Supporting statement 17a-5(c)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 17a-5(c)
A.

JUSTIFICATION
1.

Information Collection Necessity

Under Section 17(e)(1)(B) of the Securities Exchange Act of 1934 (“Exchange Act”) every
registered broker-dealer must send its customers annually its certified balance sheet and such other
financial statements and information concerning its financial condition as the Securities and
Exchange Commission (“Commission”) prescribes.
The Commission’s Rule 17a-5(c) (“Rule”) requires that each broker-dealer that carries
customer accounts furnish the Commission, each national securities exchange and registered
national securities organization of which it is a member, and its customers with:
(a)

annual audited financial statements within 105 days after the end of the fiscal year of
the broker-dealer. The statements may be furnished 30 days after that time limit has
expired if the broker or dealer sends them with the next mailing of quarterly
customer account statements; and

(b)

semiannual unaudited financial statements not later than 65 days after the date as of
which the statements are prepared. The statements may be furnished 70 days after
that time limit has expired if the broker or dealer sends them with the next mailing of
quarterly customer account statements.

Under the Rule, the audited statements must contain:
(i)

a Statement of Financial Condition with appropriate notes prepared in accordance
with generally accepted accounting principles (“GAAP”);

(ii)

a footnote containing, among other things, a statement of the amount of the brokerdealer’s net capital and its required net capital, computed in accordance with Rule
15c3-1;

(iii)

a statement that the Statement of Financial Condition of the broker-dealer’s most
recent financial report is available for examination at the principal office of the
broker-dealer and at the Commission; and

(iv)

if the broker-dealer’s independent accountant commented on any material
weaknesses, a statement that a copy of such report and comments is on file with the
Commission; and

The unaudited statements must contain the information specified in (i) and (ii) above.

Under the exemption of paragraph (c)(5) of Rule 17a-5, a broker-dealer is not required to
send the statements to its customers if the broker-dealer sends the net capital footnote described in
item (ii) above and information on how to obtain the annual and semiannual statements via a tollfree number or on the broker-dealer’s website to its customers when it otherwise would have had to
send the statements. A broker-dealer that elects to take advantage of the exemption must publish its
statements on its website in a prescribed manner, and must maintain a toll-free number that
customers can call to request a copy of the statements. If a customer requests a copy of the
statements, the broker-dealer must send them promptly at no cost to the customer.
2.

Information Collection Purpose and Use

The purpose of the Rule is to ensure that customers of broker-dealers are provided with
information concerning the financial condition of the firm that may be holding the customers’ cash
and securities. The Commission, when adopting the Rule in 1972, stated that the goal was to
“directly” send a customer essential information so that the customer could “judge whether his
broker or dealer is financially sound.” The Commission adopted the Rule in response to the failure
of several broker-dealers holding customer funds and securities in the period between 1968 and
1971.
Information regarding the broker-dealer’s financial condition, which includes information
regarding the broker-dealer’s net capital and its required net capital, is “essential information”
customers need in order to gauge whether the broker-dealer is sufficiently financially sound to be
entrusted with their securities and cash. The purpose of the net capital requirements is to ensure that
broker-dealers have sufficient liquid assets (those assets that can be readily converted into cash) in
excess of liabilities to promptly satisfy the firm’s liabilities, including those to customers.
3.

Consideration Given to Information Technology

On May 9, 1996, the Commission issued an interpretive release (Securities Exchange Act
Release No. 37182, 61 FR 24644) regarding, among other things, the use of electronic media by
broker-dealers in satisfying their requirements under the Rule. This interpretive release reduces
the printing and mailing burden on broker-dealers by allowing them to deliver the financial
statements to their customers through electronic media.
Under the exemption of paragraph (c)(5) of Rule 17a-5, a broker-dealer can take
advantage of the Internet as an alternative method of delivery to its customers of its full balance
sheet.
4.

Duplication

Not applicable. No other rule requires brokers or dealers to send such information to
their customers.

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5.

Effects on Small Entities

Firms that carry customer accounts are required to comply with this Rule. There are
approximately 213 such firms. 1 Of these firms, approximately 36 are small businesses. 2 The
complexity and length of financial statements generally varies proportionately with the volume
and complexity of the broker-dealer’s business. Additionally, the number of financial statements
that a broker-dealer must send to its customers is directly proportional to the number of
customers of the broker-dealer. Therefore, small businesses should not experience additional or
disproportionate burden as a result of complying with the Rule.
It would not be appropriate to provide small firms with an exemption from the Rule
because customers must have financial information to evaluate the financial soundness of a
broker-dealer that may be holding their cash and securities.
6.

Consequences of Not Conducting Collection

If the required collection were eliminated, the protections afforded to the public would be
lessened. If the required collection were conducted less frequently, the financial information
would become outdated.
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).
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

Not applicable.
10.

Confidentiality

Not applicable. The information is not confidential.
11.

Sensitive Questions

Not applicable. Questions of a sensitive nature are not asked.
1

The Commission’s Division of Economic and Risk Analysis calculated this estimate based upon
information submitted by broker-dealers in 2013 in Form X-17A-5 Schedule I.

2

The Commission’s Division of Economic and Risk Analysis calculated this estimate based upon
information submitted by broker-dealers in 2013 in Form X-17A-5 Schedule I.

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12.

Information Collection Burden

Since the time of the previous calculation of the PRA burden in 2011, the Commission’s
estimate of the number of broker-dealers that carry customer accounts has decreased from 244 to
213, 3 the Commission’s estimate of the number of public customer accounts has increased from
101 million to 115 million, 4 and the Commission’s estimate of the number of broker-dealers that
take advantage of the exemption of paragraph (c)(5) of Rule 17a-5 has decreased from 195 to
170. 5
Broker-dealers taking advantage of the exemption send the financial disclosure statement,
instead of their full balance sheet, twice a year. Some broker-dealers print the financial
disclosure statement, which is typically about one paragraph in length, on a separate page and
include it with the quarterly account statement, and some broker-dealers print it directly on the
quarterly account statement. The Commission believes that the time burden for sending the
semi-annual financial disclosure statement with quarterly customer account statements for
broker-dealers taking advantage of the exemption should be calculated on a per-broker-dealer
basis. Sending the financial disclosure statement will likely involve drafting the statement and
making programming adjustments to the computer system that generates the account statements.
The cost of sending the statement should not, therefore, depend on the number of account
statements sent.
The Commission previously estimated that each broker-dealer that takes advantage of the
exemption would spend approximately 40 hours every six months to send the financial
disclosure statement to its customers, for a total of 15,600 hours (195 broker-dealers * 2 mailings
* 40 hours = 15,600 hours). To the best knowledge of the Commission, there have been no
significant developments, innovations or changes in the practices of broker-dealers since the time
of the last PRA burden estimate to alter the 40 hour estimate. The Commission now estimates
that this ongoing third-party burden is approximately 13,600 hours (170 broker-dealers * 2
mailings * 40 hours = 13,600 hours). As in the previous Paperwork Reduction Act filing, the
Commission does not expect that broker-dealers will incur additional costs for postage and
printing to send the financial disclosure statement, as the statement will be sent with a quarterly
mailing of customer account statements. This is an ongoing third party disclosure burden.

3

The Commission’s Division of Economic and Risk Analysis calculated this estimate based upon
information submitted by broker-dealers in 2013 in Form X-17A-5 Schedule 1.

4

The Commission’s Division of Economic and Risk Analysis calculated this estimate based upon
information submitted by broker-dealers in 2013 in Form X-17A-5 Schedule 1.

5

The Commission estimates that the number of broker-dealers that take advantage of the exemption of
paragraph (c)(5) of Rule 17a-5 has decreased in roughly the same proportion as the number of brokerdealers that carry customer accounts has decreased. Since the number of carrying broker-dealers has
dropped by approximately 13% since the previous PRA submission in 2011, the staff estimates that the
number of carrying broker-dealers taking advantage of the exemption of paragraph (c)(5) of Rule 17a-5
similarly has fallen by 13%, resulting in a new estimate of 170 broker-dealers that take advantage of the
paragraph (c)(5) exemption.

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The Commission previously estimated that broker-dealers that take advantage of the
exemption would spend a total of 186 hours per year sending balance sheets to customers who
request them via a toll-free number. The burden was calculated by multiplying the estimated
number of annual requests (1,114) by the estimated average amount of time required to process
each request (10 minutes). The Commission now estimates that broker-dealers that take
advantage of the exemption hold approximately 100 million customer accounts (170/195 times
115 million = 100 million) and the Commission estimates that the number of annual requests will
be approximately 969 6 and that the burden is 162 hours (969 annual requests times 10 minutes 7).
This is an ongoing third party disclosure burden.
In addition to the burden of sending the financial disclosure statements and balance
sheets to customers, the Commission estimates that the 170 broker-dealers that take advantage of
the exemption will incur a total of approximately 57 hours per year in reporting burden sending
the balance sheet to the Commission. The 57 hours burden was calculated by multiplying the
number of exempt broker-dealers (170), the frequency of sending the balance sheets (twice per
year), and the estimated average amount of time required to send each balance sheet (10
minutes). This is an ongoing reporting burden. The Commission also estimates that the 170
broker-dealers that take advantage of the exemption must spend a total of approximately 568
hours per year sending the balance sheet to each national securities exchange and registered
national securities organization of which it is a member. This is a third party disclosure burden.
The Commission estimates that out of a total of 18 national securities exchanges and
organizations, each broker-dealer is a member of approximately 10 exchanges and
organizations. 8 The 568 hours burden was calculated by multiplying the number of exempt
broker-dealers (170), the number of estimated securities exchanges and organizations of which
each broker-dealer is a member (10), the frequency of sending the balance sheets (twice per
year), and the estimated average amount of time required to send each balance sheet (10
minutes). This is an ongoing third-party disclosure burden.
The Commission previously estimated that 49 broker-dealers carrying approximately 20
million customer accounts did not take advantage of the exemption and that it would take
approximately 10 seconds to send each balance sheet. The total annual burden was therefore
approximately 111,200 hours (20 million customer accounts * two balance sheets sent per year *
10 seconds). The Commission now estimates that 43 broker-dealers (213-170 = 43) carrying
approximately 23 million customer accounts (43/213 * 115 million = 23,215,962) will incur
approximately 127,880 hours per year in third party reporting burden to send the balance sheets

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The Commission estimates that the number of annual requests has decreased in roughly the same
proportion as the number of broker-dealers that carry customer accounts has decreased. Since the number
of carrying broker-dealers has dropped by approximately 13% since the previous PRA submission in 2011,
the staff estimates that the number of annual requests has fallen by 13%, resulting in a new estimate of 969
requests annually.

7

10 minutes is approximately 16.7% of an hour.

8

There are a total of 18 national securities exchanges and one national securities association registered with
the Commission. The Commission estimates that the average broker-dealer taking advantage of the
exemption is a member of approximately half of the registered national securities exchanges (9), and is a
member of Financial Industry Regulatory Authority.

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(23 million customer accounts * two balance sheets per year * ten seconds 9 = 127,880 hours).
This is an on-going third-party disclosure burden.
In addition, each of the 43 broker-dealers will spend approximately 10 minutes sending
its balance sheet to each national securities exchange and registered national securities
organization of which it is a member. The Commission estimates that each broker-dealer is a
member to approximately 10 national securities exchanges and organizations. The Commission
estimates that the 43 broker-dealers will spend approximately 144 hours per year to send the
balance sheets to these exchanges and organizations (43 * 10 * two balance sheets per year * 10
minutes = 144 hours). This is a third party disclosure burden. Therefore, the total annual third
party disclosure burden for the 43 broker-dealers is 128,024 hours (127,880 + 144 = 128,024
hours).
Each of the 43 broker-dealers not taking advantage of the exemption will also spend
approximately 10 minutes sending its balance sheet to the Commission. The Commission
estimates that the 43 broker-dealers will incur approximately 15 hours per year in reporting
burden to send the balance sheets to the Commission (43 * two balance sheets per year * 10
minutes = 15 hours).
The total annual burden for Rule 17a-5(c) has therefore increased from approximately
128,000 hours to approximately 142,426 hours (13,600+162+57+568+128,024+15 = 142,426
hours) of which approximately 142,352 hours is a third-party disclosure (142,426-57-15 =
142,354 hours) and of which 72 hours (57+15 hours = 72 hours) is a reporting burden.
13.

Costs to Respondents

Not applicable. The Commission does not expect that respondents will have to incur
capital or start-up costs to comply with the Rule.
14.

Costs to Federal Government

There are no costs to the federal government associated with this rule.
15.

Changes in Burden

Since the time of the last submission, there has been a decrease in the Commission’s
estimate of the number of broker-dealers that carry customer accounts, from 244 in 2011 to 213 in
2014, and an increase in the total number of public customer accounts, from 101 million in 2011 to
115 million in 2014. Further, the Commission previously estimated that 195 broker-dealers took
advantage of the exemption of paragraph (c)(5) of Rule 17a-5 and that 49 broker-dealers carrying
approximately 20 million customer accounts did not take advantage of the exemption. The
Commission now estimates that 170 broker-dealers take advantage of the exemption and that 43
broker-dealers carrying 23 million customer accounts do not take advantage of the exemption. See
9

10 seconds is approximately 0.278% of an hour.

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item 12 for a discussion of the effect of these and other changes on the reporting burden, which has
increased from 127,636 hours to 142,426 hours.
16.

Information Collections 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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