[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15099]
[[Page Unknown]]
[Federal Register: June 22, 1994]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Under Secretary for Domestic Finance
17 CFR Parts 402 and 404
RIN 1505-AA44
Amendments to Regulations for the Government Securities Act of
1986
AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Department of the Treasury (``Department'') is publishing
for comment proposed amendments to the financial responsibility rules
in Part 402 and a conforming amendment to a recordkeeping requirement
in Part 404 of the regulations issued under the Government Securities
Act of 1986 (``GSA''). The proposed amendments would raise the minimum
capital requirements for all government securities brokers and dealers
subject to the requirements of Section 402.2 and establish a written
notification requirement for certain withdrawals of capital. The
proposed amendments parallel the Securities and Exchange Commission's
(``SEC'') final and proposed amendments to the minimum net capital
requirements for brokers and dealers subject to the requirements of 17
CFR 240.15c3-1 (Rule 15c3-1) and final rules regarding the withdrawal
of capital.
DATES: Comments must be submitted on or before August 22, 1994.
ADDRESSES: Comments should be sent to: Government Securities
Regulations Staff, Bureau of the Public Debt, Department of the
Treasury, 999 E Street N.W., Room 515, Washington, D.C. 20239-0001.
Comments received will be available for public inspection and copying
at the Treasury Department Library, Room 5030, Main Treasury Building,
1500 Pennsylvania Avenue N.W., Washington, D.C. 20220.
FOR FURTHER INFORMATION CONTACT: Don Hammond (Acting Director) or Kerry
Lanham (Government Securities Specialist) at 202-219-3632. (TDD for
hearing impaired: 202-219-9274.)
SUPPLEMENTARY INFORMATION:
1. Background
The Department is proposing amendments to its financial
responsibility rules in Part 402 that would raise the minimum capital
requirements and establish written notification requirements for
certain capital withdrawals for those government securities brokers and
dealers subject to the provisions of Sec. 402.2. Additionally, the
Department is proposing a conforming change to the recordkeeping
requirements of Part 404 which is necessitated by the proposals to
revise the minimum capital levels. The Department believes that these
proposed amendments will enhance the capital adequacy of government
securities brokers and dealers and provide for more effective
regulatory oversight. These proposed amendments parallel rule
amendments adopted or proposed by the SEC. The Department's amendments,
if adopted, will increase investor confidence in the financial
responsibility of government securities brokers and dealers without
creating any substantial new barriers to entry into the government
securities market.
The SEC published proposed revisions to its minimum capital levels
in October 1989\1\ and December 1992\2\ and to its capital withdrawal
rules in August 1990.\3\ The SEC published its final capital withdrawal
regulations on March 5, 1991,\4\ finalized its first change in minimum
capital levels on November 24, 1992,\5\ but has not yet finalized its
second proposal on minimum capital levels for certain introducing
firms. The Treasury capital rule\6\ uses the SEC capital standard (Rule
15c3-1)\7\ as a foundation and, accordingly, it is useful to strive to
minimize the differences between the two rules. Additionally, it is
Treasury's objective to maintain consistency with the SEC rule and,
ultimately, have a uniform capital rule for all government securities
brokers and dealers registered with the SEC. The Treasury would have
acted sooner to propose these amendments but its rulemaking authority
under the GSA expired on October 1, 1991, and was not reauthorized
until December 17, 1993. (107 Stat. 2344, Pub. L. 103-202).
---------------------------------------------------------------------------
\1\Securities Exchange Act Release No. 27249 (September 15,
1989), 54 FR 40395 (October 2, 1989).
\2\Securities Exchange Act Release No. 31512 (November 24,
1992), 57 FR 57027 (December 2, 1992).
\3\Securities Exchange Act Release No. 28347 (August 15, 1990),
55 FR 34027 (August 21, 1990).
\4\Securities Exchange Act Release No. 28927 (February 20,
1991), 56 FR 9124 (March 5, 1991).
\5\Securities Exchange Act Release No. 31511 (November 24,
1992), 57 FR 56973 (December 2, 1992).
\6\17 CFR Sec. 402.2.
\7\Sec. 240.15c3-1.
---------------------------------------------------------------------------
Having reviewed the SEC's actions, the Department has determined to
propose changes to its capital rule, which, for the most part, parallel
the SEC's modifications. The following text explains the Department's
rationale supporting its amendments, with particular emphasis on the
differences between the Department's and the SEC's changes.\8\
---------------------------------------------------------------------------
\8\Explanations of the SEC's reasons for the changes to its
capital rule are found in the releases accompanying their proposed
and final rules. See Supra notes 1, 2, 3, 4 and 5.
---------------------------------------------------------------------------
II. Analysis
A. Minimum Capital Requirements
The SEC has either increased or proposed increasing the minimum net
capital requirements for most brokers and dealers subject to Rule 15c3-
1 to an amount ranging up to $250,000, depending on the type of
business conducted by the broker or dealer. The previous minimum
requirements had been unchanged for at least 16 years, and, in the case
of the $5,000 level applicable to introducing brokers, for 26
years.9 Inflation over this period has reduced the level of
protection that the current minimum standards provide.
---------------------------------------------------------------------------
\9\54 FR 40395, 40396 n. 14 (October 2, 1989).
---------------------------------------------------------------------------
The Department, in developing its existing capital rule, modified
the SEC minimum capital levels prior to incorporating them into the
Treasury rule. The modifications reflected the different structure of
the Treasury capital requirement whereby securities haircuts are not
deducted but instead act as a benchmark with which liquid capital is
compared in determining capital adequacy. Nonetheless, the minimum
dollar capital levels are based on liquid capital after deducting
haircuts, which is comparable to the SEC's calculation of net capital.
The Treasury rule currently has a $5,000 minimum liquid capital
requirement for introducing brokers\10\ and a $25,000 minimum liquid
capital requirement for all other government securities brokers and
dealers\11\ subject to the rule.\12\ These levels are equivalent to SEC
requirements applicable to brokers and dealers operating under the
aggregate indebtedness capital computation prior to the amendments. The
Department believes that increasing the minimum levels is appropriate
in order to provide better protection to investors in the event of a
government securities broker's or dealer's insolvency and to reflect
the current realities of the government securities market. Accordingly,
the Department is proposing to increase the minimum capital
requirements for all government securities brokers and dealers subject
to the provisions of Sec. 402.2. The other capital requirement--that
liquid capital be at least equal to 120% of haircuts--would be
unaffected by this proposal.
---------------------------------------------------------------------------
\10\17 CFR Sec. 402.2(c).
\11\17 CFR Sec. 402.2(b).
\12\The Treasury capital rule requires that a government
securities broker or dealer maintain a capital level of the greater
of (i) 120% of total haircuts; or (ii) the minimum dollar capital
amounts, computed by deducting total haircuts from liquid capital,
applicable to its business.
---------------------------------------------------------------------------
The increases would be effected by creating four minimum capital
standards from the two current requirements, reflecting a better
differentiation of the risks related to a government securities
broker's or dealer's operations based on the type of government
securities business it conducts. The four proposed minimum capital
requirements would be as follows: (1) government securities brokers and
dealers that carry customer or broker-dealer accounts would be subject
to a minimum level of $250,000; (2) government securities brokers and
dealers that carry customer accounts but that operate under the
exemption provided by Rule 15c3-3(k)(2)(i)\13\ would have a minimum
requirement of $100,000; (3) government securities brokers that
introduce accounts on a fully disclosed basis and receive but do not
hold customer securities would be subject to a minimum requirement of
$50,000; and (4) introducing firms that never handle customer funds or
securities would be subject to a minimum requirement of $25,000.
---------------------------------------------------------------------------
\13\17 CFR Sec. 240.15c3-3(k)(2)(i).
---------------------------------------------------------------------------
These changes represent increases from the current minimum levels
of between $20,000 and $225,000, depending on the type of business
conducted by the government securities broker or dealer. The Department
is proposing fewer levels than the SEC has proposed since the
operations of government securities brokers and dealers do not
encompass all the activities available to diversified brokers or
dealers. The proposed Treasury minimum capital requirements adequately
reflect the different levels of custodial risk found in the various
types of government securities operations without creating significant
barriers to entry into the government securities market.
Any increase of capital requirements represents a potential burden
on regulated entities and on the market; this potential effect must be
weighed against the resulting benefits. Minimum capital levels provide
a cushion which is available to ease the liquidation or resolution of
troubled government securities brokers and dealers. This is a
fundamental element of customer protection. The increases that the
Department is proposing are modest relative to the size and complexity
of the government securities market and the operations of government
securities brokers and dealers.
When the SEC first proposed increasing broker's and dealer's
minimum capital levels, the SEC received comments opposing the
increased requirements. The SEC has also received additional negative
comments from introducing firms that would be affected by the
outstanding proposal to increase the minimum net capital level of such
brokers. However, the Department believes that its proposed increases
will have a very small impact on the firms, including introducing
brokers, subject to Sec. 402.2. An analysis of the government
securities brokers and dealers subject to the provisions of Sec. 402.2
indicates that, as of June 30, 1993, only seven, out of a total of 39,
would not be in compliance with the proposed, fully phased-in minimum
capital levels. Four of these firms would not be in compliance with the
new requirements for introducing firms, two would be out of compliance
with the $100,000 requirement and one would not meet the $250,000
level. The aggregate capital shortfall of these seven firms is less
than $200,000, with the largest individual deficit being less than
$50,000. To ease the compliance burden and to provide a period for the
affected government securities brokers and dealers to adjust, the
Department is proposing to add an Appendix E to Sec. 402.2 which would
phase in the increases over an 18-month time frame from the effective
date. This corresponds to the phase in time frames that were adopted
and proposed by the SEC.
B. Capital Withdrawal Requirements
The SEC promulgated final rules regarding the withdrawal of capital
by brokers and dealers.14 These rules require written notification
to the SEC and the broker's or dealer's designated examining authority
of certain capital withdrawals; add a restriction on the withdrawal of
capital based on the ratio of net capital to securities haircuts;
provide additional definitions; and permit the SEC, by order, to
prohibit the withdrawal of capital in certain described circumstances.
The Department is proposing to amend its capital withdrawal
provisions15 to include the notification requirements and certain
definitions but has determined not to propose the other two
requirements (as explained below).
---------------------------------------------------------------------------
\1\4See Supra note 4.
\1\517 CFR 202.2(i).
---------------------------------------------------------------------------
The notification provisions would require post-withdrawal
notification of certain significant capital withdrawals as well as
prior notification for larger withdrawals. Whether the notification
would be required prior to the withdrawal\16\ would be determined by
the aggregate size of total withdrawals relative to the government
securities broker's or dealer's excess liquid capital17 over a 30
calendar day period. Once aggregate withdrawals have exceeded 20
percent of a government securities broker's or dealer's excess liquid
capital in a 30 calendar day period, the government securities broker
or dealer will have two business days thereafter in which to file
notification of the withdrawals. Aggregate withdrawals in excess of 30
percent of excess liquid capital in any 30 calendar day period would
require notification two business days prior to such withdrawal. A
government securities broker or dealer may use the level of excess
liquid capital calculated in its most recent Form G-405, ``Report on
Finances and Operations of Government Securities Brokers and Dealers
(FOGS)'' filing,18 provided the firm assures itself that this
amount has not materially changed since that time. A government
securities broker or dealer is not required under the proposed rule to
provide notice to the Department, but instead notice would be sent to
the SEC and to the broker's or dealer's designated examining authority.
---------------------------------------------------------------------------
\1\6If prior notification is required, the post-withdrawal
notification must also be filed.
\1\7Excess liquid capital is that amount of liquid capital which
exceeds the greater of the amount of capital required under (i)
Sec. 402.2(a); or Sec. 402.2(b) or (c) as applicable.
\18\17 CFR 405.2 requires certain government securities brokers
and dealers to file monthly and quarterly financial reports.
---------------------------------------------------------------------------
The proposed rule would exclude the reporting of net withdrawals
that, in the aggregate, are less than $500,000 in any 30 calendar day
period or those that represent securities or commodities transactions
between affiliates. The exclusion for securities and commodities
transactions requires that the transactions be conducted in the
ordinary course of business and settled no later than two business days
after the date of the transaction. Discussions with SEC staff have
indicated that forward settling transactions between affiliates would
not be eligible for this exclusion.
Therefore, net losses on forward contracts or net payments on swap
agreements, if due an affiliate, could trigger the notice requirement.
The Department specifically requests comment as to whether this
exclusion should be broadened and if so how.
The only material difference between the notification rules as
promulgated by the SEC and as proposed by the Department is that the
SEC's rules use excess net capital, whereas the Department's rule uses
excess liquid capital. This variance conforms to the different
measurement standards used under each rule.
The Department believes that knowledge of significant capital
movements is an essential part of ensuring capital adequacy and
financial responsibility. The SEC's experience with the Drexel Burnham
Lambert Group, Inc.19 and the National Association of Securities
Dealer's experience with Drexel Burnham Lambert GSI making substantial
amounts of inadequately secured loans to its holding company indicate
the importance of prompt and accurate knowledge of the movement of
capital.
---------------------------------------------------------------------------
\1\9See 56 FR 9124, 9125 (March 5, 1991).
---------------------------------------------------------------------------
The Department does not plan to amend the current restrictions on
the withdrawal of capital to reflect the SEC's adoption of a new early
warning threshold derived from securities haircuts. It has been the
Department's belief, in establishing its capital standard, that a
capital cushion related to a firm's securities position risk is a
prudent approach to determining capital adequacy. The Treasury rule
currently places a restriction on any capital withdrawals that would
cause a government securities broker's or dealer's liquid capital to
fall below a level of 150% of haircuts. This standard is analogous to
the recently-adopted SEC requirement20 and, therefore, no further
action is required in order for the two rules to conform in this area.
---------------------------------------------------------------------------
\2\0 17 CFR Sec. 240.15c3-1(e)(2)(iii).
---------------------------------------------------------------------------
The third element of the SEC's capital withdrawal rule is a
provision giving the SEC authority to prohibit a withdrawal of capital
by a broker or dealer, for up to 20 business days, if the withdrawal
would exceed 30% of excess net capital and is deemed detrimental to the
financial integrity of the broker or dealer or may unduly jeopardize
the broker's or dealer's ability to repay its creditors.\21\ The SEC
intends that this provision be used in emergency situations and the
rule provides for an expeditious review of the SEC's action. For the
reasons that follow, the Department has determined that a similar
provision should not be incorporated in the Treasury capital rule.
---------------------------------------------------------------------------
\2\117 CFR Sec. 240.15c3-1(e)(3).
---------------------------------------------------------------------------
First, while the SEC has an existing process for holding hearings,
the Department has no comparable structure and therefore the
implementation of the post-order process would require the Department
to develop additional administrative regulations and procedures.
In addition, the Department's decision not to enact a corresponding
order provision is based on the fact that the SEC has existing
temporary cease and desist authority. The SEC was granted this
authority prusuant to the Securities Enforcement Remedies and Penny
Stock Reform Act of 1990 (Pub. L. 101-429), Section 203 of which added
Section 21C to the Securities Exchange Act of 1934.\22\ Paragraph (c)
of Section 21C provides the SEC with authority to issue a temporary
cease and desist order in the event ``that the alleged violation or
threatened violation specified in the notice * * * is likely to result
in significant dissipation or conversion of assets, significant harm to
investors, or substantial harm to the public interest,* * *.''23 A
temporary cease and desist order, while different from a capital
withdrawal order, serves a similar purpose. Both are emergency remedies
that can be expeditiously applied. Prior to issuing a temporary cease
and desist order, the SEC must provide notice and opportunity for a
hearing unless the SEC ``* * * determines that notice and hearing prior
to entry would be impracticable or contrary to the public
interest.''24
---------------------------------------------------------------------------
\2\215 U.S.C. 78u-3.
\2\315 U.S.C. 78u-3(c)(1).
\2\4Id.
---------------------------------------------------------------------------
The more limited scope of the temporary cease and desist order is
not problematic to the Department because the authority provides the
SEC with the ability to issue such an order not only if a rule
violation has occurred but also if one is threatened. Since the SEC is
the appropriate regulatory agency for government securities brokers or
dealers subject to Sec. 402.2, an impending violation of a Sec. 402.2
requirement would be cause for the issuance of a temporary cease and
desist order. The SEC would still be able to anticipate sizeable
capital withdrawals that might result in violations of Sec. 402.2,
since it would receive the notifications required by the proposed rule,
as described earlier. The SEC would only be prevented from issuing a
temporary cease and desist order in the circumstance where a government
securities broker or dealer would remain in capital compliance and
would not breach the rule's early warning levels as a result of the
withdrawal. Assuming the adequacy of the current capital standards and
withdrawal restrictions, it is difficult to foresee a circumstance in
which issuance of a capital withdrawal order would be desirable when a
government securities broker or dealer would continue to remain in
capital compliance. For these reasons, the Department believes that, in
lieu of developing a separate capital withdrawal order provision, it
should rely on the SEC's existing cease and desist order authority.
Consistent with this approach, the Department also is excluding
this provision of Rule 15c3-1 from the compliance requirements for
those government securities brokers and dealers registered under
Section 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o-5)
that are subject to the SEC capital rule (i.e., interdealer brokers
operating under Sec. 402.1(e) and futures commission merchants).
In amending the withdrawal provisions, the Department has
restructured certain related definitions of terms into a Miscellaneous
Provisions paragraph (i)(3) and has added a description of what
constitutes an advance or loan of liquid capital, which is one
component of the restricted activities.
C. Conforming Change
Due to the revisions of the minimum capital requirements under both
the SEC and Treasury capital rules, a conforming change is required in
the recordkeeping provisions of Part 404. Specifically, paragraph
404.2(a)(4) contains references to the minimum dollar capital amounts
required of government securities clearing brokers and dealers. The
Department is proposing to revise these references in accordance with
the proposed fully phased-in minimum capital level of $250,000 required
of clearing firms.
III. Special Analyses
Based on the very limited impact of the proposed amendments, it is
the Department's view that the proposed regulations are not a
``significant regulatory action'' for the purposes of Executive Order
12866.
In addition, pursuant to the Regulatory Flexibility Act (5 U.S.C.
601, et seq.), it is hereby certified that the proposed regulations, if
adopted, will not have a significant economic impact on a substantial
number of small entities. As of June 30, 1993, only 39 government
securities brokers and dealers were subject to the capital requirements
of Sec. 402.2. Of these, only 11 firms would be considered small
entities. Accordingly, the relatively low dollar value of the proposed
capital increase and the small number of firms affected indicates that
there is not a significant impact. As a result, a regulatory
flexibility analysis is not required.
The Paperwork Reduction Act (44 U.S.C. 3504(h)) requires that
collections of information prescribed in proposed rules be submitted to
the Office of Management and Budget for review and approval. In
accordance with this requirement, the Department has submitted the
collection of information contained in this notice of proposed
rulemaking for review. Comments on the collection of information should
be directed to the Office of Information and Regulatory Affairs, Office
of Management and Budget, Attention: Desk Officer for Department of the
Treasury, Washington, D.C. 20503; and to the Government Securities
Regulations Staff, Bureau of the Public Debt, at the address specified
at the beginning of this document.
The collections of information in this proposed rule are contained
in proposed Sec. 402.2(i)(1). This paragraph would require a government
securities broker or dealer, subject to the requirements of Sec. 402.2,
to provide written notification of certain specified withdrawals of
capital. This collection of information is intended to allow the SEC
and the designated examining authority of the firm to better monitor
the government securities broker's or dealer's operations and financial
condition. The rule applies primarily to larger government securities
brokers and dealers since aggregate withdrawals of less than $500,000
are excluded from the requirement.
Estimated total annual reporting burden: 5 hours
Estimated average annual burden per respondent: 1 hour
Estimated number of respondents: 5
Estimated annual frequency of response: Twice
List of Subjects
17 CFR Part 402
Brokers, Government securities.
17 CFR Part 404
Banks, banking, Brokers, Government securities, Reporting and
recordkeeping requirements.
For the reasons set out in the Preamble, it is proposed to amend 17
CFR Parts 402 and 404 as follows:
PART 402--FINANCIAL RESPONSIBILITY
1. The authority citation for Part 402 is amended to read as
follows:
Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),
Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,
107 Stat. 2344 (15 U.S.C. 78o-5(b)(1)(A), (b)(4)).
2. Section 402.1 is amended by revising paragraphs (d) and (e)(1)
to read as follows:
Sec. 402.1 Application of part to registered brokers and dealers and
financial institutions; special rules for futures commission merchants
and government securities interdealer brokers; effective date.
* * * * *
(d) Futures commission merchants. A futures commission merchant
subject to Sec. 1.17 of this title that is a government securities
broker or dealer but is not a registered broker or dealer shall not be
subject to the limitations of Sec. 402.2 but rather to the capital
requirement of Sec. 1.17 or Sec. 240.15c3-1, except paragraph (e)(3)
thereof, of this title, whichever is greater.
(e) Government securities interdealer broker. (1) A government
securities interdealer broker, as defined in paragraph (e)(2) of this
section, may, with the prior written consent of the Secretary, elect
not to be subject to the limitations of Sec. 402.2 but rather to be
subject to the requirements of Sec. 240.15c3-1 of this title (SEC Rule
15c3-1), except paragraphs (c)(2)(ix) and (e)(3) thereof, and
paragraphs (e) (3) through (8) of this section by filing such election
in writing with its designated examining authority. A government
securities interdealer broker may not revoke such election without the
written consent of its designated examining authority.
* * * * *
3. Section 402.2 is amended by revising paragraphs (b), (c) and (i)
to read as follows:
Sec. 402.2 Capital requirements for registered government securities
brokers or dealers.
* * * * *
(b)(1) Minimum liquid capital for brokers or dealers that carry
customer accounts. Notwithstanding the provisions of paragraph (a) of
this section, a government securities broker or dealer that carries
customer or broker or dealer accounts and receives or holds funds or
securities for those persons within the meaning of Sec. 240.15c3-
1(a)(2)(i) of this title, shall have and maintain liquid capital in an
amount not less than $250,000 (see paragraph (a) of Appendix E for
temporary minimum requirements), after deducting total haircuts as
defined in paragraph (g) of this section.
(2) Minimum liquid capital for brokers or dealers that carry
customer accounts, but do not generally hold customer funds or
securities. Notwithstanding the provisions of paragraphs (a) and (b)(1)
of this section, a government securities broker or dealer that carries
customer or broker or dealer accounts and is exempt from the provisions
of Sec. 240.15c3-3 of this title, as made applicable to government
securities brokers and dealers by Sec. 403.4 of this chapter, pursuant
to paragraph (k)(2)(i) thereof (17 CFR 240.15c3-3(k)(2)(i)), shall have
and maintain liquid capital in an amount not less than $100,000 (see
paragraph (b) of Appendix E for temporary minimum requirements), after
deducting total haircuts as defined in paragraph (g) of this section.
(c)(1) Minimum liquid capital for introducing brokers that receive
securities. Notwithstanding the provisions of paragraphs (a) and (b) of
this section, a government securities broker or dealer that introduces
on a fully disclosed basis transactions and accounts of customers to
another registered or noticed government securities broker or dealer
but does not receive, directly or indirectly, funds from or for, or owe
funds to, customers, and does not carry the accounts of, or for,
customers shall have and maintain liquid capital in an amount not less
than $50,000 (see paragraph (c) of Appendix E for temporary minimum
requirements), after deducting total haircuts as defined in paragraph
(g) of this section. A government securities broker or dealer operating
pursuant to this paragraph (c)(1) may receive, but shall not hold
customer or other broker or dealer securities.
(2) Minimum liquid capital for introducing brokers that do not
receive or handle customer funds or securities. Notwithstanding the
provisions of paragraphs (a), (b) and (c)(1) of this section, a
government securities broker or dealer that does not receive, directly
or indirectly, or hold funds or securities for, or owe funds or
securities to, customers, and does not carry accounts of, or for,
customers and that effects ten or fewer transactions in securities in
any one calendar year for its own investment account shall have and
maintain liquid capital in an amount not less than $25,000 (see
paragraph (d) of Appendix E for temporary minimum requirements), after
deducting total haircuts as defined in paragraph (g) of this section.
* * * * *
(i) Provisions relating to the withdrawal of equity capital.
(1) Notice Provisions. No equity capital of the government
securities broker or dealer or a subsidiary or affiliate consolidated
pursuant to Appendix C to this section, Sec. 402.2c, may be withdrawn
by action of a stockholder or partner, or by redemption or repurchase
of shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, nor may any unsecured
advance or loan be made to a stockholder, partner, sole proprietor,
employee or affiliate without providing written notice, given in
accordance with paragraph (i)(1)(iv) of this section, when specified in
paragraphs (i)(1) (i) and (ii) of this section:
(i) Two business days prior to any withdrawals, advances or loans
if those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 30 percent of the government
securities broker's or dealer's excess liquid capital. A government
securities broker or dealer, in an emergency situation, may make
withdrawals, advances or loans that on a net basis exceed 30 percent of
the government securities broker's or dealer's excess liquid capital in
any 30 calendar day period without giving the advance notice required
by this paragraph, with the prior approval of its designated examining
authority. When a government securities broker or dealer makes a
withdrawal with the consent of its designated examining authority, it
shall in any event comply with paragraph (i)(1)(ii) of this section;
and
(ii) Two business days after any withdrawals, advances or loans if
those withdrawals, advances or loans on a net basis exceed in the
aggregate in any 30 calendar day period, 20 percent of the government
securities broker's or dealer's excess liquid capital.
(iii) This paragraph (i)(1) of this section does not apply to:
(A) Securities or commodities transactions in the ordinary course
of business between a government securities broker or dealer and an
affiliate where the government securities broker or dealer makes
payment to or on behalf of such affiliate for such transaction and then
receives payment from such affiliate for the securities or commodities
transaction within two business days from the date of the transaction;
or
(B) Withdrawals, advances or loans which in the aggregate in any
such 30 calendar day period, on a net basis, equal $500,000 or less.
(iv) Each required notice shall be effective when received by the
Commission in Washington, D.C., the regional or district office of the
Commission for the area in which the government securities broker or
dealer has its principal place of business, and the government
securities broker's or dealer's designated examining authority.
(2) Withdrawal Limitations. No equity capital of the government
securities broker or dealer or a subsidiary or affiliate consolidated
pursuant to Appendix C to this section, Sec. 402.2c, may be withdrawn
by action of a stockholder or a partner, or by redemption or repurchase
of shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, nor may any unsecured
advance or loan be made to a stockholder, partner, sole proprietor,
employee or affiliate if, after giving effect thereto and to any other
such withdrawals, advances or loans and any Payments of Payment
Obligations (as defined in Sec. 240.15c3-1d of this title, Appendix D
to SEC Rule 15c3-1, modified as provided in Appendix D to this section,
Sec. 402.2d) under satisfactory subordination agreements which are
scheduled to occur within 180 calendar days following such withdrawal,
advance or loan, either:
(i) The ratio of liquid capital to total haircuts, determined as
provided in Sec. 402.2, would be less than 150 percent; or
(ii) Liquid capital minus total haircuts would be less than 120
percent of the minimum capital required by Sec. 402.2(b) or
Sec. 402.2(c) as applicable; or
(iii) In the case of any government securities broker or dealer
included in such consolidation, the total outstanding principal amounts
of satisfactory subordination agreements of the government securities
broker or dealer (other than such agreements which qualify as equity
under Sec. 240.15c3-1(d) of this title) would exceed 70% of the debt-
equity total as defined in such Sec. 240.15c3-1(d).
(3) Miscellaneous Provisions. (i) Excess liquid capital is that
amount in excess of the amount required by the greater of Sec. 402.2(a)
or, Secs. 402.2 (b) or (c), as applicable. For the purposes of
paragraphs (i)(1) and (i)(2) of this section, a government securities
broker or dealer may use the amount of excess liquid capital, liquid
capital and total haircuts reported in its most recently required filed
Form G-405 for the purposes of calculating the effect of a projected
withdrawal, advance or loan relative to excess liquid capital or total
haircuts. The government securities broker or dealer must assure itself
that the excess liquid capital, liquid capital or the total haircuts
reported on the most recently required filed Form G-405 have not
materially changed since the time such report was filed.
(ii) The term equity capital includes capital contributions by
partners, par or stated value of capital stock, paid-in capital in
excess of par, retained earnings or other capital accounts. The term
equity capital does not include securities in the securities accounts
of partners and balances in limited partners' capital accounts in
excess of their stated capital contributions.
(iii) Paragraphs (i)(1) and (i)(2) of this section shall not
preclude a government securities broker or dealer from making required
tax payments or preclude the payment to partners of reasonable
compensation, and such payments shall not be included in the
calculation of withdrawals, advances or loans for purposes of
paragraphs (i)(1) and (i)(2) of this section.
(iv) For the purposes of this subsection (i), any transaction
between a government securities broker or dealer and a stockholder,
partner, sole proprietor, employee or affiliate that results in a
diminution of the government securities broker's or dealer's liquid
capital shall be deemed to be an advance or loan of liquid capital.
* * * * *
4. By adding Sec. 402.2e (Appendix E) as follows:
Sec. 402.2e Appendix E--Temporary Minimum Requirements.
(a) A government securities broker or dealer that falls within the
provisions of paragraph (b)(1) of Sec. 402.2 shall maintain not less
than the greater of: (i) The amount of liquid capital required under
paragraph 402.2(a); or (ii) liquid capital, after deducting total
haircuts, of:
(1) $25,000 through June 30, 1994;
(2) $100,000 from July 1, 1994 through December 31, 1994;
(3) $175,000 from January 1, 1995 through June 30, 1995; and
(4) $250,000 from July 1, 1995 and thereafter.
(b) A government securities broker or dealer that falls within the
provisions of paragraph (b)(2) of Sec. 402.2 shall maintain not less
than the greater of: (i) The amount of liquid capital required under
paragraph 402.2(a); or (ii) liquid capital, after deducting total
haircuts, of:
(1) $25,000 through June 30, 1994;
(2) $50,000 from July 1, 1994 through December 31, 1994;
(3) $75,000 from January 1, 1995 through June 30, 1995; and
(4) $100,000 from July 1, 1995 and thereafter.
(c) A government securities broker or dealer that falls within the
provisions of paragraph (c)(1) of Sec. 402.2 shall maintain not less
than the greater of: (i) The amount of liquid capital required under
paragraph 402.2(a); or (ii) liquid capital, after deducting total
haircuts, of:
(1) $5,000 through June 30, 1994;
(2) $20,000 from July 1, 1994 through December 31, 1994;
(3) $35,000 from January 1, 1995 through June 30, 1995; and
(4) $50,000 from July 1, 1995 and thereafter.
(d) A government securities broker or dealer that falls within the
provisions of paragraph (c)(2) of Sec. 402.2 shall maintain not less
than the greater of: (i) The amount of liquid capital required under
paragraph 402.2(a); or (ii) liquid capital, after deducting total
haircuts, of:
(1) $5,000 through June 30, 1994;
(2) $11,666 from July 1, 1994 through December 31, 1994;
(3) $18,333 from January 1, 1995 through June 30, 1995; and
(4) $25,000 from July 1, 1995 and thereafter.
PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS
5. The authority citation for Part 404 is revised to read as
follows:
Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),
Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,
107 Stat. 2344 (15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(4)).
6. Section 404.2 is amended by revising paragraph (a)(4) to read as
follows:
Sec. 404.2 Records to be made and kept current by registered
government securities brokers and dealers; records of non-resident
registered government securities brokers and dealers.
(a) * * *
(4) Paragraph 240.17a-3(b)(1) is modified to read as follows:
``(1) This section shall not be deemed to require a government
securities broker or dealer registered pursuant to Section
15C(a)(1)(A) of the Act (15 U.S.C. 78o-5(a)(1)(A)) to make or keep
such records of transactions cleared for such government securities
broker or dealer as are customarily made and kept by a clearing
broker or dealer pursuant to the requirements of Secs. 240.17a-3 and
240.17a-4: Provided, that the clearing broker or dealer has and
maintains net capital of not less than $250,000 (or, in the case of
a clearing broker or dealer that is a registered government
securities broker or dealer, liquid capital less total haircuts,
determined as provided in Sec. 402.2 of this title, of not less than
$250,000) and is otherwise in compliance with Sec. 240.15c3-1,
Sec. 402.2 of this title, or the capital rules of the exchange of
which such clearing broker or dealer is a member if the members of
such exchange are exempt from Sec. 240.15c3-1 by paragraph (b)(2)
thereof.''.
* * * * *
Dated: May 27, 1994.
Frank N. Newman,
Under Secretary for Domestic Finance.
[FR Doc. 94-15099 Filed 6-21-94; 8:45 am]
BILLING CODE 4810-39-W
