3235-0750 (Rule 18a-8) Supporting Statement - Adopting Release

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for Rule 18a-8
3235-0750
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

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) into law. 1 Section 764 of the Dodd-Frank Act
added section 15F to the Securities Exchange Act of 1934 (the “Exchange Act”), which provides
that the Commission shall adopt rules governing recordkeeping and reporting for security-based
swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”). 2 More
specifically, section 15F(f)(1)(A) provides that SBSDs and MSBSPs shall make such reports as
are required by the Commission, by rule or regulation, regarding the transactions and positions
and financial condition of the SBSD or MSBSP. 3
Accordingly, on September 19, 2019, the Commission adopted amendments to its
recordkeeping and reporting rules for broker-dealers as well as new recordkeeping and reporting
rules for SBSDs and MSBSPs (the “SBS Recordkeeping Release”). 4 More specifically, new
Exchange Act Rule 18a-8, as adopted, specifies the circumstances under which stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs must notify the Commission
about its financial or operational condition, as well as the form that the notice must take. 5
Proposed Rule 18a-8 is modeled on Exchange Act Rule 17a-11, as adopted, which applies to
broker-dealers, but Rule 18a-8 does not include a parallel requirement for every requirement in
Rule 17a-11 because some of the Rule 17a-11 notices relate to calculations that would not be
relevant to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. 6

1

See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 124 Stat.
1376 (2010).

2

See 15 U.S.C. 78o-10.

3

See 15 U.S.C. 78o-10(f)(1)(A).

4

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Final Rules, Exchange Act Release No. 87005 (Sept. 19, 2019),
84 FR 68550 (Dec. 16, 2019).

5

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Final Rules, Exchange Act Release No. 87005 (Sept. 19, 2019),
84 FR 68550 (Dec. 16, 2019).

6

See, e.g., 17 CFR 240.17a-11(b)(2) and (c)(1).

Proposed Rule 18a-8 establishes a number of new collections of information. The table
below provides a summary of the provisions adopted as part of rule 18a-8 and indicates to which
type of entity each provision applies. 7
Model stand-alone
Non-model standBank SBSDs
SBSDs
alone SBSDs
Net capital below minimum Rule 18a-8(a)(1)(i) Rule 18a-8(a)(1)(i)
Tentative net capital below
Rule 18a-8(a)(1)(ii)
minimum
Tangible net worth below
minimum
Early warning of net capital Rule 18a-8(b)(1)
Rule 18a-8(b)(1)
Early warning of tentative
Rule 18a-8(b)(2)
net capital
Early warning of tangible net
worth
Backtesting exception
Rule 18a-8(b)(4)
Notice of adjustment of
Rule 18a-8(c)
reported capital category
Failure to make and keep
Rule 18a-8(d)
Rule 18a-8(d)
Rule 18a-8(d)
current books and records
Material weakness
Rule 18a-8(e)
Rule 18a-8(e)
Failure to make a required
Rule 18a-8(g)
Rule 18a-8(g)
Rule 18a-8(g)
reserve deposit

2.

Stand-alone MSBSPs

Rule 18a-8(a)(2)

Rule 18a-8(b)(3)

Rule 18a-8(d)

Purpose and Use of the Information Collection

The information obtained under Rule 18a-8 is used to monitor the financial and
operational condition of stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank
MSBSPs. This information alerts the Commission of the need to increase surveillance of the
firm’s financial and operational condition. No similar information is already available to use or
modify for purposes of complying with Rule 18a-8 because the disclosures required by the rule
are unobtainable until the early warning mechanisms are triggered. Only the most up-to-date
information will help the Commission monitor stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs experiencing financial or operational difficulties.
3.

Consideration Given to Information Technology

Under paragraph (h) of Rule 18a-8, as adopted, firms are required to give or transmit
notices required by Rule 18a-8 to the principal office of the Commission in Washington, DC and
the regional office of the Commission for the region in which the SBSD or MSBSP has its
principal place of business. The Commission has elected to permit that specified notices
required by Rule 18a-8, as adopted, be submitted to an email address provided on the
Commission’s website. Additionally, reports required by paragraphs (d) and (e)(2) of Rule 18a8, as adopted, may be transmitted by overnight delivery.

7

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Final Rules, Exchange Act Release No. 87005 (Sept. 19, 2019),
84 FR 68550 (Dec. 16, 2019).

2

4.

Duplication

Duplication of information is not a concern because the reporting requirements are only
applicable to those stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs
that trigger specified early warning mechanisms set forth in Rule 18a-8. The Commission is not
aware of other sources of such information (for example, another federal regulatory agency), and
given the nature of the notification requirements and the Commission’s need to receive timely
notice of the events specified in the rule, reliance on another source for the information would
undermine the Commission’s ability to effectively regulate stand-alone SBSDs, stand-alone
MSBSPs, bank SBSDs, and bank MSBSPs. Consequently, to the extent that any duplication, to
the extent it exists, would be warranted.
5.

Effect on Small Entities

Based on feedback from industry participants about the security-based swap market,
entities that would qualify as SBSDs or MSBSPs will likely exceed the thresholds defining
“small entities”. 8 Thus, it is unlikely that the requirements under proposed new Rule 18a–8
would have a significant economic impact on a small entity.
6.

Consequences of Not Conducting Collection

In the absence of Rule 18a-8, the Commission and, if applicable, the CFTC, might not be
promptly alerted to a stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP’s
financial or operational problems.
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 issued a release soliciting comment on the new “collection of
information” requirements and associated paperwork burdens. 9 The Commission received no
comments regarding the collection of information requirements.
9.

Payment or Gift

8

Section 601(b) of the Regulatory Flexibility Act (“RFA”) defines the term “small entity,” The statute,
however, permits agencies to formulate their own definitions. The Commission has adopted definitions for
the term “small entity” for the purposes of Commission rulemaking in accordance with the RFA. Those
definitions, as relevant to this proposed rulemaking, are set forth in 17 CFR 240.0-10. See Statement of
Management on Internal Accounting Control, Exchange Act Release No. 18451 (Jan. 28, 1982), 47 FR
5215 (Feb. 4, 1982).

9

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers; Proposed
Rule, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25193 (May 2, 2014).

3

No payments or gifts were provided to respondents.
10.

Confidentiality

The reports required by Rule 18a-8 are available only to the staff of the Commission and
if applicable, the CFTC. Subject to the provisions of the Freedom of Information Act, 5 U.S.C.
§ 552, and the Commission’s rules thereunder (17 CFR 200.80(b)(8)), the Commission generally
would not publish or make available to any person notices or reports received pursuant to Rule
18a-8. The Commission believes that information obtained under Rule 18a-8 would relate to a
condition report prepared for the use of the Commission and other federal governmental
authorities responsible for the regulation or supervision of stand-alone SBSDs, stand-alone
MSBSPs, bank SBSDs, and bank MSBSPs.
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information.
The agency has determined that neither a PIA nor a SORN are required with the collection of
information
12.

Burden of Information Collection

Rule 18a–8 would require non-broker-dealer SBSDs and non-broker-dealer MSBSPs to
notify the Commission of certain indicia of their financial condition. 10
The Commission estimates that each Rule 18a-8 notice would take approximately 55
minutes to prepare and file, in contrast to its estimate that a Rule 17a-11 notice would take one
hour to prepare and file, because stand-alone SBSDs and stand-alone MSBSPs do not have a
DEA with which to file a copy of the Rule 18a-8 notice and bank SBSDs and bank MSBSPs are
not required to file the Rule 18a-8 notice with their prudential regulator.
The Commission estimates that it would receive approximately five Rule 18a-8 notices
per year, based on the substantially smaller pool of possible respondents, as compared with Rule
17a-11. Therefore, the Commission estimates that Rule 18a-8 would result in an industry-wide
annual burden of 4.6 hours per year (including the first year). 11 These burdens are reporting
burdens.
Summary of Hourly Burdens
A.

B.

C.

D.

E.

F.

G.

10

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Final Rules, Exchange Act Release No. 87005 (Sept. 19, 2019),
84 FR 68550 (Dec. 16, 2019). See also section 1 above.

11

55 minutes / 60 minutes = .92 hours per notice x 5 notices per year = 4.6 hours per year.

4

Name of Information
Collection

Type of
Burden

Number
of Entities
Impacted

Annual
Responses
per Entity

Initial
Burden per
Entity per
Response

Initial Burden
Annualized
per Entity per
Response

Ongoing
Burden per
Entity per
Response

[C ÷ 3 years]
Rule 18a-8 Notice

Reporting

13.

5

1

0.00

0.00

Annual
Burden Per
Entity per
Response

Total Annual
Burden Per
Entity

Total Industry
Burden

Small
Business
Entities
Affected

[ D + E]

[F * B]

[G * A]

[A * 0%]

0.92

4.60

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

0.92

0.92

4.60

Costs to Respondents

The Commission does not anticipate that proposed Rule 18a-8 will impose capital and
start-up costs or operation, maintenance, and purchase of services costs.
14.

Costs to Federal Government

Rule 18a-7 is not expected to result in costs to the federal government due to contracting,
information technology, development, hiring one or more new employees, or reallocating
existing employees.
15.

Changes in Burden

There is no change in the estimated burdens.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.
date.

OMB Expiration Date Display Approval

The Commission is not seeking approval to not display the OMB approval expiration
18.

Exceptions to Certification for PRA 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.

5

0.00