[Federal Register Volume 68, Number 215 (Thursday, November 6, 2003)]
[Proposed Rules]
[Pages 62910-62939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27307]



[[Page 62909]]

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Part III





Securities and Exchange Commission





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17 CFR Part 240



Supervised Investment Bank Holding Companies; Proposed Rules

  Federal Register / Vol. 68, No. 215 / Thursday, November 6, 2003 / 
Proposed Rules  

[[Page 62910]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-48694; File No. S7-22-03]
RIN 3235-AI97


Supervised Investment Bank Holding Companies

AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing rules to implement Section 17(i) 
of the Securities Exchange Act of 1934, which created a new framework 
for supervising an investment bank holding company (``IBHC''). An IBHC 
that meets certain, specified criteria may voluntarily file a notice of 
intention with the Commission to become a supervised investment bank 
holding company (``SIBHC'') and be subject to supervision on a group-
wide basis. Pursuant to the statute and proposed rules, an IBHC would 
be eligible to be an SIBHC if it is not affiliated with certain types 
of banks and has a substantial presence in the securities markets. The 
proposed rules would provide an IBHC with a process to become 
supervised by the Commission as an SIBHC, and would establish 
regulatory requirements for an SIBHC, including requirements regarding 
its group-wide internal risk management control system, recordkeeping, 
and periodic reporting (including reporting of consolidated 
computations of allowable capital and risk allowances consistent with 
the Basel Standards). The Commission is also proposing to add an 
exemption to the Commission's risk assessment rules to exempt a broker-
dealer that is affiliated with an SIBHC because the SIBHC will be 
maintaining records and reporting to the Commission regarding the 
financial and operational condition of members of the affiliate group. 
Finally, the Commission is proposing to adjust the audit requirements 
for OTC derivative dealers to allow accountants to use agreed-upon 
procedures when conducting audits of risk management control systems.

DATES: Comments must be received on or before February 4, 2004.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or by email, but not 
by both methods. Comment letters sent by hard copy should be submitted 
in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Alternatively, comment letters sent electronically should be submitted 
to the following electronic-mail address: [email protected]. All 
comment letters should refer to File No. S7-22-03. This file number 
should be included in the subject line if you use electronic mail. We 
will make all comment letters available for public inspection and 
copying in our public reference room at the above address. We will post 
electronically submitted comment letters on the Commission's Internet 
Web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic-mail addresses, from electronic submissions. You 
should submit only information that you wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: With respect to general questions, 
contact Catherine McGuire, Chief Counsel, Lourdes Gonzalez, Assistant 
Chief Counsel, or Linda Stamp Sundberg, Attorney Fellow, at (202) 942-
0073, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.
    With respect to calculations of allowable capital and risk 
allowances, internal risk management control systems, and books and 
records and reporting requirements, contact Michael A. Macchiaroli, 
Associate Director, at (202) 942-0132, Thomas K. McGowan, Assistant 
Director, at (202) 942-4886, Rose Russo Wells, Attorney, at (202) 942-
0143, Bonnie L. Gauch, Attorney, at (202) 942-0765, or David Lynch, 
Financial Economist, at (202) 942-0059, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 
publishing for comment proposed amendments to Rule 17a-12 [17 CFR 
240.17a-12] and Rules 17h-1T and 17h-2T [17 CFR 240.17h-1T and 240.17h-
2T], and proposed new Rules 17i-1 through 17i-8 [17 CFR 240.17i-1 
through 240.17i-8] under the Exchange Act [15 U.S.C. 78a et seq.]

Table of Contents

I. Introduction
II. Description of the Proposed Rules
    A. Proposed Rule 17i-1: Definitions
    B. Proposed Rule 17i-2: Notice of Intention to be Supervised by 
the Commission as an SIBHC
    1. Election Criteria
    2. Notice of Intention to Become an SIBHC
    3. Process for Review of Notices of Intention
    C. Proposed Rule 17i-3: Withdrawal from Supervision as an SIBHC
    D. Proposed Rule 17i-4: Internal Risk Management Control System 
Requirements for SIBHCs
    E. Proposed Rule 17i-5: Record Creation, Maintenance, and Access 
Requirements for SIBHCs
    1. Record Creation
    2. Record Maintenance
    3. Access to Records
    F. Proposed Rule 17i-6: Reporting Requirements for SIBHCs
    1. Monthly Reports
    2. Quarterly Reports
    3. Additional Reports
    4. Annual Audit Report
    5. Accountant's Report on Management Controls--Paragraph (i)(2) 
of Proposed Rule 17i-6 and Amendment to Paragraph (l) of Existing 
Rule 17a-12
    G. Exemption from Risk Assessment Rules for Broker-Dealer 
Affiliates of SIBHCs
    H. Proposed Rule 17i-7: Calculations of Allowable Capital and 
Risk Allowances or Alternative Capital Assessment
    1. Calculation of Consolidated Allowable Capital
    2. Calculation of Consolidated Allowance for Market Risk
    3. Calculation of Consolidated Allowance for Credit Risk
    4. Calculation of Consolidated Allowance for Operational Risk
    5. Alternative Capital Assessment
    6. General Questions Regarding Proposed Rule 17i-7
    7. Other Questions Regarding Capital Calculation
    I. Proposed Rule 17i-8: Notification Requirements for SIBHCs
III. General Request for Comment Regarding Proposed Rules
IV. Paperwork Reduction Act
    A. Collection of Information Under Amendments to Rules 17h-1T 
and 17h-2T and New Rules 17i-1 through 17i-8
    B. Proposed Use of Information
    C. Respondents
    D. Reporting and Recordkeeping Burdens
    1. Amendments to Rules 17h-1T and 17h-2T
    2. Proposed Rule 17i-2
    3. Proposed Rule 17i-3
    4. Proposed Rule 17i-4
    5. Proposed Rule 17i-5
    6. Proposed Rule 17i-6
    7. Proposed Rule 17i-8
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Record Retention Period
    H. Request for Comments Regarding Paperwork Burden Estimates
V. Costs and Benefits of the Proposed Rules and Rule Amendments
    A. Benefits
    B. Costs
    1. Ongoing Costs
    2. One-time Costs
    C. Request for Comment Regarding Analysis of Costs and Benefits
VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation
VII. Regulatory Flexibility Act Certification
VIII. Consideration of Impact on the Economy
IX. Statutory Authority

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I. Introduction

    Section 231 of the Gramm-Leach-Bliley Act of 1999 \2\ (the 
``GLBA'') amended Section 17 of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or the ``Act'') to create a regulatory framework 
under which a holding company of a broker-dealer may voluntarily be 
supervised by the Commission as an SIBHC. The rules we are proposing 
today would create a framework for the Commission to supervise SIBHCs. 
These rules also would enhance the Commission's supervision of the 
SIBHC's subsidiary broker-dealers through collection of additional 
information and examinations of affiliates of those broker-dealers. 
This framework would include qualification criteria for IBHCs that file 
notices of intention to be supervised by the Commission, as well as 
recordkeeping and reporting requirements for SIBHCs. An IBHC that meets 
the criteria set forth in the proposed rules would not be required to 
become an SIBHC; supervision as an SIBHC is voluntary. Taken as a 
whole, the proposed framework would permit the Commission to better 
monitor the financial condition, risk management, and activities of a 
broker-dealer's parent and affiliates on a group-wide basis. In 
particular, it would create a formal process through which the 
Commission could access important information regarding activities of a 
broker-dealer's affiliates that could impair the financial and 
operational stability of the broker-dealer or the SIBHC.
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    \2\ Pub. L. 106-102, 113 Stat. 1338 (1999).
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    In addition, securities firms that do business in the European 
Union (``EU'') have indicated that they may need to demonstrate that 
they have consolidated supervision at the holding company level that is 
``equivalent'' to EU consolidated supervision.\3\ Generally, EU 
``consolidated supervision'' would take the form of a series of rules, 
imposed at the holding company level, regarding firms' internal 
controls, capital adequacy, intra-group transactions, and risk 
concentration. Without a demonstration of ``equivalent'' supervision, 
securities firms located in the EU have stated that they may either be 
subject to additional capital charges or required to form a sub-holding 
company in the EU.
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    \3\ See ``Directive 2002/87/EC of the European Parliament and of 
the Council of 16 December 2002.''
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    Congress addressed these concerns by enacting Section 17(i) of the 
Exchange Act,\4\ which authorizes an IBHC to voluntarily elect to be 
supervised by the Commission as an SIBHC.\5\ Pursuant to Section 
17(i)(1)(A) of the Exchange Act, an IBHC that is not: (i) An affiliate 
of an insured bank (with certain exceptions) or a savings association; 
\6\ (ii) a foreign bank, foreign company, foreign bank branch agency, 
or a state-chartered commercial lending company; \7\ or (iii) a foreign 
bank that controls an Edge Act Corporation \8\ may elect to become an 
SIBHC.\9\
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    \4\ See H.R. Conf. Rep. No. 106-434, 165 (1999).
    \5\ Exchange Act Section 17(i) [15 U.S.C. 78q(i)].
    \6\ Exchange Act Section 17(i)(1)(A)(i) [15 U.S.C. 
78q(i)(1)(A)(i)].
    \7\ Exchange Act Section 17(i)(1)(A)(ii) (State-chartered 
commercial lending companies described in Section 8(a) of the 
International Banking Act of 1978 [12 U.S.C. 3106(a)]) [15 U.S.C. 
78q(i)(1)(A)(ii)].
    \8\ Exchange Act Section 17(i)(1)(A)(iii) (12 U.S.C. 611 
(``Federal Reserve Act''), and Section 25A thereunder [12 U.S.C. 
611]) [15 U.S.C. 78q(i)(1)(A)(iii)].
    \9\ Exchange Act Section 17(i)(1)(A) [15 U.S.C. 78q(i)(1)(A)].
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    This regulatory framework for SIBHCs is intended to provide a basis 
for non-U.S. financial regulators to treat the Commission as the 
principal U.S. consolidated, home-country supervisor \10\ for SIBHCs 
and their affiliated broker-dealers. This would minimize duplicative 
regulatory burdens on broker-dealers that are active in the EU and in 
other jurisdictions that may have similar laws.
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    \10\ See supra note 4.
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    Under Section 17(i) of the Exchange Act, the Commission may adopt 
rules regarding, among other things: (i) The form of an IBHC's notice 
of intention to become an SIBHC and the information and documents to be 
included with that notice;\11\ and (ii) creation and maintenance of 
records and reports, and submission of those reports to the 
Commission.\12\ Further, Section 17(i)(3)(C) of the Exchange Act 
authorizes the Commission to examine an SIBHC (including any affiliate) 
in order to (i) inform the Commission regarding the nature of the 
operations and financial condition of the SIBHC and its affiliates, the 
financial and operational risks within the SIBHC that may affect any 
broker-dealer controlled by the SIBHC, and the systems of the SIBHC and 
its affiliates for monitoring and controlling those risks; and (ii) 
monitor compliance with the provisions of Section 17(i) of the Exchange 
Act.\13\ Section 17(i)(3)(C) also provides that the Commission may 
examine the SIBHC and any affiliate to monitor compliance with the 
provisions of Exchange Act Section 17(i), provisions governing 
transactions and relationships between any broker-dealer affiliated 
with the SIBHC and any of the company's other affiliates, as well as 
applicable provisions of the Bank Secrecy Act [31 U.S.C. 53, subchapter 
II].\14\ While Section 17(i) of the Exchange Act authorizes the 
Commission to inspect any affiliate of an SIBHC, it also limits the 
focus and scope of any examination to the SIBHC and any affiliate of 
the SIBHC that, because of its size, condition, or activities, the 
nature or size of the transactions between such affiliate and any 
affiliated broker-dealer, or the centralization of functions within the 
holding company system, could, in the discretion of the Commission, 
have a materially adverse effect on the operational or financial 
condition of the broker-dealer.\15\
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    \11\ Exchange Act Section 17(i)(1)(B) [15 U.S.C. 78q(i)(1)(B)].
    \12\ Exchange Act Section 17(i)(3)(A) [15 U.S.C. 78q(i)(3)(A)].
    \13\ 15 U.S.C. 78q(i)(3)(C).
    \14\ Exchange Act Section 17(i)(3)(C)(i) [15 U.S.C. 
78q(i)(3)(C)(i)].
    \15\ Exchange Act Section 17(i)(3)(C)(ii) [15 U.S.C. 
78q(i)(3)(C)(ii)].
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    The rules proposed under Section 17(i) are not intended to 
duplicate regulation of banks, insurance companies, or futures 
commission merchants by other regulatory agencies. Section 17(i) of the 
Exchange Act directs the Commission to: (i) Accept, to the fullest 
extent possible, reports that an SIBHC or an affiliate thereof may have 
been required to provide to another appropriate regulatory agency or 
self-regulatory organization;\16\ (ii) use, to the fullest extent 
possible, reports of examination made by the appropriate regulatory 
agency or state insurance regulator;\17\ and (iii) defer to the 
appropriate regulatory agency or state insurance regulator with regard 
to interpretation and enforcement of banking or insurance 
regulations.\18\
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    \16\ Exchange Act Section 17(i)(3)(B)(i) [15 U.S.C. 
78q(i)(3)(B)(i)].
    \17\ Exchange Act Section 17(i)(3)(C)(iii) [15 U.S.C. 
78q(i)(3)(C)(iii)].
    \18\ Exchange Act Section 17(i)(4) [15 U.S.C. 78q(i)(4)].
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II. Description of the Proposed Rules

A. Proposed Rule 17i-1: Definitions

    Proposed Rule 17i-1 would incorporate the definitions set forth in 
Section 17(i)(5) of the Exchange Act \19\ into the rules promulgated 
under Section 17(i). Although these definitions apply regardless of 
whether they are incorporated into these rules, incorporating them lets 
individuals reading the proposed rules know that the terms are defined, 
and directs them to those definitions. In addition, the proposed rule 
includes definitions of the terms ``affiliate group'' and ``material 
affiliate,'' which are used

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throughout proposed Rules 17i-1 through 17i-8.
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    \19\ 15 U.S.C. 78q(i)(5).
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    Pursuant to the definitions in the Act, the term ``investment bank 
holding company'' means any person, other than a natural person, that 
owns or controls one or more broker-dealers and the associated persons 
of the investment bank holding company.\20\ The term ``associated 
person of an investment bank holding company'' means any person 
directly or indirectly controlling, controlled by, or under common 
control with the IBHC.\21\ Thus, an IBHC includes the holding company 
and all other entities within the holding company structure that meet 
the ``control'' test. A ``supervised investment bank holding company'' 
is any IBHC that is supervised by the Commission pursuant to Section 
17(i) of the Exchange Act.\22\
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    \20\ Exchange Act Section 17(i)(5)(A) [15 U.S.C. 78q(i)(5)(A)].
    \21\ Exchange Act Section 17(i)(5)(F) [15 U.S.C. 78q(i)(5)(F)].
    \22\ 15 U.S.C. 78q(i)(5)(B).
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    Sections 17(i)(5)(C), (D), and (E) of the Exchange Act state that, 
for purposes of Section 17(i) of the Exchange Act, the terms 
``affiliate,'' \23\ ``bank,'' \24\ ``bank holding company,'' \25\ 
``company,'' \26\ ``control,'' \27\ and ``savings association'' \28\ 
have the same meaning as given in Section 2 of the Bank Holding Company 
Act of 1956 \29\ (the ``Bank Holding Company Act''); the term ``insured 
bank'' has the same meaning as given in Section 3 of the Federal 
Deposit Insurance Act; \30\ and the term ``foreign bank'' has the same 
meaning as given in Section 1(b)(7) of the International Banking 
Act.\31\
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    \23\ Bank Holding Company Act Section 2(k) [12 U.S.C. 1841(k)].
    \24\ Bank Holding Company Act Section 2(c) [12 U.S.C. 1841(c)].
    \25\ Bank Holding Company Act Section 2(a) [12 U.S.C. 1841(a)].
    \26\ Bank Holding Company Act Section 2(b) [12 U.S.C. 1841(b)].
    \27\ Bank Holding Company Act Section 2(a)(2) et seq. [12 U.S.C. 
1841(a)(2) et seq].
    \28\ Bank Holding Company Act Section 2(j) [12 U.S.C. 1841(j)].
    \29\ 12 U.S.C. 1841.
    \30\ 12 U.S.C. 1813(h).
    \31\ 12 U.S.C. 3101(7).
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    Proposed Rule 17i-1 also includes definitions of the terms 
``affiliate group'' and ``material affiliate.'' The term ``affiliate 
group'' is defined to include the SIBHC and every affiliate of the 
SIBHC because we believe that we would need to obtain information 
related to all affiliates to provide effective supervision of an SIBHC. 
We define the term ``material affiliate'' to include any member of the 
affiliate group that is material to the SIBHC because, based on the 
Commission's experience in reviewing holding company documentation, 
receiving information specific to affiliates material to a holding 
company provides us with a better understanding of the holding company, 
including how risk is managed on a consolidated level.
    We request comment on whether the proposed definitions of affiliate 
group and material affiliate are appropriate, whether it would be 
helpful to reproduce the statutory definitions within the rules, and 
whether any additional terms need to be defined in these rules.

B. Proposed Rule 17i-2: Notice of Intention To Be Supervised by the 
Commission as an SIBHC

    Section 17(i)(1)(B) of the Exchange Act states that in order to 
elect to become an SIBHC, an IBHC must file with the Commission a 
written notice of intention to become supervised by the Commission in 
such form and containing such information and documents concerning the 
IBHC as the Commission, by rule, may prescribe as necessary and 
appropriate in furtherance of the purposes of Section 17 of the Act (a 
``Notice of Intention'').\32\ Proposed Rule 17i-2 would provide the 
method by which an IBHC could elect to become an SIBHC. In addition, 
consistent with Section 17(i)(1)(B) of the Exchange Act, proposed Rule 
17i-2 indicates that the IBHC will automatically become an SIBHC 45 
days after the Commission receives its completed Notice of Intention 
unless the Commission issues an order indicating either that it will 
begin its supervision sooner or that it does not believe it to be 
necessary or appropriate in furtherance of Section 17 of the Act for 
the IBHC to be so supervised. Finally, proposed Rule 17i-2 sets forth 
the criteria the Commission would use to make this determination.\33\
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    \32\ Exchange Act Section 17(i)(1)(B) [15 U.S.C. 78q(i)(1)(B)].
    \33\ Id.
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    If an IBHC becomes an SIBHC, supervision of its affiliated broker-
dealer and related associated persons generally would not be affected, 
except that a broker-dealer affiliated with an SIBHC would be exempted 
from the requirements of Rules 17h-1T and 17h-2T.
1. Election Criteria
    Section 17(i)(1)(A) of the Exchange Act sets forth certain 
limitations on whether an IBHC is eligible to become an SIBHC.\34\ 
Specifically, an IBHC that is not (i) an affiliate of an insured bank 
(with certain exceptions) or a savings association; \35\ (ii) a foreign 
bank, foreign company, or a company that is described in section 8(a) 
of the International Banking Act of 1978; \36\ or (iii) a foreign bank 
that controls, directly or indirectly, a corporation chartered under 
section 25A of the Federal Reserve Act \37\ would be eligible to file a 
Notice of Intention. Paragraph (a) of proposed Rule 17i-2 would 
incorporate these statutory exclusions.
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    \34\ Exchange Act Section 17(i)(1)(A) [15 U.S.C. 78q(i)(1)(A)].
    \35\ Exchange Act Section 17(i)(1)(A)(i) [15 U.S.C. 
78q(i)(1)(A)(i)].
    \36\ Exchange Act Section 17(i)(1)(A)(ii) [15 U.S.C. 
78q(i)(1)(A)(ii)].
    \37\ See Exchange Act Section 17(i)(1)(A)(iii) (Federal Reserve 
Act Sec.  25A [12 U.S.C. 611]) [15 U.S.C. 78q(i)(1)(A)(iii)].
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2. Notice of Intention To Become an SIBHC
    Proposed Rule 17i-2(b) would require that an IBHC that elects to 
become an SIBHC file a written Notice of Intention with the Commission 
that includes (i) a request to become an SIBHC; (ii) a statement 
certifying that it is not affiliated with an entity listed in Section 
17(i)(1)(A) of the Exchange Act; \38\ (iii) documentation demonstrating 
that it owns or controls at least one broker-dealer that maintains a 
substantial presence in the securities business as evidenced either by 
its holding tentative net capital of $100 million or more or otherwise; 
and (iv) other supplemental documents described below.
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    \38\ 15 U.S.C. 78q(i)(1)(A).
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    To assist the Commission in evaluating the IBHC's activities, 
financial condition, risk management control systems, and the 
relationships among its associated persons in order to determine 
whether Commission supervision of the IBHC is necessary and appropriate 
in furtherance of the purposes of Section 17 of the Exchange Act, an 
IBHC also would be required to file the following supplemental 
documents with its Notice of Intention pursuant to proposed Rule 17i-2:
    [sbull] A narrative describing the business and organization of the 
IBHC;
    [sbull] An alphabetical list of the members of the affiliate group, 
a designation of those affiliates it considers to be ``material 
affiliates'' and the financial regulator(s), if any, with which the 
affiliate is registered;
    [sbull] An organizational chart identifying the IBHC and its 
material affiliates;
    [sbull] Consolidated and consolidating financial statements;
    [sbull] Certain sample calculations of allowable capital and 
allowances for market, credit, and operational risk or

[[Page 62913]]

alternative capital assessments made in accordance with proposed Rule 
17i-7;
    [sbull] A list of the positions held by the affiliate group in its 
proprietary accounts and the methods the IBHC intends to use for 
computing allowances for market risk and credit risk on those 
positions;
    [sbull] A detailed description of the mathematical models the IBHC 
intends to use to calculate market and credit risk;
    [sbull] A description of how the IBHC proposes to calculate current 
exposure;
    [sbull] A description of how the IBHC proposes to determine credit 
risk weights;
    [sbull] A description of the method the IBHC proposes to use to 
calculate its allowance for operational risk;
    [sbull] A description of the internal risk management control 
system established by the IBHC to manage the risks of the affiliate 
group and how that system satisfies the requirements of proposed Rule 
17i-4;
    [sbull] Sample risk reports that the holding company provides to 
the persons responsible for managing the risks of the affiliate group; 
and
    [sbull] An undertaking providing that the SIBHC will cooperate with 
the Commission as necessary if the disclosure of any information with 
regard to Rules 17i-1 through 17i-8 would be prohibited by law or 
otherwise and that the SIBHC will obtain, for any non-U.S. affiliate, 
consent to the jurisdiction of the Commission and an agreement to 
maintain a U.S. registered agent.
    Because each firm manages its internal risks differently, the 
Commission, in its review of the Notice of Intention, would use the 
information and documents provided with the Notice of Intention to 
assess each firm's business, financial condition, and internal risk 
management control systems. We have successfully used similar 
information in the past to evaluate and monitor risks to broker-
dealers. In addition to the information and documentation described in 
the proposed rules, the IBHC would be required to furnish such other 
information and documents, including documents relating to its 
financial position, internal controls, and mathematical models, as the 
Commission may request to complete its review of the Notice of 
Intention. A Notice of Intention would not be complete until the IBHC 
has provided to the Commission all the information and documentation 
specified in the Rule and requested by the Commission.
    Further, depending on the relationship or the geographic location 
of the SIBHC and its affiliates, the Commission could require that an 
SIBHC obtain additional agreements that may be necessary for the 
Commission to adequately assess any risks that affiliate may pose to 
the SIBHC and its subsidiary broker-dealers. For example, the 
Commission may have a greater concern regarding access to information 
if a broker-dealer's affiliate operates in a jurisdiction that limits 
the exchange of information through bank secrecy laws or other 
impediments. Paragraph (b)(xiv) of proposed Rule 17i-2 would address 
this issue by requiring that an SIBHC provide the Commission with an 
undertaking indicating that it agrees to cooperate with the Commission 
as needed, including by describing any secrecy laws or other 
impediments that could restrict the ability of the SIBHC to provide 
information on the operations or activities of the SIBHC. If any 
material impediments exist, we would require the SIBHC to describe the 
manner in which it proposes to provide the Commission with adequate 
assurances of access to information.
    Pursuant to paragraph (c) of proposed Rule 17i-2, IBHCs and SIBHCs 
would have a continuing requirement to amend their Notices of 
Intention. If any of the information or documentation filed with the 
Commission as part of the Notice of Intention is found to be or becomes 
inaccurate prior to a Commission determination, the IBHC would be 
required to notify the Commission and provide the Commission with a 
description of the circumstances in which the information or 
documentation was found to be or became inaccurate along with updated, 
accurate information and documents. Whereas after a Commission 
determination, if an SIBHC materially changes a mathematical model or 
other method used to compute allowable capital or allowance for market, 
credit, or operational risk, or its internal risk management control 
systems as described in its Notice of Intention, prior to making the 
changes the SIBHC would be required to file an amended Notice of 
Intention describing the changes.
    We request comment as to whether the information and documents 
required to be included in the Notice of Intention pursuant to 
paragraph (b) of proposed Rule 17i-2 are appropriate, or whether the 
Commission should receive other financial, operational, or other types 
of information. If so, please indicate what additional information or 
documentation the Commission should require, and how the additional 
information and documents may assist the Commission in evaluating the 
financial and operational position of an IBHC.
3. Process for Review of Notice of Intention
    Pursuant to paragraph (d)(2) of proposed Rule 17i-2, an IBHC would 
become an SIBHC subject to Commission supervision pursuant to Section 
17(i) of the Exchange Act 45 calendar days after the Commission 
receives a completed Notice of Intention,\39\ unless the Commission 
issues an order determining either that (i) the Commission will begin 
to supervise the IBHC as an SIBHC prior to 45 calendar days after the 
Commission received the completed Notice of Intention to become 
supervised; or (ii) the Commission will not supervise the IBHC because 
supervision of the entity as an SIBHC is not necessary or appropriate 
in furtherance of the purposes of Section 17 of the Exchange Act.\40\
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    \39\ Pursuant to paragraph (d)(1) of proposed Rule 17i-2, a 
Notice of Intention to be supervised by the Commission as an SIBHC 
would not be complete until the IBHC had filed all the documentation 
and information required pursuant to paragraphs (a) through (c) of 
that proposed Rule with the Commission.
    \40\ Exchange Act Sec.  17(i)(1)(B) [15 U.S.C. 78q(i)(1)(B)].
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    The Commission may begin supervising the IBHC as an SIBHC 
``[u]nless the Commission finds that such supervision is not necessary 
or appropriate in furtherance of the purposes'' of Section 17.\41\ The 
purposes of Section 17 are quite broad. Section 17 generally permits 
the Commission to carry out its regulatory oversight responsibilities 
regarding broker-dealers by establishing rules related to 
recordkeeping, reporting, and examination. In addition, Section 17(h) 
provides the Commission authority to require that a broker-dealer 
obtain information and make and keep such records and reports regarding 
the broker-dealer's affiliates and the financial and securities 
activities, capital and funding of certain of those affiliates \42\ as 
the Commission prescribes to assess the financial and operational risks 
to a broker-dealer from those affiliates.
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    \41\ 15 U.S.C. 17(i)(1)(B).
    \42\ Those affiliates would include affiliates whose business 
activities are reasonably likely to have a ``material impact'' on 
the financial or operational condition of the broker-dealer.
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    We believe that, consistent with the purposes of Section 17, the 
Commission's supervision of an IBHC as an SIBHC may be necessary and 
appropriate only when the IBHC is affiliated with a broker-dealer that 
has a

[[Page 62914]]

``substantial presence'' in the securities business.\43\ Supervision of 
an SIBHC that owns or controls a broker-dealer with a substantial 
presence in the securities business would permit the Commission to be 
better informed regarding the financial and operational conditions of 
broker-dealers and their holding companies whose failure could have a 
materially adverse impact on other securities market participants, thus 
reducing systemic risk and furthering the purposes of Section 17. 
Evidence that an IBHC owns or controls a broker-dealer that maintains 
$100 million in tentative net capital would be sufficient to 
demonstrate a substantial presence in the securities business.
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    \43\ As set forth in paragraph (d)(2)(i)(B) of proposed Rule 
17i-2.
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    Paragraph (d)(1) of proposed Rule 17i-2 states that all Notices of 
Intention, amendments, and other documentation and information filed 
pursuant to proposed Rule 17i-2 will be accorded confidential 
treatment. We believe it is important to accord confidential treatment 
to the information and documents an SIBHC would be required provide to 
the Commission as part of its Notice of Intention because the 
information and documents would generally be highly sensitive, non-
public business information.
    The Commission seeks comment on the requirement that an SIBHC own 
or control a broker-dealer that has a substantial presence in the 
securities business. In addition, we request comment as to whether 
maintenance by a broker-dealer of a specified dollar amount of 
tentative net capital (e.g., $100 million) is an appropriate method to 
demonstrate whether a broker-dealer has a substantial presence in the 
securities business. If so, is $100 million in tentative net capital 
appropriate, or should the dollar amount be higher or lower?

C. Proposed Rule 17i-3: Withdrawal From Supervision as an SIBHC

    Proposed Rule 17i-3 would permit an SIBHC to withdraw from 
Commission supervision by filing a notice of withdrawal with the 
Commission. Pursuant to the proposed Rule, a notice of withdrawal from 
supervision would take effect one year after it is filed with the 
Commission (or a shorter or longer period that the Commission deems 
necessary or appropriate to ensure effective supervision of the 
material risks to the SIBHC and any affiliated broker-dealer or to 
prevent evasion of the purposes of Section 17 of the Exchange Act).\44\ 
The proposed Rule would also require that an SIBHC include in its 
notice of withdrawal a statement that it is in compliance with proposed 
Rule 17i-2(c) regarding amendments to its Notice of Intention to help 
to assure that the Commission has updated information when considering 
the SIBHC's withdrawal request.
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    \44\ See paragraph (b) of proposed Rule 17i-3.
---------------------------------------------------------------------------

    Paragraph (c) of proposed Rule 17i-3 states that the Commission may 
discontinue supervising an SIBHC if the Commission finds that the SIBHC 
no longer exists or is no longer an IBHC, or that continued supervision 
of the SIBHC is not necessary or appropriate in furtherance of the 
purposes of Section 17. Among other things, if an SIBHC makes a 
material amendment to a mathematical model, its internal risk 
management control systems, or its corporate structure as described in 
its Notice of Intention (and as modified from time to time), the 
Commission would review whether the change would cause continued 
supervision of the SIBHC to no longer be necessary or appropriate in 
furtherance of the purposes of Section 17 of the Act.
    In order to determine whether continued supervision of an SIBHC is 
necessary or appropriate in furtherance of the purposes of Section 17 
of the Act, the Commission would consider the same criteria it 
initially considered to determine whether an IBHC will be supervised by 
the Commission as an SIBHC.
    We request comment on all aspects of the withdrawal provisions 
included in proposed Rule 17i-3. Specifically, we request comment on 
whether the information the Commission intends to use to determine 
whether continued supervision of an SIBHC is necessary or appropriate 
in furtherance of the purposes of Section 17 of the Act is appropriate, 
and whether the Commission should consider any additional factors. In 
addition, we request comment as to whether the time frames for 
withdrawal included in the proposed Rule are appropriate, or whether 
they should be longer or shorter. If the time periods should be longer 
or shorter, under what circumstances?

D. Proposed Rule 17i-4: Internal Risk Management Control System 
Requirements for SIBHCs

    Participants in the securities markets are exposed to various 
risks, including (i) market risk; \45\ (ii) credit risk; \46\ (iii) 
operational risk; \47\ (iv) funding risk ;\48\ and (v) legal risk.\49\ 
Large broker-dealers and IBHCs generally are more exposed to high 
levels of these types of risk due, in part, to their intricate 
corporate structures, the complexity of business activities in which 
they engage, and the diverse range of financial instruments they trade. 
Due to the level of risk exposures created by these types of business 
activities and products, it is important for firms to implement robust 
risk management control systems. A firm that has adopted and follows 
appropriate risk management controls reduces its risk of significant 
loss, which also reduces the risk that those losses will be spread to 
other market participants or throughout the financial markets as a 
whole.\50\
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    \45\ Market risk involves the risk that prices or rates will 
adversely change due to economic forces. Such risks include adverse 
effects of movements in equity and interest rate markets, currency 
exchange rates, and commodity prices. Market risk can also include 
the risks associated with the cost of borrowing securities, dividend 
risk, and correlation risk.
    \46\ Credit risk comprises risk of loss resulting from 
counterparty default on loans, swaps, options, and during 
settlement.
    \47\ Operational risk encompasses the risk of loss due to the 
breakdown of controls within the firm including, but not limited to, 
unidentified limit excesses, unauthorized trading, fraud in trading 
or in back office functions, inexperienced personnel, and unstable 
and easily accessed computer systems.
    \48\ Funding risk includes the risk that a firm will not be able 
to raise sufficient cash to meet all its obligations that are due, 
which may occur even if the firm has positive net worth if some 
assets are not readily marketable.
    \49\ Legal risk arises from possible risk of loss due to an 
unenforceable contract or an ultra vires act of a counterparty.
    \50\ This is commonly referred to as systemic risk. Systemic 
risk includes the risk that the failure of one firm or within one 
market segment would trigger failures in other market segments or 
throughout the financial markets as a whole.
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    The specific elements of a risk management control system will vary 
depending on the size, complexity, and organization of a firm. 
Accordingly, the design and implementation of a system of internal 
controls for a particular firm or affiliate group may differ from other 
firms. An individual firm must have the flexibility to implement 
specific policies and procedures unique to its circumstances. However, 
as we have found before, well-developed risk management systems 
generally share certain core principles such as establishing clear 
responsibilities at each level of management, separation of certain key 
responsibilities, and effective monitoring and reporting.
    Proposed Rule 17i-4 would require an SIBHC to establish, document 
and maintain a system of internal risk management controls to assist it 
in

[[Page 62915]]

managing the risks associated with its business activities, including 
market, credit, operational, funding, and legal risks.
    Proposed Rule 17i-4 would require an SIBHC to comply with present 
Exchange Act Rule 15c3-4 as though it were a broker-dealer.\51\ 
Currently, Rule 15c3-4 applies to over-the-counter derivatives dealers 
\52\ (``OTC derivatives dealers''). Based on the Commission's 
experience with OTC derivatives dealers, we believe this rule would 
require an SIBHC to develop strong internal controls that would reduce 
risk at the SIBHC and would require an SIBHC to adequately document 
those controls so the controls can be examined.
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    \51\ In a separate release, we also proposed rules and rule 
amendments that would, among other things, establish optional 
alternative net capital requirements for certain broker-dealers. See 
Exchange Act Release No. 48690 (October 24, 2003). In connection 
with that proposal, we proposed amendments to Rule 15c3-4 that would 
apply to a broker or dealer that elects to compute its net capital 
under proposed Appendix E of Rule 15c3-1.
    \52\ See Exchange Act Release No. 40594 (Oct 23, 1998), 63 FR 
59362 (Nov 3, 1998).
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    Paragraph (b) of proposed Rule 17i-4 would require that an SIBHC 
establish, document, and maintain procedures for the detection and 
prevention of money laundering and terrorist financing as part of its 
internal risk management control system. These procedures should 
include appropriate safeguards at the holding company level to prevent 
money laundering through affiliates.\53\ This proposed requirement 
would allow us to adequately inspect members of the affiliate group as 
required by the statute.\54\ We request comment on all aspects of the 
internal risk management control system requirements included in 
proposed Rule 17i-4. We also request comment on whether Rule 17i-4 
should incorporate Rule 15c3-4 or should be fashioned as a stand-alone 
rule. In addition, we request comment as to whether any aspect of Rule 
15c3-4 could be better tailored to reflect unique aspects of group risk 
management practices (as opposed to internal firm risk management 
practices).
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    \53\ This parallels requirements in the New Basel Capital Accord 
(See infra, note 67). See also Financial Action Task Force on Money 
Laundering (``FATF'') Recommendation 22 and see generally the FATF's 
Special Recommendations on Terrorist Financing. (The FATF's 
documents can be found at: www.FATF-GAFI.org).
    \54\ See generally, Exchange Act Sec.  17(i)(3)(C)(i)(I) [15 
U.S.C. 78q(i)(3)(C)(i)(I)].
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    Finally, we request comment on whether Rule 15c3-4 should be 
amended to require that results of the periodic reviews of the internal 
risk management control system conducted by an internal auditor and 
annual reviews of the internal risk management control system conducted 
by an accountant should be reported in writing to the SIBHC's Board of 
Directors. In addition, we request comment on whether results of these 
periodic reviews should be reported in writing to the Commission.

E. Proposed Rule 17i-5: Record Creation, Maintenance, and Access 
Requirements for SIBHCs

    Pursuant to Section 17(i)(3)(A) of the Exchange Act, an SIBHC would 
be required to make and keep records, furnish copies thereof, and make 
such reports as the Commission may require by rule.\55\ Proposed Rule 
17i-5 would require that an SIBHC make and keep current certain records 
relating to its business. In addition, it would require that an SIBHC 
preserve those and other records for certain prescribed time periods. 
The purpose of this rule is to require an SIBHC to create and maintain 
records that would allow the Commission to remain informed as to the 
SIBHC's activities, financial condition, policies, systems for 
monitoring and controlling financial and operational risks, and 
transaction among members of the affiliate group, as well as determine 
whether the SIBHC is in compliance with the Exchange Act and rules to 
which it is subject.
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    \55\ See supra, note 12.
---------------------------------------------------------------------------

1. Record Creation
    Paragraph (a) of proposed Rule 17i-5 would require that the SIBHC 
make and keep current (i) a record reflecting the results of quarterly 
stress testing of the affiliate group's funding and liquidity with 
respect to certain specified events; (ii) a record of the SIBHC's 
contingency plans to respond to certain specified events affecting the 
affiliate group's funding and liquidity; and (iii) a record of the 
basis for credit risk weights for each counterparty.
    The specified events concerning which an SIBHC would need to 
conduct stress tests and create a contingency plan would include, (i) a 
credit rating downgrade of the SIBHC; (ii) an inability of the SIBHC to 
access capital markets for short-term funding; (iii) an inability of 
the SIBHC to move liquid assets across international borders when (i) 
or (ii) occur; or (iv) an inability of the SIBHC to access credit or 
assets held at a particular institution when (i) or (ii) occur. These 
events are intended to identify possible liquidity and funding stress 
scenarios that would impose significant financial distress on the 
SIBHC. The Commission believes that records of the SIBHC's contingency 
plans to respond to those events would provide the Commission with 
important information during an examination that would be necessary to 
adequately assess the SIBHC's financial condition and financial and 
operational risks.
    We request comment as to whether there are any other records that 
an SIBHC should be required to create. We also request comment as to 
whether it would be appropriate to expand the list of specified events 
described above.
2. Record Maintenance
    Pursuant to paragraph (b) of proposed Rule 17i-5, the SIBHC would 
be required to preserve (i) the records required to be created pursuant 
to 17i-5(a); (ii) all Notices of Intention, amendments thereto, and 
other documentation and information filed with the Commission in 
accordance with proposed Rule 17i-2 and any responses thereto; (iii) 
reports and notices filed with the Commission in accordance with 
proposed Rules 17i-6 and 17i-8; and (iv) records documenting the 
internal risk management control system established in accordance with 
proposed Rule 17i-4 to manage the risks of the affiliate group.
    Proposed Rule 17i-5 would require that an SIBHC maintain the 
specified records for a period of three years in an easily accessible 
place. Exchange Act Rule 17a-4 presently requires that broker-dealers 
maintain certain records for this time period, and we believe this time 
period is sufficient with relation to the records required pursuant to 
proposed Rule 17i-5 to allow effective examinations of SIBHCs. The 
proposed Rule would allow an SIBHC to maintain these records in any 
manner permitted pursuant to Rule 17a-4(f).\56\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17a-4(f).
---------------------------------------------------------------------------

    Paragraph (c) of proposed Rule 17i-5 would allow an SIBHC to 
maintain the records required under the rule either at the SIBHC, at an 
affiliate, or at a records storage facility, provided that the records 
are located within the boundaries of the United States. If these 
records are maintained by an entity other than the SIBHC, the SIBHC 
would be required to file a written undertaking from the entity with 
the Commission. This is intended to allow the SIBHC the flexibility to 
maintain records, while permitting the Commission to obtain those 
records.
    Proposed Rule 17i-5 would not require an SIBHC to maintain its 
required records in a prescribed standard form. To reduce the 
recordkeeping burden on SIBHCs, proposed Rule 17i-5 would instead allow 
the SIBHC to meet its

[[Page 62916]]

recordkeeping requirements through records created for its own use so 
long as those records include the information required in the proposed 
rules.
    We request comment on the record maintenance provisions of 
paragraph (b) to proposed Rule 17a-5. Specifically, are there other 
records that an SIBHC should preserve in order to provide the 
Commission with adequate information in reviewing the SIBHC's financial 
or operational condition or compliance with applicable rules? In 
addition, we request comment as to what reports an SIBHC should 
maintain with respect to its affiliates that may be regulated by 
another financial regulator (for each such report, please delineate the 
information contained in that report, as well as any information an 
SIBHC would be required to maintain pursuant to proposed Rule 17i-6 
that may not be included in that report).
3. Access to Records
    The Commission has authority to examine an SIBHC and its affiliates 
pursuant to Section 17(i)(3)(C) of the Exchange Act.\57\ However, the 
Act limits the focus and scope of such examinations. The statutory 
provisions also require that the Commission use, to the fullest extent 
possible, examination reports regarding an examination of the SIBHC or 
certain regulated affiliates made by an appropriate regulator.\58\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78q(i)(3)(C).
    \58\ See supra, note 17.
---------------------------------------------------------------------------

    Paragraph (d) of proposed Rule 17i-5 would specify that all 
information obtained by the Commission pursuant to this section from 
the SIBHC will be accorded confidential treatment pursuant to Section 
24(b) of the Exchange Act. Section 17(j) of the Exchange Act \59\ also 
provides for confidentiality of SIBHC documents. We believe it is 
important to accord confidential treatment to these documents because 
the information an SIBHC would be required to create, maintain, and 
grant the Commission access to pursuant to the proposed Rules would 
generally be highly sensitive, non-public business information.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q(j).
---------------------------------------------------------------------------

    We believe the requirements set forth in proposed Rule 17i-5 are 
necessary to keep the Commission informed as to the SIBHC's activities, 
financial condition, policies, systems for monitoring and controlling 
financial and operational risks, transactions and relationships between 
any broker or dealer affiliate of the SIBHC, and the extent to which 
the SIBHC has complied with the provisions of the Act and the 
regulations prescribed and orders issued under the Act.
    We request comment as to whether the Commission should accord 
confidential treatment to the documents an SIBHC is required to create, 
maintain, and grant the Commission access to pursuant to proposed Rule 
17i-5.

F. Proposed Rule 17i-6: Reporting Requirements for SIBHCs

    Proposed Rule 17i-6 would require an SIBHC to file certain monthly 
and quarterly reports with the Commission, as well as an annual audit 
report. These reporting requirements are designed to inform the 
Commission about the activities of the SIBHC, as well as the financial 
condition, policies, systems for monitoring and controlling financial 
and operational risks, and transactions and relationships involving the 
affiliate group. In addition, these requirements are designed to keep 
the Commission informed of the extent to which the SIBHC or its 
affiliates have complied with the provisions of the Exchange Act, and 
regulations prescribed and orders issued under the Exchange Act.
1. Monthly Reports
    Paragraph (a) of proposed Rule 17i-6 would require that the SIBHC 
file a monthly risk report with the Commission, within 17 business days 
after the end of each month that is not also the end of a quarter. This 
report would include consolidated financial statements for the 
affiliate group, computations of consolidated allowable capital and 
allowances for market, credit, and operational risk, a graph reflecting 
daily intra-month Value at Risk (``VaR'') for each business line, 
consolidated credit risk information, a summary report of the SIBHC's 
exposures on a consolidated basis for each of the top ten countries to 
which it is exposed, and certain regular risk reports the SIBHC 
generally provides to the persons responsible for managing risk for the 
affiliate group. These reports would be due within the same time frames 
as the monthly FOCUS reports broker-dealers are required to file 
pursuant to Rule 17a-5(a). These reports would allow the Commission to 
review and monitor the risk profile for the affiliate group. Further, 
they would alert the Commission to any deterioration in the affiliate 
group's financial or operational position and risk profile. Broker-
dealers currently are required to file detailed financial information, 
which is used by the Commission and the broker-dealer's designated 
examining authority \60\ to evaluate the broker-dealer's financial and 
operational condition.
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    \60\ Pursuant to Exchange Act Rule 17d-1 [17 CFR 240.17d-1], 
where a broker-dealer is a member of more than one self-regulatory 
organization (as defined in Exchange Act Sec.  3(a)(26) [15 U.S.C. 
78c(a)(26)]), the Commission shall ``designate'' one self-regulatory 
organization as responsible for examining the broker-dealer for 
compliance with applicable financial responsibility rules. The self-
regulatory organization of a broker-dealer that has been so 
designated is commonly referred to as the broker-dealer's designated 
examining authority (or ``DEA'').
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    We request comment on the timing of the monthly reporting 
requirements. Further, we request comment on whether any additional 
information should be included in the monthly reports to be filed with 
the Commission. We also request comment on whether the monthly 
reporting requirement should be modified for an SIBHC (or a member of 
the affiliate group) required to file information, documents, and 
reports pursuant to Sec. Sec.  13(a) or 15(d) of the Exchange Act and, 
if so, how and why they should be modified.
2. Quarterly Reports
    Paragraph (a)(2) of proposed Rule 17i-6 would require that an SIBHC 
file a quarterly risk report with the Commission within 35 calendar 
days after the end of each quarter. This report would include, in 
addition to all the information required to be filed on a monthly 
basis, (i) consolidating financial statements (that break out data 
regarding each material affiliate into separate columns); (ii) the 
results of backtesting of each of the models used to compute allowable 
capital and allowances for market and credit risk; (iii) a description 
of all material pending legal or arbitration proceedings involving any 
member of the affiliate group that are required to be disclosed under 
generally accepted accounting principles; and (iv) the aggregate debt 
scheduled to mature within twelve months from the most recent quarter 
by each affiliate that is a broker-dealer and any other material 
affiliate, together with the allowance for losses for such 
transactions. The information an SIBHC would be required to file on a 
quarterly basis would provide the Commission with valuable insight as 
to the financial and operational condition of the SIBHC.
    Requiring reports to be filed within 35 calendar days after the end 
of each quarter provides time frames similar to those for quarterly 
reports due from companies required to file information, documents, and 
reports pursuant to Sec. Sec.  13(a) or 15(d) of the Exchange Act.\61\

[[Page 62917]]

We request comment as to whether this time period is appropriate for 
SIBHCs.
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    \61\ See Release No. 33-8128 (Sep. 5, 2002), 67 FR 179 (Sep. 16, 
2002).
---------------------------------------------------------------------------

    We request comment as to whether any additional information should 
be included in the quarterly reports to be filed with the Commission. 
We also request comment on whether the quarterly reporting requirement 
should be modified for an SIBHC (or member of the affiliate group) 
required to file information, documents, and reports pursuant to 
Sec. Sec.  13(a) or 15(d) of the Exchange Act and, if so, how they 
should be modified.
3. Additional Reports
    Paragraph (b) of proposed Rule 17i-6 would provide that, in 
addition to the monthly and quarterly reports specified in the proposed 
Rule, an SIBHC may be required, upon receiving written notice from the 
Commission, to provide the Commission with additional financial or 
operational information. As specified in the proposed Rule, the 
Commission may request additional reports in order to monitor the 
SIBHC's financial or operational condition, risk management system, any 
transactions and relationships among members of the affiliate group, 
and the extent to which the SIBHC has complied with the provisions of 
the Exchange Act and regulations and orders issued under the Exchange 
Act. This will allow the Commission the flexibility to obtain 
information, for instance, to more closely monitor the financial and 
operational condition of an SIBHC during periods of market stress.
    In addition, if a broker-dealer affiliated with the SIBHC or the 
SIBHC were to file notice (pursuant to Rule 17a-11 or proposed Rule 
17i-8, respectively), the Commission would be able to request 
additional reports from the SIBHC to fully assess the situation giving 
rise to the filing of the notice.
    We request comment on our proposal to require that an SIBHC file 
such additional reports as the Commission may request.
4. Annual Audit Report
    Pursuant to paragraph (c)(1) of proposed paragraph 17i-6, the SIBHC 
would be required to file an annual audit report containing 
consolidated financial statements. Paragraphs (c)(2) and (c)(3) of 
proposed Rule 17i-6 would require that the annual audit report be ``as 
of'' the same date as, and filed with the Commission concurrently with, 
the annual audit report of the SIBHC's subsidiary broker-dealers.
    Paragraphs (d), (e), (f), (g), (h), (i), (j), (k), (l), and (m) of 
proposed Rule 17i-6 are based on existing Rules 17a-5 and 17a-12 
regarding (i) the nature and form or reports, (ii) accountants, (iii) 
audit objectives, (iv) the extent and timing of audit procedures, (v) 
the accountant's report, (vi) supplemental reports, (vii) notification 
of a change in fiscal year, (viii) extensions and exemptions, (ix) how 
the reports should be filed, and (x) confidentiality.
    Paragraph (e) would require that the audit and supplemental reports 
be prepared by an accountant that is a ``registered public accounting 
firm'' as that term is defined in the Sarbanes-Oxley Act of 2002.\62\ 
We are proposing that the review be conducted by a registered public 
accounting firm because such firms would be subject to PCAOB rules, 
examination, and discipline.
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    \62\ 15 U.S.C. 7201(a)(12). The term ``registered public 
accounting firm'' means a public accounting firm registered with the 
Public Company Accounting Oversight Board (``PCAOB'') in accordance 
with the Sarbanes-Oxley Act of 2002.
---------------------------------------------------------------------------

    We believe the requirements set forth in proposed Rule 17i-6 are 
necessary to keep the Commission informed as to the SIBHC's activities, 
financial condition, policies, systems for monitoring and controlling 
financial and operational risks, and transactions and relationships 
between any broker or dealer affiliate of the SIBHC and the extent to 
which the SIBHC has complied with the provisions of the Act and the 
regulations prescribed and orders issued under the Act. In addition, 
paragraph (k) of proposed Rule 17i-6 regarding extensions and 
exemptions would provide the Commission with flexibility to address 
firm-specific issues as they arise. Finally, we believe it is important 
to accord confidential treatment to the reports and statements filed 
pursuant to proposed Rule 17i-6, as specified in paragraph (m), because 
these reports would include information that generally would be non-
public and highly sensitive.
    We request comment on the proposed timing of the annual audit 
reports and whether any additional information should be included in 
that report. We also request comment on whether the annual audit 
requirements should be modified for an SIBHC (or member of the 
affiliate group) required to file information, documents, and reports 
pursuant to sections 13(a) or 15(d) of the Exchange Act and, if so, how 
they should be modified. In addition, we request comment as to whether 
the Commission should accord confidential treatment to the reports 
filed with the Commission by the SIBHC pursuant to proposed Rule 17i-6.
    We also request comment on our proposal to require that an SIBHC 
use a registered public accounting firm to perform its annual audit.
5. Accountant's Report on Management Controls--Paragraph (i)(2) of 
Proposed Rule 17i-6 and Amendment to Paragraph (l) of Existing Rule 
17a-12
    Paragraph (i)(2) of proposed Rule 17i-6 would require that the 
SIBHC submit a supplemental report, prepared by the accountant, 
regarding the accountant's review of the internal risk management 
control system established and documented in accordance with proposed 
Rule 17i-4. This review would have to be accomplished using procedures 
agreed-upon by the accountant and the SIBHC. The Rule also specifies 
that the agreed-upon procedures would be required to be performed and 
the report to be prepared in accordance with the rules promulgated by 
the PCAOB. Pursuant to paragraph (i)(4) of proposed Rule 17i-6, the 
SIBHC would be required to submit the agreed-upon procedures to the 
Commission prior to the review.
    Paragraph (i)(4) of proposed Rule 17i-6 differs from present Rule 
17a-12(l), which requires that an accountant provide an opinion 
regarding an OTC derivatives dealer's compliance with its internal risk 
management control system. Auditors of OTC derivatives dealers have 
stated that the lack of standards for evaluating compliance with 
internal risk management control systems prevents them from issuing an 
opinion. For this reason, the Commission is proposing to amend present 
Rule 17a-12(l) so that, similar to the requirements of paragraph (i)(2) 
of proposed Rule 17i-6, an OTC derivatives dealer would be required to 
submit a supplemental report, prepared by the accountant using agreed-
upon procedures, regarding the accountant's review of the internal risk 
management control system established and documented in accordance with 
Rule 15c3-4.
    Paragraph (i)(2) of proposed Rule 17i-6 and this proposed amendment 
to Rule 17a-12(l) would allow an accountant to review an SIBHC's or OTC 
derivatives dealer's internal risk management control systems and 
provide a report regarding whether the risk management control systems 
comply with the requirements of proposed Rule 17i-4 or Rule 15c3-4, 
respectively, and that the SIBHC or OTC derivatives dealer is, in fact, 
following its risk management system.
    We request comment as to whether the proposed amendment to Rule 
17a-12(l) would adequately resolve the lack of standards for conducting 
an audit of a firm's internal risk management

[[Page 62918]]

control systems and its compliance with those systems.

G. Exemption From Risk Assessment Rules for Broker-Dealer Affiliates of 
SIBHCs

    The Commission presently receives financial and risk information 
about holding companies and certain affiliates of broker-dealers, and 
certain off-balance sheet items of broker-dealers, their holding 
companies, and their affiliates pursuant to the risk assessment rules 
(Rules 17h-1T and 17h-2T) and through meetings with and reports from 
members of the Derivatives Policy Group.\63\ These supervisory tools 
generally have performed well by assisting the Commission in 
identifying, at an early stage, firms that are experiencing financial 
problems.
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    \63\ Pursuant to the ``risk-assessment rules,'' adopted under 
Exchange Act Section 17(h), broker-dealers also submit consolidated 
and consolidating financial statements, organizational charts of the 
holding company, descriptions of material legal exposures, and risk 
management policies and procedures to the Commission. [17 CFR 
240.17h-1T and 17 CFR 240.17h-2T]. Member firms of the Derivatives 
Policy Group (``DPG'') also voluntarily supply us with additional 
information regarding derivative financial instruments, off balance 
sheet obligations, and the concentration of credit risk. The DPG was 
formed in March 1995 by the industry and the Commission to provide a 
voluntary oversight framework for monitoring derivatives activities 
of broker-dealer affiliates.
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    As part of this rulemaking, the Commission is proposing to amend 
Rules 17h-1T and 17h-2T \64\ to exempt broker-dealers that are 
affiliated with an SIBHC from those rules. Rule 17h-1T requires that a 
broker-dealer maintain and preserve records and other information 
concerning the broker-dealer's holding companies, affiliates, or 
subsidiaries that are likely to have a material impact on the financial 
or operational condition of the broker-dealer. Rule 17h-2T requires 
that broker-dealers file quarterly reports with the Commission 
concerning the information required to be maintained and preserved 
under Rule 17h-1T. We believe that exempting a broker-dealer that is 
affiliated with an SIBHC is appropriate because, pursuant to proposed 
Rule 17i-5, the SIBHC would be required to make and retain documents 
substantially similar to those the broker-dealer is required to make 
and retain pursuant to Rule 17h-1T. Further, pursuant to proposed Rule 
17i-6, the SIBHC would be required to make reports that are 
substantially similar to those the broker-dealer is required to make 
pursuant to 17h-2T. We request comment on the proposed exemptions from 
Rules 17h-1T and 17h-2T for broker-dealers affiliated with an SIBHC.
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    \64\ 17 CFR 240.17h-1T and 240.17h-2T.
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H. Proposed Rule 17i-7: Calculations of Allowable Capital and Risk 
Allowances or Alternative Capital Assessment

    Proposed Rule 17i-7 would require an SIBHC to calculate the 
affiliate group's allowable capital and allowances for certain types of 
risk. Proposed Rule 17i-7 would not set minimum group-wide capital 
levels for SIBHCs; rather, it would require the SIBHC to perform 
certain calculations that the Commission could review to gain an 
understanding of the financial position of the affiliate group and 
identify any risks it poses to the broker-dealer.
    The Basel Committee on Banking Supervision \65\ (``Basel 
Committee'') has developed international regulatory standards that aim 
to align economic capital calculations with regulatory capital 
requirements for large internationally active banking institutions 
(``Basel Standards'').\66\ The Basel Committee has proposed to modify 
the Basel Standards.\67\ Our proposal incorporates a capital 
computation for the SIBHC that is consistent with the Basel Standards. 
The Basel Standards have been used by many other financial regulators 
for many years as a method to assess capital adequacy at the holding 
company level.
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    \65\ The central bank governors of the Group of Ten countries 
(``G-10 countries'') established the Basel Committee in 1974 to 
provide a forum for ongoing cooperation among member countries on 
banking supervisory matters.
    \66\ The basic consultative papers developed by the Basel 
Committee are: the Basel Capital Accord (1988), the Core Principles 
for Effective Banking Supervision (1997), and the Core Principles 
Methodology (1999). The Basel Standards establish a common 
measurement system, a framework for supervision, and a minimum 
standard for capital adequacy for international banks in the G-10 
countries. It is intended to increase the transparency and 
consistency of the supervision of financial companies across 
borders. The Basel Standards generally have been implemented for 
internationally active, large banking institutions by U.S. bank 
regulators. See Office of the Comptroller of the Currency, Federal 
Reserve System, Federal Deposit Insurance Corporation, ``Risk Based 
Capital Standards; Market Risk,'' 61 FR 47358 (Sept. 6, 1996).
    \67\ In April 2003, the Basel Committee released for public 
comment a document entitled ``The New Basel Capital Accord'' (the 
``New Basel Capital Accord'') to modify the Basel Standards. This 
paper can presently be found at: http://www.bis.org/bcbs/cp3full.pdf. Comments were accepted through July 31, 2003. On 
October 11, 2003, the Committee announced that it had received over 
200 comment letters, that there is continued broad support for the 
structure of the new accord and agreement on the need to adopt a 
more risk-sensitive capital framework. The Committee requested 
comment by December 31, 2003, on an amendment to its proposed 
treatment of expected and unexpected losses. The Basel Committee 
expects to issue a final revision of the proposed New Basel Capital 
Accord by the middle of 2004, with an effective date for 
implementation of December 31, 2006. Currently, U.S. banking 
regulators have released an Advanced Notice of Proposed Rulemaking 
to seek comment on their preliminary views regarding the 
implementation of the proposed New Basel Capital Accord (68 FR 45900 
(August 4, 2003)). Comments are due by November 3, 2003.
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    We are proposing what we believe are prudent parameters for 
measuring allowable capital and allowances for risk for the SIBHC that 
are consistent with the Basel Standards. In some cases these parameters 
may be more conservative than some firms believe are necessary to 
account for risk. For example, the proposal would place limits on the 
amount of subordinated debt that may be included in allowable capital, 
require that the VaR model used to calculate the allowance market risk 
be based on a ten business-day movement in rates and prices and that a 
99% confidence level be used, and require that the VaR measure be 
multiplied by a factor of at least three. Requiring that an SIBHC 
calculate its allowable capital and allowances for market, credit and 
operational risk based on the Basel Standards would provide the 
Commission with a useful measure of the SIBHC's financial position and 
allow for greater comparability of an SIBHC's financial condition to 
that of other international securities firms and banking institutions.
1. Calculation of Consolidated Allowable Capital
    Consistent with the Basel Standards,\68\ proposed Rule 17i-7 would 
require that an SIBHC calculate ``allowable capital'' for the affiliate 
group that would include common shareholders' equity (less goodwill, 
deferred tax assets, other intangible assets, and certain other 
deductions), certain cumulative and non-cumulative preferred stock,\69\ 
and certain properly subordinated debt. As set forth in

[[Page 62919]]

further detail in the proposed rule, the cumulative and non-cumulative 
preferred stock and the subordinated debt would be subject to 
additional limitations based on comparisons of the individual 
components of allowable capital.
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    \68\ Proposed Rule 17i-7 is generally consistent with U.S. 
banking regulators' interpretations of the Basel Standards and 
incorporates the quantitative and qualitative conditions imposed on 
banking institutions. However, one difference is our proposal to use 
maximum potential exposure as opposed to notional add-ons to 
calculate credit risk for OTC derivatives instruments, and our 
interpretation as to what instruments should be subject to market 
risk, as opposed to credit risk, treatment. These differences, and 
the reasons for them, are described more specifically in the 
sections relating to the calculations of allowance for market and 
credit risk.
    \69\ The cumulative and non-cumulative preferred stock could not 
(i) have a maturity date, (ii) be redeemed at the option of the 
holder, or (iii) contain any other provisions that would require 
future redemption of the issue. In addition, the issuer would have 
to be able to defer or eliminate dividends. Finally, the cumulative 
and non-cumulative preferred stock would be subject to certain 
limits (see paragraphs (a)(2) and (a)(3)(i) of proposed Rule 17i-7).
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    When first implemented, the Basel Standards allowed national bank 
supervisors discretion in counting goodwill as capital during a 
transition period. Thus, we solicit comment on whether goodwill should 
be included in allowable capital for a particular transition period 
and, if so, the length of the transition period.
    An entity's debt is not ordinarily includible in its regulatory 
capital. However, because debt can provide a long-term source of 
working capital to the entity and may have many of the characteristics 
of capital, the Basel Standards permit unrestricted long-term 
subordinated debt \70\ to count as regulatory capital. Under paragraph 
(a)(3)(ii) of proposed Rule 17i-7, consistent with the Basel Standards, 
subordinated debt could be included in allowable capital if it meets 
four criteria. First, the original weighted average maturity of the 
SIBHC's subordinated debt must be at least five years. Second, the 
subordinated debt instrument must state clearly on its face that 
repayment of the debt is not protected by the Securities Investor 
Protection Corporation (``SIPC'') or any Federal agency. Third, the 
debt must be unsecured and subordinated in right of payment to all 
senior indebtedness of the SIBHC. Fourth, the terms of the subordinated 
debt agreement may permit acceleration only in the event of bankruptcy 
or reorganization of the SIBHC under Chapters 7 (liquidation) or 11 
(reorganization) of the U.S. Bankruptcy Code.
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    \70\ By contract, subordinated debt is debt that is subordinated 
in right of payment to all senior indebtedness of the company.
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    The four criteria subordinated debt would have to satisfy to be 
included in allowable capital are necessary to help assure permanency 
of capital and to inform subordinated lenders of the risks associated 
with being a subordinated lender. Funds lent under a subordinated debt 
agreement necessarily are subject to the risks of the SIBHC's business 
and must be available to pay other creditors if the SIBHC defaults on 
other obligations. Although the customers of certain of the SIBHC's 
affiliates may be entitled to the protection of SIPC under specific 
circumstances, subordinated lenders of the SIBHC would not be entitled 
to that protection.
    Under the proposal, to be included in allowable capital, 
subordinated debt would be required to be unsecured and subordinated in 
right of payment to all of the SIBHC's senior debt. Debt that, upon 
default, can be repaid by conversion of collateral or before other debt 
could not be considered subordinated in right of repayment to all 
senior indebtedness of the SIBHC because the debt effectively would 
have priority over at least some other debt.
    Subordinated debt instruments that permit acceleration of payment 
upon events other than bankruptcy or reorganization of the SIBHC would 
not qualify for inclusion in allowable capital under the proposed 
rules.\71\ Acceleration clauses raise significant supervisory concerns 
because repayment of the debt could be accelerated at a time when an 
SIBHC is experiencing financial difficulties. Acceleration, therefore, 
could inhibit an SIBHC's ability to resolve its financial problems in 
the normal course of business and force the company into involuntary 
bankruptcy.
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    \71\ The prohibition on acceleration of payment also would 
prohibit inclusion of credit sensitive subordinated debt in 
allowable capital. Credit sensitive subordinated debt ties payments 
to the financial condition of a borrower/holding company or its 
affiliates. This feature of the debt forces a holding company to 
make increased payments as its financial condition deteriorates and, 
therefore, acts as a de facto acceleration clause that may deplete 
the holding company's resources and increase the likelihood of 
default on debt. Furthermore, a credit requirement clause 
potentially would allow a subordinated lender to obtain payment 
before senior creditors.
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    We request comment on the inclusion of subordinated debt in 
allowable capital generally and on the following questions in 
particular:
    [sbull] Is five years the appropriate maturity for subordinated 
debt to be included in allowable capital? Would another term, whether 
longer or shorter, be more appropriate?
    [sbull] To be included in allowable capital, should subordinated 
debt be subject to negative pledge provisions that, for example, would 
restrict an SIBHC's ability to pledge the equity securities of a 
subsidiary to secure the debt or to sell a subsidiary unless the buyer 
agreed to assume liability for some portion of the debt?
    [sbull] Should subordinated debt that is subject to acceleration 
events other than bankruptcy or reorganization of the SIBHC under the 
Bankruptcy Code be included in allowable capital?
    [sbull] What should be the maximum amount of subordinated debt that 
is includible in allowable capital?
    [sbull] What are the additional costs of issuing subordinated debt 
versus long-term debt of the same maturity?
    Some industry participants have suggested that certain long-term 
debt that cannot be accelerated should be included in allowable capital 
because at the SIBHC level there is no protected class of creditors, 
and therefore there is no significant difference between that type of 
long-term debt and subordinated debt. In addition, they assert that 
subordinated debt is more costly to an entity than long-term debt that 
cannot be accelerated because of the restrictive provisions associated 
with, and the lack of an active trading market for, subordinated debt.
    We solicit comment on whether long-term debt, subject to 
appropriate limitations, should be included in allowable capital. 
Specifically, we request comment on the following issues:
    [sbull] If long-term debt is included in allowable capital, what 
restrictions should apply?
    [sbull] Would trading in its long-term debt provide a more reliable 
indication of the credit quality of the SIBHC than subordinated debt 
and, if so, why?
    [sbull] Does a holder of its subordinated debt have a greater 
incentive to monitor the financial condition of the SIBHC than a holder 
of its long-term debt because its claim is more junior?
    [sbull] Are there debt instruments other than subordinated debt 
that provide an equivalent market signal about the credit quality of 
the issuer?
    [sbull] Is there a material difference between the depth of the 
market for the long-term debt of an SIBHC and the depth of the market 
for its subordinated debt and, if so, how would any such difference 
impact the cost of financing for the SIBHC?
    [sbull] Would there be any other adverse effects if the SIBHC were 
permitted to include long-term debt in allowable capital?
    [sbull] If long-term debt could be included in allowable capital, 
what, if any, requirements should apply to the maturity date of the 
long-term debt? What events of acceleration should be permissible?
    [sbull] Should long-term debt be subject to a negative pledge, 
that, for example, would restrict an SIBHC's ability to pledge the 
equity securities of a subsidiary to secure the debt or to sell a 
subsidiary unless the pledgor or buyer agreed to assume liability for 
some portion of the debt?
    [sbull] What other provisions concerning the inclusion of long-term 
debt in allowable capital should be considered?

[[Page 62920]]

2. Calculation of Consolidated Allowance for Market Risk
    Paragraph (b) of proposed Rule 17i-7 would require that an SIBHC 
calculate a consolidated allowance for market risk daily for all 
proprietary positions. The SIBHC would calculate an allowance for 
market risk for each position using either a VaR model or, if there is 
not adequate historical data to support a VaR model, an alternative 
method. Generally, the allowance for market risk would constitute three 
times \72\ the largest amount the SIBHC could lose over a ten-day 
period with a 99% confidence level (as determined using the VaR model 
or alternative method).\73\ An SIBHC would need to provide the 
Commission with information regarding any alternative method for 
computing allowance for market risk for particular positions during the 
Commission's review of its Notice of Intention so that the Commission 
could evaluate the method to determine whether it adequately measured 
the risks of those positions.
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    \72\ Paragraph (b)(1) of proposed Rule 17i-7 would establish the 
initial multiplication factor (three); however the multiplication 
factor would subsequently be set based on the number of backtesting 
errors generated through use of the model. The initial 
multiplication factor was derived from the minimum requirement set 
forth in 17 CFR 240.15c3-1f(e)(1)(iv)(C) (the rule used by OTC 
derivatives dealers to calculate market risk capital charges). This 
initial multiplication factor would be used until sufficient 
backtesting results has been collected to use the Table set forth in 
17 CFR 240.15c3-1e(e)(1)(iii)(C).
    \73\ See supra, note 51. Specifically, see proposed 17 CFR 
240.15c3-1e(e)(2)(i).
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    Paragraph (b)(1) of proposed Rule 17i-7 would require that each VaR 
model used to calculate allowance for market risk must meet the 
qualitative and quantitative requirements set forth in rules the 
Commission is also proposing today in a separate release, proposed Rule 
15c3-1e(e).\74\ The qualitative and quantitative standards set forth in 
proposed Rule 15c3-1e(e) are similar to the requirements for models 
used by OTC derivatives dealers and are consistent with the Basel 
Standards. The qualitative requirements would address three aspects of 
an SIBHC's risk management system: (i) The model would have to be 
integrated into, and thus relied upon, in the SIBHC's daily risk 
management process; (ii) the model would be required to undergo 
periodic reviews by the SIBHC's internal audit staff and annual reviews 
by an accountant; and (iii) the SIBHC would need to conduct backtesting 
of the model (the results of the backtests would be used by the SIBHC 
to determine the multiplication factors to be used when calculating 
market and credit risk).\75\ The quantitative requirements would set 
forth basic standards for each model including, (i) it must use a 99 
percent, one-tailed confidence level and with price changes equivalent 
to a ten business-day movement in rates and prices for purposes of 
determining market risk, (ii) it must use an effective historical 
observation period that must be at least one year in length and include 
periods of market stress, and (iii) it must take into account and 
incorporate all significant identifiable market risk factors applicable 
to the affiliate group's positions.
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    \74\ See supra, note 51.
    \75\ See supra, note 51. Specifically, see proposed 17 CFR 
240.15c3-1e(e)(1).
---------------------------------------------------------------------------

    Consistent with the Basel Standards, paragraph (b)(1) of proposed 
Rule 17i-7 would require that each VaR model used to calculate 
allowance for market risk also must be one that can be disaggregated by 
each line of business exposed to market risk and by each legal entity.
    We request comment on all aspects of the proposed methods for 
calculating market risk, including whether any other quantitative or 
qualitative requirements should be applied to VaR models. In addition, 
we request that commenters address any perceived differences between 
the proposed methodology for calculating market risk and the Basel 
Standards. Further, we request comment on alternative methods for 
computing allowance for market risk, and the appropriateness of those 
methods.
3. Calculation of Consolidated Allowance for Credit Risk
    Paragraph (c) of proposed Rule 17i-7 would require that an SIBHC 
calculate a consolidated allowance for credit risk daily using either a 
calculation consistent with the Basel Standards or the methodology set 
forth in paragraph (c)(1) of proposed Rule 17i-7, which is similar to 
the proposed New Basel Capital Accord. This choice would provide SIBHCs 
with some flexibility while the Basel Standards are under review. The 
methodology set forth in paragraph (c)(1) of proposed Rule 17i-7 would 
require that an SIBHC multiply the credit equivalent amount of certain 
asset and off-balance sheet items by the appropriate credit risk weight 
of the asset or off-balance sheet item, and then multiply the result by 
8%.\76\ In general, the asset and off-balance sheet items subject to 
this allowance are loans and loan commitments receivable, receivables 
arising from derivatives contracts, repurchase and reverse repurchase 
agreements, structured financial products, credit substitutes, and 
other extensions of credit.
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    \76\ This is consistent with the calculation of credit risk used 
by OTC derivatives dealers (See 17 CFR 240.15c3-1f(d)(2)). In 
addition, the 8% basic multiplier to calculate credit risk capital 
charges is consistent with the Basel Standards.
---------------------------------------------------------------------------

    Consistent with the proposed New Basel Capital Accord, Paragraph 
(c)(1)(i) of proposed Rule 17i-7 would establish the manner in which 
the ``credit equivalent amount'' of a balance sheet item should be 
calculated. The credit equivalent amounts for receivables relating to 
(i) derivatives contracts, repurchase agreements, reverse repurchase 
agreements, stock loans, stock borrows, and other similar 
collateralized transactions; (ii) loans and loan commitments 
receivable; and (iii) other assets would be calculated differently, and 
are set forth in paragraphs (c)(1)(i)(A), (B), and (C) of proposed Rule 
17i-7, respectively. Paragraph (c)(1)(i)(D) of proposed Rule 17i-7 
would define the term ``current exposure'' to be the current 
replacement value of the counterparty's positions with the member of 
the affiliate group including the effect of netting agreements with 
that counterparty,\77\ and taking into account the value of collateral 
from that counterparty \78\ pledged to and held by any member of the 
affiliate group and the fair market value of any credit derivatives 
that specifically change the exposure to the counterparty (as long as 
the credit derivatives are not used to change the

[[Page 62921]]

credit risk weight of the counterparty as provided in paragraph 
(c)(1)(ii)(E)).\79\ Finally, paragraph (c)(1)(i)(E) of proposed Rule 
17i-7 defines the term ``maximum potential exposure'' to be the 
increase in the net replacement value of the counterparty's positions 
with the member of the affiliate group, including the effect of netting 
agreements with that counterparty,\80\ and taking into account the 
value of collateral from that counterparty \81\ pledged to and held by 
any member of the affiliate group and the fair market value of any 
credit derivatives that specifically change the exposure to the 
counterparty (as long as the credit derivatives are not used to change 
the credit risk weight of the counterparty as provided in paragraph 
(c)(1)(ii)(E)).\82\ Paragraph (c)(1)(i)(E) of proposed Rule 17i-7 also 
states that maximum potential exposure would be required to be 
calculated daily using a VaR model that meets the same qualitative and 
quantitative standards as required for models used to compute the 
allowance for market risk.\83\
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    \77\ Only netting agreements that meet the requirements set 
forth in paragraph (d)(5) of proposed Rule 15c3-1e could be used to 
reduce current or maximum potential exposures. See supra note 51. 
Generally, the SIBHC could use a netting agreement that allows the 
SIBHC to net gross receivables and gross payables with a 
counterparty upon default of the counterparty if (i) the netting 
agreement is legally enforceable in each relevant jurisdiction, 
including in insolvency proceedings; (ii) the gross receivables and 
gross payables subject to the netting agreement with a counterparty 
can be determined at any time; and (iii) for internal risk 
management purposes, the SIBHC monitors and controls its exposure to 
the counterparty on a net basis.
    \78\ Only collateral that meets the requirements set forth in 
paragraph (d)(6) of proposed Rule 15c3-1e could be used to reduce 
current or maximum potential exposures. See supra note 51. 
Generally, the SIBHC could take the fair market value of collateral 
pledged to and held by the SIBHC into account, provided (i) the 
collateral is marked to market each day and is subject to a daily 
margin maintenance requirement; (ii) the collateral has a ready 
market or consists of major market foreign currency as defined in 
Sec.  240.15c3-1a(b)(1)(i)(C) or U.S. currency; (iii) the collateral 
agreement is legally enforceable by the SIBHC against the 
counterparty and any other parties to the agreement; (iv) the 
collateral does not consist of securities issued by the counterparty 
or a party related to the SIBHC or to the counterparty; and (v) the 
collateral is not used in determining the credit rating of the 
counterparty.
    \79\ The fair market value of any credit derivatives that 
specifically change the SIBHC's exposure to the counterparty may be 
used to calculate ``current exposure'' and ``maximum potential 
exposure'' only to the extent that the credit derivative is not used 
to change the credit risk weight of the counterparty as set forth in 
paragraph (c)(1)(ii)(E).
    \80\ See supra, note 77.
    \81\ See supra, note 78.
    \82\ See supra, note 79.
    \83\ However, the quantitative requirements for a VaR model 
intended to calculate maximum potential exposure would be required 
to use a 99 percent, one-tailed confidence level and with price 
changes equivalent to a five-day movement in rates and prices for 
repurchase agreements, reverse repurchase agreements, stock lending 
and borrowing, and similar collateralized transactions (See 
paragraph (c)(1)(i)(E) of proposed Rule 17i-7) and to a one-year 
movement in rates and prices for other positions (See proposed 17 
CFR 240.15c3-1e(e)(2)(ii)) (as opposed to a ten business-day 
movement for VaR models used to calculate the allowance for market 
risk (See proposed Sec.  17 CFR 240.15c3-1e(e)(2)(i)).
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    We request comment on whether the proposed method of calculating 
the credit equivalent amount is appropriate, or whether it should be 
changed. In addition we request comment on whether the definitions of 
``current exposure'' and ``maximum potential exposure'' are 
appropriate, or if they should be changed. If the proposed method for 
calculating credit equivalent amount or the definitions of ``current 
exposure'' or ``maximum potential exposure'' should be changed, please 
elaborate as to how they should be changed.
    Paragraph (c)(1)(ii) of proposed Rule 17i-7 provides that credit 
risk weights would generally be determined according to the standards 
published by the Basel Committee, as modified from time to time.\84\ An 
SIBHC may also use internal credit ratings \85\ or calculate credit 
risk weights using internal calculations \86\ when calculating its 
allowance for credit risk.
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    \84\ See paragraph (c)(1)(ii)(A) of proposed Rule 17i-7.
    \85\ See paragraph (c)(1)(ii)(B) of proposed Rule 17i-7.
    \86\ See paragraph (c)(1)(ii)(C) of proposed Rule 17i-7.
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    In addition, paragraph (c)(1)(ii)(D) of proposed Rule 17i-7 would 
allow SIBHCs to adjust credit risk weights of receivables covered by 
certain types of guarantees,\87\ and paragraph (c)(1)(ii)(E) of 
proposed Rule 17i-7 would allow SIBHCs to adjust credit risk weights of 
receivables covered by certain credit derivatives (such as credit 
default swaps, total return swaps, and similar instruments used to 
manage credit risk)\88\ in recognition of the benefits these 
instruments provide.
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    \87\ The guarantee would be required to be an unconditional and 
irrevocable guarantee of the due and punctual payment and 
performance of the obligation and the SIBHC or member of the 
affiliate group can demand payment after any payment is missed 
without having to make collection efforts. Further, the guarantee 
would be required to be evidenced by a written obligation of the 
guarantor that allows the SIBHC or member of the affiliate group to 
substitute the guarantor for the counterparty upon default or 
nonpayment by the counterparty. These proposed requirements are 
designed to allow an SIBHC to reduce its allowance for credit risk 
only if the guarantee contains features that make it more reliable.
    \88\ The credit derivative would be required to be one that (i) 
provides credit protection equivalent to a guarantee, (ii) is used 
for bona fide hedging purposes to reduce the credit risk weight of a 
counterparty, (iii) is not incorporated into the VaR model used for 
deriving potential exposures, and (iv) is not held for market-making 
purposes.
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    The Commission requests comment on the determination of credit risk 
weights. In particular, the Commission requests comment on whether an 
additional method of calculating credit risk weights, based on internal 
estimates of annual probabilities of default, should be included in 
proposed Rule 17i-7. If such a method should be used, the Commission 
requests comment on whether the following table appropriately matches 
credit risk weights to annual probabilities of default:

    Credit Risk Weight of Counterparty Based on Annual Probability of
                                 Default
------------------------------------------------------------------------
                                                           Credit risk
             Annual probability of default                 weight  (in
                                                             percent)
------------------------------------------------------------------------
Less than .003%........................................                2
0.05%..................................................               17
0.11%..................................................               30
3.80%..................................................              200
5.30% or higher........................................              230
Event of default has occurred..........................             1250
------------------------------------------------------------------------

    These credit risk weights are based on the formulas provided in the 
Advanced Internal Ratings-based Approach to credit risk proposed by the 
Basel Committee.\89\ We have derived the credit risk weights using a 
loss given default (the percentage of the amount owed by the 
counterparty the firm expects to lose if the counterparty defaults) of 
75%. We believe 75% to be a conservative number for use in determining 
credit risk weights. We request comment as to whether 75% is 
appropriate, or whether it should be increased or decreased.
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    \89\ See the New Basel Capital Accord (April, 2003).
---------------------------------------------------------------------------

    The Commission believes that calculating a credit risk capital 
charge on exposures arising from transactions in OTC derivatives 
instruments using a VaR model that meets that qualitative and 
quantitative requirements set forth in proposed Sec.  240.15c3-
1e(e)\90\ to calculate maximum potential exposure is a more precise 
method than using a ``notional add-on'' to approximate maximum 
potential exposure. In addition, Commission reviews of risk management 
systems of large U.S. broker-dealers indicate that these broker-dealers 
generally use maximum potential exposure to measure and manage the 
credit risk of their portfolios. These broker-dealers would therefore 
incur little, if any, additional cost to calculate credit risk using 
maximum potential exposure as opposed to ``notional add-ons.''
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    \90\ See supra, note .
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    We request comment on this approach to the calculation of credit 
risk on OTC derivatives, repurchase agreements, reverse repurchase 
agreements, stock lending and borrowing, and similar collateralized 
transactions. In addition, we request comment on the proposed 
requirements for guarantees used to reduce an SIBHC's allowance for 
credit risk. We also request comment on the appropriate treatment of 
credit derivatives in this context. Credit derivatives could enter into 
the calculation of credit risk in two ways. The first would be to 
substitute the credit risk weight of the writer of the

[[Page 62922]]

credit derivative for the credit risk weight of the counterparty. The 
second would be to adjust the current exposure and the maximum 
potential exposure by the value of the credit derivative.
    Certain accounting differences may cause differences in application 
of the Basel Committee's recommendations when applied to securities 
firms rather than banking firms. For instance, the broker-dealers must 
mark all positions to market, whereas banks may use cost as a basis to 
value securities held for investment purposes. These differences may 
require the Commission to apply adjustments to the Basel Committee's 
recommendations, or not to apply adjustments that are in the Basel 
Committee's recommendations. The Commission solicits comments on how 
the differences in accounting standards might affect the allowance for 
credit risk, and what modifications the Commission should make to the 
proposed rules to address those differences.
    The Commission seeks comment on all aspects of the proposed method 
of calculating the allowance for credit risk. Because the Basel 
Standards have been implemented by many financial regulators, we 
request comment as to whether the proposed rule is consistent with the 
Basel Standards as they have been implemented. In addition, we request 
comment as to whether the proposed rule is consistent with the present 
version of the proposed New Basel Capital Accord and how various 
financial regulators have proposed to implement the proposed New Basel 
Capital Accord. Should an SIBHC have other alternative methods for 
calculating the allowance for credit risk?
4. Calculation of Consolidated Allowance for Operational Risk
    Under proposed Rule 17i-7, an SIBHC would be required to calculate 
an allowance for operational risk consistent with the appropriate 
standards published by the Basel Committee. The Basel Committee has 
proposed three methods for the calculation of an allowance for 
operational risk (i) the basic approach; (ii) the standardized 
approach; and (iv) the advanced measurement approach. For a complete 
discussion of the proposed operational risk calculation, please refer 
to the proposed New Basel Capital Accord.\91\ The basic and 
standardized approach calculations are based on fixed percentages. 
Under the basic approach, the allowance is 15% of consolidated annual 
revenues net of interest expense averaged over the past three years. 
The standardized approach maps these revenues to eight business lines. 
The allowance for operational risk is then a percentage of revenues net 
of interest expense, ranging from 12% to 18%, attributed to each 
business line. The advanced measurement approach requires a system for 
tracking and controlling operational risk and provides that the 
allowance for operational risk is the largest operational loss that 
might be expected over a one-year period with 99.9% confidence.
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    \91\ See the New Basel Capital Accord (April, 2003).
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    We solicit comment on all aspects of these three methods for 
calculating consolidated allowance for operational risk. In addition, 
we request that commenters address whether any of the three methods is 
preferable and, if so, explain why. Further, could any changes be made 
to these methods that would better accommodate the broker-dealer 
business? Finally, should we allow an SIBHC to choose one of the three 
methods, or should the proposed Rule require that SIBHCs use the 
advanced measurement approach?
5. Alternative Capital Assessment
    Under paragraph (e) of proposed Rule 17i-7, an SIBHC would be 
permitted to compute a capital assessment using the Basel Standards 
that the SIBHC already is required to submit to a financial regulator 
or supervisor in lieu of the computations described in paragraphs (a) 
through (d). This proposed Rule is intended to allow an entity that may 
already be subject to certain consolidated supervision requirements to 
continue to use its present systems and methodologies to compute a 
capital assessment for reporting purposes for the affiliate group so 
long as that computation is consistent with the Basel Standards.
6. General Questions Regarding Proposed Rule 17i-7
    We believe the requirements set forth in proposed Rule 17i-7 are 
necessary to keep the Commission informed as to the SIBHC's financial 
condition.
    We request comment on whether we should allow this alternative 
standard or whether some other approach may be warranted.
    We are proposing what we believe are prudent parameters for 
computing an SIBHC's risk allowances, although in some cases these 
parameters may be more conservative than some firms may believe are 
necessary to account for risk. For example, the proposal requires that 
the VaR model used to calculate market risk be based on a ten business-
day movement in rates and prices and that a 99% confidence level be 
used, and that the VaR measure be multiplied by a factor of at least 
three. These parameters are based on our experience and existing 
Commission rules (e.g., Appendix F of Rule 15c3-1) and rules of other 
regulatory agencies where there are similar risk factors in the 
regulated entities. We ask for comment on all these parameters.
7. Other Questions Regarding Capital Calculation
    Proposed Rules 17i-6 and 17i-7 would apply a capital reporting 
requirement consistent with the Basel Standards to the SIBHC. The Basel 
Committee is currently developing a new international agreement, the 
proposed New Basel Capital Accord. The proposed New Basel Capital 
Accord specifies three ``pillars'' for the group-wide supervision of 
internationally active banks and financial enterprises. The first 
pillar, ``minimum regulatory capital'' requirements, requires 
calculations for credit and operational risk and, for firms with 
significant trading activity, market risk. The second pillar, 
``supervisory review,'' requires that capital be assessed relative to 
overall risks and that supervisors review and take action in response 
to those assessments.
    The third pillar requires certain disclosures which will allow 
market participants to assess key pieces of information concerning, for 
example, the capital, risk exposures, and risk assessment processes of 
the institution. The purpose of the third pillar is to complement the 
minimum capital requirements and the supervisory review process by 
encouraging market discipline.
    The third pillar is discussed in the U.S. banking agencies' 
Advanced Notice of Proposed Rulemaking on the proposed New Basel 
Capital Accord.\92\ As the banking agencies noted, an integral part of 
the advanced approaches is enhanced public disclosure practices. 
Specific disclosure requirements would be applicable to all 
institutions using the advanced approaches and would encompass capital, 
credit risk, credit risk mitigation, securitization, market risk, 
operational risk, and interest rate risk.
---------------------------------------------------------------------------

    \92\ See Risk-Based Capital Guidelines; Implementation of New 
Basel Capital Accord, 68 FR 45900 (August 4, 2003), beginning at 
45943.
---------------------------------------------------------------------------

    We request comment on whether any additional disclosures by U.S. 
broker-dealer firms, their holding companies, and affiliates should be 
required to meet the requirements of the third pillar of the proposed 
New Basel Capital Accord.

[[Page 62923]]

If additional, specific disclosure is warranted, commenters are asked 
to address where that disclosure should be made as well as whether 
disclosures should be made on a quarterly, annual, or other periodic 
basis. In addition, we request comment on whether additional required 
disclosures should depend on whether a firm is privately held or is a 
public reporting company.
    We also request comment on whether the regulatory regime outlined 
in this proposal together with existing Commission regulation of 
broker-dealers would meet the requirements of the first and second 
pillars of the proposed New Basel Capital Accord or whether changes or 
enhancements should be made.
    We request comment on whether, if the proposed New Basel Capital 
Accord is adopted, there should be a transition period before the 
Commission requires its use by SIBHCs.

I. Proposed Rule 17i-8: Notification Requirements for SIBHCs

    A broker-dealer that is part of a large holding company structure 
may be vulnerable to increased risks from the activities of its 
affiliates and may face difficulty in continuing its operations if a 
major affiliate ceased operations or encountered financial 
difficulties. Proposed Rule 17i-8 would require the SIBHC to notify the 
Commission upon the occurrence of certain events. The proposed early 
warning system is designed to provide the Commission with information 
so that it can identify these potential risks to the broker-dealer and 
its customers.
    Paragraph (a) of proposed Rule 17i-8 would require the SIBHC to 
immediately notify the Commission upon the occurrence of certain 
events. These events include (i) the occurrence of certain backtesting 
exceptions; (ii) the SIBHC's computation reflects that consolidated 
allowable capital is less than 110% of the sum of consolidated 
allowances for market, credit and operational risk; (iii) an affiliate 
declares bankruptcy or otherwise becomes insolvent; (iv) the SIBHC 
becomes aware that a credit rating agency intends to decrease its 
evaluation of the creditworthiness of an affiliate or the credit rating 
assigned to one or more outstanding short or long-term obligations of 
an affiliate; (v) the SIBHC becomes aware that a financial regulatory 
agency or self-regulatory organization has taken certain regulatory 
actions against an affiliate; or (vi) the SIBHC becomes ineligible to 
be supervised by the Commission as a SIBHC (e.g., the SIBHC purchases 
an insured bank, or the SIBHC's affiliated broker-dealer's tentative 
net capital falls below $100 million).\93\ We believe that these events 
would indicate a decline in the financial and operational well-being of 
the firm. Were an SIBHC to file a notification as required by proposed 
Rule 17i-8, the Commission may be prompted to request additional 
reports, as contemplated by proposed Rule 17i-6(b), and otherwise begin 
to monitor the firm's condition more closely.
---------------------------------------------------------------------------

    \93\ See paragraph (a) of proposed Rule 17i-8.
---------------------------------------------------------------------------

    In addition, proposed Rule 17i-8 would require that an SIBHC notify 
the Commission if there were a material change (along with a 
description of that change) in the ownership or organization of the 
affiliate group, the status of any affiliate that is material, or the 
major business functions of any material affiliate.\94\
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    \94\ See paragraph (b) of proposed Rule 17i-8.
---------------------------------------------------------------------------

    Paragraph (c) of proposed Rule 17i-8 would specify the manner in 
which these notices and reports should be provided to the Commission. 
In addition, paragraph (c) of proposed Rule 17i-8 would specify that 
the notices and reports filed with the Commission pursuant to Rule 17i-
8 would be accorded confidential treatment. We believe it is important 
to accord confidential treatment to the notices and reports an SIBHC 
would be required provide pursuant to proposed Rule 17i-8 because the 
information contained in those notices and reports would generally be 
highly sensitive, non-public business information.
    We believe the requirements set forth in proposed Rule 17i-8 are 
necessary to keep the Commission informed as to the SIBHC's activities, 
financial condition, policies, systems for monitoring and controlling 
financial and operational risks, and transactions and relationships 
between any broker or dealer affiliate of the SIBHC and the extent to 
which the SIBHC has complied with the provisions of the Act and the 
regulations prescribed and orders issued under the Act.
    We request comment on all aspects of these notification 
requirements. In addition, we request comment as to whether the events 
that would trigger the notification requirement are appropriate, and 
whether other triggering events should be included.

III. General Request for Comment Regarding Proposed Rules

    The Commission solicits comment on its proposal to supervise IBHCs 
as SIBHCs. The Commission solicits comments on whether this proposal 
would provide adequate Commission oversight on a group-wide basis of 
IBHCs that file a Notice of Intent to become supervised by the 
Commission as an SIBHCs.
    We note that on September 12, 2003, the Federal Reserve Board, the 
Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, and the Federal Deposit Insurance Commission requested 
public comment on an interim final rule and a notice of proposed 
rulemaking to amend their risk-based capital standards for the 
treatment of assets in asset-backed commercial paper programs 
consolidated under the recently issued Financial Accounting Standards 
Board Interpretation No. 46, Consolidation of Variable Interest 
Entities.\95\ The rule would also modify the risk-based capital 
treatment of certain securitizations with early amortization 
provisions. In addition, the treatment of securitization exposures is 
discussed in the banking agencies Advanced Notice of Proposed 
Rulemaking on the proposed New Basel Capital Accord.\96\
---------------------------------------------------------------------------

    \95\ See Risk-Based Capital Guidelines; Capital Adequacy 
Guidelines; Capital Maintenance: Asset-Backed Commercial Paper 
Programs and Early Amortization Provisions, 68 FR 56568 (Oct. 1, 
2003).
    \96\ See Risk-Based Capital Guidelines; Implementation of New 
Basel Capital Accord, 68 FR 45900 (August 4, 2003), beginning at 
45932.
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    Should the Commission consider any modifications to the 
calculations of allowances for market and credit risk for asset-backed 
securitization programs as contemplated by proposed Rule 17i-7? If so, 
how and why should the Commission modify these calculations for asset-
backed securitization programs? Should the Commission consider any 
other issues related to the capital treatment of securitization 
exposures?
    Commenters may also wish to discuss whether the Commission should 
consider a different approach, and if so, what that approach should be.
    Commenters should provide empirical data to support their views. 
Comments should be submitted by February 4, 2004.

IV. Paperwork Reduction Act

    Certain provisions of proposed new Rules 17i-1 through 17i-8 and 
the amendments to Rules 17h1-T and 17h-2T contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\97\ The Commission has submitted them to the 
Office of Management and Budget (``OMB'') for review in accordance with 
44 U.S.C. 3507(d) and 5 C.F.R. 1320.11. The titles for the collections 
of information are (i) Rules 17h-1T and

[[Page 62924]]

17h-2T Risk Assessment Rules; (ii) Rule 17i-2 Notice of Intention to be 
Supervised by the Commission as a Supervised Investment Bank Holding 
Company; (iii) Rule 17i-3 Withdrawal from Supervision as an Supervised 
Investment Bank Holding Company; (iv) Rule 17i-4 Internal Risk 
Management Control Systems Requirements for Supervised Investment Bank 
Holding Companies; (v) Rule 17i-5 Record Creation, Maintenance, and 
Access Requirements for Supervised Investment Bank Holding Companies; 
(vi) Rule 17i-6 Reporting Requirements for Supervised Investment Bank 
Holding Companies; and (vii) Rule 17i-8 Notification Requirements for 
Supervised Investment Bank Holding Companies. An agency may not conduct 
or sponsor, and a person is not required to comply with, a collection 
of information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \97\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

A. Collection of Information Under the Amendments to Rules 17h-1T and 
17h-2T and New Rules 17i-1 Through 17i-8

    Proposed Rule 17i-1 through 17i-8 would create a framework for 
Commission supervision of SIBHCs. The collections of information 
included in these proposed rules are necessary to allow the Commission 
to effectively determine whether SIBHC supervision is necessary or 
appropriate in furtherance of the purposes of Sec.  17 of the Act and 
allow the Commission to supervise the activities of these SIBHCs. These 
rules also would enhance the Commission's supervision of the SIBHCs' 
subsidiary broker-dealers through collection of additional information 
and inspections of affiliates of those broker-dealers. Regulatory 
oversight pursuant to this system is voluntary, and eligible IBHCs 
would not be required to be supervised in this manner. This framework 
would include procedures through which an IBHC could file a Notice of 
Intention to become supervised by the Commission as an SIBHC, as well 
as recordkeeping and reporting requirements for SIBHCs.
    The amendments to Rules 17h-1T and 17h-2T \98\ would exempt broker-
dealers that are affiliated with an SIBHC from those rules and thus 
reduce their ``collection of information'' requirements. This exemption 
is designed to eliminate duplicative recordkeeping and reporting 
requirements.
---------------------------------------------------------------------------

    \98\ See supra, note 64.
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B. Proposed Use of Information

    The Commission would use the information collected under the 
proposed new Rules to determine whether SIBHC supervision is necessary 
or appropriate in furtherance of the purposes of Sec.  17 of the Act 
and to monitor the financial condition, risk management, and activities 
of SIBHCs on a group-wide basis. In particular, it would allow the 
Commission access to important information regarding activities of a 
broker-dealer's affiliates that could impair the financial and 
operational stability of the broker-dealer or the SIBHC.

C. Respondents

    An IBHC can file a Notice of Intention to be supervised by the 
Commission as an SIBHC only if it: (1) Has a subsidiary broker or 
dealer that can evidence that it has a substantial presence in the 
securities business; and (2) is not (i) affiliated with an insured bank 
(with certain exceptions) or a savings association, (ii) a foreign 
bank, foreign company, or a company that is described in section 8(a) 
of the International Banking Act of 1978, or (iii) a foreign bank that 
controls a corporation chartered under section 25A of the Federal 
Reserve Act.\99\ Paragraph (d)(2)(i)(B) of proposed Rule 17i-2 would 
indicate that the Commission would not consider it to be necessary or 
appropriate to supervise an IBHC unless it can demonstrate that it owns 
or controls a broker-dealer that has a substantial presence in the 
securities business (which may be demonstrated by a showing that the 
broker-dealer maintains tentative net capital of at least $100 
million).
---------------------------------------------------------------------------

    \99\ Federal Reserve Act section 25A [12 U.S.C. 611].
---------------------------------------------------------------------------

    As of March 31, 2003, approximately 100 registered broker-dealers 
reported their tentative net capital as being between $100 million and 
$1 billion.\100\ Many of these broker-dealers are affiliated with 
another broker-dealer that reported its tentative net capital as being 
more than $100 million. Approximately 35 could not be supervised by the 
Commission as an SIBHC due to the fact that each is either: (i) 
affiliated with an insured bank (with certain exceptions) or a savings 
association,\101\ (ii) a foreign bank, foreign company, or a company 
that is described in section 8(a) of the International Banking Act of 
1978, or (iii) a foreign bank that controls a corporation chartered 
under section 25A of the Federal Reserve Act.\102\ In addition, some 
broker-dealers may not be active in jurisdictions that require 
securities firms to demonstrate that they have consolidated supervision 
at the holding company level that is equivalent to EU consolidated 
supervision, or may not find it to be cost-effective to register as an 
SIBHC for other reasons. Thus, the Commission estimates that six IBHCs 
will file notices of intent to be supervised by the Commission as 
SIBHCs.
---------------------------------------------------------------------------

    \100\ Per March 31, 2003, FOCUS Report filings. Broker-dealers 
are required to file monthly and/or quarterly reports on Form X-17A-
5 pursuant to Rule 17a-5(a) (17 CFR 240.17a-5(a)), commonly referred 
to as FOCUS Reports. In addition, see supra, note, wherein we 
propose rules and rule amendments that would allow a holding company 
that owns or controls a broker-dealer that maintains more than $1 
billion in tentative net capital. The supervisory framework provided 
by those proposed rules and rule amendments would allow the broker-
dealers of those entities to calculate market and credit risk 
capital charges using mathematical modeling techniques, thus we 
believe those firms will elect that supervisory framework and will 
not elect to be supervised pursuant to these proposed new rules.
    \101\ See Exchange Act section 17(i)(1)(A)(i) [15 U.S.C. 
78q(i)(1)(A)(i)].
    \102\ Federal Reserve Act section 25A [12 U.S.C. 611].
---------------------------------------------------------------------------

D. Reporting and Recordkeeping Burdens

1. Amendments to Rules 17h-1T and 17h-2T
    The amendments to Rules 17h-1T and 17h-2T \103\ would exempt 
broker-dealers that are affiliated with an SIBHC from those rules and 
thus reduce their ``collection of information'' requirements. Rule 17h-
1T requires that a broker-dealer maintain and preserve records and 
other information concerning the broker-dealer's holding companies, 
affiliates, or subsidiaries that are likely to have a material impact 
on the financial or operational condition of the broker-dealer. Rule 
17h-2T requires broker-dealers to file with the Commission quarterly 
reports concerning the information required to be maintained and 
preserved under Rule 17h-1T. The present PRA burden for broker-dealers 
that are presently reporting pursuant to Rules 17h-1T and 17h-2T is 24 
hours per year for each broker-dealer respondent. The estimated six 
firms therefore would have their annual burden reduced by an aggregate 
of 144 hours per year.
---------------------------------------------------------------------------

    \103\ See supra, note 64.
---------------------------------------------------------------------------

2. Proposed Rule 17i-2
    Proposed Rule 17i-2 would require that an IBHC file a Notice of 
Intention to become supervised by the Commission as an SIBHC. The 
Notice of Intention would have to set forth certain information and 
include a number of documents. The SIBHC would also have

[[Page 62925]]

to submit amendments to its Notice of Intention if certain information 
became incorrect or if it made certain material changes. The Commission 
designed Rule 17i-2 so an IBHC could compile and submit existing 
documents with its Notice of Intention (as opposed to requiring that an 
IBHC create additional documents) in order to decrease any costs or 
burdens involved with this proposed rule.
    As stated previously in section IV.C., we estimate that 
approximately six IBHCs will file Notices of Intention to become 
SIBHCs. We estimate that each IBHC that files a Notice of Intention to 
become supervised by the Commission would take approximately 900 hours 
to draft a Notice of Intention, compile the various documents to be 
included with the Notice of Intention, and work with the Commission 
staff. Further, we believe that an IBHC would have an attorney review 
its Notice of Intention, and we estimate that it would take the 
attorney approximately 100 hours to complete such a review. 
Consequently, we estimate the total burden for all six firms to be 
approximately 6,000 hours.\104\ We believe this would be a one-time 
burden.
---------------------------------------------------------------------------

    \104\ (900 hours + 100 hours) x 6 IBHCs/SIBHCs = 6,000 hours.
---------------------------------------------------------------------------

    The estimates of the initial burden for proposed Rule 17i-2 are 
based on the estimates the Commission made in adopting Rule 17c3-1f, 
which contained similar requirements.\105\ Our burden estimates for 
proposed Rule 17i-2 are lower than our burden estimates relating to the 
application provisions of Rule 15c3-1f because our estimates relating 
to the creation of mathematical models have been removed from the 
estimate. Proposed Rule 17i-2 does not require that mathematical models 
be created. In addition, the requirement to create a model is not a 
paperwork burden. Accordingly, the costs associated with creation of 
mathematical models are included in the Cost-Benefit discussion 
regarding proposed Rule 17i-7 (which would require that an SIBHC 
calculate allowances for market and credit risk using mathematical 
models). The estimates we used here were also adjusted based on the 
staff's experience in implementing the OTC derivatives dealer rules. We 
based our burden estimates for proposed Rule 17i-2 on our burden 
estimates for Rule 15c3-1f because the application provisions of Rule 
15c3-1f and proposed Rule 17i-2 are substantially similar and because 
no comments were received regarding the burden estimates for Rule 15c3-
1f.
---------------------------------------------------------------------------

    \105\ See 17 CFR 240.15c3-1f(a).
---------------------------------------------------------------------------

    Rule 17i-2 also requires that an IBHC/SIBHC \106\ update its Notice 
of Intention on an ongoing basis. We estimate, based on the staff's 
experience, that an IBHC/SIBHC will take approximately 2 hours each 
month to update its Notice of Intention, as necessary. Thus, we 
estimate that it will take the six IBHC/SIBHCs, in the aggregate, about 
144 hours each year \107\ to update their Notices of Intention.
---------------------------------------------------------------------------

    \106\ An IBHC would be required to review and update its Notice 
of Intention to the extent it becomes inaccurate prior to a 
Commission determination, and an SIBHC would be required to update 
its Notice of Intention if it changes a mathematical model used to 
calculate its risk allowances pursuant to proposed Rule 17i-7 after 
a Commission determination was made.
    \107\ (2 hours x 12 months each year) x 6 SIBHCs = 144.
---------------------------------------------------------------------------

3. Proposed Rule 17i-3
    Proposed Rule 17i-3 would provide a method by which an SIBHC could 
withdraw from Commission supervision as an SIBHC. The proposed rule 
would require that an SIBHC file a notice of withdrawal with the 
Commission stating that the SIBHC wished to withdraw from Commission 
supervision.
    Due to the benefits and costs associated with becoming supervised 
by the Commission as an SIBHC, we believe that an IBHC would carefully 
consider filing a Notice of Intention. For PRA purposes only, we 
estimate that one SIBHC may wish to withdraw from Commission 
supervision as an SIBHC over a ten-year period.
    We estimate, based on the staff's experience, that an SIBHC that 
withdraws from Commission supervision as an SIBHC would take one 
attorney approximately 24 hours to draft a withdrawal notice and submit 
it to the Commission. Further, we believe the SIBHC would have a senior 
attorney or executive officer review the notice of withdrawal before 
submitting it to the Commission, and that it would take such person 8 
hours to conduct such a review. Thus, we estimate that the annual, 
aggregate burden of withdrawing from Commission supervision as an SIBHC 
would be approximately 3.2 hours each year.\108\
---------------------------------------------------------------------------

    \108\ (1 SIBHC / every 10 years) x (24 hours to draft + 8 hours 
to review) = 3.2 hours.
---------------------------------------------------------------------------

4. Proposed Rule 17i-4
    Proposed Rule 17i-4 would require an SIBHC to have in place a risk 
management control system appropriate for its business and 
organization. An SIBHC would need to consider, among other things, the 
sophistication and experience of its operations, risk management, and 
audit personnel, as well as the separation of duties among these 
personnel, when designing and implementing its internal control 
system's guidelines, policies, and procedures. These requirements are 
designed to result in control systems that would adequately address the 
risks posed by the firm's business and the environment in which it is 
being conducted. In addition, this would enable an SIBHC to implement 
specific policies and procedures unique to its circumstances.
    Proposed Rule 17i-4 also would require that an SIBHC periodically 
review its internal risk management control system for integrity of the 
risk measurement, monitoring, and management process, and 
accountability, at the appropriate organizational level, for defining 
the permitted scope of activity and level of risk.
    In implementing its policies and procedures, an SIBHC would be 
required to document and record its system of internal risk management 
controls. In particular, an SIBHC would be required to document its 
consideration of certain issues affecting its business when designing 
its internal controls. An SIBHC would also be required to prepare and 
maintain written guidelines that discuss its internal control system.
    The information to be collected under proposed Rule 17i-4 would be 
essential to the supervision of SIBHCs and their compliance with the 
Commission's proposed rules. More specifically, the requirement that an 
SIBHC document the planning, implementation, and periodic review of its 
risk management controls is designed to assure that all pertinent 
issues are considered, that the risk management controls are 
implemented properly, and that they continue to adequately address the 
risks faced by SIBHCs.
    As stated previously in section IV.C., we estimate that 
approximately six IBHCs will file Notices of Intention to be supervised 
by the Commission as SIBHCs. We further estimate that the average 
amount of time an SIBHC would spend assessing its present structure, 
businesses, and controls, and establishing and documenting its risk 
management control system would be about 3,600 hours, and that this 
would be a one-time burden. In addition, we estimate that an SIBHC 
would spend approximately 250 hours each year maintaining its risk 
management control system. Thus, we estimate that the total initial 
burden for all SIBHCs would be

[[Page 62926]]

approximately 21,600 hours \109\ and the continuing annual burden would 
be about 1,500 hours.\110\
---------------------------------------------------------------------------

    \109\ (3,600 hours x 6 SIBHCs) = 21,600 hours.
    \110\ (250 hours per year x 6 SIBHCs) = 1,500 hours per year.
---------------------------------------------------------------------------

    The estimates of the initial and annual burdens for proposed Rule 
17i-4 are based on the estimates the Commission made in adopting Rule 
15c3-4. Proposed Rule 17i-4 makes Rule 15c3-4 applicable to SIBHCs. Our 
burden estimates for proposed Rule 17i-4 are higher than our burden 
estimates for Rule 15c3-4 because an SIBHC would be establishing, 
documenting, and maintaining a system of internal risk management 
controls for the affiliate group, and not just for one firm. We based 
our burden estimates for proposed Rule 17i-4 on our burden estimates 
for Rule 15c3-4 because Rule 15c3-4 and proposed Rule 17i-4 are 
substantially similar and because no comments were received regarding 
the burden estimates for Rule 15c3-4.
    Internationally active firms generally already have in place risk 
management practices, and will generally review and improve their risk 
management practices in the near future despite these rules. However, 
we recognize that, to the extent an IBHC presently has a group-wide 
internal risk management control system, those systems may not take 
into account all of the elements and issues required by proposed Rule 
17i-4. In addition, these firms may not have documented their 
consideration of these elements and issues, or other aspects of their 
internal risk management control systems.
5. Proposed Rule 17i-5
    Pursuant to proposed Rule 17i-5, an SIBHC would be required to make 
and keep current certain records relating to its business. In addition, 
it would be required to preserve those and other records for certain 
prescribed time periods. The purpose of this rule is to require that 
the SIBHC create and maintain records that would allow the Commission 
to evaluate SIBHC compliance with the rules to which it is subject. We 
expect that any additional burden under the proposed rule would be 
minimal because the information that would be called for under the 
proposed rule is information a prudent IBHC that manages risk on a 
group-wide basis would maintain in the ordinary course of its business.
    Pursuant to proposed Rule 17i-5, an SIBHC would be required to make 
and keep records reflecting (i) the results of quarterly stress tests; 
(ii) that the firm had created a contingency plan to respond to certain 
possible funding and liquidity difficulties; and (iii) the basis for 
credit risk weights. We estimate that the average amount of time an 
SIBHC would spend to create a record regarding stress tests is about 64 
hours each quarter, or approximately 256 hours each year. This estimate 
is based on the staff's experience working with models and dealing with 
firms that use models through implementation of the OTC derivatives 
dealers rules, as well as informal discussions with potential 
respondents. We further estimate that the average amount of time an 
SIBHC would spend to create and document a contingency plan regarding 
funding and liquidity of the affiliate group (which we believe an SIBHC 
would do only once, not on an ongoing basis) would be about 40 hours. 
This estimate is based on the staff's experience. In addition, we 
estimate that the average amount of time an SIBHC would spend to create 
a record regarding the basis for credit risk weights would be about 30 
minutes for each counterparty, and that on average, an SIBHC will 
establish approximately 20 new counterparty arrangements each 
year.\111\ This estimate is based on informal discussions the staff has 
had with potential respondents.
---------------------------------------------------------------------------

    \111\ We estimate that, on average, each firm presently 
maintains relationships with approximately 1,000 counterparties. 
Further, it is our understanding that firms generally already 
maintain documentation regarding their credit decisions, including 
their determination of credit risk weights, for those 
counterparties.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 17i-5, an SIBHC would be required to 
maintain these and other records for at least three years in an easily 
accessible place. We estimate that the average amount of time an SIBHC 
would spend to maintain these and other, specified records for three 
years would be about 24 hours per year per SIBHC. This estimate is 
based on our present estimates for Rule 17a-4, which previously have 
been subject to notice and comment and have been approved by OMB.
    As stated previously in section IV.C., we estimate that 
approximately six IBHCs will file Notices of Intention to be supervised 
by the Commission as SIBHCs. Thus, the total initial burden relating to 
proposed new Rule 17i-5 for all SIBHCs would be approximately 240 hours 
\112\ and the continuing annual burden would be approximately 1,740 
hours.\113\
---------------------------------------------------------------------------

    \112\ (40 hours to create and document a contingency plan 
regarding funding and liquidity of the affiliate group) x 6 SIBHCs.
    \113\ ((256 hours to create a record regarding stress tests) + 
((30 minutes x 20 counterparties) to create a record regarding the 
basis for credit risk weights) + (24 hours per year to maintain 
records)) x 6 SIBHCs.
---------------------------------------------------------------------------

6. Proposed Rule 17i-6
    Proposed Rule 17i-6 would require an SIBHC to file certain monthly 
and quarterly reports with the Commission, as well as an annual audit 
report. These reporting requirements are necessary to keep the 
Commission informed as to the activities of the SIBHC, as well as the 
financial condition, transactions and relationships involving the 
affiliate group, and policies, systems for monitoring and controlling 
financial and operational risks. In addition, these requirements are 
essential to keeping the Commission informed of the extent to which the 
SIBHC or its affiliates have complied with Section 17(i) of the 
Exchange Act and the rules promulgated thereunder. Finally, these 
reports could also be used to evaluate the activities conducted by 
these SIBHCs and to anticipate, where possible, how they might be 
affected by significant economic events.
    As stated previously in section IV.C., we anticipate that the 
proposed rule would affect approximately six SIBHCs. We estimate that, 
on average, it would take an SIBHC about 8 hours each month to prepare 
and file the monthly reports required by this rule (or approximately 96 
hours per year).\114\ We estimate that, on average, it would take an 
SIBHC about 16 hours each quarter (or 64 hours each year) \115\ to 
prepare and file the quarterly reports required by this rule. We 
estimate that, on average, it would take an SIBHC about 200 hours to 
prepare and file the annual audit reports required by this rule. Thus, 
we estimate that the total annual burden of proposed Rule 17i-6 on all 
SIBHCs would be approximately 2,160 hours.\116\
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    \114\ (8 hours x 12 months in a year) = 96 hours/year.
    \115\ (16 hours x 4 quarters in a year) = 64 hours/year.
    \116\ (96 hours per year to prepare and file monthly reports + 
64 hours each year to prepare and file quarterly reports + 200 hours 
each year to prepare and file annual audit reports) x 6 SIBHCs = 
2,160 hours.
---------------------------------------------------------------------------

    These estimates are based on our present estimates for 17a-12, 
which were previously subject to notice and comment and have been 
approved by OMB. However the estimates for the monthly and quarterly 
reports were reduced somewhat due to the fact that an SIBHC would not 
be required to complete specified forms, but instead could provide the 
required information to the Commission in its existing format. We 
believe that our use of existing internal reports will decrease the 
burden on SIBHCs because an SIBHC may compile existing documents and 
submit them to the Commission.

[[Page 62927]]

Further, the time burden relating to the annual audit was increased in 
recognition of the fact that the audit of a holding company is 
generally more time consuming than the audit of one entity (for both 
the accountants and the firm employees working with them). However, 
many of these holding companies are already audited at the holding 
company level, so, aside from the special supplemental reports, no 
additional burden should be imposed by proposed Rule 17i-6. We believe 
that most well-managed SIBHCs already report to their senior management 
much of the information required to be provided to the Commission 
pursuant to proposed Rule 17i-6.
    7. Proposed Rule 17i-8
    Proposed Rule 17i-8 would require SIBHCs to report on the 
occurrence of certain events that may have a material adverse affect on 
the SIBHC. The proposed early warning system is modeled after the early 
warning system used with respect to broker-dealers in Exchange Act Rule 
17a-11. Like Exchange Act Rule 17a-11, proposed Rule 17i-8 is designed 
to give the Commission advance warning of problems that may pose 
material risks to the financial and operational capability of an SIBHC 
and its affiliated broker-dealers. The proposed rule would be integral 
to the supervision of SIBHCs and their affiliated broker-dealers.
    We estimate that it would take an SIBHC approximately one hour to 
create a notice required to be submitted to the Commission pursuant to 
proposed Rule 17i-8. This estimate is based on our present estimates 
for Rule 17a-11, which were previously subject to notice and comment 
and have been approved by OMB. The Commission received 692 Rule 17a-11 
Notices from 627 broker-dealers during the year ending December 2001. 
At that time, there were approximately 7,217 active broker-dealers 
registered with the Commission.\117\ Thus, 9% of active, registered 
broker-dealers had a situation arise which caused them to file a notice 
pursuant to Rule 17a-11. Using this 9% figure, we estimate that of the 
approximately six IBHCs that we believe will register to be supervised 
as SIBHCs, one may be required to file notice pursuant to proposed Rule 
every other year.\118\ Thus, we estimate that the annual burden of 
proposed Rule 17i-8 for all SIBHCs would be about 30 minutes.
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    \117\ Of approximately 7,739 broker-dealers registered with the 
Commission in 2001, approximately 341 were not yet active because 
their registration was pending SRO approval and approximately 181 
were inactive because they had ceased doing a securities business 
and had filed a Form BDW with the Commission. Of those, 7217 active, 
registered broker-dealers, three were registered OTC derivatives 
dealers.
    \118\ (6 SIBHCs x 9%) = 0.54.
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E. Collection of Information Is Mandatory

    The collections of information requirements in proposed new Rules 
17i-1 through 17i-8 would be mandatory for every IBHC that files a 
Notice of Intention to be supervised by the Commission as an SIBHC and 
every SIBHC that is supervised by the Commission.

F. Confidentiality

    The information and documents collected, retained, and/or filed 
pursuant to Proposed new Rules 17i-1 through 17i-8 would be accorded 
confidential treatment.

G. Record Retention Period

    Proposed Rule 17i-5(b) would require that an IBHC preserve for 
three years in an easily accessible place information relating to (i) 
its Notice of Intention; (ii) its group-wide system of internal risk 
management controls; (iii) the records it is required to make and keep 
current; (iv) the reports it is required to make; and (v) its 
calculations of allowable capital and allowances for market, credit, 
and operational risk.

H. Request for Comments Regarding Paperwork Burden Estimates

    Under 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to 
evaluate:
    [sbull] Whether the proposed collection of information is necessary 
for the proper performance of the functions of the Commission, 
including whether the information would have practical utility;
    [sbull] The accuracy of the Commission's estimate of the burden of 
the proposed collection of information;
    [sbull] Ways in which we might enhance the quality, utility, and 
clarity of the information to be collected; and
    [sbull] Ways in which we might minimize the burden of the 
collection of information on those required to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons wishing to submit comments on the collection of information 
requirements should address them to The Office of Management and 
Budget, Room 3208, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, New 
Executive Office Building, Washington, DC 20503; and should also send a 
copy of their comments to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
The submission should reference File No. S7-22-03. OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication of this document in the Federal Register; 
therefore, comments to OMB are best assured of having full effect if 
OMB receives them within 30 days of this publication.
    The Commission has submitted the proposed collections of 
information to OMB for approval. Requests for the materials submitted 
to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-22-03, and be 
submitted to the Securities and Exchange Commission, Records 
Management, Office of Filings and Information Services, 450 Fifth 
Street, NW., Washington, DC 20549-0609.

V. Costs and Benefits of the Proposed Rules and Rule Amendments

    The Commission has identified certain costs and benefits that would 
be associated with the proposed framework for supervising SIBHCs. 
Supervision pursuant to this system is voluntary, and eligible IBHCs 
would not be required to be supervised in this manner. This framework 
would include requirements for IBHCs that file Notices of Intention to 
be supervised by the Commission as SIBHCs, as well as recordkeeping and 
reporting requirements for SIBHCs, including a requirement that an 
SIBHC calculate and report a calculation of allowable capital and 
allowances for market, credit and operational risk.

A. Benefits

    There are many quantifiable and non-quantifiable benefits that 
would be created by these rules. We have attempted to delineate those 
costs below.
    U.S. securities firms that do business in the EU have indicated 
that they may need to demonstrate that they are subject to consolidated 
supervision at the holding company level that is ``equivalent'' to EU 
consolidated supervision. Generally, EU ``consolidated supervision'' 
would take the form of a series of rules, imposed at the holding 
company level, regarding firms' internal controls, capital adequacy, 
intra-group transactions, and risk concentration. Without a 
demonstration of ``equivalent'' supervision, securities firms located 
in the EU have stated that they may either be subject to additional 
capital charges or required to form a sub-holding

[[Page 62928]]

company in the EU.\119\ The regulatory framework for SIBHCs set forth 
in the proposed rules is intended to provide a basis for non-U.S. 
financial regulators to treat the Commission as the principal U.S. 
consolidated, home-country supervisor \120\ for SIBHCs and their 
affiliated broker-dealers. In response to a survey conducted during the 
rulemaking process to promulgate the OTC derivatives dealers rules, 
firms suggested that they would incur significant costs in creating a 
new, non-U.S. regulated affiliate. Based on that information, we 
estimate that it would cost an IBHC approximately $8 million to with 
create a new, non-U.S., regulated affiliate,\121\ or about $48 million 
in the aggregate for the six IBHCs we believe will file Notices of 
Intention to become supervised by the Commission as SIBHCs. We do not 
have sufficient information to estimate what additional capital charges 
may be imposed on securities firms that do business in the EU if they 
are not subject to equivalent supervision.
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    \119\ See supra note 3.
    \120\ See supra note 4.
    \121\ Five firms responded to the survey and estimated that 
their annual operating costs would increase by at least $36 million 
in the aggregate to conduct business as an OTC derivatives dealer. 
($36 million / 5 firms) = $7.2 million each. ($7.2 million x an 
inflation factor of 1.12 (to account for inflation from 1998 to the 
present)) = approximately $8 million.
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    Certain broker dealers must create records and file quarterly 
reports with the Commission regarding the financial condition, 
organization, and risk management practices of the affiliated group 
pursuant to Exchange Act Rules 17h-1T and 17h-2T.\122\ Broker-dealers 
affiliated with IBHCs that meet the criteria set forth in proposed 
Rules 17i-1 through 17i-8 generally would be subject to Rules 17h-1T 
and 17h-2T. To the extent that the information collected or made and 
maintained pursuant to proposed Rule 17i-5 reports are made and filed 
pursuant to proposed Rule 17i-6 by the SIBHC of a broker-dealer that is 
subject to Rules 17h-1T and 17h-2T, that broker-dealer will be exempted 
from the provisions of Rules 17h-1T and 17h-2T. We estimate that, on 
average, a broker-dealer affiliated with one of the six SIBHCs would 
save about $1,215.12.\123\ In the aggregate, the total cost savings 
associated with these amendments would be approximately $7,291.\124\
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    \122\ See supra, note 64.
    \123\ We estimate, based on the present burden for 17h-1T and 
17h-2T (which has been subject to notice and comment and has been 
approved by OMB), that each broker-dealer affiliated with an SIBHC 
that will no longer have to maintain records or file reports will 
spend 24 hours less each year to perform these tasks. The staff 
believes that a broker-dealer would have a financial reporting 
manager perform these tasks. According to the Securities Industry 
Association's (``SIA'') Report on Management and Professional 
Earnings in the Securities Industry--2002, the hourly cost of a 
financial reporting manager is $50.63. (($50.63 x 24 hours) = 
$1,215.12. Generally, to achieve an hourly cost using the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2002, the staff will take the median (or, if no median is 
provided, the mean) salary provided in that Report for the position 
cited, divide that amount by 1,800 hours (in the average year), and 
then multiply the result by 135% (to account for employee overhead 
costs).
    \124\ ($1,215.12 x six affected broker-dealers) = $7,291.
---------------------------------------------------------------------------

    In addition, proposed Rules 17i-1 through 17i-8 would not only 
create a regulatory framework for the Commission to supervise SIBHCs, 
but they would improve the Commission's ability to supervise the 
financial condition and securities activities of SIBHCs' affiliated 
broker-dealers. The proposed requirement that an SIBHC establish, 
document and maintain an internal risk management control system 
reduces the risk of significant losses by the SIBHC's affiliated 
broker-dealers. The proposed internal risk management control system 
requirement would also reduce systemic risk. We have no way to quantify 
this benefit.
    An additional benefit arises from the reduced borrowing costs, or 
increased stock price that would result from better risk management 
practices. Credit rating agencies analyze risk management practices, 
among many factors, in determining credit ratings. A firm that has 
better risk management systems may be rated better, and would therefore 
pay lower interest rates to borrow and realize higher stock prices. 
However it is unclear to what extent risk management factors into 
credit ratings. In addition, present internal risk management control 
systems vary widely from firm to firm. Therefore it is difficult to 
quantify this benefit.
    However, evolving industry best practice for internationally active 
firms suggests that some of the firms already have group-wide internal 
risk management control systems in place, and some firms will implement 
the risk management practices in the near future.

B. Costs

    IBHCs that file Notices of Intention to become supervised by the 
Commission as SIBHCs would incur various on-going costs and one-time 
costs.
1. Ongoing Costs
    Proposed Rules 17i-1 through 17i-8 would cause an SIBHC to incur 
ongoing costs relating to: (i) Drafting and reviewing a Notice of 
Intention; (ii) drafting and reviewing a notice of withdrawal; (iii) 
updating its internal risk management control system; (iv) creating a 
record regarding stress tests; (v) creating a record regarding the 
basis for credit risk weights; (vi) maintaining its records in 
accordance with proposed Rule 17i-5; (vii) preparing and filing monthly 
and quarterly reports; (viii) preparing and filing its annual audit; 
(ix) calculating allowable capital and allowances for market, credit, 
and operational risk; (x) maintaining its models; (xi) conducting 
stress tests on its models; and (xii) filing notices pursuant to 
proposed Rule 17i-8.
    Proposed Rule 17i-2 would require that an SIBHC update its Notice 
of Intention on an ongoing basis. We estimate, that each SIBHC will 
incur a cost of approximately $1,358 each year to make any necessary 
updates to its Notice of Intention.\125\ Thus, we estimate that the 
total annual cost to make any updates to the notice would be, in 
aggregate, about $8,150 each year for all SIBHCs.\126\
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    \125\ We estimate that an SIBHC will take about 24 hours each 
year to assure that its Notice of Intention is accurate and make any 
necessary updates. We believe an SIBHC will have a senior compliance 
person perform this task. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2002, the hourly cost of a senior compliance person is $56.60. (24 
hours x $56.60) = $1,358.40.
    \126\ ($1,358.40 x 6 SIBHCs) = $8,150.
---------------------------------------------------------------------------

    Proposed Rule 17i-3 would require that an SIBHC file a notice of 
withdrawal with the Commission if it wished to withdraw from Commission 
supervision. We estimate that each SIBHC that withdraws from Commission 
supervision would incur a cost of about $2,130 to draft and review a 
notice or withdrawal to submit to the Commission.\127\ However, we 
further estimate that one SIBHC may withdraw from Commission 
supervision only once every ten years. Thus, the annual cost of this 
rule would be approximately $213.\128\
---------------------------------------------------------------------------

    \127\ We estimate, based on the staff's experience, that it 
would take one attorney approximately 24 hours to draft a withdrawal 
notice and that it would take a senior attorney or executive officer 
8 hours to review the notice of withdrawal before submitting it to 
the Commission. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of an attorney is $63.75, and the average hourly cost of a 
senior attorney and executive officer is $75.00. ((24 hours x 
$63.75) + (8 hours x $75.00)) = $2,130.
    \128\ ($2,130.00 x 10 years) = $213.
---------------------------------------------------------------------------

    Proposed Rule 17i-4 would require an SIBHC to maintain an internal 
risk management control system. We estimate that an SIBHC would incur a 
cost of approximately $14,150

[[Page 62929]]

associated with maintaining its risk management control system each 
year.\129\ Thus, the continuing annual burden would be, in aggregate, 
approximately $84,897 for all six SIBHCs.\130\
---------------------------------------------------------------------------

    \129\ We estimate that it would take each SIBHC 250 hours each 
year to maintain its internal risk management control system, and 
that an SIBHC would have a senior compliance person perform that 
task. According to the SIA's Report on Management and Professional 
Earnings in the Securities Industry--2002, the hourly cost of a 
senior compliance person is $56.60. (250 hours x $56.60) = 
$14,149.50.
    The hourly burden estimates are roughly based on the estimates 
made in the Commission's OTC derivatives dealer releases, through 
which Rule 15c3-4 was promulgated. Proposed Rule 17i-4 states that 
an SIBHC must comply with Rule 15c3-4 as if it were a broker-dealer. 
No comments were received in response to the estimates proposed in 
the OTC derivatives dealers proposing release, and those burden 
estimates were not changed in the final rule release. Those 
estimates were increased to account for the fact that an SIBHC would 
be designing and implementing a system of internal risk management 
controls for the affiliate group, and not just for one firm.
    \130\ ($14,149.50 x 6 SIBHCs) = $84,897.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 17i-5, an SIBHC would be required to 
create records regarding stress tests and the basis for credit risk 
weights, and preserve those and other records relating to its business 
for certain prescribed time periods. We estimate that an SIBHC would 
incur an annual cost of about $17,280 to create a record regarding 
stress tests as required by proposed Rule 17i-5.\131\ Further, we 
estimate that, on average, an SIBHC would incur an annual cost of 
approximately $371 to create a record regarding the basis for credit 
risk weights.\132\ These estimates are based on informal discussions 
with potential respondents. Further, we estimate that, on average, an 
SIBHC would incur an annual cost of $1,413 to maintain records pursuant 
to proposed Rule 17i-5.\133\ Thus, the aggregate annual cost relating 
to proposed new Rule 17i-5 for all SIBHCs would be approximately 
$114,382.\134\
---------------------------------------------------------------------------

    \131\ Based on the staff's experience working with models and 
dealing with firms that use models through implementation of the OTC 
derivatives dealers rules, as well as informal discussions with 
potential respondents, we estimate that an SIBHC would spend 
approximately 256 hours each year to create a record regarding 
stress tests. We believe that an SIBHC would have a trading floor 
supervisor or equivalent create this record. According to the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2002, the hourly cost of a trading floor supervisor is 
$67.50. ($67.50 x 256) = $17,280.
    \132\ Based on the staff's informal discussions with potential 
respondents, we estimate that an SIBHC would spend 30 minutes per 
counterparty to create a record regarding credit risk weights, and 
that, on average, each SIBHC would initiate relationships with 20 
new counterparties each year. We believe that an SIBHC would have an 
intermediate accountant create this record. According to the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2002, the hourly cost of an intermediate accountant is 
$37.05. ($37.05 x (30 minutes x 20 counterparties)) = $370.50.
    \133\ We estimate, based on our present estimates for Rule 17a-
4, which previously have been subject to notice and comment and have 
been approved by OMB, that an SIBHC will spend about 24 hours per 
year to maintain records as required pursuant to proposed Rule 17i-
5. The staff believes that an SIBHC would have a programmer analyst 
perform this task. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of a programmer analyst is $58.88. ($58.88 x 24) = $1,413.12.
    \134\ (($17,280 + $370.50 + $1,413.12) x 6 SIBHCs) = 
$114,381.72.
---------------------------------------------------------------------------

    Proposed Rule 17i-6 would require an SIBHC to file certain monthly 
and quarterly reports with the Commission, as well as an annual audit 
report. We estimate that the average cost for an SIBHC to prepare and 
file the monthly reports would be about $399 per month, and thus 
approximately $4,788 per year.\135\ We estimate that, on average, an 
SIBHC would incur a quarterly cost of $798 to prepare and file the 
required quarterly reports, and thus would incur an annual cost of 
$3,192 to file these reports.\136\ Finally, we estimate that, on 
average, an SIBHC would incur an annual cost of $9,750 to prepare and 
file an annual audit.\137\ Thus, we estimate that the total cost that, 
in aggregate, SIBHCs would incur that are associated with proposed Rule 
17i-6 would be approximately $106,385.\138\
---------------------------------------------------------------------------

    \135\ We estimate that an SIBHC would spend about 8 hours per 
month and 96 hours per year to prepare and file these monthly 
reports. We believe that an SIBHC would have a senior accountant 
prepare and file these reports. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2002, the hourly cost of a senior accountant is $49.88. ($49.88 x 8 
hours) = $399.04. ($399.04 x 12 months) = $4,788.48.
    \136\ We estimate that an SIBHC would spend about 16 hours per 
quarter and 64 hours per year to prepare and file these quarterly 
reports. We believe that an SIBHC would have a senior accountant 
prepare and file these reports. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2002, the hourly cost of a senior accountant is $49.88. ($49.88 x 16 
hours) = $798.08. ($798.08 x 4 quarters) = $3,192.32.
    \137\ We estimate that an SIBHC would spend about 200 hours per 
year to prepare and file an annual audit. We believe that an SIBHC 
would have a senior internal auditor work with accountants to 
prepare and file these reports. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2002, the hourly cost of a senior internal auditor is $48.75. 
($48.75 x 200 hours) = $9,750.
    \138\ (($4,788.48 + $3,192.32 + $9750) x 6 SIBHCs) = $106,385. 
The hourly burden estimates relating to proposed Rule 17i-6 are 
based on the present estimates for Rule 17a-12, which were 
previously subject to notice and comment and have been approved by 
OMB. However, those estimates were reduced somewhat due to the fact 
that SIBHCs would not be required to create any special report, but 
instead could provide the required information to the Commission in 
its existing format.
---------------------------------------------------------------------------

    Proposed Rule 17i-7 would require an SIBHC to calculate the 
affiliate group's allowable capital and allowances for certain types of 
risk. Once the appropriate systems and models are in place, we estimate 
that each SIBHC would incur a cost of about $52,374 to calculate its 
group-wide allowances for market, credit, and operational risk.\139\ In 
addition, we estimate that each SIBHC will incur a cost of about 
$378,000 to maintain its models.\140\ Finally, we estimate that each 
SIBHC will incur an annual cost of approximately $24,915 to perform 
stress tests on its models at least once each quarter.\141\ Thus, we 
estimate that the annual cost that SIBHCs will incur, in aggregate, 
will be approximately $2.7 million.\142\
---------------------------------------------------------------------------

    \139\ We estimate, based on staff experience and discussions 
with industry participants, that, on average, each SIBHC will take 
approximately 1,050 hours per year to calculate allowable capital 
and allowances for market, credit, and operational risk and to 
verify and review that data. We believe that an SIBHC would have a 
senior accountant perform these calculations and verifications. 
According to the SIA's Report on Management and Professional 
Earnings in the Securities Industry--2002, the hourly cost of a 
senior accountant is $49.88. ($49.88 x 1,050 hours) = $52,374.
    \140\ We estimate, based on staff experience and discussions 
with industry participants, that each SIBHC will spend an average of 
approximately 5,600 hours per year maintaining its models. We 
believe that an SIBHC would have a senior programmer and a senior 
research analyst spend approximately 2,800 hours each maintaining 
its models. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of a senior programmer is $63.75 and the hourly cost of a 
senior research analyst is $71.25. (($63.75 x 2,800 hours) + ($71.25 
x 2,800 hours) = $378,000.
    \141\ We estimate, based on staff experience and discussions 
with industry participants, that each SIBHC will spend about 640 
hours each year to conduct stress tests on its models. We believe 
that an SIBHC would have a junior research analyst conduct stress 
tests on its models. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of a junior research analyst is $38.93. ($38.93 x 640 hours) = 
$24,915.20.
    \142\ (($52,374 + $378,000 + $24,915.20) x 6 SIBHCs = 
$2,731,735.20.
---------------------------------------------------------------------------

    Proposed Rule 17i-8 would require SIBHCs to report to the 
Commission the occurrence of certain material risks. We estimate that 
it would cost an SIBHC approximately $64 to create a notice required to 
be submitted to the Commission pursuant to Proposed Rule 17i-8.\143\ 
However, we estimate that

[[Page 62930]]

only one SIBHC may be required to send a notice as required by proposed 
Rule 17i-8 every other year. Thus, we estimate that the annual cost of 
proposed Rule 17i-8 for all SIBHCs would be about $32.\144\
---------------------------------------------------------------------------

    \143\ We estimate that it would take an SIBHC approximately one 
hour to create a notice required to be submitted to the Commission 
pursuant to proposed Rule 17i-8. However, we further estimate that 
only one SIBHC may be required to submit such notice every other 
year. We believe that an SIBHC would have an attorney create a 
notice required to be submitted to the Commission pursuant to 
proposed Rule 17i-8. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of an attorney is $63.75. ($63.75 x 1 hour) = $63.75. The 
hourly burden estimate for proposed Rule 17i-8 is based on our 
present estimates for Rule 17a-11, which were previously subject to 
notice and comment and have been approved by OMB. The Commission 
received 692 Rule 17a-11 Notices from 627 broker-dealers during the 
year ending December 2001. At that time, there were approximately 
7,217 active broker-dealers that are registered with the Commission. 
Thus, 9% (692/7,217) of active, registered broker-dealers had a 
situation arise which caused them to file a notice pursuant to Rule 
17a-11. Using this 9% figure, we estimate that of the approximately 
6 IBHCs that we believe will register to be supervised as SIBHCs, 
one may be required to file notice pursuant to proposed Rule 17i-8 
every other year ((6 SIBHCs x 9%) = 0.54).
    \144\ ($63.75 x (30 minutes/one hour)) = $31.88.
---------------------------------------------------------------------------

2. One-time Costs
    We believe that an SIBHC would incur five types of one-time costs 
associated with becoming an SIBHC: (i) Costs associated with drafting a 
Notice of Intention to submit to the Commission; (ii) costs associated 
with assessing its present structure, businesses, and controls, and 
designing and implementing a risk management control system in order to 
comply with proposed Rule 17i-4; (iii) costs associated with creating 
and documenting a contingency plan regarding funding and liquidity of 
the affiliate group; (iv) costs associated with upgrading the 
information technology (``IT'') systems it uses to manage group-wide 
risk, make and retain records and reports, and calculate group-wide 
capital; and (v) costs associated with developing mathematical models 
to calculate its group-wide allowances for market and credit risk as 
required by proposed Rule 17i-7.
    Proposed Rule 17i-2 would require that an IBHC file a Notice of 
Intention to become supervised by the Commission that includes certain 
information and documents. We estimate that each IBHC that files a 
Notice of Intention to become supervised by the Commission as an SIBHC 
would incur a cost of approximately $50,940 to draft a Notice of 
Intention, compile the various documents to be included with the Notice 
of Intention, and work with the Commission staff.\145\ Further, we 
believe that an IBHC would have an attorney review the Notice of 
Intention, and that it would incur a cost of approximately $6,375 
relating to this review.\146\ Consequently, we estimate that the total 
costs that would be incurred by the six IBHCs we believe will file 
Notices of Intention to become supervised by the Commission as SIBHCs 
is about $343,890.\147\
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    \145\ We estimate that an SIBHC will spend 900 hours to perform 
this task. Further, we believe that an SIBHC would have a senior 
compliance person perform this task. According to the SIA's Report 
on Management and Professional Earnings in the Securities Industry--
2002, the hourly cost of a senior compliance person is $56.60. 
($56.60 x 900 hours) = $50,940.
    \146\ We believe that an SIBHC will have an attorney review the 
Notice of Intention and that it would take an attorney 100 hours to 
complete this review. According to SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of an attorney is $63.75. ($63.75 x 100 hours) = $6,375.
    \147\ ($50,940 + $6,375) x 6 SIBHCs = $343,890. The hourly 
burden estimates used to derive these cost estimates are based on 
the estimates made in the Commission's OTC derivatives dealer 
releases, which contained a similar requirement. No comments were 
received in response to the estimates proposed in the OTC 
derivatives dealers proposing release, and those burden estimates 
were not changed in the final rule release. We adjusted those 
estimates such that the burden hours associated with creation of VaR 
models was moved to the burden estimates for proposed Rule 17i-7. We 
also adjusted the estimates based on the staff's experience in 
implementing the OTC derivatives dealer rules.
---------------------------------------------------------------------------

    Each SIBHC would incur a one-time cost to assess its present 
structure, businesses, and controls, and establish, document and 
maintain a risk management control system in order to comply with 
proposed Rule 17i-4. We estimate that the one-time cost for an SIBHC to 
assess its present structure, businesses, and controls, and establish, 
document and maintain a risk management control system will cost 
approximately $203,760.\148\ Thus, we anticipate the total aggregate 
cost for all SIBHCs would be about $1.2 million.\149\
---------------------------------------------------------------------------

    \148\ We estimate that the average amount of time an SIBHC would 
spend assessing its present structure, businesses, and controls, and 
designing and implementing a risk management control system would be 
about 3,600 hours. We believe that an SIBHC would have a senior 
compliance person performing this task. According to the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2002, the hourly cost of a senior compliance person is 
$56.60. ($56.60 x 3,600 hours) = $203,760.
    \149\ ($203,760.00 per SIBHC x 6 SIBHCs expected to apply) = 
$1,222,560. The estimates of the initial and annual burdens for 
proposed Rule 17i-4 are based on the estimates the Commission made 
in adopting Rule 15c3-4. Proposed Rule 17i-4 makes Rule 15c3-4 
applicable to SIBHCs. Our burden estimates for proposed Rule 17i-4 
are higher than our burden estimates for Rule 15c3-4 because an 
SIBHC would be establishing, documenting, and maintaining a system 
of internal risk management controls for the affiliate group, and 
not just for one firm. We based our burden estimates for proposed 
Rule 17i-4 on our burden estimates for Rule 15c3-4 because Rule 
15c3-4 and proposed Rule 17i-4 are substantially similar and because 
no comments were received regarding the burden estimates for Rule 
15c3-4.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 17i-5, an SIBHC would be required to 
document a contingency plan regarding funding and liquidity of the 
affiliate group. We estimate that it would cost each SIBHC about $1,958 
to document such a contingency plan.\150\ Consequently, it would cost 
the six SIBHCs we expect to file Notices of Intention to be supervised 
by the Commission, in aggregate, approximately $11,746.\151\
---------------------------------------------------------------------------

    \150\ We estimate that, on average, an SIBHC would spend about 
40 hours to create and document a contingency plan regarding funding 
and liquidity of the affiliate group. This estimate is based on the 
staff's experience. Further, we believe that an SIBHC would have a 
senior treasury manager perform this task. According to the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2002, the hourly cost of a senior treasury manager is 
$48.94. ($48.94 x 40 hours) = $1,957.60.
    \151\ ($1,957.60 x 6 SIBHCs) = $11,746.
---------------------------------------------------------------------------

    The IT systems used by IBHCs to manage risk, make and retain 
records and reports, and calculate capital differ widely based on the 
types of business and the size of the IBHC. In addition, these IT 
systems may be in varying stages of readiness to meet the requirements 
of the proposed rules. We estimate that it will cost an IBHC that has 
well-developed IT systems to manage group-wide risk, make and retain 
their records, provide reports, and calculate group-wide capital about 
$1 million to upgrade its IT systems. We estimate that it will cost an 
IBHC that has less well-developed IT systems approximately $10 million 
to upgrade its IT systems. Thus, we estimate that, on average, it will 
cost each of the six SIBHCs about $5.5 million to upgrade their IT 
systems, or approximately $33 million in total. We believe that the 
costs for an SIBHC to update information technology systems in order to 
comply with proposed Rules 17i-1 through 17i-8 would be an initial, 
one-time cost. These estimates are based on the experience of 
Commission staff, as well as informal discussions with potential 
respondents.
    Pursuant to proposed Rule 17i-7 an SIBHC would be required to 
calculate its group-wide allowances for market, credit, and operational 
risk on a monthly basis. SIBHCs would generally use mathematical models 
to calculate market and credit risk. The SIBHC's size, the types of 
business in which it engages, and the complexity of its portfolio will 
all factor into the cost of model development. We estimate, based on 
staff experience, our experience with OTC derivatives dealers, and 
discussions with industry participants, that it will cost an SIBHC 
between $6,750 (if the firm already manages risks using mathematical 
models and simply needs to adjust those models to assure they comply 
with the qualitative and quantitative requirements set forth in

[[Page 62931]]

the proposed rules) and $675,000 (if the firm is complex and does not 
presently use mathematical models to manage risk) to update or create 
mathematical models.\152\ Thus, we estimate that the additional cost to 
create new models would be, in aggregate, between about $40,500 and 
about $4.1 million for all six firms.\153\
---------------------------------------------------------------------------

    \152\ We estimate that an SIBHC that already manages risk using 
mathematical models may need to spend 100 hours to review its models 
and adjust them to assure they comply with the qualitative and 
quantitative requirements set forth in the proposed rules. We 
believe that an SIBHC would have a senior programmer and a senior 
research analyst spend approximately 50 hours each to perform this 
task. According to the SIA's Report on Management and Professional 
Earnings in the Securities Industry--2002, the hourly cost of a 
senior programmer is $63.75 and the hourly cost of a senior research 
analyst is $71.25. (($63.75 x 50 hours) + ($71.25 x 50 hours) = 
$6,750. Further, we estimate that a complex SIBHC that does not 
presently use mathematical models to manage risk would spend 
approximately 10,000 hours to create mathematical models to use in 
calculating market and credit risk as required by the proposed 
rules. We believe that an SIBHC would have a senior programmer and a 
senior research analyst spend approximately 5,000 hours each to 
perform this task. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2002, the hourly 
cost of a senior programmer is $63.75 and the hourly cost of a 
senior research analyst is $71.25. (($63.75 x 5,000 hours) + ($71.25 
x 5,000 hours) = $675,000. These hourly burden estimates are based 
on staff experience and discussions with industry participants.
    \153\ ($6,750 x 6 SIBHCs) = $40,500. ($675,000 x 6 SIBHCs) = 
$4,050,000.
---------------------------------------------------------------------------

    The Commission notes that broker-dealers with tentative net capital 
of between $100 million and $1 billion that are not affiliated with 
banks generally do not report a VaR figure in their market risk 
disclosure of their holding companies' annual reports. However, some 
firms of this size do report a VaR figure in their market risk 
disclosure of their holding companies' annual reports. IBHCs that do 
not presently use VaR to manage group-wide risk may not find it to be 
cost effective to file a Notice of Intention to be supervised by the 
Commission as an SIBHC. However, this regulatory framework is available 
to a wide range of firms as an alternative, and may allow some of them 
to compete more effectively.
    As stated previously, there are approximately one hundred 
applicants who qualify based on the minimum tentative net capital 
requirements. In addition, it is unclear to what extent IBHCs have made 
these investments already in the ordinary course of business. Evolving 
industry best practice for internationally active firms suggests that 
some IBHCs will have already made some or all the investments required 
by the proposed rules, and some IBHCs have plans to make those 
investments in the near future. As stated previously in section IV.C., 
we believe that the six IBHCs that qualify will file a Notice of 
Intention to become supervised by the Commission as SIBHCs because it 
is cost effective and because they have made or plan to make the 
necessary investments regardless of Commission rule making. To the 
extent that a firm that becomes subject to this rule will not incur 
additional costs to establish, document and maintain a risk management 
control system, upgrade its IT, or create mathematical models, our 
estimates with regard to the proposed rules may be reduced. We seek 
specific comment on the degree to which potential applicants under this 
rule have already made, or are making, the necessary investments in 
risk management control systems, IT, and mathematical modeling.

C. Request for Comment Regarding Analysis of Costs and Benefits

    To assist the Commission in evaluating the costs and benefits that 
may result from the proposed supervisory framework for SIBHCs, the 
Commission requests comments on the potential costs and benefits 
identified in this release, as well as any other costs or benefits that 
may result from the proposed rules and rule amendments. In addition, we 
invite commenters to provide views and data comparing the costs and 
benefits discussed above with the costs and benefits of the current 
regulatory framework. Commenters should provide analysis and data 
relating to the costs and benefits associated with each of the proposed 
Rules. In particular, we solicit comments on the potential costs for 
any necessary modifications to accounting, information and 
recordkeeping systems, and risk management control systems required to 
implement the proposed rules, and the potential benefits arising from 
participation in this optional regulatory framework.

VI. Consideration on Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \154\ requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine if an action is necessary or appropriate in the public 
interest, to consider if the action will promote efficiency, 
competition, and capital formation. Section 23(a)(2) of the Exchange 
Act \155\ requires the Commission, in adopting rules under the Exchange 
Act, to consider the impact that any such rule would have on 
competition. Exchange Act Section 23(a)(2) prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \154\ 15 U.S.C. 78c(f).
    \155\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission's preliminary view is that proposed Rules 17i-1 
through 17i-8 would promote both efficiency and capital formation. The 
proposed rules should provide qualifying IBHCs an opportunity to 
increase operational efficiency by continuing to compete effectively 
outside of the United States in countries that require consolidated 
supervision as a condition of doing business. Although the proposed 
rules would impose new costs relating to: (i) Creation and 
implementation of a group-wide system of internal management controls; 
(ii) recordkeeping; and (iii) reporting, an IBHC filing a Notice of 
Intention to be supervised by the Commission as an SIBHC would not be 
subject to consolidated supervision in non-U.S. marketplaces. Further, 
as this framework for oversight is voluntary, we do not believe IBHCs 
will file Notices of Intention to be supervised by the Commission as an 
SIBHC unless the benefits of such an election outweigh the costs with 
respect to the applying firm.
    The Commission notes that broker-dealers with tentative net capital 
of between $100 million and $1 billion that are not affiliated with 
banks generally do not report a VaR figure in their market risk 
disclosure of their holding companies' annual reports. However, some 
firms of this size do report a VaR figure in their market risk 
disclosure of their holding companies' annual reports. IBHCs that do 
not presently use VaR to manage group-wide risk may not find it to be 
cost effective to file a Notice of Intention to be supervised by the 
Commission as an SIBHC. However, this regulatory framework is available 
to a wide range of firms as an alternative, and may allow some of them 
to compete more effectively.
    The Commission's preliminary view is that the proposed rules would 
not have anti-competitive effects on smaller broker-dealers because 
smaller broker-dealers are generally not interested in consolidated 
supervision.\156\ These rules

[[Page 62932]]

implement Section 17(i) of the Exchange Act. These rules are intended, 
in part, to allow U.S. broker-dealers to compete more effectively in 
the global securities markets.
---------------------------------------------------------------------------

    \156\ Generally, smaller broker-dealers are organized in a 
simpler manner, and they do not engage in international transactions 
that could cause them to be subject to regulation by international 
securities regulatory agencies.
---------------------------------------------------------------------------

    [sbull] We solicit comment on whether the proposal would promote 
both efficiency and capital formation.
    [sbull] We request comment on the competitive benefits to broker-
dealers that may result under the proposed rules.
    [sbull] We also request comment on any anticompetitive effects that 
may result under the proposed rules.

VII. Regulatory Flexibility Act Certification

    The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that 
proposed new Rules 17i-1 through 17i-8, and proposed amendments to 
Rules 17h-1T, 17h-2T, and 17a-12(l) under the Exchange Act, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.
    Proposed new Rules 17i-1 through 17i-8 would create a framework for 
the Commission to supervise SIBHCs. These rules also would enhance the 
Commission's supervision of the SIBHC's subsidiary broker-dealers 
through collection of additional information and examinations of 
affiliates of those broker-dealers. This framework would include 
qualification criteria for IBHCs that file Notices of Intention to be 
supervised by the Commission, as well as recordkeeping and reporting 
requirements for SIBHCs. An IBHC that meets the criteria set forth in 
the proposed rules would not be required to become an SIBHC; 
supervision as an SIBHC is voluntary. Taken as a whole, the proposed 
framework would permit the Commission to better monitor the financial 
condition, risk management, and activities of a broker-dealer's parent 
and affiliates on a group-wide basis. In particular, it would create a 
formal process through which the Commission could access important 
information regarding activities of a broker-dealer's affiliates that 
could impair the financial and operational stability of the broker-
dealer or the SIBHC. Further, as this framework for oversight is 
voluntary, we do not believe IBHCs will file Notices of Intention to be 
supervised by the Commission as SIBHCs unless the benefits of such 
supervision outweigh the costs with respect to the applying firm. The 
Commission is also proposing to add an exemption to the risk assessment 
rules to exempt a broker-dealer that is affiliated with an SIBHC 
because the SIBHC will be maintaining records and reporting to the 
Commission regarding the financial and operational condition of members 
of the affiliate group. Finally, the Commission is proposing to adjust 
the audit requirements for OTC derivative dealers to allow accountants 
to use agreed-upon procedures when conducting audits of risk management 
control systems.
    An IBHC can apply to become an SIBHC only if it is not affiliated 
with an insured bank (with certain exceptions) or a savings 
association,\157\ (ii) a foreign bank, foreign company, or a company 
that is described in section 8(a) of the International Banking Act of 
1978, or (iii) a foreign bank that controls a corporation chartered 
under section 25A of the Federal Reserve Act.\158\ In addition, 
pursuant to paragraph (d)(2)(i)(B) of proposed Rule 17i-2, the 
Commission would not consider such supervision necessary or appropriate 
unless the investment bank holding company demonstrates that it owns or 
controls a broker or dealer that has a substantial presence in the 
securities business, which may be demonstrated by a showing that the 
broker or dealer maintains tentative net capital of $100 million or 
more. Accordingly, an IBHC could not be a small entity.\159\
---------------------------------------------------------------------------

    \157\ See supra, note 6.
    \158\ Federal Reserve Act Sec.  25A [12 U.S.C. 611].
    \159\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The proposed changes to Rules 17h-1T and 17h-2T would apply only to 
broker-dealers that are affiliated with an IBHC that becomes supervised 
by the Commission as an SIBHC. In addition, Rules 17h-1T and 17h-2T 
only require that one broker-dealer within a holding company structure 
obtain and maintain the required records and file the required reports. 
Generally, a broker-dealer would be exempt from Rules 17h-1T and 17h-2T 
if it (i) maintains less than $250,000 in net capital, (ii) is exempt 
from Rule 15c3-3 pursuant to Sec.  240.15c3-3(k)(1), (iii) maintains 
less than $20 million in net capital and is either exempt from Rule 
15c3-3 pursuant to Sec.  240.15c3-3(k)(2) or is not exempt from Rule 
15c3-3 but does not hold funds or securities for, nor owe money or 
securities to customers. Thus, no small broker-dealers are subject to 
Rules 17h-1T and 17h-2T.
    Rule 17a-12 is only applicable to OTC derivatives dealers. As 
stated previously, a broker-dealer generally would be considered a 
small entity if (i) it has total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
Rule 17a-5(d) or, if not required to file such statements, a broker-
dealer that had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the last day of the preceding fiscal year (or 
in the time that it has been in business, if shorter); and (ii) it is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization.\160\ An OTC derivatives 
dealer is a ``dealer'' under the Exchange Act.\161\ The minimum capital 
requirements for an OTC derivatives dealer are tentative net capital of 
at least $100 million and net capital of at least $20 million. Thus, no 
small broker-dealers are subject to Rule 17a-12.
---------------------------------------------------------------------------

    \160\ Exchange Act Rule 0-10 [17 CFR 240.0-10].
    \161\ See Section 3(a)(5) of the Exchange Act [15 U.S.C. 
78c(a)(5)].
---------------------------------------------------------------------------

    Accordingly, proposed new Rules 17i-1 through 17i-8, and the 
proposed amendments to Rules 17h-1T, 17h-2T, and 17a-12(l), if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.
    We encourage written comments regarding this certification. We 
solicit comment as to whether the proposed rules and rule amendments 
could have an effect that we have not considered. We request that 
commenter describe the nature of any effect on small entities and 
provide empirical data to support the extent of the effect.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \162\ we must advise OMB as to whether the 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \162\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effect on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review. We request comment on the 
potential impact of the proposed regulation on the economy on an annual 
basis. Commenters are requested to provide empirical data and other 
factual support for their view to the extent possible.

[[Page 62933]]

IX. Statutory Authority

    The amendments are proposed pursuant to the authority conferred on 
the Securities and Exchange Commission by the Exchange Act (15 U.S.C. 
78a, et seq.) (particularly sections 17, 23, and 24(b) thereof (15 
U.S.C. 78q, 78w, and 78x(b))).

List of Subjects in 17 CFR Part 240

    Brokers, OTC derivatives dealers, Reporting and recordkeeping 
requirements, Securities, Supervised investment bank holding companies.

Text of Proposed Rules and Rule Amendments

    In accordance with the foregoing, the Securities and Exchange 
Commission hereby proposes to amend Title 17 Chapter II of the Code of 
Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    3. The authority citation for Part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
    4. Section 240.17a-12, paragraph (l) is revised to read as follows:


Sec.  240.17a-12  Reports to be made by certain OTC derivatives 
dealers.

* * * * *
    (l) Accountant's report on management controls. (1) The OTC 
derivatives dealer shall file concurrently with the annual audit report 
a supplemental report by the certified public accountant indicating the 
results of the certified public accountant's review of the OTC 
derivatives dealer's internal risk management control system with 
respect to the requirements of Sec.  240.15c3-4. This review shall be 
conducted in accordance with procedures agreed to by the OTC 
derivatives dealer and the certified public accountant conducting the 
review. The purpose of the review is to confirm that the OTC 
derivatives dealer has established, documented, and maintained an 
internal risk management control system in accordance with Sec.  
240.15c3-4, and is in compliance with that internal risk management 
control system.
    (2) The agreed-upon procedures are to be performed, and the report 
is to be prepared, in accordance with U.S. Generally Accepted 
Attestation Standards.
    (3) Prior to the commencement of the review, every OTC derivatives 
dealer shall file the procedures to be performed pursuant to paragraph 
(l)(1) of this section with the Commission's principal office in 
Washington, DC. Prior to the commencement of any subsequent review, 
every OTC derivatives dealer shall file with the Commission's principal 
office in Washington, DC a notice of changes in the agreed-upon 
procedures. If there are no changes, the OTC derivatives dealer should 
indicate in the notice that no changes have been made to those 
procedures.
* * * * *
    5. Section 240.17h-1T is amended by:
    a. Redesignating paragraph (d)(5) as paragraph (d)(6); and
    b. Adding new paragraph (d)(5).
    The addition reads as follows:


Sec.  240.17h-1T  Risk assessment recordkeeping requirements for 
associated persons of brokers and dealers.

* * * * *
    (d) * * *
    (5) The provisions of this section shall not apply to a broker or 
dealer affiliated with a supervised investment bank holding company, as 
defined in Sec.  240.17i-1(a).
* * * * *
    6. Section 240.17h-2T is amended by:
    a. Redesignating paragraph (b)(5) as paragraph (b)(6); and
    b. Adding new paragraph (b)(5).
    The addition reads as follows:


Sec.  240.17h-2T  Risk assessment reporting requirements for brokers 
and dealers.

* * * * *
    (b) * * *
    (5) The provisions of this section shall not apply to a broker or 
dealer affiliated with a supervised investment bank holding company, as 
defined in Sec.  240.17i-1(a).
* * * * *
    7. Sections 240.17i-1 through 240.17i-8 are added to read as 
follows:

Supervised Investment Bank Holding Company Rules


Sec.  240.17i-1.  Definitions.

    (a) For purposes of Sec. Sec.  240.17i-1 through 240.17i-8, the 
terms investment bank holding company, supervised investment bank 
holding company, affiliate, bank, bank holding company, company, 
control, savings association, insured bank, foreign bank, person 
associated with an investment bank holding company and associated 
person of an investment bank holding company shall be defined as set 
forth in section 17(i)(5) of the Act.
    (b) For purposes of Sec. Sec.  240.17i-2 through 240.17i-8, the 
term affiliate group shall include the supervised investment bank 
holding company and every affiliate of the supervised investment bank 
holding company.
    (c) For purposes of Sec. Sec.  240.17i-1 through 240.17i-8, the 
term material affiliate shall mean any member of the affiliate group 
that is material to the supervised investment bank holding company.


Sec.  240.17i-2.  Notice of intention to be supervised by the 
Commission as a supervised investment bank holding company.

    (a) An investment bank holding company that owns or controls a 
broker or dealer may file with the Commission a written notice of 
intention to become supervised by the Commission pursuant to section 
17(i) of the Act (15 U.S.C. 78q(i)), provided that the investment bank 
holding company is not:
    (1) An affiliate of an insured bank (other than an institution 
described in paragraph (D), (F), or (G) of section 2(c)(2), or held 
under section 4(f), of the Bank Holding Company Act of 1956) (12 U.S.C. 
1841(c)(2)(D), (F), or (G) and 12 U.S.C. 1843(f)) or a savings 
association;
    (2) A foreign bank, foreign company, or company that is described 
in section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)); or
    (3) A foreign bank that controls, directly or indirectly, a 
corporation chartered under section 25A of the Federal Reserve Act (12 
U.S.C. 611).
    (b) To become supervised as a supervised investment bank holding 
company an investment bank holding company shall file a notice of 
intention that includes the following:
    (1) A request to become supervised as a supervised investment bank 
holding company;
    (2) A statement certifying that the investment bank holding company 
is not an entity described in section 17(i)(1)(A)(i)--(iii) of the Act 
(15 U.S.C. 78q(i)(1)(A)(i)--(iii));
    (3) Documentation demonstrating that the investment bank holding 
company owns or controls a broker or dealer that maintains a 
substantial presence in the securities business as evidenced either by 
its holding $100 million or more in tentative net capital as calculated 
pursuant to Sec.  240.15c3-1 or by any other information and 
documentation as the Commission determines is appropriate; and
    (4) Supplemental documents including:
    (i) A narrative describing the business and organization of the 
investment bank holding company;

[[Page 62934]]

    (ii) An alphabetical list of each member of the affiliate group, an 
indication of which affiliates the investment bank holding company 
regards as material to the holding company, and the financial 
regulator(s), if any, with which the affiliate is registered;
    (iii) An organizational chart that identifies the investment bank 
holding company, each broker or dealer owned or controlled by the 
investment bank holding company, and each material affiliate;
    (iv) Consolidated and consolidating financial statements of the 
affiliate group as of the end of the quarter preceding the filing of 
the notice of intention;
    (v) The following computations for the affiliate group:
    (A) Allowable capital and allowances for market risk, credit risk, 
and operational risk; or
    (B) A computation made pursuant to Sec.  240.17i-7(e);
    (vi) A list of the positions that the affiliate group holds in any 
proprietary accounts and a brief description of the method that the 
investment bank holding company will use to calculate allowances for 
market and credit risk on those positions pursuant to Sec.  240.17i-
7(b) and (c);
    (vii) A description of each mathematical model that the investment 
bank holding company intends to use to price positions and to calculate 
allowances for market and credit risk (as specified in Sec.  240.17i-
7(b) and (c)), including:
    (A) A statement of whether the model was developed by the 
investment bank holding company, one of its affiliates or subsidiaries, 
or another person;
    (B) If the mathematical model incorporates correlations across risk 
factors, a description of the process used to measure these 
correlations;
    (C) A description of the tests performed on the mathematical model 
and the results of those tests, including a description of back tests 
and alternative tests to estimate risk, such as stress tests and 
scenario tests, and procedures instituted to respond to test results 
(including a schedule of multiplication factors to apply to the credit 
equivalent amount based on backtesting results);
    (D) A description of how the mathematical model satisfies the 
qualitative and quantitative requirements listed in Sec.  240.15c3-
1e(e);
    (E) A description of the internal controls relating to the 
creation, use and maintenance of the mathematical model, including a 
description of who may input data into the model, who has access to any 
or all of the model's outputs, and what outputs are accessible to whom; 
and
    (F) A statement that the model is used to analyze and report risk 
to senior management;
    (viii) A description of any positions for which the investment bank 
holding company proposes to use an alternative method for computing an 
allowance for market risk and a description of how that allowance would 
be determined;
    (ix) A description of how the investment bank holding company 
proposes to calculate current exposure (as defined in Sec.  240.17i-
7(c)(1)(i)(E));
    (x) A description of how the investment bank holding company 
proposes to determine or calculate credit risk weights and internal 
credit ratings;
    (xi) A description of the method the investment bank holding 
company proposes to use to calculate its allowance for operational risk 
pursuant to Sec.  240.17i-7(e);
    (xii) A comprehensive description of the internal risk management 
control system of the investment bank holding company established to 
manage the risks of the affiliate group, including market, credit, 
liquidity and funding, legal and compliance, and operational risks, and 
how that system satisfies the requirements set forth in Sec.  240.17i-
4;
    (xiii) Sample risk reports provided to the persons responsible for 
managing the risks of the affiliate group that the investment bank 
holding company proposes to provide to the Commission pursuant to Sec.  
240.17i-6(a)(1)(v);
    (xiv) An undertaking that provides:
    (A) If the disclosure of any information with regard to Sec. Sec.  
240.17i-1 through 240.17i-8 would be prohibited by law or otherwise, 
the supervised investment bank holding company will cooperate with the 
Commission as needed, including by describing any secrecy laws or other 
impediments that could restrict the ability of the supervised 
investment bank holding company or any material affiliate from 
providing information on its operations or activities and by discussing 
the manner in which the supervised investment bank holding company 
proposes to provide the Commission with adequate assurances of access 
to information; and
    (B) For any non-U.S. affiliate of the supervised investment bank 
holding company, the supervised investment bank holding company will 
obtain consent to the jurisdiction of the Commission and an agreement 
to maintain a U.S. registered agent; and
    (xv) Any other information and documents relating to the investment 
bank holding company's activities, financial condition, policies, 
systems for monitoring and controlling financial and operational risks, 
and transactions and relationships among members of the affiliate group 
that the Commission may request to complete its review of the notice of 
intention.
    (c) Amendments to the notice of intention. (1) Prior to Commission 
determination. If any of the information or documentation filed with 
the Commission as part of the notice of intention to become a 
supervised investment bank holding company described in paragraph (b) 
of this section is found to be or becomes inaccurate prior to the 
Commission determination, the investment bank holding company shall 
promptly notify the Commission and provide the Commission with a 
description of the circumstances in which the information or 
documentation was found to be or has become inaccurate along with 
updated, accurate information and documents.
    (2) Subsequent to Commission determination. If, subsequent to the 
Commission determination of a notice of intention to become a 
supervised investment bank holding company, the supervised investment 
bank holding company materially changes a mathematical model or other 
method used to compute allowable capital or allowance for market, 
credit, or operational risk, or its internal risk management control 
systems as described in its notice of intention (and as modified from 
time to time), prior to making the changes the supervised investment 
bank holding company shall file an amended notice of intention 
describing the changes.
    (d) Process for review of notice of intention. (1) When filed. A 
notice of intention to be supervised by the Commission as a supervised 
investment bank holding company shall not be complete until the 
investment bank holding company has filed with the Commission all the 
documentation and information specified in this section. Any 
documentation and information submitted, and any amendments thereto, 
shall be considered filed when received at the Office of the Secretary 
at the Commission's principal office in Washington DC. All notices, 
amendments thereto, and other documentation and information filed 
pursuant to this section shall be accorded confidential treatment.
    (2) Commission determination. (i) An investment bank holding 
company shall become a supervised investment bank holding company 
pursuant to section 17(i) of the Act (15 U.S.C. 78q(i)) 45

[[Page 62935]]

calendar days after the Commission receives a completed notice of 
intention to register as a supervised investment bank holding company 
pursuant to paragraph (a) of this section, unless the Commission issues 
an order determining either that:
    (A) The Commission will begin to supervise the investment bank 
holding company prior to 45 calendar days after the Commission receives 
the completed notice of intention; or
    (B) The Commission will not supervise the investment bank holding 
company because supervision of the investment bank holding company as a 
supervised investment bank holding company is not necessary or 
appropriate in furtherance of the purposes of section 17 of the Act (15 
U.S.C. 78q). The Commission will not consider such supervision 
necessary or appropriate unless the investment bank holding company 
demonstrates that it owns or controls a broker or dealer that has a 
substantial presence in the securities business, which may be 
demonstrated by a showing that the broker or dealer maintains tentative 
net capital of $100 million or more.
    (ii) The Commission will, upon the filing of an amendment to the 
notice of intention submitted by a supervised investment bank holding 
company pursuant to paragraph (c) of this section, determine whether 
continued supervision of the investment bank holding company is 
necessary or appropriate in furtherance of the purposes of section 17 
of the Act (15 U.S.C. 78q) after reviewing the amended notice of 
intention to determine whether the supervised investment bank holding 
company and its subsidiary brokers or dealers are in compliance with 
the requirements of Sec. Sec.  240.17i-1, 240.17i-2, 240.17i-3, 
240.17i-4, 240.17i-5, 240.17i-6, 240.17i-7, and 240.17i-8 and other 
applicable rules promulgated under section 17 of the Act (15 U.S.C. 
78q).


Sec.  240.17i-3.  Withdrawal from supervision by the Commission as a 
supervised investment bank holding company.

    (a) A supervised investment bank holding company may withdraw from 
supervision by the Commission as a supervised investment bank holding 
company by filing a notice of withdrawal with the Commission. The 
notice of withdrawal shall include a statement that the supervised 
investment bank holding company is in compliance with Sec.  240.17i-
2(c) regarding amendments to its notice of intention to be supervised 
by the Commission as a supervised investment bank holding company.
    (b) A notice of withdrawal from supervision as a supervised 
investment bank holding company shall become effective one year after 
it is filed with the Commission, or within such shorter or longer 
period as the Commission determines to be necessary or appropriate to 
ensure effective supervision of the material risks to the supervised 
investment bank holding company and to any associated person of the 
supervised investment bank holding company that is a broker or dealer, 
or to prevent evasion of the purposes of section 17 of the Act (15 
U.S.C. 78q).
    (c) Notwithstanding paragraphs (a) and (b) of this section, the 
Commission, by order, may discontinue supervision of any supervised 
investment bank holding company if the Commission finds that:
    (1) The supervised investment bank holding company is no longer in 
existence;
    (2) The supervised investment bank holding company has ceased to be 
an investment bank holding company; or
    (3) Continued supervision by the Commission of the supervised 
investment bank holding company is not necessary or appropriate in 
furtherance of the purposes of section 17 of the Act (15 U.S.C. 78q).


Sec.  240.17i-4.  Internal risk management control system requirements 
for supervised investment bank holding companies.

    (a) A supervised investment bank holding company shall comply with 
Sec.  240.15c3-4 as though it were a broker or dealer.
    (b) As part of its internal risk management control system, a 
supervised investment bank holding company shall establish, document, 
and maintain procedures for the detection and prevention of money 
laundering and terrorist financing.


Sec.  240.17i-5.  Record creation, maintenance, and access requirements 
for supervised investment bank holding companies.

    (a) A supervised investment bank holding company shall make and 
keep current the following records:
    (1) A record reflecting the results of stress tests, conducted at 
least once each quarter, of the affiliate group's funding and liquidity 
with respect to the following events:
    (i) A credit rating downgrade of the supervised investment bank 
holding company;
    (ii) An inability of the supervised investment bank holding company 
to access capital markets for short-term funding;
    (iii) An inability of the supervised investment bank holding 
company to move liquid assets across international borders when the 
events described in paragraphs (a)(1)(i) or (ii) of this section occur; 
or
    (iv) An inability of the supervised investment bank holding company 
to access credit or assets held at a particular institution when the 
events described in paragraphs (a)(1)(i) or (ii) of this section occur;
    (2) The supervised investment bank holding company's contingency 
plans to respond to the events outlined in paragraphs (a)(1)(i) through 
(iv) of this section; and
    (3) A record of the basis for the determination of the credit risk 
weight for each counterparty.
    (b) Except as provided in paragraphs (c) of this section, the 
supervised investment bank holding company shall preserve for a period 
of not less than three years in an easily accessible place using any 
storage media acceptable under Sec.  240.17a-4(f):
    (1) The documents created in accordance with paragraph (a) of this 
section;
    (2) All notices of intention, amendments thereto, and other 
documentation and information filed with the Commission pursuant to 
Sec.  240.17i-2, and any responses thereto;
    (3) All reports and notices the supervised investment bank holding 
company shall file pursuant to Sec.  240.17i-6;
    (4) All notices the supervised investment bank holding company 
shall file pursuant to Sec.  240.17i-8; and
    (5) Records documenting the system of internal risk management 
controls for market, credit, leverage, funding, legal and operational 
risks required to be established pursuant to Sec.  240.17i-4 to manage 
the risks of the affiliate group, including written guidelines, 
policies, and procedures.
    (c) A supervised investment bank holding company may maintain the 
records specified in paragraph (b) of this section either at the 
supervised investment bank holding company, at an affiliate, or at a 
records storage facility, provided that the records are located within 
the boundaries of the United States. If the records are maintained by 
an entity other than the supervised investment bank holding company, 
the supervised investment bank holding company shall file with the 
Commission a written undertaking in a form acceptable to the Commission 
from the entity, signed by a duly authorized person at the entity 
maintaining the records, to the effect that the records will be treated 
as if the supervised investment bank holding company were maintaining 
the records

[[Page 62936]]

pursuant to this section and that the entity maintaining the records 
undertakes to permit examination of those records at any time or from 
time to time during business hours by representatives or designees of 
the Commission and to promptly furnish the Commission or its designee a 
true, correct, complete and current copy of any or all or any part of 
those records in either paper, or electronically if the records are 
stored electronically. The election to store records pursuant to the 
provisions of this paragraph (c) shall not relieve the supervised 
investment bank holding company from any of its responsibilities under 
this section or Sec.  240.17i-6.
    (d) All information obtained by the Commission pursuant to this 
section from the supervised investment bank holding company shall be 
accorded confidential treatment.


Sec.  240.17i-6.  Reporting requirements for supervised investment bank 
holding companies.

    (a) Filing of monthly reports. The supervised investment bank 
holding company shall file:
    (1) A monthly risk report not later than 17 business days after the 
end of each month that does not end a quarter, which shall include:
    (i) A consolidated balance sheet, income statement, and 
computations of allowable capital and allowances for market, credit, 
and operational risk pursuant to Sec.  240.17i-7 (including notes to 
the financial statements) for the affiliate group; and
    (ii) A graph reflecting, for each business line, the daily intra-
month VaR;
    (iii) Consolidated credit risk information, including:
    (A) Aggregate current exposure and current exposures (including 
commitments) listed by counterparty for:
    (1) The 15 largest exposures; and
    (2) The 5 largest exposures to regulated financial institutions;
    (B) The 10 largest commitments by counterparty;
    (C) Maximum potential exposure listed by counterparty for:
    (1) The 15 largest exposures; and
    (2) The 5 largest exposures to regulated financial institutions;
    (D) The aggregate maximum potential exposure;
    (iv) A summary report reflecting the geographic distribution of the 
supervised investment bank holding company's exposures on a 
consolidated basis for each of the top ten countries to which it is 
exposed (by residence of the main operating group of the counterparty); 
and
    (v) Certain regular risk reports provided to the persons 
responsible for managing risk for the affiliate group as the Commission 
may request from time to time.
    (2) A quarterly risk report, which may be unaudited, not later than 
35 calendar days after the end of each quarter, including:
    (i) The information described in paragraph (a)(1) of this section;
    (ii) A consolidating balance sheet and income statement (including 
notes to the financial statements) for the affiliate group. The 
consolidating balance sheet shall break out information regarding each 
material affiliate into separate columns, but may consolidate 
information regarding affiliate group entities that are not material 
affiliates into one column;
    (iii) The results of backtesting of all models used to compute 
allowable capital and allowances for market and credit risk indicating, 
for each model, the number of backtesting exceptions;
    (iv) A description of all material pending legal or arbitration 
proceedings involving any member of the affiliate group that are 
required to be disclosed by the supervised investment bank holding 
company under generally accepted accounting principles; and
    (v) The aggregate amount of commercial paper, secured and other 
unsecured borrowing, bank loans, lines of credit, or any other 
borrowings, and the principal installments of long-term or medium-term 
debt, scheduled to mature within twelve months from the most recent 
quarter by each affiliated broker or dealer and any other material 
affiliate, together with the allowance for losses for those 
transactions.
    (b) Additional reports. In addition to the reports required by 
paragraph (a) of this section, upon receiving written notice from the 
Commission, the supervised investment bank holding company shall file 
other information as the Commission may request in order to monitor:
    (1) The supervised investment bank holding company's financial or 
operational condition, risk management system, and transactions and 
relationships among members of the affiliate group; or
    (2) The extent to which the supervised investment bank holding 
company has complied with the provisions of the Act and regulations 
prescribed and orders issued under the Act.
    (c) Annual filing of audited financial statements.
    (1) A supervised investment bank holding company shall file 
annually, on a calendar or fiscal year basis, an annual audit report 
containing a consolidated balance sheet, income statement, and 
computations of allowable capital and allowances for market, credit and 
operational risk computed in accordance with Sec.  240.17i-7 (including 
notes to the financial statements).
    (2) Annual audit reports prepared pursuant to this paragraph (c) 
shall be prepared as of the same date as the annual audit of the 
supervised investment bank holding company's subsidiary broker or 
dealer.
    (3) Annual audit reports prepared pursuant to this paragraph (c) 
shall be filed concurrently with the annual audit of its affiliated 
broker or dealer (as required pursuant to Sec.  240.17a-5(d)) as 
follows:
    (i) Two copies shall be filed at the Commission's principal office 
in Washington, DC; and
    (ii) One copy shall be filed at the regional office of the 
Commission for the region in which the supervised investment bank 
holding company's subsidiary broker or dealer is located.
    (d) Nature and form of reports. A supervised investment bank 
holding company shall file the financial statements pursuant to 
paragraph (c) of this section in accordance with the following 
requirements:
    (1) An accountant that meets the requirements of paragraph (e) of 
this section shall conduct an audit and give an opinion covering the 
statements filed pursuant to paragraph (c) of this section.
    (2) The supervised investment bank holding company shall attach to 
the report required by paragraph (c)(1) of this section an oath or 
affirmation that to the best knowledge and belief of the individual 
making the oath or affirmation the information contained in the report 
is true and correct. The oath or affirmation shall be made before a 
person duly authorized to administer the oath or affirmation. If the 
supervised investment bank holding company is a partnership, the oath 
or affirmation shall be made by a general partner; if a corporation, 
the oath or affirmation shall be made by the chief executive officer, 
or, in the absence of a chief executive officer, by the person 
authorized to act in that officer's place.
    (e) Accountants. (1) The provisions of Sec.  240.17a-5(f) shall 
apply to a supervised investment bank holding company as though the 
supervised investment bank holding company were a broker or dealer, 
except that, a supervised investment bank holding company shall not be 
required to send notice to any designated examining authority as 
indicated in Sec.  240.17a-5(d)(2)(i) and (d)(4).

[[Page 62937]]

    (2) In addition to the qualification and independence requirements 
set forth in Sec.  240.17a-5(f), an accountant shall be a registered 
public accounting firm as that term is defined in the Sarbanes-Oxley 
Act of 2002 (15 U.S.C. 7201(a)(12)).
    (f) Audit objectives. The audit shall be conducted in accordance 
with the rules promulgated by the Public Company Accounting Oversight 
Board and shall include a review of the accounting system and the 
internal accounting controls (including appropriate tests thereof) for 
the period since the date of the prior audited financial statements. 
The audit shall include all procedures necessary under the 
circumstances to enable the accountant to express an opinion on the 
statement of financial condition, results of operations, cash flows, 
and the computations of allowable capital and allowances for market, 
credit, and operational risk under Sec.  240.17i-7. The scope of the 
audit and review of the accounting system and the internal accounting 
controls shall be sufficient to provide reasonable assurance that any 
material inadequacies that exist at the date of the examination in the 
accounting system or internal accounting controls would be disclosed.
    (g) Extent and timing of audit procedures. The extent and timing of 
audit procedures are matters for the accountant to determine on the 
basis of its review and evaluation of existing internal controls and 
other audit procedures performed in accordance with the rules 
promulgated by the Public Company Accounting Oversight Board and the 
audit objectives listed in paragraph (f) of this section.
    (h) Accountant's report, general provisions. The provisions of 
Sec.  240.17a-5(i) shall apply to a supervised investment bank holding 
company and its audit.
    (i) Supplemental reports. The supervised investment bank holding 
company shall file, concurrently with the annual audit report, the 
following supplemental reports prepared by the accountant in accordance 
with the rules promulgated by the Public Company Accounting Oversight 
Board:
    (1) A supplemental report entitled ``Accountant's Report on 
Reportable Conditions'' describing any matter that would be deemed to 
be a reportable condition under the rules promulgated by the Public 
Company Accounting Oversight Board that is unresolved as of the date of 
the accountant's report. The supplemental report shall indicate any 
corrective action taken or proposed by the supervised investment bank 
holding company with regard to any identified reportable conditions. If 
the audit did not disclose any reportable conditions, the supplemental 
report shall so state.
    (2) A supplemental report entitled ``Accountant's Report on 
Internal Risk Management Control System'' indicating the results of the 
accountant's review of the internal risk management control system 
established and documented by the supervised investment bank holding 
company in accordance with Sec.  240.17i-4 and utilized by the 
affiliate group. This review shall be conducted by the accountant in 
accordance with procedures agreed to by the supervised investment bank 
holding company and the accountant conducting the review. The agreed-
upon procedures are to be performed in accordance with the rules 
promulgated by the Public Company Accounting Oversight Board. The 
purpose of the review is to confirm that the internal risk management 
control system complies with the requirements of Sec.  240.17i-4 and 
that the supervised investment bank holding company and its affiliate 
group are adhering to the requirements of that internal risk management 
control system.
    (3) A supplemental report entitled ``Accountant's Report on 
Inventory Pricing and Modeling'' indicating the results of the 
accountant's review of the procedures for pricing financial instrument 
inventory (including modeling procedures) established by the supervised 
investment bank holding company and utilized by the affiliate group. 
This review shall be conducted by the accountant in accordance with 
procedures agreed to by the supervised investment bank holding company 
and the accountant conducting the review. The agreed-upon procedures 
are to be performed in accordance with the rules promulgated by the 
Public Company Accounting Oversight Board. The purpose of the review is 
to confirm that the financial instrument pricing procedures relied upon 
by the affiliate group conform to the procedures established by the 
supervised investment bank holding company pursuant to Sec.  240.17i-4 
and comply with the qualitative and quantitative standards set forth in 
Sec.  240.15c3-1e(e) (as required pursuant to Sec.  240.17i-7(b)(1)).
    (4) The supervised investment bank holding company shall file, 
prior to the commencement of the review and no later than December 10 
of each year, a statement with the Commission's principal office in 
Washington, DC that includes:
    (i) A description of the procedures for conducting the audit agreed 
to by the supervised investment bank holding company and the accountant 
(pursuant to paragraphs (i)(2) and (i)(3) of this section); and
    (ii) A notice describing any changes in those agreed-upon 
procedures, if any. If there are no changes, the supervised investment 
bank holding company should indicate that no changes have been made to 
those procedures.
    (j) Notification of change of fiscal year. If a supervised 
investment bank holding company changes its fiscal year, it must file a 
notice of the change (including a detailed explanation of the reason 
for the change) with the Commission.
    (k) Extensions and exemptions. Upon the written request of the 
supervised investment bank holding company, or on its own motion, the 
Commission may grant an extension of time or an exemption from any of 
the requirements of paragraphs (a) through (j) of this section either 
unconditionally or on specified terms and conditions.
    (l) When filed. The reports provided for in this section shall be 
considered filed when two copies are received at the Commission's 
principal office in Washington, DC, and one copy is received at the 
regional or district office of the Commission for the region or 
district in which the broker or dealer has its principal place of 
business. The copies sent to the Commission's principal office shall be 
addressed to the Division of Market Regulation.
    (m) Confidentiality. All reports and statements filed by the 
supervised investment bank holding company with the Commission pursuant 
to this section shall be accorded confidential treatment.


Sec.  240.17i-7.  Calculations of allowable capital and risk allowances 
or alternative capital assessment.

    (a) Computation of allowable capital. The supervised investment 
bank holding company shall calculate allowable capital on a 
consolidated basis, which shall be the sum of:
    (1) Common shareholders' equity on the consolidated balance sheet 
of the supervised investment bank holding company less:
    (i) Goodwill;
    (ii) Deferred tax assets;
    (iii) Other intangible assets; and
    (iv) Other deductions from common stockholders' equity as required 
by the Federal Reserve Board in calculating Tier 1 capital (as defined 
in 12 CFR 225, Appendix A).
    (2) Cumulative and non-cumulative preferred stock, except that the 
amount of the cumulative preferred stock may not exceed 33% of the 
items included in allowable capital pursuant to paragraph (a)(1) of 
this section, provided that:

[[Page 62938]]

    (i) The stock does not have a maturity date;
    (ii) The stock cannot be redeemed at the option of the holder of 
the instrument;
    (iii) The stock has no other provisions that will require future 
redemption of the issue; and
    (iv) The issuer of the stock can defer or eliminate dividends; and
    (3) The sum of the following items on the consolidated balance 
sheet, to the extent that sum does not exceed the sum of the items 
included in allowable capital pursuant to paragraphs (a)(1) and (a)(2) 
of this section:
    (i) Cumulative preferred stock in excess of the 33% limit specified 
in paragraph (a)(2) of this section; and
    (ii) Subordinated debt if:
    (A) The original weighted average maturity of the subordinated debt 
is at least five years;
    (B) Each subordinated debt instrument states clearly on its face 
that repayment of the debt is not protected by any Federal agency or 
the Securities Investor Protection Corporation;
    (C) The subordinated debt is unsecured and subordinated in right of 
payment to all senior indebtedness of the holding company; and
    (D) The subordinated debt instrument permits acceleration only in 
the event of bankruptcy or reorganization of the holding company under 
Chapters 7 (liquidation) and 11 (reorganization) of the U.S. Bankruptcy 
Code (11 U.S.C 7 and 11 U.S.C. 11, respectively).
    (b) Allowance for market risk. The supervised investment bank 
holding company shall calculate its allowance for market risk on a 
consolidated basis daily for all proprietary positions, including debt 
instruments, equity instruments, commodity instruments, foreign 
exchange contracts, and derivative contracts, which shall be the sum 
of:
    (1) Value at risk. The value at risk (``VaR'') measure obtained by 
applying one or more approved VaR models to each position and 
multiplying the result by the appropriate multiplication factor. Each 
VaR model shall meet the applicable qualitative and quantitative 
requirements set forth in Sec.  240.15c3-1e(e). In addition, the model 
shall be one that can be disaggregated by each line of business and by 
each legal entity exposed to market risk. The initial multiplication 
factor shall be three, unless the Commission determines pursuant to 
Sec.  240.17i-2(a) or (c), based on a review of the supervised 
investment bank holding company's internal risk management and control 
system and the VaR model, that another multiplication factor is 
appropriate. A supervised investment bank holding company may use a VaR 
model to determine its allowance for market risk only for positions for 
which there is adequate historical data to support a VaR model; and
    (2) Alternative method. If there is not adequate historical data to 
support a VaR model for certain positions, the supervised investment 
bank holding company shall use the method described in its notice of 
intention to calculate the allowance for market risk.
    (c) Allowance for credit risk. The supervised investment bank 
holding company shall compute an allowance for credit risk daily for 
certain assets on the consolidated balance sheet and certain off-
balance sheet items, including loans and loan commitments, exposures 
due to derivatives contracts, structured financial products, other 
extensions of credit, and credit substitutes as follows:
    (1) Multiplying the credit equivalent amount of the asset or off-
balance sheet item by the appropriate credit risk weight of the asset 
or off-balance sheet item or counterparty as determined according to 
paragraph (c)(1)(ii) of this section, then multiplying the product by 
8%, in accordance with the following:
    (i) Credit equivalent amount:
    (A) The credit equivalent amount for receivables relating to 
derivative contracts, repurchase agreements, reverse repurchase 
agreements, stock loans, stock borrows, and other similar 
collateralized transactions is the sum of;
    (1) The supervised investment bank holding company's current 
exposure to the counterparty (as defined in paragraph (c)(1)(i)(E) of 
this section); and
    (2) The supervised investment bank holding company's maximum 
potential exposure to the counterparty (as defined in paragraph 
(c)(1)(i)(F) of this section) multiplied by the appropriate 
multiplication factor. The initial multiplication factor shall be one, 
unless the Commission determines pursuant to Sec.  240.17i-2(a) or (c), 
based on a review of the group-wide internal risk management control 
system, including a review of the VaR model used to determine maximum 
potential exposure, that another multiplication factor is appropriate;
    (B) The credit equivalent amount for certain loans and loan 
commitments receivable shall be determined by multiplying the nominal 
amount of the contract by the following credit conversion factors:
    (1) 0% credit conversion factor for loan commitments that:
    (i) May be unconditionally cancelled by the lender; or
    (ii) May be cancelled by the lender due to credit deterioration of 
the borrower;
    (2) 5% credit conversion factor for margin loans extended by 
members of the affiliate group in compliance with applicable self-
regulatory organization rules and Federal regulations;
    (3) 20% credit conversion factor for:
    (i) Loan commitments of less than one year; or
    (ii) Short term self-liquidating trade related contingencies, 
including letters of credit;
    (4) 50% credit conversion factor for loan commitments with an 
original maturity of greater than one year that contain transaction 
contingencies, including performance bonds, revolving underwriting 
facilities, note issuance facilities and bid bonds; and
    (5) 100% credit conversion factor for bankers' acceptances, standby 
letters of credit, and forward purchases of assets, and similar direct 
credit substitutes;
    (C) Credit equivalent amount for other assets. The credit 
equivalent amount for other assets shall be the asset's book value on 
the supervised investment bank holding company's consolidated balance 
sheet;
    (D) The current exposure of a member of the affiliate group to a 
counterparty is the current replacement value of the counterparty's 
positions with the member of the affiliate group, including the effect 
of netting agreements with that counterparty meeting the requirements 
of Sec.  240.15c3-1e(d)(5) and taking into account the value of 
collateral from the counterparty pledged to and held by any member of 
the affiliate group meeting the requirements of Sec.  240.15c3-
1e(d)(6), and the fair market value of any credit derivatives that 
specifically change the exposure to the counterparty (as long as the 
credit derivatives are not used to change the credit risk weight of the 
counterparty as provided in paragraph (c)(1)(ii)(E) of this section);
    (E) The maximum potential exposure of a member of the affiliate 
group to a counterparty is the increase in the net replacement value of 
the counterparty's positions with the member of the affiliate group, 
including the effect of netting agreements with that counterparty 
meeting the requirements of Sec.  240.15c3-1e(d)(5) and taking into 
account the value of collateral from the counterparty pledged to and 
held by any member of the affiliate group meeting the requirements of 
Sec.  240.15c3-1e(d)(6), and the fair market value of any credit 
derivatives that specifically change the exposure to the counterparty 
(as long as the credit derivatives are not used to change the credit 
risk weight of the

[[Page 62939]]

counterparty as provided in paragraph (c)(1)(ii)(E) of this section) 
calculated daily using a VaR model that meets the requirements of Sec.  
240.15c3-1e(e), except that for repurchase agreements, reverse 
repurchase agreements, stock lending and borrowing, and similar 
collateralized transactions, maximum potential exposure shall be 
calculated using a time horizon of five days;
    (ii) Credit risk weights. (A) General standard. The credit risk 
weights that shall be applied to certain assets and counterparties 
shall be determined according to standards published by the Basel 
Committee on Banking Supervision, as modified from time to time;
    (B) Internal credit ratings. The supervised investment bank holding 
company may, upon a determination by the Commission pursuant to Sec.  
240.17i-2(a) or (c), determine credit ratings for counterparties that 
are not rated using internal calculations, and the supervised 
investment bank holding company may use these internal credit ratings 
in lieu of ratings issued by a nationally recognized statistical rating 
organization for purposes of determining credit risk weights;
    (C) Internal calculations. The supervised investment bank holding 
company may, upon a determination by the Commission pursuant to Sec.  
240.17i-2(a) or (c), determine credit risk weights of counterparties 
based on internal calculations;
    (D) Receivables covered by guarantees. For the portion of a current 
exposure covered by a guarantee, where that guarantee is an 
unconditional and irrevocable guarantee of the due and punctual payment 
and performance of the obligation and the supervised investment bank 
holding company or member of the affiliate group can demand payment 
after any payment is missed without having to make collection efforts, 
the supervised investment bank holding company or member of the 
affiliate group may substitute the credit risk weight of the guarantor 
for the credit risk weight of the counterparty if the guarantee is 
evidenced by a written obligation of the guarantor that allows the 
holding company or member of the affiliate group to substitute the 
guarantor for the counterparty upon default or nonpayment by the 
counterparty;
    (E) Receivables covered by credit derivatives. The supervised 
investment bank holding company may reduce the credit risk weight of a 
counterparty by using credit derivatives (such as credit default swaps, 
total return swaps, and similar instruments used to manage credit risk) 
that provide credit protection equivalent to guarantees, if the credit 
derivative is used for bona fide hedging purposes to reduce the credit 
risk weight of a counterparty, is not incorporated into the VaR model 
used for deriving potential exposures, and is not held for market-
making purposes. The credit risk weight for the covered portion of the 
exposure shall be the credit risk weight of the writer of the 
derivative. The uncovered portion of the exposure shall be assigned the 
credit risk weight of the counterparty; or
    (2) Upon a determination by the Commission pursuant to Sec.  
240.17i-2(a) or (c), using a calculation consistent with standards 
published by the Basel Committee on Banking Supervision, as modified 
from time to time.
    (d) Allowance for operational risk. A supervised investment bank 
holding company shall compute an allowance for operational risk on a 
consolidated basis consistent with the appropriate standards published 
by the Basel Committee on Banking Supervision, as modified from time to 
time.
    (e) Alternative capital assessment. If the Commission determines 
pursuant to Sec.  240.17i-2(a) or (c), the supervised investment bank 
holding company may compute a capital assessment using the standards 
promulgated by the Basel Committee on Banking Supervision (as modified 
from time to time) that it is required to submit to a financial 
regulator or supervisor in lieu of the computations described in 
paragraphs (a) through (d) of this section.


Sec.  240.17i-8.  Notification provisions for supervised investment 
bank holding companies.

    (a) A supervised investment bank holding company shall send written 
notice promptly (but within 24 hours), in accordance with paragraph (c) 
of this section, after the occurrence of the following events:
    (1) Any backtesting exception determined in accordance with Sec.  
240.15c3-1e(e)(1)(iii) and (iv) that would require that the supervised 
investment bank holding company use a higher multiplication factor in 
the calculation of its allowances for market or credit risk;
    (2) If a computation shows that allowable capital (calculated in 
accordance with Sec.  240.17i-7(a)) is less than 110% of the sum of the 
affiliate group's allowances for market, credit, and operational risk 
(calculated in accordance with Sec.  240.17i-7(b), (c), and (d));
    (3) An affiliate declares bankruptcy or otherwise becomes 
insolvent;
    (4) The supervised investment bank holding company becomes aware 
that a nationally recognized statistical rating organization has 
determined to reduce its assessment of the creditworthiness of an 
affiliate or the credit rating(s) assigned to one or more outstanding 
short or long-term obligations of an affiliate;
    (5) The supervised investment bank holding company becomes aware 
that any financial regulatory agency or self-regulatory organization 
has taken enforcement action or some other, similar formal regulatory 
action against an affiliate; or
    (6) The supervised investment bank holding company becomes 
ineligible to be supervised by the Commission as a supervised 
investment bank holding company.
    (b) The supervised investment bank holding company shall file a 
written report if there is a material change, along with a description 
of the reason for the change, in:
    (1) The ownership or organization of the affiliate group;
    (2) The material affiliate status of any affiliate group entity; or
    (3) The major business functions of any material affiliate.
    (c) Every notice or report required to be given or transmitted 
pursuant to this section shall be given or transmitted to the principal 
office of the Commission in Washington, DC, and the regional or 
district office of the Commission for the region or district in which 
the supervised investment bank holding company's subsidiary broker or 
dealer has its principal place of business. For the purposes of this 
section, ``notice'' shall be given or transmitted by telegraphic notice 
or facsimile transmission. The reports required by paragraph (b) of 
this section may be transmitted by overnight delivery. The notices and 
reports filed under this section shall be accorded confidential 
treatment.

    Dated: October 24, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27307 Filed 11-5-03; 8:45 am]
BILLING CODE 8010-01-P