Supporting statement for Rule 17a-5 (c) with table

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.
Paragraph (c) of Rule 17a-5 under the Exchange Act (“Rule”) 1 requires that each brokerdealer that carries customer accounts file with the Commission and each national securities
exchange and registered national securities organization of which it is a member, and send to its
customers:
(a)

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-dealer sends them with the next mailing of quarterly customer
account statements; and

(b)

Unaudited financial statements dated 6 months from the date of the audited
statements not later than 65 days after the date of the unaudited statements. The
statements may be furnished 70 days after that time limit has expired if the brokerdealer sends them with the next mailing of quarterly customer account statements.

Under the Rule, the audited statements must contain:

1

(i)

A Statement of Financial Condition with appropriate notes prepared in accordance
with U.S. 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
Exchange Act 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 regional office of the Commission for the region in which
the broker-dealer has its principal place of business; and

(iv)

If, in connection with the most recent annual reports of the broker-dealer under
paragraph (d) of Rule 17a-5, the report of the independent public accountant
identifies one or more material weaknesses, a statement that one or more material

17 CFR 240.17a-5.

weaknesses have been identified and that a copy of such report is available for
inspection at principal office of the Commission and at the regional office of the
Commission for the region in which the broker-dealer has its principal place of
business.
The unaudited statements must contain the information specified in (i) and (ii) above.
Under paragraph (c)(5) of Rule 17a-5, a broker-dealer is not required to send the audited and
unaudited statements to its customers if, at the times it would be required to send the audited and
unaudited statements, the broker-dealer sends to its customers a financial disclosure statement that
includes, as applicable, the information described in items (ii), (iii), and (iv) above, and information
on how to obtain the audited and unaudited statements via a toll-free number or on the brokerdealer’s website. A broker-dealer that elects to take advantage of the exemption must publish its
statements on its website when it otherwise would have had to send the statements 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 in the
event of the failure of the broker-dealer.
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 required by the Rule to their customers through electronic media.

2

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
Statement of Financial Condition.
4.

Duplication

Not applicable. No other rule requires brokers or dealers to send such information to
their customers.
5.

Effects on Small Entities

Firms that carry customer accounts are required to comply with this Rule. There are
approximately 162 such firms. 2 Of these firms, approximately three are small businesses. 3 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 burdens 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)(2).
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.

2

Commission staff calculated this estimate based upon information submitted by broker-dealers in 2017 on
Part II of Form X-17A-5.

3

Paragraph (c) of Exchange Act Rule 0-10 (17 CFR 240.0-10) provides that for purposes of the Regulatory
Flexibility Act, a small entity when used with reference to a broker-dealer means a broker-dealer that had
total capital (net worth plus subordinated liabilities) of less than $500,000. Commission staff calculated
this estimate based upon information submitted by broker-dealers in 2017 on Part IIA of Form X-17A-5.

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9.

Payment or Gift

No payments or gifts were provided to respondents.
10.

Confidentiality

The information is not confidential.
11.

Sensitive Questions

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

Information Collection Burden

Since the time of the previous calculation of the Paperwork Reduction Act (“PRA”)
burden in 2014, the Commission’s estimate of the number of broker-dealers that carry customer
accounts has decreased from 213 to 162, 4 the Commission’s estimate of the number of public
customer accounts has increased from 115 million to 132 million, 5 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 170 to 129. 6
Broker-dealers taking advantage of the exemption of paragraph (c)(5) of Rule 17a-5 send
the financial disclosure statement, instead of their full balance sheet, twice a year. Some brokerdealers 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.

4

Commission staff calculated this estimate based upon information submitted by broker-dealers in 2017 in
Form X-17A-5 Part II.

5

Commission staff calculated this estimate based upon information submitted by broker-dealers in 2017 in
Form X-17A-5 Schedule 1.

6

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 approximately 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 24% since the previous PRA submission in 2014, 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 24%, resulting in a new estimate of 129 broker-dealers that take advantage of the
exemption.

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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 approximately 13,600 hours (170 brokerdealers * 2 mailings * 40 hours = 13,600 hours). To the best knowledge of the Commission,
there have been no significant developments, innovations, or changes in the practices of brokerdealers since the time of the last PRA burden estimate which would alter the 40 hour estimate.
The Commission now estimates that this burden is approximately 10,320 hours (129 brokerdealers * 2 mailings * 40 hours = 10,320 hours). As in the previous PRA 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.
The Commission previously estimated that broker-dealers that take advantage of the
exemption would spend a total of 162 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, 969, by the estimated average amount of time required to process
each request (10 minutes). The Commission now estimates that the number of annual requests
will be approximately 736 7 and that the burden is 123 hours (736 annual requests times 10
minutes). 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 previously estimated that broker-dealers that take
advantage of the exemption would incur a total of approximately 57 hours per year in reporting
burden to send 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 estimated that
the 170 broker-dealers would 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. The Commission estimated 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). The Commission now estimates that these broker-dealers would spend approximately
43 hours per year to send the balance sheet to the Commission (129 broker-dealers * 2 times per
7

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 24% since the previous PRA submission in 2014,
the staff estimates that the number of annual requests has fallen by 24%, resulting in a new estimate of 736
requests annually.

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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year * 10 minutes = 43 hours). The Commission also estimates that these broker-dealers would
spend approximately 430 hours per year to send the balance sheet to each national securities
exchange and registered national securities organization of which it is a member (129 brokerdealers * 10 securities exchanges and organizations * 2 times per year * 10 minutes = 430
hours). This is an ongoing third-party disclosure burden.
The Commission previously estimated that 43 broker-dealers carrying approximately 23
million customer accounts did not take advantage of the exemption and that it would take
approximately 10 seconds to send a balance sheet to a customer for a total third-party disclosure
burden of 127,880 hours per year. The Commission now estimates that 33 broker-dealers (162 129 = 33) carrying approximately 27 million customer accounts (33/162 * 132 million =
approximately 27 million) will incur approximately 150,000 hours per year in third party
reporting burden to send the balance sheets to their customers (27 million customer accounts *
two balance sheets per year * ten seconds = 150,000 hours). This is an on-going third-party
disclosure burden.
In addition, the Commission previously estimated that 43 broker-dealers did not take
advantage of the exemption and that each broker-dealer would spend approximately 10 minutes
sending its balance sheet to each national securities exchange and registered national securities
organization of which it is a member for a total third-party disclosure burden of 144 hours (as
stated above, the Commission estimates that each broker-dealer is a member of approximately 10
national securities exchanges and organizations). The Commission now estimates that the 33
broker-dealers that do not take advantage of the exemption will spend approximately 110 hours
per year to send the balance sheets to these exchanges and organizations (33 * 10 * two balance
sheets per year * 10 minutes = 110 hours). This is a third party disclosure burden.
The Commission previously estimated that each of the 43 broker-dealers not taking
advantage of the exemption would also spend approximately 10 minutes sending its balance
sheet to the Commission for a reporting burden of 15 hours per year. The Commission now
estimates that the 33 broker-dealers that do not take advantage of the exemption will incur
approximately 11 hours per year in reporting burden to send the balance sheets to the
Commission (33 * two balance sheets per year * 10 minutes = 11 hours).
13.

Costs to Respondents

The Commission does not expect that respondents will have to incur capital or start-up
costs or operation and maintenance and purchase of services costs to comply with the Rule.
14.

Costs to Federal Government

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

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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 213 to 162, and an
increase in the total number of public customer accounts, from 115 million to 132 million. Further,
the Commission previously estimated that 170 broker-dealers took advantage of the exemption of
paragraph (c)(5) of Rule 17a-5 and that 43 broker-dealers carrying approximately 23 million
customer accounts did not take advantage of the exemption. The Commission now estimates that
129 broker-dealers take advantage of the exemption and that 33 broker-dealers carrying 27 million
customer accounts do not take advantage of the exemption.
As a result of these changed estimates, the total burden has changed from 142,426 hours
(13,600 + 162 + 57 + 568 + 127,880 + 144 + 15 = 142,426) to 161,037 hours (10,320 + 123 + 43 +
430 + 150,000 + 110 + 11 = 161,037), an increase of 18,611 hours. The third party disclosure
burden for broker-dealers not taking advantage of the exemption of paragraph (c)(5) of Rule 17a-5
to send a balance sheet to customers has increased from 127,880 hours to 150,000 hours annually
due to the increase in the number of customer accounts. The remaining burdens have decreased due
to a decrease in the number of broker-dealers carrying customer accounts, as well as a decrease in
the number of broker-dealers taking advantage of the exemption of paragraph (c)(5) of Rule 17a-5
and a decrease in the number of broker-dealers not taking advantage of the exemption. The total
annual reporting burden has decreased from 72 hours (57 + 15) to 54 hours (43 + 11). The total
annual third party disclosure burden has increased from 142,354 (13,600 + 162 + 568 + 127,880 +
144) hours to 160,983 (10,320 + 123 + 430 + 150,000 + 110) hours.

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IC

IC1
IC2
IC3
IC4

IC Title
Broker-Dealers taking advantage
of exemption
Sending financial disclosure
statements to customers
Sending balance sheets to
customers
Sending financial disclosure
statements to SEC
Sending balance sheets to SROs

IC6

Broker-Dealers not taking
advantage of exemption
Sending financial statements to
customers
Sending balance sheets to SROs

IC7

Sending balance sheets to SEC

IC5

Total for all ICs

Annual No. of Responses
Previously
approved*
340

Requested **
258

971

Annual Time Burden (Hrs.)

Change

Requested **

Change

-82

Previously
approved*
13,600

10,320

-3,280

736

-235

162

123

-39

340

258

-82

57

43

-14

3400

2580

-820

568

430

-138

45,999,981

54,000,012

8,000,031

127,880

150,000

22,120

860

660

-200

144

110

-34

86

66

-20

15

10

-5

46,005,978

54,004,570

7,998,592

142,426

161,036

18,610

* Due to rounding differences, the amounts OMB approved may differ slightly from the amounts we requested.
The numbers in this column reflect the amounts OMB actually approved.
** The amounts requested in this Supporting Statement may differ slightly from the amounts calculated in OMB’s
ROCIS system due to rounding.

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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