[Federal Register Volume 68, Number 151 (Wednesday, August 6, 2003)]
[Rules and Regulations]
[Pages 46446-46452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20077]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-48272; File No. S7-48-02]
RIN 3235-AI68


Broker-Dealer Exemption From Sending Certain Financial 
Information to Customers

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rule.

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SUMMARY: We are adopting amendments to a rule under the Securities 
Exchange Act of 1934 that provide a conditional exemption from the 
rule's requirement that a broker-dealer that carries customer accounts 
send its full balance sheet and certain other financial information to 
each of its customers twice a year. Under the amendments, the broker-
dealer can send its customers summary information regarding its net 
capital, as long as it also provides customers with a toll-free number 
to call for a free copy of its full balance sheet, makes its full 
balance sheet available to customers over the Internet, and meets other 
specified requirements. The amendments are intended to reduce the cost 
of doing business for a broker-dealer while providing customers of the 
broker-dealer with easy access to the information they need to evaluate 
the financial soundness of the broker-dealer.

EFFECTIVE DATE: September 5, 2003.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 942-0132; Thomas K. McGowan, Assistant Director, at 
(202) 942-4886; or Rose Russo Wells, Attorney, at (202) 942-0143; 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: We are amending Rule 17a-5(c) \1\ under the 
Securities Exchange Act of 1934 (``Exchange Act''). We proposed these 
amendments for comment in November 2002.\2\
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    \1\ 17 CFR 240.17a-5(c).
    \2\ Exchange Act Release No. 46920 (Nov. 26, 2002), 67 FR 71909 
(Dec. 3, 2002) (``Proposing Release'').
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I. Background

    A broker-dealer that carries customer accounts must generally send 
its full balance sheet to each of its customers twice a year under 
section 17(e)(1)(B) of the Exchange Act and Exchange Act Rule 17a-5(c). 
Rule 17a-5(c) requires the broker-dealer to send an audited balance 
sheet within 105 days of the date of the audited balance sheet and an 
unaudited balance sheet (dated six months after the date of the audited 
balance sheet) within 65 days of the date of the unaudited balance 
sheet. The full balance sheet includes footnote disclosures required by 
generally accepted accounting principles (``GAAP'') and a footnote 
disclosing the amount of net capital the broker-dealer held as of the 
balance sheet date and the minimum amount of net capital we required 
the broker-dealer to hold as of that date.\3\ There are currently

[[Page 46447]]

approximately 400 broker-dealers subject to the rule that carry a total 
of approximately 103 million public customer accounts.\4\
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    \3\ Exchange Act Rule 15c3-1 defines net capital and sets 
minimum net capital requirements for a broker-dealer. Rule 15c3-1 is 
designed to ensure that each broker-dealer maintains sufficient 
liquid assets (those assets that can be readily converted into cash) 
in excess of liabilities to promptly satisfy the firm's liabilities, 
including those to customers. A broker-dealer that fails to meet the 
minimum net capital requirements must cease conducting a securities 
business.
    \4\ These numbers are based on reports broker-dealers are 
required to file with the Commission on Form X-17a-5, ``Financial 
and Operational Combined Uniform Single Report'' (commonly referred 
to as FOCUS Reports).
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    When we adopted Rule 17a-5(c) on June 30, 1972,\5\ our goal was for 
broker-dealers to ``directly'' send a customer essential information so 
that a customer could ``judge whether his broker or dealer is 
financially sound.''\6\ We adopted the Rule in response to the failures 
of many broker-dealers holding customer funds and securities in the 
period between 1968 and 1971. When first adopted, Rule 17a-5(c) 
required a broker-dealer to send its balance sheet to its customers 
five times a year. We later reduced this to two times a year.\7\
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    \5\ We adopted Rule 17a-5(c) pursuant to Exchange Act sections 
17(a), 10(b), 15(c)(1), (2) and (3), and 23(a). In 1975, Congress 
passed the Securities Acts Amendments, Pub. L. No. 94-29, 89 Stat. 
97, which gave the Commission explicit authority, pursuant to 
Exchange Act section 17(e), over the accounting practices of broker-
dealers. Section 17(e) provides:
    (1)(A) Every registered broker or dealer shall annually file 
with the Commission a balance sheet and income statement certified 
by a registered public accounting firm, prepared on a calendar or 
fiscal year basis, and such other financial statements (which shall, 
as the Commission specifies, be certified) and information 
concerning its financial condition as the Commission, by rule may 
prescribe as necessary or appropriate in the public interest or for 
the protection of investors.
    (B) Every registered broker and dealer shall annually send to 
its customers its certified balance sheet and such other financial 
statements and information concerning its financial condition as the 
Commission, by rule, may prescribe pursuant to subsection (a) of 
this section.
    (C) The Commission, by rule or order, may conditionally or 
unconditionally exempt any registered broker or dealer, or class of 
such brokers or dealers, from any provision of this paragraph if the 
Commission determines that such exemption is consistent with the 
public interest and the protection of investors.
    (2) The Commission, by rule, as it deems necessary or 
appropriate in the public interest or for the protection of 
investors, may prescribe the form and content of financial 
statements filed pursuant to this title and the accounting 
principles and accounting standards used in their preparation.
    \6\ Exchange Act Release No. 9658 (June 30, 1972).
    \7\ Exchange Act Release No. 11187 (Jan. 17, 1975).
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    In a letter of February 26, 2001, the staff of the Commission's 
Division of Market Regulation (``Division'') provided no-action relief 
to allow a broker-dealer to send its balance sheet with its next 
mailing of quarterly customer account statements after the expiration 
of the time limits prescribed by Rule 17a-5(c), provided that the 
broker-dealer also sent certain updated net capital information.\8\ 
Further, the Commission has provided that, with the consent of the 
customer, a broker-dealer may send its balance sheet electronically.\9\
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    \8\ Letter of February 26, 2001 from Michael Macchiaroli, 
Associate Director, to Cheryl M. Kallem, Chairperson, Securities 
Industry Association (2001 SEC No-Act. LEXIS 523).
    \9\ Exchange Act Release No. 37182 (May 15, 1996).
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II. Pilot Program Granting Exemptive Relief

    In July 1998, the Securities Industry Association (``SIA'') \10\ 
requested additional relief on behalf of broker-dealers due to the cost 
of sending a full balance sheet to each customer.\11\ Full balance 
sheets for large broker-dealers may be six or more pages long, 
primarily due to the footnote disclosures required by GAAP.
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    \10\ The 600 member firms of the SIA include investment banks, 
broker-dealers, and mutual fund companies.
    \11\ Letter of July 17, 1998 from Mark Holloway, Chairman, SIA 
Capital Committee to Michael A. Macchiaroli, Associate Director.
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    In response to the request for relief, we issued a conditional 
exemptive order establishing a two-year pilot program ending December 
31, 2001 that permitted a broker-dealer that elected to take advantage 
of the exemption to send only a ``financial disclosure statement'' to 
its customers containing summary information regarding its net capital 
when it otherwise would have had to send its customers its full balance 
sheet, as long as it also provided customers with a toll-free number to 
call for a free copy of its full balance sheet and made its full 
balance sheet available to customers on its Internet Web site.\12\ The 
exemptive order required that the financial disclosure statement 
include certain of the broker-dealer's net capital information as of 
the balance sheet date and information on how to obtain the broker-
dealer's full balance sheet, at no cost to customers, by accessing the 
broker-dealer's Internet Web site or by calling a toll-free telephone 
number to promptly obtain the customer's choice of either a paper copy 
or an electronic copy. The no-action relief allowing a broker-dealer to 
send its financial information with its next mailing of quarterly 
customer account statements after the expiration of the Rule 17a-5(c) 
time limits as long as it also sent certain updated net capital 
information also applied to broker-dealers taking advantage of the 
exemption. These broker-dealers would therefore send customers net 
capital information as of the balance sheet date, as required by the 
exemptive order, and updated net capital information, as required by 
the no-action relief.
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    \12\ Exchange Act Release No. 42222 (Dec. 10, 1999).
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    A broker-dealer taking advantage of the exemption and the no-action 
relief could send its financial disclosure statement with the updated 
net capital information to its customers and publish its balance sheet 
on its Web site at the time of its next mailing of quarterly customer 
account statements after the expiration of the Rule 17a-5(c) time 
limits. For example, a broker-dealer with a fiscal year end of November 
30 is required by Rule 17a-5(c) to send an audited balance sheet to 
customers by March 15 (105 days after November 30). The broker-dealer 
would use a calendar year for its mailings of quarterly customer 
account statements. If the broker-dealer sends its first quarterly 
customer account statements at the beginning of April, the no-action 
relief allows it to send its audited balance sheet with certain updated 
net capital information to its customers with those first quarterly 
account statements. If the broker-dealer takes advantage of the 
exemption and the no-action relief, it could send its financial 
disclosure statement and updated net capital information to its 
customers with the first quarterly account statements at the beginning 
of April and publish its November 30 audited balance sheet on its Web 
site at the same time.
    The pilot program was designed to reduce the cost to broker-dealers 
of complying with Rule 17a-5(c) while making it as easy as possible for 
customers to get the information they need to evaluate the financial 
soundness of a broker-dealer that may be holding their cash and 
securities. Participation in the pilot program was voluntary, and 
broker-dealers that participated in the pilot program were the firms 
that were likely to benefit most from taking advantage of the 
exemption.
    In December 2001, we extended the pilot program for one year, until 
December 31, 2002.\13\ As of July 2002, 29 broker-dealers holding a 
total of about 40 million customer accounts participated in the pilot 
program. In November 2002, we extended the pilot program to June 30, 
2003.\14\ As of June 2003, 3 additional broker-dealers holding a total 
of approximately 300,000 customer accounts were taking advantage of the 
exemption.
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    \13\ Exchange Act Release No. 45179 (Dec. 20, 2001), 66 FR 67341 
(Dec. 28, 2001).
    \14\ Exchange Act Release No. 46921 (Nov. 26, 2002), 67 FR 72005 
(Dec. 3, 2002).

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[[Page 46448]]

III. Proposing Release and Comments

    Based upon our experience with the pilot program, we proposed to 
amend Rule 17a-5(c) to codify the relief we granted in the pilot 
program.\15\ At the same time, we extended the pilot program to June 
30, 2003 to allow us time to receive and consider comments on the 
proposed amendments.
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    \15\ Exchange Act Release No. 46920 (Nov. 26, 2002), 67 FR 71909 
(Dec. 3, 2002).
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    Specifically, the proposed amendments would have permitted a 
broker-dealer that elected to take advantage of the exemption to send 
only a ``financial disclosure statement'' to its customers when it 
otherwise would have had to send its customers its full balance sheet. 
This financial disclosure statement consisted of the amount of the 
broker-dealer's net capital as of the date of the balance sheet the 
broker-dealer would have sent absent the exemption, the amount of the 
broker-dealer's required net capital as of that date, and information 
on how to obtain the broker-dealer's full balance sheet, at no cost to 
customers, by accessing the broker-dealer's Internet Web site or by 
calling a toll-free telephone number to promptly obtain the customer's 
choice of either a paper copy or an electronic copy.
    The proposed amendments would have required that the financial 
information be ``given prominence in the materials delivered to 
customers'' and also would have required that, when posting its balance 
sheet to its Web site, the broker-dealer place a prominent link 
directly to the balance sheet on any Web page that a customer would 
typically use to enter the Web site.\16\
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    \16\ Proposed paragraphs (c)(5)(ii) and (iii) of Rule 17a-5.
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    The proposed amendments would not have allowed a broker-dealer to 
take advantage of the relief if, during the year prior to the date of 
the broker-dealer's balance sheet, the broker-dealer was required to 
provide notice to the Commission of the occurrence of any disqualifying 
event specified in the rule. Disqualifying events would have included 
net capital deficiencies, net capital early warning deficiencies, books 
and records failures, and internal control or financial disclosure 
inadequacies.
    In the Proposing Release, we solicited comment on whether we should 
codify the no-action relief to allow a broker-dealer taking advantage 
of the exemption to send its financial disclosure statement with its 
next mailing of quarterly customer account statements after the 
expiration of the time limits prescribed by Rule 17a-5(c) and whether a 
broker-dealer taking advantage of the exemption should be required to 
place its balance sheet on its Web site sooner than it is required to 
send the financial disclosure statement to customers.
    We received six comments in response to the proposed rule 
amendments: four comments from individuals, a comment from an industry 
representative, and a comment from a broker-dealer that is taking 
advantage of the exemption.\17\ Three individuals were opposed to the 
proposed amendments. Two of them stated that investors need more 
information. The third stated that having the full balance sheet sent 
to each customer was a more ``up-front trustworthy approach.'' One of 
them suggested that broker-dealers distribute their balance sheets to 
customers electronically in PDF format. The fourth individual supported 
the amendments but was concerned that some mutual fund companies might 
try to use the amendments to raise fund expenses.
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    \17\ Division staff has prepared a summary of the comment 
letters received on the proposed rule amendments entitled ``Comment 
Summary, Broker-Dealer Exemption From Sending Certain Financial 
Information to Customers'' (``Comment Summary''). Copies of the 
comment letters and Comment Summary have been placed in Public 
Reference File No. S7-48-02 and are available for inspection in the 
Commission's Public Reference Room. The commenters are as follows: 
Individuals Carolyn Allen, James Marolda, Keith McCallion, Fred 
Winkler; Broker-Dealer Merrill Lynch, Pierce, Fenner & Smith; 
Industry Representative Securities Industry Association Capital 
Committee.
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    The industry representative and broker-dealer taking advantage of 
the exemption strongly supported the proposed amendments. Both were in 
favor of codifying the no-action relief to allow a broker-dealer taking 
advantage of the exemption to send its financial disclosure statement 
with its next mailing of quarterly customer account statements after 
the expiration of the time limits under Rule 17a-5(c). The industry 
representative also proposed requiring a broker-dealer taking advantage 
of the exemption to place its full balance sheet on its Web site within 
90 calendar days after the date of the balance sheet. Under this 
proposal, the broker-dealer with a fiscal year end of November 30 in 
the example above that takes advantage of the exemption would be 
required to place its audited balance sheet on its Web site by February 
28.
    Since the financial disclosure statement typically consists of less 
than a half-page of printed material, we also requested comment on 
whether the statement should be required to be on a separate page, to 
help make customers aware that the financial information is included in 
the materials (which generally include the customer's quarterly account 
statement) sent to them by their broker-dealer. The only comments we 
received on that issue were from the industry representative and the 
broker-dealer taking advantage of the exemption, both of whom were 
opposed to requiring that broker-dealers taking advantage of the 
exemption send the financial disclosure statement on a separate page 
from other materials sent to customers. The industry representative 
stated that the requirement that the financial information be ``given 
prominence in the materials delivered to customers'' provides 
sufficient guidance for broker-dealers. The broker-dealer taking 
advantage of the exemption stated that requiring the financial 
information to be reported on a separate page would add to the expense 
and paperwork burden on firms taking advantage of the exemption.

IV. Final Rule Amendments

    After considering the comment letters, we are adopting rule 
amendments substantially as proposed. Specifically, pursuant to amended 
Rule 17a-5(c), a broker-dealer that elects to take advantage of the 
exemption must send only a ``financial disclosure statement'' to its 
customers when it otherwise would have had to send its customers its 
full balance sheet. The financial disclosure statement consists of the 
amount of the broker-dealer's net capital as of the date of the balance 
sheet the broker-dealer would have sent absent the exemption, the 
amount of the broker-dealer's required net capital as of that date, and 
information on how to obtain the broker-dealer's full balance sheet, at 
no cost to customers, by accessing the broker-dealer's Internet Web 
site or by calling a toll-free telephone number to promptly obtain the 
customer's choice of either a paper copy or an electronic copy. We are 
adding a requirement that a broker-dealer taking advantage of the 
exemption place its full audited balance sheet on its Web site within 
90 days after the date of the audited balance sheet and its full 
unaudited balance sheet on its Web site within 75 days after the date 
of the unaudited balance sheet.
    We solicited comment on whether a broker-dealer taking advantage of 
the exemption should be required to post its balance sheet on its Web 
site sooner than it is required to send the financial disclosure 
statement to customers. In its comments, the industry representative 
proposed requiring a broker-dealer

[[Page 46449]]

taking advantage of the exemption to place its full balance sheet on 
its Web site within 90 calendar days after the date of the balance 
sheet. We have concluded that it would be feasible for a broker-dealer 
taking advantage of the exemption to place its full audited balance 
sheet on its Web site within 90 days of the date of the audited balance 
sheet and, since unaudited financial statements can be published more 
quickly than audited financial statements, to place its full unaudited 
balance sheet on its Web site within 75 days of the date of the 
unaudited balance sheet. These time limits will allow broker-dealers 
sufficient time to prepare the statements and to place them on their 
Web sites and will enable customers with Internet access to obtain the 
most recent audited balance sheet of a broker-dealer taking advantage 
of the exemption more quickly than customers would obtain such 
information from the broker-dealer under the existing rule.
    In addition, as discussed below, we have eliminated certain of the 
disqualifying events included in the proposed amendments. Finally, we 
have codified the no-action relief, with the addition of time limits, 
to allow a broker-dealer to send its audited balance sheet 30 days 
after the 105-day time limit has expired and to send its unaudited 
balance sheet 70 days after the 65-day time limit has expired, if the 
broker-dealer sends the balance sheets with its next mailing of 
quarterly customer account statements. In order to take advantage of 
this provision, the broker-dealer must include a footnote with the 
mailing containing the amount of the broker-dealer's net capital and 
its required net capital as of a fiscal month end that is within the 
75-day period immediately preceding the date the statements are sent to 
customers. We chose the 30- and 70-day time limits because they provide 
the minimum amount of time needed, based on an analysis of broker-
dealers' year-ends, for a broker-dealer with a November 30 fiscal year-
end to send its financial information with the next mailing of 
quarterly customer account statements. There are approximately 15 
broker-dealers that carry customer accounts that have November 30 
fiscal year-ends.
    Individual customers of broker-dealers need timely access to 
reliable information. We believe that these amendments will not 
compromise that access. Interested customers of broker-dealers taking 
advantage of the exemption can call a toll-free number to have a full 
balance sheet sent to them promptly after it is requested at no cost. 
The toll-free number, along with net capital and other information, 
will be sent to customers when they would have received the full 
balance sheet of the broker-dealer absent the exemption. Customers with 
Internet access can obtain the most recent audited balance sheet of 
broker-dealers taking advantage of the exemption within 90 days after 
the date of the audited balance sheet--sooner than broker-dealers not 
taking advantage of the exemption would be required to send their 
audited balance sheets to customers.\18\
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    \18\ We note that reporting companies must meet certain criteria 
for accelerated filing of their financial statements. See, for 
example, 17 CFR 240.13a-10(j). These amendments do not alter or 
affect those requirements.
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    The amendments add paragraph (5) to Rule 17a-5(c). The new 
paragraph provides an exemption from the Rule's requirement that 
broker-dealers carrying customer accounts send their full balance 
sheets to their customers twice a year.\19\ In order to take advantage 
of the exemption, broker-dealers must meet six conditions.
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    \19\ In addition to requiring that a broker-dealer send audited 
and unaudited statements to customers, Rule 17a-5(c)(1) requires 
that the broker-dealer file the statements with the Commission and 
with each national securities exchange and registered national 
securities association of which it is a member. These amendments do 
not affect the requirement to make those filings.
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    First, a broker-dealer taking advantage of the exemption must send 
a financial disclosure statement to each customer twice a year at the 
times that it otherwise would have been required by Rule 17a-5(c) to 
send its full balance sheet to each customer. The financial disclosure 
statement must include the amount of the broker-dealer's net capital as 
of the date of that full balance sheet and the amount of the broker-
dealer's required net capital as of that date.
    Second, the financial disclosure statement must be ``given 
prominence'' in the materials delivered to the broker-dealer's 
customers and must include information on how to obtain the full 
balance sheet of the broker-dealer via a toll-free number or on the 
broker-dealer's Web site. After considering the comment letters, we 
have determined that requiring the financial disclosure statement to be 
on a separate page would add unnecessary additional costs of complying 
with Rule 17a-5(c) and therefore we have not included such a 
requirement in the amendments.
    Third, a broker-dealer taking advantage of the exemption must place 
its full audited balance sheet on its Web site not later than 90 days 
after the date as of which the audited balance sheet is prepared and 
must place its full unaudited balance sheet on its Web site not later 
than 75 days after the date as of which the unaudited balance sheet is 
prepared. The broker-dealer must place separate, prominent links to the 
balance sheet on its Web site Home page and at each Internet location 
from which a customer can enter or log on to the broker-dealer's Web 
site.
    Fourth, a broker-dealer taking advantage of the exemption must 
maintain a toll-free telephone number that customers can call to 
request a copy of the full balance sheet.
    Fifth, if a customer requests a copy of the full balance sheet, the 
broker-dealer must send it promptly at no cost to the customer.
    Finally, a broker-dealer cannot take advantage of the exemption if, 
during the year prior to the date of the broker-dealer's balance sheet, 
the broker-dealer was required to provide notice to the Commission 
under Exchange Act Rule 17a-11(e) of the existence of any ``material 
inadequacy'' in certain of its internal controls, its accounting 
system, or certain of its practices and procedures. These practices and 
procedures include, for example, periodic net capital computations and 
periodic counts of securities. In such a situation, it is appropriate 
that a broker-dealer be required to send all mandated financial 
information directly to customers because material inadequacies in its 
internal controls or accounting systems directly impact the accuracy 
and reliability of the broker-dealer's past financial statements. In 
that case, it is important that customers receive a full description of 
the broker-dealer's current financial statements. In the proposed 
amendments, certain net capital deficiencies and certain books and 
records failures that the firm is required to report to the Commission 
under Exchange Act Rule 17a-11 were included as disqualifying events.
    After further consideration, the staff has concluded that to 
include these occurrences in the events that would disqualify a broker-
dealer from taking advantage of the exemption could create many 
triggers that would not actually be indicia of broker-dealers in 
financial difficulty. The Commission believes that in the vast majority 
of instances in which broker-dealers eligible for the relief notify the 
Commission of such occurrences, the firms are not in danger of 
insolvency.

V. Paperwork Reduction Act

    As set forth in the Proposing Release, the amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction

[[Page 46450]]

Act of 1995 (``PRA'').\20\ We have submitted the collection of 
information requirements of the proposed amendments to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\21\ The OMB has approved the amended PRA collection and assigned 
control number 3235-0199 to them. 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 control number.
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    \20\ 44 U.S.C. section 3501 et seq.
    \21\ 44 U.S.C. section 3507(d) and 5 CFR 1320.11.
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    As stated in the Proposing Release, we estimate that the amendments 
will reduce the existing paperwork burden on broker-dealers taking 
advantage of the exemption. The Proposing Release solicited comments on 
the proposed collections of information. We received no comments that 
addressed the PRA submission. However, we did receive comments on other 
aspects of the proposed amendments. After carefully considering the 
comments received, we are not changing our collection of information 
burden estimate.
    As discussed above, today we are adopting amendments to Rule 17a-
5(c) that are substantially similar to the proposed amendments. We 
note, however, that the rule amendments as adopted and changed from the 
proposal do not change the PRA estimate. The amendments allow a broker-
dealer that elects to take advantage of the exemption, instead of 
sending its full balance sheet, to send a financial disclosure 
statement, consisting of certain net capital information and 
information on how to obtain its full balance sheet, to its customers 
twice a year, as long as the broker-dealer also posts its balance sheet 
on its Web site and promptly sends its balance sheet to its customers 
who request it via a toll-free number. We estimate that the amendments 
will reduce the existing paperwork burden on broker-dealers taking 
advantage of the exemption.
    The previous PRA burden for Rule 17a-5(c) was 542,222 hours and 
$19.52 million. The hour burden was based on an estimated average of 10 
seconds to send each balance sheet times 97.6 million public customer 
accounts times two balance sheets per year (195,200,000 responses * 10 
seconds /60 seconds/60 minutes = 542,222 hours per year). The cost 
burden was based on an estimated average of 10 cents per response for 
postage and printing costs (195,200,000 responses * $.10 = $19.52 
million).
    Since the time of the previous calculation of the PRA burden, the 
number of public customer accounts has increased to 103 million. 
Further, industry sources represented that it now costs approximately 
11 cents to mail a full balance sheet to a customer, primarily due to 
the additional postage required to mail the approximately six pages of 
footnotes required by GAAP, and that few customers agreed to accept the 
balance sheets electronically. We are now using that estimate of 11 
cents instead of the 10 cents per balance sheet we had used previously.
    Since the inception of the pilot program on December 10, 1999, to 
July 1, 2002, 29 broker-dealers, carrying a total of approximately 40 
million customer accounts, have taken advantage of the relief. Now that 
the Commission has adopted the proposed amendments, some additional 
firms may take advantage of the exemption. Because these firms have not 
yet taken advantage of the relief and because they may be smaller firms 
than some of the firms that have already taken advantage of the relief, 
these firms may realize fewer benefits from the exemption than those 
firms already taking advantage of the exemption.
    Broker-dealers currently taking advantage of the exemption send the 
financial disclosure statement, instead of their full balance sheet, 
twice a year. Some broker-dealers print the financial disclosure 
statement, which is typically about one paragraph in length, on a 
separate page, and some broker-dealers print it on the account 
statement.
    We estimate that the 29 broker-dealers currently taking advantage 
of the exemption will spend 222,000 hours per year sending the 
financial disclosure statements to their customers. This estimate is 
based on an estimated average of 10 seconds to send each statement 
times 40 million customers times 2 financial disclosure statements per 
year. We have estimated in previous PRA filings that it requires 10 
seconds to send a full balance sheet to a customer. Sending the 
financial disclosure statement instead of the full balance sheet may 
require less time.
    We estimate that broker-dealers taking advantage of the exemption 
will save up to 11 cents each on postage and printing to send the 
financial disclosure statement instead of the full balance sheet to 
their customers. We estimate that the 29 firms currently taking 
advantage of the exemption have reduced their postage and printing 
costs by up to $8.8 million per year (40 million accounts * 2 mailings 
* up to 11 cents).
    Broker-dealers that take advantage of the exemption must send 
balance sheets to customers who request them via a toll-free number. 
Based on requests received by broker-dealers participating in the pilot 
program, we estimate that the firms that take advantage of the 
exemption will send approximately 550 balance sheets per year to 
customers who request them via the firms' toll-free numbers (1384 
requests from December 31, 1999 to July 1, 2002/30 months * 12 months = 
554).\22\ Even if it takes 10 minutes to send each balance sheet, the 
total annual burden would be small (10 minutes * 550 balance sheets/ 60 
= 92 hours). In addition, we estimate that it will cost approximately 
74 cents in postage to mail the balance sheet (two 37-cent stamps to 
mail six pages) for a total of $407 and that there may be small 
printing costs, which we are not able to quantify. We believe that the 
firms that will take advantage of the exemption already maintain a 
toll-free number for their customers and already have an Internet Web 
site.
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    \22\ Customers, when requesting that the full balance sheet be 
sent to them, have not requested that the balance sheet be sent 
electronically.
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    We therefore estimate the total burden for broker-dealers who take 
advantage of the exemption to be 222,000 hours and less than $10,000.
    We estimate the burden for broker-dealers who do not take advantage 
of the exemption (383 broker-dealers carrying approximately 63 million 
customer accounts) to be about 350,000 hours per year and $13.9 million 
per year. The hour burden was calculated by multiplying the estimated 
number of balance sheets to be sent annually (63 million customers 
times two balance sheets sent per year) by the estimated average amount 
of time required to send each balance sheet (10 seconds). The cost 
burden was calculated by multiplying the number of balance sheets sent 
per year (126 million) by estimated postage and printing costs for each 
balance sheet (11 cents).
    We therefore estimate that, with the amendments, the total annual 
hour burden for Rule 17a-5(c) will be approximately 572,000 hours 
(350,000 hours for firms not taking advantage of the exemption and 
222,000 hours for firms taking advantage of the exemption), and the 
total annual cost burden will be approximately $13.9 million. The hour 
burden will increase by 29,778 hours from our previous estimate 
(572,000 hours -542,222 hours). All of this increase is due to an 
increase in the total number of public customer accounts since the time 
of the last submission. The estimated cost

[[Page 46451]]

burden is $2.38 million higher due to an increase in the number of 
public customer accounts and an increase in estimated average postage 
and printing costs and is $8 million lower due to the amendments. The 
cost burden is therefore lower by $5.62 million ($8 million -$2.38 
million = $5.62 million).

VI. Costs and Benefits of the Amendments

    The amendments are intended to reduce the cost of doing business to 
a broker-dealer while providing customers of the broker-dealer with 
easy access to the information they need to evaluate the financial 
soundness of the broker-dealer. No costs to customers are expected. The 
amendments provide regulatory relief for those broker-dealers that take 
advantage of the exemption. The broker-dealers who take advantage of 
the exemption will do so because they believe that the benefits of 
doing so outweigh the costs.
    There are currently approximately 400 broker-dealers that carry 
customer accounts. These firms carry a total of approximately 103 
million accounts. Since the inception of the pilot program on December 
10, 1999, to July 1, 2002, 29 broker-dealers, carrying a total of 
approximately 40 million customer accounts, had taken advantage of the 
relief. Now that the Commission has adopted the amendments, some 
additional firms may take advantage of the exemption. Because these 
firms have not yet taken advantage of the relief and because they may 
be smaller firms than some of the firms that have already taken 
advantage of the relief, these firms may realize fewer benefits from 
the exemption than those firms already taking advantage of the 
exemption.
    The amendments reflect our view that subject to certain conditions 
it is not necessary for a broker-dealer to send its balance sheet two 
times a year to customers to keep them informed of the financial 
condition of the broker-dealer if customers receive the broker-dealer's 
net capital information twice a year and if the full balance sheet is 
available on the Web site of the broker-dealer or by a call to a toll-
free number. In fact, customers with Internet access will be able to 
obtain the full balance sheet of broker-dealers taking advantage of the 
exemption within minutes at any time and will be able to obtain the 
most recent audited balance sheet of those broker-dealers within 90 
days after the date of the balance sheet--sooner than broker-dealers 
not taking advantage of the exemption would be required to send their 
audited balance sheets to customers. Customers without Internet access 
can call at any time to be promptly sent a free copy of the full 
balance sheet.
    We expect that the amendments will provide benefits to broker-
dealers and to their customers. We expect that broker-dealers taking 
advantage of the exemption will reduce their cost of compliance with 
Rule 17a-5(c). As discussed above, we estimate that the 29 firms taking 
advantage of the exemption as of July 2002 have reduced their postage 
and printing costs by up to $8.8 million per year. Larger broker-
dealers are likely to realize greater benefits than smaller firms as 
larger firms carry more customer accounts. As election of the exemption 
is voluntary, we would expect a broker-dealer to elect the exemption 
only if the firm would be able to conduct business at a lower cost than 
under current Commission rules. The amendments could reduce overall 
costs to broker-dealers. In general, to the extent that costs to 
broker-dealers are reduced, such cost reductions may ultimately be 
passed on to consumers.
    We estimate that the amendments will result in certain costs to 
broker-dealers. Firms taking advantage of the exemption must have and 
maintain a toll-free telephone line and must have and maintain Web 
sites containing their balance sheets. We expect, however, that firms 
taking advantage of the exemption will already have a toll-free number 
for their customers and will already have a Web site, as these tend to 
be the larger firms. Firms taking advantage of the exemption must also 
send their full balance sheet to customers who request it via the toll-
free telephone number. However, as election of the relief is voluntary, 
any new associated costs only reduce the net benefit of the election 
and do not impose a new burden.

VII. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\23\ 
the Commission has certified that the amendments would not have a 
significant economic impact on a substantial number of small entities. 
This certification was incorporated into the Proposing Release. We 
received no comments concerning the impact on small entities or the 
Regulatory Flexibility Act Certification.
---------------------------------------------------------------------------

    \23\ 5 U.S.C. section 605(b).
---------------------------------------------------------------------------

VIII. Burden on Competition, and Promotion of Efficiency, Competition, 
and Capital Formation

    Section 3(f) of the Exchange Act \24\ requires us, when engaging in 
rulemaking that requires us to consider or determine whether an action 
is necessary or appropriate in the public interest, to consider whether 
the action will promote efficiency, competition, and capital formation. 
Section 23(a)(2) of the Exchange Act \25\ requires us to consider the 
anticompetitive effects of any rules that we adopt under the Exchange 
Act. Section 23(a)(2) prohibits us from adopting any rule that would 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission believes the amendments should improve efficiency, 
competition, and capital formation by decreasing the costs of doing 
business for a broker-dealer that carries customer accounts and elects 
to take advantage of the relief. Additional firms taking advantage of 
the relief, however, may be smaller firms that may realize fewer 
benefits from taking advantage of the exemption than larger firms 
currently taking advantage of the relief. In addition, the amendments 
should have no anticompetitive effects. Any broker-dealer, providing it 
can meet the conditions, may use the exemption.

IX. Statutory Basis

    The amendments contained in this release are being adopted under 
the Exchange Act, particularly section 17 and section 23(a).

List of Subjects in 17 CFR part 240

    Brokers, Customers, Dealers, Reporting and recordkeeping.

Text of Rule

0
For the reasons set out in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

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

0
1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-l, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *

[[Page 46452]]


0
2. Section 240.17a-5 is amended by:
0
a. Revising the phrase ``except if the activities'' to read ``except as 
provided in paragraph (c)(5) of this section or if the activities'' in 
the introduction text of paragraph (c)(1);
0
b. Revising the introduction text of paragraph (c)(2);
0
c. Revising paragraph (c)(3); and
0
d. Adding paragraph (c)(5).
0
The revisions and addition read as follows:


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

* * * * *
    (c) * * *
    (2) Audited statements to be furnished. Audited statements shall be 
furnished within 105 days after the date of the audited financial 
statements required by paragraph (d) of this section. The statements 
may be furnished 30 days after that time limit has expired if the 
broker or dealer sends them with the next mailing of the broker's or 
dealer's quarterly customer statements of account. In that case, the 
broker or dealer must include a statement in that mailing of the amount 
of the broker's or dealer's net capital and its required net capital in 
accordance with Sec.  240.15c3-1, as of a fiscal month end that is 
within the 75-day period immediately preceding the date the statements 
are sent to customers. The audited statements shall include the 
following:
* * * * *
    (3) Unaudited statements to be furnished. Unaudited statements 
dated 6 months from the date of the audited statements required to be 
furnished by paragraphs (c)(1) and (2) of this section shall be 
furnished within 65 days after the date of the unaudited statements. 
The unaudited statements may be furnished 70 days after that time limit 
has expired if the broker or dealer sends them with the next mailing of 
the broker's or dealer's quarterly customer statements of account. In 
that case, the broker or dealer must include a statement in that 
mailing of the amount of the broker's or dealer's net capital and its 
required net capital in accordance with Sec.  240.15c3-1, as of a 
fiscal month end that is within the 75-day period immediately preceding 
the date the statements are sent to customers. The unaudited statements 
shall contain the information specified in paragraphs (c)(2)(i) and 
(ii) of this section.
* * * * *
    (5) Exemption from sending certain financial information to 
customers. A broker or dealer is not required to send to its customers 
the statements prescribed by paragraphs (c)(2) and (c)(3) of this 
section if the following conditions are met:
    (i) The broker or dealer semi-annually sends its customers, at the 
times it otherwise is required to send its customers the statements 
prescribed by paragraphs (c)(2) and (c)(3) of this section, a financial 
disclosure statement that includes:
    (A) The amount of the broker's or dealer's net capital and its 
required net capital in accordance with Sec.  240.15c3-1, as of the 
date of the statements prescribed by paragraphs (c)(2) and (c)(3) of 
this section;
    (B) To the extent required under paragraph (c)(2)(ii) of this 
section, a description of the effect on the broker's or dealer's net 
capital and required net capital of the consolidation of the assets and 
liabilities of subsidiaries or affiliates consolidated pursuant to 
Appendix C of Sec.  240.15c3-1; and
    (C) Any statements otherwise required by paragraphs (c)(2)(iii) and 
(iv) of this section.
    (ii) The financial disclosure statement is given prominence in the 
materials delivered to customers of the broker or dealer and includes 
an appropriate caption stating that customers may obtain the statements 
prescribed by paragraphs (c)(2) and (c)(3) of this section, at no cost, 
by:
    (A) Accessing the broker's or dealer's Web site at the specified 
Internet Uniform Resource Locator (URL); or
    (B) Calling the broker's or dealer's specified toll-free telephone 
number.
    (iii) Not later than 90 days after the date of the audited 
statements prescribed by paragraph (c)(2) of this section and not later 
than 75 days after the date of the unaudited statements prescribed by 
paragraph (c)(3) of this section, the broker or dealer publishes the 
statements on its Web site, accessible by hyperlinks in either textual 
or button format, which are separate, prominent links, are clearly 
visible, and are placed in each of the following locations:
    (A) On the broker's or dealer's Web site home page; and
    (B) On each page at which a customer can enter or log on to the 
broker's or dealer's Web site; and
    (C) If the Web sites for two or more brokers or dealers can be 
accessed from the same Home page, on the Home page of the Web site of 
each broker or dealer.
    (iv) The broker or dealer maintains a toll-free telephone number 
that customers can call to request a copy of the statements prescribed 
by paragraphs (c)(2) and (c)(3) of this section.
    (v) If a customer requests a copy of the statements prescribed by 
paragraphs (c)(2) and (c)(3) of this section, the broker or dealer 
sends it promptly at no cost to the customer.
    (vi) During the year prior to the date of the statements prescribed 
by paragraphs (c)(2) and (c)(3) of this section, the broker or dealer 
was not required by paragraph (e) of Sec.  240.17a-11 to give notice 
and transmit a report to the Commission.
* * * * *

    By the Commission.

    Dated: August 1, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20077 Filed 8-5-03; 8:45 am]
BILLING CODE 8010-01-P