17a-4 supporting statementl

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 17a-4

A.

JUSTIFICATION
1.

Information Collection Necessity

All brokers and 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, brokers, and dealers
(“broker-dealers”). Section 17(a)(1) provides in pertinent part:
“[all members of a national securities exchange and registered brokers and 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].”
To standardize recordkeeping practices throughout the industry, the Commission, in
1940, adopted Rules 17a-3 and 17a-4 (one of the “Books and Records Rules”), 3 which codified
and specified minimum standards with respect to business records that broker-dealers must
create and maintain. Rule 17a-3 requires exchange members, brokers and dealers to make and
keep current certain records relating to a broker’s or 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.
To aggregate the entire burden of Rule 17a-4 into one information collection (and OMB
control number), the Commission is moving the annual burden hours for paragraph (b)(11) of
Rule 17a-4 into this information collection. 4

1
2
3
4

15 U.S.C. 78q(a).
15 U.S.C. 78w(a).
17 CFR 240.17a-3 and 17 CFR 240.17a-4.
The burden estimate for paragraph (b)(11) of Rule 17a-4 was in a separate information collection (OMB
control number 3235-0506) with paragraph (a)(16) of Rule 17a-3. Paragraph (a)(16) of Rule 17a-3 is being
moved to the information collection for Rule 17a-3.

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2.

Information Collection Purpose and Use

The purpose of requiring that broker-dealers 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 SROs have access to the information and documents necessary to
determine whether broker-dealers are in compliance with the Commission’s antifraud and antimanipulation rules, financial responsibility program, and other Commission, SRO, and state
laws, rules, and regulations. Without Rule 17a-4, it would be 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 Information Technology

Rule 17a-4 specifically allows brokers and dealers to use electronic storage media to
comply with the record-keeping requirements under the Securities and Exhange Act of 1934. In
fact, because it simply 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

There is no duplication.
5.

Effects on Small Entities

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. Further, brokerdealers may choose which media (hard-copy, microfiche, electronic storage, etc.) is most
appropriate given their size and the type of business they do. The books and records required
under Rule 17a-4 are normally retained by small broker-dealers.
6.

Consequences of Not Conducting Collection

Rule 17a-4 is a record preservation rule. Without Rule 17a-4, it would be 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 anti-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.

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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, Rule 17a-4(a) 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 Rule 17a-3(a)(17) 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, or dealer with respect to compliance with applicable laws and rules, and
supervision of the activities of each natural person associated with the member, broker, or
dealer until three years after the termination of the use of the manual.
In addition, Rule 17a-4(d) 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 with respect to the records itemized above
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 of these documents do not become obsolete (e.g.,
organizational documents).
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.

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9.

Payment or Gift

The Commission did not provide any payment or gift 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
anticipation of, or in connection with an examination or inspection of the books and records of
any person or any other investigation.
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

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.
To aggregate the entire burden of Rule 17a-4 into one information collection (and OMB
control number), the Commission is moving the annual burden hours for paragraph (b)(11) of
Rule 17a-4 into this information collection. Paragraph (b)(11) of Rule 17a-4 requires any brokerdealer that sponsors an internal broker-dealer system to maintain certain records relating to such
system for at least three years, the first two years in an easily accessible place.5 The Commission
estimates that paragraph (b)(11) of Rule 17a-4 imposes an annual burden of 3 hours per year to
maintain the requisite records. The Commission estimates that there are approximately 150 internal
broker-dealer systems,6 resulting in an annual recordkeeping burden of 450 hours.7
5

An internal broker-dealer system is any facility that provides a mechanism for collecting, receiving,
disseminating, or displaying system orders and facilitating agreement to the basic terms of a purchase or sale of
a security between a customer and the sponsor, but excludes a national securities exchange, an exchange
exempt from registration based on limited volume, and an alternative trading system. See 17 C.F.R. 240.17a3(a)(16)(ii)(A). Because an internal broker-dealer system is not included in the definition of an exchange, it is
regulated under the broker-dealer regulatory scheme.

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The Commission believes that most over-the-counter (“OTC”) market makers maintain an internal brokerdealer system. In 2010, the Commission estimated that there are approximately 150 OTC market makers
responsible for more than 1% of the trading volume in an exchange-traded security. See Commission,
Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Rule 602 of
Regulation NMS (Nov. 7, 2013), available at
http://www.reginfo.gov/public/do/DownloadDocument?documentID=431473&version=1.

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3 hours x 150 internal broker-dealer systems = 450 hours.

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Therefore, the Commission estimates that compliance with Rule 17a-4 requires 1,042,866
hours each year ((4,104 broker-dealers x 254 hours) + (150 broker-dealers x 3 hours). 8 These
burdens are recordkeeping burdens.
The Commission believes that requirements resulting from Rule 17a-4 would be
performed by individuals in a broker-dealer’s compliance department. A Compliance Clerk
earns an average of $65 per hour, 9 resulting in a total internal cost of compliance of
approximately $67.8 million ((1,042,416 x $65) + (450 x $65)).
13.

Costs to Respondents

Based on conversations with members of the securities industry and the Commission’s
experience in the area, we estimate 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. The Commission estimates that the
annual reporting and recordkeeping cost burden is $20,520,000. This cost is calculated by the
number of active, registered broker-dealers multiplied by the recordkeeping cost for each
respondent (4,104 active, registered broker-dealers x $5,000). This is a recordkeeping cost.
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

The annual recordkeeping burden and cost decreased due to the decline in the number of
respondents (active broker-dealers) to 4,104.
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.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
8

There were 4,104 broker-dealers as of April 1, 2016.

9

This figure is based on SIFMA’s Office Salaries in the Securities Industry 2016, modified by Commission
staff to account for an 1,800-hour work-year multiplied by 2.93 to account for bonuses, firm size, employee
benefits, and overhead.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
This collection does not involve statistical methods.