Document ID: SEC-2020-1047-0001
Agency: sec
Document Type: Notice
Title: Order Granting Exemptions under the Investment Company Act
Posted Date: 2020-07-06T04:00Z

[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Notices]
[Pages 40356-40358]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14371]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89184]

Order Under Section 17(h)(4) of the Securities Exchange Act of 
1934 Granting Exemption from Rule 17h-1T and Rule 17h-2T for Certain 
Broker-Dealers Maintaining Capital, Including Subordinated Debt of 
Greater Than $20 Million But Less Than $50 Million

June 29, 2020.

I. Introduction

    Section 17(h) was added to the Securities Exchange Act of 1934 
(``Exchange Act'') to address the concern that financial problems of a 
broker-dealer's affiliate could cause the broker-dealer to fail or 
experience significant financial difficulties.\1\ The Securities and 
Exchange Commission (``Commission'') adopted Rules 17h-1T and 17h-2T 
under Section 17(h) of the Exchange Act.\2\ As discussed below, these 
rules contain provisions that exempt certain broker-dealers from the 
requirements of the rules. This order exempts from the requirements of 
the rules broker-dealers that do not hold funds or securities for, or 
owe money or securities to, customers and do not carry customer 
accounts, or that are exempt from Rule 15c3-3 pursuant to paragraph 
(k)(2) of that rule, and that maintain total assets of less than $1 
billion and capital, including debt subordinated in

[[Page 40357]]

accordance with appendix D of Rule 15c3-1 under the Exchange Act 
(``Rule 15c3-1d''), of less than $50 million.\3\
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    \1\ See Final Temporary Risk Assessment Rules, Exchange Act 
Release No. 30929 (July 16, 1992), 57 FR 32159 (July 21, 1992).
    \2\ See 15 U.S.C. 78q(h) (``Section 17h of the Exchange Act''); 
17 CFR 240.17h-1T (``Rule 17h-1T''); 17 CFR 240.17h-2T (``Rule 17h-
2T'').
    \3\ For the purposes of the exemptions in Rule 17h-1T and Rule 
17h-2T and this order, capital must be calculated pursuant to 
paragraph (d)(3) of Rule 17h-1T and paragraph (b)(3) of Rule 17h-2T.
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    Rule 17h-1T requires a broker-dealer that is not exempt under 
paragraph (d) of the Rule to maintain and preserve certain records, 
including: (1) An organizational chart that includes the broker-dealer 
and its affiliates; (2) policies, procedures, or systems concerning 
methods for monitoring and controlling financial and operational risks 
to the broker-dealer resulting from the activities of its affiliates; 
(3) a description of material pending legal and arbitration proceedings 
involving the broker-dealer or its affiliates; (4) consolidating and 
consolidated financial statements; and (5) the broker-dealer's 
securities and commodities position records. Rule 17h-2T requires a 
broker-dealer that is not exempt under paragraph (b) of the Rule to 
file Form 17-H with the Commission on a quarterly basis. The form 
elicits information concerning certain of the broker-dealer's 
affiliates.\4\ Paragraph (d) of Rule 17h-1T and paragraph (b) of Rule 
17h-2T exempt from their respective requirements certain categories of 
broker-dealers, as long as the broker-dealers maintain capital of less 
than $20 million (``$20 million exemption''). These categories of 
broker-dealers include: (1) broker-dealers that are exempt from Rule 
15c3-3 pursuant to paragraph (k)(2) of that rule; and (2) broker-
dealers that do not hold funds or securities for customers, owe money 
or securities to customers, or carry the accounts of customers.
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    \4\ See Form 17-H, available at https://www.sec.gov/about/forms/form17-h.pdf.
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II. Discussion

    Section 17(h)(4) of the Exchange Act provides that the Commission 
by rule or order may exempt any person or class of persons, under such 
terms and conditions and for such periods as the Commission shall 
provide in such rule or order, from the provisions of Section 17(h) of 
the Exchange Act, and the rules thereunder. The statute further 
provides that, in granting such exemptions, the Commission shall 
consider, among other factors:
     Whether information of the type required under section 
17(h) of the Exchange Act is available from a supervisory agency (as 
defined in section 3401(6)of title 12), a State insurance commission or 
similar State agency, the Commodity Futures Trading Commission 
(``CFTC''), or a similar foreign regulator;
     The primary business of any associated person;
     The nature and extent of domestic or foreign regulation of 
the associated person's activities;
     The nature and extent of the registered person's 
securities activities; and
     With respect to the registered person and its associated 
persons, on a consolidated basis, the amount and proportion of assets 
devoted to, and revenues derived from, activities in the United States 
securities markets.
    The Commission has administered the risk assessment program under 
Section 17(h) of the Exchange Act for 28 years. Based on this 
experience, the Commission believes it is appropriate to raise by order 
the threshold for the $20 million exemption to $50 million, provided 
the broker-dealer maintains less than $1 billion in total assets.
    In adopting the $20 million exemption (rather than a $5 million 
exemption, which was proposed),\5\ the Commission stated that the 
number of broker-dealers subject to Rules 17h-1T and 17h-2T would be 
reduced without a corresponding trade-off in risk.\6\ Moreover, the 
Commission stated that its staff intended to focus its efforts on the 
largest 50 to 75 broker-dealers.\7\ Thus, from the outset, the 
Commission's risk assessment program under Section 17(h) of the 
Exchange Act sought to be risk-based and to focus on larger broker-
dealers. Information filed by broker-dealers on Form X-17A-5 (``FOCUS 
Report'') indicates that for the subset of firms subject to Rules 17h-
1T and 17h-2T, those maintaining $50 million or more in capital 
currently account for over 98% of total capital of subject broker-
dealers. Similarly, for all broker-dealers, those maintaining $50 
million or more in capital account for nearly 97% of the total capital 
of all broker-dealers. Based upon the current record of broker-dealers 
subject to Rules 17h-1T and 17h-2T maintained by Commission staff and 
information filed by broker-dealers in the FOCUS Reports and other 
information known to Commission staff, the Commission believes 
exempting certain broker-dealers that maintain total assets of less 
than $1 billion and maintain capital of greater than $20 million but 
less than $50 million will provide relief to approximately 59 broker-
dealers or approximately 21% of the approximately 275 broker-dealers 
currently subject to Rules 17h-1T and 17h-2T.
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    \5\ See Proposed Temporary Risk Assessment Rules, Exchange Act 
Release No. 29635 (Aug. 30, 1991), 56 FR 44016 (Sep. 6, 1991).
    \6\ See Final Temporary Risk Assessment Rules, 57 FR at 32164-
65.
    \7\ See Final Temporary Risk Assessment Rules, 57 FR at 32165.
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    Exempting certain firms that maintain total assets of less than $1 
billion and maintain capital, including subordinated debt, of greater 
than $20 million but less than $50 million from Rules 17h-1T and 17h-2T 
is intended to reduce the number of broker-dealers subject to the rules 
without materially increasing risk, given that firms continuing to be 
subject to the rules account for over 98% of the total capital of firms 
subject to the rules prior to the issuance of this Order and nearly 97% 
of the total capital of all broker-dealers. The Commission is setting 
the ceiling for this exemption at $50 million with this goal in mind. 
Moreover, limiting the availability of this exemption to firms with 
total assets of less than $1 billion will prevent highly leveraged 
firms with relatively small levels of capital from availing themselves 
of the exemption. A broker-dealer with a high level of leverage and a 
small level of capital can pose heightened risks because it has less 
capital to absorb losses and, therefore, poses greater credit risk to 
its customers, counterparties, and other creditors. Thus, the 
Commission's risk assessment program will continue to focus on those 
broker-dealers and affiliates that conduct a substantial securities 
business and thus are in a position to potentially pose significant 
risk to investors and to the orderly, fair, and efficient functioning 
of the markets.\8\ Moreover, increasing the exemption to $50 million 
will reduce the regulatory burden for a cohort of smaller broker-
dealers that pose less risk to the orderly, fair, and efficient 
functioning of the markets relative to broker-dealers that will 
continue to be subject to the rules.
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    \8\ Many of the largest broker-dealers, which use alternative 
methods of computing their net capital under Appendix E of Rule 
15c3-1, are exempt from Rules 17h-1T and 17h-2T but are subject to 
heightened monitoring as part of the Commission's Risk Supervised 
Broker-Dealer Program. See 17 CFR 17h-1T(d)(4) and 17 CFR 17h-
2T(b)(4). See also 17 CFR 240.15c3-1e.
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    In considering this Order, the Commission focused on the fourth 
factor in Section 17(h)(4) of the Exchange Act (i.e., the nature and 
extent of the person's securities activities).\9\ Although the other 
four factors included

[[Page 40358]]

in Section 17(h)(4) of the Exchange Act were considered, the Commission 
determined they did not inform the exemption as the exemption does not 
alter the type of information required to be reported or preserved, 
does not vary in applicability based upon the business activities of or 
the extent of regulatory oversight over a broker-dealer's affiliate, 
and applies regardless of the extent of a broker-dealer and its 
affiliate conducting business in the United States.\10\ More 
specifically, the cohort of broker-dealers that will be able to rely on 
this exemption maintains total assets of less than $1 billion and 
maintains capital, including subordinated debt, of greater than $20 
million but less than $50 million, and do not hold funds or securities 
for, or owe money or securities to, customers and do not carry customer 
accounts, or that are exempt from Rule 15c3-3 pursuant to paragraph 
(k)(2) of that rule. These firms are relatively small in size, as 
measured by the amount of total assets and by the amount of capital 
(including subordinated debt) that they maintain. The Commission 
believes these exempted firms--because of their relative size and the 
fact that they do not hold customer funds or securities, or owe money 
or securities to, customers and do not carry customer accounts, or are 
exempt from Rule 15c3-3 pursuant to paragraph (k)(2) of that rule--
present less risk to the financial markets. Consequently, the 
objectives of this exemption align most closely with the fourth factor 
in Section 17(h)(4) of the Exchange Act (i.e., the nature and extent of 
the registered person's securities activities).
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    \9\ 15 U.S.C. 78q(h)(4). Section 17(h)(4) of the Exchange Act 
states that the HYPERLINK Commission by HYPERLINK rule or order may 
exempt any HYPERLINK person or class of HYPERLINK persons, under 
such terms and conditions and for such periods as the HYPERLINK 
Commission shall provide in such HYPERLINK rule or order, from the 
provisions of this subsection, and the HYPERLINK rules thereunder. 
In granting such exemptions, the HYPERLINK Commission shall 
consider, among other factors--
    (A) whether information of the type required under this 
subsection is available from a supervisory HYPERLINK agency (as 
defined in section 3401(6) of title 12), a HYPERLINK State insurance 
HYPERLINK commission or similar HYPERLINK State agency, the 
Commodity Futures Trading Commission, or a similar foreign 
regulator;
    (B) the primary business of any associated HYPERLINK person;
    (C) the nature and extent of domestic or foreign regulation of 
the associated HYPERLINK person's activities;
    (D) the nature and extent of the registered HYPERLINK person's 
HYPERLINK securities activities; and
    (E) with respect to the registered HYPERLINK person and its 
associated HYPERLINK persons, on a consolidated basis, the amount 
and proportion of assets devoted to, and revenues derived from, 
activities in the United HYPERLINK States securities markets.
    \10\ 15 U.S.C. 78q(h)(4)(A)-(C) & (E).
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    In light of changes in the financial services industry, including 
consolidation among financial services institutions, the Commission 
believes that this Order strikes an appropriate balance in terms of 
relieving certain broker-dealers--those that maintain total assets of 
less than $1 billion and maintain capital, including subordinated debt, 
of greater than $20 million but less than $50 million and that do not 
hold funds or securities for, or owe money or securities to, customers 
and do not carry customer accounts, or that are exempt from Rule 15c3-3 
pursuant to paragraph (k)(2) of that rule --from the requirements of 
Rules 17h-1T and 17h-2T while continuing to subject to the rules those 
broker-dealers that pose greater risk to the financial markets, 
investors, and other market participants.

III. Conclusion

    It is hereby ordered pursuant to section 17(h)(4) of the Exchange 
Act that any broker-dealer that does not hold funds or securities for, 
or owe money or securities to, customers and does not carry the 
accounts of or for customers, or that is exempt from Rule 15c3-3 
pursuant to paragraph (k)(2) of that rule, is hereby exempt from Rule 
17h-1T and Rule 17h-2T, if it maintains total assets of less than $1 
billion and capital, including debt subordinated in accordance with 
Rule 15c3-1d, of less than $50 million.\11\
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    \11\ See supra note 3.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14371 Filed 7-2-20; 8:45 am]
BILLING CODE 8011-01-P