What Is SEC Form 17-H?

The term SEC Form 17-H refers to a form that must be filed by all securities brokers with the Securities and Exchange Commission (SEC). The form, called the Risk Assessment Report for Broker-Dealers, consists of six pages, which cite a broker’s business activities related to its risk profile. This SEC form requires broker-dealers to file the form as per Rules 17h-1T and Rule 17h-2T of the Securities and Exchange Act of 1934.

Key Takeaways

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

Understanding SEC Form 17-H

The Securities and Exchange Commission is an independent federal agency responsible for protecting investors and ensuring the fairness of U.S. markets. The agency, which was created in 1934, promotes public disclosure and oversees corporate takeovers in the U.S. while protecting investors from market manipulation and other types of risk.

The 17h rules (17h-1T and 17h-2T) of the Securities and Exchange Act of 1934, which were adopted in 1992, outlined certain requirements for recordkeeping and reporting for certain broker-dealers. As such, Form 17-H requires them to disclose information regarding the activities of certain affiliated entities that could materially affect the financial and operating conditions of a broker-dealer. These entities include parent companies, holding companies, and subsidiaries.

As mentioned above, the form is composed of six pages and is known as the Risk Assessment Report for Brokers and Dealers form. It requests items such as the investment company’s current organizational chart, copies of all risk-management and related policies, information related to any legal proceedings, and the company's financial statements.

The SEC amended the filing requirements for Rule 17h in June 2020, increasing the threshold for reporting entities. This change exempted certain broker-dealers, which the agency said, would reduce the burden for smaller firms. Companies whose capital ranges between $20 million and $50 million are now exempt from the rule, provided they maintain less than $1 billion in total assets.

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

Special Considerations

One form of risk that the SEC aims to identify is market manipulation or misconduct. This type of risk is often unrelated to the merit of projects underlying the investment. Rather, these situations are frequently motivated by conflicts of interest, and they often occur in the presence of asymmetric information between various market participants—for example, when hedge fund managers misvalue assets in order to inflate or smooth their returns, or when corporate issuers misstate earnings, or in instances of brokers favoring some investors over others by cherry-picking (or allocating) trades to them that may disregard material data or broad market metrics.

Another type of risk assessment deals with understanding and identifying market-wide, or systemic risks, which may flow from the correlated activities of many market participants. These risks can propagate through the entire market or a segment of it, adversely affecting many entities, including those that did not contribute to the activity that caused the market-wide risk. An example of this type of risk might occur by using derivative securities such as over-the-counter (OTC) swap agreements, for which inadequate margining could leave customers exposed to counterparty risk.

By disrupting market activities that investors rely on, such risks threaten access to, as well as the cost of, capital that is required to finance worthwhile investment opportunities in the economy. As part of its risk-assessment program, the SEC currently focuses on 50-75 firms a year—out of approximately 275 17-H filer 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 going forward. Focusing on liquidity was one of the big lessons learned during the 2008 financial crisis

History of SEC Form 17-H

The SEC adopted both rule and Form 17-H on the heels of the collapse of Drexel Burnham Lambert and its holding company, Drexel Burnham and Lambert Group, one of the most spectacular examples of insider trading in history.

In 1990, Drexel was already in trouble for its questionable high-yield bond trading practices proliferated by Michael Milken and others in the 1980s, when DBL transferred $220 million of BD capital to its parent as a short-term loan.

Neither the SEC nor the New York Stock Exchange (NYSE) was made aware of this significant capital transfer at the time. In a matter of weeks, Drexel and its associated entities could not meet their financial obligations, and as a result, DBL filed for bankruptcy. Thus, Rule 17-H is an important way that the SEC may screen securities organizations to mitigate or head off any potential risks and threats, like the Drexel demise cited above.