their records?
3. Capital Charge
    As discussed above, Rule 15c3-1 requires a broker-dealer to take a
capital charge for short securities differences that are unresolved for
seven days or longer and for long securities differences where the
securities have been sold before they are adequately resolved.\875\ The
Commission's proposed capital rule for stand-alone SBSDs is modeled
closely on Rule 15c3-1 but the proposal did not include these types of
capital charges.\876\ The failure to include these capital charges in
proposed Rule 18a-1 was inadvertent and, consequently, the Commission
is proposing to include them in the rule.
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    \875\ See 17 CFR 240.15c3-1(c)(2)(v).
    \876\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70214.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on this proposed capital
charge. In addition, the Commission requests comment, including
empirical data in support of comments, in response to the following
questions:
    1. Is the proposed capital appropriate for stand-alone SBSDs? If
not, explain why.

III. General Request for Comment

    The Commission invites comment, including relevant data and
analysis, regarding all aspects of the proposed rules. The Commission
also requests comment on appropriate effective dates for the proposals,
including whether it would be appropriate to stagger or delay the
effective dates for the requirements based on the nature or
characteristics of the activities or entities to which they would
apply.

IV. Paperwork Reduction Act

    Certain provisions of the rule amendments and new rules proposed in
this release would contain a new ``collection of information'' within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\877\ The
Commission is submitting the proposed rule amendments and proposed new
rules to the Office of Management and Budget (``OMB'') for review and
approval in accordance with the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to a collection of
information unless it displays a currently valid OMB control number.
The titles for the collections of information are:
---------------------------------------------------------------------------

    \877\ See 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) Rule 17a-3--Records to be made by certain brokers and dealers
(OMB control number 3235-0033);
    (2) Rule 17a-4--Records to be preserved by certain brokers and
dealers (OMB control number 3235-0279);
    (3) Rule 17a-5--Reports to be made by certain brokers and dealers
(OMB control number 3235-0123);
    (4) Rule 17a-11--Notification provisions for brokers and dealers
(OMB control number 3235-0085);
    (5) Rule 18a-5--Records to be made by certain security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
    (6) Rule 18a-6--Records to be preserved by certain security-based
swap dealers and major security-based swap participants (a proposed new
collection of information);
    (7) Rule 18a-7--Reports to be made by certain security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
    (8) Rule 18a-8--Notification provisions for security-based swap
dealers and major security-based swap participants (a proposed new
collection of information);
    (9) Rule 18a-9--Quarterly security counts to be made by certain
security-based swap dealers (a proposed new collection of information);
and
    (10) Form SBS (a proposed new collection of information).

The burden estimates contained in this section do not include any other
possible costs or economic effects beyond the burdens required to be
calculated for PRA purposes.

A. Summary of Collections of Information Under the Proposed Rules and
Proposed Rule Amendments

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
    Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting and recordkeeping for SBSDs and MSBSPs.\878\ Rule
17a-3 requires a broker-dealer to make and keep current certain
records.\879\ The Commission is proposing to amend this rule to account
for the security-based swap and swap activities of broker-dealers,
including broker-dealer SBSDs and broker-dealer MSBSPs. With respect to
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the
Commission is proposing new Rule 18a-5--which is modeled on Rule 17a-3,
as proposed to be amended--to require these registrants to make and
keep current certain records.\880\ Proposed Rule 18a-5 would not
include a parallel requirement for every requirement in Rule 17a-3
because some of the requirements in Rule 17a-3 relate to activities
that are not expected or permitted of SBSDs and MSBSPs. Further, the
proposed recordkeeping requirements for bank SBSDs and bank MSBSPs are
tailored specifically to their activities as an SBSD or an MSBSP
because: (1) the Commission's authority under section 15F(f) of the
Exchange Act is tied to activities related to the SBSD or MSBSP
business; (2) bank SBSDs and bank MSBSPs are subject to recordkeeping
requirements applicable to banks; and (3) the prudential regulators--
rather than the Commission--establish and monitor capital, margin, and
other prudential requirements applicable to bank SBSDs and bank MSBSPs.
---------------------------------------------------------------------------

    \878\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
    \879\ See 17 CFR 240.17a-3.
    \880\ See proposed Rule 18a-5.
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-3 and proposed Rule 18a-5 would
establish a number of new collections of information, as summarized in
the table below.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Non-SBSD/ MSBSP     Non-model broker-   ANC broker-dealer     Broker-dealer     Non-model stand-     ANC stand-alone
                                    broker-dealers       dealer SBSDs            SBSDs              MSBSPs            alone SBSDs            SBSDs            Bank SBSDs      Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters.................  17a-3(a)(1)*.......  17a-3(a)(1)*......  17a-3(a)(1)*......  17a-3(a)(1)*......  18a-5(a)(1).......  18a-5(a)(1).......  18a-5(b)(1).......  18a-5(a)(1).
General ledger.................  ...................  ..................  ..................  ..................  18a-5(a)(2).......  18a-5(a)(2).......  ..................  18a-5(a)(2).
Ledgers for customer and non-    17a-3(a)(3)*.......  17a-3(a)(3)*......  17a-3(a)(3)*......  17a-3(a)(3)*......  18a-5(a)(3).......  18a-5(a)(3).......  18a-5(b)(2).......  18a-5(a)(3).
 customer accounts.
Stock record...................  17a-3(a)(5)*.......  17a-3(a)(5)*......  17a-3(a)(5)*......  17a-3(a)(5)*......  18a-5(a)(4).......  18a-5(a)(4).......  18a-5(b)(3).......  18a-5(a)(4).
Memoranda of brokerage orders..  17a-3(a)(6)*.......  17a-3(a)(6)*......  17a-3(a)(6)*......  17a-3(a)(6)*......  ..................  ..................  18a-5(b)(4).        ..................
Memoranda of proprietary orders  17a-3(a)(7)*.......  17a-3(a)(7)*......  17a-3(a)(7)*......  17a-3(a)(7)*......  18a-5(a)(5).......  18a-5(a)(5).......  18a-5(b)(5).......  18a-5(a)(5).
Confirmations..................  17a-3(a)(8)*.......  17a-3(a)(8)*......  17a-3(a)(8)*......  17a-3(a)(8)*......  18a-5(a)(6).......  18a-5(a)(6).......  18a-5(b)(6).......  18a-5(a)(6).
Accountholder information......  17a-3(a)(9)*.......  17a-3(a)(9)*......  17a-3(a)(9)*......  17a-3(a)(9)*......  18a-5(a)(7).......  18a-5(a)(7).......  18a-5(b)(7).......  18a-5(a)(7).
Options positions..............  ...................  ..................  ..................  ..................  18a-5(a)(8).......  18a-5(a)(8).......  ..................  18a-5(a)(8).
Trial balances and computation   ...................  ..................  ..................  ..................  18a-5(a)(9).......  18a-5(a)(9).......  ..................  18a-5(a)(9).
 of net capital.
Associated person's employment   ...................  ..................  ..................  ..................  18a-5(a)(10)......  18a-5(a)(10)......  18a-5(b)(8).......  18a-5(a)(10).
 application.

Liquidity stress test..........  ...................  ..................  17a-3(a)(24)......  ..................  ..................  18a-5(a)(11).
Account equity and margin        ...................  17a-3(a)(25)......  17a-3(a)(25)......  17a-3(a)(25)......  18a-5(a)(12)......  18a-5(a)(12)......  ..................  18a-5(a)(12).
 calculations under proposed
 Rule 18a-3.
Possession or control            ...................  17a-3(a)(26)......  17a-3(a)(26)......  ..................  18a-5(a)(13)......  18a-5(a)(13)......  18a-5(b)(9).
 requirements under proposed
 Rule 18a-4.
Customer reserve requirements    ...................  17a-3(a)(27)......  17a-3(a)(27)......  ..................  18a-5(a)(14)......  18a-5(a)(14)......  18a-5(b)(10).
 under proposed Rule 18a-4.
Unverified transactions........  ...................  17a-3(a)(28)......  17a-3(a)(28)......  17a-3(a)(28)......  18a-5(a)(15)......  18a-5(a)(15)......  18a-5(b)(11)......  18a-5(a)(15).
Political contributions........  ...................  17a-3(a)(29)......  17a-3(a)(29)......  ..................  18a-5(a)(16)......  18a-5(a)(16)......  18a-5(b)(12).
Compliance with external         ...................  17a-3(a)(30)......  17a-3(a)(30)......  17a-3(a)(30)......  18a-5(a)(17)......  18a-5(a)(17)......  18a-5(b)(13)......  18a-5(a)(17).
 business conduct requirements.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Broker-dealers are currently required to comply with these paragraphs of Rule 17a-3, but the Commission proposes to amend these paragraphs to tailor the types of records that should be made
  and kept with respect to security-based swaps, and to make certain technical changes.

2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6
    Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting and recordkeeping for SBSDs and MSBSPs.\881\ Rule
17a-4 requires a broker-dealer to preserve certain records if it makes
or receives them.\882\ The Commission is proposing to amend this rule
to account for the security-based swap and swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs. With
respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank
MSBSPs, the Commission is proposing new Rule 18a-6--which is modeled on
Rule 17a-4, as proposed to be amended--to require these registrants to
preserve certain records if they make or receive them.\883\ Proposed
Rule 18a-6 would not include a parallel requirement for every
requirement in Rule 17a-4 because some of the requirements in Rule 17a-
4 relate to activities that are not expected or permitted of SBSDs and
MSBSPs. In addition, the recordkeeping requirements for bank SBSDs and
bank MSBSPs are tailored specifically to bank SBSD and bank MSBSP
activities relating to operating as an SBSD or an MSBSP.
---------------------------------------------------------------------------

    \881\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
    \882\ See 17 CFR 240.17a-4.
    \883\ See proposed Rule 18a-6.
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-4 and proposed Rule 18a-6 would
establish a number of new collections of information, as summarized in
the table below.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Non-SBSD/ MSBSP     Non-model broker-   ANC broker-dealer     Broker-dealer     Non-model stand-     ANC stand-alone
                                   broker- dealers       dealer SBSDs            SBSDs              MSBSPs            alone SBSDs            SBSDs            Bank SBSDs      Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Records To Be Preserved for a Period of Not Less Than 6 Years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters.................  ...................  ..................  ..................  ..................  18a-6(a)(1) citing  18a-6(a)(1) citing  18a-6(a)(2) citing  18a-6(a)(1) citing
                                                                                18a-5(a)(1).        18a-5(a)(1).        18a-5(b)(1).        18a-5(a)(1).
General ledger.................  ...................  ..................  ..................  ..................  18a-6(a)(1) citing  18a-6(a)(1) citing  ..................  18a-6(a)(1) citing
                                                                                18a-5(a)(2).        18a-5(a)(2).                            18a-5(a)(2).
Ledgers for customer and non-    ...................  ..................  ..................  ..................  18a-6(a)(1) citing  18a-6(a)(1) citing  18a-6(a)(2) citing  18a-6(a)(1) citing
 customer accounts.                                                                                18a-5(a)(3).        18a-5(a)(3).        18a-5(b)(2).        18a-5(a)(3).
Stock record...................  ...................  ..................  ..................  ..................  18a-6(a)(1) citing  18a-6(a)(1) citing  18a-6(a)(2) citing  18a-6(a)(1) citing
                                                                                18a-5(a)(4).        18a-5(a)(4).        18a-5(b)(3).        18a-5(a)(4).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Records To Be Preserved for a Period of Not Less Than 3 Years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Memoranda of brokerage orders..  ...................  ..................  ..................  ..................  ..................  ..................  18a-6(b)(2)(i)
                                                                                citing 18a-
                                                                                6(b)(4)
Memoranda of proprietary orders  ...................  ..................  ..................  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)      18a-6(b)(1)(i)
                                                                                citing 18a-         citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(5).            6(a)(5).            6(b)(5).            6(a)(5).
Confirmations..................  ...................  ..................  ..................  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)      18a-6(b)(1)(i)
                                                                                citing 18a-         citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(6).            6(a)(6).            6(b)(6).            6(a)(6).

Accountholder information......  ...................  ..................  ..................  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)      18a-6(b)(1)(i)
                                                                                citing 18a-         citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(7).            6(a)(7).            6(b)(7).            6(a)(7).
Options positions..............  ...................  ..................  ..................  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      ..................  18a-6(b)(1)(i)
                                                                                citing 18a-         citing 18a-                             citing 18a-
                                                                                6(a)(8).            6(a)(8).                                6(a)(8).
Trial balances and computation   17a-4(b)(1) citing   17a-4(b)(1) citing  17a-4(b)(1) citing  17a-4(b)(1) citing  18a-6(b)(1)(i)      18a-6(b)(1)(i)      ..................  18a-6(b)(1)(i)
 of net capital.                  17a-3(a)(11).        17a-3(a)(11).       17a-3(a)(11).       17a-3(a)(11).       citing 18a-         citing 18a-                             citing 18a-
                                                                                6(a)(9).            6(a)(9).                                6(a)(9).
Liquidity stress test..........  ...................  ..................  17a-4(b)(1) citing  ..................  ..................  18a-6(b)(1)(i)
                                                                           17a-3(a)(24).                                               citing 18a-
                                                                                6(a)(11).
Account equity and margin        ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  17a-4(b)(1) citing  18a-6(b)(1)(i)      18a-6(b)(1)(i)      ..................  18a-6(b)(1)(i)
 calculations under proposed                           17a-3(a)(25).       17a-3(a)(25).       17a-3(a)(25).       citing 18a-         citing 18a-                             citing 18a-
 Rule 18a-3.                                                                                6(a)(12).           6(a)(12).                               6(a)(12).
Possession or control            ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)
 requirements under proposed                           17a-3(a)(26).       17a-3(a)(26).                           citing 18a-         citing 18a-         citing 18a-
 Rule 18a-4.                                                                                6(a)(13).           6(a)(13).           6(b)(9).
Customer reserve requirements    ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)
 under proposed Rule 18a-4.                            17a-3(a)(27).       17a-3(a)(27).                           citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(14).           6(a)(14).           6(b)(10).
Unverified transactions........  ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  17a-4(b)(1) citing  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)      18a-6(b)(1)(i)
                                                       17a-3(a)(28).       17a-3(a)(28).       17a-3(a)(28).       citing 18a-         citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(15).           6(a)(15).           6(b)(11).           6(a)(15).
Political contributions........  ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  ..................  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)
                                                       17a-3(a)(29).       17a-3(a)(29).                           citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(16).           6(a)(16).           6(b)(12).
Compliance with external         ...................  17a-4(b)(1) citing  17a-4(b)(1) citing  17a-4(b)(1) citing  18a-6(b)(1)(i)      18a-6(b)(1)(i)      18a-6(b)(2)(i)      18a-6(b)(1)(i)
 business conduct requirements.                        17a-3(a)(30).       17a-3(a)(30).       17a-3(a)(30).       citing 18a-         citing 18a-         citing 18a-         citing 18a-
                                                                                6(a)(17).           6(a)(17).           6(b)(13).           6(a)(17).
Bank records...................  ...................  ..................  ..................  ..................  18a-6(b)(1)(ii)...  18a-6(b)(1)(ii)...  ..................  18a-6(b)(1)(ii).
Bills..........................  ...................  ..................  ..................  ..................  18a-6(b)(1)(iii)..  18a-6(b)(1)(iii)..  ..................  18a-6(b)(1)(iii).
Communications.................  17a-4(b)(4)*.......  17a-4(b)(4)*......  17a-4(b)(4)*......  17a-4(b)(4)*......  18a-6(b)(1)(iv)...  18a-6(b)(1)(iv)...  18a-6(b)(2)(ii)...  18a-6(b)(1)(iv).
Trial balances.................  ...................  ..................  ..................  ..................  18a-6(b)(1)(v)....  18a-6(b)(1)(v)....  ..................  18a-6(b)(1)(v).
Account documents..............  ...................  ..................  ..................  ..................  18a-6(b)(1)(vi)...  18a-6(b)(1)(vi)...  18a-6(b)(2)(iii)..  18a-6(b)(1)(vi).
Written agreements.............  17a-4(b)(7)*.......  17a-4(b)(7)*......  17a-4(b)(7)*......  17a-4(b)(7)*......  18a-6(b)(1)(vii)..  18a-6(b)(1)(vii)..  18a-6(b)(2)(iv)...  18a-6(b)(1)(vii).
Information supporting           17a-4(b)(8)*.......  17a-4(b)(8)*......  17a-4(b)(8)*......  17a-4(b)(8)*......  18a-6(b)(1)(viii).  18a-6(b)(1)(viii).  18a-6(b)(2)(v)....  18a-6(b)(1)(viii).
 financial reports.
Rule 15c3-4 risk management      ...................  ..................  ..................  ..................  18a-6(b)(1)(ix)...  18a-6(b)(1)(ix)...  ..................  18a-6(b)(1)(ix).
 records (OTC derivatives
 dealers only).
Internal credit ratings........  ...................  ..................  ..................  ..................  ..................  18a-6(b)(1)(x)
Regulation SBSR information....  17a-4(b)(14).......  17a-4(b)(14)......  17a-4(b)(14)......  17a-4(b)(14)......  18a-6(b)(1)(xi)...  18a-6(b)(1)(xi)...  18a-6(b)(2)(vi)...  18a-6(b)(1)(xi).
Records relating to business     ...................  17a-4(b)(15)......  17a-4(b)(15)......  17a-4(b)(15)......  18a-6(b)(1)(xii)..  18a-6(b)(1)(xii)..  18a-6(b)(2)(vii)..  18a-6(b)(1)(xii).
 conduct standards.
Special entity documents.......  ...................  17a-4(b)(16)......  17a-4(b)(16)......  17a-4(b)(16)......  18a-6(b)(1)(xiii).  18a-6(b)(1)(xiii).  18a-6(b)(2)(viii).  18a-6(b)(1)(xiii).
Associated person's employment   ...................  ..................  ..................  ..................  18a-6(d)(1).......  18a-6(d)(1).......  18a-6(d)(1).......  18a-6(d)(1).
 application.
Regulatory authority reports...  ...................  ..................  ..................  ..................  18a-6(d)(2)(i)....  18a-6(d)(2)(i)....  18a-6(d)(2)(ii)...  18a-6(d)(2)(i).
Compliance, supervisory, and     ...................  ..................  ..................  ..................  18a-6(d)(3)(i)....  18a-6(d)(3)(i)....  18a-6(d)(3)(ii)...  18a-6(d)(3)(i).
 procedures manuals.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Life of the enterprise and of any successor enterprise
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate documents............  17a-4(d)*..........  17a-4(d)*.........  17a-4(d)*.........  17a-4(d)*.........  18a-6(c)..........  18a-6(c)..........  ..................  18a-6(c).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Broker-dealers are currently required to comply with these paragraphs of Rule 17a-4, but the Commission proposes to amend these paragraphs as required by the Dodd-Frank Act or to tailor to
  the types of records that should be preserved with respect to security-based swaps, and to make certain technical changes.

3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7
    Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs and MSBSPs.\884\ Further, section
15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such reports as
are required by the Commission, by rule or regulation, regarding the
transactions and positions and financial condition of the SBSD or
MSBSP.\885\ The Commission has concurrent authority under section
17(a)(1) of the Exchange Act to prescribe reporting requirements for
broker-dealers.\886\
---------------------------------------------------------------------------

    \884\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
    \885\ See 15 U.S.C. 78o-10(f)(1)(A).
    \886\ See 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------

    Rule 17a-5 requires a broker-dealer to annually file reports
audited by a PCAOB-registered independent public accountant, disclose
certain financial information to customers, file with the Commission a
statement about its engagement of an independent public accountant,
notify the Commission of a change of accountant, and to notify the
Commission of the change in fiscal year.\887\ The rule also requires
the independent public accountant to notify the broker-dealer if the
accountant discovers an instance of non-compliance with certain broker-
dealer rules or an instance of material weakness.\888\ Rule 17a-5
requires broker-dealers to file a financial report, compliance report,
and/or exemption report with the Commission on an annual basis.\889\
ANC broker-dealers are required to file with the Commission additional
information relating to market risk, credit risk, and the monthly
liquidity stress test on a periodic basis.\890\
---------------------------------------------------------------------------

    \887\ See 17 CFR 240.17a-5.
    \888\ See 17 CFR 240.17a-5(h).
    \889\ See 17 CFR 240.17a-5(d).
    \890\ See 17 CFR 240.17a-5(a)(5).
---------------------------------------------------------------------------

    The Commission is proposing amendments to Rule 17a-5 to account for
the security-based swap activities of broker-dealer SBSDs and broker-
dealer MSBSPs.\891\ Proposed Rule 18a-7--which is modeled on Rule 17a-
5, as proposed to be amended--would establish reporting requirements
for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank
MSBSPs.\892\ Under Rule 17a-5, as proposed to be amended, and proposed
Rule 18a-7, SBSDs and MSBSPs would be required to periodically file
proposed Form SBS.\893\ Broker-dealer SBSDs and broker-dealer MSBSPs
would file Form SBS instead of the applicable part of Form X-17A-
5.\894\ Form SBS would include additional entries as compared to Part
II CSE of Form X-17A-5 to account for the firm's security-based swap
activities.
---------------------------------------------------------------------------

    \891\ See Rule 17a-5, as proposed to be amended. See also
section II.B. of this release.
    \892\ See proposed Rule 18a-7.
    \893\ See paragraph (a)(1)(iv) of Rule 17a-5, as proposed to be
amended; paragraphs (a)(1) and (2) of proposed Rule 18a-7. Nonbank
SBSDs and nonbank MSBSPs would be required to file Form SBS on a
monthly basis, whereas bank SBSDs and bank MSBSPs would be required
to file Form SBS on a quarterly basis. Compare paragraphs (a)(1)(iv)
of Rule 17a-5, as proposed to be amended, with paragraph (a)(1) of
proposed Rule 18a-7, and paragraph (a)(2) of proposed Rule 18a-7.
    \894\ As described above, a broker-dealer is required to file
with the Commission or the broker-dealer's DEA a different part of
Form X-17A-5 (Part II, Part IIA, Part IIB, or Part II CSE),
depending on the nature of its business.
---------------------------------------------------------------------------

    Proposed Rule 18a-7 does not include a parallel requirement for
every requirement in Rule 17a-5.\895\ Moreover, instead of requiring
stand-alone SBSDs and stand-alone MSBSPs to make available to customers
an audited statement of financial condition with appropriate notes and
certain reports of the independent public accountant, the Commission
proposes that stand-alone SBSDs and stand-alone MSBSPs make such
information available on their public Web site.\896\ Further, for the
reasons discussed above, the reporting requirements in proposed Rule
18a-7, other than the requirement to periodically file proposed Form
SBS, would not apply to bank SBSDs and bank MSBSPs.
---------------------------------------------------------------------------

    \895\ For example, as described in further detail above, the
Commission is not proposing a requirement in Rule 18a-7 that is
parallel to the exemption report requirement in Rule 17a-5 or the
requirement to file certain reports with SIPC. See 17 CFR 240.17a-
5(d)(4) and (e)(4).
    \896\ Compare 17 CFR 240.17a-5(c), with paragraph (b) of
proposed Rule 18a-7.
---------------------------------------------------------------------------

4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8
    Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs and MSBSPs.\897\ Section 15F(f)(1)(A)
provides that SBSDs and MSBSPs shall make such reports as are required
by the Commission, by rule or regulation, regarding the transactions
and positions and financial condition of the SBSD or MSBSP.\898\ In
addition, the Commission has concurrent authority under section
17(a)(1) of the Exchange Act to prescribe reporting requirements for
broker-dealers.\899\
---------------------------------------------------------------------------

    \897\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
    \898\ See 15 U.S.C. 78o-10(f)(1)(A).
    \899\ See 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------

    Rule 17a-11 specifies the circumstances under which a broker-dealer
must notify the Commission and other securities regulators about its
financial or operational condition, as well as the form that the notice
must take.\900\ The Commission is proposing amendments to Rule 17a-11
to account for the security-based swap activities of broker-dealer
SBSDs and broker-dealer MSBSPs.\901\ Proposed Rule 18a-8--which is
modeled on Rule 17a-11, as proposed to be amended--would establish
notification requirements for stand-alone SBSDs, stand-alone MSBSPs,
bank SBSDs, and bank MSBSPs.\902\
---------------------------------------------------------------------------

    \900\ See 17 CFR 240.17a-11.
    \901\ See paragraphs (b)(5), (e), and (f) of Rule 17a-11, as
proposed to be amended.
    \902\ See proposed Rule 18a-8.
---------------------------------------------------------------------------

    Proposed Rule 18a-8 would not include a parallel requirement for
every requirement in Rule 17a-11 because some of the Rule 17a-11
notices relate to calculations that would not be relevant to stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.\903\
Further, the notification requirements for bank SBSDs and bank MSBSPs
are designed to be tailored specifically to their activities as an SBSD
or an MSBSP.
---------------------------------------------------------------------------

    \903\ See, e.g., 17 CFR 240.17a-11(b)(2) and (c)(1).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-11 and proposed Rule 18a-8
would establish a number of new collections of information, as
summarized in the table below.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Non-SBSD/ MSBSP     Non-model broker-   ANC broker-dealer     Broker-dealer      ANC stand-alone    Non-model stand-
                                    broker-dealers       dealer SBSDs            SBSDs              MSBSPs               SBSDs            alone SBSDs         Bank SBSDs      Stand-alone MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net capital below minimum......  ...................  ..................  ..................  ..................  18a-8.............  18a-8
                                                                                (a)(1)(i).........  (a)(1)(i).........
Tentative net capital below      ...................  ..................  ..................  ..................  18a-8 (a)(1)(ii).
 minimum.

Tangible net worth below         ...................  ..................  ..................  ..................  ..................  ..................  ..................  18a-8 (a)(2).
 minimum.
Early warning of net capital...  ...................  ..................  ..................  ..................  18a-8(b)(1).......  18a-8(b)(1).
Early warning of tentative net   ...................  ..................  ..................  ..................  18a-8 (b)(2).
 capital.
Early warning of tangible net    ...................  ..................  ..................  17a-11 (b)(6).....  ..................  ..................  ..................  18a-8(b)(3).
 worth.
Backtesting exception..........  ...................  ..................  ..................  ..................  18a-8(b)(4).
Notice of adjustment of          ...................  ..................  ..................  ..................  ..................  ..................  18a-8(c).
 reported capital category.
Failure to make and keep         ...................  ..................  ..................  ..................  18a-8(d)..........  18a-8(d)..........  18a-8(d)..........  18a-8(d).
 current books and records.
Material weakness..............  ...................  ..................  ..................  ..................  18a-8(e)..........  18a-8(e).
Insufficient liquidity reserves  ...................  ..................  17a-11(e).........  ..................  18a-8(f).
Failure to make a required       17a-11(f)..........  17a-11(f).........  17a-11(f).........  ..................  18a-8(g)..........  18a-8(g)..........  18a-8(g).
 reserve deposit.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. Proposed Rule 18a-9
    Section 764 of the Dodd-Frank Act added section 15F(f)(2) to the
Exchange Act, which provides that the Commission shall adopt rules
governing reporting for SBSDs.\904\ In addition, section
15F(f)(2)(B)(ii) provides that nonbank SBSDs shall keep books and
records in such form and manner and for such period as may be
prescribed by the Commission by rule or regulation.\905\
---------------------------------------------------------------------------

    \904\ See Public Law 111-203, 764; 15 U.S.C. 78o-10(f)(2).
    \905\ See 15 U.S.C. 78o-10(f)(1)(B)(ii).
---------------------------------------------------------------------------

    Proposed Rule 18a-9, which is modeled on Rule 17a-13, would require
stand-alone SBSDs to examine and count the securities they physically
hold, account for the securities that are subject to their control or
direction but are not in their physical possession, verify the
locations of securities under certain circumstances, and compare the
results of the count and verification with their records.\906\
---------------------------------------------------------------------------

    \906\ Proposed Rule 18a-9 does not include the exceptions from
applicability that Rule 17a-13 includes. See 17 CFR 240.17a-13(a)
and (e).
---------------------------------------------------------------------------

B. Proposed Use of Information

    Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5
would require broker-dealers, SBSDs, and MSBSPs to make and keep
current certain books and records. Rule 17a-4, as proposed to be
amended, and proposed Rule 18a-6 would require broker-dealers, SBSDs,
and MSBSPs to preserve certain records if the firm makes or receives
the type of record. These rules are designed, among other things, to
promote the prudent operation of broker-dealers, SBSDs, and MSBSPs and
to assist the Commission, SROs, and state securities regulators in
conducting effective examinations.\907\ Thus, the collections of
information under the proposed amendments to Rules 17a-3 and 17a-4, and
proposed Rules 18a-5 and 18a-6, would facilitate the examinations of
broker-dealers, SBSDs, and MSBSPs.
---------------------------------------------------------------------------

    \907\ See, e.g., Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, 66 FR 55818
(``The Commission has required that broker-dealers create and
maintain certain records so that, among other things, the
Commission, [SROs], and State Securities Regulators . . . may
conduct effective examinations of broker-dealers'' (footnote
omitted)).
---------------------------------------------------------------------------

    Rule 17a-5, as proposed to be amended, and proposed Rule 18a-7
would establish reporting requirements for broker-dealers, SBSDs, and
MSBSPs. Rule 17a-11, as proposed to be amended, and proposed Rule 18a-8
would require broker-dealers, SBSDs, and MSBSPs to notify the
Commission of certain events related to their financial condition. The
rules are designed to promote compliance with the proposed financial
responsibility requirements for SBSDs and MSBSPs, facilitate
regulators' oversight and examinations of such firms, and promote
transparency of SBSDs' and MSBSPs' financial condition and operation.
    Proposed Rule 18a-9 would require a stand-alone SBSD to physically
examine, count and verify all securities positions (e.g., equities,
corporate bonds, and government securities), and to compare the results
of the count and verification with the firm's records at least once
each calendar quarter. This proposed rule is designed to promote an
SBSD's custody of securities and accurate accounting for securities.

C. Respondents

    Consistent with prior releases, the Commission estimates that fifty
or fewer entities ultimately may be required to register with the
Commission as SBSDs.\908\
---------------------------------------------------------------------------

    \908\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70292; Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant'', 77 FR 30725.
---------------------------------------------------------------------------

    In addition, consistent with prior releases, based on available
data regarding the single-name credit default swap market--which the
Commission believes will comprise the majority of security-based
swaps--the Commission estimates that the number of MSBSPs likely will
be five or fewer and, in actuality, may be zero.\909\ Therefore, to
capture the likely number of MSBSPs that may be subject to the
collections of information for purposes of this PRA, the Commission
estimates for purposes of this PRA that five entities will register
with the Commission as MSBSPs. Accordingly, for purposes of calculating
PRA reporting burdens, the Commission estimates there will be fifty
SBSDs and five MSBSPs.
---------------------------------------------------------------------------

    \909\ See id.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP02MY14.000

    Of the five MSBSPs, the Commission estimates that one firm also
would be registered as a broker-dealer and an FCM.\910\ By definition,
an MSBSP's primary business is not engaging in security-based swap
activity, so it would be rare for an MSBSP to qualify as a broker-
dealer and/or FCM but not an SBSD. Such an MSBSP would be engaged in
the business of effecting securities transactions,\911\ but not in the
business of effecting security-based swap transactions \912\ or
commodities, securities futures products, or swaps \913\ and yet
involved in enough security-based swap transactions to be required to
register as an MSBSP.\914\ However, the Commission estimates there will
be one broker-dealer FCM MSBSP for the purposes of calculating PRA
burdens, in recognition that broker-dealer MSBSPs and stand-alone
MSBSPs are subject to different burdens under the proposed and amended
rules in certain instances.\915\
---------------------------------------------------------------------------

    \910\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65808.
    \911\ See 15 U.S.C. 78c(a)(4) (generally defining broker as any
person engaged in the business of effecting transactions in
securities for the account of others).
    \912\ See 15 U.S.C. 78c(a)(71) (generally defining security-
based swap dealer as any person who holds himself out as a dealer in
security-based swaps, makes a market in security-based swaps,
regularly enters into security-based swaps with counterparties as an
ordinary course of business for its own account, or engages in any
other activity causing it to be commonly known in the trade as a
dealer or market maker in security-based swaps).
    \913\ See 7 U.S.C. 1a(28) (generally defining futures commission
merchant as a person engaged in soliciting or in accepting orders
for the purchase or sale of a commodity for future delivery, a
security futures product, or a swap).
    \914\ See 15 U.S.C. 78c(a)(67) (generally defining major
security-based swap participant as any person who is not an SBSD but
maintains a substantial position in security-based swaps for any of
the major security-based swap categories, whose outstanding
security-based swaps could have serious adverse effects on the
financial stability of the U.S. banking system or financial markets,
or is highly leveraged and maintains a substantial position in
security-based swaps for any of the major security-based swap
categories).
    \915\ The Commission believes that the broker-dealer MSBSP would
register as an FCM, since the broker-dealer may find it beneficial
to hedge security and security-based swap positions with futures
contracts, options on futures, or swaps. See Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR 65814.
---------------------------------------------------------------------------

    The Commission previously estimated that sixteen broker-dealers
would likely seek to register as SBSDs.\916\ The Commission is
retaining this estimate for purposes of this release. The Commission
believes that all sixteen broker-dealer SBSDs also will be registered
as FCMs, since SBSDs may find it beneficial to hedge security-based
swap positions with futures contracts, options on futures, or
swaps.\917\ Accordingly, for purposes of calculating PRA reporting
burdens, the Commission estimates there will be sixteen broker-dealer
FCM SBSDs.
---------------------------------------------------------------------------

    \916\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70292.
    \917\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65814.
---------------------------------------------------------------------------

    For purposes of calculating PRA reporting burdens, the Commission
estimates there would be twenty-five bank SBSDs and nine stand-alone
SBSDs.\918\ Because the Commission estimates that sixteen broker-
dealers would likely register as SBSDs, there would be an estimated
maximum of thirty-four non-broker-dealer SBSDs consisting of bank SBSDs
and stand-alone SBSDs.\919\ For business planning purposes, risk
management purposes, potential regulatory requirements, and other
reasons, some of these entities likely would register with the
Commission as stand-alone SBSDs. Because many of the dealers that
currently engage in OTC derivatives activities are banks, the
Commission estimates that approximately 75% of the thirty-four non-
broker-dealer SBSDs would register as bank SBSDs (i.e., twenty-five
firms),\920\ and the remaining 25% would register as stand-alone SBSDs
(i.e., nine firms).\921\
---------------------------------------------------------------------------

    \918\ The Commission does not anticipate that any firms will be
dually registered as a broker-dealer and a bank.
    \919\ 50 SBSDs - 16 broker-dealer SBSDs = 34 maximum non-broker-
dealer SBSDs.
    \920\ 34 maximum estimated non-broker-dealer SBSDs x 75% = 25.5,
rounded to 25 bank SBSDs.
    \921\ 34 maximum estimated non-broker-dealer SBSDs x 25% = 8.5,
rounded to 9 stand-alone FCM SBSDs.
---------------------------------------------------------------------------

    The Commission believes that none of the bank SBSDS would register
as FCMs, because of the burden associated with complying with three
different supervisors' regulatory requirements.\922\ However, the
Commission believes that all of the stand-alone SBSDs would register as
FCMs, since SBSDs may find it beneficial to hedge security-based swap
positions with futures contracts, options on futures, or swaps.\923\
---------------------------------------------------------------------------

    \922\ In addition, the Commission understands that banks do not
register as FCMs; rather, bank affiliates register as FCMs.
    \923\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, 76 FR 65814.
---------------------------------------------------------------------------

    Of the nine stand-alone FCM SBSDs, the Commission estimates that,
based on its experience with ANC broker-dealers and OTC derivatives
dealers, the majority of stand-alone SBSDs would apply to use internal
models.\924\ Consequently, the Commission is estimating that six of the
nine stand-alone SBSDs would apply to operate as ANC stand-alone SBSDs,
which would use internal models to compute net capital under proposed
Rule 18a-1. Because the Commission estimates that there would be six
ANC stand-alone SBSDs, the Commission estimates that three stand-alone
SBSDs would not use internal models to compute net capital.\925\
---------------------------------------------------------------------------

    \924\ VaR models, while more risk-sensitive than standardized
haircuts, tend to substantially reduce the amount of the deductions
to tentative net capital in comparison to the standardized haircuts
because the models recognize more offsets between related positions
than the standardized haircuts. Therefore, the Commission expects
that stand-alone SBSDs that have the capability to use internal
models to calculate net capital would choose to do so.
    \925\ 9 stand-alone FCM SBSDs - 6 ANC stand-alone FCM SBSDs = 3
non-model stand-alone FCM SBSDs.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP02MY14.001

    Of the sixteen broker-dealer FCM SBSDs, the Commission estimates
that ten firms would operate as ANC broker-dealer SBSDs, which use
internal models to compute net capital under Rule 15c3-1.\926\ Because
the Commission estimates that ten broker-dealer SBSDs would be ANC
broker-dealer SBSDs, it is estimated that six broker-dealer SBSDs would
not use internal models to compute net capital.\927\
---------------------------------------------------------------------------

    \926\ Currently, 6 broker-dealers are registered as ANC broker-
dealers and 1 broker-dealer's application to register as an ANC
broker-dealer is pending. The Commission has previously estimated
that all current and future ANC broker-dealers will also register as
SBSDs. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70293.
    \927\ 16 broker-dealer FCM SBSDs - 10 ANC broker-dealer FCM
SBSDs = 6 non-model broker-dealer FCM SBSDs.
---------------------------------------------------------------------------

    As of April 1, 2013, there were 4,545 broker-dealers registered
with the Commission. The Commission estimates that twenty-five
registered broker-dealers will be engaged in security-based swap
activities but would not be required to register as an SBSD or MSBSP.
Other than OTC derivatives dealers, which are subject to significant
limitations on their activities, broker-dealers historically have not
participated in a significant way in security-based swap trading for at
least two reasons.\928\ First, because the Exchange Act has not
previously defined security-based swaps as ``securities,'' security-
based swaps have not been required to be traded through registered
broker-dealers.\929\ Second, a broker-dealer engaging in security-based
swap activities is currently subject to existing regulatory
requirements with respect to those activities, including capital,
margin, segregation, and recordkeeping requirements. Specifically, the
existing broker-dealer capital requirements make it relatively costly
to conduct these activities in broker-dealers. As a result, security-
based swap activities are mostly concentrated in
---------------------------------------------------------------------------

    \928\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70302.
    \929\ See Public Law 111-203, 761 (amending definition of
``security'' in 15 U.S.C. 78c(a)(10)).
[GRAPHIC] [TIFF OMITTED] TP02MY14.002

affiliates of broker-dealers, not broker-dealers themselves.\930\
---------------------------------------------------------------------------

    \930\ See International Swaps and Derivatives Association
(``ISDA''), Margin Survey 2012 (May 1, 2012) (``ISDA Margin Survey
2012''), at Appendix 1, available at http://www2.isda.org/attachment/NDM5MQ==/ISDA%20Margin%20Survey%202012%20FORMATTED.pdf.
The ISDA Margin Survey is conducted annually to examine the state of
collateral use and management among derivatives dealers and end-
users. Appendix 1 to the survey lists firms that responded to the
survey including broker-dealers. See id.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of these
estimates of the number of respondents. Commenters should provide
specific data and analysis to support any comments they submit with
respect to the number of respondents, including identifying any sources
of industry information that could be used to estimate the number of
respondents.

D. Total Initial and Annual Recordkeeping and Reporting Burden

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5
    The proposed amendments to Rule 17a-3 and proposed Rule 18a-5 would
impose collection of information requirements that result in initial
and annual time burdens for broker-dealers, SBSDs, and MSBSPs. Current
Rule 17a-3 imposes an estimated annual burden of 539 hours per firm and
$8,256 in costs and a total industry burden of 2,449,755 hours and
$37,523,520 in costs.\931\ The Commission estimates that the proposed
amendments to Rule 17a-3 would impose the following initial and annual
burdens:
---------------------------------------------------------------------------

    \931\ See Commission, Supporting Statement for the Paperwork
Reduction Act Information Collection Submission for Rule 17a-3 (Mar.
28, 2011), available at http://www.reginfo.gov/public/do/DownloadDocument?documentID=238297&version=1.

------------------------------------------------------------------------
           Burden                Initial burden         Annual burden
------------------------------------------------------------------------
New security-based swap       Per firm: 30 hours..  Per firm: 42 hours.
 records \932\.               Industry: 1,260       Industry: 1,764
                               hours.                hours.
New burdens applicable to     Per firm: 60 hours..  Per firm: 75 hours.
 broker-dealer SBSDs and      Industry: 1,020       Industry: 1,275
 broker[dash]dealer MSBSPs     hours.                hours.
 \933\.
New burdens applicable to     Per firm: 60 hours..  Per firm: 75 hours.
 broker-dealer SBSDs \934\.   Industry: 960 hours.  Industry: 1,200
                                                     hours.
New burdens applicable to     Per firm: 20 hours..  Per firm: 25 hours.
 ANC broker-dealers \935\.    Industry: 200 hours.  Industry: 250 hours.
                             -------------------------------------------
    Total--Proposed           Industry: 3,440       Industry: 4,489
     amendments to Rule 17a-   hours.                hours.
     3.
------------------------------------------------------------------------

    The Commission estimates that proposed Rule 18a-5 would impose the
following initial and annual burdens:
---------------------------------------------------------------------------

    \932\ See paragraphs (a)(1), (a)(3), (a)(5)(ii), (a)(6)(ii),
(a)(7)(ii), (a)(8)(ii), and (a)(9)(iv) of Rule 17a-3, as proposed to
be amended.
    \933\ See paragraphs (a)(25), (a)(28), and (a)(30) of Rule 17a-
3, as proposed to be amended.
    \934\ See paragraphs (a)(26), (a)(27), and (a)(29) of Rule 17a-
3, as proposed to be amended.
    \935\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.

------------------------------------------------------------------------
           Burden                Initial burden         Annual burden
------------------------------------------------------------------------
Burdens applicable to stand-  Per firm: 260 hours   Per firm: 325 hours
 alone SBSDs and stand-alone   and $1,000.           and $4,650.
 MSBSPs \936\.                Industry: 3,380       Industry: 4,225
                               hours and $13,000.    hours and $60,450.
Burdens applicable to stand-  Per firm: 60 hours..  Per firm: 75 hours.
 alone SBSDs \937\.           Industry: 540 hours.  Industry: 675 hours.
Burdens applicable to ANC     Per firm: 20 hours..  Per firm: 25 hours.
 stand-alone SBSDs \938\.     Industry: 120 hours.  Industry: 150 hours.
Burdens applicable to bank    Per firm: 200 hours.  Per firm: 250 hours.
 SBSDs and bank MSBSPs \939\. Industry: 5,000       Industry: 6,250
                               hours.                hours.
Burdens applicable to bank    Per firm: 60 hours..  Per firm: 75 hours.
 SBSDs \940\.                 Industry: 1,500       Industry: 1,875
                               hours.                hours.
                             -------------------------------------------
    Total--Proposed Rule 18a- Industry: 10,540      Industry: 13,175
     5.                        hours and $13,000.    hours and $60,450.
------------------------------------------------------------------------

Estimated Ongoing Hours and Costs of Current Rule 17a-3
    In the Supporting Statement accompanying the most recent extension
of Rule 17a-3's collection, the estimated ongoing burden for a
registered broker-dealer to make and keep current the books and records
required by Rule 17a-3 averages out to 539 hours per year and $8,256
per year (after adjusting for increases in postage prices), although
actual recordkeeping requirements vary depending on the broker-dealer's
size and complexity.\941\ Given that 4,545 broker-dealers were
registered with the Commission as of April 1, 2013, current Rule 17a-3
creates an estimated industry-wide ongoing annual burden of 2,449,755
hours \942\ and $37,523,520.\943\
---------------------------------------------------------------------------

    \936\ See paragraphs (a)(1) through (a)(10), (a)(12), (a)(15),
and (a)(17) of proposed Rule 18a-5.
    \937\ See paragraphs (a)(13), (a)(14), and (a)(16) of proposed
Rule 18a-5.
    \938\ See paragraph (a)(11) of proposed Rule 18a-5.
    \939\ See paragraphs (b)(1) through (b)(8), (b)(11), and (b)(13)
of proposed Rule 18a-5.
    \940\ See paragraphs (b)(9), (b)(10), and (b)(12) of proposed
Rule 18a-5.
    \941\ See Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 17a-3 at 9 (2,723,970
hours/year/5,057 registered broker-dealers = 539 hours/year per
registered broker-dealer).
    \942\ 539 hours/year x 4,545 registered broker-dealers =
2,449,755 hours/year.
    \943\ $8,256/year x 4,545 registered broker-dealers =
$37,523,520/year.
---------------------------------------------------------------------------

Estimated Hours and Costs of Proposed Amendments to Rule 17a-3
    Many of the proposed amendments to Rule 17a-3 are not expected to
impose an initial burden. Most of the additional proposed amendments
discussed in section II.A.2.b. of this release are largely clarifying
changes that should not impose an hour burden or costs. With respect to
the proposed new records required by the proposed amendments to Rule
17a-3, these are not expected to impose initial dollar costs because
firms should already own or have established the requisite
recordkeeping system software. Firms will likely need to program
software to begin collecting additional records and may need to update
their compliance manuals to reflect that certain paragraphs of Rule
17a-3 have been proposed to be re-numbered. The Commission expects
these services to be performed in-house, and these hourly burdens are
estimated below.
    The Commission does not expect there to be a burden associated with
its proposal to modify the definition of securities regulatory
authority to include the CFTC and prudential regulators to the extent
they oversee security-based swap activities, because the Commission
does not expect any broker-dealers to dually register as banks and
estimates that thirty-four broker-dealers would be dually registered as
FCMs,\944\ swap dealers, and/or major swap participants.\945\ In the
three instances that securities regulatory authority is mentioned, the
broker-dealer must provide certain information to its securities
regulatory

authority if the firm does not make the required record or memorandum
containing the information and the information is requested by the
securities regulatory authority.\946\ The Commission understands that
it is already industry practice to make the required record and
memorandum of the information in these three instances (especially
among more sophisticated entities dually registered with the Commission
and the CFTC), and therefore the Commission does not believe that this
proposed amendment would impose an additional burden.
---------------------------------------------------------------------------

    \944\ The Commission estimates that 34 broker-dealers are dually
registered as FCMs-17 non-SBSD/MSBSP broker-dealers, 16 broker-
dealer SBSDs, and 1 broker-dealer MSBSP. As of March 31, 2013, 34
broker-dealers reported a positive value on Line Item 7060 of the
FOCUS Report (amount required to be segregated under CFTC rules),
which is a line item that is only filled in by FCMs.
    \945\ The Commission estimates that all 17 estimated broker-
dealer FCM SBSDs and broker-dealer FCM MSBSPs would also register as
swap dealers or major swap participants. See Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 76 FR 65814 (estimating that 35 SBSDs or MSBSPs would
also be registered with the CFTC as swap dealers or major swap
participants).
    \946\ See paragraphs (a)(6)(i), (a)(7)(i), and (a)(19)(i) of
Rule 17a-3, as proposed to be amended.
---------------------------------------------------------------------------

    The Commission proposes to eliminate three exemptions from Rule
17a-3 which should not affect the burden of complying with Rule 17a-3.
Paragraph (b)(2) exempts transactions cleared by a bank if the bank
keeps the requisite records for the broker-dealer,\947\ but the
Commission believes that this exemption is not relied on. Paragraph (c)
exempts records of certain U.S. bond sales \948\ and paragraph (d)
exempts records of certain de minimis cash transactions,\949\ but the
Commission believes these transactions are currently automatically
recorded as a matter of practice because it likely takes more time to
identify these transactions as exempt than to make and keep records of
these transactions.
---------------------------------------------------------------------------

    \947\ See 17 CFR 240.17a-3(b)(2).
    \948\ See 17 CFR 240.17a-3(c).
    \949\ See 17 CFR 240.17a-3(d).
---------------------------------------------------------------------------

    The Commission proposes to amend paragraphs (a)(1), (a)(3), (a)(5),
(a)(6), (a)(7), (a)(8), and (a)(9) of Rule 17a-3 to include a provision
requiring broker-dealers to make and keep current various records for
security-based swaps.\950\ The Commission estimates that the proposed
amendments to paragraphs (a)(1), (a)(3), (a)(5), (a)(6), (a)(7),
(a)(8), and (a)(9) of Rule 17a-3 would impose on each broker-dealer
that engages in security-based swap activities an initial burden of
thirty hours and an ongoing burden of approximately ten minutes per
business day, or forty-two hours per year.\951\ The Commission
estimates that there are forty-two respondents--sixteen broker-dealer
SBSDs, one broker-dealer MSBSP, and twenty-five non-SBSD/MSBSP broker-
dealers engaged in security-based swap activities.\952\ Thus, these
proposed amendments would add to the industry an estimated initial
burden of 1,260 hours \953\ and an ongoing burden of 1,764 hours per
year.\954\
---------------------------------------------------------------------------

    \950\ The provision for securities other than security-based
swaps would largely mirror the paragraph's current text. See
paragraphs (a)(1), (a)(3), (a)(5)(i), (a)(6)(i), (a)(7)(i),
(a)(8)(i), and (a)(9)(i) through (iii) of Rule 17a-3, as proposed to
be amended. The provision for security-based swaps would tailor to
security-based swaps the type of records the broker-dealer must make
and keep current. See paragraphs (a)(1), (a)(3), (a)(5)(ii),
(a)(6)(ii), (a)(7)(ii), (a)(8)(ii), and (a)(9)(iv) of Rule 17a-3, as
proposed to be amended.
    \951\ (10 minutes/business day/60 minutes/hour) x 251 business
days/year = 42 hours/year. There are 251 non-weekend days in 2013.