[Federal Register Volume 69, Number 118 (Monday, June 21, 2004)]
[Rules and Regulations]
[Pages 34472-34500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13413]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 240

[Release No. 34-49831; File No. S7-22-03]
RIN 3235-AI97


Supervised Investment Bank Holding Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting 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 
specified criteria may elect to become a supervised investment bank 
holding company (``SIBHC'') and be subject to supervision on a group-
wide basis by filing a notice of intention with the Commission. 
Pursuant to the statute and these new rules, an IBHC is eligible to be 
an SIBHC if it is not affiliated with certain types of banks and has a 
subsidiary broker-dealer with a substantial presence in the securities 
markets. These rules provide an IBHC with a process to become 
supervised by the Commission as an SIBHC, and 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 standards 
published by the Basel Committee on Banking Supervision). The 
Commission also is adopting an exemption to the Commission's risk 
assessment rules to exempt a broker-dealer that is affiliated with an 
SIBHC from those rules because these new SIBHC rules will require that 
an SIBHC maintain substantially the same records and make substantially 
the same reports to the Commission that a broker-dealer must maintain 
and make pursuant to the risk assessment rules. Finally, the Commission 
is amending the audit requirements for over-the-counter (``OTC'') 
derivatives dealers to permit OTC derivatives dealers to file, as part 
of their annual audits, a supplemental report regarding the firm's 
internal risk management control systems based on agreed-upon 
procedures rather than auditing standards.

EFFECTIVE DATE: August 20, 2004.

FOR FURTHER INFORMATION CONTACT: 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.
    With respect to general questions, contact 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.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction.
II. The Proposed Rules.
III. Overview of Comments Received.
IV. Final Rules and Rule Amendments.
    A. Rule 17i-1: Definitions.

[[Page 34473]]

    B. 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.
    4. Requirement that an IBHC be affiliated with a broker-dealer 
that has a substantial presence in the securities business.
    5. Continuing obligation to amend a Notice of Intention.
    C. Rule 17i-3: Withdrawal from Supervision as an SIBHC.
    D. Rule 17i-4: Internal Risk Management Control System 
Requirements for SIBHCs.
    E. Rule 17i-5: Record Creation, Maintenance, and Access 
Requirements for SIBHCs.
    1. Record creation.
    2. Record maintenance.
    3. Access to records.
    F. Rule 17i-6: Reporting Requirements for SIBHCs.
    1. Monthly reports.
    2. Quarterly reports.
    3. Organizational chart.
    4. Additional reports.
    5. Annual audit report.
    6. Accountant's report on management controls--paragraph 
(d)(1)(ii) of 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. 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.
     i. Credit equivalent amount.
    ii. Current exposure.
    iii. Maximum potential exposure.
    iv. Credit risk weights.
    4. Calculation of consolidated allowance for operational risk.
    5. General discussion of Basel pillars.
    I. Rule 17i-8: Notification Requirements for SIBHCs.
V. Amendment to Rule 30-3.
VI. Paperwork Reduction Act.
    A. Collection of Information Under Amendments to Rules 17h-1T 
and 17h-2T and New Rules 17i-2 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. Rule 17i-2.
    3. Rule 17i-3.
    4. Rule 17i-4.
    5. Rule 17i-5.
    6. Rule 17i-6.
    7. Rule 17i-8.
    E. Collection of Information is Mandatory.
    F. Confidentiality.
    G. Record Retention Period.
VII. Costs and Benefits of the Rules and Rule Amendments.
    A. Benefits.
    B. Costs.
    1. Ongoing costs.
    2. One-time costs.
VIII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation.
IX. Summary of Regulatory Flexibility Act Certification.
X. Statutory Authority.

I. Introduction

    The rules the Commission is adopting today implement the framework 
for Commission supervision of SIBHCs set forth in section 17(i) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'' or the 
``Act'').\1\ These rules also enhance the Commission's supervision of 
an SIBHC's affiliated broker-dealers through collection of additional 
information and examinations of affiliates of those broker-dealers. 
This framework includes qualification criteria for IBHCs that file 
notices of intention to be supervised by the Commission, as well as 
recordkeeping and reporting requirements for SIBHCs. Taken as a whole, 
this framework permits the Commission to monitor the financial 
condition, risk management, and activities of an SIBHC and its 
affiliates (including broker-dealer affiliates) on a group-wide basis. 
Neither the Exchange Act nor these new rules require that an IBHC 
become an SIBHC; supervision as an SIBHC is voluntary.
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    \1\ 15 U.S.C. 78q(i).
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    This regulatory framework for SIBHCs also 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 \2\ for SIBHCs and 
their affiliates (including broker-dealers). To the extent that non-
U.S. financial regulators treat the Commission as the principal U.S. 
consolidated, home-country supervisor for SIBHCs and their affiliates, 
any duplicative regulatory burdens on SIBHCs that are active outside 
the U.S. would be minimized.
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    \2\ See H.R. Conf. Rep. No. 106-434, 165-166 (1999). Without a 
demonstration of ``equivalent'' supervision, U.S. securities firms 
have expressed concerns that an affiliated institution located in 
the EU either may be subject to additional capital charges or be 
required to form a sub-holding company in the EU. See ``Directive 
2002/87/EC of the European Parliament and of the Council of 16 
December 2002.''
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    These new rules 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;\3\ (ii) use, to the fullest extent possible, reports of 
examination made by the appropriate regulatory agency or State 
insurance regulator;\4\ and (iii) defer to the appropriate regulatory 
agency or State insurance regulator with regard to interpretation and 
enforcement of banking or insurance regulations.\5\
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    \3\ Exchange Act Sec.  17(i)(3)(B)(i) [15 U.S.C. 
78q(i)(3)(B)(i)].
    \4\ Exchange Act Sec.  17(i)(3)(C)(iii) [15 U.S.C. 
78q(i)(3)(C)(iii)].
    \5\ Exchange Act Sec.  17(i)(4) [15 U.S.C. 78q(i)(4)].
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II. The Proposed Rules

    The Commission proposed Rules 17i-1 through 17i-8 and amendments to 
Rules 17a-12, 17h-1T, and 17h-2T on October 24, 2003 (Exchange Act 
Release No. 48694 (October 24, 2003)) \6\ (the ``Proposing Release'') 
to implement section 17(i) of the Exchange Act.
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    \6\ 68 FR 62910 (November 6, 2003).
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    Proposed Rules 17i-1 through 17i-8 were designed to implement the 
framework for Commission supervision of SIBHCs set forth in section 
17(i) of the Act. The proposed rules would have (i) incorporated 
definitions found in the Exchange Act into the SIBHC rules and also 
would have defined the terms ``affiliate group'' and ``material 
affiliate,'' (ii) provided a method by which an IBHC could elect to 
become an SIBHC and the criteria the Commission would use to make a 
determination as to whether it would be necessary or appropriate in 
furtherance of section 17 of the Act for the IBHC to be supervised by 
the Commission as an SIBHC, (iii) permitted an SIBHC to withdraw from 
Commission supervision by filing a notice of withdrawal with the 
Commission and would have provided a method through which the 
Commission could terminate supervision if it found that the SIBHC was 
no longer an IBHC or it was necessary or appropriate in furtherance of 
section 17 of the Act for the Commission to terminate supervision of 
the SIBHC, (iv) required that an SIBHC comply with present Exchange Act 
Rule 15c3-4 as though it were a broker-dealer \7\ and establish, 
document and maintain an internal risk management control system and 
periodically review

[[Page 34474]]

this internal risk management control system, (v) required that an 
SIBHC make and keep current certain records relating to its business, 
and preserve those and other records for certain prescribed time 
periods, (vi) required an SIBHC to file with the Commission certain 
monthly and quarterly reports and an annual audit report, (vii) 
required that an SIBHC calculate, using a Basel-like Standard,\8\ the 
affiliate group's allowable capital and allowances for market risk, 
credit risk, and operational risk, and (viii) required that an SIBHC 
notify the Commission upon the occurrence of certain, specified events 
that could indicate a decline in the financial and operational well-
being of the SIBHC.
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    \7\ 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), 68 FR 62872 (Nov. 
6, 2003) (the ``CSE Proposing Release''). In the CSE Proposing 
Release 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.
    \8\ The central bank governors of the Group of Ten countries 
established the Basel Committee in 1974 to provide a forum for 
ongoing cooperation among member countries on banking supervisory 
matters. Its basic consultative papers are: the Basel Capital Accord 
(1988), the Core Principles for Effective Banking Supervision 
(1997), and the Core Principles Methodology (1999). The standards 
set by the Basel Committee (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. The Basel Committee is currently developing a new 
international agreement and issued a proposal to modify the Basel 
Standards in April 2003, when it released for public comment a 
document entitled ``The New Basel Capital Accord'' (the ``New Basel 
Capital Accord''). This proposal can presently be found at: http://www.bis.org/bcbs/cp3full.pdf. The Basel Committee expects to issue a 
final version of the New Basel Capital Accord by the middle of 2004, 
with an effective date for implementation of December 31, 2006.
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    In addition, a proposed amendment to Rule 17a-12(l) would have 
required that, similar to the requirements for an SIBHC set forth in 
proposed Rule 17i-6(i)(2),\9\ an OTC derivatives dealer submit a 
supplemental report, prepared by the accountant using agreed-upon 
procedures rather than auditing standards, regarding the accountant's 
review of the internal risk management control system established and 
documented in accordance with Rule 15c3-4.
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    \9\ This requirement is now set forth in paragraph (d)(1)(ii) of 
Rule 17i-6, as adopted.
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    Finally, the amendments to Rules 17h-1T and 17h-2T \10\ would have 
exempted broker-dealers that are affiliated with an SIBHC from those 
rules because, pursuant to proposed Rules 17i-5 and 17i-6, the SIBHC 
would have been required to make and retain documents and file reports 
that are substantially similar to, and contain the same information as, 
those its subsidiary broker-dealer is required to make, retain, and 
file pursuant to Rules 17h-1T and 17h-2T.
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    \10\ 17 CFR 240.17h-1T and 240.17h-2T.
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III. Overview of Comments Received

    The Commission received two comment letters regarding the Proposing 
Release \11\ from the International Swaps and Derivatives Association 
(``ISDA'') and The Bear Stearns Companies, Inc. (``Bear Stearns''). The 
comments contained in ISDA's letter generally relate to the proposed 
rule requirements regarding the manner in which credit and operational 
risk should be calculated by the holding company. Bear Stearns' letter 
focused on three areas: The proposed credit risk treatment of margin 
loans, the proposed credit risk treatment of over-the-counter 
derivatives, and the proposed treatment of market risk. These comments, 
and the Commission's response to those comments, are discussed more 
specifically below in the descriptions of the final rule amendments.
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    \11\ We received a third comment letter that referenced the 
Proposing Release; however, it did not address the content of the 
Proposing Release.
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IV. Final Rules and Rule Amendments

A. Rule 17i-1: Definitions

    New Rule 17i-1 incorporates the definitions of ``investment bank 
holding company,''\12\ ``supervised investment bank holding 
company,''\13\ ``affiliate,'' \14\ ``bank,'' ``bank holding company,'' 
``company,'' ``control,'' ``savings association,'' ``insured bank''\15\ 
``foreign bank,''\16\ ``person associated with an investment bank 
holding company'' and ``associated person of an investment bank holding 
company''\17\ set forth in section 17(i)(5) of the Exchange Act \18\ 
into the rules promulgated under section 17(i). Although these 
definitions apply regardless of whether they are incorporated into the 
rules, incorporating them lets individuals reading the new rules know 
that the terms are defined, and directs them to those definitions.
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    \12\ Exchange Act Sec.  17(i)(5)(A) [15 U.S.C. 78q(i)(5)(A)]. 
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. An IBHC includes the holding company and all other entities 
within the holding company structure that meet the ``control'' test.
    \13\ 15 U.S.C. 78q(i)(5)(B). A ``supervised investment bank 
holding company'' is any IBHC that is supervised by the Commission 
pursuant to Section 17(i) of the Exchange Act.
    \14\ Section 17(i)(5)(C) of the Exchange Act states that, for 
purposes of Section 17(i) of the Exchange Act, the terms 
``affiliate'' [12 U.S.C. 1841(k)], ``bank'' [12 U.S.C. 1841(c)], 
``bank holding company'' [12 U.S.C. 1841(a)], ``company'' [12 U.S.C. 
1841(b)], ``control'' [12 U.S.C. 1841(a)(2) et seq.], and ``savings 
association'' [12 U.S.C. 1841(j)] have the same meaning as given in 
Section 2 of the Bank Holding Company Act of 1956 [12 U.S.C. 1841] 
(the ``Bank Holding Company Act'').
    \15\ Section 17(i)(5)(D) of the Exchange Act states that, for 
purposes of Section 17(i) of the Exchange Act, the term ``insured 
bank'' has the same meaning as given in Section 3 of the Federal 
Deposit Insurance Act [12 U.S.C. 1813(h)].
    \16\ Section 17(i)(5)(E) of the Exchange Act states that, for 
purposes of Section 17(i) of the Exchange Act, the ``foreign bank'' 
has the same meaning as given in Section 1(b)(7) of the 
International Banking Act [12 U.S.C. 3101(7)].
    \17\ Exchange Act Sec.  17(i)(5)(F) [15 U.S.C. 78q(i)(5)(F)]. 
The terms ``persons associated with an investment bank holding 
company'' and ``associated person of an investment bank holding 
company'' mean any person directly or indirectly controlling, 
controlled by, or under common control, with the IBHC.
    \18\ 15 U.S.C. 78q(i)(5).
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    New 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.
    No comments were received regarding these definitions and the 
Commission is adopting this rule as proposed.

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

    Exchange Act Sec.  17(i)(1)(B) authorizes the Commission to 
prescribe rules regarding the form, information, and documents to be 
included in an IBHC's notice of intention to become supervised by the 
Commission as an SIBHC (a ``Notice of Intention'') as the Commission 
may prescribe as necessary or appropriate in furtherance of the 
purposes of Sec.  17 of the Act.\19\ The Commission received no 
comments regarding proposed Rule 17i-2. Thus, the Commission is 
adopting Rule 17i-2 substantially as it was proposed.\20\
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    \19\ 15 U.S.C. 78q(i)(1)(B).
    \20\ In addition to minor grammatical changes, the rule, as 
adopted, no longer includes proposed paragraph (b)(4)(xiv)(B) 
because we believe it is unnecessary.
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    New Rule 17i-2 provides that an IBHC that meets the statutory 
election criteria may elect to become an SIBHC by filing a written 
Notice of Intention with the Commission, and prescribes the form of an 
IBHC's Notice of Intention and the information and documents to be 
included therewith. New Rule 17i-2 also sets forth the

[[Page 34475]]

process for Commission review of a Notice of Intention and the criteria 
the Commission will use to make this determination. The new Rule 
specifies that the Commission will supervise the IBHC as an SIBHC 
unless the Commission determines that it is not necessary or 
appropriate in furtherance of the purposes of Sec.  17 of the Act. The 
new Rule further states that the Commission will not consider such 
supervision necessary or appropriate unless the IBHC demonstrates 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 $100 million or 
more. Finally, new Rule 17i-2 requires that an IBHC or SIBHC amend its 
Notice of Intention in certain, specified circumstances.
    If an IBHC becomes an SIBHC, regulation of its affiliated broker-
dealer and related associated persons generally will remain unchanged 
(except that, pursuant to amendments described later in this release, a 
broker-dealer affiliated with an SIBHC is 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,\21\ and 
paragraph (a) of new Rule 17i-2 incorporates these statutory 
exclusions. Specifically, an IBHC that is not (i) an affiliate of 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, directly or indirectly, a corporation 
chartered under section 25A of the Federal Reserve Act is eligible to 
file a Notice of Intention.
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    \21\ Exchange Act Sec.  17(i)(1)(A) [15 U.S.C. 78q(i)(1)(A)].
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2. Notice of Intention To Become an SIBHC
    Paragraph (b) of new Rule 17i-2 requires that an IBHC that elects 
to become an SIBHC file a written Notice of Intention with the 
Commission that is designed to provide the Commission with a basis for 
evaluating the IBHC's activities, financial condition, internal 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. Pursuant to the Rule, an IBHC's Notice 
of Intention must include (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; \22\ (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.
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    \22\ 15 U.S.C. 78q(i)(1)(A).
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    New Rule 17i-2 specifies that an IBHC must file the following 
supplemental documents with its Notice of Intention to assist the 
Commission in making its determination:
     A narrative describing the business and organization of 
the IBHC;
     An alphabetical list of each member of the affiliate 
group, with an identification of the financial regulator, if any, by 
whom the affiliate is regulated, and a designation as to whether the 
affiliate is a material affiliate;
     An organizational chart identifying the IBHC, each broker-
dealer owned or controlled by the IBHC, and the IBHC's material 
affiliates;
     Certain consolidated and consolidating financial 
statements;
     Sample calculations of allowable capital and allowances 
for market, and credit risk or alternative capital assessments made in 
accordance with Rule 17i-7;
     A list of the categories of 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;
     A detailed description of the mathematical models the IBHC 
intends to use to price positions and calculate market and credit risk;
     A description of any positions for which the IBHC proposes 
to use a method other than Value at Risk (``VaR'') to compute an 
allowance for market risk;
     A description of how the IBHC proposes to calculate 
current exposure;
     A description of how the IBHC proposes to determine credit 
risk weights and internal credit ratings;
     A description of the method the IBHC proposes to use to 
calculate its allowance for operational risk;
     A description of the internal risk management control 
system established by the IBHC to manage the risks of the affiliate 
group and an explanation of how that system satisfies the requirements 
of Rule 17i-4;
     Sample risk reports that the holding company provides to 
the persons responsible for managing the risks of the affiliate group; 
and
     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.

    The Commission, in its review of each Notice of Intention, will use 
the information and documents provided by the IBHC to assess the IBHC's 
business, financial condition, and internal risk management control 
systems in recognition of the fact that each IBHC manages its business 
and its internal risks differently. We have successfully used firm-
specific information and documents in the past to evaluate and monitor 
risks to broker-dealers.
    Paragraph (b)(xiv) of new Rule 17i-2 requires 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, the SIBHC must describe the 
manner in which it proposes to provide the Commission with adequate 
assurances of access to information.
    In addition to the information and documentation specifically 
described in the rules, the IBHC must also 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. Paragraph (b)(xv) of new Rule 17i-2 was designed to provide 
the Commission with needed flexibility to assure it has the information 
and documents necessary to make the required determination.\23\ In 
addition, experience the Commission gains over time or changes in 
business practice at broker-dealers and IBHCs may cause the Commission 
to re-evaluate whether the

[[Page 34476]]

information and documentation it receives is sufficient.
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    \23\ For instance, in the course of its review of a Notice of 
Intention, the information or documents the Commission receives may 
highlight an issue regarding the IBHC's financial position, internal 
controls, or a mathematical model. If the Commission is unable to 
obtain information or documents not specified in the Rule it may be 
unable to make the required determination.
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    We find the information and documentation an IBHC is required to 
compile and submit as part of its Notice of Intention pursuant to 
paragraph (b) of new Rule 17i-2 is necessary and appropriate in 
furtherance of the purposes of Sec.  17 of the Act. The information and 
documentation will inform the Commission as to the IBHC's activities, 
financial condition, policies, and systems for monitoring and 
controlling financial and operational risks, transactions and 
relationships between any broker or dealer affiliate of the IBHC.
    A Notice of Intention or amendment thereto will 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.\24\
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    \24\ 17 CFR 240.17i-2(d)(1).
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    Paragraph (d)(1) of Rule 17i-2 states that all Notices of 
Intention, amendments, and other documentation and information filed 
pursuant to Rule 17i-2 will be accorded confidential treatment.\25\ We 
believe it is important to accord confidential treatment to the 
information and documentation an IBHC provides to the Commission as 
part of its Notice of Intention because that information and 
documentation will generally be highly sensitive, non-public business 
information.
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    \25\ Section 17(j) of the Exchange Act authorizes the Commission 
to keep confidential the information it receives pursuant to rules 
adopted under section (i) [15 U.S.C. 78q(j)]. Section 17(j) 
provides, ``Notwithstanding any other provision of law, the 
Commission shall not be compelled to disclose any information 
required to be reported under'' section 17(i).
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3. Process for Review of Notices of Intention
    Pursuant to paragraph (d)(2) of new Rule 17i-2, an IBHC will become 
an SIBHC subject to Commission supervision 45 calendar days after the 
Commission receives a completed Notice of Intention, 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.\26\ The Commission will use the information and documents 
provided as part of an IBHC's Notice of Intention to assess the 
financial and operational condition of the IBHC and make this 
determination.
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    \26\ Exchange Act Sec.  17(i)(1)(B) [15 U.S.C. 78q(i)(1)(B)].
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4. Requirement That an IBHC Be Affiliated With a Broker-Dealer That Has 
a Substantial Presence in the Securities Business
    Pursuant to the Act, the Commission may supervise an IBHC that has 
submitted a Notice of Intention as an SIBHC ``[u]nless the Commission 
finds that such supervision is not necessary or appropriate in 
furtherance of the purposes'' of section 17.\27\ 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,\28\ as the 
Commission prescribes to assess the financial and operational risks to 
a broker-dealer from those affiliates.
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    \27\ 15 U.S.C. 17(i)(1)(B).
    \28\ Those affiliates would include, but not be limited to, 
affiliates whose business activities are reasonably likely to have a 
``material impact'' on the financial or operational condition of the 
broker-dealer.
---------------------------------------------------------------------------

    We find, consistent with the purposes of section 17, the 
Commission's supervision of an IBHC as an SIBHC is necessary and 
appropriate only when the IBHC is affiliated with a broker-dealer that 
has a ``substantial presence'' in the securities business.\29\ 
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. Among other things, 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.
---------------------------------------------------------------------------

    \29\ As set forth in sub-paragraph (d)(2)(i)(B) of Rule 17i-2.
---------------------------------------------------------------------------

5. Continuing Obligation To Amend a Notice of Intention
    Pursuant to paragraph (c) of new Rule 17i-2, IBHCs and SIBHCs have 
a continuing obligation 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, an IBHC must 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.
    After a Commission determination, if an SIBHC materially changes a 
mathematical model or other method used to compute its allowable 
capital or allowances for market, credit, or operational risk, or its 
internal risk management control systems, prior to making the changes 
the SIBHC must file an amended Notice of Intention describing the 
changes and obtain Commission approval of the amendment. Commission 
approval is necessary to assure that the SIBHC continues to utilize 
risk measures that are sufficient to properly manage the financial and 
operational risks of the affiliate group.

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

    New Rule 17i-3 permits an SIBHC to withdraw from Commission 
supervision by filing a notice of withdrawal with the Commission, 
consistent with Exchange Act Sec.  17(i)(2)(A). Pursuant to the Rule, a 
notice of withdrawal from supervision will take effect one year after 
it is filed with the Commission (or a shorter or longer period that the 
Commission determines is necessary or appropriate to help 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).\30\ The new Rule also requires an 
SIBHC to include in its notice of withdrawal a statement regarding 
whether it is in compliance with new Rule 17i-2(c) regarding amendments 
to its Notice of Intention to help to assure that the Commission has 
current information when considering the SIBHC's withdrawal notice.
---------------------------------------------------------------------------

    \30\ See section 17(i)(2)(A) of the Exchange Act and paragraph 
(b) of Rule 17i-3.
---------------------------------------------------------------------------

    In addition, paragraph (c) of new Rule 17i-3 provides, consistent 
with Exchange Act Sec.  17(i)(2)(B), that the Commission may 
discontinue supervising an SIBHC if the Commission finds that the SIBHC 
no

[[Page 34477]]

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 or to its internal risk 
management control systems as described in its Notice of Intention (and 
as modified from time to time), the Commission may 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.
    The Commission will generally review and consider the same types of 
information it initially reviewed and considered when making its 
original determination to supervise the IBHC as an SIBHC to determine 
whether continued supervision of the SIBHC is necessary or appropriate 
in furtherance of the purposes of section 17 of the Act.
    The Commission received no comments regarding proposed Rule 17i-3, 
and the Commission is adopting Rule 17i-3 substantially as it was 
proposed.

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

    New Rule 17i-4 requires that an SIBHC comply with present Exchange 
Act Rule 15c3-4 as if it were an OTC derivatives dealer with respect to 
all of its business activities and transactions.\31\ That is, an 
SIBHC's compliance with Rule 15c3-4 is not limited to its OTC 
derivatives transactions.\32\ Currently, Rule 15c3-4 requires that each 
OTC derivatives dealer establish, document and maintain a system of 
internal risk management controls to assist it in managing the risks 
associated with its business activities, including market risk, credit 
risk, operational risk, funding risk, and legal risk.
---------------------------------------------------------------------------

    \31\ Paragraphs (c)(5)(xiii), (c)(5)(xiv), (d)(8), and (d)(9) 
would not apply to an IBHC that elects SIBHC supervision because 
those paragraphs relate solely to limitations on the types of 
transactions an OTC derivatives dealer may undertake.
    \32\ See 17 CFR 240.15c3-4(c)(5)(x), (c)(5)(xi), (d)(1), (d)(5), 
and (d)(10).
---------------------------------------------------------------------------

    An SIBHC that has adopted and follows appropriate risk management 
controls reduces its risk of significant loss, which also reduces the 
risk to other market participants or throughout the financial markets 
as a whole. Due to the level of risk exposures created by the types of 
business activities of SIBHCs, it is important for SIBHCs to implement 
robust internal risk management control systems. Based on the 
Commission's experience with OTC derivatives dealers, we believe new 
Rule 17i-4 will cause SIBHCs to develop strong internal controls that 
will reduce risk at the SIBHC and require that each SIBHC adequately 
document those internal controls. It is important that the internal 
controls be adequately documented to assure that examiners and 
accountants can review and audit them. We also believe that, similar to 
Rule 15c3-4, new Rule 17i-4 provides flexibility for an SIBHC to design 
and implement internal risk management control systems specific to its 
business model and circumstances.
    Paragraph (b) of new Rule 17i-4 contains one requirement that is 
not presently included in Rule 15c3-4 `` it requires 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. This requirement is designed 
to allow the Commission to examine the SIBHC and members of the 
affiliate group as provided for in the Act.\33\ An SIBHC's procedures 
should include appropriate safeguards at the holding company level to 
prevent money laundering through affiliates.\34\
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    \33\ See generally, Exchange Act Sec.  17(i)(3)(C)(i)(II) [15 
U.S.C. 78q(i)(3)(C)(i)(II)], which provides the Commission with the 
authority to make examinations of any SIBHC and any affiliate of 
such company in order to monitor compliance with the provisions of 
subsection 17(i) of the Act, provisions governing transactions and 
relationships between any broker-dealer affiliated with the SIBHC 
and any of the company's other affiliates and applicable provisions 
of subchapter II of chapter 53, title 31, United States Code 
(commonly known as the ``Bank Secrecy Act'') and the regulations 
thereunder.
    \34\ This parallels requirements in the New Basel Capital Accord 
(See supra, note 8). See also Financial Action Task Force on Money 
Laundering (``FATF''), The Forty Recommendations (2003), 
Recommendation 22, and see generally the FATF's Special 
Recommendations on Terrorist Financing. (The FATF's documents can 
presently be found at: www.FATF-GAFI.org).
---------------------------------------------------------------------------

    The Commission received no comments regarding proposed Rule 17i-4. 
The Commission is adopting Rule 17i-4 substantially as it was proposed.

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

    Section 17(i)(3)(A) of the Exchange Act authorizes the Commission 
to require that an SIBHC must make and keep records, furnish copies 
thereof, and make such reports as the Commission may require.\35\ New 
Rule 17i-5 specifies the records that an SIBHC must make and keep 
current, the length of time those records must be preserved, and the 
format SIBHCs may use to preserve those records. This rule is designed 
to require an SIBHC to create and maintain sufficient records to keep 
the Commission informed as to: (i) The SIBHC's activities, financial 
condition, policies, systems for monitoring and controlling financial 
and operational risks, and transactions among members of the affiliate 
group; and (ii) the extent to which the SIBHC has complied with the 
provisions of the Exchange Act and rules to which it is subject.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q(i)(3)(A).
---------------------------------------------------------------------------

    In addition, new Rule 17i-5(d) \36\ specifies that all information 
obtained by the Commission from the SIBHC pursuant to this Rule will be 
accorded confidential treatment to the extent permitted by law.\37\ We 
believe it is important to accord confidential treatment to these 
documents because the information an SIBHC is required create, 
maintain, and grant the Commission access to pursuant to new Rule 17i-5 
generally is highly sensitive, non-public business information.
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17i-5(d).
    \37\ See supra, note 25.
---------------------------------------------------------------------------

    The Commission received no comments regarding proposed Rule 17i-5, 
and, except as described below, the Commission is adopting Rule 17i-5 
substantially as it was proposed. The Commission has added a 
requirement to Rule 17a-5 that an SIBHC make a record of the 
calculations of allowable capital and allowances for market, credit, 
and operational risk computed at least monthly.
1. Record Creation
    Paragraph (a) of new Rule 17i-5 requires that an 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 and internal credit ratings, if applicable, for 
each counterparty.
    The specified events for which an SIBHC will 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 unsecured, short-term funding; (iii) an inability 
of the SIBHC to move liquid assets across international borders when an 
event described in (i) or (ii) occurs; or (iv) an inability of the 
SIBHC to access credit or assets held at a particular institution when 
an event described in (i) or (ii) occurs. The Commission believes these 
events would present liquidity and funding stress scenarios that would

[[Page 34478]]

likely create significant financial distress for the SIBHC. The records 
an SIBHC is required to create pursuant to Rule 17i-5 are intended to 
provide the Commission with sufficient information to adequately assess 
the SIBHC's financial condition and financial and operational risks. 
These records will be available to the Commission during examinations 
or as otherwise requested.
    The Commission requested comment on whether there are any other 
records that an SIBHC should be required to create. The Commission has 
given additional consideration to the questions raised in its request 
for comment and has determined to add a requirement that an SIBHC make 
a record, on a consolidated basis, of the calculations of allowable 
capital and allowances for market, credit, and operational risk 
computed on at least a monthly basis. This parallels the manner in 
which net capital is recorded at the broker-dealer level. As proposed, 
an SIBHC would have been required to maintain copies of all reports 
required to be filed with the Commission, and those reports would have 
included calculations of allowable capital, and allowances for market, 
credit, and operational risk (as opposed to statements of allowable 
capital and allowances for market, credit, and operational risk which 
the rule, as adopted, requires). Because we do not believe it is 
necessary for an SIBHC to provide the Commission with the detailed 
calculations, we eliminated the requirement that an SIBHC report this 
information to the Commission \38\ and instead is requiring an SIBHC to 
simply maintain a record of these calculations.
---------------------------------------------------------------------------

    \38\ See proposed Rule 17i-6(a)(1)(i).
---------------------------------------------------------------------------

2. Record Maintenance
    Pursuant to paragraph (b) of new Rule 17i-5, the SIBHC must 
preserve (i) the records required to be created pursuant to 17i-5(a) 
(as described above); (ii) all Notices of Intention, amendments 
thereto, and other documentation and information filed with the 
Commission in accordance with Rule 17i-2, and any responses thereto; 
(iii) reports and notices filed with the Commission in accordance with 
Rules 17i-6 and 17i-8; and (iv) records documenting the internal risk 
management control system established in accordance with Rule 17i-4 to 
manage the risks of the affiliate group. This requirement is designed 
to require that an SIBHC maintain the specified records, which would 
provide the Commission with sufficient information to adequately assess 
the SIBHC's financial condition and financial and operational risks.
    New Rule 17i-5 requires that an SIBHC maintain the specified 
records for a period of three years in an easily accessible place. This 
requirement is designed to assure that the specified records will be 
available to the Commission during examinations or as otherwise 
requested. Exchange Act Rule 17a-4 presently requires that broker-
dealers maintain certain records for three years, and we believe this 
time period is appropriate with relation to the records required 
pursuant to new Rule 17i-5. The new Rule would allow an SIBHC to 
maintain these records in any manner permitted pursuant to Rule 17a-
4(f).\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17a-4(f). Rule 17a-4 allows a broker-dealer to 
maintain its records either in hard-copy (paper), microfiche, 
microfilm, or electronic format, subject to the conditions set forth 
in paragraph (f).
---------------------------------------------------------------------------

    New Rule 17i-5 does not require an SIBHC to maintain its required 
records in a prescribed standard form. To reduce the recordkeeping 
burden on SIBHCs, new Rule 17i-5 instead allows an SIBHC to meet its 
recordkeeping requirements using records it created for its own use so 
long as those records include the information required in the rules.
    Paragraph (c) of new Rule 17i-5 allows 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 United States. If these records are maintained by an entity 
other than the SIBHC, the SIBHC must file with the Commission a written 
undertaking from the entity which states that the records will be 
treated as if the SIBHC were maintaining the records and that the 
entity undertakes to permit examination of these records by 
representatives of the Commission and to promptly furnish copies of 
such records to the Commission. This provision is intended to provide 
an SIBHC with flexibility with relation to record maintenance, without 
impairing the Commission's ability to obtain the SIBHC's records as 
necessary.
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.\40\ 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 made by an 
appropriate regulator of the SIBHC or certain regulated affiliates.\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q(i)(3)(C). The primary purpose of our 
examination of supervised investment bank holding companies is to 
verify their financial and operational positions and to verify 
whether the internal risk management controls and the methodologies 
for calculating allowable capital and allowances for market, credit, 
and operational risk are consistent with those controls and 
methodologies approved by the Commission.
    \41\ See supra, note 41.
---------------------------------------------------------------------------

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

    New Rule 17i-6 requires that an SIBHC file certain monthly and 
quarterly reports with the Commission, as well as an annual audit 
report. These reporting requirements are designed 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 thereunder.
    The Commission received no comments regarding proposed Rule 17i-6, 
and except as noted below, is adopting Rule 17i-6 as proposed. We have 
amended the timing of the reports, extending the deadline for the 
filing of monthly reports to 30 calendar days after month-end (instead 
of 17 business days after month-end) and the deadline for filing the 
annual audit report to 65 calendar days after year-end (instead of 60 
calendar days after year-end). In addition, certain financial 
information need not be filed with the monthly and quarterly reports if 
that financial information has not yet been made public in the SIBHC's 
annual report on Form 10-K. We believe that an extension of these time 
periods is appropriate because an SIBHC must include detailed 
information, potentially from a number of affiliates, in these reports. 
The extension, moreover, does not delay significantly the time at which 
the Commission will receive the reports and, therefore, should provide 
the Commission with accurate information about risks that the SIBHC and 
its affiliates may pose to any affiliated broker-dealer.
    The Commission also made other changes to the rule as proposed. We 
have added a section to require that an SIBHC provide the Commission 
with an organizational chart on a yearly basis. In addition, the rule, 
as adopted, no longer includes a requirement that an SIBHC file a 
supplemental report on inventory pricing and modeling with its annual 
audited statements, nor does it include many of the technical audit 
report

[[Page 34479]]

requirements. These changes are discussed more fully below.
1. Monthly Reports
    Paragraph (a) of new Rule 17i-6 requires an SIBHC to file a monthly 
risk report with the Commission, within 30 calendar days after the end 
of each month that does not end a calendar quarter. This report must 
include a consolidated balance sheet and income statement for the 
affiliate group, computations of consolidated allowable capital and 
allowances for market, credit, and operational risk, a graph reflecting 
daily intra-month 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 monthly reports are intended to allow the Commission to review 
and monitor the risk profile for the affiliate group, and alert the 
Commission to any deterioration in the affiliate group's financial 
position, operational position, or risk profile.
    We changed the language of the rule to provide that an SIBHC is not 
required to file a separate monthly report when the monthly report 
would coincide with a quarter-end. The quarterly report requirement was 
expanded to include the information contained in the monthly report, a 
consolidating balance sheet and income statement for the affiliate 
group, the results of backtesting of all models used to compute 
allowable capital and allowances for market and credit risk, a 
description of all material pending legal or arbitration proceedings 
involving the SIBHC or any member of the affiliate group, and the 
aggregate amount of short-term, unsecured borrowings and lines of 
credit as to each material affiliate
    In addition, the rule, as amended, no longer includes a requirement 
that an SIBHC provide consolidated credit risk information regarding 
the 5 largest exposures to regulated financial institutions.\42\ These 
exposures will be reflected as part of an SIBHC's response to 
paragraphs (a)(1)(iii)(A) and (B),\43\ that require that an SIBHC 
provide the Commission with information regarding its 15 largest 
exposures to all persons. Thus, it would be duplicative to require that 
an SIBHC report its 5 largest exposures to financial institutions 
separately.
---------------------------------------------------------------------------

    \42\ Paragraphs (a)(1)(iii)(A)(2) and (a)(1)(iii)(C)(2) in 
proposed Rule 17i-6.
    \43\ The requirements contained in paragraphs (a)(1)(iii)(A)(1) 
and (a)(1)(iii)(C)(1) of proposed Rule 17i-6 can now be found in 
paragraphs (a)(1)(iii)(A) and (a)(1)(iii)(B) in new Rule 17i-6.
---------------------------------------------------------------------------

2. Quarterly Reports
    Paragraph (a)(2) of new Rule 17i-6 requires that an SIBHC file a 
quarterly risk report with the Commission within 35 calendar days after 
the end of each quarter. In addition to all the information required to 
be filed on a monthly basis, the quarterly report must include: (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 amount 
of 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 must file on a quarterly basis 
will provide the Commission with valuable insight as to the financial 
and operational condition of the SIBHC.
    As proposed, these reports are required to be filed within 35 
calendar days after the end of each quarter, which is similar to the 
time frames for quarterly reports due from public companies that are 
``accelerated filers'' \44\ and are required to file information, 
documents, and reports pursuant to Sec. Sec.  13(a) or 15(d) of the 
Exchange Act.\45\
---------------------------------------------------------------------------

    \44\ As defined in 17 CFR Sec.  240.12b-2.
    \45\ See Release No. 33-8128 (Sept. 5, 2002), 67 FR 58480 (Sept. 
16, 2002).
---------------------------------------------------------------------------

    New paragraph (a)(3) of Rule 17i-6 states that the SIBHC need not 
include consolidated and consolidating balance sheets and income 
statements with its quarterly report on the quarter-end that coincides 
with the SIBHC's fiscal year-end. This provision was revised so that an 
SIBHC that is a publicly traded company would not be required to file 
its financial statements, under this rule, prior to the date it would 
otherwise be required to file its financial statements with the 
Commission pursuant to rules applicable to public companies.
3. Organizational Chart
    We have added a new paragraph (b) to Rule 17i-6, which would 
require that an SIBHC file an organizational chart with the Commission 
at least once each year as of its fiscal year-end. In addition, this 
paragraph would require that an SIBHC provide the Commission with 
quarterly updates if a material change in its organization has 
occurred. The Commission finds these organizational charts to be useful 
tools in reviewing holding company risk.\46\
---------------------------------------------------------------------------

    \46\ Pursuant to Sec.  240.17h-2T(a)(1)(i) and Form 17H, a 
broker-dealer subject to Rule 17h-2T must file an organizational 
report with its annual filing and with any quarterly filing if there 
has been a material change in the information provided to the 
Commission. We proposed to exempt from Rules 17h-1T and 17h-2T a 
broker-dealer that is affiliated with an SIBHC because the 
information an SIBHC would have been required to provide to the 
Commission pursuant to proposed Rule 17i-6 was substantially similar 
to that which broker-dealers must provide pursuant to Rules 17h-1T 
and 17h-2T. However, Rule 17i-6, as proposed, did not include this 
organizational chart requirement.
---------------------------------------------------------------------------

4. Additional Reports
    Paragraph (c) of new Rule 17i-6 \47\ provides that an SIBHC may be 
required, upon receiving written notice from the Commission, to provide 
the Commission with additional financial or operational information. 
This rule provides the Commission with the flexibility to request 
additional reports, during periods of market stress or otherwise, to 
monitor the SIBHC's activities, financial condition, policies, systems 
for monitoring and controlling financial and operational risks, 
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 prescribed and orders issued 
thereunder. In addition, if a broker-dealer affiliated with the SIBHC 
or the SIBHC were to file a notice, pursuant to Rule 17a-11 or Rule 
17i-8, respectively, the Commission may request additional reports from 
the SIBHC to fully assess the situation giving rise to the filing of 
the notice.
---------------------------------------------------------------------------

    \47\ Paragraph (b) of proposed Rule 17i-6 was redesignated as 
paragraph (c) f new Rule 17i-6.
---------------------------------------------------------------------------

5. Annual Audit Report
    Pursuant to paragraph (d)(1) of new Rule 17i-6,\48\ an SIBHC must 
file an annual audit report containing consolidated financial 
statements and a supporting schedule containing statements of allowable 
capital, and allowances for market, credit, and operational risk. The 
audit must be conducted by a registered public accounting firm (as that 
term is defined at 15 U.S.C. 7201(a)(12)) in accordance the rules 
promulgated by the Public Company Accounting Oversight Board. Paragraph 
(d)(2) of new Rule 17i-6 requires that the annual audit report be

[[Page 34480]]

``as of'' the same date as the annual audit of the SIBHC's affiliated 
broker-dealer, and filed with the Commission not later than 65 calendar 
days after the end of the fiscal year.
---------------------------------------------------------------------------

    \48\ Paragraph (c)(1) of proposed Rule 17i-6 was redesignated as 
paragraph (d)(1) of new Rule 17i-6.
---------------------------------------------------------------------------

    Paragraph (f) of new Rule 17i-6 \49\ allows the Commission to grant 
extensions or exemptions from the annual audit requirement at the 
request of the SIBHC, or on its own motion. This provision will provide 
the Commission with flexibility to address firm-specific issues as they 
arise.
---------------------------------------------------------------------------

    \49\ Paragraph (k) of proposed Rule 17i-6 was redesignated as 
paragraph (f) of new Rule 17i-6.
---------------------------------------------------------------------------

    We did not adopt the proposed requirement that an SIBHC file 
supplemental reports on reportable conditions and inventory pricing and 
modeling with its annual audited statements \50\ because the report on 
reportable conditions would generally be reported through Form 8-K for 
public companies, and the staff has found the supplemental report on 
inventory pricing and modeling filed by OTC derivatives dealers to be 
less useful than other information required to be filed.
---------------------------------------------------------------------------

    \50\ As set forth in paragraph (i)(3) of proposed Rule 17i-6.
---------------------------------------------------------------------------

    Rule 17i-6 no longer includes certain additional, technical 
paragraphs regarding the annual audit because, upon further 
consideration, they were found to be duplicative with the rules of the 
Public Company Accounting Oversight Board (``PCAOB''),\51\ including 
their independence standards.
---------------------------------------------------------------------------

    \51\ New Rule 17i-6(d)(1)(i) requires that an SIBHC's financial 
statements must be audited by a registered public accounting firm. 
The term ``registered public accounting firm'' is defined in Section 
2(a)(12) of the Sarbanes-Oxley Act of 2002 [Pub. L. 107-204] 
[codified at 15 U.S.C. 7201(a)(12)] as ``a public accounting firm 
registered with the [Public Company Accounting Oversight] Board in 
accordance with this Act.''
---------------------------------------------------------------------------

    Paragraph (h) of new Rule 17i-6 \52\ specifies that all information 
obtained by the Commission pursuant to these rules will be accorded 
confidential treatment to the extent permitted by law.\53\ We believe 
it is important to accord confidential treatment to the reports and 
statements filed pursuant to new Rule 17i-6 because these reports will 
contain information that generally would be non-public and highly 
sensitive.
---------------------------------------------------------------------------

    \52\ Paragraph (m) of proposed Rule 17i-6 was redesignated as 
paragraph (h) of new Rule 17i-6.
    \53\ See supra, note 25.
---------------------------------------------------------------------------

6. Accountant's Report on Management Controls--Paragraph (d)(1)(ii) of 
Rule 17i-6 and Amendment to Paragraph (l) of Existing Rule 17a-12
    Paragraph (d)(1)(ii) of new Rule 17i-6 \54\ requires that an SIBHC 
submit a supplemental report, prepared by its accountant, regarding the 
accountant's review of the internal risk management control system 
established and documented in accordance with Rule 17i-4. This review 
must be accomplished using procedures agreed-upon by the accountant and 
the SIBHC. The Rule also specifies that the agreed-upon procedures must 
be performed and the report must be prepared in accordance with the 
rules promulgated by the PCAOB. Pursuant to paragraph (d)(1)(ii) of new 
Rule 17i-6, the SIBHC must submit the agreed-upon procedures to the 
Commission prior to the accountant's initial review.
---------------------------------------------------------------------------

    \54\ Proposed paragraph 17i-6(i)(1) was redesignated as 
paragraph 17i-6(d)(1)(ii) in the rules as adopted.
---------------------------------------------------------------------------

    As explained in the Proposing Release, proposed paragraph 
(d)(1)(ii) of 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 also amending present Rule 17a-12(l) so 
that, similar to the requirements of paragraph (d)(1)(ii) of new 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 (d)(1)(ii) of new Rule 17i-6 and this amendment to Rule 
17a-12(l) will require an accountant to review an SIBHC's or OTC 
derivatives dealer's internal risk management control systems and 
provide a report regarding whether the internal risk management control 
systems comply with the requirements of Rule 17i-4 or Rule 15c3-4, 
respectively, and whether the SIBHC or OTC derivatives dealer is 
following its internal risk management control systems.
    The Commission received no comments regarding its proposed 
amendments to Rule 17a-12(l), and is thus adopting this amendment to 
Rule 17a-12(l) as it was proposed.

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

    The Commission presently receives financial and risk information 
about certain holding companies and other broker-dealer affiliates, 
including certain off-balance sheet items pursuant to the risk 
assessment rules \55\ and through meetings with industry 
representatives. 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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    \55\ 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].
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    As part of this rulemaking, the Commission is amending Rules 17h-1T 
and 17h-2T \56\ 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 it is appropriate to exempt a broker-dealer that is 
affiliated with an SIBHC because, pursuant to new Rule 17i-5, the SIBHC 
must 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 new 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.
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    \56\ Id.
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    The Commission received no comments regarding these proposed 
amendments to Rules 17h-1T and 17h-2T. Consequently, the Commission is 
adopting these amendments to Rules 17h-1T and 17h-2T as proposed.

H. Rule 17i-7: Calculations of Allowable Capital and Risk Allowances or 
Alternative Capital Assessment

    New Rule 17i-7 requires that an SIBHC compute allowable capital and 
allowances for market, credit, and

[[Page 34481]]

operational risk on a consolidated basis for the affiliate group. These 
calculations are designed to be consistent with the Basel Standards, 
which will 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.
    New Rule 17i-7 does not set minimum group-wide capital levels for 
SIBHCs; rather, it requires the SIBHC to perform certain calculations 
that the Commission will review, when they are reported pursuant to the 
requirements of new Rule 17i-6, to gain an understanding of the 
financial and operational position of the affiliate group and identify 
any risks the SIBHC may pose its affiliated broker-dealer or other 
market participants.
    As discussed below, we believe the new rules provide prudent 
parameters for measuring allowable capital and allowances for risk for 
the SIBHC.
1. Calculation of Consolidated Allowable Capital
    Consistent with the Basel Standards,\57\ new Rule 17i-7 requires 
that an SIBHC calculate ``allowable capital'' for the affiliate group 
that includes common shareholders' equity (less goodwill, certain 
deferred tax assets,\58\ other intangible assets, and certain other 
deductions), certain cumulative and non-cumulative preferred stock,\59\ 
certain properly subordinated debt, and hybrid capital instruments. As 
set forth in further detail in the rule, to be included in allowable 
capital the cumulative and non-cumulative preferred stock and the 
subordinated debt are subject to additional limitations based on 
comparisons of the individual components of allowable capital.\60\
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    \57\ New Rule 17i-7 is generally consistent with the Basel 
Standards. However, one difference is our method for computing 
maximum potential exposure based on the VaR of those positions (as 
opposed to approximating maximum potential exposure through the use 
of notional add-ons) when calculating credit risk for OTC 
derivatives instruments. This difference is described more 
specifically in the section relating to the calculations of 
allowance for credit risk.
    \58\ Pursuant to the paragraph (a)(1)(ii) of new Rule 17i-7, 
deferred tax assets, except those permitted for inclusion in Tier 1 
capital by the Board of Governors of the Federal Reserve (12 CFR 
225, Appendix A) must be deducted from shareholders' equity when 
computing allowable capital.
    \59\ The cumulative and non-cumulative preferred stock may 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 must be able 
to defer or eliminate dividends.
    \60\ See paragraphs (a)(2) and (a)(3)(i) of Rule 17i-7.
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    The Commission received no comments regarding the requirement to 
calculate allowable capital set forth in paragraph (a) of proposed Rule 
17i-7.
    As proposed, Rule 17i-7 would have required that all deferred tax 
assets be subtracted from common shareholders' equity when computing 
allowable capital. In order to remain consistent with the CSE 
Release,\61\ certain deferred-tax assets are now includable in an 
SIBHC's allowable capital, subject to the limitations set forth in 
paragraph (a)(1)(ii). Generally, an SIBHC may include the amount of 
deferred-tax assets dependent upon future taxable income, so long as 
they do not exceed the lesser of the amount of deferred-tax assets the 
company expects to realize within one year of the calendar quarter-end 
date (based upon its projected taxable income for the year), or 10 
percent of allowable capital.\62\ Any deferred tax assets in excess of 
this amount must be subtracted from common shareholder's equity. There 
generally is no limit in allowable capital on the amount of deferred-
tax assets that can be realized from taxes paid in prior carry-back 
years or from future reversals of existing taxable temporary 
differences.
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    \61\ In a separate, companion release, we amended rules to, 
among other things, establish optional alternative net capital 
requirements for certain broker-dealers. See Exchange Act Release 
No. 49830 (June 8, 2004) (the ``CSE Release''). That release also 
outlined a capital calculation to be performed by the holding 
company of a broker-dealer that uses that alternative net capital 
requirement. The rules set forth in the CSE Release were proposed on 
October 24, 2003 (see supra, note 7).
    \62\ For purposes of calculating the 10% limitation, allowable 
capital is defined as the sum of the elements set forth in Rule 17i-
7, paragraph (a)(1).
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    Paragraph (a)(3)(ii) of proposed Rule 17i-7 would have allowed an 
SIBHC to include subordinated debt as part of its allowable capital, 
subject to certain criteria intended to help assure that the 
subordinated debt provides a long-term source of working capital to the 
SIBHC and that it has many of the characteristics of capital. We did 
not receive any comments relating to this provision, so we are adopting 
paragraph (a)(3)(ii) of new Rule 17i-7 as it was proposed.
    As proposed, Rule 17i-7 would not have allowed an SIBHC to include 
hybrid capital instruments in its calculation of allowable capital. The 
proposing CSE Release also would have disallowed holding companies from 
using hybrid capital instruments as part of allowable capital.\63\ In 
response to views expressed by firms that a holding company should be 
allowed to include hybrid capital instruments in the calculation of 
allowable capital to be more consistent with both the Basel Standards 
and the Federal Reserve's definition of Tier 1 and Tier 2 capital, Rule 
17i-7, as adopted, allows an SIBHC to include hybrid capital 
instruments in its calculation of allowable capital, subject to the 
requirements set forth in paragraph (a)(4). This change is consistent 
with the final CSE Release.
---------------------------------------------------------------------------

    \63\ The paragraph headings (A)-(D) in paragraph (a)(3)(ii) were 
deleted; the language, however, is the same as the Proposing 
Release.
---------------------------------------------------------------------------

    Hybrid capital instruments generally have characteristics of both 
equity and debt. Generally, to be includable in allowable capital, 
hybrid capital instruments must be unsecured, fully paid, subordinated 
to general creditors, not redeemable before maturity at the option of 
the holder, available to participate in losses while the issuer is 
operating as a going concern, and must permit the issuer the option to 
defer interest payments if the issuer does not report a profit in the 
preceding annual period. Hybrid capital instruments may constitute no 
more than 15% of allowable capital, before deductions.
    In the Proposing Release, the Commission solicited comment on 
whether long-term debt, subject to appropriate limitations, should be 
included in allowable capital. These same questions were asked in the 
CSE Release. Some firms expressed interest in favor of inclusion. Other 
firms expressed an interest that long-term debt be included as 
allowable capital during a phase-out period, suggesting that a swift 
phase-out of long-term debt would be difficult because of the amount of 
debt involved and could impact capital markets negatively, increasing 
funding costs.
    To maintain consistency with the Basel Standards, holding companies 
may not include long-term debt in allowable capital. We understand, 
however, that an SIBHC might not be able to convert significant amounts 
of long-term debt to subordinated debt quickly without potentially 
incurring significant costs and causing market disruptions. 
Accordingly, as part of its Notice of Intention, the SIBHC may request 
to phase-out the inclusion of long-term debt as allowable capital over 
a period of up to three years \64\ that

[[Page 34482]]

begins upon adoption of these final rules. At the end of three years, 
an SIBHC no longer may include long-term debt in allowable capital. 
However, an SIBHC that wishes to extend the long-term debt phase-out 
beyond the initial three-year period may amend its notice of intention, 
pursuant to new Rule 17i-2(c)(2), to include long-term debt in its 
allowable capital calculation for an additional two years. The 
Commission will determine if the amount of the SIBHC's long-term debt 
and market conditions warrant an extension.\65\
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    \64\ We believe, based on the staff's experience, that three 
years should be a sufficient time period for a firm to convert its 
funding sources from long-term debt to other types of positions that 
could be included in allowable capital pursuant to this rule. Long-
term debt must meet the criteria specified in paragraph (a)(3)(iii) 
of Rule 17i-7, as adopted, to be included.
    \65\ See Rule 17i-7(a)(3)(iii).
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2. Calculation of Consolidated Allowance for Market Risk
    Paragraph (b) of new Rule 17i-7 requires that an SIBHC compute a 
consolidated allowance for market risk for its proprietary positions 
using either a VaR model or, if there is not adequate historical data 
to support a VaR model, an alternative method.\66\ An SIBHC must 
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 can evaluate the method to determine whether it adequately 
measures the risks of those positions. The VaR of the positions must be 
multiplied by an appropriate multiplication factor \67\ to provide 
adequate capital during periods of market stress. The computation of 
the allowance for market risk is consistent with the calculation of 
market risk charges under the Basel Standards.
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    \66\ Generally, the allowance for market risk constitutes three 
times 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). See supra, note 61. see Sec.  17 CFR 240.15c3-
1e(d)(2)(i).
    \67\ Paragraph (b)(1) of Rule 17i-7 establishes 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 Sec.  
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 Sec.  17 
CFR 240.15c3-1e(d)(1)(iii)(C).
---------------------------------------------------------------------------

    Paragraph (b)(1) of new Rule 17i-7 requires that each VaR model 
used to calculate allowance for market risk meet the qualitative and 
quantitative requirements set forth in rules the Commission is also 
adopting today in a separate release, Rule 15c3-1e(d).\68\ The 
qualitative and quantitative standards set forth in Rule 15c3-1e(d) are 
similar to the requirements for models used by OTC derivatives dealers 
and are consistent with the Basel Standards. The qualitative 
requirements address four aspects of an SIBHC's risk management system: 
(i) The model must be integrated into, and thus relied upon, in the 
SIBHC's daily risk management process; (ii) the model must undergo 
periodic reviews by the SIBHC's internal audit staff and annual reviews 
by an accountant; (iii) the SIBHC must conduct backtesting of the 
model, the results of which must be used by the SIBHC to determine the 
multiplication factor to be used when calculating market and credit 
risk, and (iv) for purposes of incorporating specific risk into a VaR 
model, a firm must demonstrate that it has methodologies in place to 
capture liquidity, event, and default risk adequately for each 
position.\69\ The quantitative requirements set forth basic standards 
for each model including, (i) for purposes of determining market risk, 
the model must use a 99 percent, one-tailed confidence level, with 
price changes equivalent to a ten business-day movement in rates and 
prices, (ii) the model must use an effective historical observation 
period of at least one year, and the firm must consider the effects of 
market stress when constructing the model, and historical data sets 
must be updated at least monthly and re-assessed whenever market prices 
or volatilities change significantly, and (iii) the model must take 
into account and incorporate all significant identifiable market risk 
factors applicable to the affiliate group's positions.
---------------------------------------------------------------------------

    \68\ See supra, note 61. Where Rule 17i-7 cross-references or 
incorporates requirements set forth in Sec.  240.15c3-1e, the SIBHC 
must comply with those provisions as though it were a broker-dealer.
    \69\ See supra, note 61. Specifically, see Sec.  17 CFR 
240.15c3-1e(d)(1).
---------------------------------------------------------------------------

    The Commission received no comments regarding the requirement that 
an SIBHC calculate an allowance for market risk as set forth in 
paragraph (b) of proposed Rule 17i-7.
    As proposed, Rule 17i-7 would have required that an SIBHC compute 
an allowance for market risk daily. Firms argued that an SIBHC should 
not be required to calculate allowance for market risk daily because of 
the burden this would impose on firms and because the information only 
must be reported to the Commission monthly. The rule, as adopted, no 
longer requires that an SIBHC compute an allowance for market risk 
daily. Further, as adopted, under Rule 17i-5, an SIBHC must make and 
keep current a record of monthly computations of allowable capital and 
allowances for market, credit, and operational risk. We also note that, 
under Rule 17i-6, an SIBHC must report a consolidated allowance for 
market risk to the Commission monthly. As part of the qualitative and 
quantitative requirements for the use of models, an SIBHC must compute 
VaR on its positions on a daily basis as part of its daily risk 
management process. These changes are consistent with the CSE Release.
3. Calculation of Consolidated Allowance for Credit Risk
    Paragraph (c) of new Rule 17i-7 requires that an SIBHC compute a 
consolidated allowance for credit risk using either the methodology set 
forth in paragraph (c)(1) of Rule 17i-7, which is similar to the 
proposed New Basel Capital Accord, or, pursuant to paragraph (c)(2) of 
Rule 17i-7 (if the Commission approves the SIBHC's request), a 
calculation consistent with the present Basel Standards. This choice 
provides SIBHCs with flexibility while the Basel Standards are under 
review.
    As proposed, Rule 17i-7 would have required that an SIBHC compute 
an allowance for credit risk daily. In response to comments made by 
firms, the rule no longer requires that an SIBHC compute an allowance 
for credit risk daily. Pursuant to Rule 17i-5, as adopted, an SIBHC 
must make and keep current a record of monthly computations of its 
allowance for credit risk. In addition, an SIBHC must calculate its 
current exposures on a daily basis as part of its internal risk 
management control system.
    The methodology an SIBHC must use to compute its allowance for 
credit risk, as set forth in paragraph (c)(1) of new Rule 17i-7, 
requires 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%.\70\ 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, stock loans, stock borrows, structured financial products, 
credit substitutes, and other extensions of credit.
---------------------------------------------------------------------------

    \70\ 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.

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[[Page 34483]]

    The credit equivalent amount of receivables relating to derivatives 
contracts, repurchase and reverse repurchase agreements, stock loans, 
stock borrows, and other similar collateralized instruments is the sum 
of the SIBHC's maximum potential exposure to a counterparty, multiplied 
by the appropriate multiplication factor, plus the SIBHC's current 
exposure to that counterparty. The Commission believes that calculating 
an allowance for credit risk using a maximum potential exposure 
computed using a VaR model is a more precise method than using a 
``notional add-on'' to approximate maximum potential exposure.\71\ In 
addition, Commission reviews of risk management systems of large U.S. 
broker-dealers indicate that these firms generally use maximum 
potential exposure to measure and manage the credit risk of their 
portfolios. Consequently, many of these firms already have systems in 
place to calculate maximum potential exposure using VaR models.
---------------------------------------------------------------------------

    \71\ See supra, note 61.
---------------------------------------------------------------------------

    ISDA, in its comment letter, indicated that it strongly supported 
the Commission's proposal to allow firms to calculate current exposure 
and maximum potential exposure at the counterparty (as opposed to the 
transactional) level, recognizing the effect of netting arrangements, 
taking account of collateral posted by the counterparty, and 
recognizing the protection value of credit derivatives. ISDA also 
indicated that it believes that OTC derivatives and securities 
financing transactions (such as repurchase agreements) often exhibit 
similar counterparty risk characteristics and should receive uniform 
treatment, and that Proposed Rule 17i-7 does provide for uniform 
treatment of these types of instruments.
i. Credit Equivalent Amount
    Consistent with the proposed New Basel Capital Accord, Paragraph 
(c)(1)(i) of new Rule 17i-7 establishes 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) Loans and loan commitments receivable; (ii) derivatives contracts, 
repurchase agreements, reverse repurchase agreements, stock loans, 
stock borrows, and other similar collateralized transactions; and (iii) 
other assets would be calculated differently, and are set forth in 
paragraphs (c)(1)(i)(A), (B), and (C) of new Rule 17i-7, respectively.
    As proposed, paragraph (c)(1)(i)(B)(2) of Rule 17i-7 would have 
included a 5% credit conversion factor for margin loans. Bear Stearns, 
in its comment letter, argued that its experience with margin loans 
suggested that such a level is unjustifiably high. Bear Stearns stated 
that the requirements of Regulation T and New York Stock Exchange Rule 
431, combined with strict operational controls, substantially minimize 
risk of loss. Thus, Bear Stearns recommended that firms be allowed to 
adopt a portfolio-specific risk-based methodology, consistent with the 
proposed New Basel Capital Accord, for determining the appropriate 
amount of capital related to margin lending regardless of whether the 
loan is held at a broker-dealer or a non-broker-dealer affiliate.
    After considering these comments, we have determined that it is 
appropriate to delete proposed paragraph (c)(1)(i)(B)(2). Consistent 
with the Basel Standards, an SIBHC may apply to use the VaR-based 
exposure treatment under paragraph (c)(1)(i)(B) for its margin loans as 
a ``similar collateralized transaction.'' For unrated counterparties, 
the Commission could determine, after a review of the description of 
the margin loans in the SIBHC's Notice of Intention, that the margin 
loans could be treated as a pool with a very low loss history. In this 
case, the SIBHC could use internal estimates of exposure at default 
that take into account the loss history for the pool.
ii. Current Exposure
    We have revised the definition of current exposure as set forth in 
paragraph (c)(1)(i)(D) of new Rule 17i-7. The rule, as adopted, defines 
the term ``current exposure'' to be the current replacement value of 
the counterparty's positions, including the effect of netting 
agreements with that counterparty,\72\ and taking into account the 
value of collateral from that counterparty.\73\ As adopted, Rule 17i-7 
no longer requires that the SIBHC subtract the fair market value of any 
credit derivatives that specifically change the exposure to the 
counterparty.\74\ Instead, pursuant to paragraph (c)(1)(iii), an SIBHC 
may include in its Notice of Intention (or in an amendment thereto) a 
proposal for use of credit derivatives in its calculation of allowance 
for credit risk.\75\ Requiring subtraction of the fair market value of 
credit derivatives could reduce the allowance for credit risk without 
consideration of the SIBHC's credit risk exposure to the credit 
derivative counterparty. The Commission will be able to consider that 
exposure in its review of an SIBHC's Notice of Intention (or an 
amendment thereto).
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    \72\ Only netting agreements that meet the requirements set 
forth in paragraph (c)(4)(iv) of Rule 15c3-1e could be used to 
reduce current or maximum potential exposures. See supra, note 61. 
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.
    \73\ Only collateral that meets the requirements set forth in 
paragraph (c)(4)(v) of Rule 15c3-1e could be used to reduce current 
or maximum potential exposures. See supra, note 61. Generally, the 
SIBHC can take into account the fair market value of collateral 
pledged and held, provided (i) the collateral is marked to market 
each day and is subject to a daily margin maintenance requirement; 
(ii) the collateral is subject to the firm's physical possession or 
control; (iii) the collateral is liquid and transferable; (iv) the 
collateral may be liquidated promptly by the firm without 
intervention by another party; (v) the collateral agreement is 
legally enforceable by the SIBHC against the counterparty and any 
other parties to the agreement; (vi) the collateral does not consist 
of securities issued by the counterparty or a party related to the 
SIBHC or to the counterparty; (vii) the Commission has approved the 
SIBHC's use of a VaR model to calculate its allowance for market 
risk for the type of collateral during its review of the SIBHC's 
Notice of Intention, and (viii) the collateral is not used in 
determining the credit rating of the counterparty.
    \74\ These changes are consistent with the CSE release.
    \75\ The credit derivative must 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, 
and (iii) is not held for market timing purposes.
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iii. Maximum Potential Exposure
    We have revised the definition of maximum potential exposure as set 
forth in paragraph (c)(1)(i)(E) of new Rule 17i-7. The rule, as 
adopted, defines the term ``maximum potential exposure'' to be the VaR 
of the counterparty's positions, after applying the effect of netting 
agreements with that counterparty,\76\ and taking into account the 
value of collateral from that counterparty and the current replacement 
value of the counterparty's positions.\77\ Paragraph (c)(1)(i)(E) of 
new Rule 17i-7 also states that maximum potential exposure must be 
calculated using a VaR model that meets the same qualitative and 
quantitative standards as required for models used to compute the 
allowance for market risk.\78\ Similar to

[[Page 34484]]

the changes made to the definition of current exposure, paragraph 
(c)(1)(i)(E) no longer requires that an SIBHC subtract the fair market 
value of any credit derivatives that specifically change the exposure 
to the counterparty because requiring subtraction of the fair market 
value of credit derivatives could reduce the allowance for credit risk 
without consideration of the SIBHC's credit risk exposure to the credit 
derivative counterparty. As was stated above, pursuant to paragraph 
(c)(1)(iii), an SIBHC may propose to use credit derivatives in its 
calculation of allowance for credit risk in its Notice of Intention (or 
in an amendment thereto).
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    \76\ See supra, note 72.
    \77\ See supra, note 73.
    \78\ 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, with price changes 
equivalent to a movement in rates and prices of not less than five-
days for repurchase agreements, reverse repurchase agreements, stock 
lending and borrowing, and similar collateralized transactions (See 
paragraph (c)(1)(i)(E) of Rule 17i-7) and to a movement in rates and 
prices of one-year for other positions (See Sec.  17 CFR 240.15c3-
1e(d)(2)(ii)) (as opposed to a ten business-day movement for VaR 
models used to calculate the allowance for market risk (See Sec.  17 
CFR 240.15c3-1e(d)(2)(i)). The proposal would have required that the 
maximum potential exposure for repurchase agreements, reverse 
repurchase agreements, stock lending and borrowing, and similar 
collateralized transactions be calculated using a time horizon of 
``five days,'' as opposed to ``not less than five days.'' This 
revision clarifies that the time horizon is a minimum period, not an 
absolute period.
---------------------------------------------------------------------------

    Bear Stearns, in its comment letter, suggested that the time 
horizon for VaR models used for purposes of determining maximum 
potential exposure should be ten business days if the position is 
marked to market daily and a written agreement enforceable against the 
counterparty provides that the broker-dealer or its affiliate may call 
for additional collateral daily. Paragraph (e)(2)(ii) of proposed Sec.  
240.15c3-1e, proposed for comment in the CSE Proposing Release,\79\ 
would have required the VaR model to use a time horizon of one year. In 
response to comments received, including Bear Stearns' comment, 
paragraph (d)(2)(ii) of Sec.  240.15c3-1e \80\ as adopted allows a firm 
to use a shorter time horizon to calculate MPE under specified 
conditions. More specifically, the Commission may approve a shorter 
time horizon, if there is a valid collateral agreement, based on a 
demonstration by the firm that it has sufficient systems and controls, 
including those necessary to mark positions to market daily and 
promptly call for and track collateral posted, and promptly liquidate 
positions as may be necessary to avoid loss by the firm. This 
modification of the time horizon requirement should help a firm to 
maintain a liquid capital basis while promoting operational efficiency.
---------------------------------------------------------------------------

    \79\ Paragraph (e)(2)(ii) of proposed Sec.  240.15c3-1e has been 
re-designated as paragraph (d)(2)(ii) of that section, as adopted. 
See supra, note 61.
    \80\ Id.
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iv. Credit Risk Weights
    Paragraph (c)(1)(ii) of new Rule 17i-7 provides that credit risk 
weights must generally be determined according to the standards 
published by the Basel Committee, as modified from time to time.\81\ In 
its Notice of Intention or an amendment to its Notice of Intention, an 
SIBHC may propose to use internal credit ratings or internal 
calculations when computing its allowance for credit risk.\82\ In 
addition, paragraph (c)(1)(ii)(B) of new Rule 17i-7 allows SIBHCs to 
adjust credit risk weights of receivables covered by certain forms of 
credit protection.\83\ As adopted, Rule 17i-7 would allow an SIBHC to 
adjust credit risk weights of receivables covered by certain 
derivatives (such as credit default swaps and similar instruments used 
to manage credit risk) if the SIBHC has requested, in its Notice of 
Intention of an amendment thereto, to use these derivatives to adjust 
credit risk weights. Allowing an SIBHC to adjust credit risk weights of 
receivables covered by certain credit derivatives could have reduced 
credit risk weights without consideration of the SIBHC's credit 
exposure to the credit derivative counterparty. Thus, we decided only 
to permit this adjustment of credit risk weights where we have had a 
chance to consider that exposure.
---------------------------------------------------------------------------

    \81\ See paragraph (c)(1)(ii)(A) of new Rule 17i-7.
    \82\ See generally paragraph (b)(4)(x) of new Rule 17i-2.
    \83\ The guarantee must 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 
immediate payment after any payment is missed without having to make 
collection efforts. Further, the guarantee must 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 
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.
---------------------------------------------------------------------------

4. Calculation of Consolidated Allowance for Operational Risk
    Pursuant to new Rule 17i-7(d), an SIBHC must calculate an allowance 
for operational risk in accordance with the 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 (iii) the advanced 
measurement approach. For a complete discussion of the proposed 
operational risk calculation, please refer to the proposed New Basel 
Capital Accord.\84\ The basic and standardized approach calculations 
are based on fixed percentages. Generally, 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.
---------------------------------------------------------------------------

    \84\ See supra, note 8.
---------------------------------------------------------------------------

    One commenter stated that, as currently structured, there is a 
perverse incentive built into the standardized approach for computing 
operational risk in that firms built around business lines with a beta 
factor of 18% (e.g., corporate finance, trading and sales, and payments 
and settlements) end up with a higher capital charge than if they were 
to remain on the basic indicator approach. Thus, the commenter argued 
that this structural defect should be removed.
    We are adopting paragraph (d) of Rule 17i-7 as it was proposed. The 
rules are intended to provide SIBHCs with flexibility by permitting the 
computation of operational risk in accordance with the Basel Standards. 
We recognize, however, that the proposed New Basel Capital Accord has 
not been adopted in its final form and that we may need to further 
tailor our operational risk requirements. If, in finalizing the New 
Basel Capital Accord, the Basel Committee changes the operational risk 
computations or charges, we will review and consider amending this 
Rule.
5. General Discussion of Basel Pillars
    These amendments apply a capital reporting requirement consistent 
with the Basel Standards to an SIBHC. The Basel Committee is currently 
developing the proposed New Basel Capital Accord that 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

[[Page 34485]]

assessed relative to overall risks and that supervisors review and take 
action in response to those assessments.
    The third pillar of the proposed New Basel Capital Accord requires 
certain disclosures that are intended to allow market participants to 
assess key pieces of information about, 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. Specific disclosure requirements would apply to all 
institutions that use the proposed New Basel Capital Accord and would 
encompass capital, credit risk, credit risk mitigation, securitization, 
market risk, operational risk, and interest rate risk.
    We requested comment on whether U.S. broker-dealers and their 
holding companies and affiliates should be required to make additional 
disclosures to meet the requirements of the third pillar of the 
proposed New Basel Capital Accord. No comments were received in 
response to the request made in the Proposing Release.
    The securities industry has taken important steps to enhance public 
disclosure of material risks. For example, in June 1999, the 
Counterparty Risk Management Policy Group (CRMPG) (representing 12 
major securities firms and banks) published a report on Improving 
Counterparty Risk Management Practices.\85\ In addition, a private-
sector Working Group on Public Disclosure (representing 11 major 
securities firms and banks), issued a report in January 2001.\86\ The 
group recommended enhanced and more frequent public disclosure of 
financial information by banking and securities organizations. It also 
said financial information should be disclosed based on a firm's 
internal methodologies and exposure categories, and that quantitative 
information on a firm's risk exposure should be balanced with 
qualitative information describing its risk management process.
---------------------------------------------------------------------------

    \85\ CRMPG was formed in January 1999, after the near collapse 
of Long-Term Capital Management. The group's mission was to 
redevelop standards for strengthening risk management practices at 
banks, securities firms and other dealers to avoid similar 
difficulties in the future. Its findings were publicly released on 
June 21, 1999, and are presently available at: http://financialservices.house.gov/banking/62499crm.pdf. A hearing was held 
on June 24, 1999, regarding the group's findings and 
recommendations, before the U.S. House of Representatives, 
Subcommittee on Capital Markets, Securities and Government Sponsored 
Enterprises, Committee on Banking and Financial Services. A 
transcript of the hearing, at which the CRMPG chairs gave testimony, 
is presently available at: http://commdocs.house.gov/committees/bank/hba57791.000/hba57791_0f.htm.
    \86\ Walter V. Shipley, retired chairman of Chase Manhattan 
Bank, chaired the working group. His letter to the Board of 
Governor's of the Federal Reserve System, summarizing the group's 
findings, is presently available at: http://www.federalreserve.gov/boarddocs/press/general/2001/20010111/DisclosureGroupLetter.pdf 
(Jan. 11, 2001).
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    The Commission staff has taken a leading role to enhance public 
disclosure by financial intermediaries. It was a member of the 
Multidisciplinary Working Group on Enhanced Disclosure (Fisher II 
working group) that provided advice to its sponsoring organizations 
\87\ on steps that would advance the state of financial institutions' 
disclosures of financial risks in order to enhance the role of market 
discipline. More recently, Commission staff chaired a Joint Forum \88\ 
Working Group on Enhanced Disclosure (JFWGED) established by the Basel 
Committee, IAIS and IOSCO, seeking to follow up on the recommendations 
contained in the Fisher II report.\89\ The JFWGED expects to publish 
its report shortly.
---------------------------------------------------------------------------

    \87\ The Basel Committee, the Committee on the Global Financial 
System of the G-10 central banks (CGFS), the International 
Association of Insurance Supervisors (IAIS) and the International 
Organisation of Securities Commissions (IOSCO).
    \88\ The Joint Forum was established in 1996 under the aegis of 
the BCBS, IOSCO and the IAIS to deal with issues common to the 
banking, securities and insurance sectors.
    \89\ Final Report of the Multidisciplinary Working Group on 
Enhanced Disclosure (April 26, 2001). The report is presently 
available at: http://www.bis.org/publ/joint01.pdf.
---------------------------------------------------------------------------

    However, some issues remain. For instance, broker-dealers are 
concerned that under new, enhanced disclosure requirements they may be 
required to disclose sensitive, proprietary information. As the 
proposed New Basel Capital Accord has not yet been finalized, we do not 
believe it would be appropriate to adopt additional disclosure 
requirements as part of these amendments.
I. Rule 17i-8: Notification Requirements for SIBHCs
    Paragraph (a) of new Rule 17i-8 requires that an SIBHC immediately 
notify the Commission upon the occurrence of certain events. These 
events include: (i) The occurrence of certain backtesting exceptions; 
(ii) the early warning indications of low capital as the Commission may 
agree; (iii) a material 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 a 
material affiliate or the credit rating assigned to one or more 
outstanding short or long-term obligations of a material affiliate; (v) 
the SIBHC files a Form 8-K with the Commission; (vi) the SIBHC becomes 
aware that a financial regulatory agency or self-regulatory 
organization has taken certain regulatory actions against a material 
affiliate; or (vii) 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).\90\ We believe that the events described in items 
(i) through (vi) above would indicate a decline in the financial and 
operational well-being of the firm. Were an SIBHC to file a 
notification regarding these events, as required by new Rule 17i-8, the 
Commission may be prompted to request additional reports, as 
contemplated by Rule 17i-6(c), and otherwise begin to monitor the 
SIBHC's condition more closely. Were an SIBHC to file a notification 
regarding the event described in item (vii) above, the Commission would 
review whether it should continue supervising the IBHC as an SIBHC.
---------------------------------------------------------------------------

    \90\ See paragraph (a) of Rule 17i-8.
---------------------------------------------------------------------------

    The Commission received no comments regarding proposed Rule 17i-8.
    As proposed, paragraph (a) of Rule 17i-8 did not include a 
requirement to notify the Commission when the supervised investment 
bank holding company or any material affiliate files a Form 8-K with 
the Commission. The Commission requested comment on the proposed 
notification requirement, and in particular whether the events that 
would trigger the notification requirement are appropriate and whether 
other triggering events should be included. The Commission has given 
additional consideration to the questions raised in its request for 
comment and has determined that filing a Form 8-K may indicate that a 
major change has occurred at the SIBHC or material affiliate, and that 
the Commission may want to monitor the SIBHC more closely to determine, 
for instance, that internal risk management controls remain robust 
despite that change.
    As proposed, paragraph (b) of Rule 17i-8 would have required that 
an SIBHC file a written report with the Commission if there was 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. Paragraph (b) no longer requires that an SIBHC 
notify the

[[Page 34486]]

Commission of changes to mathematical models and changes in 
organizational control because an SIBHC must amend its Notice of 
Intention if it changes a mathematical model pursuant to new Rule 17i-
2(c)(2), and must file organizational charts with the Commission 
annually (or quarterly if there has been a material change) pursuant to 
new Rule 17i-6(b).\91\ Thus, we eliminated the notification requirement 
of proposed paragraph (b) of Rule 17i-8, because the information was 
duplicative of information already required to be filed with the 
Commission.
---------------------------------------------------------------------------

    \91\ See paragraph (a)(5) of new Rule 17i-8. In addition, Form 
8-K requires that a firm file form 8-K when it experiences a change 
of control, and SIBHCs must now inform the Division of Market 
Regulation when it files a Form 8-K pursuant to paragraph (a)(5) of 
new Rule 17i-8.
---------------------------------------------------------------------------

    Paragraph (c) of new Rule 17i-8 specifies the manner in which these 
notices and reports should be provided to the Commission. In addition, 
paragraph (c) specifies that the notices and reports filed with the 
Commission pursuant to Rule 17i-8 will be accorded confidential 
treatment.\92\ We believe it is important to accord confidential 
treatment to the notices and reports an SIBHC must provide pursuant to 
new Rule 17i-8 because the information contained in those notices and 
reports will generally be highly sensitive, non-public business 
information.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78q(j). See supra, note 24.
---------------------------------------------------------------------------

    Paragraph (d) of new Rule 17i-8 allows the Commission to grant 
extensions or exemptions from the notification provisions at the 
request of the SIBHC, or on its own motion. This paragraph will provide 
the Commission with flexibility to address firm-specific issues as they 
arise.
    We believe the requirements set forth in new 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 promulgated thereunder.

V. Amendment to Rule 30-3

    The Commission has adopted amendments to Rule 30-3 of its Rules of 
Organization and Program Management governing delegations of authority 
to the Director of the Division of Market Regulation 
(``Director'').\93\ The amendments delegate to the Director the 
authority to: (1) Review amendments to a supervised investment bank 
holding company's Notice of Intention required by paragraph (c)(2) of 
Rule 17i-2 (17 CFR 240.17i-2(c)(2)), and to approve such amendments 
pursuant to paragraph (d)(2)(ii) of Rule 17i-2 (17 CFR 240.17i-
2(d)(2)(ii)) after reviewing the amended notice of intention to 
determine whether the amendment is necessary or appropriate in 
furtherance of the purposes of section 17 of the Act (15 U.S.C. 78q); 
(2) to consider requests by supervised investment bank holding 
companies for exemptions from the requirement, and extensions of time 
within which, to file reports required by Rule 17i-6 (17 CFR 240.17i-
6), and to grant or deny such requests pursuant to paragraph (f) of 
that Rule (17 CFR 240.17i-6(f)); and (3) to consider requests by 
supervised investment bank holding companies for exemptions from the 
requirement, and extensions of time within which, to file notices 
required by Rule 17i-8 (17 CFR 240.17i-8), and to grant or deny such 
requests pursuant to paragraph (d) of that Rule (17 CFR 240.17i-8(d)).
---------------------------------------------------------------------------

    \93\ 17 CFR 200.30-3.
---------------------------------------------------------------------------

    The Commission is delegating to the Director the authority to 
approve amendments to SIBHCs' Notices of Intention regarding changes to 
mathematical models used to calculate allowances for market or credit 
risk, or to the SIBHC's internal risk management control system after 
reviewing the amended notice of intention to determine whether the 
amendment is necessary or appropriate in furtherance of the purposes of 
section 17 of the Act (15 U.S.C. 78q). The Commission is delegating to 
the Director its authority for the limited purposes described above.
    These delegations of authority to the Director are intended to 
conserve Commission resources by permitting the staff to review and to 
issue orders regarding amendments to an SIBHC's Notice of Intention 
pursuant to new Rule 17i-2, and consider and grant SIBHCs' requests for 
exemptions from, and extensions of time within which to file, reports 
required by new Rule 17i-6 and notices required to be filed by new Rule 
17i-8. The Commission anticipates that the delegation of authority will 
facilitate effective review. Nevertheless, the staff may submit matters 
to the Commission for consideration as it deems appropriate.\94\
---------------------------------------------------------------------------

    \94\ 17 CFR 200.30-3(e).
---------------------------------------------------------------------------

    The Commission finds, in accordance with the Administrative 
Procedure Act, 5 U.S.C. 553(b)(3)(A), that this amendment to Rule 30-3 
relates solely to agency organization, procedure, or practice. 
Accordingly, notice and opportunity for public comment, as well as 
publication 30 days before its effective date are unnecessary.

VI. Paperwork Reduction Act

    Certain provisions of 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.\95\ Consequently, the Commission submitted the 
proposed new rules and rule amendments to the Office of Management and 
Budget (``OMB'') in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The titles for the collections of information are (i) Rules 
17h-1T and 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. OMB 
approved these collections of information and assigned them OMB Control 
Nos. 3235-0410, 3235-0592, 3235-0593, 3235-0594, 3235-0590, 3235-0588, 
and 3235-0591, respectively. An agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \95\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    In the Proposing Release,\96\ the Commission solicited comment on 
these ``collection of information'' requirements. The Commission 
received no comments that specifically addressed the Paperwork 
Reduction Act portion of the Proposing Release. Because Rules 17i-1 
through 17i-8 and the amendments to Rules 17h1-T and 17h-2T, as 
adopted, are substantially similar to those proposed, the SEC continues 
to believe that the estimates published in the Proposing Release 
regarding the proposed collection of information burdens associated 
with new Rules 17i-1 through 17i-8 and the amendments to Rules 17h1-T 
and 17h-2T are appropriate. However, we have decreased our estimate of 
the number of

[[Page 34487]]

respondents because we expect fewer IBHC's to file Notices of Intention 
to be supervised as SIBHCs than originally estimated in light of the 
limited interest that has been expressed with regard to SIBHC 
supervision.
---------------------------------------------------------------------------

    \96\ See supra, note 6 and accompanying text.
---------------------------------------------------------------------------

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

    New Rules 17i-2 through 17i-8 create a framework for Commission 
supervision of SIBHCs. The collections of information included in these 
rules are necessary to allow the Commission to (1) effectively 
determine whether SIBHC supervision is necessary or appropriate in 
furtherance of the purposes of Sec.  17 of the Act and (2) supervise 
the activities of these SIBHCs. These rules also 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 are not required to be 
supervised in this manner. This framework includes procedures through 
which an IBHC may 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 \97\ exempt broker-
dealers that are affiliated with an SIBHC from those rules and thus 
reduce their ``collection of information'' requirements. This exemption 
was designed to eliminate duplicative recordkeeping and reporting 
requirements.
---------------------------------------------------------------------------

    \97\ See supra, note 56.
---------------------------------------------------------------------------

B. Proposed Use of Information

    The Commission intends to use the information collected under the 
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, these rules 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 is eligible 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.\98\ Pursuant to 
paragraph (d)(2)(i)(B) of Rule 17i-2, the Commission would not consider 
it to be necessary or appropriate to supervise an IBHC unless the IBHC 
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).
---------------------------------------------------------------------------

    \98\ Federal Reserve Act Sec.  25A [12 U.S.C. 611].
---------------------------------------------------------------------------

    As of September 30, 2003, approximately 115 registered broker-
dealers reported their tentative net capital as being between $100 
million and $1 billion.\99\ Many of these broker-dealers are affiliated 
with another broker-dealer that reported its tentative net capital as 
being more than $100 million. Of these 115 registered broker-dealers, 
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,\100\ (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.\101\ 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, for PRA and cost-benefit analysis purposes, 
that three IBHCs will file notices of intent to be supervised by the 
Commission as SIBHCs.
---------------------------------------------------------------------------

    \99\ This conclusion is based on the September 30, 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, 
we have adopted new 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 to elect to be 
supervised as a consolidated supervised entity in the CSE Release 
(see supra, note 61). The supervisory framework provided by those 
new rules and rule amendments would allow the broker-dealers of 
those entities to calculate market and credit risk capital charges 
using mathematical modeling techniques. We believe firms that apply 
for the CSE regulatory regime will do so and will not elect to be 
supervised pursuant to these new rules for SIBHC election.
    \100\ See Exchange Act Sec.  17(i)(1)(A)(i) [15 U.S.C. 
78q(i)(1)(A)(i)].
    \101\ Federal Reserve Act Sec.  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 \102\ 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 three 
firms therefore would have their annual burden reduced by an aggregate 
of 72 hours per year.
---------------------------------------------------------------------------

    \102\ See supra, note 56.
---------------------------------------------------------------------------

2. Rule 17i-2
    New Rule 17i-2 requires that an IBHC file a Notice of Intention if 
it wants to become supervised by the Commission as an SIBHC. The Notice 
of Intention must set forth certain information and include a number of 
documents. In addition, an SIBHC must submit amendments to its Notice 
of Intention if certain information becomes incorrect or if it makes 
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 imposed by this 
Rule.
    As stated previously in section VI.C., we estimate that 
approximately three 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 will 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

[[Page 34488]]

the Commission staff. Further, we believe that an IBHC will have an 
attorney review its Notice of Intention, and we estimate that it will 
take the attorney approximately 100 hours to complete such a review. 
Consequently, we estimate the total burden for all three firms to be 
approximately 3,000 hours.\103\ We believe this will be a one-time 
burden.
---------------------------------------------------------------------------

    \103\ We calculated this amount as follows: (900 hours + 100 
hours) x 3 IBHCs/SIBHCs = 3,000 hours.
---------------------------------------------------------------------------

    Rule 17i-2 also requires that an IBHC/SIBHC \104\ amend its Notice 
of Intention on an ongoing basis. We estimate that an IBHC/SIBHC will 
take approximately 2 hours each month to update or amend its Notice of 
Intention, as necessary. Thus, we estimate that it will take the three 
IBHC/SIBHCs, in the aggregate, about 72 hours each year \105\ to update 
or amend their Notices of Intention.
---------------------------------------------------------------------------

    \104\ 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 amend 
its Notice of Intention if it makes a material change to a 
mathematical model or other method used to calculate its risk 
allowances pursuant to Rule 17i-7 or its internal risk management 
control system after a Commission determination was made.
    \105\ We calculated this amount as follows: (2 hours x 12 months 
each year) x 3 SIBHCs = 72.
---------------------------------------------------------------------------

3. Rule 17i-3
    Rule 17i-3 provides a method by which an SIBHC may withdraw from 
Commission supervision as an SIBHC. An SIBHC that wishes to withdraw 
from Commission supervision may do so by filing a notice of withdrawal 
with the Commission.
    Due to the benefits and costs associated with becoming supervised 
by the Commission as an SIBHC, we believe that an IBHC will carefully 
consider whether to file a notice of withdrawal. We estimate that one 
SIBHC may wish to withdraw from Commission supervision as an SIBHC over 
a ten-year period.
    We estimate that, for an SIBHC that intends to withdraw from 
Commission supervision as an SIBHC, it would take one attorney 
approximately 24 hours to draft a withdrawal notice and submit it to 
the Commission. Further, we believe the SIBHC will have a senior 
attorney or executive officer review the notice of withdrawal before 
submitting it to the Commission, and that it will 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 
will be approximately 3.2 hours each year.\106\
---------------------------------------------------------------------------

    \106\ We calculated this amount as follows: (1 SIBHC/every 10 
years) x (24 hours to draft + 8 hours to review) = 3.2 hours.
---------------------------------------------------------------------------

4. Rule 17i-4
    Rule 17i-4 requires that an SIBHC have in place an internal risk 
management control system appropriate for its business and 
organization. An SIBHC must 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 adequately address the risks 
posed by the firm's business and the environment in which it is being 
conducted. In addition, these requirements enable an SIBHC to implement 
specific policies and procedures unique to its circumstances.
    Rule 17i-4 also requires 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 must document 
and record its system of internal risk management controls. In 
particular, an SIBHC must document its consideration of certain issues 
affecting its business when designing its internal controls. An SIBHC 
also must prepare and maintain written guidelines that discuss its 
internal control system.
    The information to be collected under Rule 17i-4 is essential to 
the supervision of SIBHCs and their compliance with the Commission's 
Rules. More specifically, the requirement that an SIBHC document the 
planning, implementation, and periodic review of its risk management 
controls is designed to ensure 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 VI.C., we estimate that 
approximately three 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 will spend assessing its present 
structure, businesses, and controls, and establishing and documenting 
its risk management control system will be about 3,600 hours, and that 
this would be a one-time burden. In addition, we estimate that an SIBHC 
will spend approximately 250 hours each year maintaining its internal 
risk management control system. Thus, we estimate that the total 
initial burden for all SIBHCs will be approximately 10,800 hours \107\ 
and the continuing annual burden would be about 750 hours.\108\
---------------------------------------------------------------------------

    \107\ We calculated this amount as follows: (3,600 hours x 3 
SIBHCs) = 10,800 hours.
    \108\ We calculated this amount as follows: (250 hours per year 
x 3 SIBHCs) = 750 hours per year.
---------------------------------------------------------------------------

    Internationally active firms generally already have in place risk 
management practices, and generally will review and improve their risk 
management practices notwithstanding the requirements of 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 Rule 
17i-4. In addition, firms may not have documented their consideration 
of these elements and issues, or other aspects of their internal risk 
management control systems, as the Rule requires.
5. Rule 17i-5
    Pursuant to Rule 17i-5, an SIBHC must make and keep current certain 
records relating to its business. In addition, it must 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 burden under the Rule would 
be minimal because the information that is required under the 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 Rule 17i-5, an SIBHC must 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 will 
spend to create a record regarding stress tests is about 64 hours each 
quarter, or approximately 256 hours each year. We further estimate that 
the average amount of time an SIBHC will spend to create and document a 
contingency plan

[[Page 34489]]

regarding funding and liquidity of the affiliate group (which we 
believe an SIBHC will do only once, not on an ongoing basis) will be 
about 40 hours. In addition, we estimate that the average amount of 
time an SIBHC will spend to create a record regarding the basis for 
credit risk weights will be about 30 minutes for each counterparty, and 
that on average, an SIBHC will establish approximately 20 new 
counterparty arrangements each year.\109\
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    \109\ 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.
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    In addition, requirements that were located in other proposed rules 
were moved into new Rule 17i-5. Specifically, Rule 17i-5 now also 
requires that an SIBHC make and keep records of the calculations of 
allowable capital and allowances for market, credit, and operational 
risk. An SIBHC will make a record of its calculations of allowable 
capital, and allowances for market, credit, and operational risk when 
performing the calculation in compliance with new Rule 17i-7 to comply 
with the monthly reporting requirements contained in new Rule 17i-6. 
Thus, SIBHCs should not incur any additional burden relative to this 
paragraph.
    Pursuant to Rule 17i-5, an SIBHC must 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.
    As stated previously in section VI.C., we estimate that 
approximately three IBHCs will file Notices of Intention to be 
supervised by the Commission as SIBHCs. Thus, the total initial burden 
relating to new Rule 17i-5 for all SIBHCs would be approximately 120 
hours \110\ and the continuing annual burden would be approximately 870 
hours.\111\
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    \110\ We calculated this amount as follows: (40 hours to create 
and document a contingency plan regarding funding and liquidity of 
the affiliate group) x 3 SIBHCs = 120 hours.
    \111\ We calculated this amount as follows: ((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 3 SIBHCs 
= 870 hours.
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6. Rule 17i-6
    Rule 17i-6 requires 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 may 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 VI.C., we anticipate that the Rule 
would affect approximately three SIBHCs. We estimate that, on average, 
it will 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).\112\ We estimate that, on average, it will take an SIBHC about 
16 hours each quarter (or 64 hours each year) \113\ to prepare and file 
the quarterly reports required by this rule. We estimate that, on 
average, it will 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 Rule 17i-6 on all SIBHCs will be approximately 
1,080 hours.\114\ However, 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 Rule 17i-6; 
therefore, the burdens may be significantly lower.
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    \112\ We calculated this amount as follows: (8 hours x 12 months 
in a year) = 96 hours/year.
    \113\ We calculated this amount as follows: (16 hours x 4 
quarters in a year) = 64 hours/year.
    \114\ We calculated this amount as follows: (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 3 SIBHCs = 1,080 hours.
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7. Rule 17i-8
    Rule 17i-8 requires SIBHCs to report on the occurrence of certain 
events that may have a material adverse affect on the SIBHC. This 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, 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, 
and is integral to the Commission's 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 
Rule 17i-8. We estimate that of the approximately three IBHCs that we 
believe will register to be supervised as SIBHCs, one may be required 
to file notice pursuant to Rule every four years. Thus, we estimate 
that the annual burden of Rule 17i-8 for all SIBHCs will be about 15 
minutes.

E. Collection of Information Is Mandatory

    The collection of information requirements in new Rules 17i-2 
through 17i-8 are 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 new Rules 17i-2 through 17i-8 will be accorded confidential 
treatment to the extent permitted by law.

G. Record Retention Period

    New Rule 17i-5(b) requires that an SIBHC 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 file; and (v) its calculations of 
allowable capital and allowances for market, credit, and operational 
risk.

VII. Costs and Benefits of the Rules and Rule Amendments

    The Commission has identified certain costs and benefits that will 
result from this framework for supervising SIBHCs. Supervision pursuant 
to this system is voluntary, and eligible IBHCs are not be required to 
be supervised in this manner. This framework includes requirements for 
SIBHCs 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.
    In the Proposing Release \115\ the Commission solicited comment on 
all aspects of the cost-benefit analysis to assist the Commission in 
evaluating the

[[Page 34490]]

costs and benefits that may result from the supervisory framework for 
SIBHCs. Specifically, the Commission requested comment on the potential 
costs and benefits identified in the Proposing Release, as well as any 
other costs or benefits that may result from the rules and rule 
amendments. In particular, the Commission solicited comments on the 
potential costs for any necessary modifications to accounting, 
information and recordkeeping systems, and internal risk management 
control systems required to implement the rules, and the potential 
benefits arising from participation in this optional regulatory 
framework, as well as the degree to which potential applicants under 
this rule have already made, or are making, the necessary investments 
in internal risk management control systems, information technology, 
and mathematical modeling. The Commission requested that commenters 
provide views and data comparing the costs and benefits discussed above 
with the costs and benefits of the current regulatory framework, as 
well as any analysis and data relating to the costs and benefits 
associated with each of the Rules.
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    \115\ See supra, note and accompanying text.
---------------------------------------------------------------------------

    The Commission received no comments that specifically addressed the 
Cost-Benefit Analysis included in the Proposing Release. Because Rules 
17i-1 through 17i-8 and the amendments to Rules 17h1-T and 17h-2T, as 
adopted, are substantially similar to those proposed, the SEC believes 
that the Cost-Benefit Analysis included in the Proposing Release 
regarding the benefits and costs associated with new Rules 17i-1 
through 17i-8 and the amendments to Rules 17h1-T and 17h-2T continues 
to be appropriate.

A. Benefits

    There are many quantifiable and non-quantifiable benefits that will 
result from these rules. We discuss these benefits 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'' 
takes 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 that would be subject to 
consolidated supervision by the EU.\116\ The regulatory framework for 
SIBHCs set forth in the new rules and rule amendments 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 
\117\ for SIBHCs and their affiliated broker-dealers. The Commission 
estimates that it would cost an IBHC approximately $8 million to create 
a new, non-U.S., regulated affiliate,\118\ or about $24 million in the 
aggregate for the three 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 costs may be imposed 
on securities firms that do business in the EU if they are not subject 
to equivalent supervision.
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    \116\ See ``Directive 2002/87/EC of the European Parliament and 
of the Council of 16 December 2002.''
    \117\ See supra note 2.
    \118\ See Exchange Act Release No. 48694 [68 FR 62910, at 62928, 
note 121 (Nov. 6, 2003)].
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    Currently, 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.\119\ 
Broker-dealers affiliated with IBHCs that meet the criteria set forth 
in Rules 17i-1 through 17i-8 generally already would be subject to 
Rules 17h-1T and 17h-2T. To the extent that the information collected 
or made and maintained pursuant to new Rule 17i-5 reports are made and 
filed pursuant to 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 three SIBHCs would 
save about $2,208 due to this exemption.\120\ In the aggregate, the 
total cost savings associated with these amendments would be 
approximately $6,624.\121\
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    \119\ See supra, note.
    \120\ We estimate, based on the present burden for Rules 17h-1T 
and 17h-2T, 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. This estimate was 
described in the Proposing Release, and they elicited no comments. 
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--2003, the hourly 
cost of a financial reporting manager is $92.00. We calculated this 
amount as follows: (($92.00 x 24 hours) = $2,208). Generally, to 
estimate an hourly cost using the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2003, 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).
    \121\ We calculated this amount as follows: ($2,208 x three 
affected broker-dealers) = $6,624.
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    In addition, Rules 17i-1 through 17i-8 not only create a regulatory 
framework for the Commission to supervise SIBHCs, but they improve the 
Commission's ability to supervise the financial condition and 
securities activities of SIBHCs' affiliated broker-dealers. The 
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 internal risk management 
control system requirement also will 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 will 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 will 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

    Each IBHC that files a Notice of Intention to become supervised by 
the Commission as an SIBHC would incur various on-going costs and one-
time costs.
1. Ongoing Costs
    An SIBHC will incur costs complying with new Rules 17i-1 through 
17i-8, including 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

[[Page 34491]]

accordance with 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 Rule 17i-8.
    New Rule 17i-2 requires that an SIBHC amend its Notice of Intention 
on an ongoing basis. We estimate that each SIBHC will incur a cost of 
approximately $1,704 each year to make any necessary amendments to its 
Notice of Intention.\122\ Thus, we estimate that the total annual cost 
to make any amendments to the notice will be, in aggregate, about 
$5,112 each year for all SIBHCs.\123\
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    \122\ We estimate that an SIBHC will take about 24 hours each 
year to ensure that its Notice of Intention is accurate and make any 
necessary amendments. 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--
2003, the hourly cost of a senior compliance person is $71.00. (24 
hours x $71.00) = $1,704. We described these estimates in the 
Proposing Release, and they elicited no comments.
    \123\ We calculated this amount as follows: ($1,704 x 3 SIBHCs) 
= $5,112.
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    Rule 17i-3 requires that an SIBHC file a notice of withdrawal with 
the Commission if it wishes to withdraw from Commission supervision. We 
estimate that each SIBHC that withdraws from Commission supervision 
will incur a cost of about $2,130 to draft and review a notice or 
withdrawal to submit to the Commission.\124\ However, we further 
estimate that one SIBHC may withdraw from Commission supervision only 
once every ten years. Thus, the annual cost of this rule will be 
approximately $279.\125\
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    \124\ We estimate, that it will take one attorney approximately 
24 hours to draft a withdrawal notice and that it will 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--2003, the hourly cost of an attorney is $82.00, 
and the average hourly cost of a senior attorney and executive 
officer is $102.00. ((24 hours x $82.00) + (8 hours x $102.00)) = 
$2,784. We described these estimates in the Proposing Release, and 
they elicited no comments.
    \125\ We calculated this amount as follows: ($2,784/10 years) = 
$279.
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    New Rule 17i-4 requires that an SIBHC maintain an internal risk 
management control system. We estimate that an SIBHC will incur a cost 
of approximately $17,750 associated with maintaining its internal risk 
management control system each year.\126\ Thus, the continuing annual 
burden will be, in aggregate, approximately $53,250 for all three 
SIBHCs.\127\
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    \126\ We estimate that it will 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--2003, the hourly cost of a 
compliance examiner is $71.00. We calculated this amount as follows: 
((250 hours x $71.00) = $17,750). We described these estimates in 
the Proposing Release, and they elicited no comments.
    \127\ We calculated this amount as follows: ($17,750 x 3 SIBHCs) 
= $53,250.
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    Pursuant to new Rule 17i-5, an SIBHC must 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 will incur an annual cost of about 
$23,808 to create a record regarding stress tests as required by Rule 
17i-5.\128\ Further, we estimate that, on average, an SIBHC will incur 
an annual cost of approximately $370 to create a record regarding the 
basis for credit risk weights.\129\ Further, we estimate that, on 
average, an SIBHC will incur an annual cost of $1,440 to maintain 
records pursuant to new Rule 17i-5.\130\ Thus, the aggregate annual 
cost relating to new Rule 17i-5 for all SIBHCs will be approximately 
$76,854.\131\
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    \128\ We estimate that an SIBHC will spend approximately 256 
hours each year to create a record regarding stress tests. We 
believe that an SIBHC will 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--
2003, the hourly cost of a trading floor supervisor is $93.00. We 
calculated this amount as follows: (($93.00 x 256) = $23,808). We 
described these estimates in the Proposing Release, and they 
elicited no comments.
    \129\ We estimate that an SIBHC will spend 30 minutes per 
counterparty to create a record regarding credit risk weights, and 
that, on average, each SIBHC will 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--2003, the hourly cost of an intermediate accountant is 
$37.00. We calculated this amount as follows: ($37.00 x (30 minutes 
x 20 counterparties)) = $370. We described these estimates in the 
Proposing Release, and they elicited no comments.
    \130\ We estimate that an SIBHC will spend about 24 hours per 
year to maintain records as required pursuant to Rule 17i-5. The 
staff believes that an SIBHC will have a programmer analyst perform 
this task. According to the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2003, the hourly 
cost of a programmer analyst is $60.00. We calculated this amount as 
follows: ($60.00 x 24) = $1,440. We described these estimates in the 
Proposing Release, and they elicited no comments.
    \131\ We calculated this amount as follows: (($23,808 + $370 + 
$1,440) x 3 SIBHCs) = $76,854.
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    New Rule 17i-6 requires that an SIBHC 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 will be about $440 per month, and thus 
approximately $5,280 per year.\132\ We estimate that, on average, an 
SIBHC will incur a quarterly cost of $880 to prepare and file the 
required quarterly reports, and thus will incur an annual cost of 
$3,520 to file these reports.\133\ Finally, we estimate that, on 
average, an SIBHC will incur an annual cost of $9,800 to prepare and 
file an annual audit.\134\ Thus, we estimate that the total cost that, 
in aggregate, SIBHCs will incur that are associated with new Rule 17i-6 
would be approximately $55,800.\135\
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    \132\ We estimate that an SIBHC will spend about 8 hours per 
month and 96 hours per year to prepare and file these monthly 
reports. We believe that an SIBHC will have a senior accountant 
prepare and file these reports. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2003, the hourly cost of a senior accountant is $55.00. ($55.00 x 8 
hours) = $440. ($440 x 12 months) = $5,280. We described these 
estimates in the Proposing Release, and they elicited no comments.
    \133\ We estimate that an SIBHC will spend about 16 hours per 
quarter and 64 hours per year to prepare and file these quarterly 
reports. We believe that an SIBHC will have a senior accountant 
prepare and file these reports. According to the SIA's Report on 
Management and Professional Earnings in the Securities Industry--
2003, the hourly cost of a senior accountant is $55.00. ($55.00 x 16 
hours) = $880. ($880 x 4 quarters) = $3,520. We described these 
estimates in the Proposing Release, and they elicited no comments.
    \134\ 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--
2003, the hourly cost of a senior internal auditor is $49.00. 
($49.00 x 200 hours) = $9,800. We described these estimates in the 
Proposing Release, and they elicited no comments.
    \135\ We calculated this amount as follows: (($5,280 + $3,520 + 
$9,800) x 3 SIBHCs) = $55,800). We described these estimates in the 
Proposing Release, and they elicited no comments.
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    New Rule 17i-7 requires that an SIBHC 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 will incur a cost of about $57,750 to calculate its group-
wide allowances for market, credit, and operational risk.\136\ In 
addition, we estimate that each SIBHC will incur a cost of about

[[Page 34492]]

$378,000 to maintain its models.\137\ Finally, we estimate that each 
SIBHC will incur an annual cost of approximately $32,000 to perform 
stress tests on its models at least once each quarter.\138\ Thus, we 
estimate that the annual cost that SIBHCs will incur, in aggregate, 
will be approximately $1.4 million.\139\
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    \136\ We estimate 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 will have a 
senior accountant perform these calculations and verifications. 
According to the SIA's Report on Management and Professional 
Earnings in the Securities Industry--2003, the hourly cost of a 
senior accountant is $55.00. (($55.00 x 1,050 hours) = $57,750). We 
described these estimates in the Proposing Release, and they 
elicited no comments.
    \137\ We estimate that each SIBHC will spend an average of 
approximately 5,600 hours per year maintaining its models. We 
believe that an SIBHC will 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 $64.00 and the hourly cost of a 
senior research analyst is $71.00. ($64.00 x 2,800 hours) + ($71.00 
x 2,800 hours) = $378,000. We described these estimates in the 
Proposing Release, and they elicited no comments. Due to a lack of 
data points available in the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2003 guide 
regarding salaries for this type of position, we used data obtained 
from the SIA's 2002 guide to generate this estimate.
    \138\ We estimate that each SIBHC will spend about 640 hours 
each year to conduct stress tests on its models. We believe that an 
SIBHC will 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--2003, the hourly 
cost of a junior research analyst is $50.00. (($50.00 x 640 hours) = 
$32,000). We described these estimates in the Proposing Release, and 
they elicited no comments.
    \139\ We calculated this amount as follows: ($57,750 + $378,000 
+ $32,000) x 3 SIBHCs = $1,403,250.
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    New Rule 17i-8 requires that an SIBHC report to the Commission the 
occurrence of certain material risks. We estimate that it will cost an 
SIBHC approximately $82 to create a notice required to be submitted to 
the Commission pursuant to Rule 17i-8.\140\ However, we estimate that 
only one SIBHC may be required to send a notice as required by new Rule 
17i-8 every three years. Thus, we estimate, for that the annual cost of 
Rule 17i-8 for all SIBHCs will be about $27.\141\
---------------------------------------------------------------------------

    \140\ We estimate that it will take an SIBHC approximately one 
hour to create a notice required to be submitted to the Commission 
pursuant to 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 will have an attorney create a notice required 
to be submitted to the Commission pursuant to Rule 17i-8. According 
to the SIA's Report on Management and Professional Earnings in the 
Securities Industry--2003, the hourly cost of an attorney is $82.00. 
(($82.00 x 1 hour) = $82.00).
    The hourly burden estimate for Rule 17i-8 is based on our 
present estimates for Rule 17a-11. The Commission received 841 Rule 
17a-11 Notices from 562 broker-dealers during the year ending 
December 2003. At that time, there were approximately 6,800 active 
broker-dealers that are registered with the Commission. Thus, 12% 
(841/6,800) of active, registered broker-dealers had a situation 
arise which caused them to file a notice pursuant to Rule 17a-11. 
Using this 12% figure, we estimate that of the approximately 3 IBHCs 
that we believe will register to be supervised as SIBHCs, one may be 
required to file notice pursuant to Rule 17i-8 every three years ((3 
SIBHCs x 12%) = 0.36).
    \141\ We calculated this amount as follows: (($82.00 x 1 hour) x 
.33 (once every three years)) = $27.
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2. One-Time Costs
    We believe that an SIBHC will 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 an internal risk management control system 
in order to comply with new 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 new Rule 17i-7.
    New Rule 17i-2 requires 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 will incur 
a cost of approximately $63,900 to draft a Notice of Intention, compile 
the various documents to be included with the Notice of Intention, and 
work with the Commission staff.\142\ Further, we believe that an IBHC 
will have an attorney review the Notice of Intention, and that it will 
incur a cost of approximately $8,200 relating to this review.\143\ 
Consequently, we estimate that the total costs that will be incurred by 
the three IBHCs we believe will file Notices of Intention to become 
supervised by the Commission as SIBHCs is about $216,300.\144\
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    \142\ We estimate that an SIBHC will spend 900 hours to perform 
this task. Further, we believe that 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--
2003, the hourly cost of a compliance examiner is $71.00. (($71.00 x 
900 hours) = $63,900). We described these estimates in the Proposing 
Release, and they elicited no comments.
    \143\ 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 $82.00. (($82.00 x 100 hours) = $8,200). We 
described these estimates in the Proposing Release, and they 
elicited no comments. Due to a lack of data points available in the 
SIA's Report on Management and Professional Earnings in the 
Securities Industry--2003 guide regarding salaries for this type of 
position, we used data obtained from the SIA's 2002 guide to 
generate this estimate.
    \144\ ($63,900 + $8,200) x 3 SIBHCs = $216,300. We described 
these estimates in the Proposing Release, and they elicited no 
comments.
---------------------------------------------------------------------------

    Each SIBHC will incur a one-time cost to assess its present 
structure, businesses, and controls, and establish, document and 
maintain an internal risk management control system in order to comply 
with new 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 an internal risk management control system will 
be approximately $255,600.\145\ Thus, we anticipate the total aggregate 
cost for all SIBHCs would be about $766,800.\146\
---------------------------------------------------------------------------

    \145\ We estimate that the average amount of time an SIBHC will 
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 will have a senior 
compliance person performing this task. According to the SIA's 
Report on Management and Professional Earnings in the Securities 
Industry--2003, the hourly cost of a compliance examiner is $71.00. 
(($71.00 x 3,600 hours) = $255,600). We described these estimates in 
the Proposing Release, and they elicited no comments.
    \146\ We calculated this amount as follows: ($255,600 per SIBHC 
x 3 SIBHCs expected to apply) = $766,800. We described these 
estimates in the Proposing Release, and they elicited no comments.
---------------------------------------------------------------------------

    Pursuant to new Rule 17i-5, an SIBHC must document a contingency 
plan regarding funding and liquidity of the affiliate group. We 
estimate that it will cost each SIBHC about $4,160 to document such a 
contingency plan.\147\ Consequently, it will cost the three SIBHCs we 
expect to file Notices of Intention to be supervised by the Commission, 
in aggregate, approximately $12,480.\148\
---------------------------------------------------------------------------

    \147\ We estimate that, on average, an SIBHC will spend about 40 
hours to create and document a contingency plan regarding funding 
and liquidity of the affiliate group. Further, we believe that an 
SIBHC will have a senior treasury manager perform this task. 
According to the SIA's Report on Management and Professional 
Earnings in the Securities Industry--2003, the hourly cost of a 
senior treasury manager is $104.00. ($104 x 40 hours) = $4,160. We 
described these estimates in the Proposing Release, and they 
elicited no comments.
    \148\ We calculated this amount as follows: ($4,160 x 3 SIBHCs) 
= $12,480.
---------------------------------------------------------------------------

    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 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,

[[Page 34493]]

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 three SIBHCs about $5.5 million to upgrade their IT systems, or 
approximately $16.5 million in total. We believe that the costs for an 
SIBHC to update information technology systems in order to comply with 
new Rules 17i-1 through 17i-8 will 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 new Rule 17i-7 an SIBHC must calculate its group-wide 
allowances for market, credit, and operational risk on a monthly basis. 
SIBHCs will 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 the 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.\149\ Thus, we 
estimate that the additional cost to create new models will be, in 
aggregate, between about $20,250 and about $2 million for all three 
firms.\150\
---------------------------------------------------------------------------

    \149\ 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 rules. We believe that an 
SIBHC will 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. 
(($64.00 x 50 hours) + ($71.00 x 50 hours) = $6,750). Due to a lack 
of data points available in the SIA's Report on Management and 
Professional Earnings in the Securities Industry--2003 guide 
regarding salaries for this type of position, we used data obtained 
from the SIA's 2002 guide to generate this estimate.
    Further, we estimate that a complex SIBHC that does not 
presently use mathematical models to manage risk will spend 
approximately 10,000 hours to create mathematical models to use in 
calculating market and credit risk as required by the rules. We 
believe that an SIBHC will 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 $64.00 and the hourly cost of a 
senior research analyst is $71.00. (($64 x 5,000 hours) + ($71 x 
5,000 hours) = $675,000. We described these estimates in the 
Proposing Release, and they elicited no comments.
    \150\ We calculated this amount as follows: ($6,750 x 3 SIBHCs) 
= $20,250. ($675,000 x 3 SIBHCs) = $2,025,000.
---------------------------------------------------------------------------

    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 115 applicants who 
qualify to elect SIBHC supervision based on the minimum tentative net 
capital requirements. Evolving industry best practice for 
internationally active firms suggests that some IBHCs will have already 
made some or all the investments required by the rules, and some IBHCs 
have plans to make those investments in the near future. As stated 
previously in section VI.C., we believe that the three 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 elects SIBHC supervision, 
the SIBHC will not incur additional costs to establish, document and 
maintain an internal risk management control system, upgrade its IT, or 
create mathematical models, our estimates with regard to the rules may 
be reduced.

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

    Section 3(f) of the Exchange Act \151\ 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 \152\ 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.
---------------------------------------------------------------------------

    \151\ 15 U.S.C. 78c(f).
    \152\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In the Proposing Release,\153\ the Commission solicited comments on 
whether the amendments to Rules 17h-1T and 17h-2T and new Rules 17i-1 
through 17i-8 would have any effects on competition, efficiency and 
capital formation. We received no comments in response to this 
solicitation.
---------------------------------------------------------------------------

    \153\ See supra, note 6 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that Rules 17i-1 through 17i-8 promote both 
efficiency and capital formation. The rules will 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 rules may 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 that files a Notice of 
Intention to be supervised by the Commission as an SIBHC will save 
costs because it will 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 IBHC.
    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

[[Page 34494]]

some of them to compete more effectively.
    The Commission does not believe that the rules will have anti-
competitive effects on smaller broker-dealers because smaller broker-
dealers are generally not interested in consolidated supervision.\154\ 
In addition, the Commission believes that the benefits smaller broker-
dealers would realize though SIBHC supervision would not outweigh the 
cost to establish procedures to comply with these rules. These rules 
implement section 17(i) of the Exchange Act, and are designed, in part, 
to allow U.S. broker-dealers to compete more effectively in the global 
securities markets.
---------------------------------------------------------------------------

    \154\ 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.
---------------------------------------------------------------------------

IX. Summary of Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\155\ 
the Commission has certified that the new Rules 17i-1 through 17i-8, 
and 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. This certification was 
included in the Proposing Release.\156\ The Commission solicited 
comments concerning the impact on small entities and the Regulatory 
Flexibility Act certification, but received no comments.
---------------------------------------------------------------------------

    \155\ 5 U.S.C. 605(b).
    \156\ See supra, note 6 and accompanying text.
---------------------------------------------------------------------------

X. Statutory Authority

    The amendments are made 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 and 78w)).

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government Agencies).

17 CFR Part 240

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

Text of Rules and Rule Amendments

0
In accordance with the foregoing, the Securities and Exchange 
Commission hereby amends title 17 chapter II of the Code of Federal 
Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart A--Organization and Program Management

0
1. The authority citation for Part 200, subpart A, continues to read, 
in part, as follows:

    Authority: 15 U.S.C. 77s, 77o, 77sss, 78d, 78d-1, 78d-2, 78w, 
78ll(d), 78mm, 79t, 80a-37, 80b-11, and 7202, unless otherwise 
noted.
* * * * *

0
2. Section 200.30-3 is amended by adding paragraphs (a)(79), (a)(80) 
and (a)(81) to read as follows:


Sec.  200.30-3  Delegationof authority to Director of Division of 
Market Regulation.

* * * * *
    (a) * * *
    (79) To review amendments to a supervised investment bank holding 
company's Notice of Intention, and to approve such amendments pursuant 
to paragraph (d)(2)(ii) of Rule 17i-2 (17 CFR 240.17i-2(d)(2)(ii)) 
after reviewing the amended notice of intention to determine whether 
the amendment is necessary or appropriate in furtherance of the 
purposes of section 17 of the Act (15 U.S.C. 78q).
    (80) To consider requests by supervised investment bank holding 
companies for exemptions from the requirement, and extensions of time 
within which, to file reports and notices required by Rule 17i-6 (17 
CFR 240.17i-6), and to grant or deny such requests pursuant to 
paragraph (f) of that Rule (17 CFR 240.17i-6(f)).
    (81) To consider requests by supervised investment bank holding 
companies for exemptions from the requirement, and extensions of time 
within which, to file notices required by Rule 17i-8 (17 CFR 240.17i-
8), and to grant or deny such requests pursuant to paragraph (d) of 
that Rule (17 CFR 240.17i-8(d)).
* * * * *

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

0
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, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *

0
4. Section 240.17a-12 is amended by revising paragraph (l) 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 initial 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 to the agreed-
upon procedures.
* * * * *

0
5. Section 240.17h-1T is amended by:
0
a. Redesignating paragraph (d)(5) as paragraph (d)(6); and
0
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).
* * * * *

0
6. Section 240.17h-2T is amended by:
0
a. Redesignating paragraph (b)(5) as paragraph (b)(6); and
0
b. Adding new paragraph (b)(5).

[[Page 34495]]

    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).
* * * * *

0
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.
240.17i-2 Notice of Intention to be Supervised by the Commission as 
an SIBHC.
240.17i-3 Withdrawal of Supervision as an SIBHC.
240.17i-4 Internal Risk Management Control System Requirements for 
SIBHCs.
240.17i-5 Record Creation, Maintenance, and Access Requirements for 
SIBHCs.
240.17i-6 Reporting Requirements for SIBHCs.
240.17i-7 Calculations of Allowable Capital and Risk Allowances or 
Alternative Capital Assessment.
240.17i-8 Notification Requirements for SIBHCs.

Supervised Investment Bank Holding Company Rules

    Preliminary Note:  Rules 17i-1 through 17i-8 set forth a program 
of supervision at the holding company level for supervised 
investment bank holding companies. This program is designed to 
reduce the likelihood that financial and operational weakness in a 
supervised investment bank holding company will destabilize broker 
or dealer or the broader financial system. The focus of this 
supervision of the supervised investment bank holding company is its 
financial and operational condition and its risk management controls 
and methodologies.

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 have the same 
meaning as set forth in section 17(i)(5) of the Act (15 U.S.C. 
78q(i)(5)).
    (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 by the Commission 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 that the 
Commission determines is appropriate; and
    (4) Supplemental information including:
    (i) A description of the business and organization of the 
investment bank holding company;
    (ii) An alphabetical list of each member of the affiliate group, 
with an identification of the financial regulator, if any, by whom the 
affiliate is regulated, and a designation as to whether the affiliate 
is a material affiliate;
    (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) Sample computations for the supervised investment bank holding 
company of allowable capital and allowances for market risk, credit 
risk, and operational risk made in accordance with Sec.  240.17i-7(a)-
(d);
    (vi) A list of the categories of positions that the affiliate group 
holds in its proprietary accounts and a brief description of the method 
that the investment bank holding company proposes to use to calculate 
allowances for market and credit risk on those categories of positions 
pursuant to Sec.  240.17i-7(b) and (c);
    (vii) A description of mathematical models that the investment bank 
holding company proposes to use to price positions and to compute 
allowances for market and credit risk (as specified in Sec.  240.17i-
7(b) and (c)), including:
    (A) A description of the creation, use, and maintenance of the 
mathematical models;
    (B) A description of the internal risk management controls over 
those models, including a description of each category of persons who 
may input data into the model;
    (C) If the mathematical model incorporates correlations across risk 
factors, a description of the process used to measure those 
correlations;
    (D) A description of the backtesting procedures the investment bank 
holding company proposes to use to backtest the models, including a 
description of the backtest and procedures instituted to respond to 
test results;
    (E) A description of how each mathematical model satisfies the 
applicable qualitative and quantitative requirements listed in Sec.  
240.15c3-1e(d); and
    (F) A statement describing the extent to which each mathematical 
model that it is used to analyze risk and report risk to senior 
management;
    (viii) A description of any positions for which the investment bank 
holding company proposes to use a method other than Value at Risk to 
compute an allowance for market risk and a description of how that 
allowance would be determined;

[[Page 34496]]

    (ix) A description of how the investment bank holding company 
proposes to calculate the credit equivalent amount and maximum 
potential exposure (as defined in Sec. Sec.  240.17i-7(c)(1)(i) and 
240.17i-7(c)(1)(i)(E), respectively);
    (x) A description of how the investment bank holding company 
proposes to calculate credit risk weights and internal credit ratings, 
if applicable;
    (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(d);
    (xii) A comprehensive description of the internal risk management 
control system the investment bank holding company has established to 
manage the risks of the affiliate group, including market, credit, 
leverage, liquidity, legal, and operational risks, and how that system 
satisfies the requirements of Sec.  240.17i-4;
    (xiii) Sample risk reports the supervised investment bank holding 
company regularly provides to the persons responsible for managing risk 
for the affiliate group that the investment bank holding company 
proposes to provide to the Commission pursuant to Sec.  240.17i-
6(a)(1)(iv);
    (xiv) A written undertaking, in a form acceptable to the Commission 
and signed by a duly authorized person, that provides that 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
    (xv) Any other information or 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 a Commission determination. If any of the information 
filed with the Commission as part of the notice of intention described 
in paragraph (b) of this section is found to be or becomes inaccurate 
before the Commission makes a determination, the investment bank 
holding company must promptly notify the Commission and provide the 
Commission with a description of the circumstances in which the 
information was found to be or has become inaccurate along with 
updated, accurate information.
    (2) Subsequent to a Commission determination. A supervised 
investment bank holding company must amend and resubmit to the 
Commission its notice of intention, and obtain Commission approval of 
the amendment, as set forth in paragraph (d)(2)(ii) of this section, 
before it may make a material change to 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, as modified from time 
to time.
    (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 and any 
amendments thereto shall not be complete until the investment bank 
holding company has filed with the Commission all the documentation and 
information specified in this section. The notice of intention, 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 of intention, amendments thereto, and other 
information filed in connection with the notice of intention shall be 
accorded confidential treatment to the extent permitted by law.
    (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 calendar days after the Commission receives a 
completed notice of intention to be supervised by the Commission 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). In addition, 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, upon receipt of an amendment to the notice of 
intention submitted by a supervised investment bank holding company 
pursuant to paragraph (c)(2) of this section, may approve the amendment 
after reviewing the amended notice of intention to determine whether 
the amendment is necessary or appropriate in furtherance of the 
purposes of 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 regarding whether the 
supervised investment bank holding company is in compliance with Sec.  
240.17i-2(c).
    (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, unless the Commission issues an order 
determining that it is necessary or appropriate for the Commission to 
terminate its supervision of the supervised investment bank holding 
company within a shorter or longer period to help 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;

[[Page 34497]]

    (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 an OTC derivatives dealer with 
respect to all of its business activities, except paragraphs 
(c)(5)(xiii), (c)(5)(xiv), (d)(8), and (d)(9) will not apply; and
    (b) As part of its internal risk management control system, a 
supervised investment bank holding company must 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 by 
the supervised investment bank holding company 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 unsecured 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; 
and
    (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 
plan to respond to the events outlined in paragraphs (a)(1)(i) through 
(iv) of this section;
    (3) A record of the basis for the determination of the credit risk 
weight and internal credit rating, if applicable, for each 
counterparty; and
    (4) A record of the calculations of allowable capital and 
allowances for market, credit, and operational risk computed currently 
at least once each month on a consolidated basis.
    (b) Except as provided in paragraph (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 filed by the supervised investment bank 
holding company pursuant to Sec.  240.17i-6;
    (4) All notices filed by the supervised investment bank holding 
company pursuant to Sec.  240.17i-8; and
    (5) Records documenting the system of internal risk management 
controls required to be established pursuant to Sec.  240.17i-4, 
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 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 
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 all or any part of those 
records in paper, or electronically if the records are stored 
electronically, as specified by the Commission's representative or 
designee. 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 created pursuant to this section and obtained 
by the Commission from the supervised investment bank holding company 
shall be accorded confidential treatment to the extent permitted by 
law.


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

    (a) Monthly and quarterly reports. The supervised investment bank 
holding company shall file:
    (1) A report as of the end of each month, filed not later than 30 
calendar days after the end of the month, Except that the monthly 
report need not be filed for a month-end that coincides with a fiscal 
quarter-end. The monthly report shall include:
    (i) A consolidated balance sheet and income statement (including 
notes to the financial statements) and statements of allowable capital 
and allowances for market, credit, and operational risk computed 
pursuant to Sec.  240.17i-7 for the affiliate group, Except that the 
consolidated balance sheet and income statement for the first month of 
the fiscal year may be filed at a time to which the Commission agrees 
(when making a determination pursuant to Sec.  240.17i-2(d)(2));
    (ii) A graph reflecting, for each business line, the daily intra-
month Value at Risk;
    (iii) Consolidated credit risk information, including:
    (A) Aggregate current exposure and current exposures (including 
commitments) for the 15 largest exposures listed by counterparty;
    (B) Aggregate maximum potential exposure and maximum potential 
exposures for the 15 largest exposures listed by counterparty; and
    (C) 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
    (iv) Certain risk reports the supervised investment bank holding 
company regularly provides to the persons responsible for managing risk 
for the affiliate group that the Commission may request from time to 
time.
    (2) A report as of the end of each fiscal quarter, filed not later 
than 35 calendar days after the end of the quarter, which shall include 
(except as provided in paragraph (a)(3) below):
    (i) The information contained in the monthly report, as set forth 
in paragraph (1) above;
    (ii) A consolidating balance sheet and income statement for the 
affiliate group,

[[Page 34498]]

which 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 the supervised investment bank holding company or 
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 unsecured borrowings and lines of 
credit, segregated into categories, scheduled to mature within twelve 
months from the most recent fiscal quarter as to each material 
affiliate.
    (3) For a quarter-end that coincides with the supervised investment 
bank holding company's fiscal year-end, the supervised investment bank 
holding company need not include in its filing consolidated and 
consolidating balance sheets and income statements.
    (b) Organizational chart. The supervised investment holding company 
shall file, concurrently with its quarterly report for the quarter-end 
that coincides with the supervised investment bank holding company's 
fiscal year-end, an organizational chart, as of the investment bank 
holding company's fiscal year end. Quarterly updates should be provided 
where a material change in the information provided to the Commission 
has occurred.
    (c) Additional reports. Upon receiving notice from the Commission, 
the supervised investment bank holding company shall file other 
information as the Commission may request in order to monitor the 
supervised investment bank holding company's financial or operational 
condition, risk management system, and transactions and relationships 
among members of the affiliate group.
    (d) Annual audit report.
    (1) A supervised investment bank holding company shall file an 
annual audit report as of the end of the supervised investment bank 
holding company's fiscal year, that includes:
    (i) Consolidated financial statements (including notes to the 
financial statements) for the supervised investment bank holding 
company. The audited financial statements must include a supporting 
schedule containing statements of allowable capital and allowances for 
market, credit and operational risk computed in accordance with Sec.  
240.17i-7. The audit must be conducted by a registered public 
accounting firm (as that term is defined at 15 U.S.C. 7201(a)(12)) in 
accordance the rules promulgated by the Public Company Accounting 
Oversight Board; and
    (ii) A supplemental report entitled ``Accountant's Report on 
Internal Risk Management Control System'' prepared by the registered 
public accounting firm (as that term is defined at 15 U.S.C. 
7201(a)(12)) 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 must 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 
and the report is to be prepared 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. The supervised investment bank holding company must 
file, prior to the commencement of the review, the procedures for 
conducting the audit agreed to by the supervised investment bank 
holding company and the accountant (pursuant to paragraph (d)(1) of 
this section). Prior to the commencement of each subsequent review, the 
supervised investment bank holding company shall file with the 
Commission a notice of any changes to the agreed-upon procedures.
    (2) Annual audit reports prepared pursuant to this paragraph (d) 
shall be prepared as of the same date as the annual audit of the 
supervised investment bank holding company's affiliated broker or 
dealer.
    (3) Annual audit reports prepared pursuant to this paragraph (d) 
shall be filed not later than 65 calendar days after the end of the 
fiscal year.
    (e) Consolidating Balance Sheet and Income Statement. The 
supervised investment bank holding company shall file, concurrently 
with the annual audit report, an unaudited consolidating balance sheet 
and income statement, as of the supervised investment bank holding 
company's fiscal year-end, for the affiliate group.
    (f) Extensions and exemptions. Upon the written request of the 
supervised investment bank holding company, or on its own motion, the 
Commission may conditionally or unconditionally grant or deny an 
extension of time or an exemption from any of the requirements of 
paragraphs (a) through (e) of this section to the extent that such 
exemption or extension of time is necessary or appropriate in the 
public interest or for the protection of investors.
    (g) When filed. The reports required to be filed pursuant to this 
section shall be considered filed when two copies are received at the 
Commission's principal office in Washington, DC. The copies shall be 
addressed to the Division of Market Regulation, Office of Financial 
Responsibility.
    (h) 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 to the extent 
permitted by law.


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 must compute allowable capital on a consolidated 
basis as the aggregate of the following:
    (1) Common shareholders' equity on the consolidated balance sheet 
of the supervised investment bank holding company less:
    (i) Goodwill;
    (ii) Deferred tax assets, except those permitted for inclusion in 
Tier 1 capital by the Board of Governors of the Federal Reserve (12 CFR 
225, Appendix A);
    (iii) Other intangible assets; and
    (iv) Other deductions from common stockholders' equity as required 
by the Board of Governors of the Federal Reserve 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 cumulative preferred stock may not exceed 33% of the items 
included in allowable capital pursuant to paragraph (a)(1) of this 
section, excluding cumulative preferred stock, provided that:
    (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

[[Page 34499]]

    (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) and subject to the conditions of paragraphs 
(a)(2)(i) through (iv) of this section;
    (ii) Subordinated debt if the original weighted average maturity of 
the subordinated debt is at least five years; 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; the subordinated debt is unsecured and subordinated in 
right of payment to all senior indebtedness of the holding company; and 
the subordinated debt instrument permits acceleration only in the event 
of bankruptcy or reorganization of the holding company under Chapters 7 
(liquidation) (11 U.S.C. 7) and 11 (reorganization) (11 U.S.C. 11) of 
the U.S. Bankruptcy Code; and
    (iii) As part of the investment bank holding company's notice of 
intention, the investment bank holding company may request to include, 
for a period of three years after the adoption of this Rule (or such 
other period as the Commission may approve) long-term debt that has an 
original weighted average maturity of at least five years and that 
cannot be accelerated, except upon the occurrence of certain events as 
the Commission may approve. As part of an amendment to the investment 
bank holding company's notice of intention, the supervised investment 
bank holding company may request permission to include long-term debt 
that meets these criteria in allowable capital for an additional two 
years; and
    (4) Hybrid capital instruments that are permitted for inclusion in 
Tier 2 capital by the Board of Governors of the Federal Reserve (12 CFR 
225, Appendix A).
    (b) Allowance for market risk. The supervised investment bank 
holding company must compute an allowance for market risk on a 
consolidated basis for all proprietary positions, including debt 
instruments, equity instruments, commodity instruments, foreign 
exchange contracts, and derivative contracts as the aggregate of the 
following:
    (1) Value at risk. The Value at Risk measures obtained by applying 
one or more approved Value at Risk models to each position and 
multiplying the result by the appropriate multiplication factor. Each 
Value at Risk model shall meet the applicable qualitative and 
quantitative requirements set forth in Sec.  240.15c3-1e(d); and
    (2) Alternative method. For each position for which there is not 
adequate historical data to support a Value at Risk model, the measure 
obtained by computing the allowance for market risk using a method 
described in the supervised investment bank holding company's notice of 
intention that produces a suitable allowance for market risk for those 
positions.
    (c) Allowance for credit risk. The supervised investment bank 
holding company must compute an allowance for credit risk 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 in as follows:
    (1) By multiplying the credit equivalent amount of the supervised 
investment bank holding company's exposure to the counterparty, as 
determined according to sub-paragraph (c)(1)(i) below, by the 
appropriate credit risk weight of the asset or off-balance sheet item 
or counterparty, as determined according to sub-paragraph (c)(1)(ii) 
below, then multiplying the product by 8%, in accordance with the 
following:
    (i) Credit equivalent amount:
    (A) Certain loans and loan commitments receivable. The credit 
equivalent amount for exposures relating to certain loans and loan 
commitments is 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) 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;
    (3) 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
    (4) 100% credit conversion factor for loans and bankers' 
acceptances, stand-by letters of credit, and forward purchases of 
assets, and similar direct credit substitutes;
    (B) Receivables relating to derivative contracts, repurchase 
agreements, reverse repurchase agreements, stock loans, stock borrows, 
and other similar collateralized transactions. The credit equivalent 
amount for exposures 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)(D) 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)(E) 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(d)(2), 
based on a review of the supervised investment bank holding company's 
internal risk management control system and practices, including a 
review of the Value at Risk model used to determine maximum potential 
exposure, that another multiplication factor is appropriate;
    (C) Credit equivalent amount for other assets. The credit 
equivalent amount for other assets shall be the book value of the 
exposure on the supervised investment bank holding company's 
consolidated balance sheet or other amount as determined according to 
the standards published by the Basel Committee on Banking Supervision, 
as amended from time to time;
    (D) The current exposure is the current replacement value of a 
counterparty's positions, after applying the effect of netting 
agreements with that counterparty meeting the requirements of Sec.  
240.15c3-1e(c)(4)(iv) and taking into account the value of collateral 
from the counterparty in accordance with Sec.  240.15c3-1e(c)(4)(v);
    (E) The maximum potential exposure is the Value at Risk of the 
counterparty's positions with the member of the affiliate group, after 
applying netting agreements with that counterparty meeting the 
requirements of Sec.  240.15c3-1e(c)(4)(iv) and taking into account the 
value of collateral from the counterparty in accordance with Sec.  
240.15c3-1e(c)(4)(v)) obtained using a Value at Risk model that meets 
the applicable requirements of Sec.  240.15c3-1e(d) and the current 
replacement value of the counterparty's positions with the

[[Page 34500]]

member of the affiliate group, 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 not less than five days;
    (ii) Credit risk weights.
    (A) General. 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) Receivables covered by guarantees. For the portion of a current 
exposure covered by a written 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; and
    (iii) Credit derivatives. Upon a determination by the Commission 
pursuant to Sec.  240.17i-2(d), the supervised investment bank holding 
company may use credit derivatives to reduce its allowance for credit 
risk; or
    (2) Upon a determination by the Commission pursuant to Sec.  
240.17i-2(d), using a calculation consistent with standards published 
by the Basel Committee on Banking Supervision in International 
Convergence of Capital Measurement and Capital Standards (July 1988), 
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 in accordance with the standards published by the 
Basel Committee on Banking Supervision, as amended from time to time.


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

    (a) A supervised investment bank holding company shall send notice 
promptly (but within 24 hours), in accordance with paragraph (c) of 
this section, after the occurrence of the following events:
    (1) The occurrence of any backtesting exception, determined in 
accordance with Sec.  240.15c3-1e(d)(1)(iii) or (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) The early warning indications of low capital as the Commission 
may agree;
    (3) A material 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 materially its assessment of the creditworthiness 
of a material affiliate or the credit rating(s) assigned to one or more 
outstanding short or long-term obligations of an material affiliate;
    (5) The supervised investment bank holding company files a Form 8-K 
(Sec.  249.308) with the Commission;
    (6) The supervised investment bank holding company becomes aware 
that any financial regulatory agency or self-regulatory organization 
has taken significant enforcement or regulatory action against a 
material affiliate; or
    (7) The supervised investment bank holding company becomes 
ineligible to be supervised by the Commission as a supervised 
investment bank holding company.
    (c) Every notice required to be given or transmitted pursuant to 
this section shall be given or transmitted by telegraphic notice or 
facsimile transmission to the Division of Market Regulation, Office of 
Financial Responsibility at the principal office of the Commission in 
Washington, DC. The notices filed under this section shall be accorded 
confidential treatment to the extent permitted by law.
    (d) Upon the written request of the supervised investment bank 
holding company, or on its own motion, the Commission may conditionally 
or unconditionally grant or deny an extension of time or an exemption 
from any of the requirements of this Rule 17i-8 to the extent that such 
exemption or extension of time is necessary or appropriate in the 
public interest or for the protection of investors.

    Dated: June 8, 2004.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13413 Filed 6-18-04; 8:45 am]
BILLING CODE 8010-01-P