Rule_15c3-1_Supporting_Statement_Version_E[1]

SUPPORTING STATEMENT
for the Paperwork Reduction Act New Information Collection Submission for
Rule 15c3-1 – Net Capital Requirements for Brokers or Dealers
A.

JUSTIFICATION
1.

Necessity of Information Collection

Rule 15c3-1 1 (“net capital rule”) under the Securities Exchange Act of 1934 (“Exchange
Act”) is intended to ensure that broker-dealers registered with the Securities and Exchange
Commission (“Commission”) at all times have sufficient liquid capital to protect the assets of
customers and to meet their responsibilities to other broker-dealers. 3 Rule 15c3-1 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
2

Rule 15c3-1 is an integral part of the Commission’s financial responsibility program for
broker-dealers. In particular, Rule 15c3-1 facilitates the monitoring of the financial condition of
brokers-dealers 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 counterparties to increased risk.
On July 30, 2013, the Commission adopted amendments to Rule 15c3-1 as part of the
amendments to the broker-dealer financial responsibility rules (“2013 amendments”). 5 This
supporting statement describes the impact of these amendments on the current PRA collection
for Rule 15c3-1.
2.

Purpose and Use of the Information Collection

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; 6 or (2) a financial ratio. 7 Exchange Act

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

Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78 FR
162 (Aug. 21, 2013).

6

See 17 CFR 240.15c3-1(a)(2)–(9).

7

See 17 CFR 240.15c3-1(a)(1)(i)–(iii).

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
DEA of both the carrying firm and the market maker prior to effecting transactions in the
account. 8 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. 9 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, and thereafter must continue to
compute its net capital in this manner unless a change is approved upon application to the
Commission.10
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 brokerdealer 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 (“alternative net capital firms” or “ANC firms”). 13
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. 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 broker-dealers that use Appendix E.
With respect to the 2013 amendments, the record regarding acting as an agent in a
securities loan transaction will assist examiners in verifying that the broker-dealer is properly
accounting for securities loan deficits under Rule 15c3-1. The records with respect to obtaining
DEA approval prior to withdrawing capital within one year of contribution under Rule 15c3-1
will assist examiners in determining if a broker-dealer is computing its net capital accurately
with regard to the proper classification of its capital contributions, and will help to ensure the
DEA only approves capital withdrawals which are appropriate in light of the firm’s current
8

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

9

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

10

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

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.

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financial condition at the time of the requested withdrawal. The amendments to Rule 15c3-1
also will facilitate the monitoring of the financial condition of broker-dealers by the Commission
and its staff, as well as by DEAs.
3.

Consideration Given to Information Technology

The method of computing net capital varies by size and complexity of a broker-dealer.
Most large broker-dealers subject to Rule 15c3-1 utilize automated systems for computing their
net capital and minimum requirements. Smaller broker-dealers with simple balance sheets may
compute their net capital on a manual basis.
4.

Duplication

The Commission is 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 counterparties 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 Commission requested comment in the proposing release on the included PRA
analysis in March 2007. 14 The Commission re-opened the comment period in May 2012. 15 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

14

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

15

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

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the proposals.” 16 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 related to the collections of information in the
PRA of the adopting release.
9.

Payment or Gift

No payments or gifts have been 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 provides that the requirement of public
dissemination does not apply to commercial or financial information which is privileged or
confidential.
11.

Sensitive Questions

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

Burden of Information Collection

Based on experience with the industry, the Commission estimates that broker-dealers
annually file approximately 902 notices under Rule 15c3-1 and that a broker-dealer will spend
approximately 30 minutes preparing and filing these notices. Therefore, the Commission
estimates a total annual reporting burden of 451 hours. 17
With respect to Appendices E and G of Rule 15c3-1, the following estimates are based on
the assumption that nine broker-dealers will ultimately compute deductions for market risk under
Appendix E. Currently, there are six ANC firms, and the Commission expects that three
16

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.

17

902 notices x (30 minutes / 60 minutes) = 451 hours.

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additional firms will apply to compute deductions for market risk under Appendix E. 18 The
Commission estimates that each broker-dealer that applies would incur a one-time recordkeeping
burden of approximately 1,000 hours to create and compile the various documents to be included
with the application and to work through the application process, with an aggregate one-time
recordkeeping burden of 3,000 hours. 19
The Commission estimates that an ANC firm using Appendices 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 back test the models. Consequently, the Commission estimates that the total annual
recordkeeping burden associated with reviewing and back testing mathematical models for the
six ANC firms will be approximately 37,440 hours 20 and approximately 9,360 hours 21 for the
three broker-dealers expected to become ANC firms, resulting in an aggregate annual
recordkeeping burden of 46,800 hours. 22
The Commission estimates that the average amount of time necessary to prepare and file
the monthly reports required by Appendix G will be approximately eight hours per month, or 96
hours per year. The Commission estimates that the average amount of time necessary to prepare
and file the quarterly reports will be approximately 16 hours per quarter, or 64 hours per year.
The Commission estimates that the average amount of time necessary to prepare and file the
annual audit reports will be approximately 200 hours per year. Consequently, the Commission
estimates that the total annual reporting burden of Appendix G for the six ANC firms will be
approximately 2,160 hours, 23 and the total annual reporting burden for the three broker-dealers
expected to become ANC firms will be approximately 540 hours, 24 resulting in an aggregate
annual reporting burden of 2,700 hours. 25
The Commission expects that any additional burden associated with the requirements of
Appendix G relating to preserving records will be minimal because a prudent firm that manages
risk on a group-wide basis will make and preserve these records in the ordinary course of its
business. The Commission estimates that the average one-time burden of making and preserving
these records will be approximately 40 hours and that the average annual burden will be
approximately 290 hours. Consequently, the Commission estimates that the annual
18

The Commission expects that these three firms will register as ANC firms over the next three years.
However, until their registrations are complete, these firms will not be subject to the annual burdens
discussed throughout Item 12. Therefore, the Commission has taken this fact into consideration in its
calculations.

19

The three-year annualized number for this one-time burden is 1,000 (3,000 hours / 3 years = 1,000 hours),
or 333.33 per firm.

20

(5,600 hours + 640 hours) x 6 broker-dealers = 37,440 hours.

21

((5,600 hours + 640 hours) / 2) x 3 broker-dealers = 9,360 hours.

22

37,440 hours + 9,360 hours = 46,800 hours.

23

(96 hours + 64 hours + 200 hours) x 6 broker-dealers = 2,160 hours.

24

((96 hours + 64 hours + 200 hours) / 2) x 3 broker-dealers = 540 hours.

25

2,160 hours + 540 hours = 2,700 hours.

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recordkeeping burden for the six ANC firms will be approximately 1,740 hours. 26 The
Commission estimates that the total one-time and annual recordkeeping burden for the three
broker-dealers expected to become ANC firms will be approximately 120 hours 27 and 435
hours, 28 respectively. Therefore, Commission estimates an aggregate annualized recordkeeping
burden of approximately 2,215 hours. 29
The Commission estimates that ANC firms will spend a total of approximately one hour
per year to comply with the notification provisions of Appendix G, resulting in a total annual
reporting burden of 6 hours 30 for the six ANC firms and 2 hours 31 for the three broker-dealers
expected to become ANC firms, resulting in an aggregate reporting burden of 8 hours. 32
The Commission also estimates that each broker-dealer will spend approximately 250
hours per year reviewing and updating its risk management control system, resulting in an
aggregate annual recordkeeping burden of 1,875 hours. 33
Therefore, the total annual hour burden for Appendix E and G to Rule 15c3-1 is 54,598
hours. 34
In summary, the Commission estimates that the total annual hour burden for Rule 15c3-1
prior to the 2013 amendments is 55,049. 35
With respect to the 2013 amendments, the amendments to paragraph (c)(2)(iv)(B) of Rule
15c3-1 will require a broker-dealer to make disclosures to, and obtain certain agreements from,
securities lending principals in situations where the firm participates in the settlement of a
securities lending transaction but wants to be deemed an agent for purposes of Rule 15c3-1. The
Commission, in recognition of standard stock loan agreements, designed the amendment to
accommodate the continued use of these industry model agreements by incorporating their use
into the rule’s requirements. However, the Commission estimates that 5% of the 122 brokerdealers, or approximately 6 firms, engaged in securities lending will need to modify their
standard agreements. The Commission estimates each of these firms will spend approximately
20 hours of employee resources updating their standard agreement template. Therefore, the

26

290 hours x 6 broker-dealers = 1,740 hours.

27

40 hours x 3 broker-dealers = 120 hours. The three-year annualized number for this one-time burden is 40
(120 hours / 3 years = 40 hours).

28

(290 hours/2 years) x 3 broker-dealers = 435 hours.

29

1,740 hours + 40 hours + 435 hours = 2,215 hours.

30

1 hour x 6 broker-dealers = 6 hours.

31

(1 hour x 3 broker-dealers) / 2 = 1.5 hours.

32

6 hours + 2 hours = 8 hours.

33

(250 x 6 broker-dealers) + ((250 / 2) x 3 broker-dealers)) = 1,875 hours.

34

1,000 + 46,800 + 2,700 + 2,215 + 8 + 1,875 = 54,598 hours.

35

451 + 54,598 = 55,049 hours.

6

Commission estimates that the total one-time recordkeeping burden will be approximately 120
hours. 36
The amendment to paragraph (c)(2)(i)(G)(2) of Rule 15c3-1 will require that a brokerdealer treat as a liability any capital contribution that is intended to be withdrawn within one year
of its contribution. The amendment also includes the presumption that capital withdrawn within
one year of contribution is presumed to have been intended to be withdrawn within one year,
unless the broker-dealer receives permission in writing for the withdrawal from its DEA. The
Commission estimates that 90 broker-dealers will seek to obtain permission from their DEA in
writing to withdraw capital within one year of its contribution, and that it will take a brokerdealer approximately one hour to prepare and submit the request to its DEA to withdraw capital.
Therefore, the Commission estimates that the total annual reporting burden will be
approximately 90 hours. 37
Consequently, the Commission estimates that the total annual burden associated with the
2013 amendments to Rule 15c3-1 will be approximately 130 hours. 38
Therefore, the total annual hour burden for the total collection under Rule 15c3-1,
including the 2013 amendments, will be 55,179 hours. 39
13.

Costs to Respondents

Approximately 81 broker-dealers file consolidated financial reports, of which
approximately 20 obtain an opinion of counsel under Appendix C of Rule 15c3-1. The
Commission 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. 40 The total costs for all respondents would be $160,000. 41
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 Rule 15c3-1 require the Commission to
hire any new employees or reallocate existing employees to ensure compliance with the rule.

15.

Changes in Burden

36

6 broker-dealers x 20 hours per firm = 120 hours. The three-year annualized number for this one time
burden is 40 hours (120 hours / 3 years = 40), or 6.66 hours per firm.

37

90 broker-dealers x 1 hour = 90 hours.

38

90 hours + 40 hours = 130 hours.

39

55,049 hours + 130 hours = 55,179 hours.

40

$400 x 20 hours = $8,000.

41

20 opinions x $8,000 = $160,000.

7

Due to the adoption of the 2013 amendments to Rule 15c3-1, the one-time and annual
reporting and recordkeeping burdens increased, as described in paragraph 12 above. Overall,
however, the one-time and annual hours generally decreased due to a decrease in the estimated
number of broker-dealers the Commission expects to become ANC firms from four to three.
Finally, there was no change in the cost estimates.

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 approval 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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