[Federal Register Volume 69, Number 113 (Monday, June 14, 2004)]
[Rules and Regulations]
[Pages 33258-33259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13128]



[[Page 33257]]

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Part V





Department of the Treasury





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17 CFR Part 403



Government Securities Act Regulations: Protection of Customer 
Securities and Balances; Order Regarding the Collateral Registered 
Government Securities Brokers and Dealers Must Pledge When Borrowing 
Customer Securities; Final Rule and Notice

  Federal Register / Vol. 69, No. 113 / Monday, June 14, 2004 / Rules 
and Regulations  

[[Page 33258]]


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DEPARTMENT OF THE TREASURY

17 CFR Part 403

RIN 1505-AA94


Government Securities Act Regulations: Protection of Customer 
Securities and Balances

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

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' or ``We,'' or 
``Us'') is issuing in final form an amendment to the customer 
protection rules in Sec.  403.4 of the regulations issued under the 
Government Securities Act of 1986 (``GSA''), as amended.\1\ This 
provision requires entities registered with the Securities and Exchange 
Commission (``SEC'') as specialized government securities brokers and 
dealers (``registered government securities brokers and dealers'') 
under Sec.  15C(a)(2) of the Securities Exchange Act of 1934 (``the 
Exchange Act'')\2\ to comply with the requirements of the SEC customer 
protection rule (``SEC Rule 15c3-3'') with certain modifications. We 
published a proposed rule on December 11, 2003, and received no 
comments. We are therefore adopting the changes as proposed. 
Specifically, this amendment makes certain conforming technical changes 
to the GSA regulations that allow for the expansion of collateral that 
registered government securities brokers and dealers may pledge when 
borrowing fully paid or excess-margin securities from customers. This 
final rule allows us to designate additional categories of collateral 
pursuant to an order issued by Treasury.
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    \1\ 15 U.S.C. 78o-5.
    \2\ 15 U.S.C. 78o-5(a)(2).

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EFFECTIVE DATE: June 14, 2004.

ADDRESSES: This final rule is available for downloading from the Bureau 
of the Public Debt's Web site at http://www.publicdebt.treas.gov. It is 
also available for public inspection and copying at the Treasury 
Department Library, Room 1428, Main Treasury Building, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220. To visit the library, 
call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Lee Grandy (Associate Director), 
Deidere Brewer (Government Securities Specialist), or Kevin Hawkins 
(Government Securities Specialist), Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 691-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION: The implementing regulations Treasury issued 
in 1987 \3\ under the Government Securities Act of 1986 \4\ adopted the 
SEC's customer protection rule at 17 CFR 240.15c3-3 with certain 
modifications. Currently, Sec.  403.4 of the GSA regulations maintains 
for registered government securities brokers and dealers the customer 
protection standards set out in SEC Rule 15c3-3 for brokers and dealers 
when borrowing fully paid or excess-margin securities from customers.
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    \3\ The GSA regulations were published as a final rule on July 
24, 1987 (52 FR 27910). The regulations, as amended, are codified at 
17 CFR Chapter IV.
    \4\ Pub. L. 99-571, 100 Stat. 3208 (1986).
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    On March 17, 2003, the SEC published a final amendment \5\ to Rule 
15c3-3 to allow, through the issuance of an SEC order, the expansion of 
collateral that brokers and dealers may pledge when borrowing fully 
paid or excess-margin securities from customers. Since an SEC order 
cannot be incorporated by reference to apply to registered government 
securities brokers and dealers, on December 11, 2003,\6\ we issued a 
proposed rule with conforming technical changes to Sec.  403.1 \7\ and 
Sec.  403.4 \8\ of the GSA regulations that will allow Treasury to 
expand the categories of permissible collateral by issuing an exemptive 
order. We received no comments on the proposed rule. As explained 
below, we are adopting the rule as proposed. We believe this final 
amendment will continue to protect customer securities and balances, 
while potentially adding liquidity to the securities lending markets 
and lowering borrowing costs for registered government securities 
brokers and dealers.
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    \5\ Securities and Exchange Act Release No. 34-47480 (March 11, 
2003), 68 FR 12780 (March 17, 2003).
    \6\ 68 FR 69059 (December 11, 2003).
    \7\ 17 CFR 403.1.
    \8\ 17 CFR 403.4.
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I. Background

A. SEC Rule 15c3-3

    In 1972, the SEC adopted the customer protection rule, Rule 15c3-3, 
to protect customer securities and funds held by brokers and 
dealers.\9\ At that time, securities brokers and dealers were required 
to pledge cash, U.S. Treasury bills and notes, or letters of credit as 
collateral when borrowing customer securities. In 1989, the SEC issued 
a no-action letter that expanded the categories of permissible 
collateral.\10\
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    \9\ 17 CFR 240.15c3-3.
    \10\ See Letter from Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, SEC, to Frances R. Bermanzohn, Esq., 
Senior Vice President of the Public Securities Association (March 2, 
1989). The SEC no-action letter provided that under certain facts 
and circumstances, a broker or dealer could provide to a customer 
lender as the collateral in a government securities borrowing 
transaction any of the following: ``government securities'' as 
defined in Sec.  3(a)(42)(A) and Sec.  3(a)(42)(B) of the Exchange 
Act, and securities issued or guaranteed by the Federal Home Loan 
Mortgage Corporation, the Federal National Mortgage Association, the 
Student Loan Marketing Association, or the Financing Corporation.
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    On March 17, 2003, the SEC issued a final amendment to Rule 15c3-3 
that allows for the expansion of collateral that brokers and dealers 
may pledge when borrowing fully paid or excess-margin securities from 
customers pursuant to orders issued by the SEC.\11\ The preamble to the 
SEC's final amendment stated that the amended rule provides flexibility 
to ensure receipt of full collateral by customers while allowing for a 
wider range of permissible collateral, thereby adding liquidity to the 
securities lending markets and lowering borrowing costs for brokers and 
dealers.
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    \11\ See supra note 5.
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    On April 22, 2003, the SEC issued by order \12\ the list of 
permissible categories of collateral under Rule 15c3-3.\13\
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    \12\ Securities and Exchange Act Release No. 47683 (April 16, 
2003), 68 FR 19864 (April 22, 2003).
    \13\ The SEC order expands permissible collateral for brokers 
and dealers when borrowing a customer's securities to: ``government 
securities'' as defined in sections 3(a)(42)(A) and (B) of the 
Exchange Act; certain ``government securities'' meeting the 
definition in section 3(a)(42)(C) of the Exchange Act; securities 
issued or guaranteed by certain Multilateral Development banks; 
``mortgage related securities'' as defined in section 3(a)(41) of 
the Exchange Act; certain negotiable certificates of deposit and 
bankers acceptances; foreign sovereign debt securities; foreign 
currency; and certain corporate debt securities.
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B. Government Securities Act Regulations

    When Treasury first issued the implementing regulations \14\ for 
the GSA \15\ in 1987, we reviewed the existing regulations for brokers 
and dealers registered with the SEC under Sec.  15(b) of the Exchange 
Act in order to avoid overly burdensome or duplicative regulations. In 
that regard, the GSA regulations at 17 CFR chapter IV incorporate by 
reference many of the SEC's rules regulating brokers and dealers 
including, with modifications, SEC Rule 15c3-3.
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    \14\ See supra note 3.
    \15\ See supra note 4.
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    Since the SEC does not have the authority to grant exemptions from 
Sec.  15C or the rules and regulations

[[Page 33259]]

thereunder,\16\ on December 11, 2003, Treasury issued a proposed rule 
that was similar to the SEC's final rule. The amended rule would allow 
for the expansion of the categories of collateral designated as 
permissible through the issuance of a Treasury exemptive order. We 
identified in the preamble to the proposed amendment the categories of 
collateral we were considering for an order should the amendment to 
Sec.  403.4 of the GSA regulations be issued in final form.\17\ Since 
registered government securities brokers and dealers may conduct a 
business only in government and other exempted securities (except 
municipal securities), the list of securities we identified was more 
limited than the list the SEC provided in its order. Treasury did not 
receive any comment letters in response to the proposed rule.
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    \16\ 15 U.S.C. 78mm(b).
    \17\ The categories of collateral we identified in the proposed 
amendment were: ``Government securities'' as defined in Sec.  
3(a)(42)(A) and (B) of the Exchange Act; ``Government securities'' 
as defined in Sec.  3(a)(42)(C) of the Exchange Act issued or 
guaranteed as to principal or interest by the Federal Home Loan 
Mortgage Corporation, the Federal National Mortgage Association, the 
Student Loan Marketing Association, or the Financing Corporation; 
and securities issued by, or guaranteed as to principal and interest 
by certain Multilateral Development Banks.
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II. Analysis

    We are now adopting, without change, the amendments to Sec.  403.1 
and Sec.  403.4. The amendments add a new paragraph (e) to Sec.  403.4 
and make a conforming change to Sec.  403.1. Paragraph (e) of Sec.  
403.4 modifies paragraph (b)(3)(iii)(A) of SEC Rule 15c3-3, and now 
provides that in addition to the categories of collateral currently 
acceptable (cash, U.S. Treasury bills and notes, and bank letters of 
credit), registered government securities brokers and dealers may 
pledge ``such other collateral as the Secretary designates as 
permissible by order as consistent with the public interest, the 
protection of investors, and the purposes of the Act, after giving 
consideration to the collateral's liquidity, volatility, market depth 
and location, and the issuer's creditworthiness.'' Treasury is 
publishing at the same time as this rule an order designating the 
additional categories of collateral applicable to registered government 
securities brokers and dealers.
    We believe this amendment will provide us with the flexibility to 
expand the categories of collateral that may be pledged by registered 
government securities brokers and dealers, while maintaining the 
customer protection objectives of Sec.  403.4. This amendment, and the 
accompanying order, will potentially increase liquidity in the 
securities lending markets and lower borrowing costs for registered 
government securities brokers and dealers.

III. Special Analysis

    This final rule makes only a technical change to the GSA 
regulations to provide for a broader list of collateral that registered 
government securities brokers and dealers may pledge. Therefore, this 
amendment does not meet the criteria for a ``significant regulatory 
action'' under Executive Order 12866. The purpose of the amendment is 
to relieve a restriction on registered government securities brokers 
and dealers; we are therefore making it effective immediately.
    For the same reason, we certify under the Regulatory Flexibility 
Act \18\ that the amendment, if adopted, would not have a significant 
economic impact on a substantial number of small entities. As a result, 
a regulatory flexibility analysis is not required.
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    \18\ 5 U.S.C. 601.
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    Although the amendment is technical in nature, it does not impose 
any additional burdens on such firms. The amendment should increase 
liquidity in the government securities market and lower borrowing costs 
for registered government securities brokers and dealers. The 
collections of information under the Government Securities Act 
regulations have previously been reviewed and approved by the Office of 
Management and Budget under control number 1535-0089.

List of Subjects in 17 CFR Part 403

    Banks, Banking, Brokers, Government securities.

0
For the reasons set out in the preamble, 17 CFR part 403 is amended as 
follows:

PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES

0
1. The authority citation for part 403 is revised to read as follows:

    Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; sec. 4(b), 
Pub. L. 101-432, 104 Stat. 963; sec. 102, sec. 106, Pub. L. 103-202, 
107 Stat. 2344 (15 U.S.C. 78o-5(a)(5), (b)(1)(A), (b)(4).

0
2. Section 403.1 is revised to read as follows:


Sec.  403.1  Application of part to registered brokers and dealers.

    With respect to their activities in government securities, 
compliance by registered brokers or dealers with Sec.  240.8c-1 of this 
title (SEC Rule 8c-1), as modified by Sec. Sec.  403.2 (a), (b) and 
(c), with Sec.  240.15c2-1 of this title (SEC Rule 15c2-1), with Sec.  
240.15c3-2 of this title (SEC Rule 15c3-2), as modified by Sec.  403.3, 
and with Sec.  240.15c3-3 of this title (SEC Rule 15c3-3), as modified 
by Sec. Sec.  403.4 (a)-(d), (f)(2)-(3), (g)-(j), and (m), constitutes 
compliance with this part.

0
3. Section 403.4 is amended by re-designating paragraphs (e) through 
(l) as paragraphs (f) through (m), respectively, and by adding new 
paragraph (e) to read as follows:


Sec.  403.4  Customer Protection--reserves and custody of securities.

* * * * *
    (e) For purposes of this section, Sec.  240.15c3-3(b)(3)(iii)(A) of 
this title is modified to read as follows:
    (A) Must provide to the lender upon the execution of the agreement, 
or by the close of the business day of the loan if the loan occurs 
subsequent to the execution of the agreement, collateral that fully 
secures the loan of securities, consisting exclusively of cash or 
United States Treasury bills or Treasury notes or an irrevocable letter 
of credit issued by a bank as defined in Sec.  3(a)(6)(A)-(C) of the 
Act (15 U.S.C. 78c(a)(6)(A)-(C)) or such other collateral as the 
Secretary designates as permissible by order as consistent with the 
public interest, the protection of investors, and the purposes of the 
Act, after giving consideration to the collateral's liquidity, 
volatility, market depth and location, and the issuer's 
creditworthiness; and
* * * * *

    Dated: May 24, 2004.
Brian C. Roseboro,
Under Secretary, Domestic Finance.
[FR Doc. 04-13128 Filed 6-10-04; 8:45 am]
BILLING CODE 4810-39-P