[Federal Register Volume 60, Number 80 (Wednesday, April 26, 1995)]
[Rules and Regulations]
[Pages 20396-20401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10219]
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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: Final rule.
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SUMMARY: The Department of the Treasury (``Department'' or
``Treasury'') is publishing, as a final rule, 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 recordkeeping amendment requires 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)(2) of the
Securities Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78o-
5(a)(2)) 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 reporting amendment requires 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 recordkeeping amendment. The 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 promulgated 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.
The Department is adopting the amendments essentially unchanged from
their proposed form.
DATES: The effective date is June 30, 1995. The rules are being
implemented in accordance with a phase-in schedule. See Section III of
this preamble for the entire schedule.
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\ Among other
things, the Reform Act provided the SEC and Treasury separate but
parallel authority to promulgate risk assessment rules for certain
broker-dealer holding company structures. 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 registered government securities brokers and
dealers that are subject to the rules must maintain records and submit
reports pertaining to the financial and securities activities of
certain affiliates that are financial institutions.
\1\Pub. L. 101-432, 104 Stat. 963 (1990).
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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 their affiliated
brokers and dealers, as well as to the securities markets and the
financial system as a whole. The Department believes that these rules
will enhance the safety of the government securities market and provide
for more effective regulatory oversight.
The legislative history\2\ 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
[[Page 20397]] 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.
\2\H.R. Rep. No. 101-524 and 101-477, 101st Cong., 2nd Sess.
(1990).
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Affiliates conducting these largely 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 Treasury 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 with direct access
to information concerning the business activities of brokers' and
dealers' affiliates that are outside of SEC oversight.
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.\3\ After reviewing the 63 comment
letters it received and making modifications, the SEC issued in July
1992 final temporary risk assessment rules.\4\ Rule 17h-1T\5\ is a
recordkeeping rule identifying and describing the records that
registered brokers and dealers are required to maintain and preserve.
Rule 17h-2T\6\ 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
consult with the SEC regarding the study and assessment of its rules to
determine whether any of the SEC's findings are germane to Treasury's
risk assessment rules.
\3\Securities Exchange Act Release No. 34-29635 (August 30,
1991), 56 FR 44014 (September 6, 1991).
\4\Securities Exchange Act Release No. 34-30929 (July 16, 1992),
57FR 32159 (July 21, 1992).
\5\17 CFR 240.17h-1T.
\6\17 CFR 240.17h-2T.
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The Commodity Futures Trading Commission (``CFTC'') was also
authorized to promulgate risk assessment rules applicable to registered
futures commission merchants (``FCMs'') pursuant to the Futures Trading
Practices Act of 1992.\7\ The CFTC published its proposed risk
assessment rules in March 1994.\8\ The CFTC extended its comment period
twice before promulgating the first part of its final risk assessment
rules in December 1994,\9\ which require certain FCMs to maintain and
file key information addressing the overall structure of holding
companies involving the FCMs. The CFTC deferred action on other
portions of its proposed rules pending further review and consultation
with other regulators.
\7\Pub. L. 102-546, 106 Stat. 3590 (1992).
\8\59 FR 9689 (March 1, 1994).
\9\59 FR 66674 (December 28, 1994).
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Treasury published its risk assessment amendments in proposed form
on November 15, 1994,\10\ and the comment period closed on January 17,
1995. The Department received no comments in response to the proposal.
\10\59 FR 58792 (November 15, 1994).
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II. Analysis
A. Reporting and Recordkeeping Requirements
The Department's 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.\11\ Under
the Department's rules, two general categories of records will 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
recordkeeping rules will be subject to routine inspection by the SEC
and the self-regulatory organizations. Under the reporting rules,
registered government securities brokers and dealers will be required
to file with the SEC quarterly summaries of the information that must
be maintained under the recordkeeping rules. These quarterly summaries
will be required to be filed on the SEC's Form 17-H. A more detailed
discussion of the Department's specific risk assessment requirements is
included in the preamble to the proposed rules.
\11\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
paragraph 17h-1T(a)(2), thereby providing guidelines for determining
which affiliates of the brokers and dealers are MAPs. The initial
designation of MAPs will be made by the affected 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,12 partnerships will not be treated as natural persons
and, depending on the circumstances, may be deemed to be MAPs of the
registered government securities broker or dealer. Subchapter S
corporations may be treated as natural persons for purposes of the
amendments if the Subchapter S corporation is owned by one natural
person.
\12\Id.
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Note that, with respect to the Department's 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.
B. Exemptions and Special Provisions
The Department is incorporating, with modifications and
supplements, the SEC's exemptive provisions (17 CFR 240.17h-1T(d) and
240.17h-2T(b)). The Department's provisions will exempt registered
government securities brokers [[Page 20398]] and dealers from all of
Treasury's risk assessment rules if they: (1) Do not carry customer
accounts and maintain capital (equity capital plus subordinated debt)
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,13 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's
rules also 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 affiliated firms. The Department will promptly advise the
SEC and the National Association of Securities Dealers of such a
request and consult with them in order to provide for an efficient
examination process.
\13\Similarly, the CFTC's final risk assessment rules permit
FCMs that are, or that have affiliates that are, registered broker-
dealers or registered government securities broker-dealers to file
Form 17-H in partial compliance with the CFTC's rules. See Supra
note 9.
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The Department is also adopting 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, respectively). With respect to
such affiliates, registered government securities brokers and dealers
will 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
will, however, remain responsible for maintaining organizational
charts, risk management policies, and records of legal proceedings in
which they are involved, and will 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 will 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 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), or whose functions do not include carrying
customer accounts (unless they are large firms).
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 33 registered government securities firms
in existence at the time of this writing, approximately 11 are
potentially subject to the Department's risk assessment rules since we
estimate that 22 of the 33 firms will qualify for at least one of the
Treasury exemptions. It appears that five registered government
securities brokers and dealers will qualify for an exemption because
their capital levels are under $250,000. Fourteen firms will qualify
for an exemption because they do not carry customer accounts and have
capital of less than $20 million. Six firms will potentially qualify
for an exemption because their affiliated registered brokers and
dealers follow the SEC's risk assessment rules.14
\14\The total estimated number of firms qualifying for
exemptions exceeds 22 because we anticipate that some firms will
qualify for more than one exemption.
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Of the 11 firms potentially subject to the Department's rules,
three are affiliated within the same holding company structure. Thus,
any one of the firms will be able to request that the Department
authorize it to be the Reporting Registered Government Securities
Broker or Dealer on behalf of the other two firms. Of the remaining
eight firms that are potentially subject to the Department's rules,
three have foreign bank holding companies, which could ease their
recordkeeping and reporting requirements considerably. These firms
should 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 five firms will be required to maintain and report will 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 has adopted a multi-month phase-in period.15 Refer to
Section III below for the Department's implementation schedule.
\15\Many of the commentators to the SEC's proposed risk
assessment rules stated that they would be required to make
personnel and systems adjustments to comply with the rules. To ease
the burden associated with meeting the requirements of its rules,
the SEC adopted a phased-in implementation schedule. The Department
is adopting a similar phased-in approach to implementation.
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In preparing the rules, the Department consulted with the staffs of
the SEC and the bank regulatory agencies; they concur with the
Department's approach.
The Department is also promulgating 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 redesignated paragraph (c) will 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. Implementation Schedule
Most of the Department's implementation dates have been
[[Page 20399]] modified from the dates in the proposed rules to provide
affected firms with sufficient time to make the necessary preparations
to comply with the rules. Effective June 30, 1995, affected firms will
be required to maintain records of an organizational chart, written
risk management procedures, and a description of material legal or
arbitration proceedings; the entire recordkeeping provisions will apply
as of September 30, 1995.
The Department's rules will require affected firms to file the
organizational chart, the written risk management procedures, and the
description of material legal or arbitration proceedings (Part I, Items
1-3 of Form 17-H) by July 31, 1995; the entire reporting provisions
(i.e., the remaining portions of Form 17-H, including documents
attached in accordance with the special provisions for entities subject
to certain domestic and foreign regulators) will apply for the period
ending September 30, 1995. The affected firms will have 60 calendar
days after September 30, 1995, and after each subsequent fiscal
quarter, to actually file the remaining portions of Form 17-H. The
cumulative year-end financial statements required pursuant to
Sec. 404.2(b)(4) must be filed within 105 calendar days of the end of
the fiscal year.
Note that following the first filing by July 31, 1995, of the
organizational chart, the written risk management procedures, and the
description of material legal or arbitration proceedings, this
information need be included in quarterly filings only when a material
change in the information has occurred. Additionally, the
organizational chart is required in each year-end filing.
IV. Special Analysis
It has been determined that these amendments are not a
``significant regulatory action'' for the purposes of Executive Order
12866. Therefore, a Regulatory Assessment is not required.
In the preamble to the proposed rules, pursuant to the Regulatory
Flexibility Act (5 U.S.C. 601, et seq.), the Department certified that
these amendments, if adopted, would not have a significant economic
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis was not prepared. In reviewing the
final rules being adopted herein and in light of the fact that no
comments were received, the Department has concluded that there is no
reason to alter the previous certification.
The collections of information contained in the final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))
under control number 1535-0089.
Estimated total annual reporting and recordkeeping burden: 264 hours
Estimated average annual burden per respondent and recordkeeper: 24
hours
Estimated number of respondents and recordkeepers: 11
Estimated annual frequency of response: Four
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Forms
Management Branch, Bureau of the Public Debt, Department of the
Treasury, Parkersburg, West Virginia 26106-1328; and to the Office of
Management and Budget, Paperwork Reduction Project 1535-0089,
Attention: Desk Officer for Department of the Treasury, Washington, DC
20503.
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, 17 CFR parts 404 and 405
are amended as follows:
PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS
1. The authority citation for part 404 is revised to read as
follows:
Authority: 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 [[Page 20400]] ``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 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.''
(9) Paragraph 240.17h-1T(g) of this title is modified to read as
follows:
``(g) 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 June 30, 1995.
Commencing September 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: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).
[[Page 20401]] 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 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) 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) 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 July 31, 1995. Commencing September 30, 1995, the
provisions of this section shall apply in their entirety.''
(Approved by the Office of Management and Budget under control
number 1535-0089)
Dated: April 18, 1995.
Frank N. Newman,
Deputy Secretary.
[FR Doc. 95-10219 Filed 4-25-95; 8:45 am]
BILLING CODE 4810-39-W
