[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