2011 Rule 17a-13 Justification

SUPPORTING STATEMENT
For the Paperwork Reduction Act
Information Collection Submission
“Rule 17a-13”
A.

Justification
1.

Necessity For Information Collection

In the period between 1967 and 1970, the securities industry was in the midst of a
prolonged and severe operational crisis. An increase in trading volume clogged the inadequate
machinery for the control and delivery of securities. As a result, many broker-dealers were
unable to locate securities belonging to customers. Others found themselves with substantial
quantities of securities in their possession without knowing to whom they belonged. The chaotic
state of affairs in many back offices of broker-dealers created the climate for the theft of
securities by a number of back office personnel.
In response, on November 8, 1971, the Securities and Exchange Commission (the
“Commission”) adopted Rule 17a-13. Rule 17a-13 generally requires that at least once each
calendar quarter, all registered broker-dealers physically examine and count all securities held
and account for all other securities not in their possession, but subject to the broker-dealer’s
control or direction. Any discrepancies between the broker-dealer’s securities count and the
firm’s records must be noted and, within seven days, the unaccounted for difference must be
recorded in the firm’s records. Rule 17a-13 provides that under specified conditions, the
securities counts, examination, and verification of the entire list of securities may be conducted
on a cyclical basis rather than on a certain date. Although Rule 17a-13 does not require filing a
report with the Commission, discrepancies between a broker-dealer’s records and the securities
counts may be required to be reported, for example, as a loss on Form X-17a-5, which must be
filed with the Commission under Rule 17a-5. Rule 17a-13 exempts broker-dealers that limit
their business to the sale and redemption of securities of registered investment companies and
interests or participation in an insurance company separate account and those who solicit
accounts for federally insured savings and loan associations, provided that such persons
promptly transmit all funds and securities and hold no customer funds and securities. The Rule
also does not apply to certain broker-dealers required to register only because they effect
transactions in securities futures products.
Rule 17a-13 requires the recording of only those differences in the broker-dealer’s
records that remain unresolved seven business days after the date of the examination, count, and
verification. The Commission or the self-regulatory organization (“SRO”) designated as the
broker-dealer’s examining authority may examine these recorded discrepancies in a brokerdealer’s records to determine whether they are the result of the firm’s inability to maintain
control of its business.
The Commission is statutorily authorized to promulgate this Rule by virtue of Sections
17(a) and 15(c)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 78o and 78q). These
sections authorize the Commission to provide safeguards with respect to the financial
responsibility and related practices of broker-dealers, including the acceptance of custody and
the use of customer securities. These sections also authorize the Commission to require the
making and preservation of such records as the Commission deems appropriate for the protection
of investors and in the public interest. Further statutory authority is found in Section 23(a) (15
U.S.C. §78w).

2.

Purpose and Use of the Information Collection

The information is used as an inventory control device to monitor a broker-dealer’s
ability to account for all securities held, in transfer, in transit, pledged, loaned, borrowed,
deposited, or otherwise subject to the firm’s control or direction. Any discrepancies between the
security count and the broker-dealer’s records alert the Commission and the SROs to those firms
having problems in their back offices. Without this Rule, the Commission and the SROs would
lose this important warning device to inform them when a broker-dealer might be having
problems accounting for the securities for which it is responsible.
3.

Consideration Given to Information Technology

Since the Rule provides that firms must reconcile their books and records with their
physical inventory and inventory in transit, improved information technology would not reduce
the burden.
4.

Duplication

Some organizations of which a broker-dealer may be a member require the broker-dealer
to make similar counts of securities in the firm’s possession or control. These counts, however,
are used for different purposes.
5.

Effect on Small Entities

To the extent that some broker-dealers covered by the Rule are small entities, the Rule
would impact these entities. The impact would, however, be mitigated because many small
entities do not hold securities.
6.

Consequences of Not Conducting Collection

If the security counts were conducted less frequently, investors would not have the
protection that the federal securities laws require. Many broker-dealers became insolvent
because of their inability to account for the securities that their records showed they possessed or
controlled.

7.

Inconsistencies with Guidelines in 5 CFR 1320.8(d)

There are no special circumstances. The collection is consistent with the guidelines in 5
CFR 1320.8(d).
8.

Consultations Outside the Agency
2

The Federal Register notice with a 60-day comment period soliciting comments on this
collection of information was published on March 9, 2011 (76 FR 13000). No comments were
received.
9.

Payment or Gift

The respondents receive no payments or gifts.
10.

Confidentiality

The records required to be made by Rule 17a-13 are available only to Commission
examination staff, state securities authorities, and the SROs. Subject to the provisions of the
Freedom of Information Act, 5 U.S.C. § 522, and the Commission’s rules thereunder (17 CFR
200.80(b)(4)(iii)), the Commission does not generally publish or make available information
contained in any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation
of, or in connection with an examination or inspection of the books and records of any person or any
other investigation.
11.

Sensitive Questions

Questions of a sensitive nature are not asked.
12.

Burden of Information Collection

Currently, there are approximately 5,030 broker-dealers registered with the Commission.
However, given the variability in their businesses, it is difficult to quantify how many hours per
year each broker-dealer spends complying with the Rule. As noted, the Rule requires a brokerdealer to account for all securities in its possession. Many broker-dealers hold few, if any,
securities, while others hold large quantities. Therefore, the time burden of complying with the
Rule will depend on respondent-specific factors, including size, number of customers, and
proprietary trading activity. The staff estimates that the average time spent per respondent is 100
hours per year on an ongoing basis to maintain the records required under the Rule. This
estimate takes into account the fact that more than half the 5,030 respondents – according to
financial reports filed with the Commission – may spend little or no time in complying with the
Rule, given that they do not do a public securities business or do not hold inventories of
securities. For these reasons, the staff estimates that the total compliance burden per year is
503,000 hours (5,030 respondents x 100 hours/respondent).1

1

Previously (in 2008), the Commission estimated that there were 5,700 broker-dealers registered
with the Commission, for a total burden of 570,000.
3

13.

Costs to Respondents

Not applicable: (a) it is not anticipated that respondents will have to incur any capital and start up
cost to comply with the Rule; and (b) it is not anticipated that the respondents will have to incur any
additional operational or maintenance cost (other than provided for in Item 12) to comply with the Rule.
14.

Costs to Federal Government

The staff estimates that the total time spent examining broker-dealers is approximately
268,741 hours per year and that, of that time, 1%, or 2,687 hours, is devoted to examining for
compliance with Rule 17a-13. The staff estimates that the hourly cost of these reviews is
$47.25.2 Therefore, the estimated cost to the Commission of this Rule is approximately
$127,000. There are no costs to the Federal Government apart from these labor costs.
15.

Changes in Burden

The change in the reporting burden is due to the change in the estimated number of
broker-dealers subject to Rule 17a-13.
16.

Information Collection Planned for Statistical Purposes

This provision is not applicable because compliance with Rule 17a-13 will not require the
employment of statistical methods. There is no intention to publish the information for any
purpose.
17.

Display of OMB Approval Date

The Commission is not seeking approval to not display the expiration date for OMB
approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.

2

GSA, Guide to Estimating Reporting Costs (1973) (which sets the value of one hour of staff time at $35.00
+ 35% overhead).
4