The SEC updates filing threshold to Rule 17h reporting requirements for broker-dealers

On June 29, 2020, the U.S. Securities and Exchange Commission (SEC) issued an order to update the filing threshold for broker-dealers’ Form 17-H filings made pursuant to Exchange Act Rules 17h-1T and Rule 17h-2T (SEC Release No. 2020-147) which is effective immediately. Form 17-H is the “Risk Assessment Report for Brokers and Dealers” and includes the following:

• Organizational chart reflecting associated persons and the broker-dealer
• Risk management and other policies
• Legal proceedings
• Financial Statements

Update to filing threshold

The filing threshold will exempt certain smaller broker-dealers, as defined below, from the reporting requirements of Exchange Act Rules 17h-1T and Rule 17h-2T while continuing to provide important information to the SEC on the financial condition of covered broker-dealers and their affiliates. 

Purpose of order to update the filing threshold

The purpose of the order to update the filing threshold is to increase the overall efficiency of Form 17-H filing intake and review process.  In addition, the purpose is to reduce the reporting burden on smaller broker-dealer firms in a measured manner that preserves reporting by broker-dealer firms.  The order was made based on the recommendation of the SEC’s Office of Inspector General. 

Update to 17h Rules

Prior to the order to update the filing threshold, the SEC adopted the 17h Rules in 1992, which resulted in the following:

• Set forth specified recordkeeping and reporting requirements for certain broker-dealers that are part of a holding company structure, pursuant to the Market Reform Act of 1990.
• For broker-dealers that do not hold customer funds or securities, owe money or securities to customers, or carry the accounts of or for customers, they were exempt from the 17h Rules provided that the broker-dealers maintained capital, including subordinated debt, of less than $20 million.

The order set in SEC Release No. 2020-147 updated the following:

• Broker-dealers with capital between $20 million to $50 million are exempt from the 17h Rules as long as the broker-dealers maintain less than $1 billion in total assets.
• Broker-dealers maintaining $50 million or more in capital, including subordinated debt, will continue to remain subject to the Exchange Act Rules 17h-1T and Rule 17h-2T.

Baker Tilly’s assessment

The SEC’s decision to focus on the largest broker-dealers, which presumably carry proportionally more risk to the financial markets, appears in line with our belief that the costs and benefits of regulations over regulated entities should be continually explored and modified. Relief of requirements, which are concluded to not pose a material financial risk, are helpful in protecting the efficiency of capital markets.

In conclusion, the order issued by the SEC will ease some of the burden for certain smaller broker-dealers. The order will also modernize the application of the Exchange Act Rules 17h-1T and Rule 17h-2T, which will enhance the efficiency of the SEC’s oversight of the broker-dealers that continue to be subject to these rules. Information included above was sourced from the SEC website, in particular press release 2020-147 and the referenced content within.  See the SEC website for additional details on the updates to the filing threshold to Rule 17h.

For more information or to learn how Baker Tilly’s Value Architects™ can assist your organization, contact our team.