Rule_17a-4_Supporting_Statement_Version_C[1]

SUPPORTING STATEMENT
for the Paperwork Reduction Act New Information Collection Submission for
Rule 17a-4 – Records to be Preserved by Certain Exchange Members, Brokers and Dealers

A.

JUSTIFICATION
1.

Necessity of Information Collection

All broker-dealers in the ordinary course of their businesses need to maintain certain
books and records reflecting, among other things, income and expenses, assets and liabilities,
daily trading activity and the status of customer and firm accounts. These books and records are,
for the most part, standard and would be kept by any prudent individual engaging in a securities
business.
The Commission is statutorily authorized by Sections 17(a) 1 and 23(a) 2 of the Securities
Exchange Act of 1934 (“Exchange Act”) to promulgate rules and regulations regarding the
maintenance and preservation of books and records of exchange members and broker-dealers.
Section 17(a)(1) provides in part that all members of a national securities exchange and
registered broker-dealers “shall make and keep for prescribed periods such records . . . 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].”
In 1940, the Commission, to standardize recordkeeping practices throughout the industry,
adopted Rules 17a-3 and 17a-4, 3 which codified and specified minimum standards with respect
to business records that a broker-dealer must create and maintain. Rule 17a-3 requires exchange
members and broker-dealers to make and keep current certain records relating to a member’s or
broker-dealer’s financial condition and operations. Rule 17a-4 requires broker-dealers to
preserve, for prescribed periods of time, certain records required to be created under Rule 17a-3
and certain other Commission rules. In addition, Rule 17a-4 requires broker-dealers to preserve
other records that may be created or received by the broker-dealer in the ordinary course of its
business for prescribed periods of time.
On July 30, 2013, the Commission adopted amendments to Rule 17a-4 in conjunction
with the amendments to the broker-dealer financial responsibility rules. 4 Specifically, the
amendments to Rules 17a-3 and 17a-4 will require certain large broker-dealers to make and keep
current a record documenting credit, market, and liquidity risk management controls established
and maintained by the broker-dealer to assist it in analyzing and managing the risks associated
with its business activities. The amendment only will apply to broker-dealers that have more
than (1) $1,000,000 in aggregate credit items as computed under the customer reserve formula of
Rule 15c3-3, or (2) $20,000,000 in capital. The amendment to Rule 17a-4 will require a broker1

15 U.S.C. 78q(a).

2

15 U.S.C. 78w(a).
17 CFR 240.17a-3; 17 CFR 240.17a-4.
Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78
FR 51824 (Aug. 21, 2013).

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dealer to preserve the records required pursuant to paragraph (a)(23) of Rule 17a-3 until three
years after the termination of the use of the risk management controls documented therein.
2.

Purpose and Use of the Information Collection

The purpose of requiring broker-dealers to maintain the records specified in Rule 17a-4 is
to help ensure that examiners and other representatives of the Commission, state securities
regulatory authorities, and the self-regulatory organizations (“SROs”) have access to the
information and documents necessary to determine whether broker-dealers are in compliance
with the Commission’s anti-fraud and anti-manipulation rules, financial responsibility program,
and other Commission, SRO, and state laws, rules, and regulations. Without Rule 17a-4, it
would be extremely difficult, if not impossible, for the Commission to determine whether a
broker-dealer that chose not to preserve records was in compliance with these rules. Such a
situation would not be in the public interest and would be detrimental to investors and the
financial community as a whole.
3.

Consideration Given to Improved Information Technology

Rule 17a-4 specifically allows broker-dealers to use electronic storage media to comply
with the record-keeping requirements under the Exchange Act. Because it sets minimum
standards for the electronic storage media employed, Rule 17a-4 does not limit broker-dealers to
using forms of electronic storage which may become obsolete as new technology is developed.
The Commission believes that improvements in telecommunications and data processing
technology may reduce any burdens that result from Rule 17a-4.
4.

Duplication

Not applicable. There is no duplication.
5.

Effects on Small Entities

Because the number and complexity of records required to be preserved by Rule 17a-4
vary proportionately with the volume and complexity of the broker-dealer’s business, brokerdealers may choose which media (hard-copy, microfiche, electronic storage, etc.) that is most
appropriate for their business. The books and records required under Rule 17a-4 are normally
retained by small broker-dealers.
With respect to the recent amendments to Rule 17a-4, 5 such amendments will not affect
any small entities because these requirements only will apply to certain large broker-dealers.
6.

Consequences of Not Conducting Collection

Rule 17a-4 is a record preservation rule. Without Rule 17a-4, it would be extremely
difficult, if not impossible, for the Commission to determine whether a broker-dealer that chose
not to preserve records was in compliance with the Commission’s antifraud and anti5

See Financial Responsibility Rules for Broker-Dealers, 78 FR 51824.

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manipulation rules, financial responsibility program, and other Commission, SRO, and state
laws, rules, and regulations. Such a situation would not be in the public interest and would be
detrimental to investors and the financial community as a whole.
7.

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

Certain provisions of Rule 17a-4 require respondents to retain records for more than three
years. Specifically, paragraph (a) of Rule 17a-4 requires broker-dealers to preserve for a period
of not less than six years:
1.
2.
3.
4.
5.
6.

Purchase and sales blotters, securities and cash receipts, and disbursements blotters;
Ledgers of a broker-dealer’s assets, liabilities, income and expense, and capital accounts;
Customer account ledgers;
Securities position reports;
Lists of office employees able to explain records to examiners; and
A record of persons responsible for establishing policies and procedures designed to
ensure that the broker-dealer is compliant with applicable rules and regulations.

After the closing of any customer’s account, broker-dealers must preserve for at least six years
any account cards or records which relate to the terms and conditions of opening and maintaining
the account. Broker-dealers are required to maintain and preserve in an easily accessible place:
1. Employment records of associated persons until at least three years after the employment
has terminated;
2. Processed fingerprint cards and other related information until at least three years after
the termination of employment or association;
3. All records required pursuant to paragraph (a)(15) of Rule 17a-3 for the life of the
enterprise;
4. All account record information required pursuant to paragraph (a)(17) of Rule 17a-3 until
at least six years after the earlier of the date the account was closed or the date on which
the information was replaced or updated; and
5. Each compliance, supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and practices of the
member, broker-dealer with respect to compliance with applicable laws and rules, and
supervision of the activities of each natural person associated with the member, brokerdealer until three years after the termination of the use of the manual.
In addition, paragraph (d) of Rule 17a-4 requires that a broker-dealer maintain specified
organizational documents for the life of the enterprise and any successor enterprise.
These extended retention periods are necessary in order to provide regulators with
sufficient time to conduct comprehensive inspections and investigations. Due to budget
constraints, regulators only examine broker-dealers and office locations periodically. Further,
certain documents required to be retained under Rule 17a-4 do not become obsolete (e.g.,
organizational documents).

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8.

Consultations Outside the Agency

The Commission requested comment in the proposing release on the included Paperwork
Reduction Act (“PRA”) analysis in March 2007. 6 The Commission re-opened the comment
period in May 2012. 7 The Commission received one comment addressing the PRA generally.
The commenter specifically stated that the estimates the Commission provided utilized
only the number of broker-dealers that the Commission “justifiably considers to be affected by
the proposals.” 8 The commenter, however, believed that most, if not all, broker-dealers will
spend over 90 hours each analyzing the effects of the rules as implemented, will spend many
more than 90 hours each in implementing procedures and modifying their written supervisory
procedures to comply with the new rules, will spend in excess of 240 hours each in the
monitoring of such rules, and will spend in excess of $15,000 each for outside counsel and
auditor opinions or work product. This commenter did not provide additional detail about the
basis for its view that the Commission’s estimates were too low. The Commission agreed with
the commenter that broker-dealers directly affected by the rule amendments may be required to
implement procedures or modify their written supervisory procedures in order to comply with
the rule amendments. In cases where the final rule amendments required a broker-dealer to
implement or document certain policies and procedures, these hour burdens were included in the
final PRA hour estimates discussed in the adopting release. Consequently, the Commission
addressed the commenter’s concerns that directly relate to the collections of information in the
PRA of the adopting release. However, the amendments to Rule 17a-4 do not contain policies or
procedures and are, therefore, not affected by this comment. 9
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The records required by Rule 17a-4 are available only to the examination staffs of the
Commission, state regulatory authorities, and the SROs. Subject to the provisions of the
Freedom of Information Act, 5 U.S.C. § 552 (“FOIA”) and the Commission’s rules thereunder
(17 CFR 200.80(b)(4)(iii)), the Commission generally does not publish or make available
information contained in reports, summaries, analyses, letters, or memoranda arising out of, in

6

See Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 55431
(Mar. 9, 2007), 72 FR 12862 (Mar. 19, 2007).

7

See Amendments to Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 66910
(May 3, 2012), 77 FR 27150 (May 9, 2012).

8

See letter from Michael Scillia, National Investment Banking Association, to Securities and Exchange
Commission (July 12, 2012), http://www.sec.gov/comments/s7-08-07/s70807-102.pdf.

9

This comment, however, relates to the amendment to Rule 17a-3 and is addressed in the collection of
information to Rule 17a-3. Rule 17a-4 only requires the preservation of the policies and procedures
required to be documented under Rule 17a-3.

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anticipation of, or in connection with an examination or inspection of the books and records of
any person or entity.
11.

Sensitive Questions

Not applicable. No information of a sensitive nature is required.
12.

Burden of Information Collection

As of December 31, 2011, there were 4,709 broker-dealers. The Commission estimates
that, on average, each broker-dealer spends 254 hours each year to ensure that it is in compliance
with Rule 17a-4 and to produce required records promptly at an office when so required.
Therefore, the Commission estimates that the recordkeeping burden associated with Rule 17a-4
is 1,196,086 hours each year. 10
As discussed above, the amendments to Rules 17a-3 and 17a-4 will require certain large
broker-dealers to make and keep current a record documenting credit, market, and liquidity risk
management controls established and maintained by the broker-dealer to assist it in analyzing
and managing the risks associated with its business activities. The amendment only will apply to
broker-dealers that have more than (1) $1,000,000 in aggregate credit items as computed under
the customer reserve formula of Rule 15c3-3, or (2) $20,000,000 in capital, including debt
subordinated in accordance with Appendix D to Rule 15c3-1. The amendment to Rule 17a-4
will require a broker-dealer to preserve the records required pursuant to paragraph (a)(23) of
Rule 17a-3 until three years after the termination of the use of the risk management controls
documented therein. This amendment to Rule 17a-4 should not change the current annual hour
burden for Rule 17a-4 because the paperwork burden associated with this amendment derives
from the substance of the amendments to paragraph (a)(23) of Rule 17a-3. Therefore, the
Commission is not revising the annual recordkeeping hour burden for Rule 17a-4 as a result of
the amendment to Rule 17a-4. 11
13.

Costs to Respondents

Based on conversations with members of the securities industry and the Commission’s
experience in the area, the Commission estimates that the average broker-dealer spends
approximately $5,000 each year to store documents required to be retained under Rule 17a-4.
Costs include the cost of physical space, computer hardware and software, etc., which vary
widely depending on the size of the broker-dealer and the type of storage media employed. As
noted above, as of December 31, 2011, there were 4,709 broker-dealers. Therefore, the
Commission estimates that the annual recordkeeping cost burden is $23,545,000. 12

10

4,709 broker-dealers x 254 hours = 1,196,086 hours.

11

The Commission has revised the estimated PRA for Rule 17a-3 resulting from the amendment to paragraph
(a)(23) of Rule 17a-3.

12

4,709 broker-dealers x $5,000 = $23,545,000.

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14.

Costs to the Federal Government

The federal government does not incur a cost for this collection of information since it
relates to a recordkeeping burden for the respondents.
15.

Changes in Burden

Overall, the annual recordkeeping hour burden and costs have generally decreased due to
a decrease in the overall number of registered broker-dealers from 5,057 in 2010 to 4,709 in
2011.
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 OMB expiration date.
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.

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