[Federal Register Volume 86, Number 32 (Friday, February 19, 2021)]
[Notices]
[Pages 10372-10375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03353]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91128]


Order Extending the Annual Reports Filing Deadline for Certain 
Smaller Broker-Dealers

February 12, 2021.

I. Introduction

    Broker-dealers registered with the U.S. Securities and Exchange 
Commission (``SEC'' or ``Commission'') are generally required to file 
with the Commission, within 60 calendar days after the end of the 
fiscal year of the broker-dealer, a financial report and either a 
compliance report or exemption report, along with reports prepared by 
an independent public accountant \1\ covering the financial report and, 
as applicable, the compliance or exemption report (collectively the 
``annual reports'').\2\ Pursuant to paragraph (m)(3) of Exchange Act 
Rule 17a-5 (``Rule 17a-5''), the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') has requested that the Commission extend by 
30 calendar days the deadline for certain smaller broker-dealers to 
file the annual reports.\3\ This order grants such an extension to 
certain smaller broker-dealers, subject to the conditions described in 
section III below.
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    \1\ The independent public accountant must be qualified and 
independent in accordance with 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''). See Public Law 107-204, 116 Stat. 745 
(2002); 17 CFR 240.17a-5(f)(1).
    \2\ See 17 CFR 240.17a-5(d)(5).
    \3\ See 17 CFR 240.17a-5(m)(3) (stating that on written request 
of any national securities exchange, registered national securities 
association, broker-dealer, or on its own motion, the Commission may 
grant an extension of time or an exemption from any of the 
requirements of Rule 17a-5 either unconditionally or on specified 
terms and conditions).
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II. Discussion

A. FINRA's Request

    In a letter dated February 11, 2021, FINRA requested that the 
Commission issue an order pursuant to paragraph (m)(3) of Rule 17a-5 to 
extend by 30 calendar days the deadline for certain smaller broker-
dealers to file their annual reports.\4\ In FINRA's request, it 
indicated that it had been informed by smaller broker-dealers and 
auditors that permitting an additional 30 days for filing of the annual 
reports may help to reduce the burdens in obtaining audit services by 
providing an expanded time frame for the completion of such audits 
thereby easing the availability of auditors.\5\ FINRA stated in the 
letter that the fiscal year for most broker-dealers ends on the last 
calendar day of the year (December 31), which results in the greatest 
demand for audit services in the 60 calendar days following that date. 
Further, much of the work required to complete these audits is 
performed after the broker-dealer files the final FOCUS Report (Form X-
17A-5 Part II or IIA) for the audit year, which is due to be filed with 
the Commission 17 business days after the end of the prior month (i.e., 
January 27 for broker-dealers with December 31 fiscal year ends). As a 
result, the required audit work is conducted within a compressed period 
when audit services are in greatest demand and the availability of 
independent public accountants and

[[Page 10373]]

other third-party professionals may be limited.
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    \4\ See Letter from Kris Dailey, Vice President, Office of 
Financial and Operational Risk Policy, FINRA to Michael A. 
Macchiaroli, Associate Director, SEC (February 11, 2021).
    \5\ See id. at 2.
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    FINRA further identified a number of factors that compound the 
burden of smaller broker-dealers in preparing the annual reports and 
undergoing an audit of them. For example, the auditors of smaller 
broker-dealers typically do not perform interim audit work prior to the 
fiscal year end. Interim audit work typically includes the auditors 
testing items such as revenue, expenses, and internal controls. In 
addition, some smaller broker-dealers utilize outside professional and 
consulting services to assist them in preparing supporting materials 
for the audit and to respond to auditor requests. These outside 
professional and consulting service providers often have multiple 
smaller broker-dealer clients with the same fiscal year end. As a 
result, the service providers' may have a limited capacity during the 
audit period to provide their services to smaller broker-dealers. 
Furthermore, because many smaller broker-dealers do not have fully 
automated financial and operational recordkeeping and reporting 
infrastructures, they must rely on manual processes to prepare 
documents for the independent public accountant to audit or review, 
which can take additional time as compared to more automated processes.
    FINRA also stated that some audit firms have chosen to forego 
registration with the PCAOB, resulting in fewer independent public 
accountants qualified under Rule 17a-5 to perform broker-dealer 
audits.\6\ FINRA indicates that the additional 30 days to complete a 
smaller broker-dealer audit may alleviate capacity issues for PCAOB-
registered auditors. FINRA stated that it has been informed by broker-
dealers and auditors that the additional 30 days would help the limited 
number of PCAOB-registered auditors to perform the work necessary to 
complete reports covering them. FINRA stated the additional time could 
promote better quality of the annual reports.
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    \6\ In its 2012 Annual Report on the Interim Inspection Program 
Related to the Audits of Brokers and Dealers (``Annual Inspection 
Report''), the PCAOB reported that there were 783 registered public 
accounting firms. In the 2019 Annual Inspection Report, that figure 
had declined to 411. See PCAOB, Information for Auditors of Broker-
Dealers, available at https://pcaobus.org/Pages/BrokerDealers.aspx.
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B. FINRA's Proposed Conditions for the Requested Relief

    FINRA proposed that the extension of 30 calendar days be made 
available only to broker-dealers that meet certain conditions. The 
first condition is that the broker-dealer must be in compliance with 
Exchange Act Rule 15c3-1 \7\ (``Rule 15c3-1'') as of the date of its 
most recent fiscal year end. FINRA believes this condition is 
appropriate because the financial condition of a member that avails 
itself of the additional 30 days should not be such as to raise 
concerns about whether the member may continue to conduct its broker-
dealer activities. The second condition is that as of the date of the 
broker-dealer's most recent fiscal year-end, the broker-dealer must 
have had total capital and allowable subordinated liabilities of less 
than $50 million, as reported in box 3530 of Part II or IIA of its 
FOCUS Report. FINRA believes this condition is appropriate because it 
helps to target the contemplated extension to the smaller firms that 
are in need of such relief. The third condition is that the extension 
be made available only to those broker-dealers eligible to file an 
exemption report as part of its most recent fiscal year end annual 
reports.\8\ FINRA believes this condition is appropriate so as to 
ensure that the extension is only available to firms that, by virtue of 
their business activities, generally pose less risk to customers 
because they do not custody funds and securities. The fourth condition 
is that the broker-dealer submits written notification to FINRA of its 
intent to avail itself of the additional 30 calendar days for filing 
its annual reports on an ongoing basis for as long as it meets these 
conditions. FINRA believes that the notification is appropriate so as 
to enable FINRA to monitor effectively firms that avail themselves of 
the additional 30 days. The final condition is that the broker-dealer 
submits the annual reports electronically to the Commission using an 
appropriate process. FINRA believes this condition is appropriate 
because it permits greater efficiency and is consistent with SEC staff 
guidance.
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    \7\ See 17 CFR 240.15c3-1.
    \8\ See 17 CFR 240.17a-5(d)(1)(i)(B) (prescribing whether a 
broker-dealer must file the compliance report or the exemption 
report). A broker-dealer must file an exemption report if the firm 
claimed it was exempt from Rule 15c3-3 (17 CFR 240.15c3-3) 
throughout the most recent fiscal year and was not subject to 
paragraph (p) of Rule 15c3-3 (which addresses segregation 
requirements with respect to security-based swaps). Otherwise, the 
broker-dealer must file the compliance report. See also Broker-
Dealer Reports, Exchange Act Release No. 70073 (July 30, 2013), 78 
FR 51910, 51915 (Aug. 21, 2013) n. 74 (stating that a broker-dealer 
should file an exemption report if it has not held customer 
securities or funds during the fiscal year even if it does not fit 
into one of the exemption provisions of Rule 15c3-3 identified on 
the FOCUS Report).
    See also Frequently Asked Questions Concerning the July 30, 2013 
Amendments to the Broker-Dealer Financial Reporting Rule (updated 
July 1, 2020) (describing the Division and Trading and Markets 
staff's views regarding the eligibility of certain broker-dealers to 
file exemption reports in accordance with the circumstances 
described in footnote 74 of the 2013 Broker-Dealer Reports release, 
among other things). Staff statements, including Frequently Asked 
Questions, represent the views of the staff. They are not rules, 
regulations, or statements of the Commission. The Commission has 
neither approved nor disapproved their content. These staff 
statements, like all staff guidance, have no legal force or effect: 
They do not alter or amend applicable law, and they create no new or 
additional obligations for any person.
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C. Commission Analysis

    According to FINRA, a smaller broker-dealer's window of time to 
prepare the annual reports and undergo an audit by an independent 
public accountant is often particularly compressed because much of the 
audit work does not commence until after the broker-dealer files its 
fiscal year-end FOCUS Report. According to FINRA, audit work for small 
broker-dealers is performed predominantly during the period of time 
between the due date for the fiscal year-end FOCUS Report (17 business 
days after the firm's fiscal year end) and the annual reports filing 
due date (60 calendar days after the fiscal year end). Further, 
according to FINRA, the auditors of smaller broker-dealers do not 
typically perform interim audit work prior to the broker-dealer's 
fiscal year end, unlike most larger broker-dealers. The lack of this 
interim audit work, which typically includes the testing of items such 
as revenue, expenses, and internal controls, compresses the time 
auditors have to perform required procedures in advance of the filing 
deadline. This also restricts the time frame for smaller broker-dealers 
and their auditors to identify and resolve issues.
    Moreover, according to FINRA, many smaller broker-dealers use 
manual processes to prepare supporting documentation for the audit or 
review and respond to auditor inquiries, rather than the more automated 
processes typically used by larger broker-dealers. This can make the 
work necessary to prepare the annual reports and audit them more labor 
intensive and time consuming. In addition, according to FINRA, some 
smaller broker-dealers retain third-party professionals to assist them 
with their financial reporting. These professionals often provide 
services to multiple smaller broker-dealers with the same fiscal year 
end, resulting in these professionals having limited capacity during 
the relatively brief period between the FOCUS Report filing due date 
and the annual reports filing due date. These professionals' limited 
capacity can further compress the timeframe for performing the work 
necessary to prepare the annual reports.

[[Page 10374]]

    Paragraph (m)(3) of Rule 17a-5 provides that the Commission may 
grant an extension of time for broker-dealers to file their annual 
reports. After considering the points raised in FINRA's letter and the 
burdens faced by smaller broker-dealers in preparing and filing the 
annual reports, the Commission believes that it would be appropriate to 
extend the deadline for certain smaller broker-dealers to file their 
annual reports by 30 calendar days.\9\ This additional time should 
expand the timeframe (from slightly more than one month) between the 
deadline for submitting the fiscal year-end FOCUS Report and the 
deadline to file the annual reports (i.e., the timeframe in which much 
of the work is performed to prepare the annual reports). To the extent 
auditors are able to better focus on the audit and review of annual 
reports for the small broker-dealer clients who avail themselves of the 
extension, this relief could help promote quality financial reporting.
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    \9\ FINRA requested relief on behalf of its member broker-
dealers. This Order extends relief to all broker-dealers satisfying 
its conditions in order to treat similarly situated broker-dealers 
equally regardless of whether they are FINRA members.
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    The Commission further believes it is appropriate to limit this 
relief to broker-dealers meeting the conditions described in FINRA's 
request, which should also maintain investor protections. Conditioning 
the extension on the broker-dealer being in compliance with the net 
capital requirements of Rule 15c3-1 as of the date of its fiscal year 
end is appropriate because a broker-dealer that is not in compliance 
with the rule poses a heightened risk to its customers and other 
securities market participants because of its financial condition. 
Excluding a net capital-deficient broker-dealer from this relief will 
assist the Commission and the broker-dealer's designated examining 
authority to monitor the financial condition of the firm on a timely 
basis, including analyzing whether the firm will be able to continue as 
a going concern. Therefore, a broker-dealer with a net capital 
deficiency will not be able to avail itself of the additional 30 days 
provided for in this Order.
    The Commission also believes it is appropriate to limit the 
availability of the extension to smaller broker-dealers. As discussed 
above, the extension could alleviate unique burdens associated with the 
compressed timeframe for smaller broker-dealers to prepare their annual 
reports and their independent public accountants to perform the audit 
work necessary to prepare reports covering them. Moreover, broker-
dealers that conduct a substantial securities business and thus are in 
a position to potentially pose significant risk to investors and to the 
fair, orderly, and efficient functioning of the markets, will not be 
eligible for the extension. Therefore, the Commission is limiting the 
relief to broker-dealers that have total capital and allowable 
subordinated liabilities of less than $50 million, as requested by 
FINRA. Broker-dealers falling below the $50 million threshold 
constitute approximately 3% of the total capital of all broker-dealers. 
The Commission believes that the $50 million threshold is appropriate 
in this context because smaller broker-dealers pose less significant 
risks to the fair, orderly, and efficient functioning of the markets.
    Broker-dealers that maintain custody of customer securities and 
cash are not eligible to file exemption reports and are generally 
larger in size than broker-dealers that do not carry customer accounts. 
The Commission believes firms that file an exemption report--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 customers. Therefore, a 
broker-dealer must be permitted to file an exemption report as part of 
the annual reports to qualify for the relief. Based upon information 
included in broker-dealers' FOCUS Reports, the Commission believes that 
approximately 3,000 of the 3,620 broker-dealers registered with the 
Commission would meet the $50 million threshold and exemption report 
filing conditions.
    The Commission believes that it is appropriate to make the 30-day 
extension available only to broker-dealers that have provided written 
notice to their designated examining authority of their intent to avail 
themselves of the extension. The designated examining authority is 
responsible for oversight of broker-dealers' adherence to the financial 
responsibility rules, including Rule 17a-5. This requirement will allow 
the broker-dealer's designated examining authority to more effectively 
monitor firms by enabling it to distinguish between broker-dealers that 
are filing their annual reports late as opposed to firms availing 
themselves of the relief in this Order.
    Finally, the Commission believes it is appropriate to limit the 
availability of the relief in this order to broker-dealers that file 
the annual reports electronically with the Commission using an 
appropriate process.\10\ The electronic filing condition promotes 
efficiency by ensuring broker-dealers that rely on the 30-day extension 
will have their annual reports made available to Commission staff and 
to the public more quickly than if they had been filed in paper within 
the deadline provided in Rule 17a-5. Paper filings must be manually 
processed, which is time consuming and delays the availability of 
annual reports to the staff of the Commission and to the public. By 
comparison, annual reports that are filed electronically need minimal 
or no manual processing. Therefore, to help ensure the annual reports 
are made promptly available, the Commission is conditioning the relief 
on electronic filing.
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    \10\ The Commission notes that the staff of the Division of 
Trading and Markets has previously issued no-action positions 
related to the electronic filing of broker-dealer annual reports. 
See Letter to Kris Daily, Vice President, FINRA from Michael A. 
Macchiaroli, Associate Director, Commission, dated January 27, 2017. 
Available at https://www.sec.gov/divisions/marketreg/mr-noaction/2017/finra-012717-electronic-filing-annual-reports.pdf. For further 
instructions relating to filing broker-dealer annual reports through 
EDGAR, see Electronic Filing of Broker-Dealer Annual Reports. 
Available at https://www.sec.gov/divisions/marketreg/electronic-filing-broker-dealer-annual-reports.htm.
    See also Updated Division of Trading and Markets Staff Statement 
Regarding Requirements for Certain Paper Submissions in Light of 
COVID-19 Concerns. Available at https://www.sec.gov/tm/paper-submission-requirements-covid-19-updates-061820.
    Staff statements represent the views of the staff. They are not 
rules, regulations, or statements of the Commission. The Commission 
has neither approved nor disapproved their content. These staff 
statements, like all staff guidance, have no legal force or effect: 
They do not alter or amend applicable law, and they create no new or 
additional obligations for any person.
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III. Conclusion

    It is hereby ordered pursuant to section 17(a)(1) of the Exchange 
Act and paragraph (m)(3) of Rule 17a-5 thereunder that the deadline in 
paragraph (d)(5) of Rule 17a-5 for filing the annual reports is 
extended by 30 calendar days, provided that the broker-dealer:
    (1) As of its most recent fiscal year end:
    a. Was in compliance with Rule 15c3-1; and
    b. Had total capital and allowable subordinated liabilities of less 
than $50 million, as reported in box 3530 of Part II or Part IIA of its 
FOCUS Report;
    (2) Is permitted to file an exemption report as part of its most 
recent fiscal year end annual reports;
    (3) Submits written notification to its designated examining 
authority of its intent to rely on this order on an ongoing basis for 
as long as it meets the conditions of the order; and

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    (4) Files the annual report electronically with the Commission 
using an appropriate process.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-03353 Filed 2-18-21; 8:45 am]
BILLING CODE 8011-01-P


