UNITED STATES OF AMERICA
In the Matter of
SECURITIES INDUSTRY ASSOCIATION
ORDER EXTENDING BROKER-DEALER EXEMPTION FROM SENDING FINANCIAL INFORMATION TO CUSTOMERS
The Securities and Exchange Commission ("Commission") is extending its temporary Order issued December 10, 19991 under Section 17(e) of the Securities Exchange Act of 1934 ("Exchange Act") exempting broker-dealers from Exchange Act Section 17(e)(1)(B) and Rule 17a-5(c). These sections require a broker-dealer to send each of its customers semi-annually its balance sheet with appropriate footnotes prepared in accordance with generally accepted accounting principles ("GAAP") and a footnote disclosing the firm's net capital and required net capital. To take advantage of the exemption, a broker-dealer must semi-annually send the net capital footnote to its customers, must send its balance sheet and appropriate footnotes to customers upon request via a toll-free number, and must place its balance sheet and appropriate footnotes on its web-site.
The Commission's temporary Order established a pilot program which expires on December 31, 2001. During the pilot program, a broker-dealer taking advantage of the exemption was required, among other things, to report to the Commission the number of times its balance sheet was viewed on its web-site and the number of requests for paper copies received via its toll-free number. In a letter dated December 11, 2001, the Securities Industry Association ("SIA") stated that it supported an extension of the exemption.
The Commission has determined, on the basis of information set forth in the SIA's letter and information reported by broker-dealers taking advantage of the exemption, that extending the exemption for one year is consistent with the public interest and the protection of investors. The Commission intends to propose a rule amendment shortly which would make the relief permanent.
A broker-dealer exempted under this Order must comply with each of the following requirements:
(1) The broker-dealer semi-annually sends its customers, at the times it otherwise would have sent its customers its balance sheet in accordance with Rule 17a-5(c), a statement which includes: (a) the amount of the broker-dealer's net capital and its required net capital in accordance with Rule 15c3-1, (b) to the extent required under Rule 17a-5(c)(2)(ii), a description of the effect on the broker-dealer's net capital and required net capital of subsidiaries consolidated pursuant to Appendix C of Rule 15c3-1 (jointly the "Net Capital Disclosure"), and (c) any statements otherwise required by Rule 17a-5(c)(2)(iii) - (iv).2
(2) The above statement is given prominence in the materials sent to its customers and includes an appropriate caption stating that customers may obtain the broker-dealer's balance sheet (in the case of the annual balance sheet, audited and with the auditor's certification) at no cost, by accessing the broker-dealer's web-site or calling the broker-dealer's stated toll-free number. The statement must provide the specific Internet Universal Research Locator (URL) at which the broker-dealer's balance sheet is located.
(3) The broker-dealer publishes a balance sheet prepared in accordance with GAAP, including footnotes and the Net Capital Disclosure, accessible through each of the following Internet locations:
(a) The broker-dealer's web-site home page, containing a hyperlink providing a direct link to the broker-dealer's balance sheet;
(b) Each page at which a customer can log-on to the broker-dealer's web-site, containing a hyperlink providing a direct link to the broker-dealer's balance sheet; and
(c) If the web-sites for two or more broker-dealers can be accessed from the same home page, a hyperlink directing the Internet user to the home page of each broker-dealer. Upon reaching the broker-dealer's home page, the home page contains a hyperlink providing a direct link to the particular broker-dealer's balance sheet.
Each of the above hyperlinks is placed on the broker-dealer's web-site, in either textual or button format, as a separate, prominent link, in a manner that is clearly visible.3
(4) The broker-dealer maintains a toll-free number that customers can call to request a paper or electronic copy of its balance sheet.
(5) If a customer requests a paper or electronic copy of the broker-dealer's balance sheet, the firm sends it promptly at no cost to the customer.
(6) If the broker-dealer's net capital falls below the early warning levels of Rule 17a-11 and the broker-dealer fails to cure the relevant deficiency within 24 hours, or if the broker-dealer's auditors determine that a material inadequacy exists with regard to any of the financial disclosures contained in the audited financial statements or in the broker-dealer's internal controls, the firm returns to sending its balance sheet as required under Rule 17a-5(c), including footnotes, by the next date that financial disclosures are required, until the deficiency or material inadequacy is cured.
(7) The broker-dealer submits to the Commission, addressed to Division of Market Regulation, United States Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-1001, no later than 60 days after each distribution of its published statement containing the Net Capital Disclosure:
(a) A report on the number of requests that the broker-dealer has received for copies of its balance sheet via its toll-free number and the number of times its balance sheet has been viewed on its web-site. The report contains the number of requests received in the month following its web-site publishing of its recent balance sheet and, except in the case of the first web-site publishing, in the preceding six months; and
(b) Written investor complaints regarding the exemption received by the broker-dealer in the preceding six months.
IT IS ORDERED, under Exchange Act Section 17(e)(l)(C) and Rule 17a-5(l)(3), that the exemption from Exchange Act Section 17(e)(1)(B) and Rule 17a-5(c) granted in Exchange Act Release No. 42222 is extended to December 31, 2002.
By the Commission.
Jonathan G. Katz
|1||Exchange Act Release No. 42222.|
|2||A broker-dealer may comply with this requirement by: (a) delivering the statements to its customers in paper copy form or (b) transmitting the statements to its customers electronically.|
|3||This Order exempts certain firms from the delivery requirement under Rule 17a-5(c), in part, based on the protections afforded by the Commission's financial responsibility rules. The condition that a broker-dealer makes its balance sheet available on its web-site is not an alternative method of delivering this information to customers under Rule 17a-5(c).|
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