Rule 15l-2 Supporting Statement (2023 Proposal)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 15l-2 under the Securities Exchange Act of 1934
Request for a New OMB Control Number
A. JUSTIFICATION
1. Necessity for the Information Collection
On July 26, 2023, the Securities and Exchange Commission (the “Commission” or
“SEC”) proposed new rule 240.15l-2 (“rule 15l-2”) under Section 15l of the Securities Exchange
Act of 1934 (the “Exchange Act”) that would require brokers and dealers (“broker-dealers”) to
identify and eliminate, or neutralize the effects of, conflicts of interest associated with the use of
covered technologies in investor interactions because the effects of these conflicts of interest are
contrary to the public interest and the protection of investors.1 Proposed rule 15l-2 would
contain certain requirements as described below.
Elimination, or neutralization of effect of, conflicts of interest. Proposed rule 15l-2(b)
would require broker-dealers to (i) evaluate any use or reasonably foreseeable potential use by
the broker-dealer or its associated person of a covered technology in any investor interaction to
identify any conflict of interest2 associated with that use or potential use; (ii) determine whether
any such conflict of interest places or results in placing the broker-dealer or its associated
person’s interest ahead of the interest of investors; and (iii) eliminate, or neutralize the effect of,
those conflicts of interest that place the broker-dealer’s or its associated person’s interest ahead
of the interest of investors.3
Policies and procedures. Proposed rule 15l-2(c) would require a firm that has any
investor interaction using covered technology to adopt and implement written policies and
procedures reasonably designed to achieve compliance with the proposed conflicts rules,
including: (i) a written description of the process for evaluating any use (or reasonably
foreseeable potential use) of a covered technology in any investor interaction; (ii) a written
description of any material features of any covered technology used in any investor interaction
and of any conflicts of interest associated with that use; (iii) a written description of the process
for determining whether any conflict of interest identified pursuant to the proposed rule results in
an investor interaction that places the interest of the broker-dealer or person associated with the
broker-dealer ahead of the interests of the investor; (iv) a written description of the process for
1

Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and
Investment Advisers, Release No. 34-97990 (July 26, 2023) [88 FR 53960 (Aug. 9, 2023)], available at
https://www.sec.gov/files/rules/proposed/2023/34-97990.pdf.

2

As used in the proposed rule, the term “associated person” means a natural person who is a “person
associated with a broker or dealer” as defined in section 3(a)(18) of the Exchange Act. Covered technology,
conflict of interest, investor interaction are each defined terms under the proposed rules. See proposed rule
15l-2(a).

3

See proposed rule 15l-2(b).

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determining how to eliminate, or neutralize the effect of, any conflicts of interest determined
pursuant to proposed rule 15l-2 to result in an investor interaction that places the interest of the
broker-dealer or its associated person ahead of the interests of the investor; and (v) a review and
written documentation of that review, no less frequently than annually, of the adequacy of the
policies and procedures established pursuant to the proposed rule and the effectiveness of their
implementation as well as a review of the written descriptions established pursuant to the
proposed rule.4
The requirements under proposed rule 15l-2(c) would result in a new “collection of
information” within the meaning of the Paperwork Reduction Act of 1995.5 The title of the new
collection of information we proposed is “Rule 15l-2 under the Securities Exchange Act.” OMB
has not yet assigned a control number for “Rule 15l-2 under the Securities Exchange Act.” An
agency may not conduct or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB number.
2. Purpose and Use of the Information Collection
These proposed collections are designed to require firms to have an established framework
for eliminating or neutralizing certain conflicts of interest, and which would assist broker-dealers
in complying with the requirements under proposed 15l-2(b). Additionally, the Commission’s
staff could use the information obtained through these collections in its enforcement, regulatory,
and examination programs. The respondents to these collections of information requirements
would be broker-dealers that used covered technologies in retail investor interactions.
The information collected takes the form of records retained by respondents. Responses
provided to the Commission in the context of its examination and oversight program are
generally kept confidential subject to the applicable law.6 This collection of information is found
at 17 CFR 240.15l-2 and is mandatory.
3. Consideration Given to Information Technology
The Commission’s use of computer technology in connection with this information
collection, which has been previously approved by OMB, would not change. Broker-dealers are
currently permitted to maintain records that would be required by the rule through electronic
media, subject to certain conditions.7

4

See proposed rule 15l-2(c).

5

44 U.S.C. 3501 to 3520. The requirements under proposed rule 15l-2(b) do not constitute an independent
information collection and, to the extent they would, the process broker-dealers would engage in to comply
with the policies and procedures requirements under proposed 15l-2(c), and the information collection
burden related thereto, are inextricable from any information collection burden under proposed 15l-2(b).
Therefore, the information collection burden resulting from the policies and procedures required under the
proposed rule would constitute the full burden of the rules.

6

See 17 CFR 240.0-4.

7

See Exchange Act Rule 17a-4(f) and (j) [17 C.F.R. 240.17a-4(f) and (j)].

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4. Efforts to Identify Duplication
The collection of information requirements of the proposed rule are not duplicated
elsewhere. The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates these requirements whenever it adopts amendments
to its rules.
5. Effect on Small Entities
The requirements of the proposed rule are the same for all broker-dealers, including those
that are small entities. The requirements of the proposed rule will not distinguish between small
entities and other broker-dealers because the protections of the Exchange Act are intended to
apply equally to retail investor clients of both large and small firms. Moreover, it would defeat
the purpose of the rule to exempt small entities from these requirements. The Commission
reviews all rules periodically, as required by the Regulatory Flexibility Act, to identify methods
to minimize recordkeeping or reporting requirements affecting small businesses.
6. Consequences of Not Conducting Collection
Less frequent information collection will be incompatible with the objectives of the
proposed rule and would hinder the Commission’s oversight and examination program for
broker-dealers and thereby reduce the protection to investors.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
Not applicable.
8. Consultation Outside the Agency
The Commission and the staff of the Division of Trading and Markets participate in an
ongoing dialogue with representatives of the broker-dealer industry through public conferences,
meetings, and informal exchanges. These various forums provide the Commission and staff with
a means of ascertaining and acting upon paperwork burdens confronting the industry. In
addition, the Commission has requested public comment on proposed rule 15l-2, including the
collection of information requirements resulting from the proposed rule.
The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. Before adopting the rule, the Commission will
evaluate all public comments received on the proposed rule and its associated collection of
information requirements.
9. Payment or Gift
None.
10. Confidentiality

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Responses provided to the Commission pursuant to proposed rule 15l-2 in the context of
the Commission’s examination and oversight program are generally kept confidential subject to
the applicable law.
11. Sensitive Questions
Whether information of a sensitive nature, including social security numbers, will be
required under this collection of information depends on a particular broker-dealer’s investor
interactions using covered technology. The information collection is likely to collect basic
Personally Identifiable Information (“PII”) that may include names, job titles, work addresses,
and phone numbers. However, the agency has determined that the information collection does
not constitute a system of record for purposes of the Privacy Act. Information is not retrieved by
a personal identifier.
12. Estimate of Hour and Cost Burden of Information Collection
The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 19958 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms.
The respondents to this collection of information are broker-dealers that use covered
technology in investor interactions. All such broker-dealers will be subject to the proposed rule.
As of February 2023, there were 3,504 broker-dealers registered with the Commission. We
estimate based on an analysis of filings by these firms performed by Commission staff, we
believe approximately 2,575 broker-dealers would be subject to the proposed rule.9 The table
below summarizes the initial and ongoing annual burden estimates associated with the proposed
rule. We have made certain estimates of the burdens associated with the proposed amendments
solely for the purpose of this PRA analysis. The application of the provisions of the proposed
rule—and thus the extent to which there are collections of information and their related
burdens—would be contingent on a number of factors, such as, among others, the types of
covered technologies a broker-dealer uses, a broker-dealer’s business model, the number of retail
customers of the broker-dealer, the extent, nature and frequency of investor interactions, and the
nature and extent of a broker-dealer’s conflicts. Because of the wide diversity of services and
relationships offered by broker-dealers, we expect that the obligations imposed by the proposed
rule would, accordingly, vary substantially among broker-dealers. However, we have made
certain estimates of this data solely for the purpose of this PRA analysis.

8

44 U.S.C. 3501 et seq.

9

Consistent with the Form CRS Adopting Release, we estimate that 73.5% of registered broker-dealers
report retail activity and thus, would likely be subject to the proposed rules. However, we recognize this
may capture some broker-dealers that do not have retail activity.

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Table 1: Rule 15l-2 PRA Estimates
Internal initial
burden hours1

Adopting and
implementing
policies and
procedures

Preparation of
written descriptions6

Annual review of
policies and
procedures and
written descriptions

Total new annual
burden

21 hours

60 hours

Internal annual
Wage rate3
2
burden hours
PROPOSED ESTIMATES
$487 (blended rate
for senior
corporate and
information
technology
managers, assistant
general counsel,
and compliance
attorney)

30 hours

$446 (blended rate
for senior
corporate and
information
technology
managers and
staff, assistant
general counsel,
and compliance
attorney)
$446 (blended rate
for senior
corporate and
information
technology
managers and
staff, assistant
general counsel,
and compliance
attorney)]

42.5 hours

5 hours

77.5 hours (equal to
the sum of the
above boxes)7

Internal time
cost4

Annual external
cost burden5

$14,610
(equal to
the
internal
annual
burden x
the wage
rate)

$0

$18,955
(equal to
the
internal
annual
burden x
the wage
rate)

$0

$2,230
(equal to
the
internal
annual
burden
hours x
the wage
rate)

$0

$ 35,795 (equal to
the sum of the
above boxes)8

$0 (equal to
the sum of
the above
four boxes)

Notes:
1.

Broker-dealers are already subject to extensive obligations, including certain policies and procedures requirements,
under Federal securities laws and regulations, and rules of self-regulatory organizations (in particular, FINRA) that
would apply to the extent PDA-like technologies are used in investor interactions that are subject to such existing
obligations. In reaching our estimates, we considered that broker-dealers relying more heavily on complex covered
technologies may exceed this average, while broker-dealers relying less heavily on these technologies may fall below
this average.

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2.

Totals for this category include internal initial hour burden estimates annualized over a three-year period.

3.

The Commission’s estimates of the relevant wage rates are based on salary information for the securities industry
compiled by Securities Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013, as
modified by Commission staff for 2023 (“SIFMA Wage Report”). The estimated figures are modified by firm size,
employee benefits, overhead, and adjusted to account for the effects of inflation.

4.

All costs calculated are rounded to the nearest dollar.

5.

Firms may incur third-party costs in connection with the proposed conflicts rules but, due to data limitations, for the
purpose of this Paperwork Reduction Act analysis, we estimate the full cost of compliance to be internal.

6.

Includes all written descriptions to be required under proposed rules 240.15l-2(c)(1) through (3).

7.

77.5 hours per broker-dealer x 2,575 broker-dealers = 199,562.5 aggregate burden hours.

8.

$35,795 per broker-dealer x 2,575 broker-dealers = $92,172,125 aggregate internal monetized cost.

13. Cost to Respondents
Cost burden is the cost of goods and services purchased to meet the requirements of
proposed rule 15l-2, such as for the services of outside counsel. The cost burden does not
include the hour burden discussed in Item 12 above. Estimates are based on the Commission’s
experience.
As summarized in Table 1 above, we estimate that the annual external cost associated
with the proposed rule 15l-2 is $0.
14. Cost to Federal Government
There are no additional costs to the federal government directly attributable to proposed
rule 15l-2.
15. Change in Burden
Not applicable. This is the first request for approval of a collection of information for this
proposed rule.
16. Information Collection Planned for Statistical Purposes
None.
17. Approval to Omit OMB Expiration Date
Not Applicable
18. Exceptions to Certification Statement for Paperwork Reduction Act Submission
Not Applicable.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
The collection of information will not employ statistical methods.

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