[Federal Register Volume 59, Number 206 (Wednesday, October 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26545]


[[Page Unknown]]

[Federal Register: October 26, 1994]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

17 CFR Parts 402 and 405

RIN 1505-AA48

 

Implementing Regulations for the Government Securities Act of 
1986

AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury (``Department'') is issuing in 
final form amendments to the regulations issued under the Government 
Securities Act of 1986 (the ``Government Securities Act'' or 
``GSA'').\1\ Section 405.3 of the GSA regulations requires registered 
government securities brokers and dealers to comply with the 
requirements of Securities and Exchange Commission (the ``Commission'' 
or ``SEC'') Rule 17a-11 under the Securities Exchange Act of 1934 (the 
``Exchange Act''), with certain modifications. The SEC has amended Rule 
17a-11 and the Department's amendments parallel the SEC's changes.
---------------------------------------------------------------------------

    \1\Pub. L. No. 99-571, 100 Stat. 3208 (1986).
---------------------------------------------------------------------------

    The amendments will, among other things, ease the regulatory and 
reporting burdens on registered government securities brokers and 
dealers by eliminating the requirement that they submit certain 
supplemental financial reports previously required by Sec. 405.3 of the 
GSA regulations. Registered government securities brokers and dealers 
will remain obligated to transmit notice of a capital deficiency or 
certain other events.

EFFECTIVE DATE: October 26, 1994.

FOR FURTHER INFORMATION CONTACT:
Ken Papaj (Director) or Ron Couch (Government Securities Specialist), 
Bureau of the Public Debt, Government Securities Regulations Staff, 999 
E Street NW., Room 515, Washington, DC 20239-0001. (202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

    When the Department first adopted rules and regulations affecting 
government securities brokers and dealers, it took into consideration 
the already existing regulation of securities brokers and dealers 
registered with the SEC under sections 15 or 15B of the Exchange Act, 
with a view toward preventing overly burdensome or duplicative 
regulations. In that regard, the GSA regulations incorporated, by 
reference, many of the SEC's rules regulating brokers and dealers, 
including, with modification, Rule 17a-11.
    On July 7, 1993, the SEC adopted amendments to 17 CFR 240.17a-11 
(Rule 17a-11), which became effective August 12, 1993.\2\ The primary 
purpose of Rule 17a-11 is to provide the SEC and other regulatory 
bodies with advance warning and information regarding brokers and 
dealers that are experiencing financial or operational difficulty. 
Prior to the SEC's amendments, Rule 17a-11 required a broker or dealer 
to give notice and transmit supplemental reports to the Commission and 
other regulatory bodies when its net capital declined below its 
required minimum level or when its total outstanding principal amount 
of satisfactory subordination agreements exceeded allowable levels for 
more than 90 days. The SEC's amendments, among other things, eliminated 
the requirement that brokers and dealers file Part II or Part IIA of 
Form X-17A-5, Financial and Operational Combined Uniform Single Report 
(``FOCUS Report'') after a net capital deficiency. Brokers and dealers, 
however, remain obligated to transmit same-day notice of such a capital 
deficiency. Additionally, prior to the amendments to Rule 17a-11, 
brokers and dealers whose net capital fell below certain ``early 
warning levels''\3\ were required to file monthly FOCUS Report for at 
least three successive months. This requirement was eliminated by the 
amendments and replaced with the requirement that brokers and dealers 
promptly notify the Commission and their designated examining authority 
(``DEA'') of the triggering event. However, the changes to SEC Rule 
17a-11 did not apply to registered government securities brokers and 
dealers because the Treasury is the rulemaker for these firms.
---------------------------------------------------------------------------

    \2\Securities Exchange Act Release No. 32586 (July 7, 1993), 58 
FR 37655-58 (July 13, 1993).
    \3\Early warning levels are capital levels set at amounts that 
are higher than the minimum capital requirement. In situations where 
the capital level of a broker or dealer is declining, the early 
warning level serves the purpose of alerting regulatory agencies 
that the firm may be experiencing financial or operational 
difficulty. This early notification enables the regulatory agencies 
to monitor the activities of a broker-dealer and assess its 
financial condition while there is still time to take action to 
prevent the broker-dealer from falling out of compliance with the 
minimum capital requirement.
---------------------------------------------------------------------------

    Section 405.3 of the GSA regulations requires, with certain 
modifications, every registered government securities broker or dealer 
to comply with Rule 17a-11. Consistent with the SEC's pre-amendment 
Rule 17a-11, Sec. 405.3 has required registered government securities 
brokers and dealers, including interdealer brokers and futures 
commission merchants (FCMs), to provide notice of capital deficiencies, 
to submit financial reports within 24 hours of a capital deficiency, 
and to file supplemental reports for three successive months when 
capital falls below early warning levels. Since the SEC's amendments to 
Rule 17a-11, without conforming amendments to Sec. 405.3 of the GSA 
regulations, the rules applicable to government securities brokers and 
dealers have been unclear. At the time of the amendments to SEC Rule 
17a-11, Treasury was unable to revise the GSA regulations accordingly 
because its rulemaking authority had expired in October 1991 and 
reauthorization legislation was still being considered by the Congress.
    The Treasury supported the SEC changes to Rule 17a-11 and took 
action to relieve registered government securities brokers and dealers 
of the requirement to file supplemental financial reports under 
Sec. 405.3, pending the reauthorization of Treasury's rulemaking 
authority and the issuance of conforming amendments. Accordingly, on 
August 27, 1993, at the request of Department staff, the SEC staff 
issued to no-action letter\4\ stating that no action would be 
recommended to the Commission if a DEA waived the financial report 
filing requirements of SEC Rule 17a-11, as modified and made applicable 
to registered government securities brokers and dealers by Sec. 405.3, 
provided that:
---------------------------------------------------------------------------

    \4\Letter from Michael A. Macchiaroli, Associate Director, 
Division of Market Regulation, U.S. Securities and Exchange 
Commission, to Raymond J. Hennessy, Vice President, New York Stock 
Exchange, and to John F. Pinto, Executive Vice President, National 
Association of Securities Dealers, dated August 27, 1993.
---------------------------------------------------------------------------

    (1) a registered government securities broker or dealer gives 
notice the same day of the event in accordance with Rule 17a-11:
    (a) if the liquid capital of a government securities broker-dealer 
subject to the financial responsibility requirements of Sec. 402.2 
under the GSA declines below the minimum amount required by Sec. 402.2, 
or
    (b) if the net capital of a government securities interdealer 
broker subject to the financial responsibility requirements of 
Sec. 402.1(e) of the GSA declines below the minimum amount required by 
Sec. 402.1(e), or
    (c) if the net capital of a registered government securities broker 
or dealer that is also an FCM registered with the Commodity Futures 
Trading Commission (``CFTC'') falls below the greater of (i) the 
minimum amount required by Rule 15c3-1 (17 CFR 240.15c3-1) or (ii) the 
minimum amount required by CFTC Rule 1.17 (17 CFR 1.17); or
    (2) a registered government securities broker or dealer gives 
notice promptly (within 24 hours) in accordance with Rule 17a-11 upon 
the occurrence of an event that would require under Sec. 405.3 the 
filing of a Report on Finances and Operations of Government Securities 
Brokers and Dealers (``FOGS Report'') or FOCUS Report.
    The no-action letter also noted that Treasury's rulemaking 
authority had expired, but that Treasury staff intended, upon 
reauthorization of its rulemaking authority, to amend its regulations 
under the GSA to conform to the SEC's amendments to Rule 17a-11. The 
Treasury's rulemaking authority was reauthorized on December 17, 1993, 
with the enactment of the Government Securities Act Amendments of 
1993,\5\ thus enabling the Department to make this rule change.
---------------------------------------------------------------------------

    \5\Pub. L. 103-202, 107 Stat. 2344 (1993).
---------------------------------------------------------------------------

II. Amendments

A. Section 405.3

    The new rule eliminates the prior requirement that registered 
government securities brokers or dealers file financial reports within 
24 hours after a liquid or net capital deficiency by adopting paragraph 
(b) of SEC Rule 17a-11.\6\ Registered government securities brokers and 
dealers will remain obligated to transmit notice of a liquid or net 
capital deficiency on the same day of the occurrence. However, unlike 
the previous rule, the amendments require the notice to specify the 
registered government securities broker's or dealer's capital 
requirement and its current amount of capital. This latter requirement 
does not impose any additional burdens on registered government 
securities brokers and dealers because they are required to continually 
monitor their minimum capital requirement and their current amount of 
capital to ensure compliance with the Department's capital rule.
---------------------------------------------------------------------------

    \6\17 CFR 240.17a-11(b).
---------------------------------------------------------------------------

    Section 405.3 also adopts the requirement of SEC Rule 17a-11(b) 
that a broker or dealer must give notice of a capital deficiency when 
it is informed by its DEA or the Commission that it is, or has been, in 
violation of the capital requirements, even if it does not agree with 
that determination. In the event of such a dispute, the broker or 
dealer may state in its notice the arguments for its disagreement with 
the capital deficiency determination.
    The requirement that registered government securities brokers and 
dealers file Part II or Part IIA of the FOGS Report, or in limited 
cases the FOCUS Report, within 15 calendar days after the end of the 
next three months if their capital falls below certain early warning 
levels is also eliminated. In lieu of this requirement, and consistent 
with the SEC's Rule, Sec. 405.3(a)(5) requires that, in the event a 
registered government securities broker's or dealer's capital falls 
below certain early warning levels, it is required to file notice of 
such event promptly (within 24 hours).
    Section 405.3(a)(5) also adds a new early warning level based on 
minimum capital after haircuts for registered government securities 
brokers or dealers other than government securities interdealer brokers 
and government securities brokers and dealers that also are FCMs. In 
addition to sending prompt notice any time their liquid capital is less 
than 150 percent of haircuts, such government securities brokers and 
dealers also have to send a notice when their liquid capital after 
deducting total haircuts is less than 120 percent of their minimum 
capital requirement. This is consistent with the SEC early warning 
level for net capital and especially important for a registered 
government securities broker or dealer that may have no haircuts.
    These amendments to Sec. 405.3 of the GSA regulations conform the 
notification provisions applicable to registered government securities 
brokers and dealers to the requirements applicable to diversified 
brokers and dealers registered with the SEC. The Department is 
conforming the regulations under the GSA to SEC Rule 17a-11 to ensure 
consistent regulatory treatment for all classes of government 
securities brokers and dealers registered with the Commission and to 
reduce the reporting burdens on registered government securities 
brokers and dealers.
    The Department believes that there is no reason for registered 
government securities brokers or dealers to file reports in 
circumstances where other brokers or dealers registered with the SEC 
are not filing reports. Further, the same-day notice requirement 
provides the Commission and the DEAs adequate warning of financial or 
operational problems, thereby enabling them to increase the 
surveillance of a registered government securities broker or dealer 
experiencing difficulty and to obtain any additional information 
necessary to assess the broker's or dealer's financial condition.
    Due to the revisions of SEC Rule 17a-11, the Department is also 
making minor housekeeping changes to Sec. 405.3(a) by deleting 
paragraphs 405.3(a) (4) and (5), which are no longer applicable, and 
redesignating the remaining paragraphs. To correct an oversight, the 
Department is adding new paragraph 405.3(c)(7) that indicates that 
references in SEC Rule 17a-11 to Sec. 240.17a-3, relating to records, 
mean Sec. 404.2 of the GSA regulations. This provision, which appears 
in paragraphs 405.3 (a) and (b), was inadvertently excluded from 
paragraph 405.3(c) when the implementing GSA regulations were adopted 
in July 1987.

B. Technical Amendments to Section 402.2d

    The Department is also making a technical amendment to paragraph 
(j) of Sec. 402.2d of the GSA regulations. Currently, paragraph (j) of 
Sec. 402.2d, which modifies Sec. 240.15c3-1d(c)(5)(i), prohibits a 
registered government securities broker or dealer from entering into a 
temporary subordinated loan during any period in which the broker or 
dealer is subject to ``any of the reporting provisions'' of Sec. 405.3. 
Although the requirement in Sec. 405.3 to file supplemental financial 
reports (i.e., FOGS or FOCUS Reports) in the event of a capital 
deficiency or the breaching of early warning levels is being 
eliminated, the Department is retaining the capital rule's prohibition 
against a registered government securities broker or dealer obtaining a 
temporary subordinated loan during a period of financial or operational 
difficulty. Accordingly, paragraph (j) is being amended to prohibit a 
registered government securities broker or dealer from obtaining a 
temporary subordinated loan if it has given notice under Sec. 405.3 
within the preceding thirty days. This amendment will enable the DEAs 
to prevent a registered government securities broker or dealer from 
obtaining temporary loans during periods in which the broker or dealer 
may be experiencing financial or operational difficulties.

III. Special Analysis

    Because this final rule is merely a conforming amendment, the 
Department has determined that it is not a ``significant regulatory 
action'' as defined in Executive Order 12866.
    In addition, in accordance with the Administrative Procedure Act (5 
U.S.C. 553(b)), the Department for good cause finds that issuing a 
notice of proposed rulemaking and requesting comment are unnecessary. 
This rulemaking merely makes corrections to the existing GSA rule to 
conform it to the amendments to the SEC rule upon which it is based. 
The rule makes no independent substantive changes in the treatment of 
government securities brokers and dealers--they have previously been 
subject to reporting requirements parallel to other registered brokers 
and dealers, and they will continue to be subject to reporting 
requirements parallel to other registered brokers and dealers. This 
rule change imposes no additional burdens or requirements on government 
securities brokers and dealers. For these reasons, the Department is 
issuing the rule in final form, with an immediate effective date, 
pursuant to 5 U.S.C. 553(d)(3).
    Because no notice and public comment are required for this 
rulemaking, the provisions of the Regulatory Flexibility Act (5 U.S.C 
601, et seq.), do not apply. In addition, the information collections 
concerning this rule have been previously reviewed and approved by the 
Office of Management and Budget under the Paperwork Reduction Act (44 
U.S.C. 3504(h)) and assigned control number 1535-0089. This rulemaking 
makes no substantive change to the information collection requirements 
except to delete the requirement that a registered government 
securities broker or dealer file a FOGS or FOCUS Report after 
experiencing a capital deficiency or triggering the early warning level 
notice requirements.

List of Subjects

17 CFR Part 402

    Brokers, Government securities.

17 CFR Part 405

    Brokers, Government securities, Reporting and recordkeeping 
requirements.

    For the reasons set out in the Preamble, 17 CFR Parts 402 and 405 
are amended as follows:

PART 402--FINANCIAL RESPONSIBILITY

    1. The authority citation for Part 402 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)(A), (b)(4)).

    2. Section 402.2d is amended by revising the second sentence of 
paragraph (j) to read as follows:


Sec. 402.2(d)  Appendix D--Modification of Sec. 240.15c3-1d of this 
title, relating to satisfactory subordination agreements, for purposes 
of Sec. 402.2.

* * * * *
    (j) * * *
    ``(i) * * * This temporary relief shall not apply to a government 
securities broker or dealer if, within the preceding thirty calendar 
days, it has given notice pursuant to Sec. 405.3, or if immediately 
prior to entering into such subordination agreement, the liquid 
capital, as defined in Sec. 402.2(d) of this title, of such broker or 
dealer would be less than 150% of total haircuts, as defined in 
Sec. 402.2(g) of this title, or the amount of its then outstanding 
subordination agreements exceeds the limits specified in Sec. 240.15c3-
1(d). * * *
* * * * *

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)(4)).

    4. Section 405.3 is amended by revising the section title; by 
deleting paragraphs (a)(4) and (a)(5); by redesignating paragraphs 
(a)(6), (a)(7) and (a)(8) as (a)(4), (a)(5) and (a)(6), respectively; 
by revising newly redesignated (a)(5); by redesignating and revising 
paragraph (c)(5) as (c)(6); and adding new paragraphs (c)(5) and (c)(7) 
to read as follows:


Sec. 405.3  Notification provisions for certain registered government 
securities brokers and dealers.

    (a) * * *
    (5) Section 240.17a-11(c), for the purposes of this section, is 
modified to read as follows:
    ``(c) Every registered government securities broker or dealer shall 
send notice promptly (but within 24 hours) in accordance with paragraph 
(g) of this section if a computation made pursuant to the requirements 
of Sec. 402.2 of this title shows, at any time during the month, that 
its liquid capital is less than 150 percent of total haircuts, 
determined in accordance with Sec. 402.2 of this title, or that its 
capital after deducting total haircuts from liquid capital is less than 
120 percent of the registered government securities broker or dealer's 
minimum capital requirement specified in Sec. 402.2 (b) or (c) of this 
title as applicable.''
* * * * *
    (c) * * *
    (5) Sec. 240.17a-11(c) for the purposes of this section is modified 
to read as follows:
    ``(c) Every broker or dealer shall send notice promptly (but within 
24 hours) after the occurrence of the events specified in paragraphs 
(c)(1), (c)(2), (c)(3), or (c)(4) of this section in accordance with 
paragraph (g) of this section:''
    (6) A new paragraph 240.17a-11(c)(4) is added to read as follows:
    ``(4) If a computation made by a government securities broker or 
dealer that is not a registered broker or dealer but that is also a 
futures commission merchant registered with the Commodity Futures 
Trading Commission shows that:
    ``(i) The adjusted net capital of such entity is less than the 
greater of:
    ``(A) 150 percent of the appropriate minimum dollar amount required 
by Sec. 1.17(a)(1)(i), or
    ``(B) 6 percent of the following amount: The customer finds 
required to be segregated pursuant to Sec. 4d(2) of the Commodity 
Exchange Act and Sec. 1.17 of this title, less the market value of 
commodity options purchased by option customers on or subject to the 
rules of a contract market, provided, however, the deduction for each 
option customer shall be limited to the amount of customer funds in 
such option customer's account; or
    ``(ii) At any point during the month, aggregate indebtedness is in 
excess of 1200 percent of net capital or total net capital is less than 
120 percent of the minimum net capital required.''
    (7) References to Sec. 240.17a-3, relating to records, mean 
Sec. 404.2 of this chapter.

(Approved by the Office of Management and Budget under control 
number 1535-0089.)

    Date: October 11, 1994.
Frank N. Newman,
Under Secretary for Domestic Finance.
[FR Doc. 94-26545 Filed 10-25-94; 8:45 am]
BILLING CODE 4810-39-P