15c3-1_Supporting_Statement[1]

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 15c3-1”
A.

Justification
1.

Necessity of Information Collection

Rule 15c3-1 1 (the “net capital rule”) under the Securities Exchange Act of 1934 (the
“Exchange Act”) 2 is intended to ensure that broker-dealers registered with the Securities and
Exchange Commission (the “Commission”) at all times have sufficient liquid capital to protect
the assets of customers and to meet their responsibilities to other broker-dealers. 3 The rule
generally defines the term “net capital” as a broker-dealer’s net worth (assets minus liabilities),
plus certain subordinated liabilities, less certain assets that are not readily convertible into cash
(e.g., fixed assets), and less a percentage (haircut) of certain other liquid assets (e.g., securities). 4
Rule 15c3-1 is an integral part of the Commission’s financial responsibility program for
broker-dealers. In particular, it facilitates the monitoring of the financial condition of brokersdealers by the Commission and the broker-dealer’s designated examining authority (“DEA”). If
the information were not required to be collected, the Commission and the DEAs would not be
able to monitor the financial condition of broker-dealers, exposing their customers and others to
increased risk.
2.

Purpose and Use of the Information Collection

As discussed above, Rule 15c3-1 is intended to help ensure that broker-dealers maintain
at all times sufficient liquid resources to meet all liabilities, particularly the claims of customers,
by requiring that broker-dealers maintain a minimum amount of net capital. A broker-dealer’s
minimum net capital requirement is the greater of: (1) a fixed minimum amount set forth in Rule
15c3-1 based on the types of business that the broker-dealer conducts; 5 or (2) a financial ratio. 6
Exchange Act Section 15(c)(3) and Rule 15c3-1 promulgated thereunder prohibit a broker-dealer
from effecting transactions in securities while not in compliance with its minimum net capital
requirement.
Various provisions of Rule 15c3-1 require that broker-dealers provide written notification
to the Commission and/or their DEA under certain circumstances. For example, a broker-dealer
carrying the account of an options market maker must file a notice with the Commission and the
1

17 CFR 240.15c3-1.

2

15 U.S.C. § 78 et seq.

3

See Net Capital Rule, Exchange Act Release No. 39455 (Dec. 17, 1997), 62 FR 67996 (Dec. 30, 1997).

4

See 17 CFR 240.15c3-1(c)(2).

5

See, e.g., 17 CFR 240.15c3-1(a)(2)-(9).

6

See 17 CFR 240.15c3-1(a)(1)(i)-(iii).

DEA of both the carrying firm and the market maker prior to effecting transactions in the
account. 7 In addition, the carrying firm must notify the Commission and the appropriate DEA if
a market maker fails to deposit the required equity with the carrying broker-dealer relating to the
market maker’s account within the prescribed time period or if certain deductions and other
amounts relating to the carrying firm’s market maker accounts computed in accordance with
Rule 15c3-1 exceeds 1,000% of the carrying broker-dealer’s net capital. 8 In addition, a brokerdealer electing to compute its net capital using the alternative method under paragraph (a)(1)(ii)
of Rule 15c3-1 must notify its DEA of the election in writing, 9 and thereafter must continue to
compute its net capital in this manner unless a change is approved upon application to the
Commission. 10
Moreover, Appendix C to Rule 15c3-1 requires broker-dealers that consolidate their
financial statements with a subsidiary or affiliate, under certain circumstances, to submit to their
DEA an opinion of counsel. 11 The opinion of counsel must state, among other things, that the
broker-dealer may cause that portion of the net assets of a subsidiary or affiliate related to its
ownership interest in the entity to be distributed to the broker-dealer within 30 calendar days. 12
Appendix E to Rule 15c3-1 provides an alternative method for determining certain net
capital charges for certain broker-dealers. 13 Such broker-dealers are referred to as alternative net
capital firms, or ANC firms. Appendix G to Rule 15c3-1 requires the holding company of an
ANC firm that has a principal regulator to file certain periodic reports with the Commission,
preserve certain records, and notify the Commission of certain events.
Rule 15c3-1 was promulgated under Section 15(c)(3) of the Exchange Act, 14 which
directed the Commission to adopt minimum financial responsibility requirements for brokerdealers. The statutory authority for Rule 15c3-1 is embodied in Sections 15(c)(3) and 23(a) 15 of
the Exchange Act.
3.

Consideration Given to Information Technology

The method of computing net capital varies by size and complexity of a broker-dealer.
Most larger broker-dealers subject to the net capital rule utilize automated systems for computing
their net capital and minimum requirements. Smaller broker-dealers with simple balance sheets
7

See 17 CFR 240.15c3-1(a)(6)(vi).

8

See 17 CFR 240.15c3-1(a)(6)(iv)(B) and 17 CFR 240.15c3-1(a)(6)(v).

9

See 17 CFR 240.15c3-1(a)(1)(ii).

10

Id.

11

See 17 CFR 240.15c3-1c(b)(1).

12

See 17 CFR 240.15c3-1c(b)(2).

13

See 17 CFR 240.15c3-1e.

14

15 USC 78o(c)(3).

15

15 USC 78w.

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may compute their net capital on a manual basis.
4.

Duplication

We are not aware of duplication of this information.
5.

Effects on Small Entities

Small entities may be affected to the extent they are required to maintain a minimum
amount of net capital under Rule 15c3-1. However, there are different requirements for small
entities subject to Rule 15c3-1. Most of these entities are not affected by the information
collection provisions of Rule 15c3-1.
6.

Consequences of Not Conducting Collection

If the required activities were not required to be collected, or were required to be
conducted less frequently, the Commission and the DEAs would not be able to monitor the
financial condition of broker-dealers, exposing their customers and others to increased risk and
lessening the protection afforded to the public.
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 public comments were received.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The Commission regards information obtained pursuant to the filings and notices
required by Rule 15c3-1 to be confidential. Such information is of a financial nature and
generally is not disclosed to the public. The statutory basis for the Commission’s refusal to
disclose such information to the public is the exemption contained in section (b)(4) of the
Freedom of Information Act, 5 U.S.C. 552, which essentially provides that the requirement of
public dissemination does not apply to commercial or financial information which is privileged
or confidential.

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11.

Sensitive Questions

Not applicable; no information of a sensitive nature is required.
12.

Burden of Information Collection
a.

Summary of Reporting Burden Under Rule 15c3-1

Commission staff estimates that broker-dealers annually file approximately 815 notices
under Rule 15c3-1. Based on the staff’s experience with the industry, a broker-dealer expends
approximately 30 minutes to prepare and file these notices. Therefore, Commission staff
estimates that under Rule 15c3-1, broker-dealers expend approximately 408 hours annually to
comply with the reporting burden in this rule.
Commission staff estimates that the total internal labor cost of compliance to brokerdealers in connection with this requirement is approximately $119,952 per year ($294 per hour x
408 burden hours). 16
b.

Summary of Reporting Burden Under Appendixes E and G to Rule 15c3-1

The Paperwork Reduction Act (“PRA”) estimates below are based on the assumption that
ten broker-dealers will ultimately apply to compute deductions for market risk under Appendix E
to Rule 15c3-1. There are currently six ANC firms; therefore, the Commission expects that four
additional firms will apply to compute deductions for market risk under Appendix E to the net
capital rule. Commission staff estimates that each broker-dealer that applies would incur a onetime burden of approximately 1,000 hours to create and compile the various documents to be
included with the application and to work with Commission staff through the application
process. The estimated total internal labor cost of complying with these application requirements
is approximately $1,206,400. Specifically, Commission staff estimates that a financial reporting
manager will spend approximately 900 hours preparing the application and working with
Commission staff, and an in-house counsel will spend approximately 100 hours completing a
review of the application. Assuming an hourly cost of $294 17 for a financial reporting manager
and $370 for an in-house attorney, 18 the resultant total one-time internal labor cost for the four
respondents is $1,206,400 (4 applications x ((900 hours x $294/hour) + (100 hours x
$370/hour)).

16

This hourly rate is based on the average annual salary for a Financial Reporting Manager, as reflected in
SIFMA’s Management and Professional Earnings in the Securities Industry 2012, 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.

17

Id.

18

This hourly rate is based on the average annual salary for an Attorney, as reflected in SIFMA’s Management and
Professional Earnings in the Securities Industry 2012, modified by Commission staff to account for an 1,800hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.

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Commission staff estimates that an ANC firm using Appendixes E and G to Rule 15c3-1
spends approximately 5,600 hours per year to review and update the models it uses to assess
market and credit risk and approximately 160 hours each quarter, or approximately 640 hours per
year, to backtest the models. Consequently, Commission staff estimates that the total aggregate
burden associated with reviewing and backtesting mathematical models for the six ANC firms
will be approximately 37,440 hours per year ((5,600 hours + 640 hours) x 6 broker-dealers) and
12,480 for the four broker-dealers expected to become ANC firms ((5,600 hours + 640 hours)/2 x
4 broker-dealers). The estimated total internal labor cost of compliance with these requirements
is approximately $9,634,560 per year ($193/hour 19 x 49,920 = $9,634,560).
Commission staff estimates that the average amount of time necessary to prepare and file
the monthly reports required by Appendix G would be approximately eight hours per month, or
approximately 96 hours per year, that the average amount of time necessary to prepare and file
the quarterly reports would be about 16 hours per quarter, or approximately 64 hours per year,
and that the average amount of time necessary to prepare and file the annual audit reports would
be approximately 200 hours per year. Consequently, Commission staff estimates that the total
annual reporting burden of Appendix G for the six ANC firms would be approximately 2,160
hours ((96 hours + 64 hours + 200 hours) x 6 broker-dealers), and the total for the four brokerdealers expected to become ANC firms would be approximately 720 hours ((96 hours + 64 hours
+ 200 hours)/2 x 4 broker-dealers). The estimated total internal labor cost of compliance with
these requirements is approximately $555,840 per year ($193/hour 20 x 2,880 hours = $555,840).
Commission staff expects that any additional burden associated with the requirements of
Appendix G relating to preserving records would be minimal because a prudent firm that
manages risk on a group-wide basis would make and preserve these records in the ordinary
course of its business. Commission staff estimates that the average one-time burden of making
and preserving these records would be approximately 40 hours and that the average annual
burden would be approximately 290 hours. Consequently, Commission staff estimates that the
total burden for the six ANC firms would be approximately 1,740 hours on an annual basis (290
hours x 6 broker-dealers), and the total annual burden for the four broker-dealers expected to
become ANC firms would be approximately 634 hours ((40 hours/3 years + 290 hours/2 years) x
4 broker-dealers). The estimated total internal labor cost of compliance with these requirements
is approximately $458,182 ($193/hour 21 x 2,374 hours = $458,182).
The notification provisions of Appendix G are designed to give the Commission advance
warning of situations that may pose material financial and operational risks to the broker-dealer
and its holding company. These provisions are integral to Commission supervision of brokerdealers that use Appendix E. Commission staff estimates that it would require a total of
19

This hourly rate is based on the average annual salary for a Senior Accountant, as reflected in SIFMA’s
Management and Professional Earnings in the Securities Industry 2012, 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

20

Id.

21

Id.

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approximately one hour per year to comply with the notification provisions of Appendix G,
resulting in a total annual burden of 6 hours for the six ANC firms and 2 hours (1 hour/2 x 4
broker-dealers) for the four broker-dealers expected to become ANC firms. The estimated total
internal labor cost of compliance with this requirement is approximately $2,152 ($269/hour 22 x 8
hours = $2,152).
Lastly, Commission staff estimates that each broker-dealer would spend approximately
250 hours per year reviewing and updating its risk management control system, resulting in an
aggregate annual burden of 2,000 hours ((250 x 6 broker-dealers) + (250/2 x 4 broker-dealers)).
The estimated total internal labor cost of compliance with this requirement is approximately
$538,000 ($269/hour 23 x 2,000 hours = $538,000).
In summary, the total annual hour burden for Appendix E and G to Rule 15c3-1 is 58,518
hours (1,336 + 49,920 + 2,880 + 2,374 + 8 + 2,000 = 58,518 hours). In addition, Commission
staff estimates that the total internal cost of the annual hour burden would be approximately
$11,590,967 under Appendix E and G to Rule 15c3-1 ($402,133 + $9,634,560 + $555,840 +
$458,182 + $2,152 + $538,100 = $11,590,967).
c.

Total Annual Recordkeeping and Reporting Burden

In summary, Commission staff estimates that the total annual hour burden for Rule 15c31 is 58,926 (408 + 58,518 = 71,818). Finally, the estimated internal cost for the annual hour
burden for Rule 15c3-1 is approximately $11,710,919 ($119,952 + $11,590,967 = $11,710,919).
13.

Costs to Respondents

Approximately 80 broker-dealers file consolidated financial reports, of which
approximately 20 obtain an opinion of counsel under Appendix C of Rule 15c3-1. Commission
staff estimates that the approximate cost to broker-dealers to obtain an opinion of counsel to file
the consolidated financial reports as required under Appendix C of Rule 15c3-1 would be $8,000.
This figure is based on an estimate of 20 hours per opinion for an outside counsel at $400 per
hour 24 ($400/hour x 20 hours = $8,000). The total costs for all respondents would be $160,000
(20 opinions x $8,000 = $160,000).

22

This hourly rate is based on the average annual salary for a Compliance Manager, as reflected in SIFMA’s
Management and Professional Earnings in the Securities Industry 2012, 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

23

Id.

24

This is based on an estimated $400 per hour cost for outside consulting and/or legal services. This is the same
estimate used by the Commission when it adopted its consolidated audit trail rule. See Securities Exchange Act
Release No. 67457 (Jul. 18, 2012), 77 FR 45722 (Aug. 1, 2012).

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14.

Costs to Federal Government

Not applicable. Rule 15c3-1 would not result in any costs to the federal government
beyond normal full-time employee labor costs, nor does the rule require the Commission to hire
any new employees or reallocate existing employees to ensure compliance with the rule.
15.

Changes in Burden

Since the last submission, there has been a decrease in the number of notices filed by brokerdealers, the number of broker-dealers that file consolidated financial reports, and the number of brokerdealers that Commission staff estimates will calculate net capital deductions for market and credit risk
under Appendix E, resulting in an overall decrease in the burden estimates. The decrease in the
aggregate dollar cost burden per year also is due to the fact that the prior PRA extensions erroneously
treated the monetization of internal labor costs of compliance as a separate cost burden.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
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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