SEC’s Oversight of Bear Stearns 

and Related Entities: 

Broker-Dealer Risk Assessment 

Program 

Sections of this report have been redacted to 

delete information that SEC believes is nonpublic and confidential. 

September 25, 2008 

Report No. 446-B 
UNITED STATES 

SECURlTlES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

OFFICE OF 

INSPECTOR GENERAL MEMORANDUM 

To: Christopher Cox, Chairman 

Erik R. Sirri, Director, Division of Trading and ~arkets 

Lewis W. Walker, Office of Information Technology, Acting Director 

and Chief lnforrnation Officer 

From: H. bavid Kotz, Inspector ~ene* 

Subject: SEC's Oversight of Bear Stearns and Related Entities: BrokerDealer Risk Assessment Program, Report No. 446-B 

This memorandum transmits the Securities and Exchange Cpmmission, Office of 

lnspector General's final report, detailing the results of our audit on the Division 

of Trading and Market's (TM) Broker-Dealer Risk Assessment program. This 

audit was conducted pursuant to a Congressional request from Ranking Member' 

Charles E. Grassley of the United States Senate Committee on Finance. 

The final report contains 10 recommendations, which if implemented, should 

improve the Broker-Dealer Risk Assessment program. TM and the Office of 

Information Technology's (OIT) written responses to the draft report are included 

in their entirety in Appendix Vl in the audit report. TM concurred with 9 of the 

report's 10 recommendations and OIT concurred with the two recommendations 

that pertained to OIT. 

Should you have any questions regarding this report, please do not hesitate to 

contact me. We appreciate the courtesy and cooperation that you and your staff 

extended to our auditors during this audit. 

Attachment 
ii 

cc: Peter Uhlmann, Chief of Staff, Chairman’s Office 

 Diego T. Ruiz, Executive Director, OED 

 Bob Colby, Deputy Director, TM 

 Daniel M. Gallagher, Jr., Deputy Director, TM 

 Michael A. Macchiaroli, Associate Director, TM 

 Matthew J. Eichner, Assistant Director, TM 

 Thomas K. McGowan, Assistant Director, TM 

Herb Brooks, Assistant Director, TM 

 Kimberly L. Earle, Accountant, TM 

Patrice D. Pegram, Regulatory Specialist, TM 

Denise Landers, Senior Special Counsel, TM 

George R. Eckard, Assistant Director, OIT 

Srinivas Bangarbale, Assistant Director, OIT 

Daniel F. Lisewski, Branch Chief, OIT 

Juli Johnson, Configuration Management Specialist, OIT 

Joyce C. Hankins, Team Leader, OIT 

Remi Pavlik-Simon, Program Analyst, OIT 

Ann K. Lin, Systems Analyst, OIT 

Darlene L. Pryor, Business Analyst, OED 

Rick Hillman, Managing Director of Financial Markets and Community 

 Investment, GAO 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

iii 

SEC Risk Assessment Program

Executive Summary

Background. Section 17(h) of the Securities and Exchange Act of 1934 was 

amended in 1990, and temporary rules 17h-1T and 17h-2T became effective in 

September 1992. These rules require broker-dealers that are part of a holding 

company structure with at least $20 million in capital to file with the Commission 

disaggregated, non-public information on the broker-dealer, the holding 

company, and other entities within the holding company, and to maintain and 

preserve records and other information concerning entities related to the brokerdealer. Currently, there are 146 broker-dealers that file the Risk Assessment 

Report for Brokers and Dealers (Form 17-H or 17(h) documents) with the 

Commission under the Broker-Dealer Risk Assessment program. 

The purpose of the Broker-Dealer Risk Assessment program is for staff in the 

Division of Trading and Markets (TM) to assess the risks to registered brokerdealers that may stem from affiliated entities, including holding companies and 

keep apprised of significant events that could adversely affect broker-dealers, 

customers and the financial markets. TM tracks the filing status of the 146 

broker-dealers that file 17(h) documents with the Commission, but only reviews 

in detail the filings from six prominent firms, because they have a significant 

number of customer accounts and TM has, therefore deemed them to be 

material firms. 

Congressional Request. On April 2, 2008, the Office of Inspector General 

(OIG) received a letter from Ranking Member Charles E. Grassley of the United 

States Senate Committee on Finance, requesting that the OIG analyze the 

Commission’s oversight of Consolidated Supervised Entities (CSE) firms and 

broker-dealers subject to the Commission’s Risk Assessment program.1

 This 

letter noted that TM was responsible for regulating the largest broker-dealers, 

and their associated holding companies. The letter requested that the OIG 

provide an update of findings made in its previous audit report on the 

Commission’s Broker-Dealer Risk Assessment program (Broker-Dealer Risk 

Assessment Program, Report no. 354, issued on August 13, 2002). 

The United States Senate Committee on Finance letter also requested a review 

of TM’s oversight of the CSE it directly oversees, with a special emphasis on The 

Bear Stearns Companies, Inc (Bear Stearns). The letter requested that the OIG 

analyze how the CSE program is run, the adequacy of the Commission’s 

monitoring of Bear Stearns, and to make recommendations to improve the 

Commission’s CSE program.2

 

 

1

 A copy of this request letter is attached to this report in full in Appendix II. 2

 The United States Senate Committee on Finance letter also requested that the Office of Inspector General 

(OIG) conduct an investigation into the facts and circumstances surrounding the Commission’s decision to 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

iv 

Objectives. In response to the April 2, 2008 Congressional Request, the OIG 

conducted two separate audits with regard to the Commission’s oversight of Bear 

Stearns and related entities. This audit’s objectives were to follow up on the 

current status of recommendations made in the OIG’s prior audit report of the 

Risk Assessment program (Broker-Dealer Risk Assessment Program, Report no. 

354, issued on August 13, 2002); and to examine the Broker-Dealer Risk 

Assessment Process to determine whether improvements are needed. 

The OIG performed a second audit of the Commission’s CSE program. This 

audit’s objectives were to evaluate the Commission’s CSE program, emphasizing 

the Commission’s oversight of Bear Stearns and to determine whether 

improvements are needed in the Commission’s monitoring of CSE firms and its 

administration of the CSE program. The CSE program is a voluntary program 

that was created by the Commission in 2004, which allows the Commission to 

supervise certain broker-dealer holding companies on a consolidated basis. The 

report found that the Commission’s oversight of Bear Stearns and the other CSE 

firms should be improved, the guidelines regarding the CSE firms’ capital and 

liquidity requirements should be reassessed and the Commission, in consultation 

with the Board of Governors of the Federal Reserve, should determine whether 

leverage ratio limits should be imposed. The report also found that the 

Commission should adequately incorporate the CSE firms’ concentration of 

securities into the CSE program’s assessment of the firms’ risk management 

systems, more aggressively prompt CSE firms to take action to mitigate such 

risks, and be more skeptical of the firms’ risk models. The report contained 26 

recommendations to improve the CSE program. Audit report number 446-A, 

examining the Commission’s CSE program was issued simultaneously with this 

report on September 25, 2008. 

Prior OIG Audit Report. The prior OIG report on the Broker-Dealer Risk 

Assessment program contained 14 recommendations to improve the program. 

TM addressed several of the prior OIG report’s recommendations. However, one 

of the very significant recommendations in the prior OIG report stated that the 

Commission should update and finalize temporary rules 17h-1T and 17h-2T. As 

of this date, six years later, these temporary rules still have not been updated. 

The result is that several aspects of these rules are not effective mainly because 

they do not require firms to file certain pertinent information with the Commission 

and many filings are not reviewed by TM staff. Additionally, while TM has 

claimed that the rules currently require too many firms to file 17(h) documents 

with the Commission, TM has not taken any steps to update these rules. 

The prior OIG report also recommended that TM explore the feasibility of having 

firms electronically file 17(h) documents. In 2005, TM in consultation with the 

Office of Information Technology launched the Broker-Dealer Risk Assessment 

(BDRA) system, which enables firms to file Form 17-H electronically. As of 

 not pursue an Enforcement Action against Bear Stearns. This issue was addressed in an OIG investigative 

report dated September 25, 2008. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

v 

September 2008, however, three years later, only 20 of the 146 firms filing 17(h) 

documents were filing electronically and the remaining firms still file paper 

documents. 

Results. TM is not fulfilling its obligations in accordance with the underlying 

purpose of the Broker-Dealer Risk Assessment program in several respects. 

First, TM has failed to update and finalize the rules governing the program, which 

would ensure that broker-dealers file pertinent information with the Commission 

in a timely manner. Second, TM has failed to enforce the temporary rules’ 

document retention and filing requirements that are incumbent upon brokerdealers. As a result, nearly one-third of the firms failed to file 17(h) documents 

as required by the rules. Third, even after the collapse of Bear Stearns, in March 

2008, two related broker-dealers still exist, one of which carries a significant 

number of customer accounts. However, TM has not yet determined whether 

these broker-dealers are obligated to file Form 17-H. Fourth, although TM tracks 

the filing status of 146 broker-dealers that file quarterly and annual reports with 

the Commission, TM only conducts an in-depth review of the filings for six of the 

146 firms that TM determined are most significant. TM generally does not review 

the filings for the remaining 140 firms, yet they are required to file under the 

Broker-Dealer Risk Assessment program. Fifth, TM does not timely process and 

review the filings from the six firms upon which its staff focus their review. Sixth 

and finally, TM does not maintain documentation to identify all of the brokerdealers that are exempt from the filing process. 

 

TM’s failure to carry out the purpose and goals of the Broker-Dealer Risk 

Assessment program hinders the Commission’s ability to foresee or respond to 

weaknesses in the financial markets. This may impact TM’s ability to protect 

customers from financial or other problems experienced by broker-dealers. 

Summary of Recommendations. This report reasserts an OIG 

recommendation made in 2002, that TM should update and finalize temporary 

rules 17h-1T and 17h-2T, which govern the Broker-Dealer Risk Assessment 

program and enforce broker-dealer compliance with these rules. It is also critical 

for TM to determine whether the broker-dealers associated with Bear Stearns are 

required to file Form 17-H with the Commission in light of the significant amount 

of customer accounts carried by these broker-dealers. We also recommend that 

TM process all 17(h) filings in a timely manner, ensure that firms required to file 

Form 17-H actually file, and maintain documentation to identify all of the brokerdealers that are exempt from filing Form 17-H. We further recommend that TM 

aggressively encourage firms to file electronically with the Commission, and 

resolve the technical problems that have been identified with the BDRA filing 

system. A detailed list of our recommendations can be found in Appendix V. 

TM concurred with 9 of the report’s 10 recommendations and the Office of 

Information Technology (OIT) concurred with the two recommendations that 

pertained to OIT. Management’s responses to the report are included in its 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

vi 

entirety in Appendix VI. OIG’s response to Management’s comments is included 

in Appendix VII. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

vii 

TABLE OF CONTENTS 

Executive Summary......................................................................................................iii 

Table of Contents ........................................................................................................vii 

Background and Objectives ..........................................................................................1 

Findings and Recommendations...................................................................................6 

Finding 1: TM Has Not Finalized Temporary Rules 17h-1T and 17h-2T 

Balances Are Not Fully Compliant......................................................................6 

Recommendation 1.......................................................................9 

 

Finding 2: TM Has Not Determined Whether Bear Stearns’ Broker-Dealers 

are Subject to the Broker-Dealer Risk Assessment Program...........................10 

Recommendation 2.....................................................................11 

Finding 3: TM Does Not Enforce Compliance with Rules 17h-1T and 17h2T and Its Own Policies ...................................................................................12 

Recommendation 3.....................................................................12 

Recommendation 4.....................................................................13 

Recommendation 5.....................................................................13 

Finding 4: TM Does Not Process 17(h) Filings in a Timely Manner .................14 

Recommendation 6.....................................................................14 

Finding 5: TM’s List of Exempt Firms is Incomplete and Erroneous.................14 

Recommendation 7.....................................................................15 

Finding 6: TM Has Not Effectively Encouraged Firms to Electronically File 

17(h) Documents..............................................................................................16 

Recommendation 8.....................................................................16 

Finding 7: TM Should More Effectively Utilize the BDRA System ....................17 

Recommendation 9.....................................................................17 

Finding 8: Several Technical Problems Exist with the BDRA System that 

Need to be Addressed .....................................................................................17 

Recommendation 10...................................................................18 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

viii 

Appendices 

Appendix I: Acronyms. ....................................................................................19 

Appendix II: Congressional Request for Audit.................................................20 

Appendix III: Scope and Methodology.............................................................22 

Appendix IV: Criteria .......................................................................................24 

Appendix V: List of Recommendations ...........................................................25 

Appendix VI: Management Comments............................................................28 

Appendix VII: OIG Response to Management’s Comments ...........................36 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 1

Background and Objectives

Background 

In 1990, Drexel Burnham Lambert Group, Inc. (Drexel), the holding company of a 

formerly prominent broker-dealer, experienced financial difficulties. In a period of 

about three weeks and without the knowledge of the Commission or the New 

York Stock Exchange, approximately $220 million of capital was transferred from 

the broker-dealer to its holding company, in the form of short-term loans. By the 

time the Commission learned about the transaction, Drexel or its associated 

entities had amassed a significant amount of short-term liabilities that were due 

to mature within a month and they could not meet these obligations. As a result, 

Drexel’s broker-dealer filed for bankruptcy and was subsequently liquidated. 

This case illustrates that the financial difficulties of associated entities may lead 

to the demise of the broker-dealer itself. 

Section 17(h) of the Securities and Exchange Act of 1934 (Exchange Act)3

 was 

added in 1990 by the Market Reform Act of 1990, and temporary rules 17h-1T 

and 17h-2T4

 became effective in 1992, following Drexel’s collapse. These rules 

require broker-dealers with at least $20 million in capital that are part of a holding 

company structure to file Form 17-H, Risk Assessment Report for Brokers and 

Dealers (Form 17-H or 17(h) documents) with the Commission and to maintain 

and preserve records and other information concerning the broker-dealer’s 

Material Associated Persons (MAP). 5 

Form 17-H filings consist of disaggregated, non-public information on the brokerdealer, the holding company, and other entities within the holding company. 

Form 17-H consists of two parts and broker-dealers are required to file the form 

quarterly and also file an annual report with the Commission. Part I of Form 17-H 

requires reporting in four areas: (1) Organizational Structure; (2) Financing, 

Capital Adequacy and Risk-Management Policies and Procedures; (3) Pending 

Legal Matters and Contingencies; and (4) Consolidated and Consolidating 

Financial Data. Part II of the form requires reporting financial information about 

the broker-dealer’s MAPs. 

TM’s Program Oversight and Responsibilities. The Division of Trading and 

Markets (TM) oversees the Broker-Dealer Risk Assessment program and is 

 

3 15 U.S.C. §78q(h).

4

 17 C.F.R. §§ 240.17h-1T & 240.17h-2T. 

5

 MAPs are defined as affiliates of broker-dealers that are subject to the 17(h) filing requirement. 

The determination of whether an entity is a MAP is made by the reporting broker-dealer, subject 

to Commission oversight and involves consideration of all aspects of the activities of, and the 

relationship between both entities as described in Rule 17h-1T. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 2

responsible for receiving and reviewing 17(h) filings. The Broker-Dealer Risk 

Assessment program is staffed with a full-time regulatory specialist and a parttime Certified Public Accountant, who manage the program. The purpose of this 

program is for TM staff to assess the risks to registered broker-dealers that may 

stem from affiliated entities, including holding companies and to keep TM’s staff 

apprised of significant events that could adversely affect broker-dealers, 

customers and the financial markets. 

Six Broker-Dealers Receive Comprehensive Reviews. There are 146 brokerdealers that currently file 17(h) documents with the Commission.6

 However, TM 

only conducts a detailed review of six of the 146 broker-dealers’ filings because 

TM designated these six firms as material broker-dealers based on their size and 

the significant amount of customer accounts that they carry. According to first 

quarter 2008 data provided by the Financial Industry Regulatory Authority 

(FINRA) ,

7 these six broker-dealers carry approximately 43 percent of the 

customer accounts and 11 percent of the free credit balances of all United States 

broker-dealers that are regulated by FINRA. Free credit balances represent the 

cash held by a broker in a customer’s margin account that the customer can 

withdraw at any time, without restriction. 

Increased Monitoring of Select Broker-Dealers. Of the 146 broker-dealers, 

10 additional firms carry approximately 11 percent of the customer accounts and 

3 percent of the free credit balances of all United States broker-dealers that are 

regulated by FINRA.8 However, TM does not currently monitor these 10 firms on 

a regular basis, because TM does not believe they are as material as the 6 

broker-dealers that it regularly monitors. TM may review information from these 

10 filers if an issue arises. For example, if one of these firms experiences 

financial difficulties or undergoes a major change, TM may review the firm’s 17(h) 

filings. TM has stated that it plans to monitor these firms on a regular basis in 

fiscal year 2008. As of August 2008, however, TM had not reviewed in detail any 

of these firms. 

Regulation of Firms Through the CSE and SIBHC Programs. In addition to 

the 146 firms filing 17(h) documents, TM regulates six additional firms through 

the Commission’s Consolidated Supervised Entity (CSE) program and one firm 

through the Commission’s Supervised Investment Bank Holding Company 

(SIBHC) program. Thus, there are seven firms that are regulated under the CSE 

 

6

 It is possible that additional firms are required to file Form 17-H that are not filing either because 

the Commission is not aware of these firms or the Commission has not required these firms to file 

Form 17-H. This issue is discussed later in the report.

7

 FINRA is the largest non-governmental regulator for all securities firms doing business in the 

United States. FINRA oversees more than 5,000 brokerage firms. FINRA was created in July 

2007 through the consolidation of the National Association of Securities Dealers and the 

regulation committee of the New York Stock Exchange. 

8 Source: FINRA Data as of March 31, 2008. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 3

and SIBHC programs. The intent of the CSE and SIBHC programs is for the 

Commission to provide consolidated supervision at the holding company level. 

The CSE and SIBHC firms are required to file more comprehensive information 

with the Commission than is required under the Broker-Dealer Risk Assessment 

program and TM reviews these firms in greater depth than the 17(h) filers. 

 

These seven firms carry approximately 21 percent of all customer accounts and 

70 percent of all the free credit balances of all the broker-dealers that are 

regulated by FINRA.9

 Approximately 15 full-time TM personnel with backgrounds 

in finance and economics manage these programs. 

Overall Monitoring of Firms by the Commission and the Federal Reserve. 

According to FINRA data as of March 31, 2008, the firms monitored by the 

Commission through the Broker-Dealer Risk Assessment, CSE and SIBHC 

programs carry approximately 64 percent of the customer accounts and 80 

percent of the free credit balances of all United States broker-dealers that are 

regulated by FINRA. 

Additional firms regulated by the Board of Governors of the Federal Reserve 

System (Federal Reserve) constitute up to 24 percent of the customer accounts 

and up to 17 percent of the free credit balances of all United States brokerdealers that are regulated by FINRA. 

Thus, total monitoring by either the Commission or the Federal Reserve 

constitutes as much as 88 percent of customer accounts and 97 percent of the 

free credit balances of all United States broker-dealers that are regulated by 

FINRA. 

Authority to Exempt Broker-Dealers from Filing Form 17-H. Temporary Rule 

17h-2T gives the Commission the authority to exempt broker-dealers from filing 

Form 17-H. Using its authority, TM may permit broker-dealers that it does not 

monitor in-depth, to only file Form 17-H on an annual basis (instead of quarterly) 

and only submit information as warranted by media sources and business 

developments. 

Staff Review of Filings. TM staff has described its review of filings as follows. 

The organization chart is the starting point for its review. The organization chart 

sets forth the entities which are MAPs, associated broker-dealers and all other 

entities within the holding company. 

TM staff focus on the consolidating financial statements, which identify each 

MAP, broker-dealer and significant unregulated entity in a separate column. TM 

staff review the consolidated financial statements for trends in financial condition 

 

9

 Source: FINRA Data as of March 31, 2008. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 4

and operating results. The staff look at the parent company and unregulated 

entities’ data for evidence of significant business, measured by revenues or 

balance sheet activity. If there is significant unregulated business within the 

holding company, staff analyze the nature, risk and profitability of the business to 

determine if it is supported by capital and the ability of the group to maintain 

liquidity during a downward trend in business or other event. TM staff look at 

inter-company money flows, liquidity, the types of assets held in each entity and 

the types of maturities of funding for the assets. 

As warranted, TM staff may supplement filing reviews with on-site visits. TM staff 

have documented their review of broker-dealers’ filings in written memoranda, 

which were provided to the program’s Assistant Director. TM stated that the 

memoranda are still produced, however, the most recent written memorandum 

was dated August 2007. TM currently tracks quarterly financial data of the six 

firms it reviews in a spreadsheet. 

The BDRA Electronic Filing System. The Broker-Dealer Risk Assessment 

(BDRA) system is an electronic filing system, created by the Office of Information 

Technology (OIT), in consultation with TM. The Commission started using the 

BDRA system in 2005. This system allows firms monitored under the BrokerDealer Risk Assessment, CSE and SIBHC programs to submit required filings 

electronically. However, as of September 2008, only 20 of the 146 brokerdealers that are required to file 17(h) documents with the Commission have 

opted to use BDRA. In contrast, all seven of the firms monitored under the CSE 

and SIBHC programs use BDRA to file required documents. 

Objectives 

As a result of the collapse of Bear Stearns in March 2008, we received a 

Congressional request to perform this audit of the Commission’s Risk 

Assessment program, in addition to an audit of the Commission’s CSE program 

(see Appendix II). 

 

The objectives of this audit were to follow up on recommendations made in the 

OIG’s prior audit report of the Risk Assessment program (Broker-Dealer Risk 

Assessment Program, Report no. 354, issued on August 13, 2002); and to 

examine the Commission’s broker-dealer review process to determine whether 

improvements are needed. 

The objectives of the audit on the Commission’s CSE program were to evaluate 

the Commission’s CSE program, emphasizing the Commission’s oversight of 

Bear Stearns and to determine whether improvements are needed in the 

Commission’s monitoring of CSE firms and its administration of the CSE 

program. The CSE program is a voluntary program that was created by the 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 5

Commission in 2004, which allows the Commission to supervise certain brokerdealer holding companies on a consolidated basis. The report found that the 

Commission’s oversight of Bear Stearns and the other CSE firms should be 

improved, the guidelines regarding the CSE firms’ capital and liquidity 

requirements should be reassessed and the Commission, in consultation with the 

Board of Governors of the Federal Reserve, should determine whether leverage 

ratio limits should be imposed. The report also found that the Commission 

should adequately incorporate the CSE firms’ concentration of securities into the 

CSE program’s assessment of the firms’ risk management systems, more 

aggressively prompt CSE firms to take action to mitigate such risks, and be more 

skeptical of the firms’ risk models. The report contained 26 recommendations to 

improve the CSE program. Audit report number 446-A, examining the 

Commission’s CSE program was issued simultaneously with this report on 

September 25, 2008. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 6

Findings and Recommendations 

Finding 1: TM Has Not Finalized Temporary Rules 

17h-1T and 17h-2T 

Temporary rules 17h-1T and 17h-2T were adopted in 1992, 

and TM has neither updated nor made the rules permanent, 

despite significant changes in broker-dealer operations and 

risks that have occurred since the temporary rules were 

implemented. 

In August 2002, the OIG issued an audit report on the Broker-Dealers Risk 

Assessment program that contained 14 recommendations to improve the 

program. One of the most significant recommendations in the report was that the 

Commission needed to update and finalize temporary rules 17h-1T and 17h-2T. 

As of this date, six years later, these temporary rules have still not been updated 

or finalized. 

TM’s failure to update these rules has resulted in inefficiencies that include the 

Commission’s receipt of numerous filings that TM does not review, while it does 

not receive all pertinent information from the firms that do file with the 

Commission. Instead of updating and finalizing the rules, TM has made informal 

policy decisions to compensate for the rules’ shortcomings. 

TM Focuses Its Efforts on Only Six Broker-Dealers. Currently, there are 146 

broker-dealers that file 17(h) documents with the Commission. Rather than 

updating temporary rules 17h-1T and 17h-2T, TM’s policy has been to focus its 

efforts on reviewing only six of the 146 broker-dealers that carry the largest 

number of customer accounts (43.18 percent) and comprise the most significant 

free credit balances (10.64 percent) of the more than 5,000 broker-dealers that 

are regulated by FINRA.10

TM reviews information from the remaining 140 filing firms only if a pertinent 

issue arises. For example, TM recently reviewed a 17(h) filing of a broker-dealer 

in order to provide information about the firm to another regulator. However, 

TM’s review of these other 140 firms is sporadic and random and cannot be 

considered effective monitoring. 

 

10 Source: FINRA Data as of March 31, 2008. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 7

TM informed OIG that it plans to expand its review of 17(h) filings in 2008 to 

include an additional 10 of the 146 firms that file 17(h) documents. These firms 

carry approximately 11 percent of all customer accounts and 3 percent of all the 

free credit balances for all of the broker-dealers that are regulated by FINRA. As 

of August 2008, however, TM had not reviewed in detail any of these firms. 

Impact of the Gramm-Leach-Bliley Act on the Broker-Dealer Review 

Process. The Gramm-Leach-Bliley Act (GLBA),11 became effective on March 

13, 2000, and significantly impacted temporary rule 17h-2(T). The Act permitted 

banks, securities firms and holding companies to affiliate with each other, and 

resulted in banks engaging in the securities business. As a result, the Federal 

Reserve became a principal regulator for certain securities firms subject to the 

Broker-Dealer Risk Assessment program’s reporting requirements, which was 

not the case prior to the GLBA. Some of these securities firms are subject to 

filing Form 17-H. 

TM made an internal and undocumented policy decision12 to forgo the review of 

numerous 17(h) filings from broker-dealers that already had a principal regulator, 

such as the Federal Reserve or a foreign regulator. All reporting broker-dealers 

in the United States are regulated by FINRA and firms with a principal regulator 

have dual regulation. Therefore, TM has stated that it believes it is not 

necessary to review 17(h) filings from firms with principal regulators. However, 

temporary rule 17h-2(T) still requires these firms to file Form 17-H. 

Broker-Dealer Capital Threshold Should Be Increased. Temporary rule 17h2T requires all broker-dealers with at least $20 million in capital that are part of a 

holding company structure to file 17(h) documents with the Commission. TM 

believes that the capital threshold that triggers the filing requirement should be 

raised so that fewer broker-dealers file Form 17-H. TM believes that the $20 

million capital threshold was appropriate in 1992, but that it is now too low, 

resulting in firms unnecessarily filing Form 17-H. Because of the threshold 

requirement, TM is receiving filings from 140 of 146 broker-dealers that it 

generally does not review. This has created an unnecessary filing burden for the 

firms and gives the impression that the Commission is monitoring and overseeing 

all 146 firms that are filing 17(h) documents and not just the six firms that TM 

reviews in detail. To the contrary, TM rarely, if ever reviews the filings from 140 

firms. 

While TM believes that temporary rule 17h-2T should be revised to increase the 

capital threshold, TM has not taken any measures to revise this rule or temporary 

rule 17h-1T. As such, 146 broker-dealers are required to file 17(h) documents 

with the Commission but TM does not review most of these filings. TM stated 

 

11 Public Law 106-102 (Nov. 12, 1999). 12 TM verbally informed OIG of this decision, which is not memorialized in writing. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 8

that limited staff resources and a lack of prioritization have prevented its staff 

from revising and finalizing these rules. 

In order to revise the temporary rules, TM must engage in a formal rulemaking 

process. The rulemaking process involves issuing a rule proposal for public 

review and comment and considering the public’s views. The Commission then 

considers and incorporates the public’s comments into the final rule, which is 

adopted by vote of the full Commission. Once adopted, the rule becomes a part 

of the official rules that govern the securities industry. 

TM has avoided this formal rulemaking process in favor of making an internal 

and unwritten policy decision to not review many of the firms’ 17(h) filings. This 

decision has ramifications for the 17(h) filers, the securities industry and the 

investing public. 

Temporary Rules Need to Be Updated. In addition to any modification of the 

threshold requirements that TM believes should be made, the rules have 

additional shortcomings which require immediate revision as follows: 

• The time allotted for broker-dealers to send quarterly and annual filings 

should be shortened to accommodate more timely receipt of information. 

Currently, broker-dealers have 60 and 105 days to send quarterly and 

annual filings, respectively. Firms are able to send this information in a 

much shorter time period. Receiving information 60 to105 days after the 

quarter-end or year-end hinders TM’s ability to timely review a firm’s 

filings, because the data may no longer be relevant. 

• The year-end financial statements that broker-dealers submit to the 

Commission should be audited. Currently, the financial statements are 

not required to be audited and as a result, may not comply with Generally 

Accepted Accounting Principles (GAAP).13 Compliance with GAAP is 

important because it proscribes the standard guidelines to follow in 

preparing financial statements for private companies and companies 

trading publicly in the United States. 

• The rules should be updated to allow TM to collect relevant information 

about risks posed by derivative products and transactions. The current 

rules only request peripheral information about a broker-dealer’s derivative 

activities, such as the notional amounts. This information is currently 

provided in Part II of Form 17-H. This information does not provide TM 

with an overview of a firm’s risks related to derivative activities; nor does it 

 

13 Broker-dealers are generally required to file financial statements in accordance with GAAP. If the 

financial statements are not prepared in accordance with GAAP, the broker-dealers are required to disclose 

the accounting principles upon which the financial statements are based. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 9

allow for TM to make an adequate assessment of a firm’s current risk 

management activities and measurement criteria. 

• All broker-dealers subject to filing Form 17-H should be required to file 

consolidating financial statements with the Commission. Broker-dealers 

that already have a principal regulator at the holding company level, such 

as the Federal Reserve or a foreign regulator are not required to file 

consolidating financial statements. The consolidating financial statements 

are one of the most useful parts of the filing because they provide 

information broken out by each affiliated entity of the broker-dealer. 

Information provided in this manner would provide TM with a greater 

understanding of a broker-dealer’s business and each of its counterparts, 

and would enable TM to evaluate the potential impact of each entity on the 

broker-dealer. 

• Broker-dealers should be required to file footnote disclosures that 

accompany the financial statements and the statement of cashflows. 

Broker-dealers are permitted to omit these items from the consolidating 

financial statements. The footnote disclosures are important because they 

disclose the accounting methodologies firms use to record and report 

transactions and details additional information that is omitted from the 

financial statements, such as the balance sheet and income statement. 

The statement of cash flows is important because it provides information 

regarding a company's cash receipts, cash payments and its ability to 

meet its short-term obligations. 

• The organizational charts that broker-dealers file should be supplemented 

with a narrative description of each entity associated with the brokerdealer and its ultimate holding company. TM staff stated that the 

organization chart is the starting point for its review. If the organizational 

chart contained this additional information, it would further assist TM to 

understand a broker-dealer’s operations and risks. Therefore, TM would 

be in a better position to respond to problems experienced by a brokerdealer. 

• Rule 17h-1T should be revised to ensure that firms preserve all pertinent 

documents. Rule 17h-1T does not require broker-dealers to preserve all 

pertinent documents, such as information pertaining to derivative contracts 

and laws, which impacted broker-dealers after 1992, when temporary rule 

17h-1T was implemented. 

Recommendation 1 

Within six months from the issuance of this report, the Division of Trading and 

Markets (TM) should establish a timeframe to update and finalize temporary rules 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 10

17h-1T and 17h-2T. The new rules should reflect TM’s Broker-Dealer Risk 

Assessment program’s review process and program priorities. The rules should 

be revised to: 

• Raise the capital threshold that triggers the 17(h) filing requirement (if TM 

believes the threshold is too high); 

• Shorten the time allotted firms to send quarterly and annual 17(h) filings to 

the Commission; 

• Require broker-dealers to file audited year-end financial statements; 

• Allow for the collection of relevant information about risks posed by 

derivative products and transactions; 

• Require all broker-dealers subject to filing Form 17-H to file consolidating 

financial statements with the Commission; 

• Require broker-dealers to file the footnote disclosures that accompany the 

financial statements and the statement of cash flows; 

• Require broker-dealers to supplement the organizational charts they file 

with a narrative description of each entity associated with the brokerdealer and its ultimate holding company; 

• Require broker-dealers to preserve all pertinent documents; and 

• Incorporate any additional changes that reflect TM’s policy decisions on 

how to administer the Broker-Dealer Risk Assessment program. 

Finding 2: TM Has Not Determined Whether Bear 

Stearns’ Broker-Dealers are Subject to the BrokerDealer Risk Assessment Program. 

Since the purchase of Bear Stearns in May 2008 by JP 

Morgan Chase & Co. (JP Morgan), TM has not determined 

whether Bear Stearns’ broker-dealers are subject to filing 

Form 17-H with the Commission. 

In mid-March 2008, Bear Stearns suffered a liquidity crisis at the holding 

company level and determined that unless it received outside funding (from the 

Federal Reserve or another lender) or the company was sold, it would be forced 

to file for bankruptcy protection. In May 2008, JPMorgan purchased Bear 

Stearns. This purchase resulted in JPMorgan becoming the parent company of 

two broker-dealers, that were formerly associated with Bear Stearns. These 

broker-dealers still exist, despite the collapse of the Bear Stearns holding 

company. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 11

Prior to its collapse, TM regulated Bear Stearns as part of the CSE program and 

therefore, its broker-dealers were exempt from filing Form 17-H. Subsequent to 

its collapse, Bear Stearns’ broker-dealers may now be required to file Form 17-H 

with the Commission. It is especially important for TM to determine whether 

these broker-dealers need to file Form 17-H because one of Bear Stearns’ 

broker-dealers holds a significant percentage of customer accounts and free 

credit balances. Additionally, given the catastrophic collapse of Bear Stearns and 

serious questions that have been raised regarding the Commission’s and the 

CSE program’s monitoring of Bear Stearns, we believe that TM should have 

immediately contacted Bear Stearns to discuss its potential 17(h) filing 

requirements.14 

In September 2008, the other four firms that are or were regulated in the 

Commission’s CSE program had undergone significant changes.15 These firms 

were in the process of being purchased or merged into other firms, or filed to be 

bank holding companies. It is possible that these other firms have broker-dealers 

as well and therefore, TM would also need to determine if these firms’ brokerdealers would be subject to the 17(h) filing requirement. 

TM informed OIG that it had not yet determined whether the Bear Stearns’ 

broker-dealers are required to file Form 17-H, or if they are exempt from doing so 

because their new holding company, JP Morgan, is subject to filing 

documentation under the Commission’s CSE program. TM further stated that if it 

is determined that the broker-dealers are required to file Form 17-H, to avoid 

receiving duplicate information, they will likely require only one broker-dealer to 

file Form 17-H with the Commission.

Recommendation 2

The Division of Trading and Markets (TM) should determine whether Bear 

Stearns and the broker-dealers of the other CSE firms are required to file Form 

17-H. If TM determines that these broker-dealers are required to file Form 17-H, 

the Division of Trading and Markets should enforce their compliance with this 

filing requirement and timely process and review these filings. 

 

14 For a detailed discussion of the CSE program, see OIG report, SEC’s Oversight of Bear 

Stearns and Related Entities: The Consolidated Supervised Entity Program, Report No. 446-A, 

September, 25, 2008, which was issued simultaneously with this report. 

15 These other four firms are Lehman Brothers Holdings, Inc., Merrill Lynch & Co., JP Morgan, 

and Goldman Sachs Group, Inc.
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 12

Finding 3: TM Does Not Enforce Compliance with 

Rules 17h-1T and 17h-2T and Its Own Policies 

TM does not have a mechanism in place to ensure that 

broker-dealers retain certain information and file 17(h) 

documents with the Commission, as required by Rules 17h1T and 17h-2T, nor does TM enforce compliance with its 

own policies and procedures.

Temporary Rule 17h-1T. This rule requires broker-dealers subject to the 

Broker-Dealer Risk Assessment program to retain information about their risk 

management policy, financial data, securities and commodities position data, 

trading records and information concerning certain associated entities. However, 

TM does not monitor whether broker-dealers maintain this information and TM 

has not reminded the broker-dealers of this requirement. It is important for firms 

to retain this information because it is required by the rule and TM may need to 

rely upon this information if a firm experiences financial difficulties or undergoes 

a major change, or if the information is requested from sources internal or 

external to the Commission. 

Recommendation 3 

At least annually, the Division of Trading and Markets should remind the brokerdealers subject to the Broker-Dealer Risk Assessment program of their obligation 

to retain the information specified in Rule 17h-1T. In addition, the Division of 

Trading and Markets should take appropriate steps to determine if the firms 

retain this information in accordance with Rule 17h-1T. 

Temporary Rule 17h-2T. This rule requires certain broker-dealers to file 17(h) 

documents with the Commission. However, nearly one-third of the firms that are 

required to file Form 17-H failed to do so. In fact, according to TM’s records, 47 

of 146 firms and 44 of 146 firms failed to file Form 17-H for the fourth quarter of 

2007 and third quarter of 2007, respectively. 

Of the six firms that TM actively monitors, one firm failed to file its fourth quarter 

2007 submission as of July 23, 2008. The submission was due March 31, 2008. 

Additionally, TM failed to process and review the fourth quarter filings for two 

firms as of June 24, 2008. These two submissions were due on March 31, 2008. 

This illustrates that TM is not effectively monitoring or timely reviewing 

information from the six firms that it claims it focuses its review upon. 

TM acknowledged that it generally does not follow-up with firms that do not file 

Form 17-H because TM’s staff would not likely review these filings even if the 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 13

firms submitted the documents. TM staff also admitted that there may be other 

firms that are subject to filing Form 17-H, but TM made an informal and 

undocumented policy decision to only contact non-filers when a firm’s size is 

substantial and it holds customer assets. Finally, TM stated that some firms that 

consistently fail to file Form 17-H with the Commission may be exempt from 

filing, due to a merger with another firm. However, TM did not have supporting 

documentation to verify this assertion. 

While TM made a policy decision to focus its review on only six out of 146 firms, 

temporary rule 17h-2T still requires filings from many firms that TM does not 

review. Until the temporary rules are revised, TM is responsible for ensuring that 

all of the firms required to file, are in fact filing. TM is also responsible for staying 

abreast of the information in the filings. This is important because if a firm 

collapses or experiences other problems, TM should readily have access to the 

firm’s most recent information in order to respond timely to an incident or provide 

Commission staff with further information. The 17(h) filing information also 

assists the Commission to monitor the firms that file 17(h) documents. 

Recommendation 4 

The Division of Trading and Markets should establish a procedure to ensure that 

the required broker-dealers file Form 17-H in a timely manner and conduct 

reviews of the 17(h) filings in a timely manner. 

TM’s Policies and Procedures. TM’s policies and procedures state that TM’s 

quarterly review of the filings from the six firms it monitors should be documented 

with a one to two page memorandum describing TM’s review, any findings or 

business developments, and note any discussions held with firm personnel. 

However, TM verbally told us that its policy only entails writing memoranda 

describing its review one time a year, after receiving the broker-dealers’ annual 

filings, rather than quarterly as its polices and procedures require. 

TM’s most recent memoranda describing its review of the six firms it focuses its 

review upon were dated as early as November 1, 2006 and as late as August 30, 

2007. This illustrates that TM is neither complying with its written policies and 

procedures to write quarterly memoranda, nor its verbal assertion to write annual 

memoranda. 

We believe that TM should comply with its documentation requirement because 

this helps TM’s staff to stay abreast of the broker-dealers’ operations and new 

developments. 

Recommendation 5 

The Division of Trading and Markets should either comply with its written policy 

to document its review of quarterly 17(h) filings with a written memorandum 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 14

describing its review or update its written policy to reflect an appropriate way to 

ensure that its review of 17(h) filings is properly and adequately documented. 

Finding 4: TM Does Not Process 17(h) Filings in a 

Timely Manner. 

We observed a large backlog of 17(h) filings that were 

waiting to be processed and filed by TM. This hampers TM’s 

program staff from efficiently and effectively locating and 

reviewing pertinent information in the 17(h) filings. 

We selected the ten firms that TM plans to review in 2008. From the date the 

filings were received by the Commission, it took TM from two to 112 days, with 

an average of 48 days, to process the filings. 

Although we understand that TM has chosen not to review the majority of the 

17(h) filings and believes that the rules should be updated to reflect this decision, 

the fact remains that temporary rule 17h-2T is still in place and requires all 

reporting broker-dealers to file Form 17-H with the Commission. As such, the 

Commission is responsible for, and therefore, should process these filings in a 

timely manner. Timely processing of these filings would provide the Commission 

with the information needed in order to respond in a timely manner to a major 

problem or change that a firm may experience. 

 

Recommendation 6 

The Division of Trading and Markets should establish a procedure to ensure that 

its staff process and disseminate the 17(h) filings in a defined period of time, 

which ensures that the information in the filings is current and relevant when the 

filings are processed. 

Finding 5: TM’s List of Exempt Firms is 

Incomplete and Erroneous 

TM does not maintain adequate documentation in support of 

the firms that it listed as being exempt from filing Form 17-H. 

TM staff provided OIG with a list of 112 firms they identified as being exempt 

from filing Form 17-H. TM said some firms were exempt because they had 

merged with another firm, or they otherwise no longer met the requirements for 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 15

filing Form 17-H. TM maintains information in its file room on firms that are 

exempt from filing Form 17-H. 

Of the list of 112 firms that TM identified as being exempt from filing Form 17-H, 

we judgmentally selected 20 firms from this list to determine if there was 

documentation to support the exemption.16 Of the 20 firms we reviewed, the OIG 

found that: 

• In 14 cases, TM could not locate the related file or the proof of exemption. 

One firm that was on the exemption list was one of the six firms that TM 

reviews; and 

• In six cases, TM located the files. In three of the six cases, we found 

proof of each firm’s exempt status in TM’s files. In the remaining three 

cases, proof of each firm’s exempt status was not in the file, but TM staff 

provided OIG with information from a non-Commission system, which 

substantiated these firms’ exempt status. 

We also randomly selected TM’s files of six firms, that TM indicated were exempt 

from filing Form 17-H.17 Our purpose was to determine if these firms were 

included in TM’s list of 112 exempt firms. From the six firms we selected, only 

three were on TM’s list of exempt firms. 

These reviews illustrated that TM does not maintain adequate documentation to 

support its assertion that certain broker-dealers are exempt from filing Form 17-

H. Accordingly, TM’s list of exempt firms is erroneous and incomplete. It is 

important for TM to maintain this documentation and to have an accurate and 

complete list of exempt firms to better ensure that TM does not mistakenly 

exempt any firms from the review process. 

Recommendation 7 

Within three months after the issuance of this report, the Division of Trading and 

Markets (TM) should develop and maintain a current list, with supporting 

documentation, which identifies all of the broker-dealers that are exempt from 

filing Form 17-H. TM should continuously update this list as new firms are 

exempted from filing Form 17-H. 

 

16 See Appendix III for the sampling methodology that was used. 17 See Appendix III for the sampling methodology that was used. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 16

Finding 6: TM Has Not Effectively Encouraged 

Firms to Electronically File 17(h) Documents 

Only 20 of the 146 firms that TM collects Form 17-H from file 

electronically using the BDRA system. 

The OIG report, issued in August 2002, recommended that TM explore the 

feasibility of having firms electronically file 17(h) documents. In 2005, TM in 

consultation with OIT launched the BDRA system, which enables firms to file 

electronically. TM’s policies and procedures state that TM will place additional 

emphasis on encouraging firms to file Form 17-H electronically. TM has also 

acknowledged that electronic filing is preferable to receiving paper filings. 

Currently, however, three years later, only 20 of the 146 firms from which TM 

collects Form 17-H from file electronically using the BDRA system. Of the six 

firms that TM reviews, only two firms file electronically. In contrast, all seven 

firms that TM monitors through the CSE and SIBHC programs file electronically 

using the BDRA system. While TM has made some efforts to encourage 

additional firms to file electronically, TM has not aggressively encouraged firms to 

use the BDRA system. 

The Government Paperwork Elimination Act18 and the E-Government Act of 

200219 were enacted to promote the use and availability of electronic methods to 

interact with Federal government agencies. These Acts encourage Federal 

Agencies to allow individuals or entities that deal with the Federal Government 

the option to submit information or transact electronically. In accordance with 

these Acts, TM should more aggressively encourage firms to file 17(h) 

documents using the BDRA system. 

Additionally, electronic filing is more secure, it would improve the timeliness of 

the filings and all Commission staff with access to BDRA could simultaneously 

view the filings. Electronic filing would also eliminate TM’s processing backlog of 

paper filings. 

Recommendation 8 

The Division of Trading and Markets should aggressively encourage firms to file 

electronically using the BDRA system. The Division of Trading and Markets 

should especially encourage the firms that it reviews to file electronically. This 

could be accomplished by calling the firms and periodically sending the firms 

information on how to file electronically. 

 

18 Public Law 105-277 (October 21, 1998). 

19 Public Law. 107-347 (December 17, 2002). 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 17

Finding 7: TM Should More Effectively Utilize the 

BDRA System 

TM is not using the BDRA system to store information about 

the firms it reviews or to produce management reports. 

Currently, TM only uses the BDRA system as a portal to store filings. TM staff 

could better utilize the system by storing in BDRA financial information about the 

firms it reviews, staff notes and written documents. It could also use the system 

to generate management reports. Currently, TM’s staff maintain documentation 

on the firms they review in their own files or on TM’s shared drive. Storing this 

information in the BDRA system would be beneficial because the data would be 

more centrally organized and would enable TM staff to generate management 

reports. 

TM has already discussed these capabilities with OIT. The BDRA system 

currently allows TM to store staff notes in BDRA. OIT would need to be further 

configure BDRA to enable it to create financial information and to generate 

management reports. 

Recommendation 9 

In coordination with the Office of Information Technology, the Division of Trading 

and Markets (TM) should ensure that the BDRA system includes financial 

information, staff notes and other written documentation about the firms TM 

reviews and that BDRA is used to generate management reports. 

Finding 8: Several Technical Problems Exist with 

the BDRA System That Need to be Addressed. 

Technical problems exist with the BDRA system, thus 

hampering the system’s effectiveness and firms’ willingness 

to file electronically with the Commission. 

The BDRA System. Although the BDRA system has several features that could 

assist TM with its review of 17(h) filings as described above, the BDRA system 

has several problems as follows, which can be resolved: 

• Only parts of a filing appear in the BDRA system if TM staff access the 

information in a particular manner. OIT stated that it is reviewing the 

BDRA system to identify and fix this problem. 
Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 18

• A digital signature does not consistently accompany filings that firms 

upload into BDRA. A digital signature is an electronic signature that can 

be used to authenticate the identity of the sender of a message or the 

signer of a document. The digital signature is important because it helps 

ensure that information the broker-dealers send to the Commission has 

not been altered. OIT stated that the BDRA system needs to be 

reprogrammed to ensure the firms include this signature. 

• If a filing is larger than 16 megabytes, the entire filing will not upload into 

BDRA. TM has told firms to check the size of their filings prior to 

uploading them and to divide filings over 16 megabytes into more than 

one submission. TM stated that it plans to work with OIT to see if the 

system can be configured to allow users to upload filings greater than 16 

megabytes in one submission. 

In addition to filings greater than 16 megabytes, TM also told us that filings 

less than 16 megabytes do not consistently upload into BDRA. For 

example, in August 2008, a filing that was only eight megabytes failed to 

upload into BDRA. 

• Users were unable to access the BDRA system for at least two days in 

June 2008. OIT stated that the system was inoperable because it was 

making changes to the system. 

Recommendation 10 

The Office of Information Technology, in coordination with the Division of Trading 

and Markets, should ensure that technical problems with the BDRA system are 

resolved so that: 

• All filings in the BDRA system can be properly and fully accessed; 

• A digital signature accompanies all required filings; 

• All filings, including those that are greater than and less than 16 

megabytes, can be completely and accurately uploaded into BDRA in one 

submission; and 

• Access to the BDRA system is consistently available to users and TM 

should promptly notify all users when it is unavailable. 
Appendix I

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 19

Acronyms

BDRA Broker Dealer Risk Assessment 

CSE Consolidated Supervised Entity 

FINRA Financial Industry Regulatory Authority 

GAAP Government Accepted Accounting Principles 

GLBA Gramm-Leach-Bliley Act 

MAP Material Associated Person 

OIG Office of Inspector General 

OIT Office of Information Technology 

SIBHC Supervised Investment Bank Holding Company 

TM Division of Trading and Markets 
Appendix II

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 20

Congressional Request for Audit

 April 2, 2008 

Via Electronic Transmission 

The Honorable David Kotz 

Inspector General 

US Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549-2736 

Dear Inspector General Kotz: 

 According to regulatory filings and a December 2007 Wall Street Journal article, 

the SEC Enforcement Division declined to bring a case against Bear Stearns for 

improperly valuing mortgage-related investments. Given the later collapse and federally 

backed bail-out of Bear Stearns, Congress needs to understand more about this case and 

why the SEC ultimately sought no enforcement action. 

 Moreover, I am particularly interested in this case in light of the SEC’s failed 

investigation of Pequot Capital Management. As you know, in the final report of the 

Senate’s inquiry into that matter, we found that senior SEC officials showed 

extraordinary deference to a particular witness because of his “prominence” as the head 

of Morgan Stanley. 

Request for Investigation 

 In light of my earlier investigation I need to know whether the same problems 

identified in the Pequot investigation were repeated in the Bear Stearns case. 

Accordingly, I request that you conduct a thorough investigation into the facts and 

circumstances surrounding the decision to not pursue an enforcement action against Bear 

Stearns. Please provide a final report on whether there was any improper action or 

misconduct relating to SEC investigation of Bear Stearns and its decision to close the 

investigation. The report should also describe and assess: 

1. the nature, extent, and propriety of communications between Bear Stearns 

executives or their representatives and senior SEC officials; 
Appendix II

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 21

2. the decision-making process which led to the SEC’s failure to bring an 

enforcement action following the drafting of a Wells notice; 

3. the reasons for declining to proceed with an enforcement action; and 

4. the degree to which more aggressive action by the Enforcement Division 

may have led to an earlier and more complete understanding of the issues 

that contributed to the collapse of Bear Stearns. 

Request for Audit 

 In addition to this investigative request, I would also like your office to follow-up 

on previous audit work relevant to issues surrounding Bear Stearns. The Division of 

Trading and Markets (Division) is responsible for regulating the largest broker-dealers 

and the associated holding companies. Offices within the Division are staffed with 

accountants and economists who are responsible for reviewing the market and credit-risk 

exposures of the broker dealers. Their review includes assessing broker-dealers’ 

quarterly financial filings, ensuring broker-dealers are meeting net-capital requirements 

and that other financial ratios, such as liquidity ratios, are adequate. There is a special 

emphasis in reviewing the five very large broker-dealers, including Bear Stearns, known 

as the Consolidated Supervised Entity (CSE) Program. The Division staff exercises 

additional oversight of these firms and examines their risk models. 

 I understand that the OIG conducted a prior audit of these responsibilities in 

2002. Please provide an update of the previous findings, determine whether earlier 

recommendations were implemented, and analyze the current function of these offices. 

The review should include a description and assessment of their missions, how the 

programs are run, their policies and procedures, the adequacy of any reviews conducted 

regarding Bear Stearns, and recommendations for improvements in the process. 

 If you have any questions about these requests, please contact Jason Foster or 

Emilia DiSanto at (202) 225-4515. 

 Sincerely, 

 

 Charles E. Grassley 

 Ranking Member
Appendix III

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 22

Scope and Methodology

We conducted this performance audit in accordance with generally accepted 

government auditing standards. These standards require that we plan and 

perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. 

We believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Scope. We obtained from TM, information showing all the firms currently filing 

Form 17-H, delinquent filers, exempt firms and sample 17(h) filings. We obtained 

information illustrating TM’s review of six firms and related financial information 

from 2006 to 2008. We obtained information allowing us to test TM’s timeliness 

in processing filings. We obtained information showing the status of TM’s 

implementation of prior OIG audit recommendations on this program (BrokerDealer Risk-Assessment Program, Audit No. 354, August 13, 2002). We also 

obtained information from FINRA showing the amount of customer accounts and 

free credit balances held by reporting broker-dealers as of March 31, 2008. 

We conducted our fieldwork from April 2008 to August 2008. We reviewed 

documentation on the Broker-Dealer Risk Assessment program covering the 

years 2006 to 2008. 

Methodology. We reviewed TM’s policies and procedures governing the 

Broker-Dealer Risk Assessment program, documentation showing all firms that 

file Form 17-H and documents showing delinquent filers and exempt firms. We 

also reviewed documentation of TM’s review of 17(h) filers. We reviewed and 

relied upon workpapers from our prior audit report on this program (BrokerDealer Risk-Assessment Program, Audit No. 354, issued August 13, 2002). In 

addition, we held discussions with representatives from TM and OIT to learn 

about the program and to discuss and confirm our findings. 

We conducted detailed testing to determine whether TM enforced compliance 

with temporary rules 17h-1T and 17h-2T and whether TM complied with its 

policies and procedures. We also performed testing to measure TM’s timeliness 

in processing filings, and to determine the accuracy of TM’s list of exempt firms. 

We analyzed data from FINRA to determine the amount of customer assets and 

free credit balances that were attributable to filing and non-filing broker-dealers. 

Internal/Management Controls. We reviewed internal/management controls as 

they pertained to the objectives of our audit. 
Appendix III

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 23

Use of Computer-Processed Data. We determined the umber of firms that file 

electronically by relying on data from the Commission’s BDRA system. Firms 

use the BDRA system to transmit filings electronically to TM. The BDRA system 

does not process any of the data contained in the filings but rather only stores 

the filings in electronic format. As a result, we considered the relevant risks to 

be: 

• TM’s failure to receive a filing sent by a firm; and 

• Whether information in the BDRA system could be compromised 

(information security risks). 

We identified an instance where TM failed to receive a filing that a firm 

transmitted through BDRA and where only parts of filings could only be viewed if 

TM staff accessed the BDRA system in a particular way. During the audit TM 

was working with OIT to address these issues. 

We considered the risk surrounding information security. In July 2008, OIT 

certified and accredited the BDRA system, as required by the Federal 

Information Security Management Act of 2002. Therefore, we believe that we 

can rely upon the information in the BDRA system as it pertains to information 

security. 

 

Judgmental Sampling. TM provided us with a list of 112 firms considered 

exempt from the 17(h) filing process. We judgmentally selected every fifth firm 

on the list (22 firms) to determine if TM had documentation on file indicating that 

the firms were actually exempt from filing Form 17-H. We deleted two firms from 

our sample because they were CSE firms, which are no longer part of the 

Broker-Dealer Risk Assessment program. 

TM stores information on exempt firms in file folders in a file room. Each folder 

contains information on a particular firm. We randomly selected six folders to 

determine if the firms were included in TM’s list of exempt firms. 

In another analysis we selected the ten firms that TM plans to review in the near 

future and measured how long it took TM to process these filings, from the date 

the Commission received the filings. We originally tried to review processing 

times for the six firms that TM is currently reviewing, but this information was not 

available. 

Prior Audit Coverage. From March to May 2002, the OIG audited and 

assessed the Commission’s Risk Assessment program and issued a related 

report Broker-Dealer Risk-Assessment Program, Report No. 354, August 13, 

2002. The report contained 14 recommendations aimed to improve the program.
Appendix IV

Broker-Dealer Risk Assessment Program September 25, 2008 

Formal Draft Report No. 446-B 

Page 24

Criteria

Final Temporary Risk Assessment Rules. Governs the Broker-Dealer Risk 

Assessment program. Adopted July 16, 1992 in Commission Release no. 34-

30929. 

A Study and Evaluation of the Effectiveness of the Final Temporary Risk 

Assessment Rules. Issued December 1996. Discusses the effectiveness of 

the Risk Assessment Rules. 

TM’s Policies and Procedures Governing the Broker-Dealer Risk 

Assessment program. Issued September 2007. Discusses TM’s review of 

17(h) filings and the purpose of the program. 

Report to the Congress on Financial Holding Companies under the GrammLeach-Bliley Act. Issued November 2003. Discusses how the implementation 

of the Gramm-Leach-Bliley Act, enacted on November 12, 1999, permitting 

banks, securities firms and holding companies to affiliate with one another and 

the effects of the Act on regulated entities. 

The Government Paperwork Elimination Act. Enacted on October 21, 1998. 

The Act is designed to improve customer service and governmental efficiency 

through the use of information technology. 

The E-Government Act of 2002. Enacted on December 17, 2002. This Act was 

designed to promote the use of the Internet and other information technologies to 

improve government services for citizens, internal government operations, and 

opportunities for citizen participation in government. 
Appendix V

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

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List of Recommendations

Recommendation 1 

Within 6 months from the issuance of this report, the Division of Trading and 

Markets (TM) should establish a timeframe to update and finalize temporary rules 

17h-1T and 17h-2T. The new rules should reflect the TM’s Broker-Dealer Risk 

Assessment program’s review process and program priorities. The rules should 

be revised to: 

• Raise the capital threshold that triggers the 17(h) filing requirement (if TM 

believes the threshold is too high); 

• Shorten the time allotted firms to send quarterly and annual 17(h) filings to 

the Commission; 

• Require broker-dealers to file audited year-end financial statements; 

• Allow for the collection of relevant information about risks posed by 

derivative products and transactions; 

• Require all broker-dealers subject to filing Form 17-H to file consolidating 

financial statements with the Commission; 

• Require broker-dealers to file the footnote disclosures that accompany the 

financial statements and the statement of cash flows; 

• Require broker-dealers to supplement the organizational charts they file 

with a narrative description of each entity associated with the brokerdealer and its ultimate holding company; 

• Require broker-dealers to preserve all pertinent documents; and 

• Incorporate any additional changes that reflect TM’s policy decisions on 

how to administer the Broker-Dealer Risk Assessment program. 

Recommendation 2

The Division of Trading and Markets (TM) should determine whether Bear 

Stearns and the broker-dealers of the other CSE firms are required to file Form 

17-H. If TM determines that these broker-dealers are required to file Form 17-H, 

the Division of Trading and Markets should enforce their compliance with this 

filing requirement and timely process and review these filings. 

Recommendation 3 

At least annually, the Division of Trading and Markets should remind the brokerdealers subject to the Broker-Dealer Risk Assessment program of their obligation 

to retain the information specified in Rule 17h-1T. In addition, the Division of 

Trading and Markets should take appropriate steps to determine if the firms 

retain this information in accordance with Rule 17h-1T. 
Appendix V

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Recommendation 4 

The Division of Trading and Markets should establish a procedure to ensure that 

the required broker-dealers file Form 17-H in a timely manner and conduct 

reviews of the 17(h) filings in a timely manner. 

Recommendation 5 

The Division of Trading and Markets should either comply with its written policy 

to document its review of quarterly 17(h) filings with a written memorandum 

describing its review or update its written policy to reflect an appropriate way to 

ensure that its review of 17(h) filings is properly and adequately documented. 

 

Recommendation 6 

The Division of Trading and Markets should establish a procedure to ensure that 

its staff process and disseminate the 17(h) filings in a defined period of time, 

which ensures that the information in the filings is current and relevant when the 

filings are processed. 

Recommendation 7 

Within three months after the issuance of this report, the Division of Trading and 

Markets (TM) should develop and maintain a current list, with supporting 

documentation, which identifies all of the broker-dealers that are exempt from 

filing Form 17-H. TM should continuously update this list as new firms are 

exempted from filing Form 17-H. 

Recommendation 8 

The Division of Trading and Markets should aggressively encourage firms to file 

electronically using the BDRA system. The Division of Trading and Markets 

should especially encourage the firms that it reviews to file electronically. This 

could be accomplished by calling the firms and periodically sending the firms 

information on how to file electronically. 

Recommendation 9 

In coordination with the Office of Information Technology, the Division of Trading 

and Markets (TM) should ensure that the BDRA system includes financial 

information, staff notes and other written documentation about the firms TM 

reviews and that BDRA is used to generate management reports. 

Recommendation 10 

The Office of Information Technology, in coordination with the Division of Trading 

and Markets (TM), should ensure that technical problems with the BDRA system 

are resolved so that: 

• All filings in the BDRA system can be properly and fully accessed; 

• A digital signature accompanies all required filings; 
Appendix V

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

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• All filings, including those that are greater than and less than 16 

megabytes, can be completely and accurately uploaded into BDRA in one 

submission; and 

• Access to the BDRA system is consistently available to users and TM 

should promptly notify all users when it is unavailable. 
Appendix VI

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 28

Management Comments (TM)

DIVISION OF TRADING AND MARKETS MANAGEMENT COMMENTARY

The Division of Trading and Markets (“Division”) appreciates the opportunity to 

comment on the Office of Inspector General (“OIG”) Report “SEC Risk Assessment 

Program.” 

1. The Division acknowledges that the risk assessment rules promulgated under Section 

17(h) of the Exchange Act (“the 17(h) rules”) need to be reviewed and modified to 

assure that relevant information is collected from an appropriate set of firms to meet 

the objective of the program, namely to assess the risks to registered broker-dealers 

that may stem from activities conducted in affiliates. Review of the rule set has 

already begun. The effort will accelerate with the arrival of a new attorney who is 

scheduled to begin work on September 29. The Division believes that essentially all 

of the issues raised in the OIG report will be addressed through an appropriate 

revision of the rules. For example, such an effort can assure that an appropriate 

population of broker-dealers is filing risk assessment information, and mandate that 

this information be filed electronically. 

2. As noted in the Division’s informal comments to OIG, the staff is concerned that the 

report repeatedly describes the program as reviewing “only” six firms in detail. The 

report does not recognize the compelling reason for focusing limited resources on six 

firms: these six firms, together with the firms supervised by the Commission or the 

Federal Reserve at the consolidated level, hold substantially all customer free credit 

balances. 

More specifically, as of the first quarter 2008, some $605 billion in total free credit 

balances are held by firms filing Form 17-H (or former filers now exempted because 

of CSE or SIBHC status). Broker-dealers affiliated with the CSE firms supervised by 

the Commission on a consolidated basis account for $356 billion of this $605 billion. 

Broker-dealers affiliated with holding companies supervised by the Federal Reserve, 

as either a US Bank Holding Company or a Foreign Banking Organization, account 

for another $175 billion of the total. Thus only $74 billion in free credit balances are 

held at broker-dealers affiliated with holding companies not subject to Commission or 

Federal Reserve supervision. 

The risk assessment program focused on six of these firms, which account for $60 

billion of that $74 billion in free credit balances. This focus accords with the aims of 

the 17(h) rules to assess risks that affiliates might pose to the broker-dealer. The 

remaining 140 firms that file Form 17-H but are not reviewed in depth account for 

only $14 billion of free credit balances, or 2.3 percent. While the staff believes that 
Appendix VI

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 29

the current allocation of resources is compelling, the staff also recognizes that 

additional efficiencies can be gained by revising the 17(h) rules. 

3. As noted in the Division’s informal comments to OIG, the report suggests that the 

Division’s responsibilities with regard to the 17(h) rules are unusually broad. Finding 

3 suggests that the Division should “enforce” compliance with Rules 17h-1T and 17h2T. The report also recommends that the Division at least annually “should remind 

broker-dealers subject to the 17(h) Risk Assessment Program of their obligation to 

retain the information specified.” Given that these requirements are mandated by 

rules, the staff believes that registrants must fulfill obligations even without 

prompting from the SEC, and instituting a systematic process of providing 

“reminders” could inadvertently weaken the Commission’s position when taking 

action against registrants in cases of non-compliance with other rules and 

requirements. 

4. As noted in the Division’s informal comments to OIG, the staff does not believe that 

the issue involving the Bear Stearns merger is sufficiently material to be one of the 

eight primary findings in the report. The matter is one of minimal substance that will 

be resolved in due course along with numerous other open issues associated with the 

Bear Stearns – JP Morgan merger (“Merger”). The Merger resulted in two brokerdealers, Bear Stearns & Co. and Bear Stearns Securities Corporation, becoming 

affiliates of JP Morgan, a bank holding company overseen by the Federal Reserve on 

a consolidated basis. Therefore, prior to the Merger, comprehensive holding 

company information was provided by The Bear Stearns Companies Inc. pursuant to 

the CSE rules. Subsequent to the Merger, comprehensive holding company 

information (although in reduced quantity due to the Federal Reserve’s role as 

holding company supervisor) is filed by JP Morgan pursuant to the CSE rules. In 

both cases, the information serves the purposes of the 17(h) rules, namely to allow for 

assessing the potential risks to the registered broker-dealers. In addition, the 

information provided pursuant to the CSE rules both before and after the merger 

constitutes a superset of the information required under the 17(h) rules. Discussions 

are still ongoing among the Commission, JP Morgan, and FINRA regarding which of 

the broker-dealers of the merged entity will be reorganized and how this will occur. 

When this is resolved, one of the surviving entities will request to be designated as 

the reporting broker-dealer for purposes of the 17(h) rules. Obviously, similar 

determinations may be necessary to the extent that other broker-dealers have been 

involved in corporate reorganizations or otherwise subject to changes in regulatory 

status. 

5. As noted in its informal comments to OIG, the Division believes that there is 

unnecessary, negative language throughout the report, especially in the Executive 

Summary. We believe that this language is unfair and does not accurately describe 

the issues presented,. Just to highlight several instances: The report finds that “TM is 

not fulfilling its obligations.” The report also opines that “[a] dditionally, given the 

catastrophic collapse of Bear Stearns and serious questions that have been raised 
Appendix VI

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 30

regarding the Commission’s and CSE program’s monitoring of Bear Stearns, we 

believe that TM should have immediately contacted Bear Stearns to discuss its 

potential 17(h) filing requirements.” After noting that “TM reviews information from 

the remaining 140 firms only if a pertinent issue arises,” this approach is described as 

“sporadic and random.” The report notes that rules have not been updated due to a 

“lack of prioritization,” rather than reflecting the fact that other projects were 

accorded a higher priority. 

Please indicate your concurrence or non-concurrence with each recommendation 

that applies to your Division or Office. 

Recommendation 1: Within 6 months from the issuance of this report, the Division 

of Trading and Markets should establish a timeframe to update and finalize 

temporary rules 17h-1T and 17h-2T. The new rules should reflect the Division of 

Trading and Market’s 17(h) program review process and program priorities. 

The Division concurs with this recommendation, and has already begun the process of 

addressing the need to revise the cited rules. 

Recommendation 2: The Division of Trading and Markets should determine 

whether Bear Stearns and the broker-dealers of the other CSE firms are required to 

file Form 17-H. If TM determines that these broker-dealers are required to file 

Form 17-H, the Division of Trading and Markets should enforce their compliance 

with this filing requirement and timely process and review these filings. 

The Division concurs, and will make these determinations per usual course. However, as 

described in more detail in the management response, the staff is confident in the case of 

Bear Stearns that all relevant information to permit assessment of risks to the brokerdealers affiliated with JP Morgan is currently being provided. 

Recommendation 3: At least annually, the Division of Trading and Markets should 

remind the broker-dealers subject to the 17(h) Risk Assessment Program of their 

obligation to retain the information specified in Rule 17h-1T. In addition, the 

Division of Trading and Markets should take appropriate steps to determine if the 

firms retain this information in accordance with Rule 17h-1T.

The Divsion does not concur that broker-dealers should be notified to comply with 

Commission rules, for the reasons noted in the management response. 
Appendix VI

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Recommendation 4: In accordance with Rule 17h-2T, the Division of Trading and 

Markets should establish a procedure to ensure that the required broker-dealers file 

Form 17-H in a timely manner and conduct reviews of the 17(h) filings in a timely 

manner. 

The Division concurs. 

Recommendation 5: The Division of Trading and Markets should either comply 

with its written policy to document its review of quarterly 17(h) filings with a 

written memorandum describing its review or update its written policy to reflect an 

appropriate way to ensure that its review of 17(h) filings is properly and adequately 

documented. 

The Division concurs, but notes that the FY2008 Planning Document, provided during 

the course of OIG’s review, does document this particular change in procedure. 

Recommendation 6: The Division of Trading and Markets should establish a 

procedure to ensure that its staff process and disseminate the 17(h) filings in a 

defined period of time, which ensures that the information in the filings is current 

and relevant when the filings are processed. 

The Division concurs. 

Recommendation 7: Within three months after the issuance of this report, the 

Division of Trading and Markets should develop and maintain a current list, with 

supporting documentation, which identified all of the broker-dealers that are 

exempt from filing Form 17-H. The Division of Trading and Markets should 

continuously update this list as new firms are exempted from filing Form 17-H. 

The Division concurs. 

Recommendation 8: The Division of Trading and Markets should aggressively 

encourage firms to file electronically using the BDRA system. The Division of 

Trading and Markets should especially encourage the firms that it reviews to file 

electronically. This could be accomplished by calling the firms and periodically 

sending the firms information on how to file electronically. 

The Division concurs that electronic filing should be encouraged. However, the staff 

notes that it has called firms, sent e-mail to firms, and otherwise encouraged what would 

be a voluntary migration to electronic filing. Such outreach was undertaken with more 

than 60 firms filing Form 17-H. Despite concerted efforts by the Office of Information 

Technology (“OIT”), technical issues involving the BDRA system have remained a 

significant obstacle to the success of these initiatives in migrating substantial numbers of 
Appendix VI

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 32

firms to the BDRA system. The staff is hopeful that the continued cooperation with OIT 

on the technical issues, combined with a mandatory electronic filing requirement in a 

revised rule, will succeed in eliminating non-electronic filing of Form 17-H. 

Recommendation 9: In coordination with the Office of Information Technology, the 

Division of Trading and Markets should ensure that the BDRA system includes 

financial information, staff notes and other written documentation about the firms 

TM reviews and that BDRA is used to generate management reports. 

The Division concurs, recognizing however that rule revisions could substantially alter 

the population of filers as well as the information filed. Thus it is important to design and 

implement any enhancement to the BDRA system in conjunction with rule revisions. 
Appendix VI

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Report No. 446-B 

Page 33

Management Comments (OIT)

Memorandum 

To: Jacqueline M. Wilson 

 Assistant Inspector General for Audits 

From: Lewis W. Walker 

 Chief Information Officer (Acting) 

Subject: Responses to Formal Draft Report, SEC Risk Assessment Program, 

 Report No. 446-B 

Date: September 11, 2008 

Thank you for the opportunity to respond to the above captioned report. OIT is 

responding only to those two recommendations for which it is assigned some 

responsibility for action. 

Recommendation 9: In coordination with the Office of Information Technology, 

the Division of Trading and Markets should ensure that the BDRA system 

includes financial information, staff notes and other written documentation about 

the firms TM reviews and that BDRA is used to generate management reports.

Management Response and comments: 

Although OIT does not object to this recommendation, it notes that decisions 

about the functionality of the BDRA system, what data it contains, and how the 

system is used reside solely with TM. To the extent that TM determines to 

implement any portions of this recommendation, OIT will provide support to the 

extent it is consistent with the agency’s enterprise architecture and other agency 

priorities for IT resources and funding. 

With respect to current efforts to assist TM with respect to the suggested 

enhancements to the BDRA application: 

• OIT staff has discussed with the users adding financial information to the 

report generation function. After the next release of Business Objects XI 

is implemented (currently estimated as December 2008), OIT’s Walk-in 

Development Center can help the user create financial reports. 

• Within the current release, there is a “Staff Notes” tab for each filing that is 

meant to be used for the user’s notes. Storing TM’s staff documentation 
Appendix VI

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 34

using the BDRA application is a requirement that possibly could be fulfilled 

in a future release (there is already a tab labeled “Attachments” that could 

provide the ability to store these documents). However, OIT will consider 

all options for best satisfying TM’s document management requirements 

when it is approached to architect the solution. 

Recommendation 10: The Office of Information Technology, in coordination 

with the Division of Trading and Markets should ensure that technical problems 

with the BDRA system are resolved so that: 

• All filings in the BDRA system can be properly and fully accessed; 

• A digital signature accompanies all required filings; 

• All filings, including those that are greater than and less than 16 

megabytes, can be completely and accurately uploaded into BDRA in one 

submission; and 

• Access to the BDRA system is consistently available to users and TM 

should promptly notify all users when it is unavailable. 

Management Response and comments: 

Release 1.7 to the BDRA application was successfully deployed on September 5, 

2008 and addressed almost all of recommendation 10 as noted in the following 

list of system changes: 

1) Access to All Filing Information - The BDRA Form Parser was modified so 

that the submission will include all attachments. This change resolves the 

problem of having only parts of a filing appear in the BDRA system. 

2) Digital Signatures – The capability for digital signatures existed in BDRA. In 

the new version, a digital signature will be required when the radio button for 

Digital Signature is selected on the Form 17H. However, the decision to require 

that a digital signature accompany all filings is a business decision that must be 

made by TM. 

3) Size Limit Notification - The system no longer accepts filings that are greater 

than 16MB. It will stop large submissions from being accepted and tell the user 

why the submission is not being accepted. This size limitation is necessary at 

this time due to the configuration of the underlying database. OIT plans is to 

upgrade the database to the latest version of the MYSQL database by no later 

than March 31, 2009 which will eliminate the need to impose size limits for filings. 

4) Notification for All System Downtime - In the future, the OIT Project team 

will ensure that all users are notified prior to any system downtime or future 

maintenance releases. 
Appendix VI

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In view of the above, OIT requests that recommendation 10 be revised to remove 

all recommendations except that BDRA be able to accept filings greater than 16 

megabytes. If the recommendation for digital signatures is retained, responsibility 

for its implementation should be assigned to TM. 

Cc: Srini Bangarbale 

 George Eckard 

 Remi Pavlik-Simon 

 Jeff Thomas 
Appendix VII

Broker-Dealer Risk Assessment Program September 25, 2008 

Report No. 446-B 

Page 36

OIG Response to Management’s Comments 

The Division of Trading and Markets (TM) and the Office of Information 

Technology (OIT) responded to this report. TM concurred with 9 out of 10 of the 

report’s recommendations and OIT concurred with the two recommendations that 

were addressed to their office. 

We are pleased with the willingness on the part of the Commission to implement 

the report’s recommendations. However, we are disappointed that TM disagrees 

with recommendation no. 3, which states that TM should remind broker-dealers 

subject to the 17(h) Risk Assessment Program of their obligation to retain the 

information specified in Rule 17h-1T and take appropriate steps to determine if 

the firms retain this information in accordance with Rule 17h-1T. We believe that 

enforcing the rule’s requirements is prudent and we request that TM reconsider 

its position and remind broker-dealers of the requirement to preserve information, 

as stated in recommendation 3. In addition, although not specifically mentioned 

in the report, we also believe that TM should remind the broker-dealers of their 

requirement to file Form 17-H. The OIG found that approximately one-third of the 

firms required to file this form, failed to do so. 
Audit Request and Ideas

The Office of Inspector General welcomes your input. If you would like to request an 

audit in the future or have an audit idea, please contact us at: 

U.S. Securities and Exchange Commission 

Office of Inspector General 

Attn: Assistant Inspector General, Audits (Audit Request/Idea) 

100 F Street, N.E. 

Washington D.C. 20549-2736 

Tel. #: 202-551-6061 

Fax #: 202-772-9265 

Email: oig@sec.gov

Hotline 

To report fraud, waste, abuse, and mismanagement at SEC, 

contact the Office of Inspector General at: 

Phone: 877.442.0854 

Web-Based Hotline Complaint Form: 

www.reportlineweb.com/sec_oig