Supporting Statement (3235-0806) (2023 Final Rule)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Removal of References to Credit Ratings From Regulation M: Amendments to Rule
17a-4(b)(17)
OMB Control No. 3235-0806
A. JUSTIFICATION
1. Information Collection Necessity
Section 939A(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”) 1 requires the Securities and Exchange Commission (“Commission” or
“SEC”), among other things, to “remove any reference to or requirement of reliance on credit
ratings” and “substitute in such regulations such standard of credit-worthiness” as the
Commission determines to be appropriate for those regulations. In accordance with the
requirements of Section 939A(b), the Commission adopted amendments to Rules 101 and 102 of
Regulation M to remove the existing exceptions for nonconvertible debt securities,
nonconvertible preferred securities, and asset-backed securities that are rated by at least one
nationally recognized statistical rating organization (“NRSRO”), as that term is used in Rule
15c3–1 under the Securities Exchange Act of 1934 (“Exchange Act”), in one of its generic rating
categories that signifies investment grade (“Investment Grade Exception”), and replace them
with alternative standards of credit-worthiness. 2
Regulation M is a set of prophylactic anti-manipulation rules that is designed to preserve the
integrity of the securities trading markets as independent pricing mechanisms by prohibiting
activities that could artificially influence the market for an offered security. 3 Rule 101 and Rule
102 of Regulation M prohibit distribution participants, their affiliated purchasers, issuers, selling
security holders, and their affiliated purchasers from bidding for, purchasing, or attempting to
induce any person to bid for or purchase, a covered security, during the applicable restricted
period, unless an exception applies. 4 Prior to the Commission’s June 7, 2023, amendments, Rule
101(c)(2) and Rule 102(d)(2) excepted nonconvertible debt securities, nonconvertible preferred
securities, and asset-backed securities that are rated by at least one NRSRO in one of its generic
1

See Pub. L. 111–203 sec. 939A(b), 124 Stat. 1376, 1872-90 (2010).

2

See Removal of References to Credit Ratings From Regulation M, Exchange Act Release No. 97657 (June
7, 2023), [88 FR 39962 (June 20, 2023)] (“2023 Adopting Release). The Commission also adopted an
amendment to Rule 100 of Regulation M to provide a definition for the term “structural credit risk model,”
which is used in newly adopted exceptions under Rule 101 and Rule 102 of Regulation M. This adoption
follows the Commission’s publication of proposed rule amendments in March 2022. See Removal of
References to Credit Ratings From Regulation M, Exchange Act Release No. 94499 (Mar. 22, 2022) [87
FR 18312 (Mar. 30, 2023)] (“Proposal”).

3

See Anti-manipulation Rules Concerning Securities Offerings, Exchange Act Release No. 38067 (Dec. 20,
1996), [62 FR 520, 521 (Jan. 3, 1997)] (“Regulation M Adopting Release”).

4

17 CFR 242.101(a) (distribution participants and their affiliated purchasers), 242.102(a) (issuers, selling
security holders, and their affiliated purchasers).

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rating categories that signifies investment grade. 5 The premise of the Investment Grade
Exceptions was that securities of issuers of a certain credit quality trade based on their yield and
credit-worthiness and are less susceptible to the type of manipulation that Regulation M seeks to
prevent. 6
As discussed above, in place of the Investment Grade Exceptions in Rule 101 and Rule 102,
and consistent with the Commission’s original premise in excepting nonconvertible debt
securities and nonconvertible preferred securities (together, “Nonconvertible Securities”) of
credit-worthy issuers that are less susceptible to the type of manipulation that Rule 101 and Rule
102 seek to prevent, the Commission adopted an alternative standard of credit-worthiness for
distributions of Nonconvertible Securities of issuers for which the probability of default,
estimated as of the sixth business day immediately preceding the determination of the offering
price and over the horizon of 12 full calendar months from such day, is 0.055% or less, as
determined and documented, in writing, by the distribution participant acting as the lead manager
(or in a similar capacity) of a distribution, as derived from a structural credit risk model.
To facilitate Commission examinations of broker-dealers who rely on the new exception in
Rule 101 or Rule 102, as applicable, for Nonconvertible Securities, the Commission adopted a
new paragraph (17) of Rule 17a-4(b) that requires broker-dealers to preserve the written
probability of default determination relied upon pursuant to Rule 101(c)(2)(i) or Rule
102(d)(2)(i), as applicable.
Certain provisions of the amendments impose “collection of information” requirements within
the meaning of the Paperwork Reduction of 1995 (“PRA”). The title for the information
collection included in this Supporting Statement is “Rule 17a-4(b)(17) Records to be Preserved
by Certain Brokers and Dealers.”
2. Information Collection Purpose and Use
As described in the 2023 Adopting Release, the Commission believes that the information
contained in the records required to be retained and kept pursuant to the amendment to Rule 17a–
4 will be used to facilitate the Commission in conducting examinations of broker-dealers who
rely on the new exceptions in Rule 101 and Rule 102.
3. Consideration Given to Information Technology
Use of information technology could reduce regulatory burdens related to preserving the
written probability of default determination under the amendments to Rule 17a-4.
4. Duplication

5

17 CFR 242.101(c)(2).

6

See Regulation M Adopting Release, at 62 FR 527.

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The amendments Rule 17a-4 would not result in, or require the collection of, duplicate
information that is otherwise available in a similar form. The Commission’s probability of
default standard and related record preservation requirement are not collected elsewhere.
5. Effect on Small Entities
As discussed in the 2023 Adopting Release, the Commission does not believe that any of the
persons that will be impacted by the amendments are small entities under the relevant
definitions. Small entities include broker-dealers with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the Exchange Act, 7 or, if not
required to file such statements, a broker-dealer who had total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal year (or in
the time it has been in business, if shorter), and is not affiliated with any person (other than a
natural person) who is not a small business or small organization. 8 A small business or small
organization, for purposes of “issuers” or “person” other than an investment company, is defined
as a person who, on the last day of its most recent fiscal year, had total assets of $5 million or
less. 9
Based on the Commission’s analysis of the existing information relating to broker-dealers
who are subject to Rule 101, Rule 102, and Rule 17a-4, it is unlikely that any broker-dealer
categorized as a “small business” or “small organization” under Rule 0-10 10 could serve as an
underwriter or other distribution participant, as they would almost certainly have insufficient
capital to participate in underwriting activities. In addition, the Commission continues to believe
that none of the various persons affected by the amendments would qualify as a small entity
under the Rule 0-10 definition as it is unlikely that any issuer of that size had investment grade
securities that were eligible for the Investment Grade Exception. Accordingly, the Commission
believes it is unlikely that, in the future, a small entity may become impacted by the amendments
because broker-dealers who enter this market are likely to have at least $500,000 in total capital,
as described above, or to be affiliated with a person who is not a small business or small
organization as defined under Rule 0–10, and because issuers of securities that are eligible for
the new exceptions provided in Rule 101(c)(2) and in Rule 102(d)(2) are likely to have total
assets greater than $5 million.
For the foregoing reasons, the Commission certified, in the 2023 Adopting Release, pursuant
to Section 605(b) of Title 5 of the U.S. Code, that the amendments to Rule 100, Rule 101, Rule
102, and Rule 17a-4 will not have a significant economic impact on a substantial number of
small entities.
6. Consequences of Not Conducting Collection
7

See 17 CFR 240.17a-5(d).

8

See 17 CFR 240.0-10(c).

9

17 CFR 240.0-10(a).

10

17 CFR 240.0-10.

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Absent the addition of paragraph (17) to Rule 17a-4(b), which requires broker-dealers relying
on the probability-of-default-based exception under Rule 101 or Rule 102 to preserve the written
probability of default calculation upon which they relied, the Commission would not have the
same access to necessary records in conducting examinations of broker-dealers relying on those
exceptions.
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. 11 A copy of the release is attached. Comments
on the 2023 Adopting Release were received from industry groups, investors, and other market
participants. In addition, the Commission and staff participated in ongoing dialogue with
representatives of various market participants through meetings. Any comments received on this
rulemaking are posted on the Commission’s public website, and made available through
https://www.sec.gov/comments/s7-11-22/s71122.htm. The Commission considered all
comments received prior to publishing the final rule, and explained in the Adopting Release how
the final rule responded to such comments, in accordance with 5 C.F.R. 1320.11(f).
9. Payment or Gift
No payment or gift is provided to respondents.
10. Confidentiality
The Commission will not typically receive confidential information as a result of this
collection of information. To the extent that the Commission receives—through its examinations
or investigations, or by some other means—records or disclosures from a broker-dealer
regarding probability of default determinations, such information will be kept confidential,
subject to the provisions of applicable law.
11. Sensitive Questions
The Information Collection does not collect information about individuals, but rather only
business contact information; therefore, a PIA, SORN, and PAS are not required.

11

See Proposal.

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12. Information Collection Burden
The Commission estimated the hourly burden of the information collection as summarized in
the chart below.
Summary of Hourly Burdens

Rule 17a-4(b)(17)
Information
Collections

Type of
Burden

A.

B.

C.

D.

E.

F.

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

Total Annual Burden
Per Entity

Total Industry
Burden

[C ÷ 3 years]
Preserving the written
probability of default
calculation (Rule 17a4)—Initial
Preserving the written
probability of default
calculation (Rule 17a4)—Ongoing

Recordkeeping

301

1

25

8.33

0

25

2,508.3

Recordkeeping

301

1

0

0

10

10

3,010

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS: 5,518.3

As described in more detail below, the amendment to Rule 17a-4 results in two new
information collections. The information collections are initial and ongoing recordkeeping
burdens related to preserving the written probability of default calculation pursuant to the
amendments to Rule 17a-4. These information collections apply to broker-dealers that choose to
rely on the exception for a distribution of Nonconvertible Securities under Rule 101 or Rule 102.
These PRA burdens are distinct from the existing OMB-approved burden estimates under Rule
17a-4 because there was no related recordkeeping requirement under Rule 17a-4 in connection
with reliance on the Investment Grade Exceptions.
The amendment imposes information collection burdens on broker-dealers that choose to rely
on the exception for a distribution of Nonconvertible Securities. There were 201 lead managing
underwriters, and 100 other non-lead manager broker-dealers of Nonconvertible Securities in
2021. Therefore, 301 respondents will be subject to PRA burdens under Rule 17a-4(b)(17). The
Commission believes that this number will remain roughly consistent because of the capital,
expertise, and relationships needed to underwrite a nonconvertible security. The Commission,
therefore, is estimating that 301 respondents will be subject to PRA burdens under the
amendment to Rule 17a-4.
Preserving the Written Probability of Default Calculation (Rule 17a-4(b)(17))
i. Initial Burden
The amendment to Rule 17a–4 requires broker-dealers relying on the probability -of-defaultbased exception in Rule 101 or Rule 102 to preserve for a period of not less than three years, the
first two years in an easily accessible place, the written probability of default determination
relied upon. The burden imposed by the new requirements under Rule 17a-4 are limited to the
maintenance and preservation of the written records, as the burden for creating the records is

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accounted for in the PRA estimates and Supporting Statement for the amendments to Rule 101.
The Commission thus estimates that the recordkeeping requirements under Rule 17a-4 will
impose an initial burden of 25 hours per respondent for updating the applicable policies and
systems required to account for preserving the records made pursuant to Rule 101. The
Commission, therefore, estimates that the total annual industry-wide initial burden for this
requirement would be 2,508.33 hours. 12
ii. Ongoing Burden
The Commission estimates that respondents will incur an ongoing internal annual burden of
10 hours per firm for maintaining such records, as well as to make additional updates to the
applicable record preservation policies and systems to account for preserving the records
pursuant to new Rule 17a-4(b)(17). The Commission, therefore, estimates that the total annual
ongoing industry-wide burden would be 3,010 hours. 13
Broker-dealers relying on the new exception in Rule 101(c)(2)(i) or Rule 102(d)(2)(i) must
preserve the written probability of default determination made pursuant to Rule 101(c)(2)(i), as
amended. The Commission estimates that it will take a distribution participant 25 hours to
update the applicable policies and systems required to account for capturing the records made
pursuant to new Rule 101(c)(2)(i), for an aggregate cost of $2,731,575. The Commission also
estimates that it will take a distribution participant 10 hours to maintain such records as well as
to make additional updates to the applicable record preservation policies and systems to account
for the rules. Therefore, it is estimated that annually broker-dealers will spend $1,092,630 in the
aggregate complying with this requirement.
13. Costs to Respondents
There are no external capital, start-up, maintenance or operational cost burdens associated
with this rule.
14. Costs to Federal Government
The Federal government would not incur a cost in connection with the collection of this
information.
15. Changes in Burden
There is a change in estimated burden hours for both the initial and ongoing burdens in the
2023 Adopting Release due to an increase in the estimated number of respondents from the
Proposal. In the Proposal, there was an estimated 237 respondents, whereas in the 2023
Adopting Release, there was an estimated 301 respondents. The changes are described in the
chart below.
12

301 respondents × 25 hours = 7,525 hours for the total initial burden. As we plan to request a three-year
approval period, we divide 7,525 by 3 to get 2,508.33 hours per year.

13

301 respondents × 10 hours = 3,010 hours.

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Information
Collection
Requirement
Preserving the
written
probability of
default calculation
(Rule 17a-4)—
Initial
Preserving the
written
probability of
default calculation
(Rule 17a-4)—
Ongoing

Annual
Industry
Burden
Adopted
2,508.3 hours
for 301
respondents at
8.33 hours per
respondent

Annual Industry
Burden
Change in
Reason for Change
Previously
Burden
Proposed
1,975 hours for 1,600
237 respondents hours
at 8.33 hours per
respondent

Increase in estimated
number of respondents

3,010 hours for
301
respondents at
10 hours per
respondent

2,370 hours for
237 respondents
at 10 hours per
respondent

Increase in estimated
number of respondents

640 hours

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