[Federal Register Volume 84, Number 115 (Friday, June 14, 2019)]
[Rules and Regulations]
[Pages 27708-27713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12563]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-86073; File No. S7-21-18]
RIN 3235-AM47


Amendment to Single Issuer Exemption for Broker-Dealers

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rule.

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SUMMARY: The Commission is adopting an amendment to an exemptive 
provision in the broker-dealer annual reporting rule under the 
Securities Exchange Act of 1934 (``Exchange Act''). The exemption 
provides that a broker-dealer is not required to engage an independent 
public accountant to certify the broker-dealer's annual reports filed 
with the Commission if, among other things, the securities business of 
the broker-dealer has been limited to acting as broker (agent) for a 
single issuer in soliciting subscriptions for securities of that 
issuer.

DATES: Effective Date: August 13, 2019.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at 
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 
551-5522; Timothy C. Fox, Branch Chief, at (202) 551-5687; or Rose 
Russo Wells, Special Counsel, at (202) 551-5527, Division of Trading 
and Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is amending 17 CFR 240.17a-5 
(``Rule 17a-5'').

I. Final Rule Amendment

    Most broker-dealers registered with the Commission must annually 
file with the Commission a financial report and either a compliance 
report or exemption report.\1\ In addition, paragraph

[[Page 27709]]

(d)(1)(i)(C) of Rule 17a-5 requires the broker-dealer to include with 
the annual reports reports prepared by an independent public accountant 
covering the financial report and, as applicable, the compliance or 
exemption report.\2\ The accountant must be qualified and independent 
in accordance with 17 CFR 210.2-01 (``Rule 2-01 of Regulation S-X'') 
and must be registered with the Public Company Accounting Oversight 
Board (``PCAOB'') if required by the Sarbanes-Oxley Act of 2002 
(``Sarbanes-Oxley Act'').\3\ However, paragraph (e)(1)(i)(A) of Rule 
17a-5 exempts a broker-dealer from engaging an independent public 
accountant to provide the accountant's reports if, since the date of 
the registration of the broker-dealer with the Commission or of the 
previous annual reports filed with the Commission:
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    \1\ 15 U.S.C. 78q(a)(1); 15 U.S.C. 78q(e)(1)(A); paragraph (d) 
of Rule 17a-5. See also paragraphs (d)(1)(iii) and (iv) of Rule 17a-
5 (setting forth the limited circumstances under which the annual 
reports need not be filed). Pursuant to paragraphs (d)(1)(i)(B)(1) 
and (2) of Rule 17a-5, a broker-dealer that does not claim it was 
exempt from 17 CFR 240.15c3-3 (``Rule 15c3-3'') throughout the most 
recent fiscal year must file the compliance report, and a broker-
dealer that claims it was exempt from Rule 15c3-3 throughout the 
most recent fiscal year must file the exemption report. The 
compliance report must contain statements about the broker-dealer's 
internal control over, and compliance with, certain financial 
responsibility rules. The exemption report must contain statements 
about the broker-dealer's exemption from Rule 15c3-3.
    \2\ See 17 CFR 240.17a-5(d)(1)(i)(C).
    \3\ Public Law 107-204, 116 Stat. 745 (2002). See 17 CFR 
240.17a-5(f)(1).
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     The securities business of the broker-dealer has been 
limited to acting as broker (agent) for the issuer in soliciting 
subscriptions for securities of the issuer;
     The broker has promptly transmitted to the issuer all 
funds and promptly delivered to the subscriber all securities received 
in connection with the transaction; and
     The broker has not otherwise held funds or securities for 
or owed money or securities to customers.
    In September 2018, the Commission proposed amending this exemption 
to correct an error that inadvertently amended the rule in 2013 and to 
clarify that the exemption is available only for a broker-dealer that 
acts as broker (agent) for a single issuer in soliciting subscriptions 
for securities of that issuer.\4\ More particularly, the 2018 proposal 
followed a series of amendments to the exemption, which occurred in 
1975, 1977, and 2013, that inadvertently resulted in the rule text 
providing that the exemption applies if the broker-dealer solicited 
subscriptions for ``the issuer'' rather than for ``an issuer.'' \5\
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    \4\ See Amendment to Single Issuer Exemption for Broker-Dealers, 
Exchange Act Release No. 84225 (Sept. 20, 2018), 83 FR 48733 (Sept. 
27, 2018) (``Proposing Release''). See also Broker-Dealer Reports, 
Exchange Act Release No. 70073 (Jul. 30, 2013), 78 FR 51910, 51943 
(Aug. 21, 2013).
    \5\ See Proposing Release 83 FR at 48734 (describing the series 
of events that led to the inadvertent amendment to the rule).
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    The Commission received two comment letters in response to the 
proposed amendment to this exemptive provision.\6\ The first commenter 
did not address the proposed amendment.\7\ The second commenter stated 
that it was a ``one-person sole proprietorship,'' that the ``only 
business conducted is acting as an agent for redeemable mutual funds 
and variable insurance products,'' that the ``firm does not engage in 
underwriting, nor does the firm hold or owe customer funds or 
securities,'' that ``[c]ustomer checks are made payable to the mutual 
fund or insurance company,'' and that ``[a]pplications and checks are 
promptly sent to the company.'' \8\ The commenter stated that the 
proposed amendment ``would block the use of the exemption for firms 
that do not hold or owe customer funds or securities and act as an 
agent for mutual funds,'' that it ``forces limited business firms, 
operating under a SEC Rule 15c3-3 exemption, to hire a PCAOB-registered 
accountant,'' that for ``a small firm . . . the cost of compliance is 
an onerous burden,'' and that ``increased PCAOB requirements make the 
cost unaffordable for the firm.'' The commenter stated that the ``firm 
provides personalized service to customers and has a valuable place in 
the community of broker-dealers.'' For these reasons, the commenter 
``request[ed] that the proposed regulation be amended to allow such 
limited business firms [such as the commenter's firm] to file an annual 
report prepared by an independent public accountant (CPA), but not 
necessarily registered with the [PCAOB].''
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    \6\ The comment letters are available at https://www.sec.gov/comments/s7-21-18/s72118.htm.
    \7\ See Letter from Amr A Daoud, dated Sept. 24, 2018.
    \8\ See Letter from Howard Feigenbaum, dated Oct. 24, 2018 
(``Feigenbaum Letter'').
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    In response to the commenter's request, the Commission notes that 
the exemption in paragraph (e)(1)(i)(A) of Rule 17a-5 that was proposed 
to be modified in this rulemaking addresses whether a broker-dealer 
must comply with paragraph (d)(1)(i)(C) of the rule, which requires the 
broker-dealer to file reports prepared by an independent public 
accountant with its annual reports. The Commission's proposal did not 
address the requirement that the independent public accountant must be 
registered with the PCAOB, which is prescribed in Section 17(e)(1)(A) 
of the Exchange Act and paragraph (f)(1) of Rule 17a-5. The proposal 
also did not address the requirement that the independent public 
accountant must undertake to prepare the reports in accordance with 
PCAOB standards, which is prescribed in paragraph (g) of Rule 17a-5. 
The commenter's request, consequently, asks the Commission to create a 
new and different exemption. In particular, the commenter requests that 
the Commission create an exemption pursuant to which a broker-dealer 
engaged in the business described in the comment letter would be exempt 
from the requirements in Section 17(e)(1)(A) of the Exchange Act and 
paragraph (f)(1) of Rule 17a-5 to the extent they require that the 
broker-dealer's independent public accountant be registered with the 
PCAOB. The proposed amendment that is the subject of this rulemaking 
would not alter these requirements, nor did the Commission contemplate 
doing so in the Proposing Release. For these reasons, the commenter's 
request ``that the proposed regulation be amended to allow such limited 
business firms to file an annual report prepared by an independent 
public accountant (CPA), but not necessarily registered with the 
[PCAOB]'' is beyond the scope of this rulemaking.\9\
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    \9\ The Spring 2019 Unified Agenda of Federal Regulatory and 
Deregulatory Actions stated that ``[t]he Office of the Chief 
Accountant and the Division of Trading and Markets are considering 
recommending amendments to certain broker-dealer annual reporting, 
audit and notification requirements that could differentiate the 
requirements according to different classes of broker-dealers.'' See 
Commission, Spring 2019 Unified Agenda of Federal Regulatory and 
Deregulatory Actions. Available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201904&RIN=3235-AM46. The potential issues 
involved in adopting such an approach as the commenter recommends, 
as well as the scope and form such potential action could take, 
would likely involve various policy issues that would warrant 
careful consideration following public comment.
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    The Commission understands that the comment letter addresses only 
the PCAOB-registration component of the audit requirement. Nonetheless, 
the Commission recognizes that this commenter in a separate Commission 
adjudicatory proceeding took the view that the exemption in paragraph 
(e)(1)(i)(A) of Rule 17a-5 should cover a broker-dealer acting as an 
agent for multiple issuers (which would exempt such broker-dealers from 
the audit requirement entirely).\10\ Accordingly, the Commission 
believes that it is appropriate to address in the context of this 
rulemaking why the Commission does not believe that an expansion of the 
exemption to include broker-dealers

[[Page 27710]]

that provide broker-dealer services for more than a single issuer (even 
if the broker-dealer limits its business in the manner described in the 
comment letter) would be appropriate.
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    \10\ See In the Matter of the Application of Sharemaster, 
Exchange Act Release No. 83138 (Apr. 30, 2018).
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    The annual reports a broker-dealer files with the Commission are 
used by the Commission and the broker-dealer's designated examining 
authority to monitor the financial and operational condition of the 
broker-dealer and are one of the primary means of monitoring compliance 
with the Commission's broker-dealer financial responsibility rules. The 
requirement that the annual reports be covered by reports prepared by 
an independent public accountant is intended to enhance the reliability 
of the information filed by the broker-dealer, including information 
relevant to its financial condition, ability to continue as a going 
concern, and its handling of customer securities and cash. This also 
benefits investors who are customers or potential customers of the 
broker-dealer and who do not have access to the same level of 
information about the financial condition and operations of the broker-
dealer as the independent public accountant engaged by the broker-
dealer. These investors rely on the independent public accountant to 
audit this information.
    The limited exemption to the requirement that a broker-dealer's 
annual reports be audited by an independent public accountant is 
consistent with the objectives of the rule. The exemption applies to a 
broker-dealer that acts as broker (agent) for a single entity--an 
issuer that is typically affiliated with the broker-dealer. Therefore, 
the issuer is in a privileged position to access sufficient information 
about the financial condition and operations of its agent--the broker-
dealer affiliate--to make an informed decision about continuing to use 
the broker-dealer to effect transactions in its securities. Moreover, 
by permitting the broker-dealer to act as its agent, the issuer has 
agreed that the broker-dealer can legally bind the issuer. This implies 
that the two entities have a special relationship. For these reasons, 
requiring that an independent public accountant audit this information 
would not provide a meaningful benefit to the issuer, and the risk of 
harm to the issuer is mitigated by its ability to access information 
about its agent.
    Expanding this exemption to broker-dealers similarly situated to 
the commenter's firm would not be consistent with the objectives of 
Rule 17a-5 as described above. The comment letter describes a firm that 
sells ``redeemable mutual funds and variable insurance products'' and 
that in doing so ``[c]ustomer checks are made payable to the mutual 
fund or insurance company'' and states that ``[a]pplications and checks 
are promptly sent to the company.'' \11\ The comment letter also stated 
that the firm ``provides personalized service to customers.'' In other 
words, the business described in the comment letter involves acting on 
behalf of, and selling securities and insurance products to, retail 
investors. These customers are not similarly situated to an issuer that 
is affiliated with a broker-dealer and for whom the broker-dealer is 
acting as agent. Unlike such an issuer, the customers do not have a 
privileged position that allows them to access sufficient information 
about the financial condition and operations of the broker-dealer to 
make an informed decision about continuing to use the broker-dealer to 
act on their behalf in purchasing securities, including entrusting the 
broker-dealer to promptly forward their checks. Moreover, selling the 
securities of multiple issuers, including mutual funds in a single 
family of mutual funds, is different from acting as agent for a single 
affiliated issuer. These issuers may not be in the privileged position 
of the affiliated issuer in terms of accessing information about the 
broker-dealer. Consequently, the Commission believes that this type of 
broker-dealer should continue to be required to have its annual reports 
covered by reports prepared by an independent public accountant.
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    \11\ Feigenbaum Letter.
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    For the reasons described above and in the Proposing Release, the 
Commission is adopting the amendment to Rule 17a-5 as proposed.

II. Paperwork Reduction Act

    The rule amendment clarifies the scope of an existing exemption 
available to certain broker-dealers from the requirement to file with 
the Commission reports prepared by an independent public accountant 
pursuant to paragraph (d)(1)(i)(C) of Rule 17a-5. As stated in the 
Proposing Release, the Commission believes that the amendment does not 
create any new, or revise any existing, collection of information 
pursuant to the Paperwork Reduction Act of 1995.\12\ Accordingly, no 
information was submitted to the Office of Management and Budget for 
review.
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    \12\ 44 U.S.C. 3501 et seq.
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    The Commission did not receive any comments regarding its belief 
that the rule amendment would not create any new, or revise any 
existing, collection of information pursuant to the Paperwork Reduction 
Act.

III. Economic Analysis

    The Commission is mindful of the costs imposed by, and the benefits 
obtained from, its rules. As explained below, the Commission expects 
that the amendment will benefit issuers by helping ensure that broker-
dealers do not inappropriately rely on the exemption in paragraph 
(e)(1)(i)(A) of Rule 17a-5. Whenever the Commission engages in 
rulemaking and is required to consider or determine whether an action 
is necessary or appropriate in the public interest, Section 3(f) of the 
Exchange Act requires the Commission to consider whether the action 
would promote efficiency, competition, and capital formation, in 
addition to the protection of investors. Further, when engaged in 
rulemaking under the Exchange Act, Section 23(a)(2) of the Exchange Act 
requires the Commission to consider the impact such rules would have on 
competition. Section 23(a)(2) of the Exchange Act also prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. The following analysis considers the potential 
economic effects that may result from the rule amendment, including the 
benefits and costs to market participants as well as the broader 
implications of the proposal for efficiency, competition, and capital 
formation.
    Broker-dealers serve an important role in capital formation by 
performing numerous services, including with respect to the 
distribution of securities. Broker-dealer annual reports are one of the 
primary means of monitoring compliance with the Commission's broker-
dealer financial responsibility rules, and the requirement that the 
annual reports be certified by a PCAOB-registered independent public 
accountant is intended to help enhance the reliability of the 
information filed by the broker-dealer. The exemption in paragraph 
(e)(1)(i)(A) of Rule 17a-5 is designed to streamline regulatory 
compliance for certain broker-dealers by permitting broker-dealers that 
underwrite offerings by a single issuer--typically an affiliate of the 
broker-dealer--to do so without needing to meet this requirement.
    Broker-dealers rarely rely on the very limited exemption in 
paragraph (e)(1)(i)(A) of Rule 17a-5. Staff analysis of annual reports 
filed by broker-dealers revealed that only four broker-dealers--out of 
approximately 4,000 registered with the Commission--claimed the

[[Page 27711]]

exemption in the last year. The low level of use suggests that broker-
dealers generally do not avail themselves of the existing exemption to 
compete with one another or to improve the efficiency of their 
underwriting activities.
    The Commission recognizes the value of requiring that broker-dealer 
annual reports be certified by an independent public accountant. 
However, when a broker-dealer is acting solely as an agent for a single 
issuer's securities, typically an affiliate, the issuer is likely to 
have sufficient information about the broker-dealer's financial and 
operational condition. In that case, there would be minimal benefit in 
a requirement that the broker-dealer-dealer's annual reports be 
certified by an independent public accountant. At the same time, a 
broker-dealer required to obtain such certification for its annual 
reports could bear significant costs to do so. The Commission notes 
that one broker-dealer estimated the cost for a small broker-dealer to 
obtain certification of its annual reports by a PCAOB-registered 
independent public accountant in accordance with paragraph (d)(1)(i)(C) 
of Rule 17a-5 could be approximately $3,266 per year.\13\
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    \13\ According to one broker-dealer, an audit prepared by a 
PCAOB-registered accountant would cost $2,800 in 2010. See In the 
Matter of the Application of Sharemaster, Exchange Act Release No. 
83138 (Apr. 30, 2018), at n. 4. Adjusting this amount for inflation 
yields approximately $3,266 in February 2019 (inflation calculator 
available at https://www.bls.gov/data/inflation_calculator.htm).
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    While it is possible that a broker-dealer might act as an agent for 
a single unaffiliated issuer, the Commission does not believe such a 
narrow arrangement is likely. The Commission expects that a broker-
dealer that is able to successfully market its services as an agent for 
the securities of one unaffiliated issuer would seek to market those 
services to additional unaffiliated issuers. In that case, the cost of 
having the firm's annual reports certified by a PCAOB-registered public 
accountant would likely be lower than the revenue generated from acting 
as an agent for multiple unaffiliated issuers.
    However, in the event such an arrangement were to exist, the 
Commission acknowledges that the benefits associated with certification 
by an independent public accountant could be greater than when the 
broker-dealer is acting as agent for a single affiliated issuer. 
However, the incremental benefit likely would be limited because, even 
though the entities are not affiliated, they would likely have a 
special relationship by virtue of the fact that the broker-dealer's 
underwriting business relies on that single issuer. Therefore, the 
issuer likely would have better access to information relating to the 
broker-dealer's financial and operational condition than if the issuer 
were one of several issuers for whom the broker-dealer acted as agent. 
For these reasons, the Commission does not believe that the incremental 
benefit of requiring the annual reports to be certified by an 
independent public accountant would justify the costs in this scenario.
    The Commission expects the amendment to benefit issuers that rely 
on broker-dealers to underwrite securities offerings by providing 
increased regulatory certainty about a broker-dealer's obligation to 
have its annual reports certified by an independent public accountant 
when the broker-dealer acts as an agent for multiple issuers. This will 
benefit issuers by helping ensure that broker-dealers do not 
inappropriately rely on the exemption in paragraph (e)(1)(i)(A) of Rule 
17a-5. When the broker-dealer is not acting solely as an agent for a 
single affiliate's securities, the benefits of certification are likely 
to be more substantial because the issuers are less likely to have 
sufficient information about the broker-dealer's financial condition.
    One commenter asserted that the cost of compliance with the 
separate requirements in Rule 17a-5 to engage an independent public 
accountant registered with the PCAOB (as compared to an accountant that 
is not registered with the PCAOB) represented an ``onerous burden'' for 
a firm that ``survives on a thin profit margin'' and that ``increased 
PCAOB requirements make the cost unaffordable for the firm.'' The 
Commisson acknowledges that the incremental costs associated with 
engaging an independent public accountant registered with the PCAOB as 
compared to an accountant that is not so registered could result in 
certain broker-dealers exiting the market if their revenues are too low 
to cover the incremental costs and remain profitable. However, as 
discussed above, the exemptive provision being modified in this 
rulemaking addresses whether or not the broker-dealer needs to file the 
accountant's reports (i.e., engage an independent public accountant in 
the first place). It does not address the separate requirement in Rule 
17a-5 that the accountant be registered with the PCAOB. With respect to 
the amendment being adopted in this rulemaking, the Commission 
continues to believe that because of the low reliance on the exemption 
currently, and the expectation that the number of broker-dealers 
relying on the exemption will not increase or decrease as a result of 
the amendment, the overall economic impact of the amendment is likely 
to be small.
    The Commission expects the amendment to have only a marginal impact 
on efficiency, competition, and capital formation. This assessment is 
primarily based on the belief that the amendment does not revise the 
scope of the exemption or change current practice and that the 
exemption is claimed by only a few broker-dealers. The Commission 
nevertheless acknowledges that the amendment could marginally impair 
capital formation if it prompts broker-dealers to reduce underwriting 
activity or to increase the price of underwriting activities for 
potential issuers, and the amendment could marginally reduce efficiency 
if it prompts certain broker-dealers to exit the market, forcing 
issuers to move their business to a different broker-dealer.
    The Commission considered several alternatives in terms of the 
scope of the exemption. First, the Commission considered broadening the 
scope of the exemption to include broker-dealers whose securities 
business is limited to acting as an agent for multiple issuers. Staff 
analysis of information provided by broker-dealers indicates that a 
substantial number of registered broker-dealers underwrite corporate 
securities or are selling group participants for corporate securities 
and may otherwise be eligible to take advantage of the exemption if its 
scope were broadened in this way.\14\
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    \14\ Commission staff analysis of Form BD data indicates that 
948 registered broker-dealers reported engaging in, or expecting to 
engage in, the underwriting of securities at the end of 2018.
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    Relatedly, a commenter suggested that the Commission include an 
exemption for ``limited business broker-dealers'' from the requirement 
to engage a PCAOB-registered accountant (i.e., an exemption that would 
permit the broker-dealer to engage an accountant that is not registered 
with the PCAOB). The commenter stated that it was a ``one-person sole 
proprietorship,'' that the ``only business conducted is acting as an 
agent for redeemable mutual funds and variable insurance products,'' 
that the ``firm does not engage in underwriting, nor does the firm hold 
or owe customer funds or securities,'' that ``[c]ustomer checks are 
made payable to the mutual fund or insurance company,'' and that 
``[a]pplications and checks are promptly sent to the company.''
    Rule 17a-5 provides only two exemptions from the requirement that

[[Page 27712]]

broker-dealer annual reports be certified by an independent public 
accountant.\15\ The Commission has provided for only these very limited 
exemptions from the requirement that annual reports of broker-dealers 
be audited due to the importance of reliable financial and operational 
information concerning registered broker-dealers for investor 
protection and the integrity of the capital markets. Broadening the 
exemption could benefit broker-dealers by no longer requiring them to 
engage independent public accountants when they act as an agent for 
multiple issuers in soliciting subscriptions for securities and thereby 
reducing their costs. However, an alternative that broadens these 
exceptions could impose costs on issuers to the extent that making the 
certification by the independent public accountant voluntary for 
broker-dealers that serve multiple issuers reduces the reliability of 
these broker-dealers' annual reports.
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    \15\ One exemption is the ``single issuer'' exemption provided 
for in paragraph (e)(1)(i)(A) of Rule 17a-5, which is the subject of 
this rulemaking. The other exemption is contained in paragraph 
(e)(1)(i)(B) of Rule 17a-5. The second exemption applies to broker-
dealers whose securities business is ``limited to buying and selling 
evidences of indebtedness secured by mortgage, deed of trust, or 
other lien upon real estate or leasehold interests, and the broker 
or dealer has not carried any margin account, credit balance, or 
security for any securities customer.'' Staff analysis of annual 
reports filed by broker-dealers revealed that only one broker-dealer 
claimed this exemption in the last year.
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    Further, an alternative that broadens the exemption to broker-
dealers that limit their business in the manner described by the 
commenter would impact retail customers who are not similarly situated 
to an issuer that is affiliated with a broker-dealer and for whom the 
broker-dealer is acting as agent. Unlike such an issuer, the customers 
do not have a privileged position that allows them to access sufficient 
information about the financial condition and operations of the broker-
dealer to make an informed decision about continuing to use the broker-
dealer to act on their behalf in purchasing securities, including 
entrusting the broker-dealer to promptly forward their checks. 
Consequently, this alternative could impose costs on retail customers 
to the extent they currently rely on the reports of the independent 
public accountants.
    Given the significance of the verification of a broker-dealer's 
financial and operational information by an independent public 
accountant, the Commission is not broadening the scope of the exemption 
to include broker-dealers whose securities business is limited to 
acting as an agent for multiple issuers. When a broker-dealer acts as 
an agent on behalf of an issuer, the financial condition of the broker-
dealer is important to the issuer because if a broker-dealer is 
financially constrained, it may be less able to bear the risks 
associated with underwriting activities, such as holding securities in 
inventory. If a broker-dealer acts as an agent on behalf of multiple 
issuers, its financial condition is important to capital formation for 
multiple issuers, and so the benefits of certification are likely 
higher for the broker-dealer. Moreover, the Commission notes that the 
benefits to broker-dealers from such an alternative may be limited by 
competitive effects, because an issuer that is concerned about the 
reliability of a broker-dealer's financial statements may choose to 
hire a broker-dealer with certified annual reports to act as its agent.
    Second, the Commission considered eliminating the exemption. While 
the Commission is mindful of the significance of broker-dealer audits, 
as explained above, the Commission believes that the cost of this 
alternative to broker-dealers who are now eligible to take advantage of 
the exemption does not justify the benefits that would accrue to the 
single issuer for which the broker-dealer is acting as agent, which is 
typically an affiliate of the broker-dealer, as a result of an audit. 
Therefore, the Commission believes the exemption should continue to be 
available where a broker-dealer is acting as an agent for a single 
issuer in soliciting subscriptions for securities of that issuer.
    Finally, the Commission considered further specifying that the 
limited exemption in paragraph (e)(1)(i)(A) of Rule 17a-5 would apply 
only if the broker-dealer were engaged in underwriting the securities 
of an affiliate. While this alternative would narrow the limited 
exemption, based on its observation of broker-dealers' use of this 
exemption to date, the Commission does not believe the benefits yielded 
by narrowing the exemption would be substantial.

IV. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \16\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\17\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule or proposed rule 
amendment, which if adopted, would not have significant economic impact 
on a substantial number of small entities. In the proposing release, 
the Commission certified, under section 605(b) of the Regulatory 
Flexibility Act, that, when adopted, the proposed amendments to 
paragraph (e)(1)(i)(A) of Rule 17a-5 would not have a significant 
economic impact on a substantial number of small entities.\18\
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    \16\ See 5 U.S.C. 601 et seq.
    \17\ 5 U.S.C. 551 et seq.
    \18\ See Proposing Release, 83 FR at 48737.
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    Based on filings with the Commission, the Commission believes that 
four broker-dealers are currently claiming the exemption in paragraph 
(e)(1)(i)(A) of Rule 17a-5. The rule amendment will not change whether 
a broker-dealer would or would not qualify for the exemption. For these 
reasons, the Commission certifies that the rule amendment will not have 
a significant economic impact on a substantial number of small entities 
for purposes of the RFA.

V. Statutory Authority

    The Commission is adopting amendments to Rule 17a-5 under the 
Exchange Act (17 CFR 240.17a-5) pursuant to the authority conferred by 
Exchange Act Sections 17(e)(1)(A), 17(e)(1)(C), and 36.\19\
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    \19\ 15 U.S.C. 78q(e)(1)(A); 15 U.S.C. 78q(e)(1)(C); 15 U.S.C. 
78mm.
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List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Rules

    In accordance with the foregoing, the Commission is amending title 
17, chapter II of the Code of Federal Regulation as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *

0
2. Amend Sec.  240.17a-5 by revising paragraph (e)(1)(i)(A) to read as 
follows.

[[Page 27713]]

Sec.  240.17a-5  Reports to be made by certain brokers and dealers.

* * * * *
    (e) * * *
    (1)(i) * * *
    (A) The securities business of the broker or dealer has been 
limited to acting as broker (agent) for a single issuer in soliciting 
subscriptions for securities of that issuer, the broker has promptly 
transmitted to the issuer all funds and promptly delivered to the 
subscriber all securities received in connection with the transaction, 
and the broker has not otherwise held funds or securities for or owed 
money or securities to customers; or
* * * * *

    By the Commission

    Dated: June 10, 2019.
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-12563 Filed 6-13-19; 8:45 am]
 BILLING CODE 8011-01-P


