2014 11a1-1(T) - Suppporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 11a1-1(T)

A.

Justification
1.

Information Collection Necessity

In the Securities Act Amendments of 1975, Section 11(a) of the Securities
Exchange Act of 1934 (“Exchange Act”) was amended to prohibit any member of a
national securities exchange from effecting transactions on such exchange for its own
account, the account of an associated person, or an account with respect to which it or an
associated person thereof exercises investment discretion, subject to certain exceptions.
Section 11(a) was intended to displace Exchange Act Rule 19b-2, which required each
national securities exchange to adopt a rule or rules specifying that every member of the
exchange must have, as the principal purpose of its exchange membership, the conduct of
public securities business. Under Rule 19b-2, an exchange member would be deemed to
have such a purpose if at least 80% of the volume of its exchange securities transactions
effected by it during the preceding six calendar months were effected for or with persons
other than affiliates or were effected pursuant to types of transaction specified in the rule.
Section 11(a)(1)(G) exempts from the operation of Section 11(a)(1) transactions
of certain exchange members that are effected in compliance with rules of the
Commission. These rules must, as a minimum, assure that the transaction is consistent
with the maintenance of fair and orderly markets and yields priority, parity, and
precedence in execution to orders for the account of persons who are not members or
associated with members of the exchange. 1 The Commission adopted Rule 11a1-1(T)
(17 CFR 240.11a1-1(T)), the “proprietary trading rule,” pursuant to Section 11(a)(1)(G)
under the Act. See Exchange Act Release No. 12055 (January 27, 1976) (adopting the
rule).
Rule 11a1-1(T) provides that a transaction effected on a national securities
exchange for the account of a member which meets the requirements of Exchange Act
Section 11(a)(1)(G)(i) 2 shall be deemed, in accordance with Exchange Act Section 11(a)
(1)(G)(ii), to be not inconsistent with the maintenance of fair and orderly markets and to
yield priority, parity, and precedence in the execution of an order for the account of a
person who is not a member or associated with members of the exchange if such
transaction is effected in compliance with certain disclosure requirements.
1

Section 11(a)(1)(G)(ii).

2

Section 11(a)(1)(G)(i) requires that the member for whose account transactions are being
effected be primarily engaged in the business of underwriting and distributing securities
issued by other persons, selling securities to customers, and acting as broker, or any one or
more of such activities. These members’ gross income also normally must be derived
principally from such business and related activities.

In particular, an exchange member must disclose that a bid or offer for its account
is for its account to any member with whom such bid or offer is placed or to whom it is
communicated (Rule 11a1-1(T)(a)(1)). Moreover, any such member through whom that
bid or offer is communicated must disclose to others participating in effecting the order
that it is for the account of a member (Rule 11a1-1(T)(a)(1)). Finally, immediately before
executing the order, a member (other than the specialist in such security) presenting any
order for the account of a member on the exchange must clearly announce or otherwise
indicate to the specialist and to other members then present for the trading in such
security on the exchange that he is presenting an order for the account of a member (Rule
11a1-1(T)(a)(2)).
2.

Information Collection Purpose and Use

The information required by the rule is necessary for exchange members to make
transactions for their own accounts under a specific exemption from the general
prohibition of such transactions under Section 11(a) of the Exchange Act. This general
prohibition is part of the Commission’s mandate under the Exchange Act to promote fair
and orderly markets and ensure that exchange members have, as the principle purpose of
their exchange memberships, the conduct of a public securities business. Without these
requirements, it would not be possible for the exchanges and the Commission to monitor
compliance with the preference requirements of the rule.
3.

Consideration Given to Information Technology

The compilation of this information must be done on a transaction by transaction
basis. Thus, improved information technology would not reduce the burden.
4.

Duplication

Not applicable; there is no duplication of information.
5.

Effect on Small Entities

The rule requirements are not unduly burdensome on smaller broker-dealers.
6.

Consequences of Not Conducting Collection

The information is collected as each transaction warrants and therefore there is no
way to require less frequent collection without undermining the purposes of the rule.
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).

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8.

Consultations Outside the Agency

Before adoption, Commission rules are published for notice and comment.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

No assurances of confidentiality are provided in the rule.
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not
collect any Personally Identifiable Information (PII).
12.

Information Collection Burden

There are approximately 663 respondents that require an aggregate total of 19 hours
to comply with this rule. Each of these approximately 663 respondents makes an estimated
20 annual responses, for an aggregate of 13,260 responses per year. Each response takes
approximately 5 seconds to complete. Thus, the total compliance burden per year is 19
hours (13,260 x 5 seconds/60 seconds per minute/60 minutes per hour = 19 hours). The
approximate internal cost of compliance per hour is $323, 3 resulting in a total internal cost
of compliance for the annual burden of $6,137 (19 hours @ $323).
13.

Costs to Respondents

Not applicable; (a) it is not anticipated that respondents will have to incur any
capital and start up cost to comply with the rule; (b) it is not anticipated that the
respondents will have to incur any additional operational or maintenance cost to comply
with the rule.

3

SIFMA’s Management & Professional Earnings in the Securities Industry 2012
estimates the salary for a floor broker on the NYSE was $312/hour. The $323/hour
figure in 2014 is based on the 2012 figure, adjusted for inflation using the Consumer
Price Index, and modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
overhead.

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14.

Costs to Federal Government

During fiscal years 2011, 2012, and 2013, staff did not issue any interpretative
letters concerning the rule. There is no estimated operation costs associated with this
rule.
15.

Changes in Burden

It was previously estimated that there would be approximately 763 respondents
that would require an aggregate total of 22 hours to comply with this rule. Each of these
approximately 763 respondents would make an estimated 20 annual responses, for an
aggregate of 15,260 responses per year. Each response would take approximately 5
seconds to complete. Thus, the total compliance burden per year would be 22 burden
hours (15,260 x 5 seconds/60 seconds per minute/60 minutes per hour = 22 burden
hours). The approximate cost per hour was $282, resulting in a total cost of compliance
for the respondents of $6,204 (22 hours @ $282).
The revisions to the estimate are due to market changes over time and changes in
market participant salaries. Specifically, the revised estimate is based on a revised
estimated number of respondents and a revised hourly cost of compliance. There are
approximately 663 members of floor based exchanges estimated to potentially respond
pursuant to the rule, which is decrease of 100 estimated respondents (663 - 763 = -100
respondents). It is estimated that each respondent makes 20 annual responses. This
figure remains unchanged, but as a result of a decrease in the estimated number of
respondents, the annual estimated number of responses decreased by 2000 (13,260 –
15,260 = -2000 responses). It is estimated that each response takes approximately 5
seconds to complete; this figure remains unchanged. In turn, the estimated annual
compliance burden decreased by 2 hours (19 hours - 21 hours = -2 hours). The
approximate internal cost of compliance per hour is estimated based on the hourly rate for
an NYSE floor broker at $323. 4 This is an increase in the approximate per hour cost.
The estimated internal cost of compliance decreased by $67 ($6137 - $6204 = -$67)
because, in part, the total estimated annual hour compliance burden decreased.
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.

4

See supra note 3.

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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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