Amendment to Single Issuer Exemption for Broker-Dealers, 27708-27713 [2019-12563]
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Federal Register / Vol. 84, No. 115 / Friday, June 14, 2019 / Rules and Regulations
Schleicher) applied for validation of a
type certificate change to add the Model
ASK 21 B glider in accordance with the
‘‘Technical Implementation Procedures
for Airworthiness and Environmental
Certification Between the FAA and the
European Aviation Safety Agency
(EASA),’’ Revision 6, dated September
22, 2017. This model is a modified
version of the Model ASK 21 glider and
will be documented on existing Type
Certificate Number (No.) G47EU. The
Model ASK 21 B is a two-seat, mid-wing
glider constructed from glass-fiber
reinforced plastic and features a 55.8
foot (17 meters) wingspan with
airbrakes on the upper wing surface.
The glider has a non-retractable landing
gear with a nose wheel and shockabsorbed, braked main wheel and a
T-type tailplane. The glider has a
maximum weight of 1,323 pounds (600
kilograms).
EASA type certificated the Model
ASK 21 B glider in the utility and
aerobatic categories and issued Type
Certificate No. EASA.A.221, dated
August 9, 2018. The associated EASA
Type Certificate Data Sheet (TCDS) No.
EASA.A.221 defined the certification
basis, which Alexander Schleicher
submitted to the FAA for review and
acceptance.
Gliders are type certificated by the
FAA as special class aircraft for which
airworthiness standards have not yet
been established by regulation. Under
the provisions of 14 CFR 21.17(b), the
airworthiness standards for special class
aircraft are those found by the FAA to
be appropriate and applicable to the
specific type design. FAA Advisory
Circular (AC) 21.17–2A 1 provides
guidance on acceptable design criteria
for the type certification of gliders and
powered gliders in the United States.
AC 21.17–2A allows applicants to
utilize the Joint Aviation Requirements
(JAR)–22,2 other airworthiness criteria
comparable to 14 CFR part 23, or a
combination of both as the means for
showing compliance for glider
certification.
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Comments
Airworthiness Criteria: Glider Design
Criteria for Alexander Schleicher GmbH
& Co. Segelflugzeugbau Model ASK 21
B Glider was published in the Federal
Register on April 2, 2019 (84 FR 12529).
No comments were received and the
airworthiness design criteria are
adopted as proposed.
1 Ref
AC 21.17–2A, ‘‘Type Certification—FixedWing Gliders (Sailplanes), Including Powered
Gliders,’’ dated February 10, 1993.
2 Ref JAR–22, ‘‘Sailplanes and Powered
Sailplanes.’’
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Type Certification Basis
The certification basis for the Model
ASK 21 B will be the same as the
certification basis for the Model ASK 21
as shown on TCDS No. G47EU, Revision
1, except for areas affected by the
change, which will use EASA
Certification Specification (CS)–22 3 as
shown in these airworthiness design
criteria.
Citation
The authority citation for these
airworthiness design criteria is as
follows:
Authority: 49 U.S.C. 106(g), 40113, and
44701.
The Airworthiness Design Criteria
Applicable Airworthiness Criteria Under
14 CFR 21.17(b)
Based on the Special Class provisions
of § 21.17(b), the following
airworthiness requirements form the
FAA certification basis for the Model
ASK 21 B:
1. 14 CFR part 21, effective February
1, 1965, including amendments 21–1
through 21–53.
2. Lufttuechtigkeitsforderungen fuer
Segelflugzeuge and Motorsegler (LFSM)
Airworthiness Requirements for
Sailplanes and Powered Sailplanes,
dated October 23, 1975.
3. JAR–22, dated April 1, 1980,
including amendment 1, dated May 18,
1981.
4. CS–22, amendment 2, dated March
5, 2009, for the following regulations:
CS 22.147, 22.455, 22.477, 22.561
except (b)(2), 22.595, 22.597, 22.629,
22.677, 22.685, 22.689, 22.721, 22.771,
22.773, 22.777, 22.779, 22.780, 22.781,
22.785, 22.786, 22.787, 22.788, 22.807,
and 22.831.
5. AC 21.23–1, section 5(e)(6), dated
January 12, 1981.
6. Operations are limited to Day VFR
and to flying in Instrument
Meteorological Conditions (IMC) if the
glider is equipped as required under 14
CFR 91.205. Night operation is
prohibited.
7. FAA Type Certificate Application
Date: August 16, 2018.
8. EASA Type Certificate No.
EASA.A.221, Issue 05, dated August 9,
2018.
3 Ref EASA CS–22, ‘‘Certification Specifications
for Sailplanes and Powered Sailplanes,’’
amendment 2, dated March 5, 2009.
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Issued in Kansas City, Missouri, on June 5,
2019.
Pat Mullen,
Manager, Small Airplane Standards Branch,
Policy & Innovation Division, Aircraft
Certification Service.
[FR Doc. 2019–12626 Filed 6–13–19; 8:45 am]
BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–86073; File No. S7–21–18]
RIN 3235–AM47
Amendment to Single Issuer
Exemption for Broker-Dealers
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Final rule.
AGENCY:
The Commission is adopting
an amendment to an exemptive
provision in the broker-dealer annual
reporting rule under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’).
The exemption provides that a brokerdealer is not required to engage an
independent public accountant to
certify the broker-dealer’s annual
reports filed with the Commission if,
among other things, the securities
business of the broker-dealer has been
limited to acting as broker (agent) for a
single issuer in soliciting subscriptions
for securities of that issuer.
DATES: Effective Date: August 13, 2019.
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, Deputy
Associate Director, at (202) 551–5522;
Timothy C. Fox, Branch Chief, at (202)
551–5687; or Rose Russo Wells, Special
Counsel, at (202) 551–5527, Division of
Trading and Markets, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION: The
Commission is amending 17 CFR
240.17a–5 (‘‘Rule 17a–5’’).
SUMMARY:
I. Final Rule Amendment
Most broker-dealers registered with
the Commission must annually file with
the Commission a financial report and
either a compliance report or exemption
report.1 In addition, paragraph
1 15 U.S.C. 78q(a)(1); 15 U.S.C. 78q(e)(1)(A);
paragraph (d) of Rule 17a–5. See also paragraphs
(d)(1)(iii) and (iv) of Rule 17a-5 (setting forth the
limited circumstances under which the annual
reports need not be filed). Pursuant to paragraphs
(d)(1)(i)(B)(1) and (2) of Rule 17a–5, a broker-dealer
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(d)(1)(i)(C) of Rule 17a–5 requires the
broker-dealer to include with the annual
reports reports prepared by an
independent public accountant covering
the financial report and, as applicable,
the compliance or exemption report.2
The accountant must be qualified and
independent in accordance with 17 CFR
210.2–01 (‘‘Rule 2–01 of Regulation S–
X’’) and must be registered with the
Public Company Accounting Oversight
Board (‘‘PCAOB’’) if required by the
Sarbanes-Oxley Act of 2002 (‘‘SarbanesOxley Act’’).3 However, paragraph
(e)(1)(i)(A) of Rule 17a–5 exempts a
broker-dealer from engaging an
independent public accountant to
provide the accountant’s reports if,
since the date of the registration of the
broker-dealer with the Commission or of
the previous annual reports filed with
the Commission:
• The securities business of the
broker-dealer has been limited to acting
as broker (agent) for the issuer in
soliciting subscriptions for securities of
the issuer;
• The broker has promptly
transmitted to the issuer all funds and
promptly delivered to the subscriber all
securities received in connection with
the transaction; and
• The broker has not otherwise held
funds or securities for or owed money
or securities to customers.
In September 2018, the Commission
proposed amending this exemption to
correct an error that inadvertently
amended the rule in 2013 and to clarify
that the exemption is available only for
a broker-dealer that acts as broker
(agent) for a single issuer in soliciting
subscriptions for securities of that
issuer.4 More particularly, the 2018
proposal followed a series of
amendments to the exemption, which
occurred in 1975, 1977, and 2013, that
inadvertently resulted in the rule text
providing that the exemption applies if
the broker-dealer solicited subscriptions
that does not claim it was exempt from 17 CFR
240.15c3–3 (‘‘Rule 15c3–3’’) throughout the most
recent fiscal year must file the compliance report,
and a broker-dealer that claims it was exempt from
Rule 15c3–3 throughout the most recent fiscal year
must file the exemption report. The compliance
report must contain statements about the brokerdealer’s internal control over, and compliance with,
certain financial responsibility rules. The
exemption report must contain statements about the
broker-dealer’s exemption from Rule 15c3–3.
2 See 17 CFR 240.17a–5(d)(1)(i)(C).
3 Public Law 107–204, 116 Stat. 745 (2002). See
17 CFR 240.17a–5(f)(1).
4 See Amendment to Single Issuer Exemption for
Broker-Dealers, Exchange Act Release No. 84225
(Sept. 20, 2018), 83 FR 48733 (Sept. 27, 2018)
(‘‘Proposing Release’’). See also Broker-Dealer
Reports, Exchange Act Release No. 70073 (Jul. 30,
2013), 78 FR 51910, 51943 (Aug. 21, 2013).
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for ‘‘the issuer’’ rather than for ‘‘an
issuer.’’ 5
The Commission received two
comment letters in response to the
proposed amendment to this exemptive
provision.6 The first commenter did not
address the proposed amendment.7 The
second commenter stated that it was a
‘‘one-person sole proprietorship,’’ that
the ‘‘only business conducted is acting
as an agent for redeemable mutual funds
and variable insurance products,’’ that
the ‘‘firm does not engage in
underwriting, nor does the firm hold or
owe customer funds or securities,’’ that
‘‘[c]ustomer checks are made payable to
the mutual fund or insurance
company,’’ and that ‘‘[a]pplications and
checks are promptly sent to the
company.’’ 8 The commenter stated that
the proposed amendment ‘‘would block
the use of the exemption for firms that
do not hold or owe customer funds or
securities and act as an agent for mutual
funds,’’ that it ‘‘forces limited business
firms, operating under a SEC Rule 15c3–
3 exemption, to hire a PCAOB-registered
accountant,’’ that for ‘‘a small firm . . .
the cost of compliance is an onerous
burden,’’ and that ‘‘increased PCAOB
requirements make the cost
unaffordable for the firm.’’ The
commenter stated that the ‘‘firm
provides personalized service to
customers and has a valuable place in
the community of broker-dealers.’’ For
these reasons, the commenter
‘‘request[ed] that the proposed
regulation be amended to allow such
limited business firms [such as the
commenter’s firm] to file an annual
report prepared by an independent
public accountant (CPA), but not
necessarily registered with the
[PCAOB].’’
In response to the commenter’s
request, the Commission notes that the
exemption in paragraph (e)(1)(i)(A) of
Rule 17a–5 that was proposed to be
modified in this rulemaking addresses
whether a broker-dealer must comply
with paragraph (d)(1)(i)(C) of the rule,
which requires the broker-dealer to file
reports prepared by an independent
public accountant with its annual
reports. The Commission’s proposal did
not address the requirement that the
independent public accountant must be
registered with the PCAOB, which is
prescribed in Section 17(e)(1)(A) of the
5 See Proposing Release 83 FR at 48734
(describing the series of events that led to the
inadvertent amendment to the rule).
6 The comment letters are available at https://
www.sec.gov/comments/s7-21-18/s72118.htm.
7 See Letter from Amr A Daoud, dated Sept. 24,
2018.
8 See Letter from Howard Feigenbaum, dated Oct.
24, 2018 (‘‘Feigenbaum Letter’’).
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27709
Exchange Act and paragraph (f)(1) of
Rule 17a–5. The proposal also did not
address the requirement that the
independent public accountant must
undertake to prepare the reports in
accordance with PCAOB standards,
which is prescribed in paragraph (g) of
Rule 17a–5. The commenter’s request,
consequently, asks the Commission to
create a new and different exemption. In
particular, the commenter requests that
the Commission create an exemption
pursuant to which a broker-dealer
engaged in the business described in the
comment letter would be exempt from
the requirements in Section 17(e)(1)(A)
of the Exchange Act and paragraph (f)(1)
of Rule 17a–5 to the extent they require
that the broker-dealer’s independent
public accountant be registered with the
PCAOB. The proposed amendment that
is the subject of this rulemaking would
not alter these requirements, nor did the
Commission contemplate doing so in
the Proposing Release. For these
reasons, the commenter’s request ‘‘that
the proposed regulation be amended to
allow such limited business firms to file
an annual report prepared by an
independent public accountant (CPA),
but not necessarily registered with the
[PCAOB]’’ is beyond the scope of this
rulemaking.9
The Commission understands that the
comment letter addresses only the
PCAOB-registration component of the
audit requirement. Nonetheless, the
Commission recognizes that this
commenter in a separate Commission
adjudicatory proceeding took the view
that the exemption in paragraph
(e)(1)(i)(A) of Rule 17a–5 should cover
a broker-dealer acting as an agent for
multiple issuers (which would exempt
such broker-dealers from the audit
requirement entirely).10 Accordingly,
the Commission believes that it is
appropriate to address in the context of
this rulemaking why the Commission
does not believe that an expansion of
the exemption to include broker-dealers
9 The Spring 2019 Unified Agenda of Federal
Regulatory and Deregulatory Actions stated that
‘‘[t]he Office of the Chief Accountant and the
Division of Trading and Markets are considering
recommending amendments to certain brokerdealer annual reporting, audit and notification
requirements that could differentiate the
requirements according to different classes of
broker-dealers.’’ See Commission, Spring 2019
Unified Agenda of Federal Regulatory and
Deregulatory Actions. Available at https://
www.reginfo.gov/public/do/eAgendaViewRule?
pubId=201904&RIN=3235-AM46. The potential
issues involved in adopting such an approach as the
commenter recommends, as well as the scope and
form such potential action could take, would likely
involve various policy issues that would warrant
careful consideration following public comment.
10 See In the Matter of the Application of
Sharemaster, Exchange Act Release No. 83138 (Apr.
30, 2018).
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that provide broker-dealer services for
more than a single issuer (even if the
broker-dealer limits its business in the
manner described in the comment
letter) would be appropriate.
The annual reports a broker-dealer
files with the Commission are used by
the Commission and the broker-dealer’s
designated examining authority to
monitor the financial and operational
condition of the broker-dealer and are
one of the primary means of monitoring
compliance with the Commission’s
broker-dealer financial responsibility
rules. The requirement that the annual
reports be covered by reports prepared
by an independent public accountant is
intended to enhance the reliability of
the information filed by the brokerdealer, including information relevant
to its financial condition, ability to
continue as a going concern, and its
handling of customer securities and
cash. This also benefits investors who
are customers or potential customers of
the broker-dealer and who do not have
access to the same level of information
about the financial condition and
operations of the broker-dealer as the
independent public accountant engaged
by the broker-dealer. These investors
rely on the independent public
accountant to audit this information.
The limited exemption to the
requirement that a broker-dealer’s
annual reports be audited by an
independent public accountant is
consistent with the objectives of the
rule. The exemption applies to a brokerdealer that acts as broker (agent) for a
single entity—an issuer that is typically
affiliated with the broker-dealer.
Therefore, the issuer is in a privileged
position to access sufficient information
about the financial condition and
operations of its agent—the brokerdealer affiliate—to make an informed
decision about continuing to use the
broker-dealer to effect transactions in its
securities. Moreover, by permitting the
broker-dealer to act as its agent, the
issuer has agreed that the broker-dealer
can legally bind the issuer. This implies
that the two entities have a special
relationship. For these reasons,
requiring that an independent public
accountant audit this information would
not provide a meaningful benefit to the
issuer, and the risk of harm to the issuer
is mitigated by its ability to access
information about its agent.
Expanding this exemption to brokerdealers similarly situated to the
commenter’s firm would not be
consistent with the objectives of Rule
17a–5 as described above. The comment
letter describes a firm that sells
‘‘redeemable mutual funds and variable
insurance products’’ and that in doing
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so ‘‘[c]ustomer checks are made payable
to the mutual fund or insurance
company’’ and states that
‘‘[a]pplications and checks are promptly
sent to the company.’’ 11 The comment
letter also stated that the firm ‘‘provides
personalized service to customers.’’ In
other words, the business described in
the comment letter involves acting on
behalf of, and selling securities and
insurance products to, retail investors.
These customers are not similarly
situated to an issuer that is affiliated
with a broker-dealer and for whom the
broker-dealer is acting as agent. Unlike
such an issuer, the customers do not
have a privileged position that allows
them to access sufficient information
about the financial condition and
operations of the broker-dealer to make
an informed decision about continuing
to use the broker-dealer to act on their
behalf in purchasing securities,
including entrusting the broker-dealer to
promptly forward their checks.
Moreover, selling the securities of
multiple issuers, including mutual
funds in a single family of mutual
funds, is different from acting as agent
for a single affiliated issuer. These
issuers may not be in the privileged
position of the affiliated issuer in terms
of accessing information about the
broker-dealer. Consequently, the
Commission believes that this type of
broker-dealer should continue to be
required to have its annual reports
covered by reports prepared by an
independent public accountant.
For the reasons described above and
in the Proposing Release, the
Commission is adopting the amendment
to Rule 17a–5 as proposed.
II. Paperwork Reduction Act
The rule amendment clarifies the
scope of an existing exemption available
to certain broker-dealers from the
requirement to file with the Commission
reports prepared by an independent
public accountant pursuant to
paragraph (d)(1)(i)(C) of Rule 17a–5. As
stated in the Proposing Release, the
Commission believes that the
amendment does not create any new, or
revise any existing, collection of
information pursuant to the Paperwork
Reduction Act of 1995.12 Accordingly,
no information was submitted to the
Office of Management and Budget for
review.
The Commission did not receive any
comments regarding its belief that the
rule amendment would not create any
new, or revise any existing, collection of
11 Feigenbaum
12 44
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U.S.C. 3501 et seq.
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information pursuant to the Paperwork
Reduction Act.
III. Economic Analysis
The Commission is mindful of the
costs imposed by, and the benefits
obtained from, its rules. As explained
below, the Commission expects that the
amendment will benefit issuers by
helping ensure that broker-dealers do
not inappropriately rely on the
exemption in paragraph (e)(1)(i)(A) of
Rule 17a–5. Whenever the Commission
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, Section 3(f) of the Exchange
Act requires the Commission to
consider whether the action would
promote efficiency, competition, and
capital formation, in addition to the
protection of investors. Further, when
engaged in rulemaking under the
Exchange Act, Section 23(a)(2) of the
Exchange Act requires the Commission
to consider the impact such rules would
have on competition. Section 23(a)(2) of
the Exchange Act also prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act. The following analysis
considers the potential economic effects
that may result from the rule
amendment, including the benefits and
costs to market participants as well as
the broader implications of the proposal
for efficiency, competition, and capital
formation.
Broker-dealers serve an important role
in capital formation by performing
numerous services, including with
respect to the distribution of securities.
Broker-dealer annual reports are one of
the primary means of monitoring
compliance with the Commission’s
broker-dealer financial responsibility
rules, and the requirement that the
annual reports be certified by a PCAOBregistered independent public
accountant is intended to help enhance
the reliability of the information filed by
the broker-dealer. The exemption in
paragraph (e)(1)(i)(A) of Rule 17a–5 is
designed to streamline regulatory
compliance for certain broker-dealers by
permitting broker-dealers that
underwrite offerings by a single issuer—
typically an affiliate of the brokerdealer—to do so without needing to
meet this requirement.
Broker-dealers rarely rely on the very
limited exemption in paragraph
(e)(1)(i)(A) of Rule 17a–5. Staff analysis
of annual reports filed by broker-dealers
revealed that only four broker-dealers—
out of approximately 4,000 registered
with the Commission—claimed the
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exemption in the last year. The low
level of use suggests that broker-dealers
generally do not avail themselves of the
existing exemption to compete with one
another or to improve the efficiency of
their underwriting activities.
The Commission recognizes the value
of requiring that broker-dealer annual
reports be certified by an independent
public accountant. However, when a
broker-dealer is acting solely as an agent
for a single issuer’s securities, typically
an affiliate, the issuer is likely to have
sufficient information about the brokerdealer’s financial and operational
condition. In that case, there would be
minimal benefit in a requirement that
the broker-dealer-dealer’s annual reports
be certified by an independent public
accountant. At the same time, a brokerdealer required to obtain such
certification for its annual reports could
bear significant costs to do so. The
Commission notes that one brokerdealer estimated the cost for a small
broker-dealer to obtain certification of
its annual reports by a PCAOBregistered independent public
accountant in accordance with
paragraph (d)(1)(i)(C) of Rule 17a–5
could be approximately $3,266 per
year.13
While it is possible that a brokerdealer might act as an agent for a single
unaffiliated issuer, the Commission
does not believe such a narrow
arrangement is likely. The Commission
expects that a broker-dealer that is able
to successfully market its services as an
agent for the securities of one
unaffiliated issuer would seek to market
those services to additional unaffiliated
issuers. In that case, the cost of having
the firm’s annual reports certified by a
PCAOB-registered public accountant
would likely be lower than the revenue
generated from acting as an agent for
multiple unaffiliated issuers.
However, in the event such an
arrangement were to exist, the
Commission acknowledges that the
benefits associated with certification by
an independent public accountant could
be greater than when the broker-dealer
is acting as agent for a single affiliated
issuer. However, the incremental benefit
likely would be limited because, even
though the entities are not affiliated,
they would likely have a special
relationship by virtue of the fact that the
broker-dealer’s underwriting business
13 According to one broker-dealer, an audit
prepared by a PCAOB-registered accountant would
cost $2,800 in 2010. See In the Matter of the
Application of Sharemaster, Exchange Act Release
No. 83138 (Apr. 30, 2018), at n. 4. Adjusting this
amount for inflation yields approximately $3,266 in
February 2019 (inflation calculator available at
https://www.bls.gov/data/inflation_calculator.htm).
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relies on that single issuer. Therefore,
the issuer likely would have better
access to information relating to the
broker-dealer’s financial and operational
condition than if the issuer were one of
several issuers for whom the brokerdealer acted as agent. For these reasons,
the Commission does not believe that
the incremental benefit of requiring the
annual reports to be certified by an
independent public accountant would
justify the costs in this scenario.
The Commission expects the
amendment to benefit issuers that rely
on broker-dealers to underwrite
securities offerings by providing
increased regulatory certainty about a
broker-dealer’s obligation to have its
annual reports certified by an
independent public accountant when
the broker-dealer acts as an agent for
multiple issuers. This will benefit
issuers by helping ensure that brokerdealers do not inappropriately rely on
the exemption in paragraph (e)(1)(i)(A)
of Rule 17a–5. When the broker-dealer
is not acting solely as an agent for a
single affiliate’s securities, the benefits
of certification are likely to be more
substantial because the issuers are less
likely to have sufficient information
about the broker-dealer’s financial
condition.
One commenter asserted that the cost
of compliance with the separate
requirements in Rule 17a–5 to engage an
independent public accountant
registered with the PCAOB (as
compared to an accountant that is not
registered with the PCAOB) represented
an ‘‘onerous burden’’ for a firm that
‘‘survives on a thin profit margin’’ and
that ‘‘increased PCAOB requirements
make the cost unaffordable for the
firm.’’ The Commisson acknowledges
that the incremental costs associated
with engaging an independent public
accountant registered with the PCAOB
as compared to an accountant that is not
so registered could result in certain
broker-dealers exiting the market if their
revenues are too low to cover the
incremental costs and remain profitable.
However, as discussed above, the
exemptive provision being modified in
this rulemaking addresses whether or
not the broker-dealer needs to file the
accountant’s reports (i.e., engage an
independent public accountant in the
first place). It does not address the
separate requirement in Rule 17a–5 that
the accountant be registered with the
PCAOB. With respect to the amendment
being adopted in this rulemaking, the
Commission continues to believe that
because of the low reliance on the
exemption currently, and the
expectation that the number of brokerdealers relying on the exemption will
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27711
not increase or decrease as a result of
the amendment, the overall economic
impact of the amendment is likely to be
small.
The Commission expects the
amendment to have only a marginal
impact on efficiency, competition, and
capital formation. This assessment is
primarily based on the belief that the
amendment does not revise the scope of
the exemption or change current
practice and that the exemption is
claimed by only a few broker-dealers.
The Commission nevertheless
acknowledges that the amendment
could marginally impair capital
formation if it prompts broker-dealers to
reduce underwriting activity or to
increase the price of underwriting
activities for potential issuers, and the
amendment could marginally reduce
efficiency if it prompts certain brokerdealers to exit the market, forcing
issuers to move their business to a
different broker-dealer.
The Commission considered several
alternatives in terms of the scope of the
exemption. First, the Commission
considered broadening the scope of the
exemption to include broker-dealers
whose securities business is limited to
acting as an agent for multiple issuers.
Staff analysis of information provided
by broker-dealers indicates that a
substantial number of registered brokerdealers underwrite corporate securities
or are selling group participants for
corporate securities and may otherwise
be eligible to take advantage of the
exemption if its scope were broadened
in this way.14
Relatedly, a commenter suggested that
the Commission include an exemption
for ‘‘limited business broker-dealers’’
from the requirement to engage a
PCAOB-registered accountant (i.e., an
exemption that would permit the
broker-dealer to engage an accountant
that is not registered with the PCAOB).
The commenter stated that it was a
‘‘one-person sole proprietorship,’’ that
the ‘‘only business conducted is acting
as an agent for redeemable mutual funds
and variable insurance products,’’ that
the ‘‘firm does not engage in
underwriting, nor does the firm hold or
owe customer funds or securities,’’ that
‘‘[c]ustomer checks are made payable to
the mutual fund or insurance
company,’’ and that ‘‘[a]pplications and
checks are promptly sent to the
company.’’
Rule 17a–5 provides only two
exemptions from the requirement that
14 Commission staff analysis of Form BD data
indicates that 948 registered broker-dealers reported
engaging in, or expecting to engage in, the
underwriting of securities at the end of 2018.
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Federal Register / Vol. 84, No. 115 / Friday, June 14, 2019 / Rules and Regulations
broker-dealer annual reports be certified
by an independent public accountant.15
The Commission has provided for only
these very limited exemptions from the
requirement that annual reports of
broker-dealers be audited due to the
importance of reliable financial and
operational information concerning
registered broker-dealers for investor
protection and the integrity of the
capital markets. Broadening the
exemption could benefit broker-dealers
by no longer requiring them to engage
independent public accountants when
they act as an agent for multiple issuers
in soliciting subscriptions for securities
and thereby reducing their costs.
However, an alternative that broadens
these exceptions could impose costs on
issuers to the extent that making the
certification by the independent public
accountant voluntary for broker-dealers
that serve multiple issuers reduces the
reliability of these broker-dealers’
annual reports.
Further, an alternative that broadens
the exemption to broker-dealers that
limit their business in the manner
described by the commenter would
impact retail customers who are not
similarly situated to an issuer that is
affiliated with a broker-dealer and for
whom the broker-dealer is acting as
agent. Unlike such an issuer, the
customers do not have a privileged
position that allows them to access
sufficient information about the
financial condition and operations of
the broker-dealer to make an informed
decision about continuing to use the
broker-dealer to act on their behalf in
purchasing securities, including
entrusting the broker-dealer to promptly
forward their checks. Consequently, this
alternative could impose costs on retail
customers to the extent they currently
rely on the reports of the independent
public accountants.
Given the significance of the
verification of a broker-dealer’s financial
and operational information by an
independent public accountant, the
Commission is not broadening the scope
of the exemption to include brokerdealers whose securities business is
limited to acting as an agent for multiple
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15 One
exemption is the ‘‘single issuer’’
exemption provided for in paragraph (e)(1)(i)(A) of
Rule 17a–5, which is the subject of this rulemaking.
The other exemption is contained in paragraph
(e)(1)(i)(B) of Rule 17a–5. The second exemption
applies to broker-dealers whose securities business
is ‘‘limited to buying and selling evidences of
indebtedness secured by mortgage, deed of trust, or
other lien upon real estate or leasehold interests,
and the broker or dealer has not carried any margin
account, credit balance, or security for any
securities customer.’’ Staff analysis of annual
reports filed by broker-dealers revealed that only
one broker-dealer claimed this exemption in the last
year.
VerDate Sep<11>2014
16:06 Jun 13, 2019
Jkt 247001
issuers. When a broker-dealer acts as an
agent on behalf of an issuer, the
financial condition of the broker-dealer
is important to the issuer because if a
broker-dealer is financially constrained,
it may be less able to bear the risks
associated with underwriting activities,
such as holding securities in inventory.
If a broker-dealer acts as an agent on
behalf of multiple issuers, its financial
condition is important to capital
formation for multiple issuers, and so
the benefits of certification are likely
higher for the broker-dealer. Moreover,
the Commission notes that the benefits
to broker-dealers from such an
alternative may be limited by
competitive effects, because an issuer
that is concerned about the reliability of
a broker-dealer’s financial statements
may choose to hire a broker-dealer with
certified annual reports to act as its
agent.
Second, the Commission considered
eliminating the exemption. While the
Commission is mindful of the
significance of broker-dealer audits, as
explained above, the Commission
believes that the cost of this alternative
to broker-dealers who are now eligible
to take advantage of the exemption does
not justify the benefits that would
accrue to the single issuer for which the
broker-dealer is acting as agent, which
is typically an affiliate of the brokerdealer, as a result of an audit. Therefore,
the Commission believes the exemption
should continue to be available where a
broker-dealer is acting as an agent for a
single issuer in soliciting subscriptions
for securities of that issuer.
Finally, the Commission considered
further specifying that the limited
exemption in paragraph (e)(1)(i)(A) of
Rule 17a–5 would apply only if the
broker-dealer were engaged in
underwriting the securities of an
affiliate. While this alternative would
narrow the limited exemption, based on
its observation of broker-dealers’ use of
this exemption to date, the Commission
does not believe the benefits yielded by
narrowing the exemption would be
substantial.
IV. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) 16 requires Federal agencies, in
promulgating rules, to consider the
impact of those rules on small entities.
Section 603(a) of the Administrative
Procedure Act,17 as amended by the
RFA, generally requires the Commission
to undertake a regulatory flexibility
analysis of all proposed rules, or
proposed rule amendments, to
determine the impact of such
rulemaking on ‘‘small entities.’’ Section
605(b) of the RFA states that this
requirement shall not apply to any
proposed rule or proposed rule
amendment, which if adopted, would
not have significant economic impact on
a substantial number of small entities.
In the proposing release, the
Commission certified, under section
605(b) of the Regulatory Flexibility Act,
that, when adopted, the proposed
amendments to paragraph (e)(1)(i)(A) of
Rule 17a–5 would not have a significant
economic impact on a substantial
number of small entities.18
Based on filings with the
Commission, the Commission believes
that four broker-dealers are currently
claiming the exemption in paragraph
(e)(1)(i)(A) of Rule 17a–5. The rule
amendment will not change whether a
broker-dealer would or would not
qualify for the exemption. For these
reasons, the Commission certifies that
the rule amendment will not have a
significant economic impact on a
substantial number of small entities for
purposes of the RFA.
V. Statutory Authority
The Commission is adopting
amendments to Rule 17a–5 under the
Exchange Act (17 CFR 240.17a–5)
pursuant to the authority conferred by
Exchange Act Sections 17(e)(1)(A),
17(e)(1)(C), and 36.19
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping
requirements, Securities.
Text of Rules
In accordance with the foregoing, the
Commission is amending title 17,
chapter II of the Code of Federal
Regulation as follows.
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read in part as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q,
79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3,
80b–4 and 80b–11, unless otherwise noted.
*
*
*
*
*
2. Amend § 240.17a–5 by revising
paragraph (e)(1)(i)(A) to read as follows.
■
18 See
16 See
5 U.S.C. 601 et seq.
17 5 U.S.C. 551 et seq.
PO 00000
Frm 00010
Fmt 4700
Sfmt 4700
Proposing Release, 83 FR at 48737.
U.S.C. 78q(e)(1)(A); 15 U.S.C. 78q(e)(1)(C);
15 U.S.C. 78mm.
19 15
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Federal Register / Vol. 84, No. 115 / Friday, June 14, 2019 / Rules and Regulations
§ 240.17a–5 Reports to be made by certain
brokers and dealers.
*
*
*
*
*
(e) * * *
(1)(i) * * *
(A) The securities business of the
broker or dealer has been limited to
acting as broker (agent) for a single
issuer in soliciting subscriptions for
securities of that issuer, the broker has
promptly transmitted to the issuer all
funds and promptly delivered to the
subscriber all securities received in
connection with the transaction, and the
broker has not otherwise held funds or
securities for or owed money or
securities to customers; or
*
*
*
*
*
By the Commission
Dated: June 10, 2019.
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019–12563 Filed 6–13–19; 8:45 am]
BILLING CODE 8011–01–P
PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Parts 4022 and 4044
Allocation of Assets in SingleEmployer Plans; Benefits Payable in
Terminated Single-Employer Plans;
Interest Assumptions for Valuing and
Paying Benefits
Pension Benefit Guaranty
Corporation.
ACTION: Final rule.
AGENCY:
This final rule amends the
Pension Benefit Guaranty Corporation’s
regulations on Benefits Payable in
Terminated Single-Employer Plans and
Allocation of Assets in Single-Employer
Plans to prescribe certain interest
assumptions under the benefit payments
regulation for plans with valuation dates
in July 2019 and interest assumptions
under the asset allocation regulation for
plans with valuation dates in the third
quarter of 2019. These interest
assumptions are used for valuing
benefits and paying certain benefits
under terminating single-employer
plans covered by the pension insurance
system administered by PBGC.
DATES: Effective July 1, 2019.
FOR FURTHER INFORMATION CONTACT:
Gregory Katz (katz.gregory@pbgc.gov),
Attorney, Regulatory Affairs Division,
Pension Benefit Guaranty Corporation,
1200 K Street NW, Washington, DC
20005, 202–326–4400, ext. 3829. (TTY
users may call the Federal relay service
toll free at 1–800–877–8339 and ask to
be connected to 202–326–4400, ext.
3829.)
jbell on DSK3GLQ082PROD with RULES
SUMMARY:
VerDate Sep<11>2014
16:06 Jun 13, 2019
Jkt 247001
PBGC’s
regulations on Allocation of Assets in
Single-Employer Plans (29 CFR part
4044) and Benefits Payable in
Terminated Single-Employer Plans (29
CFR part 4022) prescribe actuarial
assumptions—including interest
assumptions—for valuing and paying
plan benefits under terminating singleemployer plans covered by title IV of
the Employee Retirement Income
Security Act of 1974 (ERISA). The
interest assumptions in the regulations
are also published on PBGC’s website
(https://www.pbgc.gov).
SUPPLEMENTARY INFORMATION:
Lump Sum Interest Assumption
PBGC uses the interest assumptions in
appendix B to part 4022 (‘‘Lump Sum
Interest Rates for PBGC Payments’’) to
determine whether a benefit is payable
as a lump sum and to determine the
amount to pay as a lump sum. Because
some private-sector pension plans use
these interest rates to determine lump
sum amounts payable to plan
participants (if the resulting lump sum
is larger than the amount required under
section 417(e)(3) of the Internal Revenue
Code and section 205(g)(3) of ERISA),
these rates are also provided in
appendix C to part 4022 (‘‘Lump Sum
Interest Rates for Private-Sector
Payments’’).
This final rule updates appendices B
and C of the benefit payments regulation
to provide the rates for July 2019
measurement dates.
The July 2019 lump sum interest
assumptions will be 0.75 percent for the
period during which a benefit is (or is
assumed to be) in pay status and 4.00
percent during any years preceding the
benefit’s placement in pay status. In
comparison with the interest
assumptions in effect for June 2019,
these assumptions represent a decrease
of 0.25 percent in the immediate rate
and are otherwise unchanged.
Valuation/Asset Allocation Interest
Assumptions
PBGC uses the interest assumptions in
appendix B to part 4044 (‘‘Interest Rates
Used to Value Benefits’’) to value
benefits for allocation purposes under
section 4044 of ERISA, and some
private-sector pension plans use them to
determine benefit liabilities reportable
under section 4044 of ERISA and for
other purposes. The third quarter 2019
interest assumptions will be 2.92
percent for the first 25 years following
the valuation date and 3.07 percent
thereafter. In comparison with the
interest assumptions in effect for the
second quarter of 2019, these interest
assumptions represent an increase of
five years in the select period (the
PO 00000
Frm 00011
Fmt 4700
Sfmt 4700
27713
period during which the select rate (the
initial rate) applies), a decrease of 0.15
percent in the select rate, and an
increase of 0.02 percent in the ultimate
rate (the final rate).
Need for Immediate Guidance
PBGC updates appendix B of the asset
allocation regulation each quarter and
appendices B and C of the benefit
payments regulation each month. PBGC
has determined that notice and public
comment on this amendment are
impracticable and contrary to the public
interest. This finding is based on the
need to issue new interest assumptions
promptly so that they are available to
value benefits and, for plans that rely on
our publication of them each month or
each quarter, to calculate lump sum
benefit amounts.
Because of the need to provide
immediate guidance for the valuation
and payment of benefits under plans
with valuation dates during July 2019,
PBGC finds that good cause exists for
making the assumptions set forth in this
amendment effective less than 30 days
after publication.
PBGC has determined that this action
is not a ‘‘significant regulatory action’’
under the criteria set forth in Executive
Order 12866.
Because no general notice of proposed
rulemaking is required for this
amendment, the Regulatory Flexibility
Act of 1980 does not apply. See 5 U.S.C.
601(2).
List of Subjects
29 CFR Part 4022
Employee benefit plans, Pension
insurance, Pensions, Reporting and
recordkeeping requirements.
29 CFR Part 4044
Employee benefit plans, Pension
insurance, Pensions.
In consideration of the foregoing, 29
CFR parts 4022 and 4044 are amended
as follows:
PART 4022—BENEFITS PAYABLE IN
TERMINATED SINGLE-EMPLOYER
PLANS
1. The authority citation for part 4022
continues to read as follows:
■
Authority: 29 U.S.C. 1302, 1322, 1322b,
1341(c)(3)(D), and 1344.
2. In appendix B to part 4022, Rate Set
309 is added at the end of the table to
read as follows:
■
Appendix B to Part 4022—Lump Sum
Interest Rates for PBGC Payments
*
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*
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*
]]>Agencies
[Federal Register Volume 84, Number 115 (Friday, June 14, 2019)]
[Rules and Regulations]
[Pages 27708-27713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12563]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-86073; File No. S7-21-18]
RIN 3235-AM47
Amendment to Single Issuer Exemption for Broker-Dealers
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commission is adopting an amendment to an exemptive
provision in the broker-dealer annual reporting rule under the
Securities Exchange Act of 1934 (``Exchange Act''). The exemption
provides that a broker-dealer is not required to engage an independent
public accountant to certify the broker-dealer's annual reports filed
with the Commission if, among other things, the securities business of
the broker-dealer has been limited to acting as broker (agent) for a
single issuer in soliciting subscriptions for securities of that
issuer.
DATES: Effective Date: August 13, 2019.
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, Deputy Associate Director, at (202)
551-5522; Timothy C. Fox, Branch Chief, at (202) 551-5687; or Rose
Russo Wells, Special Counsel, at (202) 551-5527, Division of Trading
and Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is amending 17 CFR 240.17a-5
(``Rule 17a-5'').
I. Final Rule Amendment
Most broker-dealers registered with the Commission must annually
file with the Commission a financial report and either a compliance
report or exemption report.\1\ In addition, paragraph
[[Page 27709]]
(d)(1)(i)(C) of Rule 17a-5 requires the broker-dealer to include with
the annual reports reports prepared by an independent public accountant
covering the financial report and, as applicable, the compliance or
exemption report.\2\ The accountant must be qualified and independent
in accordance with 17 CFR 210.2-01 (``Rule 2-01 of Regulation S-X'')
and must be registered with the Public Company Accounting Oversight
Board (``PCAOB'') if required by the Sarbanes-Oxley Act of 2002
(``Sarbanes-Oxley Act'').\3\ However, paragraph (e)(1)(i)(A) of Rule
17a-5 exempts a broker-dealer from engaging an independent public
accountant to provide the accountant's reports if, since the date of
the registration of the broker-dealer with the Commission or of the
previous annual reports filed with the Commission:
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78q(a)(1); 15 U.S.C. 78q(e)(1)(A); paragraph (d)
of Rule 17a-5. See also paragraphs (d)(1)(iii) and (iv) of Rule 17a-
5 (setting forth the limited circumstances under which the annual
reports need not be filed). Pursuant to paragraphs (d)(1)(i)(B)(1)
and (2) of Rule 17a-5, a broker-dealer that does not claim it was
exempt from 17 CFR 240.15c3-3 (``Rule 15c3-3'') throughout the most
recent fiscal year must file the compliance report, and a broker-
dealer that claims it was exempt from Rule 15c3-3 throughout the
most recent fiscal year must file the exemption report. The
compliance report must contain statements about the broker-dealer's
internal control over, and compliance with, certain financial
responsibility rules. The exemption report must contain statements
about the broker-dealer's exemption from Rule 15c3-3.
\2\ See 17 CFR 240.17a-5(d)(1)(i)(C).
\3\ Public Law 107-204, 116 Stat. 745 (2002). See 17 CFR
240.17a-5(f)(1).
---------------------------------------------------------------------------
The securities business of the broker-dealer has been
limited to acting as broker (agent) for the issuer in soliciting
subscriptions for securities of the issuer;
The broker has promptly transmitted to the issuer all
funds and promptly delivered to the subscriber all securities received
in connection with the transaction; and
The broker has not otherwise held funds or securities for
or owed money or securities to customers.
In September 2018, the Commission proposed amending this exemption
to correct an error that inadvertently amended the rule in 2013 and to
clarify that the exemption is available only for a broker-dealer that
acts as broker (agent) for a single issuer in soliciting subscriptions
for securities of that issuer.\4\ More particularly, the 2018 proposal
followed a series of amendments to the exemption, which occurred in
1975, 1977, and 2013, that inadvertently resulted in the rule text
providing that the exemption applies if the broker-dealer solicited
subscriptions for ``the issuer'' rather than for ``an issuer.'' \5\
---------------------------------------------------------------------------
\4\ See Amendment to Single Issuer Exemption for Broker-Dealers,
Exchange Act Release No. 84225 (Sept. 20, 2018), 83 FR 48733 (Sept.
27, 2018) (``Proposing Release''). See also Broker-Dealer Reports,
Exchange Act Release No. 70073 (Jul. 30, 2013), 78 FR 51910, 51943
(Aug. 21, 2013).
\5\ See Proposing Release 83 FR at 48734 (describing the series
of events that led to the inadvertent amendment to the rule).
---------------------------------------------------------------------------
The Commission received two comment letters in response to the
proposed amendment to this exemptive provision.\6\ The first commenter
did not address the proposed amendment.\7\ The second commenter stated
that it was a ``one-person sole proprietorship,'' that the ``only
business conducted is acting as an agent for redeemable mutual funds
and variable insurance products,'' that the ``firm does not engage in
underwriting, nor does the firm hold or owe customer funds or
securities,'' that ``[c]ustomer checks are made payable to the mutual
fund or insurance company,'' and that ``[a]pplications and checks are
promptly sent to the company.'' \8\ The commenter stated that the
proposed amendment ``would block the use of the exemption for firms
that do not hold or owe customer funds or securities and act as an
agent for mutual funds,'' that it ``forces limited business firms,
operating under a SEC Rule 15c3-3 exemption, to hire a PCAOB-registered
accountant,'' that for ``a small firm . . . the cost of compliance is
an onerous burden,'' and that ``increased PCAOB requirements make the
cost unaffordable for the firm.'' The commenter stated that the ``firm
provides personalized service to customers and has a valuable place in
the community of broker-dealers.'' For these reasons, the commenter
``request[ed] that the proposed regulation be amended to allow such
limited business firms [such as the commenter's firm] to file an annual
report prepared by an independent public accountant (CPA), but not
necessarily registered with the [PCAOB].''
---------------------------------------------------------------------------
\6\ The comment letters are available at https://www.sec.gov/comments/s7-21-18/s72118.htm.
\7\ See Letter from Amr A Daoud, dated Sept. 24, 2018.
\8\ See Letter from Howard Feigenbaum, dated Oct. 24, 2018
(``Feigenbaum Letter'').
---------------------------------------------------------------------------
In response to the commenter's request, the Commission notes that
the exemption in paragraph (e)(1)(i)(A) of Rule 17a-5 that was proposed
to be modified in this rulemaking addresses whether a broker-dealer
must comply with paragraph (d)(1)(i)(C) of the rule, which requires the
broker-dealer to file reports prepared by an independent public
accountant with its annual reports. The Commission's proposal did not
address the requirement that the independent public accountant must be
registered with the PCAOB, which is prescribed in Section 17(e)(1)(A)
of the Exchange Act and paragraph (f)(1) of Rule 17a-5. The proposal
also did not address the requirement that the independent public
accountant must undertake to prepare the reports in accordance with
PCAOB standards, which is prescribed in paragraph (g) of Rule 17a-5.
The commenter's request, consequently, asks the Commission to create a
new and different exemption. In particular, the commenter requests that
the Commission create an exemption pursuant to which a broker-dealer
engaged in the business described in the comment letter would be exempt
from the requirements in Section 17(e)(1)(A) of the Exchange Act and
paragraph (f)(1) of Rule 17a-5 to the extent they require that the
broker-dealer's independent public accountant be registered with the
PCAOB. The proposed amendment that is the subject of this rulemaking
would not alter these requirements, nor did the Commission contemplate
doing so in the Proposing Release. For these reasons, the commenter's
request ``that the proposed regulation be amended to allow such limited
business firms to file an annual report prepared by an independent
public accountant (CPA), but not necessarily registered with the
[PCAOB]'' is beyond the scope of this rulemaking.\9\
---------------------------------------------------------------------------
\9\ The Spring 2019 Unified Agenda of Federal Regulatory and
Deregulatory Actions stated that ``[t]he Office of the Chief
Accountant and the Division of Trading and Markets are considering
recommending amendments to certain broker-dealer annual reporting,
audit and notification requirements that could differentiate the
requirements according to different classes of broker-dealers.'' See
Commission, Spring 2019 Unified Agenda of Federal Regulatory and
Deregulatory Actions. Available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201904&RIN=3235-AM46. The potential issues
involved in adopting such an approach as the commenter recommends,
as well as the scope and form such potential action could take,
would likely involve various policy issues that would warrant
careful consideration following public comment.
---------------------------------------------------------------------------
The Commission understands that the comment letter addresses only
the PCAOB-registration component of the audit requirement. Nonetheless,
the Commission recognizes that this commenter in a separate Commission
adjudicatory proceeding took the view that the exemption in paragraph
(e)(1)(i)(A) of Rule 17a-5 should cover a broker-dealer acting as an
agent for multiple issuers (which would exempt such broker-dealers from
the audit requirement entirely).\10\ Accordingly, the Commission
believes that it is appropriate to address in the context of this
rulemaking why the Commission does not believe that an expansion of the
exemption to include broker-dealers
[[Page 27710]]
that provide broker-dealer services for more than a single issuer (even
if the broker-dealer limits its business in the manner described in the
comment letter) would be appropriate.
---------------------------------------------------------------------------
\10\ See In the Matter of the Application of Sharemaster,
Exchange Act Release No. 83138 (Apr. 30, 2018).
---------------------------------------------------------------------------
The annual reports a broker-dealer files with the Commission are
used by the Commission and the broker-dealer's designated examining
authority to monitor the financial and operational condition of the
broker-dealer and are one of the primary means of monitoring compliance
with the Commission's broker-dealer financial responsibility rules. The
requirement that the annual reports be covered by reports prepared by
an independent public accountant is intended to enhance the reliability
of the information filed by the broker-dealer, including information
relevant to its financial condition, ability to continue as a going
concern, and its handling of customer securities and cash. This also
benefits investors who are customers or potential customers of the
broker-dealer and who do not have access to the same level of
information about the financial condition and operations of the broker-
dealer as the independent public accountant engaged by the broker-
dealer. These investors rely on the independent public accountant to
audit this information.
The limited exemption to the requirement that a broker-dealer's
annual reports be audited by an independent public accountant is
consistent with the objectives of the rule. The exemption applies to a
broker-dealer that acts as broker (agent) for a single entity--an
issuer that is typically affiliated with the broker-dealer. Therefore,
the issuer is in a privileged position to access sufficient information
about the financial condition and operations of its agent--the broker-
dealer affiliate--to make an informed decision about continuing to use
the broker-dealer to effect transactions in its securities. Moreover,
by permitting the broker-dealer to act as its agent, the issuer has
agreed that the broker-dealer can legally bind the issuer. This implies
that the two entities have a special relationship. For these reasons,
requiring that an independent public accountant audit this information
would not provide a meaningful benefit to the issuer, and the risk of
harm to the issuer is mitigated by its ability to access information
about its agent.
Expanding this exemption to broker-dealers similarly situated to
the commenter's firm would not be consistent with the objectives of
Rule 17a-5 as described above. The comment letter describes a firm that
sells ``redeemable mutual funds and variable insurance products'' and
that in doing so ``[c]ustomer checks are made payable to the mutual
fund or insurance company'' and states that ``[a]pplications and checks
are promptly sent to the company.'' \11\ The comment letter also stated
that the firm ``provides personalized service to customers.'' In other
words, the business described in the comment letter involves acting on
behalf of, and selling securities and insurance products to, retail
investors. These customers are not similarly situated to an issuer that
is affiliated with a broker-dealer and for whom the broker-dealer is
acting as agent. Unlike such an issuer, the customers do not have a
privileged position that allows them to access sufficient information
about the financial condition and operations of the broker-dealer to
make an informed decision about continuing to use the broker-dealer to
act on their behalf in purchasing securities, including entrusting the
broker-dealer to promptly forward their checks. Moreover, selling the
securities of multiple issuers, including mutual funds in a single
family of mutual funds, is different from acting as agent for a single
affiliated issuer. These issuers may not be in the privileged position
of the affiliated issuer in terms of accessing information about the
broker-dealer. Consequently, the Commission believes that this type of
broker-dealer should continue to be required to have its annual reports
covered by reports prepared by an independent public accountant.
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\11\ Feigenbaum Letter.
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For the reasons described above and in the Proposing Release, the
Commission is adopting the amendment to Rule 17a-5 as proposed.
II. Paperwork Reduction Act
The rule amendment clarifies the scope of an existing exemption
available to certain broker-dealers from the requirement to file with
the Commission reports prepared by an independent public accountant
pursuant to paragraph (d)(1)(i)(C) of Rule 17a-5. As stated in the
Proposing Release, the Commission believes that the amendment does not
create any new, or revise any existing, collection of information
pursuant to the Paperwork Reduction Act of 1995.\12\ Accordingly, no
information was submitted to the Office of Management and Budget for
review.
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\12\ 44 U.S.C. 3501 et seq.
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The Commission did not receive any comments regarding its belief
that the rule amendment would not create any new, or revise any
existing, collection of information pursuant to the Paperwork Reduction
Act.
III. Economic Analysis
The Commission is mindful of the costs imposed by, and the benefits
obtained from, its rules. As explained below, the Commission expects
that the amendment will benefit issuers by helping ensure that broker-
dealers do not inappropriately rely on the exemption in paragraph
(e)(1)(i)(A) of Rule 17a-5. Whenever the Commission engages in
rulemaking and is required to consider or determine whether an action
is necessary or appropriate in the public interest, Section 3(f) of the
Exchange Act requires the Commission to consider whether the action
would promote efficiency, competition, and capital formation, in
addition to the protection of investors. Further, when engaged in
rulemaking under the Exchange Act, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the impact such rules would have on
competition. Section 23(a)(2) of the Exchange Act also prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. The following analysis considers the potential
economic effects that may result from the rule amendment, including the
benefits and costs to market participants as well as the broader
implications of the proposal for efficiency, competition, and capital
formation.
Broker-dealers serve an important role in capital formation by
performing numerous services, including with respect to the
distribution of securities. Broker-dealer annual reports are one of the
primary means of monitoring compliance with the Commission's broker-
dealer financial responsibility rules, and the requirement that the
annual reports be certified by a PCAOB-registered independent public
accountant is intended to help enhance the reliability of the
information filed by the broker-dealer. The exemption in paragraph
(e)(1)(i)(A) of Rule 17a-5 is designed to streamline regulatory
compliance for certain broker-dealers by permitting broker-dealers that
underwrite offerings by a single issuer--typically an affiliate of the
broker-dealer--to do so without needing to meet this requirement.
Broker-dealers rarely rely on the very limited exemption in
paragraph (e)(1)(i)(A) of Rule 17a-5. Staff analysis of annual reports
filed by broker-dealers revealed that only four broker-dealers--out of
approximately 4,000 registered with the Commission--claimed the
[[Page 27711]]
exemption in the last year. The low level of use suggests that broker-
dealers generally do not avail themselves of the existing exemption to
compete with one another or to improve the efficiency of their
underwriting activities.
The Commission recognizes the value of requiring that broker-dealer
annual reports be certified by an independent public accountant.
However, when a broker-dealer is acting solely as an agent for a single
issuer's securities, typically an affiliate, the issuer is likely to
have sufficient information about the broker-dealer's financial and
operational condition. In that case, there would be minimal benefit in
a requirement that the broker-dealer-dealer's annual reports be
certified by an independent public accountant. At the same time, a
broker-dealer required to obtain such certification for its annual
reports could bear significant costs to do so. The Commission notes
that one broker-dealer estimated the cost for a small broker-dealer to
obtain certification of its annual reports by a PCAOB-registered
independent public accountant in accordance with paragraph (d)(1)(i)(C)
of Rule 17a-5 could be approximately $3,266 per year.\13\
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\13\ According to one broker-dealer, an audit prepared by a
PCAOB-registered accountant would cost $2,800 in 2010. See In the
Matter of the Application of Sharemaster, Exchange Act Release No.
83138 (Apr. 30, 2018), at n. 4. Adjusting this amount for inflation
yields approximately $3,266 in February 2019 (inflation calculator
available at https://www.bls.gov/data/inflation_calculator.htm).
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While it is possible that a broker-dealer might act as an agent for
a single unaffiliated issuer, the Commission does not believe such a
narrow arrangement is likely. The Commission expects that a broker-
dealer that is able to successfully market its services as an agent for
the securities of one unaffiliated issuer would seek to market those
services to additional unaffiliated issuers. In that case, the cost of
having the firm's annual reports certified by a PCAOB-registered public
accountant would likely be lower than the revenue generated from acting
as an agent for multiple unaffiliated issuers.
However, in the event such an arrangement were to exist, the
Commission acknowledges that the benefits associated with certification
by an independent public accountant could be greater than when the
broker-dealer is acting as agent for a single affiliated issuer.
However, the incremental benefit likely would be limited because, even
though the entities are not affiliated, they would likely have a
special relationship by virtue of the fact that the broker-dealer's
underwriting business relies on that single issuer. Therefore, the
issuer likely would have better access to information relating to the
broker-dealer's financial and operational condition than if the issuer
were one of several issuers for whom the broker-dealer acted as agent.
For these reasons, the Commission does not believe that the incremental
benefit of requiring the annual reports to be certified by an
independent public accountant would justify the costs in this scenario.
The Commission expects the amendment to benefit issuers that rely
on broker-dealers to underwrite securities offerings by providing
increased regulatory certainty about a broker-dealer's obligation to
have its annual reports certified by an independent public accountant
when the broker-dealer acts as an agent for multiple issuers. This will
benefit issuers by helping ensure that broker-dealers do not
inappropriately rely on the exemption in paragraph (e)(1)(i)(A) of Rule
17a-5. When the broker-dealer is not acting solely as an agent for a
single affiliate's securities, the benefits of certification are likely
to be more substantial because the issuers are less likely to have
sufficient information about the broker-dealer's financial condition.
One commenter asserted that the cost of compliance with the
separate requirements in Rule 17a-5 to engage an independent public
accountant registered with the PCAOB (as compared to an accountant that
is not registered with the PCAOB) represented an ``onerous burden'' for
a firm that ``survives on a thin profit margin'' and that ``increased
PCAOB requirements make the cost unaffordable for the firm.'' The
Commisson acknowledges that the incremental costs associated with
engaging an independent public accountant registered with the PCAOB as
compared to an accountant that is not so registered could result in
certain broker-dealers exiting the market if their revenues are too low
to cover the incremental costs and remain profitable. However, as
discussed above, the exemptive provision being modified in this
rulemaking addresses whether or not the broker-dealer needs to file the
accountant's reports (i.e., engage an independent public accountant in
the first place). It does not address the separate requirement in Rule
17a-5 that the accountant be registered with the PCAOB. With respect to
the amendment being adopted in this rulemaking, the Commission
continues to believe that because of the low reliance on the exemption
currently, and the expectation that the number of broker-dealers
relying on the exemption will not increase or decrease as a result of
the amendment, the overall economic impact of the amendment is likely
to be small.
The Commission expects the amendment to have only a marginal impact
on efficiency, competition, and capital formation. This assessment is
primarily based on the belief that the amendment does not revise the
scope of the exemption or change current practice and that the
exemption is claimed by only a few broker-dealers. The Commission
nevertheless acknowledges that the amendment could marginally impair
capital formation if it prompts broker-dealers to reduce underwriting
activity or to increase the price of underwriting activities for
potential issuers, and the amendment could marginally reduce efficiency
if it prompts certain broker-dealers to exit the market, forcing
issuers to move their business to a different broker-dealer.
The Commission considered several alternatives in terms of the
scope of the exemption. First, the Commission considered broadening the
scope of the exemption to include broker-dealers whose securities
business is limited to acting as an agent for multiple issuers. Staff
analysis of information provided by broker-dealers indicates that a
substantial number of registered broker-dealers underwrite corporate
securities or are selling group participants for corporate securities
and may otherwise be eligible to take advantage of the exemption if its
scope were broadened in this way.\14\
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\14\ Commission staff analysis of Form BD data indicates that
948 registered broker-dealers reported engaging in, or expecting to
engage in, the underwriting of securities at the end of 2018.
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Relatedly, a commenter suggested that the Commission include an
exemption for ``limited business broker-dealers'' from the requirement
to engage a PCAOB-registered accountant (i.e., an exemption that would
permit the broker-dealer to engage an accountant that is not registered
with the PCAOB). The commenter stated that it was a ``one-person sole
proprietorship,'' that the ``only business conducted is acting as an
agent for redeemable mutual funds and variable insurance products,''
that the ``firm does not engage in underwriting, nor does the firm hold
or owe customer funds or securities,'' that ``[c]ustomer checks are
made payable to the mutual fund or insurance company,'' and that
``[a]pplications and checks are promptly sent to the company.''
Rule 17a-5 provides only two exemptions from the requirement that
[[Page 27712]]
broker-dealer annual reports be certified by an independent public
accountant.\15\ The Commission has provided for only these very limited
exemptions from the requirement that annual reports of broker-dealers
be audited due to the importance of reliable financial and operational
information concerning registered broker-dealers for investor
protection and the integrity of the capital markets. Broadening the
exemption could benefit broker-dealers by no longer requiring them to
engage independent public accountants when they act as an agent for
multiple issuers in soliciting subscriptions for securities and thereby
reducing their costs. However, an alternative that broadens these
exceptions could impose costs on issuers to the extent that making the
certification by the independent public accountant voluntary for
broker-dealers that serve multiple issuers reduces the reliability of
these broker-dealers' annual reports.
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\15\ One exemption is the ``single issuer'' exemption provided
for in paragraph (e)(1)(i)(A) of Rule 17a-5, which is the subject of
this rulemaking. The other exemption is contained in paragraph
(e)(1)(i)(B) of Rule 17a-5. The second exemption applies to broker-
dealers whose securities business is ``limited to buying and selling
evidences of indebtedness secured by mortgage, deed of trust, or
other lien upon real estate or leasehold interests, and the broker
or dealer has not carried any margin account, credit balance, or
security for any securities customer.'' Staff analysis of annual
reports filed by broker-dealers revealed that only one broker-dealer
claimed this exemption in the last year.
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Further, an alternative that broadens the exemption to broker-
dealers that limit their business in the manner described by the
commenter would impact retail customers who are not similarly situated
to an issuer that is affiliated with a broker-dealer and for whom the
broker-dealer is acting as agent. Unlike such an issuer, the customers
do not have a privileged position that allows them to access sufficient
information about the financial condition and operations of the broker-
dealer to make an informed decision about continuing to use the broker-
dealer to act on their behalf in purchasing securities, including
entrusting the broker-dealer to promptly forward their checks.
Consequently, this alternative could impose costs on retail customers
to the extent they currently rely on the reports of the independent
public accountants.
Given the significance of the verification of a broker-dealer's
financial and operational information by an independent public
accountant, the Commission is not broadening the scope of the exemption
to include broker-dealers whose securities business is limited to
acting as an agent for multiple issuers. When a broker-dealer acts as
an agent on behalf of an issuer, the financial condition of the broker-
dealer is important to the issuer because if a broker-dealer is
financially constrained, it may be less able to bear the risks
associated with underwriting activities, such as holding securities in
inventory. If a broker-dealer acts as an agent on behalf of multiple
issuers, its financial condition is important to capital formation for
multiple issuers, and so the benefits of certification are likely
higher for the broker-dealer. Moreover, the Commission notes that the
benefits to broker-dealers from such an alternative may be limited by
competitive effects, because an issuer that is concerned about the
reliability of a broker-dealer's financial statements may choose to
hire a broker-dealer with certified annual reports to act as its agent.
Second, the Commission considered eliminating the exemption. While
the Commission is mindful of the significance of broker-dealer audits,
as explained above, the Commission believes that the cost of this
alternative to broker-dealers who are now eligible to take advantage of
the exemption does not justify the benefits that would accrue to the
single issuer for which the broker-dealer is acting as agent, which is
typically an affiliate of the broker-dealer, as a result of an audit.
Therefore, the Commission believes the exemption should continue to be
available where a broker-dealer is acting as an agent for a single
issuer in soliciting subscriptions for securities of that issuer.
Finally, the Commission considered further specifying that the
limited exemption in paragraph (e)(1)(i)(A) of Rule 17a-5 would apply
only if the broker-dealer were engaged in underwriting the securities
of an affiliate. While this alternative would narrow the limited
exemption, based on its observation of broker-dealers' use of this
exemption to date, the Commission does not believe the benefits yielded
by narrowing the exemption would be substantial.
IV. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \16\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\17\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not have significant economic impact
on a substantial number of small entities. In the proposing release,
the Commission certified, under section 605(b) of the Regulatory
Flexibility Act, that, when adopted, the proposed amendments to
paragraph (e)(1)(i)(A) of Rule 17a-5 would not have a significant
economic impact on a substantial number of small entities.\18\
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\16\ See 5 U.S.C. 601 et seq.
\17\ 5 U.S.C. 551 et seq.
\18\ See Proposing Release, 83 FR at 48737.
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Based on filings with the Commission, the Commission believes that
four broker-dealers are currently claiming the exemption in paragraph
(e)(1)(i)(A) of Rule 17a-5. The rule amendment will not change whether
a broker-dealer would or would not qualify for the exemption. For these
reasons, the Commission certifies that the rule amendment will not have
a significant economic impact on a substantial number of small entities
for purposes of the RFA.
V. Statutory Authority
The Commission is adopting amendments to Rule 17a-5 under the
Exchange Act (17 CFR 240.17a-5) pursuant to the authority conferred by
Exchange Act Sections 17(e)(1)(A), 17(e)(1)(C), and 36.\19\
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\19\ 15 U.S.C. 78q(e)(1)(A); 15 U.S.C. 78q(e)(1)(C); 15 U.S.C.
78mm.
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List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping requirements, Securities.
Text of Rules
In accordance with the foregoing, the Commission is amending title
17, chapter II of the Code of Federal Regulation as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
0
2. Amend Sec. 240.17a-5 by revising paragraph (e)(1)(i)(A) to read as
follows.
[[Page 27713]]
Sec. 240.17a-5 Reports to be made by certain brokers and dealers.
* * * * *
(e) * * *
(1)(i) * * *
(A) The securities business of the broker or dealer has been
limited to acting as broker (agent) for a single issuer in soliciting
subscriptions for securities of that issuer, the broker has promptly
transmitted to the issuer all funds and promptly delivered to the
subscriber all securities received in connection with the transaction,
and the broker has not otherwise held funds or securities for or owed
money or securities to customers; or
* * * * *
By the Commission
Dated: June 10, 2019.
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-12563 Filed 6-13-19; 8:45 am]
BILLING CODE 8011-01-P
