3235-0752 (Rule 18a-9) Supporting Statement - Adopting Release

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for Rule 18a-9
3235-0752
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 reporting and recordkeeping for security-based
swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”). 2
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”). 3 The new rules included
Exchange Act Rule 18a-9, which is modeled on Exchange Act Rule 17a-13 and establishes a
securities count program for SBSDs not dually registered as a broker-dealer or regulated by a
prudential regulator (“stand-alone SBSDs”). Rule 18a-9 requires stand-alone SBSDs to examine
and count the securities they physically hold, account for the securities that are subject to their
control and direction but are not in their physical possession, verify the locations of securities
under certain circumstances, and compare the results of the count and verification with their
records. 4 Stand-alone SBSDs are required to perform a securities count each quarter, either as of
a date certain or on a cyclical basis. Rule 18a-9, as adopted, does not apply to SBSDs or
MSBSPs regulated by a prudential regulator, or MSBSPs not dually registered as a broker-dealer
or regulated by a prudential regulator. Rule 18a-9, as adopted, requires stand-alone SBSDs to
note any discrepancies between the count and the firm’s records, and to record in the firm’s
record any discrepancies that remain unresolved seven business days after the date of the
examination, count, and verification. 5
2.

Purpose and Use of the Information Collection

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

4

See Rule 18a-9, as adopted.

5

See Rule 18a-9, as adopted.

The information is used as an inventory control device to monitor a stand-alone SBSD’s
ability to account for all securities held in transfer, in transit, pledged, loaned, borrowed,
deposited, or otherwise subject to the firm’s control or direction. Any discrepancies between the
security count and the SBSD’s records alert the Commission to those firms experiencing backoffice operational issues. Without Rule 18a-9, the Commission would lose this important
warning device to inform it when a stand-alone SBSD might be having problems accounting for
the securities for which it is responsible.
3.

Consideration Given to Information Technology

Since Rule 18a-9, as adopted, provides that firms must reconcile their books and records
with their physical inventory and inventory in transit, improved information technology is not
expected to reduce the burden.
4.

Duplication

No duplication is apparent because stand-alone SBSDs are currently unregulated entities
and do not have SROs that require similar counts of securities.
5.

Effect on Small Entities

Based on feedback from industry participants about the security-based swap market,
entities that qualify as SBSDs or MSBSPs will likely exceed the thresholds defining “small
entities”. 6 Thus, it is unlikely that the requirements under Rule 18a–9, as adopted, will have a
significant economic impact on a small entity.
6.

Consequences of Not Conducting Collection

If security counts were conducted less frequently, investors would not have the protection
that the federal securities laws require. With regard to broker-dealers, between 1967 and 1970, a
number of broker-dealers became insolvent because of their inability to account for the securities
that their records showed they possessed or controlled. The Commission believes that the risk of
insolvency due to inability to account for securities is similarly applicable to stand-alone SBSDs.
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.
6

Consultations Outside the Agency

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).

The Commission requested comment on the collection of information requirements in the
proposing release in April 2014. 7 The Commission did not receive comments regarding the
collection of information requirements.
9.

Payment or Gift

No payments or gifts are provided to respondents.
10.

Confidentiality

Subject to the provisions of the Freedom of Information Act, 5 U.S.C. § 522, and the
Commission’s rules thereunder (17 CFR 200.80(b)(4)(iii)), the Commission does not generally
publish or make available information contained in any 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

The information collection does not collect personally identifiable information.

12.

Burden of Information Collection

Rule 18a–9, as adopted, which is modeled on Rule 17a–13, requires stand-alone SBSDs
to establish a securities count program. 8 The Commission estimates that Rule 18a–9, as adopted,
imposes an initial burden of 25 hours per firm. The records required by Rule 18a-9, as adopted,
should already be recorded by the systems implemented under Exchange Act Rules 18a-5 and
18a-6, as adopted, and accordingly, the resulting initial burden is largely already accounted for
under these rules.
The Commission estimates that Rule 18a–9, as adopted, imposes a burden of 25 hours per
securities count, resulting in an ongoing annual burden of 100 hours per stand-alone SBSD, 9
based on the current approved Paperwork Reduction Act estimate for Rule 17a–13 which
estimates a securities count program imposes an average ongoing cost of 100 hours per year on a
broker-dealer. 10
7

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).

8

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

9

4 securities counts/year * 25 hours/securities count = 100 hours/year.

10

See Commission, Supporting Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 17a–13 (Feb. 26, 2014), available at
http://www.reginfo.gov/public/do/DownloadDocument?objectID=43812501.

The Commission estimates that there are six stand-alone SBSDs, resulting in an
estimated industry-wide initial burden of 150 hours 11 and an ongoing burden of 600 hours per
year. 12 Over a three year period, the total industry burden is expected to be 1,950 hours, 13
or 650 hours per year when annualized. 14 These burdens are recordkeeping burdens.
Summary of Hourly Burdens

Name of Information
Collection

Type of
Burden

A.

B.

C.

D.

E.

F.

G.

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

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%]

[C ÷ 3 years]
Securities Count
Program

Recordkeeping

13.

6

4

6.25

2.08

25.00

27.08

108.33

650.00

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

650.00

Costs to Respondents

The Commission does not anticipate that Rule 18a-9, as adopted, imposes capital and
start-up costs or operation, maintenance, and purchase of services costs.
14.

Costs to Federal Government

Rule 18a-9, as adopted, 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

The estimated burdens have decreased as a result of the burden estimate being revised to
reflect a reduction in the number of respondents. The Commission has reduced the number of
estimated respondents from the number estimated at the proposing stage because of certain
amendments to Rule 18a-10. Rule 18a-10 sets forth an alternative compliance mechanism for
security-based swap dealers that are registered as swap dealers with the Commodity Futures
Trading Commission (“CFTC”). The Commission amended Rule 18a-10 to permit stand-alone
SBSDs that are registered as swap dealers with the CFTC to comply with the reporting
requirements of the CFTC in lieu of Rule 18a-7.For the purposes of this Paperwork Reduction
Act analysis, the Commission estimates that three security-based swap dealers will avail
11

6 stand-alone SBSDs x 25 hours = 150 hours per year.

12

6 stand-alone SBSDs x 100 hours = 600 hours per year.

13

(150 hours + 600 hours in first year) + 600 hours in second year + 600 hours in third year = 1,950 hours.

14

1,950 hours / 3 years = 650 hours per year.

0.00

themselves of the alternative compliance mechanism in Rule 18a-10. The estimated number of
SBSD respondents has been reduced by this number to reflect this.
The table below summarizes the change in the estimated burden.
Summary of Changes in Burden Hours
Name of Information
Collection Previously
Reviewed

Securities Account
Program

16.

Annual
Industry
Burden

Annual Industry
Burden Previously
Reviewed

Change in
Burden

Reason for Change in Burden

650

975

(325)

Reduced estimate for the number
of respondents as a result of
amendments to Rule 18a-10

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 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.