[Federal Register Volume 71, Number 189 (Friday, September 29, 2006)]
[Proposed Rules]
[Pages 57451-57455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-16035]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038--AC27


Limitations on Withdrawals of Equity Capital

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend its regulations to provide that the 
Commission may, by written order, temporarily prohibit a futures 
commission merchant (``FCM'') from carrying out equity withdrawal 
transactions that would reduce excess adjusted net capital by 30 
percent or more. The proposed orders would be based on the Commission's 
determination that such withdrawal transactions could be detrimental to 
the financial integrity of FCMs or could adversely affect their ability 
to meet customer obligations. The proposed amendments also would 
provide that an FCM may file with the Commission a petition for 
rescission of an order temporarily prohibiting equity withdrawals from 
the FCM.

DATES: Comments must be received on or before November 28, 2006.

ADDRESSES: You may submit comments, identified by RIN 3038-AC27, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include ``Proposed Amendment 
to Rule 1.17'' in the subject line of the message.
     Fax: (202) 418-5521.
     Mail: Send to Eileen A. Donovan, Acting Secretary of the 
Commission, Commodity Futures Trading Commission, 1155 21st Street, 
NW., Washington, DC 20581.
     Courier: Same as Mail above.
    All comments received will be posted without change to http://www.cftc.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and 
Chief Accountant, at (202) 418-5430, or Thelma Diaz, Special Counsel, 
at (202) 418-5137, Division of Clearing and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Electronic mail: ([email protected]) 
or ([email protected]).

SUPPLEMENTARY INFORMATION:

I. Commission Oversight of Equity Withdrawals

    Several Commission regulations place limitations on the ability of 
owners and other insiders of FCMs and introducing brokers (``IBs'') to 
withdraw equity from these regulated entities. In 1978 the Commission 
adopted Regulation 1.17(e), which prohibits all equity withdrawal 
transactions that would reduce the adjusted net capital of FCMs or IBs 
beyond the amounts permitted by the regulation.\1\ In describing the 
transactions affected by the regulation, the Commission included any 
withdrawals made by the action of a stockholder or partner or 
redemption or repurchase of shares of stock by ``consolidated 
entities'',\2\ dividend payments or similar distributions, or through 
unsecured advances or loans made to stockholders, partners, sole 
proprietors, or employees. The regulation further clarifies that, when 
determining the effect of the proposed equity withdrawal transaction on 
the firm's capital, the firm also must take into account other pending 
equity withdrawal transactions and scheduled liability payments that 
will reduce its capital within six months after the subject equity 
withdrawal transaction.\3\ The proposed equity withdrawal transaction 
is prohibited if, when added together with such other planned capital 
reductions, it would result in capital levels that are less than 
required by Regulation 1.17(e).\4\
---------------------------------------------------------------------------

    \1\ Commission regulations cited in this release may be found at 
17 CFR Ch. I (2006). Generally speaking, Regulation 1.17(e) 
prohibits equity withdrawal transactions if such withdrawals would 
reduce the firm's adjusted net capital to less than 120 percent of 
its minimum adjusted net capital requirement under Regulation 
1.17(a)(1). Such transactions also are prohibited if they would 
result in less than the minimum amount of equity required under 
Regulation 1.17(d), which provides that FCMs and IBs must maintain a 
debt-equity ratio of at least 30 percent equity.
    \2\ Commission Regulation 1.17(f) requires, and in other 
circumstances permits, FCMs and IBs to consolidate the assets and 
liabilities of their subsidiaries and/or affiliates in a single 
computation of adjusted net capital for the FCM or IB and its 
consolidated entities.
    \3\ Regulation 1.17(e) specifically requires the firm to combine 
the amount of the subject equity withdrawal transaction with any of 
the following that are scheduled to occur within six months after 
the subject withdrawal: Any other proposed equity withdrawal; any 
payments under satisfactory subordination agreements under 
Regulation 1.17(h); and any payments of the liabilities identified 
in Regulation 1.17(c)(4)(vi).
    \4\ Pursuant to a proviso included in the regulation, required 
tax payments and the payment to partners of reasonable compensation 
are not precluded. Also, Regulation 1.17(e) provides that, upon 
application, the Commission may grant relief if it deems it to be in 
the public interest or for the protection of nonproprietary 
accounts.
---------------------------------------------------------------------------

    The purpose of these equity withdrawal restrictions is to help 
preserve and enhance the required compliance by FCMs and IBs with the 
minimum financial requirements set forth in the Commission's 
regulations.\5\ As the Commission has explained elsewhere, the 
Commission's minimum financial requirements protect customers and other 
market participants by requiring FCMs and IBs to maintain minimum 
levels of liquid assets in excess of their liabilities to finance their 
business activities.\6\ Moreover, pursuant to Section 4d of the Act,\7\ 
FCMs are required to segregate from their own assets all money, 
securities, and other property held for customers as margin for their 
commodity futures and option contracts, as well as any gains accruing 
to customers from their open futures and option positions. Part 30 of 
the Commission's regulations also call for FCMs to set aside funds, 
called the ``foreign futures and foreign options secured amount'', to 
help protect the funds of U.S. customers trading on non-U.S. futures 
markets.\8\ In the event of a shortfall in the Section 4d segregated 
funds or the Part 30 secured funds that an FCM must hold, the 
Commission's minimum net capital requirements provide protection to 
customers by requiring each FCM to maintain a minimum level of assets 
that are readily available to be contributed in the event of a 
shortfall in the customer funds. The minimum capital requirements also 
protect customers and market participants by ensuring that an FCM 
remains solvent while waiting for margin calls to be met.
---------------------------------------------------------------------------

    \5\ Section 4f(b) of the Commodity Exchange Act (``Act'') 
authorizes the Commission, by regulation, to impose minimum 
financial and related reporting requirements on FCMs and IBs. The 
Act is codified at 7 U.S.C. 1 et seq. (2000), and Section 4f(b) of 
the Act is codified at 7 U.S.C. Sec.  6f(b).
    \6\ 68 FR 40835, 40836 (July 9, 2003) (Minimum Financial and 
Related Reporting Requirements for Futures Commission Merchants and 
Introducing Brokers).
    \7\ Section 4d of the Act is codified at 7 U.S.C. Sec.  6d 
(2000).
    \8\ The term ``foreign futures and foreign options secured 
amount'' is defined in Regulation 1.3(rr).
---------------------------------------------------------------------------

    Because FCM capital requirements contribute to the security of 
customer

[[Page 57452]]

funds and the overall financial integrity of the futures markets, the 
Commission also adopted provisions in Commission Regulation 1.12(g)(2) 
that require notice of certain equity withdrawal transactions by 
FCMs.\9\ The provisions in Regulation 1.12(g)(2) originally were 
included among several proposals made by the Commission in 1994 in 
response to the financial difficulties experienced by certain FCMs 
operating within holding company structures.\10\ These proposals were 
intended to provide the Commission with access to information 
concerning the activities of FCM affiliates whose activities were 
reasonably likely to have a material impact on the financial or 
operational condition of the FCM. The Commission subsequently 
determined, in response to the recommendations of several commenters, 
that the notice requirements in Regulation 1.12(g) should be applied 
broadly to all FCMs, and not just to those subject to reporting 
requirements with respect to their material affiliates.\11\
---------------------------------------------------------------------------

    \9\ The notification requirements in Regulation 1.12(g) were 
made applicable to all FCMs effective May 31, 1996. 61 FR 19177 (May 
1, 1996). Regulation 1.12(g) does not apply to IBs.
    \10\ 59 FR 9689, 9690-9691 (March 1, 1994) (Risk Assessment for 
Holding Company Systems). The preamble for this proposed rulemaking 
identifies three FCMs within holding company structures that had 
experienced financial difficulties.
    \11\ 61 FR at 19179.
---------------------------------------------------------------------------

    In particular, Regulation 1.12(g)(2) requires that an FCM provide 
notice at least two business days prior to an action to withdraw equity 
from an FCM, or a subsidiary or affiliate consolidated pursuant to 
Regulation 1.17(f), if the equity withdrawal transaction would cause, 
on a net basis, a reduction in the FCM's excess adjusted net capital of 
30 percent or more. In response to the receipt of such a notice, 
Regulation 1.12(g)(3) provides that the Director of the Commission's 
Division of Clearing and Intermediary Oversight, or the Director's 
designee, may require that the FCM provide, within three business days 
from the date of the request or such shorter period as the Division 
Director or designee may specify, such other information as the 
Division Director or designee determines to be necessary based upon 
market conditions, reports provided by the FCM, or other available 
information.\12\
---------------------------------------------------------------------------

    \12\ Regulation 1.12(g)(2) also provides that the Commission may 
require the FCM to cause a Material Affiliated Person, as that term 
is defined in Commission Regulation 1.14(a)(2), to respond to 
requests for information from the Division Director.
---------------------------------------------------------------------------

II. Equity Withdrawal Transactions That Could Be Temporarily Delayed 
Under the Proposed Rule

    When first proposing the notification provision eventually adopted 
as Regulation 1.12(g)(2), the Commission noted that it could serve as 
``early warning'' of impending financial difficulties at an FCM or at 
its holding company.\13\ The only consequence that the regulation 
expressly contemplates as a result of the warning is that the 
Commission may require additional information from the FCM, with the 
response to be provided in a period of three days or less, as directed 
by the Commission. At the time that Regulation 1.2(g)(2) was adopted, 
the Commission determined that it was not necessary to adopt additional 
limitations within the Commission's regulations on equity withdrawal 
transactions.\14\
---------------------------------------------------------------------------

    \13\ 59 FR at 9698-99.
    \14\ 61 FR at 19180.
---------------------------------------------------------------------------

    However, the recent precipitous decline of a large FCM holding 
company has confirmed that expedited action may be necessary to protect 
FCM capital in the face of increasing financial pressures experienced 
by its parent and/or affiliated entities. In this recent example, the 
FCM registrant was part of a complex organizational group consisting of 
several layers of holding companies and their subsidiaries. In October 
of 2005, the parent company for the group announced that its chief 
executive officer had been placed on leave, and that its financial 
statements for the years 2002 through 2005 should not be relied upon. 
The next day, Federal authorities charged the chief executive officer 
with securities fraud, and on the following day the holding company 
declared that certain liquidity difficulties were causing it to impose 
a 15-day moratorium for the activities of a nonregulated subsidiary. 
According to prior financial filings of the holding company, this 
nonregulated subsidiary had been responsible for a material portion of 
the holding company's business.
    In response to these foregoing events, the Securities and Exchange 
Commission (``SEC'') issued an order to temporarily restrict 
withdrawals of capital from two other subsidiaries of the holding 
company, which were registered as securities broker-dealers.\15\ In 
issuing the order, the SEC cited to its regulation, 17 CFR Sec.  
240.15c3-1(e)(3)(i), which provides that the SEC may by order restrict, 
for a period up to twenty business days, any withdrawal by the broker 
or dealer of equity capital or unsecured loan or advance to a 
stockholder, partner, sole proprietor, employee or affiliate, if (1) 
such withdrawal, advance or loan when aggregated with all other 
withdrawals, advances or loans on a net basis during a 30 calendar day 
period, exceeds 30 percent of the broker or dealer's excess net 
capital; and (2) the SEC, based on the facts and information available, 
concludes that the withdrawal, advance or loan may be detrimental to 
the financial integrity of the broker or dealer, or may unduly 
jeopardize the broker or dealer's ability to repay its customer claims 
or other liabilities that may cause a significant impact on the markets 
or expose the customers or creditors of the broker or dealer to loss 
without taking into account the application of the Securities Investor 
Protection Act.\16\ As described by the SEC, Sec.  240.15c3-1(e)(3)(i) 
enables the SEC and its staff to examine further the financial 
condition of the broker-dealer, so as to determine whether, and under 
what circumstances, to permit the withdrawal, entirely or partially, or 
to prohibit the withdrawal for additional periods by issuing subsequent 
orders, with terms that are no longer than twenty business days.\17\
---------------------------------------------------------------------------

    \15\ A copy of the SEC order, dated October 13, 2005, may be 
accessed electronically at http://www.sec.gov/rules/other/34-52606.pdf.
    \16\ This SEC regulation also provides that an order temporarily 
prohibiting the withdrawal of capital shall be rescinded if, 
sometime after a hearing that is to be held within two business days 
from the date of the request in writing by the broker or dealer, the 
SEC determines that the restriction on capital withdrawal should not 
remain in effect. 17 CFR 240.15c3-1(e)(3)(ii).
    \17\ 55 FR 34027, 34030 (August 15, 1990) (proposing amendments 
to SEC Regulation 15c3-1 regarding withdrawals of equity capital).
---------------------------------------------------------------------------

    The Commission is proposing rule amendments in this release that 
share many aspects in common with the SEC's regulation for temporary 
delays of equity withdrawals. The proposed amendments to its 
regulations would provide the Commission with the ability to impose 
further restrictions on the flow of capital from an FCM to its holding 
company and other affiliated entities, as appropriate, in the face of 
fast-developing events that pose potential threats to the capital of 
FCMs. The Commission would impose such restrictions by way of an order 
that would be effective for a twenty-day time period, and the 
Commission could continue to make the restrictions effective against 
the FCM by issuing subsequent orders, each with a term of no more than 
twenty business days. During the periods when such orders would be 
effective, Commission staff could evaluate the effect of the proposed 
withdrawals on the continuing

[[Page 57453]]

adequacy of customer safeguards at the firm, including the continuing 
adequacy of the firm's liquid assets, in light of the most current 
information available from the FCM concerning its operations and those 
of its holding company and affiliates. As such, the proposed regulation 
would serve to further enhance the security of customer funds and the 
overall financial integrity of the futures markets.\18\ It is 
imperative that the Commission have the option to consider requiring 
such temporary delays of equity withdrawals whenever urgent 
circumstances so require.
---------------------------------------------------------------------------

    \18\ In the years since the Commission last adopted rule 
amendments addressing equity withdrawal transactions, the amount of 
funds that FCMs are required to hold as segregated funds has more 
than doubled. As of August 31, 1995, FCMs were required to hold 
approximately $25 billion as segregated funds, and $6 billion as 
secured funds. As of December 31, 2005, the amount that FCMs were 
required to hold as segregated funds had increased to over $95 
billion, and the amount required to be held as secured funds had 
grown to almost $25 billion.
---------------------------------------------------------------------------

    The Commission also has been advised by staff that Commission 
Regulations 1.12 and 1.17, which include references to FCMs and IBs 
that are organized as corporations, partnerships, or sole 
proprietorships, currently lack a specific reference to firms organized 
as ``limited liability companies.'' \19\ The Commission therefore is 
proposing other amendments in this release that would modernize the 
provisions of Regulations 1.12 and 1.17, by including references to 
limited liability companies.
---------------------------------------------------------------------------

    \19\ The Commission recently has revised other regulations to 
reflect the development of limited liability companies (``LLCs''). 
See, e.g. 69 FR 49784, 49793-4 (August 12, 2004). The amendments 
adopted in 2004 related to the management of LLCs, in order to 
determine persons with appropriate signature authority to file 
financial reports for the FCM or IB.
---------------------------------------------------------------------------

III. Proposed Amendments to Regulations 1.12 and 1.17

    In view of the foregoing considerations, the Commission is 
proposing to add a new paragraph (g)(1) to Regulation 1.17, which would 
provide that the Commission may by order restrict, for a period up to 
twenty business days, any withdrawal by the FCM of equity capital or 
any unsecured advance or loan to a stockholder, partner, limited 
liability company member, sole proprietor, employee or affiliate, if:
    (i) Such withdrawal, advance or loan, when aggregated with all 
other withdrawals, advances or loans during a 30 calendar day period 
from the FCM, or from a subsidiary or affiliate of the FCM consolidated 
pursuant to Sec.  1.17(f), would cause a net reduction in the FCM's 
excess adjusted net capital of 30 percent or more; and
    (ii) The Commission has concluded, in light of available facts and 
circumstances, that such withdrawal, advance or loan may be detrimental 
to the financial integrity of the FCM, or may unduly jeopardize its 
ability to meet customer obligations or other liabilities that may 
cause a significant impact on the markets.\20\
---------------------------------------------------------------------------

    \20\ Paragraph (g) of Regulation 1.17 currently is reserved.
---------------------------------------------------------------------------

    Under a proposed paragraph (g)(2) for Regulation 1.17, the FCM 
would be permitted to file with the Secretary of the Commission a 
written petition to request that the Commission rescind the order 
issued under paragraph (g)(1). The Commission would notify the FCM in 
writing that its petition for rescission had been denied, or, if the 
Commission determined that the order issued under paragraph (g)(1) 
should not remain in effect, the order would be rescinded. The petition 
filed by the FCM must specify the facts and circumstances supporting 
its request for rescission.
    Finally, the Commission also is proposing to add a reference to 
``limited liability company members'' in Regulation 1.12(g), to reflect 
the ownership of FCMs that are organized as limited liability 
companies. The Commission also is proposing to add references to 
limited liability company members in Regulation 1.17(d)(1) \21\ and 
Regulation 1.17(e).\22\ Furthermore, the Commission proposes to add a 
new subparagraph (D) to Rule 1.17(d)(1)(ii), in order to include as 
equity, in the case of a limited liability company, the sum of the 
``capital accounts of limited liability company members, and unrealized 
profit and loss.''
---------------------------------------------------------------------------

    \21\ Funds received under ``satisfactory subordination 
agreements'', as defined in Regulation 1.17(h), may be treated by 
the FCM as equity if the agreement meets certain additional criteria 
set forth in Regulation 1.17(d)(1), including that the lender under 
the agreement be a partner or stockholder. As proposed, Regulation 
1.17(d)(1) would provide that the lender also may be a ``limited 
liability company member.''
    \22\ The proposed amendment to Regulation 1.17(e) would include 
unsecured advances or loans to limited liability company members as 
equity withdrawal transactions that are prohibited if they would 
exceed the amounts permitted by the regulation.
---------------------------------------------------------------------------

    The Commission requests comment on each of the proposed amendments 
to Regulations 1.12 and 1.17 that have been described in this release.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission previously has 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.\23\ The Commission has determined previously 
that FCMs are not small entities for the purpose of the RFA.\24\ With 
respect to IBs, the Commission has determined to evaluate within the 
context of a particular rule proposal whether all or some IBs would be 
considered ``small entities'' for purposes of the RFA and, if so, to 
analyze at that time the economic impact on IBs of any such rule.\25\
---------------------------------------------------------------------------

    \23\ 47 FR 18618 (April 30, 1982).
    \24\ 47 FR at 18619.
    \25\ 47 FR at 18618, 18620.
---------------------------------------------------------------------------

    The proposed amendments to Regulation 1.17(g) would apply to FCMs 
only and therefore would have no economic impact on IBs. The proposed 
amendments to Regulation 1.17(d) and (e) and Regulation 1.12(g) solely 
provide clarifying language to reflect new business organizations 
structures that were not prevalent when these rules were first adopted. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the action proposed to be taken 
herein will not have a significant economic impact on a substantial 
number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \26\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The amendments being proposed would 
not, if approved, require a new collection of information on the part 
of the entities that would be subject to the proposed regulations.
---------------------------------------------------------------------------

    \26\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its action before issuing a new regulation under 
the Act. By its terms, Section 15(a) as amended does not require the 
Commission to quantify the costs and benefits of a new regulation or to 
determine whether the benefits of the regulation outweigh its costs. 
Rather, Section 15(a) simply requires the Commission to ``consider the 
costs and benefits'' of its action.
    Section 15(a) of the Act further specifies that costs and benefits 
shall be

[[Page 57454]]

evaluated in light of five broad areas of market and public concern: 
Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular regulation was necessary or appropriate to protect the 
public interest or to effectuate any of the provisions or to accomplish 
any of the purposes of the Act. The proposed amendments to Regulation 
1.17(g) would permit the Commission to issue orders temporarily 
restricting certain equity withdrawal transactions in circumstances 
that pose significant concerns for the financial condition of FCMs. The 
Commission is considering the costs and benefits of these proposed 
amendments in light of the specific provisions of Section 15(a) of the 
Act, as follows:
    1. Protection of market participants and the public. Under the 
proposed Regulation 1.17(g), the Commission would be able, in 
exceptional circumstances, to temporarily delay certain withdrawals of 
FCM equity by their owners and other insiders, which would contribute 
to the benefit of ensuring that eligible FCMs can meet their financial 
obligations to customers and other market participants.
    2. Efficiency and competition. The proposed amendments should have 
no effect, from the standpoint of imposing costs or creating benefits, 
on the efficiency and competition of the futures markets.
    3. Financial integrity of futures markets and price discovery. The 
proposed regulation contributes to the financial integrity of futures 
markets by helping to confirm and preserve the capital of FCM 
registrants. The proposed amendments should have no effect, from the 
standpoint of imposing costs or creating benefits, on the price 
discovery function of such markets.
    4. Sound risk management practices. In order to avoid application 
of the proposed regulation, FCMs may enhance existing risk management 
practices relating to the risks that practices of FCM affiliates may 
pose to the ability of FCMs to meet their obligations to customers and 
other participants in the futures markets.
    5. Other public interest considerations. The proposed amendments to 
Regulations 1.12(g), 1.17(d)(1) and 1.17(e), which would add references 
to limited liability company members and their capital contributions, 
help modernize the Commission's regulations by taking into 
consideration new forms of business organizations used by FCMs and IBs.
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the proposal with their comment letters.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

    Accordingly, 17 CFR Chapter I is proposed to be amended as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub.L. 106-554, 114 
Stat. 2763 (2000).

    2. Section 1.12 is proposed to be amended by revising paragraph 
(g)(2) to read as follows:


Sec.  1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

* * * * *
    (g) * * *
    (2) If equity capital of the futures commission merchant or a 
subsidiary or affiliate of the futures commission merchant consolidated 
pursuant to Sec.  1.17(f) (or 17 CFR Sec.  240.15c3-1e) would be 
withdrawn by action of a stockholder or a partner or a limited 
liability company member or by redemption or repurchase of shares of 
stock by any of the consolidated entities or through the payment of 
dividends or any similar distribution, or an unsecured advance or loan 
would be made to a stockholder, partner, sole proprietor, limited 
liability company member, employee or affiliate, such that the 
withdrawal, advance or loan would cause, on a net basis, a reduction in 
excess adjusted net capital (or, if the futures commission merchant is 
qualified to use the filing option available under Sec.  1.10(h), 
excess net capital as defined in the rules of the Securities and 
Exchange Commission) of 30 percent or more, notice must be provided at 
least two business days prior to the withdrawal, advance or loan that 
would cause the reduction: Provided, however, That the provisions of 
paragraphs (g)(1) and (g)(2) of this section do not apply to any 
futures or securities transaction in the ordinary course of business 
between a futures commission merchant and any affiliate where the 
futures commission merchant makes payment to or on behalf of such 
affiliate for such transaction and then receives payment from such 
affiliate for such transaction within two business days from the date 
of the transaction.
* * * * *
    3. Section 1.17 is proposed to be amended by revising paragraph 
(d)(1) introductory text; adding paragraph (d)(1)(ii)(D); revising 
paragraph (e) introductory text; and adding paragraph (g), to read as 
follows:


Sec.  1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

* * * * *
    (d) * * *
    (1) Equity capital means a satisfactory subordination agreement 
entered into by a partner or stockholder or limited liability company 
member which has an initial term of at least 3 years and has a 
remaining term of not less than 12 months if:
* * * * *
    (ii) * * *
    (D) in the case of a limited liability company, the sum of its 
capital accounts of limited liability company members, and unrealized 
profit and loss.
* * * * *
    (e) No equity capital of the applicant or registrant or a 
subsidiary's or affiliate's equity capital consolidated pursuant to 
paragraph (f) of this section, whether in the form of capital 
contributions by partners (including amounts in the commodities, 
options and securities trading accounts of partners which are treated 
as equity capital but excluding amounts in such trading accounts which 
are not equity capital and excluding balances in limited partners' 
capital accounts in excess of their stated capital contributions), par 
or stated value of capital stock, paid-in capital in excess of par or 
stated value, retained earnings or other capital accounts, may be 
withdrawn by action of a stockholder or partner or limited liability 
company member or by redemption or repurchase of shares of stock by any 
of the consolidated entities or through the payment of dividends or any 
similar distribution, nor may any unsecured

[[Page 57455]]

advance or loan be made to a stockholder, partner, sole proprietor, 
limited liability company member, or employee if, after giving effect 
thereto and to any other such withdrawals, advances, or loans and any 
payments of payment obligations (as defined in paragraph (h) of this 
section) under satisfactory subordination agreements and any payments 
of liabilities excluded pursuant to paragraph (c)(4)(vi) of this 
section which are scheduled to occur within six months following such 
withdrawal, advance or loan:
* * * * *
    (g)(1) The Commission may by order restrict, for a period up to 
twenty business days, any withdrawal by a futures commission merchant 
of equity capital, or any unsecured advance or loan to a stockholder, 
partner, limited liability company member, sole proprietor, employee or 
affiliate, if:
    (i) Such withdrawal, advance or loan would cause, when aggregated 
with all other withdrawals, advances or loans during a 30 calendar day 
period from the futures commission merchant or a subsidiary or 
affiliate of the futures commission merchant consolidated pursuant to 
Sec.  1.17(f) (or Sec.  17 CFR 240.15c3-1e), a net reduction in excess 
adjusted net capital (or, if the futures commission merchant is 
qualified to use the filing option available under Sec.  1.10(h), 
excess net capital as defined in the rules of the Securities and 
Exchange Commission) of 30 percent or more, and
    (ii) The Commission, based on the facts and information available, 
concludes that any such withdrawal, advance or loan may be detrimental 
to the financial integrity of the futures commission merchant, or may 
unduly jeopardize its ability to meet customer obligations or other 
liabilities that may cause a significant impact on the markets.
    (2) The futures commission merchant may file with the Secretary of 
the Commission a written petition to request rescission of the order 
issued under paragraph (g)(1) of this section. The petition filed by 
the futures commission merchant must specify the reasons supporting its 
request for rescission. The Commission shall respond in writing to deny 
the futures commission merchant's petition for rescission, or, if the 
Commission determines that the order issued under paragraph (g)(1) of 
this section should not remain in effect, the order shall be rescinded.
* * * * *

    Issued in Washington, DC, on September 25, 2006 by the 
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-16035 Filed 9-28-06; 8:45 am]
BILLING CODE 6351-01-P