2011 15C2-5 Justification (2)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 15c2-5
A.

JUSTIFICATION
1.

Necessity of Information Collection

The Securities and Exchange Commission (“Commission”) adopted Rule 15c2-5 (17
CFR 240.15c2-5) under the Securities Exchange Act of 1934 (“Exchange Act”) to counter abuses
in transactions known as “equity funding” programs. In these transactions, a broker-dealer sells
securities to a customer and the securities act as collateral for loans. The proceeds of the loans
are used to fund the premiums on a life insurance policy which is sold to the customer. Prior to
the adoption of Rule 15c2-5, some broker-dealers offered such programs without determining
and documenting their suitability for customers. In addition, customers were sometimes
inadequately informed of the nature and extent of their obligations under the program, the
charges to be incurred, and the risks assumed. Furthermore, a substantial portion of the payments
would go to the broker-dealer. See Exchange Act Release Nos. 34-6809 (May 22, 1962), 27 FR
5204, 5205 (June 2, 1962) (proposing release); see also 34-6851 (July 17, 1962), 27 FR 7091
(July 26, 1962) (adopting release). Although Rule 15c2-5 was prompted by the abuses associated
with equity funding programs, the rule encompasses other transactions that share the same
characteristics as these programs.
Rule 15c2-5 prohibits a broker-dealer from arranging or extending certain loans to
persons in connection with the offer or sale of securities unless, before any element of the
transaction is entered into, the broker-dealer: (1) delivers to the person a written statement
containing the exact nature and extent of the person’s obligations under the loan arrangement; the
risks and disadvantages of the loan arrangement; and all commissions, discounts, and other
remuneration received and to be received in connection with the transaction by the broker-dealer
or certain related persons (unless the person receives certain materials from the lender or brokerdealer which contain the required information); and (2) obtains from the person information on
the person’s financial situation and needs, reasonably determines that the transaction is suitable
for the person, and retains on file and makes available to the person on request a written
statement setting forth the broker-dealer’s basis for determining that the transaction was suitable.
The Commission is statutorily authorized by Section 15(c)(2) of the Exchange Act (15
U.S.C. 78o(c)(2)) to adopt rules and regulations that define and prescribe means reasonably
designed to prevent acts and practices that are fraudulent, deceptive or manipulative. Further
statutory authority is in Section 23(a) of the Exchange Act (15 U.S.C. 78w).
2.

Purpose and Use of the Information Collection

The information required by Rule 15c2-5 is necessary to execute the Commission’s
mandate under the Exchange Act of preventing fraudulent, manipulative, and deceptive acts and
practices by broker-dealers. In addition, the information required by Rule 15c2-5 provides the
broker-dealer must reasonably determine that the transaction is suitable for the customer and

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deliver to the customer a written statement setting forth the basis upon which this determination
was made.
3.

Consideration Given to Information Technology

The collection of information is done on an individual transactional basis. Thus,
improved technology would not reduce the burden.
4.

Duplication

The requirements of Rule 15c2-5 are not duplicated elsewhere. In certain circumstances,
information specified in the rule must also be produced when complying with other regulatory
requirements, such as those of the Commission or the self-regulatory organizations. Rule 15c2-5
requirements generally conform to obligations imposed by other statutory or regulatory
provisions.
5.

Effect on Small Entities

To the extent that some broker-dealers covered by Rule 15c-5 are small entities, the rule
would impact these entities. The impact would, however, be mitigated by the lower number of
Rule 15c2-5 transactions these firms execute. Moreover, a prudent businessperson would
comply with the rule in the ordinary course of business.
6.

Consequences of Not Conducting Collection

The information is collected as each transaction warrants, and therefore the collection
cannot be less frequent without undermining the purpose of the rule.
7.

Inconsistencies with Guidelines in 5 CFR 1320.8(d)(2)

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

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.

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9.

Payment or Gift

No payments or gifts have been provided to respondents.
10.

Confidentiality

No assurances of confidentiality are provided in Section 15c2-5 or Rule 15c2-5. The
records required by Rule 15c2-5 would be available only to the Commission staff, state securities
authorities, and self-regulatory organizations. Subject to the provisions of the Freedom of
Information Act, 5 U.S.C. 552, 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

There are no questions of a sensitive nature asked, except those related to the securities
industry, that are necessary to protect investors as required by federal securities law.
12.

Burden of Information Collection

The Commission estimates that there are approximately 50 respondents that require an
aggregate total of 600 hours to comply with the rule. Each of these approximately 50 registered
broker-dealers makes an estimated six annual responses, for an aggregate total of 300 responses
per year. Each response takes approximately two hours to complete. Thus, the total compliance
burden per year is 600 burden hours. The approximate cost per hour is $50.00 for clerical labor,1
resulting in a total compliance cost of $30,000 (600 hours @ $50.00 per hour). The burdens are
related to both third party disclosure and recordkeeping. We assume that 50% of these costs
($15,000) relate to recordkeeping and 50% ($15,000) relate to third party disclosure. We also
assume that the hourly burden is split equally between third party disclosure and recordkeeping.

13.

Costs to Respondents

The Commission does not believe there would be any costs to respondents to comply
with Rule 15c2-5. It is not anticipated that respondents will have to incur any capital and / or
start-up cost to comply with the rule. Further, it is not anticipated that the respondents will have
1

$50 per hour for a General Clerk is from SIFMA’s Office Salaries in the Securities Industry
2010, modified by Commission staff to account for an 1,800-hour work-year multiplied by 2.93
to account for bonuses, firm size, employee benefits, and overhead.

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to incur any additional operational or maintenance cost (other than provided for in Item 12
above) to comply with the rule.
14.

Costs to Federal Government

The Commission staff estimates that there is no annual cost to the federal government
associated with Rule 15c2-5.
15.

Changes in Burden

The total compliance cost of $30,000 (reflecting internal labor costs) as stated in Item 12
is $6,000 more than the current OMB inventory of $24,000. This increase represents an
adjustment in the cost of clerical labor from $40.00 per hour to $50.00 per hour. However, the
hourly and external cost burden will not change.
16.

Information Collection Planned for Statistical Purposes

Not applicable; the Commission does not publish information collected pursuant to Rule
15c2-5.
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.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.