Supporting Statement A

Status: Original and derived artifacts are available for this document.

Download: pdf

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 17a-4(b)(17) — Records to be Preserved by Certain Brokers and Dealers
OMB Control No. 3235-0806
A. JUSTIFICATION
1. Necessity of Information Collection
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. 1 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. 2
Because 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, 3 Rule 101(c)(2)(i) and Rule 102(d)(2)(i) provide an exception for nonconvertible debt
securities and nonconvertible preferred securities (together, “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. 4 To facilitate Commission examinations of broker-dealers who
rely on the probability-of-default-based exception for Nonconvertible Securities in Rule 101 or
Rule 102, as applicable, Rule 17a-4(b)(17) 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.
The record preservation requirements involving the written probability of default
determinations under Rule 17a-4(b)(17) are mandatory if a broker-dealer relies on the exception
in Rule 101(c)(2)(i) or Rule 102(d)(2)(i) and thus 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.”
1

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”).

2

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

3

See Regulation M Adopting Release, at 62 FR 527.

4

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”).

2
2. Information Collection Purpose and Use
The Commission believes that the information contained in the records required to be
retained and kept pursuant to Rule 17a-4(b)(17) will be used to facilitate the Commission in
conducting examinations of broker-dealers who rely on the exceptions in Rule 101(c)(2)(i) and
Rule 102(d)(2)(i).
3. Consideration Given to Information Technology
Use of information technology could reduce regulatory burdens related to preserving the
written probability of default determination under Rule 17a-4(b)(17).
4.

Duplication

Rule 17a-4(b)(17) will not result in, or require, the collection of duplicate information
that is otherwise available in a similar form. The Commission’s record preservation requirement
regarding Regulation M’s probably-of-default-based standard is not collected elsewhere.
5.

Effect on Small Entities

The Commission does not believe that any of the persons that will be impacted by Rule
17a-4(b)(17) are small entities under the relevant definitions. Small entities include brokerdealers 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, 5 or, if not required to file such statements, a brokerdealer 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. 6 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. 7
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 8 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 Rule 17a-4(b)(17) 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
5

See 17 CFR 240.17a-5(d).

6

See 17 CFR 240.0-10(c).

7

17 CFR 240.0-10(a).

8

17 CFR 240.0-10.

3
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
exceptions in Rule 101(c)(2) and in Rule 102(d)(2) are likely to have total assets greater than $5
million.
6. Consequences of Not Conducting Collection
Absent Rule 17a-4(b)(17), which requires broker-dealers relying on the probability-ofdefault-based exception under Rule 101 or Rule 102, as applicable, 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 required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
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.
12. Information Collection Burden
The Commission estimated the hourly burden of the information collection as
summarized in the chart below.
Summary of Hourly Burdens

4

Rule 17a4(b)(17)
Information
Collections

Type of
Burden

A.

B.

C.

D.

E.

F.

Numb
er of
Entiti
es
Impa
cted

Annua
l
Respo
nses
per
Entity

Initial
Burde
n per
Entity
per
Respo
nse

Initial
Burden
Annualize
d 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 17a-4)
—Initial

Recordk
eeping

275

1

25

8.33

0

25

2,291.67

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

Recordk
eeping

275

1

0

0

10

10

2,750

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS: 5,041.67

As described in more detail below, Rule 17a-4(b)(17) results in two information
collections: initial and ongoing recordkeeping burdens related to preserving the written
probability of default calculation. These information collections apply to broker-dealers that
choose to rely on the applicable exception in Rule 101(c)(2)(i) or Rule 102(d)(2)(i) for
Nonconvertible Securities. There were 166 lead managing underwriters, and 109 other non-lead
manager broker-dealers of Nonconvertible Securities in 2024. 9 Therefore, 275 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 275
respondents will be subject to PRA burdens under the amendment to Rule 17a-4.
i. Preserving the Written Probability of Default Calculation (Rule 17a-4(b)(17))
Initial Burden

9

The estimate is obtained using Mergent data for relevant securities during 2024. The previous PRA burden
estimates from 2023 were obtained using Mergent data from 2021.

5
Rule 17a-4 requires broker-dealers relying on the exception in Rule 101(c)(2)(i) or Rule
102(d)(2)(i) 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 Rule 17a-4(b)(17) is limited to the maintenance and preservation of the written
records, as the burden for creating the records is accounted for in the PRA estimates and
Supporting Statement for Rule 101. To the extent there are new (in relation to the previous
estimates) respondents relying on the applicable exception in Rule 101(c)(2)(i) or Rule
102(d)(2)(i), the Commission estimates that the record preservation requirements under Rule
17a-4(b)(17) 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.
Assuming that all 275 respondents are new entrants to the Nonconvertible Securities markets and
need to update their policies and systems required to account for preserving the records made
pursuant to Rule 101(c)(2)(i) (i.e., because they have not already done so), the Commission
estimates that the total annual industry-wide initial burden for this requirement is 2,291.67
hours. 10
Ongoing Burden
The Commission estimates that respondents will incur an internal ongoing 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 Rule 17a-4(b)(17). The Commission estimates that the total annual ongoing burden is
2,750 hours. 11
Broker-dealers relying on the 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). The
Commission estimates that it will take a distribution participant-respondent 25 hours to update
the applicable policies and systems required to account for capturing the records made pursuant
to Rule 101(c)(2)(i), for an aggregate internal cost of 2,000,625. 12 The Commission also
10

275 respondents × 25 hours = 6,875 hours for the total initial burden. As we plan to request a three-year
approval period, we divide 6,875 by 3 to get 2,291.67 hours per year.

11

275 respondents × 10 hours = 2750 hours.

12

275 respondents x 25 hours x $291 per hour for an operational research analyst = $2,000,625. The costs
used in the previous PRA estimate were based on a compliance manager’s hourly wage. See 2023 Adopting
Release, at 88 FR 39984 n.271, n.273. Because a compliance manager’s wage, for purposes of the cost
estimates in this PRA renewal, cannot be reasonably quantified, we are estimating the costs associated with
the initial and ongoing PRA burdens for Rule 17a-4(b)(17) based on the hourly wage of the worker whose
occupational profile most closely aligns with that of a compliance manager who is responsible for updating
the applicable policies and systems required to account for capturing the records made pursuant to Rule
101(c)(2)(i), maintaining those records, and making any additional updates to the applicable record
preservation policies and systems to account: an operations research analyst. This person is likely to
formulate and apply mathematical modeling and other optimizing methods to develop and interpret
information that assists management with decision making, policy formulation, or other managerial
functions, as well as collect and analyze data and develop decision support software, services, or products.
To calculate the occupational hourly rates used in this release, the Commission
uses occupational mean hourly wage data from the Occupational Employment and Wage
Statistics (OEWS) program of the Bureau of Labor Statistics (BLS) for “Securities,
Commodity Contracts, and Other Financial Investments and Related Activities” (NAICS

6
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, for an aggregate internal cost of $800,250. 13
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
Not applicable as the collection of information is a recordkeeping requirement.
15. Changes in Burden
There are changes in estimated burden hours for both the initial and ongoing burdens in
the 2023 Adopting Release due to a decrease in the estimated number of respondents from the
previously reviewed 2023 Adopting Release PRA estimate. In the 2023 Adopting Release, the
Commission estimated that there were 301 respondents, whereas the updated estimated number
is 275 respondents. The changes are described in the chart below:
Information
Collection
Requirement

Previously
Reviewed Annual
Industry Burden

New Estimated
Annual Industry
Burden

Preserving the written
probability of default

2,508.33 hours for 2,291.67 hours for
301 respondents at 275 respondents at

Change in
Burden

Reason for Change

216.66 hours Decrease in estimated number
of respondents

523). See Occupational Employment and Wage Statistics, U.S. BUREAU OF LABOR
STATISTICS, https://www.bls.gov/oes/; see also Standard Occupational Classification, U.S.
BUREAU OF LABOR STATISTICS, https://www.bls.gov/soc/ (describing occupational classification
system used by BLS); EXEC. OFF. OF THE PRESIDENT, OFF. OF MGMT. & BUDGET, NORTH
AMERICAN INDUSTRY CLASSIFICATION SYSTEM (2022), available
at https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf (describing th
e industry classification system used by BLS and other agencies). The mean hourly wage for
each occupation is adjusted for changes in the seasonally adjusted employment cost index for
private wages and salaries between the data reference period and when the data are
released by BLS. See Employment Cost Index, U.S. BUREAU OF LABOR
STATISTICS, https://www.bls.gov/eci/. The adjusted mean hourly wage is then multiplied by a
factor that accounts for nonwage costs borne by employers, such as bonuses, benefits, and
overhead. This factor is calculated as an average over the 10 most recently available years of
data of the ratio of the Bureau of Economic Analysis’s annual gross output data
for NAICS 523 to total annual wages across all occupations for NAICS 523 in the OEWS
data. See Gross Output by Industry, U.S. BUREAU OF ECONOMIC
ANALYSIS, https://www.bea.gov/data/industries/gross-output-by-industry; Occupational
Employment and Wage Statistics, U.S. BUREAU OF LABOR
STATISTICS, https://www.bls.gov/oes/. The final product is the occupational hourly rate.
13

275 respondents x 10 hours x $291 per hour for an operational research analyst = $800,250. See supra note
12.

7
calculation (Rule 17a4)—Initial

8.33 hours per
respondent

8.33 hours per
respondent

Preserving the written
probability of default
calculation (Rule 17a4)—Ongoing

3,010 hours for
2,750 hours for 275 260 hours
301 respondents at respondents at 10
10 hours per
hours per respondent
respondent

Decrease in estimated number
of respondents

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.