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

Federal RegisterMay 2, 2014

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-71958; File No. S7-05-14]

RIN 3235-AL45

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”), pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), is proposing recordkeeping, reporting, and notification requirements applicable to security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”), securities count requirements applicable to certain SBSDs, and additional recordkeeping requirements applicable to broker-dealers to account for their security-based swap and swap activities. The Commission also is proposing an additional capital charge provision that would be added to the proposed capital rule for certain SBSDs. Finally, the Commission is proposing technical amendments to the broker-dealer recordkeeping, reporting, and notification requirements.

DATES:

Comments should be received on or before July 1, 2014.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-05-14 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to Kevin M. O'Neill, Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-14. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at (202) 551-5522; Denise Landers, Senior Special Counsel, at (202) 551-5544; Raymond A. Lombardo, Branch Chief, at (202) 551-5755; Timothy C. Fox, Special Counsel at (202) 551-5687; or Valentina Minak Deng, Special Counsel, at (202) 551-5778, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Proposed Rules and Rule Amendments

A. Recordkeeping

1. Introduction

2. Records To Be Made and Kept Current

3. Record Maintenance and Preservation Requirements

B. Reporting

1. Introduction

2. Periodic Filing of Proposed Form SBS

3. Filing of Annual Audited Financial Reports and Other Reports

C. Notification

1. Introduction

2. Amendments to Rule 17a-11 and Proposed Rule 18a-8

3. Additional Proposed Amendments to Rule 17a-11

D. Quarterly Securities Count and Capital Charge for Unresolved Securities Differences

1. Introduction

2. Proposed Rule 18a-9

3. Capital Charge

III. General Request for Comment

IV. Paperwork Reduction Act

A. Summary of Collections of Information Under the Proposed Rules and Proposed Rule Amendments

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5

2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6

3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7

4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8

5. Proposed Rule 18a-9

B. Proposed Use of Information

C. Respondents

D. Total Initial and Annual Recordkeeping and Reporting Burden

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5

2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6

3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7

4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8

5. Proposed Rule 18a-9

E. Collection of Information Is Mandatory

G. Retention Period for Recordkeeping Requirements

H. Request for Comment

V. Economic Analysis

A. Introduction

B. Baseline of Economic Analysis

1. OTC Derivatives Market

2. OTC Derivatives Market Participants and Broker-Dealers

C. Analysis of the Proposed Program and Alternatives

1. Overview—The Proposed Recordkeeping, Reporting, Notification, and Securities Count Program

2. Alternatives to the Proposed Recordkeeping, Reporting, Notification, and Securities Count Rules

3. Requirements To Make and Keep Records

4. Requirements To Preserve Records

5. Reporting

6. Notification Requirements

7. Quarterly Securities Count

D. Impact on Efficiency, Competition, and Capital Formation

E. Implementation Considerations

VI. Regulatory Flexibility Act Certification

VII. Small Business Regulatory Enforcement Fairness Act

VIII. Statutory Basis and Text of the Proposed Amendments and New Rules

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.

Title VII of the Dodd-Frank Act (“Title VII”) established a new regulatory framework for the over-the-counter (“OTC”) derivatives markets.

In this

regard, Title VII was enacted, among other reasons, to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and regulation of SBSDs and MSBSPs; (2) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (3) creating recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to all registered entities and intermediaries subject to the Commission's oversight.

See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,

Public Law 111-203, 124 Stat. 1376 (2010).

Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.”

See

Public Law 111-203, 701. The Dodd-Frank Act assigns responsibility for the oversight of the U.S. OTC derivatives markets to the Commission, the Commodity Futures Trading Commission (“CFTC”), and certain prudential regulators. The term

prudential regulator

is defined in section 1(a)(39) of the Commodity Exchange Act (“CEA”) (7 U.S.C. 1(a)(39)) and that definition is incorporated by reference in section 3(a)(74) of the Exchange Act (15 U.S.C. 78c(a)(74)). Pursuant to the definition, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller

of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the “prudential regulators”) is the prudential regulator of an SBSD, MSBSP, swap participant, or major swap participant if the entity is directly supervised by that agency. The Commission has oversight authority with respect to a

security-based swap

as defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), including to implement a registration and oversight program for a

security-based swap dealer

as defined in section 3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)) and a

major security-based swap participant

as defined in section 3(a)(67) of the Exchange Act (15 U.S.C. 78c(a)(67)). The CFTC has oversight authority with respect to a

swap

as defined in section 1(a)(47) of the CEA (7 U.S.C. 1(a)(47)), including to implement a registration and oversight program for a

swap dealer

as defined in section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a

major swap participant

as defined in section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted rules to further define, among other things, the terms

swap, swap dealer, major swap participant, security-based swap, security-based swap dealer, and major security-based swap participant. See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping,

Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (joint Commission/CFTC final rule);

Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”,

Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (joint Commission/CFTC final rule).

See

Public Law 111-203, 701 through 774.

Section 764 of the Dodd-Frank Act added section 15F to the Exchange Act.

Section 15F(f)(2) provides that the Commission shall adopt rules governing reporting and recordkeeping for SBSDs and MSBSPs.

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.

Section 15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential regulator (respectively, “nonbank SBSDs” and “nonbank MSBSPs”) shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

Section 15F(f)(1)(B)(i) provides that SBSDs and MSBSPs for which there is a prudential regulator (respectively, “bank SBSDs” and “bank MSBSPs”) shall keep books and records of all activities related to their business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

Section 15F(g) of the Exchange Act requires SBSDs and MSBSPs to maintain daily trading records with respect to security-based swaps and provides that the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs.

Finally, section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs.

See

Public Law 111-203, 764; 15 U.S.C. 78o-10.

See

15 U.S.C. 78o-10(f)(2).

See

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

See

15 U.S.C. 78o-10(f)(1)(B)(ii). A nonbank SBSD or nonbank MSBSP could be dually registered with the Commission as a broker-dealer (respectively, a “broker-dealer SBSD” or “broker-dealer MSBSP”) or registered with the Commission only as an SBSD or MSBSP (respectively, a “stand-alone SBSD” or “stand-alone MSBSP”). Any of these registrants or a bank SBSD or bank MSBSP also could register with the CFTC as a futures commission merchant (“FCM”), swap dealer, or major swap participant.

See

15 U.S.C. 78o-10(f)(1)(B)(i).

See

15 U.S.C. 78o-10(g).

See

15 U.S.C. 78o-10(i).

The Commission anticipates that a number of broker-dealers will register as SBSDs (broker-dealer SBSDs) or potentially as MSBSPs (“broker-dealer MSBSPs).

Further, the Commission expects that some broker-dealers that are not registered as an SBSD or an MSBSP nonetheless will engage in security-based swap and swap activities.

The Commission has authority under section 17(a)(1) of the Exchange Act to adopt rules requiring broker-dealers—which would include broker-dealer SBSDs and broker-dealer MSBSPs—to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

The Commission also is proposing largely technical amendments to the broker-dealer recordkeeping, reporting, and notification rules.

While it is anticipated that some broker-dealers and banks will register as SBSDs in order to engage in security-based swap activities, it is unclear whether broker-dealers or banks will register as MSBSPs. For example, a broker-dealer or bank may be required to register as an MSBSP because of the nature of its security-based swap activities.

See

15 U.S.C. 78a(c)(67) (defining the term

major security-based swap participant

);

Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”,

77 FR 30596 (further defining the term

major security-based swap participant

). In this case, the broker-dealer or bank may conclude that it is more efficient to register as an SBSD in order to engage in security-based swap activities permitted of an SBSD but not of an MSBSP. Nonetheless, because a broker-dealer or bank could register as an MSBSP, the proposed rules and the discussion in this release contemplate these categories of registrants. A broker-dealer MSBSP would be subject to all the securities laws applicable to a broker-dealer, including capital, margin, segregation, recordkeeping, reporting, notification, and securities count requirements, and to any additional requirements that would be applicable only to MSBSPs. Similarly, a bank MSBSP would be subject to all laws and regulations applicable to a bank and to any additional requirements that would be applicable only to MSBSPs.

The term

security-based swap dealer

is defined in section 3(a)(71) of the Exchange Act.

See

15 U.S.C. 78c(a)(71). The definition excludes an entity that enters into security-based swaps agreements for its own account, either individually or in a fiduciary capacity, but not as a part of a regular business.

See

15 U.S.C. 78c(a)(71)(C). Further, section 3(a)(71)(D) provides that the Commission shall exempt from designation as an SBSD an entity that engages in a

de minimis

quantity of security-based swap dealing in connection with transactions with or on behalf of its customers and that the Commission shall promulgate regulations to establish factors with respect to the making of any determination to exempt.

See

15 U.S.C. 78c(a)(71)(D). The Commission has adopted Rule 3a71-2 to establish a

de minimis

exception under section 3(a)(71)(D) of the Exchange Act.

See

17 CFR 240.3a71-2;

Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”,

77 FR 30635-30643.

See

15 U.S.C. 78q(a)(1). Section 771 of the Dodd-Frank Act states that unless otherwise provided by its terms, Subtitle B of Title VII (relating to the regulation of the security-based swap markets) does not divest any appropriate Federal banking agency, the Commission, the CFTC, or any other Federal or State agency, of any authority derived from any other provision of applicable law.

See

Public Law 111-203, 771.

See

17 CFR 240.17a-3 (“Rule 17a-3”); 17 CFR 240.17a-4 (“Rule 17a-4”); 17 CFR 240.17a-5 (“Rule 17a-5”); 17 CFR 240.17a-11 (“Rule 17a-11”). The Dodd-Frank Act amended the definition of

security

in section 3(a)(10) of the Exchange Act to include a security-based swap.

See

Public Law 111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, the term

security

as used in Rules 17a-3, 17a-4, 17a-5, and 17a-11 includes a security-based swap, and any requirement in those rules relating to a security applies to a security-based swap. The Commission, however, has issued temporary exemptive relief to address the effect that the amendment to the definition of

security

would have on requirements in Exchange Act provisions and rules that did not otherwise apply specifically to security-based swaps prior to the amendment.

See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment,

Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) (“[R]egistered broker-dealers will solely be exempt from those provisions and rules to the extent that those provisions or rules do not apply to the broker's or

dealer's security-based swap positions or activities as of July 15, 2011—the day before the effectiveness of the change to the “security” definition. In other words, during the exemptive period the application of current law will remain unchanged, and those particular Exchange Act requirements will continue to apply to registered broker-dealers' security-based swap activities and positions to the same extent they apply currently. This approach is intended to help avoid undue market disruptions resulting from the change to the “security” definition, while at the same time preserving the current application of those particular provisions or rules to security-based swap activity by registered broker-dealers. Thus, under this approach of preserving the

status quo,

no exemption will be provided in connection with the [requirements in Exchange Act sections 17(a) and 17(b) and Rules 17a-3, 17a-4, 17a-5, 17a-8, and 17a-13] under the Exchange Act to the extent that those requirements currently apply to registered broker-dealer activities or positions involving instruments that will be security-based swaps (but registered broker-dealers will be exempted in connection with those requirements to the extent that the requirements do not already apply to activities or positions involving those instruments.”);

Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment,

Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013) (extending exemptive relief through February 11, 2014);

Exchange Release No. 71485 (Feb. 5, 2014) (extending exemptive relief with respect to Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 until the earliest compliance date set forth in any final rules regarding recordkeeping and reporting requirements for SBSDs and MSBSPs). The Commission expects that the adoption of the amendments contemplated herein would eliminate the need for temporary exemptive relief from section 17(a) and section 17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 thereunder.

Pursuant to sections 15F and 17(a) of the Exchange Act, the Commission is proposing to amend Rules 17a-3, 17a-4, 17a-5, and 17a-11 to establish a recordkeeping, reporting, and notification program for broker-dealer SBSDs and broker-dealer MSBSPs. The amendments to Rules 17a-3 and 17a-4 would establish additional recordkeeping requirements applicable to broker-dealers that are not dually registered as an SBSD or MSBSP to the extent they engage in security-based swap or swap activities.

Pursuant to section 15F of the Exchange Act, the Commission is proposing new Rules 18a-5 through 18a-9.

These new rules would establish a recordkeeping, reporting, and notification program for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, and securities count requirements for stand-alone SBSDs.

In addition, pursuant to sections 15F and 17(a) of the Exchange Act, the Commission is proposing new FOCUS Report Form SBS (“Form SBS”) that would be used by all types of SBSDs and MSBSPs to report financial and operational information and, in the case of broker-dealer SBSDs and broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB, or Part II CSE of the Financial and Operational Combined Uniform Single Report (“FOCUS Report”).

The Commission has proposed new Rules 18a-1 through 18a-4 to establish capital and margin requirements for SBSDs and MSBSPs, segregation requirements for SBSDs, and notification requirements with respect to segregation for SBSDs and MSBSPs.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012).

The Commission is not proposing securities count requirements for stand-alone MSBSPs or bank SBSDs. Broker-dealer SBSDs and broker-dealer MSBSPs would be subject to the existing securities count rule applicable to broker-dealers—Rule 17a-13. 17 CFR 240.17a-13. The Commission is not proposing amendments to Rule 17a-13. While in this release Rule 17a-11 is referred to as a

notification

rule and Rule 17a-13 is referred to as a

securities count

rule, Rule 17a-11 can be viewed as a reporting rule and Rule 17a-13 can be viewed as a recordkeeping rule.

See Prompt Notice of Net Capital or Recordkeeping Violations,

Exchange Act Release No. 9268 (July 29, 1971), 36 FR 14725 (Aug. 11, 1971) (adopting Rule 17a-11, in part, under section 17(a) of Exchange Act, which, as discussed above, requires a broker-dealer to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act);

Quarterly Securities Counts by Certain Exchange Members, Brokers and Dealers,

Exchange Act Release No. 9376 (Oct. 29, 1971), 36 FR 21178 (Nov. 4, 1971) (similarly adopting Rule 17a-13, in part, under section 17(a) of Exchange Act).

A broker-dealer must file the FOCUS Report Part II, Part IIA, Part IIB, or Part II CSE depending on the type of broker-dealer. A more detailed discussion of the FOCUS Report appears below in section II.B.2. of this release.

The proposed new rules are modeled on broker-dealer Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13, and on the FOCUS Report. Specifically: (1) Proposed Rules 18a-5 and 18a-6 (the new recordkeeping rules) are modeled on Rules 17a-3 and 17a-4, respectively (the broker-dealer recordkeeping rules);

(2) proposed Rule 18a-7 and proposed Form SBS (the new reporting rules) are modeled on Rule 17a-5 and on the FOCUS Report, respectively (the broker-dealer reporting rules);

(3) proposed Rule 18a-8 (the new notification rule) is modeled on Rule 17a-11 (the broker-dealer notification rule);

and (4) proposed Rule 18a-9 (the new securities count rule) is modeled on the Rule 17a-13 (the broker-dealer securities count rule).

Compare

proposed Rule 18a-5,

with

17 CFR 240.17a-3;

compare

proposed Rule 18a-6,

with

17 CFR 240.17a-4.

Compare

proposed Rule 18a-7,

with

17 CFR 240.17a-5;

compare

proposed Form SBS,

with

the FOCUS Report.

Compare

proposed Rule 18a-8,

with

17 CFR 240.17a-11.

Compare

proposed Rule 18a-9,

with

17 CFR 240.17a-13.

The broker-dealer recordkeeping, reporting, notification, and security count requirements served as the model for the proposals because SBSDs and MSBSPs are expected to operate in financial markets and effect financial transactions that are similar to the financial markets in which broker-dealers operate and the financial transactions that broker-dealers effect.

In addition, as discussed below, the objectives of these broker-dealer requirements are similar to the objectives underlying the proposals regarding security-based swaps. Moreover, the broker-dealer requirements have existed for many years and have established a system of recordkeeping for securities transactions that reflect and support prudent business practices and accountability of broker-dealers and have facilitated the ability of securities regulators to review and monitor compliance with securities laws.

Consequently, the Commission preliminarily believes the broker-dealer requirements provide an appropriate template on which to model a recordkeeping, reporting, and notification program for SBSDs and MSBSPs and a securities count program for SBSDs. Furthermore, as discussed above, it is expected that some nonbank SBSDs will dually register as broker-dealers in order to be able to offer customers a broader range of securities-based services than would be permitted of a nonbank SBSD.

Therefore, establishing consistent requirements could avoid potential competitive disparities between stand-alone SBSDs and broker-dealer SBSDs with respect to their security-based swap business.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70216 (stating a similar rationale for basing the proposed capital, margin, and segregation requirements for SBSDs on the broker-dealer capital, margin, and segregation requirements).

See, e.g., Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media Under the Electronic Signatures in Global and National Commerce Act of 2000 With Respect to Rule 17a-4(f),

Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 2001).

Although a broker-dealer SBSD would be able to offer customers a broader range of securities-based services than a bank SBSD, bank SBSDs are not expected to register as broker-dealers because of the regulatory burden associated with complying with the requirements applicable to all three types of entities.

Additionally, in accordance with Title VII, the Commission recently proposed, among other things, capital and margin

requirements applicable to nonbank SBSDs and nonbank MSBSPs, and segregation requirements applicable to SBSDs.

The capital, margin, and segregation proposals that would be applicable to SBSDs were modeled on the capital, margin, and segregation requirements that are applicable to broker-dealers.

The broker-dealer capital, margin, segregation, recordkeeping, reporting, notification, and securities count requirements are known collectively as the broker-dealer

financial responsibility rules.

The financial responsibility rules collectively establish a comprehensive regulatory program designed to promote the prudent operation of broker-dealers and the safeguarding of customer securities and funds held by broker-dealers. The recordkeeping, reporting, notification, and securities count requirements applicable to broker-dealers are an integral part of the financial responsibility rules as they are designed to provide transparency into the business activities of broker-dealers and to assist the Commission and other securities regulators in reviewing and monitoring compliance with the capital, margin, and segregation requirements. Similarly, the proposed recordkeeping, reporting, notification, and securities count requirements applicable to SBSDs and MSBSPs along with the proposed capital, margin, and segregation requirements for these registrants are designed to establish a comprehensive financial responsibility program for SBSDs and MSBSPs. Like the broker-dealer rules, the proposed recordkeeping, reporting, notification, and securities count requirements applicable to SBSDs and MSBSPs are designed to provide transparency into the business activities of SBSDs and MSBSPs and assist the Commission in reviewing and monitoring compliance with the proposed capital, margin, and segregation requirements applicable to SBSDs and MSBSPs.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70213.

Id. See also

17 CFR 240.15c3-1 (the broker-dealer capital rule); FINRA Rules 4210 through 4240 (certain broker-dealer margin rules); 17 CFR 240.15c3-3 (the broker-dealer segregation rule).

See

17 CFR 240.3a40-1.

While the proposed recordkeeping, reporting, notification, and securities count rules are modeled on the broker-dealer rules, stand-alone SBSDs and stand-alone MSBSPs will not engage in the same range of activities permitted of broker-dealers. For example, broker-dealers are permitted to act as dealers with respect to all types of securities, whereas stand-alone SBSDs would be permitted to act as dealers only with respect to security-based swaps and stand-alone MSBSPs would not be permitted to act as dealers with respect to any types of securities. Consequently, the proposed requirements in the new rules applicable to stand-alone SBSDs and stand-alone MSBSPs reflect these differences and are narrower in scope than those applicable to broker-dealer SBSDs and broker-dealer MSBSPs. Further, the proposed requirements applicable to bank SBSDs and bank MSBSPs are narrower in scope than those applicable to stand-alone SBSDs and stand-alone MSBSPs for three reasons. First, as noted above, the recordkeeping and reporting requirements for bank SBSDs and bank MSBSPs—unlike those for nonbank SBSDs and nonbank MSBSPs—must be related to their business as an SBSD or MSBSP.

Second, as banks, these registrants are subject to existing recordkeeping and reporting requirements administered by the prudential regulators and therefore to avoid potentially duplicative or conflicting requirements, the Commission has proposed fewer requirements for these entities. Third, the prudential regulators—rather than the Commission—will administer the capital, margin, and other prudential requirements applicable to bank SBSDs and bank MSBSPs and, as noted above, one of the purposes of the proposed recordkeeping requirements is to assist the Commission in reviewing and monitoring compliance with the proposed capital and margin rules applicable to nonbank SBSDs and nonbank MSBSPs, which the Commission will administer.

Compare

15 U.S.C. 78o-10(f)(1)(B)(i),

with

15 U.S.C. 78o-10(f)(1)(B)(ii)

and

15 U.S.C. 78q(a). As noted above, section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep books and records of all activities

related to the business as an SBSD or MSBSP

in such form and manner and for such period as may be prescribed by the Commission by rule or regulation (emphasis added).

See

15 U.S.C. 78o-10(f)(1)(B)(i). Whereas, section 15F(f)(1)(B)(ii) of the Exchange Act provides that each nonbank SBSD and nonbank MSBSP shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

See

15 U.S.C. 78o-10(f)(1)(B)(ii). Further, section 17(a) of the Exchange Act provides that broker-dealers shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

See

15 U.S.C. 78q(a).

Section 15F(e)(1)(A) of the Exchange Act provides that the prudential regulators shall prescribe capital and margin requirements for bank SBSDs and bank MSBSPs, and section 4s(e)(1)(A) of the CEA provides that the prudential regulators shall prescribe capital and margin requirements for swap dealers and major swap participants for which there is a prudential regulator (“bank swap dealers” and “bank swap participants”).

See

15 U.S.C. 78o-10(e)(1)(A); 7 U.S.C. 6s(e)(1)(A). The prudential regulators have proposed capital and margin requirements for bank swap dealers, bank SBSDs, bank swap participants, and bank MSBSPs.

See Margin and Capital Requirements for Covered Swap Entities,

76 FR 27564 (May 11, 2011).

The Commission recognizes that there may be alternative recordkeeping, reporting, notification, and securities count programs that could be used as a model to design a recordkeeping, reporting, notification, and securities count program for SBSDs and MSBSPs. Accordingly, in response to the requests for comment in this release, interested parties are encouraged to consider whether alternative approaches would be appropriate for SBSDs and MSBSPs generally as well as for each type of potential registrant—broker-dealer SBSD, broker-dealer MSBSP, stand-alone SBSD, stand-alone MSBSP, bank SBSD, and bank MSBSP—taking into account the unique characteristics and activities of each type of potential registrant.

Some of the current rules that are proposed to be amended and the proposed new rules prescribe recordkeeping or reporting requirements based on requirements in other rules that have been proposed but not yet adopted. For example, Rules 17a-3 and 17a-4, as proposed to be amended, and proposed Rules 18a-5 and 18a-6 would directly or indirectly cross-reference requirements in proposed Rule 901 of Regulation SBSR and proposed Rules 15Fh-1 through 15Fh-6 and proposed Rule 15Fk-1.

Similarly, Rules 17a-3, 17a-4, 17a-5, and 17a-11, as proposed to be amended, and proposed Rules 18a-5, 18a-6, 18a-7, and 18a-8 cross-reference requirements in the proposed capital, margin, and segregation requirements for SBSDs and MSBSPs.

If a cross-referenced rule is modified from the proposal when adopted, the Commission intends to make any necessary corresponding modifications to the rules proposed in this release when they are adopted.

See

section II.A. of this release.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70213.

Finally, the Commission also is proposing to add a capital charge provision to proposed Rule 18a-1.

Proposed Rule 18a-1 would establish net capital requirements for stand-alone SBSDs and is modeled on Rule 15c3-1

under the Exchange Act (the broker-dealer net capital rule) (“Rule 15c3-1”).

The capital charge provision that would be added to proposed Rule 18a-1, which is modeled on a provision in Rule 15c3-1, was inadvertently omitted from proposed Rule 18a-1 when originally proposed. The Commission preliminarily believes that proposed Rule 18a-1 should include a provision that parallels the capital charge in Rule 15c3-1.

This proposal is discussed below in greater detail in section II.D.3. of this release.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70217-70257.

The Commission staff consulted with staff from the prudential regulators and the CFTC in drafting the proposals discussed in this release.

In addition, the proposals of the CFTC were considered in developing the Commission's proposed recordkeeping, reporting, notification and securities count rules for SBSDs and MSBSPs.

See

Public Law 111-203, 712(a)(2). The CFTC has adopted recordkeeping and reporting rules for swap dealers and major swap participants.

See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants,

77 FR 20128 (Apr. 3, 2012).

Request for Comment

The Commission requests comment on the general approach that would require SBSDs and MSBSPs to comply with recordkeeping, reporting, notification, and securities count rules modeled on the broker-dealer recordkeeping, reporting, notification, and securities count rules. In addition, the Commission requests comment, including empirical data in support of comments, in response to the following questions:

1. Will the entities that register as nonbank SBSDs engage in a securities business with respect to security-based swaps that is similar to the securities business conducted by broker-dealers? If not, describe how the securities activities of nonbank SBSDs will differ from the securities activities of broker-dealers.

2. Will the entities that register as bank SBSDs engage in a securities business with respect to security-based swaps that is similar to the securities business conducted by broker-dealers? If not, describe how the securities activities of bank SBSDs will differ from the securities activities of broker-dealers.

3. How many broker-dealers will register as SBSDs? Describe the types of broker-dealers that will register as SBSDs and the types of activities these broker-dealers currently engage in? How many banks will register as SBSDs? Describe the types of banks that will register as SBSDs and the types of activities these banks currently engage in?

4. How many entities will register as MSBSPs? What types of entities? How many broker-dealers will register as MSBSPs? How many banks will register as MSBSPs?

5. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to stand-alone SBSDs or stand-alone MSBSPs that should be applicable to standalone SBSDs or stand-alone MSBSPs, or vice versa?

6. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to bank SBSDs or bank MSBSPs that should be applicable to bank SBSDs or bank MSBSPs, or vice versa?

7. Are there provisions in the rules that the CFTC adopted governing recordkeeping and reporting obligations of swap dealers and major swap participants that the Commission should consider incorporating into the recordkeeping and reporting requirements for SBSDs and MSBSPs? If so, please identify the specific provision and explain why the Commission should incorporate it.

8. In the release adopting a further definition of

major security-based swap participant,

the Commission stated that an entity's security-based swap positions in general would be attributed to a parent, other affiliate, or guarantor for purposes of the MSBSP analysis to the extent that the counterparties to those positions would have recourse to that other entity in connection with the position.

The Commission further stated that an entity that becomes an MSBSP by virtue of security-based swaps directly entered into by others must be responsible for compliance with all applicable requirements with respect to those security-based swaps (and must be liable for failures to comply), but may delegate operational compliance with transaction-focused requirements to entities that directly are party to the transactions.

The Commission stated its preliminary belief that the same approach should apply in the cross-border context when the guarantor and the guaranteed persons are located in different jurisdictions.

The Commission preliminarily believes that certain of the recordkeeping requirements that would be applicable to MSBSPs under the proposed amendments are transaction-focused and, therefore, that an MSBSP may delegate operational compliance with them to the entities that are directly a party to the transaction.

For example, the Commission preliminarily believes that the proposed requirements discussed below in section II.A.2. of this release under which MSBSPs would need to make and keep current memoranda of proprietary orders, confirmations, accountholder information, and records relating to certain business conduct standards are transaction-focused. Similarly, the proposed requirements to retain communications relating to the MSBSP's “business as such” are transaction-focused. On the other hand, the Commission preliminarily believes that other recordkeeping requirements proposed for MSBSPs are entity-level requirements and, therefore an MSBSP would not be permitted to delegate operational compliance with respect to these requirements to other entities. For example, the Commission preliminarily believes that the proposed requirement that an MSBSP make and keep current a general ledger (or other records) reflecting all assets and liabilities, income and expense, and capital accounts is an entity-level requirement. Commenters are asked to identify which of the recordkeeping requirements applicable to MSBSPs in proposed new Rules 18a-5 and 18a-6 that they believe are transaction-focused and to explain their reasons for identifying them as such. Commenters also are asked to identify any operational compliance challenges with respect to the proposed recordkeeping requirements raised by attributing guaranteed security-based swap positions to an MSBSP.

See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”,

77 FR 30689.

Id.

See Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968, 31034 (May 23, 2013).

The Commission preliminarily believes that the proposed reporting and notification requirements that would be applicable to MSBSPs are not transaction-focused and, therefore, the MSBSP could not delegate operation compliance with respect to these requirements to other entities.

II. Proposed Rules and Rule Amendments

A. Recordkeeping

1. Introduction

As discussed above in section I. of this release, section 15F(f)(2) of the Exchange Act provides that the Commission shall adopt rules governing recordkeeping for SBSDs and MSBSPs.

The Commission also has concurrent authority under section 17(a)(1) of the Exchange Act to prescribe recordkeeping requirements for broker-dealers.

Further, section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep books and records of all activities related to its business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

Section 15F(f)(1)(B)(ii) provides that each nonbank SBSD and nonbank MSBSP shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

See

15 U.S.C. 78o-10(f)(2).

See

15 U.S.C. 78q(a)(1).

See

15 U.S.C. 78o-10(f)(1)(B)(i).

See

15 U.S.C. 78o-10(f)(1)(B)(ii).

Section 15F(g) of the Exchange Act prescribes statutory recordkeeping requirements applicable to SBSDs and MSBSPs and requires the Commission to adopt rules with respect to these statutory requirements.

In particular, section 15F(g)(1) provides that each registered SBSD and MSBSP shall maintain daily trading records of the security-based swaps of the registered SBSD and MSBSP and all related records (including related cash or forward transactions) and recorded communications, including electronic mail, instant messages, and recordings of telephone calls, for such period as may be required by the Commission by rule or regulation.

Section 15F(g)(2) provides that the daily trading records shall include such information as the Commission shall require by rule or regulation.

Section 15F(g)(3) provides that each registered SBSD and MSBSP shall maintain daily trading records for each counterparty in a manner and form that is identifiable with each security-based swap transaction.

Section 15F(g)(4) provides that each registered SBSD and MSBSP shall maintain a complete audit trail for conducting comprehensive and accurate trade reconstructions.

Finally, section 15F(g)(5) provides that the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs.

See

15 U.S.C. 78o-10(g).

See

15 U.S.C. 78o-10(g)(1).

See

15 U.S.C. 78o-10(g)(2).

See

15 U.S.C. 78o-10(g)(3).

See

15 U.S.C. 78o-10(g)(4).

See

15 U.S.C. 78o-10(g)(5).

Section 15F(i)(1) of the Exchange Act provides that each registered SBSD and MSBSP shall conform with such standards as may be prescribed by the Commission, by rule or regulation, that relate to timely and accurate confirmation, processing, netting, documentation, and valuation of all security-based swaps.

Section 15F(i)(2) provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs.

See

15 U.S.C. 78o-10(i)(1).

See

15 U.S.C. 78o-10(i)(2). Pursuant to section 15F(i) of the Exchange Act, the Commission has proposed Rule 15Fi-1 that would prescribe standards related to timely and accurate confirmation and documentation of security-based swaps.

See Trade Acknowledgment and Verification of Security-Based Swap Transactions,

Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011).

After considering the anticipated business activities of SBSDs and MSBSPs, the Commission is proposing to establish a recordkeeping program for these registrants under sections 15F and 17(a) of the Exchange Act that is modeled on the recordkeeping program for broker-dealers codified in Rules 17a-3 and 17a-4.

Rules 17a-3 and 17a-4 specify requirements with respect to the records that a broker-dealer must make and keep current, as well as how long and, the manner in which, these records and other records relating to a broker-dealer's business must be maintained and preserved.

See

17 CFR 240.17a-3; 17 CFR 240.17a-4.

See

17 CFR 240.17a-3; 17 CFR 240.17a-4.

In particular, Rule 17a-3 requires a broker-dealer to make and keep current certain books and records.

The required records include, among other records: Blotters containing an itemized daily record of all purchases and sales of securities; ledgers reflecting all assets and liabilities, income and expense, and capital accounts; a securities record or ledger reflecting separately for each security as of the clearance dates all “long” or “short” positions; a memorandum of each brokerage order; a memorandum of each purchase or sale of a security for the account of the broker-dealer; and copies of confirmations.

See

17 CFR 240.17a-3.

Id.

As noted above in section I. of this release, the Dodd-Frank Act amended the definition of

security

in section 3(a)(10) of the Exchange Act to include a security-based swap.

See

Public Law 111-203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference in Rules 17a-3 and 17a-4 to a

security

includes a security-based swap. The Commission, however, has issued temporary exemptive relief excluding security-based swaps from the definition of

security

to the extent Commission rules did not otherwise apply specifically to security-based swaps prior to the amendment.

76 FR 39927.

Rule 17a-4 requires a broker-dealer to preserve additional records if the broker-dealer makes or receives the type of record.

The categories of records include, among other records, check books, bank statements, bills receivable or payable, communications relating to the broker-dealer's business as such, and written agreements.

The rule also establishes retention periods for all records required to be made and kept current under Rule 17a-3 and preserved under Rule 17a-4, and prescribes, among other things, how the records must be retained, including requirements for firms that preserve their records electronically.

See

17 CFR 240.17a-4.

Id.

The recordkeeping program codified in Rules 17a-3 and 17a-4 is designed, among other things, to promote the prudent operation of broker-dealers and assist the Commission, self-regulatory organizations (“SROs”), and state securities regulators in conducting effective examinations of broker-dealers.

As the Commission has stated,

See, e.g., See

Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f),

66 FR 22916;

Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934,

Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (“The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, [SROs], and State Securities Regulators . . . may conduct effective examinations of broker-dealers.”) (footnote omitted).

In combination, Rules 17a-3 and 17a-4 require broker-dealers to create, and preserve in an accessible manner, a comprehensive record of each securities transaction they effect and of their securities business in general. These rules impose minimum recordkeeping requirements that are based on standards a prudent broker-dealer should follow in the normal course of business. The requirements are an integral part of the investor protection function of the Commission, and other securities regulators, in that the preserved records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.

See Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the

Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f),

66 FR 22917.

Under the proposed recordkeeping program for SBSDs and MSBSPs, broker-dealer SBSDs and broker-dealer MSBSPs—as broker-dealers—would be subject to Rules 17a-3 and 17a-4.

The Commission is proposing amendments to these rules to account for the security-based swap and swap activities of broker-dealers, including broker-dealers registered as SBSDs and MSBSPs, as well as to implement the specific recordkeeping requirements mandated under the Dodd-Frank Act.

Stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would be subject to proposed Rules 18a-5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively, as these rules are proposed to be amended.

See

17 CFR 240.17a-3; 17 CFR 240.17a-4.

As discussed in more detail below, the Commission also is proposing additional largely technical amendments to Rules 17a-3 and 17a-4.

Proposed Rules 18a-5 and 18a-6 would not include a parallel requirement for every requirement in Rules 17a-3 and 17a-4 because some of the requirements in Rules 17a-3 and 17a-4 relate to activities that are not expected or permitted of SBSDs and MSBSPs. Further, the proposed recordkeeping requirements that would be applicable to bank SBSDs and bank MSBSPs are more limited in scope because, as discussed above in section I. of this release: (1) The Commission's authority under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities related to the conduct of business as an SBSD or MSBSP; (2) bank SBSDs and bank MSBSPs are subject to recordkeeping requirements applicable to banks; and (3) the prudential regulators—rather than the Commission—are responsible for capital, margin, and other prudential requirements applicable to bank SBSDs and bank MSBSPs. For these reasons, the proposed recordkeeping requirements that would be applicable to bank SBSDs and bank MSBSPs are designed to be tailored more specifically to their security-based swap activities as an SBSD or an MSBSP.

As discussed below in section II.B.2. of this release, the Commission is proposing that bank SBSDs and bank MSBSPs be subject to a limited reporting program of general information about their overall financial condition based on discrete elements of the reporting program the prudential regulators have established for banks.

2. Records To Be Made and Kept Current

As discussed above, Rule 17a-3 requires a broker-dealer to make and keep current certain records.

The Commission is proposing to amend this rule to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs.

The Commission also is proposing additional largely technical amendments to Rule 17a-3.

With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission is proposing new Rule 18a-5—which is modeled on Rule 17a-3, as proposed to be amended—to require these registrants to make and keep current certain records.

For the reasons discussed above, proposed Rule 18a-5 does not include a parallel requirement for every requirement in Rule 17a-3.

In addition, paragraph (a) of proposed Rule 18a-5 contains one set of recordkeeping requirements applicable to stand-alone SBSDs and stand-alone MSBSPs and paragraph (b) of proposed Rule 18a-5 contains a separate set of recordkeeping requirements applicable to bank SBSDs and bank MSBSPs that are more limited in scope.

See

17 CFR 240.17a-3.

Broker-dealer SBSDs and broker-dealer MSBSPs would be required to make and keep current all the records required of broker-dealers under Rule 17a-3, as proposed to be amended, plus the additional records required specifically of an SBSD or MSBSP.

The proposed technical amendments are discussed below in section II.A.2.b. of this release.

See

proposed Rule 18a-5.

The Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel requirements in paragraphs (a)(4), (a)(13), (a)(14), (a)(15), and (a)(16) of Rule 17a-3. These paragraphs require broker-dealers to make and keep current records with respect to activities that stand-alone SBSDs and stand-alone MSBSPs would not be expected or permitted to engage in or would not relate to a bank's business as an SBSD or MSBSP, or relate to rules that would not apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. Further, the Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel requirements in paragraphs (a)(17), (a)(18), (a)(19), and (a)(20) of Rule 17a-3. These requirements are designed to enhance the ability of regulators, particularly State securities regulators, to conduct effective and efficient sales practice examinations.

See Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934,

66 FR 55818. By adopting these requirements, the Commission enabled States to adopt and enforce similar rules on the State level under the National Securities Market Improvement Act of 1996.

See National Securities Markets Improvement Act of 1996,

Public Law 104-290, 110 Stat. 3416 (1996). As discussed below, the Commission has proposed external business conduct rules for SBSDs and MSBSPs and, as discussed below, the Commission is proposing recordkeeping requirements to support examinations for compliance with these proposed external business conduct rules.

Compare

paragraph (a),

with

paragraph (b) of proposed new Rule 18a-5.

As discussed above, section 15F(g) of the Exchange Act provides, among other things, that each registered SBSD and MSBSP shall maintain: (1) Daily trading records of the security-based swaps of the registered SBSD and MSBSP; (2) daily trading records for each counterparty in a manner and form that is identifiable with each security-based swap transaction; and (3) a complete audit trail for conducting comprehensive and accurate trade reconstructions.

Further, section 15F(g)(2) provides that the daily trading records shall include such information as the Commission shall require by rule or regulation.

To implement section 15F(g) of the Exchange Act, Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5 include provisions that, among other things, are designed to require information that would facilitate a comprehensive and accurate trade reconstruction for each security-based swap transaction.

See

15 U.S.C. 78o-10(g)(1), (3), and (4).

See

15 U.S.C. 78o-10(g)(2).

In this regard, the amendments to Rule 17a-3 and proposed Rule 18a-5 would require broker-dealers, SBSDs, and MSBSPs to make and keep current daily trading records,

ledger accounts,

a securities record,

memoranda of brokerage orders,

and/or memoranda of proprietary trades

with respect to security-based swap activity. The Commission has proposed Rule 901 of Regulation SBSR, which would require market participants, including broker-dealers, SBSDs, and MSBSPs, to report certain data elements to security-based swap data repositories.

See

paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.

See

paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.

See

paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-5.

See

paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended; paragraph (b)(4) of proposed Rule 18a-5.

See

paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.

See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

Securities Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010).

See also Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

78 FR 30968 (re-proposing certain aspects of Regulation SBSR).

The following data elements that would be required to be reported under proposed Rule 901 also would need to be documented in the daily trading records, ledger accounts, memoranda of brokerage orders, and/or memoranda of

proprietary trades of security-based swap transactions required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The type of security-based swap;

(2) the reference security, index, or obligor;

(3) the date and time of execution;

(4) the effective date;

(5) the termination or maturity date;

(6) the notional amount;

(7) the unique transaction identifier;

and (8) the unique counterparty identifier.

The following data elements that would be required to be reported under proposed Rule 901 would also need to be documented in the securities record of security-based swap transactions required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) The reference security, index, or obligor;

(2) the unique transaction identifier;

(3) the unique counterparty identifier;

(4) whether the security-based swap is cleared or not cleared;

and (5) if cleared, identification of the clearing agency where the security-based swap is cleared.

In addition, the securities record for security-based swaps would parallel the securities record for securities by requiring a record of whether the security-based swap is a “long” or “short” position.

Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

75 FR 75213 (discussing the requirement in paragraph (c)(1) of proposed Rule 901 to report the asset class of the security-based swap).

See id.

at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based).

See id.

at 75213 (discussing the requirement in paragraph (c)(4) of proposed Rule 901 to report the time and date of execution of the security-based swap).

See id.

at 75214 (discussing the requirement in paragraph (c)(5) of proposed Rule 901 to report the effective date of the security-based swap).

See id.

at 75214 (discussing the requirement in paragraph (c)(6) to of proposed Rule 901 to report the scheduled termination date of the security-based swap).

See id.

at 75214 (discussing the requirement in paragraph (c)(3) of proposed Rule 901 to report the notional amount of the security-based swap).

See id.

at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap).

See id.

at 75217-75218, 75221-75222 (discussing the requirement in paragraph (d) of proposed Rule 901 to report the unique identifier of the counterparty to the security-swap transaction).

See id.

at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based).

See id.

at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap).

See id.

at 75217-75218, 75221-75222 (discussing the requirement in paragraph (d)(1)(i) of proposed Rule 901 to report the participant ID of the counterparty to the security-swap transaction).

See id.

at 75214 (discussing the requirement in paragraph (c)(9) of proposed Rule 901 to report the whether or not the security-based swap will be cleared by a clearing agency).

See id.

at 75218 (discussing the requirement in paragraph (d)(1)(vi) of proposed Rule 901 to report the name of the clearing agency if the security-based swap will be cleared).

Compare

17 CFR 240.17a-3(a)(5),

with

paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended, and paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-5.

Where a data element that would need to be documented in the daily trading records of security-based swap transactions under the proposed amendments to Rule 17a-3 or proposed Rule 18a-5 is substantively the same as a data element that would need to be reported under proposed Rule 901, the Commission preliminarily believes that the type of information that would need to be documented in the daily trading records could be the same data element reported under proposed Rule 901.

Proposed Rule 901 may be modified when adopted, which could include changing or eliminating certain data elements required to be reported under the rule. Any such modifications to the data elements could change the Commission's preliminary view on the comparability of the information to be recorded in the daily trading records and the information to be reported pursuant to proposed Rule 901.

a. Amendments to Rule 17a-3 and Proposed Rule 18a-5

Undesignated Introductory Paragraph

Rule 17a-3, as proposed to be amended, would contain an undesignated introductory paragraph explaining that the rule applies to a broker-dealer, including a broker-dealer dually registered with the Commission as an SBSD or MSBSP.

The note further explains that an SBSD or MSBSP that is not dually registered as a broker-dealer (

i.e.,

a stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is subject to the books and records requirements under proposed Rule 18a-5.

See

undesignated introductory paragraph of Rule 17a-3, as proposed to be amended.

Id.

Similarly, proposed Rule 18a-5 would contain an undesignated introductory paragraph explaining that the rule applies to an SBSD or an MSBSP that is not dually registered as a broker-dealer.

The note further explains that a broker-dealer that is dually registered as an SBSD or MSBSP is subject to the books and records requirements under Rule 17a-3.

See

undesignated introductory paragraph of proposed Rule 18a-5.

Id.

Trade Blotters

Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and keep current trade blotters (or other records of original entry) containing an itemized daily record of all transactions in securities, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits.

The Commission is proposing to amend paragraph (a)(1) of Rule 17a-3 to require that the blotters specifically account for security-based swaps, and proposing to include parallel blotter requirements in paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5 that are modeled on paragraph (a)(1) of Rule 17a-3, as proposed to be amended.

In particular, paragraph (a)(1) of Rule 17a-3, as proposed to be amended, would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current blotters containing an itemized daily record of all transactions in securities,

including security-based swaps,

all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits.

In order to document the attributes of security-based swaps, the proposed amendments also would require that such records show the contract price of the security-based swap, and include for each purchase and sale, the following information: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier.

See

17 CFR 240.17a-3(a)(1).

See

paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.

See

paragraph (a)(1) of Rule 17a-3, as proposed to be amended.

See id.

Paragraph (a)(1) of proposed Rule 18a-5 mirrors paragraph (a)(1) of Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of blotters as broker-dealers.

100

Paragraph (b)(1) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current the same types of blotters but only with respect to their security-based swap activities.

101

100

Compare

paragraph (a)(1) of Rule 17a-3, as proposed to be amended,

with

paragraph (a)(1) of proposed Rule 18a-5.

101

See

paragraph (b)(1) of proposed Rule 18a-5.

General Ledger

Paragraph (a)(2) of Rule 17a-3 requires broker-dealers to make and

keep current ledgers (or other records) reflecting all assets and liabilities, income and expense, and capital accounts.

102

These records reflect the overall financial condition of the broker-dealer and in the Commission's view can incorporate security-based swap activities without the need for a clarifying amendment. Because the overall financial condition of stand-alone SBSDs and stand-alone MSBSPs is a matter of regulatory concern for the Commission, the Commission is proposing to include a parallel provision in paragraph (a)(2) of proposed Rule 18a-5 that mirrors paragraph (a)(2) of Rule 17a-3.

103

Consequently, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of general ledgers.

104

102

See

17 CFR 240.17a-3(a)(2).

103

Compare

17 CFR 240.17a-3(a)(2),

with

paragraph (a)(2) of proposed Rule 18a-5.

104

See

paragraph (a)(2) of proposed Rule 18a-5.

Ledgers for Customer and Non-Customer Accounts

Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and keep current certain ledger accounts (or other records) relating to securities and commodities transactions in customer and non-customer cash and margin accounts.

105

The Commission is proposing to amend paragraph (a)(3) of Rule 17a-3 to require that the ledgers (or other records) specifically account for security-based swaps, and to include parallel ledger requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(3) of Rule 17a-3, as proposed to be amended.

106

In particular, paragraph (a)(3) of Rule 17a-3 would be amended to include a requirement that broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, make and keep current ledger accounts (or other records) itemizing separately as to each security-based swap: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier.

107

105

See

17 CFR 240.17a-3(a)(3).

106

See

paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed Rule 18a-5.

107

See

paragraph (a)(3) of Rule 17a-3, as proposed to be amended.

Paragraph (a)(3) of Rule 18a-5 is modeled on paragraph (a)(3) of Rule 17a-3, as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same types of ledgers (or other records).

108

Unlike paragraph (a)(3) of Rule 17a-3, paragraph (a)(3) of proposed Rule 18a-5 would not refer to “cash and margin accounts” as these types of accounts involve activities that would not be permitted of stand-alone SBSDs and stand-alone MSBSPs because they are not registered as broker-dealers.

109

Paragraph (b)(2) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current ledger accounts (or other records) relating to securities and commodity transactions but only with respect to their security-based swap customers and non-customers.

110

108

Compare

paragraph (a)(3) of Rule 17a-3, as proposed to be amended,

with

paragraph (a)(3) of proposed Rule 18a-5.

109

See id.

110

See

paragraph (b)(2) of proposed Rule 18a-5. The Commission has proposed a definition of

security-based swap customer

for the purposes of proposed Rule 18a-4.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70278. Proposed Rule 18a-4—which is modeled on Rule 15c3-3—would establish segregation requirements for SBSDs with respect to their security-based swap customers.

Id.

at 70274-70288. The term

security-based swap customer

would be defined in proposed Rule 18a-4 to mean any person from whom or on whose behalf the SBSD has received or acquired or holds funds or other property for the account of the person with respect to a cleared or non-cleared security-based swap transaction.

Id.

at 70278. The definition would exclude a person to the extent that person has a claim for funds or other property which by contract, agreement or understanding, or by operation of law, is part of the capital of the SBSD or is subordinated to all claims of security-based swap customers of the SBSD.

Id.

Stock Record

Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and keep current a securities record (also referred to as a “stock record”).

111

This is a record of the broker-dealer's custody and movement of securities. The “long” side of the record accounts for the broker-dealer's responsibility as a custodian of securities and shows, for example, the securities the firm has received from customers and securities owned by the broker-dealer. The “short” side of the record shows where the securities are located such as at a securities depository.

111

See

17 CFR 240.17a-3(a)(5).

The Commission is proposing to amend paragraph (a)(5) of Rule 17a-3 to require that the securities record specifically account for security-based swaps, and to include parallel securities record requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(5) of Rule 17a-3, as proposed to be amended.

112

Paragraph (a)(5) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for securities other than security-based swaps and one for security-based swaps.

113

Specifically, paragraph (a)(5)(i) would apply to securities other than security-based swaps and largely mirror the current text of paragraph (a)(5) of Rule 17a-3.

114

Paragraph (a)(5)(ii) would apply to security-based swaps.

115

This paragraph would require a broker-dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make and keep current a securities record or ledger reflecting separately for each security-based swap: (1) The reference security, index, or obligor; (2) the unique transaction identifier; (3) the unique counterparty identifier; (4) whether it is a “long” or “short” position in the security-based swap; (5) whether the security-based swap is cleared or not cleared; and (6) if cleared, identification of the clearing agency where the security-based swap is cleared.

116

112

See

paragraph (a)(5) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4) and (b)(3) of proposed Rule 18a-5.

113

See

paragraphs (a)(5)(i)-(ii) of Rule 17a-3, as proposed to be amended.

114

Compare

17 CFR 240.17a-3(a)(5),

with

paragraph (a)(5)(i) of Rule 17a-3, as proposed to be amended.

115

See

paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended.

116

See id.

Paragraph (a)(4) of proposed Rule 18a-5 mirrors paragraph (a)(5) of Rule 17a-3 as proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to make and keep current the same type of securities record.

117

Paragraph (b)(3) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make and keep current a securities record of the firm's securities positions but only with respect to positions related to their business as an SBSD or MSBSP.

118

117

Compare

paragraph (a)(5) of Rule 17a-3, as proposed to be amended,

with

paragraph (a)(4) of proposed Rule 18a-5.

118

See

paragraph (b)(3) of proposed Rule 18a-5.

Memoranda of Brokerage Orders

Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security. The memorandum must show the terms and conditions of each brokerage order.

119

The Commission is proposing to amend paragraph (a)(6) of Rule 17a-3 to require

broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current a memorandum of each brokerage order, given or received for the purchase or sale of a security-based swap.

120

The Commission is not proposing to include a parallel provision in paragraph (a) of proposed Rule 18a-5 applicable to stand-alone SBSDs and stand-alone MSBSPs because these registrants would not be permitted to engage in the business of effecting brokerage orders in security-based swaps without registering as a broker-dealer or a bank.

121

The Commission is proposing to include a parallel provision that would be applicable to bank SBSDs and bank MSBSPs in paragraph (b) of proposed Rule 18a-5 that is modeled on paragraph (a)(6) of Rule 17a-3, as proposed to be amended.

122

119

See

17 CFR 240.17a-3(a)(6).

120

See

paragraph (a)(6) of Rule 17a-3, as proposed to be amended.

121

Generally, persons engaged in brokerage activities are required to register as brokers under section 15(b) of the Exchange Act.

See

15 U.S.C. 78o(b). Banks are permitted to engage in certain limited securities brokerage activities. Specifically, section 3(a)(4) of the Exchange Act provides eleven exceptions to broker-dealer registration for banks.

See

15 U.S.C. 78c(a)(4). In addition, the Commission and the Federal Reserve promulgated joint rules establishing further exemptions permitting banks to engage in certain securities brokerage activities without registering as a broker-dealer.

See Definitions of Terms and Exemptions Relating to the “Broker” Exceptions for Banks,

Exchange Act Release No. 56501 (Sept. 24, 2007), 72 FR 56514 (Oct. 3, 2007); 17 CFR 247.100-781. These exceptions and exemptions permit a bank to act as a broker or agent in securities transactions provided they satisfy certain conditions. Section 716 of the Dodd-Frank Act (“Swap Push-Out Provision”) generally prohibits providing certain types of federal assistance, including FDIC insurance, to SBSDs and MSBSPs with respect to any swap, security-based swap, or other activity of the SBSD or MSBSP.

See

Public Law 111-203, 716. The Swap Push-Out Provision excludes MSBSPs that are insured depository institutions.

See

Public Law 111-203, 716(b)(2)(B). Further, SBSDs that are insured depository institutions are permitted to engage in certain swap and security-based swap activities under certain conditions and still qualify for federal assistance.

See

Public Law 111-203, 716(d) through (f). Thus, a bank SBSD or bank MSBSP may act as a broker or agent in a security-based swap transaction. In such instances, the brokerage order record requirements of paragraph (b)(4) of proposed Rule 18a-5 would apply.

122

See

paragraph (b)(4) of proposed Rule 18a-5.

Paragraph (a)(6) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for brokerage orders involving securities other than security-based swaps and one for brokerage orders involving security-based swaps.

123

Specifically, proposed paragraphs (a)(6)(i)(A) and (B) would apply to securities other than security-based swaps and largely mirror the current text of paragraph (a)(6) of Rule 17a-3.

124

Proposed paragraph (a)(6)(ii) would apply to brokerage orders involving security-based swaps.

125

This paragraph would require a broker-dealer, including a broker-dealer SBSD and broker-dealer MSBSP, to make and keep current a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security-based swap, whether executed or unexecuted. The memorandum would need to include information that is similar to the information currently required under Rule 17a-3 for brokerage orders.

126

In addition, to account for the attributes of security-based swaps, the memorandum would need to include: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique counterparty identifier.

127

123

See

paragraph (a)(6) of Rule 17a-3, as proposed to be amended. Rule 17a-3 currently contains paragraphs (a)(6)(i) and (ii).

See

17 CFR 240.17a-3(a)(6)(i) and (ii). Under the amendments, paragraph (a)(6)(i) of Rule 17a-3 would be redesignated as paragraph (a)(6)(i)(A) and paragraph (a)(6)(ii) would be redesignated as paragraph (a)(6)(i)(B). The new requirement to make and keep current a memorandum of each security-based swap brokerage order would be contained in paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended.

124

Compare

17 CFR 240.17a-3(a)(6)(i) and (ii),

with

paragraphs (a)(6)(i)(A) and (B) of Rule 17a-3, as proposed to be amended.

125

See

paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended.

126

Compare

17 CFR 240.17a-3(a)(6)(i),

with

paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended.

127

See

paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended.

Paragraph (b)(4) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to document key terms of brokerage orders but only with respect to security-based swaps.

128

Consequently, proposed paragraph (b)(4) would not contain a provision for securities that are not security-based swaps.

129

Instead, the entire paragraph mirrors paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended, which, as discussed above, relates solely to security-based swaps.

130

128

See

paragraph (b)(4) of proposed Rule 18a-5.

129

See id.

130

Compare

paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended,

with

paragraph (b)(4) of proposed Rule 18a-5.

Memoranda of Proprietary Orders

Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each purchase and sale for the account of the broker-dealer.

131

Generally, paragraph (a)(7) of Rule 17a-3 requires broker-dealers to document the terms of securities transactions where they are acting as a dealer or otherwise trading for their own account. The Commission is proposing to amend paragraph (a)(7) of Rule 17a-3 to require the terms of security-based swap transactions to be documented, and to include parallel memorandum requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(7) of Rule 17a-3, as proposed to be amended.

132

Paragraph (a)(7) of Rule 17a-3, as proposed to be amended, would contain two separate provisions: One for securities other than security-based swaps and one for security-based swaps.

133

Specifically, proposed paragraph (a)(7)(i) would apply to securities other than security-based swaps and largely would mirror the current text of paragraph (a)(7) of Rule 17a-3.

134

Paragraph (a)(7)(ii) would apply to security-based swaps.

135

This paragraph would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current a memorandum documenting each security-based swap transaction for the account of the broker-dealer. The memorandum would need to include certain information regarding the purchase or sale of a security-based swap for the account of the broker-dealer that is similar to the information currently required under paragraph (a)(7) of Rule 17a-3.

136

137

131

See

17 CFR 240.17a-3(a)(7).

132

See

paragraph (a)(7) of Rule 17a-3, as proposed to be amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.

133

See

paragraphs (a)(7)(i) and (ii) of Rule 17a-3, as proposed to be amended.

134

Compare

17 CFR 240.17a-3(a)(7),

with

paragraph (a)(7)(i) of Rule 17a-3, as proposed to be amended.

135

See

paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended.

136

Compare

17 CFR 240.17a-3(a)(7),

with

paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended.

137

See

paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended.

Paragraph (a)(5) of proposed Rule 18a-5 would require stand-alone SBSDs and stand-alone MSBSPs to make memoranda of proprietary transactions but only with respect to security-based swaps.

138

This is because a stand-alone SBSD or a stand-alone MSBSP would need to be registered as a broker-dealer

(and therefore would be subject to Rule 17a-3) (or, in certain circumstances, a bank) to deal in securities other than security-based swaps. Paragraph (b)(5) of proposed Rule 18a-5 would require bank SBSDs and bank MSBSPs to make memoranda of proprietary transactions but also only with respect to security-based swaps.

139

138

See

paragraph (a)(5) of proposed Rule 18a-5.

139

See

paragraph (b)(5) of proposed Rule 18a-5.

Confirmations

Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to make and keep current copies of confirmations of purchases and sales of securities.

140

The Commission is proposing to amend paragraph (a)(8) to require that confirmations of security-based swaps be documented, and to include analogous confirmation requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on paragraph (a)(8) of Rule 17a-3, as proposed to be amended.

141

Paragraph (a)(8) of Rule 17a-3, as proposed to be amended, would contain separate provisions: One for securities other than security-based swaps and one for security-based swaps.

142

Specifically, proposed paragraph (a)(8)(i) would apply to confirmations of securities transactions other than security-based swap transactions and largely mirror the current text of paragraph (a)(8) of Rule 17a-3.

143

Proposed paragraph (a)(8)(ii) would apply to confirmations of security-based swap transactions.

144

As discussed above, section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs.

145

Pursuant to section 15F(i)(2), the Commission proposed Rule 15Fi-1 under the Exchange Act (“Rule 15Fi-1”) to prescribe standards related to timely and accurate confirmation and documentation of security-based swaps.

146

Under this proposed rule, SBSDs and MSBSPs would be required to acknowledge and, thereafter, verify security-based swap transactions.

147

Consequently, paragraph (a)(8)(ii) of Rule 17a-3 would require broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current copies of the security-based swap trade acknowledgments and verifications made pursuant to proposed Rule 15Fi-1.

148

140

See

17 CFR 240.17a-3(a)(8).

See also

Basel Committee on Banking Supervision, Bank for International Settlements,

Principles for Sound Liquidity Risk Management and Supervision,

n.2 (Sept. 2008),

available at http://www.bis.org/publ/bcbs144.pdf

(“Funding liquidity risk is the risk that the firm will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the firm. Market liquidity risk is the risk that a firm cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption.”);

Amendments to Financial Responsibility Rules for Broker-Dealers,

Exchange

Act Release No. 55432 (Mar. 9, 2007), 72 FR 12862, 12870 n.72 (Mar. 19, 2007) (“Liquidity risk includes the risk that a firm will not be able to unwind or hedge a position or meet cash demands as they become due.”);

Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies,

Federal Reserve, 77 FR 594 (Jan. 5, 2012) (proposing a rule to require certain large financial institutions to conduct liquidity stress testing at least monthly).

176

See

Senior Supervisors Group,

Risk Management Lessons from the Global Bank Crisis of 2008,

(Oct. 21, 2009),

available at http://www.sec.gov/news/press/2009/report102109.pdf

177

Id.

at 14 (“Market conditions and the deteriorating financial state of firms exposed weaknesses in firms' approaches to liquidity stress testing, particularly with respect to secured borrowing and contingent funding needs. These deteriorating conditions underscored the need for greater consideration of the overlap between systemic and firm-specific events and longer time horizons, and the connection between stress tests and business-as-usual liquidity management.”).

178

Id.

at 15 (“Interviewed firms typically calculated and maintained a measurable funding cushion, such as `months of coverage,' which is conceptually similar to rating agencies' twelve-month liquidity alternatives analyses. Some institutions were required to maintain a liquidity cushion that could withstand the loss of

unsecured

funding for one year. Many institutions found that this metric did not capture important elements of stress that the organizations faced, such as the loss of secured funding and demands for collateral to support clearing and settlement activity and to mitigate the risks of accepting novations.”) (emphasis in the original).

The Commission has proposed that certain broker-dealers, including broker-dealer SBSDs, and certain stand-alone SBSDs be subject to liquidity stress test requirements.

179

In particular, the Commission has proposed amendments to Rule 15c3-1 that would establish liquidity stress test requirements for broker-dealers that have been approved to use internal models to calculate market and credit risk charges when computing net capital (“ANC broker-dealers”), which would include broker-dealer SBSDs approved to use internal models for this purpose (“ANC broker-dealer SBSDS”).

180

The Commission has proposed identical liquidity stress test requirements for stand-alone SBSDs that are approved to use internal models to calculate market and credit risk charges when computing net capital under proposed Rule 18a-1 (“stand-alone ANC SBSDs”).

181

Under the proposed liquidity stress test requirements, ANC broker-dealers and stand-alone ANC SBSDs would be required, among other things, to conduct a liquidity stress test at least monthly that takes into account certain assumed conditions lasting for thirty consecutive days and to establish a written contingency funding plan.

179

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70252-70254 (proposing funding liquidity stress test requirements).

180

Id.

Rule 15c3-1 requires that a broker-dealer perform two calculations: (1) A computation of the minimum amount of net capital the firm must maintain; and (2) a computation of the amount of net capital the firm is maintaining.

See

17 CFR 240.15c3-1. In computing net capital, a broker-dealer must, among other things, make certain adjustments to net worth such as deducting illiquid assets and taking other capital charges and adding qualifying subordinated loans.

See

17 CFR 240.15c3-1(c)(2)(i) through (xiii). The amount remaining after these deductions is defined as

tentative net capital

See

17 CFR 240.15c3-1(c)(15). The final step in computing net capital is to take prescribed percentage deductions (“standardized haircuts”) from the mark-to-market value of the proprietary positions (

e.g.,

securities, money market instruments, and commodities) that are included in tentative net capital.

See

17 CFR 240.15c3-1(c)(2)(vi). The standardized haircuts are designed to account for the market risk inherent in these positions and to create a buffer of liquidity to protect against other risks associated with the securities business. ANC broker-dealers and OTC derivatives dealers are permitted, with Commission approval, to calculate net capital using internal models as the basis for taking market risk and credit risk charges in lieu of the standardized haircuts for classes of positions for which they have been approved to use models.

See

17 CFR 240.15c3-1(a)(5) and (a)(7); 17 CFR 240.15c3-1e; 17 CFR 240.15c3-1f. Broker-dealer SBSDs that seek to use internal models to calculate market and credit risk charges when computing net capital would need to be approved to operate as ANC broker-dealers.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70217-70256. Theoretically, a broker-dealer MSBSP could be authorized to operate as an ANC broker-dealer, in which case it would be subject to the liquidity stress test requirement.

181

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70252-70254.

To promote compliance with these proposed requirements and the risk management practices of ANC broker-dealers, the Commission is proposing to amend Rule 17a-3 to add a requirement that ANC broker-dealers, including ANC broker-dealer SBSDs, make and keep current a report of the results of the monthly liquidity stress test, a record of the assumptions underlying the liquidity stress test, and the liquidity funding plan required under the proposed amendments to Rule 15c3-1.

182

The Commission is not proposing to include a similar provision in paragraph (b) of proposed Rule 18a-5 applicable to bank SBSDs because these registrants would not be subject to the Commission's capital requirements, including the funding liquidity stress test requirement. However, the Commission is proposing to include a parallel provision applicable to stand-alone SBSDs in paragraph (a) of proposed Rule 18a-5 that is modeled on the requirement that would be added to Rule 17a-3, as proposed to be amended.

183

Consequently, stand-alone ANC SBSDs would be required to make and keep current a report of the results of the monthly liquidity stress test, a record of the assumptions underlying the liquidity stress test, and the liquidity funding plan.

184

182

See

paragraph (a)(24) of Rule 17a-3, as proposed to be amended.

183

Compare

paragraph (a)(24) of Rule 17a-3, as proposed to be amended,

with

paragraph (a)(11) of proposed Rule 18a-5.

184

See

paragraph (a)(11) of proposed Rule 18a-5.

Account Equity and Margin Calculations Under Proposed Rule 18a-3

The Commission has proposed Rule 18a-3, which would establish margin requirements with respect to non-cleared security-based swaps applicable to nonbank SBSDs and nonbank MSBSPs.

185

Proposed Rule 18a-3 would require nonbank SBSDs, among other things, to perform two daily calculations for each security-based swap account: The amount of equity in the account and a margin amount for the account.

186

Nonbank MSBSPs would be required to calculate only the equity in the account.

187

The Commission is proposing to require that nonbank SBSDs and nonbank MSBSPs make and keep current a record of the daily calculations that would be required under Rule 18a-3 by amending Rule 17a-3 and including a parallel provision in paragraph (a) of proposed Rule 18a-5.

188

The objective of these requirements is to promote compliance with proposed Rule 18a-3, to require records to assist nonbank SBSDs and nonbank MSBSPs in managing their credit risk to security-based swap counterparties, and to assist Commission examiners in reviewing

compliance with those rule requirements.

189

185

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70257-70274.

186

Id.

at 70260-70262.

187

Id.

at 70262-70263.

188

See

paragraph (a)(25) of Rule 17a-3, as proposed to be amended; paragraph (a)(12) of proposed Rule 18a-5.

See also Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70257-70274.

189

As discussed above in section I. of this release, section 15F(e)(1)(A) of the Exchange Act provides that the prudential regulators shall prescribe capital and margin requirements for bank SBSDs and bank MSBSPs.

See

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

Possession or Control Requirements Under Proposed Rule 18a-4

Rule 15c3-3 under the Exchange Act (“Rule 15c3-3”) requires a broker-dealer that carries customer securities or cash (a “carrying broker-dealer”) to maintain physical possession or control over customers' fully paid and excess margin securities.

190

Physical possession or control means the carrying broker-dealer must hold these securities in one of several locations specified in Rule 15c3-3 and free of liens or any other interest that could be exercised by a third party to secure an obligation of the broker-dealer.

191

Permissible locations include a bank, as defined in section 3(a)(6) of the Exchange Act, and a clearing agency.

192

The Commission has proposed Rule 18a-4 to establish security-based swap customer protection requirements that are modeled on the requirements in Rule 15c3-3.

193

Paragraph (b)(1) of proposed Rule 18a-4 would require an SBSD to promptly obtain and thereafter maintain physical possession or control of all excess securities collateral carried for the accounts of security-based swap customers.

194

The physical possession or control requirement of paragraph (b)(1) of proposed Rule 18a-4 would prohibit SBSDs from lending or hypothecating excess securities collateral of security-based swap customers, and would require SBSDs to either physically hold excess securities collateral or to custody the collateral in a satisfactory control location.

195

Paragraph (b)(2) of proposed new Rule 18a-4 would identify five satisfactory control locations for excess securities collateral.

196

Paragraph (b)(3) of Rule 18a-4 would require that each business day the SBSD must determine from its books and records the quantity of excess securities collateral that the firm had in its possession or control as of the close of the previous business day and the quantity of excess securities collateral the firm did not have in its possession or control on that day.

197

The paragraph would provide further that the SBSD must take steps to retrieve excess securities collateral from certain specifically identified non-control locations if securities and money market instruments of the same issue and class are at these locations.

198

190

See

17 CFR 240.15c3-3(d). The term

fully paid securities

includes all securities carried for the account of a customer in a special cash account as defined in Regulation T promulgated by the Federal Reserve, as well as margin equity securities within the meaning of Regulation T which are carried for the account of a customer in a general account or any special account under Regulation T during any period when section 8 of Regulation T (12 CFR 220.8) specifies that margin equity securities shall have no loan value in a general account or special convertible debt security account, and all such margin equity securities in such account if they are fully paid: provided, however, that the term

fully paid securities

shall not apply to any securities which are purchased in transactions for which the customer has not made full payment.

See

17 CFR 240.15c3-3(a)(3). The term

margin securities

means those securities carried for the account of a customer in a general account as defined in Regulation T, as well as securities carried in any special account other than the securities referred to in paragraph (a)(3) of Rule 15c3-3.

See

17 CFR 240.15c3-3(a)(4). The term

excess margin securities

means those securities referred to in paragraph (a)(4) of Rule 15c3-3 carried for the account of a customer having a market value in excess of 140% of the total of the debit balances in the customer's account or accounts encompassed by paragraph (a)(4) of Rule 15c3-3 which the broker-dealer identifies as not constituting margin securities.

See

17 CFR 240.15c3-3(a)(5).

191

See

17 CFR 240.15c3-3(c). Customer securities held by the carrying broker-dealer are not assets of the firm. Rather, the carrying broker-dealer holds them in a custodial capacity and the possession or control requirement is designed to ensure that the carrying broker-dealer treats them in a manner that allows for their prompt return.

192

Id.

193

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70274-70288. As broker-dealers, broker-dealer SBSDs and broker-dealer MSBSPs would be subject to Rule 15c3-3 with respect to customers that are not security-based swap customers and, in the case of a broker-dealer SBSD, Rule 18a-4 with respect to security-based swap customers.

Id.

at 70277 (“A broker-dealer SBSD would need to treat security-based swap accounts separately from other securities accounts and, consequently, would need to perform separate possession or control and reserve account computations for security-based swap accounts and other securities accounts. The former would be subject to the possession or control and reserve account requirements in proposed new Rule 18a-4 and the latter would continue to be subject to the analogous requirements in Rule 15c3-3. This would keep separate the segregated customer property related to security-based swaps from customer property related to other securities, including property of retail securities customers.”).

194

Under proposed Rule 18a-4, the term

excess securities collateral

would be defined to mean securities and money market instruments carried for the account of a security-based swap customer that have a market value in excess of the current exposure of the SBSD to the customer, excluding, under certain specified conditions, securities or money market instruments used to meet a margin requirement of a registered security-based swap clearing agency or of another SBSD.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70279. As noted above, the term

security-based swap customer

would be defined to mean any person from whom or on whose behalf the SBSD has received or acquired or holds funds or other property for the account of the person with respect to a cleared or non-cleared security-based swap transaction.

Id.

195

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70278.

196

Id.

at 70280-70281.

197

Id.

at 70281-70282.

198

Id.

at 70281.

The Commission is proposing to require that all SBSDs make and keep current a record of compliance with the possession or control requirement under proposed Rule 18a-4 by amending Rule 17a-3 to add this new requirement and including parallel requirements in paragraphs (a) and (b) of proposed Rule 18a-5.

199

Consequently, this new recordkeeping requirement would apply to broker-dealer SBSDs, stand-alone SBSDs, and bank SBSDs.

200

The records required under this proposal would need to document that each business day the firm took the steps required under paragraph (b) of proposed Rule 18a-3 described above. The objective of this new recordkeeping requirement would be to promote compliance with the possession or control requirements of proposed Rule 18a-4 and to assist Commission examiners in reviewing compliance.

199

See

paragraph (a)(26) of Rule 17a-3, as proposed to be amended; paragraphs (a)(13) and (b)(9) of proposed Rule 18a-5.

200

See id.

Customer Reserve Requirements Under Proposed Rule 18a-4

Rule 15c3-3 requires a carrying broker-dealer to maintain a reserve of funds or qualified securities in an account at a bank that is at least equal in value to the net cash owed to customers.

201

The amount of net cash owed to customers is computed pursuant to a formula set forth in Exhibit A to Rule 15c3-3.

202

The Commission has proposed a parallel requirement in proposed Rule 18a-4.

203

Proposed Rule 18a-4 would require an SBSD, among other things, to maintain a security-based swap customer reserve

account at an unaffiliated bank separate from any other bank account of the SBSD.

204

Further, it would provide that the SBSD must at all times maintain in the security-based swap customer reserve account cash and/or qualified securities in amounts computed daily in accordance with Exhibit A to proposed Rule 18a-4.

205

201

See

17 CFR 240.15c3-3(e). The term

qualified security

is defined in Rule 15c3-3 to mean a security issued by the U.S. or a security in respect of which the principal and interest are guaranteed by the U.S.

See

17 CFR 240.15c3-3(a)(6).

202

See

17 CFR 240.15c3-3a.

203

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

77 FR 70282-70287. As noted above, broker-dealer SBSDs and broker-dealer MSBSPs would be subject to Rule 15c3-3 with respect to customers that are not security-based swap customers and, in the case of a broker-dealer SBSD, Rule 18a-4 with respect to security-based swap customers.

204

Id.

205

Id.

The Commission is proposing to require that all types of SBSDs make and keep current a record of their reserve computations under proposed Rule 18a-4 by amending Rule 17a-3 to add the requirement and to include parallel requirements in paragraphs (a) and (b) of proposed Rule 18a-5.

206

The objective of this requirement would be to promote SBSD compliance with the customer reserve computation requirement and to assist Commission examiners in reviewing compliance.

206

See

paragraph (a)(27) of Rule 17a-3, as proposed to be amended; paragraphs (a)(14) and (b)(10) of proposed Rule 18a-5.

Unverified Transactions

Prudent practice requires counterparties to promptly confirm the terms of executed OTC derivatives transactions.

207

Consequently, the Commission proposed Rule 15Fi-1 to promote the efficient operation of the security-based swap market and to facilitate market participants' management of the risk of trading in security-based swaps.

208

Among other things, proposed Rule 15Fi-1 would require broker-dealers, SBSDs, and MSBSPs to provide trade acknowledgments containing the details of a security-based swap transaction within prescribed timeframes and to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of the trade acknowledgments.

209

207

See Trade Acknowledgment and Verification of Security-Based Swap Transactions,

76 FR 3860.

208

Id.

at 3861.

209

Id.

at 3861-3867.

To promote compliance with proposed Rule 15Fi-1 and the risk management practices of broker-dealers, SBSDs, and MSBSPs, the Commission is proposing to amend Rule 17a-3 to add a requirement to make a record of each security-based swap trade acknowledgment that is not verified within five business days of execution and to include parallel provisions in paragraphs (a) and (b) of proposed Rule 18a-5.

210

Consequently, all types of SBSDs and MSBSPs would be required to make and keep current these records. While the Commission did not prescribe a timeframe in proposed Rule 15Fi-1 within which security-based swap trade acknowledgements would need to be verified, the proposed rule does require procedures reasonably designed to obtain “prompt verification.”

211

The proposed requirement to make a record of security-based swap trade acknowledgments that are not verified within five business days is not intended to establish a maximum timeframe within which verification should be obtained under proposed Rule 15Fi-1. The five business day threshold is designed to require SBSDs and MSBSPs to make a record of transactions that have gone unverified for a significant length of time.

212

This could indicate a deficiency in the controls established to verify transactions or the existence of a disagreement with the counterparty as to the terms of the transaction.

210

See

paragraph (a)(28) of Rule 17a-3, as proposed to be amended; paragraphs (a)(15) and (b)(11) of proposed Rule 18a-5.

211

See Trade Acknowledgment and Verification of Security-Based Swap Transactions,

76 FR 3866.

212

Proposed Rule 15Fi-1 requires registered entities to verify the terms of security-based swap transactions with the counterparty. However, a party that is not a registered entity is not required to verify a security-based swap transaction. Registered entities must have procedures to verify security-based swap transactions with unregistered entities.

Id.

at 3866-3867.

Records Relating to Business Conduct Standards

The Commission has proposed Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-1 to establish external business conduct requirements for SBSDs and MSBSPs.

213

As currently proposed, the requirements in these rules, would address (among other things):

213

See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 64766 (June 29, 2011), 76 FR 42396 (July 18, 2011).

• Verification of the status of the counterparty;

• Certain disclosures related to the daily mark and its calculation;

• Disclosures regarding material incentives, conflicts of interest, material risks, and characteristics of the security-based swap, and certain clearing rights;

• Certain “know your counterparty” and suitability obligations for SBSDs;

• Supervisory requirements including written policies and procedures;

• Certain requirements regarding interactions with special entities;

• Provisions intended to prevent SBSDs and independent representatives of special entities from engaging in certain “pay to play” activities; and

• Certain minimum requirements relating to chief compliance officers.

To promote compliance with these external business conduct standards, the Commission is proposing amendments to Rule 17a-3 and to include parallel provisions in paragraphs (a) and (b) of proposed Rule 18a-5.

214

First, the Commission is proposing that all types of SBSDs be required to make and keep current a record that demonstrates their compliance with proposed Rule 15Fh-6 (regarding political contributions by certain security-based swap dealers).

215

Second, the Commission is proposing that all types of SBSDs and MSBSPs be required to make and keep current a record that demonstrates their compliance with proposed Rules 15Fh-1 through 15Fh-5 and Rule 15Fk-1, as applicable.

216

These paragraphs would require covered firms to keep supporting documents evidencing their compliance with the business conduct standards; a mere attestation of compliance would not be sufficient. To the extent that the rules require providing or receiving written disclosures or written representations, the SBSD or MSBSP would be required to retain a copy of such disclosure or representation.

217

214

See

paragraphs (a)(29) and (a)(30) of Rule 17a-3, as proposed to be amended; paragraphs (a)(16), (a)(17), (b)(12) and (b)(13) of proposed Rule 18a-5.

215

See

paragraph (a)(29) of Rule 17a-3, as proposed to be amended; paragraphs (a)(16) and (b)(12) of proposed Rule 18a-5.

216

See

paragraph (a)(30) of Rule 17a-3, as proposed to be amended; paragraphs (a)(17) and (b)(13) of proposed Rule 18a-5. Paragraph (b)(2) of proposed Rule 15Fk-1 would require chief compliance officers of SBSDs and MSBSPs to establish, maintain and review written policies and procedures reasonably designed to achieve compliance with section 15F of the Act and the rules and regulations thereunder, by the SBSDs and MSBSPs.

217

See

paragraph (a)(14) of Rule 17a-4, as proposed to be amended; paragraphs (b)(1)(xii) and (b)(2)(vii) of proposed Rule 18a-6.

Request for Comment

The Commission generally requests comment on the proposals to require broker-dealers, SBSDs, and MSBSPs to make and keep current certain types of records. In addition, the Commission requests comment, including empirical data in support of comments, in response to the following questions:

1. Are the provisions in Rule 17a-3 that would be included as parallel provisions in paragraph (a) of proposed Rule 18a-5 appropriate for stand-alone SBSDs and stand-alone MSBSPs? If not, explain why not. Are there alternative provisions the Commission should consider? If so, describe them. Are there provisions in Rule 17a-3 that are not being included as parallel provisions in paragraph (a) of proposed Rule 18a-5 that would be appropriate for stand-alone SBSDs and stand-alone MSBSPs? If so, explain why.

2. Are the provisions in Rule 17a-3 that would be included as parallel provisions in paragraph (b) of proposed Rule 18a-5 appropriate for bank SBSDs and bank MSBSPs? If not, explain why not. Are there alternative provisions the Commission should consider? If so, describe them. Are there provisions in Rule 17a-3 that are not being included as parallel provisions in paragraph (b) of proposed Rule 18a-5 that would be appropriate for bank SBSDs and bank MSBSPs? If so, explain why.

3. Are the recordkeeping provisions that would be added to paragraph (a) of Rule 17a-3 appropriate for broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs? If not, explain why not. Are there alternative provisions the Commission should consider? If so, describe them.

4. Paragraph (a)(23) of Rule 17a-3, as recently amended, requires certain broker-dealers to make and keep current a record documenting the broker-dealer's credit, market, and liquidity risk management controls.

218

Should an analogous requirement be added to Rule 18a-5? Explain why or why not.

218

See Financial Responsibility Rules for Broker-Dealers,

78 FR 51907.

5. Is the five business day time frame for triggering the unverified transaction record requirement an appropriate length of time? Should the time frame be shorter (

e.g.,

three days)? Should the time frame be longer (

e.g.,

seven or ten days)?

6. How do the types of records that would need to be made under Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5 align with the types of records that an FCM or a swap dealer would be required to make? Commenters are asked to identify and explain requirements that they believe would result in a dually registered entity (

e.g.,

a broker-dealer/FCM or an SBSD/swap dealer) needing to make two sets of records that address the same matter or information as opposed to a single record that includes information that would satisfy requirements of both recordkeeping programs.

7. As noted above, certain data elements that would need to be documented under the proposed amendments to Rule 17a-3 or proposed Rule 18a-5 are substantively the same as certain data elements that would need to be reported under proposed Rule 901. Should any additional data elements required to be reported under proposed Rule 901 be required to be recorded in the daily trading records under the proposed amendments to Rule 17a-3 or proposed Rule 18a-5? Are any of the data elements that would be required to be recorded in the daily trading records not appropriate for such records? If so, identify them and explain why. Are there any data elements that should be required to be recorded even though they are not required by proposed Rule 901? If so, identify them and explain why.

8. Can the data elements with respect to security-based swaps that would be required to be recorded in the daily trading records under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5 be stored in, and retrieved from, a single database in order to generate the various types of records that would need to be made (

e.g.,

ledger accounts, securities record, memoranda of brokerage orders, and memoranda of proprietary trades)? If not, explain why not. If so, describe any system changes that would need to be made and identify, estimate, and quantify the burden(s) associated with such system changes.

9. Paragraph (a)(29) of Rule 17a-3, as proposed to be amended, and paragraphs (a)(16) and (b)(12) of proposed Rule 18a-5 require broker-dealer SBSDs, stand-alone SBSDs, and bank SBSDs, respectively, to make and keep a record that demonstrates they complied with the business conduct standards required under proposed Rule 15Fh-6. Should these paragraphs also require these entities to make and keep specified records pertaining to proposed Rule 15Fh-6 to help in evaluating compliance? Explain why or why not. For example, based on the provisions of proposed Rule 15Fh-6, should the following rule text be used in paragraphs (a)(29) and (a)(30) of Rule 17a-3, as proposed to be amended (and in paragraphs (a)(16) and (a)(17), and paragraphs (b)(12) and (b)(13) of proposed Rule 18a-5):

“(29) A record with respect to § 240.15Fh-6 [as proposed at 76 FR 42396, July 18, 2011] containing the following information:

(i) The names, titles, and business and residence addresses of all covered associates of the broker or dealer;

(ii) All municipal entities to which a broker or dealer has provided services in connection with the solicitation or entry into security-based swaps or trading strategies involving security-based swaps in the past five years, but not before six months prior to the effective date of § 240.15Fh-6 [as proposed at 76 FR 42396, July 18, 2011]; and

(iii) In chronological order, all direct or indirect contributions made by the broker or dealer or any of its covered associates (including contributions made up to six months prior to becoming a covered associate) to an official of a municipal entity, or direct or indirect payments to a political party of a state or political subdivision thereof, or to a political action committee, including:

(A) The name and title of each contributor;

(B) The name and title, including the city, county, state, or other political subdivision, of each recipient of a contribution or payment;

(D) The amount and date of each contribution and payment; and

(E) Whether any such contribution was the subject of the exception for certain returned contributions pursuant to § 240.15Fh-6(d) or (e) [as proposed at 76 FR 42396, July 18, 2011]; and

(iv) The name and business address of each municipal advisor to whom the broker or dealer provides or agrees to provide, directly or indirectly, payment to solicit a municipal entity for services on its behalf; and, for purposes of this paragraph, the terms

contribution, covered

associates, municipal entity,

official of municipal entity, payment

and

solicit

will have the same meaning as set forth in § 240.15Fh-6(a) [as proposed at 76 FR 42396, July 18, 2011].

(30) A record that demonstrates the broker or dealer has complied with the business conduct standards as required under § 240.15Fh-1 through § 240.15Fh-6 and § 240.15Fk-1 [as proposed at 76 FR 42396, July 18, 2011].”?

If this rule text should be used, explain why. If this rule text should not be used, explain why not. Is there alternative rule text that should be used? If so, explain why alternative rule text should be used?

b. Additional Proposed Amendments to Rule 17a-3

The Commission is proposing several amendments to Rule 17a-3 to eliminate obsolete text, improve readability, and modernize terminology. Reference is made throughout Rule 17a-3 to “members” of a national securities exchange as a distinct class of registrant in addition to “brokers” and “dealers”. The Commission is proposing to remove these references to “members” given that the rule applies to brokers-dealers, which would include members of a national securities exchange that are brokers-dealers.

219

The Commission is

proposing a second global change that would replace the word “shall” in the rule with the word “must” or “will” where appropriate.

220

Similarly, when defining terms, the Commission is proposing to replace the phrase “shall mean” with the word “means”.

221

The Commission also proposes to make certain stylistic, corrective, and punctuation amendments to improve the rule's readability.

222

219

The proposed amendments would delete the word “member” from the title and from the following paragraphs of Rule 17a-3, as proposed to

be amended: (a), (a)(3), (a)(5)(i), (a)(6)(i), (a)(7)(i), (a)(8)(i), (a)(9), (a)(10), (a)(11), (a)(12), (a)(17)(i), (a)(18), (a)(19), (a)(20), (a)(22), (b), (e), (f)(2), and (f)(4).

See

Rule 17a-3, as proposed to be amended.

220

The proposed amendments would replace the word “shall” with the word “must” or “will” in the following paragraphs of Rule 17a-3, as proposed to be amended: (a), (a)(6)(i)(A), (a)(7)(i), (a)(10), (a)(11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i), (a)(19)(i), (b), (d), (e), and (f)(4).

See

Rule 17a-3, as proposed to be amended.

221

The proposed amendments would replace the phrase “shall mean” with the word “means” in the following paragraphs of Rule 17a-3, as proposed to be amended: (a)(6)(i)(A), (a)(16)(ii)(A), and (a)(16)(ii)(B).

See

Rule 17a-3, as proposed to be amended.

222

The Commission proposes the following stylistic and corrective changes to Rule 17a-3, as proposed to be amended: (1) Adding to paragraph (a)(1) the phrase “such securities were”; (2) adding to paragraph (a)(4)(vi) the word “and” after the semicolon; (3) replacing the word “of” with the word “or” in paragraph (a)(5), resulting in the phrase “for its account

for the account of its customers or partners”; (4) replacing the phrase “purchase or sale of securities” with the phrase “purchase or sale of a security” in the first sentence of paragraph (a)(6)(i); (5) replacing the word “and” with the word “or” in paragraph (a)(7), resulting in the phrase “A memorandum of each purchase

sale”; (6) replacing the phrase “in respect of” to with the phrase “with respect to” in paragraph (a)(9); (7) adding the phrase “, as applicable:” after the word “indicating” in paragraph (a)(9); (8) including the word “and” between the second-to-last and last subparagraphs of paragraph (a)(9) (instead of after every subparagraph); (9) replacing cross-reference in paragraph (a)(12) to “paragraph (h)(4)” with a cross-reference to “paragraph (f)(4)” due to the proposed deletion of two paragraphs; (10) amending paragraph (a)(12)(i)(G) to refer to a “broker or dealer” instead of a “broker-dealer”; and (11) replacing the superfluous “or” with a comma in the phrase “wrongful taking of property or bribery” in paragraph (a)(12)(i)(G).

The Commission is proposing to simplify the text in paragraph (a) of Rule 17a-3 to state that Rule 17a-3 applies to “every broker or dealer”, since the undesignated introductory paragraph already provides sufficient detail as to the types of registrants to which the rule applies.

223

See

undesignated introductory paragraph of Rule 17a-3, as proposed to be amended.

In recognition of the fact that broker-dealers may execute orders for non-customers, the Commission is proposing to amend paragraph (a)(6) of Rule 17a-3 to specify that a broker-dealer must maintain a copy of the customer's

or non-customer's

subscription agreement.

The Commission is proposing to restructure paragraph (a)(11) of Rule 17a-3 to eliminate paragraphs (a)(11)(i)-(ii).

224

Under these amendments, the text of paragraph (a)(11)(i) of Rule 17a-3 would be set forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as proposed to be amended, and the text of paragraph (a)(11)(ii) would be deleted from the rule.

225

224

See

paragraph (a)(11) of Rule 17a-3, as proposed to be amended.

225

Id.

The Commission is proposing to amend the “Provided, however” paragraph in paragraph (a)(12) of Rule 17a-3 that follows paragraph (a)(12)(i)(H) by replacing the list of SROs and exchanges with the term “a self-regulatory organization.”

226

Thus, rather than naming specific SROs, the paragraph would use the generic term “a self-regulatory organization.”

226

See

paragraph (a)(12) of Rule 17a-3, as proposed to be amended.

The Commission also is proposing amendments to paragraph (b) of Rule 17a-3. Paragraph (b)(1) is designed to avoid duplication and prevent an introducing broker-dealer from having to make and keep current the same records that would customarily be made by the firm's clearing broker-dealer. However, the language in paragraph (b)(1) beginning with the phrase “

Provided,

That” is outdated insofar is it references a capital standard that has been superseded. In revising paragraph (b)(1), the intent of the provision—to avoid the duplicative creation of records related to transactions introduced by one broker or dealer and cleared by a different broker or dealer—remains the same. However, the Commission is proposing to clarify the provision and eliminate the outdated capital standard reference.

227

The Commission also is proposing to delete paragraph (b)(2) as it would be redundant of paragraph (b) of Rule 17a-3, as proposed to be amended.

227

Paragraph (b) of Rule 17a-3, as proposed to be amended, would read as follows: “A broker or dealer registered pursuant to section 15 of the Act, that introduces accounts on a fully-disclosed basis, is not required to make or keep such records of transactions cleared for such broker or dealer as are made and kept by a clearing broker or dealer pursuant to the requirements of § 240.17a-3 and § 240.17a-4. Nothing herein will be deemed to relieve such broker or dealer from the responsibility that such books and records be accurately maintained and preserved as specified in § 240.17a-3 and § 240.17a-4.”

The Commission is proposing to remove paragraphs (c) and (d) of Rule 17a-3. Paragraph (c) is outdated and references instruments such as U.S. Defense Savings Stamps and U.S. Defense Savings Bonds that are no longer widely circulated and thus a specific carve-out for these instruments from the general rule set forth in paragraph (a) of Rule 17a-3 is antiquated.

228

Paragraph (d) provides a

de minimis

exception from paragraph (a) of Rule 17a-3 for any cash transaction of $100 or less involving only subscription rights or warrants which by their terms expire within 90 days after the issuance thereof. This exemption was adopted in 1953 to reduce the burden and expense of making accounting entries for these rights transactions. The Commission preliminarily believes that the burden associated with these accounting entries is no longer significant in light of the technological advances in recordkeeping systems since

1953.

229

In addition, the Commission preliminarily believes the removal of this exemption would affect a small number of transactions.

228

The Defense Savings Bond initiated by the U.S. Treasury and the U.S. Defense Savings Stamps introduced by the U.S. Postal Service were measures to finance the U.S. effort in World Wars I and II. The bonds matured in 10 years from the date of issuance. The Defense Savings Bonds were replaced by Series E savings bonds, which ceased to be issued as of June 1980. Today, these instruments are not widely held and are valued more as collectibles than for their face value.

See

information

available at www.Treasurydirect.gov.

229

See Preservation of Records and Reports of Certain Stabilizing Activities,

18 FR 2879 (May 19, 1953) (“It has been pointed out to the Commission that the accounting entries appropriate in the case of the usual securities transaction are unnecessarily burdensome and expensive as to these rights transactions because of the small sums involved and because in many cases there is no continuing relationship between the customer and the firm”).

As a consequence of the proposed removal of current paragraphs (c) and (d) from Rule 17a-3, current paragraphs (e), (f), (g), and (h) would be redesignated as paragraphs (c), (d), (e), and (f), respectively.

Current paragraph (e) references Municipal Securities Rulemaking Board (“MSRB”) Rule G-8 and states that compliance with such rule will be deemed to be compliance with this section. The proposed amendments would add the phrase “or any successor rule” to the reference to Rule G-8 so that the cross-reference does not become superseded over time.

Request for Comment

The Commission generally requests comment on these additional proposed amendments to Rule 17a-3, including comment on whether any of the proposed amendments would result in substantive changes to the requirements applicable to broker-dealers. In addition, the Commission requests comment, including empirical data in support of comments, in response to the following questions:

1. Paragraphs (a)(12)(i)(E) through (G) of Rule 17a-3 currently require broker-dealers to retain certain records with

regard to certain actions taken against their associated persons when they were associated with a broker-dealer. Should these requirements be expanded to include actions taken when they were associated with other types of entities (

e.g.,

SBSDs, MSBSPs, FCMs, investment advisers)? If so, which entities should be covered? Please explain. Also identify, estimate, and quantify any associated burdens with expanding these requirements to include actions taken when broker-dealers are associated with these other types of entities.

2. Do broker-dealers still rely on the exemptions provided in paragraphs (b)(2), (c), and/or (d) of Rule 17a-3? If so, quantify the extent to which these exemptions are relied on, and the burden associated with the Commission's proposal to eliminate these exemptions. In addition, would any system changes be needed if the exemptions provided in paragraphs (b)(2), (c), and/or (d) of Rule 17a-3 were eliminated? If so, identify, estimate, and quantify the burden(s) associated with such system changes.

3. Record Maintenance and Preservation Requirements

As discussed above, Rule 17a-4 requires a broker-dealer to preserve certain types of records if it makes or receives them. The rule also prescribes the period of time these records and the records required to be made and kept current under Rule 17a-3 must be preserved and the manner in which they must be preserved. The Commission is proposing amendments to Rule 17a-4 that are designed to account for the security-based swap activities of broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs.

230

The Commission also is proposing additional largely technical amendments to Rule 17a-4. With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission is proposing new Rule 18a-6—which is modeled on Rule 17a-4, as proposed to be amended—to establish record maintenance and preservation requirements for these types of registrants.

230

Broker-Dealer SBSDs and broker-dealer MSBSPs would be subject to all the record maintenance and preservation requirements applicable to broker-dealers under Rule 17a-4, as proposed to be amended, plus the additional requirements specifically applicable only to SBSDs and MSBSPs.

For the reasons discussed above in sections I. and II.A.1. of this release, proposed Rule 18a-6 does not include a parallel requirement for every requirement in Rule 17a-4.

231

In addition, for the reasons described in section I. of this release, the recordkeeping requirements in proposed Rule 18a-6 applicable to bank SBSDs and bank MSBSPs are more limited in scope than the requirements in the rule applicable to stand-alone SBSDs and stand-alone MSBSPs.

231

The Commission is not proposing to include in proposed Rule 18a-6 requirements that would parallel the requirements in paragraphs (b)(11), (g), (h), (k), and (l) of Rule 17a-4. These requirements relate to activities that the Commission preliminarily believes would not be relevant to stand-alone SBSDs or stand-alone MSBSPs. Other requirements in Rule 17a-4 that would not be included as parallel requirements in proposed Rule 18a-6 are discussed below.

The proposed amendments to Rule 17a-4 and proposed Rule 18a-6 are discussed in more detail below.

a. Amendments to Rule 17a-4 and Proposed Rule 18a-6

Undesignated Introductory Paragraph

Rule 17a-4, as proposed to be amended, would contain an undesignated introductory paragraph explaining that the rule applies to a broker-dealer, including a broker-dealer dually registered with the Commission as an SBSD or MSBSP.

232

The note further explains that an SBSD or MSBSP that is not dually registered as a broker-dealer (

i.e.,

a stand-alone SBSD, stand-alone MSBSP, bank SBSD, or bank MSBSP) is subject to the record maintenance and preservation requirements under proposed Rule 18a-6.

233

232

See

undesignated introductory paragraph of Rule 17a-4, as proposed to be amended.

233

Id.

Similarly, proposed Rule 18a-6 would contain an undesignated introductory paragraph explaining that the rule applies to an SBSD or MSBSP that is not registered as a broker-dealer.

234

The note further explains that a broker-dealer that is dually registered as an SBSD or MSBSP is subject to the record maintenance and preservation requirements under Rule 17a-4.

235

234

See

undesignated introductory paragraph of proposed Rule 18a-6.

235

Id.

Six Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5 Records

Paragraph (a) of Rule 17a-4 provides that brokers-dealers subject to Rule 17a-3 must preserve for a period of not less than six years, the first two years in an easily accessible place, certain categories of records required to be made and kept current under Rule 17a-3 (the “six year preservation requirement”).

236

Specifically, the six year preservation requirement applies to records required under the following paragraphs of Rule 17a-3, as proposed to be amended: Paragraph (a)(1) (trade blotters); paragraph (a)(2) (general ledgers); paragraph (a)(3) (ledgers of customer and non-customer accounts); paragraph (a)(5) (stock record); paragraph (a)(21) (person who can explain records at each office); paragraph (a)(22) (principal responsible for establishing compliance procedures); and paragraph (d) (security future product records).

237

Consequently, broker-dealer SBSDs and broker-dealer MSBSPs would be required to preserve for six years the same categories of records as broker-dealers not registered as SBSDs or MSBSPs.

238

236

See

17 CFR 240.17a-4(a).

237

Id.

As discussed below in section II.A.3.b. of this release, the Commission is proposing technical amendments to paragraph (a) of Rule 17a-4.

238

See

paragraph (a) of Rule 17a-4, as proposed to be amended.

As discussed above in section II.A.2.a. of this release, paragraphs (a) and (b) of proposed Rule 18a-5 would contain certain recordkeeping requirements that are parallel to existing requirements in Rule 17a-3. Under these parallel requirements, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would need to make and keep current certain categories of records that broker-dealers must maintain under the six year preservation requirement in Rule 17a-4. Consequently, paragraph (a) of proposed Rule 18a-6 similarly would require that these categories of records must be preserved for a period of not less than six years, the first two years in an easily accessible place.

239

Further, similar to paragraphs (a) and (b) of proposed Rule 18a-5, paragraph (a) of proposed Rule 18a-6 contains one set of six year preservation requirements applicable to stand-alone SBSDs and stand-alone MSBSPs and a separate set applicable to bank SBSDs and bank MSBSPs.

240

239

See

paragraph (a) of proposed Rule 18a-6.

240

Id.

In particular, paragraph (a)(1) of proposed Rule 18a-6 would apply to stand-alone SBSDs and stand-alone MSBSPs.

241

These registrants would be required to preserve for at least six years, the first two years in an easily accessible place, the records required to be made and kept current under the following paragraphs of proposed Rule 18a-5: Paragraph (a)(1) (trade blotters); paragraph (a)(2) (general ledgers); paragraph (a)(3) (ledgers of customer

and non-customer accounts); and paragraph (a)(4) (stock record).

242

Paragraph (a)(2) of proposed Rule 18a-6 would apply to bank SBSDs and bank MSBSPs.

243

These registrants would be required to preserve for at least six years, the first two years in an easily accessible place, the records required under the following paragraphs of proposed Rule 18a-5: Paragraph (b)(1) (trade blotters); paragraph (b)(2) (ledgers of security-based swap customers and non-customers); and paragraph (b)(3) (stock record).

244

241

See

paragraph (a)(1) of proposed Rule 18a-6 (providing that it applies to SBSDs and MSBSPs subject to paragraph (a) of proposed Rule 18a-5).

242

See

paragraph (a)(1) of proposed Rule 18a-6.

243

See

paragraph (a)(2) of proposed Rule 18a-6 (providing that it applies to SBSDs and MSBSPs subject to paragraph (b) of proposed Rule 18a-5).

244

See

paragraph (a)(2) of proposed Rule 18a-6.

Three Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5 Records

Paragraph (b) of Rule 17a-4 provides that broker-dealers subject to Rule 17a-3 must preserve for at least three years, the first two years in an easily accessible place, certain records required to be made and kept current under Rule 17a-3 (the “three year preservation requirement”).

245

Specifically, paragraph (b)(1) of Rule 17a-4 imposes the three year preservation requirement on the records required to be made and kept current under the following paragraphs of Rule 17a-3, as proposed to be amended: Paragraph (a)(4) (certain ledgers); paragraph (a)(6) (memoranda of brokerage orders); paragraph (a)(7) (memoranda of proprietary orders); paragraph (a)(8) (confirmations); paragraph (a)(9) (accountholder information); paragraph (a)(10) (options positions); paragraph (a)(16) (internal broker-dealer system); paragraph (a)(18) (associated person complaints); paragraph (a)(19) (associated person compensation); paragraph (a)(20) (advertisement and sales literature compliance); and paragraph (e) (records of each broker-dealer office).

246

245

See

17 CFR 240.17a-4(b).

246

Id.

Currently, Rule 17a-4 does not cross-reference paragraph (a)(11) of Rule 17a-3 (trial balances and computation of net capital).

See

17 CFR 240.17a-3(a)(11); 17 CFR 240.17a-4. The Commission is proposing to correct this omission by adding a cross reference to paragraph (a)(11) of Rule 17a-3 in paragraph (b)(1) of Rule 17a-4, as proposed to be amended. This would require broker-dealers to preserve these records for three years, the first two years in an easily accessible place. Based on staff experience, the Commission believes that broker-dealers have been preserving these records in a manner consistent with this proposed requirement.

The Commission is not proposing to amend or change any of the existing cross-references to Rule 17a-3 in paragraph (b)(1) of Rule 17a-4.

247

The Commission is, however, proposing to add cross-references to certain new paragraphs that would be added to Rule 17a-3 to address security-based swap activities of broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs. Specifically, paragraph (b)(1) of Rule 17a-4, as proposed to be amended, would apply the three year preservation requirement to the records required under the following paragraphs of Rule 17a-3, as proposed to be amended: Paragraph (a)(24) (liquidity stress test); paragraph (a)(25) (proposed Rule 18a-3 calculations); paragraph (a)(26) (compliance with proposed Rule 18a-4 possession or control requirements); paragraph (a)(27) (proposed Rule 18a-4 reserve account computations); paragraph (a)(28) (unverified transactions); paragraph (a)(29) (political contributions); and paragraph (a)(30) (compliance with external business conduct requirements).

248

247

See

paragraph (b)(1) of Rule 17a-4, as proposed to be amended.

248

Id.

As discussed above in section II.A.2.a. of this release, paragraphs (a) and (b) of proposed Rule 18a-5 would require stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep current certain categories of records that broker-dealers are required to make and keep current under Rule 17a-3 and certain categories of records the Commission is proposing broker-dealers be required to make and keep current under amendments to Rule 17a-3. Under these parallel requirements, stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs would need to make and keep current certain categories of records that currently are subject to the three year preservation requirement in Rule 17a-4 or, with respect to the new categories of records, are proposed to be subject to the three year preservation requirement. Consequently, paragraph (b) of proposed Rule 18a-6 would similarly require that these categories of records be preserved for a period of not less than three years, the first two years in an easily accessible place.

249

Further, similar to paragraph (a) of proposed Rule 18a-6, paragraph (b) would contain two sets of provisions.

250

249

See

paragraph (b) of proposed Rule 18a-6.

250

Id.

Paragraph (b)(1)(i) of proposed Rule 18a-6 would apply to stand-alone SBSDs and stand-alone MSBSPs.

251

These registrants would be required to preserve for a period of not less than three years, the first two years in an easily accessible place, the records required to be made and kept current under the following paragraphs of proposed Rule 18a-5, as applicable: Paragraph (a)(5) (memoranda of proprietary orders); paragraph (a)(6) (confirmations); paragraph (a)(7) (accountholder information); paragraph (a)(8) (options positions); paragraph (a)(9) (trial balances and computation of net capital or tangible net worth); paragraph (a)(11) (liquidity stress test); paragraph (a)(12) (proposed Rule 18a-3 calculations); paragraph (a)(13) (compliance with proposed Rule 18a-4 possession or control requirements); paragraph (a)(14) (proposed Rule 18a-4 reserve account computations); paragraph (a)(15) (unverified transactions); paragraph (a)(16) (political contributions); and paragraph (a)(17) (compliance with external business conduct requirements).

252

251

See

paragraph (b)(1)(i) of proposed Rule 18a-6 (providing that it applies to SBSDs and MSBSPs subject to paragraph (a) of proposed Rule 18a-5).

252

See

paragraph (b)(1)(i) of proposed Rule 18a-6.

Paragraph (b)(2) of proposed Rule 18a-6 wo

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