[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Rules and Regulations]
[Pages 68550-68733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20678]



[[Page 68549]]

Vol. 84

Monday,

No. 241

December 16, 2019

Part II





 Securities and Exchange Commission





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17 CFR Parts 200, 240, and 249





Recordkeeping and Reporting Requirements for Security-Based Swap 
Dealers, Major Security-Based Swap Participants, and Broker-Dealers; 
Final Rule

  Federal Register / Vol. 84 , No. 241 / Monday, December 16, 2019 / 
Rules and Regulations  

[[Page 68550]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240, and 249

[Release No. 34-87005; File No. S7-05-14]
RIN 3235-AL45


Recordkeeping and Reporting Requirements for Security-Based Swap 
Dealers, Major Security-Based Swap Participants, and Broker-Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), the Securities and 
Exchange Commission (``Commission''), pursuant to the Securities 
Exchange Act of 1934 (``Exchange Act''), is adopting recordkeeping, 
reporting, and notification requirements applicable to security-based 
swap dealers (``SBSDs'') and major security-based swap participants 
(``MSBSPs''), securities count requirements applicable to certain 
SBSDs, and additional recordkeeping requirements applicable to broker-
dealers to account for their security-based swap and swap activities. 
The Commission also is making substituted compliance available with 
respect to recordkeeping, reporting, and notification requirements 
under Section 15F of the Exchange Act and the rules thereunder.

DATES: 
    Effective date: February 14, 2020.
    Compliance date: The compliance dates are discussed in section 
III.B. of this release.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at 
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 
551-5522; Joseph I. Levinson, Senior Special Counsel, at (202) 551-
5598; Raymond A. Lombardo, Assistant Director, at (202) 551-5755; 
Timothy C. Fox, Branch Chief, at (202) 551-5687; Valentina Minak Deng, 
Special Counsel, at (202) 551-5778; Rose Russo Wells, Special Counsel, 
at (202) 551-5527; or Abraham Jacob, Special Counsel, at (202) 551-
5583; Division of Trading and Markets, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Final Rules and Rule Amendments
    A. Recordkeeping
    1. Introduction
    2. Records To Be Made and Kept Current
    3. Record Maintenance and Preservation Requirements
    B. Reporting
    1. Introduction
    2. Periodic Filing of FOCUS Report
    3. Filing of Annual Audited Financial Reports and Other Reports
    C. Notification
    1. Introduction
    2. Amendments to Rule 17a-11 and New Rule 18a-8
    3. Additional Amendments to Rule 17a-11 and Modifications to 
Rule 18a-8
    D. Quarterly Securities Count and Capital Charge for Unresolved 
Securities Differences
    1. Introduction
    2. Rule 18a-9
    E. Alternative Compliance Mechanisms
    1. Limited Alternative Compliance Mechanism--Rules 17a-3 and 
18a-5
    2. Full Alternative Compliance Mechanism--Rule 18a-10
    F. Cross-Border Application and Availability of Substituted 
Compliance
    1. Cross-Border Application of Recordkeeping and Reporting 
Requirements
    2. Availability of Substituted Compliance in Connection With 
Recordkeeping and Reporting Requirements
    G. Amendments to Rule 18a-1
    H. Delegation of Authority
III. Explanation of Dates
    A. Effective Date
    B. Compliance Date
    C. Effect on Existing Commission Exemptive Relief
    D. Application to Substituted Compliance
IV. Paperwork Reduction Act
    A. Summary of Collections of Information Under the Rule 
Amendments and New Rules
    1. Amendments to Rule 17a-3 and New Rule 18a-5
    2. Amendments to Rule 17a-4 and New Rule 18a-6
    3. Amendments to Rule 17a-5 and New Rule 18a-7
    4. Amendments to Rule 17a-11 and New Rule 18a-8
    5. Amendments to Rule 17a-12
    6. New Rule 18a-9
    7. Amendments to Rule 18a-10
    8. Amendments to Rule 3a71-6
    B. Use of Information
    C. Respondents
    D. Total Initial and Annual Recordkeeping and Reporting Burden
    1. Amendments to Rule 17a-3 and New Rule 18a-5
    2. Amendments to Rule 17a-4 and New Rule 18a-6
    3. Amendments to Rule 17a-5 and New Rule 18a-7
    4. Amendments to Rule 17a-11 and New Rule 18a-8
    5. Amendments to Rule 17a-12
    6. New Rule 18a-9
    7. Amendments to Rule 18a-10
    8. Amendments to Rule 3a71-6
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Retention Period for Recordkeeping Requirements
V. Economic Analysis
    A. Introduction
    B. Baseline of Economic Analysis
    1. Available Data From the Security-Based Swap Market
    2. Security-Based Swap Market: Market Participants and Activity
    3. Existing Regulation of OTC Derivatives Market Participants 
and Broker-Dealers
    C. Analysis of the Adopted Program and Alternatives
    1. Benefits of Recordkeeping, Reporting, Notification, and 
Securities Count Requirements
    2. Costs of the Recordkeeping, Reporting, Notification, and 
Securities Count Requirements
    3. Economic Effects of the Approach to Recordkeeping, Reporting, 
Notification, and Securities Count Requirements
    4. Cross-Border Application and Substituted Compliance
    D. Impact on Efficiency, Competition, and Capital Formation
    E. Alternatives to the Adopted Recordkeeping, Reporting, 
Notification, and Securities Count Rules
VI. Other Matters
VII. Regulatory Flexibility Act Certification
VIII. Statutory Basis

I. Background

    Title VII of the Dodd-Frank Act (``Title VII'') established a new 
regulatory framework for the U.S. over-the-counter (``OTC'') 
derivatives markets.\1\ Section 764 of the Dodd-Frank Act added Section 
15F to the Exchange Act.\2\ Section 15F(f)(2) provides that the 
Commission shall adopt rules governing reporting and recordkeeping for 
SBSDs and MSBSPs. Section 15F(f)(1)(A)

[[Page 68551]]

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. Section 
15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential 
regulator \3\ (respectively, ``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.\4\ 
Section 15F(f)(1)(B)(i) provides that SBSDs and MSBSPs for which there 
is a prudential regulator (respectively, ``bank SBSDs'' and ``bank 
MSBSPs'') shall keep books and records of all activities related to 
their business as an SBSD or MSBSP in such form and manner and for such 
period as may be prescribed by the Commission by rule or regulation. 
Section 15F(g) of the Exchange Act requires SBSDs and MSBSPs to 
maintain daily trading records with respect to security-based swaps and 
provides that the Commission shall adopt rules governing daily trading 
records for SBSDs and MSBSPs. Finally, Section 15F(i)(2) of the 
Exchange Act provides that the Commission shall adopt rules governing 
documentation standards for SBSDs and MSBSPs.
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    \1\ See Public Law 111-203, 701 through 774. The Dodd-Frank Act 
assigns primary responsibility for the oversight of the U.S. OTC 
derivatives markets to the Commission and the Commodity Futures 
Trading Commission (``CFTC''). The Commission has oversight 
authority with respect to a ``security-based swap'' as defined in 
Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), 
including to implement a registration and oversight program for a 
``security-based swap dealer'' as defined in Section 3(a)(71) and a 
``major security-based swap participant'' as defined in Section 
3(a)(67). The CFTC has oversight authority with respect to a 
``swap'' as defined in Section 1(a)(47) of the Commodity Exchange 
Act (``CEA'') (7 U.S.C. 1(a)(47)), including to implement a 
registration and oversight program for a ``swap dealer'' as defined 
in Section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a ``major 
swap participant'' as defined in Section 1(a)(33) of the CEA (7 
U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted 
rules to further define these terms See Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement;'' Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 
48208 (Aug. 13, 2012); Further Definition of ``Swap Dealer,'' 
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major 
Security-Based Swap Participant'' and ``Eligible Contract 
Participant,'' Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 
30596 (May 23, 2012).
    \2\ 15 U.S.C. 78o-10 (``Section 15F of the Exchange Act'' or 
``Section 15F'').
    \3\ The term ``prudential regulator'' is defined in Section 
1(a)(39) of the CEA (7 U.S.C. 1(a)(39)) and that definition is 
incorporated by reference in Section 3(a)(74) of the Exchange Act. 
Pursuant to the definition, the Board of Governors of the Federal 
Reserve System (``Federal Reserve''), the Office of the Comptroller 
of the Currency (``OCC''), the Federal Deposit Insurance Corporation 
(``FDIC''), the Farm Credit Administration, or the Federal Housing 
Finance Agency (collectively, the ``prudential regulators'') is the 
``prudential regulator'' of an SBSD, MSBSP, swap dealer, or major 
swap participant if the entity is directly supervised by that 
agency.
    \4\ A nonbank SBSD or MSBSP could be dually registered with the 
Commission as a broker-dealer (respectively, a ``broker-dealer 
SBSD'' or ``broker-dealer MSBSP'') or registered with the Commission 
only as an SBSD or MSBSP (respectively, a ``stand-alone SBSD'' or 
``stand-alone MSBSP''). Any of these registrants or a bank SBSD or 
bank MSBSP also could register with the CFTC as a futures commission 
merchant (``FCM''), swap dealer, or major swap participant.
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    Section 17(a)(1) of the Exchange Act provides the Commission with 
authority to adopt rules requiring broker-dealers--which would include 
broker-dealer SBSDs and MSBSPs--to make and keep for prescribed periods 
such records, furnish such copies thereof, and make and disseminate 
such reports as the Commission, by rule, prescribes as necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Exchange Act.\5\ The 
Commission anticipates that a number of broker-dealers will register as 
SBSDs.\6\ The Commission expects that some broker-dealers that are not 
registered as SBSDs or MSBSPs (``stand-alone broker-dealers'') 
nonetheless will engage in security-based swap and swap activities.\7\
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    \5\ See 15 U.S.C. 78q(a)(1) (``Section 17 of the Exchange Act'' 
or ``Section 17''). Section 771 of the Dodd-Frank Act states that 
unless otherwise provided by its terms, Subtitle B of Title VII 
(relating to the regulation of the security-based swap markets) does 
not divest any appropriate Federal banking agency, the Commission, 
the CFTC, or any other Federal or State agency, of any authority 
derived from any other provision of applicable law.
    \6\ While it is anticipated that some broker-dealers and banks 
will register as SBSDs in order to engage in security-based swap 
activities, it is unclear whether broker-dealers or banks will 
register as MSBSPs.
    \7\ In this release, the term ``broker-dealer'' includes an OTC 
derivatives dealer unless otherwise noted. See 17 CFR 240.3b-12 
(defining the term ``OTC derivatives dealer''). Consequently, the 
terms ``stand-alone broker-dealer,'' ``broker-dealer SBSD,'' and 
``broker-dealer MSBSP'' include entities that are OTC derivatives 
dealers unless otherwise noted.
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    In April 2014, the Commission proposed recordkeeping, reporting, 
and notification requirements applicable to SBSDs and MSBSPs, 
securities count requirements applicable to certain SBSDs, and 
additional recordkeeping requirements applicable to broker-dealers to 
account for their security-based swap and swap activities.\8\ The 
proposed requirements were modeled on existing broker-dealer 
requirements.\9\ The Commission received a number of comments in 
response to these proposals.\10\ Separately, the Commission proposed 
rules governing the cross-border treatment of recordkeeping and 
reporting requirements with respect to SBSDs and MSBSPs.\11\ The 
Commission received comments in response to these cross-border 
proposals as well.\12\ The Commission carefully considered the comments 
received on the proposals described above and, as discussed below, made 
modifications in light of the comments in crafting final rules and 
amendments.
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    \8\ See Recordkeeping and Reporting Proposing Release; Capital 
Rule for Certain Security-Based Swap Dealers, Exchange Act Release 
No. 71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014) 
(``Recordkeeping and Reporting Proposing Release'').
    \9\ See id. at 25196-97 (providing the rationale for modeling 
the proposed requirements on the relevant broker-dealer 
requirements).
    \10\ The comment letters are available at https://www.sec.gov/comments/s7-05-14/s70514.shtml.
    \11\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to 
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1, 
2013), 78 FR 30968 (May 23, 2013) (``Cross-Border Proposing 
Release'').
    \12\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
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    In this document, the Commission is amending certain existing rules 
and adopting new rules. In particular, the Commission is amending 
existing rules 17 CFR 240.17a-3 (``Rule 17a-3''), 17 CFR 240.17a-4 
(``Rule 17a-4''), 17 CFR 240.17a-5 (``Rule 17a-5''), and 17 CFR 
240.17a-11 (``Rule 17a-11''), and adopting new rules 17 CFR 240.18a-5 
(``Rule 18a-5''), 17 CFR 240.18a-6 (``Rule 18a-6''), 17 CFR 240.18a-7 
(``Rule 18a-7''), 17 CFR 240.18a-8 (``Rule 18a-8''), and 17 CFR 
240.18a-9 (``Rule 18a-9''). The amendments and new rules establish 
recordkeeping, reporting, and notification requirements for SBSDs and 
MSBSPs and securities count requirements for stand-alone SBSDs 
(collectively ``recordkeeping and reporting requirements''). The 
amendments to Rules 17a-3 and 17a-4 also establish additional 
recordkeeping requirements applicable to stand-alone broker-dealers to 
the extent they engage in security-based swap or swap activities. The 
Commission also is adopting largely technical amendments to Rules 17a-
3, 17a-4, 17a-5, and 17a-11 as well as a conforming amendment to 
existing rule 17 CFR 240.17a-12 (``Rule 17a-12'').\13\ Further, the 
Commission is adopting amendments to Parts II and III of the Financial 
and Operational Combined Uniform Single Report (``FOCUS Report''),\14\ 
and adopting Part IIC of the FOCUS Report. Part II of the FOCUS Report, 
as amended, and Part IIC of the FOCUS Report, as adopted, will be used 
by registrants to report financial and operational information. Part 
III of the FOCUS Report will accompany the annual reports that certain 
of the registrants will file. The Commission also is amending existing 
rule 17 CFR 240.3a71-6 (``Rule 3a71-6'') with respect to the cross-
border application of the recordkeeping and reporting rules and the 
availability of substituted compliance.
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    \13\ The amendments to Rule 17a-12 replace the phrase ``Part 
IIB'' with the phrase ``Part II'' each time it appears in the rule, 
thereby requiring OTC derivatives dealers to file FOCUS Report Part 
II, as amended, instead of FOCUS Report Part IIB.
    \14\ The FOCUS Report is also known as Form X-17A-5.
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    On June 21, 2019, the Commission adopted, among other requirements, 
capital and margin requirements for nonbank SBSDs and MSBSPs and 
segregation requirements for SBSDs.\15\

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As discussed below, these capital, margin, and segregation requirements 
are integrated into the recordkeeping and reporting requirements being 
adopted in this document. Moreover, at the same time that the 
Commission adopted the capital, margin, and segregation requirements, 
the Commission adopted an alternative compliance mechanism (17 CFR 
240.18a-10 ``Rule 18a-10'').\16\ The Commission is amending Rule 18a-10 
in this document to incorporate recordkeeping and reporting 
requirements into its provisions. The Commission also is amending an 
SBSD capital rule (17 CFR 240.18a-1 ``Rule 18a-1'').
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    \15\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 43872 
(Aug. 22, 2019) (``Capital, Margin, and Segregation Adopting 
Release'').
    \16\ See Capital, Margin, and Segregation Adopting Release at 
43943-46.
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    The Commission staff consulted with staff from the prudential 
regulators and the CFTC in drafting these final rules and 
amendments.\17\ In addition, relevant CFTC rules were considered as 
part of this rulemaking effort.\18\
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    \17\ See Section 712(a)(2) of the Dodd-Frank Act.
    \18\ The CFTC has adopted recordkeeping and reporting rules for 
swap dealers and major swap participants. See Swap Dealer and Major 
Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures 
Commission Merchant and Introducing Broker Conflicts of Interest 
Rules; and Chief Compliance Officer Rules for Swap Dealers, Major 
Swap Participants, and Futures Commission Merchants, 77 FR 20128 
(Apr. 3, 2012).
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II. Final Rules and Rule Amendments

A. Recordkeeping

1. Introduction
    The Commission is adopting a recordkeeping program for SBSDs and 
MSBSPs under Sections 15F and 17(a) of the Exchange Act that is modeled 
on the recordkeeping requirements for broker-dealers as set forth in 
Rules 17a-3 and 17a-4. Under this recordkeeping program, broker-dealer 
SBSDs and MSBSPs--as broker-dealers--will be subject to Rules 17a-3 and 
17a-4.\19\ The Commission is adopting amendments to these rules to 
implement the recordkeeping requirements mandated under the Dodd-Frank 
Act with respect to broker-dealer SBSDs and MSBSPs and to account for 
the security-based swap and swap activities of stand-alone broker-
dealers.
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    \19\ A commenter requested clarification as to whether an OTC 
derivatives dealer dually registered as an SBSD or MSBSP would be 
subject to Rules 17a-3 and 17a-4, as amended, or Rules 18a-5 and 
18a-6. An OTC derivatives dealer dually registered as an SBSD or 
MSBSP is subject to Rules 17a-3 and 17a-4 (rather than Rules 18a-5 
and 18a-6). The undesignated introductory paragraphs to Rules 17a-3, 
17a-4, 18a-5, and 18a-6 have been modified to clarify this 
application of the rules. In addition, as explained further below, 
an OTC derivatives dealer dually registered as an SBSD will be 
subject to Rules 18a-1, 18a-4, 18a-7, 18a-8, and 17a-13 rather than 
15c3-1, 15c3-3, 17a-5, 17a-11, and Rules 18a-9. As a result, the 
Commission has made the following conforming modifications to Rules 
17a-3, 17a-4, 18a-7, and 18a-8: (1) Where Rules 17a-3 and 17a-4 
refer to Rules 17a-5 or 17a-12, the Commission has added references 
to Rule 18a-7; (2) where Rules 17a-3 and 17a-4 refer to Rule 15c3-1, 
the Commission has added references to Rule 18a-1, if appropriate; 
and (3) where Rules 17a-3 and 17a-4 refer to Rule 15c3-3, the 
Commission has added references to Rule 18a-4.
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    Stand-alone and bank SBSDs and MSBSPs will be subject to Rules 18a-
5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively, 
as amended. Rules 18a-5 and 18a-6 do not include a parallel requirement 
for every requirement in Rules 17a-3 and 17a-4 because some of the 
requirements in Rules 17a-3 and 17a-4 relate to activities that are 
either not expected or not permitted to be conducted by stand-alone and 
bank SBSDs and MSBSPs. Further, the recordkeeping requirements 
applicable to bank SBSDs and MSBSPs are more limited in scope because: 
(1) The Commission's authority under Section 15F(f)(1)(B)(i) of the 
Exchange Act is tied to activities related to the conduct of the firm's 
business as an SBSD or MSBSP; (2) bank SBSDs and MSBSPs are subject to 
recordkeeping requirements applicable to banks with respect to their 
banking activities; and (3) the prudential regulators--rather than the 
Commission--are responsible for capital, margin, and other prudential 
requirements applicable to bank SBSDs and MSBSPs. For these reasons, 
the recordkeeping requirements for bank SBSDs and MSBSPs are tailored 
more specifically to their security-based swap activities as an SBSD or 
MSBSP.
2. Records To Be Made and Kept Current
    The Commission is adopting amendments to Rule 17a-3 to account for 
the security-based swap and swap activities of broker-dealers, 
including broker-dealer SBSDs and MSBSPs.\20\ The Commission is 
adopting Rule 18a-5--which is modeled on Rule 17a-3, as amended--to 
require stand-alone and bank SBSDs and MSBSPs to make and keep current 
certain records.\21\ As stated above, Rule 18a-5 does not include a 
parallel requirement for every requirement in Rule 17a-3.\22\ Paragraph 
(a) of Rule 18a-5 contains one set of recordkeeping requirements 
applicable to stand-alone SBSDs and MSBSPs, and paragraph (b) of Rule 
18a-5 contains a separate set of recordkeeping requirements applicable 
to bank SBSDs and MSBSPs that are more limited in scope.
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    \20\ Broker-dealer SBSDs and MSBSPs are required to make and 
keep current all the records required to be made and kept current by 
broker-dealers under Rule 17a-3, as amended, plus the additional 
records required specifically of an SBSD or MSBSP.
    \21\ See Rule 18a-5, as adopted. Paragraphs (a) and (b) of Rule 
18a-5 now read ``make and keep current'' instead of ``make and 
keep'' as proposed, to clarify the implicit requirement that a 
firm's records should be current. This language is consistent with 
Rule 17a-3, as amended, on which Rule 18a-5 is modeled.
    \22\ The Commission did not propose to include in Rule 18a-5 
requirements that would parallel those set forth in paragraphs 
(a)(4), (13) through (16), (19), and (20) of Rule 17a-3. See 
Recordkeeping and Reporting Proposing Release, 79 FR at 25200, n. 
67.
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    A commenter urged the Commission to harmonize its recordkeeping 
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping 
requirements for swap dealers and major swap participants to the 
maximum extent possible, with the goal of permitting firms to utilize a 
single recordkeeping system for swap and security-based swap 
transactions and positions.\23\ As discussed in more detail below in 
section II.E.1. of this release, in response to the comment and to 
promote harmonization with CFTC requirements, the Commission is 
adopting a limited alternative compliance mechanism in Rules 17a-3 and 
18a-5.\24\ In particular, an SBSD or MSBSP that also is registered with 
the CFTC as a swap dealer or major swap participant may comply with the 
recordkeeping requirements of the CEA and the rules thereunder in lieu 
of the requirements (discussed below) to make and keep current trade 
blotters, customer account ledgers, and stock records solely with 
respect to information required to be included in those records 
regarding security-based swap transactions and positions if the SBSD or 
MSBSP meets certain conditions. The conditions include,

[[Page 68553]]

among other things, that the SBSD or MSBSP preserves all of the data 
elements necessary to create a trade blotter, customer account ledger, 
or stock record reflecting security-based swap and swap transactions 
and positions and upon request promptly furnishes to representatives of 
the Commission such a trade blotter, customer account ledger, or stock 
record that includes security-based swap and swap transactions and 
positions in the format required by Rule 17a-3 or 18a-5, as applicable. 
This provision will permit an SBSD or MSBSP that also is registered 
with the CFTC as a swap dealer or major swap participant to maintain a 
single recordkeeping system for security-based swap and swap 
transactions and positions in accordance with the CFTC's rules with 
respect to these required records.
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    \23\ See Letter from Mary Kay Scucci, Managing Director, 
Securities Industry and Financial Markets Association (Sept. 5, 
2014) (``SIFMA 9/5/2014 Letter'').
    \24\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted. As discussed in more detail below in 
section II.E.2. of this release, the Commission also is amending 
Rule 18a-10. Rule 18a-10 establishes a full alternative compliance 
mechanism that will permit certain stand-alone SBSDs that are 
registered as swap dealers and that predominantly engage in a swaps 
business to elect to comply with the capital, margin, and 
segregation requirements of the CEA and the CFTC's rules in lieu of 
complying with the capital, margin, and segregation requirements of 
the Commission's rules. The Commission is amending Rule 18a-10 in 
this document to permit firms that will operate under Rule 18a-10 to 
elect to comply with the recordkeeping and reporting requirements of 
the CEA and the CFTC's rules in lieu of complying with Rules 18a-5, 
18a-6, 18a-7, 18a-8, and 18a-9. Consequently, a stand-alone SBSD 
that qualifies to use the full alternative compliance mechanism of 
Rule 18a-10 can comply with the recordkeeping requirements of the 
CEA and the CFTC's rules in lieu of complying with the requirements 
of Rule 18a-5.
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    Rules 17a-3 and 18a-5 require broker-dealers, SBSDs, and MSBSPs to 
make and keep current daily trading records, ledger accounts, a 
securities record, memoranda of brokerage orders, and/or memoranda of 
proprietary trades that include certain data elements with respect to 
security-based swap transactions.\25\ The data elements are: (1) The 
type of security-based swap; (2) the reference security, index, or 
obligor; (3) the date and time of execution; (4) the effective date; 
(5) the scheduled termination date; (6) the notional amount(s) and the 
currenc(ies) in which the notional amount(s) is expressed; (7) the 
unique transaction identifier; and (8) the counterparty's unique 
identification code (collectively, the ``transaction data 
elements'').\26\
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    \25\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), and 
(a)(7)(ii) of Rule 17a-3, as amended; paragraphs (a)(1) and (3), 
(a)(4)(ii), (a)(5), (b)(1) and (2), (b)(3)(ii), and (b)(4) and (5) 
of Rule 18a-5, as adopted.
    \26\ See paragraphs (a)(1) and (3), (a)(5)(ii), and (a)(6) of 
Rule 17a-3, as amended; paragraphs (a)(1) and (3) through (5) and 
(b)(1) through (5) of Rule 18a-5, as adopted.
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    As proposed, the counterparty's unique identification code data 
element was the unique counterparty identifier.\27\ Commenters 
suggested that the Commission replace the requirement to record the 
unique counterparty identifier with a requirement to record the 
counterparty's legal entity identifier (``LEI'').\28\ One commenter 
further stated that the Commission should allow firms to use different 
counterparty identifiers for internal purposes provided that they are 
able to translate their internal counterparty identifiers into the 
standard LEI convention.\29\
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    \27\ See, e.g., Recordkeeping and Reporting Proposing Release, 
79 FR at 25201.
    \28\ See SIFMA 9/5/2014 Letter; Letter from Senator Carl Levin, 
Chairman of Permanent Subcommittee on Investigations, U.S. Senate 
(July 3, 2014) (``Levin Letter'').
    \29\ See SIFMA 9/5/2014 Letter.
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    For the sake of consistency with previously adopted Commission 
rules, the Commission is replacing the requirement to record the unique 
counterparty identifier throughout Rule 17a-3, as amended, and Rule 
18a-5, as adopted, with a requirement to use the counterparty's unique 
identification code (``UIC''), as defined in Regulation SBSR.\30\ In 
particular, Regulation SBSR requires market participants--including 
broker-dealers, SBSDs, and MSBSPs--to report certain data elements to 
security-based swap data repositories (``SDRs''). One of the required 
data elements is a UIC, which Rule 900 of Regulation SBSR defines as 
``a unique identification code assigned to a person, unit of a person, 
product, or transaction.'' \31\ SDRs must use UICs assigned by an 
internationally recognized standards-setting system (``IRSS'') if an 
IRSS has been recognized by the Commission and issues that type of 
UIC.\32\ In the release adopting Regulation SBSR, the Commission 
recognized the Global Legal Entity Identifier System (``GLEIS'')--which 
is responsible for issuing LEIs--as an IRSS that satisfies the 
requirements of Rule 903 of Regulation SBSR.\33\ Under Rule 903, if an 
IRSS recognized by the Commission has assigned a UIC to a person, unit 
of a person, or product, each SDR must employ that UIC for reporting 
purposes under Regulation SBSR, and SDR participants must obtain such 
UICs for use under Regulation SBSR. Although a firm may use different 
counterparty identifiers for internal purposes, the firm's records 
compiled pursuant to the recordkeeping rules being adopted in this 
document must record the counterparty's UIC. To date, LEIs are the only 
specific type of UIC that must be used under Regulation SBSR.\34\
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    \30\ 17 CFR 242.900-242.909. See Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information, Exchange Act 
Release No. 74244 (Feb. 11, 2015), 80 FR 14563 at 14631-14632 (Mar. 
19, 2015).
    \31\ See 17 CFR 242.900(qq).
    \32\ See 17 CFR 242.903 (``Rule 903'').
    \33\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, 80 FR at 14631-32.
    \34\ While the Commission to date has only recognized the GLEIS 
as an IRSS, the rules being adopted in this document do not preclude 
the use of UICs issued by any other organization that is recognized 
as an IRSS in the future.
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    In addition to that modification, the final requirements modify the 
transaction data elements by replacing the data elements ``the 
termination or maturity date'' and ``the notional amount'' with the 
data elements ``the scheduled termination date'' and ``the notional 
amount(s) and the currenc(ies) in which the notional amount(s) is 
expressed'', respectively. This aligns the terminology identifying the 
data elements with the terminology used in Regulation SBSR.\35\
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    \35\ See 17 CFR 242.901 (``Rule 901''); Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information, 
Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 
12, 2016).
---------------------------------------------------------------------------

    The Commission stated when proposing the recordkeeping requirements 
that ``[w]here a data element that would need to be documented in the 
daily trading records of security-based swap transactions under the 
proposed amendments to Rule 17a-3 or proposed Rule 18a-5 is 
substantively the same as a data element that would need to be reported 
under proposed Rule 901, the Commission preliminarily believes that the 
type of information that would need to be documented in the daily 
trading records could be the same data element reported under proposed 
Rule 901.'' \36\ The following data element requirements being adopted 
in this document use the same terminology as Rule 901 of Regulation 
SBSR: (1) The date and time of execution; (2) the effective date; (3) 
the scheduled termination date; and (4) the notional amount(s) and the 
currenc(ies) in which the notional amount(s) is expressed. The 
Commission clarifies that for these data elements registrants may 
record the same information provided pursuant to the requirements of 
Rule 901 to satisfy the related requirements of Rules 17a-3, as 
amended, and 18a-5, as adopted.
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    \36\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25201.
---------------------------------------------------------------------------

    Finally, a commenter urged the Commission to provide firms with the 
flexibility to keep the proposed required trade blotters, general 
ledgers, ledgers for customer accounts, and stock record (discussed 
below) in various formats without mandating a particular format as long 
as all required information is kept and accessible to the 
Commission.\37\ For example, with respect to the stock record, the 
commenter urged the Commission to provide SBSDs and MSBSPs flexibility 
in the manner in which they create records for security-based swap 
transactions and not mandate a detailed specified format (particularly 
with respect to tracking collateral received and pledged), provided 
that all required information is recorded and retained and can be 
pulled together upon request to create something that recognizably

[[Page 68554]]

would be a record of the firm's security-based swap transactions.
---------------------------------------------------------------------------

    \37\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    These types of records are fundamental business records that a 
prudent company should make and retain in the ordinary course to 
document and track, among other things, its operations, financial 
account balances and transactions, asset and liability accounts, and 
custodial positions. The daily creation of these records builds an 
historical audit trail that can be used to reconstruct the sequence of 
transactions and changes in balances and positions, and to reconcile 
with third-party accounts. Having the records in place also can assist 
a firm account for transactions, balances, and positions if data feeds 
or other information systems that feed into the records are disrupted. 
Moreover, broker-dealers have been required to make and retain these 
types of records for their securities business and transactions for 
many years, and the Commission does not believe that doing so imposes a 
great burden. Further, based on staff experience, the Commission 
believes that creating a daily record of this information will 
facilitate the prompt production of the materials necessary for 
examinations and the oversight of broker-dealers, SBSDs, and MSBSPs. 
For these reasons, as discussed below, the Commission is adopting the 
requirements substantially as proposed. However, except for the general 
ledger, the firm can utilize the limited alternative compliance 
mechanism with respect to these records as they pertain to security-
based swap and swap transactions and positions if the conditions of the 
limited alternative compliance mechanism are met.\38\
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    \38\ Certain stand-alone SBSDs may qualify to use the full 
alternative compliance mechanism of Rule 18a-10, in which case they 
may comply with the recordkeeping requirements of the CEA and the 
CFTC's rules in lieu of complying with the requirements of Rule 18a-
5.
---------------------------------------------------------------------------

a. Amendments to Rule 17a-3 and New Rule 18a-5
Undesignated Introductory Paragraph
    The Commission proposed adding an undesignated introductory 
paragraph to Rule 17a-3 explaining that the rule applies to a broker-
dealer, including a broker-dealer dually registered with the Commission 
as an SBSD or MSBSP.\39\ The paragraph further explained that an SBSD 
or MSBSP that is not dually registered as a broker-dealer (i.e., a 
stand-alone SBSD or MSBSP, or bank SBSD or MSBSP) is subject to the 
books and records requirements in proposed Rule 18a-5. Similarly, 
proposed Rule 18a-5 included an undesignated introductory paragraph 
explaining that the rule applies to an SBSD or MSBSP that is not dually 
registered as a broker-dealer and that a broker-dealer that is dually 
registered as an SBSD or MSBSP is subject to the books and records 
requirements in Rule 17a-3. The Commission received no comments on the 
proposed undesignated introductory paragraphs and is adopting them with 
non-substantive modifications to clarify which rule (17a-3 or 18a-5) 
applies to a given type of entity.\40\
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    \39\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25201.
    \40\ See undesignated introductory paragraph of Rule 17a-3, as 
amended; undesignated introductory paragraph of Rule 18a-5, as 
adopted.
---------------------------------------------------------------------------

Trade Blotters
    Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and 
keep current trade blotters (or other records of original entry) 
containing an itemized daily record of all transactions in securities, 
all receipts and deliveries of securities, all receipts and 
disbursements of cash, and all other debits and credits. The Commission 
proposed to amend this paragraph to require that the trade blotters of 
broker-dealers, including broker-dealer SBSDs and MSBSPs, contain 
specific information about security-based swaps, including by recording 
specific transaction data elements.\41\ The Commission proposed to 
include parallel trade blotter requirements in Rule 18a-5 to apply to 
stand-alone and bank SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \41\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25201.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide 
firms with the flexibility to keep the proposed trade blotters in 
various formats without mandating a particular format as long as all 
required information is kept and accessible to the Commission.\42\ For 
the reasons discussed above, the Commission does not believe this would 
be appropriate. However, the Commission clarifies that a firm can 
create two separate trade blotters (one for security-based swaps and 
one for other types of positions). Moreover, as discussed in more 
detail below in section II.E.1. of this release, to promote 
harmonization with CFTC requirements and increase flexibility, an SBSD 
or MSBSP that is also registered as a swap dealer or major swap 
participant may opt to use the limited alternative compliance mechanism 
with respect to these records as they pertain to security-based swap 
and swap transactions and positions.\43\ For these reasons, the 
Commission is adopting the trade blotter requirements substantially as 
proposed.\44\
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    \42\ See SIFMA 9/5/2014 Letter.
    \43\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted.
    \44\ See paragraph (a)(1) of Rule 17a-3, as amended; paragraphs 
(a)(1) and (b)(1) of Rule 18a-5, as adopted. These paragraphs 
require that the trade blotters (or other records of original entry) 
include the following transaction data elements: (1) The type of 
security-based swap; (2) the reference security, index, or obligor; 
(3) the date and time of execution; (4) the effective date; (5) the 
scheduled termination date; (6) the notional amount(s) and the 
currenc(ies) in which the notional amount(s) is expressed; (7) the 
unique transaction identifier; and (8) the counterparty's UIC. As 
discussed above, these data elements were modified from the proposal 
to require the counterparty's UIC and to conform to Rule 901.
---------------------------------------------------------------------------

General Ledger
    Paragraph (a)(2) of Rule 17a-3 requires broker-dealers, including 
broker-dealer SBSDs and MSBSPs, to make and keep current ledgers (or 
other records) reflecting all assets and liabilities, income and 
expense and capital accounts. These records reflect the overall 
financial condition of the broker-dealer and in the Commission's view 
can incorporate security-based swap activities without the need for a 
clarifying amendment. The Commission proposed a parallel provision in 
Rule 18a-5 requiring stand-alone SBSDs and MSBSPs to make and keep 
current the same types of general ledgers.\45\
---------------------------------------------------------------------------

    \45\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25201-02.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide 
firms with the flexibility to keep the proposed general ledger in 
various formats as long as all required information is kept and 
accessible to the Commission.\46\ For the reasons discussed above, the 
Commission does not believe this would be appropriate. Moreover, as 
discussed above, the Commission does not believe it would be 
appropriate to apply the limited alternative compliance mechanism for 
this record because the information that must be recorded in a general 
ledger is broader than security-based swap information.\47\ For this 
reason, the Commission is adopting the general ledger requirement as 
proposed.\48\
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    \46\ See SIFMA 9/5/2014 Letter.
    \47\ However, a stand-alone SBSD that qualifies to use the full 
alternative compliance mechanism of Rule 18a-10 may comply with the 
recordkeeping requirements of the CEA and the CFTC's rules in lieu 
of complying with the requirements of Rule 18a-5.
    \48\ See paragraph (a)(2) of Rule 18a-5, as adopted.
---------------------------------------------------------------------------

Ledgers for Customer and Non-Customer Accounts
    Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and 
keep current certain ledger accounts (or other records) relating to 
securities and

[[Page 68555]]

commodities transactions in customer and non-customer cash and margin 
accounts. The Commission proposed to amend this paragraph to require 
that broker-dealers, including broker-dealer SBSDs and MSBSPs, make and 
keep current ledger accounts (or other records) that record specific 
security-based swap transaction data elements.\49\ The Commission 
proposed in Rule 18a-5 that stand-alone SBSDs and MSBSPs be required to 
make and keep current the same types of ledgers (or other records). 
However, the proposed rule text did not refer to ``cash and margin 
accounts'' because these types of accounts involve activities that may 
not be undertaken by stand-alone SBSDs and MSBSPs because they are not 
registered as broker-dealers. The Commission proposed in Rule 18a-5 
that bank SBSDs and MSBSPs make and keep current ledger accounts (or 
other records) relating to securities and commodity transactions, but 
only with respect to their security-based swap customers and non-
customers.
---------------------------------------------------------------------------

    \49\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25202.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide 
firms with the flexibility to keep the proposed ledgers for customer 
accounts in various formats as long as all required information is kept 
and accessible to the Commission.\50\ For the reasons discussed above, 
the Commission does not believe this would be appropriate. However, as 
discussed in more detail below in section II.E.1. of this release, to 
promote harmonization with CFTC requirements and provide additional 
flexibility, an SBSD or MSBSP that is also registered as a swap dealer 
or major swap participant may opt to use the limited alternative 
compliance mechanism with respect to these ledgers as they pertain to 
security-based swap and swap transactions and positions.\51\ For these 
reasons, the Commission is adopting the ledger account requirements 
substantially as proposed.\52\
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    \50\ See SIFMA 9/5/2014 Letter.
    \51\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that 
qualifies to use the full alternative compliance mechanism of Rule 
18a-10 may comply with the recordkeeping requirements of the CEA and 
the CFTC's rules in lieu of complying with the requirements of Rule 
18a-5.
    \52\ See paragraph (a)(3) of Rule 17a-3, as amended; paragraphs 
(a)(3) and (b)(2) of Rule 18a-5, as adopted. These paragraphs 
require that the ledgers include the following transaction data 
elements: (1) The type of security-based swap; (2) the reference 
security, index, or obligor; (3) the date and time of execution; (4) 
the effective date; (5) the scheduled termination date; (6) the 
notional amount(s) and the currenc(ies) in which the notional 
amount(s) is expressed; (7) the unique transaction identifier; and 
(8) the counterparty's UIC. As discussed above, these data elements 
were modified from the proposal to require the counterparty's UIC 
and to conform to Rule 901.
---------------------------------------------------------------------------

Stock Record
    Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and 
keep current a securities record (also referred to as a ``stock 
record''). This is a record of the broker-dealer's custody and movement 
of securities. 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. The Commission proposed to amend this paragraph to require 
that the securities record of broker-dealers, including broker-dealer 
SBSDs and MSBSPs, specifically account for security-based swap activity 
by reflecting separately for each security-based swap certain of the 
transaction data elements and other information.\53\ In addition, the 
Commission proposed parallel securities record requirements in Rule 
18a-5 for stand-alone and bank SBSDs and MSBSPs. However, the 
requirements for bank SBSDs and MSBSPs were limited to positions 
related to their business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    \53\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25202.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide 
firms with the flexibility to keep the proposed stock record in various 
formats as long as all required information is kept and accessible to 
the Commission.\54\ For the reasons discussed above, the Commission 
does not believe this would be appropriate. However, as discussed in 
more detail below in section II.E.1. of this release, to promote 
harmonization with CFTC requirements and increase flexibility, an SBSD 
or MSBSP that is also registered as a swap dealer or major swap 
participant may opt to use the limited alternative compliance mechanism 
with respect to the stock record as it pertains to security-based swap 
and swap transactions and positions.\55\ The Commission also clarifies 
that the requirement as adopted does not necessarily require the use of 
two separate stock records (i.e., one for securities and one for 
security-based swaps); instead, a broker-dealer SBSD may elect to use a 
single stock record that incorporates all of its securities customers, 
including security-based swap customers.
---------------------------------------------------------------------------

    \54\ See SIFMA 9/5/2014 Letter.
    \55\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that 
qualifies to use the full alternative compliance mechanism of Rule 
18a-10 may comply with the recordkeeping requirements of the CEA and 
the CFTC's rules in lieu of complying with the requirements of Rule 
18a-5.
---------------------------------------------------------------------------

    A commenter stated that the Commission should replace the terms 
``long'' and ``short'' in the proposed requirements with ``bought'' and 
``sold,'' respectively.\56\ The commenter explained that the former two 
terms were ``not really applicable'' to security-based swaps. The 
Commission agrees and the final amendment and rule use the terms 
``bought'' and ``sold.'' For the reasons discussed above, the 
Commission is adopting the stock record requirements with this 
modification but otherwise substantially as proposed.\57\
---------------------------------------------------------------------------

    \56\ See SIFMA 9/5/2014 Letter.
    \57\ See paragraph (a)(5)(ii) of Rule 17a-3, as amended; 
paragraphs (a)(4) and (b)(3) of Rule 18a-5, as adopted. These 
paragraphs require a securities record or ledger reflecting 
separately for each security-based swap the following transaction 
data elements: (1) The reference security, index, or obligor; (2) 
the unique transaction identifier; and (3) the counterparty's UIC. 
As discussed above, these data elements were modified from the 
proposal to require the counterparty's UIC and to conform to Rule 
901. The broker-dealer stock record requirement for securities other 
than security-based swaps that pre-existed these amendments is being 
preserved in paragraph (a)(5)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Memoranda of Brokerage Orders
    Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and 
keep current a memorandum of each brokerage order, and of any other 
instruction, given or received for the purchase or sale of a security. 
The memorandum must show the terms and conditions of each brokerage 
order. The Commission proposed to amend this paragraph to require 
broker-dealers, including broker-dealer SBSDs and MSBSPs, to make and 
keep current a memorandum of each brokerage order given or received for 
the purchase or sale of a security-based swap.\58\ Further, the rule 
required that certain of the security-based swap transaction data 
elements be documented in the memorandum. The Commission proposed a 
parallel provision in Rule 18a-5 for bank SBSDs and MSBSPs. The 
Commission did not propose a parallel provision for stand-alone SBSDs 
and MSBSPs because these registrants are not permitted to engage in the 
business of effecting brokerage orders in security-based swaps without 
registering as a broker-dealer or a bank.\59\
---------------------------------------------------------------------------

    \58\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25202-03.
    \59\ Generally, persons engaged in brokerage activities are 
required to register as brokers under Section 15 of the Exchange 
Act. However, Section 3(a)(4) of the Exchange Act permits banks to 
engage in certain limited securities brokerage activities. See also 
17 CFR 247.100-781 (joint Commission and the Federal Reserve rules 
establishing further exemptions permitting banks to engage in 
certain securities brokerage activities without registering as a 
broker-dealer). Consequently, a bank SBSD or MSBSP may act as a 
broker or agent in a security-based swap transaction. In such 
instances, the brokerage order record requirements of paragraph 
(b)(4) of Rule 18a-5 would apply.

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

[[Page 68556]]

    A commenter expressed general support for the proposed requirements 
but asked the Commission to confirm that the order ticket requirement 
only applies when there are in fact orders received for execution 
(i.e., where the orders are potentially executed on a security-based 
swap execution facility), and not where there is a negotiation that 
results in a transaction without any executable order or other 
instruction given.\60\ Furthermore, the commenter also asked the 
Commission to confirm that no order ticket needs to be created by the 
broker-dealer or its affiliated SBSD when a registered broker-dealer 
acts as an agent in connection with negotiated transactions between an 
affiliated SBSD and its customers without any executable order being 
received. In response, the Commission clarifies that the firm must 
receive an executable order or other instruction to trigger the 
memorandum requirement (i.e., an order or instruction that the broker-
dealer, SBSD, or MSBSP has agreed to execute on behalf of the 
counterparty). Consequently, preliminary negotiations or responding to 
questions about a potential transaction alone do not trigger the 
recordkeeping requirement. For these reasons, the Commission is 
adopting these requirements substantially as proposed.\61\
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    \60\ See SIFMA 9/5/2014 Letter.
    \61\ See paragraph (a)(6)(ii) of Rule 17a-3, as amended; 
paragraph (b)(4) of Rule 18a-5, as adopted. These paragraphs require 
that the memorandum include the following security-based swap 
transaction data elements: (1) The type of security-based swap; (2) 
the reference security, index, or obligor; (3) the date and time of 
execution; (4) the effective date; (5) the scheduled termination 
date; (6) the notional amount(s) and the currenc(ies) in which the 
notional amount(s) is expressed; (7) the unique transaction 
identifier; and (8) the counterparty's UIC. As discussed above, 
these data elements were modified from the proposals to require the 
counterparty's UIC and to conform to Rule 901. The broker-dealer 
memorandum requirement for securities other than security-based 
swaps that pre-existed these amendments is being preserved in 
paragraph (a)(6)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Memoranda of Proprietary Orders
    Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and 
keep current a memorandum of each purchase and sale for the account of 
the broker-dealer. Generally, this paragraph requires broker-dealers to 
document the terms of securities transactions where they are acting as 
a dealer or otherwise trading for their own account. The Commission 
proposed to amend this paragraph to require the terms of security-based 
swap transactions to be documented as well.\62\ In addition, the 
Commission proposed parallel memorandum requirements in Rule 18a-5 for 
stand-alone and bank SBSDs and MSBSPs, but only with respect to 
security-based swap transactions. The Commission received no comment 
that specifically addressed these proposed requirements and is adopting 
them substantially as proposed.\63\
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    \62\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25203-04.
    \63\ See paragraph (a)(7)(ii) of Rule 17a-3, as amended; 
paragraphs (a)(5) and (b)(4) of Rule 18a-5, as adopted. These 
paragraphs require that the memorandum include the following 
security-based swap transaction data elements: (1) The type of 
security-based swap; (2) the reference security, index, or obligor; 
(3) the date and time of execution; (4) the effective date; (5) the 
scheduled termination date; (6) the notional amount(s) and the 
currenc(ies) in which the notional amount(s) is expressed; (7) the 
unique transaction identifier; and (8) the counterparty's UIC. As 
discussed above, these data elements were modified from the 
proposals to require the counterparty's UIC and to conform to Rule 
901. The broker-dealer memorandum requirement for securities (other 
than security-based swaps) that pre-existed these amendments is 
being preserved in paragraph (a)(7)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Confirmations
    Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to keep 
copies of all trade confirmations. In addition, the Commission has 
adopted rules that require SBSDs and MSBSPs to provide trade 
acknowledgments containing the details of a security-based swap 
transaction within prescribed timeframes and to establish, maintain, 
and enforce written policies and procedures that are reasonably 
designed to obtain prompt verification of the terms of the trade 
acknowledgments.\64\ In particular, Rule 15Fi-2 requires SBSDs and 
MSBSPs to promptly verify the accuracy of, or otherwise dispute with 
their counterparties, the terms of trade acknowledgments they receive.
---------------------------------------------------------------------------

    \64\ See 17 CFR 240.15Fi-2 (``Rule 15Fi-2''); see also Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39807 (June 17, 
2016).
---------------------------------------------------------------------------

    The Commission proposed to amend paragraph (a)(8) of Rule 17a-3 to 
require that broker-dealers, including broker-dealer SBSDs and MSBSPs, 
make and keep current copies of the security-based swap trade 
acknowledgments and verifications made pursuant to Rule 15Fi-2.\65\ The 
Commission also proposed in Rule 18a-5 that stand-alone SBSDs and 
MSBSPs make and keep current copies of: (1) Confirmations of all 
purchases or sales of securities that are not security-based swaps; and 
(2) security-based swap trade acknowledgments and verifications made 
pursuant to Rule 15Fi-2. The Commission further proposed parallel 
confirmation requirements in Rule 18a-5 for bank SBSDs and MSBSPs. 
However, the requirement to make and keep current copies of 
confirmations of all purchases and sales of securities that are not 
security-based swaps would be limited to transactions that related to 
their business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    \65\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25204.
---------------------------------------------------------------------------

    A commenter stated that the Commission should not require a bank 
SBSD or MSBSP to make and keep current copies of all confirmations of 
all purchases and sales of securities (other than security-based swaps) 
or, in the alternative, the Commission should narrowly interpret when 
securities transactions are ``related to the business'' of a bank as an 
SBSD or MSBSP.\66\ The Commission disagrees that confirmations should 
not be made for transactions when the security is not a security-based 
swap. A confirmation of any securities transaction that occurs within a 
security-based swap account will assist examiners in reviewing all the 
activities in the account and whether the firm is acting in accordance 
with applicable securities laws. The Commission notes, however, that a 
bank SBSD or MSBSP must make and keep current copies of confirmations 
relating to transactions in securities, other than security-based 
swaps, only if the transaction relates to its business as an SBSD or 
MSBSP. Consequently, the final requirements do not apply to a security 
transaction that relates solely to the bank acting as a bank and not as 
an SBSD or MSBSP. For these reasons, the Commission is adopting the 
requirements as proposed.\67\
---------------------------------------------------------------------------

    \66\ See SIFMA 9/5/2014 Letter.
    \67\ See paragraph (a)(8)(ii) of Rule 17a-3, as amended; 
paragraphs (a)(6) and (b)(6) of Rule 18a-5, as adopted. The broker-
dealer confirmation requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in 
paragraph (a)(8)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Accountholder Information
    Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make a 
record for each securities accountholder that contains certain 
information about the person. The Commission proposed to amend this 
paragraph to require broker-dealers, including broker-dealer SBSDs and 
MSBSPs, to record certain information with respect to security-

[[Page 68557]]

based swap accountholders.\68\ The Commission proposed parallel 
requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs 
with respect to recording the information about security-based swap 
accountholders.
---------------------------------------------------------------------------

    \68\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25204.
---------------------------------------------------------------------------

    A commenter stated that it is not common practice in the swaps 
market to obtain signatures of persons authorized to transact business 
on behalf of a counterparty in a swap account and recommended instead 
that broker-dealers, SBSDs, and MSBSPs be permitted to satisfy this 
requirement by establishing policies and procedures relating to 
counterparty trade authorization.\69\ It is a prudent business practice 
for financial institutions to formalize relationships with their 
counterparties and to take orders from individuals only if they are 
authorized to enter into transactions on behalf of the counterparty. 
This provides greater legal certainty in terms of enforcing the rights 
of the financial institution and its counterparty. Obtaining the 
signatures of persons authorized to transact on behalf of the 
counterparty is one way to promote these objectives, but the Commission 
agrees with the commenter that it is not the only way. Maintaining a 
record of persons authorized to transact on behalf of the counterparty 
such as a copy of a corporate resolution granting the person such 
authority is another way. Consequently, the Commission is modifying the 
text of the final rules so that the means of establishing a record of 
the authorization of each person to whom the counterparty has granted 
authority to transact business in the security-based swap account are 
not limited to obtaining signatures of such persons. In particular, the 
final rules provide that, for each security-based swap account, the 
broker-dealer, SBSD, or MSBSP must make and retain a record of the 
authorization of each person the counterparty has granted authority to 
transact business in the security-based swap account. This record could 
be, for example, a signature of the person, a copy of the corporate 
resolution of the counterparty granting the person authority to trade 
on its behalf, or a communication from the counterparty identifying the 
person as having been granted authority to act on its behalf. In 
addition to promoting the objectives described above, this record will 
assist Commission staff in examining whether a given transaction has 
been appropriately authorized.
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    \69\ See SIFMA 9/5/2014 Letter.
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    Another commenter raised concerns about disclosures to the 
Commission regarding clients, associated persons, or other such persons 
arising from confidentiality requirements under the local laws of 
certain non-U.S. jurisdictions.\70\ The Commission understands that 
some foreign laws and regulations may limit or prevent disclosure of 
customer information to the Commission. These types of restrictions may 
include privacy laws, which generally restrict disclosure of certain 
identifying information about a natural person or entity, and so-called 
``blocking statutes'' (including secrecy laws) that prevent the 
disclosure of information relating to third parties and/or foreign 
governments. In response, the Commission notes that it has proposed in 
a separate release additional provisions that are designed to address 
concerns about the cross-border application of certain requirements 
that will be or have been proposed to be applicable to SBSDs and 
MSBSPs.\71\ For the foregoing reasons, the Commission is adopting the 
accountholder requirements with the modifications discussed above.\72\
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    \70\ See SIFMA 9/5/2014 Letter; Letter from Institute of 
International Bankers and Securities Industry and Financial Markets 
Association (June 21, 2018) (``IIB/SIFMA 6/21/2018 Letter'').
    \71\ See Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements, 
Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 14, 
2019) (``Cross-Border Application Proposing Release'').
    \72\ See paragraph (a)(8)(iv) of Rule 17a-3, as amended; 
paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted. These 
paragraphs require that SBSDs and MSBSPs record for each security-
based swap account the counterparty's UIC, along with other 
information. For the reasons discussed above, the ``unique 
counterparty identifier'' transaction data element in the proposed 
requirement was replaced with the counterparty's UIC. The broker-
dealer accountholder requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in 
paragraphs (a)(1)(i) through (iii) of Rule 17a-3, as amended.
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Options Positions
    Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and 
keep current a record of all options positions. The Commission did not 
propose to amend this paragraph to account for security-based swaps. In 
addition, because the records required under this paragraph are not 
specific to security-based swaps, the Commission did not propose to 
include an analogous provision applicable to bank SBSDs and MSBSPs. 
However, in order to facilitate the monitoring of the financial 
condition of stand-alone SBSDs and MSBSPs, the Commission proposed a 
parallel provision in Rule 18a-5 applicable to these entities.\73\ One 
commenter expressed support for this proposed requirement.\74\ The 
Commission is adopting the options position recordkeeping requirement 
as proposed.\75\
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    \73\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25204-05.
    \74\ See SIFMA 9/5/2014 Letter.
    \75\ See paragraph (a)(8) of Rule 18a-5, as adopted.
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Trial Balances and Computation of Net Capital
    Paragraph (a)(11) of Rule 17a-3 requires broker-dealers, including 
broker-dealer SBSDs and MSBSPs, to make and keep current a record of 
the proof of money balances of all ledger accounts in the form of trial 
balances and certain records relating to the computation of aggregate 
indebtedness and net capital under the broker-dealer net capital 
rule.\76\ The Commission did not propose that bank SBSDs and MSBSPs 
make similar records as the prudential regulators administer the 
capital requirements applicable to these entities.\77\ The Commission 
did propose a parallel requirement in Rule 18a-5 for stand-alone SBSDs 
and MSBSPs to facilitate the review and monitoring of their financial 
condition and their compliance with the regulatory capital requirements 
in proposed Rules 18a-1 and 18a-2, respectively.\78\ One commenter 
noted the importance of including recordkeeping and reporting 
requirements with respect to trial balances and the computation of net 
capital.\79\ The Commission has adopted capital requirements for stand-
alone SBSDs and MSBSPs in Rules 18a-1 and 18a-2, respectively.\80\ 
Consequently, the Commission is adopting the trial balances and 
computation of net capital recordkeeping requirement for stand-alone 
SBSDs and MSBSPs as proposed.\81\
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    \76\ The broker-dealer net capital rule is codified at 17 CFR 
240.15c3-1 (``Rule 15c3-1'').
    \77\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25205.
    \78\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers, Exchange 
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70241, 70217-57 (Nov. 
23, 2012) (``Capital, Margin, and Segregation Proposing Release'') 
(proposing Rules 18a-1 and 18a-2).
    \79\ See SIFMA 9/5/2014 Letter. The commenter also made 
substantive recommendations concerning the proposed net capital 
requirements for SBSDs and MSBSPs that are beyond the scope of this 
release.
    \80\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43879-908.
    \81\ See paragraph (a)(9) of Rule 18a-5, as adopted.

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[[Page 68558]]

Associated Persons
    Paragraph (a)(12) of Rule 17a-3 requires broker-dealers, including 
broker-dealer SBSDs and MSBSPs, to make and keep current a 
questionnaire or application for employment for each associated person 
that contains information about the associated person (the 
``questionnaire requirement'') as well other information about 
associated persons. The Commission proposed parallel requirements in 
Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs.\82\ Further, the 
Commission proposed to amend the definition of ``associated person'' in 
Rule 17a-3 to include in the definition a person associated with an 
SBSD or MSBSP as defined in Section 3(a)(70) of the Exchange Act. The 
Commission proposed a parallel definition in Rule 18a-5. However, the 
proposed Rule 18a-5 definition was more limited as applied to bank 
SBSDs and MSBSPs in that it covered persons whose activities relate to 
the conduct of the bank's business as an SBSD or MSBSP.
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    \82\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25205.
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    Commenters requested that the Commission limit the proposed 
questionnaire requirement for stand-alone and bank SBSDs and MSBSPs to 
associated persons who effect or are involved in effecting security-
based swaps on the firm's behalf.\83\ The Commission agrees with the 
comments. The questionnaire requirement, as proposed, was designed to 
provide a basis for assessing compliance with Section 15F(b)(6) of the 
Exchange Act and a related rule thereunder.\84\ Both the statute and 
the rule (Rule 15Fb6-2) apply to associated persons who effect or are 
involved in effecting security-based swaps on behalf of the SBSD or 
MSBSP.\85\ Accordingly, the Commission is narrowing the scope of the 
questionnaire requirement in Rule 18a-5 for stand-alone and bank SBSDs 
and MSBSPs so that it applies only with respect to associated persons 
who effect or are involved in effecting security-based swaps on the 
firm's behalf.\86\
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    \83\ See, e.g., SIFMA 9/5/2014 Letter; IIB/SIFMA 6/21/2018 
Letter.
    \84\ See 17 CFR 15Fb6-2 (``Rule 15Fb6-2'').
    \85\ Section 15F(b)(6) of the Exchange Act provides that it 
shall be unlawful for an SBSD or MSBSP to permit any associated 
person of the SBSD or MSBSP who is subject to a statutory 
disqualification to effect or be involved in effecting security-
based swaps on its behalf, if the SBSD or MSBSP knows, or in the 
exercise of reasonable care should have known, of the statutory 
disqualification, except to the extent otherwise provided by rule, 
regulation, or order of the Commission. Rule 15Fb6-2: (1) Prohibits 
an SBSD or MSBSP from acting as an SBSD or MSBSP unless it has 
certified electronically that it neither knows, nor in the exercise 
of reasonable care should have known, that any person associated 
with the SBSD or MSBSP ``who effects or is involved in effecting 
security-based swaps on behalf of the [SBSD] or [MSBSP] is subject 
to a statutory disqualification''; and (2) requires the Chief 
Compliance Officer (or his or her designee) of the SBSD or MSBSP to 
review and sign the questionnaire or application for employment 
executed by every associated person who is a natural person and who 
effects or is involved in effecting security-based swaps on the 
SBSD's or MSBSP's behalf, and that this questionnaire or application 
shall serve as the basis for a background check of the associated 
person to verify that the person is not subject to a statutory 
disqualification.
    \86\ See paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as 
adopted. The Commission is also modifying paragraph (b)(8)(i) of 
Rule 18a-5 as proposed to eliminate the phrase ``whose activities 
relate to the business of the security-based swap dealer or major 
security-based swap participant.'' As discussed above, the 
Commission proposed this limitation on the scope of the 
questionnaire or application for employment to address bank SBSDs 
and MSBSPs. This limitation is no longer necessary in light of the 
final rule's limitation to an associated person ``who effects or is 
involved in effecting security-based swaps on the security-based 
swap dealer's or major security-based swap participant's behalf.''
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    A commenter also requested that the Commission modify the proposal 
for foreign SBSDs and MSBSPs so that the questionnaire requirement does 
not apply to associated persons who effect or are involved in effecting 
security-based swap transactions with non-U.S. persons or foreign 
branches.\87\ As noted above, the questionnaire requirement is intended 
to support the substantive prohibition in Section 15F(b)(6) of the 
Exchange Act and the related certification and background check 
requirements in Rule 15Fb6-2. The Commission recognizes, however, as 
noted by the commenters, that there may be situations in which an SBSD 
or MSBSP is prohibited by applicable non-U.S. law from receiving, 
creating, or maintaining records with respect to certain of the 
information that needs to be recorded pursuant to the questionnaire 
requirement. Consequently, the Commission has proposed in a separate 
release additional provisions in Rule 18a-5 that would address 
situations where the law of a non-U.S. jurisdiction in which an 
associated person is employed or located may prohibit a stand-alone or 
bank SBSD or MSBSP from receiving, or creating or maintaining a record 
of, any of the information mandated by the questionnaire 
requirement.\88\
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    \87\ See SIFMA 9/5/2014 Letter.
    \88\ See Cross-Border Application Proposing Release, 84 FR at 
24206.
---------------------------------------------------------------------------

    Finally, for the sake of clarity, the Commission emphasizes that 
these associated person recordkeeping requirements apply to natural 
persons and not to legal entities that may be associated persons. For 
the reasons stated above, the Commission is adopting the associated 
person recordkeeping requirements with the modifications discussed 
above.\89\
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    \89\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as 
adopted.
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Liquidity Stress Test
    In 2012, the Commission proposed liquidity stress test requirements 
for entities that are or would be authorized to use internal models to 
compute net capital; namely, certain stand-alone broker-dealers (``ANC 
broker-dealers'') as well as certain broker-dealer and stand-alone 
SBSDs.\90\ Consequently, the Commission proposed that these entities be 
required to make and keep current certain records relating to the 
liquidity stress test requirements, if applicable.\91\ The Commission 
has deferred consideration of the proposed liquidity stress test 
requirements.\92\ Accordingly, the Commission is deferring 
consideration of the related recordkeeping requirements.\93\
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    \90\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70252-54.
    \91\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25205-06.
    \92\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43874.
    \93\ Paragraph (a)(24) of Rule 17a-3, as proposed; paragraph 
(a)(11) of Rule 18a-5, as proposed. The proposed recordkeeping 
requirements would have been set forth in these paragraphs. Since 
the publication of the recordkeeping and reporting proposing 
release, a new paragraph (a)(24) has been adopted by the Commission. 
See Form CRS Relationship Summary; Amendments to Form ADV, Exchange 
Act Release No. 86032 (June 5, 2019), 84 FR 33492, (July 12, 2019); 
17 CFR 240.17a-3(a)(24). Paragraph (a)(11) of Rule 18a-5 is being 
designated as ``[Reserved].''
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Account Equity and Margin Calculations
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs and MSBSPs to make and keep current a record of the daily 
calculations that would be required under the proposed margin rule for 
non-cleared security-based swaps--Rule 18a-3.\94\ The Commission 
proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs and 
MSBSPs. A commenter expressed support for the proposal \95\ and the 
Commission has adopted Rule 18a-3 requiring the daily calculations.\96\ 
For the reasons discussed in the proposing release, the

[[Page 68559]]

Commission is adopting daily calculation recordkeeping requirements 
substantially as proposed.\97\
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    \94\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25206-07. See also Capital, Margin, and Segregation Proposing 
Release, 77 FR at 70261-63 (proposing Rule 18a-3, requiring, among 
other things, that nonbank SBSDs perform two daily calculations for 
each security-based swap account (the equity in the account and a 
margin amount) and nonbank MSBSPs to perform one daily calculation 
(the equity in the account)).
    \95\ See SIFMA 9/5/2014 Letter.
    \96\ Capital, Margin, and Segregation Adopting Release, 84 FR at 
43909-17.
    \97\ See paragraph (a)(25) of Rule 17a-3, as amended; paragraph 
(a)(12) of Rule 18a-5, as adopted. As proposed, these paragraphs 
referred to the ``amount of equity'' in the account and the ``margin 
amount.'' Rule 18a-3, as adopted, refers instead to the ``current 
exposure'' and ``initial margin amount.'' Consequently, the 
paragraphs of the recordkeeping rules as adopted refer to the 
``current exposure'' and ``initial margin amount.''
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Possession or Control Requirements
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of compliance with the 
possession or control requirements in the proposed segregation rule for 
SBSDs--Rule 18a-4.\98\ The Commission proposed a parallel requirement 
in Rule 18a-5 for stand-alone SBSDs. A commenter supported the proposal 
\99\ and the Commission has adopted Rule 18a-4 prescribing possession 
or control requirements.\100\ For the reasons discussed in the 
proposing release, the Commission is adopting the security-based swap 
possession or control recordkeeping requirements substantially as 
proposed.\101\
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    \98\ See Recordkeeping and Reporting Proposing Release, 79 FR at 
25207. See also Capital, Margin, and Segregation Proposing Release, 
77 FR at 70278-82 (proposing Rule 18a-4 requiring, among other 
things, that SBSDs maintain possession or control over excess 
securities collateral).
    \99\ See SIFMA 9/5/2014 Letter.
    \100\ Capital, Margin, and Segregation Adopting Release, 84 FR 
at 43930-44.
    \101\ See paragraph (a)(26) of Rule 17a-3, as amended; 
paragraphs (a)(13) and (b)(9) of Rule 18a-5, as adopted. The 
Commission proposed that Rule 18a-4 apply to all SBSDs, but in 
response to comment adopted security-based swap segregation 
requirements for broker-dealers, including broker-dealer SBSDs, in 
the broker-dealer segregation rule, which is codified at 17 CFR 
240.15c3-3 (``Rule 15c3-3''). As a result, the Commission is 
modifying the cross references in paragraph (a)(26) of Rule 17a-3 to 
reflect the placement of the customer protection requirements for 
broker-dealer SBSDs in paragraph (p) of Rule 15c3-3 rather than in 
paragraph (b) of Rule 18a-4 as proposed. Paragraphs (a)(13) and 
(b)(9) of Rule 18a-5, as adopted, which apply to stand-alone and 
bank SBSDs, respectively, are not affected by this change.
---------------------------------------------------------------------------

Customer Reserve Account Requirements
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of security-based swap 
reserve account computations pursuant to proposed Rule 18a-4.\102\ The 
Commission proposed a parallel requirement in Rule 18a-5 for stand-
alone SBSDs. A commenter expressed support for the proposal \103\ and 
the Commission has amended Rule 15c3-3 and adopted Rule 18a-4 to 
prescribe security-based swap reserve account requirements.\104\ For 
the reasons discussed in the proposing release, the Commission is 
adopting the security-based swap customer reserve account recordkeeping 
requirements substantially as proposed.\105\
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    \102\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25207-08.
    \103\ See SIFMA 9/5/2014 Letter.
    \104\ Capital, Margin, and Segregation Adopting Release, 84 FR 
at 43938-42.
    \105\ See paragraph (a)(27) of Rule 17a-3, as amended; 
paragraphs (a)(14) and (b)(10) of Rule 18a-5, as adopted. Because 
the segregation requirements were codified in Rules 15c3-3 and 18a-
4, the Commission is modifying the cross references in new paragraph 
(a)(27) of Rule 17a-3 to new paragraph (p) of Rule 15c3-3 rather 
than in paragraph (b) of new Rule 18a-4 as proposed. Paragraphs 
(a)(14) and (b)(10) of Rule 18a-5 are not affected by this change.
---------------------------------------------------------------------------

Unverified Transactions
    It is prudent practice for counterparties to promptly confirm the 
terms of executed OTC derivatives transactions.\106\ The Commission 
adopted Rule 15Fi-2 to promote this practice. As discussed above, Rule 
15Fi-2 requires, among other things, that SBSDs and MSBSPs provide 
trade acknowledgments containing the details of security-based swap 
transactions and promptly verify the accuracy of, or otherwise dispute 
with their counterparties, the terms of trade acknowledgments they 
receive. To promote compliance with then proposed Rule 15Fi-2 and the 
risk management practices of SBSDs and MSBSPs, the Commission proposed 
to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 that 
would require these entities to make and keep current a record of each 
security-based swap trade acknowledgment that is not verified within 
five business days of execution.\107\ While the Commission did not 
prescribe a timeframe for security-based swap trade acknowledgments to 
be verified, paragraph (e) of Rule 15Fi-2 requires procedures 
reasonably designed to obtain ``prompt verification.''
---------------------------------------------------------------------------

    \106\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39807.
    \107\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25208.
---------------------------------------------------------------------------

    A commenter urged the Commission not to establish a rigid threshold 
of five business days and suggested that the Commission ``enter into a 
constructive dialogue with interested constituencies to establish best 
practices for trade verification.''\108\ The requirement to make a 
record of security-based swap trade acknowledgments not verified within 
five business days is not intended to establish a maximum timeframe 
within which verification should be obtained pursuant to Rule 15Fi-2. 
Instead, it is designed to require SBSDs and MSBSPs to make a record of 
the transactions that have gone unverified for a significant length of 
time, as the delay in obtaining verification may indicate, for example, 
the existence of a disagreement with the counterparty as to the terms 
of the transaction. The Commission believes that five business days 
represents an appropriate amount of time to wait before requiring a 
record to be made. This timeframe is designed to strike an appropriate 
balance in terms of a time period that is not too short and would 
capture information that is not relevant to Rule15Fi-2 or that is too 
long and would not promote compliance with Rule 15Fi-2. For these 
reasons, the Commission is adopting the unverified transaction 
recordkeeping requirements substantially as proposed.\109\
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    \108\ See SIFMA 9/5/2014 Letter.
    \109\ See paragraph (a)(28) of Rule 17a-3, as amended; 
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as adopted. For the 
reasons discussed above, the Commission modified the proposed rule 
text in these paragraphs to replace the requirement to record the 
``unique counterparty identifier'' with the counterparty's UIC. See 
paragraph (a)(28) of Rule 17a-3, as proposed to be amended; 
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as proposed to be 
adopted.
---------------------------------------------------------------------------

    Finally, the Commission has previously noted that in complying with 
the trade acknowledgement and verification requirements, policies and 
procedures reasonably designed to ensure prompt verification of a 
transaction may include policies and procedures under which an SBSD or 
MSBSP relies on its counterparty's negative affirmation to the terms of 
a trade acknowledgment. The Commission has stated that those policies 
and procedures generally should require the SBSD or MSBSP to document 
its counterparty's agreement to rely on negative affirmation.\110\ As 
such, transactions verified by negative affirmation do not need to be 
recorded as unverified under Rules 17a-3 and 18a-5.
---------------------------------------------------------------------------

    \110\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39820.
---------------------------------------------------------------------------

Records Relating to Business Conduct Standards
    The Commission has adopted rules to establish business conduct and 
chief compliance officer requirements for SBSDs and MSBSPs.\111\ The

[[Page 68560]]

requirements in these rules address (among other things):
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    \111\ See 17 CFR 240.15Fh-1 (``Rule 15Fh-1''); 17 CFR 240.15Fh-2 
(``Rule 15Fh-2''); 17 CFR 240.15Fh-3 (``Rule 15Fh-3''); 17 CFR 
240.15Fh-4 (``Rule 15Fh-4''); 17 CFR 240.15Fh-5 (``Rule 15Fh-5''); 
17 CFR 240.15Fh-6 (``Rule 15Fh-6''); 17 CFR 240.15Fk-1 (``Rule 15Fk-
1''). See also Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, Exchange Act 
Release No. 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 2016).
---------------------------------------------------------------------------

     Verification of the status of the counterparty;
     Certain disclosures related to the daily mark and its 
calculation;
     Disclosures regarding material incentives, conflicts of 
interest, material risks, and characteristics of the security-based 
swap, and certain clearing rights;
     Certain ``know your counterparty'' and suitability 
obligations for SBSDs;
     Supervisory requirements, including written policies and 
procedures;
     Certain requirements regarding interactions with special 
entities;
     Provisions intended to prevent SBSDs from engaging in 
certain ``pay to play'' activities; and
     Certain minimum requirements relating to chief compliance 
officers.
    To promote compliance with these then-proposed requirements, the 
Commission proposed to amend Rule 17a-3 and include parallel provisions 
in Rule 18a-5 that would require all SBSDs to make and keep current a 
record that demonstrates their compliance with Rule 15Fh-6 (regarding 
political contributions by certain SBSDs).\112\ In addition, the 
Commission proposed to amend Rule 17a-3 and include parallel provisions 
in Rule 18a-5 to require that all SBSDs and MSBSPs make and keep 
current a record that demonstrates their compliance with Rules 15Fh-1 
through 15Fh-5 and Rule 15Fk-1, as applicable.\113\ These recordkeeping 
requirements would require covered firms to keep supporting documents 
evidencing their compliance with the business conduct and chief 
compliance officer requirements; a mere attestation of compliance would 
not be sufficient. To the extent that the rules require providing or 
receiving written disclosures or written representations, the SBSD or 
MSBSP would be required to retain a copy of the disclosures or 
representations.
---------------------------------------------------------------------------

    \112\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25208.
    \113\ Paragraph (b)(2) of Rule 15Fk-1 requires chief compliance 
officers of SBSDs and MSBSPs to take reasonable steps to ensure that 
the registrant establishes, maintains, and reviews written policies 
and procedures reasonably designed to achieve compliance with the 
Exchange Act and the rules and regulations thereunder relating to 
its business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    A commenter asked the Commission to confirm that the proposed 
requirements would not create additional recordkeeping obligations with 
respect to the business conduct standards,\114\ particularly with 
respect to the requirements relating to compliance with such 
requirements.\115\ The commenter also generally stated that the 
Commission should not adopt additional recordkeeping rules relating to 
the pay-to-play provisions set forth in the Commission's business 
conduct release.\116\
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    \114\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 76 FR 42396.
    \115\ See SIFMA 9/5/2014 Letter.
    \116\ See id. See also Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 
29960.
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    In response to the commenter's concern, the Commission notes that 
the proposed recordkeeping requirements were not intended to add 
additional substantive business conduct or pay-to-play requirements. 
The relevant substantive requirements are prescribed in the business 
conduct and pay-to-play rules; the recordkeeping requirements are 
designed to require records of compliance with those already existing 
substantive requirements. The Commission acknowledges, however, that 
they would impose new requirements to document a registrant's 
compliance with several of the substantive business conduct and pay-to-
play requirements as well as new requirements to provide written 
documentation where the business conduct and pay-to-play rules allowed 
for oral disclosure. These proposed documentation requirements were 
designed to assist Commission examiners in reviewing compliance with 
the business conduct and pay-to-play requirements, and the anticipated 
additional burdens they will impose on registrants are discussed below 
in Sections IV and V. For these reasons, the Commission is adopting the 
business conduct standards recordkeeping requirements substantially as 
proposed.\117\
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    \117\ See paragraph (a)(30) of Rule 17a-3, as amended; 
paragraphs (a)(17) and (b)(13) of Rule 18a-5, as adopted. For the 
sake of clarity, the rules as adopted require ``[a] record 
documenting'' compliance with the business conduct standards, as 
opposed to ``[a] record that demonstrates'' such compliance as 
proposed. In addition, because Rule 15Fh-6 applies only to SBSDs, 
and not to MSBSPs, the Commission is removing the proposed reference 
to MSBSPs in paragraphs (a)(16) and (b)(12) of Rule 18a-5. On 
October 31, 2018, it issued a statement setting forth the 
Commission's position that, for a period of five years from the 
Registration Compliance Date for SBSDs and MSBSPs (as defined in 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, 80 FR at 48988 and discussed below 
in section III.B. of this release), certain actions with respect to 
specific provisions of the business conduct standards will not 
provide a basis for a Commission enforcement action. See Commission 
Statement on Certain Provisions of Business Conduct Standards for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, Exchange Act Release No. 84511 (Oct. 31, 2018), 83 FR 
55486 (Nov. 6, 2018) (``Statement on Business Conduct Standards''). 
To the extent SBSDs and MSBSPs rely on the statement, the Commission 
encourages them to maintain records of the written representations 
described in the statement until such time as the statement is no 
longer in force.
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b. Additional Amendments to Rule 17a-3 and Modifications to Rule 18a-5
    The Commission proposed several amendments to Rule 17a-3 to 
eliminate obsolete text, improve readability, and modernize 
terminology. The Commission received no comments addressing these 
proposed amendments and, as discussed below, is adopting them 
substantially as proposed.
    Reference is made throughout Rule 17a-3 to ``members'' of a 
national securities exchange as a distinct class of registrant in 
addition to ``brokers'' and ``dealers.'' The Commission proposed to 
remove these references to ``members'' given that the rule applies to 
brokers-dealers, which would include members of a national securities 
exchange that are brokers-dealers.\118\ The rule being adopted does not 
remove these references to ``members'' to avoid confusion as to whether 
their removal resulted in a substantive change to the rule.
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    \118\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25209.
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    The Commission is adopting a global change to replace the word 
``shall'' in the rule with the word ``must'' or ``will'' where 
appropriate.\119\ Similarly, when defining terms, the Commission is 
replacing the phrase ``shall mean'' with the word ``means.'' \120\ The 
Commission is also adopting certain stylistic, corrective, and 
punctuation amendments to improve the rule's readability.\121\ The 
Commission is

[[Page 68561]]

simplifying the text in paragraph (a) of Rule 17a-3 to state that Rule 
17a-3 applies to ``every broker or dealer,'' since the newly adopted 
undesignated introductory paragraph already provides sufficient detail 
as to the types of registrants to which the rule applies.\122\ In 
recognition of the fact that broker-dealers may execute orders for non-
customers, the Commission is amending paragraph (a)(6) of Rule 17a-3 to 
specify that a broker-dealer must maintain a copy of the customer's or 
non-customer's subscription agreement.\123\
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    \119\ The amendments replace the word ``shall'' with the word 
``must'' or ``will'' in the following paragraphs of Rule 17a-3, as 
amended: (a) Introductory text, (a)(6)(i)(A), (a)(7)(i), (a)(10) and 
(11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i), (a)(19)(i), 
(b), (d), (e), and (f).
    \120\ The amendments replace the phrase ``shall mean'' with the 
word ``means'' in the following paragraphs of Rule 17a-3, as 
amended: (a)(6)(i)(A) and (a)(16)(ii)(A) and (B).
    \121\ The Commission is adopting the following stylistic and 
corrective changes to Rule 17a-3, as amended: (1) Adding to 
paragraph (a)(1) the phrase ``such securities were''; (2) adding to 
paragraph (a)(4)(vi) the word ``and'' after the semicolon; (3) 
replacing the word ``of'' with the word ``or'' in paragraph (a)(5), 
resulting in the phrase ``for its account or for the account of its 
customers or partners''; (4) replacing the phrase ``purchase or sale 
of securities'' with the phrase ``purchase or sale of a security'' 
in the first sentence of paragraph (a)(6)(i); (5) replacing the word 
``and'' with the word ``or'' in paragraph (a)(7), resulting in the 
phrase ``A memorandum of each purchase or sale''; (6) replacing the 
phrase ``in respect of'' with the phrase ``with respect to'' in 
paragraph (a)(9); (7) adding the phrase ``, as applicable:'' After 
the word ``indicating'' in paragraph (a)(9); (8) including the word 
``and'' between the second-to-last and last subparagraphs of 
paragraph (a)(9) (instead of after every subparagraph); (9) 
replacing cross-reference in paragraph (a)(12) to ``paragraph 
(h)(4)'' with a cross-reference to ``paragraph (f)(4)'' due to the 
proposed deletion of two paragraphs; (10) amending paragraph 
(a)(12)(i)(G) to refer to a ``broker or dealer'' instead of a 
``broker-dealer''; (11) replacing the superfluous ``or'' with a 
comma in the phrase ``wrongful taking of property or bribery'' in 
paragraph (a)(12)(i)(G); (12) clarifying in paragraph (a)(1) that 
the unit and aggregate purchase or sale price, if any includes the 
financial terms for security-based swaps; (13) replacing ``,'' with 
``;'' after the phrase ``a notation of that entry'' in paragraph 
(a)(6)(i)(A) for consistency with 17 CFR 240.17a-3(a)(6)(i)(A) and 
paragraph (b)(4) of Rule 18a-5, as adopted; (14) replacing ``In the 
case of'' with ``For each'' in paragraph (a)(9)(iv) for consistency 
with paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted; (15) 
adding quotation marks around the term ``associated person'' in 
paragraph (a)(12)(i) for consistency with paragraph (a)(12)(i) of 
Rule 17a-3 and paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as 
adopted; (16) replacing ``or any broker or dealer'' with ``, or any 
broker, dealer, security-based swap dealer or major security-based 
swap participant'' in paragraph (a)(12)(i)(F) for consistency with 
paragraphs (a)(10)(i)(F) and (b)(8)(i)(F) of Rule 18a-5, as adopted; 
(17) adding ``, or'' after the phrase ``wrongful taking of 
property'' in paragraph (a)(12)(i)(G) for consistency with paragraph 
(a)(12)(i)(G) of Rule 17a-3 and paragraphs (a)(10)(i)(G) and 
(b)(8)(i)(G) of Rule 18a-5, as adopted; (18) replacing ``17 CFR 
240.17a-3'' with ``this section'' in paragraph (b)(v); and (19) 
replacing ``Sec. Sec.  240.17a-3 and 17a-4'' with ``this section and 
Sec.  240.17a-4'' in paragraph (b).
    \122\ See undesignated introductory paragraph of Rule 17a-3, as 
amended.
    \123\ See paragraph (a)(6) of Rule 17a-3, as amended.
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    The Commission is restructuring paragraph (a)(11) of Rule 17a-3 to 
eliminate paragraphs (a)(11)(i) and (ii).\124\ Under these amendments, 
the text formerly located in paragraph (a)(11)(i) of Rule 17a-3 is set 
forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as 
amended, and the text of paragraph (a)(11)(ii) has been deleted from 
the rule. The Commission proposed to amend the ``Provided, however'' 
paragraph in paragraph (a)(12) of Rule 17a-3 that follows paragraph 
(a)(12)(i)(H) by replacing the list of entities enumerated in the 
paragraph with the term ``a self-regulatory organization.'' \125\ The 
Commission is amending the paragraph substantially as proposed but 
adding the phrase ``a registered national securities association or a 
registered national securities exchange'' rather than the term ``a 
self-regulatory organization'' in order to more accurately reflect the 
nature of the entities listed in the paragraph prior to these 
amendments. The Commission is also redesignating this paragraph as 
paragraph (a)(12)(i)(I) of Rule 17a-3.
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    \124\ See paragraph (a)(11) of Rule 17a-3, as amended.
    \125\ See paragraph (a)(12) of Rule 17a-3, as amended.
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    As discussed in more detail in section II.E.1. of this release, the 
Commission is adopting a limited alternative compliance mechanism in 
Rules 17a-3 and 18a-5.\126\ The provisions of the limited alternative 
compliance mechanism are in paragraph (b) of Rule 17a-3 and in 
paragraph (c) of Rule 18a-5. As a result, the Commission is 
redesignating paragraphs (b) through (g) of Rule 17a-5 as paragraphs 
(c) through (g) and is redesignating proposed paragraph (c) of Rule 
18a-5 as paragraph (d).
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    \126\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted.
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    The Commission also is amending paragraph (b) of Rule 17a-3 (and, 
as mentioned above, is redesignating it as paragraph (c)). Paragraph 
(b)(1) was designed to avoid duplication so that an introducing broker-
dealer will not be required to make and keep current the same records 
that would customarily be made by the firm's clearing broker-dealer. 
However, the language in paragraph (b)(1) beginning with the phrase 
``Provided, That'' is outdated insofar is it references a capital 
standard that has been superseded, and the Commission is deleting it 
accordingly. In revising paragraph (b)(1), the intent of the 
provision--to avoid the duplicative creation of records related to 
transactions introduced by one broker or dealer and cleared by a 
different broker or dealer--remains the same. However, the Commission 
is eliminating the outdated capital standard reference.\127\ The 
Commission is also deleting paragraph (b)(2), as it would be redundant 
of paragraph (b) of Rule 17a-3, as amended.
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    \127\ Paragraph (c) of Rule 17a-3, as amended, provides that a 
broker or dealer registered pursuant to Section 15 of the Act, that 
introduces accounts on a fully-disclosed basis, is not required to 
make or keep such records of transactions cleared for such broker or 
dealer as are made and kept by a clearing broker or dealer pursuant 
to the requirements of Sec. Sec.  240.17a-3 and 240.17a-4. Nothing 
herein will be deemed to relieve such broker or dealer from the 
responsibility that such books and records be accurately maintained 
and preserved as specified in Sec. Sec.  240.17a-3 and 240.17a-4.
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    The Commission is deleting paragraphs (c) and (d) of Rule 17a-3. 
Paragraph (c) references instruments such as U.S. Defense Savings 
Stamps and U.S. Defense Savings Bonds that are no longer widely 
circulated and thus a specific carve-out for these instruments from the 
general rule set forth in paragraph (a) of Rule 17a-3 is no longer 
appropriate.\128\ Paragraph (d) provides a de minimis exception from 
paragraph (a) of Rule 17a-3 for any cash transaction of $100 or less 
involving only subscription rights or warrants which by their terms 
expire within 90 days after their issuance. This exception was adopted 
in 1953 to reduce the burden and expense of making accounting entries 
for these transactions. The burden associated with these accounting 
entries is no longer significant in light of the technological advances 
in recordkeeping systems since 1953.\129\ In addition, the removal of 
this exception will affect only a small number of transactions. As a 
consequence of the removal of paragraphs (c) and (d) from Rule 17a-3, 
paragraphs (e), (f), (g), and (h) are being redesignated as paragraphs 
(d), (e), (f), and (g), respectively.
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    \128\ The Defense Savings Bond initiated by the U.S. Treasury 
and the U.S. Defense Savings Stamps introduced by the U.S. Postal 
Service were measures to finance the U.S. effort in World Wars I and 
II. The bonds matured in 10 years from the date of issuance. The 
Defense Savings Bonds were replaced by Series E savings bonds, which 
ceased to be issued as of June 1980. Today, these instruments are 
not widely held and are valued more as collectibles than for their 
face value. See information available at www.treasurydirect.gov.
    \129\ See Preservation of Records and Reports of Certain 
Stabilizing Activities, 18 FR 2879 (May 19, 1953) (``It has been 
pointed out to the Commission that the accounting entries 
appropriate in the case of the usual securities transaction are 
unnecessarily burdensome and expensive as to these rights 
transactions because of the small sums involved and because in many 
cases there is no continuing relationship between the customer and 
the firm'').
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    Paragraph (e) of Rule 17a-3 references Municipal Securities 
Rulemaking Board (``MSRB'') Rule G-8 and states that compliance with 
that rule will be deemed to be compliance with this section. The 
Commission is adding the phrase ``or any successor rule'' to the 
reference to Rule G-8 so that the reference does not become superseded 
over time.
    The Commission also made a number of non-substantive modifications 
to the text of Rule 18a-5 in addition to the modifications discussed 
above in section II.A.2.a. of this release.\130\
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    \130\ In particular, the Commission made the following changes 
to Rule 18a-5, as adopted: (1) Removing ``such'' from the phrase 
``Each such security-based swap dealer'' in paragraph (a) for 
consistency with paragraph (b) of Rule 18a-5, as adopted; (2) 
replacing ``if any contract price'' with ``if any (including the 
financial terms for security-based swaps)'' in paragraph (a)(1) for 
consistency with paragraph (b)(1) of Rule 18a-5, as adopted; (3) 
adding ``such securities were'' before the phrase ``purchase or 
received or to whom sold or delivered'' in paragraphs (a)(1) and 
(b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as 
amended; (4) replacing ``purchase or sale'' with ``transactions'' in 
the third sentence of paragraphs (a)(1) and (b)(1) for consistency 
with paragraph (a)(1) of Rule 17a-3, as amended; (5) replacing ``the 
termination or maturity date'' with ``the scheduled termination 
date'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and (4) 
for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (6) 
replacing the phrase ``the notional amount'' with ``the notional 
amount(s) and the currenc(ies) in which the notional amount(s) is 
expressed'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and 
(4) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; 
(7) adding ``counterparty's'' before the phrase ``legal entity 
identifier'' in paragraphs (a)(1), (3), (5), and (15) and (b)(1), 
(2), (4), and (11) for consistency with paragraph (a)(1) of Rule 
17a-3, as amended; (8) removing ``,'' after ``expense'' in paragraph 
(a)(2) for consistency with paragraph (a)(2) of Rule 17a-3, as 
amended; (9) adding ``(including security-based swaps) after the 
phrase ``deliveries of securities'' in paragraphs (a)(3) and (b)(2) 
for consistency with paragraph (a)(3) of Rule 17a-3, as amended; 
(10) replacing ``,'' with ``;'' after the phrase ``all other debits 
and credits to such account'' in paragraph (a)(3) for consistency 
with paragraph (a)(3) of Rule 17a-3, as amended; (11) replacing ``in 
the case of security-based swap'' with ``for a security-based 
swaps'' in paragraph (a)(3) for consistency with paragraph (a)(3) of 
Rule 17a-3, as amended, and paragraph (b)(2) of Rule 18a-5, as 
adopted; (12) removing ``ledger accounts (or other records) 
itemizing separately,'' in paragraph (a)(3) for consistency with 
paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (b)(2) of 
Rule 18a-5, as adopted; (13) replacing ``subject'' with ``subjects'' 
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of 
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as 
adopted; (14) adding ``for'' before the phrase ``the account of its 
customers'' in paragraph (a)(4)(i) for consistency with paragraph 
(a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 
18a-5, as adopted; (15) replacing ``locations'' with ``location'' in 
paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule 
17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as 
adopted; (16) removing the ``,'' after the phrase ``in all cases'' 
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of 
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as 
adopted; (17) replacing ``Sec.  240.15Fi-1'' with ``Sec.  240.15Fi-
2'' in paragraphs (a)(6) and (15) and (b)(11) to reflect a change in 
reference; (18) replacing ``security-based swap dealer, major 
security-based swap participant'' with ``security-based swap dealer 
or major security-based swap participant'' in paragraphs (a)(10)(ii) 
and (b)(8)(ii) for grammatical correctness and internal consistency; 
(19) removing ``,'' after ``Sec.  240.15Fh-5'' in paragraph (a)(17) 
for consistency with paragraph (a)(30) of Rule 17a-3, as amended, 
and paragraph (b)(13) of Rule 18a-5, as adopted; (20) replacing ``a 
security-based swap dealer or a major security based swap 
participant'' with ``such'' in paragraph (b)(1) for clarity; (21) 
replacing ``if any (includes the contract price for security-based 
swaps)'' with ``(if any, including the financial terms for security-
based swaps)'' in paragraph (b)(1) for consistency with paragraph 
(a)(1) of Rule 17a-3, as amended; (22) replacing ``and in addition, 
for security-based swaps'' with ``and in addition, for a security-
based swap'' in paragraph (b)(2) for consistency with paragraph 
(a)(3) of Rule 17a-3, as amended, and paragraph (a)(3) of Rule 18a-
5, as adopted; (23) replacing ``the time of cancellation, if 
applicable'' with ``the time of execution or cancellation'' in 
paragraph (b)(4) for consistency with paragraph (a)(6)(i)(A) in Rule 
17a-3, as adopted; (24) changing the fourth sentence in paragraph 
(b)(4) to read ``An order entered pursuant to the exercise of 
discretionary authority by the security-based swap dealer or major 
security-based swap participant, or associated person thereof, must 
be so designated.'' for consistency with paragraph (a)(6)(i)(A) in 
Rule 17a-3, as adopted; (25) adding a citation to 15 U.S.C. 
78c(a)(70) to paragraph (c)(1) for internal consistency; (26) 
replacing ``The term, as to a person supervised by a prudential 
regulator,'' in paragraph (c)(2) with ``The term associated person, 
as to an entity supervised by a prudential regulator'' to clarify 
that the term referenced in the paragraph is ``associated person''; 
(27) adding parentheses around the phrase ``if any, including the 
financial terms for security-based swaps'' in paragraph (b)(1) for 
consistency with paragraph (a)(1) of Rule 17a-3, as amended; (28) 
replacing ``will'' with ``does'' in paragraph (h)(4) of Rule 17a-3, 
as amended, for consistency with Section 3(a)(70) of the Exchange 
Act; and (29) consolidating paragraphs (a)(19) and (b)(15) and 
designating it paragraph (c) and redesignating paragraph (c) as 
paragraph (d).

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[[Page 68562]]

3. Record Maintenance and Preservation Requirements
    Rule 17a-4 requires a broker-dealer to preserve certain types of 
records if it makes or receives them. The rule also prescribes the time 
period that these records and the records required to be made and kept 
current under Rule 17a-3 must be preserved and the manner in which they 
must be preserved. The Commission is adopting amendments to Rule 17a-4 
that are designed to account for the security-based swap activities of 
broker-dealers, including broker-dealer SBSDs and MSBSPs.\131\ The 
Commission also is adopting a number of largely technical amendments to 
Rule 17a-4. The Commission is adopting Rule 18a-6--which is modeled on 
Rule 17a-4, as amended--to establish record maintenance and 
preservation requirements for stand-alone and bank SBSDs and MSBSPs. 
Rule 18a-6 does not include a parallel requirement for every 
requirement in Rule 17a-4.\132\ In addition, the recordkeeping 
requirements in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more 
limited in scope than the requirements in the rule applicable to stand-
alone SBSDs and MSBSPs.
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    \131\ Broker-dealer SBSDs and MSBSPs are subject to all the 
record maintenance and preservation requirements applicable to 
broker-dealers under Rule 17a-4, as amended, plus the additional 
requirements specifically applicable only to SBSDs and MSBSPs.
    \132\ The Commission did not propose to include in Rule 18a-6 
requirements that would parallel the requirements in paragraphs 
(b)(11), (g), (h), (k), and (l) of Rule 17a-4, as amended. These 
requirements relate to activities that would not be relevant to 
stand-alone SBSDs or MSBSPs. Other requirements in Rule 17a-4, as 
amended, not included as parallel requirements in Rule 18a-6, as 
adopted, are discussed below.
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a. Rule 17a-4 and Rule 18a-6
Undesignated Introductory Paragraph
    The Commission proposed adding an undesignated introductory 
paragraph to Rule 17a-4 explaining that the rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP, while a stand-alone or 
bank SBSD or MSBSP is subject to Rule 18a-6.\133\ Similarly, the 
Commission proposed an undesignated introductory paragraph to Rule 18a-
6 explaining that the rule would apply to a stand-alone or bank SBSD or 
MSBSP, while a broker-dealer SBSD or MSBSP is subject to Rule 17a-4. 
The Commission received no comments on the proposed undesignated 
introductory paragraphs to Rules 17a-4 and 18a-6 and is adopting them 
with non-substantive modifications to clarify which rule (17a-4 or 18a-
6) applies to a given type of entity.\134\
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    \133\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25211.
    \134\ See undesignated introductory paragraph of Rule 17a-4, as 
amended; undesignated introductory paragraph of Rule 18a-6, as 
adopted.
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Six Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5 
Records
    Paragraph (a) of Rule 17a-4 provides that brokers-dealers subject 
to Rule 17a-3 must preserve for a period of not less than six years, 
the first two years in an easily accessible place, certain categories 
of records required to be made and kept current under Rule 17a-3 (the 
``six year preservation requirement'').\135\ Consequently, under this 
existing requirement, broker-dealer SBSDs and MSBSPs are required to 
preserve for six years the same categories of records as stand-alone 
broker-dealers. As discussed above, paragraphs (a) and (b) of Rule 18a-
5 contain certain recordkeeping requirements that parallel existing 
requirements in Rule 17a-3, as amended. Under these parallel 
requirements, stand-alone and bank SBSDs and MSBSPs must make and keep 
current certain categories of records that broker-dealers must maintain 
pursuant to the six year preservation requirement in Rule 17a-4. 
Consequently, as proposed, paragraphs (a)(1) and (2) of Rule 18a-6 
would require that these categories of records must be preserved for a 
period of not less than six years, the first two years in an easily 
accessible place.\136\ The Commission received no comments on

[[Page 68563]]

paragraphs (a)(1) and (2) of proposed Rule 18a-6 and is adopting them 
as proposed.\137\
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    \135\ Specifically, the six-year preservation requirement 
applies to records required under paragraphs (a)(1) through (3), 
(5), (21), and (22) of Rule 17a-3, as amended.
    \136\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25211-12.
    \137\ See paragraphs (a)(1) and (2) of Rule 18a-6, as adopted.
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Three Year Preservation Requirement for Certain Rule 17a-3 and Rule 
18a-5 Records
    Paragraph (b)(1) of Rule 17a-4 provides that broker-dealers subject 
to Rule 17a-3 must preserve for at least three years, the first two 
years in an easily accessible place, certain records required to be 
made and kept current under Rule 17a-3 (the ``three year preservation 
requirement'').\138\ The Commission did not propose to amend or change 
any of the existing cross-references to Rule 17a-3 in paragraph (b)(1) 
of Rule 17a-4. The Commission did, however, propose adding cross-
references to certain new paragraphs that are being added to Rule 17a-3 
to address security-based swap activities of broker-dealers, including 
broker-dealer SBSDs and MSBSPs.\139\ As discussed above, paragraphs (a) 
and (b) of Rule 18a-5 require stand-alone and bank SBSDs and MSBSPs 
make and keep current certain categories of records that broker-dealers 
must maintain pursuant to the three year preservation requirement, as 
amended to incorporate the new records relating to security-based swap 
activities. Consequently, as proposed, paragraphs (b)(1) and (2) of 
Rule 18a-6 would similarly require that these categories of records be 
preserved for a period of not less than three years, the first two 
years in an easily accessible place. The Commission received no 
comments on these proposed preservation requirements and is adopting 
them substantially as proposed.\140\
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    \138\ Specifically, paragraph (b)(1) of Rule 17a-4 applies the 
three-year preservation requirement to the records required to be 
made and kept current under paragraphs (a)(4), (6) through (10), 
(16), and (18) through (20) and (e) of Rule 17a-3, as amended. Prior 
to these amendments, Rule 17a-4 did not cross-reference paragraph 
(a)(11) of Rule 17a-3. The Commission is correcting this omission by 
adding a cross reference to paragraph (a)(11) of Rule 17a-3 in 
paragraph (b)(1) of Rule 17a-4, as amended. This requires broker-
dealers to preserve these records for three years, the first two 
years in an easily accessible place. Based on staff experience, the 
Commission believes that broker-dealers have been preserving these 
records in a manner consistent with this requirement.
    \139\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25212.
    \140\ See paragraph (b)(1) of Rule 17a-4, as amended; paragraphs 
(b)(1) and (2) of Rule 18a-6, as adopted. The Commission is adopting 
the following stylistic and corrective changes: (1) Removing the 
reference to paragraph (a)(24) of Rule 17a-3 since that paragraph is 
not being adopted as proposed; (2) replacing ``made pursuant to 
paragraphs Sec.  240.18a-5(a)(1), (a)(2), (a)(3), and (a)(4)'' with 
``made pursuant to Sec.  240.18a-5(a)(1) through (4)'' in paragraph 
(a)(1) of Rule 18a-6, as adopted, for grammatical correctness; (3) 
replacing ``made pursuant to paragraphs Sec.  240.18a-5(b)(1), 
(b)(2), and (b)(3)'' with ``made pursuant to Sec.  240.18a-5(b)(1) 
through (3)'' in paragraph (a)(2) of Rule 18a-6, as adopted, for 
grammatical correctness; (4) replacing ``;'' with ``.'' for each 
paragraph in Rule 18a-6, as adopted, for internal consistency; (5) 
removing ``as applicable'' in paragraph (b)(1)(viii) of Rule 18a-6, 
as adopted, as it is not necessary since only Part II is referenced 
in Rule 18a-6, as adopted; (6) replacing ``security-based swap 
customers'' with ``non-security-based swap customers'' in paragraph 
(b)(1)(viii)(B) of Rule 18a-6, as adopted, to correct an error and 
for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended; 
(7) removing ``,'' after ``cost'' in paragraph (b)(1)(viii)(H) of 
Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(ix) of 
Rule 17a-4, as amended; (8) removing ``;'' after ``and'' in 
paragraph (b)(1)(viii)(N) of Rule 18a-6, as adopted, for consistency 
with paragraph (b)(8)(xvi) of Rule 17a-4, as amended; (9) removing 
``Records which contain'' in paragraph (b)(2)(v) of Rule 18a-6, as 
adopted, for clarity; and (10) replacing ``; and'' with ``.'' in 
paragraph (b)(2)(vii) of Rule 18a-6, as adopted, for internal 
consistency.
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Three Year Preservation Requirement for Certain Other Records
    Paragraphs (b)(2) through (13) of Rule 17a-4 also provide that a 
broker-dealer subject to Rule 17a-3 must preserve for a period of not 
less than three years, the first two years in an easily accessible 
place, other categories of records if the broker-dealer makes or 
receives the record. These are not categories of records a broker-
dealer is required to make and keep current under Rule 17a-3 but rather 
types of records that a broker-dealer may make or receive in the 
ordinary course of business. As discussed in more detail below, the 
Commission proposed to amend certain of the provisions in paragraphs 
(b)(2) through (13) of Rule 17a-4 to account for security-based swaps 
and to require that broker-dealers, including broker-dealer SBSDs and 
MSBSPs, preserve certain additional records related to security-based 
swap activities.\141\ Further, as discussed below, the Commission 
proposed requirements in paragraph (b) of Rule 18a-6 that would require 
stand-alone and bank SBSDs and MSBSPs to preserve similar records.
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    \141\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25212-13.
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    In addition, the categories of records identified in paragraphs 
(b)(3) through (5) and (7) of Rule 17a-4 must be retained only if they 
relate to the broker-dealer's business as such (i.e., business as a 
broker-dealer). Security-based swap activities of a broker-dealer that 
is not registered as an SBSD or MSBSP are part of the broker-dealer's 
business as such for the purposes of Rule 17a-4 just like activities 
relating to other types of securities. In the case of a broker-dealer 
SBSD or MSBSP, the Commission proposed to amend Rule 17a-4 to clarify 
that the business as such of these entities would include the firm's 
business as an SBSD or MSBSP.\142\ The Commission received no comment 
on the proposed definition and is adopting it substantially as 
proposed.\143\
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    \142\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25213.
    \143\ See paragraph (m)(5) of Rule 17a-4, as amended. The 
definition as adopted is shorter than proposed to improve clarity 
and now reads: ``[t]he term business as such includes security-based 
swap activity.''
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Bank Records
    Paragraph (b)(2) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve all check books, bank 
statements, cancelled checks, and cash reconciliations. The Commission 
did not propose to amend this paragraph to specifically account for 
security-based swaps. However, the Commission did propose a parallel 
requirement in Rule 18a-6 applicable to stand-alone SBSDs and 
MSBSPs.\144\ The Commission received no comments on this proposed bank 
record preservation requirement and is adopting it as proposed.\145\
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    \144\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25213.
    \145\ See paragraph (b)(1)(ii) of Rule 18a-6, as adopted.
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Bills
    Paragraph (b)(3) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve all bills receivable or 
payable, paid or unpaid, relating to the business of the broker-dealer. 
The Commission proposed a parallel requirement in Rule 18a-6 that would 
require stand-alone SBSDs and MSBSPs to preserve these types of 
bills.\146\ The Commission received no comments on this proposed bill 
preservation requirement and is adopting it as proposed.\147\
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    \146\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25213.
    \147\ See paragraph (b)(1)(iii) of Rule 18a-6, as adopted.
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Communications
    Paragraph (b)(4) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve originals of all 
communications received and copies of all communications sent (and any 
approvals thereof) by the broker-dealer (including inter-office 
memoranda and communications) relating to its business as such, 
including all communications which are subject to the rules of a self-
regulatory organization (``SRO'') of which the broker-dealer is a 
member regarding communications with the

[[Page 68564]]

public.\148\ The term ``communications,'' as used in paragraph (b)(4) 
of Rule 17a-4, includes all electronic communications (e.g., emails and 
instant messages).\149\ Communications related to security-based swap 
activities would be communications relating to the business as such of 
a broker-dealer, including a broker-dealer SBSD and MSBSP.
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    \148\ Paragraph (b)(4) of Rule 17a-4 further provides that the 
term communications as used in the paragraph includes sales scripts.
    \149\ See, e.g., Use of Electronic Media by Broker-Dealers, 
Transfer Agents, and Investment Advisers for Delivery of 
Information; Additional Examples Under the Securities Act of 1933, 
Securities Exchange Act of 1934, and Investment Company Act of 1940, 
Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 
1996), at n. 32; Reporting Requirements for Brokers or Dealers Under 
the Securities Exchange Act of 1934, Exchange Act Release No. 38245 
(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997); Books and Records 
Requirements for Brokers and Dealers Under the Securities Exchange 
Act of 1934, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 
55818, 55825 (Nov. 2, 2001).
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    The Commission had not previously interpreted the term 
``communications'' to include telephonic communications. However, 
Section 15F(g)(1) of the Exchange Act provides that each registered 
SBSD and MSBSP shall maintain daily trading records of the security-
based swaps of the registered SBSD or MSBSP and all related records 
(including related cash or forward transactions) and recorded 
communications, including electronic mail, instant messages, and 
recordings of telephone calls, for such period as may be required by 
the Commission by rule or regulation. Therefore, to implement Section 
15F(g)(1) of the Exchange Act, the Commission proposed amendments to 
the preservation requirement in paragraph (b)(4) of Rule 17a-4 to 
require recordings of telephone calls required to be maintained 
pursuant to Section 15F(g)(1) of the Exchange Act.\150\ Under this 
requirement, a broker-dealer SBSD or MSBSP would be required to 
preserve for three years telephone calls that it records to the extent 
the recordings are required to be maintained pursuant to Section 
15F(g)(1). The Commission proposed communication preservation 
requirements for stand-alone and bank SBSDs and MSBSPs that would 
parallel those in Rule 17a-4, as proposed to be amended, to further 
implement Section 15F(g)(1). The provision applicable to bank SBSDs and 
MSBSPs would limit the requirement to communications that relate to the 
business of an SBSD or MSBSP.
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    \150\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25213-14.
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    The Commission emphasizes that the Section 15(g)(1) of the Exchange 
Act and the new rules requiring the retention of telephone calls do not 
establish requirements to record telephone calls. Instead, the rules 
require firms to retain recordings of telephone calls that are within 
the scope of Section 15(g)(1) of the Exchange Act. Thus, if the firm 
records a telephone call voluntarily or for some other reason, it will 
need to retain the recording if the call falls within the scope of 
Section 15(g)(1) of the Exchange Act. However, a firm's decision not to 
record a telephone call that falls within the scope of Section 15(g)(1) 
of the Exchange Act will not implicate these new retention 
requirements.
    A commenter urged the Commission to apply a one-year retention 
requirement as was adopted by the CFTC with respect to retaining 
recordings of telephone calls.\151\ In response, the Commission notes 
that applying the three-year retention requirement to these recordings 
is designed to allow staff examiners access to records they may need to 
review the past activities of SBSDs and MSBSPs, given that examinations 
are conducted using a risk-based program. In addition, the Commission 
believes that a three-year retention period will benefit counterparties 
in that it will preserve information that may help support them if, for 
example, a dispute arises about a transaction with an SBSD or MSBSP. A 
three-year retention period also is consistent with the retention 
period applicable to the vast majority of broker-dealer records, as 
compared to a one year period. Further, although the CFTC requires 
registrants to make and keep records of all oral communications 
pertaining to pre-execution trade information, including telephone 
calls, the Commission's record retention rule applies only to 
recordings of telephone calls, i.e., those voluntarily made by the 
registrant.\152\ The Commission is adopting the communications 
preservation requirements as proposed.\153\
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    \151\ See SIFMA 9/5/2014 Letter.
    \152\ See 17 CFR 23.202(a)(1) (requiring CFTC-registered swap 
dealers and major swap participants to ``make and keep pre-execution 
trade information, including, at a minimum, records of all oral and 
written communications provided or received concerning quotes, 
solicitations, bids, offers, instructions, trading, and prices, that 
lead to the execution of a swap, whether communicated by telephone . 
. .'').
    \153\ See paragraph (b)(4) of Rule 17a-4, as amended; paragraphs 
(b)(1)(iv) and (b)(2)(ii) of Rule 18a-6, as adopted.
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Trial Balances
    Paragraph (b)(5) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve all trial balances, 
computations of aggregate indebtedness and net capital (and working 
papers in connection therewith), financial statements, branch office 
reconciliations, and internal audit working papers relating to the 
firm's business as a broker-dealer. The Commission proposed including a 
parallel requirement in Rule 18a-6 applicable to stand-alone SBSDs and 
MSBSPs.\154\ In contrast to Rule 17a-4, the provision in Rule 18a-6, as 
proposed, did not refer to computations of ``aggregate indebtedness'' 
because the proposed capital rules for stand-alone SBSDs and MSBSPs--
Rules 18a-1 and 18a-2, respectively--did not include such a 
calculation.\155\ Further, to account for the capital standard for 
stand-alone MSBSPs, the proposed requirement referred to tangible net 
worth.\156\ The Commission received no comments on the proposal and 
adopted Rules 18a-1 and 18a-2.\157\ Consequently, the Commission is 
adopting the trial balance preservation requirements as proposed.\158\
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    \154\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25214.
    \155\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70221-29.
    \156\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70256-57. A broker-dealer MSBSP is subject to the net capital 
requirements in Rule 15c3-1.
    \157\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44052-68.
    \158\ See paragraph (b)(1)(v) of Rule 18a-6, as adopted.
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Account Documents
    Paragraph (b)(6) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve all guarantees of accounts 
and all powers of attorney and other evidence of the granting of any 
discretionary authority given in respect of any account as well as 
copies of resolutions empowering an agent to act on behalf of a 
corporation. The Commission proposed parallel requirements in Rule 18a-
6 for stand-alone and bank SBSDs and MSBSPs to preserve similar types 
of records, but only with respect to security-based swap accounts.\159\ 
For example, bank SBSDs and MSBSPs would not be required to maintain 
these records with respect to accounts involving exclusively banking 
related services. The Commission received no comments on the proposed 
account documentation

[[Page 68565]]

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

Written Agreements
    Paragraph (b)(7) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to preserve all written agreements (or 
copies thereof) entered into by the firm relating to its business as 
such, including agreements with respect to any account. The Commission 
proposed to amend this paragraph to require the preservation of written 
agreements with respect to a security-based swap customer or non-
customer--including governing documents or any document establishing 
the terms and conditions of security-based swaps of the customer or 
non-customer--with the account records of the customer or non-
customer.\161\ The Commission proposed parallel requirements in Rule 
18a-6 for stand-alone and bank SBSDs and MSBSPs. The provision 
applicable to bank SBSDs and MSBSPs would limit the preservation 
requirement to written agreements relating to the registrant's business 
as an SBSD or MSBSP. The Commission received no comments on the 
proposed written agreement preservation requirements and is adopting 
them substantially as proposed.\162\
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    \161\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25214.
    \162\ See paragraph (b)(7) of Rule 17a-4, as amended; paragraphs 
(b)(1)(vii) and (b)(2)(iv) of Rule 18a-6, as adopted. The Commission 
is adopting the following stylistic and corrective changes: (1) 
Replacing ``;'' with ``.'' for each paragraph in Rule 18a-6 for 
internal consistency; (2) removing ``as applicable'' in paragraph 
(b)(1)(viii) of Rule 18a-6, as adopted, as it is not necessary since 
only Part II is referenced in Rule 18a-6, as adopted; (3) replacing 
``security-based swap customers'' with ``non-security-based swap 
customers'' in paragraph (b)(1)(viii)(B) of Rule 18a-6, as adopted, 
to correct an error and for consistency with paragraph (b)(8)(ii) of 
Rule 17a-4, as amended; (4) removing ``,'' after ``cost'' in 
paragraph (b)(1)(viii)(H) of Rule 18a-6, as adopted, for consistency 
with paragraph (b)(8)(ix) of Rule 17a-4, as amended; (5) removing 
``;'' after ``and'' in paragraph (b)(1)(viii)(N) of Rule 18a-6, as 
adopted, for consistency with paragraph (b)(8)(xvi) of Rule 17a-4, 
as amended; (6) removing ``Records which contain'' in paragraph 
(b)(2)(v) of Rule 18a-6, as adopted, for clarity; (7) replacing ``; 
and'' with ``.'' in paragraph (b)(2)(vii) of Rule 18a-6, as adopted, 
for internal consistency.
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Information Supporting Financial Reports
    Paragraphs (b)(8)(i) through (xv) of Rule 17a-4 require a broker-
dealer, including a broker-dealer SBSD or MSBSP, to preserve records 
containing various types of information that support amounts included 
in the broker-dealer's FOCUS Report prepared as of the broker-dealer's 
audit date and amounts in the annual audited financial statements the 
broker-dealer is required to file under Rule 17a-5 or 17a-12, as 
applicable. The paragraphs specifically identify the types of 
supporting information that must be preserved, including money 
balances, securities positions (which will include security-based swap 
positions), futures positions, commodity positions, and options 
positions, among other things.
    The Commission proposed to: (1) Amend certain of these paragraphs 
to require the preservation of the same type of supporting information 
required of commodity positions, but for swap positions; (2) add a 
paragraph to require a broker-dealer SBSDs to preserve records that 
contain detail relating to the calculation of the risk margin amount 
under the proposed SBSD capital rules; and (3) add a new paragraph to 
require broker-dealer SBSDs to preserve records containing detail 
relating to the possession or control requirements in the proposed SBSD 
segregation rule.\163\ The Commission proposed requirements in Rule 
18a-6 for stand-alone SBSDs and MSBSPs that paralleled the requirements 
in paragraphs (b)(8)(i) through (xv) of Rule 17a-4, as proposed to be 
amended. Finally, the Commission proposed that bank SBSDs preserve 
records containing detail relating to the possession or control 
requirements in the proposed SBSD segregation rule (but not any of the 
other preservation requirements). The Commission received no comments 
on these proposals and has adopted the SBSD capital rules requiring a 
risk margin amount calculation and the SBSD segregation rules 
prescribing a possession or control requirement.\164\ Consequently, the 
Commission is adopting the information supporting financial statement 
preservation requirements substantially as proposed.\165\
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    \163\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25214-16. See Capital, Margin, and Segregation Proposing Release, 
77 FR at 70221-24, 70278-82 (discussing the proposed risk margin 
amount and possession or control requirements respectively).
    \164\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43883-86 (risk margin amount calculation), 43935-38 
(possession or control requirement).
    \165\ See paragraph (b)(8) of Rule 17a-4, as amended; paragraphs 
(b)(1)(viii) and (b)(2)(v) of Rule 18a-6, as adopted. The adopted 
rule text modifies the proposed rule text in the following non-
substantive ways. The Commission proposed to amend paragraph (b)(8) 
of Rule 17a-4 to add a reference to proposed Form SBS in the 
introductory text after references to certain parts of the FOCUS 
Report. It is no longer necessary to include this cross-reference, 
because as discussed below, the Commission is revising Part II and 
adopting Part IIC of the FOCUS Report instead of adopting Form SBS. 
However, non-substantive changes in connection with those revisions 
are being made to improve the clarity of paragraph (b)(8); namely, 
references to the parts of Form X-17A-5 now read ``Part II or Part 
IIA of Form X-17A-5 (Sec.  249.617 of this chapter)'' to improve 
readability, and the word ``audited'' is being removed from the 
phrase ``annual audited financial statements'' for consistency with 
Rules 17a-5 and 18a-7. Paragraph (b)(1)(viii) of Rule 18a-6, as 
adopted, reflects the following technical changes from paragraph 
(b)(1)(viii) of Rule 18a-6, as proposed to be adopted: (1) Paragraph 
(b)(1)(viii) references ``Part II of Form X-17A-5 (Sec.  249.617 of 
this chapter)'' instead of ``Part II of Form X-17A-5 (Sec.  249.617 
of this chapter), as applicable,'' because there is no need to 
reference ``as applicable'' when only one part of Form X-17A-5 is 
being referenced; (2) paragraph (b)(1)(viii)(B) refers to ``non-
security-based swap customers'' instead of ``security-based swap 
customers'' for consistency with paragraph (b)(8)(ii) of Rule 17a-4, 
as amended; (3) paragraph (b)(1)(viii)(H) no longer includes a comma 
after the word ``cost'' for consistency with paragraph (b)(8)(ix) of 
Rule 17a-4, as amended; and (4) paragraph (b)(1)(viii)(N) no longer 
includes a semicolon after the word ``and'' for consistency with 
paragraph (b)(8)(xvi), as amended.
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Rule 15c3-4 Risk Management Records
    OTC derivatives dealers and ANC broker-dealers are subject to risk 
management requirements.\166\ In particular, Rule 15c3-4 requires these 
broker-dealers to establish, document, and maintain a system of 
internal risk management controls to assist in managing the risks 
associated with the firm's business activities, including market, 
credit, leverage, liquidity, legal, and operational risks. The rule 
also requires periodic reviews (which may be performed by internal 
audit staff) and annual reviews (which must be conducted by independent 
public accountants) of the firm's risk management systems. Paragraph 
(b)(10) of Rule 17a-4 requires broker-dealers subject to Rule 15c3-4 to 
preserve the records required to be made under the rule and the results 
of the periodic reviews required to be conducted under the rule.
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    \166\ See 17 CFR 240.15c3-4 (``Rule 15c3-4'').
---------------------------------------------------------------------------

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

[[Page 68566]]

parallel record preservation requirement for these entities. The 
Commission received no comments on these proposals and has adopted the 
requirement that nonbank SBSDs and MSBSPs comply with Rule 15c3-4.\170\ 
Consequently, the Commission is adopting the risk management records 
preservation requirements as proposed.\171\
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    \167\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70250-51, 70256-57.
    \168\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25216.
    \169\ See Section 15F(d)(2)(A) of the Exchange Act (providing 
that the Commission may not prescribe rules imposing prudential 
requirements on SBSDs and MSBSPs for which there is a prudential 
regulator).
    \170\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43906-07.
    \171\ See paragraph (b)(1)(ix) of Rule 18a-6, as adopted.
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Credit Risk Determinations
    Paragraph (c)(4)(vi)(A) of Sec.  240.15c3-1e (appendix E to Rule 
15c3-1) requires an ANC broker-dealer to make and keep current a record 
of the basis of its internal credit assessments of counterparties for 
purposes of the credit risk charges it must take as part of its net 
capital computation. Paragraph (b)(12) of Rule 17a-4 requires an ANC 
broker-dealer to preserve these records. A broker-dealer SBSD approved 
to use models to compute net capital will be subject to the 
recordkeeping provision in paragraph (c)(4)(vi)(A) of appendix E to 
Rule 15c3-1 and the corresponding record preservation requirement in 
paragraph (b)(12) of Rule 17a-4. The proposed capital rule for SBSDs 
included a parallel provision requiring a stand-alone SBSD approved to 
use models to make and keep current the same type of record of the 
basis of its internal credit assessments of counterparties.\172\ 
Therefore, the Commission proposed a parallel corresponding record 
preservation requirement in Rule 18a-6 for such a stand-alone 
SBSD.\173\ The Commission received no comments on the proposal and 
adopted the requirement in the capital rule for stand-alone SBSDs to 
make and keep current these records.\174\ Consequently, the Commission 
is adopting the credit risk determination preservation record 
requirement as proposed.\175\
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    \172\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70340.
    \173\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25216-17.
    \174\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44060; paragraph (e)(2)(iii)(F)(2) of Rule 18a-1.
    \175\ See paragraph (b)(1)(x) of Rule 18a-6, as adopted.
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Regulation SBSR
    As discussed above, the Commission has adopted Regulation SBSR, 
which assigns the duty to report a security-based swap transaction to a 
registered SDR.\176\ The Commission proposed to amend paragraph (b)(14) 
of Rule 17a-4 to require that broker-dealers, including broker-dealer 
SBSDs and MSBSPs, preserve the information they are required to submit 
to a registered SDR under Regulation SBSR.\177\ In addition, the 
Commission proposed to include parallel preservation requirements in 
Rule 18a-6 for stand-alone and bank SBSDs. The Commission received no 
comments on the proposed Regulation SBSR record preservation 
requirements and is adopting them as proposed.\178\
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    \176\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, 80 FR 14567; Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information, 81 
FR 53546.
    \177\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25217.
    \178\ See paragraph (b)(14) of Rule 17a-4, as amended; 
paragraphs (b)(1)(xi) and (b)(2)(vi) of Rule 18a-6, as adopted.
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Records Relating to Business Conduct Standards
    As discussed above, the Commission has adopted Rules 15Fh-1 through 
15Fh-6 and Rule 15Fk-1. These rules require, among other things, that 
SBSDs and MSBSPs make certain disclosures, provide certain notices, and 
make other records. The Commission proposed to amend paragraph (b) of 
Rule 17a-4 to add a requirement that broker-dealer SBSDs and MSBSPs 
preserve copies of documents, communications, and notices related to 
the business conduct and chief compliance officer requirements in Rules 
15Fh-1 through 15Fh-6 and Rule 15Fk-1.\179\ In addition, the Commission 
proposed to adopt parallel record preservation requirements in Rule 
18a-6 for stand-alone and bank SBSDs and MSBSPs. The Commission 
received no comments on the proposed business conduct record 
preservation requirements and is adopting them as proposed.\180\
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    \179\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25217.
    \180\ See paragraph (b)(15) of Rule 17a-4, as amended; 
paragraphs (b)(1)(xii) and (b)(2)(vii) of Rule 18a-6, as adopted.
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    Section 15F(h)(4)(C) of the Exchange Act imposes duties on SBSDs 
that act as advisors to special entities. Paragraph (a) of Rule 15Fh-2 
defines what it means to act as an advisor to a special entity. If an 
SBSD is acting in this capacity, Section 15F(h)(4)(C) and paragraph (b) 
of Rule 15Fh-4 require the SBSD to make reasonable efforts to obtain 
such information as it considers necessary to make a reasonable 
determination that a security-based swap or trading strategy involving 
a security-based swap is in the best interests of the special entity. 
Section 15F(h)(5)(A) and paragraph (a) of Rule 15Fh-5 require an SBSD 
or MSBSP that is acting as a counterparty to a special entity to have a 
reasonable basis to believe that the special entity has a ``qualified 
independent representative,'' as that term is defined in the rule. The 
Commission proposed to amend paragraph (b) of Rule 17a-4 to add a 
requirement that broker-dealer SBSDs and MSBSPs preserve records 
relating to the determinations made pursuant to Section 15F(h)(4)(C) 
and Section 15F(h)(5)(A) of the Exchange Act.\181\ In addition, the 
Commission proposed parallel record preservation requirements in Rule 
18a-6 for stand-alone and bank SBSDs. The Commission received no 
comments on the proposed special entity advisor record preservation 
requirements and is adopting them as proposed.\182\
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    \181\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25218. As noted above in section II.A.2.a. of this release, on 
October 31, 2018, the Commission issued a statement, which set forth 
the Commission's position that, for a period of five years from the 
Registration Compliance Date for SBSDs and MSBSPs (as defined in 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, 80 FR at 48988 and discussed below 
in section III.B. of this release), certain actions with respect to 
specific provisions of the business conduct standards will not 
provide a basis for a Commission enforcement action. See Statement 
on Business Conduct Standards, 83 FR at 55486. To the extent SBSDs 
and MSBSPs rely on the statement, the Commission encourages them to 
maintain records of the written representations described in the 
statement until such time as the statement is no longer in force.
    \182\ See paragraph (b)(16) of Rule 17a-4, as amended; 
paragraphs (b)(1)(xiii) and (b)(2)(viii) of Rule 18a-6, as adopted.
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Corporate Documents
    Paragraph (d) of Rule 17a-4 requires broker-dealers to preserve 
during the life of the enterprise corporate documents such as articles 
of incorporation, minute books, and stock certificate books. It also 
requires broker-dealers to preserve during the life of the enterprise 
registration and licensing information such as all Forms BD, Forms BDW, 
and licenses or other documentation showing registration with a 
securities regulatory authority. The Commission proposed to amend 
paragraph (d) of Rule 17a-4 to add references to proposed Form SBSE-BD 
and proposed Form SBSE-W.\183\ These were the registration and 
withdrawal of registration forms, respectively, the Commission proposed 
for broker-dealer SBSDs and MSBSPs.\184\ The

[[Page 68567]]

Commission proposed a parallel requirement in Rule 18a-6 for stand-
alone and bank SBSDs and MSBSPs, except that rule text referred to the 
registration forms these entities would use (i.e., Forms SBSE and SBSE-
A, respectively) rather than Form SBSE-BD.\185\
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    \183\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25218.
    \184\ See Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 65543 
(Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011); see also Cross-Border 
Proposing Release, 78 FR 30968.
    \185\ Paragraph (m)(3) of Rule 17a-4, as amended, defines the 
term ``securities regulatory authority'' to have the meaning set 
forth in paragraph (f)(3) of Rule 17a-3, as amended. Paragraph 
(h)(1) of Rule 18a-6, as adopted, defines the term ``securities 
regulatory authority'' in the same way as that term is defined in 
paragraph (f)(3) of Rule 17a-3, as amended. The Commission proposed 
to amend the definition of ``securities regulatory authority'' to 
include the CFTC and a prudential regulator to the extent the 
prudential regulator oversees entity's security-based swap 
activities. The Commission believes the better approach is to 
specifically reference the CFTC and the prudential regulator in a 
given recordkeeping provision where the inclusion of a reference to 
the CFTC or prudential regulator is appropriate given the type of 
registrant and the nature of the records. As a result, the 
Commission is adding references to the CFTC to paragraph (d) of Rule 
17a-4, as amended, and a reference to the CFTC to paragraph (c) of 
Rule 18a-6, as adopted.
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    The Commission received no comments on these proposals and has 
adopted the forms.\186\ However, to correct an inadvertent omission, 
they now also require preservation of Form SBSE-C (17 CFR 
249.1600c).\187\ The registration rule for SBSDs and MSBSPs requires 
firms applying to register as an SBSD or MSBSP to file Form SBSE-C 
(which contains two separate certifications) in addition to Forms SBSE, 
SBSE-A, and/or SBSE-BD.\188\ For these reasons, the Commission is 
adopting the corporate document preservation requirements with the 
modifications discussed above.\189\
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    \186\ See Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 75611 
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).
    \187\ The paragraphs as adopted contain updated cross-references 
to the CFR citations for Form SBSE, Form SBSE-A, Form SBSE-BD, and 
Form SBE-W (i.e., 17 CFR 249.1600, 17 CFR 249.1600a, 17 CFR 
249.1600b, and 17 CFR 249.1601, respectively).
    \188\ See 17 CFR 240.15Fb2-1(a).
    \189\ See paragraph (d) of Rule 17a-4, as amended; paragraph (c) 
of Rule 18a-6, as adopted.
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Associated Persons
    As discussed above, paragraph (a)(12) of Rule 17a-3 requires a 
broker-dealer, including a broker-dealer SBSD or MSBSP, to make and 
keep current records of information about associated persons, and the 
Commission is adopting parallel requirements in Rule 18a-5 to require a 
stand-alone or bank SBSD or MSBSP to make and keep current the same 
types of records.\190\ Paragraph (e)(1) of Rule 17a-4 requires broker-
dealers to maintain and preserve the associated person's records in an 
easily accessible place until at least three years after the associated 
person's employment and any other connection with the broker-dealer has 
terminated. The Commission proposed to include a parallel requirement 
in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs to maintain and 
preserve their records about associated persons.\191\ The Commission 
received no comments on these proposed associated persons record 
preservation requirements and is adopting them as proposed.\192\
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    \190\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as 
adopted.
    \191\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25218.
    \192\ See paragraph (d)(1) of Rule 18a-6, as adopted. Paragraph 
(h)(2) of Rule 18a-6, as adopted, defines the term ``associated 
person'' to have the same meaning as that term is defined in 
paragraph (c) of Rule 18a-5, as adopted.
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Regulatory Authority Reports
    Paragraph (e)(6) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily 
accessible place each report that a securities regulatory authority has 
requested or required the firm to make and furnish to it pursuant to an 
order of settlement, and each regulatory exam report until three years 
after the date of the report.\193\ The Commission proposed parallel 
record preservation requirements in Rule 18a-6 for stand-alone SBSDs 
and MSBSPs to maintain and preserve the same types of reports until 
three years after the date of the report.\194\ The Commission proposed 
a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs but only 
if the reports relate to security-based swap activities. The Commission 
received no comments on these proposed regulatory authority reports 
preservation requirements and is adopting them as proposed.\195\
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    \193\ As discussed earlier, paragraph (m)(3) of Rule 17a-4 
defines the term ``securities regulatory authority'' to have the 
meaning set forth in paragraph (f)(3) of Rule 17a-3, as amended. The 
Commission proposed to amend the definition of ``securities 
regulatory authority'' to include the CFTC and a prudential 
regulator to the extent the prudential regulator oversees security-
based swap activities. The Commission believes the better approach 
is to specifically identify the CFTC and prudential regulator in a 
given recordkeeping provision where the inclusion of a reference to 
the CFTC or prudential regulator is appropriate given the type of 
registrant and the nature of the records. See paragraph (f)(3) of 
Rule 17a-3, as amended. As a result, the Commission is amending 
paragraph (e)(6) of Rule 17a-4 by adding references to reports 
requested or required by the CFTC.
    \194\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25218-19.
    \195\ See paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as 
adopted. The Commission is replacing the term ``regulatory 
authority'' with the term ``securities regulatory authority'' in 
paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as adopted. Paragraph 
(h)(1) of Rule 18a-6, as adopted, defines the term securities 
regulatory authority in the same way as that term is defined in 
paragraph (f)(3) of Rule 17a-3, as amended. As noted above, the 
Commission proposed to amend the definition of the term ``securities 
regulatory authority'' cross-referenced in paragraph (f)(3) of Rule 
17a-3 to include the CFTC and prudential regulators but is declining 
to do so. In lieu of amending the definition of the term 
``securities regulatory authority,'' the Commission is adding 
references to reports requested or required by the CFTC to paragraph 
(d)(2)(i) of Rule 18a-6, as adopted, and to reports requested or 
required by the CFTC or the prudential regulators to paragraph 
(d)(2)(ii) of Rule 18a-6, as adopted. The Commission staff consulted 
with staff from the prudential regulators and the CFTC in drafting 
the final rules discussed in this release, including paragraph 
(d)(2)(ii) of Rule 18a-6 (applicable to bank SBSDs and MSBSPs). The 
Commission recognizes that a bank SBSD or MSBSP may need to notify 
its prudential regulator(s) before furnishing (pursuant to paragraph 
(g) of Rule 18a-6) certain records identified in paragraph 
(d)(2)(ii) of Rule 18a-6.
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Compliance, Supervisory, and Procedures Manuals
    Paragraph (e)(7) of Rule 17a-4 requires a broker-dealer, including 
a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily 
accessible place each compliance, supervisory, and procedures manual, 
including any updates, modifications, and revisions, describing the 
policies and practices of the broker-dealer with respect to compliance 
with applicable laws and rules and supervision of the activities of 
each natural person associated with the broker-dealer until three years 
after the termination of the use of the manual. The Commission proposed 
a parallel requirement in Rule 18a-6 for stand-alone SBSDs and MSBSPs 
to maintain and preserve the same types of compliance, supervisory, and 
procedures manuals for the same period of time.\196\ The Commission 
proposed a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs 
but only if the manuals involve compliance with applicable laws and 
rules relating to security-based swap activities. The Commission 
received no comments on these proposed compliance, supervisory, and 
procedures manual preservation requirements and is adopting them as 
proposed.\197\
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    \196\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25219.
    \197\ See paragraphs (d)(3)(i) and (ii) of Rule 18a-6, as 
adopted.
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Electronic Storage
    Paragraph (f) of Rule 17a-4 provides that the records a broker-
dealer, including a broker-dealer SBSD or MSBSP, is required to 
maintain and preserve under Rules 17a-3 and 17a-4 may be immediately 
produced or reproduced on micrographic media or by means of electronic 
storage media and be maintained and preserved for the required time in 
that form. The use of

[[Page 68568]]

electronic storage media is subject to certain conditions, including 
that the media must preserve the records exclusively in a manner that 
is non-rewriteable and non-erasable (also known as a write once, read 
many or ``WORM'').\198\ The Commission proposed including a parallel 
record maintenance and preservation requirement in Rule 18a-6, but only 
with respect to electronic storage media.\199\ The Commission believes 
that SBSDs and MSBSPs that are not dually registered as broker-dealers 
would not use micrographic media to maintain and preserve records 
because electronic storage media is more technologically advanced and 
offers greater flexibility in managing records.\200\
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    \198\ See paragraph (f)(2)(ii)(A) of Rule 17a-4.
    \199\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25219.
    \200\ The Commission believes that most broker-dealers use 
electronic storage media rather than micrographic media for the same 
reasons.
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    The Commission received comments that its electronic storage 
requirements for SBSDs and MSBSPs, including for broker-dealers dually 
registered as SBSDs, should not mandate that the records be preserved 
exclusively in a WORM format.\201\ One commenter further urged the 
Commission, in any event, ``not to expand the WORM requirement to SBSDs 
at this time.'' \202\ The Commission also received comment requesting 
that it act on a rule petition filed by several organizations in 
November 2017 and harmonize its final rule with the CFTC's 
corresponding requirements, which were recently modified to eliminate a 
similar WORM requirement.\203\
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    \201\ See, e.g., SIFMA 9/5/2014 Letter; Letter from Walt L. 
Lukken, President and Chief Executive Officer, Futures Industry 
Association (Nov. 29, 2018) (``FIA Letter'').
    \202\ See, e.g., SIFMA 9/5/2014 Letter.
    \203\ See FIA Letter. The CFTC modified CEA Rule 1.31 to remove 
its WORM requirement in May 2017. See Recordkeeping, 82 FR 24479 
(May 30, 2017).
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    The Commission's electronic record storage requirements in Rule 
17a-4 are based on the ``importance for recordkeeping of ready access, 
reliability, and permanence of records.'' \204\ The Commission has 
described the recordkeeping requirements in Rules 17a-3 and 17a-4 as 
``integral to the Commission's investor protection function because the 
preserved records are the primary means of monitoring compliance with 
applicable securities laws, including antifraud provisions and 
financial responsibility standards.'' \205\ Any modification to the 
electronic storage requirements in Rule 17a-4 may raise issues that are 
distinct from those raised by stand-alone and bank SBSDs and MSBSPs. 
Accordingly, the Commission believes that any change to these 
requirements should be addressed in a separate regulatory initiative in 
which the Commission intends to consider electronic storage media 
issues.
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    \204\ See Reporting Requirements for Brokers or Dealers Under 
the Securities Exchange Act of 1934, Exchange Act Release No. 38245 
(Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).
    \205\ Electronic Storage of Broker-Dealer Records, Exchange Act 
Release No. 47806 (May 7, 2003), 68 FR 25281 (May 12, 2003).
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    However, the Commission is clarifying that the WORM requirement 
does not mandate the use of a specific type of media. In particular, 
the Commission issued guidance in 2003 to clarify that the WORM 
requirement can be met using an ``electronic storage system that 
prevents the overwriting, erasing or otherwise altering of a record 
during its required retention period through the use of integrated 
hardware and software control codes.'' \206\ This statement in the 
release--because it refers to ``hardware'' control codes--has raised 
questions as to whether an electronic storage system that relies 
exclusively on software coding to meet the WORM requirement is 
permitted under the rule. The Commission is clarifying that a software 
solution that prevents the overwriting, erasing, or otherwise altering 
of a record during its required retention period would meet the 
requirements of the rule. For example, the rule does not require the 
use of a specific medium such as optical disk, CD-ROM, or magnetic tape 
to meet the WORM requirement.
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    \206\ Electronic Storage of Broker-Dealer Records, 68 FR 25282.
---------------------------------------------------------------------------

    The Commission recognizes that the entities that may register as 
stand-alone or bank SBSDs or MSBSPs may have existing electronic 
storage systems that do not meet the WORM requirement and therefore 
could incur substantial costs in building a recordkeeping system that 
meets this requirement. For these reasons, the Commission is modifying 
Rule 18a-6 to eliminate the requirement that the electronic storage 
system preserve the records exclusively in a non-rewriteable and non-
erasable format (i.e., a WORM format).\207\ In connection with this 
modification, the Commission is eliminating the proposed requirement 
that the stand-alone or bank SBSD or MSBSP notify the Commission at 
least 90 days before using electronic storage media other than optical 
disk technology because this provision is no longer relevant given the 
absence of the WORM requirement in the rule as adopted.\208\ The 
Commission also is modifying the proposed rule text by replacing the 
phrase ``electronic storage media'' throughout paragraph (e) of Rule 
18a-6, as adopted, with the phrase ``electronic storage system'' to 
further clarify that the final rule does not require the use of a 
particular storage media such as optical disk or CD-ROM (as is the case 
with Rule 17a-4, as noted above).\209\
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    \207\ This requirement was in paragraph (e)(2)(ii)(A) of Rule 
18a-6, as proposed.
    \208\ This requirement was in paragraph (e)(2)(i) of Rule 18a-6, 
as proposed.
    \209\ See paragraph (e) of Rule 18a-6, as adopted. The 
Commission also is deleting the phrase ``on any medium acceptable 
under Sec.  240.18a-6'' from paragraph (e)(3)(iii) of Rule 18a-6. In 
addition, the Commission is also replacing throughout paragraph (e) 
references to information placed ``on'' electric storage systems 
with references to information placed ``in'' such systems.
---------------------------------------------------------------------------

    The Commission is modifying the provision of the rule that required 
the original and duplicate units of the storage media to be serialized 
and time-dated to clarify that this must be done if applicable (i.e., 
if the firm uses a storage media such as optical disk or CD-ROM).\210\ 
The Commission also is modifying the provision of the rule that 
required the firm to have available facilities for immediate, easily 
readable projection or productions of electronic storage media images 
and for producing easily readable images; the final rule instead 
provides that the facilities can be for the projection or production of 
images or records that are maintained on the electronic storage 
system.\211\ This modification is designed to accommodate electronic 
storage systems that do not use optical disk or CD-ROM media. Further, 
the Commission is modifying the provision of the rule that required the 
firm to be ready at all times to immediately provide an facsimile 
enlargement which the staff of the Commission may request; the final 
rule requires instead that the firm must be ready at all times to 
immediately provide in a readable format any record or index stored on 
the electronic storage system which the staff of the Commission may 
request.\212\
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    \210\ See paragraph (e)(2)(ii) of Rule 18a-6, as adopted.
    \211\ See paragraph (e)(3)(i) of Rule 18a-6, as adopted.
    \212\ See paragraph (e)(3)(ii) of Rule 18a-6, as adopted.
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    The elimination of the WORM requirement as the exclusive means of 
storing records electronically will provide flexibility to stand-alone 
and bank SBSDs and MSBSPs in terms of establishing and maintaining 
electronic storage systems and will eliminate a potential conflict with 
the requirements of the CFTC. However, eliminating the WORM requirement 
does not change the

[[Page 68569]]

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

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

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

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

    The Commission explained the audit system requirement when it 
adopted the electronic storage provisions of Rule 17a-4.\217\ In 
particular, the Commission stated that the rule requires an audit 
system to be utilized only when records required to be maintained under 
Rule 17a-4 are being entered or when any additions to existing records 
are made.\218\ Consequently, an audit record is not required when a 
record is accessed but cannot be altered by the reader.\219\ The 
Commission further stated that, although it was not specifying the 
contents of each audit system, data automatically or otherwise stored 
(in the computer or in hard copy) regarding inputting of records and 
changes to existing records will be part of that system.\220\ The 
Commission envisioned that the identities of individuals actually 
inputting records and making particular changes, and the identity of 
documents changed and the identity of new documents created, are the 
kind of information that automatically would be collected pursuant to 
the audit system requirements.\221\
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    \217\ See Reporting Requirements for Brokers or Dealers Under 
the Securities Exchange Act of 1934, Exchange Act Release No. 38245 
(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997).
    \218\ Id. at 6471.
    \219\ Id.
    \220\ Id. At 6473.
    \221\ Id.
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    In addition, as part of the 2003 guidance with respect to the WORM 
requirement, the Commission stated that the audit system would need to 
provide accountability regarding the length of time records are stored 
in a non-rewriteable and nonerasable manner.\222\ The Commission 
further stated that this should include senior management level 
approval of how the system is configured to store records for their 
required retention periods in a non-rewriteable and nonerasable 
manner.\223\
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    \222\ Electronic Storage of Broker-Dealer Records, 68 FR 25283.
    \223\ Id.
---------------------------------------------------------------------------

    The audit system requirements of Rule 18a-6 are modeled on the 
existing requirements of Rule 17a-4. Consequently, firms can rely on 
the Commission's description of the Rule 17a-4 requirements--as set 
forth above--for the purposes of Rule 18a-6.
    For the foregoing reasons, the Commission is adopting the 
electronic storage requirements with the modifications discussed 
above.\224\
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    \224\ See paragraph (e) of Rule 18a-6, as adopted. The 
Commission is also making the following non-substantive changes to 
paragraph (e) of Rule 18a-6, as adopted: (1) Inserting the word 
``an'' before the phrase ``electronic storage system,'' replacing 
the phrase ``as defined in this section'' with the phrase ``as 
defined in this paragraph (e),'' and replacing the word ``meet'' 
with the word ``meets'' in the introductory paragraph; (2) replacing 
the phrase ``any digital storage medium or system'' with ``any 
digital storage system'' in paragraph (e)(1); (3) inserting the word 
``an'' before the phrase ``electronic storage system,'' and deleting 
the phrase ``comply with the following instructions'' in paragraph 
(e)(2); (4) deleting the phrase ``to any system acceptable under 
this paragraph (e) as required by the Commission,'' and adding the 
phrase ``into a readable format'' between the words ``download'' and 
``indexes'' in paragraph (e)(2)(iii); (5) deleting the proposed text 
of paragraphs (e)(2)(i), (e)(2)(ii) introductory text, and 
(e)(2)(ii)(A) and re-numbering proposed paragraphs (e)(2)(ii)(B) 
through (D) as paragraphs (e)(2)(i) through (iii), respectively; (6) 
inserting the word ``an'' before the phrase ``electronic storage 
system'' in paragraph (e)(3); (7) replacing the phrase ``to provide, 
and immediately provide,'' with the phrase ``to immediately 
provide'' in paragraph (e)(3)(ii); (8) deleting the comma after the 
word ``original,'' replacing the phrase ``the record'' with the 
phrase ``a record,'' and adding the phrase ``the electronic storage 
system on'' between the words ``on'' and ``any'' in paragraph 
(e)(3)(iii), (9) replacing the word ``media'' with the word 
``storage'' in paragraph (e)(3)(iv); (10) deleting the phrase ``The 
security-based swap dealer or major security-based swap participant 
must,'' capitalizing the word ``Have,'' and adding the word ``the'' 
before the phrase ``electronic storage system'' in paragraph 
(e)(3)(v); and (11) replacing the words ``media'' or ``medium'' with 
the word ``system,'' deleting the phrase ``to any acceptable system 
under this section,'' replacing the phrase ``to any medium 
acceptable under Sec.  240.18a-6'' with ``to a readable format,'' 
and replacing the phrase ``upon being provided with the appropriate 
electronic storage'' with the phrase ``upon being provided with 
access to the appropriate electronic storage'' in paragraph 
(e)(3)(vii).
---------------------------------------------------------------------------

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

[[Page 68570]]

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

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

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

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

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

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

    Further, as discussed above, the Commission is eliminating the 
requirements in current paragraphs (c) and (d) of Rule 17a-3 and, as a 
consequence, current paragraphs (e) through (h) have been redesignated 
as paragraphs (d) through (g), respectively. The Commission proposed to 
amend Rule 17a-4 to make corresponding changes to cross-references to 
these paragraphs of Rule 17a-3.
    The Commission proposed amendments to paragraph (b)(8) of Rule 17a-
4 that would replace the phrase ``annual audited financial statements'' 
with the phrase ``the annual financial statements'' to reflect the 
broader range of documents required by Rule 17a-5. Due to the addition 
of paragraphs (b)(8)(xiv) and (xvi) to Rule 17a-4, as discussed above, 
the Commission proposed to redesignate paragraphs (b)(8)(xiv) and (xv) 
as paragraphs (b)(8)(xv) and (xvii), respectively.
    The Commission proposed amendments to paragraph (h) of Rule 17a-4 
that would add, after the phrase ``Rule G-9 of the Municipal Securities 
Rulemaking Board,'' the phrase ``or any successor rule'' to address the 
possibility of a future change in how the MSRB's rules are designated.
    The Commission received no comments on these proposed amendments 
and is adopting them substantially as proposed, with the modification 
discussed above about retaining references to ``members.'' \234\ The 
Commission is also making certain non-substantive modifications to Rule 
18a-6 as proposed in addition to those discussed above.\235\
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    \234\ See Rule 17a-4, as amended. In addition to the differences 
discussed above between Rule 17a-4, as proposed to be amended, and 
Rule 17a-4, as amended, the Commission is adopting the following 
non-substantive changes to Rule 17a-4: (1) Removing the phrase 
``including a broker or dealer also registered as a security-based 
swap dealer or major security based swap participant under Section 
15F(b) of the Act (15 U.S.C. 78x-8(b))'' from the undesignated 
introductory paragraph for clarity; (2) removing ``on the schedule'' 
in paragraph (b)(8)(xiii) for clarity; (3) removing ``or Form SBS'' 
in paragraph (b)(8)(xiii) as it is no longer applicable; (4) adding 
``security-based swap'' before the phrase ``possession or control 
requirements'' in paragraph (b)(8)(xiv) for clarity; (5) correcting 
references from Sec.  240.18a-4 to Sec.  240.15c3-3 in paragraph 
(b)(8)(xiv); (6) replacing ``on Form SBS'' with ``in Part II of Form 
X-17A-5''; and (7) replacing ``;'' with ``,'' in paragraphs (b)(14) 
and (15) for internal consistency.
    \235\ See Rule 18a-6, as adopted. In particular, the non-
substantive modifications to Rule 18a-6 are: (1) Replacing ``record 
maintenance and preservation requirements'' with ``books and records 
requirements'' in the undesignated introductory paragraph for 
internal consistency; (2) replacing ``;'' with ``.'' for each 
paragraph in Rule 18a-6 for internal consistency; (3) replacing 
``records required for corporation or partnerships), all Forms SBSE 
(Sec.  249.617 of this chapter), Forms SBSE-A, Forms SBSE-W (Sec.  
249.617 of this chapter),'' with ``records required for corporations 
or partnerships), all Forms SBSE (Sec.  249.617 of this chapter), 
all Forms SBSE-A, all Forms SBSE-W (Sec.  249.617 of this 
chapter),'' in paragraph (c) for consistency with paragraph (d) of 
Rule 17a-4, as amended; (4) pluralize ``production'' to 
``productions'' in paragraph (e)(3)(i) for consistency with 
paragraph (f)(3)(i) of Rule 17a-4, as amended; (5) removing 
quotation marks around ``the undersigned'' in paragraph (e)(3)(vii) 
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as 
amended; (6) removing ``under the Act'' from paragraph (e)(3)(vii) 
for consistency with paragraph (f)(3)(vii) of Rule 17a-4, as 
amended; (7) adding ``by the registrant'' after the phrase 
``arrangements for the downloading of any record required to be 
maintained and preserved'' in paragraph (e)(3)(vii) for consistency 
with paragraph (f)(3)(vii) of Rule 17a-4, as amended; (8) replacing 
``which are requested by a representative of the Commission'' with 
``that are requested by a representative of the Commission'' in 
paragraph (g) for consistency with paragraph (j) of Rule 17a-4, as 
amended.

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[[Page 68571]]

B. Reporting

1. Introduction
    The Commission in this document is establishing a reporting program 
for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act 
that is modeled on the reporting program for broker-dealers in Rule 
17a-5. Rule 17a-5 has two main elements: (1) A requirement that broker-
dealers file periodic unaudited reports about their financial and 
operational condition using the FOCUS Report form; and (2) a 
requirement that broker-dealers annually file financial statements and 
certain reports, as well as reports covering those statements and 
reports prepared by an independent public accountant registered with 
the Public Company Accounting Oversight Board (``PCAOB'') in accordance 
with PCAOB standards. The Commission proposed to amend Rule 17a-5 to 
account for the security-based swap activities of stand-alone broker-
dealers and to establish a reporting regime for broker-dealer SBSDs and 
MSBSPs.\236\ The Commission further proposed new Rule 18a-7 (which was 
modeled on Rule 17a-5) to establish a reporting regime for stand-alone 
and bank SBSDs and MSBSPs. The Commission is adopting the proposed 
amendments to Rule 17a-5 and new Rule 18a-7 with modifications, as 
discussed below.
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    \236\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25221-47.
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    A commenter requested clarification as to whether an OTC 
derivatives dealer dually registered as an SBSD or MSBSP would be 
subject to Rule 17a-5 or instead to new Rule 18a-7.\237\ The 
applicability of Rule 17a-5 or 18a-7 will depend on whether the firm is 
subject to the capital requirements of Rule 15c3-1 (in which case Rule 
17a-5 will apply), is subject to the capital requirements of Rules 18a-
1 or 18a-2 (in which case Rule 18a-7 will apply), or has a prudential 
regulator (in which case Rule 18a-7 will apply).\238\ Therefore, a 
stand-alone broker-dealer, including a stand-alone OTC derivatives 
dealer, (which is subject to Rule 15c3-1) will continue to be subject 
to Rule 17a-5.\239\ Similarly, a broker-dealer, other than an OTC 
derivatives dealer, that is also an SBSD (which is subject to Rule 
15c3-1) will be subject to Rule 17a-5. A broker-dealer, including an 
OTC derivatives dealer, that is also an MSBSP (which is subject to Rule 
15c3-1) will be subject to Rule 17a-5. A stand-alone SBSD (which is 
subject to Rule 18a-1) will be subject to Rule 18a-7. Similarly, an 
SBSD that is also an OTC derivatives dealer (``OTCDD/SBSD'') (which is 
subject to Rule 18a-1) will be subject to Rule 18a-7.\240\ A stand-
alone MSBSP (which is subject to Rule 18a-2) will be subject to Rule 
18a-7. Finally, a bank SBSD or MSBSP (which has a prudential regulator) 
will be subject to Rule 18a-7.
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    \237\ See Letter from Angie Karna, Managing Director, Nomura 
Global Financial Products Inc. (Sept. 10, 2014) (``Nomura Letter'').
    \238\ The undesignated introductory paragraphs to Rules 17a-5 
and 18a-7 have been modified to clarify this application of the 
rules.
    \239\ Paragraph (p) of Rule 17a-5 provides that an OTC 
derivatives dealer may comply with Rule 17a-5 by complying with the 
provisions of Rule 17a-12.
    \240\ As discussed in this release, an OTC derivatives dealer 
dually registered as an SBSD is subject to Rules 17a-3, 17a-4, 17a-
13, 18a-1, 18a-4, 18a-7, and 18a-8 rather than Rules 18a-5, 18a-6, 
18a-9, 15c3-1, 15c3-3, 17a-5, and 17a-11, respectively. As a result, 
the Commission has made conforming modifications to Rule 18a-7. In 
particular, where Rule 18a-7 refers to Rule 18a-9, the Commission 
has added the following reference to Rule 17a-13: ``or 240.17a-13, 
as applicable.''
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    The Commission is also adopting amendments to the FOCUS Report. The 
Commission proposed to create a new part of the FOCUS Report--Form 
SBS--to be filed by all types of SBSDs and MSBSPs, while stand-alone 
broker-dealers would continue filing FOCUS Report Parts II, IIA, IIB, 
or II CSE, as applicable.\241\ After further consideration of the 
issue, the Commission believes the best approach is to consolidate Form 
SBS and FOCUS Report Parts II, IIB, and II CSE into a single form: The 
FOCUS Report Part II. In addition, the Commission believes it is 
appropriate to adopt a new form--the FOCUS Report Part IIC--to be filed 
by bank SBSDs and MSBSPs rather than Form SBS as was proposed. The 
decision to require bank SBSDs and MSBSPs to file a separate form is 
based on the more limited information that they will need to provide on 
the form (as compared to FOCUS Report Part II filers). Consequently, 
broker-dealers that file the FOCUS Report Part II will continue to do 
so. ANC broker-dealers and OTC derivatives dealers also will file the 
FOCUS Report Part II, as will broker-dealer and stand-alone SBSDs and 
MSBSPs. Bank SBSDs and MSBSPs will file the FOCUS Report Part IIC.
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    \241\ The Commission requested comment on whether all broker-
dealers, SBSDs, and MSBSPs should file the same consolidated form. 
See Recordkeeping and Reporting Proposing Release, 79 FR at 25235-
25236. The Commission received no comments specifically addressing 
this issue.
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    A commenter urged the Commission not to impose ``position reporting 
requirements,'' arguing that they are unnecessary in light of the 
``transaction reporting requirements'' of Regulation SBSR.\242\ The 
Commission disagrees. The reporting requirements are designed to 
promote transparency of the financial and operational condition of a 
broker-dealer, SBSD, or MSBSP to the Commission and, in the case of a 
portion of the annual reports, to the public.\243\ This information 
will assist the Commission staff in monitoring these firms and 
examining them for compliance with the securities laws. Position 
records are of a different nature, and serve a different purpose, than 
the transaction data that will be reported pursuant to Regulation SBSR. 
Specifically, position records provide an overview of a firm's holdings 
at a specific point in time. The commenter states that position 
reporting requirements are unnecessary ``for purposes of market 
surveillance.'' \244\ However, as discussed above, the recordkeeping 
requirements being adopted in this document are designed to elicit 
information about the financial and operation condition of the filer. 
Market surveillance is not the objective of the requirements. Finally, 
the commenter stated that if the Commission does adopt position 
reporting requirements, it ``should limit the scope of such 
requirements for non-U.S. SBSDs to transactions that are either (i) 
cleared on a U.S.-registered clearing agency or derivatives clearing 
organization or (ii) opposite a U.S. person counterparty.'' \245\ As 
discussed above, the purpose of the reporting requirements is to obtain 
information about the financial and operational condition of the filer. 
Limiting the requirements to a subset of the filer's positions would 
not provide a complete picture of the filer's financial and operational 
condition. Moreover, the Commission has proposed in a separate release 
additional provisions that are designed to address concerns about the 
cross-border application of certain requirements applicable to SBSDs 
and MSBSPs.\246\
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    \242\ See Memorandum from the Division of Trading and Markets 
regarding a March 25, 2019 meeting with representatives of the 
Institute of International Bankers (``IIB 3/25/2019 Meeting'').
    \243\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25221.
    \244\ See IIB 3/25/2019 Meeting.
    \245\ See id.
    \246\ See Cross-Border Application Proposing Release, 84 FR 
24206.

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[[Page 68572]]

2. Periodic Filing of FOCUS Report
a. Rule 17a-5 and Rule 18a-7
Undesignated Introductory Paragraph
    The Commission proposed amending Rule 17a-5 to add an undesignated 
introductory paragraph stating that: (1) The rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP; and (2) a stand-alone 
or bank SBSD or MSBSP is subject to the reporting requirements under 
proposed Rule 18a-7.\247\ The Commission also proposed amending Rule 
17a-5 to remove paragraph (a)(1), which provides that paragraph (a) 
shall apply to every broker-dealer registered pursuant to Section 15 of 
the Exchange Act, because this text was redundant of the undesignated 
introductory paragraph of Rule 17a-5, as proposed to be added. 
Similarly, the Commission proposed that Rule 18a-7 have an undesignated 
introductory paragraph explaining that the rule applies to an SBSD or 
MSBSP that is not dually registered as a broker-dealer (i.e., a stand-
alone or bank SBSD or MSBSP). The Commission received no comments on 
the introductory paragraphs but, as discussed above, is modifying them 
to clarify which rule (17a-5 or 18a-7) applies to a given type of 
entity.\248\ The Commission received no comments on the proposed 
amendment to remove paragraph (a)(1) from Rule 17a-5 and is adopting it 
as proposed.\249\
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    \247\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25222.
    \248\ See undesignated introductory paragraph of Rule 17a-5, as 
amended; undesignated introductory paragraph of Rule 18a-7, as 
adopted.
    \249\ See Rule 17a-5, as amended. As a consequence of the 
removal of paragraph (a)(1) of Rule 17a-5, paragraphs (a)(2)(i) 
through (iv) are redesignated paragraphs (a)(1)(i) through (iv), 
respectively. Further, as a consequence of the removal of paragraph 
(a)(1), paragraphs (a)(3) through (7) of Rule 17a-5 are redesignated 
paragraphs (a)(2) through (6), respectively.
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Requirement To File the FOCUS Report
    Rule 17a-5 requires a broker-dealer, other than an OTC derivatives 
dealer, to file FOCUS Report Part II or IIA.\250\ The Commission 
proposed amending the rule to require a broker-dealer SBSD or MSBSP to 
file proposed Form SBS rather than the FOCUS Report Part II or 
IIA.\251\ The Commission also proposed including parallel requirements 
in Rule 18a-7 that: (1) Stand-alone SBSDs and MSBSPs be required to 
file proposed Form SBS with the Commission or its designee within 
seventeen business days after the end of each month; and (2) bank SBSDs 
and MSBSPs be required to file Form SBS with the Commission or its 
designee within seventeen business days after the end of each calendar 
quarter (instead of each month).\252\ The Commission proposed quarterly 
financial reporting for bank SBSDs and MSBSPs, instead of monthly 
reporting, because the prudential regulators currently require banks to 
file reports of financial and operational condition known as ``call 
reports'' on a quarterly basis.\253\ Under the proposal, the 
information reported by bank SBSDs and MSBSPs on the FOCUS Report Part 
IIC largely would be information that banks are required to provide in 
the call reports.
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    \250\ Prior to these amendments, the requirement that an OTC 
derivatives dealer file FOCUS Report Part IIB was set forth in 
paragraph (a) of Rule 17a-12. While an ANC broker-dealer is required 
under paragraph (a) of Rule 17a-5 to file FOCUS Report Part II, 
FINRA Rule 4521(b) provides that ANC broker-dealers must file 
supplemental and alternative reports as may be prescribed by FINRA. 
Under this rule, FINRA requires ANC broker-dealers to file FOCUS 
Report Part II CSE in lieu of FOCUS Report Part IIA. See also Self-
Regulatory Organizations; New York Stock Exchange, Inc.; Order 
Approving Proposed Rule Change to Require Members That Use Appendix 
E to Calculate Net Capital to File Supplemental and Alternative 
Reports, 70 FR 49349 (Commission approval of amendments to NYSE Rule 
418 requiring ANC broker-dealers to file Part II CSE).
    \251\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25222-24.
    \252\ In each case, the stand-alone or bank SBSD or MSBSP needed 
to file Form SBS with the Commission or its designee. The reference 
to a Commission designee was designed to provide the Commission with 
the option of requiring that these registrants file the FOCUS Report 
with a third party. Most broker-dealers file the FOCUS Report 
directly with their SROs pursuant to plans established by the SROs 
under paragraph (a)(3) (formerly paragraph (a)(4)) of Rule 17a-5, as 
amended. See Recordkeeping and Reporting Proposing Release, 79 FR at 
25223.
    \253\ See Consolidated Reports of Condition and Income for a 
Bank with Domestic and Foreign Offices--FFIEC 031 (``FFIEC Form 
031'' or ``call report''). See also 12 U.S.C. 161; 12 U.S.C. 324; 12 
U.S.C. 1464; 12 U.S.C. 1817.
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    In response to the Commission's proposal to require bank SBSDs and 
MSBSPs to file Form SBS seventeen business days after the end of the 
quarter, a commenter requested that it change the deadline to match the 
prudential regulators' requirement to file call reports thirty calendar 
days after the end of the quarter.\254\ To respond to the commenter's 
concerns, as well as to promote harmonization with prudential 
regulators' requirements, the Commission is adopting a thirty calendar-
day requirement as requested by the commenter. Since the proposed 
seventeen business-day requirement would have corresponded with twenty-
four calendar days (with a conservative assumption of no public 
holidays), this will provide administrative relief to bank SBSDs and 
MSBSPs by allowing them six additional calendar days to file the FOCUS 
Report Part IIC with the Commission.
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    \254\ See SIFMA 9/5/2014 Letter.
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    The Commission also proposed amendments to Rule 17a-5 to make 
explicit the requirement that the FOCUS Report filed by a stand-alone 
broker-dealer or the Form SBS filed by a broker-dealer SBSD or MSBSP 
must be ``executed.'' \255\ The Commission proposed parallel 
requirements in Rule 18a-7 to require that a Form SBS filed by a stand-
alone or bank SBSD or MSBSP must be executed. The Commission received 
no comment on these proposals for executed forms. For the reasons 
discussed above, the Commission is adopting the FOCUS Report filing 
requirements substantially as proposed.\256\
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    \255\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25224. Prior to these amendments, the FOCUS Report Parts II, IIA, 
IIB, and II CSE each had a section for the filer to execute the 
form.
    \256\ See paragraph (a) of Rule 17a-5, as amended; paragraphs 
(a)(1) and (2) of Rule 18a-7, as adopted. References in these 
paragraphs to Form SBS are changed to references to the FOCUS Report 
Part II and the FOCUS Report Part IIC, respectively. Similarly, 
references to Form SBS were also included in paragraphs (a)(1), (3), 
and (4), (b)(1), (d)(2)(i) and (iii), and (e)(3) of Rule 17a-5, as 
proposed to be amended. The references to proposed Form SBS are not 
being adopted and these provisions will continue to refer solely to 
the FOCUS Report. As discussed above, the requirement that an OTCDD/
SBSD file the FOCUS Report Part II is prescribed in Rule 18a-7 
(rather than 17a-5, as proposed).
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Additional Reporting Requirements for Registrants That Use Models
    Rule 17a-5 requires ANC broker-dealers to file additional reports 
on a monthly or quarterly basis with the FOCUS Report.\257\ The 
Commission proposed similar reporting requirements in Rule 18a-7 for 
stand-alone SBSDs approved to use internal models to compute net 
capital.\258\ These entities would be required to file most of the 
required documents within 17 business days after the end of each month. 
However, to correspond with the timing requirement in the proposed 
capital rule for these entities (Rule 18a-1),\259\ they would be 
required to file the following reports within seventeen business days 
after the end of each calendar quarter (instead of each month): A 
report identifying the number of business days for which the actual 
daily net trading loss exceeded the corresponding daily value at risk 
(``VaR''); and the results of backtesting of all internal models used 
to compute allowable capital, indicating the number of backtesting 
exceptions.

[[Page 68573]]

The Commission received no comment on these additional reporting 
proposals for stand-alone SBSDs and has adopted Rule 18a-1.\260\ 
Consequently, the Commission is adopting the additional reporting 
requirements, but with the modification that an OTCDD/SBSD must file 
them pursuant to Rule 18a-7 (rather than Rule 17a-5).\261\
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    \257\ See paragraph (a)(5) of Rule 17a-5, as amended.
    \258\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25224.
    \259\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70237-40.
    \260\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44052.
    \261\ See paragraphs (a)(3)(i) through (ix) of Rule 18a-7, as 
adopted. As proposed, paragraph (a)(3)(vii) of Rule 18a-7 would have 
required a stand-alone SBSD authorized to use internal models to 
calculate net capital to report the results of a monthly liquidity 
stress test. As discussed above, the Commission is deferring 
consideration of the liquidity stress test requirements for these 
entities and, therefore, this paragraph is being designated as 
``[Reserved].''
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b. FOCUS Report
    As discussed above, the Commission proposed Form SBS as the 
reporting form for all categories of SBSDs and MSBSPs. Proposed Form 
SBS was modeled on the FOCUS Report, particularly FOCUS Report Part II 
CSE. FOCUS Report Part II CSE served as the template for proposed Form 
SBS because it was designed to account for the use of internal models 
to compute net capital by ANC broker-dealers and elicits more detailed 
information about derivatives positions and exposures than FOCUS Report 
Parts II and IIA.\262\ Based on staff experience, including experience 
monitoring ANC broker-dealers, the Commission anticipates that most 
SBSDs will use internal models to compute their net capital.\263\
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    \262\ FOCUS Report Part IIB elicits similar information about 
derivatives positions and exposures but otherwise is more limited 
than FOCUS Report Part II CSE because OTC derivatives dealers are 
permitted to engage only in a narrow range of activities. See 17 CFR 
240.3b-12; 17 CFR 240.15a-1. See also Recordkeeping and Reporting 
Proposing Release, 79 FR at 25224, n. 440.
    \263\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43959-60.
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    However, as discussed above, the Commission is not adopting Form 
SBS as proposed, but is instead requiring the FOCUS Report Part II to 
be filed by nonbank SBSDs and MSBSPs. Further, the Commission is 
requiring that bank SBSDs and MSBSPs file FOCUS Report Part IIC (rather 
than proposed Form SBS or the FOCUS Report Part II, as amended). The 
information that must be provided by SBSDs and MSBSPs is substantively 
the same information elicited by proposed Form SBS, except that the 
information is now being elicited in FOCUS Report Parts II and IIC. 
Accordingly, the Commission is adopting changes to FOCUS Report Part II 
and the corresponding instructions to update the form, reflect the 
required filers, and account for these firms' derivatives activity.
    Thus, ANC broker-dealers that filed Part II CSE prior to these 
amendments and OTC derivatives dealers that filed Part IIB prior to 
these amendments instead will be required to file FOCUS Report Part II, 
as amended--FOCUS Report Parts II CSE and IIB will be discontinued. 
From the perspective of these entities, the information they will be 
required to enter into the revised FOCUS Report Part II as compared to 
FOCUS Report Parts II CSE and IIB is substantively the same. Similarly, 
from the perspective of broker-dealers that were required to file FOCUS 
Report Part II prior to these amendments, the information they will be 
required to enter into the revised form is substantively the same.\264\ 
Importantly, there is already significant overlap among the four forms 
filed on the eFOCUS system of the Financial Industry Regulatory 
Authority (``FINRA''): The FOCUS Report Parts II, IIA, IIB, and II 
CSE.\265\ Much of this duplication and overlap between forms is 
eliminated by combining the forms into a single revised FOCUS Report 
Part II and modifying the form to include the line items that were in 
proposed Form SBS.
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    \264\ In addition to the differences between Form SBS, as 
proposed to be adopted, and FOCUS Report Part II, as amended, as 
discussed below, broker-dealers will note the following general 
changes: (1) There are new sections added to the form that these 
firms may not be required to complete (e.g., Computation of Tangible 
Net Worth, which is required to be completed by stand-alone MSBSPs); 
(2) certain lines are worded differently or assigned different line 
item numbers (e.g., Pre-Amendment FOCUS Report Part II's ``Money 
differences'' (line item numbers 5000, 5010, 5020, and 5030) is 
relabeled ``Money suspense and balancing difference'' (line item 
numbers 5610, 5610, 6010, and 6012) in FOCUS Report Part II, as 
amended); (3) to the extent these entities engage in security-based 
swap or swap activities but are not SBSDs or MSBSPs, they will now 
have specific line items tailored to these products in which to 
input information; and (4) broker-dealers registered as FCMs are 
required to complete certain new sections the CFTC added to the 
CFTC's Form 1-FR-FCM in 2013. See Enhancing Protections Afforded 
Customers and Customer Funds Held by Futures Commission Merchants 
and Derivatives Clearing Organizations, 78 FR 68506, 68513 (Nov. 14, 
2013); 17 CFR 1.10(h) (allowing broker-dealers to file the FOCUS 
Report instead of Form 1-FR-FCM so long as all information required 
to be furnished on and submitted with Form 1-FR-FCM is provided with 
the FOCUS Report)).
    \265\ For example, all of the forms contain a cover page and 
contain (with variations): A statement of financial condition, a 
computation of net capital, a computation of the net capital 
requirement, a statement of income (loss), a statement of changes in 
ownership equity, a statement of changes in subordinated 
liabilities, and a statement of ownership equity and subordinated 
liabilities maturing or proposing to be withdrawn within the next 
six months. In addition, all of the forms except FOCUS Report Part 
IIA elicit financial and operational data; both FOCUS Report Parts 
II and II CSE contain (with variations): A computation for 
determination of reserve requirements under Rule 15c3-3, information 
for possession or control requirements under Rule 15c3-3, and a 
schedule of segregation requirements; and both FOCUS Report Parts 
IIB and II CSE contain (with variations): A schedule of aggregate 
securities and OTC derivatives positions, a schedule of geographic 
distribution of OTC derivatives exposures, a credit concentration 
report, and a portfolio summary of OTC derivatives exposures by 
internal credit rating.
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    The Commission believes that broker-dealers registering as an SBSD 
or MSBSP will find the consolidation preferable, since rather than 
familiarizing themselves with a new form (Form SBS), such dual 
registrants can continue to file FOCUS Report Part II, as amended. The 
consolidation is also expected to enhance the Commission's supervisory 
capacities, since it will be easier to compare different types of 
registrants' FOCUS Report responses when they are filing the same form.
    Bank SBSDs and MSBSPs will file FOCUS Report Part IIC, which 
elicits more limited information than FOCUS Report Part II. Moreover, 
much of the information elicited is already reported by these entities 
on their call reports. The Commission believes that bank SBSDs and 
MSBSPs will find it simpler to utilize the shorter FOCUS Report Part 
IIC, which is tailored to these entities and focuses on their business 
as an SBSD or MSBSP. Indeed, bank SBSDs and MSBSPs would have shared 
only one section in common with other Form SBS filers (the cover page), 
so the vast majority of Form SBS would not have been applicable to 
these bank entities.\266\ In addition, the capital and margin 
requirements applicable to nonbank SBSDs and MSBSPs--which are the 
source of the information input into the revised FOCUS Report Part II--
do not apply to bank SBSDs and MSBSPs. Bank SBSDs and MSBSPs are 
instructed to follow FFIEC Form 031's instructions regarding a majority 
of the line items on FOCUS Report Part IIC, as adopted, since most of 
the sections require these entities to report general financial 
information that banks are already required to report on FFIEC Form 
031.
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    \266\ The reporting requirements in Rule 18a-7 and the sections 
of the FOCUS Report applicable to bank SBSDs and MSBSPs are more 
limited in scope because bank SBSDs and MSBSPs are subject to the 
prudential regulators' reporting requirements. Further, the 
prudential regulators--rather than the Commission--are responsible 
for capital, margin, and other prudential requirements applicable to 
bank SBSDs and MSBSPs. For these reasons, the reporting requirements 
for bank SBSDs and MSBSPs are tailored to their activities as an 
SBSD or an MSBSP (as opposed to their activities as banks).
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    FOCUS Report Part II, as amended, continues to elicit financial and

[[Page 68574]]

operational information about a filer through sections consisting of 
uniquely numbered line items.\267\ To the extent a line item number has 
already been assigned in FOCUS Report Parts II, IIA, IIB, and/or II 
CSE, revised FOCUS Report Part II uses the same line item number. 
However, the amended form also includes new lines and corresponding 
line items that were proposed in Form SBS and are relevant to security-
based swap and swap activities. These line items are identified by 
numbers on revised FOCUS Report Part II with a 5-digit number beginning 
with 12000 and generally increasing upward.
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    \267\ As used in this release, the term ``line'' refers to the 
lines in the left column on the FOCUS Report that describe the type 
of entries to be made on that line. The term ``line item'' refers to 
the fields into which information is entered. For example, Line 1 of 
the Statement of Income (Loss) section on revised FOCUS Report Part 
II is cash, Line Item 200 is the field to enter the allowable amount 
of cash, and Line Item 750 is the field to enter the total amount of 
cash.
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    Proposed Form SBS would have been divided into five parts.\268\ 
FOCUS Report Part II, as amended, and FOCUS Report Part IIC, as 
adopted, are not divided into parts. Dividing the form into parts was a 
more useful approach when bank entities would have been required to 
file the same form as nonbank entities. However, now that bank SBSDs 
and MSBSPs will separately file FOCUS Report Part IIC, there is no 
longer a need to subdivide the form into parts based on the type of 
registrant (e.g., bank SBSD versus broker-dealer SBSD). In addition, 
separate parts are not necessary because the header at the top of each 
page of FOCUS Report Parts II and IIC identifies the type of 
registrants required to complete that page (as proposed in Form SBS). 
Nonetheless, the sections of revised FOCUS Report Part II appear in the 
same order as they appeared in proposed Form SBS, so they still follow 
the logic used to order the sections in the proposed form.
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    \268\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25224-36.
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    The Commission is amending the instructions for FOCUS Report Part 
II and adopting instructions for FOCUS Report Part IIC to provide 
further guidance on the information to be entered into certain line 
items.\269\
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    \269\ See FOCUS Report Part II instructions, as amended; FOCUS 
Report Part IIC instructions, as adopted. The amendments to the 
instructions include incorporating relevant instructions from 
proposed Form SBS into the instructions for FOCUS Report Parts II 
and IIC, as well as globally replacing ``non-bank'' with ``nonbank'' 
for internal consistency.
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i. Revised FOCUS Report Part II
Cover Page
    The FOCUS Report Parts II, IIA, IIB, and II CSE prior to these 
amendments (collectively and individually, the ``Pre-Amendment FOCUS 
Reports'') include a cover page that elicits basic information about 
the reporting firm. Proposed Form SBS included a cover page largely in 
the same format as the cover page in Pre-Amendment FOCUS Report Part 
II, but with modifications to account for the additional registrants 
required to file the form.\270\ The Commission is adopting the cover 
page in proposed Form SBS by retaining the existing cover page in FOCUS 
Report Part II, as amended, with non-substantive changes largely to 
account for the additional registrants required to use this form 
(stand-alone broker-dealers, ANC broker-dealers, OTC derivatives 
dealers, and broker-dealer and stand-alone SBSDs and MSBSPs) and in 
response to comment.\271\
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    \270\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25225.
    \271\ See FOCUS Report Part II, as amended, Cover Page. The 
following changes are being made: (1) The line soliciting firms to 
check the type of registrant filing the form is updated to reflect 
that bank SBSDs and MSBSPs will not be required to file this part of 
the FOCUS Report Part II; (2) in response to commenters' requests to 
more explicitly address OTC derivatives dealers, the option is added 
to check a box if the respondent is an OTC derivatives dealer (see, 
e.g., Nomura Letter); (3) in response to comment that Form SBS, as 
proposed to be adopted, did not reference foreign SBSDs or foreign 
MSBSPs, a line is added asking firms if the filer is a U.S. person 
(see SIFMA 9/5/2014 Letter); (4) a line is added asking whether the 
filer is authorized to use models to compute capital as a way to 
check that the firm is completing the correct net capital section in 
the form; (5) a typographical error is corrected so that the 
officer's title under the signature line matches the officer's title 
under the line for the signing officer to print his or her name; and 
(6) the date field is made more flexible by specifying ``2___'' 
instead of ``20__.''
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Statement of Financial Condition
    The Pre-Amendment FOCUS Reports have a Statement of Financial 
Condition section that elicits detail about filers' assets, 
liabilities, and ownership equity. Proposed Form SBS similarly had a 
Statement of Financial Condition section largely modeled on the 
parallel section in Pre-Amendment FOCUS Report Part II CSE.\272\ The 
Commission received a number of comments on this proposed section and 
has modified it in response to these comments.
---------------------------------------------------------------------------

    \272\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25226-27.
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    First, a commenter suggested that Lines 8 through 10 on the assets 
side of the Statement of Financial Condition section (which elicited 
details about securities, including security-based swaps, commodities, 
and swaps positions) should be simplified and consolidated into a 
single line item.\273\ As discussed below, the revised FOCUS Report 
Part II elicits details about these positions in other sections of the 
form. Accordingly, the Commission is consolidating these lines into 
Line 9 (Total net securities, commodities, and swaps positions) and 
making a corresponding modification in Line 24 of the liability side of 
the section (Total net securities, commodities, and swaps 
positions).\274\
---------------------------------------------------------------------------

    \273\ See, e.g., SIFMA 9/5/2014 Letter.
    \274\ See FOCUS Report Part II, as amended, Statement of 
Financial Condition, Lines 8 and 22.
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    Second, the Statement of Financial Condition section of proposed 
Form SBS required filers to report the amount of certain assets and 
liabilities that were includable in the broker-dealer customer reserve 
formula, the proposed SBSD reserve formula, and a catch-all ``other'' 
section in which information about assets and liabilities related to 
segregation requirements under the CEA would be entered if the filer is 
also registered with the CFTC.\275\ Given that Commission and CEA 
segregation requirements are the most widely applicable segregation 
requirements for FOCUS Report filers, the Commission is consolidating 
the reporting of these amounts into single lines to the extent 
applicable.\276\
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    \275\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25227.
    \276\ See FOCUS Report Part II, as amended, Statement of 
Financial Condition, Lines 3A1, 3B1, 3C1, 3D1 (receivables), 17A 
(bank loans payable), 19A1, 19B1, 19C1, 19D1, and 19E1 (payables). 
Further, the Commission has adopted the SBSD segregation 
requirements that will generate amounts includable in these line 
items. See Capital, Margin, and Segregation Adopting Release, 84 FR 
at 43930-43.
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    Third, the Statement of Financial Condition section of proposed 
Form SBS required filers to report information about payables due to 
securities customers and non-customers, security-based swap customers 
and non-customers, and swap customers and non-customers.\277\ A 
commenter suggested simplifying the form by deleting payables to 
security-based swap and swap customers and non-customers from the 
Statement of Financial Condition and capturing this information in the 
schedule that elicits detail on derivatives positions.\278\ The 
Commission agrees and has deleted these line items from this section 
and, instead, requires the information to be reported in Schedule 1 to 
FOCUS Report Part II, as amended.\279\ Similarly,

[[Page 68575]]

the commenter noted the imbalance of requiring the reporting of other 
derivatives payables on the liabilities side of the balance sheet, but 
not requiring the reporting of other derivatives receivable on the 
assets side of the balance sheet.\280\ The Commission agrees and filers 
no longer must report other derivatives payable on the Statement of 
Financial Condition section and instead will report this information on 
Schedule 1 to FOCUS Report Part II, as amended.\281\
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    \277\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25227.
    \278\ See SIFMA 9/5/2014 Letter.
    \279\ See FOCUS Report Part II, as amended, Statement of 
Financial Condition, Schedule 1--Aggregate Securities, Commodities, 
and Swaps Positions.
    \280\ See, e.g., SIFMA 9/5/2014 Letter.
    \281\ See FOCUS Report Part II, as amended, Schedule 1--
Aggregate Securities, Commodities, and Swaps Positions.
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    Fourth, the Statement of Financial Condition section of proposed 
Form SBS directed filers to report ownership equity from sole 
proprietorships, partnerships, corporations, and limited partners. The 
Commission is adding a reference to ``members'' in Line 29 of the 
Statement of Financial Condition in FOCUS Report Part II, as amended, 
instead of solely referencing ``limited partners.'' This change 
recognizes the legal structure of limited liability companies as well.
    Fifth, lines are being added to the assets and liabilities sides of 
the Statement of Financial Condition for filers to report excess cash 
collateral pledged on derivative transactions (Lines 6 and 21 on FOCUS 
Report Part II, as amended). On the assets side, a broker-dealer or 
SBSD will report cash collateral posted to a counterparty that exceeds 
the amount of variation margin the firm has posted to cover current 
exposure. On the liability side, the broker-dealer or SBSD will report 
cash collateral posted from a counterparty that is in excess of the 
amount of variation margin the counterparty is required to post to 
cover current exposure. The addition of these lines requires firms to 
report the specific amounts on the asset side that are allowable and 
non-allowable assets. Establishing unique lines to report this 
information will avoid firms reporting the amounts in other lines that 
are not specifically tailored to present the information, which--based 
on staff experience--has resulted in firms reporting the information on 
several different lines. For the foregoing reasons, the Statement of 
Financial Condition section in proposed Form SBS is being adopted by 
retaining the parallel section in FOCUS Report Part II, as amended, 
with the modifications discussed above and certain other 
modifications.\282\ This section is required to be completed by stand-
alone broker-dealers and broker-dealer and stand-alone SBSDs and 
MSBSPs.
---------------------------------------------------------------------------

    \282\ See FOCUS Report Part II, as amended, Statement of 
Financial Condition. The following non-substantive changes are being 
made: (1) A line item is added for firms to report non-allowable 
cash (e.g., petty or restricted cash); (2) the note on the second 
page of the Statement of Financial Condition clarifies that ``Stand-
alone MSBSPs should only complete the Allowable and Total columns'' 
(emphasis added); this sentence is also added to the instructions 
for the Statement of Financial Condition; (3) an obsolete accounting 
reference is updated globally (including on Line 15E, which was 
proposed as Line 14E) to accurately reflect ``ASC 860'' instead of 
``SFAS 140''; and (4) the instructions are updated to reflect the 
changes discussed in this section.
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Computation of Net Capital
    The Pre-Amendment FOCUS Reports have a Computation of Net Capital 
section. Proposed Form SBS included two sections: One to be completed 
by SBSDs authorized to use internal models to compute net capital under 
the proposed capital requirements and the other to be completed by 
filers not authorized to use internal models for this purpose.\283\ The 
Commission has adopted capital requirements for nonbank SBSDs under 
which certain firms may be authorized to use internal models to compute 
net capital.\284\
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    \283\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25227-28.
    \284\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43898-905.
---------------------------------------------------------------------------

    The Computation of Net Capital section for filers authorized to use 
models was largely modeled on the parallel section in Pre-Amendment 
FOCUS Report Part II CSE. The section in proposed Form SBS had a line 
for filers to report their contractual securities commitments because 
this line appeared on the Computation of Net Capital section in Pre-
Amendment FOCUS Report Part II.\285\ However, this line item does not 
apply to filers authorized to use models and is removing it from the 
section.\286\
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    \285\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25228.
    \286\ The FOCUS Report instructions clarify that contractual 
securities commitments not accounted for in the firm's VaR model 
will continue to be accounted for in residual marketable securities 
(Line Item 3665). See FOCUS Report Part II instructions, as amended.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

[[Page 68576]]

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

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

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

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

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

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

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

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

[[Page 68577]]

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

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

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

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

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

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

Computation for Determination of Customer Reserve Requirements
    Pre-Amendment FOCUS Report Parts II and II CSE have a Computation 
for Determination of Reserve Requirements section that elicited detail 
about filers' customer reserve computation under the broker-dealer 
customer protection rule (Rule 15c3-3). Proposed Form SBS had a 
Computation for Determination of Customer Reserve Requirements section 
modeled largely on the parallel section in Pre-Amendment FOCUS Report 
Part II CSE.\309\ The Commission received no comment on this section in 
proposed Form SBS and is adopting it by retaining the parallel section 
in FOCUS Report Part II, as amended, with non-substantive changes for 
clarity.\310\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \309\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25226.
    \310\ See FOCUS Report Part II, as amended, Computation for 
Determination of Customer Reserve Requirements. To avoid confusion 
between the customer and security-based swap customer reserve 
requirements, this section is retitled ``Computation for 
Determination of Customer Reserve Requirements'' (emphasis added), 
and the instructions are updated accordingly. In addition, in 
response to commenters, the section includes a clarification that 
the notes referenced in this section appear in 17 CFR 240.15c3-3a 
(Rule 15c3-3a) (Exhibit A to Rule 15c3-3). See SIFMA 9/5/2014 
Letter.
---------------------------------------------------------------------------

Possession or Control for Customers
    Pre-Amendment FOCUS Report Parts II and II CSE have an Information 
for Possession or Control Requirements section that elicits detail 
about securities kept in possession or control for customers under Rule 
15c3-3. Proposed Form SBS had a Possession or Control for Customers 
section modeled on the parallel section in Pre-Amendment FOCUS Report 
Part II CSE.\311\ The Commission received no comment on this section of 
proposed Form SBS and is adopting it by retaining the parallel section 
in FOCUS Report Part II, as amended, with non-substantive changes for 
clarity.\312\ This section must be completed by stand-alone broker-
dealers and broker-dealer SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \311\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25226.
    \312\ See FOCUS Report Part II, as amended, Possession or 
Control for Customers. To avoid confusion between the customer and 
security-based swap customer possession and control requirements, 
this section is retitled ``Possession or Control for Customers,'' 
and the instructions are updated accordingly.
---------------------------------------------------------------------------

Computation for Determination of PAB Requirements
    In 2013, the Commission amended Rule 15c3-3 to establish PAB 
reserve bank account requirements under which a broker-dealer must 
perform a reserve account calculation with respect to broker-dealer 
clients that is similar to the calculation for customers discussed 
above.\313\ Proposed Form SBS included a Computation for Determination 
of PAB Requirements section for filers to

[[Page 68578]]

input this calculation.\314\ The Commission received no comment on this 
proposed section of Form SBS and is adding it to FOCUS Report Part II, 
as amended, with non-substantive changes for clarity.\315\ The section 
must be completed by stand-alone broker-dealers and broker-dealer SBSDs 
and MSBSPs.
---------------------------------------------------------------------------

    \313\ See Financial Responsibility Rules for Broker-Dealers, 78 
FR at 51903. Paragraph (a)(16) of Rule 15c3-3 defines ``PAB 
account'' as ``a proprietary securities account of a broker or 
dealer (which includes a foreign broker or dealer, or a foreign bank 
acting as a broker or dealer) other than a delivery-versus-payment 
account or a receipt-versus-payment account.'' The paragraph further 
provides that the ``term does not include an account that has been 
subordinated to the claims of creditors of the carrying broker or 
dealer.''
    \314\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25226.
    \315\ See revised FOCUS Report Part II, as amended, Computation 
for Determination of PAB Requirements. In addition, in response to 
commenters, the section includes a clarification that the notes 
referenced in this section appear in Exhibit A to Rule 15c3-3 (Rule 
15c3-3a). See SIFMA 9/5/2014 Letter.
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Claiming an Exemption From Rule 15c3-3
    Pre-Amendment FOCUS Report Part II has a section for broker-dealers 
claiming an exemption from Rule 15c3-3 to identify the paragraph of the 
rule upon which the firm's exemption is based. Proposed Form SBS had a 
similar section modeled on the parallel section in Pre-Amendment FOCUS 
Report Part II.\316\ The Commission received no comment on this section 
of proposed Form SBS and is adopting it by retaining the parallel 
section in FOCUS Report Part II, as amended, with non-substantive 
changes for clarity and accuracy.\317\ This section must be completed 
by stand-alone broker-dealers and broker-dealer SBSDs and MSBSPs 
claiming an exemption from Rule 15c3-3.
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    \316\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25226.
    \317\ See FOCUS Report Part II, as amended, Claiming an 
Exemption from Rule 15c3-3. The following changes are being made: 
(1) The instruction to ``check one only'' is replaced with ``check 
all that apply'' as a firm can claim more than one exemption from 
Rule 15c3-3; (2) the incorrect references to paragraphs 
``(k)(2)(A)'' and ``(k)(2)(B)'' of Rule 15c3-3 are replaced with 
correct references to paragraphs (k)(2)(i) and (ii) of Rule 15c3-3; 
and (3) due to the inadvertent omission of instructions regarding 
this section, the instructions to FOCUS Report Part II, as amended, 
are updated to direct stand-alone broker-dealers, broker-dealer 
SBSDs, and broker-dealer MSBSPs that are claiming an exemption from 
Rule 15c3-3 to complete this section.
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Computation for Determination of Security-Based Swap Customer Reserve 
Requirements
    The Commission's proposed segregation requirements for SBSDs in 
Rule 18a-4 required them to maintain a security-based swap customer 
reserve account and to determine the amount kept in the account using 
the formula in 17 CFR 240.18a-4a (Exhibit A to Rule 18a-4).\318\ 
Accordingly, proposed Form SBS had a section titled ``Computation for 
Determination of the Amount to be Maintained in the Special Reserve 
Account for the Exclusive Benefit of Security-Based Swap Customers'' in 
which an SBSD would enter its security-based swap reserve account 
calculation.\319\ The Commission received no comment on this section. 
However, the final segregation rules codified the security-based swap 
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule 
18a-4 to apply to stand-alone SBSDs.\320\ Consequently, the Commission 
is adopting the section in proposed Form SBS by adding it to FOCUS 
Report Part II, as amended, with non-substantive changes for 
consistency internally and with Rules 15c3-3 and 18a-4.\321\ The 
modifications also include an instruction that the section must be 
completed by stand-alone broker-dealers in addition to broker-dealer 
SBSDs and MSBSPs.
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    \318\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70282-87.
    \319\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25230-31.
    \320\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43930-43.
    \321\ See FOCUS Report Part II, as amended, Computation for 
Determination of Security-Based Swap Customer Reserve Requirements. 
The following changes are being made: (1) References to Rule 18a-4 
are removed from the section's title, line items, and instructions 
to accurately reflect that the security-based swap customer reserve 
requirement adopted by the Commission is located in Rules 15c3-3 and 
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the 
Commission); (2) the parenthetical ``(See Note A)'' is added to Line 
1 for consistency with Line 1 of the Computation for Determination 
of Customer Reserve Requirements section in revised FOCUS Report 
Part II, and in response to commenters, the section includes a 
clarification that the notes referenced in this section appear in 
Exhibit B to Rule 15c3-3 or Exhibit A to Rule 18a-4, as applicable 
(see SIFMA 9/5/2014 Letter); and (3) in Lines 24 and 26, ``Reserve 
Bank Account(s)'' is replaced with ``Reserve Account(s)'' for 
consistency with paragraph (a)(9) of Rule 18a-4, as adopted (see 
paragraph (a)(9) of Rule 18a-4, as adopted).
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Possession or Control for Security-Based Swap Customers
    The Commission's proposed segregation requirements for SBSDs in 
Rule 18a-4 required them to maintain possession or control over excess 
security collateral.\322\ Accordingly, proposed Form SBS had a section 
titled ``Information for Possession or Control Requirements Under Rule 
18a-4'' that elicits detail about excess securities collateral kept in 
possession or control for customers under proposed Rule 18a-4.\323\ The 
Commission received no comment on this section of proposed Form SBS. 
However, the final segregation rules codified the security-based swap 
reserve account requirements in: (1) Rule 15c3-3 to apply to stand-
alone broker-dealers and broker-dealer SBSDs and MSBSPs; and (2) Rule 
18a-4 to apply to stand-alone SBSDs.\324\ Consequently, the Commission 
is adopting the section in proposed Form SBS by adding it to FOCUS 
Report Part II, as amended, with non-substantive changes for 
consistency internally and with Rules 15c3-3 and 18a-4.\325\ The 
modifications also include an instruction that the section must be 
completed by stand-alone broker-dealers in addition to broker-dealer 
SBSDs and MSBSPs.
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    \322\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70278-82.
    \323\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25231.
    \324\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43930-43.
    \325\ See FOCUS Report Part II, as amended, Possession or 
Control for Security-Based Swap Customers. References to Rule 18a-4 
are removed from the section's title, line items, and instructions 
in order to accurately reflect that the possession or control 
requirements adopted by the Commission are located in Rules 15c3-3 
and 18a-4 (instead of solely in Rule 18a-4 as initially proposed by 
the Commission).
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Claiming an Exemption From Rule 18a-4
    As adopted, Rule 18a-4 applies to stand-alone and bank SBSDs and to 
OTCDD/SBSDs.\326\ In addition, the final rule exempts these SBSDs from 
its requirements of if the SBSD meets certain conditions, including 
that the SBSD does not clear security-based swap transactions for other 
persons, provides notice to the counterparty regarding the right to 
segregate initial margin at an independent third-party custodian, and 
discloses in writing that any collateral received by the SBSD for non-
cleared security-based swaps will not be subject to a segregation 
requirement and regarding how a claim of the counterparty for the 
collateral would be treated in a bankruptcy or other formal liquidation 
proceeding of the SBSD. In light of these modifications to the rule 
from the proposal (which did not provide an exemption), the Commission 
is adding a line item to the FOCUS Report Part II for a stand-alone 
SBSD or OTCDD/SBSD to indicate whether the firm is claiming an 
exemption from Rule 18a-4.\327\
---------------------------------------------------------------------------

    \326\
    \327\ See FOCUS Report Part II, as amended, Claiming an 
Exemption from Rule 18a-4.
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Sections Completed by FCMs
    FCMs are required to periodically file Form 1-FR-FCM with the CFTC 
and their designated SRO.\328\ The form elicits financial and 
operational information about an FCM. To account

[[Page 68579]]

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

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

    Proposed Form SBS contained the following sections from Form 1-FR-
FCM in order to permit dual registrants to file Form SBS (rather than 
Form 1-FR-FCM) with the CFTC and its designated SRO: (1) A Computation 
of CFTC Minimum Net Capital Requirement; (2) a Statement of Segregation 
Requirements and Funds in Segregation for Customers Trading on U.S. 
Commodity Exchanges; (3) a Statement of Cleared Swaps Customer 
Segregation Requirements and Funds in Cleared Swaps Customer Accounts 
under Section 4d(f) of the CEA; (4) a Statement of Segregation 
Requirements and Funds in Segregation for Customers' Dealer Options 
Accounts; (5) a Statement of Secured Amounts and Funds Held in Separate 
Accounts for Foreign Futures and Foreign Options Customers Pursuant to 
CFTC Regulation 30.7 (and Foreign Futures and Foreign Options Secured 
Amounts Summary); and (6) a Statement of Secured Amounts and Funds Held 
in Separate Accounts for Foreign Futures and Foreign Options Customers 
Pursuant to CFTC Regulation 30.7 (and Funds Deposited in Separate CFTC 
Regulation 30.7 Accounts) (17 CFR 30.7).\330\ The Commission received 
no comment on these sections of proposed Form SBS and is adopting them 
by retaining or adding them to FOCUS Report Part II, as amended, with 
non-substantive changes.\331\ These sections will be filed by broker-
dealers that are dually registered with the CFTC as FCMs. The 
Commission believes that this will promote harmonization with CFTC 
requirements.
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    \330\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25232-33.
    \331\ See FOCUS Report Part II, as amended, Computation of CFTC 
Minimum Capital Requirements, Statement of Segregation Requirements 
and Funds in Segregation for Customers Trading on U.S. Commodity 
Exchanges, Statement of Cleared Swaps Customer Segregation 
Requirements and Funds in Cleared Swaps Customer Accounts under 
Section 4d(f) of the Commodity Exchange Act, Statement of 
Segregation Requirements and Funds in Segregation for Customers' 
Dealer Options Accounts, Statement of Secured Amounts and Funds Held 
in Separate Accounts for Foreign Futures and Foreign Options 
Customers Pursuant to CFTC Regulation 30.7, Statement of Secured 
Amounts and Funds Held in Separate Accounts for Foreign Futures and 
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The 
following non-substantive changes were made: (1) The parenthetical 
``(under)'' is added to Line 16 of the Statement of Segregation 
Requirements and Funds in Segregation for Customers Trading on U.S. 
Commodity Exchanges for consistency with the language used in Form 
1-FR-FCM; and (2) instead of using the placeholder line item number 
``9999'', the line item numbers recently assigned in FINRA's eFOCUS 
system are used for the following lines: Lines 15 and 16 in the 
Statement of Segregation Requirements and Funds in Segregation for 
Customers Trading on U.S. Commodity Exchanges, Lines 15 and 16 in 
the Statement of Cleared Swaps Customer Segregation Requirements and 
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the 
Commodity Exchange Act, Lines 1 through 7 in the Statement of 
Secured Amounts and Funds Held in Separate Accounts for Foreign 
Futures and Foreign Options Customers Pursuant to CFTC Regulation 
30.7, and Lines 9 through 11 in the Statement of Secured Amounts and 
Funds Held in Separate Accounts for Foreign Futures and Foreign 
Options Customers Pursuant to CFTC Regulation 30.7.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 68580]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 68581]]

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

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

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

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

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

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

    One commenter pointed out that not all banks file FFIEC Form 031, 
noting that U.S. branches and agencies of foreign banks file FFIEC Form 
002.\353\ The Commission acknowledges that there are multiple types of 
FFIEC reporting forms, but modeled the FOCUS Report Part IIC on the 
form it believes most bank SBSDs and MSBSPs will use. FFIEC Form 031 is 
filed by banks with both domestic and foreign offices, while FFIEC Form 
041 is filed by banks with domestic offices only. All of the line items 
that appear on FOCUS Report Part IIC, as adopted, appear on both FFIEC 
Form 031 and FFIEC Form 041, except for three line items which do not 
apply to FFIEC Form 041 filers.\354\
---------------------------------------------------------------------------

    \353\ See SIFMA 9/5/2014 Letter. The commenter also noted that 
foreign bank SBSDs generally report financial information to their 
home jurisdiction in accordance with the International Financial 
Reporting Standards rather than U.S. Generally Accepted Accounting 
Principles. See id. However, these firms likely also file FFIEC Form 
002, which is required to be prepared using U.S. Generally Accepted 
Accounting Principles. The FFIEC Form 002 instructions are available 
at http://www.ffiec.gov/PDF/FFIEC_forms/FFIEC002_201409_i.pdf.
    \354\ Line Items 2200, 6631, and 6636 regarding foreign office 
deposits do not apply to FFIEC Form 041 filers, because they do not 
have foreign branches. Line Item 1395 regarding Tier 3 capital does 
not apply to FFIEC Form 041 filers, because they are not required to 
compute Tier 3 capital.
---------------------------------------------------------------------------

    In addition to the sections drawn from FFIEC Form 031, FOCUS Report 
Part IIC, as adopted, includes sections for: (1) A Computation for 
Determination of Security-Based Swap Customer Reserve Requirements; (2) 
Possession or Control for Security-Based Swap Customers; and (3) 
Schedule 1--Aggregate Security-Based Swap and Swap Positions. Finally, 
the Commission is adopting instructions for FOCUS Report Part IIC, 
which closely track the instructions for proposed Form SBS and FOCUS 
Report Part II, as amended.\355\
---------------------------------------------------------------------------

    \355\ In addition to removing references to entities that will 
not file FOCUS Report Part IIC and removing references to sections 
and schedules that are not part of FOCUS Report Part IIC, the 
following change is made to FOCUS Report Part IIC's general 
instructions: The instruction ``Money amounts should be expressed in 
whole dollars.'' is deleted because this instruction does not appear 
in the instructions accompanying FFIEC Form 031. Additional changes 
to FOCUS Report Part IIC's instructions that relate to specific 
sections of the form are discussed in this release's discussion of 
the applicable section.
---------------------------------------------------------------------------

Cover Page
    As discussed above, proposed Form SBS included a cover page modeled 
largely on the cover page to Pre-Amendment FOCUS Report Part II.\356\ 
The Commission received no comment on the proposed cover page and is 
adopting it in FOCUS Report Part IIC with non-substantive changes 
largely to account for the fact that FOCUS Report Part IIC will only be 
filed by bank SBSDs and MSBSPs.\357\
---------------------------------------------------------------------------

    \356\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25225.
    \357\ See FOCUS Report Part IIC, Cover Page. The following 
changes are being made: (1) The line soliciting firms to check the 
type of registrant filing the form is shortened to only reflect the 
registrants required to file FOCUS Report Part IIC (bank SBSDs and 
MSBSPs); (2) in response to comment that proposed Form SBS did not 
reference foreign SBSDs or foreign MSBSPs, a line is added asking 
firms whether the filer is a U.S. person (see SIFMA 9/5/2014 
Letter); (3) the line soliciting firms to check the reason the firm 
is filing FOCUS Report Part IIC is shortened to only reflect the 
range of reasons bank SBSDs and MSBSPs would file the report: at the 
special request by the Commission, pursuant to Rule 18a-7, or other; 
(4) the line soliciting firms to ``Check here if respondent is 
filing an audited report'' is removed, because bank SBSDs and MSBSPs 
are not required to file annual reports with the Commission (see 17 
CFR 240.18a-7(c)(1)(i)); (5) a typographical error is corrected so 
the officer's title printed under the signature line matches the 
officer's title printed under the line for the signing officer to 
write out his or her name; and (6) a typographical error in the 
instructions is corrected so that the ``Official use'' line 
references line item 33 instead of 31.
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Balance Sheet
    A bank must report details about its assets, liabilities, and 
equity capital on Schedule RC to FFIEC Form 031. Schedule RC also 
includes a Memoranda section that elicits information about the bank's 
external auditors and fiscal year end. Proposed Form SBS had a Balance 
Sheet section to be completed by bank SBSDs and MSBSPs.\358\ The lines 
and line items in this section were the same as in Schedule RC to FFIEC 
Form 031, except that it did not include line items from the Memoranda 
section. The Commission received no comment on this proposed section 
and is adopting it in FOCUS Report Part IIC with non-substantive 
changes for consistency with Schedule RC to FFIEC Form 031.\359\ This 
section must be completed by bank SBSDs and MSBSPs.
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    \358\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25231.
    \359\ See FOCUS Report Part IIC, Balance Sheet (Information As 
Reported On FFIEC Form 031--Schedule RC). The following changes are 
being made: (1) Lines 4B, 4C, 13A1, 13A2, 13B1, and 13B2 are 
indented so their corresponding line items are not included in the 
Totals column; (2) on Line 8, the word ``Investment'' is replaced 
with ``Investments''; (3) on Line 23, the Line Item number ``3828b'' 
is replaced with ``3838b''; (4) in the instructions, clarification 
is added that ``FFIEC Instructions'' refers to ``instructions 
accompanying FFIEC Form 031''; and (5) because the instructions 
direct filers to prepare this section in accordance with the FFIEC 
Instructions, the following sentence is deleted: ``In addition, the 
data reported on this section should only be updated quarterly.''
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Regulatory Capital
    The prudential regulators are responsible for administering capital 
requirements for bank SBSDs and MSBSPs. A bank must report details 
about its regulatory capital on Schedule RC-R to FFIEC Form 031. 
Schedule RC-R also includes a Memoranda section that elicits detail 
about derivatives. Proposed Form SBS similarly included a regulatory 
capital section to be completed by bank SBSDs and MSBSPs.\360\ The 
lines and line items in this section were largely the same as in 
Schedule RC-R to FFIEC Form 031. More specifically, the proposed 
section required banks to enter the total amounts of the components of 
bank regulatory capital (i.e., total Tier 1, Tier 2, or Tier 3 capital) 
and other summary measures, rather than requiring the level

[[Page 68582]]

of detail required by the prudential regulators on Schedule RC-R. The 
Commission received no comment on this proposed section and is adopting 
it in FOCUS Report Part II, with non-substantive changes for 
consistency with Schedule RC-R to FFIEC Form 031.\361\ This section 
must be completed by bank SBSDs and MSBSPs.
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    \360\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25231-32.
    \361\ See FOCUS Report Part IIC, Regulatory Capital (Information 
As Reported On FFIEC Form 031--Schedule RC-R). The following changes 
are being made; (1) on Line 7, the phrase ``Total assets for 
leverage capital purposes'' is replaced with ``Total assets for the 
leverage ratio'' and line item number ``L138b'' is replaced with 
``A224b''; (2) on Lines 8 through 10, the same line item numbers are 
assigned to Columns A and B; and (3) because the instructions direct 
filers to prepare this section in accordance with the FFIEC 
Instructions, the following sentence is deleted: ``In addition, the 
data reported on this section should only be updated quarterly.''
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Income Statement
    A bank must report details about its income or loss and expenses on 
Schedule RI to FFIEC Form 031. Schedule RI also includes a Memoranda 
section that elicits further details about the bank's income or loss. 
Proposed Form SBS included an income statement section to be completed 
by bank SBSDs and MSBSPs.\362\ The proposed income statement section 
included some--but not all--of the line items on Schedule RI. More 
specifically, to focus the reporting on summary information and 
information relevant to securities and derivatives activities, the 
proposed income statement section included only line items from 
Schedule RI that require the entry of: (1) Total amounts for categories 
of income, expense, and loss; (2) details about gains and losses on 
securities positions; (3) details about trading revenues; and (4) 
details about gains and losses on derivatives. The Commission received 
no comment on the proposed income statement section and is adopting it 
in FOCUS Report Part IIC with minor non-substantive changes.\363\ This 
section must be completed by bank SBSDs and MSBSPs.
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    \362\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25232.
    \363\ See FOCUS Report Part IIC, Income Statement (Information 
As Reported On FFIEC Form 031--Schedule RI). The following changes 
are being made: (1) In FOCUS Report Part IIC, the parentheticals 
instructing filers which lines to total are deleted from Lines 9, 
9F, and 9G, because one of these parentheticals contained an 
inaccurate cross-reference and this change preserves flexibility in 
case FFIEC Form 031's lines are renumbered in the future; and (2) 
because the instructions direct filers to prepare this section in 
accordance with the FFIEC Instructions, the following sentence is 
deleted: ``In addition, the data reported on this section should 
only be updated quarterly.''
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Computation for Determination of Security-Based Swap Customer Reserve 
Requirements
    As discussed above, FOCUS Report Part II, as amended, includes a 
section for broker-dealers and stand-alone SBSDs to provide a 
computation of their security-based swap customer reserve requirements. 
Proposed Form SBS would have required bank SBSDs to complete an 
identical section.\364\ The Commission received no comment on applying 
this section to bank SBSDs and is adopting it in FOCUS Report Part IIC 
with non-substantive changes for consistency internally and with Rules 
15c3-3 and 18a-4.\365\
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    \364\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25230-31.
    \365\ See FOCUS Report Part IIC, Computation for Determination 
of Security-Based Swap Customer Reserve Requirements. The following 
non-substantive changes are being made: (1) References to Rule 18a-4 
are removed from the section's title, line items, and instructions 
to accurately reflect that the security-based swap customer reserve 
requirement adopted by the Commission is located in Rules 15c3-3 and 
18a-4 (instead of solely in Rule 18a-4 as initially proposed by the 
Commission); (2) to improve clarity, the form and instructions 
reflect that the section is titled ``Computation for Determination 
of Security-Based Swap Customer Reserve Requirements'' instead of 
``Computation for Determination of the Amount to be Maintained in 
the Special Account for the Exclusive Benefit of Security-Based Swap 
Customers--Rule 18a-4, Exhibit A''; (3) the section's heading and 
instructions are updated to state that a stand-alone SBSD exempt 
from Rule 18a-4 is not required to complete this section to reflect 
that paragraph (f) of Rule 18a-4, as amended, provides an exemption 
from the rule for certain bank SBSDs; (4) the parenthetical ``(See 
Note A)'' is added to Line 1 for consistency with Line 1 of the 
Computation for Determination of Customer Reserve Requirements 
section in revised FOCUS Report Part II, and, in response to 
commenters, the section includes a clarification that the notes 
referenced in this section appear in Exhibit A to Rule 18a-4 (see 
SIFMA 9/5/2014 Letter); (5) in response to comment received, Lines 
20 and 21 now correctly cross-reference ``Line 19'' instead of 
``Line 21'' (See SIFMA 9/5/2014 Letter); (6) in Lines 23 and 25, 
``Reserve Bank Account(s)'' is replaced with ``Reserve Account(s)'' 
for consistency with paragraph (a)(9) of Rule 18a-4; and (7) to 
eliminate extraneous text, the following sentence is deleted from 
the instructions: ``The term `security-based swap customer' is 
defined in 17 CFR 240.18a-4.''
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Possession or Control for Security-Based Swap Customers
    As discussed above, FOCUS Report Part II, as amended, includes a 
section in which broker-dealers and stand-alone SBSDs enter information 
related to possession or control for security-based swap customers. 
Proposed Form SBS required bank SBSDs to complete an identical 
section.\366\ The Commission received no comment on applying this 
section to bank SBSDs and is adopting it in FOCUS Report Part IIC with 
non-substantive changes for consistency internally and with Rules 15c3-
3 and 18a-4.\367\
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    \366\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25230-31.
    \367\ See FOCUS Report Part IIC, Possession or Control for 
Security-Based Swap Customers. The following changes are being made: 
(1) References to Rule 18a-4 are removed from the section's title, 
line items, and instructions to accurately reflect that the 
possession or control requirements adopted by the Commission is 
located in Rules 15c3-3 and 18a-4 (instead of solely in Rule 18a-4 
as initially proposed by the Commission); (2) to improve clarity, 
the form and instructions reflect that the section is titled 
``Possession or Control for Security-Based Swap Customers'' instead 
of ``Information for Possession or Control Requirements under Rule 
18a-4''; and (3) the section's heading and instructions are updated 
to state that a stand-alone SBSD exempt from Rule 18a-4 is not 
required to complete this section to reflect that paragraph (f) of 
Rule 18a-4, as amended, provides an exemption from the rule for 
certain bank SBSDs.
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Claiming an Exemption From Rule 18a-4
    As discussed above, Rule 18a-4, as adopted, exempts bank SBSDs from 
the requirements of the rule if the SBSD meets certain conditions.\368\ 
In light of this modification to the rule from the proposal (which did 
not provide an exemption), the Commission is adding a line item to the 
FOCUS Report Part IIC for a bank SBSD to indicate whether the firm is 
claiming an exemption from Rule 18a-4.\369\
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    \368\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43933-35.
    \369\ See FOCUS Report Part IIC, Claiming an Exemption from Rule 
18a-4.
---------------------------------------------------------------------------

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

[[Page 68583]]

swaps, mixed swaps, and swaps \372\ should be changed to references to 
``long/bought'' and ``short/sold'' positions. The Commission agrees and 
is making this modification.
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    \370\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25235.
    \371\ See SIFMA 4/30/2015 Meeting.
    \372\ See id.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting the 
requirement that bank SBSDs and MSBSPs must complete a truncated 
version of Schedule 1 by including it in FOCUS Report Part IIC, as 
adopted, with the modifications discussed above.
3. Filing of Annual Audited Financial Reports and Other Reports
    Rule 17a-5 generally requires a broker-dealer to, among other 
things, annually file reports audited by a PCAOB-registered independent 
public accountant, disclose certain financial information to customers, 
and notify the Commission of a change of accountant. The rule also 
requires the independent public accountant to notify the broker-dealer 
if the accountant determines that the broker-dealer is not in 
compliance with certain broker-dealer financial responsibility rules or 
that a ``material weakness,'' as defined in paragraph (d)(3)(iii) of 
the rule, exists. As discussed above, the Commission is amending Rule 
17a-5 so that it is applicable to broker-dealer SBSDs, other than 
OTCDD/SBSDs, and broker-dealer MSBSPs. With respect to stand-alone 
SBSDs and MSBSPs and OTCDD/SBSDs, the Commission is adopting in new 
Rule 18a-7 many requirements that parallel requirements in Rule 17a-5, 
as amended. However, Rule 18a-7 does not include a parallel requirement 
for every requirement in Rule 17a-5.\373\ Further, the requirements in 
Rule 18a-7 relating to the filing of annual audited reports and other 
reports do not apply to bank SBSDs and MSBSPs (as discussed above, bank 
SBSDs and MSBSPs are subject to requirements to file FOCUS Report Part 
IIC on a quarterly basis).
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    \373\ The Commission did not propose in Rule 18a-7 (and is not 
adopting) a requirement that is parallel to the exemption report 
requirement in paragraph (d)(4) of Rule 17a-5 because this provision 
would not apply to stand-alone SBSDs and MSBSPs. Rule 18a-7 also 
does not include requirements that parallel the requirements in 
paragraphs (d)(6) and (e)(4) of Rule 17a-5, as amended, requiring 
broker-dealers to file certain reports with the Securities Investor 
Protection Corporation (``SIPC'') because stand-alone SBSDs and 
MSBSPs and OTCDD/SBSDs will not be members of SIPC. In addition, 
Rule 18a-7 does not include a requirement that parallels the 
requirement for a broker-dealer, other than an OTC derivatives 
dealer, to file Form Custody with the firm's DEA. Additional 
differences between Rule 18-7 and Rule 17a-5 are discussed below.
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a. Amendments to Rule 17a-5 and Adoption of Rule 18a-7
Liquidity Stress Test Reports
    The Commission proposed that broker-dealers (including broker-
dealer SBSDs) and stand-alone SBSDs authorized to use internal models 
to compute net capital be subject to liquidity stress test 
requirements.\374\ Consequently, the Commission proposed to amend Rule 
17a-5 and include in proposed Rule 18a-7 a parallel provision to 
require these entities to file a monthly report with the Commission 
containing the results of the liquidity stress test.\375\ As 
consideration of the proposed liquidity stress test requirements is 
being deferred,\376\ the Commission is deferring consideration of these 
related reporting requirements.\377\
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    \374\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70252-70254.
    \375\ See Recordkeeping and Reporting Release, 79 FR at 25237.
    \376\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43874.
    \377\ See paragraph (a)(5)(vii) of Rule 17a-5, as amended; 
paragraph (a)(3)(vii) of Rule 18a-7, as adopted. The proposed 
reporting requirements would have been set forth in these 
paragraphs, which instead are being designated ``[Reserved].''
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Customer Statements
    Paragraph (c) of Rule 17a-5 requires, among other things, that 
certain broker-dealers annually send their customers audited statements 
that must include (along with other information) a statement of 
financial condition (with appropriate notes), a footnote with 
information about the firm's net capital, and, if applicable, 
information about any material weaknesses in the firm's internal 
control over compliance with certain broker-dealer financial 
responsibility rules identified in the most recent reports of the 
firm's auditor. In addition, this paragraph requires these broker-
dealers to send their customers unaudited statements dated six months 
after the date of the audited statements that must include (along with 
other information) a statement of financial condition and a footnote 
containing information about the firm's net capital. Under paragraph 
(c)(5) of Rule 17a-5, a broker-dealer is exempt from sending the 
statements to customers if the broker-dealer, among other things, semi-
annually sends its customers a financial disclosure statement that 
includes, among other things, information regarding the firm's net 
capital and a statement that the audited and unaudited statements are 
available at no charge on the broker-dealer's website and by calling a 
toll-free number to request a paper copy of the statements. Broker-
dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be 
subject to these requirements and therefore will need to send the 
audited and unaudited statements to their customers, including 
security-based swap customers. However, these firms will be permitted 
to take advantage of the exemption described above.\378\
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    \378\ See the broad definition of ``customer'' in paragraph 
(c)(4) of Rule 17a-5.
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    The Commission proposed in Rule 18a-7 that stand-alone SBSDs and 
MSBSPs be required to disclose on their websites (rather than send 
paper copies) information that is similar to the information broker-
dealers are required to send to customers.\379\ The proposal required 
stand-alone SBSDs and MSBSPs to disclose on their websites an audited 
statement of financial condition with appropriate notes within ten 
business days after the date the firm is required to file its audited 
annual reports with the Commission. In addition, it required a stand-
alone SBSD (but not an MSBSP) to disclose on its website at the same 
time: (1) A statement of the amount of the firm's net capital and 
required net capital and other information, if applicable, related to 
the firm's net capital; and (2) if, in connection with the firm's most 
recent annual reports, the report of the independent public accountant 
identified one or more material weaknesses, a copy of the report. 
Further, the proposal required stand-alone SBSDs and MSBSPs to disclose 
on their websites unaudited statements containing the same information 
as the audited statement discussed above within 30 calendar days of the 
date of the unaudited statements. Finally, it required stand-alone 
SBSDs and MSBSPs to make a paper copy of the information required to be 
disclosed on their websites available at no charge upon request of the 
customer and to maintain a toll-free number to receive such requests. 
The Commission received no comments on these customer disclosure 
proposals and is adopting them with the modification that an OTCDD/SBSD 
will be subject to these requirements pursuant to Rule 18a-7 (rather 
than Rule 17a-5).\380\
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    \379\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 25237-38.
    \380\ See paragraph (b) of Rule 18a-7, as adopted.
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Annual Reports
    Paragraph (d) of Rule 17a-5 requires broker-dealers, among other 
things, to file with the Commission annual reports consisting of a 
financial report and either a compliance report or an

[[Page 68584]]

exemption report, as well as reports that are prepared by an 
independent public accountant registered with the PCAOB covering the 
financial report and the compliance report or the exemption report in 
accordance with standards of the PCAOB. The financial report must 
contain financial statements, including, among others, a statement of 
financial condition, a statement of income, and a statement of cash 
flows and also must contain, as applicable, supporting schedules 
consisting of a computation of net capital under Rule 15c3-1, a 
computation of the reserve requirements under Rule 15c3-3, and 
information relating to the possession or control requirements under 
Rule 15c3-3. Generally, broker-dealers that maintain custody of 
customer securities and/or cash (and, therefore, do not claim an 
exemption from Rule 15c3-3) must file the compliance report. The report 
must contain statements about the broker-dealer's internal control over 
compliance with Rules 15c3-1, 15c3-3, 17a-13, and SRO customer account 
statement rules as well as statements as to whether the firm was in 
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 (the 
customer reserve account requirement) as of the end of the firm's 
fiscal year. The exemption report must contain statements about the 
broker-dealer's claimed exemption from Rule 15c3-3.
    The Commission proposed amending paragraph (d) of Rule 17a-5 to 
require a broker-dealer that was subject to proposed Rule 18a-4 (i.e., 
a broker-dealer SBSD) \381\ to: (1) File the compliance report and 
related report of the independent public accountant covering the 
compliance report (i.e., the firm could not file the exemption report 
even if it claimed an exemption from Rule 15c3-3); and (2) incorporate 
the possession or control and customer reserve requirements of the 
proposed SBSD segregation rule into the financial report supporting 
schedules and the compliance report.\382\
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    \381\ As noted above, the Commission proposed that Rule 18a-4, 
the SBSD segregation rule, apply to all SBSDs, but, in response to 
comment, adopted security-based swap segregation requirements for 
broker-dealers, including broker-dealer SBSDs, in paragraph (p) of 
the broker-dealer segregation rule, Rule 15c3-3. As a result, the 
Commission is modifying the cross references in paragraph (d) of 
Rule 17a-5 to reflect the placement of the customer protection 
requirements for broker-dealer SBSDs in paragraph (p) of Rule 15c3-3 
rather than in paragraph (b) of Rule 18a-4 as proposed.
    \382\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25238-40.
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    The Commission also proposed parallel annual reporting requirements 
in proposed new Rule 18a-7 for stand-alone SBSDs and MSBSPs. The 
proposals required stand-alone SBSDs and MSBSPs to annually file with 
the Commission a financial report. In addition, they required stand-
alone SBSDs to file a compliance report that contained statements about 
the firm's compliance with the proposed SBSD capital and segregation 
rules and statements about the firm's internal control over compliance 
with those rules and the proposed SBSD securities count rule. Further, 
the proposals required stand-alone SBSDs and MSBSPs to file reports of 
an independent public accountant covering the financial report and the 
compliance report.
    The final segregation rule for stand-alone SBSDs, bank SBSDs, and 
OTCDD/SBSDs (Rule 18a-4) establishes an exemption from its requirements 
if the firm meets certain conditions.\383\ Consequently, the Commission 
is modifying the proposed annual reports provisions in Rule 18a-7 to 
require a stand-alone SBSD or OTCDD/SBSD that is operating under the 
exemption from Rule 18a-4 to file an exemption report instead of the 
compliance report.\384\ The exemption report for stand-alone SBSDs and 
OTCDD/SBSDs is modeled on the existing exemption report for broker-
dealers. In the report, the SBSD must state that it met the exemptive 
provisions in Rule 18a-4 throughout the most recent fiscal year without 
exception or with one or more exceptions. If applicable, the firm will 
need to briefly describe the nature of each exception and the 
approximate dates the exception existed. In addition, the stand-alone 
SBSD or OTCDD/SBSD will need to file a report of its independent public 
accountant covering the exemption report. Permitting these firms to 
file the exemption report in lieu of the compliance report should 
reduce the costs of the audit and will result in a report that aligns 
more closely with their activities (i.e., operating under the 
exemption).
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    \383\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4). The final 
segregation requirements for broker-dealer SBSDs, other than OTCDD/
SBSDs, do not contain a similar exemption.
    \384\ See paragraphs (c)(1)(i)(B)(2) and (c)(4) of Rule 18a-7, 
as adopted.
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    Finally, a commenter requested that the Commission permit the 
independent public accountant to adhere to generally accepted auditing 
standards (``GAAS'') rather than PCAOB standards. The commenter stated 
that: (1) This would promote consistency with other U.S. regulators; 
(2) the PCAOB standards are ``almost identical'' to GAAS; and (3) using 
GAAS would be the lowest cost alternative.\385\ The commenter also 
stated that the Commission should eliminate the PCAOB standards' 
applicability to audited compliance and exemption reports, because the 
requirement provides a ``non-existent benefit'' in light of existing 
Commission regulations and Commission and FINRA staff examinations.
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    \385\ See Email from Mary Kay Scucci, Managing Director, 
Securities Industry and Financial Markets Association (Feb. 7, 2019) 
(``SIFMA 2/7/2019 Email'').
---------------------------------------------------------------------------

    In response, the Commission first notes that the requirement that 
broker-dealer annual financial statements be certified by a PCAOB-
registered independent public accountant is consistent with the 
requirements imposed by the Exchange Act.\386\ Moreover, as noted 
above, this requirement applies to all broker-dealers that must file 
certified annual reports. Further, the PCAOB has issued attestation 
standards specific to the examination of compliance reports and the 
review of exemption reports.\387\ Consequently, the Commission does not 
believe it would be appropriate to amend Rule 17a-5 to permit broker-
dealers subject to that rule to file annual reports that are not 
certified by a PCAOB-registered accountant because the firm is dually 
registered as an SBSD. Additionally, the Commission does not believe it 
would be appropriate to have the financial reports audited under PCAOB 
standards and the compliance or exemption report (as applicable) 
examined or reviewed, respectively, under GAAS.
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    \386\ See Section 17(e)(1)(A) of the Exchange Act (as amended by 
Pub. L. 107-204, section 205(c)(2) (2002)).
    \387\ See PCAOB, Attestation Standard No. 1, Examination 
Engagements Regarding Compliance Reports of Brokers and Dealers, and 
Attestation Standard No. 2, Review Engagements Regarding Exemption 
Reports of Brokers and Dealers.
---------------------------------------------------------------------------

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

[[Page 68585]]

similarly to a stand-alone SBSD because they are both subject to the 
same capital rule. Further, Rule 17a-12, the OTC derivatives dealer 
reporting rule, does not require that the auditor of an OTC derivatives 
dealer's annual audited financial statements be registered with the 
PCAOB or that the audit be conducted in accordance with standards of 
the PCAOB.\388\ Accordingly, the Commission believes that stand-alone 
SBSDs and MSBSPs and OTCDD/SBSDs should have the option to engage an 
independent public accountant that is not registered with the PCAOB, 
and that the independent public accountant engaged by the firm should 
have the option to use either GAAS in the United States or PCAOB 
standards.\389\
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    \388\ Paragraph (b) of Rule 17a-12 provides that the statements 
must be audited by ``a certified public accountant,'' paragraph (f) 
provides that the accountant must be independent, and paragraph 
(h)(1) provides that the audit must be ``made in accordance with 
U.S. Generally Accepted Auditing Standards.''
    \389\ See Section 17(e)(1)(A) of the Exchange Act. See also 
Section 17(e)(1)(C) of the Exchange Act (providing the Commission 
with exemptive authority with respect to Section 17(e)(1)(A) of the 
Exchange Act).
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    For these reasons, the Commission is adopting the proposed annual 
reports requirements with the modifications that stand-alone SBSDs and 
OTCDD/SBSDs operating under the exemption from Rule 18a-4 will be 
required to file the exemption report instead of the compliance report, 
that stand-alone SBSDs and MSBSPs and OTCDD/SBSDs may engage an 
independent public accountant that is not registered with the PCAOB, 
and that the accountant must undertake, as part of the engagement, to 
prepare its reports based on an examination or review, as applicable, 
of the reports prepared by the broker-dealer in accordance with GAAS in 
the United States or PCAOB standards.\390\ In addition, the Commission 
made a number of non-substantive modifications to paragraph (d) of Rule 
17a-5,\391\ as proposed to be amended, and paragraph (c) of Rule 18a-7, 
as proposed to be adopted.\392\
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    \390\ See paragraph (d) of Rule 17a-5, amended; paragraphs (c), 
(e), and (f) of Rule 18a-7, as adopted.
    \391\ Proposed references to Rule 18a-4 in paragraph (d) of Rule 
17a-5 are changed to Rule 15c3-3 because--as discussed above--the 
segregation requirements for broker-dealer SBSDs are codified in 
Rule 15c3-3. Proposed references to Form SBS are changed to the 
FOCUS Report because--as discussed above--that will be the financial 
reporting form for SBSDs and MSBSPs. Paragraph (d)(2)(iii) of Rule 
17a-5, as amended, also contains the following non-substantive 
differences from the paragraph as proposed to be amended: (1) 
Replacing the word ``either'' with ``any of'' in paragraph 
(d)(2)(iii) because the paragraph references more than two 
computations; and (2) replacing the word ``the'' with ``Customer'' 
in the phrase ``Computation for Determination of the Reserve 
Requirements Under Exhibit A of Sec.  240.15c3-3'' for consistency 
with FOCUS Report Parts II and III.
    \392\ Proposed references to Form SBS are changed to the FOCUS 
Report. In addition, the final rule refers to ``the Computation of 
Tangible Net Worth under Sec.  240.18a-2'' instead of the ``the 
Computation for Determination of Tangible Net Worth under Sec.  
240.18a-2.'' Further, the final rule refers to ``a Computation for 
Determination of Security-Based Swap Customer Reserve Requirements 
under Exhibit A of Sec.  240.18a-4)'' instead of ``a Computation for 
Determination of the Reserve Requirements under Exhibit A of Sec.  
240.18a-4.'' Finally, the final rule refers to ``Possession or 
Control for Security-Based Swap Customers under Sec.  240.18a-4'' 
instead of ``Information Relating to the Possession or Control 
Requirements under Sec.  240.18a-4.''
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Timing and Location of Filing
    Paragraph (d)(5) of Rule 17a-5 provides that a broker-dealer, 
broker-dealer SBSD, other than an OTCDD/SBSD, and broker-dealer MSBSP 
must file the annual reports with the Commission not more than sixty 
calendar days after the end of the firm's fiscal year. Paragraph (d)(6) 
of Rule 17a-5 requires that the broker-dealer file the annual reports: 
(1) At the office of the Commission for the region where the broker-
dealer has its principal place of business; (2) at the Commission's 
principal office in Washington, DC; (3) at the principal office of the 
broker-dealer's DEA; and (4) with SIPC. The Commission proposed 
parallel filing requirements in Rule 18a-7 for stand-alone SBSDs and 
MSBSPs, except that these entities would need to file the annual 
reports solely with the Commission.\393\ Broker-dealers, including OTC 
derivatives dealers, currently may file their annual reports 
electronically.\394\ The Commission is amending paragraph (d)(6) of 
Rule 17a-5 to provide broker-dealers, including broker-dealer SBSDs and 
MSBSPs the option to file the annual reports with the Commission 
electronically. In addition, the Commission is modifying paragraph 
(c)(6) of Rule 18a-7 to provide this option to stand-alone SBSDs, 
OTCDD/SBSDs, and stand-alone MSBSPs. For these reasons, the Commission 
is adopting the proposed requirements regarding the timing and location 
of the filings with these modifications.\395\
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    \393\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25240. Stand-alone SBSDs and MSBSPs would not be members of SIPC 
and would not have a DEA.
    \394\ See https://www.sec.gov/divisions/marketreg/electronic-filing-broker-dealer-annual-reports.htm.
    \395\ See paragraphs (c)(5) and (6) of Rule 18a-7, as adopted.
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Nature and Form of the Reports
    Paragraph (e) of Rule 17a-5, among other things: (1) Requires the 
broker-dealer to attach a notarized oath or affirmation to the 
financial reports; (2) provides that the annual reports are not 
confidential, except that the broker-dealer can request confidentiality 
for all parts of the annual reports other than the statement of 
financial condition and related accountant's report; and (3) requires a 
broker-dealer to file certain additional reports with SIPC. FOCUS 
Report Part III serves as the cover sheet for the annual reports and 
provides a template for the broker-dealer to execute the oath or 
affirmation. Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-
dealer MSBSPs will be subject to these requirements, as amended. The 
Commission proposed amendments to paragraph (e) of Rule 17a-5 and 
parallel nature and form of the reports requirements in Rule 18a-7 for 
stand-alone SBSDs and MSBSPs.\396\
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    \396\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25240-41.
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    More specifically, the Commission proposed amending paragraph (e) 
of Rule 17a-5 to remove the text of the oath or affirmation because the 
text is set forth in FOCUS Report Part III as well. The Commission 
received no comment on this aspect of the proposal. However, to avoid 
confusion as to whether this change would result in a new substantive 
requirement, the Commission has determined to retain the text of the 
oath or affirmation in paragraph (e)(2) of Rule 17a-5 and to include it 
in paragraph (d)(1) of Rule 18a-7.
    Paragraph (e)(4)(i) of Rule 17a-5 requires a broker-dealer to file 
with SIPC ``a report on the SIPC annual general assessment 
reconciliation or exclusion from membership forms that contains such 
information and is in such format as determined by SIPC by rule and 
approved by the Commission.'' SIPC's rule (SIPC Rule 600, ``Rules 
Relating to Supplemental Report of SIPC Membership'') was approved by 
the Commission on March 14, 2016.\397\
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    \397\ See Securities Investor Protection Corporation, Release 
No. SIPA-175 (Mar. 14, 2016), 81 FR 14372 (Mar. 17, 2016).
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    Under paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers are 
required to file the report with the Commission pursuant to the 
requirements in that paragraph (which prescribes the information that 
must be included in, and the format of, the report). However, under 
paragraph (e)(4)(ii) of Rule 17a-5, broker-dealers were no longer 
required to do so after SIPC adopted its rule under paragraph (e)(4)(i) 
of Rule 17a-5 and the rule was approved by the Commission. Therefore, 
for fiscal years that ended on or after April 30, 2016,

[[Page 68586]]

when SIPC's rule became effective, paragraph (e)(4)(ii) of Rule 17a-5 
became moot. As a consequence, the Commission is making the technical 
amendment to paragraph (e)(4) of Rule 17a-5 to eliminate paragraph 
(e)(4)(ii). As amended, paragraph (e)(4) of Rule 17a-5 provides that: 
``The broker or dealer must file with SIPC a report on the SIPC annual 
general assessment reconciliation or exclusion from membership forms 
that contains such information and is in such format as determined by 
SIPC by rule and approved by the Commission.'' A broker-dealer is not 
required to also file the report with the Commission. There is no 
parallel provision in Rule 17a-12, the reporting rule for OTC 
derivatives dealers,\398\ or in Rule 18a-7, because these entities are 
not (or will not) be members of SIPC.
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    \398\ Paragraph (p) of Rule 17a-5 provides that an OTC 
derivatives dealer may comply with Rule 17a-5 by complying with Rule 
17a-12.
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    In addition, the Commission proposed a number of changes to FOCUS 
Report Part III, which before these amendments was the cover page to be 
attached to a broker-dealer's annual reports, to accommodate its use by 
OTC derivatives dealers and stand-alone SBSDs and MSBSPs.\399\ The 
Commission also proposed amending FOCUS Report Part III to address 
amendments made to Rule 17a-5 in 2013.\400\ Further, the Commission 
proposed a number of non-substantive changes to FOCUS Report Part 
III.\401\ The Commission received no comments on these proposed 
requirements and is adopting them.\402\ However, the Commission is 
making several non-substantive changes to the original proposal to 
improve the clarity of FOCUS Report Part III.\403\ The Commission is 
also making several non-substantive changes to the checklist on the 
second page of FOCUS Report Part III.\404\
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    \399\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25241, n. 689. The Commission's EDGAR system will be updated to 
reflect the amendments to FOCUS Report Part III.
    \400\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 2524, n. 690. See also Broker-Dealer Reports, 78 FR 51910.
    \401\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25241, n. 691.
    \402\ See paragraph (e) of Rule 17a-5, as amended; paragraph (d) 
of Rule 18a-7, as adopted; FOCUS Report Part III, as amended. 
References in the paragraphs to ``Form SBS'' are changed to the 
``FOCUS Report'' and references to ``Rule 18a-4'' in paragraph (e) 
of Rule 17a-5 are changed to ``Rule 15c3-3.''
    \403\ The following non-substantive changes to the rule were 
made. The title of the facing page was changed from ``Audited Annual 
Report'' to ``Annual Reports'' to more accurately reflect that 
multiple reports are filed with the facing page, and not all of 
these reports are audited. For the same reason, ``report'' is 
replaced with ``filing'' or ``reports'', as applicable, in the 
phrases ``Report for the period beginning _____and ending _____,'' 
``PCAOB-registered independent public accountant whose opinion is 
contained in this report'', and ``This report** contains.'' 
Similarly, because not all the accountant-prepared documents filed 
with the facing page are opinions, the word ``opinion'' is replaced 
with ``reports'' in the phrases ``PCAOB-registered independent 
public accountant whose opinion is contained in this report'' and 
``Claims for exemption from the requirement that the annual report 
be covered by the opinion of a PCAOB-registered independent public 
accountant must be supported by a statement of facts and 
circumstances relied on as the basis of the exemption.'' For further 
confirmation of the PCAOB-registered accountant's identity, a field 
was added to identify the accountant's PCAOB registration number (if 
applicable). This information is publicly available on the PCAOB's 
website. In the ``Type of Registrant'' section, the ``OTC 
derivatives dealer'' checkbox is replaced with a ``Check here if 
respondent is an OTC derivatives dealer'' for consistency with FOCUS 
Report Part II, and to clarify that an OTC derivatives dealer is a 
type of broker-dealer. To simplify text and improve accuracy, ``Name 
and Telephone Number of'' is removed from the phrase ``Name and 
Telephone Number of Person to Contact with Regard to this Filing.'' 
The language in the oath or affirmation is updated for consistency 
with the language in the oath or affirmation in paragraph (e)(2) of 
Rule 17a-5 and paragraph (d)(1) of Rule 18a-7.
    \404\ The following amendments were made to the checklist. The 
line item for the facing page is deleted because the checklist is 
part of the facing page, so a firm filling out the checklist is also 
necessarily filling out the facing page. In new line item (e), 
``Statement of changes in stockholders' equity or partners' or sole 
proprietor's capital'' is replaced with ``Statement of changes in 
stockholders' or partners' or sole proprietor's equity'' to match 
the language used in paragraph (d)(2)(i) of Rule 17a-5, paragraph 
(b)(2) of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7. 
``Notes to consolidated statement of financial condition'' and 
``Notes to consolidated financial statements'' are added to the 
checklist as new line items (b) and (g), respectively, because they 
are required by paragraph (d)(2)(i) of Rule 17a-5, paragraph (b)(2) 
of Rule 17a-12, and paragraph (c)(2)(i) of Rule 18a-7. The line 
items titled ``Computation of net capital under 17 CFR 240.15c3-1'' 
and ``Computation of net capital under 17 CFR 240.18a-1'' are 
consolidated into a single new line item (h). Because the security-
based swap reserve requirements are now included in both Rule 15c3-3 
(governing broker-dealers) and Rule 18a-4 (governing SBSDs), cross-
references to Rule 15c3-3 are added to new line items (k) and (n). 
To clarify that proposed line item (o) includes both the customer 
and PAB reserve requirements, new line item (l) is added requiring a 
computation for determination of PAB requirements under Exhibit A of 
Sec.  240.15c3-3. In addition, for added clarity about which line 
items apply to securities instead of security-based swaps, the 
phrase ``reserve requirements'' is replaced with ``customer reserve 
requirements'' in new line item (j) and ``possession or control 
requirements'' is replaced with ``possession or control requirements 
for customers'' in new line item (m). Proposed line items (n) 
through (r) are consolidated into new line item (o) which better 
matches the language used in paragraph (d)(2)(iii) of Rule 17a-5, 
paragraph (b)(4) of Rule 17a-12, and paragraph (c)(2)(iii) of Rule 
18a-7. In new line item (p), ``A reconciliation between the audited 
and unaudited Statements of Financial Condition with respect to 
methods of consolidation'' is replaced with ``Summary of financial 
data for subsidiaries not consolidated in the statement of financial 
condition'' to better match the language used in paragraph (d)(2)(i) 
of Rule 17a-5 and paragraph (b)(2) of Rule 17a-12. In line item (s), 
a reference to Rule 18a-7 is added to reflect that an exemption 
report can be filed pursuant this rule in addition to pursuant to 
Rule 17a-5. In line item (q), the phrase ``in accordance with 17 CFR 
240.17a-5, 17 CFR 240.17a-12, or 17 CFR 240.18a-7, as applicable'' 
is added after ``Oath or affirmation.'' Proposed line item (u), ``A 
copy of the SIPC Supplemental Report'' is removed from the 
checklist, because for fiscal years that end on or after April 30, 
2016, the supplemental report is filed only with SIPC (and not with 
the Commission). See 17 CFR 240.17a-5(e)(4); Securities Investor 
Protection Corporation, File No. SIPC-2015-01 (Mar. 14, 2016), 81 FR 
14372 (Mar. 17, 2016); Letter from SIPC to All Broker-Dealers 
including those that pay SIPC assessments and those that claim 
exclusion from SIPC membership regarding SIPC Series 600 Rules (Apr. 
29, 2016). In line item (w), a reference to Rule 18a-7 is added to 
reflect that an exemption report can be filed pursuant this rule in 
addition to pursuant to Rule 17a-5. Proposed line items (z), (aa), 
and (dd) are consolidated into new line item (u), which better 
matches the language used in paragraph (f)(1) of Rule 17a-5, 
paragraph (b) of Rule 17a-12, and paragraph (f)(1) of Rule 18a-7. 
The checklist also includes new line item (t), titled ``Independent 
public accountant's report based on an examination of the statement 
of financial condition'' to account for a firm's ability to request 
confidential treatment for the financial statements but not the 
statement of financial condition. Proposed line items (bb) and (ee) 
are consolidated into new line item (v), which now reads 
``Independent public accountant's report based on an examination of 
certain statements in the compliance report under 17 CFR 240.17a-5 
or 17 CFR 240.18a-7, as applicable'' to better reflect the language 
used in paragraph (g)(2)(i) of Rule 17a-5 and paragraph (f)(2)(i) of 
Rule 18a-7. Line item (x) is added for supplemental reports on 
applying agreed-upon procedures, in accordance with Rule 17a-5 (with 
respect to ANC broker-dealers) and Rule 17a-12 (with respect to OTC 
derivatives dealers). Throughout the checklist, the articles ``A'' 
and ``An'' are deleted as unnecessary and for internal consistency. 
In addition, line items are renumbered as needed due to insertions 
or deletions, and proposed line item (v) is moved to the end of the 
checklist as line item (y).
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Qualification of the Independent Public Accountant
    As noted above, a broker-dealer is required to file with the 
Commission a report of a PCAOB-registered independent public accountant 
covering the annual reports. Paragraph (f) of Rule 17a-5: (1) 
Prescribes certain minimum qualifications for the independent public 
accountant; (2) requires the broker-dealer to file with the Commission 
a statement concerning the accountant; and (3) requires the broker-
dealer to file a notice when replacing the accountant. Broker-dealer 
SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs will be subject 
to these requirements. The Commission proposed to include in Rule 18a-7 
parallel independent public accountant qualifications, statement, and 
notice requirements for stand-alone SBSDs and MSBSPs.\405\ The 
Commission is modifying these requirements to conform them to the 
modifications discussed above pursuant to which a

[[Page 68587]]

stand-alone SBSD or MSBSP as well as an OTCDD/SBSD may engage an 
independent public accountant that is not registered with the PCAOB. 
The Commission received no other comments related to these proposed 
accountant qualification requirements and is adopting them with the 
modification discussed above.\406\
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    \405\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25241-43.
    \406\ See paragraph (e) of Rule 18a-7, as adopted. The 
modification deletes the phrase ``and the independent public 
accountant must be registered with the Public Company Accounting 
Oversight Board'' from the text of the final rule.
---------------------------------------------------------------------------

Engagement of the Independent Public Accountant
    Paragraph (g) of Rule 17a-5 provides that the independent public 
accountant engaged by the broker-dealer to provide the reports covering 
the annual reports must, as part of the engagement, undertake to 
prepare the following reports, as applicable, in accordance with PCAOB 
standards: (1) A report based on an examination of the financial 
report; and (2) either a report based on an examination of certain 
statements in the compliance report or a report based on a review of 
the statements in the exemption report. Broker-dealer SBSDs, other than 
OTCDD/SBSDs, and broker-dealer MSBSPs will be subject to these 
requirements. The Commission proposed parallel engagement of accountant 
requirements in Rule 18a-7 for stand-alone SBSDs and MSBSPs.\407\ The 
Commission is modifying these requirements to conform them to the 
modifications discussed above pursuant to which a stand-alone SBSD or 
MSBSP as well as an OTCDD/SBSD may engage an independent public 
accountant that is not registered with the PCAOB and the accountant may 
use GAAS in the United States or PCAOB standards. The Commission 
received no other comments related to these proposed requirements and 
is adopting them with the modification discussed above and with one 
additional modification.\408\ As discussed above, the final segregation 
rule for stand-alone SBSDs, OTCDD/SBSDs, and bank SBSDs includes an 
exemption from the rule's requirements if firm meets certain 
conditions.\409\ Consequently, the Commission is requiring a stand-
alone SBSD or OTCDD/SBSD that is exempt from the segregation rule to 
file the exemption report instead of the compliance report. 
Accordingly, a stand-alone SBSD or OTCDD/SBSD that is exempt from the 
segregation rule must engage the independent public accountant to 
perform a review of the firm's exemption report instead of an 
examination of the compliance report.\410\
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    \407\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25243.
    \408\ See paragraph (f) of Rule 18a-7, as adopted.
    \409\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43933-35 (adopting paragraph (f) of Rule 18a-4).
    \410\ See paragraph (f)(2)(ii) of Rule 18a-7, as adopted.
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Notification of Non-Compliance or Material Weakness
    Paragraph (h) of Rule 17a-5 requires the independent public 
accountant engaged to prepare reports covering a broker-dealer's annual 
reports to provide the broker-dealer with a notification if, during the 
course of preparing its reports, the accountant discovers the firm is 
not in compliance with Rule 15c3-1, 15c3-3, 17a-13, or SRO customer 
account statement rules, or if the accountant determines that any 
material weaknesses exist. If the notification from the accountant 
concerns an occurrence that requires the broker-dealer to provide 
notification to the Commission (e.g., under Rule 17a-11), the broker-
dealer must provide the accountant with a copy of the notification sent 
to the Commission. If the accountant does not receive the copy of the 
notification within one business day, or if the accountant disagrees 
with the statements in the notification, the accountant must notify the 
Commission and the broker-dealer's DEA within one business day.\411\ 
Broker-dealer SBSDs, OTCDD/SBSDs, and broker-dealer MSBSPs will be 
subject to these requirements.
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    \411\ The Commission proposed to amend paragraph (h) of Rule 
17a-5 to add references to the proposed SBSD segregation rule (Rule 
18a-4) so that the notification requirements would be triggered if 
the accountant discovered a broker-dealer SBSD was not in compliance 
with that rule. As discussed above, the broker-dealer SBSD 
segregation requirements are being codified in Rule 15c3-3 (which is 
already referenced in paragraph (h) of Rule 17a-5). Therefore, these 
proposed amendments are not being adopted. However, the note to 
paragraph (h) of Rule 17a-5 refers to the ``special reserve 
account'' instead of ``special account'' as proposed, for internal 
consistency with Rules 15c3-3 and 18a-4, as adopted.
---------------------------------------------------------------------------

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

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

Reports of the Independent Public Accountant
    Paragraph (i) of Rule 17a-5 prescribes requirements for the reports 
of the independent public accountant covering the broker-dealer's 
annual reports, including: (1) Technical requirements; (2) required 
representations; (3) the opinions or conclusions to be expressed in the 
accountant's reports; and (4) requirements related to matters to which 
the accountant takes exception. Broker-dealer SBSDs, other than OTCDD/
SBSDs, and broker-dealer MSBSPs will be subject to these requirements. 
The Commission proposed parallel requirements in Rule 18a-7 for stand-
alone SBSDs and MSBSPs.\414\ The Commission is modifying these 
requirements to conform them to the modifications discussed above 
pursuant to which a stand-alone SBSD or MSBSP as well as an OTCDD/SBSD 
also registered as an OTC derivatives dealer may engage an independent 
public accountant that is not registered with the PCAOB and the 
accountant may use GAAS in the United States or PCAOB standards. The 
Commission received no other comments related to these proposed 
requirements regarding reports of the independent accountant and is 
adopting them as proposed.\415\
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    \414\ See also Recordkeeping and Reporting Proposing Release, 79 
FR at 25245.
    \415\ See paragraph (h) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

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

[[Page 68588]]

filing period for the annual reports.\416\ The Commission received no 
comments on these proposed requirements regarding notification of a 
change of fiscal year and is adopting them with the modification that 
an OTCDD/SBSD will be subject to these requirements pursuant to Rule 
18a-7 (rather than Rule 17a-5). \417\
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    \416\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25245.
    \417\ See paragraph (i) of Rule 18a-7, as adopted. As proposed, 
these requirements were in paragraph (j) of Rule 18a-7. Paragraph 
(i) of the rule contained a provision under which the Commission 
could grant extensions and exemptions from the filing requirements 
in the rule. On further consideration, the Commission believes this 
provision is unnecessary and is not adopting it. No commenters 
addressed it.
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Filing Requirements
    Paragraph (o) of Rule 17a-5 provides that a filing pursuant to the 
rule is deemed to be accomplished when it is received by the 
Commission's principal office with duplicates filed simultaneously at 
the locations prescribed in particular paragraphs of Rule 17a-5. 
Broker-dealer SBSDs, other than OTCDD/SBSDs, and broker-dealer MSBSPs 
will be subject to this requirement. The Commission proposed a parallel 
filing requirement in proposed Rule 18a-7 for stand-alone and bank 
SBSDs and MSBSPs.\418\ The Commission received no comment on these 
proposed filing requirements and is adopting them with the modification 
that an OTCDD/SBSD will be subject to these requirements pursuant to 
Rule 18a-7 (rather than Rule 17a-5).\419\
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    \418\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25245.
    \419\ See paragraph (j) of Rule 18a-7, as adopted. As proposed, 
this requirement was in paragraph (k) of Rule 18a-7, but for the 
reasons discussed above it is being adopted in paragraph (j).
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b. Additional Amendments to Rule 17a-5 and Modifications to Rule 18a-7
    The Commission proposed several amendments to Rule 17a-5 to 
eliminate obsolete text, improve readability, and to modernize 
terminology.\420\ The Commission also proposed to redesignate certain 
paragraphs in Rule 17a-5 as a consequence of the proposal to delete 
other paragraphs in Rule 17a-5. The Commission received no comment on 
these amendments or redesignations and is adopting them as 
substantially as proposed.\421\
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    \420\ See also Recordkeeping and Reporting Proposing Release, 79 
FR at 25246.
    \421\ In addition to the differences discussed above between 
Rule 17a-5, as proposed to be amended, and Rule 17a-5, as amended, 
the Commission is adopting the following non-substantive changes to 
Rule 17a-5: (1) Replacing ``Each broker or dealer that computes 
certain of its capital charges in accordance with'' with ``Broker-
dealers that have been authorized by the Commission to compute net 
capital pursuant to'' to clarify in paragraph (a)(5) that ANC 
broker-dealers must file additional reports ``with the Commission''; 
(2) replacing ``VaR'' with ``value at risk'' in paragraph (a)(5)(ii) 
for consistency with paragraph (a)(3)(ii) of Rule 18a-6, as adopted; 
(3) replacing ``broker or dealer's'' with ``broker's or dealer's'' 
in paragraphs (a)(5)(v)(D)-(G); (4) adding ``within 17 business days 
after the end of the month'' in paragraph (a)(5)(vi) for clarity 
regarding the timing of the risk reports and consistency with 
paragraph (a)(3)(vi) of Rule 18a-6, as adopted; (5) replacing 
``from'' with ``after'' in paragraph (c)(3) for consistency with 
paragraph (b)(2) of Rule 18a-7, as adopted; (6) adding ``to'' after 
the phrase ``the broker or dealer is not subject'' in paragraph 
(d)(1)(i)(B)(2) for internal consistency; (7) removing ``as 
applicable, including'' and adding ``Information Relating to the'' 
after the phrases ``Possession or Control'' in paragraph (d)(2)(ii) 
for clarity and consistency with 17 CFR 240.17a-5(d)(2)(ii); (8) 
replacing references to Sec.  240.18a-4(c) with Sec.  240.15c3-
3(p)(3) in paragraphs (d)(3)(i)(A)(4) and (5), (d)(3)(i)(C), and 
(d)(3)(iii); (9) adding ``identified'' to paragraph (d)(3)(i)(B) for 
consistency with paragraph (c)(3)(i)(B) Rule 18a-7, as adopted; (10) 
removing references to ``members'' as a distinct class of registrant 
in addition to a ``broker'' or ``dealer'' in paragraph (e)(3) of 
Rule 17a-5; and (11) for internal consistency, the phrase ``shall 
fail'' is replaced with ``fails'' in the note to paragraph (h).
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    The Commission proposed amending paragraph (a)(4) of Rule 17a-5 to 
specify that a DEA ``must promptly transmit that information'' obtained 
through the filing of Form Custody, instead of merely requiring that 
the DEA ``transmit the information'' obtained through the Form Custody 
filing.\422\ The Commission received no comment on this amendment and 
is adopting it as proposed. The Commission also proposed changes to the 
structuring of paragraph (a)(5) of Rule 17a-5, which requires certain 
ANC reports to be filed.\423\ The Commission received no comment on 
this reorganization and is adopting it as proposed.
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    \422\ See also Recordkeeping and Reporting Proposing Release, 79 
FR at 25246.
    \423\ See paragraph (a)(5) of Rule 17a-5, as proposed to be 
amended. See also Recordkeeping and Reporting Proposing Release, 79 
FR at 25246-47.
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    The Commission also made additional modifications to the text of 
Rule 18a-7 as proposed.\424\
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    \424\ In particular, the Commission is adopting the following 
non-substantive modifications to proposed Rule 18a-7: (1) Replacing 
``must file an executed Part II of Form X-17A-5 (Sec.  249.617 of 
this chapter) with the Commission or its designee'' with ``must file 
with the Commission or its designee Part II of Form X-17A-5 (Sec.  
249.617 of this chapter)'' in paragraph (a)(1) for consistency with 
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (2) replacing ``must 
file an executed Part IIC of Form X-17A-5 (Sec.  249.617 of this 
chapter) with the Commission or its designee'' with ``must file with 
the Commission or its designee Part IIC of Form X-17A-5 (Sec.  
249.617 of this chapter)'' in paragraph (a)(2) for consistency with 
paragraph (a)(1)(ii) of Rule 17a-5, as amended; (3) adding 
``additional reports with the Commission'' at the end of paragraph 
(a)(3) for clarity; (4) adding ``in the format described in the 
application'' before the phrase ``within 17 business days after the 
end of the month'' in paragraph (a)(3)(vi) for consistency with 
paragraph (a)(5)(vi) of Rule 17a-5, as amended; (5) removing ``,'' 
after ``VaR'' in paragraph (a)(3)(ix) for consistency with paragraph 
(a)(5)(ix) of Rule 17a-5, as amended; (6) removing the phrase 
``required by Sec.  240.18a-7(d)'' from paragraph (b)(2)(v) to 
eliminate an incorrect cross-reference to this paragraph; (6) 
removing ``a model approved pursuant to'' after the phrase ``in 
accordance with'' in paragraph (a)(3)(i) for consistency with 
paragraph (a)(5)(i) of Rule 17a-5; (7) removing ``otherwise'' from 
paragraph (c)(1)(i) for consistency with paragraph (d)(1)(i)(B)(1) 
of Rule 17a-5, as amended; (8) replacing ``request for a change 
should'' with ``request for a change must'' in paragraph (c)(1)(ii) 
for clarity; (9) replacing ``is not required to'' with ``need not'' 
in paragraph (c)(1)(iii) for consistency with paragraph (d)(1)(iii) 
of Rule 17a-5, as amended; (10) removing ``including'' before the 
phrase ``a Computation of Net Capital'' in paragraph (c)(2)(ii) for 
clarity; (11) adding ``Information Relating to the'' before the 
phrase ``Possession or Control'' in paragraph (c)(2)(ii) for 
consistency with of 17 CFR 240.17a-5(d)(2)(ii); (12) replacing 
``filed pursuant to paragraph (a) of this section, a reconciliation, 
including appropriate explanations, between the computation in the 
financial report and the computation in the most recently filed 
report, or if no material differences exist, a statement so 
indicating must be included in the financial report.'' with ``filed 
by the registrant pursuant to paragraph (a) of this section, a 
reconciliation, including appropriate explanations, between the 
computation in the financial report and the computation in the most 
recent Part II of Form X-17A-5 filed by the registrant. If no 
material differences exist, a statement so indicating must be 
included in the financial report.'' in paragraph (c)(2)(iii) for 
consistency with paragraph (d)(2)(iii) of Rule 17a-5, as amended; 
(13) adding ``as of the end of the most recent fiscal year; and'' to 
the end of paragraph (c)(3)(i)(A)(4) for consistency with paragraph 
(d)(3)(i)(A)(4) of Rule 17a-5, as amended; (14) replacing ``The 
information used to assert compliance with Sec. Sec.  240.18a-1 and 
240.18a-4(c) was derived from the books and records of the security-
based swap dealer; and'' with ``The information the security-based 
swap dealer used to state whether it was in compliance with 
Sec. Sec.  240.18a-1, 240.18a-4(c), and, if 240.18a-4(c) was derived 
from the books and records of the security-based swap dealer.'' in 
paragraph (c)(3)(i)(A)(5) for consistency with paragraph 
(d)(3)(i)(A)(5) of Rule 17a-5, as amended; (15) replacing ``60'' 
with ``sixty (60)'' in paragraph (c)(5) for consistency with 
paragraph (d)(5) of Rule 17a-5, as amended; (16) removing ``(d)(2)'' 
from the third sentence of paragraph (d)(2) for consistency with 
paragraph (e)(3) of Rule 17a-5, as amended; (17) replacing ``of this 
chapter. In addition, the accountant'' with ``of this chapter, and 
the independent public accountant'' in paragraph (e)(1) for 
consistency with paragraph (f)(1) of Rule 17a-5, as amended; (18) 
replacing ``Such statement must'' with ``The statement must'' in 
paragraph (e)(2) for consistency with paragraph (f)(2) of Rule 17a-
5, as amended; (19) replacing ``a notice which must'' with ``a 
notice that must'' in paragraph (e)(3) for consistency with 
paragraph (f)(3) of Rule 17a-5, as amended; (20) adding ``,'' after 
``Sec.  240.18a-8'' in the second sentence of paragraph (g)(1) for 
consistency with paragraph (h) of Rule 17a-5, as amended; and (21) 
removing ``and'' at the end of paragraph (h)(3)(i) for consistency 
with paragraph (i)(3)(i) of Rule 17a-5, as amended.
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C. Notification

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

[[Page 68589]]

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

[[Page 68590]]

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

[[Page 68591]]

Commission received no comment on this revision but believes it would 
be appropriate to further modernize the rule by amending it to permit 
the notices to be sent by email. Accordingly, the rule, as amended, 
provides in pertinent part that the notice section must be given or 
transmitted to the principal office of the Commission in Washington, DC 
and the regional office of the Commission for the region in which the 
broker or dealer has its principal place of business, or to an email 
address provided on the Commission's website.\462\ This modification to 
provide for notification by email is based on the notification 
provision in recently adopted Rule 18a-10 and is designed to provide a 
simpler and more efficient process for sending the notifications (i.e., 
via email).\463\ Consequently, a broker-dealer will be able to transmit 
a notification required pursuant to Rule 17a-11 using an email address 
provided on the Commission's website and designated for the purpose of 
receiving such notifications.
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    \458\ As discussed above, current paragraph (g) of Rule 17a-11 
(containing the existing manner of notification requirements for 
broker-dealers) was redesignated as paragraph (h).
    \459\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25251.
    \460\ See Tom Standage, No Morse, L.A. Times, Feb. 8, 2006, at 
B15 (noting that Western Union discontinued its telegram services 
effective January 27, 2006).
    \461\ The Commission's website provides instructions on how to 
send the Rule 17a-11 notifications by facsimile transmission. The 
instructions are available at https://www.sec.gov/divisions/marketreg/bdnotices.htm. Notifications sent to the Commission's 
headquarters pursuant to the instructions are converted to PDFs and 
sent to an email box that is monitored by Commission staff.
    \462\ See paragraph (h) of Rule 17a-11, as amended.
    \463\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43943-46 (adopting Rule 18a-10).
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    The Commission proposed a parallel manner of notification 
requirement in Rule 18a-8.\464\ The Commission received no comment on 
this provision but is modifying Rule 18a-8 to provide that the notice 
must be given or transmitted to the principal office of the Commission 
in Washington, DC and the regional office of the Commission for the 
region in which the SBSD or MSBSP has its principal place of business, 
or to an email address provided on the Commission's website.\465\ 
Consequently, SBSDs and MSBSPs also will be permitted to transmit a 
notification required pursuant to Rule 18a-8 using an email address 
provided on the Commission's website and designated for the purpose of 
receiving such notifications.
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    \464\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25251.
    \465\ See paragraph (h) of Rule 18a-8, as amended. As discussed 
below, the Commission is amending the email notification provision 
in paragraph (e) of Rule 18a-10 to align it with this modification 
to paragraph (h) of Rule 18a-8.
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    For these reasons, the Commission is adopting the manner of 
notification requirements with the modification discussed above and 
with the modification that an OTCDD/SBSD will be subject to these 
requirements pursuant to Rule 18a-7 (rather than Rule 17a-5).
3. Additional Amendments to Rule 17a-11 and Modifications to Rule 18a-
8.
    The Commission proposed several amendments to Rule 17a-11 to 
eliminate obsolete text, improve readability, and modernize 
terminology. The Commission proposed a global change to Rule 17a-11 
that replaced the use of the word ``shall'' in the rule with the word 
``must'' or ``will'' where appropriate.\466\ The Commission also 
proposed certain stylistic, corrective, and punctuation amendments to 
improve the readability of Rule 17a-11.\467\ The Commission received no 
comment on these amendments and is adopting them as proposed.
---------------------------------------------------------------------------

    \466\ The 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) and (2), (b), (c), (g), (h), 
and (j). See Rule 17a-11, as proposed to be amended.
    \467\ The Commission proposed the following stylistic and 
corrective changes to Rule 17a-11: (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 deletion of paragraph (a), paragraphs (b) 
through (e) of Rule 17a-11 were redesignated paragraphs (a) through 
(d), respectively. Further, the Commission is adding two new 
notification provisions to Rule 17a-11 that are codified in paragraphs 
(e) and (f) of the rule, as amended. As a consequence of the deletion 
of paragraph (a) and the addition of the two new provisions, paragraphs 
(f) through (i) were redesignated paragraphs (g) through (j), 
respectively. Similarly, due to the addition and deletion of various 
paragraphs, the Commission made a global change that replaced the 
cross-references to ``paragraph (g)'' of Rule 17a-11 with ``paragraph 
(h)'' of Rule 17a-11.\468\ The Commission received no comment on these 
revisions and is adopting them as proposed.
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    \468\ The amendments replace the phrase ``paragraph (g)'' with 
the phrase ``paragraph (h)'' in the following paragraphs of Rule 
17a-11, as amended: (a)(1), (b), (c), (d)(1) and (2), and (g). See 
Rule 17a-11, as amended.
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    Prior to these amendments, paragraph (f) of Rule 17a-11 made 
reference to a ``member'' of a national securities exchange as a 
distinct class of registrant in addition to a ``broker'' and 
``dealer.'' The Commission proposed to remove this reference to a 
``member'' given that the rule applies to broker-dealers, which would 
include a member of a national securities exchange that is a broker-
dealer (and as discussed above, proposed to redesignate paragraph (f) 
as paragraph (g)).\469\ The Commission received no comment on this 
revision and is adopting it as proposed.
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    \469\ See paragraph (g) of Rule 17a-11, as proposed to be 
amended.
---------------------------------------------------------------------------

    Prior to these amendments, paragraph (f) of Rule 17a-11 contained a 
reference to the notices required under ``paragraphs (b), (c), (d), or 
(e)'' of Rule 17a-11. The Commission proposed to replace the quoted 
language with a reference to ``this section'' (and as discussed above, 
proposed to redesignate paragraph (f) as paragraph (g)).\470\ The 
proposed change incorporated all the notices required under Rule 17a-
11, including notices that are required under the new security-based 
swap customer reserve account notification requirement. The Commission 
received no comment on this revision and is adopting it as 
proposed.\471\
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    \470\ See paragraph (g) of Rule 17a-11, as proposed to be 
amended.
    \471\ See paragraph (g) of Rule 17a-11, as amended.
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    Finally, prior to these amendments, paragraph (h) contained 
references to ``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).'' The 
Commission proposed amending the references to state, ``Sec.  240.15c3-
1, Sec.  240.15c3-1d, Sec.  240.15c3-3, Sec.  240.17a-5, and Sec.  
240.17a-12.'' \472\ This amendment corrected certain cross-references 
that are outdated due to the recently adopted amendments to some of 
these rules.\473\ It also eliminated cross-references to specific 
paragraphs in the event of future amendments to these cross-referenced 
rules. The Commission received no comment on this amendment and is 
adopting it as proposed.\474\
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    \472\ See paragraph (i) of Rule 17a-11, as proposed to be 
amended.
    \473\ See Broker-Dealer Reports, 78 FR 51910; Financial 
Responsibility Rules for Broker-Dealers, 78 FR 51824.
    \474\ See paragraph (i) of Rule 17a-11, as amended.
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    The Commission also made certain non-substantive modifications to 
Rule 18a-8.\475\
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    \475\ The non-substantive modifications to Rule 18a-8, as 
adopted, are: (1) Adding ``of such deficiency'' after the phrase 
``must give notice'' in paragraph (a)(1)(i) and (ii) and (a)(2) for 
consistency with paragraph (a)(1) of Rule 17a-11, as amended; (2) 
removing ``as appropriate'' after the phrase ``its current amount of 
tentative net capital'' in paragraph (a)(1)(ii) for clarity; (3) 
adding a ``,'' after the phrase ``with paragraph (h) of this 
section'' in paragraph (e)(2) for consistency with paragraph (d)(2) 
of Rule 17a-11, as amended; and (4) adding ``for which there is no 
prudential regulator'' after the phrase ``If a security-based swap 
dealer'' in paragraph (g) for clarity.

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[[Page 68592]]

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

1. Introduction
    The Commission proposed a securities count program for stand-alone 
SBSDs under Section 15F of the Exchange Act that is modeled on the 
securities count program for broker-dealers codified in Rule 17a-
13.\476\ Rule 17a-13 requires certain broker-dealers (generally, 
broker-dealers that hold customer 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. Broker-dealer SBSDs, including OTCDD/SBSDs, and 
broker-dealer MSBSPs will be subject to Rule 17a-13.\477\ Consequently, 
they must comply with the existing securities count requirements in the 
rule with respect to security-based swaps.
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    \476\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25252-54.
    \477\ The undesignated introductory paragraph to Rule 18a-9 has 
been modified to clarify this application of the rules. The Dodd-
Frank Act amended the definition of ``security'' in Section 3(a)(10) 
of the Exchange Act to include a security-based swap. 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 section III.C. of this release.
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    Stand-alone SBSDs will be subject to Rule 18a-9, which is modeled 
on Rule 17a-13. Rule 18a-9 does not include a parallel requirement for 
every requirement in Rule 17a-13.\478\ In addition, Rule 18a-9 does not 
apply to stand-alone MSBSPs because the customer protection rationale 
for Rule 17a-13 and Rule 18a-9 is not as pertinent to stand-alone 
MSBSPs. For example, the Commission 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.
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    \478\ The Commission is not including in Rule 18a-9, as adopted, 
provisions that would parallel the provisions in paragraphs (a)(1), 
(2), and (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. The Commission believes that SBSDs will not limit 
their activities to the types of activities in which the exempt 
broker-dealers engage.
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2. Rule 18a-9
Undesignated Introductory Paragraph
    The Commission proposed that Rule 18a-9 have an undesignated 
introductory paragraph explaining that the rule applies only to a 
stand-alone SBSD.\479\ The note further explained that a broker-dealer, 
including a broker-dealer SBSD, is subject to the securities count 
requirements under Rule 17a-13.\480\ The Commission received no 
comments on this proposed introductory paragraph and is adopting it 
with modifications to clarify which rule (17a-13 or 18a-9) applies to a 
given type of entity.\481\
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    \479\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25253.
    \480\ See id.
    \481\ See undesignated introductory paragraph of Rule 18a-9, as 
adopted.
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Requirement To Perform a Securities Count
    Paragraph (b) of Rule 17a-13 requires a quarterly securities count 
and specifies the steps a broker-dealer must take in performing the 
count. 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,\482\ 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.
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    \482\ See section III.C. of this release.
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    The Commission proposed parallel securities count requirements in 
Rule 18a-9 that mirrored the requirements in paragraph (b) of Rule 17a-
13.\483\ Consequently, a stand-alone SBSD would be required to perform 
a securities count each quarter following steps that are identical to 
the steps specified in paragraph (b) of Rule 17a-13.\484\ Moreover, a 
securities count needed to be performed no sooner than two months after 
the last count and no later than four months after the last count.\485\
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    \483\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25253-54.
    \484\ See paragraph (a) of Rule 18a-9, as proposed to be 
adopted.
    \485\ See id.
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    Stand-alone SBSDs may have limited activities. The Commission 
believes, however, that stand-alone SBSDs will likely hold securities 
in a proprietary capacity and as hedges or collateral related to their 
swaps activity, and therefore are susceptible to the same risks as 
broker-dealers if securities are not counted and verified. This is the 
same reason that OTC derivatives dealers are not exempt from performing 
quarterly securities counts even though they also conduct a more 
limited business than traditional broker-dealers.
    The Commission acknowledges that security-based swaps are not held 
in depositories or at other types of custodians. Instead, they are 
documented in contractual agreements. In order to meet the requirements 
of Rules 17a-13 and 18a-9, as applicable, a broker-dealer and SBSD 
generally will need to account for or verify its open security-based 
swap transactions. The method of doing so could involve steps to 
confirm open transactions reflected in the firm's books and records 
with securities clearing agencies or counterparties. The Commission is 
adopting this requirement as proposed.\486\
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    \486\ See paragraph (a) of Rule 18a-9, as adopted.
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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 of unresolved differences 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. This permits a broker-dealer to perform 
the securities count on a rolling basis throughout the quarter as 
opposed to performing it all at once.\487\ The Commission proposed a 
parallel securities count requirement in Rule 18a-8.\488\ Consequently, 
a stand-alone SBSD could perform the securities count as of a date 
certain or on a cyclical basis subject to conditions that

[[Page 68593]]

are identical to the conditions in paragraph (c) of Rule 17a-13. The 
Commission received no comment on this provision and is adopting it as 
proposed.\489\
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    \487\ 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.
    \488\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25254.
    \489\ See paragraph (b) of Rule 18a-9, as adopted.
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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. Thus, the rule requires a 
separation of duties as a control to promote the integrity of the 
securities count process. The Commission proposed a parallel separation 
of duties requirement in Rule 18a-9 that mirrored the requirement in 
paragraph (d) of Rule 17a-13.\490\ Consequently, a stand-alone SBSD was 
required 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.\491\ The Commission 
received no comment on this provision and is adopting it as 
proposed.\492\
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    \490\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25254.
    \491\ See paragraph (c) of Rule 18a-9, as proposed to be 
adopted.
    \492\ See paragraph (c) of Rule 18a-9, as adopted. Paragraph (d) 
of Rule 18a-9, as proposed to be adopted, would have mirrored 
paragraph (f) of Rule 17a-13, but the Commission is not adopting 
that provision.
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E. Alternative Compliance Mechanisms

    A commenter urged the Commission to harmonize its recordkeeping 
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping 
requirements for swap dealers and major swap participants to the 
maximum extent possible with the goal of permitting firms to utilize a 
single recordkeeping system for security-based swaps and swaps.\493\ In 
response to the comment and to promote harmonization with CFTC 
requirements, the Commission--as discussed below--is adopting a limited 
alternative compliance mechanism in Rules 17a-3 and 18a-5 and amending 
Rule 18a-10 to add recordkeeping and reporting requirements to the full 
alternative compliance mechanism provided by that rule.\494\
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    \493\ See SIFMA 9/5/2014 Letter. See also Recordkeeping and 
Reporting Proposing Release, 79 FR at 25198, 25209 (seeking comment 
on whether there are provisions in the CFTC's recordkeeping and 
reporting rules for swap dealers and major swap participants that 
the Commission should consider with respect to the rules for SBSDs 
and MSBSPs).
    \494\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43943-46 (adopting Rule 18a-10, which provides an alternative 
compliance mechanism for certain SBSDs with respect to capital, 
margin, and segregation requirements).
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1. Limited Alternative Compliance Mechanism--Rules 17a-3 and 18a-5
    Under the limited alternative compliance mechanism, an SBSD or 
MSBSP may comply with the recordkeeping requirements of the CEA and the 
rules thereunder applicable to swap dealers and major swap participants 
in lieu of complying with the requirements in Rules 17a-3 and 18a-5 to 
make and keep current trade blotters, customer account ledgers, and 
stock records solely with respect to information required to be 
included in these records regarding security-based swap transactions 
and positions if the SBSD or MSBSP:
     is registered as an SBSD or MSBSP pursuant to Section 15F 
of the Exchange Act;
     is registered as a swap dealer or major swap participant 
pursuant to section 4s of the Commodity Exchange Act and the rules 
thereunder;
     is subject to 17 CFR 23.201-202, 17 CFR 23.402, and 17 CFR 
23.501 (the ``CFTC's Books and Records Rules'') with respect to its 
swap-related books and records;
     preserves all of the data elements necessary to create the 
records required by paragraphs (a)(1), (3), and (5) of Rule 17a-3; 
paragraphs (a)(1), (3), and (4) of Rule 18a-5; or paragraphs (b)(1) 
through (3) of Rule 18a-5, as applicable, as they pertain to security-
based swap and swap transactions and positions;
     upon request furnishes promptly to representatives of the 
Commission the records required by paragraphs (a)(1), (3), and (5) of 
Rule 17a-3; paragraphs (a)(1), (3), and (4) of Rule 18a-5; or 
paragraphs (b)(1) through (3) of Rule 18a-5, as applicable, as they 
pertain to security-based swap and swap transactions and positions, as 
well as the records required by the CFTC's Books and Records Rules, as 
they pertain to security-based swap and swap transactions and 
positions, in the format applicable to that category of record as set 
forth in Rule 17a-3 or Rule 18a-5, as applicable; and
     provides notice of its intent to utilize the limited 
alternative compliance mechanism by notifying the Commission in 
writing, both at the principal office of the Commission in Washington, 
DC and at the regional office of the Commission for the region in which 
the registrant has its principal place of business, and, if the 
registrant is a broker-dealer, by notifying in writing the registrant's 
DEA.\495\
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    \495\ See paragraph (b) of Rule 17a-3, as amended, and paragraph 
(c) of Rule 18a-5, as adopted.
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    These records must be maintained for the retention period and in 
the manner specified for that category of record in Rule 17a-4 or 18a-
6, as applicable.
    The first three prongs of the limited alternative compliance 
mechanism identify the entities that may use it; that is, entities that 
are registered with the Commission as an SBSD or MSBSP and with the 
CFTC as a swap dealer or major swap participant and are subject to the 
recordkeeping requirements of the CFTC with respect to its swap-related 
books and records. The fourth and fifth prongs set forth the 
substantive requirements of the limited alternative compliance 
mechanism: (1) That the registrant preserve the data elements necessary 
to create the relevant required records as they pertain to security-
based swap and swap transactions and positions, regardless of format; 
and (2) that the registrant provide those data elements as they pertain 
to security-based swap and swap transactions and positions in the 
format required by Commission rules upon request by a representative of 
the Commission. In effect, these two requirements taken together mean 
that a firm will not be required to create a trade blotter, customer 
account ledger, or stock record reflecting security-based swap 
transactions and positions formatted pursuant to the Commission's rules 
each day, but instead only when requested to do so by Commission staff. 
This should promote harmonization with CFTC requirements because firms 
will be able to create the daily records for both security-based swap 
and swap transactions and positions in the format required by the CFTC. 
For example, firms will not have to create on a daily basis two sets of 
trade blotters for security-based swap and swap transactions and 
positions: one in the Commission's required format and the other in the 
CFTC's required format.
    The limited alternative compliance mechanism applies only to the 
provisions of Rules 17a-3 and 18a-5 that were specifically referenced 
by the commenter as appropriate for ``harmonization,'' \496\ with the 
exception of the general ledger requirements in paragraph (a)(2) of 
Rules 17a-3 and 18a-5. Consequently, the limited alternative compliance 
mechanism may be applied to: (1) The trade blotter requirements in 
paragraph (a)(1) of Rule 17a-3, as amended, and paragraphs

[[Page 68594]]

(a)(1) and (b)(1) of Rule 18a-5, as adopted; (2) the customer account 
ledger requirements of paragraph (a)(3) of Rule 17a-3, as amended, and 
paragraphs (a)(3) and (b)(2) of Rule 18a-5, as adopted; and (3) the 
stock record requirements of paragraph (a)(5)(ii) of Rule 17a-3, as 
amended, and paragraphs (a)(4) and (b)(3) of Rule 18a-5, as adopted. 
The Commission does not believe it would be appropriate to apply the 
limited alternative compliance mechanism to the general ledger 
requirements in paragraph (a)(2) of Rules 17a-3 and 18a-5 because the 
information that must be recorded in a general ledger is not limited to 
security-based swap and swap information. In particular, the general 
ledger must include information reflecting all assets and liabilities, 
income and expense, and capital accounts in order to facilitate 
examinations of the firm's overall financial condition and solvency. 
The Commission believes that the substantive requirements of the 
remaining provisions identified by the commenter as applied to 
security-based swap and swap transactions and positions are 
sufficiently similar to their counterparts in the CFTC's Books and 
Records Rules to make use of the limited alternative compliance 
mechanism appropriate. The Commission emphasizes that the limited 
alternative compliance mechanism applies solely to the books and 
records requirements with respect to security-based swap and swap 
transactions and positions, and does not extend to any books and 
records requirements for other types of transactions and positions. For 
other types of transactions and positions, the SBSD or MSBSP must make 
and keep current a trade blotter, customer account ledger, and stock 
record in the format required by Rule 17a-3 or 18a-5 as applicable.
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    \496\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    The commenter seeking harmonization with the CFTC's requirements 
also stated that the Commission should permit bank SBSDs and MSBSPs to 
satisfy the Commission's recordkeeping requirements by complying with 
recordkeeping rules established by their prudential regulator, stating 
that ``[s]uch rules should be supplemented with additional requirements 
only to the extent that such additional obligations are necessary for 
the Commission to fulfill its regulatory oversight of bank SBSDs and 
MSBSPs.'' \497\ Based largely on its consultations with the prudential 
regulators regarding their recordkeeping and reporting requirements, 
the Commission believes that the final amendments and rules being 
adopted in this document achieve this objective by specifically 
addressing a bank's activities as an SBSD or an MSBSP and only those 
activities. In particular, the rules being adopted in this document for 
bank SBSDs and MSBSPs are focused solely on documenting or requiring 
the reporting of information relating to engaging in security-based 
swap activities as opposed to the more traditional banking activities 
addressed by prudential regulators' existing recordkeeping and 
reporting requirements. In addition, as discussed above in section 
II.B.2. of this release, the Commission is adopting a reporting form 
for bank SBSDs and MSBSPs (the FOCUS Report Part IIC) that elicits 
information that largely is drawn from the call reports banks must file 
with the prudential regulators. In this way, the Commission has 
harmonized its reporting requirements for bank SBSDs and MSBSPs with 
the reporting requirements of the prudential regulators.
---------------------------------------------------------------------------

    \497\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

2. Full Alternative Compliance Mechanism--Rule 18a-10
    The Commission adopted the full alternative compliance mechanism in 
Rule 18a-10.\498\ Rule 18a-10 permits certain SBSDs that are registered 
as swap dealers and that predominantly engage in a swaps business to 
elect to comply with the capital, margin, and segregation requirements 
of the CEA and the CFTC's rules in lieu of complying with the capital, 
margin, and segregation requirements of Rules 18a-1, 18a-3, and 18a-
4.\499\ The Commission is amending Rule 18a-10 in this document to 
permit firms that will operate under Rule 18a-10 to elect to comply 
with the recordkeeping and reporting requirements of the CEA and the 
CFTC's rules in lieu of complying with Rules 18a-5, 18a-6, 18a-7, 18a-
8, and 18a-9.
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    \498\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43943-46.
    \499\ The full alternative compliance mechanism of Rule 18a-10 
is not available to a nonbank SBSD that is also registered as a 
broker-dealer, including a broker-dealer that is an OTC derivatives 
dealer. In theory, a bank SBSD could use the full alternative 
compliance mechanism of Rule 18a-10 if it met the required 
conditions. However, the Commission does not expect that these 
entities would choose to do so. See Capital, Margin, and Segregation 
Adopting Release, 84 FR at 43944 n. 707.
---------------------------------------------------------------------------

    Paragraph (a) of Rule 18a-10 sets forth the conditions that an SBSD 
must meet to operate under the full alternative compliance mechanism. 
The Commission is amending the preface of paragraph (a) to reference 
recordkeeping and reporting requirements of the CEA and the CFTC's 
rules as well as Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in order 
to add these requirements to the full alternative compliance 
mechanism.\500\ The conditions for operating under the full alternative 
compliance mechanism are set forth in paragraphs (a)(1) through (5) of 
Rule 18a-10. Paragraphs (a)(1) through (3) of Rule 18a-10 provide that 
the firm must be registered with the Commission as an SBSD, must not be 
registered with the Commission as a broker-dealer (including an OTC 
derivatives dealer), and must be registered with the CFTC as a swap 
dealer. Paragraph (a)(4) of Rule 18a-10 provides that the SBSD must be 
exempt from the segregation requirements of Rule 18a-4. Paragraph 
(a)(5) of Rule 18a-10 provides that the aggregate gross notional amount 
of the firm's outstanding security-based swap positions must not exceed 
the lesser of two thresholds as of the most recently ended quarter of 
the firm's fiscal year.\501\ The thresholds are: (1) The maximum fixed-
dollar gross notional amount of open security-based swaps specified in 
paragraph (f) of the rule (``maximum fixed-dollar threshold''); and (2) 
10% of the combined aggregate gross notional amount of the firm's open 
security-based swap and swap positions. The amount of the maximum 
fixed-dollar threshold is $250 billion for a transitional period of 
three years and will then drop to $50 billion unless the Commission, by 
order: (1) Maintains the maximum fixed-dollar amount at $250 billion 
for an additional period of time or indefinitely after the 3-year 
transition period ends; or (2) lowers it to an amount that is less than 
$250 billion but greater than $50 billion.\502\ Other than the 
amendment to the preface of paragraph (a) discussed above, the 
Commission is not amending the conditions set forth in paragraphs 
(a)(1) through (5) of Rule 18a-10. In addition, the Commission is not 
amending paragraph (f) of Rule 18a-10 (specifying the maximum fixed-
dollar threshold).
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    \500\ As amended, the preface to paragraph (a) of Rule 18a-10 
provides that a security-based swap dealer may comply with capital, 
margin, segregation, recordkeeping, and reporting requirements of 
the Commodity Exchange Act and chapter I of title 17 of the Code of 
Federal Regulations applicable to swap dealers in lieu of complying 
with Sec. Sec.  240.18a-1 and 240.18a-3 through 240.18a-9.
    \501\ The gross notional amount is based on the notional amounts 
of the firm's security-based swaps and swaps that are outstanding as 
of the quarter end. It is not based on transaction volume during the 
quarter.
    \502\ See paragraphs (f)(1)(i) and (ii) of Rule 18a-10, as 
adopted.
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    Paragraph (b) of Rule 18a-10 sets forth requirements for a firm 
that is

[[Page 68595]]

operating pursuant to the rule. Paragraph (b)(1) provides, in pertinent 
part, that the firm must comply with the capital, margin, and 
segregation requirements of the CEA and the CFTC's rules applicable to 
swap dealers. The Commission is amending paragraph (b)(1) to reference 
recordkeeping and reporting requirements of the CEA and the CFTC's 
rules to add these requirements to this provision.\503\ Consequently, a 
firm that is subject to Rule 18a-10 must comply with applicable 
capital, margin, segregation, recordkeeping, and reporting requirements 
of the CEA and the CFTC's rules and a failure to comply with one or 
more of those rules will constitute a failure to comply with Rule 18a-
10.
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    \503\ As amended, paragraph (b)(1) of Rule 18a-10 provides that 
compliance with capital, margin, segregation, recordkeeping, and 
reporting requirements of the Commodity Exchange Act and chapter I 
of title 17 of the Code of Federal Regulations applicable to swap 
dealers and treat security-based swaps or collateral related to 
security-based swaps as swaps or collateral related to swaps, as 
applicable, pursuant to those requirements to the extent the 
requirements do not specifically address security-based swaps or 
collateral related to security-based swaps.
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    Paragraph (b)(1) also provides, in pertinent part, that the firm 
must treat security-based swaps and related collateral pursuant of the 
CEA and the CFTC's rules to the extent the requirements do not 
specifically address security-based swaps and related collateral. This 
provision is designed to ensure that security-based swaps and related 
collateral do not fall into a ``regulatory gap'' with respect to an 
SBSD operating under the full alternative compliance mechanism. Under a 
CFTC no-action letter, if a capital, margin, segregation, 
recordkeeping, or reporting requirement applicable to a swap or 
collateral related to a swap is silent as to a security-based swap or 
collateral related to a security-based swap, the nonbank SBSD must 
treat the security-based swap or collateral related to the security-
based swap pursuant to the requirement applicable to the swap or 
collateral related to the swap.\504\
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    \504\ See, e.g., Letter from Eileen T. Flaherty, Director, 
Division of Swap Dealer and Intermediary Oversight, and Jeffrey M. 
Bandman, Acting Director, Division of Clearing and Risk, CFTC, to 
Mary P. Johannes, Senior Director, ISDA (Aug. 23, 2016) (providing 
no-action relief to swap dealers and major swap participants with 
respect to the CFTC's margin rules for non-cleared swaps pursuant to 
which these entities can portfolio margin non-cleared swaps with 
non-cleared security-based swaps, provided, among other conditions, 
the security-based swaps shall be treated as if they were swaps for 
all applicable provisions of the CFTC's margin rules).
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    The Commission is making clarifying amendments to paragraph (b)(1) 
of Rule 18a-10 to provide that the firm must treat a security-based 
swap or collateral related to a security-based swap as a swap or 
collateral related to a swap, as applicable, if the CEA or the CFTC's 
rules do not specifically address a security-based swap or collateral 
related to a security-based swap.\505\
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    \505\ The amendments adding the recordkeeping and reporting 
requirements to paragraph (b)(1) and making the clarification 
discussed above result in the paragraph providing that compliance 
with capital, margin, segregation, recordkeeping, and reporting 
requirements of the Commodity Exchange Act and chapter I of title 17 
of the Code of Federal Regulations applicable to swap dealers and 
treat security-based swaps or collateral related to security-based 
swaps as swaps or collateral related to swaps, as applicable, 
pursuant to those requirements to the extent the requirements do not 
specifically address security-based swaps or collateral related to 
security-based swaps.
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    The amendments to Rule 18a-10 being adopted in this document will 
require a firm operating under the rule to treat security-based swaps 
and related collateral pursuant to the recordkeeping and reporting 
requirements of the CEA and the CFTC's rules as if they were swaps or 
related collateral to the extent those requirements do not specifically 
address security-based swaps and related collateral. For example, if 
the recordkeeping and reporting requirements of the CEA and CFTC's 
rules do not address a security-based swap transaction, the firm will 
need to treat it as a swap transaction for the purposes of the 
recordkeeping and reporting requirements that apply to swap 
transactions.
    Paragraph (b)(2) of Rule 18a-10 requires the firm to provide a 
written disclosure to its counterparties after it begins operating 
pursuant to the rule. The disclosure must be provided before the first 
transaction with the counterparty after the firm begins operating 
pursuant to the rule. The disclosure must notify the counterparty that 
the firm is complying with the applicable capital, margin, and 
segregation requirements of the CEA and the CFTC's rules in lieu of 
complying with Rules 18a-1, 18a-3, and 18a-4. The Commission is 
amending paragraph (b)(2) to reference the recordkeeping and reporting 
requirements of the CEA and the CFTC's rules as well as Rules 18a-5, 
18a-6, 18a-7, 18a-8, and 18a-9 in order to add these requirements to 
the disclosure requirement.\506\
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    \506\ As amended, paragraph (b)(2) of Rule 18a-10 provides that 
an SBSD must disclose in writing to each counterparty to a security-
based swap before entering into the first transaction with the 
counterparty after the date the SBSD begins operating under this 
section that the SBSD is operating under this section and is 
therefore complying with the applicable capital, margin, 
segregation, recordkeeping, and reporting requirements of the 
Commodity Exchange Act and the rules promulgated by the Commodity 
Futures Trading Commission thereunder in lieu of complying with the 
capital, margin, segregation, recordkeeping, and reporting 
requirements promulgated by the Commission in Sec. Sec.  240.18a-1, 
240.18a-3, 240.18a-4; 240.18a-5, 240.18a-6, 240.18a-7, 240.18a-8, 
and 240.18a-9.
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    Paragraph (b)(3) of Rule 18a-10 requires the SBSD to immediately 
notify the Commission and the CFTC in writing if it fails to meet a 
condition in paragraph (a) of the rule. The Commission is making a non-
substantive amendment to paragraph (b)(3) because--as discussed next--
new paragraph (b)(4) is being added to the rule.\507\ As discussed 
above in section II.C. of this release, Rule 17a-11 specifies the 
circumstances under which a broker-dealer must notify the Commission 
and other regulators about its financial or operational condition, as 
well as the form of the notice. Stand-alone and bank SBSDs and MSBSPs 
are subject to Rule 18a-8, which is modeled on Rule 17a-11. Rule 18a-8 
is designed to provide the Commission with the ability to take 
effective proactive steps to respond when a stand-alone or bank SBSD is 
experiencing or likely to experience financial difficulty.\508\ 
However, an SBSD operating under Rule 18a-10 may comply with the 
notification requirements of the CFTC's rules in lieu of complying with 
Rule 18a-8. Therefore, in order to retain a requirement that the SBSD 
provide notice to the Commission if it is experiencing or likely to 
experience financial difficulty, the Commission is adding paragraph 
(b)(4) to Rule 18a-10. This paragraph provides that an SBSD operating 
pursuant to Rule 18a-10 must simultaneously notify the Commission if 
the firm is required to send a notice concerning its capital, books and 
records, liquidity, margin operations, or segregation operations to the 
CFTC by transmitting to the Commission a copy of the notice being sent 
to the CFTC.\509\
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    \507\ The non-substantive amendment removes the period at the 
end of the paragraph and in its place adds the text: ``; and.''
    \508\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25247.
    \509\ See paragraph (b)(4) of Rule 18a-10, as amended. See, 
e.g., 17 CFR 1.12 (CFTC) (maintenance of minimum financial 
requirements by futures commission merchants and introducing 
brokers).
---------------------------------------------------------------------------

    In addition, as discussed in section II.A.3.a. of this release, 
paragraph (j) of Rule 17a-4 requires a broker-dealer to furnish 
promptly to a representative of the Commission legible, true, complete, 
and current copies of those records of the broker-dealer that are 
required to be preserved under Rule 17a-4, or any other records of the 
broker-dealer subject to examination under Section 17(b) of the 
Exchange Act that are

[[Page 68596]]

requested by the representative of the Commission. Paragraph (g) of 
Rule 18a-6 prescribes a parallel prompt production requirement for 
stand-alone and bank SBSDs and MSBSPs. However, an SBSD operating under 
Rule 18a-10 may comply with the record preservation requirements of the 
CFTC's rules in lieu of complying with Rule 18a-6. Therefore, in order 
to retain a requirement that the SBSD furnish records promptly to the 
Commission, paragraph (b)(5) is being added to Rule 18a-10. This 
paragraph provides that the SBSD must furnish promptly to a 
representative of the Commission legible, true, complete, and current 
copies of those records of the SBSD that are required to be preserved 
under the CEA and CFTC's rules applicable to swap dealers, or any other 
records of the SBSD subject to examination pursuant to Section 15F of 
the Exchange Act that are requested by a representative of the 
Commission.
    Paragraph (c) of Rule 18a-10 addresses the situation in which a 
firm fails to comply with a condition in paragraph (a) of the rule and, 
therefore, no longer qualifies to operate pursuant to the rule. The 
paragraph provides that a firm in that circumstance must begin 
complying with Rules 18a-1, 18a-3, and 18a-4 no later than either: (1) 
Two months after the end of the month in which the firm failed to meet 
the condition in paragraph (a); or (2) after a longer period of time as 
granted by the Commission by order subject to any conditions imposed by 
the Commission. The Commission is amending the preface to paragraph (c) 
to reference Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in order to 
add these rules to the compliance requirement.\510\
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    \510\ As amended, the preface to paragraph (c) of Rule 18a-10 
reads: ``A security-based swap dealer that fails to meet one or more 
of the conditions specified in paragraph (a) of this section must 
begin complying with Sec. Sec.  240.18a-1 and 240.18a-3 through 
240.18a-9 no later than:.''
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    Paragraph (d) of Rule 18a-10 addresses how a firm would elect to 
operate pursuant to the rule. Under paragraph (d)(1), a firm can make 
the election as part of the process of applying to register as an SBSD. 
In this case, the firm must provide written notice to the Commission 
and the CFTC during the registration process of its intent to operate 
pursuant to the rule. Upon being registered as an SBSD, the firm can 
begin complying with Rule 18a-10, provided it meets the conditions in 
paragraph (a) of the rule. Under paragraph (d)(2) of Rule 18a-10, an 
SBSD can make the election after the firm has been registered as an 
SBSD. In this case, paragraph (d)(2)(i) provides that the firm must 
provide written notice to the Commission and the CFTC of its intent to 
operate pursuant to the rule. In addition, paragraph (d)(2)(ii) 
provides that the firm must continue to comply with Rules 18a-1, 18a-3, 
and 18a-4 for two months after the end of the month in which the firm 
provides the notice or for a shorter period of time as granted by the 
Commission by order subject to any conditions imposed by the 
Commission. The Commission is amending the preface to paragraph 
(d)(2)(ii) to reference Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 in 
order to add these rules to the compliance requirement.\511\
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    \511\ As amended, paragraph (d)(2)(ii) of Rule 18a-10 provides: 
``Continue to comply with Sec. Sec.  240.18a-1 and 240.18a-3 through 
240.18a-9 for at least:.''
---------------------------------------------------------------------------

    As discussed above, paragraph (b)(3) requires a firm operating 
pursuant to the rule to immediately notify the Commission and the CFTC 
in writing if the SBSD fails to meet a condition in paragraph (a). 
Further, paragraphs (d)(1) and (2) require a firm to provide written 
notice to the Commission and the CFTC of its intent to operate pursuant 
to the rule. Paragraph (e) of Rule 18a-10 provides that the notices 
required by the rule must be sent by facsimile transmission to the 
principal office of the Commission and the regional office of the 
Commission for the region in which the security-based swap dealer has 
its principal place of business or to an email address to be specified 
separately, and to the principal office of the CFTC in a manner 
consistent with the notification requirements of the CFTC. The 
paragraph also requires that notices include a brief summary of the 
reason for the notice and contact information for an individual who can 
provide further information about the matter that is the subject of the 
notice (emphasis added). The Commission is amending paragraph (e) of 
Rule 18a-10 to provide that the notice must be sent by facsimile 
transmission to the principal office of the Commission and the regional 
office of the Commission for the region in which the security-based 
swap dealer has its principal place of business or to an email address 
provided on the Commission's website, and to the principal office of 
the CFTC in a manner consistent with the notification requirements of 
the CFTC. This amendment is intended to clarify the location of the 
email address for firms that choose to send the notice via email.

F. Cross-Border Application and Availability of Substituted Compliance

1. Cross-Border Application of Recordkeeping and Reporting Requirements
    In the 2013 cross-border proposing release, the Commission 
preliminarily interpreted the Title VII requirements associated with 
registration to apply generally to the activities of registered 
entities.\512\ In reaching that preliminary conclusion, the Commission 
did not concur with the views of certain commenters that the Title VII 
requirements should not apply to the foreign security-based swap 
activities of registered entities, stating that such a view could be 
difficult to reconcile with, among other things, the statutory language 
describing the requirements applicable to SBSDs.\513\ The Commission 
further preliminarily identified the recordkeeping and reporting 
requirements as entity-level requirements, rather than requirements 
specifically applicable to particular transactions. Entity-level 
requirements primarily address concerns relating to the entity as a 
whole, with a particular focus on safety and soundness of the entity to 
reduce systemic risk in the U.S. financial system. The Commission 
accordingly proposed to apply the entity-level requirements on a firm-
wide basis to address risks to the SBSD as a whole. The Commission did 
not propose any exception from the application of the entity-level 
requirements to SBSDs.\514\
---------------------------------------------------------------------------

    \512\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39825, n.191 (citing Cross-Border 
Proposing Release, 78 FR at 30986).
    \513\ See Cross-Border Proposing Release, 78 FR at 30986.
    \514\ See Cross-Border Proposing Release, 78 FR at 31011. The 
Commission similarly expressed the preliminary view that MSBSPs 
should be required to adhere to the entity-level requirements. See 
id. at 31035.
---------------------------------------------------------------------------

    A commenter expressed the view that requirements with respect to 
daily trading records and confirmations should be deemed transaction-
level, on the grounds that the application and enforcement of these 
requirements will be addressed at the transaction level, and for 
consistency with the CFTC's approach.\515\ After considering the 
commenter's concerns, the Commission continues to believe that the 
entirety of the recordkeeping and reporting requirements--including 
requirements addressing daily trading records and confirmations--
appropriately are considered entity-level requirements.\516\

[[Page 68597]]

If the Commission treated its recordkeeping requirements as 
transaction-based requirements, and then excluded certain transactions 
from its recordkeeping requirements, it would not be able to 
effectively regulate and examine registrants. Not only would the 
Commission have an incomplete picture of registrants' transactions if 
other jurisdictions did not require records regarding the excluded 
transactions, but this approach would create logistical complexities 
when comparing records kept in different formats. These concerns about 
an incomplete picture of a registrant's business are exacerbated by the 
possibility that a registrant would not keep records of excluded 
transactions because its jurisdiction does not regulate either the 
transaction (e.g., exclusions for certain security-based swap products 
or for certain transactions) or the entity. For these reasons, the 
Commission is treating recordkeeping and reporting requirements as 
entity-level requirements.
---------------------------------------------------------------------------

    \515\ See SIFMA 9/5/2014 Letter.
    \516\ The Commission also believes that treating these 
requirements as entity-level requirements is necessary or 
appropriate to help prevent the evasion of the particular provisions 
of the Exchange Act that were added by the Dodd-Frank Act and 
prophylactically will help ensure that the purposes of those 
provisions of the Dodd-Frank Act are not undermined.
---------------------------------------------------------------------------

2. Availability of Substituted Compliance in Connection With 
Recordkeeping and Reporting Requirements
a. Existing Substituted Compliance Rule
    In 2013, the Commission proposed to make substituted compliance 
potentially available in connection with the requirements applicable to 
foreign SBSDs pursuant to Section 15F of the Exchange Act, other than 
the registration requirements applicable to dealers. Because the 
recordkeeping and reporting requirements being adopted are grounded in 
Section 15F, substituted compliance generally would have been available 
for those requirements under the proposal.\517\ Upon a Commission 
substituted compliance determination, a person would be able to satisfy 
relevant recordkeeping or reporting requirements by substituting 
compliance with corresponding requirements under a foreign regulatory 
system.
---------------------------------------------------------------------------

    \517\ See Cross-Border Proposing Release, 78 FR at 30968, 31085.
---------------------------------------------------------------------------

    The Commission subsequently adopted Rule 3a71-6, which provides 
that substituted compliance is available with respect to the 
Commission's business conduct requirements, and (rather than addressing 
all requirements under Section 15F of the Exchange Act) reserved the 
issue as to whether substituted compliance also would be available in 
connection with other requirements under that statute.\518\ Rule 3a71-6 
was amended to make substituted compliance available with respect to 
the Commission's trade acknowledgment and verification 
requirements,\519\ and to make it available with respect to capital and 
margin requirements.\520\
---------------------------------------------------------------------------

    \518\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR 29960. See 
also Cross-Border Proposing Release, 78 FR at 31207.
    \519\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 30143-44.
    \520\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43946-50.
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b. Amendments to Final Rule
    A commenter requested that the Commission permit a foreign SBSD or 
MSBSP to satisfy its recordkeeping requirements by complying with 
recordkeeping rules established by its foreign regulator, provided the 
Commission determines such rules impose requirements comparable to 
Commission rules.\521\ Another commenter stated that ``[t]he Commission 
should allow non-U.S. SBSDs to satisfy any public disclosure 
requirements through substituted compliance.'' \522\ The Commission 
agrees with the commenters and is amending Rule 3a71-6 to provide 
foreign SBSDs and MSBSPs with the potential to utilize substituted 
compliance with comparable foreign requirements to satisfy Section 15F 
of the Exchange Act and Exchange Act Rules 18a-5, 18a-6, 18a-7, 18a-8, 
and 18a-9 thereunder.\523\
---------------------------------------------------------------------------

    \521\ See SIFMA 9/5/2014 Letter. See also Letter from Kyle 
Brandon, Managing Director and Director of Research, Securities 
Industry and Financial Markets Association (Jan. 13, 2015) (``SIFMA 
1/13/2015 Letter'').
    \522\ See IIB 3/25/2019 Meeting.
    \523\ See paragraph (d)(6) of Rule 3a71-6, as amended. Rule 
3a71-6 provides that substituted compliance is potentially available 
in connection with the business conduct requirements for foreign 
MSBSPs and SBSDs. This decision reflects the fact that the business 
conduct standards apply to MSBSPs and SBSDs, and recognizes that the 
market efficiency goals that underpin substituted compliance also 
can apply when substituted compliance is granted to MSBSPs. See 
Business Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, 81 FR at 30076. This same 
reasoning applies with respect to the Commission's recordkeeping and 
reporting requirements and Rule 3a71-6, as amended, provides that 
substituted compliance is also potentially available to foreign 
MSBSPs (in addition to foreign SBSDs) with respect to Section 15F of 
the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9, as 
applicable.
---------------------------------------------------------------------------

    A commenter requested that foreign branches of U.S. banks (i.e., 
registered bank SBSDs that engage in dealing activity through foreign 
branches) be eligible for substituted compliance with respect to 
recordkeeping and reporting requirements classified as transaction-
level requirements.\524\ As discussed above, the Commission does not 
believe it would be appropriate to the treat the recordkeeping and 
reporting requirements as transaction-level requirements. In addition, 
the Commission has previously stated its belief that substituted 
compliance should not be available to registered entities that are U.S. 
persons.\525\
---------------------------------------------------------------------------

    \524\ See SIFMA 9/5/2014 Letter.
    \525\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 30077.
---------------------------------------------------------------------------

    In amending Rule 3a71-6, the Commission concludes that the 
principles associated with substituted compliance for the business 
conduct, trade acknowledgment and verification, and capital and margin 
requirements in large part similarly apply to these recordkeeping and 
reporting requirements. Accordingly, except as discussed below, the 
revised substituted compliance rule applies to Section 15F of the 
Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder 
in the same manner as it applies to the business conduct, trade 
acknowledgment and verification, and capital and margin requirements.
i. Basis for Substituted Compliance in Connection With the 
Recordkeeping and Reporting Requirements
    In light of the global nature of the security-based swap market and 
the prevalence of cross-border transactions within that market, there 
is the potential that the application of the Title VII recordkeeping 
and reporting requirements may lead to requirements that are 
duplicative of or in conflict with applicable foreign requirements, 
even when the two sets of requirements implement similar goals and lead 
to similar results. Those results have the potential to disrupt 
existing business relationships, and, more generally, to reduce 
competition and market efficiency.\526\
---------------------------------------------------------------------------

    \526\ See generally Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 
at 30073-74 (addressing the basis for making substituted compliance 
available in the context of the business conduct requirements).
---------------------------------------------------------------------------

    To address those effects, the Commission concludes that under 
certain circumstances it may be appropriate to allow for the 
possibility of substituted compliance whereby foreign SBSDs and MSBSPs 
may satisfy Section 15F of the Exchange Act and Rules 18a-5, 18a-6, 
18a-7, 18a-8, and 18a-9 thereunder by complying with

[[Page 68598]]

comparable foreign requirements. Allowing for the possibility of 
substituted compliance in this manner may help achieve the benefits of 
these recordkeeping and reporting requirements in a way that helps 
avoid regulatory duplication or conflict and hence promotes market 
efficiency, enhances competition, and facilitates a well-functioning 
global security-based swap market. Accordingly, Rule 3a71-6 is amended 
to identify the recordkeeping and reporting requirements of Section 15F 
of the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 
thereunder as being eligible for substituted compliance.\527\
---------------------------------------------------------------------------

    \527\ See paragraph (d) of Rule 3a71-6, as adopted. Paragraph 
(a)(1) of Rule 3a71-6 provides that the Commission may, 
conditionally or unconditionally, by order, make a determination 
with respect to a foreign financial regulatory system that 
compliance with specified requirements under that foreign financial 
system by a registered SBSD and/or registered MSBSP, or class 
thereof, may satisfy the corresponding requirements identified in 
paragraph (d) of the rule that would otherwise apply.
---------------------------------------------------------------------------

ii. Comparability Criteria, and Consideration of Related Requirements
    The Commission will endeavor to take a holistic approach in 
determining the comparability of foreign requirements for substituted 
compliance purposes, focusing on regulatory outcomes as a whole rather 
than on requirement-by-requirement similarity.\528\ The Commission's 
comparability assessments associated with Section 15F of the Exchange 
Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder 
accordingly will consider whether, in the Commission's view, the 
foreign regulatory system achieves regulatory outcomes that are 
comparable to the regulatory outcomes associated with these 
recordkeeping and reporting requirements. However, paragraph (a)(2)(i) 
of Rule 3a71-6 provides that the Commission's substituted compliance 
determination will take into account factors that the Commission 
determines appropriate, such as, for example the scope and objectives 
of the relevant foreign regulatory requirements, as well as the 
effectiveness of the supervisory compliance program administered, and 
the enforcement authority exercised, by a foreign financial regulatory 
authority or authorities in such system to support its oversight of 
such foreign security-based swap entity (or class thereof) or of the 
activities of such security-based swap entity (or class thereof).
---------------------------------------------------------------------------

    \528\ See, e.g., Business Conduct Standards for Security-Based 
Swap Dealers and Major Security-Based Swap Participants, 81 FR at 
30078-79.
---------------------------------------------------------------------------

    In reviewing applications, the Commission may determine to conduct 
its comparability analyses regarding the recordkeeping and reporting 
requirements in conjunction with comparability analyses regarding other 
Exchange Act requirements in connection with SBSDs and MSBSPs. 
Accordingly, depending on the applicable facts and circumstances, the 
comparability assessment associated with the recordkeeping and 
reporting requirements may constitute part of a broader assessment of 
the foreign regulatory system's risk mitigation requirements, and the 
applicable comparability assessments may be conducted at the level of 
those risk mitigation requirements as a whole.
    Commenters generally requested additional guidance regarding the 
criteria the Commission would consider when making a substituted 
compliance determination.\529\ Such criteria have been set forth in the 
final rule as discussed below. The Commission's recordkeeping, 
reporting, notification, and security count requirements reflect and 
support prudent business practices and accountability of registrants 
and have facilitated the ability of securities regulators to review and 
monitor compliance with securities laws. The Commission's recordkeeping 
and reporting requirements are integral to the ability of the 
Commission and other securities regulators to effectively examine and 
inspect regulated firms' compliance with the applicable securities 
laws.\530\ More specifically, the records that firms are required to 
preserve can be reviewed by Commission staff and other securities 
regulators to monitor compliance with applicable securities laws.\531\ 
Similarly, FOCUS Reports are used to determine which firms are engaged 
in various securities-related activities, and how economic events and 
government policies might affect segments of the securities 
industry.\532\
---------------------------------------------------------------------------

    \529\ See, e.g., Letter from Catherine T. Dixon, Chair, Federal 
Regulation of Securities Committee, American Bar Association (Oct. 
2, 2013); Letter from Americans for Financial Reform (Aug. 22, 
2013); Letter from Futures and Options Association (Aug. 21, 2013).
    \530\ See Commission Guidance to Broker-Dealers on the Use of 
Electronic Storage Media Under the Electronic Signatures in Global 
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 
FR at 22917, 22921 (The Commission's recordkeeping rules ``impose 
minimum recordkeeping requirements that are based on standards a 
prudent broker-dealer should follow in the normal course of 
business. The requirements are an integral part of the investor 
protection function of the Commission, and other securities 
regulators, in that the preserved records are the primary means of 
monitoring compliance with applicable securities laws''. ``Investor 
protection depends on the examination process, which, in turn, 
relies on the records that broker-dealers are required to make and 
maintain.''); FOCUS Reporting System; Requirements for Financial 
Reporting, Exchange Act Release No. 17534 (Feb. 11, 1981), 46 FR 
13205, 13205 (Feb. 20, 1981) (``The FOCUS Report is one of the 
primary means of monitoring the financial and operational condition 
of brokers and dealers and enforcing the financial responsibility 
rules'').
    \531\ See Commission Guidance to Broker-Dealers on the Use of 
Electronic Storage Media Under the Electronic Signatures in Global 
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 
FR at 22917.
    \532\ See FOCUS Reporting System; Requirements for Financial 
Reporting, 46 FR at 13205.
---------------------------------------------------------------------------

    The Commission's recordkeeping and reporting requirements are also 
important for protecting customers against the risks involved in having 
their securities held by a third party.\533\ A failure to maintain 
accurate, accessible, and true records may lead to situations where a 
firm cannot account for customer property or its own assets.\534\ 
Similarly, the Commission's reporting requirements promote transparency 
of the financial and operational condition of broker-dealers to the 
Commission, the firm's DEA, and, in the case of a portion of the annual 
reports, to the public.\535\
---------------------------------------------------------------------------

    \533\ See Study of Unsafe and Unsound Practices of Brokers and 
Dealers at 6 (the Commission's reporting requirements, ``together 
with the Commission's inspection powers, [are] an integral element 
in the arsenal for protection of customers against the risks 
involved in leaving securities with their broker-dealer'').
    \534\ See Commission Guidance to Broker-Dealers on the Use of 
Electronic Storage Media Under the Electronic Signatures in Global 
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 
FR at 22919 (``A failure to maintain accurate, accessible, and true 
records may lead to situations where a firm cannot account for 
customer property or its own assets. For these reasons, the 
Commission's broker-dealer recordkeeping requirements are an 
important part of managing systemic risk in the industry.'').
    \535\ See section II.B.1. of this release.
---------------------------------------------------------------------------

    In light of these considerations, paragraph (d)(6) of Rule 3a71-6 
states that prior to making a substituted compliance determination 
regarding SBSD and MSBSP recordkeeping and reporting requirements, the 
Commission intends to consider (in addition to any conditions imposed), 
whether the foreign financial regulatory system's required records and 
reports, the timeframes for recording or reporting information, the 
accounting standards governing the records and reports, and the 
required format of the records and reports are comparable to applicable 
provisions arising under the Act and its rules and regulations and 
would permit the Commission to examine and inspect regulated firms' 
compliance with the applicable securities laws.
    A commenter stated that a Commission substituted compliance 
determination should not be a

[[Page 68599]]

prerequisite for a foreign bank SBSD to comply with ``home-country'' 
financial recordkeeping and reporting requirements in lieu of the 
Commission's requirements.\536\ The commenter referred to this approach 
as ``Automatic Substituted Compliance'' for foreign bank SBSDs. Rule 
3a71-6 does not provide ``automatic'' substituted compliance for any 
type of registrant. Moreover, as discussed above, the Commission 
preliminarily interpreted the Title VII requirements associated with 
registration to apply generally to the activities of registered 
entities.\537\ Further, in reaching that preliminary conclusion, the 
Commission did not concur with the views of certain commenters that the 
Title VII requirements should not apply to the foreign security-based 
swap activities of registered entities, stating that such a view could 
be difficult to reconcile with, among other things, the statutory 
language describing the requirements applicable to SBSDs.\538\ The 
Commission believes that it is appropriate to evaluate the substance of 
a foreign regulatory system to which substituted compliance would apply 
before granting substituted compliance to an entity. An ``automatic'' 
substituted compliance regime would be contrary to this view, as it 
would permit a foreign bank SBSD to comply with local requirements 
without any analyses by the Commission as to whether those requirements 
were comparable to the Commission's requirements. Therefore, the 
Commission does not believe the approach suggested by the commenter 
would be appropriate.
---------------------------------------------------------------------------

    \536\ See IIB 3/25/2019 Meeting.
    \537\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39825, n.191 (citing Cross-Border 
Proposing Release, 78 FR at 30986).
    \538\ See Cross-Border Proposing Release, 78 FR at 30986.
---------------------------------------------------------------------------

    The same commenter stated that the Commission should allow a 
foreign stand-alone SBSD to satisfy financial recordkeeping and 
reporting requirements through substituted compliance if the SBSD 
qualifies for substituted compliance with respect to the Commission's 
capital and margin requirements for SBSDs.\539\ The commenter referred 
to this approach as ``One-Step Substituted Compliance.'' The Commission 
does not believe that a positive substituted compliance determination 
with respect to nonbank SBSD capital and margin requirements should 
automatically result in a positive substituted compliance determination 
with respect to SBSD recordkeeping and reporting requirements. Once 
again, the Commission believes that it is appropriate to evaluate the 
substance of each foreign regulatory system to which substituted 
compliance would apply before granting substituted compliance to an 
entity. As discussed above, the recordkeeping and reporting 
requirements are integral to the ability of the Commission and other 
securities regulators to effectively examine and inspect regulated 
firms' compliance with the applicable securities laws, including 
capital and margin requirements. Therefore, the Commission will need to 
analyze a jurisdiction's recordkeeping and reporting requirements to 
determine whether they would permit the Commission to examine and 
inspect regulated firms' compliance with the applicable securities laws 
in a manner comparable to its examinations and inspections for firms 
subject to the recordkeeping and reporting requirements specified in 
Section 15F of the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, 
and 18a-9.
---------------------------------------------------------------------------

    \539\ See IIB 3/25/2019 Meeting.
---------------------------------------------------------------------------

    However, as discussed above, in reviewing substituted compliance 
applications, the Commission may conduct its comparability analyses 
regarding the recordkeeping and reporting requirements in conjunction 
with comparability analyses regarding other Exchange Act requirements 
that promote risk management in connection with SBSDs and MSBSPs. Thus, 
the Commission's comparability analyses regarding the recordkeeping and 
reporting requirements could be made in conjunction with comparability 
analyses regarding capital and margin requirements.
    Finally, this commenter also stated that, if substituted compliance 
is not available with respect to a disclosure requirement, ``the 
Commission should limit the application of such public disclosure 
requirements to SBSDs that are not otherwise subject to a public 
disclosure regime.'' \540\ For example, the commenter argues that 
paragraph (b)(7) of Rule 18a-7, as proposed, ``could require a 
standalone SBSD that is a public reporting company to publish material, 
non-public information every six months, rather than on an annual basis 
on Form 20-F.'' \541\ Form 20-F, however, requires the public 
disclosure of substantially more information than will be required by 
Rule 18a-7, which requires relatively little information to be publicly 
disclosed. Moreover, Rule 18a-7 will require the disclosure of 
information such as a firm's net capital computation that may not be 
required under other disclosure regimes. For these reasons, the 
Commission is not adopting the commenter's proposed approach.
---------------------------------------------------------------------------

    \540\ See IIB 3/25/2019 Meeting.
    \541\ See IIB 3/25/2019 Meeting.
---------------------------------------------------------------------------

G. Amendments to Rule 18a-1

    Paragraph (e) of appendix E to Rule 15c3-1 establishes a non-
exclusive list of circumstances under which the Commission may restrict 
the business of an ANC broker-dealer, including when the firm fails to 
meet the reporting requirements set forth in Rule 17a-5 or an event 
specified in Rule 17a-11 occurs. The Commission proposed a parallel 
provision in Rule 18a-1 to apply to a stand-alone SBSD authorized to 
use models.\542\ The circumstances in proposed Rule 18a-1 under which 
the Commission could have restricted the stand-alone SBSD's business 
included that the firm failed to meet a proposed reporting requirement 
or an event in the proposed notification rule for SBSDs occurs. The 
Commission adopted the provision in Rule 18a-1 under which the 
Commission may restrict the business of a stand-alone SBSD or OTCDD/
SBSD authorized to use models.\543\ However, in the final rule, the 
circumstances under which the Commission can restrict a firm's business 
did not include that the firm fails to meet a reporting requirement or 
an event in the notification rule for SBSDs occurs. As the SBSD 
reporting and notification rules are being adopted in this document, 
the Commission is amending Rule 18a-1 to add the these circumstances to 
those listed in the rule under which the Commission may restrict the 
business of a stand-alone SBSD or OTCDD/SBSD authorized to use models: 
(1) The SBSD fails to meet the reporting requirements set forth in Rule 
18a-7; or (2) any event specified in Rule 18a-8 occurs.\544\
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    \542\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70240, 70338.
    \543\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44058-59.
    \544\ See paragraphs (d)(9)(iii)(A) and (B) of Rule 18a-1, as 
amended.
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H. Delegation of Authority

    In recognition of the adoption in this document of recordkeeping, 
reporting, and notification requirements for SBSDs and MSBSPs, 
securities count requirements applicable to certain SBSDs, and 
additional recordkeeping requirements applicable to broker-dealers to 
account for their security-based swap and swap activities in accordance 
with the Dodd-Frank Act, the Commission is amending its rule governing 
delegations of authority to the Director of the Division of Trading and 
Markets (``Division'').

[[Page 68600]]

    Because OTC derivatives dealers will be required to file FOCUS 
Report Part II instead of FOCUS Report Part IIB, the reference to FOCUS 
Report Part IIB is being changed to FOCUS Report Part II. Specifically, 
paragraph (a)(65) of 17 CFR 200.30-3 (``Rule 30-3'') is being amended 
to delegate authority to the Division to authorize the issuance of 
orders requiring OTC derivatives dealers to file FOCUS Report Part II 
instead of FOCUS Report Part IIB. In addition, due to re-numbering of 
paragraphs as a result of these amendments, paragraph (a)(30) of Rule 
30-3 is amended to cross-reference paragraph (a)(3) instead of 
paragraph (a)(4) of Rule 17a-5. Finally, paragraph (a)(65)'s cross-
reference to Rule 17a-12 is corrected to read ``Sec.  240.17a-
12(a)(1)(ii)'' instead of ``Sec.  240.17a-12(a)(ii),'' \545\ and 
paragraph (a)(5)'s cross-reference to Rule 17a-5 is corrected to read 
``Sec.  240.17a-5(m)(3) of this chapter (Rule 17a-5(m)(3))'' instead of 
``Rule 17a-5(1)(3) (Sec.  240.17a-5(1)(3) of this chapter).'' These 
delegations of authority are intended to preserve Commission resources 
and increase the effectiveness and efficiency of the Commission's 
oversight of compliance with the financial responsibility rules. 
Nevertheless, the Division may submit matters to the Commission for its 
consideration, as it deems appropriate.
---------------------------------------------------------------------------

    \545\ See paragraph (a)(65)(i) of Rule 30-3 under the Exchange 
Act, as amended.
---------------------------------------------------------------------------

Administrative Law Matters
    The Commission finds, in accordance with the Administrative 
Procedure Act (``APA''),\546\ that these amendments relate solely to 
agency organization, procedure, or practice, and do not relate to a 
substantive rule. Accordingly, the provisions of the APA regarding 
notice of rulemaking, opportunity for public comment, and publication 
of the amendment prior to its effective date are not applicable. For 
the same reason, and because this amendment does not substantively 
affect the rights or obligations of non-agency parties, the provisions 
of the Small Business Regulatory Enforcement Fairness Act,\547\ are not 
applicable. Additionally, the provisions of the Regulatory Flexibility 
Act, which apply only when notice and comment are required by the APA 
or other law,\548\ are not applicable. Further, because this amendment 
imposes no new burdens on private persons, the Commission does not 
believe that the amendment will have any anti-competitive effects for 
purposes of Section 23(a)(2) of the Exchange Act.\549\ Finally, this 
amendment does not contain any collection of information requirements 
as defined by the Paperwork Reduction Act of 1980, as amended.
---------------------------------------------------------------------------

    \546\ See 5 U.S.C. 553(b)(3)(A).
    \547\ See 5 U.S.C. 804(3)(C).
    \548\ See 5 U.S.C. 603.
    \549\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

III. Explanation of Dates

A. Effective Date

    These final rules will be effective 60 days following publication 
of this release in the Federal Register.

B. Compliance Date

    The compliance date for the rules being adopted in this document, 
other than the amendments to Rule 3a71-6 discussed below, will be 18 
months after the effective date of any final rules originally proposed 
in May 2019 addressing the cross-border application of certain 
security-based swap requirements.\550\ As set forth recently in the 
release adopting capital, margin, and segregation requirements, this 
compliance date will also be the compliance date for SBSD and MSBSP 
registration requirements (the ``Registration Compliance Date'').\551\ 
The Commission believes the compliance date provided in this release, 
which will be in excess of 18 months, will allow sufficient time to 
prepare for and come into compliance with the new recordkeeping and 
reporting requirements.
---------------------------------------------------------------------------

    \550\ The Commission proposed rules on May 10, 2019 which 
include rules and/or guidance regarding security-based swap 
transactions ``arranged, negotiated, or executed'' by personnel 
located in the United States, the cross-border scope of the SBSD de 
minimis exception, the certification and opinion of counsel 
requirement of Rule 15Fb2-1, the questionnaire and application 
requirement of Rule 18a-5, and the cross-border application of the 
statutory disqualification prohibition within Section 15F(b)(6) of 
the Exchange Act. See Cross-Border Application Proposing Release, 84 
FR at 24206.
    \551\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43954-57. Moreover, as explained in that release, the 
Registration Compliance Date will also be the compliance date for 
(1) nonbank SBSD and MSBSP capital and margin requirements; (2) SBSD 
and MSBSP segregation requirements; (3) SBSD and MSBSP business 
conduct and chief compliance officer requirements; and (4) SBSD and 
MSBSP trade acknowledgement and verification requirements. See also 
Business Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, 81 FR at 30081; see also Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
81 FR 39807.
---------------------------------------------------------------------------

    A commenter asked to delay cross-border application of the 
Commission's recordkeeping and reporting rules with respect to home 
jurisdiction regulations that have not yet been finalized, as a 
preferable solution to requiring foreign firms to build the 
technological, operational, and compliance systems required to comply 
with U.S. law for a short, interim period if the home jurisdiction is 
ultimately deemed comparable for substituted compliance purposes.\552\ 
The commenter's concerns should be mitigated by the extended compliance 
date applicable to the rules being adopted in this document. The 
Commission believes that such a delay would not be appropriate because 
a comprehensive set of records will be integral to the Commission's 
ability to exercise its regulatory responsibilities once these firms 
are registered.\553\ In addition, as discussed below in section III.D. 
of this release, to address concerns that the compliance date could be 
before substituted compliance determinations are made, the Commission 
would consider substituted compliance requests that are submitted prior 
to the compliance date.
---------------------------------------------------------------------------

    \552\ See SIFMA 9/5/2014 Letter.
    \553\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25197 (``The recordkeeping, reporting, notification, and 
securities count requirements applicable to broker-dealers are an 
integral part of the financial responsibility rules as they are 
designed to provide transparency into the business activities of 
broker-dealers and to assist the Commission and other securities 
regulators in reviewing and monitoring compliance with the capital, 
margin, and segregation requirements.'').
---------------------------------------------------------------------------

    Finally, one commenter stated that SBSDs and MSBSPs will require 
adequate time following registration to begin complying with 
substantive Title VII requirements, since considerable resources will 
be needed to amend recordkeeping systems and documentation processes 
between finalization of recordkeeping and documentation rules and the 
initial compliance dates for those rules.\554\ Regarding the 
Commission's policy statement on the sequencing of final rules 
governing security-based swaps,\555\ another commenter suggested 
grouping rulemakings into two categories in terms of the applicable 
compliance date.\556\ In response, the Commission notes that it has 
coordinated the compliance dates

[[Page 68601]]

for the Commission's: (1) SBSD and MSBSP registration requirements; (2) 
nonbank SBSD and MSBSP capital and margin requirements; (3) SBSD and 
MSBSP segregation requirements; (4) SBSD and MSBSP recordkeeping and 
reporting requirements; (5) SBSD and MSBSP business conduct and chief 
compliance officer requirements; (6) SBSD and MSBSP trade 
acknowledgement and verification requirements; and (7) statutory 
disqualification process. The Commission also does not believe it would 
be appropriate to delay the compliance date for the Commission's 
recordkeeping rules beyond the compliance date for the rules 
establishing the registration process for SBSDs and MSBSPs, because 
this would undermine the Commission's ability to effectively regulate 
and supervise registrants.
---------------------------------------------------------------------------

    \554\ See Letter from Kenneth E. Bentsen, Jr., Executive Vice 
President, Public Policy and Advocacy, Securities Industry and 
Financial Markets Association (Aug. 13, 2012) (``SIFMA 8/13/2012 
Letter''). See also Memorandum from Richard E. Grant, Office of 
Commissioner Michael S. Piwowar, regarding an email from Sarah A. 
Miller, Chief Executive Officer, Institute of International Bankers 
(Nov. 16, 2016) (``IIB 11/16/2016 Letter'').
    \555\ See Statement of General Policy on the Sequencing of the 
Compliance Dates for Final Rules Applicable to Security-Based Swaps 
Adopted Pursuant to the Securities Exchange Act of 1934 and the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange 
Act Release No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 2012). 
Comments on the sequencing policy statement which are relevant to 
the Commission's recordkeeping and reporting requirements are 
available at http://www.sec.gov/comments/s7-05-12/s70512.shtml.
    \556\ See Letter from Chris Barnard (Aug. 13, 2012).
---------------------------------------------------------------------------

C. Effect on Existing Commission Exemptive Relief

    On July 1, 2011, the Commission issued an order granting, among 
other things, temporary exemptive relief from compliance with certain 
recordkeeping and reporting provisions of the Exchange Act that would 
have applied to the security-based swap activities of registered 
broker-dealers due to the expansion of the Exchange Act definition of 
``security'' to include security-based swaps.\557\ The compliance dates 
of this release implicate the expiration of this temporary exemptive 
relief related to registered broker-dealer recordkeeping and reporting 
requirements.
---------------------------------------------------------------------------

    \557\ See Order Granting Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with the Pending 
Revisions of the Definition of ``Security'' to Encompass Security-
Based Swaps, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 
39927 (July 7, 2011) (``Exchange Act Exemptive Order'').
---------------------------------------------------------------------------

    With regard to the recordkeeping and reporting obligations of 
registered broker-dealers, the Exchange Act Exemptive Order provided 
limited exemptions for registered broker-dealers, subject to certain 
conditions and limitations, from compliance with Sections 17(a) and 
17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and 
17a-13 (collectively, ``the Recordkeeping Provision Exemptions'') in 
connection with security-based swaps solely to the extent the 
provisions or rules did not apply to the broker-dealer's security-based 
swap positions or activities as of July 15, 2011.\558\ The Exchange Act 
Exemptive Order also provided that, until such time as the underlying 
exemptive relief expires, no contract entered into on or after July 16, 
2011 shall be void or considered voidable by reason of Section 29(b) of 
the Exchange Act because any person that is a party to the contract 
violated a provision of the Exchange Act for which the Commission 
provided exemptive relief in the Exchange Act Exemptive Order 
(``Section 29(b) Exemption).\559\ The Recordkeeping Provision 
Exemptions are scheduled to expire on the compliance date for any final 
rules regarding recordkeeping and reporting requirements for SBSDs and 
MSBSPs.\560\ Accordingly, all the Recordkeeping Provision Exemptions, 
together with the portion of the Section 29(b) Exemption that relates 
to the Exchange Act provisions for which the Commission provided 
exemptive relief in the Recordkeeping Provision Exemptions, will expire 
upon the compliance date set forth in section III.B. of this release.
---------------------------------------------------------------------------

    \558\ See Exchange Act Exemptive Order at 39938-39.
    \559\ See Exchange Act Exemptive Order at 39940.
    \560\ The Recordkeeping Provision Exemptions originally were set 
to expire on the compliance date for any final rules further 
defining the terms ``security-based swap'' and ``eligible contract 
participant.'' See Exchange Act Exemptive Order at 39938-39. In the 
final rules further defining the term ``security-based swap,'' the 
Commission extended this expiration date to February 13, 2013. See 
Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping, 77 FR at 48304. On February 7, 2013, the 
Commission extended the expiration date until February 11, 2014. See 
Order Extending Temporary Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps, and Request for 
Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218, 
10220 (Feb. 13, 2013). On February 5, 2014, the Commission further 
extended the expiration date until the compliance date set forth in 
any recordkeeping and reporting rules for SBSDs and MSBSPs. See 
Order Extending Temporary Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps, and Request for 
Comment, Exchange Act Release No. 71485 (Feb. 5, 2014), 79 FR 7731, 
7734 (Feb. 10, 2014) (``Exchange Act Exemption Extension Order'').
---------------------------------------------------------------------------

    In addition, the Commission also has provided an exemption from the 
``dealer'' registration requirements of Section 15(a)(1) of the 
Exchange Act, and the other requirements of the Exchange Act and the 
rules and regulations thereunder that apply to a dealer that is not 
registered with the Commission, solely in connection with dealing 
activities involving security-based swaps with counterparties that meet 
the definition of eligible contract participant as set forth in Section 
1a(12) of the CEA as in effect on July 20, 2010 (``Dealer 
Exemptions'').\561\ The Dealer Exemptions are scheduled to expire on 
the later of the compliance dates set forth in any final rules 
regarding capital, margin, and segregation requirements for SBSDs and 
MSBSPs and any final rules regarding recordkeeping and reporting 
requirements for SBSDs and MSBSPs \562\ As noted in section III.B. of 
this release, both relevant compliance dates will be 18 months after 
the effective date of any final rules addressing the cross-border 
application of certain security-based swap requirements or the 
Registration Compliance Date. Accordingly, all of the Dealer 
Exemptions, together with the portion of the Section 29(b) Exemption 
that relates to the Exchange Act provisions for which the Commission 
provided exemptive relief in the Dealer Exemptions, will expire upon 
the Registration Compliance Date.
---------------------------------------------------------------------------

    \561\ See Exchange Act Exemptive Order at 39939.
    \562\ The Dealer Exemptions originally were set to expire on the 
compliance date for any final rules further defining the terms 
``security-based swap'' and ``eligible contract participant.'' See 
Exchange Act Exemptive Order at 39938, 39940. In the final rules 
further defining the term ``security-based swap,'' the Commission 
extended this expiration date to February 13, 2013. See Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 77 FR at 48304. On February 7, 2013, the Commission 
again extended the expiration date until February 11, 2014. See 
Order Extending Temporary Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps, and Request for 
Comment, 78 FR at 10220. On February 5, 2014, the Commission further 
extended the expiration date until the later of the compliance dates 
set forth in any final rules regarding capital, margin, and 
segregation requirements for SBSDs and MSBSPs and any final rules 
regarding recordkeeping and reporting requirements for SBSDs and 
MSBSPs. See Exchange Act Exemption Extension Order at 7734-35.
---------------------------------------------------------------------------

    Finally, the Commission has provided an exemption from the 
``broker'' registration requirements of Section 15(a)(1) of the 
Exchange Act, and the other requirements of the Exchange Act and the 
rules and regulations thereunder that apply to a broker that is not 
registered with the Commission, solely in connection with broker 
activities involving security-based swaps (``Broker Exemptions'').\563\ 
The Broker Exemptions are scheduled to expire on the later of the 
compliance dates set forth in any final rules regarding capital, 
margin, and segregation requirements for SBSDs and MSBSPs and any final 
rules regarding recordkeeping and reporting requirements for SBSDs and 
MSBSPs.\564\

[[Page 68602]]

However, the Commission has stated that an entity that meets the 
definition of ``security-based swap execution facility'' in Section 
3(a)(77) of the Exchange Act also would meet the definition of 
``broker'' in Section 3(a)(4) of the Act.\565\ The Commission also has 
granted temporary exemptions from the registration requirements for 
security-based swap execution facilities in Section 3D(a)(1) of the 
Exchange Act and from certain disclosure requirements in Section 3D(c) 
of the Exchange Act (``SB SEF Exemptions'').\566\ The SB SEF Exemptions 
will expire on the earliest compliance date set forth in any of the 
final rules regarding registration of security-based swap execution 
facilities.\567\ The Commission recognizes that market participants who 
currently rely on the SB SEF Exemptions pending the Commission's 
finalization of registration rules for security-based swap execution 
facilities may also currently rely on the Broker Exemptions. The 
Commission therefore finds that it is necessary and appropriate in the 
public interest and consistent with the protection of investors to 
extend the Broker Exemptions, insofar as they apply to persons and 
activities subject to the SB SEF Exemptions, until the expiration date 
for the SB SEF Exemptions.\568\
---------------------------------------------------------------------------

    \563\ See Exchange Act Exemptive Order at 39939.
    \564\ The Broker Exemptions originally were set to expire on the 
compliance date for any final rules further defining the terms 
``security-based swap'' and ``eligible contract participant.'' See 
Exchange Act Exemptive Order at 39938, 39940. In the final rules 
further defining the term ``security-based swap,'' the Commission 
extended this expiration date to February 13, 2013. See Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 77 FR at 48304. On February 7, 2013, the Commission 
again extended the expiration date until February 11, 2014. See 
Order Extending Temporary Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps, and Request for 
Comment, 78 FR at 10220. On February 5, 2014, the Commission further 
extended the expiration date until the later of the compliance dates 
set forth in any final rules regarding capital, margin, and 
segregation requirements for SBSDs and MSBSPs and any final rules 
regarding recordkeeping and reporting requirements for SBSDs and 
MSBSPs. See Exchange Act Exemption Extension Order at 7734-35.
    \565\ Registration and Regulation of Security-Based Swap 
Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 
76 FR 10948, 10959 (Feb. 28, 2011).
    \566\ See Temporary Exemptions and Other Temporary Relief, 
Together with Information on Compliance Dates for New Provisions of 
the Securities Exchange Act of 1934 Applicable to Security-Based 
Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287, 
36292-93, 36306 (June 22, 2011).
    \567\ See id.
    \568\ See 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    Accordingly, solely for purposes of the Exchange Act Exemption 
Extension Order as it relates to exemption from the ``broker'' 
registration requirements of Section 15(a)(1) of the Exchange Act and 
the other requirements of the Exchange Act and the rules and 
regulations thereunder that apply to a broker that is not registered 
with the Commission, and solely in connection with the operation of a 
facility for the trading or processing of security-based swaps that is 
not currently registered as a national securities exchange or as a 
security-based swap execution facility (``SB SEF Broker Exemptions''), 
the compliance date is the expiration date of the SB SEF Exemptions. 
Similarly, solely for purposes of the Exchange Act Exemption Extension 
Order as it relates to the portion of the Section 29(b) Exemption that 
relates to the Exchange Act provisions for which the Commission 
provided exemptive relief in the SB SEF Broker Exemptions, the 
compliance date set forth in this release is the expiration date of the 
SB SEF Exemptions. All other portions of the Broker Exemptions, 
together with the portion of the Section 29(b) Exemption that relates 
to the Exchange Act provisions for which the Commission provided 
exemptive relief in these other portions of the Broker Exemptions, will 
expire upon the Registration Compliance Date.

D. Application to Substituted Compliance

    For the amendments to Rule 3a71-6 being adopted in this release to 
provide foreign SBSDs and MSBSPs with the potential to utilize 
substituted compliance with comparable foreign requirements to satisfy 
Section 15F of the Exchange Act and new Exchange Act Rules 18a-5, 18a-
6, 18a-7, 18a-8, and 18a-9, consistent with the other rules adopted in 
this document, the Commission is adopting an effective date of 60 days 
following publication in the Federal Register. There will be no 
separate compliance date in connection with that rule amendment, as the 
rule does not impose obligations upon entities. As discussed above, 
SBSDs and MSBSPs will not be required to comply with the recordkeeping 
and reporting requirements until they are registered, and the 
registration requirement for those entities will not be triggered until 
a number of regulatory benchmarks have been met.
    In practice, the Commission recognizes that if the requirements of 
a foreign regime are comparable to Title VII requirements, and the 
other prerequisites to substituted compliance also have been satisfied, 
then it may be appropriate to permit an SBSD or MSBSP to rely on 
substituted compliance commencing at the time that entity is registered 
with the Commission. Accordingly, to address commenters' concerns that 
the compliance date could be before substituted compliance 
determinations are made, the Commission would consider substituted 
compliance requests that are submitted prior to the compliance date for 
its recordkeeping and reporting requirements.

IV. Paperwork Reduction Act

    Certain provisions of the rule amendments and new rules being 
adopted in this release contain a new ``collection of information'' 
within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\569\ The Commission submitted the rule amendments and new 
rules to the Office of Management and Budget (``OMB'') for review and 
approval in accordance with the PRA.\570\ The Commission's earlier PRA 
assessments have been revised to reflect the modifications to the rules 
and amendments from those that were proposed, as well as additional 
information and data now available to the Commission.\571\ 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 and OMB control numbers for the collections 
of information are:
---------------------------------------------------------------------------

    \569\ See 44 U.S.C. 3501 et seq.
    \570\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \571\ The hourly rates use for internal professionals used 
throughout this section IV. of the release are taken from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified to account for an 1800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead, in addition to SIFMA's Office Salaries in 
the Securities Industry 2013, modified by Commission staff to 
account for an 1800-hour work-year and inflation, and multiplied by 
2.93 to account for bonuses, firm size, employee benefits, and 
overhead.

----------------------------------------------------------------------------------------------------------------
                                                                                                    OMB control
                Rule                                          Rule title                                No.
----------------------------------------------------------------------------------------------------------------
Rule 17a-3..........................  Records to be made by certain exchange members, brokers          3235-0033
                                       and dealers.
Rule 17a-4..........................  Records to be preserved by certain exchange members,             3235-0279
                                       brokers and dealers.
Rule 17a-5..........................  Reports to be made by certain brokers and dealers.........       3235-0123

[[Page 68603]]

 
Rule 17a-11.........................  Notification provisions for brokers and dealers...........       3235-0085
Rule 17a-12.........................  Reports to be made by certain OTC derivatives dealers.....       3235-0498
Rule 18a-5..........................  Records to be made by certain security-based swap dealers        3235-0745
                                       and major security-based swap participants.
Rule 18a-6..........................  Records to be preserved by certain security-based swap           3235-0751
                                       dealers and major security-based swap participants.
Rule 18a-7..........................  Reports to be made by certain security-based swap dealers        3235-0749
                                       and major security-based swap participants.
Rule 18a-8..........................  Notification provisions for security-based swap dealers          3235-0750
                                       and major security-based swap participants.
Rule 18a-9..........................  Quarterly security counts to be made by certain security-        3235-0752
                                       based swap dealers.
Rule 18a-10.........................  Alternative compliance mechanism for security-based swap         3235-0702
                                       dealers that are registered as swap dealers and have
                                       limited security-based swap activities.
Rule 3a71-6.........................  Substituted compliance for security-based swap dealers and       3235-0715
                                       major security-based swap participants.
----------------------------------------------------------------------------------------------------------------

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

1. Amendments to Rule 17a-3 and New Rule 18a-5
    Rule 17a-3 requires a broker-dealer to make and keep current 
certain records. The Commission is amending this rule to account for 
the security-based swap and swap activities of broker-dealers, 
including broker-dealer SBSDs and MSBSPs. With respect to stand-alone 
SBSDs and MSBSPs, and bank SBSDs and MSBSPs, the Commission is adopting 
new Rule 18a-5--which is modeled on Rule 17a-3, as amended--to require 
these registrants to make and keep current certain records.\572\ Rule 
18a-5 does not include a parallel requirement for every requirement in 
Rule 17a-3. Paragraph (a) of Rule 18a-5 contains recordkeeping 
requirements for stand-alone SBSDs and MSBSPs, and paragraph (b) 
contains recordkeeping requirements for bank SBSDs and MSBSPs that are 
more limited in scope. The amendments to Rule 17a-3 and new Rule 18a-5 
establish a number of new collections of information, as summarized in 
the table below.
---------------------------------------------------------------------------

    \572\ See Rule 18a-5, as adopted.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Non-model                                       Non-model          Model
                                                                  Stand-alone    broker-dealer    ANC broker-    Broker-dealer    stand-alone   stand[dash]alone    Bank SBSDs      Stand-alone
                                                                broker-dealers       SBSDs       dealer SBSDs       MSBSPs           SBSDs            SBSDs                           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-customer accounts................   * 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)
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 of net capital.................  ..............  ..............  ..............  ..............     18a-5(a)(9)      18a-5(a)(9)   ..............     18a-5(a)(9)
Associated person's employment application....................  ..............  ..............  ..............  ..............    18a-5(a)(10)     18a-5(a)(10)      18a-5(b)(8)    18a-5(a)(10)
Account equity and margin calculations under Rule 18a-3.......  ..............    17a-3(a)(25)    17a-3(a)(25)    17a-3(a)(25)    18a-5(a)(12)     18a-5(a)(12)   ..............    18a-5(a)(12)
Possession or control requirements for security-based swap        17a-3(a)(26)    17a-3(a)(26)    17a-3(a)(26)    17a-3(a)(26)    18a-5(a)(13)     18a-5(a)(13)      18a-5(b)(9)  ..............
 customers....................................................
Security-based swap customer reserve requirements.............    17a-3(a)(27)    17a-3(a)(27)    17a-3(a)(27)    17a-3(a)(27)    18a-5(a)(14)     18a-5(a)(14)     18a-5(b)(10)  ..............
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 business conduct requirements.................  ..............    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)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Commission is amending these pre-existing paragraphs of Rule 17a-3 to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.

    A commenter urged the Commission to harmonize its recordkeeping 
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping 
requirements for swap dealers and major swap participants to the 
maximum extent possible, with the goal of permitting firms to utilize a 
single recordkeeping system for swaps and security-based swaps.\573\ As 
discussed in more detail above, in response to the comment and to 
promote harmonization with CFTC requirements, the Commission is 
adopting a limited alternative compliance mechanism in Rules 17a-3 and 
18a-5.\574\ In particular, an SBSD or MSBSP that also is registered 
with the CFTC as a swap dealer or major swap participant may comply 
with the recordkeeping requirements of the CEA and the rules thereunder 
applicable to swap dealers and major swap participants in lieu of 
complying with the requirements in Rules 17a-3 and 18a-5 to make and 
keep current trade blotters, customer account ledgers, and stock 
records

[[Page 68604]]

solely with respect to information required to be included in these 
records regarding security-based swap transactions and positions if the 
SBSD or MSBSP meets certain conditions. The conditions include, among 
other things, that the SBSD or MSBSP preserves all of the data elements 
necessary to create these records as they pertain to security-based 
swap and swap transactions and upon request promptly furnishes to 
representatives of the Commission such records that includes security-
based swap and swap transactions and positions in the format required 
by Rule 17a-3 or 18a-5, as applicable. This provision will permit an 
SBSD or MSBSP that also is registered with the CFTC as a swap dealer or 
major swap participant to maintain a single recordkeeping system for 
security-based swap and swap transactions and positions in accordance 
with the CFTC's rules with respect to these required records.
---------------------------------------------------------------------------

    \573\ See SIFMA 9/5/2014 Letter.
    \574\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c) 
of Rule 18a-5, as adopted.
---------------------------------------------------------------------------

2. Amendments to Rule 17a-4 and New Rule 18a-6
    Rule 17a-4 requires a broker-dealer to preserve certain records if 
it makes or receives them and prescribes the time period and the manner 
in which records must be preserved. The Commission is amending this 
rule to account for the security-based swap and swap activities of 
broker-dealers, including broker-dealer SBSDs and MSBSPs. With respect 
to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, 
the Commission is adopting new Rule 18a-6--which is modeled on Rule 
17a-4, as amended. Rule 18a-6 does not include a parallel requirement 
for every requirement in Rule 17a-4, and the recordkeeping requirements 
in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more limited in 
scope than the requirements in the rule applicable to stand-alone SBSDs 
and MSBSPs. As discussed above, the records a broker-dealer, including 
a broker-dealer SBSD or MSBSP, is required to maintain and preserve 
under Rules 17a-3 and 17a-4 may be maintained and preserved by means of 
electronic storage media. The use of electronic storage media is 
subject to certain conditions, including that the media must preserve 
the records exclusively in a non-rewriteable and non-erasable format. 
In response to comment, the Commission is modifying Rule 18a-6 to 
eliminate the requirement that the electronic storage system preserve 
the records exclusively in a non-rewriteable and non-erasable 
format.\575\ The amendments to Rule 17a-4 and new Rule 18a-6 establish 
a number of new collections of information, as summarized in the table 
below.
---------------------------------------------------------------------------

    \575\ See Rule 18a-6, as adopted.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Non-model                                       Non-model
                                                                    Stand-alone    broker-dealer    ANC broker-    Broker-dealer    stand-alone    Model stand-     Bank SBSDs      Stand-alone
                                                                  broker-dealers       SBSDs       dealer SBSDs       MSBSPs           SBSDs        alone SBSDs                       MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Records to be preserved for a period of not less than 6 years
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trade blotters..................................................  ..............  ..............  ..............  ..............     18a-6(a)(1)     18a-6(a)(1)     18a-6(a)(2)     18a-6(a)(1)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(1)         5(a)(1)         5(b)(1)         5(a)(1)
General ledger..................................................  ..............  ..............  ..............  ..............     18a-6(a)(1)     18a-6(a)(1)  ..............     18a-6(a)(1)
                                                                                                                                     citing 18a-     citing 18a-                     citing 18a-
                                                                                                                                         5(a)(2)         5(a)(2)                         5(a)(2)
Ledgers for customer and non-customer accounts..................  ..............  ..............  ..............  ..............     18a-6(a)(1)     18a-6(a)(1)     18a-6(a)(2)     18a-6(a)(1)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(3)         5(a)(3)         5(b)(2)         5(a)(3)
Stock record....................................................  ..............  ..............  ..............  ..............     18a-6(a)(1)     18a-6(a)(1)     18a-6(a)(2)     18a-6(a)(1)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(4)         5(a)(4)         5(b)(3)         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-
                                                                                                                                                                         5(b)(4)
Memoranda of proprietary orders.................................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)       (b)(1)(i)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(5)         5(a)(5)         5(b)(5)         5(a)(5)
Confirmations...................................................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)       (b)(1)(i)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(6)         5(a)(6)         5(b)(6)         5(a)(6)
Accountholder information.......................................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)       (b)(1)(i)
                                                                                                                                     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                         5(a)(7)         5(a)(7)         5(b)(7)         5(a)(7)
Options positions...............................................  ..............  ..............  ..............  ..............           18a-6           18a-6  ..............           18a-6
                                                                                                                                       (b)(1)(i)       (b)(1)(i)                       (b)(1)(i)
                                                                                                                                     citing 18a-     citing 18a-                     citing 18a-
                                                                                                                                         5(a)(8)         5(a)(8)                         5(a)(8)
Trial balances and computation of net capital...................     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6  ..............           18a-6
                                                                     citing 17a-     citing 17a-     citing 17a-     citing 17a-       (b)(1)(i)       (b)(1)(i)                       (b)(1)(i)
                                                                        3(a)(11)        3(a)(11)        3(a)(11)        3(a)(11)     citing 18a-     citing 18a-                     citing 18a-
                                                                                                                                         5(a)(9)         5(a)(9)                         5(a)(9)
Account equity and margin calculations under new Rule 18a-3.....  ..............     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6  ..............           18a-6
                                                                                     citing 17a-     citing 17a-     citing 17a-       (b)(1)(i)       (b)(1)(i)                       (b)(1)(i)
                                                                                        3(a)(25)        3(a)(25)        3(a)(25)     citing 18a-     citing 18a-                     citing 18a-
                                                                                                                                        5(a)(12)        5(a)(12)                        5(a)(12)

[[Page 68605]]

 
Possession or control requirements for security-based swap           17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6           18a-6  ..............
 customers......................................................     citing 17a-     citing 17a-     citing 17a-     citing 17a-       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)
                                                                        3(a)(26)        3(a)(26)        3(a)(26)        3(a)(26)     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                        5(a)(13)        5(a)(13)         5(b)(9)
Security-based swap customer reserve requirements...............     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6           18a-6  ..............
                                                                     citing 17a-     citing 17a-     citing 17a-     citing 17a-       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)
                                                                        3(a)(27)        3(a)(27)        3(a)(27)        3(a)(27)     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                        5(a)(14)        5(a)(14)        5(b)(10)
Unverified transactions.........................................  ..............     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6           18a-6           18a-6
                                                                                     citing 17a-     citing 17a-     citing 17a-       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)       (b)(1)(i)
                                                                                        3(a)(28)        3(a)(28)        3(a)(28)     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                        5(a)(15)        5(a)(15)        5(b)(11)        5(a)(15)
Political contributions.........................................  ..............     17a-4(b)(1)     17a-4(b)(1)  ..............           18a-6           18a-6           18a-6  ..............
                                                                                     citing 17a-     citing 17a-                       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)
                                                                                        3(a)(29)        3(a)(29)                     citing 18a-     citing 18a-     citing 18a-
                                                                                                                                        5(a)(16)        5(a)(16)        5(b)(12)
Compliance with business conduct requirements...................  ..............     17a-4(b)(1)     17a-4(b)(1)     17a-4(b)(1)           18a-6           18a-6           18a-6           18a-6
                                                                                          citing          citing          citing       (b)(1)(i)       (b)(1)(i)       (b)(2)(i)       (b)(1)(i)
                                                                                  17a[dash]3(a)(  17a[dash]3(a)(  17a[dash]3(a)(     citing 18a-     citing 18a-     citing 18a-     citing 18a-
                                                                                             30)             30)             30)        5(a)(17)        5(a)(17)        5(b)(13)        5(a)(17)
Bank records....................................................  ..............  ..............  ..............  ..............           18a-6           18a-6  ..............           18a-6
                                                                                                                                      (b)(1)(ii)      (b)(1)(ii)                      (b)(1)(ii)
Bills...........................................................  ..............  ..............  ..............  ..............           18a-6           18a-6  ..............           18a-6
                                                                                                                                     (b)(1)(iii)     (b)(1)(iii)                     (b)(1)(iii)
Communications..................................................    17a-4(b)(4)*    17a-4(b)(4)*    17a-4(b)(4)*    17a-4(b)(4)*           18a-6           18a-6           18a-6           18a-6
                                                                                                                                      (b)(1)(iv)      (b)(1)(iv)      (b)(2)(ii)      (b)(1)(iv)
Trial balances..................................................  ..............  ..............  ..............  ..............           18a-6           18a-6  ..............           18a-6
                                                                                                                                       (b)(1)(v)       (b)(1)(v)                       (b)(1)(v)
Account documents...............................................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                      (b)(1)(vi)      (b)(1)(vi)     (b)(2)(iii)      (b)(1)(vi)
Written agreements..............................................    17a-4(b)(7)*    17a-4(b)(7)*    17a-4(b)(7)*    17a-4(b)(7)*           18a-6           18a-6           18a-6           18a-6
                                                                                                                                     (b)(1)(vii)     (b)(1)(vii)      (b)(2)(iv)     (b)(1)(vii)
Information supporting financial reports........................    17a-4(b)(8)*    17a-4(b)(8)*    17a-4(b)(8)*    17a-4(b)(8)*           18a-6           18a-6           18a-6           18a-6
                                                                                                                                    (b)(1)(viii)    (b)(1)(viii)       (b)(2)(v)    (b)(1)(viii)
Rule 15c3-4 risk management records (OTC derivatives dealers      ..............  ..............  ..............  ..............           18a-6           18a-6  ..............           18a-6
 only)..........................................................                                                                      (b)(1)(ix)      (b)(1)(ix)                      (b)(1)(ix)
Credit risk determinations......................................  ..............  ..............  ..............  ..............  ..............           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           18a-6           18a-6           18a-6
                                                                                                                                      (b)(1)(xi)      (b)(1)(xi)      (b)(2)(vi)      (b)(1)(xi)
Records relating to business conduct standards..................  ..............    17a-4(b)(15)    17a-4(b)(15)    17a-4(b)(15)           18a-6           18a-6           18a-6           18a-6
                                                                                                                                     (b)(1)(xii)     (b)(1)(xii)     (b)(2)(vii)     (b)(1)(xii)
Special entity documents........................................  ..............    17a-4(b)(16)    17a-4(b)(16)    17a-4(b)(16)           18a-6           18a-6           18a-6           18a-6
                                                                                                                                    (b)(1)(xiii)    (b)(1)(xiii)    (b)(2)(viii)    (b)(1)(xiii)
Associated person's employment application......................  ..............  ..............  ..............  ..............     18a-6(d)(1)     18a-6(d)(1)     18a-6(d)(1)     18a-6(d)(1)
Regulatory authority reports....................................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                       (d)(2)(i)       (d)(2)(i)      (d)(2)(ii)       (d)(2)(i)
Compliance, supervisory, and procedures manuals.................  ..............  ..............  ..............  ..............           18a-6           18a-6           18a-6           18a-6
                                                                                                                                       (d)(3)(i)       (d)(3)(i)      (d)(3)(ii)       (d)(3)(i)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     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)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Commission is amending these pre-existing paragraphs of Rule 17a-4 to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.

3. Amendments to Rule 17a-5 and New Rule 18a-7
    Rule 17a-5, the broker-dealer reporting rule, requires, among other 
things, that broker-dealers file periodic unaudited reports about their 
financial and operational condition using the FOCUS Report form; and 
that broker-dealers annually file financial statements and certain 
reports, as well as reports covering those statements and reports 
prepared by an independent public accountant registered with the PCAOB, 
in accordance with PCAOB standards.
    Rule 17a-5 is being amended to account for the security-based swap 
activities of entities subject to its requirements and new Rule 18a-7--
which is modeled on Rule 17a-5; is being adopted to establish reporting 
requirements for SBSDs and MSBSPs that will not be subject to Rule 17a-
5.\576\ A stand-alone broker-dealer, including a stand-alone OTC 
derivatives dealer, will continue to be subject to Rule 17a-5.\577\ 
Similarly, a broker-dealer, other than an

[[Page 68606]]

OTC derivatives dealer, that is also an SBSD will be subject to Rule 
17a-5. A broker-dealer, including an OTC derivatives dealer, that is 
also an MSBSP will be subject to Rule 17a-5. A stand-alone SBSD will be 
subject to Rule 18a-7. Similarly, an SBSD that is also an OTC 
derivatives dealer will be subject to Rule 18a-7. A stand-alone MSBSP 
will be subject to Rule 18a-7. Finally, a bank SBSD or MSBSP will be 
subject to Rule 18a-7.
---------------------------------------------------------------------------

    \576\ See section II.B.3.a. of this release (discussing the 
requirement to file annual reports and the qualifications of 
independent public accountants).
    \577\ Paragraph (p) of Rule 17a-5 provides that an OTC 
derivatives dealer may comply with Rule 17a-5 by complying with the 
provisions of Rule 17a-12.
---------------------------------------------------------------------------

4. Amendments to Rule 17a-11 and New Rule 18a-8
    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. The Commission is amending Rule 17a-11 to account for the 
security-based swap activities of broker-dealers.\578\ The Commission 
is adopting new Rule 18a-8--which is modeled on Rule 17a-11, as 
amended--to establish notification requirements for stand-alone SBSDs 
and MSBSPs, and bank SBSDs and MSBSPs.\579\ The amendments to Rule 17a-
11 and new Rule 18a-8 establish a number of new collections of 
information, as summarized in the table below.
---------------------------------------------------------------------------

    \578\ See paragraph (f) of Rule 17a-11, as amended.
    \579\ See Rule 18a-8, as adopted.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Non-SBSD/       Non-model                                          Model          Non-model
                                                                 MSBSP broker-   broker-dealer    ANC broker-    Broker-dealer  stand[dash]alone    stand-alone     Bank SBSDs      Stand-alone
                                                                    dealers          SBSDs       dealer SBSDs       MSBSPs            SBSDs            SBSDs                          MSBSPs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net capital below minimum.....................................  ..............  ..............  ..............  ..............            18a-8            18a-8  ..............  ..............
                                                                                                                                      (a)(1)(i)        (a)(1)(i)
Tentative net capital below minimum...........................  ..............  ..............  ..............  ..............            18a-8   ..............  ..............  ..............
                                                                                                                                     (a)(1)(ii)
Tangible net worth below minimum..............................  ..............  ..............  ..............  ..............  ................  ..............  ..............           18a-8
                                                                                                                                                                                          (a)(2)
Early warning of net capital..................................  ..............  ..............  ..............  ..............      18a-8(b)(1)      18a-8(b)(1)  ..............  ..............
Early warning of tentative net capital........................  ..............  ..............  ..............  ..............            18a-8   ..............  ..............  ..............
                                                                                                                                         (b)(2)
Early warning of tangible net worth...........................  ..............  ..............  ..............  ..............  ................  ..............  ..............     18a-8(b)(3)
Backtesting exception.........................................  ..............  ..............  ..............  ..............      18a-8(b)(4)   ..............  ..............  ..............
Notice of adjustment of reported capital category.............  ..............  ..............  ..............  ..............  ................  ..............        18a-8(c)  ..............
Failure to make and keep current books and records............  ..............  ..............  ..............  ..............         18a-8(d)         18a-8(d)        18a-8(d)        18a-8(d)
Material weakness.............................................  ..............  ..............  ..............  ..............         18a-8(e)         18a-8(e)  ..............  ..............
Failure to make a required special reserve deposit............       17a-11(f)       17a-11(f)       17a-11(f)  ..............         18a-8(g)         18a-8(g)        18a-8(g)  ..............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. Amendments to Rule 17a-12
    The amendments to Rule 17a-12, the OTC derivatives dealer reporting 
rule,\580\ require OTC derivatives dealers to file FOCUS Report Part 
II, as amended, instead of FOCUS Report Part IIB by replacing the 
phrase ``Part II'' with the phrase ``Part IIB'' each time it appears in 
the rule.\581\
---------------------------------------------------------------------------

    \580\ OTC derivatives dealers dually registered as SBSDs are 
subject to the reporting requirements of Rule 18a-7.
    \581\ OTC derivatives dealers dually registered as SBSDs or 
MSBSPs will also file FOCUS Report Part II.
---------------------------------------------------------------------------

6. New Rule 18a-9
    The Commission is adopting new Rule 18a-9, which is modeled on Rule 
17a-13, to 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. Rule 18a-9 does not include a parallel requirement 
for every requirement in Rule 17a-13.\582\ In addition, Rule 18a-9 does 
not apply to stand-alone MSBSPs because the customer protection 
rationale for Rules 17a-13 and 18a-9 is not as pertinent to stand-alone 
MSBSPs.
---------------------------------------------------------------------------

    \582\ The Commission is not including in Rule 18a-9, as adopted, 
provisions that would parallel the provisions in paragraphs (a)(1), 
(2), and (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. The Commission believes that SBSDs will not limit 
their activities to the types of activities in which the exempt 
broker-dealers engage.
---------------------------------------------------------------------------

7. Amendments to Rule 18a-10
    Rule 18a-10 permits certain SBSDs that are registered as swap 
dealers and that predominantly engage in a swaps business to elect to 
comply with the capital, margin, and segregation requirements of the 
CEA and the CFTC's rules in lieu of complying with the capital, margin, 
and segregation requirements of Rules 18a-1, 18a-3, and 18a-4.\583\ The 
Commission is amending Rule 18a-10 to permit firms that will operate 
under the rule to elect to comply with the recordkeeping and reporting 
requirements of the CEA and the CFTC's rules in lieu of complying with 
Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.\584\
---------------------------------------------------------------------------

    \583\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43943-46.
    \584\ See Rule 18a-10, as amended.
---------------------------------------------------------------------------

    As discussed above, Rule 17a-11 specifies the circumstances under 
which a broker-dealer must notify the Commission and other regulators 
about its financial or operational condition, as well as the form of 
the notice. Stand-alone and bank SBSDs and MSBSPs are subject to Rule 
18a-8, which is modeled on Rule 17a-11 and is designed to provide the 
Commission with the ability to take effective proactive steps to 
respond when a firm is experiencing or likely to experience financial 
difficulty.\585\ A stand-alone SBSD operating under Rule 18a-10, 
however, may comply with the notification requirements of the CFTC's 
rules in lieu of complying with Rule 18a-8. In order to retain a 
requirement that the SBSD provide notice to the Commission if it is 
experiencing or likely to experience financial difficulty, the 
Commission is

[[Page 68607]]

adding paragraph (b)(4) to Rule 18a-10. This paragraph provides that 
the SBSD must simultaneously notify the Commission if the firm is 
required to send a notice concerning its capital, books and records, 
liquidity, margin operations, or segregation operations to the CFTC by 
transmitting to the Commission a copy of the notice being sent to the 
CFTC.\586\
---------------------------------------------------------------------------

    \585\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25247.
    \586\ See paragraph (b)(4) of Rule 18a-10, as amended.
---------------------------------------------------------------------------

8. Amendments to Rule 3a71-6
    In May 2016, the Commission adopted Rule 3a71-6 to provide that 
foreign SBSDs and MSBSPs could satisfy applicable business conduct 
requirements under Section 15F by complying with comparable regulatory 
requirements of a foreign jurisdiction, subject to certain conditions. 
The Commission is amending Rule 3a71-6 to provide foreign SBSDs and 
MSBSPs with the option to apply for substituted compliance to satisfy 
the recordkeeping and reporting requirements of Section 15F of the 
Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 
thereunder.\587\
---------------------------------------------------------------------------

    \587\ See paragraph (d)(6) of Rule 3a71-6, as amended.
---------------------------------------------------------------------------

B. Use of Information

    Rules 17a-3 and 17a-4, as amended, and new Rules 18a-5 and 18a-6 
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.\588\ Thus, the collections of information under the 
amendments to Rules 17a-3 and 17a-4, and new Rules 18a-5 and 18a-6, are 
expected to facilitate the examinations of broker-dealers, SBSDs, and 
MSBSPs.
---------------------------------------------------------------------------

    \588\ See, e.g., Books and Records Requirements for Brokers and 
Dealers Under the Securities Exchange Act of 1934, 66 FR at 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)).
---------------------------------------------------------------------------

    Rules 17a-5, 17a-11, 17a-12, and 18a-10, as amended, and new Rules 
18a-7 and 18a-8 are designed to promote compliance with the financial 
responsibility requirements for broker-dealers, SBSDs, and MSBSPs, 
facilitate regulators' oversight and examinations of such firms, and 
promote transparency of their financial condition and operation.
    Rule 18a-9 is designed to promote an SBSD's custody of securities 
and accurate accounting for securities.
    The Commission plans to use the information collected pursuant to 
Rule 3a71-6, as amended, to evaluate requests for substituted 
compliance determinations with respect to the recordkeeping and 
reporting requirements applicable to foreign SBSDs and MSBSPs.

C. Respondents

    The Commission estimated the number of respondents in the proposing 
release. The Commission received no comment on these estimates and 
continues to believe they are appropriate. However, the Commission is 
updating its estimated number of broker-dealers to reflect the number 
of broker-dealers registered with the Commission as of December 31, 
2018 (instead of April 1, 2013 as reflected in the proposing release), 
and is revising the number of respondents with respect to certain 
rules, as discussed below, to reflect the amendments to Rule 18a-10. 
The following chart summarizes the Commission's estimated number of 
respondents:
[GRAPHIC] [TIFF OMITTED] TR16DE19.000

    Consistent with prior releases, based on available data regarding 
the single-name CDS 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.\589\ 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.
---------------------------------------------------------------------------

    \589\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 80 FR at 48990. See also 
Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant'', 77 FR at 30727.
---------------------------------------------------------------------------

    The Commission estimates there will be one broker-dealer FCM MSBSP 
for the purposes of calculating PRA

[[Page 68608]]

burdens, in recognition that broker-dealer MSBSPs and stand-alone 
MSBSPs are subject to different burdens under the new and amended rules 
in certain instances.\590\ However, 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,\591\ but not in the business of effecting 
security-based swap transactions \592\ or commodities, securities 
futures products, or swaps \593\ and yet involved in enough security-
based swap transactions to be required to register as an MSBSP.\594\
---------------------------------------------------------------------------

    \590\ 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 at 65814.
    \591\ See Section 3(a)(4) of the Exchange Act.
    \592\ See Section 3(a)(71) of the Exchange Act.
    \593\ See 7 U.S.C. 1a(28).
    \594\ See Section 3(a)(67) of the Exchange Act.
---------------------------------------------------------------------------

    Consistent with prior releases, the Commission estimates that 50 or 
fewer entities ultimately may be required to register with the 
Commission as SBSDs, and 16 broker-dealers will likely seek to register 
as SBSDs.\595\ The Commission believes that all 16 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.\596\
---------------------------------------------------------------------------

    \595\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43959; Recordkeeping and Reporting Proposing Release, 79 FR at 
25260.
    \596\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 80 FR at 79002.
---------------------------------------------------------------------------

    Because many of the dealers that currently engage in OTC 
derivatives activities are banks, the Commission estimates that 
approximately 75% of the 34 non-broker-dealer SBSDs will register as 
bank SBSDs (i.e., 25 firms), and the remaining 25% will register as 
stand-alone SBSDs (i.e., 9 firms).\597\ The Commission believes that 
none of the bank SBSDS will register as FCMs, because of the burden 
associated with complying with three different supervisors' regulatory 
requirements.\598\ However, the Commission cannot precisely estimate 
how many of the nine stand-alone SBSDs will register as FCMs. The 
Commission anticipates that entities that want to clear security-based 
swaps for others may also want to clear swaps for others and, 
therefore, may need to register as FCMs.\599\ The Commission also 
anticipates that some stand-alone SBSDs that deal in non-cleared 
security-based swaps will generally seek exemption from the omnibus 
segregation requirements in Rule 18a-4. In order to qualify for the 
exemption, these firms cannot clear security-based swap transactions 
for others. The Commission believes that stand-alone SBSDs that seek 
this exemption and thus will not clear security-based swaps for others 
likely also would not clear swaps for others, which obviates the need 
for these SBSDs to register as an FCM.\600\ For purposes of developing 
paperwork burden estimates in connection with the recently adopted 
capital, margin, and segregation requirements, the Commission estimated 
six of nine stand-alone SBSDs would avail themselves of the exemption 
under paragraph (f) of Rule 18a-4.\601\ Consistent with that estimate, 
the Commission estimates that the remaining three of the nine stand-
alone SBSDs will also be registered as FCMs.
---------------------------------------------------------------------------

    \597\ The Commission does not anticipate that any firms will be 
dually registered as a broker-dealer and a bank.
    \598\ The Commission understands that affiliates of banks 
(rather than banks) register as FCMs.
    \599\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 80 FR at 79002.
    \600\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44025.
    \601\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43959.
---------------------------------------------------------------------------

    Of the nine stand-alone SBSDs, the Commission estimates that, based 
on its experience with ANC broker-dealers and OTC derivatives dealers, 
four of the nine stand-alone SBSDs will apply to operate as stand-alone 
SBSDs which will use internal models to compute net capital under Rule 
18a-1.\602\ This estimate has been reduced from six in the proposing 
release \603\ to account for the adoption of Rule 18a-10, which will 
enable stand-alone SBSDs to elect the full alternative compliance 
mechanism and comply with certain CFTC rules in lieu of Commission 
rules, including recordkeeping and reporting rules. Finally, in the 
proposing release, the Commission estimated that three stand-alone 
SBSDs would not apply to use models.\604\ This estimate has been 
modified from three to two in the final release to account for the 
nonbank SBSDs that will elect the full alternative compliance mechanism 
under Rule 18a-10.
---------------------------------------------------------------------------

    \602\ 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.
    \603\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25260.
    \604\ See id.
---------------------------------------------------------------------------

    Of the 16 broker-dealer FCM SBSDs, the Commission estimates that 
ten firms will operate as ANC broker-dealer SBSDs, which use internal 
models to compute net capital under Rule 15c3-1.\605\
---------------------------------------------------------------------------

    \605\ Currently, 5 broker-dealers are registered as ANC broker-
dealers. The Commission has previously estimated that all current 
and future ANC broker-dealers will also register as SBSDs. See 
Recordkeeping and Reporting Proposing Release; Capital Rule for 
Certain Security-Based Swap Dealers, 79 FR at 25261.
---------------------------------------------------------------------------

    As of December 31, 2018, there were 3,764 broker-dealers registered 
with the Commission. The Commission estimates that 25 registered 
broker-dealers will be engaged in security-based swap activities but 
will 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.\606\ 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.\607\ 
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. The existing financial responsibility 
requirements make it more costly to conduct these activities in a 
broker-dealer than in an unregulated entity. As a result, security-
based swap activities are mostly concentrated in affiliates of broker-
dealers, not broker-dealers themselves.\608\
---------------------------------------------------------------------------

    \606\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43960; Recordkeeping and Reporting Proposing Release, 79 FR at 
25261.
    \607\ See Section 761 of the Dodd-Frank Act (amending definition 
of ``security'' in Section 3 of the Exchange Act).
    \608\ See International Swaps and Derivatives Association 
(``ISDA''), Margin Survey 2015 (Aug. 2015) (``ISDA Margin Survey 
2015''), available at http://www2.isda.org/attachment/Nzc4MQ==/Margin%20survey%202015%20FINAL.pdf. The ISDA Margin Survey is 
conducted annually to examine the state of collateral use and 
management among derivatives dealers and end-users. The appendix to 
the survey lists firms that responded to the survey, including 
broker-dealers. See id.
---------------------------------------------------------------------------

    Finally, for purposes of estimating the number of respondents with 
respect to the amendments to Rule 3a71-6, applications for substituted 
compliance may be filed by foreign financial authorities, or by non-
U.S. SBSDs or

[[Page 68609]]

MSBSPs. Consistent with prior estimates, the Commission staff expects 
that there may be approximately 22 non-U.S. entities that may 
potentially register as SBSDs.\609\ Potentially, all such non-U.S. 
SBSDs, or some subset thereof, may seek to rely on substituted 
compliance in connection with the requirements adopted in this 
document.\610\ For purposes of this PRA, however, consistent with prior 
estimates, the Commission estimates that three of these security-based 
swap entities will submit such applications in connection with the 
Commission's recordkeeping, reporting, and notification 
requirements.\611\
---------------------------------------------------------------------------

    \609\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39832.
    \610\ It is possible that some subset of MSBSPs will be non-U.S. 
MSBSPs and seek to rely on substituted compliance. See Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
81 FR at 39832.
    \611\ See id. at 38392.
---------------------------------------------------------------------------

D. Total Initial and Annual Recordkeeping and Reporting Burden

1. Amendments to Rule 17a-3 and New Rule 18a-5
    The amendments to Rule 17a-3 and new Rule 18a-5 will impose 
collection of information requirements that result in initial and 
annual burdens for broker-dealers, SBSDs, and MSBSPs. The Commission 
estimates that these amendments to Rule 17a-3 will impose the following 
initial and annual burdens: \612\
---------------------------------------------------------------------------

    \612\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), 
(a)(7)(ii), (a)(8)(ii), (a)(9)(iv), and (a)(25) through (30) of Rule 
17a-3, as amended.

------------------------------------------------------------------------
             Burden                 Initial burden       Annual burden
------------------------------------------------------------------------
New security-based swap records.  Per firm: 70 hours  Per firm: 42
                                  Industry: 2,940      hours.
                                   hours..            Industry: 1,764
                                                       hours.
New burdens applicable to broker- Per firm: 60 hours  Per firm: 75
 dealer SBSDs and MSBSPs..        Industry: 1,020      hours.
                                   hours..            Industry: 1,275
                                                       hours.
New burdens applicable to broker- Per firm: 20 hours  Per firm: 25
 dealer SBSDs.                    Industry: 320        hours.
                                   hours..            Industry: 400
                                                       hours.
                                 ---------------------------------------
    Total--Amendments to Rule     Industry: 4,280     Industry: 3,439
     17a-3.                        hours..             hours.
------------------------------------------------------------------------

    The Commission estimates that new Rule 18a-5 will impose the 
following initial and annual burdens: \613\
---------------------------------------------------------------------------

    \613\ See paragraphs (a)(1) through (10) and (12) through (17) 
and (b)(1) through (13) of Rule 18a-5, as adopted.

------------------------------------------------------------------------
             Burden                 Initial burden       Annual burden
------------------------------------------------------------------------
Burdens applicable to stand-      Per firm: 260       Per firm: 325
 alone SBSDs and MSBSPs.           hours and $1,000.   hours and $4,650.
                                  Industry: 2,600     Industry: 3,250
                                   hours and $10,000.  hours and
                                                       $46,500.
Burdens applicable to stand-      Per firm: 60 hours  Per firm: 75
 alone SBSDs.                     Industry: 360        hours.
                                   hours.             Industry: 450
                                                       hours.
Burdens applicable to bank SBSDs  Per firm: 200       Per firm: 250
 and MSBSPs.                       hours.              hours.
                                  Industry: 5,000     Industry: 6,250
                                   hours.              hours.
Burdens applicable to bank SBSDs  Per firm: 60 hours  Per firm: 75
                                  Industry: 1,500      hours.
                                   hours.             Industry: 1,875
                                                       hours.
                                 ---------------------------------------
    Total--New Rule 18a-5.......  Industry: 9,460     Industry: 11,825
                                   hours and $10,000.  hours and
                                                       $46,500.
------------------------------------------------------------------------

Estimated Hours and Costs of Amendments to Rule 17a-3
    In the proposing release, the Commission estimated that many of the 
amendments to Rule 17a-3 are not expected to impose an initial 
burden.\614\ The Commission received no comment on these estimates and 
continues to believe they are appropriate.
---------------------------------------------------------------------------

    \614\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25262-63.
---------------------------------------------------------------------------

    The Commission is amending Rule 17a-3 to require broker-dealers to 
make and keep current various records for security-based swaps.\615\ 
The Commission estimates that these amendments will impose on each 
broker-dealer that engages in security-based swap activities an initial 
burden of 70 hours and an ongoing burden of approximately ten minutes 
per business day, or 42 hours per year.\616\ The Commission estimates 
that there are 42 respondents.\617\ Thus, the Commission estimates that 
the amendments will add to the industry an estimated initial burden of 
2,940 hours \618\ and an ongoing burden of 1,764 hours per year.\619\
---------------------------------------------------------------------------

    \615\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), 
(a)(7)(ii), (a)(8)(ii), (a)(9)(iv), and (a)(26) and (27) of Rule 
17a-3, as amended.
    \616\ (10 minutes per business day / 60 minutes per hour) x 251 
business days per year = 42 hours per year. There were 251 business 
days in 2018.
    \617\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 stand-
alone broker-dealers engaged in security-based swap activities = 42 
broker-dealers engaged in security-based swap activities.
    \618\ 70 hours per year x 42 broker-dealers engaged in security-
based swap activities = 2,940 hours per year. These internal hours 
likely will be performed by a compliance manager.
    \619\ 42 hours per year x 42 broker-dealers engaged in security-
based swap activities = 1,764 hours per year. These internal hours 
likely will be performed by a compliance clerk.
---------------------------------------------------------------------------

    The amendments to Rule 17a-3 require three additional types of 
records to be made and kept current by broker-dealer SBSDs and 
MSBSPs.\620\ Because the burden to run the applicable calculation or 
comply with the

[[Page 68610]]

applicable standard is accounted for in the PRA estimates for Rules 
18a-3, 15Fi-2, 15Fh-1 through 15Fh-5, and 15Fk-1,\621\ the burden 
imposed by these new requirements is the requirement to make and keep 
current a written record of these tasks. The Commission estimates that 
paragraphs (a)(25), (a)(28), and (a)(30) of Rule 17a-3, as amended, 
will impose an initial burden of 60 hours per firm and an ongoing 
annual burden of 75 hours per firm. The Commission estimates that there 
are 17 respondents (16 broker-dealer SBSDs and 1 broker-dealer MSBSP), 
adding to the industry an initial burden of 1,020 hours \622\ and an 
ongoing burden of 1,275 hours per year.\623\
---------------------------------------------------------------------------

    \620\ See paragraphs (a)(25), (28), and (30) of Rule 17a-3, as 
amended (adopting recordkeeping requirements for Rule 18a-3 
calculations, unverified transactions, and compliance with business 
conduct requirements, respectively).
    \621\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43963; Trade Acknowledgment and Verification of Security-Based 
Swap Transactions, 81 FR at 39807; Business Conduct Standards for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, 76 FR at 42443-48.
    \622\ 60 hours x 17 broker-dealer SBSDs and MSBSPs = 1,020 
hours. These internal hours likely will be performed by a compliance 
manager.
    \623\ 75 hours per year x 17 broker-dealer SBSDs and MSBSPs = 
1,275 hours per year. These internal hours likely will be performed 
by a compliance clerk.
---------------------------------------------------------------------------

    The amendments to Rule 17a-3 require one additional type of record 
to be made and kept current by broker-dealer SBSDs.\624\ Because the 
burden to run the applicable calculation or comply with the applicable 
standard is accounted for in the PRA estimate for Rule 15Fh-6,\625\ the 
burden imposed by this requirement is the requirement to make and keep 
current a written record of these tasks. The Commission estimates that 
new paragraph (a)(29) of Rule 17a-3 will impose an initial burden of 20 
hours per firm and an ongoing annual burden of 25 hours per firm. The 
Commission estimates that there are 16 broker-dealer SBSDs, adding to 
the industry an initial burden of 320 hours \626\ and an ongoing burden 
of 400 hours per year.\627\
---------------------------------------------------------------------------

    \624\ See paragraph (a)(29) of Rule 17a-3, as amended (political 
contributions).
    \625\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
    \626\ 20 hours x 16 broker-dealer SBSDs = 320 hours. These 
internal hours likely will be performed by a compliance manager.
    \627\ 25 hours per year x 16 broker-dealer SBSDs = 400 hours per 
year. These internal hours likely will be performed by a compliance 
clerk.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for the amendments to Rule 17a-3. However, the 
estimated initial burden for Rule 17a-3 is increased to reflect that 
the requirements to make and keep possession or control and special 
reserve account computation records now apply to all broker-dealers 
engaged in security-based swap activities (instead of just broker-
dealer SBSDs).\628\ Other than this change, the Commission continues to 
believe its hour and cost burden estimates for the amendments to Rule 
17a-3 are appropriate.
---------------------------------------------------------------------------

    \628\ See Rule 17a-3, as amended (paragraph (a)(26) (compliance 
with Rule 15c3-3(p) possession or control requirements); paragraph 
(a)(27) (Rule 15c3-3(p) reserve account computations)).
---------------------------------------------------------------------------

Estimated Hours and Costs of New Rule 18a-5
    The Commission estimates that new Rule 18a-5 will cause a stand-
alone SBSD or MSBSP to incur an initial dollar cost of approximately 
$1,000 to purchase recordkeeping system software and an ongoing dollar 
cost of $4,650 per year for associated equipment and systems 
development. The Commission estimates that there are 10 respondents (6 
stand-alone SBSDs and 4 stand-alone MSBSPs), resulting in an estimated 
industry-wide initial burden of $10,000 \629\ and an industry-wide 
ongoing burden of $46,500 per year.\630\
---------------------------------------------------------------------------

    \629\ $1,000 x 10 stand-alone SBSDs and MSBSPs = $10,000.
    \630\ $4,650 per year x 10 stand-alone SBSDs and MSBSPs = 
$46,500 per year.
---------------------------------------------------------------------------

    New Rule 18a-5 is not expected to increase the initial and ongoing 
dollar costs that bank SBSDs and MSBSPs incur to purchase recordkeeping 
system software and for equipment and systems development. Banks are 
already subject to recordkeeping requirements by their prudential 
regulators,\631\ so they should already own or have established the 
requisite recordkeeping system software. Although bank SBSDs and MSBSPs 
may need to program the software to begin collecting additional 
records, the Commission expects these services to be performed in-
house, and these hour burdens are estimated below.
---------------------------------------------------------------------------

    \631\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR 
219.21 through 219.24 (Federal Reserve); 12 CFR 344.4 (FDIC).
---------------------------------------------------------------------------

    New Rule 18a-5 requires 13 types of records to be made and kept 
current by stand-alone SBSDs and MSBSPs.\632\ New Rule 18a-5 imposes 
the burden to make and keep current these records, but does not require 
the firm to perform the underlying task.\633\ Therefore, after 
consideration of the estimated burdens under Rule 17a-3, as amended, 
the Commission estimates that these 13 paragraphs will impose on each 
firm an initial burden of 260 hours and an ongoing annual burden of 325 
hours. The Commission estimates that there are 10 respondents (6 stand-
alone SBSDs and 4 stand-alone MSBSPs), resulting in an estimated 
industry-wide initial burden of 2,600 hours \634\ and an industry-wide 
ongoing annual burden of 3,250 hours.\635\
---------------------------------------------------------------------------

    \632\ See Rule 18a-5, as adopted (paragraph (a)(1) (trade 
blotters); paragraph (a)(2) (general ledgers); paragraph (a)(3) 
(ledgers of customer and non-customer accounts); paragraph (a)(4) 
(stock record); paragraph (a)(5) (memoranda of proprietary orders); 
paragraph (a)(6) (confirmations); paragraph (a)(7) (accountholder 
information); paragraph (a)(8) (options positions); paragraph (a)(9) 
(trial balances and computation of net capital); paragraph (a)(10) 
(associated person's application); paragraph (a)(12) (Rule 18a-3 
calculations); paragraph (a)(15) (unverified transactions); 
paragraph (a)(17) (compliance with business conduct standards)).
    \633\ In estimating the burden associated with Rules 18a-5 and 
18a-6, as adopted, the Commission recognizes that entities that will 
register stand-alone SBSDs and MSBSPs likely make and keep some 
records today as a matter of routine business practice, but the 
Commission does not have information about the records that such 
entities currently keep. Therefore, the Commission assumes that 
these entities currently keep no records when it estimates the PRA 
burden for these entities.
    \634\ 260 hours x 10 stand-alone SBSDs and MSBSPs = 2,600 hours. 
These internal hours likely will be performed by a compliance 
manager.
    \635\ 325 hours per year x 10 stand-alone SBSDs and MSBSPs = 
3,250 hours per year. These internal hours likely will be performed 
by a compliance clerk.
---------------------------------------------------------------------------

    New Rule 18a-5 requires three types of records to be made and kept 
current by stand-alone SBSDs.\636\ Because the burden to run the 
applicable calculation or comply with the applicable standard is 
accounted for in the PRA estimates for Rules 18a-4 and 15Fh-6,\637\ the 
burden imposed by these new requirements is the requirement to make and 
keep current a written record of these tasks. The Commission estimates 
that these three paragraphs will impose an initial burden of 60 hours 
per firm and an ongoing annual burden of 75 hours per firm. The 
Commission estimates that there are 6 stand-alone SBSDs, resulting in 
an industry-wide initial burden of 360 hours \638\ and an industry-wide 
ongoing burden of 450 hours per year.\639\
---------------------------------------------------------------------------

    \636\ See Rule 18a-5, as adopted (paragraph (a)(13) (compliance 
with Rule 18a-4 possession or control requirements); paragraph 
(a)(14) (Rule 18a-4 reserve account computations); and paragraph 
(a)(16) (political contributions)).
    \637\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43964-67; Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
    \638\ 60 hours x 6 stand-alone SBSDs = 360 hours. These internal 
hours likely will be performed by a compliance manager.
    \639\ 75 hours per year x 6 stand-alone SBSDs = 450 hours per 
year. These internal hours likely will be performed by a compliance 
clerk.
---------------------------------------------------------------------------

    New Rule 18a-5 requires ten types of records to be made and kept 
current by bank SBSDs and MSBSPs, all of which are limited to the 
firm's business as an SBSD or MSBSP.\640\ New Rule 18a-5

[[Page 68611]]

imposes the burden to make and keep current these records, but does not 
require the firm to perform the underlying task. Therefore, after 
consideration of the estimated burdens under Rule 17a-3, as amended, 
the Commission estimates that these ten paragraphs will impose on each 
firm an initial burden of 200 hours per firm and an ongoing burden of 
250 hours per firm. The Commission estimates that there are 25 
respondents (25 bank SBSDs and no bank MSBSPs), resulting in an 
estimated industry-wide initial burden of 5,000 hours \641\ and an 
industry-wide ongoing burden of 6,250 hours per year.\642\
---------------------------------------------------------------------------

    \640\ See Rule 18a-5, as adopted (paragraph (b)(1) (trade 
blotters); paragraph (b)(2) (ledgers for customer and non-customer 
accounts); paragraph (b)(3) (stock record); paragraph (b)(4) 
(memoranda of brokerage orders); paragraph (b)(5) (memoranda of 
proprietary orders); paragraph (b)(6) (confirmations); paragraph 
(b)(7) accountholder information); paragraph (b)(8) (associated 
person's application); paragraph (b)(11) (unverified transactions); 
and paragraph (b)(13) (compliance with business conduct 
requirements)).
    \641\ 200 hours x 25 bank SBSDs = 5,000 hours. These internal 
hours likely will be performed by a compliance manager.
    \642\ 250 hours per year x 25 bank SBSDs = 6,250 hours per year. 
These internal hours likely will be performed by a compliance clerk.
---------------------------------------------------------------------------

    New Rule 18a-5 requires three types of records to be made and kept 
current by bank SBSDs, all of which are limited to the firm's business 
as an SBSD.\643\ Because the burden to run the applicable calculation 
or comply with the applicable standard is accounted for in the PRA 
estimates for Rules 18a-4 and 15Fh-6,\644\ the burden imposed by these 
new requirements is the requirement to make and keep current a written 
record of these tasks. The Commission estimates that these three 
paragraphs will impose an initial burden of 60 hours per firm and an 
ongoing annual burden of 75 hours per firm. The Commission estimates 
that there are 25 bank SBSDs, resulting in an industry-wide initial 
burden of 1,500 hours \645\ and an industry-wide ongoing burden of 
1,875 hours per year.\646\
---------------------------------------------------------------------------

    \643\ See Rule 18a-5, as adopted (paragraph (b)(9) (compliance 
with Rule 18a-4 possession or control requirements); paragraph 
(b)(10) (Rule 18a-4 reserve account computations); and paragraph 
(b)(12) (political contributions)).
    \644\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43964-67; Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 29959.
    \645\ 60 hours x 25 bank SBSDs = 1,500 hours. These internal 
hours likely will be performed by a compliance manager.
    \646\ 75 hours per year x 25 bank SBSDs = 1,875 hours per year. 
These internal hours likely will be performed by a compliance clerk.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 18a-5 and continues to believe they are 
appropriate.
Estimated Hours and Costs of the Limited Alternative Compliance 
Mechanism
    As discussed above, the Commission is adopting the limited 
alternative compliance mechanism. The registrant's obligation to 
preserve these records will continue for the retention period specified 
for that category of record as set forth in Rule 17a-4 or Rule 18a-6, 
as applicable.
    The Commission believes that registrants who choose to use the 
limited alternative compliance mechanism will incur lower costs and 
hour burdens, especially with respect to initial compliance burdens, 
than they would pursuant to the standard compliance requirements. 
Indeed, were that not the case, registrants would be unlikely to use 
the limited alternative compliance mechanism. However, for purposes of 
this Paperwork Reduction Act analysis, the Commission is making the 
conservative estimate that no firms will utilize the limited 
alternative compliance mechanism.
2. Amendments to Rule 17a-4 and New Rule 18a-6
    The amendments to Rule 17a-4 and new Rule 18a-6 impose collection 
of information requirements that will result in initial and ongoing 
burdens for broker-dealers, SBSDs, MSBSPs, and certain third-party 
custodians. The Commission estimates that the amendments to Rule 17a-4 
will impose the following initial and annual burdens: \647\
---------------------------------------------------------------------------

    \647\ See paragraphs (b)(1) and (4), (b)(8)(v) through (viii) 
and (xvi), and (b)(14), (15), and (16) of Rule 17a-4, as amended

------------------------------------------------------------------------
             Burden                 Initial burden       Annual burden
------------------------------------------------------------------------
Recorded telephone calls........  Per firm: 13 hours  Per firm: 6 hours
                                  Industry: 221        and $2,000.
                                   hours.             Industry: 102
                                                       hours and
                                                       $34,000.
New burdens applicable to all     Per firm: 65 hours  Per firm: 30 hours
 broker-dealers.                  Industry: 2,730      and $600.
                                   hours.             Industry: 1,260
                                                       hours and
                                                       $25,200.
New burdens applicable to broker- Per firm: 65 hours  Per firm: 30 hours
 dealer SBSDs and MSBSPs.         Industry: 1,105      and $600.
                                   hours.             Industry: 510
                                                       hours and
                                                       $10,200.
New burdens applicable to broker- Per firm: 13 hours  Per firm: 6 hours
 dealer SBSDs.                    Industry: 208        and $120.
                                   hours.             Industry: 96 hours
                                                       and $1,920.
                                 ---------------------------------------
    Total--Amendments to Rule     Industry: 4,264     Industry: 1,968
     17a-4.                        hours.              hours and
                                                       $40,720.
------------------------------------------------------------------------

    The Commission estimates that new Rule 18a-6 will impose the 
following initial and annual burdens: \648\
---------------------------------------------------------------------------

    \648\ See paragraphs (a)(1) and (2), (b)(1)(i) through (xiii), 
(b)(2)(i) through (viii), (c), (d)(1), (d)(2)(i) and (ii), (d)(3)(i) 
and (ii), and (f) of Rule 18a-6, as adopted.

------------------------------------------------------------------------
             Burden                 Initial burden      Annual 'Burden
------------------------------------------------------------------------
Burdens applicable to stand-      Per firm: 364       Per firm: 280
 alone SBSDs and MSBSPs.           hours.              hours and $5,720.
                                  Industry: 3,640     Industry: 2,800
                                   hours.              hours and
                                                       $57,200.
Burdens applicable to stand-      Per firm: 44 hours  Per firm: 30 hours
 alone SBSDs.                     Industry: 264        and $360.
                                   hours.             Industry: 180
                                                       hours and $2,160.
Burdens applicable to model       Per firm: 18 hours  Per firm: 10 hours
 stand-alone SBSDs.               Industry: 72 hours   and $120.
                                                      Industry: 40 hours
                                                       and $480.

[[Page 68612]]

 
Burdens applicable to bank SBSDs  Per firm: 247       Per firm: 190
 and MSBSPs.                       hours.              hours and $4,520.
                                  Industry: 6,175     Industry: 4,750
                                   hours.              hours and
                                                       $113,000.
Burdens applicable to bank SBSDs  Per firm: 57 hours  Per firm: 40 hours
                                  Industry: 1,425      and $480.
                                   hours.             Industry: 1,000
                                                       hours and
                                                       $12,000.
Burdens applicable to third-      Per firm: 0 hours.  Per firm: 2 hours.
 party custodians.                Industry: 0 hours.  Industry: 35
                                                       hours.
                                 ---------------------------------------
    Total--New Rule 18a-6.......  Industry: 11,576    Industry: 8,805
                                   hours.              hours and
                                                       $184,840.
------------------------------------------------------------------------

Estimated Hours and Costs of Amendments to Rule 17a-4
    In the proposing release, the Commission estimated that many of the 
amendments to Rule 17a-4 are not expected to impose an initial 
burden.\649\ The Commission received no comment on these estimates and 
continues to believe they are appropriate.
---------------------------------------------------------------------------

    \649\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25266.
---------------------------------------------------------------------------

    The Commission is amending Rule 17a-4 to require broker-dealer 
SBSDs and MSBSPs to retain telephone calls that are already recorded 
and are related to the broker-dealer SBSD's and broker-dealer MSBSP's 
business as such.\650\ Because the retention of telephonic recordings 
is only required if the broker-dealer SBSD or broker-dealer MSBSP 
voluntarily chooses to record, the Commission's burden estimate does 
not include the cost of recording phone calls. Therefore, the burdens 
imposed by the amendment will be to provide adequate physical space and 
computer hardware and software for storage. The Commission estimates 
that the amendment will impose an initial burden of 13 hours per firm. 
The Commission estimates that there are 17 respondents (16 broker-
dealer SBSDs and 1 broker-dealer MSBSP), resulting in an estimated 
industry-wide initial burden of 221 hours.\651\
---------------------------------------------------------------------------

    \650\ See paragraph (b)(4) of Rule 17a-4, as amended.
    \651\ 13 hours x 17 broker-dealer SBSDs and MSBSPs = 221 hours. 
These internal hours likely will be performed by a senior database 
administrator.
---------------------------------------------------------------------------

    The Commission estimates that each firm will incur an annual burden 
of approximately 6 hours to confirm that telephonic communications are 
being retained in accordance with Rule 17a-4, and approximately $2,000 
for server, equipment, and systems development costs. The Commission 
estimates that there are 17 respondents (16 broker-dealer SBSDs and 1 
broker-dealer MSBSP), resulting in an estimated industry-wide ongoing 
annual cost of 102 hours \652\ and $34,000.\653\
---------------------------------------------------------------------------

    \652\ 6 hours x 17 broker-dealer SBSDs and MSBSPs = 102 hours. 
These internal hours likely will be performed by a compliance clerk.
    \653\ $2,000 x 17 broker-dealer SBSDs and MSBSPs = $34,000.
---------------------------------------------------------------------------

    The amendments to Rule 17a-4 add five types of records to be 
preserved by broker-dealers.\654\ Because the burden to create these 
records is already accounted for in the PRA estimates for Rule 17a-3, 
Rule 15c3-1, or Regulation SBSR,\655\ the Commission estimates that 
these amendments will impose an initial burden of 65 hours per firm and 
an ongoing annual burden of 30 hours and $600 per firm.\656\ The 
Commission estimates that there are 42 respondents--16 broker-dealer 
SBSDs, 1 broker-dealer MSBSP, and 25 stand-alone broker-dealers engaged 
in security-based swap activities.\657\ Thus, these amendments will add 
to the industry an estimated initial burden of 2,730 hours \658\ and an 
ongoing annual burden of 1,260 hours \659\ and $25,200.\660\
---------------------------------------------------------------------------

    \654\ See Rule 17a-4, as amended (paragraph (b)(1) (cross-
referencing paragraph (a)(26) of Rule 17a-3, as amended (compliance 
with possession or control requirements for security-based swap 
customers); paragraph (a)(27) of Rule 17a-3, as amended (Rule 18a-4 
reserve account computations)); paragraph (b)(8)(v) through (viii) 
(identifying information about swaps); paragraph (b)(8)(xvi) (risk 
margin calculation); and paragraph (b)(14) (Regulation SBSR 
information)).
    \655\ See Commission, Supporting Statement for the Paperwork 
Reduction Act Information Collection Submission for Rule 17a-3 (Oct. 
19, 2016), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68827501; Commission, Supporting Statement 
for the Paperwork Reduction Act Information Collection Submission 
for Rule 15c3-1 (May 26, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=74206901; 
Regulation SBSR--Reporting and Dissemination of Security-Based Swap 
Information, 81 FR 53545.
    \656\ Unless otherwise noted, the estimates for this rule 
consider the burden of providing adequate physical space and 
computer hardware and software for storage, preserving these records 
for the requisite time period, and producing them when requested.
    \657\ 16 broker-dealer SBSDs + 1 broker-dealer MSBSP + 25 stand-
alone broker-dealers engaged in security-based swap activities = 42 
broker-dealers engaged in security-based swap activities.
    \658\ 65 hours x 42 respondents = 2,730 hours. These internal 
hours likely will be performed by a senior database administrator.
    \659\ 30 hours per year x 42 respondents = 1,260 hours per year. 
These internal hours likely will be performed by a compliance clerk.
    \660\ $600 x 42 respondents = $25,200.
---------------------------------------------------------------------------

    The amendments to Rule 17a-4 add five types of records to be 
preserved by broker-dealer SBSDs and MSBSPs.\661\ Because the burden to 
create these records is accounted for in the PRA estimates for Rule 
17a-3 or for Rules 15Fh-1 through 15Fh-5 and 15Fk-1,\662\ the 
Commission estimates that these amendments will impose an initial 
burden of 65 hours per firm and an ongoing annual burden of 30 hours 
and $600 per firm. The Commission estimates that there are 17 
respondents (16 broker-dealer SBSDs and 1 broker-dealer MSBSP), adding 
to the industry an initial burden of 1,105 hours \663\ and an ongoing 
annual burden of 510 hours \664\ and $10,200.\665\
---------------------------------------------------------------------------

    \661\ See Rule 17a-4, as amended (paragraph (b)(1), cross-
referencing paragraph (a)(25) of Rule 17a-3, as amended (Rule 18a-3 
calculations); paragraph (b)(1), cross-referencing paragraph (a)(28) 
of Rule 17a-3, as amended (unverified transactions); paragraph 
(b)(1), cross-referencing paragraph (a)(30) of Rule 17a-3, as 
amended (compliance with business conduct standards); paragraph 
(b)(15) (documents and notices related to the business conduct 
standards); and paragraph (b)(16) (special entity documents).
    \662\ See Commission, Supporting Statement for the Paperwork 
Reduction Act Information Collection Submission for Rule 17a-3; 
section IV.D.1. of this release; Business Conduct Standards for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, 81 FR at 29959.
    \663\ 65 hours x 17 broker-dealer SBSDs and MSBSPs = 1,105 
hours. These internal hours likely will be performed by a senior 
database administrator.
    \664\ 30 hours per year x 17 broker-dealer SBSDs and MSBSPs = 
510 hours per year. These internal hours likely will be performed by 
a compliance clerk.
    \665\ $600 x 17 broker-dealer SBSDs and MSBSPs = $10,200.
---------------------------------------------------------------------------

    The amendments to Rule 17a-4 add one type of record to be preserved 
by broker-dealer SBSDs.\666\ Because the burden to create this record 
is accounted for in the PRA estimate for

[[Page 68613]]

Rule 17a-3, as amended,\667\ the Commission estimates that the 
amendment will impose an initial burden of 13 hours per firm and an 
ongoing annual burden of 6 hours and $120 per firm. The Commission 
estimates that there are 16 broker-dealer SBSDs, adding to the industry 
an initial burden of 208 hours,\668\ and an ongoing annual burden of 96 
hours \669\ and $1,920.\670\
---------------------------------------------------------------------------

    \666\ See paragraph (b)(1) of Rule 17a-4, as amended (cross-
referencing paragraph (a)(29) of Rule 17a-3, as amended (political 
contributions)).
    \667\ See section IV.D.1. of this release.
    \668\ 13 hours x 16 broker-dealer SBSDs = 208 hours. These 
internal hours likely will be performed by a senior database 
administrator.
    \669\ 6 hours per year x 16 broker-dealer SBSDs = 96 hours per 
year. These internal hours likely will be performed by a compliance 
clerk.
    \670\ $120 x 16 broker-dealer SBSDs = $1,920.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for the amendments to Rule 17a-4. However, the 
estimated burden for Rule 17a-4 is increased to reflect that the 
requirements to make and keep possession or control and special reserve 
account computation records now apply to all broker-dealers engaged in 
security-based swap activities (instead of just broker-dealer 
SBSDs).\671\ Other than this change, the Commission continues to 
believe its hour and cost burden estimates for the amendments to Rule 
17a-3 are appropriate.
---------------------------------------------------------------------------

    \671\ See paragraph (b)(1) of Rule 17a-3, as amended (cross-
referencing paragraph (a)(26) (compliance with Rule 15c3-3(p) 
possession or control requirements); paragraph (a)(27) (Rule 15c3-
3(p) reserve account computations)).
---------------------------------------------------------------------------

Estimated Hours and Costs of New Rule 18a-6
    New Rule 18a-6 requires 27 types of records to be preserved by 
stand-alone SBSDs and MSBSPs.\672\ The Commission estimates that the 
record preservation requirements applicable to stand-alone SBSDs and 
MSBSPs will impose an initial burden of 364 hours \673\ and an ongoing 
annual burden of 280 hours and $5,720 per firm. The Commission 
estimates that there are 10 respondents (6 stand-alone SBSDs and 4 
stand-alone MSBSPs), resulting in an estimated industry-wide initial 
burden of 3,640 hours,\674\ and an industry-wide ongoing annual burden 
of 2,800 hours \675\ and $57,200.\676\
---------------------------------------------------------------------------

    \672\ See Rule 18a-6, as adopted (paragraph (a)(1), cross-
referencing paragraph (a)(1) of Rule 18a-5, as adopted (trade 
blotters); paragraph (a)(1), cross-referencing paragraph (a)(2) of 
Rule 18a-5, as adopted (general ledgers); paragraph (a)(1), cross-
referencing paragraph (a)(3) of Rule 18a-5, as adopted (ledgers of 
customer and non-customer accounts); paragraph (a)(1), cross-
referencing paragraph (a)(4) of Rule 18a-5, as adopted (stock 
record); paragraph (b)(1)(i), cross-referencing paragraph (a)(5) of 
Rule 18a-5, as adopted (memoranda of proprietary orders); paragraph 
(b)(1)(i), cross-referencing paragraph (a)(6) of Rule 18a-5, as 
adopted (confirmations); paragraph (b)(1)(i), cross-referencing 
paragraph (a)(7) of Rule 18a-5, as adopted (accountholder 
information); paragraph (b)(1)(i), cross-referencing paragraph 
(a)(8) of Rule 18a-5, as adopted (options positions); paragraph 
(b)(1)(i), cross-referencing paragraph (a)(9) of Rule 18a-5, as 
adopted (trial balances and computation of net capital); paragraph 
(b)(1)(i), cross-referencing paragraph (a)(12) of Rule 18a-5, as 
adopted (Rule 18a-3 calculations); paragraph (b)(1)(i), cross-
referencing paragraph (a)(15) of Rule 18a-5, as adopted (unverified 
transactions); paragraph (b)(1)(i), cross-referencing paragraph 
(a)(17) of Rule 18a-5, as adopted (compliance with business conduct 
standards); paragraph (b)(1)(ii) (bank records); paragraph 
(b)(1)(iii) (bills); paragraph (b)(1)(iv) (communications); 
paragraph (b)(1)(v) (trial balances); paragraph (b)(1)(vi) (account 
documents); paragraph (b)(1)(vii) (written agreements); paragraph 
(b)(1)(viii) (information supporting financial reports); paragraph 
(b)(1)(ix) (Rule 15c3-4 risk management records); paragraph 
(b)(1)(xi) (Regulation SBSR information); paragraph (b)(1)(xii) 
(records relating to business conduct standards); paragraph 
(b)(1)(xiii) (special entity documents); paragraph (c) (corporate 
documents); paragraph (d)(1) (associated person's employment 
application); paragraph (d)(2)(i) (regulatory authority reports); 
and paragraph (d)(3)(i) (compliance, supervisory, and procedures 
manuals)). Unless otherwise noted, new Rule 18a-6 does not require 
firms to create records or perform the underlying task, so the 
estimates for this rule consider the burden of providing adequate 
physical space and computer hardware and software for storage, 
preserving these records for the requisite time period, and 
producing them when requested.
    \673\ The Commission believes that any initial dollar cost 
associated with Rule 18a-6, as adopted, is already accounted for in 
the PRA estimate for Rule 18a-5, as adopted, which includes the cost 
of recordkeeping system software.
    \674\ 364 hours x 10 stand-alone SBSDs and MSBSPs = 3,640 hours. 
These internal hours likely will be performed by a senior database 
administrator.
    \675\ 280 hours per year x 10 stand-alone SBSDs and MSBSPs = 
2,800hours per year. These internal hours likely will be performed 
by a compliance clerk.
    \676\ $5,720 per year x 10 stand-alone SBSDs and MSBSPs = 
$57,200 per year.
---------------------------------------------------------------------------

    New Rule 18a-6 requires three types of records to be preserved by 
stand-alone SBSDs.\677\ The Commission estimates that the relevant 
portions of paragraph (b)(1)(i) of new Rule 18a-6 will impose an 
initial burden of 44 hours per firm,\678\ and an ongoing annual burden 
of 30 hours and $360 per firm. The Commission estimates that there are 
6 stand-alone SBSDs, resulting in an industry-wide initial burden of 
264 hours \679\ and an industry-wide ongoing annual burden of 180 hours 
\680\ and $2,160.\681\
---------------------------------------------------------------------------

    \677\ See paragraph (b)(1)(i) of Rule 18a-6, as adopted (cross-
referencing paragraph (a)(13) of Rule 18a-5, as adopted (compliance 
with Rule 18a-4 possession or control requirements); paragraph 
(a)(14) of Rule 18a-5, as adopted (Rule 18a-4 reserve account 
computations); and paragraph (a)(16) of Rule 18a-5, as adopted 
(political contributions)). The burden to create these records is 
accounted for in the PRA estimate for new Rule 18a-5. See section 
IV.D.1. of this release.
    \678\ The Commission believes that any initial dollar cost 
associated with Rule 18a-6, as adopted, is already accounted for in 
the PRA estimate for Rule 18a-5, as adopted, which includes the cost 
of recordkeeping system software.
    \679\ 44 hours x 6 stand-alone SBSDs = 264 hours. These internal 
hours likely will be performed by a senior database administrator.
    \680\ 30 hours per year x 6 stand-alone SBSDs = 180 hours per 
year. These internal hours likely will be performed by a compliance 
clerk.
    \681\ $360 per year x 6 stand-alone SBSDs = $2,160 per year.
---------------------------------------------------------------------------

    New Rule 18a-6 requires one type of record to be preserved by 
stand-alone SBSDs authorized to use models to compute capital.\682\ The 
Commission estimates that paragraph (b)(1)(x) will impose an initial 
burden of 18 hours \683\ and an ongoing annual burden of ten hours and 
$120 per stand-alone SBSD authorized to use models. The Commission 
estimates that there are 4 stand-alone SBSDs authorized to use models 
to compute capital, resulting in an industry-wide initial burden of 72 
hours \684\ and an industry-wide ongoing annual burden of 40 hours 
\685\ and $480.\686\
---------------------------------------------------------------------------

    \682\ See Rule 18a-6, as adopted (paragraph (b)(1)(x) (credit 
risk determinations)). The burden of actually performing the 
underlying task and creating the written record is already accounted 
for in the PRA estimate for Rule 18a-1. See Capital, Margin, and 
Segregation Adopting Release, 84 FR at 43961-63.
    \683\ The Commission believes that any initial dollar cost 
associated with new Rule 18a-6 is already accounted for in the PRA 
estimate for Rule 18a-5, as adopted, which includes the cost of 
recordkeeping system software.
    \684\ 18 hours x 4 model stand-alone SBSDs = 72 hours. These 
internal hours likely will be performed by a senior database 
administrator.
    \685\ 10 hours per year x 4 model stand-alone SBSDs = 40 hours 
per year. These internal hours likely will be performed by a 
compliance clerk.
    \686\ $120 per year x 4 model stand-alone SBSDs = $480 per year.
---------------------------------------------------------------------------

    New Rule 18a-6 requires 18 types of records to be preserved by bank 
SBSDs and MSBSPs, all of which are limited to the firm's business as an 
SBSD or MSBSP.\687\ After consideration of the

[[Page 68614]]

similar burdens imposed by Rule 17a-4, as amended, the Commission 
estimates that new Rule 18a-6 will impose on bank SBSDs and MSBSPs an 
initial burden of 247 hours per firm \688\ and an ongoing burden of 190 
hours and $4,520 per firm. The Commission estimates that there are 25 
respondents (25 bank SBSDs and no bank MSBSPs), resulting in an 
estimated industry-wide initial burden of 6,175 hours \689\ and an 
industry-wide ongoing annual burden of 4,750 hours \690\ and 
$113,000.\691\
---------------------------------------------------------------------------

    \687\ See Rule 18a-6, as adopted (paragraph (a)(2), cross-
referencing paragraph (b)(1) of Rule 18a-5, as adopted (trade 
blotters); paragraph (a)(2), cross-referencing paragraph (b)(2) of 
Rule 18a-5, as adopted (ledgers of security-based swap customers and 
non-customers); paragraph (a)(2), cross-referencing paragraph (b)(3) 
of Rule 18a-5, as adopted (stock records); paragraph (b)(2)(i), 
cross-referencing paragraph (b)(4) of Rule 18a-5, as adopted 
(memoranda of brokerage orders); paragraph (b)(2)(i), cross-
referencing paragraph (b)(5) of Rule 18a-5, as adopted (memoranda of 
proprietary orders); paragraph (b)(2)(i), cross-referencing 
paragraph (b)(6) of Rule 18a-5, as adopted (confirmations); 
paragraph (b)(2)(i), cross-referencing paragraph (b)(7) of Rule 18a-
5, as adopted (accountholder information); paragraph (b)(2)(i), 
cross-referencing paragraph (b)(11) of Rule 18a-5, as adopted 
(unverified transactions); paragraph (b)(2)(i), cross-referencing 
paragraph (b)(13) of Rule 18a-5, as adopted (compliance with 
external business conduct requirements); paragraph (b)(2)(ii) 
(communications); paragraph (b)(2)(iii) (account documents); 
paragraph (b)(2)(iv) (written agreements); paragraph (b)(2)(vi) 
(Regulation SBSR information); paragraph (b)(2)(vii) (records 
relating to business conduct standards); paragraph (b)(2)(viii) 
(special entity documents); paragraph (d)(1) (associated person's 
employment application); paragraph (d)(2)(ii) (regulatory authority 
reports); paragraph (d)(3)(ii) (compliance, supervisory, and 
procedures manuals)).
    \688\ The Commission believes that any initial dollar cost 
associated with Rule 18a-6, as adopted, is already accounted for in 
the PRA estimate for Rule 18a-5, as adopted, which includes the cost 
of recordkeeping system software.
    \689\ 247 hours x 25 bank SBSDs = 6,175 hours. These internal 
hours likely will be performed by a senior database administrator.
    \690\ 190 hours per year x 25 bank SBSDs = 4,750 hours per year. 
These internal hours likely will be performed by a compliance clerk.
    \691\ $4,520 per year x 25 bank SBSDs = $113,000 per year.
---------------------------------------------------------------------------

    New Rule 18a-6 requires four types of records to be preserved by 
bank SBSDs, all of which are limited to the firm's business as an 
SBSD.\692\ The Commission estimates that paragraphs (b)(2)(i) and (v) 
of new Rule 18a-6 will impose an initial burden of 57 hours per firm 
\693\ and an ongoing annual burden of 40 hours and $480 per firm. The 
Commission estimates that there are 25 bank SBSDs, resulting in an 
industry-wide initial burden of 1,425 hours \694\ and an industry-wide 
ongoing annual burden of 1,000 hours \695\ and $12,000.\696\
---------------------------------------------------------------------------

    \692\ See Rule 18a-6, as adopted (paragraph (b)(2)(i), cross-
referencing paragraph (b)(9) (compliance with Rule 18a-4 possession 
or control requirements) of Rule 18a-5, as adopted; paragraph 
(b)(2)(i), cross-referencing paragraph (b)(10) (Rule 18a-4 reserve 
account computations) of Rule 18a-5, as adopted; paragraph 
(b)(2)(i), cross-referencing paragraph (b)(12) (political 
contributions) of Rule 18a-5, as adopted; and paragraph (b)(2)(v) 
(Rule 18a-4 reserve account computations)). The burden to perform 
the underlying task or create these records is accounted for in the 
PRA estimates for new Rules 18a-4 and 18a-5. See Capital, Margin, 
and Segregation Adopting Release, 84FR at 43964-67; section IV.D.1. 
of this release.
    \693\ The Commission believes that any initial dollar cost 
associated with new Rule 18a-6 is already accounted for in the PRA 
estimate for Rule 18a-5, as adopted, which includes the cost of 
recordkeeping system software.
    \694\ 57 hours x 25 bank SBSDs = 1,425 hours. These internal 
hours likely will be performed by a compliance manager and a senior 
database administrator.
    \695\ 40 hours per year x 25 bank SBSDs = 1,000 hours per year. 
These internal hours likely will be performed by a compliance clerk.
    \696\ $480 per year x 25 bank SBSDs = $12,000 per year.
---------------------------------------------------------------------------

    Paragraph (f) of new Rule 18a-6 requires third-party custodians for 
non-broker-dealer SBSDs and non-broker-dealer MSBSPs to file with the 
Commission a written undertaking and surrender the SBSD or MSBSP's 
records upon the Commission's request.\697\ The obligation to provide 
documents upon the Commission's request does not impose a new burden, 
since this requirement merely changes the respondent's identity rather 
than adding to the quantity of burdens. Thus, the burden is the 
requirement to prepare and file a written undertaking. The Commission 
estimates that 50% of the 35 non-broker-dealer SBSDs and non-broker-
dealer MSBSPs will retain a third-party custodian, resulting in 
approximately 17.5 written undertakings. The Commission estimates that 
paragraph (f) of new Rule 18a-6 will impose an ongoing annual burden of 
2 hours per written undertaking, resulting in an industry-wide ongoing 
burden of 35 hours per year.\698\
---------------------------------------------------------------------------

    \697\ See paragraph (f) of Rule 18a-6, as adopted.
    \698\ 2 hours per year x 17.5 written undertakings = 35 hours 
per year. These internal hours likely will be performed by an 
attorney.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 18a-6 and continues to believe they are 
appropriate.
3. Amendments to Rule 17a-5 and New Rule 18a-7
    The amendments to Rule 17a-5 and new Rule 18a-7 will impose 
collection of information requirements that result in annual burdens 
for broker-dealers, SBSDs, and MSBSPs. The Commission estimates that 
the amendments to Rule 17a-5 will impose the following initial and 
annual burdens: \699\
---------------------------------------------------------------------------

    \699\ See paragraph (a)(1)(ii) of Rule 17a-5, as amended.

------------------------------------------------------------------------
             Burden                 Initial burden       Annual burden
------------------------------------------------------------------------
FOCUS Report Part II (ANC broker- Per firm: 25 hours  Per firm: 228
 dealer SBSDs).                   Industry: 250        hours.
                                   hours.             Industry: 2,280
                                                       hours.
FOCUS Report Part II (non-model   Per firm: 50 hours  Per firm: 240
 broker-dealer SBSDs).            Industry: 300        hours.
                                   hours.             Industry: 1,440
                                                       hours.
FOCUS Report Part II (broker-     Per firm: 35 hours  Per firm: 204
 dealer MSBSPs).                  Industry: 35 hours   hours.
                                                      Industry: 204
                                                       hours.
FOCUS Report Part II (stand-      Per firm: 20 hours  Per firm: 120
 alone broker-dealers engaged in  Industry: 500        hours.
 security-based swap activities).  hours.             Industry: 3,000
                                                       hours.
                                 ---------------------------------------
    Total--Amendments to Rule     Industry: 1,085     Industry: 6,924
     17a-5.                        hours.              hours.
------------------------------------------------------------------------

    The Commission estimates that Rule 18a-7 will impose the following 
initial and annual burdens: \700\
---------------------------------------------------------------------------

    \700\ See paragraphs (a)(1) through (3), (b), (c), (d), (e), 
(f), and (i) of Rule 18a-7, as adopted.

------------------------------------------------------------------------
             Burden                 Initial burden       Annual burden
------------------------------------------------------------------------
Additional ANC reports..........  Per firm: 0 hours.  Per firm: 120
                                  Industry: 0 hours.   hours.
                                                      Industry: 480
                                                       hours.
Customer statements.............  Per firm: 10 hours  Per firm: 1 hours.
                                  Industry: 100       Industry: 10
                                   hours.              hours.
Annual report (stand-alone SBSDs  Per firm: 0 hours.  Per firm: 70 hours
 not exempt from Rule 18a-4).     Industry: 0 hours.   and $6.70.
                                                      Industry: 0 hours
                                                       and $0.
Annual report (stand-alone SBSDs  Per firm: 0 hours.  Per firm: 17 hours
 exempt from Rule 18a-4).         Industry: 0 hours.   and $6.70.
                                                      Industry: 102
                                                       hours and $40.2.

[[Page 68615]]

 
Annual report (stand-alone        Per firm: 0 hours.  Per firm: 10 hours
 MSBSPs).                         Industry: 0 hours.   and $6.70.
                                                      Industry: 40 hours
                                                       and $26.80.
Statement regarding accountant..  Per firm: 10 hours  Per firm: 2 hours
                                  Industry: 100        and 50[cent].
                                   hours.             Industry: 20 hours
                                                       and $5.00.
Engagement of accountant (stand-  Per firm: 0 hours.  Per firm:
 alone SBSDs not exempt from      Industry: 0 hours.   $450,000.
 Rule 18a-4).                                         Industry: $0.
Engagement of accountant (stand-  Per firm: 0 hours.  Per firm:
 alone SBSDs exempt from Rule     Industry: 0 hours.   $303,000.
 18a-4).                                              Industry:
                                                       $1,818,000.
Engagement of accountant (stand-  Per firm: 0 hours.  Per firm:
 alone MSBSPs).                   Industry: 0 hours.   $300,000.
                                                      Industry:
                                                       $1,200,000.
Notice of change of fiscal year.  Per firm: 0 hours.  Per firm: 1 hour
                                  Industry: 0 hours.   and 50[cent].
                                                      Industry: 1 hour
                                                       and 50[cent].
FOCUS Report Part II (stand-      Per firm: 160       Per firm: 192
 alone SBSDs).                     hours.              hours.
                                  Industry: 960       Industry: 1,152
                                   hours.              hours.
FOCUS Report Part II (stand-      Per firm: 40 hours  Per firm: 48
 alone MSBSPs).                   Industry: 160        hours.
                                   hours.             Industry: 192
                                                       hours.
FOCUS Report Part IIC (bank       Per firm: 36 hours  Per firm: 16
 SBSDs).                          Industry: 900        hours.
                                   hours.             Industry: 400
                                                       hours.
                                 ---------------------------------------
    Total--New Rule 18a-7.......  Industry: 2,220     Industry: 2,397
                                   hours.              hours and
                                                       $3,018,072.5.
------------------------------------------------------------------------

Estimated Hours and Costs of Amendments to Rule 17a-5
    In the proposing release, the Commission estimated that many of the 
amendments to Rule 17a-5 are not expected to impose an initial 
burden.\701\ The Commission received no comment on these estimates and 
continues to believe they are appropriate.
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    \701\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25270. The Commission does not estimate a change in the burden 
associated with the new lines added to the FOCUS Report, as compared 
with Form SBS in the proposing release, because the addition of new 
lines is offset by the deletion of other lines, such as the deletion 
of lines in the Statement of Income (Loss) or Statement of 
Comprehensive Income, as Applicable. In addition, many of the new 
lines are not so much new burdens as different burdens, since in the 
absence of these new lines, firms would still be required to report 
this same information, except that it would be reported on a 
different line. For example, in the Statement of Financial 
Condition, excess cash collateral pledged on derivative transactions 
(Line 6) is currently reported under other assets (Line 15).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii) of Rule 17a-5, as amended, will require 
broker-dealer SBSDs and MSBSPs to file FOCUS Report Part II, as 
amended, monthly instead of filing the applicable part of the FOCUS 
Report quarterly.\702\ Part II, Part IIA, and Part II CSE of the FOCUS 
Report each impose a different burden on respondents due to their 
varying lengths and calculations, so the burden of filing FOCUS Report 
Part II, as amended, depends on which part of the FOCUS Report the firm 
is currently required to file.
---------------------------------------------------------------------------

    \702\ See paragraph (a)(1)(ii) of Rule 17a-5, as amended.
---------------------------------------------------------------------------

    ANC broker-dealer SBSDs will be required to file FOCUS Report Part 
II, as amended, instead of FOCUS Report Part II CSE. Although FOCUS 
Report Part II, as amended, is modeled on Part II CSE, the burden on 
ANC broker-dealer SBSDs will increase, because ANC broker-dealer SBSDs 
will be required to complete additional sections and line items 
eliciting more detail about their security-based swap and swap 
activities.\703\ In consideration of these additional requirements, the 
Commission estimates that the requirement for ANC broker-dealer SBSDs 
to file FOCUS Report Part II, as amended, every month will add an 
initial burden of 25 hours per firm and an ongoing annual burden of 228 
hours per firm. The Commission estimates that there are ten ANC broker-
dealer SBSDs, adding to the industry an initial burden of 250 hours 
\704\ and an ongoing burden of 2,280 hours per year.\705\
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    \703\ ANC broker-dealer SBSDs will be required to complete the 
following new sections: (1) Computation for Determination of 
Security-Based Swap Customer Reserve Requirements; (2) Possession or 
Control for Security-Based Swap Customers; (3) Schedule 1--Aggregate 
Securities, Commodities, and Swaps Positions; and (4) Schedule 4--
Geographic Distribution of Derivatives Exposures for Ten Largest 
Countries.
    \704\ 25 hours x 10 ANC broker-dealer SBSDs = 250 hours. These 
internal hours likely will be performed by a compliance manager.
    \705\ 228 hours per year x 10 ANC broker-dealer SBSDs = 2,280 
hours per year. These internal hours likely will be performed by a 
compliance manager.
---------------------------------------------------------------------------

    Non-model broker-dealer SBSDs will be required to file FOCUS Report 
Part II, as amended, instead of Part II or Part IIA of the FOCUS 
Report. Given that SBSDs are expected to be larger and relatively 
sophisticated firms, the Commission assumes that all non-model broker-
dealer SBSDs are carrying firms that file Part II. Although sections of 
Part II are also found in FOCUS Report Part II, as amended, the burden 
on non-model broker-dealer SBSDs will increase (but not as much as for 
ANC broker-dealer SBSDs), because non-model broker-dealer SBSDs will be 
required to file monthly instead of quarterly and will complete 
additional sections and line items eliciting more detail about their 
security-based swap and swap activities.\706\ In consideration of these 
additional requirements, the Commission estimates that the

[[Page 68616]]

requirement for non-model broker-dealer SBSDs to file FOCUS Report Part 
II, as amended, every month will add an initial burden of 50 hours per 
firm and an ongoing annual burden of 240 hours per firm. The Commission 
estimates that there are 6 non-model broker-dealer SBSDs, adding to the 
industry an initial burden of 300 hours \707\ and an ongoing burden of 
1,440 hours per year.\708\
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    \706\ Non-model broker-dealer SBSDs will be required to complete 
the following new sections: (1) Financial and Operational Data--
Operational Deductions from Capital--Note A; (2) Financial and 
Operational Data--Potential Operational Charges Not Deducted from 
Capital--Note B; (3) Computation for Determination of PAB 
Requirements; (4) Computation for Determination of Security-Based 
Swap Customer Reserve Requirements; (5) Possession or Control for 
Security-Based Swap Customers; (6) Schedule 1--Aggregate Securities, 
Commodities, and Swaps Positions; (7) Schedule 2--Credit 
Concentration Report for Fifteen Largest Current Exposures in 
Derivatives; (8) Schedule 3--Portfolio Summary of Derivatives 
Exposures by Internal Credit Rating; and (9) Schedule 4--Geographic 
Distribution of Derivatives Exposures for Ten Largest Countries. In 
addition, non-model broker-dealer SBSDs also registered as FCMs will 
be required to file the following sections not included on Pre-
Amendment FOCUS Report Part II, but which the CFTC already requires 
FCMs to file as part of Form 1-FR-FCM: (1) Computation of CFTC 
Minimum Capital Requirement; (2) Statement of Segregation 
Requirements and Funds in Segregation for Customers Trading on U.S. 
Commodity Exchanges; (3) Statement of Cleared Swaps Customer 
Segregation Requirements and Funds in Cleared Swaps Customer 
Accounts under Section 4d(f) of the Commodity Exchange Act; (4) 
Statement of Segregation Requirements and Funds in Segregation for 
Customers' Dealer Options Accounts; and (5) Statement of Secured 
Amounts and Funds Held in Separate Accounts for Foreign Futures and 
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The 
Commission does not estimate a burden for these 5 sections from Form 
1-FR-FCM, since the CFTC already requires FCMs to file these 5 
sections on a monthly basis (17 CFR 1.10(b)(1)(i)), and therefore, 
the hourly burden is already accounted for in the PRA estimate for 
the CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does 
not anticipate that FCMs will be required to file both the CFTC's 
Form 1-FR-FCM and the Commission's FOCUS Report Part II, as amended.
    \707\ 50 hours x 6 non-model broker-dealer SBSDs = 300 hours. 
These internal hours likely will be performed by a compliance 
manager.
    \708\ 240 hours per year x 6 non-model broker-dealer SBSDs = 
1,440 hours per year. These internal hours likely will be performed 
by a compliance manager.
---------------------------------------------------------------------------

    Broker-dealer MSBSPs will be required to file FOCUS Report Part II, 
as amended, instead of Part II or Part IIA of the FOCUS Report. Given 
that MSBSPs are expected to be larger and relatively sophisticated 
firms, the Commission assumes that broker-dealer MSBSPs are carrying 
firms that file Part II. Although sections of Part II are also found in 
FOCUS Report Part II, as amended, the burden on broker-dealer MSBSPs 
will increase (but not as much as for broker-dealer SBSDs), because 
broker-dealer MSBSPs will be required to file monthly instead of 
quarterly and will complete additional sections and line items 
eliciting more detail about their security-based swap and swap 
activities.\709\ In consideration of these additional requirements, the 
Commission estimates that the requirement for broker-dealer MSBSPs to 
file FOCUS Report Part II, as amended, every month will add an initial 
burden of 35 hours per firm and an ongoing annual burden of 204 hours 
per firm. The Commission estimates that there will be one broker-dealer 
MSBSP, meaning that the estimated burden on the industry will be the 
same as for a single broker-dealer MSBSP.
---------------------------------------------------------------------------

    \709\ Broker-dealer MSBSPs will be required to complete the 
following new sections: (1) Financial and Operational Data--
Operational Deductions from Capital--Note A; (2) Financial and 
Operational Data--Potential Operational Charges Not Deducted from 
Capital--Note B; (3) Computation for Determination of PAB 
Requirements; and (4) Schedule 1--Aggregate Securities, Commodities, 
and Swaps Positions. In addition, broker-dealer MSBSPs also 
registered as FCMs will be required to file the following sections 
not included on Pre-Amendment FOCUS Report Part II, but which the 
CFTC already requires FCMs to file as part of Form 1-FR-FCM: (1) 
Computation of CFTC Minimum Capital Requirement; (2) Statement of 
Segregation Requirements and Funds in Segregation for Customers 
Trading on U.S. Commodity Exchanges; (3) Statement of Cleared Swaps 
Customer Segregation Requirements and Funds in Cleared Swaps 
Customer Accounts under Section 4d(f) of the Commodity Exchange Act; 
(4) Statement of Segregation Requirements and Funds in Segregation 
for Customers' Dealer Options Accounts; and (5) Statement of Secured 
Amounts and Funds Held in Separate Accounts for Foreign Futures and 
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The 
Commission does not estimate a burden for these 5 sections from Form 
1-FR-FCM, since the CFTC already requires FCMs to file these 5 
sections on a monthly basis (17 CFR 1.10(b)(1)(i)), and therefore, 
the hourly burden is already accounted for in the PRA estimate for 
the CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does 
not anticipate that FCMs will be required to file both the CFTC's 
Form 1-FR-FCM and the Commission's FOCUS Report Part II, as amended.
---------------------------------------------------------------------------

    Stand-alone non-model broker-dealers that engage in security-based 
swap activities will be required to file FOCUS Report Part II, as 
amended, instead of the currently existing FOCUS Report Part II. 
Although sections of Part II are also found in FOCUS Report Part II, as 
amended, the burden on stand-alone non-model broker-dealers engaged in 
security-based swap activities will increase, because stand-alone non-
model broker-dealers will be required to complete additional line items 
eliciting more detail about their security-based swap and swap 
activities.\710\ In consideration of these additional requirements, the 
Commission estimates that the requirement for stand-alone non-model 
broker-dealers engaged in security-based swap activities to file FOCUS 
Report Part II, as amended, will add an initial burden of 20 hours per 
firm and an ongoing annual burden of 120 hours per firm. The Commission 
estimates that there are 25 stand-alone non-model broker-dealers 
engaged in security-based swap activities, adding to the industry an 
initial burden of 500 hours \711\ and an ongoing burden of 3,000 hours 
per year.\712\
---------------------------------------------------------------------------

    \710\ Stand-alone non-model broker-dealers that engage in 
security-based swap activities will be required to complete the 
following new sections: (1) Computation for Determination of PAB 
Requirements; (2) Computation for Determination of Security-Based 
Swap Customer Reserve Requirements; (3) Possession or Control for 
Security-Based Swap Customers; and (4) Schedule 1--Aggregate 
Securities, Commodities, and Swaps Positions. In addition, non-model 
broker-dealer SBSDs also registered as FCMs will be required to file 
the following sections not included on Pre-Amendment FOCUS Report 
Part II, but which the CFTC already requires FCMs to file as part of 
Form 1-FR-FCM: (1) Computation of CFTC Minimum Capital Requirement; 
(2) Statement of Segregation Requirements and Funds in Segregation 
for Customers Trading on U.S. Commodity Exchanges; (3) Statement of 
Cleared Swaps Customer Segregation Requirements and Funds in Cleared 
Swaps Customer Accounts under Section 4d(f) of the Commodity 
Exchange Act; (4) Statement of Segregation Requirements and Funds in 
Segregation for Customers' Dealer Options Accounts; and (5) 
Statement of Secured Amounts and Funds Held in Separate Accounts for 
Foreign Futures and Foreign Options Customers Pursuant to CFTC 
Regulation 30.7. The Commission does not estimate a burden for these 
5 sections from Form 1-FR-FCM, since the CFTC already requires FCMs 
to file these 5 sections on a monthly basis (17 CFR 1.10(b)(1)(i)), 
and therefore, the hourly burden is already accounted for in the PRA 
estimate for the CFTC's Rule 1.10 (1 CFR 1.10). In addition, the 
Commission does not anticipate that FCMs will be required to file 
both the CFTC's Form 1-FR-FCM and the Commission's FOCUS Report Part 
II, as amended.
    \711\ 20 hours x 25 stand-alone non-model broker-dealers engaged 
in security-based swap activities = 500 hours. These internal hours 
likely will be performed by a compliance manager.
    \712\ 120 hours per year x 25 stand-alone non-model broker-
dealers engaged in security-based swap activities = 3,000 hours per 
year. These internal hours likely will be performed by a compliance 
manager.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 17a-5 and continues to believe they are 
appropriate. However, the estimated burden for Rule 17a-5 is decreased 
to reflect that stand-alone non-model broker-dealers are no longer 
required to complete Schedules 2 through 4 of the FOCUS Report. Other 
than this change, the Commission continues to believe its hour and cost 
burden estimates for the amendments to Rule 17a-5 are appropriate.
Estimated Hours and Costs of New Rule 18a-7
    New Rule 18a-7, which is modeled on Rule 17a-5, as amended, will 
require non-broker-dealer SBSDs and non-broker-dealer MSBSPs to satisfy 
certain reporting requirements.\713\
---------------------------------------------------------------------------

    \713\ See Rule 18a-7, as adopted.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs authorized to use 
models to compute capital to periodically file certain additional 
reports relating to their use of internal models to calculate net 
capital.\714\ After consideration of the Supporting Statement 
accompanying the most recent extension of Rule 17a-5, which estimates 
that the requirement to file additional ANC reports imposes a burden of 
120 hours per respondent,\715\ the Commission estimates that paragraph 
(a)(3) of new Rule 18a-7 will impose an annual burden of 120 hours per 
model stand-alone SBSD. The Commission estimates that there are 4 model 
stand-alone SBSDs, resulting in an industry-wide ongoing burden of 480 
hours per year.\716\
---------------------------------------------------------------------------

    \714\ See paragraph (a)(3) of Rule 18a-7, as adopted.
    \715\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5 (May 26, 2017), 
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=74209001 (4 hours per monthly report x 12 
months per year + 8 hours per quarterly report x 4 quarters per year 
+ 40 hours per annual report = 120 hours per year).
    \716\ 120 hours per year x 4 model stand-alone SBSDs = 480 hours 
per year. These internal hours likely would be performed by a 
compliance manager.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to 
disclose certain financial statements on their

[[Page 68617]]

internet websites.\717\ After consideration of the Supporting Statement 
accompanying the most recent extension of Rule 17a-5, which requires 
similar disclosures by mail instead of on the firm's website,\718\ the 
Commission staff's experience with burden estimates for similar 
collections of information, and the estimated initial web development 
costs, the Commission estimates that paragraph (b) of new Rule 18a-7 
will impose an initial burden of ten hours per firm and an annual 
burden of one hour per firm. The Commission estimates that there are 10 
respondents (6 stand-alone SBSDs and 4 stand-alone MSBSPs), resulting 
in an industry-wide initial burden of 100 hours \719\ and an industry-
wide ongoing burden of 10 hours per year.\720\
---------------------------------------------------------------------------

    \717\ See paragraph (b) of Rule 18a-7, as adopted. The 
Commission does not anticipate a dollar cost to establish a website 
and a toll-free number under this paragraph, because the Commission 
believes firms that are large enough to register as an SBSD or MSBSP 
already maintain a toll-free number for their customers and already 
have an internet website. See Broker-Dealer Exemption from Sending 
Certain Financial Information to Customers, Exchange Act Release No. 
48272 (Aug. 1, 2003), 68 FR 46446, 46450 (Aug. 6, 2003).
    \718\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5. See section 
II.B.3.a. of this release for a discussion of the similarities 
between paragraph (c) of Rule 17a-5, as amended and paragraph (b) of 
Rule 18a-7, as adopted.
    \719\ 10 hours x 10 stand-alone SBSDs and MSBSPs = 100 hours. 
These internal hours likely would be performed by a compliance 
manager.
    \720\ 1 hour per year x 10 stand-alone SBSDs and MSBSPs = 10 
hours per year. These internal hours likely would be performed by a 
compliance clerk.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file 
with the Commission an annual report consisting of certain financial 
reports, and attach to the financial report an oath or 
affirmation.\721\ Based on the Commission staff's experience with the 
burden imposed by current Rule 17a-5's annual reports requirement and 
related postage costs,\722\ the Commission estimates that paragraphs 
(c) and (d) of new Rule 18a-7 will impose on stand-alone MSBSPs an 
annual burden of 10 hours and $6.70 per firm. The Commission estimates 
that there are 4 stand-alone MSBSPs, resulting in an industry-wide 
ongoing burden of 40 hours \723\ and $26.80 per year.\724\ In the 
proposing release, the Commission estimated that many of the amendments 
to Rule 17a-5 are not expected to impose an initial burden.\725\ The 
Commission received no comment on these estimates and continues to 
believe they are appropriate.
---------------------------------------------------------------------------

    \721\ See paragraphs (c) and (d) of Rule 18a-7, as adopted.
    \722\ As of May 2018, a priority mail flat rate envelope costs 
$6.70, based on costs obtained on the U.S. Postal Service website, 
available at www.usps.gov. Firms that file electronically will not 
incur this cost.
    \723\ 10 hours per year x 4 stand-alone MSBSPs = 40 hours per 
year. These internal hours likely would be performed by a senior 
accountant.
    \724\ $6.70 per year x 4 stand-alone MSBSPs = $26.80 per year.
    \725\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25270.
---------------------------------------------------------------------------

    Stand-alone SBSDs not exempt from Rule 18a-4 will be required to 
include a compliance report with their annual reports.\726\ Thus, after 
consideration of the Supporting Statement accompanying the most recent 
extension of Rule 17a-5, which estimates that each compliance report 
takes approximately 60 hours to prepare,\727\ the Commission estimates 
that paragraphs (c) and (d) of new Rule 18a-7 will impose an annual 
burden of 70 hours and $6.70 per stand-alone SBSD that files a 
compliance report. The Commission estimates that there are no stand-
alone SBSDs that will file a compliance report, resulting in an 
industry-wide ongoing burden of 0 hours \728\ and $0 per year.\729\
---------------------------------------------------------------------------

    \726\ See paragraph (c)(1)(i)(B) of Rule 18a-7, as adopted.
    \727\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5.
    \728\ 70 hours per year x 2 stand-alone SBSDs = 210 hours per 
year. These internal hours likely would be performed by a senior 
accountant.
    \729\ $6.70 per year x 2 stand-alone SBSDs = $20.10 per year. 
Firms that file electronically will not incur this cost. As 
discussed above, the Commission estimates that of the 9 stand-alone 
SBSDs, 6 will avail themselves of the exemption from Rule 18a-4, and 
the remaining 3 will be registered as FCMs. The Commission also 
believes that the three stand-alone SBSDs that are registered as 
FCMs will also elect to avail themselves of the full alternative 
compliance mechanism. Consequently, the Commission estimates that 
there will be no stand-alone SBSDs not exempt from Rule 18a-4. See 
section IV.C of this release.
---------------------------------------------------------------------------

    Stand-alone SBSDs exempt from Rule 18a-4 will be required to 
include an exemption report with their annual reports.\730\ Thus, after 
consideration of the Supporting Statement accompanying the most recent 
extension of Rule 17a-5, which estimates that each exemption report 
takes approximately 7 hours to prepare,\731\ the Commission estimates 
that paragraphs (c) and (d) of new Rule 18a-7 will impose an annual 
burden of 17 hours and $6.70 per stand-alone SBSD that files an 
exemption report. The Commission estimates that there are 6 stand-alone 
SBSDs that will file an exemption report, resulting in an industry-wide 
ongoing burden of 102 hours \732\ and $40.20 per year.\733\
---------------------------------------------------------------------------

    \730\ See paragraph (c)(1)(i)(B) of Rule 18a-7, as adopted.
    \731\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5.
    \732\ 17 hours per year x 6 stand-alone SBSDs = 102 hours per 
year. These internal hours likely would be performed by a senior 
accountant.
    \733\ $6.70 per year x 6 stand-alone SBSDs = $40.20 per year. 
Firms that file electronically will not incur this cost.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file a 
statement regarding the independent public accountant engaged to audit 
the firm's annual reports.\734\ In addition to postage costs, the 
Supporting Statement accompanying the most recent extension of Rule 
17a-5 estimates that the parallel requirement in Rule 17a-5 will impose 
a two-hour burden on each introducing broker-dealer to file an updated 
statement, and a more significant ten-hour burden on each carrying 
broker-dealer, since the changes may require renegotiating the carrying 
broker-dealer's agreement with its independent public accountant.\735\ 
Consistent with that Supporting Statement, the Commission estimates 
that paragraph (e) of new Rule 18a-7 will impose an initial burden of 
ten hours per firm and an annual burden of 2 hours and 50 cents per 
firm.\736\ The Commission estimates that there are 10 respondents (6 
stand-alone SBSDs and 4 stand-alone MSBSPs), resulting in an industry-
wide initial burden of 100 hours \737\ and an industry-wide ongoing 
burden of 20 hours \738\ and $5.00 per year.\739\
---------------------------------------------------------------------------

    \734\ See paragraph (e) of Rule 18a-7, as adopted.
    \735\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5.
    \736\ It currently costs 50 cents to send a one ounce retail 
domestic first-class letter through the U.S. Postal Service. See 
U.S. Postal Service, First-Class Mail, available at http://pe.usps.com/text/dmm300/Notice123.htm#_c011 (last visited May 10, 
2018).
    \737\ 10 hours x 13 stand-alone SBSDs and MSBSPs = 130 hours. 
These internal hours likely would be performed by a senior 
accountant.
    \738\ 2 hours per year x 10 stand-alone SBSDs and MSBSPs = 20 
hours per year. These internal hours likely would be performed by a 
compliance clerk.
    \739\ $0.50 per year x 10 stand-alone SBSDs and MSBSPs = $5.00 
per year.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to engage 
an independent public accountant to provide reports covering the firm's 
annual reports.\740\ As discussed above, the Commission is modifying 
the provisions of Rule 18a-7 to allow stand-alone SBSDs and MSBSPs, as 
well as an SBSD also registered as an OTC derivatives dealer, to engage 
an independent public accountant that is not registered with the PCAOB, 
and to permit the accountant to use GAAS in the United States or PCAOB

[[Page 68618]]

standards.\741\ The Supporting Statement accompanying the most recent 
extension of Rule 17a-5 estimates that it will cost each carrying firm 
$300,000 to retain an independent public accountant to audit its 
financial statements and $150,000 to examine its compliance 
report.\742\ Stand-alone MSBSPs are not required to file a compliance 
or exemption report, while stand-alone SBSDs will be required to retain 
an independent public accountant to review their compliance report (if 
they are not exempt from Rule 18a-4) or exemption report (if they are 
exempt from Rule 18a-4).
---------------------------------------------------------------------------

    \740\ See paragraph (f) of Rule 18a-7, as adopted.
    \741\ See section II.B.3.a. of this release (discussing the 
requirement to file annual reports and the qualifications of 
independent public accountants).
    \742\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-5.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that paragraph (f) of new Rule 
18a-7 will impose an annual cost of $300,000 on each stand-alone MSBSP. 
The Commission estimates that there are 4 stand-alone MSBSPs, resulting 
in an industry-wide ongoing burden of $1,200,000 per year.\743\ The 
Commission estimates that paragraph (f) of new Rule 18a-7 will impose 
on stand-alone SBSDs exempt from Rule 18a-4 an annual cost of $303,000 
per firm,\744\ since both their financial statements and exemption 
report will need to be audited. The Commission estimates that there are 
6 stand-alone SBSDs exempt from Rule 18a-4, resulting in an industry-
wide ongoing burden of $1,818,000 per year.\745\ The Commission 
estimates that paragraph (f) of new Rule 18a-7 will impose on stand-
alone SBSDs not exempt from Rule 18a-4 an annual cost of $450,000 per 
firm,\746\ since both their financial statements and compliance report 
will need to be audited. The Commission estimates that there are no 
stand-alone SBSDs not exempt from Rule 18a-4, resulting in an industry-
wide ongoing burden of $0 per year.\747\
---------------------------------------------------------------------------

    \743\ $300,000 per year x 4 stand-alone MSBSPs = $1,200,000 per 
year.
    \744\ $300,000 per year (financial statements) + $3,000 per year 
(exemption report) = $303,000 per year.
    \745\ $303,000 per year x 6 stand-alone SBSDs = $1,818,000 per 
year.
    \746\ $300,000 per year (financial statements) + $150,000 per 
year (compliance report) = $450,000 per year.
    \747\ $450,000 per year x 0 stand-alone SBSDs = $0 per year. As 
discussed above, the Commission estimates that of the 9 stand-alone 
SBSDs, 6 will avail themselves of the exemption from Rule 18a-4, and 
the remaining 3 will be registered as FCMs. The Commission also 
believes that the three stand-alone SBSDs that are registered as 
FCMs will also elect to avail themselves of the full alternative 
compliance mechanism. Consequently, the Commission estimates that 
there will be no stand-alone SBSDs not exempt from Rule 18a-4. See 
section IV.C of this release.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to notify 
the Commission of a change in fiscal year.\748\ Based on the Commission 
staff's experience with the parallel requirement under Rule 17a-5, and 
the Supporting Statement accompanying the most recent extension of Rule 
17a-11, which estimates that each financial notice takes approximately 
1 hour to prepare and file with the Commission,\749\ the Commission 
estimates that paragraph (i) of new Rule 18a-7 will impose a burden of 
1 hour and 50 cents on a firm planning to change its fiscal year. The 
Commission estimates that each year, 1 firm will change its fiscal 
year, such that the estimated burden on the industry will be 1 hour and 
50 cents per year.
---------------------------------------------------------------------------

    \748\ See paragraph (i) of Rule 18a-7, as adopted.
    \749\ See Commission, Supporting Statement for the Paperwork 
Reduction Act Information Collection Submission for Rule 17a-11 
(July 24, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=75553601.
---------------------------------------------------------------------------

    New Rule 18a-7 will require stand-alone SBSDs and MSBSPs to file 
FOCUS Report Part II, as amended, monthly,\750\ and will require bank 
SBSDs and MSBSPs to file new FOCUS Report Part IIC quarterly.\751\
---------------------------------------------------------------------------

    \750\ See paragraph (a)(1) of Rule 18a-7, as adopted.
    \751\ See paragraph (a)(2) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

    Stand-alone SBSDs will be required to file FOCUS Report Part II, as 
amended, on a monthly basis.\752\ FOCUS Report Part II, as amended, 
includes eleven sections and four schedules applicable to stand-alone 
SBSDs.\753\ Stand-alone SBSDs dually registered as FCMs will be 
required to complete five additional sections, all of which the CFTC 
already requires FCMs to file as part of Form 1-FR-FCM.\754\ In 
consideration of these additional requirements, the Commission 
estimates that the requirement for stand-alone SBSDs to file FOCUS 
Report Part II, as amended, every month will impose an initial burden 
of 160 hours per firm and an ongoing annual burden of 192 hours per 
firm. The Commission estimates that there are 6 stand-alone SBSDs, 
resulting in an industry-wide initial burden of 960 hours \755\ and an 
industry-wide ongoing burden of 1,152 hours per year.\756\
---------------------------------------------------------------------------

    \752\ See paragraph (a)(1) of Rule 18a-7, as adopted.
    \753\ Stand-alone SBSDs will be required to complete the 
following sections and schedules: (1) Statement of Financial 
Condition; (2) either Computation of Net Capital (Filer Authorized 
to Use Models) or Computation of Net Capital (Filer Not Authorized 
to Use Models); (3) Computation of Minimum Regulatory Capital 
Requirements (Non-Broker-Dealer); (4) Statement of Income (Loss); 
(5) Capital Withdrawals; (6) Capital Withdrawals--Recap; (7) 
Financial and Operational Data; (8) Financial and Operational Data--
Operational Deductions from Capital--Note A; (9) Financial and 
Operational Data--Potential Operational Charges Not Deducted from 
Capital--Note B; (10) Computation for Determination of Security-
Based Swap Customer Reserve Requirements; (11) Possession or Control 
for Security-Based Swap Customers; (12) Schedule 1--Aggregate 
Securities, Commodities, and Swaps Positions; (13) Schedule 2--
Credit Concentration Report for Fifteen Largest Exposures in 
Derivatives; (14) Schedule 3--Portfolio Summary of Derivatives 
Exposures by Internal Credit Rating; and (15) Schedule 4--Geographic 
Distribution of Derivatives Exposures for Ten Largest Countries.
    \754\ Stand-alone SBSDs also registered as FCMs will be required 
to file the following sections: (1) Computation of CFTC Minimum 
Capital Requirement; (2) Statement of Segregation Requirements and 
Funds in Segregation for Customers Trading on U.S. Commodity 
Exchanges; (3) Statement of Cleared Swaps Customer Segregation 
Requirements and Funds in Cleared Swaps Customer Accounts under 
Section 4d(f) of the Commodity Exchange Act; (4) Statement of 
Segregation Requirements and Funds in Segregation for Customers' 
Dealer Options Accounts; and (5) Statement of Secured Amounts and 
Funds Held in Separate Accounts for Foreign Futures and Foreign 
Options Customers Pursuant to CFTC Regulation 30.7. The Commission 
does not estimate a burden for these five sections, since the CFTC 
already requires FCMs to file these five sections on a monthly basis 
(17 CFR 1.10(b)(1)(i)), and therefore, the hourly burden is already 
accounted for in the PRA estimate for the CFTC's Rule 1.10 (1 CFR 
1.10). In addition, the Commission does not anticipate that FCMs 
will be required to file both the CFTC's Form 1-FR-FCM and the 
Commission's FOCUS Report Part II, as amended.
    \755\ 160 hours x 6 stand-alone SBSDs = 960 hours. These 
internal hours likely would be performed by a senior compliance 
manager.
    \756\ 192 hours per year x 6 stand-alone SBSDs = 1,152 hours per 
year. These internal hours likely would be performed by a senior 
compliance manager.
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    Stand-alone MSBSPs will be required to file FOCUS Report Part II, 
as amended, on a monthly basis.\757\ FOCUS Report Part II, as amended, 
includes three sections and four schedules applicable to stand-alone 
MSBSPs.\758\ Stand-alone MSBSPs dually registered as FCMs will be 
required to complete five additional sections, all of which the CFTC 
already requires FCMs to file as part of Form 1-FR-FCM.\759\ In

[[Page 68619]]

consideration of these additional requirements, the Commission 
estimates that the requirement for stand-alone MSBSPs to file FOCUS 
Report Part II, as amended, every month will impose an initial burden 
of 40 hours per firm and an ongoing annual burden of 48 hours per firm. 
The Commission estimates that there are 4 stand-alone MSBSPs, resulting 
in an industry-wide initial burden of 160 hours \760\ and an industry-
wide ongoing burden of 192 hours per year.\761\
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    \757\ See paragraph (a)(1) of Rule 18a-7, as adopted.
    \758\ Stand-alone MSBSPs will be required to complete the 
following sections and schedules: (1) Statement of Financial 
Condition; (2) Computation of Tangible Net Worth; (3) Statement of 
Income (Loss); (4) Schedule 1--Aggregate Securities, Commodities, 
and Swaps Positions; (5) Schedule 2--Credit Concentration Report for 
Fifteen Largest Exposures in Derivatives; (6) Schedule 3--Portfolio 
Summary of Derivatives Exposures by Internal Credit Rating; and (7) 
Schedule 4 -Geographic Distribution of Derivatives Exposures for Ten 
Largest Countries.
    \759\ Stand-alone MSBSPs also registered as FCMs will be 
required to file the following sections: (1) Computation of CFTC 
Minimum Capital Requirement; (2) Statement of Segregation 
Requirements and Funds in Segregation for Customers Trading on U.S. 
Commodity Exchanges; (3) Statement of Cleared Swaps Customer 
Segregation Requirements and Funds in Cleared Swaps Customer 
Accounts under Section 4d(f) of the Commodity Exchange Act; (4) 
Statement of Segregation Requirements and Funds in Segregation for 
Customers' Dealer Options Accounts; and (5) Statement of Secured 
Amounts and Funds Held in Separate Accounts for Foreign Futures and 
Foreign Options Customers Pursuant to CFTC Regulation 30.7. The 
Commission does not estimate a burden for these 5 sections, since 
the CFTC already requires FCMs to file these 5 sections on a monthly 
basis (17 CFR 1.10(b)(1)(i)), and therefore, the hourly burden is 
already accounted for in the PRA estimate for the CFTC's Rule 1.10 
(1 CFR 1.10). In addition, the Commission does not anticipate that 
FCMs will be required to file both the CFTC's Form 1-FR-FCM and the 
Commission's FOCUS Report Part II, as amended.
    \760\ 40 hours x 4 stand-alone MSBSPs = 160 hours. These 
internal hours likely will be performed by a senior compliance 
manager.
    \761\ 48 hours per year x 4 stand-alone MSBSPs = 192 hours per 
year. These internal hours likely will be performed by a senior 
compliance manager.
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    Bank SBSDs will be required to file new FOCUS Report Part IIC on a 
quarterly basis.\762\ New FOCUS Report Part IIC includes five sections 
and one schedule applicable to bank SBSDs.\763\ The Commission does not 
expect new FOCUS Report Part IIC to impose a significant burden on bank 
SBSDs, because two of the five sections require the firm to file 
calculations already computed in accordance with Rule 18a-3, and the 
other three sections either mirror or are scaled down versions of 
schedules to FFIEC Form 031, which banks are already required to file 
with their prudential regulator (although they will need to transpose 
this information from FFIEC Form 031 to FOCUS Report Part IIC). 
Although bank SBSDs dually registered as FCMs will be required to 
complete five additional sections, the CFTC already requires FCMs to 
file these schedules on Form 1-FR-FCM.\764\ In consideration of these 
additional requirements, the Commission estimates that the requirement 
for bank SBSDs to file FOCUS Report Part IIC quarterly will impose an 
initial burden of 36 hours per firm and an ongoing annual burden of 16 
hours per firm. The Commission estimates that there are 25 bank SBSDs, 
resulting in an industry-wide initial burden of 900 hours \765\ and an 
industry-wide ongoing burden of 400 hours per year.\766\
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    \762\ See paragraph (a)(2) of Rule 18a-7, as adopted.
    \763\ Bank SBSDs will be required to complete the following 
sections and schedules: (1) Balance Sheet (Information as Reported 
on FFIEC Form 031--Schedule RC); (2) Regulatory Capital (Information 
as Reported on FFIEC Form 031--Schedule RC-R); (3) Income Statement 
(Information as Reported on FFIEC Form 031--Schedule RI); (4) 
Computation for Determination of Security-Based Swap Customer 
Reserve Requirements; (5) Possession or Control for Security-Based 
Swap Customers; and (6) Schedule 1--Aggregate Security-Based Swap 
and Swap Positions.
    \764\ Bank SBSDs also registered as FCMs will be required to 
file the following sections: (1) Computation of CFTC Minimum Capital 
Requirement; (2) Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Commodity Exchanges; (3) 
Statement of Cleared Swaps Customer Segregation Requirements and 
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the 
Commodity Exchange Act; (4) Statement of Segregation Requirements 
and Funds in Segregation for Customers' Dealer Options Accounts; and 
(5) Statement of Secured Amounts and Funds Held in Separate Accounts 
for Foreign Futures and Foreign Options Customers Pursuant to CFTC 
Regulation 30.7. The Commission does not estimate a burden for these 
5 sections, since the CFTC already requires FCMs to file these 5 
sections on a monthly basis (17 CFR 1.10(b)(1)(i)), and therefore, 
the hourly burden is already accounted for in the PRA estimate for 
the CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does 
not anticipate that FCMs will be required to file both the CFTC's 
Form 1-FR-FCM and the Commission's FOCUS Report Part II, as amended.
    \765\ 36 hours x 25 bank SBSDs = 900 hours. These internal hours 
likely will be performed by a senior compliance manager.
    \766\ 16 hours per year x 25 bank SBSDs = 400 hours per year. 
These internal hours likely will be performed by a senior compliance 
manager.
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    Bank MSBSPs will be required to file new FOCUS Report Part IIC on a 
quarterly basis.\767\ New FOCUS Report Part IIC includes three sections 
and one schedule applicable to bank MSBSPs.\768\ Bank MSBSPs dually 
registered as FCMs will be required to complete five additional 
sections, all of which the CFTC already requires FCMs to file as part 
of Form 1-FR-FCM.\769\ However, the Commission does not expect any 
banks to register with the Commission as MSBSPs and therefore does not 
anticipate these requirements to impose an additional burden.\770\
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    \767\ See paragraph (a)(2) of Rule 18a-7, as adopted.
    \768\ Bank MSBSPs will be required to complete the following 
sections and schedules: (1) Balance Sheet (Information as Reported 
on FFIEC Form 031--Schedule RC); (2) Regulatory Capital (Information 
as Reported on FFIEC Form 031--Schedule RC-R); (3) Income Statement 
(Information as Reported on FFIEC Form 031--Schedule RI); and (4) 
Schedule 1--Aggregate Security-Based Swap and Swap Positions.
    \769\ Bank MSBSPs also registered as FCMs will be required to 
file the following sections: (1) Computation of CFTC Minimum Capital 
Requirement; (2) Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Commodity Exchanges; (3) 
Statement of Cleared Swaps Customer Segregation Requirements and 
Funds in Cleared Swaps Customer Accounts under Section 4d(f) of the 
Commodity Exchange Act; (4) Statement of Segregation Requirements 
and Funds in Segregation for Customers' Dealer Options Accounts; and 
(5) Statement of Secured Amounts and Funds Held in Separate Accounts 
for Foreign Futures and Foreign Options Customers Pursuant to CFTC 
Regulation 30.7. The Commission does not estimate a burden for these 
5 sections, since the CFTC already requires FCMs to file these 5 
sections on a monthly basis (17 CFR 1.10(b)(1)(i)), and therefore, 
the hourly burden is already accounted for in the PRA estimate for 
the CFTC's Rule 1.10 (1 CFR 1.10). In addition, the Commission does 
not anticipate that FCMs will be required to file both the CFTC's 
Form 1-FR-FCM and the Commission's FOCUS Report Part II, as amended.
    \770\ The Commission estimates that the requirement for bank 
MSBSPs to file FOCUS Report Part IIC quarterly will impose an 
initial burden of 16 hours per firm and an ongoing annual burden of 
8 hours per firm.
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    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 18a-7 and continues to believe they are 
appropriate.
4. Amendments to Rule 17a-11 and New Rule 18a-8
    The amendments to Rule 17a-11 and new Rule 18a-8 will impose 
collection of information requirements that result in annual burdens 
for broker-dealers, SBSDs, MSBSPs, and national securities exchanges 
and national securities associations. The Commission estimates that 
Rule 17a-11, as amended, will impose the following initial and annual 
burdens: \771\
---------------------------------------------------------------------------

    \771\ See paragraphs (f) and (g) of Rule 17a-11, as amended.

------------------------------------------------------------------------
                   Burden                           Annual burden
------------------------------------------------------------------------
New notice of failure to deposit in Rule     Per notice: 1 hour.
 15c3-3(p) account.                          Industry: 100 hours.
New notices filed by exchanges and national  Per notice: 1 hour.
 securities associations.                    Industry: 5 hours.
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total--Amendments to Rule 17a-11.......  Industry: 105 hours.
------------------------------------------------------------------------


[[Page 68620]]

    The Commission estimates that new Rule 18a-8 will impose an annual 
burden of 4.6 hours per year.
Estimated Hours and Costs of Amendments to Rule 17a-11
    The Commission is adopting paragraph (f) to Rule 17a-11, which will 
require broker-dealers engaged in security-based swap activities to 
notify the Commission if they fail to make a deposit required under 
paragraph (p) of Rule 15c3-3.\772\ Because the burden to calculate the 
reserve amount is already accounted for in the PRA estimate for Rule 
15c3-3,\773\ the burden imposed by paragraph (f) of Rule 17a-11, as 
amended, is the requirement to notify the Commission when the firm 
fails to act in accordance with paragraph (p) of Rule 15c3-3. Given the 
similarity of this new requirement to the current requirements of Rule 
17a-11, the Commission estimates that each required notice will take 
one hour to prepare and file.\774\ Based on Commission experience with 
the number of notices filed under current Rule 17a-11,\775\ the 
Commission estimates that 100 notices will be filed each year under 
paragraph (f) of Rule 17a-11, as amended, resulting in an industry-wide 
ongoing burden of 100 hours per year.\776\
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    \772\ See paragraph (f) of Rule 17a-11, as amended.
    \773\ See Capital, Margin, and Segregation Adopting Release, 
84FR at 43964-67.
    \774\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-11.
    \775\ See id. (noting that in 2016, the Commission received 
approximately 253 notices under Rule 17a-11).
    \776\ 100 notices per year x 1 hour per notice = 100 hours per 
year. These internal hours likely will be performed by a compliance 
manager.
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    The Commission is redesignating current paragraph (f) of Rule 17a-
11 as paragraph (g) and requiring a broker-dealer's national securities 
exchange or national securities association to notify the Commission if 
it learns that the broker-dealer failed to provide a notice required 
under any paragraph of Rule 17a-11 (instead of just paragraphs (b) 
through (e) of Rule 17a-11 as it currently requires).\777\ Thus, these 
entities will be subject to new burdens to file a delinquent broker-
dealer's notices under new paragraph (f) (failure to deposit in Rule 
15c3-3(p) account). After considering the similar preexisting Rule 17a-
11 requirement, the Commission estimates that each required notice will 
take one hour to prepare and file.\778\ Based on Commission experience 
with the number of notices currently filed by these entities, the 
Commission estimates that five notices will be filed pursuant to the 
amendment to paragraph (g) of Rule 17a-11, as amended, resulting in an 
estimated industry-wide ongoing burden of five hours per year.\779\
---------------------------------------------------------------------------

    \777\ See paragraph (g) of Rule 17a-11, as amended.
    \778\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-11.
    \779\ 5 notices per year x 1 hour per notice = 5 hours per year. 
These internal hours likely will be performed by a compliance 
manager.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for the amendments to Rule 17a-11 and continues to 
believe they are appropriate.
Estimated Hours and Costs of New Rule 18a-8
    New Rule 18a-8 will require non-broker-dealer SBSDs and non-broker-
dealer MSBSPs to notify the Commission of certain indicia of their 
financial condition.\780\ The Commission estimates that each Rule 18a-8 
notice will take approximately 55 minutes to prepare and file, in 
contrast to its estimate that a Rule 17a-11 notice will take one hour 
to prepare and file,\781\ because stand-alone SBSDs and MSBSPs do not 
have a DEA with which to file a copy of the Rule 17a-11 notice and bank 
SBSDs and MSBSPs are not required to file the Rule 17a-11 notice with 
their prudential regulator.\782\
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    \780\ See Rule 18a-8, as adopted.
    \781\ See Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-11.
    \782\ Compare paragraph (h) of Rule 17a-11, as amended, with 
paragraph (h) of Rule 18a-8, as adopted.
---------------------------------------------------------------------------

    The Commission estimates that it will receive approximately five 
Rule 18a-8 notices per year, based on the substantially smaller pool of 
possible respondents, as compared with current Rule 17a-11. Under 
current Rule 17a-11, there are approximately 3,582 possible 
respondents--3,764 registered broker-dealers, minus approximately 182 
broker-dealers registered pursuant to Section 15(b)(11)(A) of the 
Exchange Act.\783\ In contrast, the Commission estimates that there 
will be 35 non-broker-dealer SBSDs and non-broker-dealer MSBSPs (25 
bank SBSDs, 6 stand-alone SBSDs, and 4 stand-alone MSBSPs). Assuming 
that each of the 5 Rule 18a-8 notices takes 55 minutes to prepare and 
file, the Commission estimates new Rule 18a-8 will result in an 
industry-wide ongoing burden of 4.6 hours per year.\784\
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    \783\ Rule 17a-11 does not apply to a broker-dealer registered 
pursuant to Section 15(b)(11)(A) of the Exchange Act that is not a 
member of either a national securities exchange or a national 
securities association. See paragraph (j) of Rule 17a-11, as 
amended. The Commission estimates that there are approximately 3,582 
broker-dealers subject to Rule 17a-11 after consulting with SIPC 
(3,764 registered broker-dealers--approximately 182 broker-dealers 
registered pursuant to Section 15(b)(11)(A) of the Exchange Act = 
3,711 Rule 17a-11 respondents).
    \784\ 5 notices per year x (55 minutes per notice / 60 minutes 
per hour) = 4.6 hours per year. These internal hours likely will be 
performed by a compliance manager.
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    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 18a-8 and continues to believe they are 
appropriate.
5. Amendments to Rule 17a-12
    Rule 17a-12, as amended, will require OTC derivatives dealers to 
file FOCUS Report Part II, as amended, instead of FOCUS Report Part 
IIB. This is not so much a new burden as a different burden, since in 
the absence of this amendment these firms would be required to file 
FOCUS Report Part IIB instead. The new lines on FOCUS Report Part II, 
as amended, will generally not be applicable to OTC derivatives 
dealers. Some new lines on FOCUS Report Part II, as amended, require 
similar types of information as FOCUS Report Part IIB, but may be 
phrased in a different way.\785\ Other new lines on FOCUS Report Part 
II, as amended, may require additional detail regarding information 
that was already required to be reported on FOCUS Report Part IIB.\786\ 
Still other new lines on FOCUS Report Part II, as amended, require 
information that the OTC derivative dealers are already required to 
calculate pursuant to another Exchange Act rule.\787\ Finally, some new 
line items on FOCUS Report Part II, as amended, are not applicable to 
OTC derivatives dealers and therefore will not be completed by these 
firms.\788\
---------------------------------------------------------------------------

    \785\ Compare, e.g., FOCUS Report Part IIB, Schedule VI--
Aggregate Securities and Commodities Positions, Line 2 (U.S. 
Government agency), with FOCUS Report Part II, as amended, Schedule 
1--Aggregate Securities, Commodities, and Swaps Positions, Line 2 
(U.S. government agency and U.S. government sponsored enterprises).
    \786\ Compare, e.g., FOCUS Report Part IIB, Schedule VI--
Aggregate Securities and Commodities Positions, Line 2 (U.S. 
Government agency), with FOCUS Report Part II, as amended, Schedule 
1--Aggregate Securities, Commodities, and Swaps Positions, Lines 2A-
2B (requesting a break-out of the portion of U.S. government agency 
and U.S. government sponsored enterprises attributable to mortgage-
backed securities and debt securities).
    \787\ See, e.g., FOCUS Report Part II, as amended, Computation 
of Minimum Regulatory Capital Requirements (Broker-Dealer), Line 9A 
(soliciting the filer's net capital in excess of 120% of the firm's 
minimum net capital requirement).
    \788\ See, e.g., FOCUS Report Part II, as amended, Computation 
of Minimum Regulatory Capital Requirements (Non-Broker-Dealer SBSD).
---------------------------------------------------------------------------

    Although FOCUS Report Part II, as amended, is partially modeled on 
Part

[[Page 68621]]

IIB, the initial burden on OTC derivatives dealers is expected to 
increase, so that firms can analyze revised FOCUS Report Part II. 
However, once firms have analyzed FOCUS Report Part II, as amended, the 
amendments to Rule 17a-12 are not expected to change the estimated 
ongoing burden imposed by Rule 17a-12. The Commission estimates that 
Rule 17a-12, as amended, will impose on each OTC derivative dealers an 
initial burden of 20 hours. The Commission estimates that there are 4 
respondents, resulting in an estimated industry-wide initial burden of 
80 hours.\789\ The Commission estimates that Rule 17a-12, as amended, 
will not change the estimated ongoing burden imposed by Rule 17a-12.
---------------------------------------------------------------------------

    \789\ 20 hours x 4 OTC derivatives dealers = 80 hours. These 
internal hours likely will be performed by a compliance manager.
---------------------------------------------------------------------------

6. New Rule 18a-9
    New Rule 18a-9, which is modeled on Rule 17a-13, will require 
stand-alone SBSDs to establish a securities count program.\790\ As 
explained below, the Commission estimates that new Rule 18a-9 will 
impose an industry-wide initial burden of 225 hours and an industry-
wide ongoing burden of 900 hours per year.
---------------------------------------------------------------------------

    \790\ See Rule 18a-9, as adopted.
---------------------------------------------------------------------------

    The current approved PRA estimate for Rule 17a-13 estimates a 
securities count program imposes an average ongoing cost of 100 hours 
per year.\791\ The Commission is using this estimate, and therefore 
estimates that new Rule 18a-9 will impose an ongoing annual burden of 
100 hours per stand-alone SBSD. The Commission estimates that there are 
6 stand-alone SBSDs, resulting in an estimated industry-wide ongoing 
burden of 600 hours per year.\792\
---------------------------------------------------------------------------

    \791\ See Commission, Supporting Statement for the Paperwork 
Reduction Act Information Collection Submission for Rule 17a-13 
(Feb. 28, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=7182940.
    \792\ 100 hours per year x 6 stand-alone SBSDs = 600 hours per 
year. These internal hours likely will be performed by an operations 
specialist.
---------------------------------------------------------------------------

    The Commission also estimates that new Rule 18a-9 will impose an 
initial burden of 25 hours per firm. The records required by new Rule 
18a-9 should already be recorded by the systems implemented under new 
Rules 18a-5 and 18a-6, and accordingly, the resulting initial burden is 
largely already accounted for under these rules.\793\ However, the 
Commission estimates that the initial cost to establish procedures for 
conducting the securities count program, including identifying the 
persons involved in the program, will create an initial burden of 
approximately 25 hours per stand-alone SBSD, or 150 hours for the 
estimated 6 stand-alone SBSDs.\794\
---------------------------------------------------------------------------

    \793\ However, the Commission assumes that stand-alone SBSDs and 
MSBSPs do not currently have a securities count program in place.
    \794\ 25 hours x 6 stand-alone SBSDs = 150 hours. These internal 
hours likely will be performed by a senior operations manager.
---------------------------------------------------------------------------

    The Commission received no comments regarding its hour and cost 
burden estimates for new Rule 18a-9 and continues to believe they are 
appropriate.
7. Amendments to Rule 18a-10
    Rule 18a-10, as amended, contains an alternative compliance 
mechanism pursuant to which a stand-alone SBSD that is registered as a 
swap dealer and predominantly engages in a swaps business may elect to 
comply with the recordkeeping and reporting requirements of the CEA and 
the CFTC's rules in lieu of complying with Rules 18a-5, 18a-6, 18a-7, 
18a-8, and 18a-9.\795\ The Commission estimates that 3 stand-alone 
SBSDs will elect to operate under Rule 18a-10. These respondents were 
included in the proposing release in other collections of information 
(Rule 18a-5, Rule 18a-6, Rule 18a-7, Rule 18a-8, and Rule 18a-9, as 
proposed), and have been moved to the information collection for new 
Rule 18a-10.\796\
---------------------------------------------------------------------------

    \795\ See Rule 18a-10, as amended.
    \796\ See supra section IV.C.
---------------------------------------------------------------------------

    The Commission estimates the paperwork burden associated with 
transmitting to the Commission a copy of the notice required by 
paragraph (b)(4) of Rule 18a-10, as amended, to be 5 minutes for a 
stand-alone SBSD operating under Rule 18a-10. The Commission further 
estimates that it will receive one notice from a single submitting SBSD 
per year. The Commission is basing this estimate on the smaller pool of 
possible respondents, as compared with new Rule 18a-8.\797\
---------------------------------------------------------------------------

    \797\ See supra section IV.D.4.
---------------------------------------------------------------------------

    Assuming that the single Rule 18a-10 notice takes 5 minutes to 
transmit to the Commission, the Commission estimates Rule 18a-10, as 
amended, will result in an industry-wide ongoing burden of 0.083 hours 
per year.\798\
---------------------------------------------------------------------------

    \798\ 1 notice per year x (5 minutes per notice / 60 minutes per 
hour) = 0.0833 hours per year. These internal hours likely will be 
performed by a compliance manager.
---------------------------------------------------------------------------

8. Amendments to Rule 3a71-6
    Rule 3a71-6, as amended, will require submission of certain 
information to the Commission to the extent foreign SBSDs or MSBSPs 
elect to request a substituted compliance determination with respect to 
the Title VII recordkeeping and reporting requirements. The Commission 
expects that foreign SBSDs and MSBSPs will seek to rely on substituted 
compliance upon registration, and that it is likely that the majority 
of such requests will be made during the first year following the 
effective date of this amendment. Requests will not be necessary with 
regard to applicable rules and regulations of a foreign jurisdiction 
that have previously been the subject of a substituted compliance 
determination in connection with the applicable rules.
    The Commission expects that the majority of substituted compliance 
applications will be submitted by foreign authorities, and that very 
few substituted compliance requests will come from SBSDs or MSBSPs. For 
purposes of this assessment, the Commission estimates that three SBSDs 
or MSBSPs will submit such applications in connection with the 
Commission's recordkeeping and reporting requirements.\799\ After 
consideration of the release adopting Rule 3a71-6, the Commission 
estimates that the total paperwork burden incurred by such entities 
associated with preparing and submitting a request for a substituted 
compliance determination in connection with the recordkeeping and 
reporting requirements will be approximately 240 hours, plus $240,000 
for the services of outside professionals for all 3 requests.\800\
---------------------------------------------------------------------------

    \799\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 29959. 
See also Trade Acknowledgment and Verification of Security-Based 
Swap Transactions, 81 FR at 39382; Capital, Margin, and Segregation 
Adopting Release, 84 FR at 43960.
    \800\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR at 30097 
(``The Commission estimates that the total one-time paperwork burden 
incurred by such entities associated with preparing and submitting a 
request for a substituted compliance determination in connection 
with the business conduct requirements will be approximately 240 
hours, plus $240,000 for the services of outside professionals for 
all three requests''). The Commission further stated that in 
practice those amounts may overestimate the costs of requests 
pursuant to Rule 3a71-6 as adopted, as such requests would solely 
address the business conduct requirements, rather than the broader 
proposed scope of substituted compliance set forth in the Cross-
Border Proposing Release. See id. at 30097, n. 1583. To the extent 
that an SBSD submits substituted compliance requests in connection 
with the business conduct requirements, the trade acknowledgment and 
verification requirements, the capital and margin requirements, and 
the recordkeeping and reporting requirements, the Commission 
believes that the paperwork burden associated with the requests 
would be greater than that associated with a narrower request, given 
the need for more information regarding the comparability of the 
relevant rules and the adequacy of the associated supervision and 
enforcement practices. In the Commission's view, however, the burden 
associated with such a combined request would not exceed the prior 
estimate. See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39833, n. 258.

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[[Page 68622]]

    The Commission received no comments regarding its hour and cost 
burden estimates for Rule 3a71-6, as amended, and continues to believe 
they are appropriate.

E. Collection of Information Is Mandatory

    The collections of information pursuant to the rule amendments and 
new rules, being adopted, are mandatory, as applicable, for broker-
dealers, SBSDs, MSBSPs, certain third-party custodians, and NSEs and 
NSAs. Compliance with the collection of information requirements 
associated with Rule 3a71-6, regarding the availability of substituted 
compliance, is mandatory for all foreign financial authorities, foreign 
SBSDs, or foreign MSBSPs that seek a substituted compliance 
determination.

F. Confidentiality

    The broker-dealer and stand-alone SBSD and MSBSP annual reports 
filed with the Commission are not confidential, except that if the 
statement of financial condition is bound separately from the balance 
of the annual reports and each page of the balance of the annual 
reports is stamped ``confidential,'' then the balance of the annual 
reports shall be deemed confidential to the extent permitted by 
law.\801\ Subject to certain exceptions,\802\ if there are material 
weaknesses, the accountant's report on the compliance report must be 
made available for customers' inspection and, consequently, it will not 
be deemed confidential.\803\ Subject to certain exceptions,\804\ a 
broker-dealer must furnish to its customers its unaudited financial 
statements,\805\ and must provide annually a balance sheet with 
appropriate notes prepared in accordance with generally accepted 
accounting principles and which must be audited if the broker-dealer is 
required to file audited financial statements with the Commission.\806\
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    \801\ See paragraph (e)(3) of Rule 17a-5, as amended; paragraph 
(d)(2) of Rule 18a-7, as adopted.
    \802\ See paragraph (c)(1)(i) through (iii) of Rule 17a-5, as 
amended.
    \803\ See paragraph (c)(2)(iv) of Rule 17a-5, as amended.
    \804\ See paragraph (c)(1)(i) through (iii) of Rule 17a-5, as 
amended.
    \805\ See paragraph (c)(3) of Rule 17a-5, as amended.
    \806\ See paragraph (c)(2)(i) of Rule 17a-5, as amended.
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    Stand-alone SBSDs and MSBSPs must also make publicly available on 
their websites audited and unaudited financial statements, and also 
make these documents available in writing, upon request, to any person 
that has a security-based swap account.\807\ A stand-alone SBSD will 
also be required to disclose on its website at the same time: (1) A 
statement of the amount of the firm's net capital and required net 
capital and other information, if applicable, related to the firm's net 
capital; \808\ and (2) if, in connection with the firm's most recent 
annual reports, the report of the independent public accountant 
identifies one or more material weaknesses, a copy of the report.\809\
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    \807\ See paragraph (b) of Rule 18a-7, as adopted.
    \808\ See paragraph (b)(1)(ii) of Rule 18a-7, as adopted.
    \809\ See paragraphs (b)(1)(iii) of Rule 18a-7, as adopted.
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    The forms that the Commission has adopted for use by applicants for 
registration as SBSDs or MSBSPs provides for applicants to notify the 
Commission regarding intended reliance on substituted compliance.\810\ 
The Commission generally will make requests for substituted compliance 
determinations public, subject to requests for confidential treatment 
being submitted pursuant to any applicable provisions governing 
confidentiality under the Exchange Act.\811\
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    \810\ See Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants, 80 FR at 49049.
    \811\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No. 
72372 (June 25, 2014, 79 FR 47278, 47359 (Aug. 12, 2014).
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    With respect to the other information collected under the rule 
amendments and new rules being adopted, the firm can request the 
confidential treatment of the information.\812\ If such a confidential 
treatment request is made, the Commission anticipates that it will keep 
the information confidential subject to the provisions of applicable 
law.\813\
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    \812\ See 17 CFR 200.83. Information regarding requests for 
confidential treatment of information submitted to the Commission is 
available at http://www.sec.gov/foia/howfo2.htm#privacy.
    \813\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the 
Commission).@G. Retention Period for Recordkeeping Requirements
---------------------------------------------------------------------------

    Rule 17a-4, as amended, specifies the required retention periods 
for a broker-dealer.\814\ New Rule 18a-6 specifies the required 
retention periods for non-broker-dealer SBSDs and non-broker-dealer 
MSBSPs.\815\ Many of the required records must be retained for three 
years; certain other records must be retained for longer periods.\816\
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    \814\ See Rule 17a-4, as amended.
    \815\ See Rule 18a-6, as adopted.
    \816\ See Rule 17a-4, as amended; Rule 18a-6, as adopted.
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V. Economic Analysis

A. Introduction

    The Commission is sensitive to the costs and benefits of its rules. 
The following economic analysis presents the costs and benefits--
including the effects on efficiency, competition, and capital 
formation--that will result from the new recordkeeping, reporting, 
notification, and securities count rules for stand-alone SBSDs, stand-
alone MSBSPs, bank SBSDs, and bank MSBSPs and from the amendments to 
Rules 17a-3, 17a-4, 17a-5, 17a-11 and 17a-12 with respect to firms that 
are registered as broker-dealers. The costs and benefits of adopting 
these new rules and rule amendments are discussed below and have 
informed the policy choices described throughout this release.
    As discussed more fully in section II. above, pursuant to Sections 
15F and 17(a) of the Exchange Act, the Commission is amending Rules 
17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 to establish recordkeeping, 
reporting, and notification requirements for broker-dealers, including 
broker-dealer SBSDs and MSBSPs to account for their security-based swap 
activities. Pursuant to Section 15F of the Exchange Act, the Commission 
is adopting new Rules 18a-5 through 18a-9 to establish recordkeeping, 
reporting, and notification requirements for stand-alone SBSDs, stand-
alone MSBSPs, bank SBSDs, and bank MSBSPs, and securities count 
requirements for stand-alone SBSDs. Further, pursuant to Sections 15F 
and 17(a) of the Exchange Act, the Commission is amending FOCUS Report 
Part II that consolidates proposed Form SBS and existing FOCUS Report 
Parts II, IIB, and II CSE that will be filed by nonbank SBSDs, nonbank 
MSBSPs, stand-alone broker-dealers, and stand-alone OTC derivatives 
dealers to report financial information. The Commission is adopting 
FOCUS Report Part IIC for bank SBSDs and MSBSPs to report their 
financial information because these entities will be required to 
provide more limited information relative to other SBSDs and MSBSPs. 
The Commission believes these rules and rule amendments will help 
regulators

[[Page 68623]]

determine whether relevant market participants comply with the recently 
adopted capital, margin, and segregation requirements.\817\
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    \817\ See Capital, Margin, and Segregation Adopting Release, 84 
FR 43872.
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    As discussed above, the Commission is establishing limited and full 
alternative compliance mechanisms. The limited alternative compliance 
mechanism in Rules 17a-3 and 18a-5 will allow an SBSD or MSBSP that 
also is registered with the CFTC as a swap dealer or major swap 
participant to comply with the requirements to make and keep certain 
current trade blotters, customer account ledgers, and stock records 
solely with respect to required information regarding security-based 
swaps by complying with the requirements of the CEA and the rules 
thereunder applicable to swap dealers and major swap participants if 
the SBSD or MSBSP meets certain conditions.\818\
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    \818\ See Rule 17a-3, as amended, and Rule 18a-5, as adopted. 
See also discussion in section II.E.1. of this release.
---------------------------------------------------------------------------

    The Commission is amending the full alternative compliance 
mechanism in existing Rule 18a-10 that permits certain SBSDs that are 
registered as swap dealers and that predominantly engage in a swaps 
business to elect to comply with the capital, margin, and segregation 
requirements of the CEA and the CFTC's rules in lieu of complying with 
the capital, margin, and segregation requirements in Rules 18a-1, 18a-
3, and 18a-4. The amendments to Rule 18a-10 will permit firms that will 
operate under Rule 18a-10 to elect to comply with the recordkeeping and 
reporting requirements of the CEA and the CFTC's rules in lieu of 
complying with Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.\819\ The 
Commission believes the availability of the alternative compliance 
mechanisms will promote harmonization with CFTC requirements and reduce 
compliance costs for eligible SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \819\ See Rule 18a-10, as amended. See also discussion in 
section II.E.2. of this release.
---------------------------------------------------------------------------

    Additionally, as discussed above, the Commission is amending Rule 
3a71-6 to provide non-U.S. stand-alone SBSDs and non-U.S. stand-alone 
MSBSPs with the potential to utilize substituted compliance with 
comparable foreign requirements to satisfy the recordkeeping and 
reporting requirements of Section 15F of the Exchange Act and Rules 
18a-5, 18a-6, 18a-7, 18a-8 and 18a-9 thereunder.\820\ The Commission 
believes that allowing for the possibility of substituted compliance 
will help achieve the benefits of the recordkeeping and reporting 
requirements being adopted in this document in a manner that avoids the 
costs that non-U.S. stand-alone SBSDs and non-U.S. stand-alone MSBSPs 
would have to bear due to regulatory duplication or conflict.
---------------------------------------------------------------------------

    \820\ See section II.F.2. of this release.
---------------------------------------------------------------------------

    The sections below present an overview of the security-based swap 
market, a discussion of the general costs and benefits of the adopted 
recordkeeping and reporting requirements, and a discussion of the costs 
and benefits of each amendment and new rule. The Economic Analysis also 
includes a discussion of the potential effects of the rule amendments 
and new rules on competition, efficiency, and capital formation. Where 
possible, the Commission has attempted to quantify the costs, benefits, 
and effects on efficiency, competition, and capital formation expected 
to result from adopting these rules. At times, however, the Commission 
is unable to quantify the economic effects because, as explained in 
detail below, it lacks the information necessary to provide a 
reasonable estimate, and in those instances, the discussion of the 
economic effects of the rule or amendment is qualitative in nature.

B. Baseline of Economic Analysis

    To assess the economic impact of the final rules described in this 
release, the Commission employs as a baseline the security-based swap 
market as it exists at the time of this release, including applicable 
rules that the Commission already has adopted but excluding rules that 
the Commission has proposed but not yet finalized. The baseline for 
analysis includes the statutory provisions that currently govern the 
security-based swap market pursuant to the Dodd-Frank Act and rules 
adopted in the Commission's intermediary definitions release,\821\ 
cross-border release,\822\ SDR registration release,\823\ security-
based swap entity registration release,\824\ Regulation SBSR release 
and amendments,\825\ U.S. activity release,\826\ business conduct 
release,\827\ and trade acknowledgment release \828\ as these statutes 
and final rules--even if compliance is not yet required--are part of 
the existing regulatory landscape that market participants expect to 
govern their security-based swap activity.
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    \821\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77 
FR 30597.
    \822\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, 79 FR 47278.
    \823\ See Security-Based Swap Data Repository Registration, 
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb. 
11, 2015), 80 FR 14438 (Mar. 19, 2015).
    \824\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 80 FR 48964.
    \825\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, 80 FR 14563. See also Regulation 
SBSR--Reporting and Dissemination of Security-Based Swap 
Information, 81 FR 53546.
    \826\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office of an 
Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act 
Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016).
    \827\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR 29960.
    \828\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR 39808.
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    Additionally, the baseline includes any recordkeeping and reporting 
rules currently applicable to participants in the security-based swap 
market including applicable rules previously adopted by the 
Commission,\829\ but excludes the rules and rule amendments addressed 
in this release. With respect to the minor amendments to Rules 17a-3, 
17a-4, 17a-5, 17a-11, and 17a-12, the baseline for purposes of this 
economic analysis is the current recordkeeping and reporting regime for 
broker-dealers under such rules.
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    \829\ The Commission has temporarily excluded security-based 
swaps from the definition of ``security.'' See section III.C. of 
this release. Thus, for purposes of the Commission's baseline 
analysis for broker-dealers, security-based swap activities will be 
excluded.
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    The following sections provide an overview of aspects of the 
security-based swap market that are likely to be most affected by the 
amendments being adopted in this document, as well as elements of the 
current market structure, such as central clearing and platform 
trading, that are likely to determine the scope of transactions that 
will be covered by them.
1. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part, 
by available data on security-based swap transactions, though the 
Commission acknowledges that limitations in the data limit the extent 
to which it is possible to quantitatively characterize the market.\830\ 
Since these data do not

[[Page 68624]]

cover the entire market, the Commission has analyzed market activity 
using a sample of transactions data that includes only certain segments 
of the market. The Commission believes, however, that the data 
underlying this analysis provides reasonably comprehensive information 
regarding single-name credit default swap (``CDS'') transactions and 
the composition of the participants in the single-name CDS market.
---------------------------------------------------------------------------

    \830\ The Commission also relies on qualitative information 
regarding market structure and evolving market practices provided by 
commenters, both in letters and in meetings with Commission staff, 
and knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

    Specifically, the analysis of the current state of the security-
based swap market is based on data obtained from the DTCC Derivatives 
Repository Limited Trade Information Warehouse (``TIW''), especially 
data regarding the activity of market participants in the single-name 
CDS market during the period from 2008 to 2017. Although the definition 
of security-based swaps is not limited to single-name CDS,\831\ single-
name CDS contracts make up a majority of security-based swaps, and the 
Commission believes that the single-name CDS data are sufficiently 
representative of the market to inform our analysis of the current 
security-based swap market. According to data published by the Bank for 
International Settlements (``BIS''), the global notional amount 
outstanding in single-name CDS was approximately $4.6 trillion,\832\ in 
multi-name index CDS was approximately $4.4 trillion, and in multi-
name, non-index CDS was approximately $343 billion.\833\ The total 
gross market value outstanding in single-name CDS was approximately 
$130 billion, and in multi-name CDS instruments was approximately $174 
billion.\834\ The global notional amount outstanding in equity forwards 
and swaps as of December 2017 was $3.21 trillion, with total gross 
market value of $197 billion.\835\
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    \831\ While other repositories may collect data on transactions 
in total return swaps on equity and debt, the Commission does not 
currently have access to such data for these products (or other 
products that are security-based swaps). Additionally, the 
Commission explains below that data related to single-name CDS 
provides reasonably comprehensive information for the purpose of 
this analysis.
    \832\ The global notional amount outstanding represents the 
total face amount used to calculate payments under outstanding 
contracts. The gross market value is the cost of replacing all open 
contracts at current market prices.
    \833\ See BIS, Semi-annual OTC derivatives statistics at 
December 2017, Table 10.1, available at https://www.bis.org/statistics/d10_1.pdf (accessed May 18, 2018).
    \834\ See id.
    \835\ These totals include swaps and security-based swaps, as 
well as products that are excluded from the definition of ``swap,'' 
such as certain equity forwards. See OTC, equity-linked derivatives 
statistics, Table D8, available at https://www.bis.org/statistics/d8.pdf (accessed May 18, 2018). For the purposes of this analysis, 
the Commission assumes that multi-name index CDS are not narrow-
based index CDS and therefore, do not fall within the security-based 
swap definition. See 15 U.S.C. 78c(a)(68)(A); see also Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 77 FR 48208. The Commission also assumes that all 
instruments reported as equity forwards and swaps are security-based 
swaps, potentially resulting in underestimation of the proportion of 
the security-based swap market represented by single-name CDS. 
Therefore, when measured on the basis of gross notional outstanding 
single-name CDS contracts appear to constitute roughly 59% of the 
security-based swap market. Although the BIS data reflects the 
global OTC derivatives market, and not just the U.S. market, the 
Commission has no reason to believe that these ratios differ 
significantly in the U.S. market
---------------------------------------------------------------------------

    The Commission further notes that the data available from TIW does 
not encompass those CDS transactions that both: (i) Do not involve U.S. 
counterparties; \836\ and (ii) are based on non-U.S. reference 
entities. Notwithstanding this limitation, the TIW single-name CDS data 
should provide sufficient information to permit the Commission to 
identify the types of market participants active in the security-based 
swap market and the general pattern of dealing within that market.\837\
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    \836\ Following publication of the Warehouse Trust Guidance on 
CDS data access, TIW surveyed market participants, asking for the 
physical address associated with each of their accounts (i.e., where 
the account is organized as a legal entity). This physical address 
is designated the registered office location by TIW. When an account 
reports a registered office location, the Commission has assumed 
that the registered office location reflects the place of domicile 
for the fund or account. When an account does not report a 
registered office location, the Commission has assumed that the 
settlement country reported by the investment adviser or parent 
entity to the fund or account is the place of domicile. Thus, for 
purposes of this analysis, the Commission has classified accounts as 
``U.S. counterparties'' when they have reported a registered office 
location in the United States. The Commission notes, however, that 
this classification is not necessarily identical in all cases to the 
definition of U.S. person under Rule 3a71-3(a)(4).
    \837\ The challenges the Commission faces in estimating measures 
of current market activity stem, in part, from the absence of 
comprehensive reporting requirements for security-based swap market 
participants. The Commission has adopted rules regarding trade 
reporting, data elements, and public reporting for security-based 
swaps that are designed to, when fully implemented, provide the 
Commission with additional measures of market activity that will 
allow us to better understand and monitor activity in the security-
based swap market. See Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information, 81 FR 53545.
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2. Security-Based Swap Market: Market Participants and Activity
    The final rules and rule amendments will apply regulatory 
requirements to security-based swap market participants. The following 
sections provide information about the security-based swap market, 
focusing on the subset of participants likely to incur recordkeeping 
and reporting requirements as a result of these rules and rule 
amendments and the activities that would be subject to these 
requirements.
a. Security-Based Swap Dealers
    Security-based swap activity is concentrated in a relatively small 
number of dealers, which already represent a small percentage of all 
market participants active in the security-based swap market. Based on 
an analysis of the 2017 single-name CDS data, the Commission's earlier 
estimates of the number of entities likely to register as security-
based swap dealers remain largely unchanged. Of the approximately 50 
entities that the Commission estimates might register as security-based 
swap dealers, the Commission believes that it is reasonable to expect 
22 to be non-U.S. persons.
    Many of these dealers are already subject to other regulatory 
frameworks under U.S. law based on their role as intermediaries or on 
the volume of their positions in other products, such as swaps. Persons 
who will register as SBSDs and MSBSPs are likely also to be engaged in 
swap activity, which is subject to regulation by the CFTC.\838\ This 
overlap reflects the relationship between single-name CDS contracts, 
which are security-based swaps, and index CDS contracts, which may be 
swaps or security-based swaps. A single-name CDS contract covers 
default events for a single reference entity or reference security. 
Index CDS contracts and related products make payouts that are 
contingent on the default of index components and allow participants in 
these instruments to gain exposure to the credit risk of the basket of 
reference entities that comprise the index, which is a function of the 
credit risk of the index components. A default event for a reference 
entity that is an index component will result in payoffs on both 
single-name CDS written on the reference entity and index CDS written 
on indices that contain the reference entity. Because of this 
relationship between the payoffs of single-name CDS and index CDS 
products, prices of these

[[Page 68625]]

products depend upon one another,\839\ creating hedging opportunities 
across these markets.
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    \838\ See section II. of this release. See also Application of 
Certain Title VII Requirements to Security-Based Swap Transactions 
Connected with a Non-U.S. Person's Dealing Activity That Are 
Arranged, Negotiated, or Executed by Personnel Located in a U.S. 
Branch or Office or in a U.S. Branch or Office of an Agent, Exchange 
Act Release No. 74834 (Apr. 29, 2015), 80 FR 27444, 27458 (May 13, 
2015); Registration Process for Security-Based Swap Dealers and 
Major Security-Based Swap Participants, 80 FR at 49000.
    \839\ ``Correlation'' typically refers to linear relationships 
between variables; ``dependence'' captures a broader set of 
relationships that may be more appropriate for certain swaps and 
security-based swaps. See, e.g., George Casella and Roger L. Berger, 
Statistical Inference 171 (2002).
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active 
in one market are likely to be active in the other. Commission staff's 
analysis of approximately 4,358 TIW accounts that participated in the 
market for single-name CDS in 2017 revealed that approximately 2,936 of 
those accounts, or 67%, also participated in the market for index CDS. 
Of the accounts that participated in both markets, data regarding 
transactions in 2017 suggests that, contingent upon an account 
transacting in notional volume of index CDS in the top third of 
accounts, the probability of the same account landing in the top third 
of accounts in terms of single-name CDS notional volume is 
approximately 38%; by contrast, the probability of the same account 
landing in the bottom third of accounts in terms of single-name CDS 
notional volume is only 5.4%.
    The CFTC has adopted recordkeeping and reporting requirements that 
apply to registered swap dealers. The Commission estimates that 
approximately 46 of the 50 expected security-based swap dealers will be 
dually registered with the CFTC and therefore be subject to CFTC 
requirements.\840\ Accordingly, the recordkeeping baseline for entities 
that are currently registered with the CFTC as swap dealers or major 
swap participants includes the activities related to compliance with 
the CFTC's recordkeeping and reporting requirements for swaps.
---------------------------------------------------------------------------

    \840\ See, e.g., Swap Data Recordkeeping and Reporting 
Requirements: Pre-Enactment and Transition Swaps (Final Rule), 77 FR 
35200 (June 12, 2012); Swap Dealer and Major Swap Participant 
Recordkeeping, Reporting, and Duties Rules, 77 FR 20128 (Apr. 3, 
2012).
---------------------------------------------------------------------------

    Additionally, based on an analysis of TIW data and filings with the 
Commission, the Commission estimates that 16 market participants that 
will register as security-based swap dealers have already registered 
with the Commission as broker-dealers and are thus subject to Exchange 
Act and FINRA requirements applicable to such entities. As the 
Commission discusses below, some registered dealers may also be subject 
to similar requirements in one or more foreign jurisdictions.
    Finally, the Commission also notes that it has adopted rules for 
the registration of security-based swap dealers and major security-
based swap participants, although market participants are not yet 
required to comply with those rules. Thus, there are not yet any 
security-based swap dealers or major security-based swap participants 
registered with the Commission.
b. Security-Based Swap Market Activity
    As already noted, firms that act as dealers play a central role in 
the security-based swap market. Based on an analysis of 2017 single-
name CDS data in TIW, accounts of those firms that are likely to exceed 
the security-based swap dealer de minimis thresholds and trigger 
registration requirements intermediated transactions with a gross 
notional amount of approximately $2.9 trillion, approximately 55% of 
which was intermediated by the top five dealer accounts.\841\
---------------------------------------------------------------------------

    \841\ The Commission staff analysis of TIW transaction records 
indicates that approximately 99% of single-name CDS price-forming 
transactions in 2017 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of 
counterparties. Approximately 21% of accounts of firms expected to 
register as security-based dealers and observable in TIW have entered 
into security-based swaps with over 1,000 unique counterparty accounts 
as of year-end 2017.\842\ Another 25% of these accounts transacted with 
500 to 1,000 unique counterparty accounts; 29% transacted with 100 to 
500 unique accounts; and 25% of these accounts intermediated security-
based swaps with fewer than 100 unique counterparties in 2017. The 
median dealer account transacted with 495 unique accounts (with an 
average of approximately 570 unique accounts). Non-dealer 
counterparties transacted almost exclusively with these dealers. The 
median non-dealer counterparty transacted with two dealer accounts 
(with an average of approximately three dealer accounts) in 2017.
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    \842\ Many dealer entities and financial groups transact through 
numerous accounts. Given that individual accounts may transact with 
hundreds of counterparties, the Commission may infer that entities 
and financial groups may transact with at least as many 
counterparties as the largest of their accounts.
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    Figure 2 below describes the percentage of global, notional 
transaction volume in North American corporate single-name CDS reported 
to TIW between January 2008 and December 2017, separated by whether 
transactions are between two ISDA-recognized dealers (interdealer 
transactions) or whether a transaction has at least one non-dealer 
counterparty. Figure 2 also shows that the portion of the notional 
volume of North American corporate single-name CDS represented by 
interdealer transactions has remained fairly constant through 2015 
before falling from approximately 72% in 2015 to approximately 40% in 
2017. This fall corresponds to the availability of clearing to non-
dealers. Interdealer transactions continue to represent a significant 
fraction of trading activity, even as notional volume has declined over 
the past ten years,\843\ from more than $6 trillion in 2008 to less 
than $700 billion in 2017.\844\
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    \843\ The start of this decline predates the enactment of the 
Dodd-Frank Act and the proposal of rules thereunder, which is 
important to note for the purpose of understanding the economic 
baseline for this rulemaking.
    \844\ This estimate is lower than the gross notional amount of 
$4.6 trillion noted above as it includes only the subset of single-
name CDS referencing North American corporate documentation.

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[[Page 68626]]

[GRAPHIC] [TIFF OMITTED] TR16DE19.001

    The high level of interdealer trading activity reflects the central 
position of a small number of dealers, each of which intermediates 
trades with many hundreds of counterparties. While the Commission is 
unable to quantify the current level of trading costs for single-name 
CDS, these dealers appear to enjoy market power as a result of their 
small number and the large proportion of order flow that they privately 
observe.
    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American 
corporate single-name CDS reflected in the set of data that the 
Commission analyzed was between counterparties domiciled in the United 
States and counterparties domiciled abroad, as shown in Figure 3 below. 
Using the self-reported registered office location of the TIW accounts 
as a proxy for domicile, the Commission estimates that only 12% of the 
global transaction volume by notional volume between 2008 and 2017 was 
between two U.S.-domiciled counterparties, compared to 49% entered into 
between one U.S.-domiciled counterparty and a foreign-domiciled 
counterparty and 39% entered into between two foreign-domiciled 
counterparties.\845\
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    \845\ For purposes of this discussion, the Commission has 
assumed that the registered office location reflects the place of 
domicile for the fund or account, but this domicile does not 
necessarily correspond to the location of an entity's sales or 
trading desk. See Security-Based Swap Transactions Connected With a 
Non-U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office of an 
Agent; Security-Based Swap Dealer De Minimis Exception, 81 FR at 
8607, n. 83.
---------------------------------------------------------------------------

    If the Commission instead considers the number of cross-border 
transactions from the perspective of the domicile of the corporate 
group (e.g., by classifying a foreign bank branch or foreign subsidiary 
of a U.S. entity as domiciled in the United States), the percentages 
shift significantly. Under this approach, the fraction of transactions 
entered into between two U.S.-domiciled counterparties increases to 
34%, and to 51% for transactions entered into between a U.S.-domiciled 
counterparty and a foreign-domiciled counterparty. By contrast, the 
proportion of activity between two foreign-domiciled counterparties 
drops from 39% to 15%. This change in respective shares based on 
different classifications suggests that the activity of foreign 
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts 
for a higher percentage of security-based swap activity than U.S. 
subsidiaries of foreign firms and U.S. branches of foreign banks. It 
also demonstrates that financial groups based in the United States are 
involved in an overwhelming majority (approximately 85%) of all 
reported transactions in North American corporate single-name CDS.
    Financial groups based in the United States are also involved in a 
majority of interdealer transactions in North American corporate 
single-name CDS. Of the 2017 transactions on North American corporate 
single-name CDS between two ISDA-recognized dealers and their branches 
or affiliates, 94% of transaction notional volume involved at least one 
account of an entity with a U.S. parent. The Commission notes, in 
addition, that a majority of North American corporate single-name CDS 
transactions occur in the interdealer

[[Page 68627]]

market or between dealers and foreign non-dealers, with the remaining 
portion of the market consisting of transactions between dealers and 
U.S.-person non-dealers. Specifically, 60% of North American corporate 
single-name CDS transactions involved either two ISDA-recognized 
dealers or an ISDA-recognized dealer and a foreign non-dealer. 
Approximately 39% of such transactions involved an ISDA-recognized 
dealer and a U.S.-person non-dealer.
[GRAPHIC] [TIFF OMITTED] TR16DE19.002

c. Participation of Banks and Broker-Dealers
    A high degree of concentration is equally prevalent in derivatives 
activity within the U.S. banking system: According to the OCC, at the 
end of the fourth quarter of 2017, derivatives activity in the U.S. 
banking system continues to be dominated by a small group of large 
financial institutions. Four large commercial banks represent 89.4% of 
the total banking industry notional amounts and 85.9% of industry net 
current credit exposure.\846\ This concentration largely appears to 
reflect the fact that larger entities are well-capitalized and 
therefore possess competitive advantages in engaging in dealing 
activities by providing potential counterparties with adequate 
assurances of financial performance.\847\
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    \846\ See OCC, Quarterly Report on Bank Trading and Derivatives 
Activities, Fourth Quarter 2017(available at https://www.occ.treas.gov/topics/capital-markets/financial-markets/derivatives/pub-derivatives-quarterly-qtr4-2017.pdf).
    \847\ See, e.g., Craig Pirrong, Rocket Science, Default Risk and 
The Organization of Derivatives Markets, (Working Paper 17-18, 
2006), available at http://www.cba.uh.edu/spirrong/Derivorg1.pdf 
(noting that counterparties seek to reduce risk of default by 
engaging in credit derivative transactions with well-capitalized 
firms). See also Further Definitions of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'', 77 
FR at 30739-42.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \848\ This column reflects the number of participants who are 
also trading for their own accounts.

    Table 1--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap Market Through a Registered Investment
                Adviser, an Unregistered Investment Adviser, or Directly as a Transacting Agent, From November 2006 Through December 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Account holders by type                       Number     Represented by a registered
                                                              investment adviser
                                                 Represented by an
                                              unregistered investment
                                                      adviser
                                            Participant is transacting
                                                    agent \848\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds.............................      3,857           1,973              51%           1,859              48%              25               1%
DFA Special Entities......................      1,319           1,262              96%              37               3%              20               2%
Registered Investment Companies...........      1,159           1,082              93%              73               6%               4               0%
Banks (non-ISDA-recognized dealers).......        349              20               6%               8               2%             321              92%

[[Page 68628]]

 
Insurance Companies.......................        301             196              65%              34              11%              71              24%
ISDA-Recognized Dealers...................         91               0               0%               0               0%              91             100%
Foreign Sovereigns........................         83              63              76%               3               4%              17              20%
Non-Financial Corporations................         75              52              69%               4               5%              19              25%
Finance Companies.........................         20              11              55%               0               0%               9              45%
Other/Unclassified........................      5,883           3,745              64%           1,887              32%             251               4%
                                           -------------------------------------------------------------------------------------------------------------
    All...................................     13,137           8,404              64%           3,905              30%             828               6%
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Existing Regulation of OTC Derivatives Market Participants and 
Broker-Dealers
    As discussed above, the adopted rules and amendments will apply to 
various different entities that the Commission anticipates will 
register as SBSDs or MSBSPs, including stand-alone firms, banks, and 
registered broker-dealers. In addition, the adopted amendments will 
also apply to certain stand-alone broker-dealers that do not register 
as an SBSD or MSBSP but nonetheless still engage in security-based swap 
transactions. For all of these entities, the economic baseline includes 
the reports and records these firms currently generate in the ordinary 
course of their business and in anticipation of regulatory reporting 
requirements, such as Regulation SBSR's requirement for SBSDs and 
MSBSPs to report each security-based swap transaction to a registered 
SDR \849\ and to establish, maintain, and enforce written policies and 
procedures that are designed to ensure compliance with security-based 
swap transaction reporting obligations.\850\ Because compliance with 
registration rules for SBSDs and MSBSPs is not yet required,\851\ 
however, there are no entities of any type currently registered as 
SBSDs or MSBSPs and the Commission can only arrive at an estimate of 
the number and type of these registrants based on an analysis of the 
2017 single-name CDS data.\852\
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    \849\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, 81 FR 53545. While the Commission 
recognizes that SBSDs and MSBSPs are not yet required to comply with 
Regulation SBSR, the Commission nevertheless believes that these 
firms have invested in reporting infrastructure in anticipation of 
future regulatory reporting requirements.
    \850\ See id.
    \851\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 80 FR 48964.
    \852\ See section V.B.2.a. of this release for the Commission's 
estimates of the potential number of registrants based on an 
analysis of the 2017 single-name CDS data.
---------------------------------------------------------------------------

    Below, the Commission summarizes, based on available information, 
the current recordkeeping, reporting, notification, and securities 
count practices of these various entities, including those practices 
that are required by regulation and those that have been independently 
adopted by the entities.
a. Stand-Alone SBSDs and MSBSPs
    Certain firms that are neither banks nor broker-dealers that 
participate in the market for security-based swaps will register with 
the Commission as stand-alone SBSDs and MSBSPs. The Commission believes 
that firms engaged in the security-based swap market currently produce, 
as part of their ordinary business practices, financial reports such as 
a balance sheet and a quarterly and year-end income statement that are 
included in the financial reporting requirements the Commission is 
adopting in this document. Such firms may not, however, produce annual 
audited financial statements, as required under the adopted rules. The 
Commission also believes that firms engaged in the security-based swap 
business currently maintain records documenting the firms' derivatives 
positions to facilitate, among other things, effective risk management. 
The Commission expects that these firms maintain these records for the 
duration for which they hold a given position and for some period of 
time thereafter. Moreover, the Commission believes that firms that 
eventually register with the Commission as SBSDs or as MSBSPs will 
likely create transaction records to submit to registered SDRs as a 
result of their anticipated reporting obligations under Regulation SBSR 
and will likely have order management systems in place to record 
information that is required to be submitted under Regulation SBSR.
    Given that the Commission has not previously regulated these firms, 
the Commission does not have information regarding the recordkeeping 
and reporting costs these nonbank and non-broker-dealer firms presently 
incur in the ordinary course of business. As noted above, the 
Commission believes that these firms, however, maintain some records 
documenting their business activities as a matter of routine business 
practice and maintain some transaction records in anticipation of their 
reporting obligations under Regulation SBSR. Any new costs imposed by 
the new rules should be incremental to the costs currently being 
incurred by these entities.
b. Bank SBSDs and MSBSPs
    In addition to stand-alone SBSDs and MSBSPs, the Commission expects 
certain banks to register as SBSDs and MSBSPs. The economic baseline 
for banks that participate in the security-based swap market includes 
the existing recordkeeping, record retention, reporting, and 
notification requirements that are imposed on banks by their relevant 
prudential regulator as well as the reports and records these firms 
currently generate in the ordinary course of their business.
    Prudential regulators already subject banks to recordkeeping and 
retention requirements.\853\ In addition, banks must file financial 
statements and supporting schedules known as ``call reports'' with 
their prudential regulator.\854\ The Commission believes that the most 
common form of call report for a bank that will register as an SBSD or 
MSBSP is FFIEC Form 031.\855\ Like the FOCUS Report, FFIEC Form 031 
elicits financial and operational information about a bank, which is 
entered into uniquely numbered line

[[Page 68629]]

items. A bank must report details about its assets, liabilities, and 
equity capital on Schedule RC to FFIEC Form 031.\856\ A bank must also 
report details about its regulatory capital on Schedule RC-R to FFIEC 
Form 031.\857\ The information elicited on Schedule RC-R is designed to 
facilitate an analysis of the bank's regulatory capital. A bank must 
report details about its income (loss) and expenses on Schedule RI to 
FFIEC Form 031.\858\
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    \853\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR 
219.21 through 219.24 (FDIC); 12 CFR 344.4 (FDIC).
    \854\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12 
U.S.C. 1464.
    \855\ FFIEC Form 031 is filed by banks with domestic and foreign 
offices, which the Commission believes will characterize most bank 
SBSDs.
    \856\ See FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-
29. Schedule RC also has a Memoranda section that which elicits 
information about bank's external auditors and fiscal year end date. 
See FFIEC Form 031, Schedule RC, Balance Sheet, Memoranda, Lines 1-
2.
    \857\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital, 
Lines 1-62. Schedule RC-R also has a ``Memoranda'' section that 
elicits detail about derivatives. See FFIEC Form 031, Schedule RC-R, 
Regulatory Capital, Memoranda, Lines 1-2.
    \858\ See FFIEC Form 031, Schedule RI, Income Statement, Lines 
1-14. Schedule RI also has a ``Memoranda'' section that elicits 
further detail about income (loss). See FFIEC Form 031, Schedule RI, 
Income Statement, Memoranda, Lines 1-14.
---------------------------------------------------------------------------

    The Commission has estimated the cost of the existing 
recordkeeping, record retention, reporting, and notification 
requirements that are applicable to nationally chartered banks under 
existing regulations issued by the OCC. The Commission arrived at the 
estimate by examining PRA collections to which national banks are 
subject and selecting those that are analogous to the recordkeeping, 
record retention, reporting, and notification rules the Commission is 
adopting herein.\859\ The Commission then estimated that reporting 
burdens generate approximately $79/hour of cost for national banks and 
that recordkeeping burdens generate approximately $30/hour of cost for 
national banks.\860\ The Commission estimates that national banks 
currently incur annual costs of $55,982,398 to comply with the OCC's 
financial reporting, notification and recordkeeping rules.\861\ The 
OCC's rules generally relate to banking activities, not securities and 
security-based swap activities. The Commission thus recognizes that 
some of the costs reflected in the OCC's rules may not be analogous to 
costs that may be imposed by the Commission's new rules. Nonetheless, 
these cost estimates may help provide context and cost ranges with 
respect to the nationally chartered banks impacted by the Commission's 
new rules.
---------------------------------------------------------------------------

    \859\ PRA collections for OCC-regulated national banks, together 
with PRA collections for other Federal regulatory agency rules, are 
available at www.reginfo.gov/public/do/PRAMain. Given that different 
banks comply with different prudential regulations, the Commission 
recognizes that the estimate based on OCC regulations represents one 
estimate of the costs imposed on banks by currently applicable 
recordkeeping, record retention, reporting and notification 
requirements.
    \860\ This assumption is derived from OCC staff's description of 
the hourly costs it estimates in connection with Paperwork Reduction 
Act burdens. For the purposes of this Economic Analysis, the 
Commission assumes that reporting burdens will be performed 5% by 
clerical staff at $20 an hour, 10% by managerial or technical staff 
at $40 an hour, 55% by senior management at $80 an hour, and 30% by 
legal counsel at $100 an hour, which, in the aggregate, equals $79 
an hour. The Commission assumes that recordkeeping burdens will be 
performed 70% by clerical staff at $20 an hour, 20% by managerial or 
technical staff at $40 an hour, and 10% by senior management at $80 
an hour, which in the aggregate, equals $30 an hour.
    \861\ The Commission derived the estimates of the hourly burden 
associated with these OCC rules from the number of hours approved 
for information collection purposes by the OMB. See the chart below 
for a representation of the calculation methodology:
---------------------------------------------------------------------------

c. Broker-Dealers, SBSD Broker-Dealers, and MSBSP Broker-Dealers
    As noted above, the Commission expects some broker-dealers to 
register as broker-dealer SBSDs or broker-dealer MSBSPs, while other 
broker-dealers engaging in security-based swap transactions may be 
subject to regulation as stand-alone broker dealers. A broker-dealer 
that engages in security-based swap activities is currently subject to 
existing regulatory requirements, including capital, margin, 
segregation, recordkeeping, reporting, notification, and securities 
count requirements.\862\ Specifically, the existing broker-dealer 
capital requirements make it relatively costly for broker-dealers to 
conduct security-based swap activities in broker-dealers.\863\ Instead 
of occurring at broker-dealers, security-based swap dealing activity is 
currently mostly concentrated in entities that are affiliated with 
broker-dealers, but not in broker-dealers themselves.\864\
---------------------------------------------------------------------------

    \862\ OTC derivatives dealers are a special class of broker-
dealers that are exempt from certain broker-dealer requirements, 
including membership in an SRO, regular broker-dealer margin rules, 
and application of SIPA. OTC derivatives dealers are subject to 
special requirements, including limitations on the scope of their 
securities activities, specific internal risk management control 
systems, recordkeeping obligations, and reporting responsibilities. 
They are also subject to alternative net capital treatment. See 17 
CFR 240.15a-1.
    \863\ See Capital, Margin, and Segregation Proposing Release, 77 
FR at 70217-257.
    \864\ See ISDA Margin Survey 2015.

----------------------------------------------------------------------------------------------------------------
                                                                   Annual hourly   Compensation
                     Reporting/recordkeeping                         industry        rate (per       Estimated
                                                                      burden           hour)        annual cost
----------------------------------------------------------------------------------------------------------------
Interagency Call Report (FFIEC 031 and 041).....................         406,141             $79     $32,085,139
Foreign Branch Call Report (FFIEC 041)..........................           4,651              79         367,429
Country Exposure Report (FFIEC 009).............................           8,384              79         662,336
Exchange Act Disclosures Reported to the OCC....................             523              79          41,317
Recordkeeping Requirements for Securities Transactions..........           6,944              30         208,320
Disclosure of Financial and Other Information...................             669              79          52,851
Interagency Guidance on Asset Securitization Activities.........             778              30          23,340
Advanced Capital Adequacy Framework Reporting...................         137,500              79      10,862,500
Liquidity Risk Report...........................................          43,992              79       3,475,368
General Reporting and Recordkeeping by Savings Associations.....          61,362              30       1,840,860
Notice or Application for Capital Distributions.................             546              79          43,134
Annual Stress Test Rule and Stress Test Reporting Templates.....          73,876              79       5,836,204
Recordkeeping and Disclosure Provisions Associated with Stress            16,120              30         483,600
 Testing Guidance...............................................
                                                                 -----------------------------------------------
    Total Costs.................................................  ..............  ..............      55,982,398
----------------------------------------------------------------------------------------------------------------

    As of December 31, 2018, there were 3,764 broker-dealers registered 
with the Commission. The broker-dealers registered with the Commission 
vary significantly in terms of their size, business activities, and the 
complexity of their operations.\865\ The Commission estimates that as 
of December 31, 2018, ten broker-dealers dominated the

[[Page 68630]]

broker-dealer industry, holding over half of all the capital held by 
broker-dealers.\866\
---------------------------------------------------------------------------

    \865\ See Broker-Dealer Reports, 78 FR at 51967.
    \866\ Using data from FOCUS Reports filed by broker-dealers in 
2018, total aggregate capital summed across 3,764 broker-dealer was 
$391,515 million of which the ten largest broker-dealers totaled 
$206,736 million, or 52.8%. This is consistent with estimates 
previous reported by the Commission. See Broker-Dealer Reports, 78 
FR at 51968.
---------------------------------------------------------------------------

    Broker-dealers registered with the Commission are currently subject 
to recordkeeping, reporting, notification, and securities count 
requirements. The baseline for the economic analysis for registered 
broker-dealers includes Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 
as they existed prior to these amendments as well as any reports and 
records these firms currently generate in the ordinary course of their 
business. Below, the Commission discusses the obligations these 
existing rules currently place on registered broker-dealers.
i. Existing Rules 17a-3 and 17a-4
    The Commission is adopting amendments to Rules 17a-3 and 17a-4 to 
establish additional recordkeeping requirements for broker-dealer 
SBSDs, broker-dealer MSBSPs,\867\ and broker-dealers that conduct 
security-based swap activities but are not registered as SBSDs.\868\ 
Under existing Rule 17a-3, broker-dealers must make and keep certain 
books and records. The Commission estimates that Rule 17a-3 currently 
imposes $218,361,917 of annual costs on broker-dealers.\869\ Rule 17a-4 
currently requires that firms preserve the records made and kept under 
Rule 17a-3, as well as additional records, including written 
agreements, communications relating to its business as such, and 
records reflecting inputs into the FOCUS Report. The rule also 
establishes retention periods for all records required under Rule 17a-3 
and required to be preserved under Rule 17a-4, along with storage media 
requirements for those firms that preserve records electronically. The 
Commission estimates that current Rule 17a-4 imposes $86,220,558 of 
annual costs on broker-dealers.\870\
---------------------------------------------------------------------------

    \867\ See section II.A.2. of this release.
    \868\ The amendments to the recordkeeping and reporting rules 
will apply to all broker-dealers that conduct security-based swap 
activities. The de minimis exception applies solely to registration 
as an SBSD. See 17 CFR 240.3a71-2(a)(1).
    \869\ (2,763,612 hours x $63 per hour national hourly rate for a 
compliance clerk) + $44,254,361 in external costs = $218,361,917. 
See Commission, Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-3 (Mar 9, 2017), 
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=72125401.
    \870\ (1,042,866 hours x $63 per hour national hourly rate for a 
compliance clerk) + $20,520,000 in external costs = $86,220,058. See 
Commission, Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-4 (Oct. 19, 2016), 
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68823501.
---------------------------------------------------------------------------

ii. Existing Rule 17a-5
    The existing broker-dealer financial reporting requirements appear 
in Rule 17a-5. The baseline for this economic analysis with respect to 
the amendments to Rule 17a-5 is the broker-dealer financial reporting 
requirements as they exist prior to the amendments being adopted in 
this document. The Commission estimates that current Rule 17a-5 imposes 
$140,225,396 of annual costs on broker-dealers.\871\
---------------------------------------------------------------------------

    \871\ (353,509 hours x $269 per hour national hourly rate for a 
compliance manager) + $45,131,475 in external costs = $140,225,396. 
See Supporting Statement for the Paperwork Reduction Act Information 
Collection Submission for Rule 17a-5 (May. 26, 2017), available at 
https://www.reginfo.gov/public/do/DownloadDocument?objectID=74209001.
---------------------------------------------------------------------------

    Rule 17a-5 has two main elements: (1) Broker-dealers must file 
periodic unaudited reports containing information about their financial 
and operational condition on a FOCUS Report; and (2) broker-dealers 
must annually file financial statements and certain reports and a 
report covering the financial statements and reports prepared by an 
independent public accountant registered with the PCAOB in accordance 
with PCAOB standards.\872\ In addition to these two main elements, a 
few other aspects of Rule 17a-5 are described below.
---------------------------------------------------------------------------

    \872\ See id. These requirements are described in more detail 
below.
---------------------------------------------------------------------------

a. Periodic Reports
    Broker-dealers periodically report information about their 
financial and operational condition on FOCUS Report Part II, Part IIA, 
Part IIB, or Part II CSE. Each version of the report is designed for a 
particular type of broker-dealer and the information to be reported is 
tailored to the type of broker-dealer.\873\
---------------------------------------------------------------------------

    \873\ A broker-dealer that holds customer funds or securities 
completes and files FOCUS Report Part II. A broker-dealer that does 
not hold customer funds or securities completes and files FOCUS 
Report Part IIA. An OTC derivatives dealer completes and files FOCUS 
Report Part IIB. An ANC broker-dealer completes and files FOCUS 
Report Part II CSE.
---------------------------------------------------------------------------

b. Annual Audited Reports and Related Notifications
    Under paragraphs (d) and (g) of Rule 17a-5, a broker-dealer is 
required to, among other things, annually file reports with the 
Commission that are audited by a PCAOB-registered independent public 
accountant, disclose certain financial information to customers, notify 
the Commission of a change of accountant, and notify the Commission of 
a change in its fiscal year.\874\ Paragraph (h) of Rule 17a-5 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 determines that any material weakness exists.
---------------------------------------------------------------------------

    \874\ Paragraph (n)(2) of Rule 17a-5 requires that the notice 
contain a detailed explanation for the reasons for the change and 
requires that changes in the filing period for the annual reports be 
approved in writing by the broker-dealer's DEA.
---------------------------------------------------------------------------

c. Customer Statements
    Paragraph (c) of Rule 17a-5 requires, among other things, that 
certain broker-dealers annually send their customers audited and 
unaudited statements regarding their financial condition. Under 
paragraph (c)(5), a broker-dealer is exempt from sending the statement 
of financial condition to customers if the broker-dealer, among other 
things: (1) Sends its customers semi-annual statements relating to the 
firm's net capital and, if applicable, the identification of any 
material weaknesses; and (2) makes the statement of financial condition 
described above available on the broker-dealer's website home page and 
maintains a toll-free number that customers can call to request a copy 
of the statement.
d. Additional ANC Broker-Dealer Reports
    Paragraph (a)(6) of Rule 17a-5 requires ANC broker-dealers to 
periodically file certain reports with the Commission. The reports 
contain information related to the ANC broker-dealers' use of internal 
models to calculate market and credit risk charges when computing net 
capital.
iii. Existing Rule 17a-11
    The existing broker-dealer notice requirements are contained in 
Rule 17a-11. The baseline for this economic analysis with respect to 
the amendments to Rule 17a-11 is the broker-dealer notification 
requirements as they exist today. 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. The 
Commission estimates that current Rule 17a-11 imposes $90,115 of annual 
costs on broker-dealers in the aggregate.\875\
---------------------------------------------------------------------------

    \875\ 335 hours x $269 per hour national hourly rate for a 
compliance manager = $90,115. See Supporting Statement for the 
Paperwork Reduction Act Information Collection Submission for Rule 
17a-11 (Jul. 28, 2017), available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=75553601.

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

[[Page 68631]]

a. Failure To Meet Minimum Capital Requirements
    Paragraph (b) of Rule 17a-11 requires a broker-dealer to notify the 
Commission if the firm's net capital or, if applicable, tentative net 
capital declines below the minimum amount required under Rule 15c3-1.
b. Early Warning of Potential Capital or Model Problem
    Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives dealer 
or an ANC broker-dealer to notify the Commission when its tentative net 
capital falls below the minimum required for these types of broker-
dealers. 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. These 
notices are designed to provide the Commission with an ``early 
warning'' that the broker-dealer may experience financial 
difficulty.\876\ The events triggering the early warning notification 
requirements are:
---------------------------------------------------------------------------

    \876\ See Early Warning Rule, Exchange Act Release No. 32586 
(July 7, 1993), 58 FR 37655 (July 13, 1993).
---------------------------------------------------------------------------

     The computation of a broker-dealer subject to the 
aggregate indebtedness standard of Rule 15c3-1 shows that the firm's 
aggregate indebtedness is in excess of 1,200% of its net capital;\877\
---------------------------------------------------------------------------

    \877\ See paragraph (c)(1) of Rule 17a-11. For certain types of 
broker-dealers, the minimum net capital requirement 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 paragraph (a)(1)(i) of Rule 15c3-1. 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 Exhibit A of Rule 15c3-3;\878\
---------------------------------------------------------------------------

    \878\ See paragraph (c)(2) of Rule 17a-11. For certain types of 
broker-dealers, the minimum net capital requirement 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 
paragraph (a)(1)(i) of Rule 15c3-1. 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;\879\
---------------------------------------------------------------------------

    \879\ See paragraph (c)(2) of Rule 17a-11.
---------------------------------------------------------------------------

     With respect to an OTC derivatives dealer, the occurrence 
of the fourth and each subsequent backtesting exception under 17 CFR 
240.15c3-1f (appendix F of Rule 15c3-1) during any 250 business days 
measurement period.\880\
---------------------------------------------------------------------------

    \880\ See paragraph (c)(4) of Rule 17a-11.
---------------------------------------------------------------------------

c. 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. The notice must specify the books and records which have not 
been made or which are not current. A broker-dealer is required to 
report to the Commission within 48 hours of the original notice what 
the broker or dealer has done or is doing to correct the situation.
d. Material Weakness
    Paragraph (e) of Rule 17a-11 requires a broker-dealer to provide 
notification about a material weakness as that term is defined in Rule 
17a-5. 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 indicating what the 
broker-dealer has done or is doing to correct the situation.\881\
---------------------------------------------------------------------------

    \881\ See also Broker-Dealer Reports, 78 FR at 51939 (discussing 
amendment of material weakness standard in Rule 17a-5). As discussed 
above in section II.B.3.a. of this release, the Commission is using 
the concept of material weakness in Rule 18a-7.
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e. Failure To Make a Required Reserve Deposit
    An additional broker-dealer notification is required under Exchange 
Act Rule 15c3-3, rather than Rule 17a-11. Specifically, 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.
iv. Existing Rule 17a-12
    The Commission is adopting amendments to Rule 17a-12 to require OTC 
derivatives dealers to file revised FOCUS Report Part II instead of 
FOCUS Report Part IIB as required by current Rule 17a-12.\882\ The 
baseline for this economic analysis with respect to amendments to Rule 
17a-12 is current Rule 17a-12. The Commission estimates that current 
Rule 17a-12 imposes an annual burden of $568,320 in the aggregate.\883\
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    \882\ See section IV.A.5. of this release.
    \883\ 1,080 hours x $269 per hour national hourly rate for a 
compliance manager = $290,520 aggregate compliance costs per year 
and $277,800 aggregate reporting costs per year. See Supporting 
Statement for the Paperwork Reduction Act Information Collection 
Submission for Rule 17a-12/Form X-17A-5 Part IIB (Feb. 5, 2019), 
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=88964601.
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4. Regulation SBSR
    Regulation SBSR implements requirements for regulatory reporting 
and public dissemination of security-based swap transactions set forth 
in Title VII of the Dodd-Frank Act. Regulation SBSR assigns the 
reporting side \884\ the obligation of reporting primary and secondary 
trade information about the transaction to a registered SDR or to the 
Commission, in the event that there is no registered SDR to accept the 
report.\885\
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    \884\ Rule 901(a) of Regulation SBSR establishes a reporting 
hierarchy that specifies the side that has the duty to report a 
security-based swap to a registered SDR. This entity refers to the 
``reporting side.'' See Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information, 80 FR at 14566-67.
    \885\ In addition, any security-based swap that is accepted for 
clearing by a registered clearing agency having its principal place 
of business in the United States must be reported to a registered 
SDR, regardless of the registration status or U.S. person status of 
the counterparties and regardless of where the transaction is 
executed. See id. at 14568.
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    Based on historical data the Commission estimated that 300 entities 
would be required to report transaction information under Regulation 
SBSR,\886\ including all 50 potential registered SBSDs and all 5 
potential registered MSBSPs. As a result of the Regulation SBSR 
reporting hierarchy, the Commission expected all these SBSDs and MSBSPs 
to incur reporting obligations because at least one of these 55 
potential registrants appeared on either side of the majority of 
security-based swap transactions.\887\
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    \886\ See id. at 14674.
    \887\ See id.
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    The Commission believes that SBSDs and MSBSPs will have incurred 
three categories of costs to comply with Regulation SBSR. First, they 
would likely have had to establish and maintain an internal order 
management system (``OMS'') capable of capturing relevant security-
based swap transaction information in order for it to be reported. 
Second, they would have had to implement reporting mechanisms.

[[Page 68632]]

Third, given that manual processes would likely have been incapable of 
capturing and reporting the numerous data elements relating to 
security-based swaps required by Regulation SBSR, SBSDs and MSBSPs 
would have had to establish an appropriate compliance program and 
support for operating any OMS and reporting mechanism capable of 
reporting data within the timeframe set forth by Regulation SBSR.\888\
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    \888\ See id. at 14701.
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    To the extent that the same or similar information is needed to 
comply with the recordkeeping and reporting rules being adopted in this 
document, market participants can use the infrastructure already in 
place in anticipation of Regulation SBSR to comply with their 
recordkeeping and reporting obligations under the current rulemaking. 
Consistent with prior releases, the Commission believes that once a 
respondent's reporting infrastructure and compliance systems are in 
place the marginal burden of reporting transactions would be de minimis 
when compared to the costs of putting those systems in place and 
maintaining them over time.\889\ Thus the changes implemented in 
anticipation of compliance with Regulation SBSR are likely to 
substantially reduce certain compliance related burdens emanating from 
the recordkeeping, reporting, notification, and securities count rules 
and rule amendments being adopted in this document. As a result, the 
Commission's estimates of these burdens \890\ should be viewed as an 
upper bound of the potential costs of these rules and rule amendments.
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    \889\ See id. at 14702.
    \890\ See section IV.E. of this release.
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5. Global Regulatory Efforts
    The global security-based swap market is highly interconnected and 
highly concentrated.\891\ This interconnectedness allows U.S. market 
participants to use security-based swaps as a tool for sharing 
financial and commercial risks and to access liquidity across 
jurisdictional boundaries.\892\ However, these opportunities for risk 
sharing also represent channels for risk transmission to the U.S. 
financial system: Because dealers facilitate the majority of security-
based swap transactions, with bilateral relationships that extend to 
potentially thousands of counterparties, deficiencies in SBSD records 
and reports may have outcomes that affect a large number of 
counterparties and have potentially significant cross-border 
implications.\893\
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    \891\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office or in a 
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De 
Minimis Exception, 81 FR 8598. See also Application of ``Security-
Based Swap Dealer'' and ``Major Security-Based Swap Participant'' 
Definitions to Cross-Border Security-Based Swap Activities, 79 FR at 
47283.
    \892\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office or in a 
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De 
Minimis Exception, 81 FR 8598. See also Application of ``Security-
Based Swap Dealer'' and ``Major Security-Based Swap Participant'' 
Definitions to Cross-Border Security-Based Swap Activities, 79 FR at 
47283.
    \893\ See id.
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    In 2009, the G20 Leaders--whose membership includes the United 
States, 18 other countries, and the European Union (``EU'')--addressed 
global improvements in the OTC derivatives markets. They expressed 
their view on a variety of issues relating to OTC derivatives 
contracts. In subsequent summits, the G20 Leaders have returned to OTC 
derivatives regulatory reform and encouraged international consultation 
in developing standards for these markets.\894\
---------------------------------------------------------------------------

    \894\ See, e.g., G20 Leaders' Final Declaration para. 24 (Nov. 
2011), available at https://g20.org/wp-content/uploads/2014/12/Declaration_eng_Cannes.pdf.
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    Many SBSDs will likely already be subject to foreign regulation of 
their security-based swap activities that are similar to regulations 
that may apply to them pursuant to Title VII, even if the relevant 
foreign jurisdictions do not classify certain market participants as 
``dealers'' for regulatory purposes. Some of these regulations may 
duplicate, and in some cases conflict with, certain elements of the 
Title VII regulatory framework including the recordkeeping and 
reporting rules being adopted in this document.

C. Analysis of the Adopted Program and Alternatives

    In determining appropriate recordkeeping, reporting, notification, 
and securities count requirements, the Commission assessed and 
considered a number of different costs and benefits, and the 
determinations it has made may have a variety of economic consequences 
for the relevant firms, markets, and the financial system as a whole. 
As an initial matter, the recordkeeping, reporting, notification, and 
securities count rules and rule amendments being adopted in this 
document represent the manner in which SBSDs and MSBSPs will document, 
report, and retain evidence of their compliance with, among other 
things, the Commission's capital, margin, and segregation rules. The 
Commission believes that these rules, by their nature, will have a more 
limited economic impact as compared to the Commission's capital, 
margin, and segregation rules.
    With respect to the likely benefits of the adopted rules and 
amendments, the recordkeeping, reporting, notification, and securities 
count requirements are broadly intended to facilitate effective 
oversight of SBSD and MSBSPs. Requiring registered firms to comply with 
recordkeeping and reporting rules should help ensure more effective 
regulatory oversight. The new rules and rule amendments should further 
help the Commission determine whether an SBSD or MSBSP is operating in 
compliance with the Exchange Act and the rules thereunder.
    The Commission further believes that the required annual audit of 
nonbank SBSDs' and nonbank MSBSPs' financial statements and the public 
availability of firms' Statement of Financial Condition will provide 
customers and counterparties access to financial information that will 
permit them to better assess the financial condition of firms. While it 
is difficult to quantify the extent to which lack of information about 
the financial conditions of other market participants reduces 
willingness to participate in the security-based swap market, the 
Commission staff's experience is that market participants' willingness 
to engage in activities increases when such participants are better 
able to understand the financial condition of other market participants 
and counterparties.
    The Commission also recognizes that there will be costs associated 
with the new rules and rule amendments. These costs include the costs 
of complying with the new rules and rule amendments, for example one-
time and ongoing financial reporting costs, and costs associated with 
ongoing record maintenance. To the extent that costs associated with 
the new rules and amendments arise from complying with the new 
requirements, these costs are discussed below in section V.C.2. of this 
release.
    The Commission believes that the new rules and rule amendments will 
require improvements in technology to meet minimum standards for 
recordkeeping and reporting. SBSDs and MSBSPs that do not have the 
technology to store and maintain the information required by the new 
rules and rule amendments will likely need to invest in technology. 
While investments in new technology will entail costs for SBSDs and 
MSBSPs, these technological investments may generate benefits for 
financial markets at large by helping

[[Page 68633]]

regulators to more effectively track trading and risk exposure in 
security-based swaps. Moreover, to the extent that improvements in 
technology required by the rule and rule amendments also enable SBSDs 
and MSBSPs to more effectively track their trading and risk exposure in 
security-based swaps, the cost of these improvements for these entities 
may be partially offset.
    In addition, the rules being adopted in this document, in 
conjunction with other requirements established under the Dodd-Frank 
Act, could have a substantial impact on international commerce and the 
relative competitive position of intermediaries operating in multiple 
jurisdictions. For example, intermediaries operating in other 
jurisdictions could be advantaged relative to U.S. competitors if 
corresponding requirements are not established in other jurisdictions 
or if the Commission's rules are substantially more stringent and 
costly than corresponding requirements in other jurisdictions. This 
could affect the ability of intermediaries and other market 
participants based in the U.S. to participate in non-U.S. markets and 
the propensity of non-U.S.-based intermediaries and other market 
participants to participate in U.S. markets or perform market-facing 
activities using personnel located in the United States. Accordingly, 
the reporting, recordkeeping, notification, and security count 
requirements for security-based swaps being adopted in this document 
could entail substantial differences in the costs of compliance between 
the U.S. and foreign jurisdictions and could therefore have 
international implications in terms of the extent of market 
participation in U.S. versus non-U.S. jurisdictions.\895\
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    \895\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to 
Registration of Security-Based Dealers and Major Security-Based Swap 
Participants, 78 FR at 31034.
---------------------------------------------------------------------------

    In certain instances it is difficult to quantify the potential 
benefits and costs of the new rules and rule amendments. For example, 
firms that choose to register in some capacity as an SBSD or MSBSP may 
not currently be subject to Commission, CFTC, or prudential regulation. 
The Commission does not have comprehensive information about such 
firms' current recordkeeping, reporting, notification, and securities 
count practices with respect to their security-based swap activities 
and thus it is difficult to reliably gauge the economic effect of the 
new rules and rules amendments on these firms. With regard to entities 
that are currently regulated by the Commission and that are likely to 
be affected by the rules and rule amendments being adopted in this 
document, the Commission staff's experience with broker-dealers under 
the existing recordkeeping, reporting, notification, and securities 
count rules gives it a better understanding of the compliance-related 
costs (such as those related to retaining attorneys, accountants, and 
other professionals), and in such cases the Commission has prepared 
below a summary of its estimate of these costs.\896\
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    \896\ See section V.C.2. of this release.
---------------------------------------------------------------------------

    The benefits and costs of each adopted rule and amendment, as well 
as the reasonable alternatives, are discussed in further detail below.
1. Benefits of Recordkeeping, Reporting, Notification, and Securities 
Count Requirements
a. Requirements To Make and Keep Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-3)
    The Commission is amending existing Rule 17a-3 to account for 
security-based swap activities of broker-dealers, including broker-
dealer SBSDs and MSBSPs.\897\ The Commission believes that the 
amendments to Rule 17a-3 will generate valuable information that will 
assist the Commission to improve the regulatory oversight and 
documentation of the security-based swap activities of stand-alone 
broker-dealers, broker-dealer SBSDs and MSBSPs. For example, requiring 
these firms to record the UIC of the counterparties in their security-
based swap transactions will assist the Commission in accurately 
determining which parties are involved in the specific security-based 
swap transactions and will thereby improve the Commission's analysis of 
the firms' credit and counterparty risk exposures as well as assist in 
the accurate determination of the firms' aggregate financial exposure 
to the related parties.
---------------------------------------------------------------------------

    \897\ See, e.g., paragraph (a)(1) of Rule 17a-3, as amended 
(addition of information that must be included in security-based 
swap purchase and sale blotters). See also section II.A.2. of this 
release for a discussion of the specific requirements in the 
amendments.
---------------------------------------------------------------------------

    As noted above in section II.A.2. of this release, in practice, the 
Commission's adoption of a requirement to use UICs for the purposes of 
Rules 17a-3 and 18a-5 means that until such time as the Commission 
recognizes any other IRSS, registrants will be required to use LEIs as 
requested by commenters.\898\ As the Commission noted in the Regulation 
SBSR adopting release, requiring the use of UICs will provide a 
streamlined way of reporting, disseminating, and interpreting security-
based swap information.\899\ The Commission believes Rules 17a-3 and 
18a-5 will require few entities that are not already required to obtain 
UICs under Regulation SBSR to obtain UICs.\900\
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    \898\ While the Commission to date has only recognized the GLEIS 
as an IRSS, the rules being adopted in this document do not preclude 
the use of UICs issued by any other organization that is recognized 
as an IRSS in the future.
    \899\ Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, 80 FR 14563.
    \900\ See section V.B.4. of this release.
---------------------------------------------------------------------------

    The records generated as a result of amendments to Rule 17a-3 will 
also constitute an important means of determining compliance of market 
participants with securities laws such as the capital, margin, and 
segregation rules applicable to SBSDs and MSBSPs. The amendments to 
Rule 17a-3 will therefore facilitate more effective oversight and 
surveillance of the participants in and the market for security-based 
swaps.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-5)
    The Commission is adopting new Rule 18a-5--which is modeled on Rule 
17a-3, as amended--to require stand-alone SBSDs, stand-alone MSBSPs, 
bank SBSDs, and bank MSBSPs to make and keep current certain 
records.\901\ As with Rule 17a-3, under Rule 18a-5, firms are required 
to document specific attributes of their security-based swap 
transactions (e.g., the contract price of the security-based swap; the 
type of security-based swap; the reference security, index or obligor 
etc.). However, not all of the provisions of Rule 17a-3 are being 
included as part of Rule 18a-5 because some of Rule 17a-3's provisions 
relate to activities that are not expected or permitted of stand-alone 
SBSDs and MSBSPs not dually registered as a broker-dealer. Similarly, 
and as described above, the new requirements that apply to bank SBSDs 
and MSBSPs under new Rule 18a-5 are more limited than the new 
requirements that apply to stand-alone SBSDs and MSBSPs under the same 
rule because the Commission's authority under Section 15F(f)(1)(B)(i) 
of the Exchange Act is limited to activities related to their business 
as an SBSD or MSBSP and because banks are already subject to the 
existing recordkeeping requirements from prudential regulators who are 
responsible for capital, margin, and

[[Page 68634]]

other prudential requirements applicable to bank SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \901\ See section II.A.2.a. of this release (describing Rule 
18a-5, as adopted).
---------------------------------------------------------------------------

    The Commission believes that new Rule 18a-5 will provide for 
improved regulatory oversight of the security-based swap activities of 
stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. As 
with the records generated by broker-dealer SBSDs and MSBSPs under the 
amendments to Rule 17a-3, records generated as a result of new Rule 
18a-5 will also constitute an important means of determining compliance 
of non-broker-dealer SBSDs and MSBSPs with securities laws such as the 
capital, margin, and segregation rules applicable to SBSDs and MSBSPs 
and will facilitate the Commission's regulation of the security-based 
swap market.\902\
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    \902\ See section V.C.1.a.i. of this release.
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b. Requirements To Preserve Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-4)
    The Commission is adopting amendments to existing Rule 17a-4--which 
contains requirements for broker-dealers subject to Rule 17a-3 to 
preserve certain types of records required to be made and kept current 
under Rule 17a-3 and prescribes the duration for which and the manner 
in which these records must be preserved--to account for the security-
based swap activities of broker-dealers, including broker-dealer SBSDs 
and MSBSPs, as well as certain non-substantive amendments.
    For example, and as discussed above,\903\ the Commission is 
adopting amendments to certain provisions in paragraph (b) of existing 
Rule 17a-4 to account for security-based swap transactions, and is 
adopting amendments that require broker-dealers, including broker-
dealer SBSDs and MSBSPs, to preserve certain additional records related 
to security-based swap activities. Further, the Commission is amending 
the preservation requirement in paragraph (b)(4) of existing Rule 17a-4 
to include ``recordings of telephone calls required to be maintained 
pursuant to section 15F(g)(1) of the [Exchange] Act.'' The amendment 
establishes a requirement to preserve for three years telephone calls 
that a covered firm chooses to record to the extent that the calls are 
required to be maintained pursuant to Section 15F(g)(1) of the Exchange 
Act.
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    \903\ See section II.A.3.a. of this release (discussing 
paragraph (b) of Rule 17a-4, as amended).
---------------------------------------------------------------------------

    The Commission believes that by keeping current, preserving and 
ensuring ready access to the records required under Rule 17a-3, as 
amended, the amendments to Rule 17a-4 will support the benefits 
emanating from the amendments to Rule 17a-3. These benefits primarily 
include improving the Commission's regulatory oversight by ensuring its 
ability to monitor and review documentation of the security-based swap 
activities of stand-alone broker-dealers, broker-dealer SBSDs and 
MSBSPs.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-6)
    With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, 
and bank MSBSPs, the Commission is adopting new Rule 18a-6 to establish 
record preservation requirements for these categories of potential 
registrants. New Rule 18a-6 is modeled on the record preservation 
requirements of Rule 17a-4, as amended, but contains modifications to 
account for the differences applicable to stand-alone SBSDs, stand-
alone MSBSPs, bank SBSDs and MSBSPs consistent with their anticipated 
business activities related to security-based swaps.\904\ Many, but not 
all, of the same record preservation requirements that are applicable 
to broker-dealer SBSDs and MSBSPs under the amendments to Rule 17a-4 
will also apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, 
and bank MSBSPs under new Rule 18a-6. For example, analogous to 
paragraph (a) of Rule 17a-4, as amended \905\ paragraph (a) of new Rule 
18a-6 requires that certain records required to be created and 
maintained under Rule 18a-5 be preserved for a period of not less than 
six years, the first two in an easily accessible place.\906\
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    \904\ See section II.A.3.a. of this release (discussing Rule 
17a-4, as amended, and Rule 18a-6, as adopted).
    \905\ See id. (discussing Rule 17a-4 record retention 
requirements).
    \906\ See id. (discussing requirements for stand-alone SBSDs, 
stand-alone MSBSPs, bank SBSDs and MSBSPs to maintain and preserve 
records).
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    In response to comments received to the proposing release, the 
Commission is modifying Rule 18a-6 to eliminate the requirement that 
the electronic storage system preserve records exclusively in a non-
rewriteable and non-erasable format.\907\ The Commission believes that 
the removal of these requirements will reduce the likelihood that 
stand-alone or banks SBSDs and MSBSPs will need to maintain an extra 
set of records, and avoid the associated costs of maintaining those 
extra records, in order to comply with the rule.\908\ For SBSDs and 
MSBSPs that are also registered with the CFTC as swap dealers and major 
swap participants, these modifications to the rule will also eliminate 
a potential conflict with the requirements of the CFTC.
---------------------------------------------------------------------------

    \907\ See section II.A.3.a. of this release (discussing Rule 
18a-6 electronic storage requirements).
    \908\ The costs to implement an electronic storage system to 
preserve records in a non-rewriteable and non-erasable format may be 
substantial. In April 2018, SIFMA reported the results of anonymous 
survey of a group of its members about the costs of implementing 
such a system. Of the 25 respondents, 16 firms had implemented such 
a system in the previous three years at an average cost of $6 
million with several firms reporting costs in excess of $25 million. 
See Petition for Rulemaking to Amend Exchange Act Rule 17a-4(f)--
Addendum (available at: https://www.sec.gov/rules/petitions/2018/ptn4-713-addendum.pdf).
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    The Commission believes that by keeping current, preserving, and 
ensuring ready access to the records required under new Rule 18a-5, new 
Rule 18a-6 will support the benefits stemming from new Rule 18a-5 
without increasing the costs associated with keeping records. These 
benefits primarily include improving the Commission's regulatory 
oversight by ensuring its ability to monitor and review documentation 
of the security-based swap activities of non-broker-dealer SBSDs and 
MSBSPs.
c. Reporting
    The Commission is adopting amendments to existing Rule 17a-5--which 
contains requirements for broker-dealers to file periodic unaudited 
reports containing information about their financial and operational 
condition and for broker-dealers to file annual financial statements, 
certain reports and a report covering these financial statements and 
reports prepared by an independent public accountant registered with 
the PCAOB in accordance with PCOAB standards \909\--to account for the 
security-based swap activities of broker-dealers, including broker-
dealer SBSDs and MSBSPs, as well as certain non-substantive amendments. 
Further, the Commission is adopting new Rule 18a-7--which is modeled on 
Rule 17a-5, as amended--to establish reporting requirements for stand-
alone SBSDs, SBSDs also registered as OTC derivatives dealers, stand-
alone MSBSPs, bank SBSDs, and bank MSBSPs. The Commission believes that 
the economic effects associated with the new reporting requirements 
will depend upon the nature of the filings that potential registrants 
make today based upon their current registration status (e.g., broker-
dealer vs. non-broker-dealer).
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    \909\ See section II.B.2. of this release (discussing Rule 17a-5 
reporting requirements).

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[[Page 68635]]

i. Stand-Alone Broker-Dealers (Amendments to Rule 17a-5)
    As described above, under these rules and rule amendments, stand-
alone broker-dealers (including stand-alone OTC derivatives dealers and 
stand-alone ANC broker-dealers) that engage in security-based swap 
activities but that do not register with the Commission as an SBSD or 
MSBSP will be required to complete revised FOCUS Report Part II.\910\ 
FOCUS Report Part II, as amended, largely retains the structure and 
line items of the FOCUS Report Part II that existed prior to these 
amendments, but also includes new line items and schedules tailored 
specifically to security-based swap activities.\911\ It also largely 
elicits the same information as FOCUS Report Parts IIB and II CSE.\912\ 
Consequently, broker-dealers that filed the FOCUS Report Part II prior 
to these amendments, ANC broker-dealers that filed the FOCUS Report 
Part II CSE, and OTC derivatives dealers that filed the FOCUS Report 
Part IIB will need to enter into the FOCUS Report Part II, as amended, 
substantively the same information as was required of them prior to 
these amendments.
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    \910\ See id. (discussing broker-dealer SBSDs' and broker-dealer 
MSBSPs' use of revised FOCUS Report Part II).
    \911\ See section II.B.1. of this release.
    \912\ See id.
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    The Commission believes that the information elicited from stand-
alone broker-dealers on their security-based swap activities will 
assist the Commission and the DEAs of these entities to examine them 
more effectively. The reporting requirements for stand-alone broker-
dealers on account of their security-based swap related activities are 
also expected to promote transparency of the financial and operational 
condition of these entities to the Commission.
ii. Broker-Dealer SBSDs and MSBSPs (Amendments to Rule 17a-5)
    The Commission has designed FOCUS Report Part II, as amended, to 
elicit the information that it believes it needs to effectively oversee 
the financial condition of broker-dealer SBSDs and MSBSPs. The 
Commission has carefully considered FOCUS Report Part II, as amended, 
in light of its experience with broker-dealer regulation and in 
relation to its new statutory responsibilities under Section 15F of the 
Exchange Act. The Commission believes that the information elicited in 
FOCUS Report Part II, as amended, will promote compliance of the 
relevant regulated entities with Rules 15c3-1 and 15c3-3 and will 
assist the Commission, SROs, state securities regulators and the 
regulated entities' DEAs in conducting effective examinations of these 
entities. Additionally, the broker-dealer SBSD and broker-dealer MSBSP 
reporting requirements related to their security-based swap activities 
should promote transparency of the financial and operational condition 
of the broker-dealer to the Commission and the firms' DEA. This may, in 
turn, improve the Commission's ability to value the relevant 
registrants' security-based swap exposures and assist the Commission in 
assessing these entities' compliance with rules related to capital 
requirements.
iii. Stand-Alone SBSDs and MSBSPs (New Rule 18a-7)
    As described in more detail above,\913\ stand-alone SBSDs and 
MSBSPs will be required to file FOCUS Report Part II, as amended, with 
the Commission or its designee on a monthly basis.\914\ With respect to 
their security-based swap activities, stand-alone SBSDs and MSBSPs are 
required to report information similar to that required of broker-
dealer SBSDs. However, these entities are not required to complete the 
sections applicable only to broker-dealers.
---------------------------------------------------------------------------

    \913\ See section II.B.2. of this release.
    \914\ The Commission estimates that 9 of the approximately 50 
entities that it anticipates to register with the Commission as 
SBSDs will be stand-alone SBSDs.
---------------------------------------------------------------------------

    In addition, stand-alone MSBSPs will be required to complete a 
simpler Computation of Tangible Net Worth, compared to the much longer 
and more complex Computation of Net Capital and Computation of Minimum 
Regulatory Capital Requirements sections that stand-alone SBSDs are 
required to complete.\915\ Moreover, stand-alone MSBSPs will not be 
required to complete the sections in FOCUS Report Part II, as amended, 
that require firms to compute the amount that must be maintained in the 
security-based swap customer reserve account or the section relating to 
information for the possession or control requirements for security-
based swap customers because stand-alone MSBSPs generally will not be 
subject to those requirements under Rule 18a-4.\916\ Furthermore, 
stand-alone MSBSPs will not be required to complete and file a number 
of sections of FOCUS Report Part II, as amended, that relate to the 
operational data related to the firm; specifically, they will not be 
required to complete and file the Capital Withdrawals, Capital 
Withdrawals Recap, and the Financial and Operational Data sections of 
FOCUS Report Part II, as amended.\917\ The Commission therefore 
believes that the economic effects associated with the reporting 
requirements on stand-alone MSBSPs will be significantly less than the 
economic effects of the reporting requirements on stand-alone SBSDs.
---------------------------------------------------------------------------

    \915\ Compare FOCUS Report Part II, as amended, Computation of 
Tangible Net Worth, with FOCUS Report Part II, as amended, 
Computation of Net Capital (Filer Authorized to Use Models) and 
FOCUS Report Part II, as amended, Computation of Minimum Regulatory 
Capital Requirements (Non-Broker-Dealer SBSD).
    \916\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44071-76.
    \917\ See FOCUS Report Part II, as amended, Capital Withdrawals, 
Capital Withdrawals--Recap, and Financial and Operational Data.
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    In addition, stand-alone SBSDs and MSBSPs will be required to 
generate and file their financial report and, in the case of stand-
alone SBSDs, compliance report or exemption report, with the Commission 
on an annual basis.\918\ While the Commission expects that stand-alone 
SBSDs and MSBSPs currently prepare financial statements that encompass 
their security-based swap activity, under the new rules, these entities 
will be required to prepare a financial report in a format consistent 
with FOCUS Report Part II, as amended, which includes numerous entries, 
computations, and schedules that a stand-alone SBSD may not currently 
prepare as a part of its business practices.
---------------------------------------------------------------------------

    \918\ See paragraph (c) of Rule 18a-7, as adopted.
---------------------------------------------------------------------------

    For stand-alone SBSDs approved to use models, there will be a 
number of additional monthly and quarterly reporting requirements, 
independent of those on FOCUS Report Part II, as amended.\919\ The 
additional reports required of stand-alone SBSDs approved to use models 
are modeled on parallel reporting requirements for ANC broker-
dealers.\920\ Consequently, stand-alone SBSDs approved to use models 
will be required to file the same types of additional reports relating 
to their use of internal models as ANC broker-dealers, including ANC 
broker-dealer SBSDs.
---------------------------------------------------------------------------

    \919\ See section II.B.3.a. of this release. See also paragraph 
(a)(3) of Rule 18a-7, as adopted.
    \920\ Compare paragraph (a)(3) of Rule 18a-7, as adopted, with 
paragraph (a)(5) of Rule 17a-5, as amended.
---------------------------------------------------------------------------

    The Commission believes that using the new reporting requirements 
will help the Commission to evaluate whether stand-alone SBSDs and 
MSBSPs are operating in compliance with the Exchange Act and the rules 
thereunder. The Commission also believes that the availability of FOCUS 
Report Part II, as amended, will greatly enhance the Commission's 
ability to oversee the financial condition of the relevant registrants, 
and that the public

[[Page 68636]]

availability of a firm's audited Statement of Financial Condition and 
net capital computations will facilitate the public's evaluation of the 
firm's financial health.
    In response to comments received to the proposing release, the 
Commission is modifying Rule 18a-7 so that stand-alone SBSDs and 
MSBSPs, as well as SBSDs also registered as an OTC derivatives dealers, 
may engage an independent public accountant that is not registered with 
the PCAOB, and that the accountant may prepare its reports in 
accordance with GAAS in the United States or PCAOB standards.\921\ The 
Commission estimates that of the 9 stand-alone SBSDs, 3 will make use 
of the full alternative compliance mechanism.\922\ The Commission 
estimates that of the 5 MSBSPs, one will also be registered as an FCM. 
As with Commission registered broker-dealers, CFTC-registered FCMs are 
required to use independent accountants that are registered with the 
PCAOB.\923\
---------------------------------------------------------------------------

    \921\ See section II.B.3.a. of this release for a discussion of 
why the Commission believes this option is appropriate for stand-
alone SBSDs and MSBSPs but not for SBSDs and MSBSPs that are also 
registered as broker-dealers.
    \922\ See section IV.C. of this release.
    \923\ See 17 CFR 1.16(b).
---------------------------------------------------------------------------

    The Commission estimates that there will be 6 stand-alone SBSDs and 
4 MSBSPs that may engage an independent public accountant as a result 
of Rule 18a-7.\924\ The Commission estimates the total cost to these 10 
entities to engage an accountant as required by Rule 18a-7 to be 
$3,018,000.\925\ Providing these options to these types of SBSDs and 
MSBSPs will not change the requirement to engage an independent public 
accountant but will increase the number of accountants that could 
potentially be hired. The Commission believes this could result in 
lower costs to this group of firms.
---------------------------------------------------------------------------

    \924\ See section IV.C of this release.
    \925\ ($300,000 per stand-alone MSBSP x 4) + $303,000 per stand-
alone SBSD exempt from Rule 18a-4 x 6) = $3,018,000. See section 
IV.D.3. of this release (PRA estimate of the total initial and 
annual recordkeeping and reporting burden for amendments to Rule 
17a-5, as amended, and Rule 18a-7, as adopted).
---------------------------------------------------------------------------

iv. Bank SBSDs and MSBSPs (New Rule 18a-7)
    As described above,\926\ bank SBSDs and MSBSPs will be required to 
periodically complete and file FOCUS Report Part IIC with the 
Commission. Relative to what broker-dealer SBSDs, broker-dealer MSBSPs, 
stand-alone SBSDs, and stand-alone MSBSPs will report in FOCUS Report 
Part II, as amended, bank SBSDs and MSBSPs will report less information 
on FOCUS Report Part IIC because FOCUS Report Part IIC is tailored 
specifically to a bank's activities as an SBSD or an MSBSP. Further, 
FOCUS Report Part IIC elicits financial information that largely 
derives from the information that banks already report on the call 
reports that they file with their prudential regulators.\927\ Finally, 
unlike broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs and 
MSBSPs, bank SBSDs and MSBSPs will not be required to complete and file 
an annual audited financial report because this set of potential 
registrants are currently subject to the reporting requirements 
administered by their prudential regulators. These reporting 
requirements include filing of annual audited financial reports.
---------------------------------------------------------------------------

    \926\ See section II.B.2. of this release.
    \927\ See section II.B.2.b.ii. of this release. See also 12 
U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12 U.S.C. 1464.
---------------------------------------------------------------------------

    Consistent with the directive in Section 15F(f) of the Exchange 
Act, bank SBSDs and MSBSPs will also be required to report, in FOCUS 
Report Part IIC, details relating to their security-based swap 
activities. To this end bank SBSDs and MSBSPs will be required to 
create and maintain additional relevant details about their security-
based swap positions. In relation to reporting details about bank 
SBSDs' or bank MSBSPs' security-based swap positions, the Commission 
has limited the number of schedules required to be completed and filed 
by these entities in FOCUS Report Part IIC to one schedule that elicits 
details about their security-based swap positions. This schedule is 
also largely derived from the banks' call report.
    The Commission believes that the reporting requirements for bank 
SBSDs and MSBSPs will help the Commission and other regulators ensure 
that registrants follow applicable capital, margin, and segregation 
rules. The Commission believes that such capital, margin, and 
segregation rules are an integral part of ensuring that security-based 
swap activity is conducted in a financially responsible manner.
d. Notification Requirements
i. Broker-Dealer SBSDs and MSBSPs (Amendments to Rule 17a-11)
    The Commission is adopting amendments to existing Rule 17a-11--
which 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--to account for the security-based swap activities of broker-
dealer SBSDs and MSBSPs.\928\ Specifically, a broker-dealer SBSD will 
be required to notify the Commission when it fails to make a deposit in 
its security-based swap customer account.\929\
---------------------------------------------------------------------------

    \928\ See paragraphs (b)(5), (e), and (f) of Rule 17a-11, as 
amended.
    \929\ See paragraph (f) of Rule 17a-11, as amended.
---------------------------------------------------------------------------

    The Commission believes that the amendments to Rule 17a-11 will 
result in improving Commission and DEA oversight of broker-dealer 
SBSDs' and broker-dealer MSBSPs' security-based swap activities, 
including activities and financial conditions that suggest a material 
level of risk to the firm.
ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-8)
    The Commission is adopting new Rule 18a-8--which is modeled on Rule 
17a-11, as amended--to establish notification requirements for stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.\930\ New 
Rule 18a-8 is modeled closely upon the requirements applicable to 
broker-dealer SBSDs and MSBSPs. For example, the Commission has 
included a net capital deficiency and tentative net capital deficiency 
notification requirement in paragraph (a)(1) of Rule 18a-8 applicable 
to stand-alone SBSDs that is modeled on the notification requirements 
applicable to broker-dealers, over-the-counter derivatives dealers, and 
ANC broker-dealers that appear in paragraph (a) of Rule 17a-11, as 
amended.\931\ The Commission has also included ``early warning'' 
notification requirements in paragraph (b) of Rule 18a-8 that will be 
applicable to stand-alone SBSDs and MSBSPs and that are modeled after 
the relevant early warning provisions applicable to broker-dealers in 
paragraph (b) of Rule 17a-11, as amended.\932\ Likewise, the 
requirement for a bank SBSD, bank MSBSP, stand-alone SBSD, or stand-
alone MSBSP to notify the Commission in the event that it fails to make 
and keep current its required books and records is modeled on a similar 
requirement for broker-dealers.\933\
---------------------------------------------------------------------------

    \930\ See Rule 18a-8, as adopted.
    \931\ Compare paragraph (a)(1) of Rule 18a-8, as adopted, with 
paragraph (a) of Rule 17a-11, as amended.
    \932\ Compare paragraph (b) of Rule 18a-8, with paragraph (b) of 
Rule 17a-11, as amended.
    \933\ Compare paragraph (d) of Rule 18a-8, as adopted, with 
paragraph (c) Rule 17a-11, as amended.
---------------------------------------------------------------------------

    These notification requirements serve an important role in the 
context of the reporting and recordkeeping rules for broker-dealer 
SBSDs, broker-dealer

[[Page 68637]]

MSBSPs, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank 
MSBSPs because they serve to alert the Commission to the fact that 
certain events are occurring at a registrant that are highly relevant 
to the registrant's overall ability to continue to meet its obligations 
to customers and counterparties. For example, a report of a capital 
deficiency will alert the Commission to the fact that a registrant may 
lack sufficient capital to continue to operate its business and to meet 
its obligations to customers and counterparties. The notification 
requirements are thus critical to helping the Commission fulfill its 
statutory responsibility to monitor whether SBSDs and MSBSPs are 
operating in compliance with the Exchange Act and the rules 
thereunder.\934\
---------------------------------------------------------------------------

    \934\ See 15 U.S.C. 78o-10(f).
---------------------------------------------------------------------------

e. Quarterly Securities Count Requirement for Stand-Alone SBSDs (New 
Rule 18a-9)
    As discussed in greater detail above,\935\ the Commission is 
establishing a securities count program for SBSDs under Sections 15F 
and 17(a) of the Exchange Act that is modeled on Rule 17a-13's 
securities count program for broker-dealers. More specifically, stand-
alone SBSDs will be subject to new Rule 18a-9. For reasons explained 
above, new Rule 18a-9 will not apply to stand-alone MSBSPs, bank SBSDs, 
or bank MSBSPs.\936\ Rule 18a-9 applies substantially all the same 
affirmative obligations to stand-alone SBSDs that apply to broker-
dealers under Rule 17a-13.\937\
---------------------------------------------------------------------------

    \935\ See section II.D.1. of this release.
    \936\ See id.
    \937\ Compare Rule 18a-9, as adopted, with Rule 17a-13. Rule 
18a-9 omits the exemptions from applicability of the rule that 
appear in paragraphs (a)(1) through (3) and (e) of Rule 17a-13 
because those exemptions relate to broker-dealer-specific functions 
and broker-dealer registration status.
---------------------------------------------------------------------------

    As discussed in the Recordkeeping and Reporting Proposing Release, 
Rule 17a-13, the model for Rule 18a-9, arose in the aftermath of the 
1967-1970 securities industry crisis where deficiencies in broker-
dealers' internal controls and procedures for, among other things, 
adequately checking and counting securities created a serious 
``paperwork crisis'' in the securities markets.\938\ The Commission 
believes that instituting a parallel provision will help to avoid a 
similar problem for stand-alone SBSDs. Moreover, the Commission 
believes that to the extent a stand-alone SBSD has not invested in the 
technology necessary to help ensure that it can accurately track and 
safeguard securities, the rule will require such investments to be 
made,\939\ which could improve the quality of such tracking and 
safeguarding.
---------------------------------------------------------------------------

    \938\ See Recordkeeping and Reporting Proposing Release, 79 FR 
at 25247.
    \939\ See section V.C.2. of this release.
---------------------------------------------------------------------------

2. Costs of the Recordkeeping, Reporting, Notification, and Securities 
Count Requirements
    Compliance with the new rules and rule amendments will impose 
certain implementation-related costs on SBSDs and MSBSPs, as well as on 
stand-alone broker-dealers engaged in security-based swap activities. 
These costs may include start-up costs, including other costs such as 
those related to personnel and technology. The Commission understands 
that entities that engage in security-based swap transactions currently 
already incur costs during their normal business activities and that 
the new rules and rule amendments will impose incremental costs on such 
entities. While these incremental costs are not negligible, the 
Commission believes that they are unlikely to be material.
    Based on section IV.D. of this release, the Commission has 
estimated the implementation-related costs of the new rules and rule 
amendments for SBSDs, MSBSPs, and stand-alone broker-dealers that 
engage in security-based swap activities.\940\ The Commission estimates 
that across all potential SBSDs and MSBSP registrants including stand-
alone broker dealers that engage in security-based swap transactions, 
the initial implementation costs are approximately $10 million and the 
ongoing annual costs of implementation are approximately $9 million.
---------------------------------------------------------------------------

    \940\ See section IV.D. of this release (discussing total 
initial and annual recordkeeping and reporting burdens of the new 
rules and rule amendments).
---------------------------------------------------------------------------

    The following is a breakdown of the estimates of the costs imposed 
by the different rules and rule amendments being adopted in this 
document on each of the affected parties.\941\
---------------------------------------------------------------------------

    \941\ The Commission is also adopting technical amendments which 
it estimates will not impose material additional costs.
---------------------------------------------------------------------------

a. Requirements To Make and Keep Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-3)
    Amendments to Rule 17a-3 are estimated to impose a one-time initial 
cost of approximately $1,151,320 \942\ and an annual ongoing cost of 
approximately $216,657 \943\ across the entire industry that includes 
broker-dealer SBSDs, broker-dealer MSBSPs and stand-alone broker-
dealers engaged in security-based swap activities.
---------------------------------------------------------------------------

    \942\ 4,280 hours x $269 per hour national hourly rate for a 
compliance manager = $1,151,320. See section IV.D.1. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for proposed amendments to Rule 17a-3). The $269 
per hour figure for a compliance manager is from the Securities 
Industry and Financial Market Association (``SIFMA'')'s Management & 
Professional Earnings in the Securities Industry 2012, as modified 
by Commission staff to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \943\ 3,439 hours x $63 per hour national hourly rate for a 
compliance clerk = $216,657. See section IV.D.1. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for amendments to Rule 17a-3). The $63 per hour 
figure for a compliance clerk is from SIFMA's Management & 
Professional Earnings in the Securities Industry 2012, as modified 
by Commission staff to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
---------------------------------------------------------------------------

ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-5)
    The Commission estimates that new Rule 18a-5 will result in a total 
initial industry cost of $2,554,740 for non-broker-dealer SBSDs and 
MSBSPs.\944\ On an ongoing annual basis, the Commission estimates that 
new Rule 18a-5 will result in $791,475 of total industry costs for non-
broker-dealer SBSDs and MSBSPs.\945\
---------------------------------------------------------------------------

    \944\ (9,460 hours x $269 per hour national hourly rate for a 
compliance manager) + $10,000 in external costs = $2,554,740. See 
section IV.D.1. of this release (PRA estimate of the total initial 
and annual recordkeeping and reporting burden for Rule 18a-5, as 
adopted).
    \945\ (11,825 hours x $63 per hour national hourly rate for a 
compliance clerk) + $46,500 in external costs = $791,475. See 
section IV.D.1. of this release (PRA estimate of the total initial 
and annual recordkeeping and reporting burden for Rule 18a-5, as 
adopted).
---------------------------------------------------------------------------

    The Commission believes that requiring non-broker-dealer SBSDs and 
MSBSPs to comply with more limited recordkeeping requirements relative 
to broker-dealer SBSDs and MSBSPs, in keeping with the former entities' 
more restricted SBS-related business activities, will reduce compliance 
costs for these entities without compromising the effectiveness of the 
regulatory oversight achieved by the adopted rules.
    Additionally, the Commission has attempted to reduce compliance 
burdens and to allow firms subject to Rule 18a-5 to take advantage of 
potential efficiencies by basing new Rule 18a-5 upon existing Rule 17a-
3 rather than starting with a wholly new rule. The Commission believes 
that many non-broker-dealer SBSDs and non-broker-dealer MSBSPs will be 
affiliates of broker-dealers that already have familiarity with Rule 
17a-3 upon

[[Page 68638]]

which new Rule 18a-5 is modeled. Greater familiarity with the rule 
should reduce compliance burdens and costs for these entities. However, 
the Commission does acknowledge that with respect to entities not so 
affiliated, this approach is much less likely to ease compliance 
burdens.
b. Requirements To Preserve Records
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-4)
    The Commission estimates that the amendments to Rule 17a-4 will 
result in a total initial industry cost of $1,338,896 to broker-
dealers.\946\ On an ongoing annual basis, the Commission estimates that 
the amendments to Rule 17a-4 will result in $164,704 in industry costs 
to broker-dealers.\947\
---------------------------------------------------------------------------

    \946\ 4,264 hours x $314 per hour national hourly rate for a 
senior database administrator = $1,338,896. See section IV.D.2. of 
this release (PRA estimate of the total initial and annual 
recordkeeping and reporting burden for amendments to Rule 17a-4). 
The $314 per hour figure for a senior database administrator is from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2012, as modified by Commission staff to account for a 
1,800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead.
    \947\ (1,968 hours x $63 per hour national hourly rate for a 
compliance clerk) + $40,720 in external costs = $164,704. See 
section IV.D.2. of this release (PRA estimate of the total initial 
and annual recordkeeping and reporting burden for amendments to Rule 
17a-4, as amended).
---------------------------------------------------------------------------

ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-6)
    The Commission estimates that new Rule 18a-6 will result in 
$3,634,864 in terms of initial costs to the industry \948\ and $750,615 
in terms of annual ongoing costs to the industry.\949\
---------------------------------------------------------------------------

    \948\ 11,576 hours x $314 per hour national hourly rate for a 
senior database administrator = $3,634,864.
    \949\ (8,770 hours x $63 per hour national hourly rate for a 
compliance clerk) + (35 hours x $379 per hour for national hourly 
rate for an attorney) + $184,840 in external costs = $750,615.
---------------------------------------------------------------------------

c. Reporting Requirements
i. Broker-Dealer SBSDs, Broker-Dealer MSBSPs, and Stand-Alone Broker-
Dealers (Amendments to Rule 17a-5)
    The Commission anticipates that there may be additional costs 
associated with stand-alone broker dealers, broker-dealer SBSDs or 
broker-dealer MSBSPs completing and filing the annual reports required 
under paragraph (d) of Rule 17a-5, as amended. For example, the 
amendments will increase the cost of completing the annual compliance 
report filed by a broker-dealer SBSD because the compliance report for 
such firms will include statements about the firms' compliance with 
Rule 18a-4, the customer segregation rule that will apply to broker-
dealer SBSDs.\950\ Similarly, an ANC broker-dealer that currently files 
FOCUS Report Part II CSE and that registers with the Commission as an 
SBSD or MSBSP will experience a marginal impact on its reporting 
obligations due to new line items and schedules tailored to 
specifically elicit details about security-based swap activities.\951\
---------------------------------------------------------------------------

    \950\ See section II.B.3.a. of this release.
    \951\ See id.
---------------------------------------------------------------------------

    The Commission also anticipates that the cost of auditing the 
annual reports filed by stand-alone broker-dealers, broker-dealer SBSDs 
and MSBSPs will rise.\952\ Currently, and as described in more detail 
above, broker-dealers are required to engage a PCAOB-registered 
independent public accountant to conduct an annual audit of their 
annual reports.\953\ The Commission believes the additional required 
components of the financial report and the compliance report will 
increase the costs of ongoing compliance as well as those of the annual 
audit for these entities.
---------------------------------------------------------------------------

    \952\ See id.
    \953\ See section II.B.1. of this release.
---------------------------------------------------------------------------

    However, the Commission believes that overall the additional costs 
imposed by the amendments will be insubstantial because the FOCUS 
Report Part II, as amended, largely retains the same structure as it 
existed prior to the amendments. This will reduce uncertainty and avoid 
additional compliance costs that could stem from devising an entirely 
new reporting form and rules. Furthermore, the scope of the additional 
information--generally related to the firms' security-based swap 
activities--requested in FOCUS Report Part II, as amended, is 
circumscribed by what broker-dealer SBSDs and MSBSPs report currently 
in FOCUS Report Part II, Part II CSE, or Part IIB. The Commission 
believes that the economic effects associated with the requirement to 
file FOCUS Report Part II, as amended, will accordingly be 
circumscribed by the relevant registrants' current reporting 
obligations.
    The Commission estimates that the amendments to Rule 17a-5 will 
result in an initial total cost of $291,865 to broker-dealers.\954\ On 
an ongoing annual basis, the Commission estimates that the amendments 
to Rule 17a-5 will result in total costs of $1,862,556 per year to 
broker-dealers.\955\
---------------------------------------------------------------------------

    \954\ 1,085 hours x $269 per hour national hourly rate for a 
compliance manager = $291,865. See section IV.D.3. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for amendments to Rule 17a-5, as amended). The 
majority of costs that broker-dealers will incur as a result of the 
amendments to Rule 17a-5, as amended, are expected to result from 
the additional information required in FOCUS Report Part II, as 
amended, as compared to the parts of the FOCUS Report currently 
being filed by broker-dealers. Because broker-dealers (other than 
broker-dealers required to file Part IIA) will be required to file 
FOCUS Report Part II, as amended, on an ongoing basis, it is 
characterized as an annual cost, rather than an initial cost.
    \955\ 6,924 hours x $269 per hour national hourly rate for a 
compliance manager = $ 1,862,556. See section IV.D.3. of this 
release (PRA estimate of the total initial and annual recordkeeping 
and reporting burden for amendments to Rule 17a-5, as amended).
---------------------------------------------------------------------------

ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-7)
    New Rule 18a-7 as adopted will require stand-alone SBSDs and MSBSPs 
to file FOCUS Report Part II, as amended, with the Commission or its 
designee on a monthly basis. Given that stand-alone SBSDs and MSBSPs 
are not broker-dealers, these firms do not have experience filing the 
FOCUS Report, and thus reporting on FOCUS Report Part II, as amended, 
could represent a significant undertaking for them.
    Relative to the information these firms generate now, FOCUS Report 
Part II, as amended, likely elicits greater detail about the 
registrants' security-based swap positions. In order to be able to 
provide the security-based swap information elicited by FOCUS Report 
Part II, as amended, registrants will need to have the requisite 
additional details regarding their security-based swap positions. While 
the Commission expects that stand-alone SBSDs and MSBSPs currently 
prepare financial statements that encompass their security-based swap 
activity, reporting on FOCUS Report Part II, as amended, may require 
these firms to establish new systems that facilitate their reporting of 
the required information. While these upgrades are likely to entail 
costs for firms, firms may also use these upgrades towards more 
efficiently tracking their trading and security-based swap exposures.
    Moreover, since many of the entities that the Commission expects 
will register as stand-alone SBSDs and MSBSPs are currently not 
regulated, they are likely to be unaccustomed to completing and filing 
detailed reports with financial regulators. Therefore the Commission 
anticipates that stand-alone SBSDs and MSBSPs will bear substantial 
costs in connection with completing and filing FOCUS Report Part II, as 
amended.
    Rule 18a-7 as adopted further requires stand-alone SBSDs to 
generate and file their financial report and their

[[Page 68639]]

compliance report or exemption report with the Commission on an annual 
basis. The compliance report contains several statements and 
descriptions related to the firms' compliance with the financial 
responsibility rules. The exemption report contains several statements 
regarding the firms' exemption from Rule 18a-4. These details will be 
entirely new for most stand-alone SBSD registrants. Finally, Rule 18a-7 
requires stand-alone SBSDs and MSBSPs to file an annual audited report 
with the Commission. Stand-alone SBSDs and MSBSPs will be required to 
hire an independent public accountant to perform the audit and to 
prepare the annual audit report. The Commission is modifying Rule 18a-7 
to permit stand-alone SBSDs and MSBSPs the option to engage an 
independent public accountant that is not registered with the PCAOB, 
and to permit the accountant to use GAAS in the United States or PCAOB 
Standards.\956\
---------------------------------------------------------------------------

    \956\ See section II.B.3.a. of this release (discussing the 
requirement to file annual reports and the qualifications of 
independent public accountants).
---------------------------------------------------------------------------

    The Commission believes that this will entail compliance-related 
costs for these entities. Specifically, the Commission believes that 
stand-alone SBSDs approved to use models may incur compliance costs 
related to, among other things, preparing and filing the additional 
reports that will be required under the new rules. The Commission 
estimates that all stand-alone MSBSPs will incur costs stemming from 
the requirement to engage an auditor. The Commission anticipates that 
stand-alone MSBSPs will incur fewer costs in complying with these 
requirements as compared to stand-alone SBSDs because stand-alone 
MSBSPs will not be required to file the compliance report or the 
exemption report. The Commission believes the additional reports that 
stand-alone SBSDs approved to use models will be required to file with 
the Commission will give rise to less substantial compliance costs 
relative to the other costs generated by the reporting requirements. 
This is the case because the additional reporting obligations for 
stand-alone SBSDs approved to use models are relatively few and are 
generally closely related to their use of internal models approved by 
the Commission to calculate market and credit risk. Stand-alone SBSDs 
approved to use models will incur the majority of the costs associated 
with these internal models in designing and operating the models 
themselves rather than in filing the reports arising from these models.
    While the Commission understands that stand-alone SBSDs and MSBSPs 
may not currently be registered as broker-dealers and thus may not 
currently be filing the FOCUS Report (and thus have no familiarity with 
it), many stand-alone SBSDs and MSBSPs may be affiliated with, or be 
part of, a larger financial firm that contains a broker-dealer, thus 
providing a source of experience with the FOCUS Report that is internal 
to the firm and reducing compliance-related costs. Moreover, the 
accounting and legal communities are familiar with the FOCUS Report so 
the Commission believes that this familiarity should mitigate the 
compliance costs for stand-alone SBSDs and MSBSPs insofar as they have 
access to external assistance that has experience with the FOCUS 
Report. At the same time, the Commission acknowledges that there may be 
stand-alone SBSDs and MSBSPs affiliated with, for example, FCMs, and 
such firms would conceivably benefit from rules based upon or similar 
to CFTC rules.
    Furthermore, the information required to be reported by bank SBSDs 
and MSBSPs on the FOCUS Report Part IIC largely would be information 
that banks are already required to provide in call reports. Thus, the 
Commission does not believe that FOCUS Report Part IIC will require 
substantial additional effort to complete.\957\
---------------------------------------------------------------------------

    \957\ Whenever possible, the Commission has adopted the same 
line item numbers as are used for the call report (but appended with 
the letter ``b'' in FOCUS Report Part IIC) to facilitate a bank 
SBSD's or bank MSBSP's use of data from the call report.
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    The Commission estimates that Rule 18a-7 will result in an initial 
industry cost of $597,180.\958\ The Commission further estimates that 
Rule 18a-7 will result in an ongoing annual industry cost of 
$3,169,083.50.\959\
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    \958\ 2,220 hours x $269 per hour national hourly rate for a 
compliance manager = $597,180. See section IV.D.3. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for amendments to Rule 17a-5, as amended, and Rule 
18a-7, as adopted). The majority of the costs that SBSDs and MSBSPs 
will incur as a result of Rule 18a-7 are expected to result from the 
requirements to elicit information in Form SBS and to conduct an 
annual audit. Because the additional information in the Form SBS and 
the annual audit will be required on an ongoing basis, the 
Commission is characterizing them as sources of ongoing costs.
    \959\ (2,397 hours x $63 per hour national hourly rate for a 
compliance clerk) + $3,018,072.5 in external costs = $3,169,083.50. 
See section IV.D.3. of this release (PRA estimate of the total 
initial and annual recordkeeping and reporting burden Rule 18a-7, as 
adopted).
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d. Notification Requirements
    The Commission believes that costs of the notification requirement 
will be incidental to the related underlying substantive obligation.
i. Broker-Dealer MSBSPs and Stand-Alone Broker-Dealers (Amendments to 
Rule 17a-11)
    The Commission believes that most of the costs stemming from the 
notification requirements contained in amendments to Rule 17a-11 will 
arise from preparing and filing the notices. In the aggregate, the 
Commission estimates the amendments to Rule 17a-11 to result in an 
ongoing annual industry cost of $28,245 to broker-dealer SBSDs and 
MSBSPs.\960\
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    \960\ (105 hours) x $269 per hour national hourly rate for a 
compliance manager = $28,245. See section IV.D.4. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for amendments to Rule 17a-11, as amended, and Rule 
18a-8, as adopted).
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ii. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs 
(New Rule 18a-8)
    The Commission estimates that the notification requirements 
contained in new Rule 18a-8 for non-broker-dealer SBSDs and MSBSPs will 
result in an ongoing annual industry-wide costs of $1,237.\961\
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    \961\ 4.6 hours x $269 per hour national hourly rate for a 
compliance manager = $1,237. See section IV.D.4. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for amendments to Rule 17a-11, as amended, and Rule 
18a-8, as adopted).
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e. Quarterly Securities Count Requirement (New Rule 18a-9)
    The Commission believes that the costs and any larger economic 
effects associated with new Rule 18a-9 should be similar to the costs 
associated with existing Rule 17a-13 on which new Rule 18a-9 is 
modeled. These costs will primarily be related to the development and 
maintenance of internal procedures and controls and the investment in 
technology. The Commission estimates that Rule 18a-9 will impose an 
initial industry-wide cost of $51,150 \962\ and an industry-wide 
ongoing annual cost of $75,600.\963\
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    \962\ 150 hours x $341 per hour national hourly rate for a 
senior operations manager = $51,150. See section IV.D.5. of this 
release (PRA estimate of the total initial and annual recordkeeping 
and reporting burden for Rule 18a-9). The $341 per hour figure for a 
senior operations manager is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2012, as modified by Commission 
staff to account for an 1,800-hour work-year and multiplied by 5.35 
to account for bonuses, firm size, employee benefits, and overhead.
    \963\ 600 hours x $126 per hour national hourly rate for an 
operations specialist = $75,600. See section IV.D.5. of this release 
(PRA estimate of the total initial and annual recordkeeping and 
reporting burden for Rule 18a-9). The $126 per hour figure for an 
operations specialist is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2012, as modified by Commission 
staff to account for an 1,800-hour work-year and multiplied by 5.35 
to account for bonuses, firm size, employee benefits, and overhead.

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[[Page 68640]]

3. Economic Effects of the Approach to Recordkeeping, Reporting, 
Notification, and Securities Count Requirements
    In addition to the costs and benefits of the specific rules and 
amendments discussed above, certain economic effects arise from the 
Commission's overall approach in adopting recordkeeping, reporting, 
notification, and securities count requirements. Generally, the new 
requirements being adopted in this document are based upon the existing 
comprehensive system of recordkeeping, reporting, notification, and 
securities count rules applicable to broker-dealers, as modified to 
capture and document the security-based swap activities of broker-
dealers, SBSDs, and MSBSPs. As discussed in Section II. above, the 
current broker-dealer recordkeeping, reporting, notification, and 
securities count requirements served as the template for the new rules 
and rule amendments for several reasons. The financial markets in which 
entities expected to register as SBSDs and MSBSPs operate are similar 
to the financial markets in which broker-dealers currently operate in 
that the markets are driven in significant part by dealers that buy and 
sell on a regular basis and take principal risk.
    The Commission believes that adopting a similar regulatory approach 
for similar markets is likely to mitigate the cost borne by market 
participants. Broker-dealers and third-party service providers that 
assist broker-dealers in meeting their recordkeeping, reporting, and 
notification requirements are familiar with Commission recordkeeping, 
reporting, and notification rules for broker-dealers. To the extent 
that these entities become subject to these final rules or provide 
services to entities that become subject to these final rules, 
consistency with the existing recordkeeping, reporting, and 
notification requirements for broker-dealers will likely reduce the 
costs associated with compliance with these rules. The Commission 
believes that these efficiencies could be realized even by firms that 
are not currently registered as broker-dealers given that some of the 
new registrants will likely be part of larger financial firms that have 
a broker-dealer affiliate, thus providing a source of in-house 
experience with the Commission's broker-dealer rules. However, the 
Commission acknowledges that these reductions in compliance costs may 
be much more limited for firms that are not currently broker-dealers 
and are not affiliated with broker-dealers.
    In addition, Commission staff consulted with staff from fellow 
regulators regarding the new rules and rule amendments, as those 
regulators may have analogous regulations. The Commission believes the 
final rules may benefit security-based swap markets by applying 
recordkeeping and reporting requirements that are consistent with 
similar requirements in other jurisdictions. In considering whether 
there were other practicable regulatory alternatives, the Commission 
also examined existing rules of the prudential regulators. For example, 
the OCC has promulgated rules governing recordkeeping and confirmation 
requirements for securities transactions effected by national 
banks.\964\ Paragraph (a)(1) of the OCC rule governing the record that 
a national bank effecting securities transactions for customers must 
maintain (Rule 12.3) appears broadly consistent with paragraph (a)(6) 
of Rule 17a-3, as amended, as well as with paragraph (b)(7) of Rule 
18a-5.\965\ Consistency with prudential regulators' requirements may 
mitigate compliance burdens for bank SBSDs and MSBSPs that become 
subject to the adopted rules.
---------------------------------------------------------------------------

    \964\ See 12 CFR 12.3.
    \965\ Compare 12 CFR 12.3(a), with paragraph (a)(6) of Rule 17a-
3, as amended, and paragraph (b)(7) of Rule 18a-5, as adopted.
---------------------------------------------------------------------------

    The Commission also believes the new rules and rule amendments 
herein are broadly consistent with the approach taken by the CFTC. The 
CFTC's final rules were modeled on existing rules promulgated by both 
the CFTC and the Commission.\966\ As noted above,\967\ entities that 
are active participants in the security-based swap market also tend to 
be active participants in the CFTC-regulated swap market, and the 
Commission estimated that approximately 35 of the 50 expected SBSDs 
will be dually registered with the CFTC and therefore be subject to 
CFTC recordkeeping, reporting, and notification requirements.
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    \966\ See CFTC, Swap Dealer and Major Swap Participant 
Recordkeeping, Reporting, and Duties Rules, 77 FR at 20171 (stating 
swap dealer and major swap participant rules are modeled on existing 
rules as well as those of the Commission).
    \967\ See section V.B.2.a. of this release.
---------------------------------------------------------------------------

    The recordkeeping rules the Commission is adopting are similar to 
those of the CFTC in terms of their level of prescriptiveness. For 
example, paragraph (a)(1) of existing Rule 17a-3 sets forth the 
requirement that a broker-dealer make and keep current a trade blotter, 
while paragraphs (a)(1) and (b)(1) of Rule 18a-5 include parallel 
blotter requirements for stand-alone SBSDs and MSBSPs and bank-SBSDs 
and bank-MSBSPs respectively.\968\ In comparison, the CFTC's rule 202 
(``Daily Trading Records''), which corresponds to the Commission's 
Rules 17a-3 and 18a-5, prescribes that swap dealers and major swap 
participants must make and keep trade execution records that are very 
similar to the records required to be made and kept by Rules 17a-3 and 
18a-5.\969\ Because the Commission is adopting requirements that are 
similar to CFTC requirements, entities that are already registered with 
the CFTC may experience relatively lower costs to become compliant with 
the adopted rules.
---------------------------------------------------------------------------

    \968\ See section II.A.2.a. of this release.
    \969\ See 17 CFR 23.202(a)(2) (Rule 202).
---------------------------------------------------------------------------

    Further, as the Commission has noted in other releases, regulatory 
consistency can also reduce the likelihood of regulatory arbitrage. The 
new requirements applicable to stand-alone SBSDs and MSBSPs seek to 
regulate these firms' security-based swap activity in a manner 
consistent with the regulation of security-based swap activities 
conducted at broker-dealers and at banks, while reflecting the business 
model of such entities.\970\ As a result, the final rules mitigate the 
risk that bank SBSDs and MSBSPs restructure their activities in order 
to take advantage of differences in prudential regulators' 
recordkeeping and reporting requirements and those adopted by the 
Commission.
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    \970\ In this regard, the Commission notes the new rules exclude 
a number of recordkeeping requirements for bank SBSDs and MSBSPs. As 
discussed above in section I of this release, Section 15F(f)(1)(B) 
of the Exchange Act requires such institutions to keep only those 
books and records of all activities related to the conduct of 
business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    The Commission believes that applying consistent requirements 
across all entities that engage in security-based swap activity will 
facilitate competition between these entities on similar terms insofar 
as firms operating in different jurisdictions will incur similar 
compliance costs. The Commission is seeking to provide all security-
based swap activity, irrespective of the entity within which such 
activity is conducted, a level regulatory playing field while being 
cognizant of the fact that firms with a more limited security-based 
swap business should also be subject to an appropriately circumscribed 
set of regulations.

[[Page 68641]]

    In response to a commenter's concerns regarding harmonization with 
the CFTC's recordkeeping requirements as well as to promote 
harmonization with CFTC requirements,\971\ the Commission is also 
adopting a limited alternative compliance mechanism that--subject to 
certain requirements \972\--allows registrants to employ a single 
recordkeeping system for swap and security-based swap transactions and 
positions and to follow a single set of recordkeeping requirements 
while helping to ensure that the requisite records are promptly 
available to the Commission staff in a format that readily permits 
examination. The limited alternative compliance mechanism could thereby 
ease compliance burdens--particularly initial burdens--for registrants 
that have already devoted substantial resources towards complying with 
the CFTC's recordkeeping requirements for swap transactions and 
positions and will not be required to incur afresh the costs of the 
recordkeeping system software needed to comply with the Commission's 
new recordkeeping requirements for security-based swap transactions and 
positions. The limited alternative compliance mechanism should also 
afford the relevant registrants greater flexibility in the manner in 
which they record security-based swap transactions and positions.\973\
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    \971\ See Nomura Letter.
    \972\ See section II.A.1. of this release.
    \973\ See section II.A.2. of this release. As stated above, 
however, the Commission is making the conservative estimate that no 
firms will use the limited alternative compliance mechanism. 
However, the Commission believes that providing the limited 
alternative compliance mechanism could ease compliance burdens for 
some firms already registered with the CFTC.
---------------------------------------------------------------------------

    Finally, the Commission is amending the full alternative compliance 
mechanism in existing Rule 18a-10 that permits certain SBSDs that are 
registered as swap dealers and that predominantly engage in a swaps 
business to elect to comply with the capital, margin, and segregation 
requirements of the CEA and the CFTC's rules in lieu of complying with 
the capital, margin, and segregation requirements in Rules 18a-1, 18a-
3, and 18a-4. The amendments to Rule 18a-10 will permit firms that will 
operate under Rule 18a-10 to elect to comply with the recordkeeping and 
reporting requirements of the CEA and the CFTC's rules in lieu of 
complying with Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9. The 
Commission believes the availability of the full alternative compliance 
mechanism will promote harmonization with CFTC requirements and reduce 
compliance costs for eligible SBSDs and MSBSPs. The Commission 
estimates that in the absence of the full alternative compliance 
mechanism, the initial industry compliance costs could be as much as 
$827,715 higher and the ongoing annual industry compliance could be as 
much as $1,292,637 higher.\974\
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    \974\ This estimate is based on the Commission's estimate that 3 
stand-alone SBSDs will take advantage of the full alternative 
compliance mechanism. See section IV.D.7 of this release. The 
increase in initial industry compliance costs in the absence of full 
alternative compliance for Rules 18a-5, 18a-6, 18a-7, 18a-8, and 
18a-9 are $261,240, $395,640, $145,260, $0.00, and $25,575, 
respectively. The corresponding increases in ongoing compliance 
costs are $89,550, $79,088, $1,114,549, $0.00, and $9,450, 
respectively. See section IV.D.1. through section IV.D.4. and 
section IV.D.6. of this release.
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4. Cross-Border Application and Substituted Compliance
    As discussed above,\975\ the Commission treats the adopted 
recordkeeping and reporting requirements as entity-level requirements. 
Entity-level requirements apply to all the security-based swap 
transactions of the registered entity regardless of the U.S. person 
status of the entity or the U.S. person status of the entity's 
counterparty to any particular transactions. The Commission believes 
that the concentration of global security-based swap activity within a 
small group of large entities makes entity level regulation--thereby 
not exempting certain transactions from the recordkeeping, reporting, 
notification, and securities count requirements being adopted in this 
document--critical to advancing the policy objectives of Title VII.
---------------------------------------------------------------------------

    \975\ See section II.F.1. of this release.
---------------------------------------------------------------------------

    Classifying security-based swap recordkeeping and reporting 
requirements as entity-level requirements may facilitate and strengthen 
Commission oversight of registered SBSDs and enhance compliance with 
the full range of obligations under Federal securities laws and 
Commission rules regardless of the location of counterparties or 
personnel. Title VII security-based swap recordkeeping and reporting 
requirements may enhance the Commission's ability to evaluate foreign 
SBSDs and MSBSPs' records for evidence of market manipulation or other 
abusive practices within the United States. Moreover, since the 
marginal cost of keeping daily trading records and confirmations is 
likely to be low for SBSDs and MSBSPs, the Commission does not believe 
that the savings associated with limited application of these 
requirements to a subset of an SBSD's or MSBSP's transactions is likely 
to be high.
    In considering the scope of the entities that will be included 
within the ambit of the new recordkeeping, reporting, notification, and 
securities count requirements being adopted in this document, the 
Commission is aware that market participants may respond to entity-
level requirements by restructuring their business or exiting markets 
to reduce the likelihood of incurring an obligation to register with 
the Commission. Compliance with the recordkeeping and reporting 
requirements will increase costs for SBSDs and MSBSPs, including those 
that are non-U.S. persons. To the extent that foreign SBSDs and MSBSPs 
have market power, they may pass the costs of these requirements 
through to U.S. persons in the form of higher transaction costs. 
Furthermore, to the extent that non-U.S. persons avoid transacting with 
U.S. persons to avoid registration requirements, U.S. persons may 
implicitly bear the costs of compliance through reduced access to 
liquidity provided by non-U.S. persons.\976\
---------------------------------------------------------------------------

    \976\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, 79 FR at 47343.
---------------------------------------------------------------------------

    Given that security-based swap markets are global and the 
Commission expects registered SBSDs and MSBSPs to transact across 
multiple jurisdictions, some registered SBSDs may be subject to 
duplicative or mutually conflicting recordkeeping and reporting 
requirements in multiple foreign jurisdictions. This may impede the 
entry of foreign SBSDs and MSBSPs into the U.S. security-based swap 
market, disrupt existing business relationships, and, more generally, 
reduce competition and market efficiency. As discussed above, the 
Commission is amending Rule 3a71-6 to provide non-U.S. SBSDs and non-
U.S. MSBSPs with the potential to utilize substituted compliance with 
comparable foreign requirements to satisfy the recordkeeping and 
reporting requirements of Section 15F of the Exchange Act and Rules 
18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder.\977\
---------------------------------------------------------------------------

    \977\ See section II.F.2. of this release.
---------------------------------------------------------------------------

    Allowing for the possibility of substituted compliance is expected 
to help achieve the benefits of the recordkeeping and reporting 
requirements being adopted in this document in a manner that avoids the 
costs that foreign registrants would have

[[Page 68642]]

to bear due to regulatory duplication or conflict. A substituted 
compliance determination could thus preserve the access of foreign 
registrants into U.S. security-based swap markets and hence promote 
market efficiency and enhance competition therein while also generally 
facilitating a well-functioning global security-based swap market. 
Further, as the availability of substituted compliance lowers the 
potential costs to non-U.S. SBSDs and non-U.S. MSBSPs of complying with 
the rules being adopted in this document, the costs of completing 
security-based swap transactions may be lower, relative to the case 
where substituted compliance is not available and counterparties, 
including non-dealer counterparties, may bear lower transactions costs 
as a result. At the same time, the process of making substituted 
compliance requests may cause foreign registrants to incur additional 
costs of applying for a substituted compliance determination. These 
substituted compliance requests will be made on a voluntary basis, and 
foreign registrants will only make such requests when the anticipated 
costs of relying on substituted compliance are lower than the costs of 
complying directly with the final rules being adopted in this document. 
Further, after a substituted compliance determination is made, foreign 
registrants will choose substituted compliance only if their expected 
private benefits from participating in U.S. security-based swap markets 
exceed expected private costs, including any conditions the Commission 
may attach to the substituted compliance determination.
    The Commission also recognizes that these costs and the overall 
economic effects of allowing substituted compliance for the final 
recordkeeping and reporting rules will depend on, among other things: 
Whether and to what extent substituted compliance requests will be 
granted for jurisdictions in which some of the most active foreign 
registrants are currently regulated and supervised; the costs of 
potential relocation, business restructuring, or direct compliance by 
foreign registrants that may be denied substituted compliance requests; 
the relevant information required to demonstrate consistency between 
the foreign regulatory requirements and the Commission's recordkeeping 
and reporting rules; the relevant information required to demonstrate 
the adequacy of the foreign regime's compliance and enforcement 
mechanisms; the fraction of foreign registrants in a given jurisdiction 
that may choose to make substituted compliance requests; and whether 
substituted compliance determinations for subsequent applications are 
more likely to be granted after an initial affirmative substituted 
compliance determination for the first applicant from a given 
jurisdiction. Nevertheless, the potential for the duplication of 
recordkeeping and reporting compliance costs on foreign registrants may 
be more significant in cases where the foreign jurisdictions' 
regulatory regimes impose less stringent recordkeeping and reporting 
requirements than the requirements being adopted in this document or 
when other prerequisites for substituted compliance have not been 
satisfied. The Commission thus recognizes that there will be limits to 
the availability of substituted compliance, including the possibility 
that substituted compliance may be permitted with regard to some 
requirements and not with regard to others, or that, in certain 
circumstances, substituted compliance may not be permitted with respect 
to any requirements of a particular jurisdiction.

D. Impact on Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act provides that whenever the 
Commission engages in rulemaking under the Exchange Act and is required 
to consider or determine whether an action is necessary or appropriate 
in the public interest, the Commission shall also consider, in addition 
to the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. In addition, Section 
23(a)(2) of the Exchange Act requires the Commission, when making rules 
under the Exchange Act, to consider the impact such rules would have on 
competition.\978\ Section 23(a)(2) of the Exchange Act also prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \978\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In the aggregate, the recordkeeping, reporting, and notification 
rules are an integral part of the financial responsibility rules 
governing security-based swaps which, in turn, are part of the 
regulatory regime for OTC derivatives markets established by Title VII 
of the Dodd Frank Act. As stated above, the Commission believes that 
the recordkeeping, reporting, notification, and securities count rules 
and rule amendments being adopted in this document address, among other 
things, the documentation, reporting, and evidence of compliance with 
the capital, margin, and segregation rules. Thus, the Commission 
believes that these rules, by their nature, will have a more limited 
economic impact as compared to the Commission's capital, margin, and 
segregation rules.\979\
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    \979\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43968-44040.
---------------------------------------------------------------------------

    Similarly, while the Commission expects that the adoption of these 
rules and rule amendments, and their attendant benefits and costs, will 
affect competition, efficiency, and capital formation, the Commission 
believes that such impact will be more limited than the impact from the 
capital, margin, and segregation rules. In most instances, the 
Commission believes the costs of the new rules and rule amendments will 
be implementation-related and the benefits will stem from enabling the 
Commission to evaluate whether SBSDs and MSBSPs are in compliance with 
the financial responsibility rules governing security-based swap 
activities. The Commission's belief that the costs of the rule and rule 
amendments will be implementation-related is supported by the results 
of a broker-dealer survey conducted prior to the finalization of the 
OTC derivatives rules.\980\ According to this survey even though the 
majority, i.e., 57.5% of surveyed broker-dealers, stated that they 
expected to be ``highly impacted'' by the regulation of OTC derivatives 
markets under Title VII of the Dodd Frank Act,\981\ the specific areas 
that were anticipated as representing top operational challenges were 
all implementation-related. Thus, the majority, i.e., 61.9% of surveyed 
broker-dealers, indicated that their top anticipated challenge from 
Title VII regulations for OTC derivatives markets was ``documenting 
compliance with suitability requirements when making recommendations to 
counterparties'' followed by 59.5%, who cited the ``need for subject 
matter expertise to derivatives and the disclosure obligations set 
forth in the CFTC's recently proposed rules.'' In terms of the areas 
that the survey respondents anticipated would represent the most 
significant operational challenges emerging from the Dodd-Frank Act, 
45.3% indicated ``regulatory inquiries and exams'' followed by 35.7% 
for

[[Page 68643]]

``trade reporting'' and 19% for ``disclosures and reporting 
requirements.''
---------------------------------------------------------------------------

    \980\ See Harvard Law School Forum on Corporate Governance and 
Financial Regulation, Broker-Dealers Respond to Dodd-Frank and FINRA 
(Oct. 8, 2011), available at https://corpgov.law.harvard.edu/2011/10/08/broker-dealers-respond-to-dodd-frank-and-finra/.
    \981\ The survey considered the following specific initiatives 
of the Dodd-Frank Act: (1) The uniform fiduciary standard; (2) the 
Volcker Rule regulating proprietary trading under Dodd-Frank Title 
VI and (iii) the regulation of the OTC derivatives markets under 
Title VII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The rules are designed to provide greater regulatory transparency 
into the business activities of firms that engage in security-based 
swap activities and to assist the Commission and other regulators in 
reviewing and determining compliance with the capital, margin, and 
segregation requirements. As the Commission has discussed in its 
associated release,\982\ the capital, margin, and segregation 
requirements have the potential to enhance efficiency and capital 
formation in financial markets through their impact on competition. In 
general, the Commission believes that the new rules and rule amendments 
will thus help ensure that firms that engage in security-based swap 
activities do so in a financially responsible manner. The Commission 
further believes that the new rules and rule amendments, by improving 
its ability to monitor the financial condition of the relevant 
registrants, could increase the willingness of market participants that 
value regulatory oversight of the security-based swap market to engage 
in security-based swap activities. Additional participation in the 
security-based swap market could lead to increased competition between 
suppliers of security-based swap liquidity and increased efficiency, 
through both lower transactions costs and reduced search costs. These, 
in turn, may have a positive effect on capital formation, to the extent 
that they improve opportunities for risk sharing using security-based 
swaps.
---------------------------------------------------------------------------

    \982\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44033-40.
---------------------------------------------------------------------------

    The Commission is cognizant, however, that it must be sensitive to 
the costs and burdens imposed by its rules on both individual firms and 
financial markets as a whole. For example, overly restrictive or costly 
recordkeeping requirements could reduce the willingness of firms to 
engage in security-based swap trading. This could, in turn, increase 
transaction costs for market participants and dampen liquidity in the 
market. Even if the costs of overly restrictive recordkeeping, 
reporting, notification, and securities count requirements were 
shouldered only by those market participants that are subject to them, 
the regulations will impose additional costs on capital markets at 
large since the resources used to comply with the regulations will not 
be available for potentially more efficient uses, thereby distorting 
capital allocation and, in turn, adversely affecting capital formation. 
Similarly, the additional costs of the new recordkeeping, reporting, 
securities count, and notification requirements could represent 
barriers to entry for potential market participants; however, the 
Commission believes that these rules and rule amendments are unlikely 
to increase the barriers to entry in this market in a material way. 
Notwithstanding this belief, the Commission has taken steps, where 
appropriate, to reduce compliance costs for some SBSDs and MSBSPs by 
establishing the limited and full alternative compliance mechanisms.
    As described in more detail above, broker-dealers historically have 
not participated in a significant way in security-based swap trading, 
in part, because the existing broker-dealer capital requirements make 
it relatively costly to conduct these activities in broker-
dealers.\983\ Thus, from among the 3,893 stand-alone broker-dealers 
registered with the Commission as of December 31, 2017, the Commission 
estimates that approximately twenty-five (or only 0.62%) will be 
engaged in security-based swap activities while not being required to 
register as SBSDs or MSBSPs.\984\
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    \983\ See section IV.C. of this release.
    \984\ See id.
---------------------------------------------------------------------------

    To the extent that the new rules or rule amendments are burdensome 
or costly, they may induce market participants to scale back their 
activities or exposures to avoid incurring the obligation to register 
as SBSDs or MSBSPs. This reduction in scale could adversely impact 
competition between liquidity suppliers leading to lower liquidity, 
impeded price discovery, and higher transaction costs, all of which are 
characteristics of reduced levels of efficiency in the market. 
Moreover, it is possible that increased costs could lead certain market 
participants to cease engaging altogether in security-based swap 
trading or to restructure their activities in ways that allow them to 
avoid registration with the Commission and entity-level requirements 
under Title VII.
    The Commission is particularly cognizant of the impacts of 
restructuring in financial markets that are global in scope. 
Competitive disparities in regulations across different jurisdictions 
coupled with SBSDs' flexibility to restructure their businesses and 
operations may result in market fragmentation.\985\ The outcome of such 
restructuring could be a large pool of security-based swap liquidity 
consisting of transactions that are carried out by unregistered non-
U.S.-person dealers with non-U.S.-person counterparties using personnel 
outside of the United States and a smaller pool consisting of 
transactions involving U.S. persons or using personnel located in a 
U.S. branch or office. Such fragmentation could make it more difficult 
for U.S. persons to find liquidity in the United States, and those U.S. 
persons that might otherwise use security-based swaps to hedge 
financial and commercial risks may reduce their hedging activity and 
assume an inefficient amount of risk, or engage in precautionary 
savings by accumulating capital to mitigate the effects of market 
risks, which would inhibit capital formation. The Commission notes, 
however, that the type of restructuring necessary to avoid counting 
security-based swap dealing activity towards de minimis thresholds 
which will trigger requirements to register as an SBSD will likely be 
costly for non-U.S. persons,\986\ and these costs may reduce the 
likelihood that non-U.S. persons restructure in response to the 
requirements being adopted in this release. In particular, to the 
extent that the costs of restructuring are larger than the costs of 
complying with Commission recordkeeping, reporting, and notification 
rules, they may reduce the likelihood of market fragmentation and the 
associated impacts on competition, efficiency, and capital formation 
that might otherwise result from counterparties seeking to avoid 
complying with these rules.
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    \985\ Analysis of TIW data shows that 79.5% of North American 
corporate single-name CDS transactions in 2014 involved either two 
ISDA-recognized dealers or an ISDA-recognized dealer and a non-U.S.-
person non-dealer. The Commission believes that restructuring as a 
response to competitive disparities stemming from Title VII 
regulation is more likely to occur within this subset of the market 
because these dealers currently operate from locations throughout 
the world and enjoy a volume of business that is more likely to make 
such restructuring profitable.
    \986\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office or in a 
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De 
Minimis Exception, 81 FR at 8633.
---------------------------------------------------------------------------

    In addition to the competitive effects of compliance burdens 
discussed above, the approach to substituted compliance may impact 
competition between U.S. and non-U.S. entities. Substituted compliance 
for recordkeeping and reporting requirements may reduce burdens for 
foreign SBSDs and MSBSPs and may promote competition if it reduces the 
likelihood that foreign SBSDs and MSBSPs exit the U.S. security-based 
swap market. Moreover, substituted compliance could improve efficiency 
by reducing the potential that a fragmented market develops, in which

[[Page 68644]]

U.S. persons cannot easily access liquidity provided by foreign SBSDs 
and MSBSPs.

E. Alternatives to the Adopted Recordkeeping, Reporting, Notification, 
and Securities Count Rules

    The Commission recognizes that there may be other appropriate 
approaches to establishing recordkeeping, reporting, and notification 
requirements. In the course of preparing and considering the new rules 
and rule amendments it is adopting in this document, Commission staff 
reviewed and analyzed analogous rule sets utilized by the Commission's 
fellow Federal regulators, with a view towards determining whether 
there may be other practicable alternatives.
    One alternative would be for all SBSDs and MSBSPs to keep and 
report the same records and other financial reports. While technically 
possible and arguably simpler to implement and administer, the 
Commission does not believe such a requirement would be justified given 
the different capital, margin, and segregation requirements that apply 
to each participant. For example, since a stand-alone MSBSP is not 
subject to a minimum net capital requirement under the capital rules 
applicable to SBSDs and MSBSPs (it is subject to a positive tangible 
net worth standard instead),\987\ it may be unduly burdensome to 
require stand-alone MSBSPs to calculate and report in FOCUS Report Part 
II, as amended, the amount of net capital they hold. Hence, while the 
Commission considered this approach, the Commission believes that such 
an approach would be confusing and unduly burdensome for firms required 
to complete and file FOCUS Report Part II, as amended, and would 
introduce significant compliance challenges beyond those imposed by the 
new rules and rule amendments.
---------------------------------------------------------------------------

    \987\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43906-08.
---------------------------------------------------------------------------

    Another alternative to the new rules and rule amendments the 
Commission is adopting would be rules that are less prescriptive. Under 
such rules, detailed record production and retention requirements could 
be replaced by more general references to the types of information the 
firm needs to document and retain for examination purposes. This 
approach could promote a consistent view and management of 
recordkeeping and reporting obligations within a large financial firm 
that has numerous subsidiaries. This approach would also likely have 
the advantage of being less costly, as the firm would be more able to 
bring recordkeeping practices at its subsidiaries into conformity with 
existing recordkeeping practices at the parent. While this approach has 
its benefits, the financial markets and transactions in which SBSDs and 
MSBSPs are expected to operate and engage in, respectively, are similar 
to the financial markets and transactions in which broker-dealers 
operate, and the Commission believes these similarities argue for a 
consistent regulatory approach.\988\ In addition, as discussed above, 
the objectives of these broker-dealer requirements are similar to the 
objectives underlying the new rules and rule amendments regarding 
security-based swaps.\989\
---------------------------------------------------------------------------

    \988\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43881 (stating a similar rationale for basing the proposed 
capital, margin, and segregation requirements for SBSDs on the 
broker-dealer capital, margin, and segregation requirements).
    \989\ See section I of this release.
---------------------------------------------------------------------------

    The Commission considered modifying the electronic storage 
requirements in Rule 17a-4 to remove the requirement that the 
electronic storage system preserve records exclusively in a non-
rewriteable and non-erasable format similar to the modification made to 
Rule 18a-6 in response to comments that it received. The Commission 
concluded that any such modification to Rule 17a-4 would affect a large 
number of broker-dealers that are not likely to register either as 
SBSDs or MSBSPs and may raise issues that are distinct from those 
raised by stand-alone or bank SBSDs and MSBSPs. Accordingly, the 
Commission believes that any change to these requirements should be 
addressed in a separate rulemaking.\990\
---------------------------------------------------------------------------

    \990\ See section II.A.3.a. of this release.
---------------------------------------------------------------------------

    The Commission has also considered alternatives to the financial 
reporting rules being adopted. For example, with respect to bank SBSDs 
and MSBSPs, one alternative would be to permit these firms to use the 
existing financial reports made with their respective prudential 
regulators. This approach would allow the firms to avoid creating and 
filing an additional financial report with the Commission, and would 
likely result in fewer compliance-related costs. The Commission is 
aware of the burdens and costs associated with preparing an additional 
regulatory submission such as FOCUS Report Part IIC, but Rule 18a-7(a) 
is designed to lower burdens that bank SBSDs and MSBSPs may face to 
meet reporting requirements by aligning certain Commission reporting 
requirements with requirements these entities already face because they 
are subject to prudential regulators' reporting requirements. While 
FOCUS Report Part IIC seeks certain specific transaction and position 
data regarding bank SBSDs' and bank MSBSPs' security-based swap 
activities, the other required financial data in FOCUS Report Part IIC 
for bank SBSDs and MSBSPs are likely readily available because these 
come directly from the filings these firms are already required to make 
with their respective prudential regulators.\991\
---------------------------------------------------------------------------

    \991\ See section II.B.2.b.ii. of this release.
---------------------------------------------------------------------------

    The Commission has also considered alternative financial reporting 
arrangements for stand-alone SBSDs or stand-alone MSBSPs. For example, 
the Commission is aware that the CFTC proposed that stand-alone swap 
dealers and stand-alone major swap participants be required to submit 
monthly unaudited financial statements within 17 business days of the 
end of the month, as well as GAAP financial statements within 60 days 
of the end of the fiscal year.\992\ The Commission believes that the 
information elicited by FOCUS Report Part II, as amended, should assist 
the Commission and the firms' DEAs to conduct effective examinations of 
broker-dealer SBSDs and MSBSPs. The broker-dealer SBSD and broker-
dealer MSBSP reporting requirements should promote transparency of the 
financial and operational condition of these entities to both the 
Commission and the public.
---------------------------------------------------------------------------

    \992\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, 81 FR 91252, 91276 (Dec. 16, 2016) (discussion of 
proposed CFTC Regulation 23.105).
---------------------------------------------------------------------------

    The Commission has also considered alternatives to the notification 
and securities count rules.\993\ An alternative to the notification 
rule would be to not have such a rule, or to have fewer events give 
rise to the requirement for a notification. Similarly, with respect to 
the quarterly securities count rule, the Commission believes the 
alternative would be to specify a less frequent count or to omit 
altogether the requirement for securities count.
---------------------------------------------------------------------------

    \993\ See section II.D.1. of this release (summarizing rationale 
underlying Rule 17a-13).
---------------------------------------------------------------------------

    The Commission adopted the notification and securities count rules 
because it believes that the rules are an appropriate component of its 
oversight of the financial responsibility of firms engaged in the 
security-based swap business. The broker-dealer recordkeeping, 
reporting, notification, and securities count requirements are part of 
the broker-dealer financial responsibility rules.\994\ The financial 
responsibility rules are designed to work together to establish a 
comprehensive regulatory program designed to promote the prudent

[[Page 68645]]

operation of broker-dealers and the safeguarding of customer securities 
and funds held by broker-dealers. In this regard, the notification and 
securities count rules (in conjunction with the recordkeeping and 
reporting rules) are designed to promote compliance with the capital, 
margin, and segregation requirements for broker-dealers. The 
recordkeeping, reporting, notification, and securities count 
requirements applicable to SBSDs and MSBSPs, along with the capital, 
margin, and segregation requirements for these registrants, are 
designed to establish a comprehensive financial responsibility program 
for SBSDs and MSBSPs. Like the broker-dealer rules, the recordkeeping, 
reporting, notification, and securities count requirements applicable 
to SBSDs and MSBSPs are designed to promote compliance with the 
capital, margin, and segregation requirements applicable to SBSDs and 
MSBSPs. Omitting such rules would create regulatory disparities between 
broker-dealers, banks, stand-alone SBSDs, and stand-alone MSBSPs. For 
these reasons, the Commission believes that alternative approaches 
would not be as effective in helping to ensure compliance with the 
capital, margin, and segregation requirements applicable to SBSDs and 
MSBSPs.
---------------------------------------------------------------------------

    \994\ See 17 CFR 240.3a40-1.
---------------------------------------------------------------------------

VI. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\995\ the Office of 
Information and Regulatory Affairs has designated these rules as ``[not 
a major rule],'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \995\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \996\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Pursuant to Section 605(b) of the RFA,\997\ the 
Commission certified in the Proposing Release and the Cross-Border 
Proposing Release that the proposed amendments to Rules 17a-3, 17a-4, 
17a-5, and 17a-11 and new Rules 3a71-6 and 18a-5 through 18a-9 would 
not have a significant economic impact on any ``small entity'' \998\ 
for purposes of the RFA.\999\
---------------------------------------------------------------------------

    \996\ See 5 U.S.C. 601 et seq.
    \997\ See 5 U.S.C. 605(b).
    \998\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in 17 CFR 240.0-10 (``Rule 0-
10''). See Statement of Management on Internal Accounting Control, 
Exchange Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 
1982).
    \999\ See Recordkeeping and Reporting Proposing Release; Capital 
Rule for Certain Security-Based Swap Dealers, 79 FR at 25296-25297; 
Cross-Border Proposing Release, 78 FR at 31204-31205.
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes: (1) When used with reference to an ``issuer'' or 
a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less,\1000\ or (2) a broker-dealer with 
total capital (net worth plus subordinated liabilities) of less than 
$500,000 on the date in the prior fiscal year as of which its audited 
financial statements were prepared pursuant to paragraph (d) of Rule 
17a-5, or, if not required to file such statements, a broker-dealer 
with total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the last day of the preceding fiscal year (or in the 
time that it has been in business, if shorter); and is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization.\1001\
---------------------------------------------------------------------------

    \1000\ See 17 CFR 240.0-10(a).
    \1001\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    Based on available information about the security-based swap 
market, the market, while broad in scope, is largely dominated by 
entities such as those that will be covered by the SBSD and MSBSP 
definitions. Based on feedback from industry participants about the 
security-based swap markets, the Commission continues to believe that 
(1) the types of entities that would engage in more than a de minimis 
amount of dealing activity involving security-based swaps--which 
generally would be large financial institutions--would not be ``small 
entities'' for purposes of the RFA; \1002\ and (2) the types of 
entities that may have security-based swap positions above the level 
required to register as ``major security-based swap participants'' 
would not be ``small entities'' for purposes of the RFA. Thus, the 
Commission believes that it is unlikely that the requirements 
applicable to SBSDs and MSBSPs that are being established under the 
amendments to Rules 3a71-6, 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 and 
new Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9, will have a 
significant economic impact on any small entity.
---------------------------------------------------------------------------

    \1002\ The amendments are discussed in detail in section II of 
this release. The Commission discusses the economic impact, 
including the compliance costs and burdens, of the amendments in 
sections IV and V of this release.
---------------------------------------------------------------------------

    The Commission estimates that as of December 31, 2018 there are 
approximately 996 broker-dealers that are ``small'' for the purposes 
Rule 0-10. While the amendments to Rules 17a-3, 17a-4, and 17a-5 
relating to making and keeping records that include details about 
security-based swaps and swaps and reporting information about 
security-based swaps and swaps will apply to all broker-dealers with 
such positions, it is unlikely that these amendments will have any 
impact on small broker-dealers, since most, if not all, of these firms 
generally do not hold these types of positions. In addition, the 
technical amendments to Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 
will apply to all broker-dealers, including broker-dealers that are 
small. However, these amendments will have no impact on broker-dealers, 
including small broker-dealers, because they will not establish new 
substantive requirements.
    For the foregoing reasons, the Commission certifies that the 
amendments to Rules 3a71-6, 17a-3, 17a-4, 17a-5, 17a-11, and 17a-12 and 
new Rules 18a-5 through 18a-9, will not have a significant economic 
impact on a substantial number of small entities for purposes of the 
RFA.

VIII. Statutory Basis

    The Commission is revising Rules 30-3, 17a-3, 17a-4, 17a-5, 17a-11, 
17a-12, and 3a71-6 under the Exchange Act (17 CFR 200.30-3, 17 CFR 
240.17a-3, 17 CFR 240.17a-4, 17 CFR 240.17a-5, 17 CFR 240.17a-11, 17 
CFR 240.17a-12, and 17 CFR 240.3a71-6), Part II of Form X-17A-5 and the 
instructions thereto (17 CFR 249.617), and Part III of Form X-17A-5 (17 
CFR 249.617), and adding new Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-
9 under the Exchange Act (17 CFR 240.18a-5, 17 CFR 240.18a-6, 17 CFR 
240.18a-7, 17 CFR 240.18a-8, and 17 CFR 240.18a-9), and Part IIC of 
Form X-17A-5 and the instructions thereto (17 CFR 249.617) pursuant to 
the authority conferred by the Exchange Act, including Sections 15F, 
17, and 23(a).

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Civil rights, Classified information, Conflicts 
of interest, Environmental impact

[[Page 68646]]

statements, Equal employment opportunity, Federal buildings and 
facilities, Freedom of information, Government securities, Organization 
and functions (Government agencies), Privacy, Reporting and 
recordkeeping requirements, Sunshine Act.

17 CFR Part 240

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

17 CFR Part 249

    Brokers, Recordkeeping and reporting requirements, Securities.

Text of Rules and Rule Amendments

    For the reasons set out in the preamble, the Commission is amending 
title 17, chapter II, of the Code of Federal Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart A--Organization and Program Management

0
1. The authority citation for part 200, subpart A, continues to read in 
part as follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1, 
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et 
seq., unless otherwise noted.
* * * * *
    Section 200.30-3 is also issued under 15 U.S.C. 78b, 78d, 78f, 
78k-1, 78q, 78s, and 78eee.
* * * * *

0
2. Section 200.30-3 is amended by revising paragraphs (a)(5) and (30) 
and (a)(65)(i) to read as follows:


Sec.  200.30 3   Delegation of authority to Director of Division of 
Trading and Markets.

* * * * *
    (a) * * *
    (5) Pursuant to Sec.  240.17a-5(m)(3) of this chapter (Rule 17a-
5(m)(3)), to consider applications by brokers and dealers for 
exemptions from, and extension of time within which to file, reports 
required by Sec.  240.17a-5 of this chapter (Rule 17a-5) and to grant, 
and to authorize the issuance of orders denying, such applications, 
provided such applicant is advised of his right to have such denial 
reviewed by the Commission.
* * * * *
    (30) Pursuant to section 17(a) of the Act, 15 U.S.C. 78q, to 
approve amendments to the plans which are consistent with the reporting 
structure of Sec. Sec.  240.17a-5(a)(2) and 240.17a-10(b) of this 
chapter (Rules 17a-5(a)(2) and 17a-10(b)) filed by self-regulatory 
organizations pursuant to Sec. Sec.  240.17a-5(a)(3) and 240.17a-10(b) 
of this chapter (Rules 17a-5(a)(3) and 17a-10(b)).
* * * * *
    (65) * * *
    (i) To authorize the issuance of orders requiring over-the-counter 
(OTC) derivatives dealers to file, pursuant to Sec.  240.17a-
12(a)(1)(ii) of this chapter, monthly, or at least at such times as 
shall be specified, Part II of Form X-17A-5 (Sec.  249.617 of this 
chapter) and such other financial and operational information as shall 
be specified.
* * * * *

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

0
3. The general 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, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
 4. Amend Sec.  240.3a71-6 by adding paragraph (d)(6) to read as 
follows:


Sec.  240.3a71-6  Substituted compliance for security-based swap 
dealers and major security-based swap participants.

* * * * *
    (d) * * *
    (6) Recordkeeping and reporting. The recordkeeping and reporting 
requirements of Section 15F of the Act (15 U.S.C. 78o-10) and 
Sec. Sec.  240.18a-5 through 240.18a-9; provided, however, that prior 
to making such a substituted compliance determination the Commission 
intends to consider (in addition to any conditions imposed), whether 
the foreign financial regulatory system's required records and reports, 
the timeframes for recording or reporting information, the accounting 
standards governing the records and reports, and the required format of 
the records and reports are comparable to applicable provisions arising 
under the Act and its rules and regulations and would permit the 
Commission to examine and inspect regulated firms' compliance with the 
applicable securities laws.

0
5. Amend Sec.  240.17a-3 by:
0
a. Adding introductory text;
0
b. Revising paragraphs (a) introductory text, (a)(1) and (3), 
(a)(4)(vi) and (vii), (a)(5) through (11), (a)(12)(i) introductory 
text, and (a)(12)(i)(A) and (E) through (H);
0
 c. Removing the undesignated paragraph following paragraph (a)(12)(i);
0
d. Adding paragraph (a)(12)(i)(I);
0
e. Revising paragraph (a)(12)(ii);
0
 f. In paragraphs (a)(16)(ii)(A) and (B), removing the phrase ``shall 
mean'' and adding in its place ``means'';
0
g. In paragraphs (a)(17)(i)(A) and (a)(17)(i)(B)(1), removing the word 
``shall'' and adding in its place ``must'' wherever it appears;
0
h. In paragraphs (a)(17)(i)(C) and (D), removing the word ``shall'' and 
adding in its place ``will'' wherever it appears;
0
 i. In paragraphs (a)(18)(i) and (a)(19)(i), removing the word 
``shall'' and adding in its place ``must'' wherever it appears;
0
j. Adding paragraphs (a)(25) through (30);
0
k. Revising paragraphs (b) through (g); and
0
 l. Removing paragraph (h).
    The additions and revisions read as follows:


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

    This section applies to the following types of entities: A member 
of a national securities exchange who transacts a business in 
securities directly with others than members of a national securities 
exchange; a broker or dealer who transacts a business in securities 
through the medium of a member of a national securities exchange; a 
broker or dealer, including an OTC derivatives dealer as that term is 
defined in Sec.  240.3b-12, registered pursuant to section 15 of the 
Act (15 U.S.C. 78o); a security-based swap dealer registered pursuant 
to section 15F of the Act (15 U.S.C. 78o-10) that is also a broker or 
dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act; and a major security-based swap participant 
registered pursuant to section 15F of the Act that is also a broker or 
dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act. Section 240.18a-5 (rather than this section) 
applies to the following types of entities: A security-based swap 
dealer registered pursuant to section 15F of the Act that is not also a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; and a major security-based swap 
participant registered pursuant to section 15F of the Act that is not 
also a broker or dealer, including an OTC

[[Page 68647]]

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

[[Page 68648]]

a memorandum of each order received, showing the time of receipt; the 
terms and conditions of the order and of any modification thereof; the 
account for which it was entered; the identity of each associated 
person, if any, responsible for the account; the identity of any other 
person who entered or accepted the order on behalf of the customer, or, 
if a customer entered the order on an electronic system, a notation of 
that entry. The memorandum need not show the identity of any person 
other than the associated person responsible for the account who may 
have entered the order if the order is entered into an electronic 
system that generates the memorandum and if that system is not capable 
of receiving an entry of the identity of any person other than the 
responsible associated person. In the circumstance in the preceding 
sentence, the member, broker or dealer must produce upon request by a 
representative of a securities regulatory authority a separate record 
that identifies each other person. An order with a customer other than 
a member, broker or dealer entered pursuant to the exercise of 
discretionary authority by the member, broker or dealer, or associated 
person thereof, must be so designated.
    (ii) A memorandum of each purchase or sale of a security-based swap 
for the account of the member, broker or dealer showing the price; and, 
in addition, where the purchase or sale is with a customer other than a 
broker or dealer, a memorandum of each order received, showing the time 
of receipt; the terms and conditions of the order and of any 
modification thereof; the account for which it was entered; the 
identity of any other person who entered or accepted the order on 
behalf of the customer, or, if a customer entered the order on an 
electronic system, a notation of that entry. The memorandum must also 
include the type of security-based swap, the reference security, index, 
or obligor, the date and time of execution, the effective date, the 
scheduled termination date, the notional amount(s) and the currenc(ies) 
in which the notional amount(s) is expressed, the unique transaction 
identifier, and the counterparty's unique identification code. An order 
entered pursuant to the exercise of discretionary authority must be so 
designated.
    (8)(i) With respect to a security other than a security-based swap, 
copies of confirmations of all purchases and sales of securities, 
including all repurchase and reverse repurchase agreements, and copies 
of notices of all other debits and credits for securities, cash and 
other items for the account of customers and partners of such member, 
broker or dealer.
    (ii) With respect to a security-based swap, copies of the security-
based swap trade acknowledgment and verification made in compliance 
with Sec.  240.15Fi-2.
    (9) A record with respect to each cash, margin, and security-based 
swap account with such member, broker or dealer indicating, as 
applicable:
    (i) The name and address of the beneficial owner of such account;
    (ii) Except with respect to exempt employee benefit plan securities 
as defined in Sec.  240.14a-1(d), but only to the extent such 
securities are held by employee benefit plans established by the issuer 
of the securities, whether or not the beneficial owner of securities 
registered in the name of such members, brokers or dealers, or a 
registered clearing agency or its nominee objects to disclosure of his 
or her identity, address, and securities positions to issuers;
    (iii) In the case of a margin account, the signature of such owner; 
provided that, in the case of a joint account or an account of a 
corporation, such records are required only in respect of the person or 
persons authorized to transact business for such account; and
    (iv) For each security-based swap account, a record of the unique 
identification code of such counterparty, the name and address of such 
counterparty, and a record of the authorization of each person the 
counterparty has granted authority to transact business in the 
security-based swap account.
    (10) A record of all puts, calls, spreads, straddles, and other 
options in which such member, broker or dealer has any direct or 
indirect interest or which such member, broker or dealer, has granted 
or guaranteed, containing, at least, an identification of the security, 
and the number of units involved. An OTC derivatives dealer must also 
keep a record of all eligible OTC derivative instruments as defined in 
Sec.  240.3b-13 in which the OTC derivatives dealer has any direct or 
indirect interest or which it has written or guaranteed, containing, at 
a minimum, an identification of the security or other instrument, the 
number of units involved, and the identity of the counterparty.
    (11) A record of the proof of money balances of all ledger accounts 
in the form of trial balances and a record of the computation of 
aggregate indebtedness and net capital, as of the trial balance date, 
pursuant to Sec.  240.15c3-1 or Sec.  240.18a-1, as applicable. The 
computation need not be made by any member, broker or dealer 
unconditionally exempt from Sec.  240.15c3-1 pursuant to Sec.  
240.15c3-1(b)(1) or (3). Such trial balances and computations must be 
prepared currently at least once a month.
    (12)(i) A questionnaire or application for employment executed by 
each associated person as that term is defined in paragraph (g)(4) of 
this section of the member, broker or dealer, which questionnaire or 
application must be approved in writing by an authorized representative 
of the member, broker or dealer and must contain at least the following 
information with respect to the associated person:
    (A) The associated person's name, address, social security number, 
and the starting date of the associated person's employment or other 
association with the member, broker or dealer;
* * * * *
    (E) A record of any denial, suspension, expulsion, or revocation of 
membership or registration of any member, broker or dealer with which 
the associated person was associated in any capacity when such action 
was taken;
    (F) A record of any permanent or temporary injunction entered 
against the associated person, or any member, broker, dealer, security-
based swap dealer or major security-based swap participant with which 
the associated person was associated in any capacity at the time such 
injunction was entered;
    (G) A record of any arrest or indictment for any felony, or any 
misdemeanor pertaining to securities, commodities, banking, insurance 
or real estate (including, but not limited to, acting or being 
associated with a broker or dealer, investment company, investment 
adviser, futures sponsor, bank, or savings and loan association), 
fraud, false statements or omissions, wrongful taking of property or 
bribery, forgery, counterfeiting, or extortion, and the disposition of 
the foregoing; and
    (H) A record of any other name or names by which the associated 
person has been known or which the associated person has used.
    (I) Provided, however, that if such associated person has been 
registered as a registered representative of such member, broker or 
dealer with, or the associated person's employment has been approved by 
a registered national securities association or a registered national 
securities exchange, then retention of a full, correct, and complete 
copy of any and all applications for such registration or approval will 
be deemed to satisfy the requirements of this paragraph (a)(12)(i).
    (ii) A record listing every associated person of the member, broker 
or dealer

[[Page 68649]]

which shows, for each associated person, every office of the member, 
broker or dealer, where the associated person regularly conducts the 
business of handling funds or securities or effecting any transactions 
in, or inducing or attempting to induce the purchase or sale of any 
security for the member, broker or dealer and the Central Registration 
Depository number, if any, and every internal identification number or 
code assigned to that person by the member, broker or dealer.
* * * * *
    (25) A record of the daily calculation of the current exposure and, 
if applicable, the initial margin amount for each account of a 
counterparty required under Sec.  240.18a-3(c).
    (26) A record of compliance with possession or control requirements 
under Sec.  240.15c3-3(p)(2).
    (27) A record of the reserve computation required under Sec.  
240.15c3-3(p)(3).
    (28) A record of each security-based swap transaction that is not 
verified under Sec.  240.15Fi-2 within five business days of execution 
that includes, at a minimum, the unique transaction identifier and the 
counterparty's unique identification code.
    (29) A record documenting that the broker or dealer has complied 
with the business conduct standards as required under Sec.  240.15Fh-6.
    (30) A record documenting that the broker or dealer has complied 
with the business conduct standards as required under Sec. Sec.  
240.15Fh-1 through 240.15Fh-5 and 240.15Fk-1.
* * * * *
    (b) A broker or dealer may comply with the recordkeeping 
requirements of the Commodity Exchange Act and chapter I of this title 
applicable to swap dealers and major swap participants in lieu of 
complying with paragraphs (a)(1), (3), and (5) of this section solely 
with respect to required information regarding security-based swap 
transactions and positions if:
    (1) The broker or dealer is registered as a security-based swap 
dealer or major security-based swap participant pursuant to section 15F 
of the Act (15 U.S.C. 78o-10);
    (2) The broker or dealer is registered as a swap dealer or major 
swap participant pursuant to section 4s of the Commodity Exchange Act 
and chapter I of this title;
    (3) The broker or dealer is subject to 17 CFR 23.201, 23.202, 
23.402, and 23.501 with respect to its swap-related books and records;
    (4) The broker or dealer preserves all of the data elements 
necessary to create the records required by paragraphs (a)(1), (3), and 
(5) of this section as they pertain to security-based swap and swap 
transactions and positions;
    (5) The broker or dealer upon request furnishes promptly to 
representatives of the Commission the records required by paragraphs 
(a)(1), (3), and (5) of this section as well as the records required by 
17 CFR 23.201, 23.202, 23.402, and 23.501 as they pertain to security-
based swap and swap transactions and positions in the format applicable 
to that category of record as set forth in this section; and
    (6) The broker or dealer provides notice of its intent to utilize 
this paragraph (b) by notifying in writing the Commission, both at the 
principal office of the Commission in Washington, DC, and at the 
regional office of the Commission for the region in which the 
registrant has its principal place of business, as well as by notifying 
in writing the registrant's designated examining authority.
    (c) A member of a national securities exchange, or a broker or 
dealer registered pursuant to section 15 of the Act (15 U.S.C. 78o), 
that introduces accounts on a fully-disclosed basis, is not required to 
make or keep such records of transactions cleared for such member, 
broker or dealer as are made and kept by a clearing broker or dealer 
pursuant to the requirements of this section and Sec.  240.17a-4. 
Nothing in this paragraph (c) will be deemed to relieve such member, 
broker or dealer from the responsibility that such books and records be 
accurately maintained and preserved as specified in this section and 
Sec.  240.17a-4.
    (d) For purposes of transactions in municipal securities by 
municipal securities brokers and municipal securities dealers, 
compliance with Rule G-8 of the Municipal Securities Rulemaking Board 
or any successor rule will be deemed to be in compliance with this 
section.
    (e) The provisions of this section will not apply to security 
futures product transactions and positions in a futures account (as 
that term is defined in Sec.  240.15c3-3(a)(15)); provided, that the 
Commodity Futures Trading Commission's recordkeeping rules apply to 
those transactions and positions.
    (f) Every member, broker or dealer must make and keep current, as 
to each office, the books and records described in paragraphs (a)(1), 
(6), (7), (12), and (17), (a)(18)(i), and (a)(19) through (22) of this 
section.
    (g) When used in this section:
    (1) The term office means any location where one or more associated 
persons regularly conduct the business of handling funds or securities 
or effecting any transactions in, or inducing or attempting to induce 
the purchase or sale of, any security.
    (2) The term principal means any individual registered with a 
registered national securities association as a principal or branch 
manager of a member, broker or dealer or any other person who has been 
delegated supervisory responsibility over associated persons by the 
member, broker or dealer.
    (3) The term securities regulatory authority means the Commission, 
any self-regulatory organization, or any securities commission (or any 
agency or office performing like functions) of the States.
    (4) The term associated person means a ``person associated with a 
broker or dealer'' or ``person associated with a security-based swap 
dealer or major security-based swap participant'' as defined in 
sections 3(a)(18) and (70) of the Act (15 U.S.C. 78c(a)(18) and (70)) 
respectively, but does not include persons whose functions are solely 
clerical or ministerial.
* * * * *

0
6. Amend Sec.  240.17a-4 by:
0
 a. Adding introductory text;
0
 b. Revising paragraphs (a), (b) introductory text, (b)(1), (3) through 
(5), and (7), (b)(8) introductory text, (b)(8)(i), (v) through (viii), 
and (xii) through (xv);
0
c. Adding paragraphs (b)(8)(xvi) and (xvii);
0
d. Revising paragraph (b)(9);
0
 e. In paragraph (b)(11), removing the word ``shall'' and adding in its 
place the word ``must'';
0
 f. Revising paragraphs (b)(12) and (13);
0
 g. Adding paragraphs (b)(14) through (16);
0
 h. Revising paragraphs (c), (d), (e) introductory text, and (e)(1) 
through (4) and (6);
0
i. In the last sentence of paragraph (e)(8), removing the word 
``shall'' and adding in its place the word ``must'';
0
j. In paragraph (f) introductory text, removing the word ``paragraph,'' 
and adding in its place the word ``section'';
0
k. In paragraphs (f)(2) introductory text and (f)(3) introductory text, 
removing the word ``shall'' and adding in its place the word ``must'';
0
l. In paragraph (f)(3)(iv)(B), removing the phrase ``each index.'' and 
adding in its place the phrase ``the index.'';
0
m. In paragraph (f)(3)(vi), removing the phrase ``the self-regulatory 
organizations'' and adding in its place the phrase ``any self-
regulatory organization'';

[[Page 68650]]

0
n. Revising paragraphs (f)(3)(vii) and (g);
0
o. In paragraph (h), adding the phrase ``or any successor rule'' after 
the word ``Board'';
0
p. Revising paragraph (i) and removing the undesignated paragraph 
following paragraph (i);
0
q. In paragraph (j), removing the word ``shall'' and adding in its 
place the word ``must'';
0
r. In paragraph (k)(1), removing the word ``shall'' and adding in its 
place the word ``must'' wherever it appears;
0
s. In paragraph (l), removing ``Sec.  240.17a-3(g)'' and adding in its 
place ``Sec.  240.17a-3(e)'';
0
t. Revising paragraphs (m)(1) through (4); and
0
u. Adding paragraph (m)(5).
    The additions and revisions read as follows:


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

    This section applies to the following types of entities: A member 
of a national securities exchange who transacts a business in 
securities directly with others than members of a national securities 
exchange; a broker or dealer who transacts a business in securities 
through the medium of a member of a national securities exchange; a 
broker or dealer, including an OTC derivatives dealer as that term is 
defined in Sec.  240.3b-12, registered pursuant to section 15 of the 
Act (15 U.S.C. 78o); a security-based swap dealer registered pursuant 
to section 15F of the Act (15 U.S.C. 78o-10) that is also a broker or 
dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act; and a major security-based swap participant 
registered pursuant to section 15F of the Act that is also a broker or 
dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act. Section 240.18a-6 (rather than this section) 
applies to the following types of entities: A security-based swap 
dealer registered pursuant to section 15F of the Act that is not also a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; and a major security-based swap 
participant registered pursuant to section 15F of the Act that is not 
also a broker or dealer, including an OTC derivatives dealer, 
registered pursuant to section 15 of the Act.
    (a) Every member, broker or dealer subject to Sec.  240.17a-3 must 
preserve for a period of not less than 6 years, the first two years in 
an easily accessible place, all records required to be made pursuant to 
Sec.  240.17a-3(a)(1) through (3), (5), and (21) and (22), and 
analogous records created pursuant to Sec.  240.17a-3(d).
    (b) Every member, broker or dealer subject to Sec.  240.17a-3 must 
preserve for a period of not less than three years, the first two years 
in an easily accessible place:
    (1) All records required to be made pursuant to Sec.  240.17a-
3(a)(4), (6) through (11), (16), (18) through (20), and (25) through 
(30), and analogous records created pursuant to Sec.  240.17a-3(e).
* * * * *
    (3) All bills receivable or payable (or copies thereof), paid or 
unpaid, relating to the member, broker or dealer's business as such.
    (4) Originals of all communications received and copies of all 
communications sent (and any approvals thereof) by the member, broker 
or dealer (including inter-office memoranda and communications) 
relating to its business as such, including all communications which 
are subject to rules of a self-regulatory organization of which the 
member, broker or dealer is a member regarding communications with the 
public. As used in this paragraph (b)(4), the term communications 
includes sales scripts and recordings of telephone calls required to be 
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1)).
    (5) All trial balances, computations of aggregate indebtedness and 
net capital (and working papers in connection therewith), financial 
statements, branch office reconciliations, and internal audit working 
papers, relating to the member, broker or dealer's business as such.
* * * * *
    (7) All written agreements (or copies thereof) entered into by such 
member, broker or dealer relating to its business as such, including 
agreements with respect to any account. Written agreements with respect 
to a security-based swap customer or non-customer, including governing 
documents or any document establishing the terms and conditions of the 
customer's or non-customer's security-based swaps must be maintained 
with the customer's or non-customer's account records.
    (8) Records which contain the following information in support of 
amounts included in the report prepared as of the fiscal year end on 
Part II or IIA of Form X-17A-5 (Sec.  249.617 of this chapter), as 
applicable, and in the annual financial statements filed with the 
Commission required by Sec.  240.17a-5(d), Sec.  240.17a-12(b), or 
Sec.  240.18a-7(c), as applicable:
    (i) Money balance and position, long or short, including 
description, quantity, price, and valuation of each security including 
contractual commitments in customers' accounts, in cash and fully 
secured accounts, partly secured accounts, unsecured accounts, and in 
securities accounts payable to customers;
* * * * *
    (v) Description of futures commodity contracts or swaps, contract 
value on trade date, market value, gain or loss, and liquidating equity 
or deficit in customers' and non-customers' accounts;
    (vi) Description of futures commodity contracts or swaps, contract 
value on trade date, market value, gain or loss, and liquidating equity 
or deficit in trading and investment accounts;
    (vii) Description, money balance, quantity, price, and valuation of 
each spot commodity, and swap position or commitments in customers' and 
non-customers' accounts;
    (viii) Description, money balance, quantity, price, and valuation 
of each spot commodity, and swap position or commitments in trading and 
investment accounts;
* * * * *
    (xii) Description, settlement date, contract amount, quantity, 
market price, and valuation for each aged failed to deliver requiring a 
charge in the Computation of Net Capital pursuant to Sec.  240.15c3-1 
or Sec.  240.18a-1, as applicable;
    (xiii) Detail relating to information for possession or control 
requirements under Sec.  240.15c3-3 or Sec.  240.18a-4, as applicable 
and reported in Part II or IIA of Form X-17A-5 (Sec.  249.617 of this 
chapter), as applicable;
    (xiv) Detail relating to information for security-based swap 
possession or control requirements under Sec.  240.15c3-3 or Sec.  
240.18a-4, as applicable, and reported in Part II or IIA of Form X-17A-
5 (Sec.  249.617 of this chapter);
    (xv) Detail of all items, not otherwise substantiated, which are 
charged or credited in the Computation of Net Capital pursuant to Sec.  
240.15c3-1 or Sec.  240.18a-1, as applicable, such as cash margin 
deficiencies, deductions related to securities values and undue 
concentration, aged securities differences, and insurance claims 
receivable;
    (xvi) Detail relating to the calculation of the risk margin amount 
pursuant to Sec.  240.15c3-1(c)(17) or Sec.  240.18a-1(c)(6), as 
applicable; and
    (xvii) Other schedules which are specifically prescribed by the 
Commission as necessary to support information reported as required by 
Sec. Sec.  240.17a-5, 240.17a-12, and 240.18a-7, as applicable.

[[Page 68651]]

    (9) The records required to be made pursuant to Sec.  240.15c3-
3(d)(5) and (o) or Sec.  240.18a-4, as applicable.
* * * * *
    (12) The records required to be made pursuant to Sec.  240.15c3-
1e(c)(4)(vi) or Sec.  240.18a-1(e)(2)(iii)(F)(2), as applicable.
    (13) The written policies and procedures the broker-dealer 
establishes, documents, maintains, and enforces to assess 
creditworthiness for the purpose of Sec.  240.15c3-1(c)(2)(vi)(E), 
(c)(2)(vi)(F)(1) and (2), and (c)(2)(vi)(H) or Sec.  240.18a-
1(c)(1)(vi)(2), as applicable.
    (14) A copy of information required to be reported under Sec. Sec.  
242.901 through 242.909 of this chapter (Regulation SBSR).
    (15) Copies of documents, communications, disclosures, and notices 
related to business conduct standards as required under Sec. Sec.  
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
    (16) Copies of documents used to make a reasonable determination 
with respect to special entities, including information relating to the 
financial status, the tax status, the investment or financing 
objectives of the special entity as required under section 15F(h)(4)(C) 
and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and (5)(A)).
    (c) Every member, broker or dealer subject to Sec.  240.17a-3 must 
preserve for a period of not less than six years after the closing of 
any customer's account any account cards or records which relate to the 
terms and conditions with respect to the opening and maintenance of the 
account.
    (d) Every member, broker or dealer subject to Sec.  240.17a-3 must 
preserve during the life of the enterprise and of any successor 
enterprise all partnership articles or, in the case of a corporation, 
all articles of incorporation or charter, minute books, and stock 
certificate books (or, in the case of any other form of legal entity, 
all records such as articles of organization or formation, and minute 
books used for a purpose similar to those records required for 
corporations or partnerships), all Forms BD (Sec.  249.501 of this 
chapter), all Forms BDW (Sec.  249.501a of this chapter), all Forms 
SBSE-BD (Sec.  249.1600b of this chapter), all Forms SBSE-C (Sec.  
249.1600c of this chapter), all Forms SBSE-W (Sec.  249.1601 of this 
chapter), all amendments to these forms, and all licenses or other 
documentation showing the registration of the member, broker or dealer 
with any securities regulatory authority or the Commodity Futures 
Trading Commission.
    (e) Every member, broker or dealer subject to Sec.  240.17a-3 must 
maintain and preserve in an easily accessible place:
    (1) All records required under Sec.  240.17a-3(a)(12) until at 
least three years after the associated person's employment and any 
other connection with the member, broker or dealer has terminated.
    (2) All records required under Sec.  240.17a-3(a)(13) until at 
least three years after the termination of employment or association of 
those persons required by Sec.  240.17f-2 to be fingerprinted.
    (3) All records required pursuant to Sec.  240.17a-3(a)(15) during 
the life of the enterprise.
    (4) All records required pursuant to Sec.  240.17a-3(a)(14) for 
three years.
* * * * *
    (6) Each report which a securities regulatory authority or the 
Commodity Futures Trading Commission has requested or required the 
member, broker or dealer to make and furnish to it pursuant to an order 
or settlement, and each securities regulatory authority, Commodity 
Futures Trading Commission, or prudential regulator examination report 
until three years after the date of the report.
* * * * *
    (f) * * *
    (3) * * *
    (vii) For every member, broker or dealer exclusively using 
electronic storage media for some or all of its record preservation 
under this section, at least one third party (the undersigned), who has 
access to and the ability to download information from the member's, 
broker's or dealer's electronic storage media to any acceptable medium 
under this section, must file with the designated examining authority 
for the member, broker or dealer the following undertakings with 
respect to such records:

    The undersigned hereby undertakes to furnish promptly to the 
U.S. Securities and Exchange Commission (``Commission''), its 
designees or representatives, any self-regulatory organization of 
which it is a member, or any State securities regulator having 
jurisdiction over the member, broker or dealer, upon reasonable 
request, such information as deemed necessary by the staffs of the 
Commission, any self-regulatory organization of which it is a 
member, or any State securities regulator having jurisdiction over 
the member, broker or dealer to download information kept on the 
member's, broker's or dealer's electronic storage media to any 
medium acceptable under Sec.  240.17a-4. Furthermore, the 
undersigned hereby undertakes to take reasonable steps to provide 
access to information contained on the member's, broker's or 
dealer's electronic storage media, including, as appropriate, 
arrangements for the downloading of any record required to be 
maintained and preserved by the member, broker or dealer pursuant to 
Sec. Sec.  240.17a-3 and 240.17a-4 in a format acceptable to the 
staffs of the Commission, any self-regulatory organization of which 
it is a member, or any State securities regulator having 
jurisdiction over the member, broker or dealer. Such arrangements 
will provide specifically that in the event of a failure on the part 
of a member, broker or dealer to download the record into a readable 
format and after reasonable notice to the broker or dealer, upon 
being provided with the appropriate electronic storage medium, the 
undersigned will undertake to do so, as the staffs of the 
Commission, any self-regulatory organization of which it is a 
member, or any State securities regulator having jurisdiction over 
the member, broker or dealer may request.

    (g) If a person who has been subject to Sec.  240.17a-3 ceases to 
transact a business in securities directly with others than members of 
a national securities exchange, or ceases to transact a business in 
securities through the medium of a member of a national securities 
exchange, or ceases to be registered pursuant to section 15 of the Act 
(15 U.S.C. 78o) such person must, for the remainder of the periods of 
time specified in this section, continue to preserve the records which 
it theretofore preserved pursuant to this section.
* * * * *
    (i)(1) If the records required to be maintained and preserved 
pursuant to the provisions of Sec. Sec.  240.17a-3 and 240.17a-4 are 
prepared or maintained by an outside service bureau, depository, bank 
which does not operate pursuant to Sec.  240.17a-3(b)(2), or other 
recordkeeping service on behalf of the member, broker or dealer 
required to maintain and preserve such records, such outside entity 
must file with the Commission a written undertaking in form acceptable 
to the Commission, signed by a duly authorized person, to the effect 
that such records are the property of the member, broker or dealer 
required to maintain and preserve such records and will be surrendered 
promptly on request of the member, broker or dealer and including the 
following provision:

    With respect to any books and records maintained or preserved on 
behalf of [BD], the undersigned hereby undertakes to permit 
examination of such books and records at any time or from time to 
time during business hours by representatives or designees of the 
Securities and Exchange Commission, and to promptly furnish to said 
Commission or its designee true, correct, complete and current hard 
copy of any or all or any part of such books and records.

    (2) Agreement with an outside entity will not relieve such member, 
broker or dealer from the responsibility to prepare

[[Page 68652]]

and maintain records as specified in this section or in Sec.  240.17a-
3.
* * * * *
    (m) * * *
    (1) The term office has the meaning set forth in Sec.  240.17a-
3(g)(1).
    (2) The term principal has the meaning set forth in Sec.  240.17a-
3(g)(2).
    (3) The term securities regulatory authority has the meaning set 
forth in Sec.  240.17a-3(g)(3).
    (4) The term associated person has the meaning set forth in Sec.  
240.17a-3(g)(4).
    (5) The term business as such includes security-based swap 
activity.
* * * * *

0
7. Section 240.17a-5 is amended by:
0
 a. Adding introductory text;
0
 b. Revising paragraph (a) heading and removing paragraph (a)(1);
0
c. Redesignating paragraphs (a)(2) through (7) as paragraphs (a)(1) 
through (6);
0
d. Revising newly redesignated paragraphs (a)(1)(ii) through (iv) and 
(a)(2) through (5);
0
e. In newly redesignated paragraph (a)(6), removing the word ``shall'' 
and adding in its place the word ``will'' wherever it appears;
0
f. Revising paragraph (b)(1);
0
g. In paragraphs (b)(3) through (5), removing the word ``shall'' and 
adding in its place the word ``will'' wherever it appears;
0
h. In paragraphs (c)(1) and (2), removing the word ``shall'' and adding 
in its place the word ``must'' wherever it appears;
0
i. Revising paragraph (c)(3);
0
j. In paragraph (c)(4)(iii), removing the word ``shall'' and adding in 
its place the word ``must'';
0
k. Designate the undesignated paragraph following paragraph (c)(4)(iii) 
as paragraph (c)(4)(iv);
0
l. In paragraph (c)(5)(iii)(C), removing the word ``Home'' and adding 
in its place the word ``home'' wherever it appears;
0
m. In paragraph (d)(1)(i) introductory text, removing ``(d)(1)(iv)'' 
and adding ``(iv)'' in its place and adding ``(15 U.S.C. 78o)'' after 
the phrase ``section 15 of the Act'';
0
n. Revising paragraphs (d)(1)(i)(B), (d)(2)(i) through (iii), 
(d)(3)(i)(A)(4) and (5), (d)(3)(i)(B) and (C), (d)(3)(iii), (d)(6), 
(e)(1)(ii), and (e)(2) through (4);
0
o. In the fifth sentence of paragraph (f)(3)(v)(B), adding the word 
``the'' before the phrase ``independent public accountant does not 
agree'';
0
p. Revising the note to paragraph (h);
0
q. In paragraph (k) introductory text, removing the word ``shall'' and 
adding in its place the word ``must'' wherever it appears and removing 
the phrase ``Market Regulation'' and adding in its place the phrase 
``Trading and Markets'';
0
r. In paragraph (l), removing ``(1)'' and ``(2)'', removing the phrase 
``Securities Exchange Act of 1934'' and adding in its place the word 
``Act'', and removing the word ``shall'' and adding in its place the 
word ``must'';
0
s. In paragraph (m)(1), removing the word ``shall'' and adding in its 
place the word ``must'';
0
t. In paragraph (m)(2), removing ``(48 Stat. 882; 15 U.S.C. 78c)'' and 
``(78 Stat. 565; 15 U.S.C. 78c)'' and adding in their place ``(15 
U.S.C. 78c)'';
0
u. In paragraph (m)(4), removing the word ``shall'' and adding in its 
place the word ``will'';
0
v. In paragraph (n)(2), removing the word ``shall'' and adding in its 
place the word ``must'';
0
and
0
w. Revising paragraph (o).
    The additions and revisions read as follows:


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

    This section applies to the following types of entities: Except as 
provided in this introductory text, a broker or dealer, including an 
OTC derivatives dealer as that term is defined in Sec.  240.3b-12 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a broker 
or dealer, other than an OTC derivatives dealer, registered pursuant to 
section 15 of the Act that is also a security-based swap dealer 
registered pursuant to section 15F of the Act (15 U.S.C. 78o-10); and a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act that is also a major-security-based 
swap participant registered pursuant to section 15F of the Act. Section 
240.18a-7 (rather than this section) applies to the following types of 
entities: A security-based swap dealer registered pursuant to section 
15F of the Act that is not also a broker or dealer, other than an OTC 
derivatives dealer, registered pursuant to section 15 of the Act; a 
security-based swap dealer registered pursuant to section 15F of the 
Act that is also an OTC derivatives dealer; and a major security-based 
swap participant registered pursuant to section 15F of the Act that is 
not also a broker or dealer, including an OTC derivatives dealer, 
registered pursuant to section 15 of the Act.
    (a) Monthly and quarterly reports--(1) * * *
    (ii) Every broker or dealer subject to this paragraph (a) who 
clears transactions or carries customer accounts and every broker or 
dealer that is registered as a security-based swap dealer or major 
security-based swap participant under section 15F of the Act (15 U.S.C. 
78o-10) must file with the Commission an executed Part II of Form X-
17A-5 (Sec.  249.617 of this chapter) within 17 business days after the 
end of the calendar quarter and within 17 business days after the end 
of the fiscal year of the broker or dealer where that date is not the 
end of a calendar quarter. Certain of such brokers or dealers must file 
with the Commission an executed Part IIA in lieu thereof if the nature 
of their business is limited as described in the instructions to Part 
II of Form X-17A-5 (Sec.  249.617 of this chapter).
    (iii) Every broker or dealer that neither clears transactions nor 
carries customer accounts and that is not registered as a security-
based swap dealer or major security-based swap participant under 
section 15F of the Act (15 U.S.C. 78o-10) must file with the Commission 
an executed Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter) 
within 17 business days after the end of each calendar quarter and 
within 17 business days after the end of the fiscal year of the broker 
or dealer where that date is not the end of a calendar quarter.
    (iv) Upon receiving written notice from the Commission or the 
examining authority designated pursuant to section 17(d) of the Act (15 
U.S.C. 78q(d)) (``designated examining authority''), a broker or dealer 
who receives such notice must file with the Commission on a monthly 
basis, or at such times as will be specified, an executed Part II or 
Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter), and such 
other financial or operational information as will be required by the 
Commission or the designated examining authority.
    (2) The reports provided for in this paragraph (a) that must be 
filed with the Commission will be considered filed when received at the 
Commission's principal office in Washington, DC, and the regional 
office of the Commission for the region in which the broker or dealer 
has its principal place of business. All reports filed pursuant to this 
paragraph (a) will be deemed to be confidential.
    (3) The provisions of paragraph (a)(1) of this section will not 
apply to a member of a national securities exchange or a registered 
national securities association if said exchange or association 
maintains records containing the information required by Part I, Part 
II, or Part IIA of Form X-17A-5 (Sec.  249.617 of this chapter), as to 
such member, and transmits to the Commission a copy of the applicable 
parts of Form X-17A-5 (Sec.  249.617 of this chapter) as to such 
member,

[[Page 68653]]

pursuant to a plan, the procedures and provisions of which have been 
submitted to and declared effective by the Commission. Any such plan 
filed by a national securities exchange or a registered national 
securities association may provide that when a member is also a member 
of one or more national securities exchanges, or of one or more 
national securities exchanges and a registered national securities 
association, the information required to be submitted with respect to 
any such member may be submitted by only one specified national 
securities exchange or registered national securities association. For 
the purposes of this section, a plan filed with the Commission by a 
national securities exchange or a registered national securities 
association will not become effective unless the Commission, having due 
regard for the fulfillment of the Commission's duties and 
responsibilities under the provisions of the Act, declares the plan to 
be effective. Further, the Commission, in declaring any such plan 
effective, may impose such terms and conditions relating to the 
provisions of the plan and the period of its effectiveness as may be 
deemed necessary or appropriate in the public interest, for the 
protection of investors, or to carry out the Commission's duties and 
responsibilities under the Act.
    (4) Every broker or dealer subject to this paragraph (a) must file 
Form Custody (Sec.  249.639 of this chapter) with its designated 
examining authority within 17 business days after the end of each 
calendar quarter and within 17 business days after the end of the 
fiscal year of the broker or dealer where that date is not the end of a 
calendar quarter. The designated examining authority must maintain the 
information obtained through the filing of Form Custody and must 
promptly transmit that information to the Commission at such time as it 
transmits the applicable part of Form X-17A-5 (Sec.  249.617 of this 
chapter) as required in paragraph (a)(2) of this section.
    (5) Broker-dealers that have been authorized by the Commission to 
compute net capital pursuant to Sec.  240.15c3-1e must file the 
following additional reports with the Commission:
    (i) For each product for which the broker or dealer calculates a 
deduction for market risk other than in accordance with Sec.  240.15c3-
1e(b)(1) or (3), the product category and the amount of the deduction 
for market risk within 17 business days after the end of the month;
    (ii) A graph reflecting, for each business line, the daily intra-
month value at risk within 17 business days after the end of the month;
    (iii) The aggregate value at risk for the broker or dealer within 
17 business days after the end of the month;
    (iv) For each product for which the broker or dealer uses scenario 
analysis, the product category and the deduction for market risk within 
17 business days after the end of the month;
    (v) Credit risk information on derivatives exposures within 17 
business days after the end of the month, including:
    (A) Overall current exposure;
    (B) Current exposure (including commitments) listed by counterparty 
for the 15 largest exposures;
    (C) The ten largest commitments listed by counterparty;
    (D) The broker's or dealer's maximum potential exposure listed by 
counterparty for the 15 largest exposures;
    (E) The broker's or dealer's aggregate maximum potential exposure;
    (F) A summary report reflecting the broker's or dealer's current 
and maximum potential exposures by credit rating category; and
    (G) A summary report reflecting the broker's or dealer's current 
exposure for each of the top ten countries to which the broker or 
dealer is exposed (by residence of the main operating group of the 
counterparty);
    (vi) Regular risk reports supplied to the broker's or dealer's 
senior management in the format described in the application, within 17 
business days after the end of the month;
    (vii) [Reserved]
    (viii) A report identifying the number of business days for which 
the actual daily net trading loss exceeded the corresponding daily VaR 
within 17 business days after the end of each calendar quarter; and
    (ix) The results of backtesting of all internal models used to 
compute allowable capital, including VaR and credit risk models, 
indicating the number of backtesting exceptions within 17 business days 
after the end of the calendar quarter.
* * * * *
    (b) * * *
    (1) If a broker or dealer holding any membership interest in a 
national securities exchange or registered national securities 
association ceases to be a member in good standing of such exchange or 
association, such broker or dealer must, within two business days after 
such event, file with the Commission Part II or Part IIA of Form X-17A-
5 (Sec.  249.617 of this chapter) as determined by the standards set 
forth in paragraphs (a)(1)(ii) through (iv) of this section as of the 
date of such event. The report must be filed at the Commission's 
principal office in Washington, DC, and with the regional office of the 
Commission for the region in which the broker or dealer has its 
principal place of business; provided, however, that such report need 
not be made or filed if the Commission, upon written request or upon 
its own motion, exempts such broker or dealer, either unconditionally 
or on specified terms and conditions, from such requirement; provided, 
further, that the Commission may, upon request of the broker or dealer, 
grant extensions of time for filing the report specified herein for 
good cause shown.
* * * * *
    (c) * * *
    (3) Unaudited statements to be furnished. Unaudited statements 
dated 6 months after the date of the audited statements required to be 
furnished by paragraphs (c)(1) and (2) of this section must be 
furnished within 65 days after the date of the unaudited statements. 
The unaudited statements may be furnished 70 days after that time limit 
has expired if the broker or dealer sends them with the next mailing of 
the broker's or dealer's quarterly customer statements of account. In 
that case, the broker or dealer must include a statement in that 
mailing of the amount of the broker's or dealer's net capital and its 
required net capital in accordance with Sec.  240.15c3-1, as of a 
fiscal month end that is within the 75-day period immediately preceding 
the date the statements are sent to customers. The unaudited statements 
must contain the information specified in paragraphs (c)(2)(i) and (ii) 
of this section.
* * * * *
    (d) * * *
    (1)(i) * * *
    (B)(1) If the broker or dealer did not claim it was exempt from 
Sec.  240.15c3-3 throughout the most recent fiscal year or the broker 
or dealer is subject to Sec.  240.15c3-3(p), a compliance report as 
described in paragraph (d)(3) of this section executed by the person 
who makes the oath or affirmation under paragraph (e)(2) of this 
section; or
    (2) If the broker or dealer did claim it was exempt from Sec.  
240.15c3-3 throughout the most recent fiscal year and the broker or 
dealer is not subject to Sec.  240.15c3-3(p), an exemption report as 
described in paragraph (d)(4) of this section executed by the person 
who makes the oath or affirmation under paragraph (e)(2) of this 
section;
* * * * *
    (2) * * *

[[Page 68654]]

    (i) A Statement of Financial Condition, a Statement of Income, a 
Statement of Cash Flows, a Statement of Changes in Stockholders' or 
Partners' or Sole Proprietor's Equity, and a Statement of Changes in 
Liabilities Subordinated to Claims of General Creditors. The statements 
must be prepared in accordance with U.S. generally accepted accounting 
principles and must be in a format that is consistent with the 
statements contained in Part II or Part IIA of Form X-17A-5 (Sec.  
249.617 of this chapter), as applicable. If the Statement of Financial 
Condition filed in accordance with instructions to Part II or Part IIA 
of Form X-17A-5 (Sec.  249.617 of this chapter), as applicable, is not 
consolidated, a summary of financial data, including the assets, 
liabilities, and net worth or stockholders' equity, for subsidiaries 
not consolidated in the applicable Part II or Part IIA as filed by the 
broker or dealer must be included in the notes to the financial 
statements reported on by the independent public accountant.
    (ii) Supporting schedules that include, from Part II or Part IIA of 
Form X-17A-5 (Sec.  249.617 of this chapter), a Computation of Net 
Capital under Sec.  240.15c3-1, a Computation for Determination of 
Customer Reserve Requirements under Sec.  240.15c3-3a (Exhibit A of 
Sec.  240.15c3-3), a Computation for Determination of PAB Requirements 
under Exhibit A of Sec.  240.15c3-3, a Computation for Determination of 
Security-Based Swap Customer Reserve Requirements under Sec.  240.15c3-
3b (Exhibit B of Sec.  240.15c3-3), Information Relating to the 
Possession or Control Requirements for Customers under Sec.  240.15c3-
3, and Information Relating to the Possession or Control Requirements 
for Security-Based Swap Customers under Sec.  240.15c3-3, as 
applicable.
    (iii) If any of the Computation of Net Capital under Sec.  
240.15c3-1, the Computation for Determination of Customer Reserve 
Requirements Under Exhibit A of Sec.  240.15c3-3, or the Computation 
for Determination of Security-Based Swap Customer Reserve Requirements 
under Exhibit B of Sec.  240.15c3-3, as applicable, in the financial 
report is materially different from the corresponding computation in 
the most recent Part II or Part IIA of Form X-17A-5 (Sec.  249.617 of 
this chapter), as applicable, filed by the broker or dealer pursuant to 
paragraph (a) of this section, a reconciliation, including appropriate 
explanations, between the computation in the financial report and the 
computation in the most recent Part II or Part IIA of Form X-17A-5, as 
applicable, filed by the broker or dealer. If no material differences 
exist, a statement so indicating must be included in the financial 
report.
    (3) * * *
    (i) * * *
    (A) * * *
    (4) The broker or dealer was in compliance with Sec. Sec.  
240.15c3-1, 240.15c3-3(e) and, if applicable, 240.15c3-3(p)(3) as of 
the end of the most recent fiscal year; and
    (5) The information the broker or dealer used to state whether it 
was in compliance with Sec. Sec.  240.15c3-1, 240.15c3-3(e) and, if 
applicable, 240.15c3-3(p)(3) was derived from the books and records of 
the broker or dealer.
    (B) If applicable, a description of each identified material 
weakness in the Internal Control Over Compliance of the broker or 
dealer during the most recent fiscal year.
    (C) If applicable, a description of an instance of non-compliance 
with Sec.  240.15c3-1, Sec.  240.15c3-3(e), or, if applicable, Sec.  
240.15c3-3(p)(3) as of the end of the most recent fiscal year.
* * * * *
    (iii) The broker or dealer is not permitted to conclude that its 
Internal Control Over Compliance was effective during the most recent 
fiscal year if there were one or more material weaknesses in its 
Internal Control Over Compliance during the most recent fiscal year. 
The broker or dealer is not permitted to conclude that its Internal 
Control Over Compliance was effective as of the end of the most recent 
fiscal year if there were one or more material weaknesses in its 
internal control as of the end of the most recent fiscal year. A 
material weakness is a deficiency, or a combination of deficiencies, in 
Internal Control Over Compliance such that there is a reasonable 
possibility that non-compliance with Sec.  240.15c3-1, Sec.  240.15c3-
3(e), or Sec.  240.15c3-3(p)(3) will not be prevented or detected on a 
timely basis or that non-compliance to a material extent with Sec.  
240.15c3-3, except for paragraph (e), Sec.  240.15c3-3(p), except for 
paragraph (p)(3), Sec.  240.17a-13, or any Account Statement Rule will 
not be prevented or detected on a timely basis. A deficiency in 
Internal Control Over Compliance exists when the design or operation of 
a control does not allow the management or employees of the broker or 
dealer, in the normal course of performing their assigned functions, to 
prevent or detect on a timely basis non-compliance with Sec.  240.15c3-
1, Sec.  240.15c3-3, or Sec.  240.17a-13, or any Account Statement 
Rule.
* * * * *
    (6) Filing of annual reports. The annual reports must be filed with 
the Commission at the regional office of the Commission for the region 
in which the broker or dealer has its principal place of business and 
to the Commission's principal office in Washington, DC, or the annual 
reports may be filed with the Commission electronically in accordance 
with directions provided on the Commission's website. The annual 
reports must also be filed at the principal office of the designated 
examining authority for the broker or dealer and with the Securities 
Investor Protection Corporation (``SIPC'') if the broker or dealer is a 
member of SIPC. Copies of the reports must be provided to all self-
regulatory organizations of which the broker or dealer is a member, 
unless the self-regulatory organization by rule waives the requirement 
in this paragraph (d)(6).
* * * * *
    (e) * * *
    (1) * * *
    (ii) A broker or dealer that files an annual report under paragraph 
(d) of this section that is not covered by a report prepared by an 
independent public accountant must include in the oath or affirmation 
required by paragraph (e)(2) of this section a statement of the facts 
and circumstances relied upon as a basis for exemption from the 
requirement that the annual report filed under paragraph (d) of this 
section be covered by reports prepared by an independent public 
accountant.
    (2) The broker or dealer must attach to the financial report an 
oath or affirmation that, to the best knowledge and belief of the 
person making the oath or affirmation:
    (i) The financial report is true and correct; and
    (ii) Neither the broker or dealer, nor any partner, officer, 
director, or equivalent person, as the case may be, has any proprietary 
interest in any account classified solely as that of a customer. The 
oath or affirmation must be made before a person duly authorized to 
administer such oaths or affirmations. If the broker or dealer is a 
sole proprietorship, the oath or affirmation must be made by the 
proprietor; if a partnership, by a general partner; if a corporation, 
by a duly authorized officer; or if a limited liability company or 
limited liability partnership, by the chief executive officer, chief 
financial officer, manager, managing member, or those members vested 
with management authority for the limited liability company or limited 
liability partnership.
    (3) The annual reports filed under paragraph (d) of this section 
are not

[[Page 68655]]

confidential, except that, if the Statement of Financial Condition in a 
format that is consistent with Part II or Part IIA of Form X-17A-5 
(Sec.  249.617 of this chapter) is bound separately from the balance of 
the annual reports filed under paragraph (d) of this section, and each 
page of the balance of the annual reports is stamped ``confidential,'' 
then the balance of the annual reports will be deemed confidential to 
the extent permitted by law. However, the annual reports, including the 
confidential portions, will be available for official use by any 
official or employee of the U.S. or any State, by national securities 
exchanges and registered national securities associations of which the 
broker or dealer filing such a report is a member, by the Public 
Company Accounting Oversight Board, and by any other person if the 
Commission authorizes disclosure of the annual reports to that person 
as being in the public interest. Nothing contained in this paragraph 
(e)(3) may be construed to be in derogation of the rules of any 
registered national securities association or national securities 
exchange that give to customers of a broker or dealer the right, upon 
request to the broker or dealer, to obtain information relative to its 
financial condition.
    (4) The broker or dealer must file with SIPC a report on the SIPC 
annual general assessment reconciliation or exclusion from membership 
forms that contains such information and is in such format as 
determined by SIPC by rule and approved by the Commission.
* * * * *
    (h) * * *

    Note 1 to paragraph (h):  The attention of the broker or dealer 
and the independent public accountant is called to the fact that 
under Sec.  240.17a-11(a)(1), among other things, a broker or dealer 
whose net capital declines below the minimum required pursuant to 
Sec.  240.15c3-1 must give notice of such deficiency that same day 
in accordance with Sec.  240.17a-11(h) and the notice must specify 
the broker or dealer's net capital requirement and its current 
amount of net capital. The attention of the broker or dealer and 
accountant also is called to the fact that under Sec.  240.15c3-
3(i), if a broker or dealer fails to make a reserve bank account or 
special reserve account deposit, as required by Sec.  240.15c3-3, 
the broker or dealer must immediately notify the Commission and the 
regulatory authority for the broker or dealer, which examines such 
broker or dealer as to financial responsibility and must promptly 
thereafter confirm such notification in writing.

* * * * *
    (o) Filing requirements. For purposes of filing requirements as 
described in this section, filing will be deemed to have been 
accomplished upon receipt at the Commission's principal office in 
Washington, DC, with duplicate originals simultaneously filed at the 
locations prescribed in the particular paragraph of this section which 
is applicable.
* * * * *

0
8. Section 240.17a-11 is amended by:
0
a. Adding introductory text;
0
b. Removing paragraph (a);
0
c. Redesignating paragraphs (b) through (i) as paragraphs (a) through 
(d) and (g) through (j);
0
d. Revising newly redesignated paragraphs (a), (b) introductory text, 
(c), and (d);
0
e. Adding new reserved paragraph (e) and paragraph (f); and
0
f. Revising newly redesignated paragraphs (g) through (j).
    The revisions and additions read as follows:


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

    This section applies to the following types of entities: Except as 
provided in this introductory text, a broker or dealer, including an 
OTC derivatives dealer as that term is defined in Sec.  240.3b-12, 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a broker 
or dealer, other than an OTC derivatives dealer, registered pursuant to 
section 15 of the Act that is also a security-based swap dealer 
registered pursuant to section 15F of the Act (15 U.S.C. 78o-10); and a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act that is also a major-security-based 
swap participant registered pursuant to section 15F of the Act. Section 
240.18a-8 (rather than this section) applies to the following types of 
entities: A security-based swap dealer registered pursuant to section 
15F of the Act that is not also a broker or dealer, other than an OTC 
derivatives dealer, registered pursuant to section 15 of the Act; a 
security-based swap dealer registered pursuant to section 15F of the 
Act that is also an OTC derivatives dealer; and a major security-based 
swap participant registered pursuant to section 15F of the Act that is 
not also a broker or dealer, including an OTC derivatives dealer, 
registered pursuant to section 15 of the Act.
    (a)(1) Every broker or dealer whose net capital declines below the 
minimum amount required pursuant to Sec.  240.15c3-1, or is insolvent 
as that term is defined in Sec.  240.15c3-1(c)(16), must give notice of 
such deficiency that same day in accordance with paragraph (h) of this 
section. The notice must specify the broker or dealer's net capital 
requirement and its current amount of net capital. If a broker or 
dealer is informed by its designated examining authority or the 
Commission that it is, or has been, in violation of Sec.  240.15c3-1 
and the broker or dealer has not given notice of the capital deficiency 
under this section, the broker or dealer, even if it does not agree 
that it is, or has been, in violation of Sec.  240.15c3-1, must give 
notice of the claimed deficiency, which notice may specify the broker's 
or dealer's reasons for its disagreement.
    (2) In addition to the requirements of paragraph (b)(1) of this 
section, an OTC derivatives dealer or broker or dealer permitted to 
compute net capital pursuant to the alternative method of Sec.  
240.15c3-1e must also provide notice if its tentative net capital falls 
below the minimum amount required pursuant to Sec.  240.15c3-1. The 
notice must specify the tentative net capital requirements, and current 
amount of net capital and tentative net capital, of the OTC derivatives 
dealer or the broker or dealer permitted to compute net capital 
pursuant to the alternative method of Sec.  240.15c3-1e.
    (b) Every broker or dealer must send notice promptly (but within 24 
hours) after the occurrence of the events specified in paragraphs 
(b)(1) through (5) of this section in accordance with paragraph (h) of 
this section:
* * * * *
    (c) Every broker or dealer that fails to make and keep current the 
books and records required by Sec.  240.17a-3, must give notice of this 
fact that same day in accordance with paragraph (h) of this section, 
specifying the books and records which have not been made or which are 
not current. The broker or dealer must also transmit a report in 
accordance with paragraph (h) of this section within 48 hours of the 
notice stating what the broker or dealer has done or is doing to 
correct the situation.
    (d) Whenever any broker or dealer discovers, or is notified by an 
independent public accountant under Sec.  240.17a-12(i)(2), of the 
existence of any material inadequacy as defined in Sec.  240.17a-
12(h)(2), or whenever any broker or dealer discovers, or is notified by 
an independent public accountant under Sec.  240.17a-5(h), of the 
existence of any material weakness as defined in Sec.  240.17a-
5(d)(3)(iii), the broker or dealer must:
    (1) Give notice, in accordance with paragraph (h) of this section, 
of the material inadequacy or material weakness within 24 hours of the 
discovery or notification of the material inadequacy or material 
weakness; and
    (2) Transmit a report in accordance with paragraph (h) of this 
section, within 48 hours of the notice stating

[[Page 68656]]

what the broker or dealer has done or is doing to correct the 
situation.
    (e) [Reserved]
    (f) If a broker-dealer fails to make in its special reserve account 
for the exclusive benefit of security-based swap customers a deposit, 
as required by Sec.  240.15c3-3(p), the broker-dealer must give 
immediate notice in writing in accordance with paragraph (h) of this 
section.
    (g) Every national securities exchange or national securities 
association that learns that a broker or dealer has failed to send 
notice or transmit a report as required by this section, even after 
being advised by the securities exchange or the national securities 
association to send notice or transmit a report, must immediately give 
notice of such failure in accordance with paragraph (h) of this 
section.
    (h) Every notice or report required to be given or transmitted by 
this section must be given or transmitted to the principal office of 
the Commission in Washington DC and the regional office of the 
Commission for the region in which the broker or dealer has its 
principal place of business, or to an email address provided on the 
Commission's website, and to the designated examining authority of 
which such broker or dealer is a member, and to the Commodity Futures 
Trading Commission (CFTC) if the broker or dealer is registered as a 
futures commission merchant with the CFTC. The report required by 
paragraph (c) or (d)(2) of this section may be transmitted by overnight 
delivery.
    (i) Other notice provisions relating to the Commission's financial 
responsibility or reporting rules are contained in Sec. Sec.  240.15c3-
1, 240.15c3-1d, 240.15c3-3, 240.17a-5, and 240.17a-12.
    (j) The provisions of this section will not apply to a broker or 
dealer registered pursuant to section 15(b)(11)(A) of the Act (15 
U.S.C. 78o(b)(11)(A)) that is not a member of either a national 
securities exchange pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or a national securities association registered pursuant to 
section 15A(a) of the Act (15 U.S.C. 78o-3(a)).


Sec.  240.17a-12   [Amended]

0
9. Section 240.17a-12 is amended by removing ``Part IIB'' and adding in 
its place ``Part II'' each time it appears.

0
10. Section 240.18a-1 is amended by adding paragraphs (d)(9)(iii)(A) 
and (B) to read as follows:


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

* * * * *
    (d) * * *
    (9) * * *
    (iii) * * *
    (A) The security-based swap dealer fails to meet the reporting 
requirements set forth in Sec.  240.18a-7;
    (B) Any event specified in Sec.  240.18a-8 occurs;
* * * * *

0
11. Section 240.18a-5 is added to read as follows:


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

    This section applies to the following types of entities: A 
security-based swap dealer registered pursuant to section 15F of the 
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, including 
an OTC derivatives dealer as that term is defined in Sec.  240.3b-12, 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); and a 
major security-based swap participant registered pursuant to section 
15F of the Act that is not also a broker or dealer, including an OTC 
derivatives dealer, registered pursuant to section 15 of the Act. 
Section 240.17a-3 (rather than this section) applies to the following 
types of entities: A member of a national securities exchange who 
transacts a business in securities directly with others than members of 
a national securities exchange; a broker or dealer who transacts a 
business in securities through the medium of a member of a national 
securities exchange; a broker or dealer, including an OTC derivatives 
dealer, registered pursuant to section 15 of the Act; a security-based 
swap dealer registered pursuant to section 15F of the Act that is also 
a broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; and a major security-based swap 
participant registered pursuant to section 15F of the Act that is also 
a broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act.
    (a) This paragraph (a) applies only to security-based swap dealers 
and major security-based swap participants registered under section 15F 
of the Act for which there is no prudential regulator. Each security-
based swap dealer and major security-based swap participant subject to 
this paragraph (a) must make and keep current the following books and 
records:
    (1) Blotters (or other records of original entry) containing an 
itemized daily record of all purchases and sales of securities 
(including security-based swaps), all receipts and deliveries of 
securities (including certificate numbers), all receipts and 
disbursements of cash and all other debits and credits. Such records 
must show the account for which each such purchase or sale was 
effected, the name and amount of securities, the unit and aggregate 
purchase or sale price, if any (including the financial terms for 
security-based swaps), the trade date, and the name or other 
designation of the person from whom such securities were purchased or 
received or to whom sold or delivered. For security-based swaps, such 
records must also show, for each transaction, the type of security-
based swap, the reference security, index, or obligor, the date and 
time of execution, the effective date, the scheduled termination date, 
the notional amount(s) and the currenc(ies) in which the notional 
amount(s) is expressed, the unique transaction identifier, and the 
counterparty's unique identification code.
    (2) Ledgers (or other records) reflecting all assets and 
liabilities, income and expense and capital accounts.
    (3) Ledger accounts (or other records) itemizing separately as to 
each account for every customer or non-customer of such security-based 
swap dealer or major security-based swap participant, all purchases and 
sales, receipts and deliveries of securities (including security-based 
swaps) and commodities for such account and all other debits and 
credits to such account; and in addition, for a security-based swap, 
the type of security-based swap, the reference security, index, or 
obligor, the date and time of execution, the effective date, the 
scheduled termination date, the notional amount(s) and the currenc(ies) 
in which the notional amount(s) is expressed, the unique transaction 
identifier, and the counterparty's unique identification code.
    (4) A securities record or ledger reflecting separately for each:
    (i) Security, other than a security-based swap, as of the clearance 
dates all ``long'' or ``short'' positions (including securities in 
safekeeping and securities that are the subjects of repurchase or 
reverse repurchase agreements) carried by such security-based swap 
dealer or major security-based swap participant for its account or for 
the account of its customers and showing the location of all securities 
long and the offsetting position to all securities short, including 
long security count differences and short security count differences 
classified by the date of the physical

[[Page 68657]]

count and verification in which they were discovered, and, in all cases 
the name or designation of the account in which each position is 
carried.
    (ii) Security-based swap, the reference security, index, or 
obligor, the unique transaction identifier, the counterparty's unique 
identification code, whether it is a ``bought'' or ``sold'' position in 
the security-based swap, whether the security-based swap is cleared or 
not cleared, and if cleared, identification of the clearing agency 
where the security-based swap is cleared.
    (5) A memorandum of each purchase or sale of a security-based swap 
for the account of the security-based swap dealer or major security-
based swap participant showing the price. The memorandum must also 
include the type of security-based swap, the reference security, index, 
or obligor, the date and time of execution, the effective date, the 
scheduled termination date, the notional amount(s) and the currenc(ies) 
in which the notional amount(s) is expressed, the unique transaction 
identifier, and the counterparty's unique identification code. An order 
entered pursuant to the exercise of discretionary authority must be so 
designated.
    (6) With respect to a security other than a security-based swap, 
copies of confirmations of all purchases and sales of securities. With 
respect to a security-based swap, copies of the security-based swap 
trade acknowledgment and verification made in compliance with Sec.  
240.15Fi-2.
    (7) For each security-based swap account, a record of the unique 
identification code of such counterparty, the name and address of such 
counterparty, and a record of the authorization of each person the 
counterparty has granted authority to transact business in the 
security-based swap account.
    (8) A record of all puts, calls, spreads, straddles and other 
options in which such security-based swap dealer or major security-
based swap participant has any direct or indirect interest or which 
such security-based swap dealer or major security-based swap 
participant has granted or guaranteed, containing, at least, an 
identification of the security, and the number of units involved.
    (9) A record of the proof of money balances of all ledger accounts 
in the form of trial balances, and a record of the computation of net 
capital or tangible net worth, as applicable, as of the trial balance 
date, pursuant to Sec.  240.18a-1 or Sec.  240.18a-2, respectively. 
Such trial balances and computations must be prepared currently at 
least once per month.
    (10)(i) A questionnaire or application for employment executed by 
each ``associated person'' (as defined in paragraph (d) of this 
section) of the security-based swap dealer or major security-based swap 
participant who effects or is involved in effecting security-based 
swaps on the security-based swap dealer's or major security-based swap 
participant's behalf, which questionnaire or application must be 
approved in writing by an authorized representative of the security-
based swap dealer or major security-based swap participant and must 
contain at least the following information with respect to the 
associated person:
    (A) The associated person's name, address, social security number, 
and the starting date of the associated person's employment or other 
association with the security-based swap dealer or major security-based 
swap participant;
    (B) The associated person's date of birth;
    (C) A complete, consecutive statement of all the associated 
person's business connections for at least the preceding ten years, 
including whether the employment was part-time or full-time;
    (D) A record of any denial of membership or registration, and of 
any disciplinary action taken, or sanction imposed, upon the associated 
person by any Federal or state agency, or by any national securities 
exchange or national securities association, including any finding that 
the associated person was a cause of any disciplinary action or had 
violated any law;
    (E) A record of any denial, suspension, expulsion or revocation of 
membership or registration of any broker, dealer, security-based swap 
dealer or major security-based swap participant with which the 
associated person was associated in any capacity at the time such 
action was taken;
    (F) A record of any permanent or temporary injunction entered 
against the associated person, or any broker, dealer, security-based 
swap dealer or major security-based swap participant with which the 
associated person was associated in any capacity at the time such 
injunction was entered;
    (G) A record of any arrest or indictment for any felony, or any 
misdemeanor pertaining to securities, commodities, banking, insurance 
or real estate (including, but not limited to, acting or being 
associated with a broker or dealer, security-based swap dealer, major 
security-based swap participant, investment company, investment 
adviser, futures sponsor, bank, or savings and loan association), 
fraud, false statements or omissions, wrongful taking of property or 
bribery, forgery, counterfeiting or extortion, and the disposition of 
the foregoing; and
    (H) A record of any other name or names by which the associated 
person has been known or which the associated person has used.
    (ii) A record listing every associated person of the security-based 
swap dealer or major security-based swap participant which shows, for 
each associated person, every office of the security-based swap dealer 
or major security-based swap participant where the associated person 
regularly conducts the business of handling funds or securities or 
effecting any transactions in, or inducing or attempting to induce the 
purchase or sale of any security, for the security-based swap dealer or 
major security-based swap participant and the Central Registration 
Depository number, if any, and every internal identification number or 
code assigned to that person by the security-based swap dealer or major 
security-based swap participant.
    (11) [Reserved]
    (12) A record of the daily calculation of the current exposure and, 
if applicable, the initial margin amount for each account of a 
counterparty required under Sec.  240.18a-3(c).
    (13) A record of compliance with possession or control requirements 
under Sec.  240.18a-4(b).
    (14) A record of the reserve computation required under Sec.  
240.18a-4(c).
    (15) A record of each security-based swap transaction that is not 
verified under Sec.  240.15Fi-2 within five business days of execution 
that includes, at a minimum, the unique transaction identifier and the 
counterparty's unique identification code.
    (16) A record documenting that the security-based swap dealer has 
complied with the business conduct standards as required under Sec.  
240.15Fh-6.
    (17) A record documenting that the security-based swap dealer or 
major security-based swap participant has complied with the business 
conduct standards as required under Sec. Sec.  240.15Fh-1 through 
240.15Fh-5 and 240.15Fk-1.
    (18) [Reserved]
    (b) This paragraph (b) applies only to security-based swap dealers 
and major security-based swap participants registered under section 15F 
of the Act for which there is a prudential regulator. Each security-
based swap dealer and major security-based swap participant subject to 
this paragraph (b) must make and keep current the following books and 
records:

[[Page 68658]]

    (1) For security-based swaps and any other positions related to the 
firm's business as such, blotters (or other records of original entry) 
containing an itemized daily record of all purchases and sales of 
securities (including security-based swaps), all receipts and 
deliveries of securities (including certificate numbers), all receipts 
and disbursements of cash and all other debits and credits. Such 
records must show, the account for which each such purchase and sale 
was effected, the name and amount of securities, the unit and aggregate 
purchase or sale price (if any, including the financial terms for 
security-based swaps), the trade date, and the name or other 
designation of the person from whom such securities were purchased or 
received or to whom sold or delivered. For security-based swaps, such 
records must also show, for each transaction, the type of security-
based swap, the reference security, index, or obligor, the date and 
time of execution, the effective date, the scheduled termination date, 
the notional amount(s) and the currenc(ies) in which the notional 
amount(s) is expressed, the unique transaction identifier, and the 
counterparty's unique identification code.
    (2) Ledger accounts (or other records) itemizing separately as to 
each account for every security-based swap customer or non-customer of 
such security-based swap dealer or major security-based swap 
participant, all purchases, sales, receipts and deliveries of 
securities (including security-based swaps) and commodities for such 
account and all other debits and credits to such account; and in 
addition, for a security-based swap, the type of security-based swap, 
the reference security, index, or obligor, the date and time of 
execution, the effective date, the scheduled termination date, the 
notional amount(s) and the currenc(ies) in which the notional amount(s) 
is expressed, the unique transaction identifier, and the counterparty's 
unique identification code.
    (3) For security-based swaps and any securities positions related 
to the firm's business as a security-based swap dealer or a major 
security-based swap participant, a securities record or ledger 
reflecting separately for each:
    (i) Security, other than a security-based swap, as of the clearance 
dates all ``long'' or ``short'' positions (including securities in 
safekeeping and securities that are the subjects of repurchase or 
reverse repurchase agreements) carried by such security-based swap 
dealer or major security-based swap participant for its account or for 
the account of its customers and showing the location of all securities 
long and the offsetting position to all securities short, including 
long security count differences and short security count differences 
classified by the date of the physical count and verification in which 
they were discovered, and in all cases the name or designation of the 
account in which each position is carried.
    (ii) Security-based swap, the reference security, index, or 
obligor, the unique transaction identifier, the counterparty's unique 
identification code, whether it is a ``bought'' or ``sold'' position in 
the security-based swap, whether the security-based swap is cleared or 
not cleared, and if cleared, identification of the clearing agency 
where the security-based swap is cleared.
    (4) A memorandum of each brokerage order, and of any other 
instruction, given or received for the purchase or sale of a security-
based swap, whether executed or unexecuted. The memorandum must show 
the terms and conditions of the order or instructions and of any 
modification or cancellation thereof; the account for which entered; 
the time the order was received; the time of entry; the price at which 
executed; the identity of each associated person, if any, responsible 
for the account; the identity of any other person who entered or 
accepted the order on behalf of the customer, or, if a customer entered 
the order on an electronic system, a notation of that entry; and, to 
the extent feasible, the time of execution or cancellation. The 
memorandum also must include the type of the security-based swap, the 
reference security, index, or obligor, the date and time of execution, 
the effective date, the scheduled termination date, the notional 
amount(s) and the currenc(ies) in which the notional amount(s) is 
expressed, the unique transaction identifier, and the counterparty's 
unique identification code. An order entered pursuant to the exercise 
of discretionary authority by the security-based swap dealer or major 
security-based swap participant, or associated person thereof, must be 
so designated. The term instruction must include instructions between 
partners and employees of a security-based swap dealer or major 
security-based swap participant. The term time of entry means the time 
when the security-based swap dealer or major security-based swap 
participant transmits the order or instruction for execution.
    (5) A memorandum of each purchase or sale of a security-based swap 
for the account of the security-based swap dealer or major security-
based swap participant showing the price. The memorandum must also 
include the type of security-based swap, the reference security, index, 
or obligor, the date and time of execution, the effective date, the 
scheduled termination date, the notional amount(s) and the currenc(ies) 
in which the notional amount(s) is expressed, the unique transaction 
identifier, and the counterparty's unique identification code. An order 
entered pursuant to the exercise of discretionary authority must be so 
designated.
    (6) With respect to a security other than a security-based swap, 
copies of confirmations of all purchases and sales of securities 
related to the business of a security-based swap dealer or major 
security-based swap participant. With respect to a security-based swap, 
copies of the security-based swap trade acknowledgment and verification 
made in compliance with Sec.  240.15Fi-2.
    (7) For each security-based swap account, a record of the 
counterparty's unique identification code, the name and address of such 
counterparty, and a record of the authorization of each person the 
counterparty has granted authority to transact business in the 
security-based swap account.
    (8)(i) A questionnaire or application for employment executed by 
each ``associated person'' (as defined in paragraph (c) of this 
section) of the security-based swap dealer or major security-based swap 
participant who effects or is involved in effecting security-based 
swaps on the security-based swap dealer's or major security-based swap 
participant's behalf, which questionnaire or application must be 
approved in writing by an authorized representative of the security-
based swap dealer or major security-based swap participant and must 
contain at least the following information with respect to the 
associated person:
    (A) The associated person's name, address, social security number, 
and the starting date of the associated person's employment or other 
association with the security-based swap dealer or major security-based 
swap participant;
    (B) The associated person's date of birth;
    (C) A complete, consecutive statement of all the associated 
person's business connections for at least the preceding ten years, 
including whether the employment was part-time or full-time;
    (D) A record of any denial of membership or registration, and of 
any disciplinary action taken, or sanction imposed, upon the associated 
person by any Federal or state agency, or by any national securities 
exchange or national securities association, including any finding that 
the associated person was a

[[Page 68659]]

cause of any disciplinary action or had violated any law;
    (E) A record of any denial, suspension, expulsion or revocation of 
membership or registration of any broker, dealer, security-based swap 
dealer or major security-based swap participant with which the 
associated person was associated in any capacity at the time such 
action was taken;
    (F) A record of any permanent or temporary injunction entered 
against the associated person, or any broker, dealer, security-based 
swap dealer or major security-based swap participant with which the 
associated person was associated in any capacity at the time such 
injunction was entered;
    (G) A record of any arrest or indictment for any felony, or any 
misdemeanor pertaining to securities, commodities, banking, insurance 
or real estate (including, but not limited to, acting or being 
associated with a broker or dealer, security-based swap dealer, major 
security-based swap participant, investment company, investment 
adviser, futures sponsor, bank, or savings and loan association), 
fraud, false statements or omissions, wrongful taking of property or 
bribery, forgery, counterfeiting or extortion, and the disposition of 
the foregoing; and
    (H) A record of any other name or names by which the associated 
person has been known or which the associated person has used.
    (ii) A record listing every associated person of the security-based 
swap dealer or major security-based swap participant which shows, for 
each associated person, every office of the security-based swap dealer 
or major security-based swap participant where the associated person 
regularly conducts the business of handling funds or securities or 
effecting any transactions in, or inducing or attempting to induce the 
purchase or sale of any security, for the security-based swap dealer or 
major security-based swap participant and every internal identification 
number or code assigned to that person by the security-based swap 
dealer or major security-based swap participant.
    (9) A record of compliance with possession or control requirements 
under Sec.  240.18a-4(b).
    (10) A record of the reserve computation required under Sec.  
240.18a-4(c).
    (11) A record of each security-based swap transaction that is not 
verified under Sec.  240.15Fi-2 within five business days of execution 
that includes, at a minimum, the unique transaction identifier and the 
counterparty's unique identification code.
    (12) A record documenting that the security-based swap dealer has 
complied with the business conduct standards as required under Sec.  
240.15Fh-6.
    (13) A record documenting that the security-based swap dealer or 
major security-based swap participant has complied with the business 
conduct standards as required under Sec.  240.15Fh-1 through Sec.  
240.15Fh-5 and Sec.  240.15Fk-1.
    (14) [Reserved]
    (c) A security-based swap dealer or major security-based swap 
participant may comply with the recordkeeping requirements of the 
Commodity Exchange Act and chapter I of this title applicable to swap 
dealers and major swap participants in lieu of complying with 
paragraphs (a)(1), (3), and (4) or paragraphs (b)(1) through (3) of 
this section, as applicable, solely with respect to required 
information regarding security-based swap transactions and positions 
if:
    (1) The security-based swap dealer or major security-based swap 
participant is registered as a security-based swap dealer or major 
security-based swap participant pursuant to section 15F of the Act;
    (2) The security-based swap dealer or major security-based swap 
participant is registered as a swap dealer or major swap participant 
pursuant to section 4s of the Commodity Exchange Act and chapter I of 
this title;
    (3) The security-based swap dealer or major security-based swap 
participant is subject to 17 CFR 23.201, 23.202, 23.402, and 23.501 
with respect to its swap-related books and records;
    (4) The security-based swap dealer or major security-based swap 
participant preserves all of the data elements necessary to create the 
records required by paragraphs (a)(1), (3), and (4) or paragraphs 
(b)(1) through (3) of this section, as applicable, as they pertain to 
security-based swap and swap transactions and positions;
    (5) The security-based swap dealer or major security-based swap 
participant upon request furnishes promptly to representatives of the 
Commission the records required by paragraphs (a)(1), (3), and (4) or 
paragraphs (b)(1) through (3) of this section, as applicable, as well 
as the records required by 17 CFR 23.201, 23.202, 23.402, and 23.501 as 
they pertain to security-based swap and swap transactions and positions 
in the format applicable to that category of record as set forth in 
this section; and
    (6) The security-based swap dealer or major security-based swap 
participant provides notice of its intent to utilize this paragraph (c) 
by notifying in writing the Commission, both at the principal office of 
the Commission in Washington, DC and at the regional office of the 
Commission for the region in which the registrant has its principal 
place of business.
    (d)(1) The term associated person means for purposes of this 
section a person associated with a security-based swap dealer or major 
security-based swap participant as that term is defined in section 
3(a)(70) of the Act (15 U.S.C. 78c(a)(70)).
    (2) The term associated person, as to an entity supervised by a 
prudential regulator, includes only those persons whose activities 
relate to its business as a security-based swap dealer or major 
security-based swap participant.

0
12. Section 240.18a-6 is added to read as follows:


Sec.  240.18a-6   Records to be preserved by certain security-based 
swap dealers and major security-based swap participants.

    This section applies to the following types of entities: A 
security-based swap dealer registered pursuant to section 15F of the 
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, including 
an OTC derivatives dealer as that term is defined in Sec.  240.3b-12, 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); and a 
major security-based swap participant registered pursuant to section 
15F of the Act that is not also a broker or dealer, including an OTC 
derivatives dealer, registered pursuant to section 15 of the Act. 
Section 240.17a-4 (rather than this section) applies to the following 
types of entities: A member of a national securities exchange who 
transacts a business in securities directly with others than members of 
a national securities exchange; a broker or dealer who transacts a 
business in securities through the medium of a member of a national 
securities exchange; a broker or dealer, including an OTC derivatives 
dealer, registered pursuant to section 15 of the Act; a security-based 
swap dealer registered pursuant to section 15F of the Act that is also 
a broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; and a major security-based swap 
participant registered pursuant to section 15F of the Act that is also 
a broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act.
    (a)(1) Every security-based swap dealer and major security-based 
swap participant for which there is no prudential regulator must 
preserve for a period not less than six years, the first two years in 
an easily accessible place,

[[Page 68660]]

all records required to be made pursuant to Sec.  240.18a-5(a)(1) 
through (4).
    (2) Every security-based swap dealer and major security-based swap 
participant for which there is a prudential regulator must preserve for 
a period not less than six years, the first two years in an easily 
accessible place, all records required to be made pursuant to Sec.  
240.18a-5(b)(1) through (3).
    (b)(1) Every security-based swap dealer and major security-based 
swap participant for which there is no prudential regulator must 
preserve for a period of not less than three years, the first two years 
in an easily accessible place:
    (i) All records required to be made pursuant to Sec.  240.18a-
5(a)(5) through (9) and (12) through (17).
    (ii) All check books, bank statements, cancelled checks, and cash 
reconciliations.
    (iii) All bills receivable or payable (or copies thereof), paid or 
unpaid, relating to the business of such security-based swap dealer or 
major security-based swap participant, as such.
    (iv) Originals of all communications received and copies of all 
communications sent (and any approvals thereof) by the security-based 
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as such. 
As used in this paragraph (b)(1)(iv), the term ``communications'' 
includes sales scripts and recordings of telephone calls required to be 
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1)).
    (v) All trial balances and computations of net capital or tangible 
net worth requirements (and working papers in connection therewith), as 
applicable, financial statements, branch office reconciliations, and 
internal audit working papers, relating to the business of such 
security-based swap dealer or major security-based swap participant as 
such.
    (vi) All guarantees of security-based swap accounts and all powers 
of attorney and other evidence of the granting of any discretionary 
authority given in respect of any security-based swap account, and 
copies of resolutions empowering an agent to act on behalf of a 
corporation.
    (vii) All written agreements (or copies thereof) entered into by 
such security-based swap dealer or major security-based swap 
participant relating to its business as such, including agreements with 
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or 
any document establishing the terms and conditions of the customer's or 
non-customer's security-based swaps must be maintained with the 
customer's or non-customer's account records.
    (viii) Records which contain the following information in support 
of amounts included in the report prepared as of the audit date on Part 
II of Form X-17A-5 (Sec.  249.617 of this chapter) and in annual 
financial statements required by Sec.  240.18a-7(d):
    (A) Money balance and position, long or short, including 
description, quantity, price, and valuation of each security, including 
contractual commitments, in security-based swap customers' accounts, in 
fully secured accounts, partly secured accounts, unsecured accounts, 
and in securities accounts payable to security-based swap customers;
    (B) Money balance and position, long or short, including 
description, quantity, price, and valuation of each security, including 
contractual commitments, in security-based swap non-customers' 
accounts, in fully secured accounts, partly secured accounts, unsecured 
accounts, and in security-based swap accounts payable to non-security-
based swap customers;
    (C) Position, long or short, including description, quantity, 
price, and valuation of each security, including contractual 
commitments, included in the Computation of Net Capital as commitments, 
securities owned, securities owned not readily marketable, and other 
investments owned not readily marketable;
    (D) Description of futures commodity contracts or swaps, contract 
value on trade date, market value, gain or loss, and liquidating equity 
or deficit in customers' and non-customers' accounts;
    (E) Description of futures commodity contracts or swaps, contract 
value on trade date, market value, gain or loss and liquidating equity 
or deficit in trading and investment accounts;
    (F) Description, money balance, quantity, price, and valuation of 
each spot commodity and swap position or commitments in customers' and 
non-customers' accounts;
    (G) Description, money balance, quantity, price, and valuation of 
each spot commodity and swap position or commitments in trading and 
investment accounts;
    (H) Number of shares, description of security, exercise price, 
cost, and market value of put and call options, including short out of 
the money options having no market or exercise value, showing listed 
and unlisted put and call options separately;
    (I) Quantity, price, and valuation of each security underlying the 
haircut for undue concentration made in the Computation of Net Capital 
pursuant to Sec.  240.18a-1;
    (J) Description, quantity, price, and valuation of each security 
and commodity position or contractual commitment, long or short, in 
each joint account in which the security-based swap dealer or major 
security-based swap participant has an interest, including each 
participant's interest and margin deposit;
    (K) Description, settlement date, contract amount, quantity, market 
price, and valuation for each aged failed to deliver requiring a charge 
in the Computation of Net Capital pursuant to Sec.  240.18a-1;
    (L) Detail relating to information for possession or control 
requirements under Sec.  240.18a-4 and reported on Part II of Form X-
17A-5 (Sec.  249.617 of this chapter);
    (M) Detail of all items, not otherwise substantiated, which are 
charged or credited in the Computation of Net Capital pursuant to 
Sec. Sec.  240.18a-1 and 240.18a-2, such as cash margin deficiencies, 
deductions related to securities values and undue concentration, aged 
securities differences, and insurance claims receivable;
    (N) Detail relating to the calculation of the risk margin amount 
pursuant to Sec.  240.18a-1(c)(6); and
    (O) Other schedules which are specifically prescribed by the 
Commission as necessary to support information reported as required by 
Sec.  240.18a-7.
    (ix) The records required to be made pursuant to Sec.  240.15c3-4 
and the results of the periodic reviews conducted pursuant to Sec.  
240.15c3-4(d).
    (x) The records required to be made pursuant to Sec.  240.18a-
1(e)(2)(iv)(F)(1) and (2).
    (xi) A copy of information required to be reported under Sec. Sec.  
242.901 through 242.909 of this chapter (Regulation SBSR).
    (xii) Copies of documents, communications, disclosures, and notices 
related to business conduct standards as required under Sec. Sec.  
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
    (xiii) Copies of documents used to make a reasonable determination 
with respect to special entities, including information relating to the 
financial status, the tax status, and the investment or financing 
objectives of the special entity as required under sections 
15F(h)(4)(C) and (5)(A) of the Act (15 U.S.C. 78o-10(h)(4)(C) and 
(5)(A)).

[[Page 68661]]

    (2) Every security-based swap dealer and major security-based swap 
participant for which there is a prudential regulator must preserve for 
a period of not less than three years, the first two years in an easily 
accessible place:
    (i) All records required to be made pursuant to Sec.  240.18a-
5(b)(4) through (7) and (9) through (13).
    (ii) Originals of all communications received and copies of all 
communications sent (and any approvals thereof) by the security-based 
swap dealer or major security-based swap participant (including inter-
office memoranda and communications) relating to its business as a 
security-based swap dealer or major security-based swap participant. As 
used in this paragraph (b)(2)(ii), the term ``communications'' includes 
sales scripts and recordings of telephone calls required to be 
maintained pursuant to section 15F(g)(1) of the Act (15 U.S.C. 78o-
10(g)(1)).
    (iii) All guarantees of security-based swap accounts and all powers 
of attorney and other evidence of the granting of any discretionary 
authority given in respect of any security-based swap account, and 
copies of resolutions empowering an agent to act on behalf of a 
corporation.
    (iv) All written agreements (or copies thereof) entered into by 
such security-based swap dealer or major security-based swap 
participant relating to its business as a security-based swap dealer or 
major security-based swap participant, including agreements with 
respect to any account. Written agreements with respect to a security-
based swap customer or non-customer, including governing documents or 
any document establishing the terms and conditions of the customer's or 
non-customer's security-based swaps, must be maintained with the 
customer's or non-customer's account records.
    (v) Detail relating to information for possession or control 
requirements under Sec.  240.18a-4 and reported on Part IIC of Form X-
17A-5 (Sec.  249.617 of this chapter) that is in support of amounts 
included in the report prepared as of the audit date on Part IIC of 
Form X-17A-5 (Sec.  249.617 of this chapter) and in the registrant's 
annual reports required by Sec.  240.18a-7(c).
    (vi) A copy of information required to be reported under Regulation 
SBSR (Sec. Sec.  242.901 through 242.909 of this chapter).
    (vii) Copies of documents, communications, disclosures, and notices 
related to business conduct standards as required under Sec. Sec.  
240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1.
    (viii) Copies of documents used to make a reasonable determination 
with respect to special entities, including information relating to the 
financial status, the tax status, and the investment or financing 
objectives of the special entity as required under sections 
15F(h)(4)(C) and (5)(A) of the Act.
    (c) Every security-based swap dealer and major security-based swap 
participant subject to this section must preserve during the life of 
the enterprise and of any successor enterprise all partnership articles 
or, in the case of a corporation, all articles of incorporation or 
charter, minute books, and stock certificate books (or, in the case of 
any other form of legal entity, all records such as articles of 
organization or formation and minute books used for a purpose similar 
to those records required for corporations or partnerships), all Forms 
SBSE (Sec.  249.1600 of this chapter), all Forms SBSE-A (Sec.  
249.1600a of this chapter), all Forms SBSE-C (Sec.  249.1600c of this 
chapter), all Forms SBSE-W (Sec.  249.1601 of this chapter), all 
amendments to these forms, and all licenses or other documentation 
showing the registration of the security-based swap dealer or major 
security-based swap participant with any securities regulatory 
authority or the Commodity Futures Trading Commission.
    (d) Every security-based swap dealer and major security-based swap 
participant subject to this section must maintain and preserve in an 
easily accessible place:
    (1) All records required under Sec.  240.18a-5(a)(10) or (b)(8) 
until at least three years after the associated person's employment and 
any other connection with the security-based swap dealer or major 
security-based swap participant has terminated.
    (2)(i) For security-based swap dealers and major security-based 
swap participants for which there is not a prudential regulator, each 
report which a securities regulatory authority or the Commodity Futures 
Trading Commission has requested or required the security-based swap 
dealer or major security-based swap participant to make and furnish to 
it pursuant to an order or settlement, and each securities regulatory 
authority or Commodity Futures Trading Commission examination report 
until three years after the date of the report.
    (ii) For security-based swap dealers and major security-based swap 
participants for which there is a prudential regulator, each report 
related to security-based swap activities which a securities regulatory 
authority, the Commodity Futures Trading Commission, or a prudential 
regulator has requested or required the security-based swap dealer or 
major security-based swap participant to make and furnish to it 
pursuant to an order or settlement, and each securities regulatory 
authority, Commodity Futures Trading Commission, or prudential 
regulator examination report until three years after the date of the 
report.
    (3)(i) For security-based swap dealers and major security-based 
swap participants for which there is not a prudential regulator, each 
compliance, supervisory, and procedures manual, including any updates, 
modifications, and revisions to the manual, describing the policies and 
practices of the security-based swap dealer or major security-based 
swap participant with respect to compliance with applicable laws and 
rules, and supervision of the activities of each natural person 
associated with the security-based swap dealer or major security-based 
swap participant until three years after the termination of the use of 
the manual.
    (ii) For security-based swap dealers and major security-based swap 
participants for which there is a prudential regulator, each 
compliance, supervisory, and procedures manual, including any updates, 
modifications, and revisions to the manual, describing the policies and 
practices of the security-based swap dealer or major security-based 
swap participant with respect to compliance with applicable laws and 
rules relating to security-based swap activities, and supervision of 
the activities of each natural person associated with the security-
based swap dealer or major security-based swap participant until three 
years after the termination of the use of the manual.
    (e) The records required to be maintained and preserved pursuant to 
Sec. Sec.  240.18a-5 and 240.18a-6 may be immediately produced or 
reproduced by means of an electronic storage system (as defined in this 
paragraph (e)) that meets the conditions set forth in this paragraph 
(e) and be maintained and preserved for the required time in that form.
    (1) For purposes of this section, the term electronic storage 
system means any digital storage system that meets the applicable 
conditions set forth in this paragraph (e).
    (2) If an electronic storage system is used by a security-based 
swap dealer or major security-based swap participant, it must:

[[Page 68662]]

    (i) Verify automatically the quality and accuracy of the electronic 
storage system recording process;
    (ii) If applicable, serialize the original and duplicate units of 
the storage media, and time-date for the required period of retention 
the information placed in such electronic storage system; and
    (iii) Have the capacity to readily download into a readable format 
indexes and records preserved in the electronic storage system.
    (3) If a security-based swap dealer or major security-based swap 
participant uses an electronic storage system, it must:
    (i) At all times have available, for examination by the staff of 
the Commission, facilities for immediate, easily readable projection or 
production of records or images maintained on the electronic storage 
system and for producing easily readable representations of those 
records or images.
    (ii) Be ready at all times to immediately provide in a readable 
format any record or index stored on the electronic storage system 
which the staff of the Commission may request.
    (iii) Store separately from the original a duplicate copy of a 
record stored on the electronic storage system for the time required.
    (iv) Organize and index accurately all information maintained on 
both original and any duplicate storage system.
    (A) At all times, a security-based swap dealer or major security-
based swap participant must be able to have such indexes available for 
examination by the staff of the Commission.
    (B) Each index must be duplicated and the duplicate copies must be 
stored separately from the original copy of each index.
    (C) Original and duplicate indexes must be preserved for the time 
required for the indexed records.
    (v) Have in place an audit system providing for accountability 
regarding inputting of records required to be maintained and preserved 
pursuant to Sec. Sec.  240.18a-5 and 240.18a-6 to the electronic 
storage system and inputting of any changes made to every original and 
duplicate record maintained and preserved thereby.
    (A) At all times the security-based swap dealer or major security-
based swap participant must be able to have the results of such audit 
system available for examination by the staff of the Commission.
    (B) The audit results must be preserved for the time required for 
the audited records.
    (vi) The security-based swap dealer or major security-based swap 
participant must maintain, keep current, and provide promptly upon 
request by the staff of the Commission all information necessary to 
access records and indexes stored in the electronic storage system; or 
place in escrow and keep current a copy of the physical and logical 
file format of the electronic storage system, the field format of all 
different information types written on the electronic storage system 
and the source code, together with the appropriate documentation and 
information necessary to access records and indexes.
    (f)(1) If the records required to be maintained and preserved 
pursuant to the provisions of Sec. Sec.  240.18a-5 and 240.18a-6 are 
prepared or maintained by a third party on behalf of the security-based 
swap dealer or major security-based swap participant, the third party 
must file with the Commission a written undertaking in a form 
acceptable to the Commission, signed by a duly authorized person, to 
the effect that such records are the property of the security-based 
swap dealer or major security-based swap participant and will be 
surrendered promptly on request of the security-based swap dealer or 
major security-based swap participant and including the following 
provision:

    With respect to any books and records maintained or preserved on 
behalf of [SBSD or MSBSP], the undersigned hereby undertakes to 
permit examination of such books and records at any time or from 
time to time during business hours by representatives or designees 
of the Securities and Exchange Commission, and to promptly furnish 
to said Commission or its designee true, correct, complete, and 
current hard copies of any or all or any part of such books and 
records.

    (2) Agreement with an outside entity will not relieve such 
security-based swap dealer or major security-based swap participant 
from the responsibility to prepare and maintain records as specified in 
this section or in Sec.  240.18a-5.
    (g) Every security-based swap dealer and major security-based swap 
participant subject to this section must furnish promptly to a 
representative of the Commission legible, true, complete, and current 
copies of those records of the security-based swap dealer or major 
security-based swap participant that are required to be preserved under 
this section, or any other records of the security-based swap dealer or 
major security-based swap participant subject to examination or 
required to be made or maintained pursuant to section 15F of the Act 
that are requested by a representative of the Commission.
    (h) When used in this section:
    (1) The term securities regulatory authority means the Commission, 
any self-regulatory organization, or any securities commission (or any 
agency or office performing like functions) of the States.
    (2) The term associated person has the meaning set forth in Sec.  
240.18a-5(d).

0
13. Section 240.18a-7 is added to read as follows:


Sec.  240.18a-7   Reports to be made by certain security-based swap 
dealers and major security-based swap participants.

    This section applies to the following types of entities: A 
security-based swap dealer registered pursuant to section 15F of the 
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, other than 
an OTC derivatives dealer as that term is defined in Sec.  240.3b-12, 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a 
security-based swap dealer registered pursuant to section 15F of the 
Act that is also an OTC derivatives dealer registered pursuant to 
section 15 of the Act; and a major security-based swap participant 
registered pursuant to section 15F of the Act that is not also a broker 
or dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act. Section 240.17a-5 (rather than this section) 
applies to the following types of entities: Except as provided above, a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; a broker or dealer, other than an 
OTC derivatives dealer, registered pursuant to section 15 of the Act 
that is also a security-based swap dealer registered pursuant to 
section 15F of the Act; and a broker or dealer, including an OTC 
derivatives dealer, registered pursuant to section 15 of the Act that 
is also a major-security-based swap participant registered pursuant to 
section 15F of the Act.
    (a) Filing of reports. (1) Every security-based swap dealer or 
major security-based swap participant for which there is no prudential 
regulator must file with the Commission or its designee Part II of Form 
X-17A-5 (Sec.  249.617 of this chapter) within 17 business days after 
the end of each month.
    (2) Every security-based swap dealer or major security-based swap 
participant for which there is a prudential regulator must file with 
the Commission or its designee Part IIC of Form X-17A-5 (Sec.  249.617 
of this chapter) within 30 calendar days after the end of each calendar 
quarter.

[[Page 68663]]

    (3) Security-based swap dealers that have been authorized by the 
Commission to compute net capital pursuant to Sec.  240.18a-1(d), must 
file the following additional reports with the Commission:
    (i) For each product for which the security-based swap dealer 
calculates a deduction for market risk other than in accordance with 
Sec.  240.18a-1(e)(1)(i) and (iii), the product category and the amount 
of the deduction for market risk within 17 business days after the end 
of the month;
    (ii) A graph reflecting, for each business line, the daily intra-
month value at risk within 17 business days after the end of the month;
    (iii) The aggregate value at risk for the security-based swap 
dealer within 17 business days after end of the month;
    (iv) For each product for which the security-based swap dealer uses 
scenario analysis, the product category and the deduction for market 
risk within 17 business days after the end of the month;
    (v) Credit risk information on security-based swap, mixed swap and 
swap exposures, within 17 business days after the end of the month, 
including:
    (A) Overall current exposure;
    (B) Current exposure (including commitments) listed by counterparty 
for the 15 largest exposures;
    (C) The ten largest commitments listed by counterparty;
    (D) The broker's or dealer's maximum potential exposure listed by 
counterparty for the 15 largest exposures;
    (E) The broker's or dealer's aggregate maximum potential exposure;
    (F) A summary report reflecting the broker's or dealer's current 
and maximum potential exposures by credit rating category; and
    (G) A summary report reflecting the broker's or dealer's current 
exposure for each of the top ten countries to which the broker or 
dealer is exposed (by residence of the main operating group of the 
counterparty);
    (vi) Regular risk reports supplied to the security-based swap 
dealer's senior management in the format described in the application, 
within 17 business days after the end of the month;
    (vii) [Reserved]
    (viii) A report identifying the number of business days for which 
the actual daily net trading loss exceeded the corresponding daily VaR 
within 17 business days after the end of each calendar quarter; and
    (ix) The results of backtesting of all internal models used to 
compute allowable capital, including VaR and credit risk models, 
indicating the number of backtesting exceptions within 17 business days 
after the end of each calendar quarter.
    (b) Customer disclosures. (1) Every security-based swap dealer or 
major security-based swap participant for which there is no prudential 
regulator must make publicly available on its website within 10 
business days after the date the firm is required to file with the 
Commission the annual reports pursuant to paragraph (c) of this 
section:
    (i) A Statement of Financial Condition with appropriate notes 
prepared in accordance with U.S. generally accepted accounting 
principles which must be audited;
    (ii) A statement of the amount of the security-based swap dealer's 
net capital and its required net capital, computed in accordance with 
Sec.  240.18a-1. Such statement must include summary financial 
statements of subsidiaries consolidated pursuant to Sec.  240.18a-1c 
(appendix C to Sec.  240.18a-1 (Rule 18a-1)), where material, and the 
effect thereof on the net capital and required net capital of the 
security-based swap dealer; and
    (iii) If, in connection with the most recent annual reports 
required under paragraph (c) of this section, the report of the 
independent public accountant required under paragraph (c)(1)(i)(C) of 
this section covering the report of the security-based swap dealer 
required under paragraph (c)(1)(i)(B)(1) of this section identifies one 
or more material weaknesses, a copy of the report.
    (2) Every security-based swap dealer or major security-based swap 
participant for which there is no prudential regulator must make 
publicly available on its website unaudited statements as of the date 
that is 6 months after the date of the most recent audited statements 
filed with the Commission under paragraph (c)(1) of this section. These 
reports must be made publicly available within 30 calendar days of the 
date of the statements.
    (3) The information that is made publicly available pursuant to 
paragraphs (b)(1) and (2) of this section must also be made available 
in writing, upon request, to any person that has a security-based swap 
account. The security-based swap dealer or major security-based swap 
participant must maintain a toll-free telephone number to receive such 
requests.
    (c) Annual reports--(1) Reports required to be filed. (i) Except as 
provided in paragraph (c)(1)(iii) of this section, every security-based 
swap dealer or major security-based swap participant registered 
pursuant to section 15F of the Act for which there is no prudential 
regulator must file annually, as applicable:
    (A) A financial report as described in paragraph (c)(2) of this 
section;
    (B)(1) If the security-based swap dealer did not claim it was 
exempt from Sec.  240.18a-4 throughout the most recent fiscal year, a 
compliance report as described in paragraph (c)(3) of this section 
executed by the person who makes the oath or affirmation under 
paragraph (d)(1) of this section; or
    (2) If the security-based swap dealer did claim it was exempt from 
Sec.  240.18a-4 throughout the most recent fiscal year, an exemption 
report as described in paragraph (c)(4) of this section executed by the 
person who makes the oath or affirmation under paragraph (d)(1) of this 
section; and
    (C) A report prepared by an independent public accountant, under 
the engagement provisions in paragraph (e) of this section, covering 
each report required to be filed under paragraphs (c)(1)(i)(A) and (B) 
of this section, as applicable.
    (ii) The reports required to be filed under this paragraph (c) must 
be as of the same fiscal year end each year, unless a change is 
approved in writing by the Commission. The original request for a 
change must be filed at the Commission's principal office in 
Washington, DC. A copy of the written approval must be sent to the 
regional office of the Commission for the region in which the security-
based swap dealer or major security-based swap participant has its 
principal place of business.
    (iii) A security-based swap dealer or major security-based swap 
participant succeeding to and continuing the business of another 
security-based swap dealer or major security-based swap participant 
need not file reports under this paragraph (c) as of a date in the 
fiscal year in which the succession occurs if the predecessor security-
based swap dealer or major security-based swap participant has filed 
the reports in compliance with this paragraph (c) as of a date in such 
fiscal year.
    (2) Financial report. The financial report must contain:
    (i)(A) A Statement of Financial Condition, a Statement of Income, a 
Statement of Cash Flows, a Statement of Changes in Stockholders' or 
Partners' or Sole Proprietor's Equity, and Statement of Changes in 
Liabilities Subordinated to Claims of General Creditors. The statements 
must be prepared in accordance with U.S. generally accepted accounting 
principles and must be in a format that is consistent with the

[[Page 68664]]

statements contained in Part II of Form X-17A-5 (Sec.  249.617 of this 
chapter).
    (B) If there is other comprehensive income in the period(s) 
presented, the financial report must contain a Statement of 
Comprehensive Income (as defined in Sec.  210.1-02 of this chapter) in 
place of a Statement of Income.
    (ii) Supporting schedules that include, from Part II of Form X-17A-
5 (Sec.  249.617 of this chapter), a Computation of Net Capital under 
Sec.  240.18a-1, a Computation of Tangible Net Worth under Sec.  
240.18a-2, a Computation for Determination of Security-Based Swap 
Customer Reserve Requirements under Sec.  240.18a-4a (Exhibit A of 
Sec.  240.18a-4), and Information Relating to the Possession or Control 
Requirements for Security-Based Swap Customers under Sec.  240.18a-4, 
as applicable.
    (iii) If any of the Computation of Net Capital under Sec.  240.18a-
1, the Computation of Tangible Net Worth under Sec.  240.18a-2, or the 
Computation for Determination of Security-Based Swap Customer Reserve 
Requirements under Exhibit A of Sec.  240.18a-4 in the financial report 
is materially different from the corresponding computation in the most 
recent Part II of Form X-17A-5 (Sec.  249.617 of this chapter) filed by 
the registrant pursuant to paragraph (a) of this section, a 
reconciliation, including appropriate explanations, between the 
computation in the financial report and the computation in the most 
recent Part II of Form X-17A-5 filed by the registrant. If no material 
differences exist, a statement so indicating must be included in the 
financial report.
    (3) Compliance report. (i) The compliance report must contain:
    (A) Statements as to whether:
    (1) The security-based swap dealer has established and maintained 
Internal Control Over Compliance as that term is defined in paragraph 
(c)(3)(ii) of this section;
    (2) The Internal Control Over Compliance of the security-based swap 
dealer was effective during the most recent fiscal year;
    (3) The Internal Control Over Compliance of the security-based swap 
dealer was effective as of the end of the most recent fiscal year;
    (4) The security-based swap dealer was in compliance with 
Sec. Sec.  240.18a-1 and 240.18a-4(c) as of the end of the most recent 
fiscal year; and
    (5) The information the security-based swap dealer used to state 
whether it was in compliance with Sec. Sec.  240.18a-1 and 240.18a-4(c) 
was derived from the books and records of the security-based swap 
dealer.
    (B) If applicable, a description of each identified material 
weakness in the Internal Control Over Compliance of the security-based 
swap dealer during the most recent fiscal year.
    (C) If applicable, a description of an instance of non-compliance 
with Sec.  240.18a-1 or Sec.  240.18a-4(c) as of the end of the most 
recent fiscal year.
    (ii) The term Internal Control Over Compliance means internal 
controls that have the objective of providing the security-based swap 
dealer with reasonable assurance that non-compliance with Sec.  
240.18a-1, Sec.  240.18a-4(c), Sec.  240.18a-9, or Sec.  240.17a-13, as 
applicable, will be prevented or detected on a timely basis.
    (iii) The security-based swap dealer is not permitted to conclude 
that its Internal Control Over Compliance was effective during the most 
recent fiscal year if there were one or more material weaknesses in its 
Internal Control Over Compliance during the most recent fiscal year. 
The security-based swap dealer is not permitted to conclude that its 
Internal Control Over Compliance was effective as of the end of the 
most recent fiscal year if there were one or more material weaknesses 
in its internal control as of the end of the most recent fiscal year. A 
material weakness is a deficiency, or a combination of deficiencies, in 
Internal Control Over Compliance such that there is a reasonable 
possibility that non-compliance with Sec.  240.18a-1 or Sec.  240.18a-
4(c) will not be prevented, or detected on a timely basis or that non-
compliance to a material extent with Sec.  240.18a-4, except for 
paragraph (c), or Sec.  240.18a-9 or Sec.  240.17a-13, as applicable, 
will not be prevented or detected on a timely basis. A deficiency in 
Internal Control Over Compliance exists when the design or operation of 
a control does not allow the management or employees of the security-
based swap dealer in the normal course of performing their assigned 
functions, to prevent or detect on a timely basis non-compliance with 
Sec.  240.18a-1, Sec.  240.18a-4, Sec.  240.18a-9, or Sec.  240.17a-13, 
as applicable.
    (4) Exemption report. The exemption report must contain the 
following statements made to the best knowledge and belief of the 
security-based swap dealer:
    (i) A statement that the security-based swap dealer met the 
exemption provisions in Sec.  240.18a-4(f) throughout the most recent 
fiscal year without exception or that it met the exemption provisions 
in Sec.  240.18a-4(f) throughout the most recent fiscal year except as 
described under paragraph (c)(4)(ii) of this section; and
    (ii) If applicable, a statement that identifies each exception 
during the most recent fiscal year in meeting the exemption provisions 
in Sec.  240.18a-4(f) and that briefly describes the nature of each 
exception and the approximate date(s) on which the exception existed.
    (5) Timing of filing. The annual reports must be filed not more 
than sixty (60) calendar days after the end of the fiscal year of the 
security-based swap dealer or major security-based swap participant.
    (6) Location of filing. The annual reports must be filed with the 
Commission at the regional office of the Commission for the region in 
which the security-based swap dealer or major security-based swap 
participant has its principal place of business and the Commission's 
principal office in Washington, DC, or the annual reports may be filed 
with the Commission electronically in accordance with directions 
provided on the Commission's website.
    (d) Nature and form of reports. The annual reports filed pursuant 
to paragraph (c) of this section must be prepared and filed in 
accordance with the following requirements:
    (1)(i) The security-based swap dealer or major security-based swap 
participant must attach to each of the confidential and non-
confidential portions of the annual reports separately bound under 
paragraph (d)(2) of this section a complete and executed Part III of 
Form X-17A-5 (Sec.  249.617 of this chapter). The security-based swap 
dealer or major security-based swap participant must attach to the 
financial report an oath or affirmation that, to the best knowledge and 
belief of the person making the oath or affirmation:
    (A) The financial report is true and correct; and
    (B) Neither the registrant, nor any partner, officer, director, or 
equivalent person, as the case may be, has any proprietary interest in 
any account classified solely as that of a customer.
    (ii) The oath or affirmation must be made before a person duly 
authorized to administer such oaths or affirmations. If the security-
based swap dealer or major security-based swap participant is a sole 
proprietorship, the oath or affirmation must be made by the proprietor; 
if a partnership, by a general partner; if a corporation, by a duly 
authorized officer; or if a limited liability company or limited 
liability partnership, by the chief executive officer, chief financial 
officer, manager, managing member, or those members vested with 
management authority for the limited liability company or limited 
liability partnership.

[[Page 68665]]

    (2) The annual reports filed under paragraph (c) of this section 
are not confidential, except that, if the Statement of Financial 
Condition is in a format that is consistent with Part II of Form X-17A-
5 (Sec.  249.617 of this chapter), and is bound separately from the 
balance of the annual reports filed under paragraph (c) of this 
section, and each page of the balance of the annual report is stamped 
``confidential,'' then the balance of the annual reports will be deemed 
confidential to the extent permitted by law. However, the annual 
reports, including the confidential portions, will be available for 
official use by any official or employee of the U.S. or any State, and 
by any other person if the Commission authorizes disclosure of the 
annual reports to that person as being in the public interest. Nothing 
contained in this paragraph (d)(2) may be construed to be in derogation 
of the right of customers of a security-based swap dealer or major 
security-based swap participant, upon request to the security-based 
swap dealer or major security-based swap participant, to obtain 
information relative to its financial condition.
    (e) Independent public accountant--(1) Qualifications of 
independent public accountant. The independent public accountant must 
be qualified and independent in accordance with Sec.  210.2-01 of this 
chapter.
    (2) Statement regarding independent public accountant. (i) Every 
security-based swap dealer or major security-based swap participant 
that is required to file annual reports under paragraph (c) of this 
section must file no later than December 10 of each year (or 30 days 
after effective date of its registration as a security-based swap 
dealer or major security-based swap participant if earlier) a statement 
as prescribed in paragraph (e)(2)(ii) of this section with the 
Commission's principal office in Washington, DC and the regional office 
of the Commission for the region in which its principal place of 
business is located. The statement must be dated no later than December 
1 (or 20 calendar days after the effective date of its registration as 
a security-based swap dealer or major security-based swap participant, 
if earlier). If the engagement of an independent public accountant is 
of a continuing nature, providing for successive engagements, no 
further filing is required. If the engagement is for a single year, or 
if the most recent engagement has been terminated or amended, a new 
statement must be filed by the required date.
    (ii) The statement must be headed ``Statement regarding independent 
public accountant under Rule 18a-7(e)(2)'' and must contain the 
following information and representations:
    (A) Name, address, telephone number and registration number of the 
security-based swap dealer or major security-based swap participant.
    (B) Name, address, and telephone number of the independent public 
accountant.
    (C) The date of the fiscal year of the annual reports of the 
security-based swap dealer or major security-based swap participant 
covered by the engagement.
    (D) Whether the engagement is for a single year or is of a 
continuing nature.
    (E) A representation that the independent public accountant has 
undertaken the items enumerated in paragraphs (f)(1) and (2) of this 
section.
    (3) Replacement of accountant. A security-based swap dealer or 
major security-based swap participant must file a notice that must be 
received by the Commission's principal office in Washington, DC and the 
regional office of the Commission for the region in which its principal 
place of business is located not more than 15 business days after:
    (i) The security-based swap dealer or major security-based swap 
participant has notified the independent public accountant that 
provided the reports the security-based swap dealer or major security-
based swap participant filed under paragraph (c)(1)(i)(C) of this 
section for the most recent fiscal year that the independent public 
accountant's services will not be used in future engagements; or
    (ii) The security-based swap dealer or major security-based swap 
participant has notified an independent public accountant that was 
engaged to provide the reports required under paragraph (c)(1)(i)(C) of 
this section that the engagement has been terminated; or
    (iii) An independent public accountant has notified the security-
based swap dealer or major security-based swap participant that the 
independent public accountant would not continue under an engagement to 
provide the reports required under paragraph (c)(1)(i)(C) of this 
section; or
    (iv) A new independent public accountant has been engaged to 
provide the reports required under paragraph (c)(1)(i)(C) of this 
section without any notice of termination having been given to or by 
the previously engaged independent public accountant.
    (v) The notice must include:
    (A) The date of notification of the termination of the engagement 
or of the engagement of the new independent public accountant, as 
applicable; and
    (B) The details of any issues arising during the 24 months (or the 
period of the engagement, if less than 24 months) preceding the 
termination or new engagement relating to any matter of accounting 
principles or practices, financial statement disclosure, auditing scope 
or procedure, or compliance with applicable rules of the Commission, 
which issues, if not resolved to the satisfaction of the former 
independent public accountant, would have caused the independent public 
accountant to make reference to them in the report of the independent 
public accountant. The issues required to be reported include both 
those resolved to the former independent public accountant's 
satisfaction and those not resolved to the former accountant's 
satisfaction. Issues contemplated by this section are those which occur 
at the decision-making level--that is, between principal financial 
officers of the security-based swap dealer or major security-based swap 
participant and personnel of the accounting firm responsible for 
rendering its report. The notice must also state whether the 
accountant's report filed under paragraph (c)(1)(i)(C) of this section 
for any of the past two fiscal years contained an adverse opinion or a 
disclaimer of opinion or was qualified as to uncertainties, audit 
scope, or accounting principles, and must describe the nature of each 
such adverse opinion, disclaimer of opinion, or qualification. The 
security-based swap dealer or major security-based swap participant 
must also request the former independent public accountant to furnish 
the security-based swap dealer or major security-based swap participant 
with a letter addressed to the Commission stating whether the 
independent public accountant agrees with the statements contained in 
the notice of the security-based swap dealer or major security-based 
swap participant and, if not, stating the respects in which the 
independent public accountant does not agree. The security-based swap 
dealer or major security-based swap participant must file three copies 
of the notice and the accountant's letter, one copy of which must be 
manually signed by the sole proprietor, or a general partner or a duly 
authorized corporate, limited liability company, or limited liability 
partnership officer or member, as appropriate, and by the independent 
public accountant, respectively.
    (f) Engagement of the independent public accountant. The 
independent public accountant engaged by the security-based swap dealer 
or major security-based swap participant to

[[Page 68666]]

provide the reports required under paragraph (c)(1)(i)(C) of this 
section must, as part of the engagement, undertake the following, as 
applicable:
    (1) To prepare an independent public accountant's report based on 
an examination of the financial report required to be filed by the 
security-based swap dealer or major security-based swap participant 
under paragraph (c)(1)(i)(A) of this section in accordance with 
generally accepted auditing standards in the United States or the 
standards of the Public Company Accounting Oversight Board; and
    (2)(i) To prepare an independent public accountant's report based 
on an examination of the statements required under paragraphs 
(c)(3)(i)(A)(2) through (5) of this section in the compliance report 
required to be filed by the security-based swap dealer under paragraph 
(c)(1)(i)(B)(1) of this section in accordance with generally accepted 
auditing standards in the United States or the standards of the Public 
Company Accounting Oversight Board; or
    (ii) To prepare an independent public accountant's report based on 
a review of the statements required under paragraphs (c)(4)(i) through 
(ii) of this section in the exemption report required to be filed by 
the security-based swap dealer under paragraph (c)(1)(i)(B)(2) of this 
section in accordance with generally accepted auditing standards in the 
United States or the standards of the Public Company Accounting 
Oversight Board.
    (g) Notification of non-compliance or material weakness. If, during 
the course of preparing the independent public accountant's reports 
required under paragraph (c)(1)(i)(C) of this section, the independent 
public accountant determines that:
    (1) A security-based swap dealer is not in compliance with Sec.  
240.18a-1, Sec.  240.18a-4, Sec.  240.18a-9, or Sec.  240.17a-13, as 
applicable, or the independent public accountant determines that any 
material weaknesses (as defined in paragraph (c)(3)(iii) of this 
section) exist, the independent public accountant must immediately 
notify the chief financial officer of the security-based swap dealer of 
the nature of the non-compliance or material weakness. If the notice 
from the accountant concerns an instance of non-compliance that would 
require a security-based swap dealer to provide a notification under 
Sec.  240.18a-8, or if the notice concerns a material weakness, the 
security-based swap dealer must provide a notification in accordance 
with Sec.  240.18a-8, as applicable, and provide a copy of the 
notification to the independent public accountant. If the independent 
public accountant does not receive the notification within one business 
day, or if the independent public accountant does not agree with the 
statements in the notification, then the independent public accountant 
must notify the Commission within one business day. The report from the 
accountant must, if the security-based swap dealer failed to file a 
notification, describe any instances of non-compliance that required a 
notification under Sec.  240.18a-8 or any material weakness. If the 
security-based swap dealer filed a notification, the report from the 
accountant must detail the aspects of the notification of the security-
based swap dealer with which the accountant does not agree; or
    (2) A major security-based swap participant is not in compliance 
with Sec.  240.18a-2, the independent public accountant must 
immediately notify the chief financial officer of the major security-
based swap participant of the nature of the non-compliance. If the 
notice from the accountant concerns an instance of non-compliance that 
would require a major security-based swap participant to provide a 
notification under Sec.  240.18a-8, the major security-based swap 
participant must provide a notification in accordance with Sec.  
240.18a-8 and provide a copy of the notification to the independent 
public accountant. If the independent public accountant does not 
receive the notification within one business day, or if the independent 
public accountant does not agree with the statements in the 
notification, then the independent public accountant must notify the 
Commission within one business day. The report from the accountant 
must, if the major security-based swap participant failed to file a 
notification, describe any instances of non-compliance that required a 
notification under Sec.  240.18a-8. If the major security-based swap 
participant filed a notification, the report from the accountant must 
detail the aspects of the notification of the major security-based swap 
participant with which the accountant does not agree.

    Note 1 to paragraph (g): The attention of the security-based 
swap dealer, major security-based swap participant, and the 
independent public accountant is called to the fact that under Sec.  
240.18a-8(a), among other things, a security-based swap dealer or 
major security-based swap participant whose net capital or tangible 
net worth, as applicable, declines below the minimum required 
pursuant to Sec.  240.18a-1 or Sec.  240.18a-2, as applicable, must 
give notice of such deficiency that same day in accordance with 
Sec.  240.18a-8(h) and the notice must specify the security-based 
swap dealer's net capital requirement and its current amount of net 
capital, or the extent of the major security-based swap 
participant's failure to maintain positive tangible net worth, as 
applicable.

    (h) Reports of the independent public accountant required under 
paragraph (c)(1)(i)(C) of this section--(1) Technical requirements. The 
independent public accountant's reports must:
    (i) Be dated;
    (ii) Be signed manually;
    (iii) Indicate the city and state where issued; and
    (iv) Identify without detailed enumeration the items covered by the 
reports.
    (2) Representations. The independent public accountant's reports 
must:
    (i) State whether the examinations were made in accordance with 
generally accepted auditing standards in the United States or the 
standards of the Public Company Accounting Oversight Board; and
    (ii) Identify any examination procedures deemed necessary by the 
independent public accountant under the circumstances of the particular 
case which have been omitted and the reason for their omission.
    (iii) Nothing in this section may be construed to imply authority 
for the omission of any procedure that independent public accountants 
would ordinarily employ in the course of an examination for the purpose 
of expressing the opinions required under this section.
    (3) Opinion to be expressed. The independent public accountant's 
reports must state clearly:
    (i) The opinion of the independent public accountant with respect 
to the financial report required under paragraph (c)(1)(i)(C) of this 
section and the accounting principles and practices reflected in that 
report;
    (ii) The opinion of the independent public accountant with respect 
to the financial report required under paragraph (c)(1)(i)(C) of this 
section, as to the consistency of the application of the accounting 
principles, or as to any changes in those principles which have a 
material effect on the financial statements; and
    (iii)(A) The opinion of the independent public accountant with 
respect to the statements required under paragraphs (c)(3)(i)(A)(2) 
through (5) of this section in the compliance report required under 
paragraph (c)(1)(i)(B)(1) of this section; or
    (B) The conclusion of the independent public accountant with 
respect to the statements required under paragraphs (c)(4)(i) and (ii) 
of this section in the exemption report required

[[Page 68667]]

under paragraph (c)(1)(i)(B)(2) of this section.
    (4) Exceptions. Any matters to which the independent public 
accountant takes exception must be clearly identified, the exceptions 
must be specifically and clearly stated, and, to the extent 
practicable, the effect of each such exception on any related items 
contained in the annual reports required under paragraph (c) of this 
section must be given.
    (i) Notification of change of fiscal year. (1) In the event any 
security-based swap dealer or major security-based swap participant for 
which there is no prudential regulator finds it necessary to change its 
fiscal year, it must file, with the Commission's principal office in 
Washington, DC and the regional office of the Commission for the region 
in which the security-based swap dealer or major security-based swap 
participant has its principal place of business, a notice of such 
change.
    (2) Such notice must contain a detailed explanation of the reasons 
for the change. Any change in the filing period for the annual reports 
must be approved by the Commission.
    (j) Filing requirements. For purposes of filing requirements as 
described in this section, filing will be deemed to have been 
accomplished upon receipt at the Commission's principal office in 
Washington, DC, with duplicate originals simultaneously filed at the 
locations prescribed in the particular paragraph of this section which 
is applicable.

0
14. Section 240.18a-8 is added to read as follows:


Sec.  240.18a-8   Notification provisions for security-based swap 
dealers and major security-based swap participants.

    This section applies to the following types of entities: A 
security-based swap dealer registered pursuant to section 15F of the 
Act (15 U.S.C. 78o-10) that is not also a broker or dealer, other than 
an OTC derivatives dealer as that term is defined in Sec.  240.3b-12, 
registered pursuant to section 15 of the Act (15 U.S.C. 78o); a 
security-based swap dealer registered pursuant to section 15F of the 
Act that is also an OTC derivatives dealer; and a major security-based 
swap participant registered pursuant to section 15F of the Act that is 
not also a broker or dealer, including an OTC derivatives dealer, 
registered pursuant to section 15 of the Act. Section 240.17a-11 
(rather than this section) applies to the following types of entities: 
Except as provided above, a broker or dealer, including an OTC 
derivatives dealer, registered pursuant to section 15 of the Act; a 
broker or dealer, other than an OTC derivatives dealer, registered 
pursuant to section 15 of the Act that is also a security-based swap 
dealer registered pursuant to section 15F of the Act; and a broker or 
dealer, including an OTC derivatives dealer, registered pursuant to 
section 15 of the Act that is also a major-security-based swap 
participant registered pursuant to section 15F of the Act.
    (a)(1)(i) Every security-based swap dealer for which there is no 
prudential regulator whose net capital declines below the minimum 
amount required pursuant to Sec.  240.18a-1 must give notice of such 
deficiency that same day in accordance with paragraph (h) of this 
section. The notice must specify the security-based swap dealer's net 
capital requirement and its current amount of net capital. If a 
security-based swap dealer is informed by the Commission that it is, or 
has been, in violation of Sec.  240.18a-1 and the security-based swap 
dealer has not given notice of the capital deficiency under this 
section, the security-based swap dealer, even if it does not agree that 
it is, or has been, in violation of Sec.  240.18a-1, must give notice 
of the claimed deficiency, which notice may specify the security-based 
swap dealer's reasons for its disagreement.
    (ii) Every security-based swap dealer for which there is no 
prudential regulator whose tentative net capital declines below the 
minimum amount required pursuant to Sec.  240.18a-1 must give notice of 
such deficiency that same day in accordance with paragraph (h) of this 
section. The notice must specify the security-based swap dealer's 
tentative net capital requirement and its current amount of tentative 
net capital. If a security-based swap is informed by the Commission 
that it is, or has been, in violation of Sec.  240.18a-1 and the 
security-based swap dealer has not given notice of the capital 
deficiency under this section, the security-based swap dealer, even if 
it does not agree that it is, or has been, in violation of Sec.  
240.18a-1, must give notice of the claimed deficiency, which notice may 
specify the security-based swap dealer's reasons for its disagreement.
    (2) Every major security-based swap participant for which there is 
no prudential regulator who fails to maintain a positive tangible net 
worth pursuant to Sec.  240.18a-2 must give notice of such deficiency 
that same day in accordance with paragraph (h) of this section. The 
notice must specify the extent to which the firm has failed to maintain 
positive tangible net worth. If a major security-based swap participant 
is informed by the Commission that it is, or has been, in violation of 
Sec.  240.18a-2 and the major security-based swap participant has not 
given notice of the capital deficiency under this section, the major 
security-based swap participant, even if it does not agree that it is, 
or has been, in violation of Sec.  240.18a-2, must give notice of the 
claimed deficiency, which notice may specify the major security-based 
swap participant's reasons for its disagreement.
    (b) Every security-based swap dealer or major security-based swap 
participant for which there is no prudential regulator must send notice 
promptly (but within 24 hours) after the occurrence of the events 
specified in paragraphs (b)(1) through (3) or paragraph (b)(4) of this 
section, as applicable, in accordance with paragraph (h) of this 
section:
    (1) If a computation made by a security-based swap dealer pursuant 
to Sec.  240.18a-1 shows that its total net capital is less than 120 
percent of the security-based swap dealer's required minimum net 
capital;
    (2) If a computation made by a security-based swap dealer 
authorized by the Commission to compute net capital pursuant to Sec.  
240.18a-1(d) shows that its total tentative net capital is less than 
120 percent of the security-based swap dealer's required minimum 
tentative net capital;
    (3) If the level of tangible net worth of a major security-based 
swap participant falls below $20 million; and
    (4) The occurrence of the fourth and each subsequent backtesting 
exception under Sec.  240.18a-1(d)(9) during any 250 business day 
measurement period.
    (c) Every security-based swap dealer that files a notice of 
adjustment of its reported capital category with the Federal Reserve 
Board, the Office of the Comptroller of the Currency or the Federal 
Deposit Insurance Corporation must give notice of this fact that same 
day by transmitting a copy notice of the adjustment of reported capital 
category in accordance with paragraph (h) of this section.
    (d) Every security-based swap dealer or major security-based swap 
participant that fails to make and keep current the books and records 
required by Sec.  240.18a-5 or Sec.  240.17a-3, as applicable, must 
give notice of this fact that same day in accordance with paragraph (h) 
of this section, specifying the books and records which have not been 
made or which are not current. The security-based swap dealer or major 
security-based swap participant must also transmit a report in 
accordance with paragraph (h) of this section within 48 hours of the 
notice stating what the security-based swap dealer or major

[[Page 68668]]

security-based swap participant has done or is doing to correct the 
situation.
    (e) Whenever any security-based swap dealer for which there is no 
prudential regulator discovers, or is notified by an independent public 
accountant under Sec.  240.18a-7(g), of the existence of any material 
weakness, as defined in Sec.  240.18a-7(c)(3)(iii), the security-based 
swap dealer must:
    (1) Give notice, in accordance with paragraph (h) of this section, 
of the material weakness within 24 hours of the discovery or 
notification of the material weakness; and
    (2) Transmit a report in accordance with paragraph (h) of this 
section, within 48 hours of the notice stating what the security-based 
swap dealer has done or is doing to correct the situation.
    (f) [Reserved]
    (g) If a security-based swap dealer fails to make in its special 
reserve account for the exclusive benefit of security-based swap 
customers a deposit, as required by Sec.  240.18a-4(c), the security-
based swap dealer must give immediate notice in writing in accordance 
with paragraph (h) of this section.
    (h) Every notice or report required to be given or transmitted by 
this section must be given or transmitted to the principal office of 
the Commission in Washington, DC and the regional office of the 
Commission for the region in which the security-based swap dealer or 
major security-based swap participant has its principal place of 
business, or to an email address provided on the Commission's website, 
and to the Commodity Futures Trading Commission (CFTC) if the security-
based swap dealer or major security-based swap participant is 
registered as a futures commission merchant with the CFTC. The report 
required by paragraph (d) or (e)(2) of this section may be transmitted 
by overnight delivery.

0
15. Section 240.18a-9 is added to read as follows:


Sec.  240.18a-9   Quarterly security counts to be made by certain 
security-based swap dealers.

    This section applies to a security-based swap dealer registered 
pursuant to section 15F of the Act (15 U.S.C. 78o-10) that does not 
have a prudential regulator and that is not also a broker or dealer, 
including an OTC derivatives dealer as that term is defined in Sec.  
240.3b-12, registered pursuant to section 15 of the Act (15 U.S.C. 
78o). Section 240.17a-13 (rather than this section) applies to the 
following entities (if not exempt under the provisions of Sec.  
240.17a-13): A member of a national securities exchange who transacts a 
business in securities directly with others than members of a national 
securities exchange; a broker or dealer who transacts a business in 
securities through the medium of a member of a national securities 
exchange; a broker or dealer, including an OTC derivatives dealer, 
registered pursuant to section 15 of the Act; a security-based swap 
dealer registered pursuant to section 15F of the Act that is also a 
broker or dealer, including an OTC derivatives dealer, registered 
pursuant to section 15 of the Act; and a major security-based swap 
participant that is also a broker or dealer, including an OTC 
derivatives dealer, registered pursuant to section 15 of the Act.
    (a) Any security-based swap dealer that is subject to the 
provisions of this section must at least once in each calendar quarter-
year:
    (1) Physically examine and count all securities held including 
securities that are the subjects of repurchase or reverse repurchase 
agreements;
    (2) 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 its control or direction but not in its physical possession 
by examination and comparison of the supporting detailed records with 
the appropriate ledger control accounts;
    (3) Verify 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 its 
control or direction but not in its physical possession, where such 
securities have been in said status for longer than thirty days;
    (4) Compare the results of the count and verification with its 
records; and
    (5) Record on the books and records of the security-based swap 
dealer all unresolved differences setting forth the security involved 
and date of comparison in a security count difference account no later 
than 7 business days after the date of each required quarterly security 
examination, count, and verification in accordance with the 
requirements provided in paragraph (b) of this section. Provided, 
however, that no examination, count, verification, and comparison for 
the purpose of this section is within 2 months of or more than 4 months 
following a prior examination, count, verification, and comparison made 
under this paragraph (a)(5).
    (b) 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. In either case the recordation must be 
effected within 7 business days subsequent to the examination, count, 
verification, and comparison of a particular security. In the event 
that an examination, count, verification, and comparison is made on a 
cyclical basis, it may not extend over more than 1 calendar quarter-
year, and no security may be examined, counted, verified, or compared 
for the purpose of this section within 2 months of or more than 4 
months after a prior examination, count, verification, and comparison.
    (c) The examination, count, verification, and comparison must 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.

0
 16. Section 240.18a-10 is amended by revising paragraphs (a) 
introductory text and (b)(1) through (3), adding paragarphs (b)(4) and 
(5), and revising paragraphs (c) introductory text, (d)(2)(ii) 
introductory text, and (e) to read as follows:


Sec.  240.18a-10   Alternative compliance mechanism for security-based 
swap dealers that are registered as swap dealers and have limited 
security-based swap activities.

    (a) A security-based swap dealer may comply with capital, margin, 
segregation, recordkeeping, and reporting requirements of the Commodity 
Exchange Act and chapter I of this title applicable to swap dealers in 
lieu of complying with Sec. Sec.  240.18a-1 and 240.18a-3 through 
240.18a-9 if:
* * * * *
    (b) * * *
    (1) Comply with capital, margin, segregation, recordkeeping, and 
reporting requirements of the Commodity Exchange Act and chapter I of 
this title applicable to swap dealers and treat security-based swaps or 
collateral related to security-based swaps as swaps or collateral 
related to swaps, as applicable, pursuant to those requirements to the 
extent the requirements do not specifically address security-based 
swaps or collateral related to security-based swaps;
    (2) Disclose in writing to each counterparty to a security-based 
swap before entering into the first transaction with the counterparty 
after the date the security-based swap dealer begins operating under 
this section that the security-based swap dealer is operating under 
this section and is therefore complying with the applicable capital, 
margin, segregation, recordkeeping, and reporting requirements of the

[[Page 68669]]

Commodity Exchange Act and the rules promulgated by the Commodity 
Futures Trading Commission thereunder in lieu of complying with the 
capital, margin, segregation, recordkeeping, and reporting requirements 
promulgated by the Commission in Sec. Sec.  240.18a-1 and 240.18a-3 
through 240.18a-9;
    (3) Immediately notify the Commission and the Commodity Futures 
Trading Commission in writing if the security-based swap dealer fails 
to meet a condition specified in paragraph (a) of this section;
    (4) Simultaneously notify the Commission if the security-based swap 
dealer is required to send a notice concerning its capital, books and 
records, liquidity, margin operations, or segregation operations to the 
Commodity Futures Trading Commission by transmitting to the Commission 
a copy of the notice being sent to the Commodity Futures Trading 
Commission; and
    (5) Furnish promptly to a representative of the Commission legible, 
true, complete, and current copies of those records of the security-
based swap dealer that are required to be preserved under the Commodity 
Exchange Act and chapter I of this title applicable to swap dealers, or 
any other records of the security-based swap dealer subject to 
examination pursuant to section 15F of the Act (15 U.S.C. 78o-10) that 
are requested by a representative of the Commission.
    (c) A security-based swap dealer that fails to meet one or more of 
the conditions specified in paragraph (a) of this section must begin 
complying with Sec. Sec.  240.18a-1 and 240.18a-3 through 240.18a-9 no 
later than:
* * * * *
    (d) * * *
    (2) * * *
    (ii) Continue to comply with Sec. Sec.  240.18a-1 and 240.18a-3 
through 240.18a-9 for at least:
* * * * *
    (e) The notices required by this section must be sent by facsimile 
transmission to the principal office of the Commission and the regional 
office of the Commission for the region in which the security-based 
swap dealer has its principal place of business or to an email address 
provided on the Commission's website, and to the principal office of 
the Commodity Futures Trading Commission in a manner consistent with 
the notification requirements of the Commodity Futures Trading 
Commission. The notice must include a brief summary of the reason for 
the notice and the contact information of an individual who can provide 
further information about the matter that is the subject of the notice.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
17. The authority citation for part 249 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, 
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *

0
18. Subpart G is amended by revising the heading to read as follows:

Subpart G--Forms for Reports To Be Made by Certain Exchange 
Members, Brokers, Dealers, Security-Based Swap Dealers, and Major 
Security-Based Swap Participants

* * * * *

0
19. Section 249.617 is revised to read as follows:


Sec.  249.617   Form X-17A-5, information required of certain brokers, 
dealers, security-based swap dealers, and major security-based swap 
participants pursuant to sections 15F and 17 of the Securities Exchange 
Act of 1934 and Sec. Sec.  240.17a-5, 240.17a-10, 240.17a-11, 240.17a-
12, and 240.18a-79 of this chapter, as applicable.

    Appropriate parts of Form X-17A-5, as applicable, shall be used by 
brokers, dealers, security-based swap dealers, and major security-based 
swap participants required to file reports under Sec. Sec.  240.17a-5, 
240.17a-10, 240.17a-11, 240.17a-12, and 240.18a-7 of this chapter, as 
applicable.

0
20. Part III of Form X-17A-5 (referenced in Sec.  249.617 of this 
chapter) is revised to read as follows:

    Note:  The text of Part III of Form X-17A-5 does not and this 
amendment will not appear in the Code of Federal Regulations.

BILLING CODE 8011-01-P

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0
21. Part II of Form X-17A-5 and the instructions thereto (referenced in 
Sec.  249.617 of this chapter) are revised to read as follows:

    Note: The text of Part II of Form X-17A-5 and the instructions 
thereto do not and this amendment will not appear in the Code of 
Federal Regulations.


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0
22. Part IIC of Form X-17A-5 and the instructions thereto (referenced 
in Sec.  249.617 of this chapter) are added to read as follows:

    Note:  The text of Part IIC of Form X-17A-5 and the instructions 
thereto will not appear in the Code of Federal Regulations.


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    By the Commission.

    Dated: September 19, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-20678 Filed 12-13-19; 8:45 am]
BILLING CODE 8011-01-C