Order Under Section 17(h)(4) of the Securities Exchange Act of 1934 Granting Exemption from Rule 17h-1T and Rule 17h-2T for Certain Broker-Dealers Maintaining Capital, Including Subordinated Debt of Greater Than $20 Million But Less Than $50 Million, 40356-40358 [2020-14371]
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40356
Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,12 the Exchange believes that the
proposed rule change will not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intramarket Competition
The Exchange does not believe that
the proposed change would place any
burden on intramarket competition that
is not necessary or appropriate.
The proposed extension of the waiver
is not designed to affect competition,
but rather to provide relief to Users that,
while a Rule 7.1 closure is in effect,
have no option but to use the Hot Hands
service.
The proposed extension of the waiver
would not apply differently to distinct
types or sizes of market participants.
Rather, all Users whose equipment
requires work during the extension of
the Data Center closure would have the
resulting fees waived, and the extension
of the waiver would apply uniformly to
all Users during the period.
Intermarket Competition
The Exchange does not believe that
the proposed change would impose any
burden on intermarket competition that
is not necessary or appropriate.
The Exchange believes that the
proposed change would not affect the
competitive landscape among the
national securities exchanges, as the Hot
Hands service is solely charged within
co-location to existing Users, and would
be temporary.
For the reasons described above, the
Exchange believes that the proposed
rule change reflects this competitive
environment.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
khammond on DSKJM1Z7X2PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 13 of the Act and
subparagraph (f)(2) of Rule 19b–4 14
thereunder, because it establishes a due,
12 15
U.S.C. 78f(b)(8).
U.S.C. 78s(b)(3)(A).
14 17 CFR 240.19b–4(f)(2).
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 15 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov’’ rule-comments@sec.gov. Please
include File Number SR–NYSENAT–
2020–20 on the subject line.
Paper Comments
• Send paper comments in triplicate
to: Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSENAT–2020–20. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website 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
13 15
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04:41 Jul 03, 2020
15 15
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PO 00000
U.S.C. 78s(b)(2)(B).
Frm 00173
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10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSENAT–2020–20 and
should be submitted on or before July
27, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14379 Filed 7–2–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89184]
Order Under Section 17(h)(4) of the
Securities Exchange Act of 1934
Granting Exemption from Rule 17h–1T
and Rule 17h–2T for Certain BrokerDealers Maintaining Capital, Including
Subordinated Debt of Greater Than $20
Million But Less Than $50 Million
June 29, 2020.
I. Introduction
Section 17(h) was added to the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) to address the concern
that financial problems of a brokerdealer’s affiliate could cause the brokerdealer to fail or experience significant
financial difficulties.1 The Securities
and Exchange Commission
(‘‘Commission’’) adopted Rules 17h–1T
and 17h–2T under Section 17(h) of the
Exchange Act.2 As discussed below,
these rules contain provisions that
exempt certain broker-dealers from the
requirements of the rules. This order
exempts from the requirements of the
rules broker-dealers that do not hold
funds or securities for, or owe money or
securities to, customers and do not carry
customer accounts, or that are exempt
from Rule 15c3–3 pursuant to paragraph
(k)(2) of that rule, and that maintain
total assets of less than $1 billion and
capital, including debt subordinated in
16 17
CFR 200.30–3(a)(12).
Final Temporary Risk Assessment Rules,
Exchange Act Release No. 30929 (July 16, 1992), 57
FR 32159 (July 21, 1992).
2 See 15 U.S.C. 78q(h) (‘‘Section 17h of the
Exchange Act’’); 17 CFR 240.17h–1T (‘‘Rule 17h–
1T’’); 17 CFR 240.17h–2T (‘‘Rule 17h–2T’’).
1 See
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Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Notices
accordance with appendix D of Rule
15c3–1 under the Exchange Act (‘‘Rule
15c3–1d’’), of less than $50 million.3
Rule 17h–1T requires a broker-dealer
that is not exempt under paragraph (d)
of the Rule to maintain and preserve
certain records, including: (1) An
organizational chart that includes the
broker-dealer and its affiliates; (2)
policies, procedures, or systems
concerning methods for monitoring and
controlling financial and operational
risks to the broker-dealer resulting from
the activities of its affiliates; (3) a
description of material pending legal
and arbitration proceedings involving
the broker-dealer or its affiliates; (4)
consolidating and consolidated
financial statements; and (5) the brokerdealer’s securities and commodities
position records. Rule 17h–2T requires
a broker-dealer that is not exempt under
paragraph (b) of the Rule to file Form
17–H with the Commission on a
quarterly basis. The form elicits
information concerning certain of the
broker-dealer’s affiliates.4 Paragraph (d)
of Rule 17h–1T and paragraph (b) of
Rule 17h–2T exempt from their
respective requirements certain
categories of broker-dealers, as long as
the broker-dealers maintain capital of
less than $20 million (‘‘$20 million
exemption’’). These categories of brokerdealers include: (1) broker-dealers that
are exempt from Rule 15c3–3 pursuant
to paragraph (k)(2) of that rule; and (2)
broker-dealers that do not hold funds or
securities for customers, owe money or
securities to customers, or carry the
accounts of customers.
khammond on DSKJM1Z7X2PROD with NOTICES
II. Discussion
Section 17(h)(4) of the Exchange Act
provides that the Commission by rule or
order may exempt any person or class
of persons, under such terms and
conditions and for such periods as the
Commission shall provide in such rule
or order, from the provisions of Section
17(h) of the Exchange Act, and the rules
thereunder. The statute further provides
that, in granting such exemptions, the
Commission shall consider, among
other factors:
• Whether information of the type
required under section 17(h) of the
Exchange Act is available from a
supervisory agency (as defined in
section 3401(6)of title 12), a State
insurance commission or similar State
agency, the Commodity Futures Trading
3 For
the purposes of the exemptions in Rule 17h–
1T and Rule 17h–2T and this order, capital must
be calculated pursuant to paragraph (d)(3) of Rule
17h–1T and paragraph (b)(3) of Rule 17h–2T.
4 See Form 17–H, available at https://
www.sec.gov/about/forms/form17-h.pdf.
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04:41 Jul 03, 2020
Jkt 250001
Commission (‘‘CFTC’’), or a similar
foreign regulator;
• The primary business of any
associated person;
• The nature and extent of domestic
or foreign regulation of the associated
person’s activities;
• The nature and extent of the
registered person’s securities activities;
and
• With respect to the registered
person and its associated persons, on a
consolidated basis, the amount and
proportion of assets devoted to, and
revenues derived from, activities in the
United States securities markets.
The Commission has administered the
risk assessment program under Section
17(h) of the Exchange Act for 28 years.
Based on this experience, the
Commission believes it is appropriate to
raise by order the threshold for the $20
million exemption to $50 million,
provided the broker-dealer maintains
less than $1 billion in total assets.
In adopting the $20 million
exemption (rather than a $5 million
exemption, which was proposed),5 the
Commission stated that the number of
broker-dealers subject to Rules 17h–1T
and 17h–2T would be reduced without
a corresponding trade-off in risk.6
Moreover, the Commission stated that
its staff intended to focus its efforts on
the largest 50 to 75 broker-dealers.7
Thus, from the outset, the Commission’s
risk assessment program under Section
17(h) of the Exchange Act sought to be
risk-based and to focus on larger brokerdealers. Information filed by brokerdealers on Form X–17A–5 (‘‘FOCUS
Report’’) indicates that for the subset of
firms subject to Rules 17h–1T and 17h–
2T, those maintaining $50 million or
more in capital currently account for
over 98% of total capital of subject
broker-dealers. Similarly, for all brokerdealers, those maintaining $50 million
or more in capital account for nearly
97% of the total capital of all brokerdealers. Based upon the current record
of broker-dealers subject to Rules 17h–
1T and 17h–2T maintained by
Commission staff and information filed
by broker-dealers in the FOCUS Reports
and other information known to
Commission staff, the Commission
believes exempting certain brokerdealers that maintain total assets of less
than $1 billion and maintain capital of
greater than $20 million but less than
$50 million will provide relief to
5 See Proposed Temporary Risk Assessment
Rules, Exchange Act Release No. 29635 (Aug. 30,
1991), 56 FR 44016 (Sep. 6, 1991).
6 See Final Temporary Risk Assessment Rules, 57
FR at 32164–65.
7 See Final Temporary Risk Assessment Rules, 57
FR at 32165.
PO 00000
Frm 00174
Fmt 4703
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40357
approximately 59 broker-dealers or
approximately 21% of the
approximately 275 broker-dealers
currently subject to Rules 17h–1T and
17h–2T.
Exempting certain firms that maintain
total assets of less than $1 billion and
maintain capital, including
subordinated debt, of greater than $20
million but less than $50 million from
Rules 17h–1T and 17h–2T is intended
to reduce the number of broker-dealers
subject to the rules without materially
increasing risk, given that firms
continuing to be subject to the rules
account for over 98% of the total capital
of firms subject to the rules prior to the
issuance of this Order and nearly 97%
of the total capital of all broker-dealers.
The Commission is setting the ceiling
for this exemption at $50 million with
this goal in mind. Moreover, limiting
the availability of this exemption to
firms with total assets of less than $1
billion will prevent highly leveraged
firms with relatively small levels of
capital from availing themselves of the
exemption. A broker-dealer with a high
level of leverage and a small level of
capital can pose heightened risks
because it has less capital to absorb
losses and, therefore, poses greater
credit risk to its customers,
counterparties, and other creditors.
Thus, the Commission’s risk assessment
program will continue to focus on those
broker-dealers and affiliates that
conduct a substantial securities business
and thus are in a position to potentially
pose significant risk to investors and to
the orderly, fair, and efficient
functioning of the markets.8 Moreover,
increasing the exemption to $50 million
will reduce the regulatory burden for a
cohort of smaller broker-dealers that
pose less risk to the orderly, fair, and
efficient functioning of the markets
relative to broker-dealers that will
continue to be subject to the rules.
In considering this Order, the
Commission focused on the fourth
factor in Section 17(h)(4) of the
Exchange Act (i.e., the nature and extent
of the person’s securities activities).9
Although the other four factors included
8 Many of the largest broker-dealers, which use
alternative methods of computing their net capital
under Appendix E of Rule 15c3–1, are exempt from
Rules 17h–1T and 17h–2T but are subject to
heightened monitoring as part of the Commission’s
Risk Supervised Broker-Dealer Program. See 17 CFR
17h–1T(d)(4) and 17 CFR 17h–2T(b)(4). See also 17
CFR 240.15c3–1e.
9 15 U.S.C. 78q(h)(4). Section 17(h)(4) of the
Exchange Act states that the HYPERLINK
Commission by HYPERLINK rule or order may
exempt any HYPERLINK person or class of
HYPERLINK persons, under such terms and
conditions and for such periods as the HYPERLINK
E:\FR\FM\06JYN1.SGM
Continued
06JYN1
40358
Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
in Section 17(h)(4) of the Exchange Act
were considered, the Commission
determined they did not inform the
exemption as the exemption does not
alter the type of information required to
be reported or preserved, does not vary
in applicability based upon the business
activities of or the extent of regulatory
oversight over a broker-dealer’s affiliate,
and applies regardless of the extent of
a broker-dealer and its affiliate
conducting business in the United
States.10 More specifically, the cohort of
broker-dealers that will be able to rely
on this exemption maintains total assets
of less than $1 billion and maintains
capital, including subordinated debt, of
greater than $20 million but less than
$50 million, and do not hold funds or
securities for, or owe money or
securities to, customers and do not carry
customer accounts, or that are exempt
from Rule 15c3–3 pursuant to paragraph
(k)(2) of that rule. These firms are
relatively small in size, as measured by
the amount of total assets and by the
amount of capital (including
subordinated debt) that they maintain.
The Commission believes these
exempted firms—because of their
relative size and the fact that they do
not hold customer funds or securities, or
owe money or securities to, customers
and do not carry customer accounts, or
are exempt from Rule 15c3–3 pursuant
to paragraph (k)(2) of that rule—present
less risk to the financial markets.
Consequently, the objectives of this
exemption align most closely with the
fourth factor in Section 17(h)(4) of the
Exchange Act (i.e., the nature and extent
of the registered person’s securities
activities).
In light of changes in the financial
services industry, including
Commission shall provide in such HYPERLINK rule
or order, from the provisions of this subsection, and
the HYPERLINK rules thereunder. In granting such
exemptions, the HYPERLINK Commission shall
consider, among other factors—
(A) whether information of the type required
under this subsection is available from a
supervisory HYPERLINK agency (as defined in
section 3401(6) of title 12), a HYPERLINK State
insurance HYPERLINK commission or similar
HYPERLINK State agency, the Commodity Futures
Trading Commission, or a similar foreign regulator;
(B) the primary business of any associated
HYPERLINK person;
(C) the nature and extent of domestic or foreign
regulation of the associated HYPERLINK person’s
activities;
(D) the nature and extent of the registered
HYPERLINK person’s HYPERLINK securities
activities; and
(E) with respect to the registered HYPERLINK
person and its associated HYPERLINK persons, on
a consolidated basis, the amount and proportion of
assets devoted to, and revenues derived from,
activities in the United HYPERLINK States
securities markets.
10 15 U.S.C. 78q(h)(4)(A)–(C) & (E).
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04:41 Jul 03, 2020
Jkt 250001
consolidation among financial services
institutions, the Commission believes
that this Order strikes an appropriate
balance in terms of relieving certain
broker-dealers—those that maintain
total assets of less than $1 billion and
maintain capital, including
subordinated debt, of greater than $20
million but less than $50 million and
that do not hold funds or securities for,
or owe money or securities to,
customers and do not carry customer
accounts, or that are exempt from Rule
15c3–3 pursuant to paragraph (k)(2) of
that rule —from the requirements of
Rules 17h–1T and 17h–2T while
continuing to subject to the rules those
broker-dealers that pose greater risk to
the financial markets, investors, and
other market participants.
III. Conclusion
It is hereby ordered pursuant to
section 17(h)(4) of the Exchange Act that
any broker-dealer that does not hold
funds or securities for, or owe money or
securities to, customers and does not
carry the accounts of or for customers,
or that is exempt from Rule 15c3–3
pursuant to paragraph (k)(2) of that rule,
is hereby exempt from Rule 17h–1T and
Rule 17h–2T, if it maintains total assets
of less than $1 billion and capital,
including debt subordinated in
accordance with Rule 15c3–1d, of less
than $50 million.11
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14371 Filed 7–2–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89191; File No. SR–
NYSEArca-2019–92]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 3 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 3, to List and Trade
Four Series of Active Proxy Portfolio
Shares Issued by T. Rowe Price
Exchange-Traded Funds, Inc. Under
NYSE Arca Rule 8.601–E
June 30, 2020
I. Introduction
On December 23, 2019, NYSE Arca,
Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
PO 00000
11 See
supra note 3.
Frm 00175
Fmt 4703
Sfmt 4703
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the following under NYSE
Arca Rule 8.601–E (Active Proxy
Portfolio Shares): T. Rowe Price Blue
Chip Growth ETF, T. Rowe Price
Dividend Growth ETF, T. Rowe Price
Growth Stock ETF, and T. Rowe Price
Equity Income ETF (‘‘Funds’’).3 The
proposed rule change was published for
comment in the Federal Register on
January 3, 2020.4
On February 13, 2020, pursuant to
Section 19(b)(2) of the Act,5 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.6 On March 31,
2020, the Exchange filed Amendment
No. 1 to the proposed rule change,
which replaced and superseded the
proposed rule change as originally
filed.7 On April 1, 2020, the
Commission published Amendment No.
1 for notice and comment and instituted
proceedings under Section 19(b)(2)(B) of
the Act 8 to determine whether to
approve or disapprove the proposed
rule change.9 On May 2020, 2020, the
Exchange filed Amendment No. 2 to the
1 15
U.S.C.78s(b)(1).
CFR 240.19b-4.
3 The Exchange originally proposed to adopt
NYSE Arca Rule 8.601–E to permit the Exchange to
list and trade Managed Portfolio Securities, and to
list and trade Shares of the Funds under proposed
Exchange Rule 8.601–E (Managed Portfolio
Securities). In Amendment No. 1, the Exchange
removed the proposal to adopt proposed NYSE
Arca Rule 8.601–E (Managed Portfolio Securities)
and revised the proposal to seek to list and trade
Shares of the Funds under proposed NYSE Arca
Rule 8.601–E (Active Proxy Portfolio Shares). See
Amendment No. 1, infra note 7. See also
Amendment No. 6 to SR–NYSEArca-2019–95
(proposing to adopt NYSE Arca Rule 8.601–E to list
and trade Active Proxy Portfolio Shares, available
on the Commission’s website at https://
www.sec.gov/comments/sr-nysearca-2019-95/
srnysearca201995-7329866-218548.pdf. The
Commission recently approved the Exchange’s
proposed rule change to adopt NYSE Arca Rule
8.601–E to permit the listing and trading of Active
Proxy Portfolio Shares. See Securities Exchange Act
Release No. 89185 (June 29, 2020) (SR–NYSEArca2019–95) (‘‘Active Proxy Portfolio Shares Order’’).
4 See Securities Exchange Act Release No. 87865
(Dec. 30, 2019), 85 FR 380.
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 88197,
85 FR 9887 (Feb. 20, 2020). The Commission
designated April 2, 2020, as the date by which the
Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
7 Amendment No. 1 is available on the
Commission’s website at https://www.sec.gov/
comments/sr-nysearca-2019-92/srnysearca2019927015540-214975.pdf.
8 15 U.S.C. 78s(b)(2)(B).
9 See Securities Exchange Act Release No. 88535,
85 FR 19554 (April 7, 2020).
2 17
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06JYN1
]]>Agencies
[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Notices]
[Pages 40356-40358]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14371]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89184]
Order Under Section 17(h)(4) of the Securities Exchange Act of
1934 Granting Exemption from Rule 17h-1T and Rule 17h-2T for Certain
Broker-Dealers Maintaining Capital, Including Subordinated Debt of
Greater Than $20 Million But Less Than $50 Million
June 29, 2020.
I. Introduction
Section 17(h) was added to the Securities Exchange Act of 1934
(``Exchange Act'') to address the concern that financial problems of a
broker-dealer's affiliate could cause the broker-dealer to fail or
experience significant financial difficulties.\1\ The Securities and
Exchange Commission (``Commission'') adopted Rules 17h-1T and 17h-2T
under Section 17(h) of the Exchange Act.\2\ As discussed below, these
rules contain provisions that exempt certain broker-dealers from the
requirements of the rules. This order exempts from the requirements of
the rules broker-dealers that do not hold funds or securities for, or
owe money or securities to, customers and do not carry customer
accounts, or that are exempt from Rule 15c3-3 pursuant to paragraph
(k)(2) of that rule, and that maintain total assets of less than $1
billion and capital, including debt subordinated in
[[Page 40357]]
accordance with appendix D of Rule 15c3-1 under the Exchange Act
(``Rule 15c3-1d''), of less than $50 million.\3\
---------------------------------------------------------------------------
\1\ See Final Temporary Risk Assessment Rules, Exchange Act
Release No. 30929 (July 16, 1992), 57 FR 32159 (July 21, 1992).
\2\ See 15 U.S.C. 78q(h) (``Section 17h of the Exchange Act'');
17 CFR 240.17h-1T (``Rule 17h-1T''); 17 CFR 240.17h-2T (``Rule 17h-
2T'').
\3\ For the purposes of the exemptions in Rule 17h-1T and Rule
17h-2T and this order, capital must be calculated pursuant to
paragraph (d)(3) of Rule 17h-1T and paragraph (b)(3) of Rule 17h-2T.
---------------------------------------------------------------------------
Rule 17h-1T requires a broker-dealer that is not exempt under
paragraph (d) of the Rule to maintain and preserve certain records,
including: (1) An organizational chart that includes the broker-dealer
and its affiliates; (2) policies, procedures, or systems concerning
methods for monitoring and controlling financial and operational risks
to the broker-dealer resulting from the activities of its affiliates;
(3) a description of material pending legal and arbitration proceedings
involving the broker-dealer or its affiliates; (4) consolidating and
consolidated financial statements; and (5) the broker-dealer's
securities and commodities position records. Rule 17h-2T requires a
broker-dealer that is not exempt under paragraph (b) of the Rule to
file Form 17-H with the Commission on a quarterly basis. The form
elicits information concerning certain of the broker-dealer's
affiliates.\4\ Paragraph (d) of Rule 17h-1T and paragraph (b) of Rule
17h-2T exempt from their respective requirements certain categories of
broker-dealers, as long as the broker-dealers maintain capital of less
than $20 million (``$20 million exemption''). These categories of
broker-dealers include: (1) broker-dealers that are exempt from Rule
15c3-3 pursuant to paragraph (k)(2) of that rule; and (2) broker-
dealers that do not hold funds or securities for customers, owe money
or securities to customers, or carry the accounts of customers.
---------------------------------------------------------------------------
\4\ See Form 17-H, available at https://www.sec.gov/about/forms/form17-h.pdf.
---------------------------------------------------------------------------
II. Discussion
Section 17(h)(4) of the Exchange Act provides that the Commission
by rule or order may exempt any person or class of persons, under such
terms and conditions and for such periods as the Commission shall
provide in such rule or order, from the provisions of Section 17(h) of
the Exchange Act, and the rules thereunder. The statute further
provides that, in granting such exemptions, the Commission shall
consider, among other factors:
Whether information of the type required under section
17(h) of the Exchange Act is available from a supervisory agency (as
defined in section 3401(6)of title 12), a State insurance commission or
similar State agency, the Commodity Futures Trading Commission
(``CFTC''), or a similar foreign regulator;
The primary business of any associated person;
The nature and extent of domestic or foreign regulation of
the associated person's activities;
The nature and extent of the registered person's
securities activities; and
With respect to the registered person and its associated
persons, on a consolidated basis, the amount and proportion of assets
devoted to, and revenues derived from, activities in the United States
securities markets.
The Commission has administered the risk assessment program under
Section 17(h) of the Exchange Act for 28 years. Based on this
experience, the Commission believes it is appropriate to raise by order
the threshold for the $20 million exemption to $50 million, provided
the broker-dealer maintains less than $1 billion in total assets.
In adopting the $20 million exemption (rather than a $5 million
exemption, which was proposed),\5\ the Commission stated that the
number of broker-dealers subject to Rules 17h-1T and 17h-2T would be
reduced without a corresponding trade-off in risk.\6\ Moreover, the
Commission stated that its staff intended to focus its efforts on the
largest 50 to 75 broker-dealers.\7\ Thus, from the outset, the
Commission's risk assessment program under Section 17(h) of the
Exchange Act sought to be risk-based and to focus on larger broker-
dealers. Information filed by broker-dealers on Form X-17A-5 (``FOCUS
Report'') indicates that for the subset of firms subject to Rules 17h-
1T and 17h-2T, those maintaining $50 million or more in capital
currently account for over 98% of total capital of subject broker-
dealers. Similarly, for all broker-dealers, those maintaining $50
million or more in capital account for nearly 97% of the total capital
of all broker-dealers. Based upon the current record of broker-dealers
subject to Rules 17h-1T and 17h-2T maintained by Commission staff and
information filed by broker-dealers in the FOCUS Reports and other
information known to Commission staff, the Commission believes
exempting certain broker-dealers that maintain total assets of less
than $1 billion and maintain capital of greater than $20 million but
less than $50 million will provide relief to approximately 59 broker-
dealers or approximately 21% of the approximately 275 broker-dealers
currently subject to Rules 17h-1T and 17h-2T.
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\5\ See Proposed Temporary Risk Assessment Rules, Exchange Act
Release No. 29635 (Aug. 30, 1991), 56 FR 44016 (Sep. 6, 1991).
\6\ See Final Temporary Risk Assessment Rules, 57 FR at 32164-
65.
\7\ See Final Temporary Risk Assessment Rules, 57 FR at 32165.
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Exempting certain firms that maintain total assets of less than $1
billion and maintain capital, including subordinated debt, of greater
than $20 million but less than $50 million from Rules 17h-1T and 17h-2T
is intended to reduce the number of broker-dealers subject to the rules
without materially increasing risk, given that firms continuing to be
subject to the rules account for over 98% of the total capital of firms
subject to the rules prior to the issuance of this Order and nearly 97%
of the total capital of all broker-dealers. The Commission is setting
the ceiling for this exemption at $50 million with this goal in mind.
Moreover, limiting the availability of this exemption to firms with
total assets of less than $1 billion will prevent highly leveraged
firms with relatively small levels of capital from availing themselves
of the exemption. A broker-dealer with a high level of leverage and a
small level of capital can pose heightened risks because it has less
capital to absorb losses and, therefore, poses greater credit risk to
its customers, counterparties, and other creditors. Thus, the
Commission's risk assessment program will continue to focus on those
broker-dealers and affiliates that conduct a substantial securities
business and thus are in a position to potentially pose significant
risk to investors and to the orderly, fair, and efficient functioning
of the markets.\8\ Moreover, increasing the exemption to $50 million
will reduce the regulatory burden for a cohort of smaller broker-
dealers that pose less risk to the orderly, fair, and efficient
functioning of the markets relative to broker-dealers that will
continue to be subject to the rules.
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\8\ Many of the largest broker-dealers, which use alternative
methods of computing their net capital under Appendix E of Rule
15c3-1, are exempt from Rules 17h-1T and 17h-2T but are subject to
heightened monitoring as part of the Commission's Risk Supervised
Broker-Dealer Program. See 17 CFR 17h-1T(d)(4) and 17 CFR 17h-
2T(b)(4). See also 17 CFR 240.15c3-1e.
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In considering this Order, the Commission focused on the fourth
factor in Section 17(h)(4) of the Exchange Act (i.e., the nature and
extent of the person's securities activities).\9\ Although the other
four factors included
[[Page 40358]]
in Section 17(h)(4) of the Exchange Act were considered, the Commission
determined they did not inform the exemption as the exemption does not
alter the type of information required to be reported or preserved,
does not vary in applicability based upon the business activities of or
the extent of regulatory oversight over a broker-dealer's affiliate,
and applies regardless of the extent of a broker-dealer and its
affiliate conducting business in the United States.\10\ More
specifically, the cohort of broker-dealers that will be able to rely on
this exemption maintains total assets of less than $1 billion and
maintains capital, including subordinated debt, of greater than $20
million but less than $50 million, and do not hold funds or securities
for, or owe money or securities to, customers and do not carry customer
accounts, or that are exempt from Rule 15c3-3 pursuant to paragraph
(k)(2) of that rule. These firms are relatively small in size, as
measured by the amount of total assets and by the amount of capital
(including subordinated debt) that they maintain. The Commission
believes these exempted firms--because of their relative size and the
fact that they do not hold customer funds or securities, or owe money
or securities to, customers and do not carry customer accounts, or are
exempt from Rule 15c3-3 pursuant to paragraph (k)(2) of that rule--
present less risk to the financial markets. Consequently, the
objectives of this exemption align most closely with the fourth factor
in Section 17(h)(4) of the Exchange Act (i.e., the nature and extent of
the registered person's securities activities).
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\9\ 15 U.S.C. 78q(h)(4). Section 17(h)(4) of the Exchange Act
states that the HYPERLINK Commission by HYPERLINK rule or order may
exempt any HYPERLINK person or class of HYPERLINK persons, under
such terms and conditions and for such periods as the HYPERLINK
Commission shall provide in such HYPERLINK rule or order, from the
provisions of this subsection, and the HYPERLINK rules thereunder.
In granting such exemptions, the HYPERLINK Commission shall
consider, among other factors--
(A) whether information of the type required under this
subsection is available from a supervisory HYPERLINK agency (as
defined in section 3401(6) of title 12), a HYPERLINK State insurance
HYPERLINK commission or similar HYPERLINK State agency, the
Commodity Futures Trading Commission, or a similar foreign
regulator;
(B) the primary business of any associated HYPERLINK person;
(C) the nature and extent of domestic or foreign regulation of
the associated HYPERLINK person's activities;
(D) the nature and extent of the registered HYPERLINK person's
HYPERLINK securities activities; and
(E) with respect to the registered HYPERLINK person and its
associated HYPERLINK persons, on a consolidated basis, the amount
and proportion of assets devoted to, and revenues derived from,
activities in the United HYPERLINK States securities markets.
\10\ 15 U.S.C. 78q(h)(4)(A)-(C) & (E).
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In light of changes in the financial services industry, including
consolidation among financial services institutions, the Commission
believes that this Order strikes an appropriate balance in terms of
relieving certain broker-dealers--those that maintain total assets of
less than $1 billion and maintain capital, including subordinated debt,
of greater than $20 million but less than $50 million and that do not
hold funds or securities for, or owe money or securities to, customers
and do not carry customer accounts, or that are exempt from Rule 15c3-3
pursuant to paragraph (k)(2) of that rule --from the requirements of
Rules 17h-1T and 17h-2T while continuing to subject to the rules those
broker-dealers that pose greater risk to the financial markets,
investors, and other market participants.
III. Conclusion
It is hereby ordered pursuant to section 17(h)(4) of the Exchange
Act that any broker-dealer that does not hold funds or securities for,
or owe money or securities to, customers and does not carry the
accounts of or for customers, or that is exempt from Rule 15c3-3
pursuant to paragraph (k)(2) of that rule, is hereby exempt from Rule
17h-1T and Rule 17h-2T, if it maintains total assets of less than $1
billion and capital, including debt subordinated in accordance with
Rule 15c3-1d, of less than $50 million.\11\
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\11\ See supra note 3.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14371 Filed 7-2-20; 8:45 am]
BILLING CODE 8011-01-P
