[Federal Register Volume 59, Number 219 (Tuesday, November 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28041]
[[Page Unknown]]
[Federal Register: November 15, 1994]
VOL. 59, NO. 219
Tuesday, November 15, 1994
DEPARTMENT OF THE TREASURY
Office of the Under Secretary for Domestic Finance
17 CFR Parts 404 and 405
RIN 1505-AA47
Amendments to Regulations for the Government Securities Act of
1986
AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.
ACTION: Proposed rule.
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SUMMARY: The Department of the Treasury (``Department'' or
``Treasury'') is publishing for comment proposed amendments to the
recordkeeping rules in Part 404 and the reporting rules in Part 405 of
the regulations issued under the Government Securities Act of 1986
(``GSA''). The proposed recordkeeping amendment would require entities
registered with the Securities and Exchange Commission (``SEC'') as
specialized government securities brokers and dealers (``registered
government securities brokers and dealers'') under Section 15C(a)(1)(A)
of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15
U.S.C. 78o-5(a)(1)(A)) to maintain and preserve records concerning the
financial and securities activities of affiliates whose business
activities are reasonably likely to have a material impact on the
financial or operational condition of the registered government
securities brokers and dealers. The proposed reporting amendment would
require registered government securities brokers and dealers to file
with the SEC quarterly summary reports of the information required to
be maintained and preserved by the proposed recordkeeping amendment.
The proposed amendments (``risk assessment rules'') parallel the SEC's
final temporary risk assessment rules applicable to brokers and dealers
that conduct general or municipal securities businesses (``registered
brokers and dealers''). The Department's risk assessment rules are
being proposed pursuant to the authority granted to the Department by
the Market Reform Act of 1990 (the ``Reform Act'') and are intended to
provide regulators with access to information concerning the financial
risk posed to registered government securities brokers and dealers--and
to the securities markets as a whole--as a result of certain financial
and securities activities conducted by affiliates within holding
company structures.
DATES: Comments must be submitted on or before January 17, 1995.
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: Kerry Lanham (Government Securities
Specialist) or Lee Grandy (Government Securities Specialist) at 202-
219-3632. (TDD for hearing impaired: 202-219-3988.)
SUPPLEMENTARY INFORMATION:
I. Background
In response to the stock market disruption of October 1987, the
bankruptcy of Drexel Burnham Lambert Group, Inc. (Drexel) in February
1990, and other developments in the securities markets, Congress passed
the Reform Act in September 1990.\1\ The Reform Act authorized the SEC
to halt trading of registered securities\2\ during extremely volatile
conditions (``circuit breakers''), facilitate coordinated clearing
mechanisms, develop regulations for large trader reporting, and
promulgate risk assessment rules for broker-dealer holding company
structures. The Reform Act also contained a ``conforming'' amendment to
Section 15C of the Exchange Act authorizing Treasury to promulgate risk
assessment rules applicable to registered government securities brokers
and dealers;\3\ Treasury's risk assessment authority paralleled SEC
risk assessment authority. The Reform Act authorized Treasury to
require registered government securities brokers and dealers to
maintain and report information on the financial and securities
activities of certain affiliates that had the potential to pose
material amounts of risk to the brokers and dealers. The Reform Act did
not authorize Treasury to require financial institutions that have
filed notice (or are required to file notice) as government securities
brokers and dealers to maintain and report risk assessment information,
although the registered government securities brokers and dealers that
would be required to follow the rules would have to maintain records
and submit reports pertaining to the financial and securities
activities of certain affiliates that are financial institutions.
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\1\Pub. L. 101-432, 104 Stat. 963 (1990).
\2\The SEC has authority to halt trading in securities that are
registered under the Securities Act of 1933. U.S. government and
other ``exempt'' securities are not included in the definition of
registered securities under the federal securities laws.
\3\15 U.S.C. 78o-5(b)(2).
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The Drexel failure demonstrated that financial difficulties or
liquidity problems of parent companies or affiliates of brokers and
dealers could have a material and adverse effect on brokers and dealers
themselves; risk assessment authority was therefore intended to help
regulators monitor such developments. The primary focus of the risk
assessment authority was the financial health of large holding
companies whose potential failures pose risks to the affiliated brokers
and dealers, as well as to the securities markets and the financial
system as a whole. The Department believes that these proposed rules
will enhance the safety of the government securities market and provide
for more effective regulatory oversight.
The legislative history\4\ of the Reform Act indicated that risk
assessment rules would require information concerning several
particular types of potentially risky financial and securities
activities conducted by affiliates of brokers and dealers, including
bridge loans, interest rate swaps, foreign currency transactions, other
derivatives (e.g., forwards and futures), and real estate developments.
Off-balance sheet derivatives such as interest rate swaps and foreign
currency transactions were identified as particularly important
categories for risk assessment rules given their high growth rates and
the limited public information available regarding their magnitude and
use.
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\4\H.R. Rep. No. 101-524 and 101-477, 101st Cong., 2nd Sess.
(1990).
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Today, many of these off-balance sheet transactions are conducted
by holding company affiliates of brokers and dealers. In numerous
instances, the activities of these affiliates are not regulated by
securities or financial institution regulatory agencies. Affiliates
conducting these unregulated activities can attain a degree of leverage
and assume credit risks that brokers and dealers, which are subject to
the capital and customer protection rules of the Department and the
SEC, cannot attain. The business activities of these affiliates could
have significant and adverse effects on the financial health of brokers
and dealers. For example, large losses at the parent company level
might cause the credit rating of the parent to decline, which could
cause liquidity problems at the broker or dealer. Thus, the Reform Act
specifically provided the SEC, which was already responsible for the
examination and enforcement of all brokers and dealers (banks excluded)
under the Exchange Act, with direct access to information concerning
the business activities of brokers' and dealers' affiliates that are
outside of SEC oversight. The Reform Act did not, however, provide the
SEC with any new regulatory authority over the affiliates themselves.
In September 1991, the SEC published for comment proposed temporary
Rules 17h-1T and 17h-2T, which together with proposed Form 17-H, would
establish a risk assessment recordkeeping and reporting system for
registered brokers and dealers.5 In response to the request for
comments, the SEC received 63 letters addressing the proposed temporary
rules. After reviewing the comments it received and making
modifications, the SEC issued in July 1992 final temporary risk
assessment rules.6 Rule 17h-1T7 is a recordkeeping rule
identifying and describing the records that registered brokers and
dealers are required to maintain and preserve. Rule 17h-2T8 sets
forth requirements for registered brokers and dealers to submit
quarterly reports summarizing the information required to be maintained
under Rule 17h-1T. The preamble of the SEC's final temporary rules
stated that the SEC staff would issue for public comment a study
evaluating the effectiveness of the SEC's risk assessment rules within
90 days after the rules have been fully operative for two years. At
that time, the SEC will consider what, if any, modifications to its
rules would be appropriate. Treasury will be interested in the SEC's
findings to the extent that such findings are germane to Treasury risk
assessment rules.
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\5\Securities Exchange Act Release No. 29635 (August 30, 1991),
56 FR 44014 (September 6, 1991).
\6\Securities Exchange Act Release No. 30929 (July 16, 1992), 57
FR 32159 (July 21, 1992).
\7\ 17 CFR 240.17h-1T.
\8\ 17 CFR 240.17h-2T.
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Treasury's ability to issue proposed risk assessment rules was
precluded by the expiration of its rulemaking authority under the GSA
on October 1, 1991. Treasury's authority was not renewed until December
17, 1993 (107 Stat. 2344, Pub. L. 103-202).
The Reform Act's conforming amendment, under which Treasury was
authorized to promulgate risk assessment rules, specifically mandated
that, with respect to ``associated persons''9 of registered
government securities brokers and dealers that are also associated
persons of registered brokers and dealers subject to SEC rules,
Treasury rules should conform to the greatest extent practicable to the
rules established by the SEC. In view of this mandate and the
Department's understanding that many registered government securities
brokers and dealers have holding company structures similar to those of
many registered brokers and dealers, the Department has determined that
the SEC's rules should serve as a foundation for Treasury risk
assessment rules, and Treasury risk assessment rules should be
companion rules to the SEC rules.
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\9\ The term ``affiliate'' is not used in the Reform Act,
although it is used extensively in the legislative history. The term
used in the Reform Act is ``associated persons,'' the definition of
which is based on Section 3(a)(18) of the Exchange Act (15 U.S.C.
78c(a)(18)), except that natural persons are not included for
purposes of the risk assessment provisions.
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The Commodity Futures Trading Commission (``CFTC'') was also
authorized to promulgate risk assessment rules pursuant to the Futures
Trading Practices Act of 1992.10 The CFTC published its proposed
risk assessment rules in March 1994.11 As proposed, the rules
would require that registered futures commission merchants (``FCMs'')
maintain information and submit reports regarding the activities of
affiliates whose activities are reasonably likely to have a material
impact on the financial or operational condition of the FCMs.
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\1\0 Pub. L. 102-546, 106 Stat. 3590 (1992).
\1\1 59 FR 9689 (March 1, 1994).
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II. Analysis
A. Reporting and Recordkeeping Requirements
The Department's proposed risk assessment rules incorporate the
SEC's final temporary risk assessment Rules 17h-1T and 17h-2T, with
minor modifications that reflect both the specialized activities of
registered government securities brokers and dealers and the
Department's analysis of the SEC's interpretive letter to the
Securities Industry Association (``SIA'') in September 1993.12
Under the Department's proposed amendments, two general categories of
records would be required: (1) Information concerning the holding
company organization, risk management policies, and material legal
proceedings; and (2) financial and securities information pertinent to
assessing risk in the holding company system (e.g., consolidating and
consolidated financial statements and positions in various financial
instruments). The information required to be maintained and preserved
pursuant to the proposed recordkeeping amendment would be subject to
routine inspection by the SEC. Under the proposed reporting amendment,
registered government securities brokers and dealers would be required
to file with the SEC quarterly summaries of the information required to
be maintained under the proposed recordkeeping amendment. These
quarterly summaries would be required to be filed on the SEC's Form 17-
H.
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\1\2 See letter from Michael Macchiaroli, Associate Director,
Division of Market Regulation, Securities and Exchange Commission to
Douglas G. Preston, Esq., Securities Industry Association (September
20, 1993). [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) 76,696.
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The information required to be maintained and reported by the firms
pertains only to the firms' ``Material Associated Persons'' (``MAPs'').
The Reform Act did not define MAPs. However, the legislative history
accompanying the statute specified a number of factors that should be
considered when determining which affiliates (associated persons) might
have a ``material'' impact on the financial or operational condition of
brokers and dealers. These factors have been incorporated into
Sec. 17h-1T(a)(2), thereby providing guidelines for determining which
affiliates of the brokers and dealers are MAPs. The initial designation
of MAPs would be made by registered government securities brokers and
dealers.
The term ``associated persons,'' as explained in the legislative
history, is based on the definition at 3(a)(18) of the Exchange Act (15
U.S.C. 78c(a)(18)), except that natural persons are excluded for the
purposes of the risk assessment rules (which automatically excludes
natural persons from the definition of MAPs). Consistent with the SEC
approach,13 partnerships would not be treated as natural persons
and, depending on the circumstances, could be deemed to be MAPs of the
registered government securities broker or dealer. Subchapter S
corporations could be treated as natural persons for purposes of the
proposed amendments if the Subchapter S corporation is owned by one
natural person.
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\1\3See supra note 12.
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Note that, with respect to the Department's proposed risk
assessment rules, the definition of ``associated persons'' differs from
the definition of that term as specified in Sec. 400.3 of the GSA
regulations. The term as used in Sec. 400.3 specifically applies to
certain natural persons who are associated with government securities
brokers or dealers. The following general categories of information
would be required to be maintained and reported.
1. Organization, Risk Management Procedures, and Material Legal
Proceedings
Paragraphs (a)(1)(i) through (a)(1)(iii) of SEC Rule 17h-1T, as
made applicable by the Department's proposed recordkeeping amendment,
would require registered government securities brokers and dealers to
maintain an organizational chart of the holding company structure,
written risk management policies and procedures, and information on
material legal proceedings. The organizational chart would show the
registered government securities broker or dealer and all of its
associated persons, including a designation of which associated persons
are MAPs. Although it would be preferable that this information be
maintained in a chart format, a registered government securities broker
or dealer would be able to maintain and report a description of the
organizational structure that sets forth the relationships among the
registered government securities broker or dealer and its associated
persons, including an indication of which associated persons are deemed
to be MAPs. This information would be included in the first filing of
Form 17-H by the registered government securities broker or dealer and
each year-end filing. Quarterly updates would be required only when a
material change in organizational structure has occurred.
Registered government securities brokers and dealers would also be
required to keep a record of any existing written policies, procedures
or systems concerning their: Methods for monitoring the financial and
operational risks to them as a result of activities of their associated
persons, financing and capital adequacy, and trading positions and
risks. A registered government securities broker or dealer is not
required to create such policies or procedures if none exist. Thus, the
firm would be required to submit with Form 17-H either copies of the
policies (if the firm operates under written policies), a written
summary of such policies (if the firm operates under informal or oral
policies), or a written statement explaining the absence of such
policies. This information would be filed only with the firm's first
filing of Form 17-H. Quarterly updates would be required when
significant changes occur.
Further, registered government securities brokers and dealers would
be required to keep records of all pending legal or arbitration
proceedings to which the registered government securities broker or
dealer or a MAP is a party, or to which any of its property is subject,
as would be required to be disclosed by all firms under generally
accepted accounting principles (``GAAP'').14 The information would
be maintained and reported on a consolidated basis. The consolidation
would be through the highest level holding company that is a MAP--in
most cases the ultimate parent company. The information would be
reported with the firm's first filing of Form 17-H. Quarterly updates
would be filed when material changes occur.
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\1\4Based on contingencies disclosure requirements in Statement
of Financial Accounting Standards No. 5 of the Financial Accounting
Standards Board.
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2. Financial and Securities Information
Paragraphs (a)(1)(iv) and (a)(1)(v) of SEC Rule 17h-1T, as modified
by the Department's proposed recordkeeping amendment, would require
registered government securities brokers and dealers to maintain and
preserve quarterly consolidated and consolidating balance sheets and
income statements, and quarterly consolidated cash flow statements for
the registered government securities broker or dealer and the highest
level holding company that is a MAP. The financial statements would
have to be prepared in accordance with GAAP and would require the
inclusion of notes to the financial statements (although notes would
not have to be provided for the consolidating statements). The
financial statements could be unaudited (unless the firm already
produces audited statements for other purposes). In instances where the
registered government securities broker or dealer would maintain and
file reports that a foreign affiliate files with certain foreign
regulators (see later section on MAPs that are subject to the
supervision of a foreign financial regulatory authority), a short
narrative explaining the material differences between GAAP and foreign
accounting or reporting conventions would be required. A quantitative
reconciliation would not be required.
In order to maintain consistency between the Department's and the
SEC's rules, registered government securities brokers and dealers would
have the option to maintain and report the consolidating income
statements required by paragraph (a)(1)(v) of SEC Rule 17h-1T (as
modified by the Department's proposed recordkeeping amendment) and Part
I, Item 4 of Form 17-H, respectively, on a cumulative year-to-date
basis rather than on a quarterly basis.15 In preparing the
consolidating balance sheets and income statements for recordkeeping
and reporting purposes, registered government securities brokers and
dealers would be required to provide separate entries for each MAP.
Registered government securities brokers and dealers would be permitted
to combine non-MAP affiliates' information in a single category in the
consolidating statements.
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\1\5To reduce the burden on the industry, the staff of the SEC
provided registered brokers and dealers with this option in its
letter to the SIA. See supra note 12.
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Paragraph (a)(1)(vi) of SEC Rule 17h-1T, as modified by the
Department's proposed recordkeeping amendment, and Part II, Section I
of Form 17-H would require registered government securities brokers and
dealers to maintain and report aggregate, gross long and short
securities and commodities positions held by each MAP at quarter-end
(and month-end if greater than quarter-end). Registered government
securities brokers and dealers would also be required to provide a
separate listing of each single unhedged16 securities or
commodities position, other than U.S. Treasury securities, held by each
MAP that exceeds the ``Materiality Threshold'' at any month-end.
Materiality Threshold is defined in Sec. 17h-1T(a)(4), as modified by
the Department's proposed recordkeeping amendment (which largely
differentiates between the Department's and the SEC's capital standards
terminology).
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\1\6In its letter to the SIA (see supra note 12), the staff of
the SEC stated that the determination of whether a position is
unhedged should be made by the broker or dealer and that the broker
or dealer should consider only existing positions. The Department
would adopt the same policy.
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Paragraph (a)(1)(vii) of SEC Rule 17h-1T, as made applicable by the
Department's proposed recordkeeping amendment, and Part II, Section II
of Form 17-H would require registered government securities brokers and
dealers to maintain and report data on certain financial instruments
with off-balance sheet risk and concentrations of credit risk. The
Department believes that capturing such information, including data on
derivative instruments that are not currently subject to regulation,
would enable regulators to better understand the use, scope, and
potential risk of these instruments. Part II, Section II of Form 17-H
provides specific line items for the information and would be reported
quarterly by the firms. The line items include gross long and short
positions in when-issued securities, written stock options, futures,
forwards, interest rate swaps, other swaps, foreign exchange,
commodities, loan commitments, commercial letters of credit, assets
sold with recourse, and a summary of delta or similar analysis if
available.
Part II, Section II of the SEC's Form 17-H was developed based on
the SEC's review of financial instruments with ``off-balance sheet
risk'' and ``concentrations of credit risk,'' as those terms are used
in Statement of Financial Accounting Standards No. 105 (``SFAS 105'')
of the Financial Accounting Standards Board. The SEC noted in the
preamble to its final temporary rules17 that it received several
comment letters regarding the disclosure of SFAS 105-type information
on a quarterly basis (SFAS 105 requires only annual disclosure). In its
preamble, the SEC stated that it ``recognizes that certain additional
burdens will be created by the imposition of quarterly SFAS 105
disclosure; however, the market for these types of instruments is
growing, and much of this activity is being booked outside of the
registered broker-dealer.'' The Department endorses the SEC's view that
such data, though lengthy and somewhat burdensome, is essential to
carrying out the risk assessment provisions of the Reform Act. Further,
as discussed below in the ``Scope of Proposed Risk Assessment Rules''
section, exemptions and special provisions will obviate quarterly
submissions of Form 17-H for most registered government securities
brokers and dealers.
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\1\7See supra note 6, p. 32166.
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Paragraphs (a)(1) (viii) through (x) of SEC Rule 17h-1T, as made
applicable by the Department's proposed recordkeeping amendment, and
Part II, Sections III through V of Form 17-H would require registered
government securities brokers and dealers to maintain and report data
on bridge loans and other material unsecured extensions of credit by
each MAP, funding sources for the registered government securities
broker or dealer and each MAP, and real estate activities conducted by
each MAP. The information would be filed quarterly based on quarter-end
results, or based on month-end results if greater than quarter-end
results for all activities except real estate.
Part II of Form 17-H requires a separate column or separate form
for positions held by each MAP. In cases where a registered government
securities broker or dealer has a non-MAP affiliate which, in turn, has
subsidiaries that are MAPs, the registered government securities broker
or dealer may maintain and report the securities and commodities
position information on a consolidated basis through the non-MAP
affiliate.
B. Exemptions and Special Provisions
The Department proposes to incorporate, with modifications and
supplements, the SEC's exemptive provisions (17 CFR 240.17h-1T(d) and
240.17h-2T(b)). The proposed provisions would exempt registered
government securities brokers and dealers from all of Treasury's risk
assessment rules if they: (1) Do not carry customer accounts and
maintain capital of less than $20 million, (2) maintain capital of less
than $250,000 (regardless of whether they carry customer accounts or
not), or (3) have an affiliated registered broker or dealer, provided
that the registered broker or dealer is subject to, and in compliance
with, the SEC's risk assessment rules, and provided that all of the
MAPs of the registered government securities broker or dealer are also
MAPs of the registered broker or dealer. A registered government
securities broker or dealer that has no affiliates or holding company
would not be subject to the Department's risk assessment rules. The
Department also proposes to allow affiliated registered government
securities brokers and dealers to request in writing that the
Department permit one of the firms (a ``Reporting Registered Government
Securities Broker or Dealer'') to maintain and report risk assessment
information on behalf of the other firms.
The Department also proposes to adopt the SEC's special provisions
for affiliates that are already subject to supervision by certain U.S.
or foreign financial regulatory authorities. (See paragraphs (b) and
(c) of 17 CFR 240.17h-1T, and paragraphs (c) and (d) of 17 CFR 240.17h-
2T, as modified by Secs. 404.2(b) and 405.5. With respect to such
affiliates, registered government securities brokers and dealers would
be deemed in compliance with the financial and securities recordkeeping
requirements of the rule by maintaining copies of reports that such
affiliates already submit to certain domestic and foreign regulators.
The registered government securities brokers and dealers would,
however, remain responsible for maintaining organizational charts, risk
management policies, and records of legal proceedings in which they are
involved, and would have to submit such information on Form 17-H (Items
1-3 of Part I of the form).
The Department believes that these types of special provisions and
exemptions would preclude duplicative and unnecessary recordkeeping and
reporting for various registered government securities brokers and
dealers without compromising regulators' need to capture information on
the potentially risky activities of entire holding company systems.
C. Scope of Proposed Risk Assessment Rules
In proposing its risk assessment rules, the SEC noted that the
rules would provide it with greater advance warning of situations, such
as the Drexel failure, which could have a significant impact on the
functioning of the markets and investors in general.18 The SEC
also noted that it believed the majority of registered brokers and
dealers that conduct a business with the public do not pose the types
of risks the Reform Act was designed to address. Following this
precept, the SEC exempted from its rules registered brokers and dealers
whose activities are not likely to pose a material threat to the
investing public or the marketplace (e.g., limited purpose mutual fund
brokers), whose operations are relatively small (as measured by capital
levels), and whose functions do not include carrying customer accounts
(unless they are large firms).
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\1\8 See supra note 5, pp. 44015-44016.
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The SEC also adopted special provisions for registered brokers and
dealers that have certain regulated affiliates, such as banks,
insurance companies, futures commission merchants, and foreign
affiliates, recognizing the existence of certain regulatory reporting
by these entities and eliminating the need to create a new set of
records for such entities. In lieu of adhering to the bulk of the SEC's
risk assessment rules, registered brokers and dealers are, in certain
specified cases, able to maintain and submit copies of reports that
these affiliates already routinely submit to U.S. and foreign
regulators.
Of the approximately 5,600 registered brokers and dealers that
conduct a public business, SEC staff informs us that roughly 250 firms
are currently following the SEC's risk assessment rules. These are the
largest firms and the ones that potentially pose the most risk to the
markets. In contrast, of the 37 registered government securities firms
in existence at the time of this writing, approximately 12 would be
potentially subject to the Department's risk assessment rules. The
Department estimates that 25 of the 37 firms would qualify for at least
one of the proposed Treasury exemptions. It appears that six registered
government securities brokers and dealers would qualify for an
exemption because their capital levels are under $250,000. Seventeen
firms would qualify for an exemption because they do not carry customer
accounts and have capital of less than $20 million. Six firms would
potentially qualify for an exemption because their affiliated
registered brokers and dealers follow the SEC's risk assessment rules.
Of the 12 firms potentially subject to the Department's rules,
three are affiliated within the same holding company structure. Thus,
any one of the firms would be able to request that the Department
authorize it to be a Reporting Registered Government Securities Broker
or Dealer on behalf of the other two firms. Of the remaining nine firms
that would be potentially subject to the Department's rules, three have
foreign bank holding companies, which could ease their recordkeeping
and reporting requirements considerably. These firms would be able to
maintain and submit the same reports that their holding companies
submit to foreign financial regulatory authorities, with a copy
translated into English. The amount of information the remaining six
firms would be required to maintain and report would be based on the
number of MAPs designated and the types of activities the MAPs conduct.
The Department believes this approach meets the objectives of the
statute without imposing significant costs or burdens on market
participants. In order to provide affected firms time to make personnel
and systems adjustments required for compliance, the Department
proposes a three-month phase-in period.
In preparing the proposed rules, the Department consulted with the
staffs of the SEC and the bank regulatory agencies; they concur with
the Department's approach.
The Department also proposes to promulgate technical amendments to
Sec. 404.2 by redesignating paragraphs (b) and (c) as paragraphs (c)
and (d), respectively, and by revising newly redesignated paragraph
(c). The revisions to paragraph (c) would more accurately define the
terms ``registered government securities broker or dealer'' and ``the
Secretary of the Treasury'' as they are used to modify 17 CFR 240.17a-
7.
III. Special Analysis
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.
Sec. 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 March 31, 1994, there
were 37 registered government securities brokers and dealers, of which
only 13 firms would be considered small entities. Treasury estimates
that all 13 of the small firms will qualify for at least one of the
recordkeeping and reporting exemptions in the proposed rules.
Accordingly, the inapplicability of the proposed regulations to small
firms 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. Sec. 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 regulation are
contained in proposed Secs. 404.2(b) and 405.5. The proposed
recordkeeping requirements in Sec. 404.2(b) would require registered
government securities brokers and dealers to maintain and preserve
records concerning the financial and securities activities of
affiliates whose business activities are reasonably likely to have a
material impact on the financial or operational condition of the
registered government securities brokers or dealers. The proposed
reporting requirements in Sec. 405.5 would require registered
government securities brokers and dealers to file with the SEC
quarterly summary reports of the information required to be maintained
and preserved by the proposed recordkeeping requirements. The
collection of information is intended to allow the SEC access to
certain information concerning the financial risk posed to registered
government securities brokers and dealers. The rule applies only to
registered government securities brokers and dealers. The Department's
estimated reporting and recordkeeping burden hours are based on the
SEC's estimated burden hours for their proposed temporary risk
assessment rules.
Estimated total annual reporting and recordkeeping burden: 288 hours
Estimated average annual burden per respondent and recordkeeper: 24
hours
Estimated number of respondents and recordkeepers: 12
Estimated annual frequency of response: Four
List of Subjects
17 CFR Part 404
Banks, banking, Brokers, Government securities, Reporting and
recordkeeping requirements.
17 CFR Part 405
Brokers, Government securities, Reporting and recordkeeping
requirements.
For the reasons set out in the Preamble, it is proposed to amend 17
CFR Parts 404 and 405 as follows:
PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS
1. 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)(2),
(b)(4)).
2. Section 404.2 is amended by redesignating paragraphs (b) and (c)
as paragraphs (c) and (d), respectively; by revising newly redesignated
paragraph (c); and by adding new paragraph (b) 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.
* * * * *
(b) Every registered government securities broker or dealer shall
comply with the requirements of Sec. 240.17h-1T of this title (SEC Rule
17h-1T), with the following modifications:
(1) For the purposes of this section, references to ``broker or
dealer'' and ``broker or dealer registered with the Commission pursuant
to Section 15 of the Act'' mean registered government securities
brokers or dealers.
(2) For the purposes of this section, references to Secs. 240.17h-
1T and 240.17h-2T of this title mean those sections as modified by
Secs. 404.2(b) and 405.5, respectively.
(3) For the purposes of this section, ``associated person'' has the
meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),
except that natural persons are excluded.
(4) Paragraphs 240.17h-1T(a)(1)(iii) through (vi) of this title are
modified to read as follows:
``(iii) A description of all material pending legal or arbitration
proceedings involving a Material Associated Person or the registered
government securities broker or dealer that are required to be
disclosed, under generally accepted accounting principles on a
consolidated basis, by the highest level holding company that is a
Material Associated Person.
``(iv) Consolidated and consolidating balance sheets, prepared in
accordance with generally accepted accounting principles, which may be
unaudited and which shall include the notes to the financial
statements, as of quarter-end for the registered government securities
broker or dealer and its highest level holding company that is a
Material Associated Person;
``(v) Quarterly consolidated and consolidating income statements
and consolidated cash flow statements, prepared in accordance with
generally accepted accounting principles, which may be unaudited and
which shall include the notes to the financial statements, for the
registered government securities broker or dealer and its highest level
holding company that is a Material Associated Person;
``(vi) The amount as of quarter-end, and at month-end if greater
than quarter-end, of the aggregate long and short securities and
commodities positions held by each Material Associated Person,
including a separate listing of each single unhedged securities or
commodities position, other than U.S. Treasury securities, that exceeds
the Materiality Threshold at any month-end;''
(5) Paragraphs 240.17h-1T(a)(3) and (a)(4) of this title are
modified to read as follows:
``(3) The information, reports and records required by the
provisions of this section shall be maintained and preserved in
accordance with the provisions of Sec. 404.3 of this title and shall be
kept for a period of not less than three years in an easily accessible
place.
``(4) For the purposes of this section and Sec. 405.5 of this
title, the term ``Materiality Threshold'' shall mean the greater of:
``(i) $100 million; or
``(ii) 10 percent of the registered government securities broker's
or dealer's liquid capital based on the most recently filed Form G-405
(or, in the case of futures commission merchants and interdealer
brokers subject to the capital rules in Secs. 402.1(d) and 402.1(e),
respectively, tentative net capital based on the most recently filed
Form X-17A-5) or 10 percent of the Material Associated Person's
tangible net worth, whichever is greater.''
(6) Paragraph 240.17h-1T(b) of this title is modified to read as
follows:
``(b) Special provisions with respect to Material Associated
Persons subject to the supervision of certain domestic regulators. A
registered government securities broker or dealer shall be deemed to be
in compliance with the recordkeeping requirements of paragraph
(a)(1)(iii) through (x) of this section with respect to a Material
Associated Person if:''
* * * * *
(7) Paragraph 240.17h-1T(c) of this title is modified to read as
follows:
``(c) Special provisions with respect to Material Associated
Persons subject to the supervision of a foreign financial regulatory
authority. A registered government securities broker or dealer shall be
deemed to be in compliance with the recordkeeping requirements of
paragraph (a)(1)(iii) through (x) of this section with respect to a
Material Associated Person if such registered government securities
broker or dealer maintains in accordance with the provisions of this
section copies of the reports filed by such Material Associated Person
with a Foreign Financial Regulatory Authority. The registered
government securities broker or dealer shall maintain a copy of the
original report and a copy translated into the English language. For
the purposes of this section, the term Foreign Financial Regulatory
Authority shall have the meaning set forth in section 3(a)(52) of the
Act.''
(8) Paragraph 240.17h-1T(d) of this title is modified to read as
follows:
``(d) Exemptions. (1) The provisions of this section shall not
apply to any registered government securities broker or dealer:
``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of
this title, as made applicable by Sec. 403.4, pursuant to paragraph
(k)(2) of Sec. 240.15c3-3 of this title; or
``(ii) If the registered government securities broker or dealer
does not qualify for an exemption from the provisions of Sec. 240.15c3-
3 of this title, as made applicable by Sec. 403.4, and such registered
government securities broker or dealer does not hold funds or
securities for, or owe money or securities to, customers and does not
carry the accounts of, or for, customers; unless
``(iii) In the case of paragraphs (d)(1) (i) or (ii) of this
section, the registered government securities broker or dealer
maintains capital of at least $20,000,000, including debt subordinated
in accordance with Appendix D of Sec. 240.15c3-1 of this title, as
modified by Appendix D of Sec. 402.2.
``(2) The provisions of this section shall not apply to any
registered government securities broker or dealer which maintains
capital of less than $250,000, including debt subordinated in
accordance with Appendix D of Sec. 240.15c3-1 of this title, as
modified by Appendix D of Sec. 402.2, even if the registered government
securities broker or dealer holds funds or securities for, or owes
money or securities to, customers or carries the accounts of, or for,
customers.
``(3) The provisions of this section shall not apply to any
registered government securities broker or dealer which has an
associated person that is a registered broker or dealer, provided that:
``(i) The registered broker or dealer is subject to, and in
compliance with, the provisions of Sec. 240.17h-1T of this title, and
``(ii) All of the Material Associated Persons of the registered
government securities broker or dealer are Material Associated Persons
of the registered broker or dealer subject to Sec. 240.17h-1T of this
title.
``(4) In calculating capital for the purposes of this paragraph, a
registered government securities broker or dealer shall include with
its equity capital and subordinated debt the equity capital and
subordinated debt of any other registered government securities brokers
or dealers or registered brokers or dealers that are associated persons
of such registered government securities broker or dealer, except that
the equity capital and subordinated debt of registered brokers and
dealers that are exempt from the provisions of Sec. 240.15c3-3 of this
title, pursuant to paragraph (k)(1) of Sec. 240.15c3-3, shall not be
included in the capital computation.
``(5) The Secretary may, upon written application by a Reporting
Registered Government Securities Broker or Dealer, exempt from the
provisions of this section, either unconditionally or on specified
terms and conditions, any registered government securities brokers or
dealers that are associated persons of such Reporting Registered
Government Securities Broker or Dealer. The term ``Reporting Registered
Government Securities Broker or Dealer'' shall mean any registered
government securities broker or dealer that submits such application to
the Secretary on behalf of its associated registered government
securities brokers or dealers.''
(9) Paragraph 240.17h-1T(g) of this title is modified to read as
follows:
``(g) Temporary implementation schedule. Every registered
government securities broker or dealer subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i), (ii), and (iii) of this section commencing March
31, 1995. Commencing June 30, 1995, the provisions of this section
shall apply in their entirety.''
(c)(1) Every non-resident government securities broker or dealer
registered or applying for registration pursuant to Section 15C of the
Act shall comply with Sec. 240.17a-7 of this title, provided that:
(i) For the purposes of this section, references to ``broker or
dealer'' and ``broker or dealer registered or applying for registration
pursuant to Section 15 of the Act'' mean registered government
securities brokers or dealers; and
(ii) For the purposes of this section, references to ``any rule or
regulation of the Commission'' and ``any rule or regulation of the
Securities and Exchange Commission'' mean any rule or regulation of the
Secretary.
(2) For the purposes of this section, the term ``non-resident
government securities broker or dealer'' means:
(i) in the case of an individual, one who resides in or has his
principal place of business in any place not subject to the
jurisdiction of the United States;
(ii) in the case of a corporation, one incorporated in or having
its principal place of business in any place not subject to the
jurisdiction of the United States; and
(iii) in the case of a partnership or other unincorporated
organization or association, one having its principal place of business
in any place not subject to the jurisdiction of the United States.
* * * * *
PART 405--REPORTS AND AUDIT
3. The authority citation for Part 405 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)(2),
(b)(4)).
4. Section 405.5 is added to read as follows:
Sec. 405.5 Risk assessment reporting requirements for registered
government securities brokers and dealers.
(a) Every registered government securities broker or dealer shall
comply with the requirements of Sec. 240.17h-2T of this title (SEC Rule
17h-2T), with the following modifications:
(1) For the purposes of this section, references to ``broker or
dealer'' and ``broker or dealer registered with the Commission pursuant
to Section 15 of the Act'' mean registered government securities
brokers or dealers.
(2) For the purposes of this section, references to
Sec. Sec. 240.17h-1T and 240.17h-2T of this title mean those sections
as modified by Sec. Sec. 404.2(b) and 405.5, respectively.
(3) For the purposes of this section, ``associated person'' has the
meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),
except that natural persons are excluded.
(4) Paragraph 240.17h-2T(b) of this title is modified to read as
follows:
``(b) Exemptions. (1) The provisions of this section shall not
apply to any registered government securities broker or dealer:
``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of
this title, as made applicable by Sec. 403.4, pursuant to paragraph
(k)(2) of Sec. 240.15c3-3 of this title; or
``(ii) If the registered government securities broker or dealer
does not qualify for exemption from the provisions of Sec. 240.15c3-3
of this title, as made applicable by Sec. 403.4, and such registered
government securities broker or dealer does not hold funds or
securities for, or owe money or securities to, customers and does not
carry the accounts of, or for, customers; unless
``(iii) In the case of paragraphs (b)(1) (i) or (ii) of this
section, the registered government securities broker or dealer
maintains capital of at least $20,000,000, including debt subordinated
in accordance with Appendix D of Sec. 240.15c3-1 of this title, as
modified by Appendix D of Sec. 402.2.
``(2) The provisions of this section shall not apply to any
registered government securities broker or dealer which maintains
capital of less than $250,000, including debt subordinated in
accordance with Appendix D of Sec. 240.15c3-1 of this title, as
modified by Appendix D of Sec. 402.2, even if the registered government
securities broker or dealer holds funds or securities for, or owes
money or securities to, customers or carries the accounts of, or for,
customers.
``(3) The provisions of this section shall not apply to any
registered government securities broker or dealer which has an
associated person that is a registered broker or dealer, provided that:
``(i) The registered broker or dealer is subject to, and in
compliance with, the provisions of Sec. 240.17h-1T and Sec. 240.17h-2T
of this title, and
``(ii) All of the Material Associated Persons of the registered
government securities broker or dealer are Material Associated Persons
of the registered broker or dealer subject to Sec. 240.17h-1T and
Sec. 240.17h-2T of this title.
``(4) In calculating capital for the purposes of this paragraph, a
registered government securities broker or dealer shall include with
its equity capital and subordinated debt the equity capital and
subordinated debt of any other registered government securities brokers
or dealers or registered brokers or dealers that are associated persons
of such registered government securities broker or dealer, except that
the equity capital and subordinated debt of registered brokers and
dealers that are exempt from the provisions of Sec. 240.15c3-3 of this
title, pursuant to paragraph (k)(1) of Sec. 240.15c3-3, shall not be
included in the capital computation.
``(5) The Secretary may, upon written application by a Reporting
Registered Government Securities Broker or Dealer, exempt from the
provisions of this section, either unconditionally or on specified
terms and conditions, any registered government securities brokers or
dealers that are associated persons of such Reporting Registered
Government Securities Broker or Dealer. The term ``Reporting Registered
Government Securities Broker or Dealer'' shall mean any registered
government securities broker or dealer that submits such application to
the Secretary on behalf of its associated registered government
securities brokers or dealers.''
(5) Paragraph 240.17h-2T(c) of this title is modified to read as
follows:
``(c) Special provisions with respect to Material Associated
Persons subject to the supervision of certain domestic regulators. A
registered government securities broker or dealer shall be deemed to be
in compliance with the reporting requirements of paragraph (a) of this
section with respect to a Material Associated Person if such registered
government securities broker or dealer files Items 1, 2, and 3 (in Part
I) of Form 17-H in accordance with paragraph (a) of this section,
provided that:
``(1) Such Material Associated Person is subject to examination by
or the reporting requirements of a Federal banking agency and the
registered government securities broker or dealer or such Material
Associated Person furnishes in accordance with paragraph (a) of this
section copies of reports filed by the Material Associated Person with
the Federal banking agency pursuant to section 5211 of the Revised
Statutes, section 9 of the Federal Reserve Act, section 7(a) of the
Federal Deposit Insurance Act, section 10(b) of the Home Owners' Loan
Act, or section 5 of the Bank Holding Company Act of 1956; or''
* * * * *
(6) Paragraph 240.17h-2T(d) of this title is modified to read as
follows:
``(d) Special provisions with respect to Material Associated
Persons subject to the supervision of a foreign financial regulatory
authority. A registered government securities broker or dealer shall be
deemed to be in compliance with the reporting requirements of paragraph
(a) of this section with respect to a Material Associated Person if
such registered government securities broker or dealer furnishes, in
accordance with the provisions of paragraph (a) of this section, Items
1, 2, and 3 (in Part I) of Form 17-H and copies of the reports filed by
such Material Associated Person with a Foreign Financial Regulatory
Authority. The registered government securities broker or dealer shall
file a copy of the original Foreign Financial Regulatory report and a
copy translated into the English language. For the purposes of this
section, the term Foreign Financial Regulatory Authority shall have the
meaning set forth in section 3(a)(52) of the Act.''
(7) Paragraph 240.17h-2T(f) of this title is modified to read as
follows:
``(f) Temporary implementation schedule. Every registered
government securities broker or dealer subject to the requirements of
this section shall file the information required by Items 1, 2 and 3
(in Part I) of Form 17-H by April 30, 1995. Commencing June 30, 1995,
the provisions of this section shall apply in their entirety.''
Date: October 31, 1994.
Frank N. Newman,
Deputy Secretary.
[FR Doc. 94-28041 Filed 11-14-94; 8:45 am]
BILLING CODE 4810-39-P
