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). This form, called the Risk Assessment Report for Broker-Dealers, consists of six pages relating to the broker’s business activities and their 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. securities markets. The agency, which was created in 1934, requires 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) were added to the Securities and Exchange Act provisions in 1992, outlining certain requirements for recordkeeping and reporting for securities broker-dealers. In compliance with these rules, Form 17-H requires broker-dealers to disclose information regarding the activities of certain affiliated entities, such as parent companies, holding companies, and subsidiaries.

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.

Purpose of SEC Form 17-H

The primary purpose of Form 17-H is to allow the SEC to monitor potential sources of systemic risk risks among broker-dealers. Each broker-dealer is required to list the number and types of assets under their control, as well as any pending litigation, debt obligations, organizational charts, as well as the names of "Material Associated Persons," the company's principal employees and executives.

Many broker-dealers operate as part of a larger investment firm, with a family of parent companies, subsidiaries, and other affiliates, that may make risky trades or rely on one another for credit. Broker-dealers sometimes rely on their parent companies for short-term liquidity, so a credit risk at one of these companies could affect the financial health of the others.

By disrupting market activities, such risks make it harder for investors and enterprises to access capital. 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 the 17-H rules and Form 17-H following the collapse of Drexel Burnham Lambert and its holding company, Drexel Burnham and Lambert Group. The two companies were shut down in 1990 due to insider trading and manipulation in the junk bond market.

During the 1980s, Drexel suffered from a series of investigations and lawsuits for the high-yield bond trading practices proliferated by Michael Milken and others. In 1990, the company attempted to stave off bankruptcy by transferring $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. 

According to the SEC, Drexel's collapse "demonstrated that broker-dealers could encounter serious financial difficulty due to the loss of market confidence, loss of access to the capital markets, or failure of the registered broker-dealer’s affiliates or the holding company itself." Thus, Rule 17-H is an important way that the SEC may screen securities organizations to mitigate or reduce risks, like the Drexel demise cited above.