2012 extension Rule 17a-11 justification

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission
“Rule 17a-11”

A.

JUSTIFICATION
1.

Necessity of Information Collection

In response to an operational crisis in the securities industry between 1967 and
1970, the Securities and Exchange Commission (“Commission”) adopted Rule 17a-11
(17 CFR 240.17a-11) under the Securities Exchange Act of 1934 (“Exchange Act”) on
July 11, 1971. The Rule requires broker-dealers that are experiencing financial or
operational difficulties to provide notice to the Commission, the broker-dealer’s
designated examining authority (“DEA”), and the Commodity Futures Trading
Commission (“CFTC”) if the broker-dealer is registered with the CFTC as a futures
commission merchant. Rule 17a-11 is an integral part of the Commission’s financial
responsibility program, which enables the Commission, a broker-dealer’s DEA, and the
CFTC to increase surveillance of a broker-dealer experiencing difficulties and to obtain
any additional information necessary to gauge the broker-dealer’s financial or operational
condition.
Rule 17a-11 also requires over-the-counter (“OTC”) derivatives dealers and
broker-dealers that are permitted to compute net capital pursuant to Appendix E to
Exchange Act Rule 15c3-1 to notify the Commission when their tentative net capital
drops below certain levels. OTC derivatives dealers must also provide notice to the
Commission of backtesting exceptions identified pursuant to Appendix F of Rule 15c3-1
(17 CFR 15c3-1f).
The Commission is statutorily authorized to promulgate Rule 17a-11 under
Sections 15(c)(3) and 17(a) of the Exchange Act (15 U.S.C. 78o(c)(3) et seq. and 15
U.S.C. 78q(a) et seq.). These sections authorize the Commission to provide safeguards
with respect to financial responsibility and to request that such records be made and kept
as are necessary or appropriate in the public interest. Further statutory authority is found
in Section 23(a) of the Act (15 U.S.C. 78w(a) et seq.).
2.

Purpose and Use of the Information Collection

The information obtained under Rule 17a-11 is used to monitor the financial and
operational condition of a broker-dealer by the Commission staff, by the broker-dealer’s
DEA, and by the CFTC. This information alerts the Commission, the DEA, and the
CFTC of the need to increase surveillance of the broker-dealer’s financial and operational
condition and to assist the broker-dealer to comply with the Commission’s rules. No
similar information is already available to use or modify for purposes of complying with
Rule 17a-11 because the disclosures required by the rule are unobtainable until the early

warning mechanisms are triggered. Only the most up-to-date information will help the
Commission, SROs, and the CFTC to monitor broker-dealers experiencing financial or
operational difficulties.
3.

Consideration Given to Information Technology

Broker-dealers required to provide notice under Rule 17a-11 may give or transmit
such notice by telegraphic notice or facsimile transmission. Reports required by Rule
17a-11 may be transmitted by overnight delivery. Certain SROs have developed systems
that enable them to receive these notices electronically.
4.

Duplication

Duplication of information is not a concern because the reporting requirements
are only applicable to those broker-dealers triggering the early warning mechanisms of
Rule 17a-11.
5.

Effect on Small Entities

To the extent that some broker-dealers that are required to give notice under the
Rule are small entities, the Rule will impact these entities. However, information is
collected from small registered broker-dealers only when they are required to provide
notice under the Rule.
6.

Consequences of Not Conducting Collection

Only broker-dealers having financial or operational problems must give notice
under the Rule. Less frequent notification would result in the Commission, SROs, and
the CFTC not receiving notification of broker-dealers’ financial or operational problems.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the
guidelines in 5 CFR 1320.5(d)(2).
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 comments were received.
9.

Payment or Gift

Not applicable. No payment or gift is provided to respondents.

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10.

Confidentiality

The Commission will generally not publish or make available to any person
notices or reports received pursuant to Rule 17a-11. The Commission believes that
information obtained under Rule 17a-11 relates to a condition report prepared for the use
of the Commission, other federal governmental authorities, and securities industry SROs
responsible for the regulation or supervision of financial institutions.
11.

Sensitive Questions

No questions of a sensitive nature are asked by Rule 17a-11.
12.

Burden of Information Collection

Only broker-dealers whose capital declines below certain specified levels or who
are otherwise experiencing financial or operational problems have a reporting burden
under Rule 17a-11. In 2011, the Commission received approximately 465 notices under
this Rule, including one notice from an OTC derivatives dealer permitted to compute net
capital pursuant to Appendix E to Exchange Act Rule 15c3-1.
The Commission estimates that each broker-dealer reporting pursuant to Rule
17a-11 will spend approximately one hour preparing and transmitting the notice required
by the Rule. Accordingly, the total estimated annualized burden under Rule 17a-11 is
465 hours.
13.

Cost to Respondents

The Rule does not impose any costs other than the internal labor costs that are
described in Item 12.
14.

Costs to Federal Government

The annual operational costs incurred by the federal government in enforcing
compliance and reviewing the notices required by Rule 17a-11 amount to approximately
$9,118. This amount is based upon the calculation of the value of approximately 193
hours of staff time devoted to these activities, plus the related overhead expenses. These
estimates have been computed based on the GSA, Guide to Estimating Report Costs
(1986).
15.

Changes in Burden

The change in the reporting burden is due to a change in the number of notices
filed by broker-dealers pursuant to Rule 17a-11 from 2008 to 2011.

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16.

Information Collection Planned for Statistical Purposes

This provision is not applicable because compliance with Rule 17a-11 will not
require the employment of statistical methods. There is no intention to publish the
information for any purpose.
17.

Display of OMB Expiration 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.

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