Rule 15c3-1 Supporting Statement - SBSB Proposing Release - Final 3-23-16

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 15c3-1 – Net Capital Requirements for Brokers or Dealers
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

Rule 15c3-1 1 under the Securities Exchange Act of 1934 (“Exchange Act”) 2 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
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
broker-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.
In accordance with Section 764 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the “Dodd-Frank Act”), the Commission proposed to amend Rule 15c31 to set forth net capital requirements for broker-dealers that also register as nonbank securitybased swap dealers (“broker-dealer SBSDs”), along with other changes that would apply to
broker-dealers, including a special class of broker-dealer that uses internal models to compute
net capital (“ANC broker-dealers”). 5 This supporting statement describes the impact of the
proposed amendments in the SBSD Proposing Release on the current PRA collection for Rule
15c3-1.

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 Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071
(Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012) (“SBSD Proposing Release”).

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
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
There are also certain recordkeeping requirements under Rule 15c3-1. For example, a
broker-dealer must keep a record of who is acting as an agent in a securities loan transaction and
records with respect to obtaining DEA approval prior to withdrawing capital within one year of a
contribution. 11 These records help the Commission and its staff, as well as DEAs, facilitate the
monitoring of the financial condition of broker-dealers.
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. 12 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. 13

6

See 17 CFR 240.15c3-1(a)(2)–(9).

7

See 17 CFR 240.15c3-1(a)(1)(i)–(iii).

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 240.15c3-1(c)(2)(iv)(B); 17 CFR 240.15c3-1(c)(2)(i)(G)(2).

12

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

13

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

2

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”). 14
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.
Under proposed amendments to Rule 15c3-1 in the SBSD Proposing Release, ANC
broker-dealers would be required to perform a liquidity stress test at least monthly and, based on
the results of that test, maintain liquidity reserves to address funding needs. In addition, if such
ANC broker-dealer is part of a consolidated entity using liquidity stress tests, the ANC brokerdealer would need to justify and document any differences in the assumptions used in their
liquidity stress tests from those used in the liquidity stress tests of the consolidated entity. ANC
broker-dealers also would be required to establish a written contingency funding plan. Brokerdealer SBSDs that do not use models would be required to comply with certain requirements of
Rule 15c3-4. Finally, under proposed paragraph (c)(2)(vi)(O)(1)(iii) of Rule 15c3-1, brokerdealer SBSDs would be required to use an industry sector classification system that is
documented and reasonable in terms of grouping types of companies with similar business
activities and risk characteristics, used for credit default swap reference names for purposes of
calculating “haircuts” on security-based swaps. These proposed amendments would be integral
parts of the Commission’s financial responsibility program.
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.

14

See 17 CFR 240.15c3-1e.

3

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 has issued a release soliciting comment on the new “collection of
information” requirements described above and associated paperwork burdens. 15 A copy of the
SBSD Proposing Release is attached. Comments on Commission releases are generally received
from registrants, investors, and other market participants. In addition, the Commission and staff
participate in ongoing dialogue with representatives of various market participants through
public conferences, meetings, and informal exchanges. Comments received on the SBSD
Proposing Release are posted on the Commission’s public website, and made available
through http://www.sec.gov/rules/proposed.shtml. The Commission will consider all comments
received prior to publishing the final rule, and will explain in any adopting release how the final
rule responds to such comments, in accordance with 5 C.F.R. 1320.11(f).
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. The collection of information will not include Personally Identifiable
Information. 16

15

See SBSD Proposing Release, supra note 5.

16

The term “Personally Identifiable Information” refers to information which can be used to distinguish or
trace an individual’s identity, such as their name, social security number, biometric records, etc. alone, or

4

12.

Burden of Information Collection

Current Rule 15c3-1 Collection of Information
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
Paragraph (c)(2)(iv)(B) of Rule 15c3-1 requires 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 broker-dealers, 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 Commission estimates that the total one-time recordkeeping
burden will be approximately 120 hours. 18
Paragraph (c)(2)(i)(G)(2) of Rule 15c3-1 requires that a broker-dealer 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 broker-dealer 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. 19
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
additional firms will apply to compute deductions for market risk under Appendix E. 20 The
when combined with other personal or identifying information which is linked or linkable to a specific
individual, such as date and place of birth, mother’s maiden name, etc.
17

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

18

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 6.67 hours per firm.

19

90 broker-dealers x 1 hour = 90 hours.

20

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.

5

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 or an annualized burden of 1,000 per year. 21
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 22 and approximately 12,480 hours 23 for the
three broker-dealers expected to become ANC firms, resulting in an aggregate annual
recordkeeping burden of 49,920 hours. 24
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, 25 and the total annual reporting burden for the three broker-dealers
expected to become ANC firms will be approximately 720 hours, 26 resulting in an aggregate
annual reporting burden of 2,880 hours. 27
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
recordkeeping burden for the six ANC firms will be approximately 1,740 hours. 28 The
Commission estimates that the total one-time and annual recordkeeping burden for the three
21

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.

22

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

23

(Y1: 0 hours) + (Y2: 5,600 hours + 640 hours = 6,240 hours) + (Y3: 5,600 hours + 640 hours = 6,240
hours) = 12,480 hours / 3 years = 4,160 x 3 broker-dealers = 12,480 hours.

24

37,440 hours + 12,480 hours = 49,920 hours.

25

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

26

(Y1: 0 hours) + (Y2: 96 hours + 64 hours + 200 hours = 360 hours) + (Y3: 96 hours + 64 hours + 200 hours
= 360 hours) = 720 hours / 3 years = 240 hours x 3 broker-dealers = 720 hours.

27

2,160 hours + 720 hours = 2,880 hours.

28

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

6

broker-dealers expected to become ANC firms will be approximately 120 hours 29 and 580
hours, 30 respectively. Therefore, Commission estimates an aggregate annualized recordkeeping
burden of approximately 2,360 hours. 31
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 32 for the six ANC firms and 2 hours 33 for the three broker-dealers
expected to become ANC firms, resulting in an aggregate reporting burden of 8 hours. 34
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 1,500 for the six ANC firms 35and 500 for the three
broker-dealers expected to become ANC firms 36 totaling 2,000 hours. 37
Therefore, the total annual hour burden for Appendix E and G to Rule 15c3-1 is 58,168
hours. 38
A broker-dealer is required to take a 15 percent haircut on its proprietary positions in
commercial paper, nonconvertible debt, and preferred stock unless the broker-dealer establishes,
documents, maintains, and enforces written policies and procedures for determining
creditworthiness. 39 The staff estimates that approximately 434 broker-dealers would be affected
by the requirement that a broker-dealer establish, document, maintain, and enforce policies and
procedures that are reasonably designed to determine whether a security or a money market
instrument has a minimal amount of credit risk. 40 If the security or money market instrument has
29

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).

30

(Y1: 0 hours) + (Y2: 290 hours) + (Y3: 290 hours) = 580 hours / 3 years = 193.33 hours x 3 broker-dealers
= 580 hours.

31

1,740 hours (six ANC firms) + 40 hours (3 broker-dealers expected to become ANC firms) + 580 hours (3
broker-dealers expected to become ANC firms) = 2,360 hours.

32

1 hour x 6 broker-dealers = 6 hours.

33

(Y1: 0 hours) + (Y2: 1 hour) + (Y3: 1 hour) = 2 hours / 3 years = .67 hours x 3 broker-dealers = 2 hours.

34

6 hours (six ANC firms) + 2 hours (3 broker-dealers expected to become ANC firms) = 8 hours.

35

250 hours x 6 broker-dealers = 1,500 hours.

36

(Y1: 0 hours) + (Y2: 250 hours) + (Y3: 250 hours) = 500 hours / 3 years = 166.67 hours x 3 broker-dealers
= 500 hours.

37

1,500 hours (six ANC firms) + 500 hours (3 broker-dealers expected to become ANC firms) = 2,000 hours.

38

1,000 + 49,920 + 2,880 + 2,360 + 8 + 2,000 = 58,168 hours.

39

Removal of Certain References to Credit Ratings under the Securities Exchange Act of 1934, Exchange
Act Release No. 71194 (Dec. 27, 2013), 79 FR 1522 (Jan. 8, 2014).

40

The number of 434 broker-dealers was obtained by reviewing broker-dealer Financial and Operational
Combined Single (or “FOCUS”) Reports for 2012 year-end and then calculating how many firms reported
holding proprietary debt positions. For FOCUS Part II filers, the balances examined were “Bankers
Acceptances” and “Corporate Debt.” For FOCUS CSE filers, the balances examined were: “Money

7

a minimal amount of credit risk, the broker-dealer can take haircuts on the security or money
market instrument pursuant to paragraphs (c)(2)(vi)(E), (c)(2)(vi)(F)(1), (c)(2)(vi)(F)(2) and
(c)(2)(vi)(H) of Rule 15c3-1. The staff estimates that, on average, broker-dealers will spend 25
hours developing policies and procedures or revising their current policies and procedures for
evaluating creditworthiness for the purposes of Rule 15c3-1, resulting in an aggregate one-time
recordkeeping burden of 10,850 hours. 41 This estimate is based on the Commission’s belief that
many of these broker-dealers already have their own criteria in place for evaluating
creditworthiness and, therefore, most broker-dealers will only be revising their current policies
and procedures for evaluating creditworthiness.
The staff also estimates that, on average, each broker-dealer will spend an additional 10
hours a year reviewing and adjusting its own standards for evaluating creditworthiness.
Therefore, the Commission estimates that the total annualized recordkeeping burden to the
industry will be approximately 4,340 annual hours. 42 Consequently, the Commission estimates
that the total annual burden associated with evaluating creditworthiness under Rule 15c3-1 will
be approximately 7,957 hours. 43
Therefore, the total annual hour burden for the current PRA collection under Rule 15c31, before the SBSD Proposing Release, is 66,706 hours. 44
SBSD Proposing Release
The proposed amendments to Rule 15c3-1 described in the SBSD Proposing Release
would set forth net capital requirements for broker-dealer SBSDs, along with other changes that

Market Instruments,” “Private Label Mortgage Backed Securities,” “Other Asset Backed Securities,” and
“Corporate Debt.” For Part IIA filers, the balance examined was “Debt Securities.” Broker-dealers that
hold preferred stock also may hold positions in debt securities. However, because preferred stock is not a
separate line item on the FOCUS Report, broker-dealers that hold only preferred stock and no other debt
securities are not included in this estimate.
41

434 broker-dealers x 25 hours = 10,850 hours. For purposes of this supporting statement, this one-time
burden annualized over the three-year approval period is 3,617 hours (10,850 / 3 = 3,616.67), with an
average hour burden per broker-dealer of 8 hours (3,617 / 434 broker-dealers = 8.33).

42

434 broker-dealers x 10 hours = 4,340 hours. The Commission estimates that broker-dealers will use a
controller to do this work. The Commission estimates the per-firm costs of the controller to be $10,475
initially and $4,190 on an annual basis, for an aggregate industry cost of $4,546,150 initially and
$1,818,460 on an annual basis. This is an internal labor cost. For purposes of this analysis, the
Commission is using salary data from the SIFMA’s Report on Management and Professional Earnings in
the Securities Industry 2012, which provides base salary and bonus information for middle management
and professional positions within the securities industry, as 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. The Commission believes that the reviews required by the proposed amendments would be
performed by the controller at an average rate $419 per hour. $419 x 25 = $10,475 x 434 = $4,546,150;
$419 x 10 = $4,190 x 434 = $1,818,460.

43

See supra note 40. 3,617 hours + 4,340 hours = 7,957 hours.

44

451 + 40 + 90 + 58,168 = 58,749; 58,749 hours + 7,957 hours = 66,706 hours.

8

would apply to broker-dealers, including ANC broker-dealers. 45 These proposed amendments
would impose additional one-time hour burdens or additional annual hour burdens to the industry
and are discussed below.
Proposing Liquidity Stress Test. With respect to information collections relating to
liquidity stress tests, the Commission staff estimates that the proposed requirements would result
in a one-time burden to ANC broker-dealers as they would need to develop models for the
liquidity stress test, document the results of the test to provide to senior management, document
differences in the assumptions used in the liquidity stress test of the firm from those used in a
consolidated entity of which the firm is a part, and develop a written contingency funding plan.
Based on experience supervising ANC broker-dealers, the Commission staff estimates that the 9
ANC broker-dealers 46 would spend an average of approximately 200 hours 47 to comply with
these requirements, resulting in an industry-wide one-time hour burden of approximately 1,800
recordkeeping hours. 48 The Commission staff believes that these hours would be evenly split
between an in-house attorney and a risk management specialist, at a rate of $378 and $259 per
hour, respectively. 49 This would result in a one-time startup cost across the industry of
$191,100, annualized over three years. 50
The Commission staff further estimates that the 9 ANC broker-dealers would each spend
an average of approximately 50 hours per month testing and documenting the results of its
liquidity stress test and reviewing its contingency funding plan, resulting in a total annual hour
burden of approximately 5,400 recordkeeeping hours. 51 The staff estimates that these hours
would be evenly split between a senior compliance examiner and a risk management specialist,

45

See supra note 5. The collection of information for proposed new Rule 18a-1 is contained in a separate
supporting statement.

46

The following estimates are based on the assumption that nine broker-dealers will ultimately compute
deductions for market risk under Appendix E to Rule 15c3-1. The SBSD Proposing Release (see note 5)
contained an estimate of 10 ANC broker-dealers. SBSD Proposing Release, 77 FR at 70294. The most
current estimate, however, is 9 ANC broker-dealers based on the current collection of information.
Therefore, the hour burdens with respect to the ANC broker-dealers have been revised in this supporting
statement to reflect the revised estimate.

47

200 hours represents the Commission staff’s estimate of the average hour burden of all firms, including
both non-broker dealer firms electing to use internal models for the first time. The Commission’s
experience with ANC broker-dealers is that they already have contingent funding plans in place at the
parent level, and so they would have a smaller burden to adapt that plan to the broker-dealer entity under
Rule 15c3-1. Therefore, as respondents to this Rule 15c3-1 information collection are limited to ANC
broker-dealers, the hour burden estimate provided here is on the high end.

48

9 ANC broker-dealers x 200 hours = 1,800 hours. For purposes of this supporting statement, this one-time
burden annualized over the three-year approval period is 600 hours (1,800 / 3 = 600), with an average hour
burden per broker-dealer of 66.666 (600/9 = 66.67).

49

The hourly rates for internal professionals used in the SBSD Proposing Release are taken from SIFMA’s
Management and Professional Earnings in the Securities Industry 2011.

50

[($378 x 900 hours) + ($259 x 900 hours)] / 3 years = $340,200 + 233,100 = $573,300 / 3 = $191,100.

51

9 ANC broker-dealers x 50 hours/month x 12 months = 5,400 hours.

9

at a rate of $230 and $259 per hour, respectively. This would result in an annual cost across the
industry of $1,320,300. 52
Risk Management Control System. Proposed amendments to Rule 15c3-1 would require
that all broker-dealer SBSDs comply with Rule 15c3-4. 53 Rule 15c3-4 requires OTC derivatives
dealers and firms subject to its provisions, to establish, document, and maintain a system of
internal risk management controls to assist the firm in managing the risks associated with
business activities, including market, credit, leverage, liquidity, legal, and operational risks.
Currently, there are 9 ANC broker-dealers expected to register as broker-dealer SBSDs, and 6
additional broker-dealers are expected to register as SBSDs that do not use models. Because
ANC broker-dealers are currently subject to Rule 15c3-4, only those 6 broker-dealer SBSDs not
expected to use internal models to compute net capital would have additional costs associated
with complying with Rule 15c3-4. The Commission staff estimates that each of these firms
would spend 2,000 hours to establish a risk management control system, and 250 hours per year
to review and update that system. 54 This results in an estimated industry-wide one-time hour
burden of approximately 12,000 recordkeeping hours, 55 and an estimated industry-wide annual
hour burden of approximately 1,500 recordkeeping hours per year. 56
The staff believes that the one-time hour burden would be evenly split between an inhouse attorney, a risk management specialist, and an operations specialist, at rates of $378, $259,
and $117 per hour, respectively. This would result in a one-time startup cost of $1,005,333
across the industry, annualized over three years. 57 The staff further believes that the annual hour
burden would be performed by a risk management specialist. This would result in an annual cost
across the industry of $388,500. 58
Industry Sector Classification. Finally, with respect to documenting an industry sector
classification system with respect to credit default swap haircuts under proposed paragraph
(c)(2)(vi)(O)(1)(iii) of Rule 15c3-1, the Commission staff expects that 6 broker-dealer SBSDs
not using models would each spend 1 hour per year complying with this requirement, 59 for an
industry-wide total annual hour burden of 6 hours. 60 These hours are recordkeeping hours.
52

($230 x 2,700 hours) + ($259 x 2,700 hours) = $621,000 + $699,300 = $1,320,300.

53

See proposed paragraph (a)(10)(ii) of Rule 15c3-1.

54

The one-time estimate of 2,000 hours and the annual estimate of 250 hours is based on the estimates for
OTC derivatives dealer burdens to implement the same controls under Rule 15c3-1. See OTC Derivatives
Dealers, 62 FR 67940.

55

6 non-model broker-dealer SBSDs x 2,000 hours = 12,000 hours. For purposes of this supporting statement,
this one-time burden annualized over the three-year approval period is 4,000 hours (12,000 / 3 = 4,000),
with an average hour burden per broker-dealer of 666.67 hours (4,000 / 6 broker-dealers = 666.67).

56

6 non-model broker-dealer SBSDs x 250 hours/year = 1,500 hours/year.

57

[($378 x 4,000 hours) + ($259 x 4,000 hours) + ($117 x 4,000 hour)] / 3 years = $1,005,333.

58

$259 x 1,500 hours = $388,500.

59

The Commission staff expects that these firms would utilize third party systems, resulting in reduced hours
and costs.

60

6 non-model broker-dealer SBSDs x 1 hour/year = 6 hours/year.

10

The staff believes that the annual hour burden would be performed by an internal
compliance attorney, at a rate of $322 per hour. This would result in an annual cost across the
industry of $1,932. 61
Total Industry Annual Hour Burden with SBSD Proposing Release
Thus, the total annual industry hour burden attributable to the SBSD Proposing Release
would be 11,506 hours per year. 62 Therefore, the resulting estimated total yearly ongoing hour
burden to comply with Rule 15c3-1, as amended by the SBSD Proposing Release, would be
approximately 78,212 hours. 63

Nature of Information Collection
Burden

Type of Burden

Total Number
of
Respondents

Total
Number of
Responses
Per Year

Initial Burden
Per Response
Per Year Per
Respondent

Ongoing
Burden Per
Response Per
Year Per
Respondent

Total
Annualized
Burden Per
Year Per
Respondent

Total
Annualized
Reporting
Burden For
All
Respondents

Small
Business
Entities
Affected

Rule 15c3-1: Notices

Reporting

902

1

0

0.5

0.5

451

290

Paragraph (c)(2)(iv)(B): Disclosures
and Agreements

Recordkeeping

6

1

6.67

0

6.67

40

0

Paragraph (c)(2)(i)(G)(2): Capital
Withdrawal Liability

Reporting

90

1

0

1

1

90

29

Appendix E computations for ANC
firms

Recordkeeping

3

1

333.33

0

333.33

1,000

0

Reviewing and back testing models
for existing ANC firms

Recordkeeping

6

1

0

6,240

6,240

37,440

0

Reviewing and back testing models
for new ANC firms

Recordkeeping

3

1

0

4,160

4,160

12,480

0

Appendix G monthly reports for
existing ANC firms

Reporting

6

12

0

8

96

576

0

Appendix G quarterly reports for
existing ANC firms

Reporting

6

4

0

16

64

384

0

Appendix G annual reports for
existing ANC firms

Reporting

6

1

0

200

200

1,200

0

Appendix G monthly reports for new
ANC firms

Reporting

3

12

0

5.33

64

192

0

Appendix G quarterly reports for new
ANC firms

Reporting

3

4

0

10.67

42.67

128

0

Appendix G annual reports for new
ANC firms

Reporting

3

1

0

133.33

133.33

400

0

Appendix G recordkeeping for
existing ANC firms

Recordkeeping

6

1

0

290

290

1,740

0

Appendix G recordkeeping for new
ANC firms

Recordkeeping

3

1

13.33

193.33

206.67

620

0

Appendix G notification provision for
existing ANC firms

Reporting

6

1

0

1

1

6

0

Reporting

3

1

0

0.67

0.67

2

0

Recordkeeping

6

1

0

250

250

1,500

0

Recordkeeping

3

1

0

166.67

166.67

500

0

Appendix G notification provision for
new ANC firms
Appendix G updating risk
management profile for existing ANC
firms
Appendix G updating risk
management profile for existing ANC
firms
Creating procedures to determine
creditworthiness to avoid 15% haircut

Recordkeeping

434

1

8.33

10

18.33

7,956.67

139

NEW: Proposing liquidity stress test

Recordkeeping

9

12

5.56

50

666.67

6,000

0

NEW: Rule 15c3-4: Risk management
control system

Recordkeeping

6

1

666.67

250

916.67

5,500

0

NEW: 15c3-1(c)(2(vi)(O)(l)(iii):
Industry sector classification

Recordkeeping

6

1

0

1

1

6

0

61
62
63

$322 x 6 hours = $1,932.
600 + 5,400 + 4,000 + 1,500 + 6 = 11,506 hours.
66,706 + 11,506 = 78,212 hours.

11

Nature of Information Collection
Burden

Type of Burden

Total Number
of
Respondents

Total
Number of
Responses
Per Year

Initial Burden
Per Response
Per Year Per
Respondent

Ongoing
Burden Per
Response Per
Year Per
Respondent

Total
Annualized
Burden Per
Year Per
Respondent

Totals

13.

Total
Annualized
Reporting
Burden For
All
Respondents

Small
Business
Entities
Affected

78,212

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. 64 The total costs for all respondents would be $160,000. 65
The staff does not anticipate that the proposed amendments to Rule 15c3-1 from the
SBSD Proposing Release would impose external costs.

Nature of Information Collection
Burden

Opinion of counsel to file
consolidated financial reports under
Appendix C
Totals

14.

Type of
Burden

Total Number
of Respondents

Total
Number of
Responses
Per Year

Initial Burden
Per Response
Per Year Per
Respondent

Ongoing
Burden Per
Response Per
Year Per
Respondent

Total
Annualized
Burden Per
Year Per
Respondent

Total
Annualized
Reporting
Burden For
All
Respondents

Small
Business
Entities
Affected

Reporting

20

1

$0.00

$8,000.00

$8,000.00

$160,000.00

0

$160,000.00

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

The increase in the annual hour burden of 15,076 hours is attributable to the proposed
amendments in the SBSD Proposing Release, described in paragraph 12 above. There is no
change in the current cost estimate of $160,000.
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 not display the OMB approval expiration
date.

64

$400 x 20 hours = $8,000.

65

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

12

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.

13