Definition of SEC Form 17-H


What is the SEC 17-H form?

The term SEC Form 17-H refers to a form that all securities dealers must file with the Securities and Exchange Commission (SEC). This form, called the Brokerage Risk Assessment Report, consists of six pages related to the broker’s business activities and risk profile. This SEC form requires stockbrokers to submit the form in accordance with Rules 17h-1T and Rule 17h-2T of the Securities and Exchange Act of 1934.

Key takeaways

  • Certain brokers must file SEC Form 17-H with the Securities and Exchange Commission.
  • The form requires brokers to provide financial information on their risk profile, including financial statements and information on any legal issues they face.
  • Stock brokers must provide information about the activities of a parent company, holding company or subsidiary that may affect its financial or operating conditions.
  • The SEC adopted the rule and Form 17-H following the collapse of Drexel Burnham Lambert and its parent company, Drexel Burnham and Lambert Group.

Understanding Form SEC 17-H

The Securities and Exchange Commission is an independent federal agency responsible for protecting investors and ensuring the fairness of the U.S. securities markets. The agency, which was created in 1934, requires public disclosure and oversees corporate acquisitions in the US. At the same time, it protects investors from market manipulation and other types of risk.

The 5pm rules (5pm-1T and 5pm-2T) were added to the provisions of the Securities and Exchange Law in 1992, outlining certain record-keeping and reporting requirements for securities brokers. Pursuant to these rules, Form 17-H requires brokers to disclose information about the activities of certain affiliated entities, such as parent companies, holding companies, and subsidiaries.

The form consists of six pages and is known as the Broker and Dealer Risk Assessment Report form. Request items such as the investment company’s current organizational chart, copies of all risk management and related policies, information related to any legal procedures, and the company’s financial statements.

The SEC amended the filing requirements of Rule 17h in June 2020, increasing the threshold for reporting entities. This change exempted certain brokers, which the agency said would reduce the burden for smaller companies. Companies whose capital ranges from $ 20 million to $ 50 million are now exempt from the rule, as long as they hold less than $ 1 billion in total assets.

Brokerage firms must meet certain requirements before they can register with the Financial Industry Regulatory Authority (FINRA), including licensing, compliance, and continuing education.

Purpose of form SEC 17-H

The primary purpose of Form 17-H is to allow the SEC to control potential sources of systemic risk among brokers. Each stockbroker must list the number and types of assets under its control, as well as any pending litigation, debt obligations, organizational charts, as well as the names of the “Associated Material Persons”, the main employees and executives of the company.

Many stockbrokers operate as part of a larger investment firm, with a family of parent companies, subsidiaries, and other affiliates, who may engage in risky trades or depend on each other for credit. Stockbrokers sometimes rely on their parent companies for short-term liquidity, so a credit risk in one of these companies could affect the financial health of the others.

By disrupting market activities, these risks make it difficult for investors and companies to access capital. As part of its underwriting program, the SEC currently targets 50-75 firms per year – out of approximately 275 17-H filing firms – for in-person screening visits.

The SEC is also developing an expanded liquidity review process, which may bring increased scrutiny of 17-H firms in the future. Focusing on liquidity was one of the great lessons learned during the 2008 financial crisis.

History of the SEC 17-H form

The SEC adopted Rules 17-H and Form 17-H following the collapse of Drexel Burnham Lambert and its parent company, Drexel Burnham and Lambert Group. The two companies were closed in 1990 due to insider trading and manipulation in the junk bond market.

During the 1980s, Drexel suffered a series of investigations and lawsuits over high-yield bond trading practices that proliferated Michael Milken and others. In 1990, the company tried to avoid bankruptcy by transferring $ 220 million of capital from BD to its parent as a short-term loan.

Neither the SEC nor the New York Stock Exchange (NYSE) were aware of this significant capital transfer at the time. Within weeks, Drexel and its associated entities were unable to meet their financial obligations and, as a result, DBL went bankrupt.

According to the SEC, Drexel’s collapse “demonstrated that brokers could run into serious financial difficulties due to loss of market confidence, loss of access to capital markets, or failure of brokers’ registered subsidiaries. or the holding company itself “. Thus, Rule 17-H is an important way that the SEC can evaluate securities organizations to mitigate or reduce risks, such as the disappearance of Drexel cited above.

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Mark Holland

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