20396 Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations

1Pub. L. 101–432, 104 Stat. 963 (1990).

2H.R. Rep. No. 101–524 and 101–477, 101st

Cong., 2nd Sess. (1990).

fan duct cowl (the firewall) of the thrust

reversers to determine the type of topcoat

material installed, in accordance with Boeing

Alert Service Bulletin 737–78A1056, dated

August 11, 1994.

(1) If the existing topcoat has silica fibers

in it, no further action is required by this AD.

(2) If the existing topcoat does not have

silica fibers in it, prior to further flight,

accomplish the application of the DC92–010

topcoat to the firewall of the thrust reversers

in accordance with the service bulletin.

(b) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager, Seattle

Aircraft Certification Office (ACO), FAA,

Transport Airplane Directorate. Operators

shall submit their requests through an

appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, Seattle ACO.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Seattle ACO.

(c) Special flight permits may be issued in

accordance with §§ 21.197 and 21.199 of the

Federal Aviation Regulations (14 CFR 21.197

and 21.199) to operate the airplane to a

location where the requirements of this AD

can be accomplished.

(d) The inspection and application shall be

done in accordance with Boeing Alert

Service Bulletin 737–78A1056, dated August

11, 1994. This incorporation by reference was

approved by the Director of the Federal

Register in accordance with 5 U.S.C. 552(a)

and 1 CFR part 51. Copies may be obtained

from Boeing Commercial Airplane Group,

P.O. Box 3707, Seattle, Washington 98124–

2207. Copies may be inspected at the FAA,

Transport Airplane Directorate, 1601 Lind

Avenue, SW., Renton, Washington; or at the

Office of the Federal Register, 800 North

Capitol Street, NW., suite 700, Washington,

DC.

(e) This amendment becomes effective on

May 26, 1995.

Issued in Renton, Washington, on April 14,

1995.

John J. Hickey,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 95–9771 Filed 4–25–95; 8:45 am]

BILLING CODE 4910–13–U

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for

Domestic Finance

17 CFR Parts 404 and 405

RIN 1505–AA47

Amendments to Regulations for the

Government Securities Act of 1986

AGENCY: Office of the Under Secretary

for Domestic Finance, Treasury.

ACTION: Final rule.

SUMMARY: The Department of the

Treasury (‘‘Department’’ or ‘‘Treasury’’)

is publishing, as a final rule,

amendments to the recordkeeping rules

in part 404 and the reporting rules in

part 405 of the regulations issued under

the Government Securities Act of 1986

(‘‘GSA’’). The recordkeeping

amendment requires entities registered

with the Securities and Exchange

Commission (‘‘SEC’’) as specialized

government securities brokers and

dealers (‘‘registered government

securities brokers and dealers’’) under

section 15C(a)(2) of the Securities

Exchange Act of 1934 (the ‘‘Exchange

Act’’) (15 U.S.C. 78o–5(a)(2)) to

maintain and preserve records

concerning the financial and securities

activities of affiliates whose business

activities are reasonably likely to have a

material impact on the financial or

operational condition of the registered

government securities brokers and

dealers. The reporting amendment

requires registered government

securities brokers and dealers to file

with the SEC quarterly summary reports

of the information required to be

maintained and preserved by the

recordkeeping amendment. The

amendments (‘‘risk assessment rules’’)

parallel the SEC’s final temporary risk

assessment rules applicable to brokers

and dealers that conduct general or

municipal securities businesses

(‘‘registered brokers and dealers’’). The

Department’s risk assessment rules are

being promulgated pursuant to the

authority granted to the Department by

the Market Reform Act of 1990 (the

‘‘Reform Act’’) and are intended to

provide regulators with access to

information concerning the financial

risk posed to registered government

securities brokers and dealers—and to

the securities markets as a whole—as a

result of certain financial and securities

activities conducted by affiliates within

holding company structures. The

Department is adopting the amendments

essentially unchanged from their

proposed form.

DATES: The effective date is June 30,

1995. The rules are being implemented

in accordance with a phase-in schedule.

See Section III of this preamble for the

entire schedule.

FOR FURTHER INFORMATION CONTACT:

Kerry Lanham (Government Securities

Specialist) or Lee Grandy (Government

Securities Specialist) at 202–219–3632.

(TDD for hearing impaired: 202–219–

3988.)

SUPPLEMENTARY INFORMATION:

I. Background

In response to the stock market

disruption of October 1987, the

bankruptcy of Drexel Burnham Lambert

Group, Inc. (‘‘Drexel’’) in February 1990,

and other developments in the

securities markets, Congress passed the

Reform Act in September 1990.1 Among

other things, the Reform Act provided

the SEC and Treasury separate but

parallel authority to promulgate risk

assessment rules for certain brokerdealer holding company structures. The

Reform Act authorized Treasury to

require registered government securities

brokers and dealers to maintain and

report information on the financial and

securities activities of certain affiliates

that had the potential to pose material

amounts of risk to the brokers and

dealers. The Reform Act did not

authorize Treasury to require financial

institutions that have filed notice (or are

required to file notice) as government

securities brokers and dealers to

maintain and report risk assessment

information, although registered

government securities brokers and

dealers that are subject to the rules must

maintain records and submit reports

pertaining to the financial and securities

activities of certain affiliates that are

financial institutions.

The Drexel failure demonstrated that

financial difficulties or liquidity

problems of parent companies or

affiliates of brokers and dealers could

have a material and adverse effect on

brokers and dealers themselves; risk

assessment authority was therefore

intended to help regulators monitor

such developments. The primary focus

of the risk assessment authority was the

financial health of large holding

companies whose potential failures pose

risks to their affiliated brokers and

dealers, as well as to the securities

markets and the financial system as a

whole. The Department believes that

these rules will enhance the safety of

the government securities market and

provide for more effective regulatory

oversight.

The legislative history 2 of the Reform

Act indicated that risk assessment rules

would require information concerning

several particular types of potentially

risky financial and securities activities

conducted by affiliates of brokers and

dealers, including bridge loans, interest

rate swaps, foreign currency

transactions, other derivatives (e.g.,

forwards and futures), and real estate
Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations 20397

3Securities Exchange Act Release No. 34–29635

(August 30, 1991), 56 FR 44014 (September 6,

1991).

4Securities Exchange Act Release No. 34–30929

(July 16, 1992), 57FR 32159 (July 21, 1992).

5 17 CFR 240.17h–1T.

6 17 CFR 240.17h–2T.

7Pub. L. 102–546, 106 Stat. 3590 (1992).

8 59 FR 9689 (March 1, 1994).

9 59 FR 66674 (December 28, 1994).

10 59 FR 58792 (November 15, 1994).

11See letter from Michael Macchiaroli, Associate

Director, Division of Market Regulation, Securities

and Exchange Commission to Douglas G. Preston,

Esq., Securities Industry Association (September 20,

1993). (1993 Transfer Binder) Fed. Sec. L. Rep.

(CCH) ¶ 76,696. 12 Id.

developments. Off-balance sheet

derivatives such as interest rate swaps

and foreign currency transactions were

identified as particularly important

categories for risk assessment rules

given their high growth rates and the

limited public information available

regarding their magnitude and use.

Affiliates conducting these largely

unregulated activities can attain a

degree of leverage and assume credit

risks that brokers and dealers, which are

subject to the capital and customer

protection rules of the Treasury and the

SEC, cannot attain. The business

activities of these affiliates could have

significant and adverse effects on the

financial health of brokers and dealers.

For example, large losses at the parent

company level might cause the credit

rating of the parent to decline, which

could cause liquidity problems at the

broker or dealer. Thus, the Reform Act

specifically provided the SEC with

direct access to information concerning

the business activities of brokers’ and

dealers’ affiliates that are outside of SEC

oversight.

In September 1991, the SEC published

for comment proposed temporary Rules

17h–1T and 17h–2T, which together

with proposed Form 17–H, would

establish a risk assessment

recordkeeping and reporting system for

registered brokers and dealers.3 After

reviewing the 63 comment letters it

received and making modifications, the

SEC issued in July 1992 final temporary

risk assessment rules.4 Rule 17h–1T5 is

a recordkeeping rule identifying and

describing the records that registered

brokers and dealers are required to

maintain and preserve. Rule 17h–2T6

sets forth requirements for registered

brokers and dealers to submit quarterly

reports summarizing the information

required to be maintained under Rule

17h–1T. The preamble of the SEC’s final

temporary rules stated that the SEC staff

would issue for public comment a study

evaluating the effectiveness of the SEC’s

risk assessment rules within 90 days

after the rules have been fully operative

for two years. At that time, the SEC will

consider what, if any, modifications to

its rules would be appropriate. Treasury

will consult with the SEC regarding the

study and assessment of its rules to

determine whether any of the SEC’s

findings are germane to Treasury’s risk

assessment rules.

The Commodity Futures Trading

Commission (‘‘CFTC’’) was also

authorized to promulgate risk

assessment rules applicable to registered

futures commission merchants

(‘‘FCMs’’) pursuant to the Futures

Trading Practices Act of 1992.7 The

CFTC published its proposed risk

assessment rules in March 1994.8 The

CFTC extended its comment period

twice before promulgating the first part

of its final risk assessment rules in

December 1994,9 which require certain

FCMs to maintain and file key

information addressing the overall

structure of holding companies

involving the FCMs. The CFTC deferred

action on other portions of its proposed

rules pending further review and

consultation with other regulators.

Treasury published its risk

assessment amendments in proposed

form on November 15, 1994,10 and the

comment period closed on January 17,

1995. The Department received no

comments in response to the proposal.

II. Analysis

A. Reporting and Recordkeeping

Requirements

The Department’s risk assessment

rules incorporate the SEC’s final

temporary risk assessment Rules 17h–

1T and 17h–2T, with minor

modifications that reflect both the

specialized activities of registered

government securities brokers and

dealers and the Department’s analysis of

the SEC’s interpretive letter to the

Securities Industry Association (‘‘SIA’’)

in September 1993.11 Under the

Department’s rules, two general

categories of records will be required:

(1) Information concerning the holding

company organization, risk management

policies, and material legal proceedings;

and (2) financial and securities

information pertinent to assessing risk

in the holding company system (e.g.,

consolidating and consolidated

financial statements and positions in

various financial instruments). The

information required to be maintained

and preserved pursuant to the

recordkeeping rules will be subject to

routine inspection by the SEC and the

self-regulatory organizations. Under the

reporting rules, registered government

securities brokers and dealers will be

required to file with the SEC quarterly

summaries of the information that must

be maintained under the recordkeeping

rules. These quarterly summaries will

be required to be filed on the SEC’s

Form 17–H. A more detailed discussion

of the Department’s specific risk

assessment requirements is included in

the preamble to the proposed rules.

The information required to be

maintained and reported by the firms

pertains only to the firms’ ‘‘Material

Associated Persons’’ (‘‘MAPs’’). The

Reform Act did not define MAPs.

However, the legislative history

accompanying the statute specified a

number of factors that should be

considered when determining which

affiliates (associated persons) might

have a ‘‘material’’ impact on the

financial or operational condition of

brokers and dealers. These factors have

been incorporated into paragraph 17h–

1T(a)(2), thereby providing guidelines

for determining which affiliates of the

brokers and dealers are MAPs. The

initial designation of MAPs will be

made by the affected registered

government securities brokers and

dealers.

The term ‘‘associated persons,’’ as

explained in the legislative history, is

based on the definition at 3(a)(18) of the

Exchange Act (15 U.S.C. 78c(a)(18)),

except that natural persons are excluded

for the purposes of the risk assessment

rules (which automatically excludes

natural persons from the definition of

MAPs). Consistent with the SEC

approach,12 partnerships will not be

treated as natural persons and,

depending on the circumstances, may

be deemed to be MAPs of the registered

government securities broker or dealer.

Subchapter S corporations may be

treated as natural persons for purposes

of the amendments if the Subchapter S

corporation is owned by one natural

person.

Note that, with respect to the

Department’s risk assessment rules, the

definition of ‘‘associated persons’’

differs from the definition of that term

as specified in § 400.3 of the GSA

regulations. The term as used in § 400.3

specifically applies to certain natural

persons who are associated with

government securities brokers or

dealers.

B. Exemptions and Special Provisions

The Department is incorporating, with

modifications and supplements, the

SEC’s exemptive provisions (17 CFR

240.17h–1T(d) and 240.17h–2T(b)). The

Department’s provisions will exempt

registered government securities brokers
20398 Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations

13Similarly, the CFTC’s final risk assessment

rules permit FCMs that are, or that have affiliates

that are, registered broker-dealers or registered

government securities broker-dealers to file Form

17–H in partial compliance with the CFTC’s rules.

See Supra note 9.

14The total estimated number of firms qualifying

for exemptions exceeds 22 because we anticipate

that some firms will qualify for more than one

exemption.

15Many of the commentators to the SEC’s

proposed risk assessment rules stated that they

would be required to make personnel and systems

adjustments to comply with the rules. To ease the

burden associated with meeting the requirements of

its rules, the SEC adopted a phased-in

implementation schedule. The Department is

adopting a similar phased-in approach to

implementation.

and dealers from all of Treasury’s risk

assessment rules if they: (1) Do not carry

customer accounts and maintain capital

(equity capital plus subordinated debt)

of less than $20 million; (2) maintain

capital of less than $250,000 (regardless

of whether they carry customer accounts

or not); or (3) have an affiliated

registered broker or dealer,13 provided

that the registered broker or dealer is

subject to, and in compliance with, the

SEC’s risk assessment rules, and

provided that all of the MAPs of the

registered government securities broker

or dealer are also MAPs of the registered

broker or dealer. A registered

government securities broker or dealer

that has no affiliates or holding

company would not be subject to the

Department’s risk assessment rules. The

Department’s rules also allow affiliated

registered government securities brokers

and dealers to request in writing that the

Department permit one of the firms—a

‘‘Reporting Registered Government

Securities Broker or Dealer’’—to

maintain and report risk assessment

information on behalf of the other

affiliated firms. The Department will

promptly advise the SEC and the

National Association of Securities

Dealers of such a request and consult

with them in order to provide for an

efficient examination process.

The Department is also adopting the

SEC’s special provisions for affiliates

that are already subject to supervision

by certain U.S. or foreign financial

regulatory authorities. (See paragraphs

(b) and (c) of 17 CFR 240.17h–1T, and

paragraphs (c) and (d) of 17 CFR

240.17h–2T, as modified by §§ 404.2(b)

and 405.5, respectively). With respect to

such affiliates, registered government

securities brokers and dealers will be

deemed in compliance with the

financial and securities recordkeeping

requirements of the rule by maintaining

copies of reports that such affiliates

already submit to certain domestic and

foreign regulators. The registered

government securities brokers and

dealers will, however, remain

responsible for maintaining

organizational charts, risk management

policies, and records of legal

proceedings in which they are involved,

and will have to submit such

information on Form 17–H (Items 1–3 of

Part I of the form).

The Department believes that these

types of special provisions and

exemptions will preclude duplicative

and unnecessary recordkeeping and

reporting for various registered

government securities brokers and

dealers without compromising

regulators’ need to capture information

on the potentially risky activities of

entire holding company systems.

C. Scope of Proposed Risk Assessment

Rules

In proposing its risk assessment rules,

the SEC noted that it believed the

majority of registered brokers and

dealers that conduct a business with the

public do not pose the types of risks the

Reform Act was designed to address.

Following this precept, the SEC

exempted from its rules registered

brokers and dealers whose activities are

not likely to pose a material threat to the

investing public or the marketplace

(e.g., limited purpose mutual fund

brokers), whose operations are relatively

small (as measured by capital levels), or

whose functions do not include carrying

customer accounts (unless they are large

firms).

The SEC also adopted special

provisions for registered brokers and

dealers that have certain regulated

affiliates, such as banks, insurance

companies, futures commission

merchants, and foreign affiliates,

recognizing the existence of certain

regulatory reporting by these entities

and eliminating the need to create a new

set of records for such entities. In lieu

of adhering to the bulk of the SEC’s risk

assessment rules, registered brokers and

dealers are, in certain specified cases,

able to maintain and submit copies of

reports that these affiliates already

routinely submit to U.S. and foreign

regulators.

Of the approximately 5,600 registered

brokers and dealers that conduct a

public business, SEC staff informs us

that roughly 250 firms are currently

following the SEC’s risk assessment

rules. These are the largest firms and the

ones that potentially pose the most risk

to the markets. In contrast, of the 33

registered government securities firms

in existence at the time of this writing,

approximately 11 are potentially subject

to the Department’s risk assessment

rules since we estimate that 22 of the 33

firms will qualify for at least one of the

Treasury exemptions. It appears that

five registered government securities

brokers and dealers will qualify for an

exemption because their capital levels

are under $250,000. Fourteen firms will

qualify for an exemption because they

do not carry customer accounts and

have capital of less than $20 million.

Six firms will potentially qualify for an

exemption because their affiliated

registered brokers and dealers follow the

SEC’s risk assessment rules.14

Of the 11 firms potentially subject to

the Department’s rules, three are

affiliated within the same holding

company structure. Thus, any one of the

firms will be able to request that the

Department authorize it to be the

Reporting Registered Government

Securities Broker or Dealer on behalf of

the other two firms. Of the remaining

eight firms that are potentially subject to

the Department’s rules, three have

foreign bank holding companies, which

could ease their recordkeeping and

reporting requirements considerably.

These firms should be able to maintain

and submit the same reports that their

holding companies submit to foreign

financial regulatory authorities, with a

copy translated into English. The

amount of information the remaining

five firms will be required to maintain

and report will be based on the number

of MAPs designated and the types of

activities the MAPs conduct. The

Department believes this approach

meets the objectives of the statute

without imposing significant costs or

burdens on market participants. In order

to provide affected firms time to make

personnel and systems adjustments

required for compliance, the

Department has adopted a multi-month

phase-in period.15 Refer to Section III

below for the Department’s

implementation schedule.

In preparing the rules, the Department

consulted with the staffs of the SEC and

the bank regulatory agencies; they

concur with the Department’s approach.

The Department is also promulgating

technical amendments to § 404.2 by

redesignating paragraphs (b) and (c) as

paragraphs (c) and (d), respectively, and

by revising newly redesignated

paragraph (c). The revisions to

redesignated paragraph (c) will more

accurately define the terms ‘‘registered

government securities broker or dealer’’

and ‘‘the Secretary of the Treasury’’ as

they are used to modify 17 CFR

240.17a–7.

III. Implementation Schedule

Most of the Department’s

implementation dates have been
Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations 20399

modified from the dates in the proposed

rules to provide affected firms with

sufficient time to make the necessary

preparations to comply with the rules.

Effective June 30, 1995, affected firms

will be required to maintain records of

an organizational chart, written risk

management procedures, and a

description of material legal or

arbitration proceedings; the entire

recordkeeping provisions will apply as

of September 30, 1995.

The Department’s rules will require

affected firms to file the organizational

chart, the written risk management

procedures, and the description of

material legal or arbitration proceedings

(Part I, Items 1–3 of Form 17–H) by July

31, 1995; the entire reporting provisions

(i.e., the remaining portions of Form 17–

H, including documents attached in

accordance with the special provisions

for entities subject to certain domestic

and foreign regulators) will apply for the

period ending September 30, 1995. The

affected firms will have 60 calendar

days after September 30, 1995, and after

each subsequent fiscal quarter, to

actually file the remaining portions of

Form 17–H. The cumulative year-end

financial statements required pursuant

to § 404.2(b)(4) must be filed within 105

calendar days of the end of the fiscal

year.

Note that following the first filing by

July 31, 1995, of the organizational

chart, the written risk management

procedures, and the description of

material legal or arbitration proceedings,

this information need be included in

quarterly filings only when a material

change in the information has occurred.

Additionally, the organizational chart is

required in each year-end filing.

IV. Special Analysis

It has been determined that these

amendments are not a ‘‘significant

regulatory action’’ for the purposes of

Executive Order 12866. Therefore, a

Regulatory Assessment is not required.

In the preamble to the proposed rules,

pursuant to the Regulatory Flexibility

Act (5 U.S.C. 601, et seq.), the

Department certified that these

amendments, if adopted, would not

have a significant economic impact on

a substantial number of small entities.

Accordingly, a regulatory flexibility

analysis was not prepared. In reviewing

the final rules being adopted herein and

in light of the fact that no comments

were received, the Department has

concluded that there is no reason to

alter the previous certification.

The collections of information

contained in the final regulations have

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3504(h)) under

control number 1535–0089.

Estimated total annual reporting and

recordkeeping burden: 264 hours

Estimated average annual burden per

respondent and recordkeeper: 24

hours

Estimated number of respondents and

recordkeepers: 11

Estimated annual frequency of response:

Four

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be directed

to the Forms Management Branch,

Bureau of the Public Debt, Department

of the Treasury, Parkersburg, West

Virginia 26106–1328; and to the Office

of Management and Budget, Paperwork

Reduction Project 1535–0089, Attention:

Desk Officer for Department of the

Treasury, Washington, DC 20503.

List of Subjects

17 CFR Part 404

Banks, Banking, Brokers, Government

securities, Reporting and recordkeeping

requirements.

17 CFR Part 405

Brokers, Government securities,

Reporting and recordkeeping

requirements.

For the reasons set out in the

Preamble, 17 CFR parts 404 and 405 are

amended as follows:

PART 404—RECORDKEEPING AND

PRESERVATION OF RECORDS

1. The authority citation for part 404

is revised to read as follows:

Authority: 15 U.S.C. 78o–5 (b)(1)(B),

(b)(1)(C), (b)(2), (b)(4).

2. Section 404.2 is amended by

redesignating paragraphs (b) and (c) as

paragraphs (c) and (d), respectively; by

revising newly redesignated paragraph

(c); and by adding new paragraph (b) to

read as follows:

§ 404.2 Records to be made and kept

current by registered government securities

brokers and dealers; records of nonresident registered government securities

brokers and dealers.

* * * * *

(b) Every registered government

securities broker or dealer shall comply

with the requirements of § 240.17h–1T

of this title (SEC Rule 17h–1T), with the

following modifications:

(1) For the purposes of this section,

references to ‘‘broker or dealer’’ and

‘‘broker or dealer registered with the

Commission pursuant to Section 15 of

the Act’’ mean registered government

securities brokers or dealers.

(2) For the purposes of this section,

references to §§ 240.17h–1T and

240.17h–2T of this title mean those

sections as modified by §§ 404.2(b) and

405.5, respectively.

(3) For the purposes of this section,

‘‘associated person’’ has the meaning set

out in Section 3(a)(18) of the Act (15

U.S.C. 78c(a)(18)), except that natural

persons are excluded.

(4) Paragraphs 240.17h–1T(a)(1)(iii)

through (vi) of this title are modified to

read as follows:

‘‘(iii) A description of all material

pending legal or arbitration proceedings

involving a Material Associated Person

or the registered government securities

broker or dealer that are required to be

disclosed, under generally accepted

accounting principles on a consolidated

basis, by the highest level holding

company that is a Material Associated

Person.

‘‘(iv) Consolidated and consolidating

balance sheets, prepared in accordance

with generally accepted accounting

principles, which may be unaudited and

which shall include the notes to the

financial statements, as of quarter-end

for the registered government securities

broker or dealer and its highest level

holding company that is a Material

Associated Person;

‘‘(v) Quarterly consolidated and

consolidating income statements and

consolidated cash flow statements,

prepared in accordance with generally

accepted accounting principles, which

may be unaudited and which shall

include the notes to the financial

statements, for the registered

government securities broker or dealer

and its highest level holding company

that is a Material Associated Person;

‘‘(vi) The amount as of quarter-end,

and at month-end if greater than

quarter-end, of the aggregate long and

short securities and commodities

positions held by each Material

Associated Person, including a separate

listing of each single unhedged

securities or commodities position,

other than U.S. Treasury securities, that

exceeds the Materiality Threshold at

any month-end;’’

(5) Paragraphs 240.17h–1T(a)(3) and

(a)(4) of this title are modified to read

as follows:

‘‘(3) The information, reports and

records required by the provisions of

this section shall be maintained and

preserved in accordance with the

provisions of § 404.3 of this title and

shall be kept for a period of not less

than three years in an easily accessible

place.

‘‘(4) For the purposes of this section

and § 405.5 of this title, the term
20400 Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations

‘‘Materiality Threshold’’ shall mean the

greater of:

‘‘(i) $100 million; or

‘‘(ii) 10 percent of the registered

government securities broker’s or

dealer’s liquid capital based on the most

recently filed Form G–405 (or, in the

case of futures commission merchants

and interdealer brokers subject to the

capital rules in §§ 402.1(d) and 402.1(e),

respectively, tentative net capital based

on the most recently filed Form X–17A–

5) or 10 percent of the Material

Associated Person’s tangible net worth,

whichever is greater.’’

(6) Paragraph 240.17h–1T(b) of this

title is modified to read as follows:

‘‘(b) Special provisions with respect to

Material Associated Persons subject to

the supervision of certain domestic

regulators. A registered government

securities broker or dealer shall be

deemed to be in compliance with the

recordkeeping requirements of

paragraph (a)(1)(iii) through (x) of this

section with respect to a Material

Associated Person if:’’

* * * * *

(7) Paragraph 240.17h–1T(c) of this

title is modified to read as follows:

‘‘(c) Special provisions with respect to

Material Associated Persons subject to

the supervision of a foreign financial

regulatory authority. A registered

government securities broker or dealer

shall be deemed to be in compliance

with the recordkeeping requirements of

paragraph (a)(1)(iii) through (x) of this

section with respect to a Material

Associated Person if such registered

government securities broker or dealer

maintains in accordance with the

provisions of this section copies of the

reports filed by such Material

Associated Person with a Foreign

Financial Regulatory Authority. The

registered government securities broker

or dealer shall maintain a copy of the

original report and a copy translated

into the English language. For the

purposes of this section, the term

Foreign Financial Regulatory Authority

shall have the meaning set forth in

section 3(a)(52) of the Act.’’

(8) Paragraph 240.17h–1T(d) of this

title is modified to read as follows:

‘‘(d) Exemptions. (1) The provisions of

this section shall not apply to any

registered government securities broker

or dealer:

‘‘(i) Which is exempt from the

provisions of § 240.15c3–3 of this title,

as made applicable by § 403.4, pursuant

to paragraph (k)(2) of § 240.15c3–3 of

this title; or

‘‘(ii) If the registered government

securities broker or dealer does not

qualify for an exemption from the

provisions of § 240.15c3–3 of this title,

as made applicable by § 403.4, and such

registered government securities broker

or dealer does not hold funds or

securities for, or owe money or

securities to, customers and does not

carry the accounts of, or for, customers;

unless

‘‘(iii) In the case of paragraphs (d)(1)(i)

or (ii) of this section, the registered

government securities broker or dealer

maintains capital of at least

$20,000,000, including debt

subordinated in accordance with

Appendix D of § 240.15c3–1 of this

title, as modified by Appendix D of

§ 402.2.

‘‘(2) The provisions of this section

shall not apply to any registered

government securities broker or dealer

which maintains capital of less than

$250,000, including debt subordinated

in accordance with Appendix D of

§ 240.15c3–1 of this title, as modified by

Appendix D of § 402.2, even if the

registered government securities broker

or dealer holds funds or securities for,

or owes money or securities to,

customers or carries the accounts of, or

for, customers.

‘‘(3) The provisions of this section

shall not apply to any registered

government securities broker or dealer

which has an associated person that is

a registered broker or dealer, provided

that:

‘‘(i) The registered broker or dealer is

subject to, and in compliance with, the

provisions of § 240.17h–1T and

§ 240.17h–2T of this title, and

‘‘(ii) All of the Material Associated

Persons of the registered government

securities broker or dealer are Material

Associated Persons of the registered

broker or dealer subject to § 240.17h–1T

and § 240.17h–2T of this title.

‘‘(4) In calculating capital for the

purposes of this paragraph, a registered

government securities broker or dealer

shall include with its equity capital and

subordinated debt the equity capital and

subordinated debt of any other

registered government securities brokers

or dealers or registered brokers or

dealers that are associated persons of

such registered government securities

broker or dealer, except that the equity

capital and subordinated debt of

registered brokers and dealers that are

exempt from the provisions of

§ 240.15c3–3 of this title, pursuant to

paragraph (k)(1) of § 240.15c3–3, shall

not be included in the capital

computation.

‘‘(5) The Secretary may, upon written

application by a Reporting Registered

Government Securities Broker or Dealer,

exempt from the provisions of this

section, either unconditionally or on

specified terms and conditions, any

registered government securities brokers

or dealers that are associated persons of

such Reporting Registered Government

Securities Broker or Dealer. The term

‘‘Reporting Registered Government

Securities Broker or Dealer’’ shall mean

any registered government securities

broker or dealer that submits such

application to the Secretary on behalf of

its associated registered government

securities brokers or dealers.’’

(9) Paragraph 240.17h–1T(g) of this

title is modified to read as follows:

‘‘(g) Implementation schedule. Every

registered government securities broker

or dealer subject to the requirements of

this section shall maintain and preserve

the information required by paragraphs

(a)(1)(i), (ii), and (iii) of this section

commencing June 30, 1995.

Commencing September 30, 1995, the

provisions of this section shall apply in

their entirety.’’

(c) (1) Every non-resident government

securities broker or dealer registered or

applying for registration pursuant to

Section 15C of the Act shall comply

with § 240.17a–7 of this title, provided

that:

(i) For the purposes of this section,

references to ‘‘broker or dealer’’ and

‘‘broker or dealer registered or applying

for registration pursuant to Section 15 of

the Act’’ mean registered government

securities brokers or dealers; and

(ii) For the purposes of this section,

references to ‘‘any rule or regulation of

the Commission’’ and ‘‘any rule or

regulation of the Securities and

Exchange Commission’’ mean any rule

or regulation of the Secretary.

(2) For the purposes of this section,

the term ‘‘non-resident government

securities broker or dealer’’ means:

(i) In the case of an individual, one

who resides in or has his principal place

of business in any place not subject to

the jurisdiction of the United States;

(ii) In the case of a corporation, one

incorporated in or having its principal

place of business in any place not

subject to the jurisdiction of the United

States; and

(iii) In the case of a partnership or

other unincorporated organization or

association, one having its principal

place of business in any place not

subject to the jurisdiction of the United

States.

* * * * *

PART 405—REPORTS AND AUDIT

3. The authority citation for part 405

is revised to read as follows:

Authority: 15 U.S.C. 78o–5 (b)(1)(B),

(b)(1)(C), (b)(2), (b)(4).
Federal Register / Vol. 60, No. 80 / Wednesday, April 26, 1995 / Rules and Regulations 20401

4. Section 405.5 is added to read as

follows:

§ 405.5 Risk assessment reporting

requirements for registered government

securities brokers and dealers.

(a) Every registered government

securities broker or dealer shall comply

with the requirements of § 240.17h–2T

of this title (SEC Rule 17h–2T), with the

following modifications:

(1) For the purposes of this section,

references to ‘‘broker or dealer’’ and

‘‘broker or dealer registered with the

Commission pursuant to Section 15 of

the Act’’ mean registered government

securities brokers or dealers.

(2) For the purposes of this section,

references to §§ 240.17h–1T and

240.17h–2T of this title mean those

sections as modified by §§ 404.2(b) and

405.5, respectively.

(3) For the purposes of this section,

‘‘associated person’’ has the meaning set

out in Section 3(a)(18) of the Act (15

U.S.C. 78c(a)(18)), except that natural

persons are excluded.

(4) Paragraph 240.17h–2T(b) of this

title is modified to read as follows:

‘‘(b) Exemptions. (1) The provisions of

this section shall not apply to any

registered government securities broker

or dealer:

‘‘(i) Which is exempt from the

provisions of § 240.15c3–3 of this title,

as made applicable by § 403.4, pursuant

to paragraph (k)(2) of § 240.15c3–3 of

this title; or

‘‘(ii) If the registered government

securities broker or dealer does not

qualify for exemption from the

provisions of § 240.15c3–3 of this title,

as made applicable by § 403.4, and such

registered government securities broker

or dealer does not hold funds or

securities for, or owe money or

securities to, customers and does not

carry the accounts of, or for, customers;

unless

‘‘(iii) In the case of paragraphs (b)(1)

(i) or (ii) of this section, the registered

government securities broker or dealer

maintains capital of at least

$20,000,000, including debt

subordinated in accordance with

Appendix D of § 240.15c3–1 of this title,

as modified by Appendix D of § 402.2.

‘‘(2) The provisions of this section

shall not apply to any registered

government securities broker or dealer

which maintains capital of less than

$250,000, including debt subordinated

in accordance with Appendix D of

§ 240.15c3–1 of this title, as modified by

Appendix D of § 402.2, even if the

registered government securities broker

or dealer holds funds or securities for,

or owes money or securities to,

customers or carries the accounts of, or

for, customers.

‘‘(3) The provisions of this section

shall not apply to any registered

government securities broker or dealer

which has an associated person that is

a registered broker or dealer, provided

that:

‘‘(i) The registered broker or dealer is

subject to, and in compliance with, the

provisions of § 240.17h–1T and

§ 240.17h–2T of this title, and

‘‘(ii) All of the Material Associated

Persons of the registered government

securities broker or dealer are Material

Associated Persons of the registered

broker or dealer subject to § 240.17h–1T

and § 240.17h–2T of this title.

‘‘(4) In calculating capital for the

purposes of this paragraph, a registered

government securities broker or dealer

shall include with its equity capital and

subordinated debt the equity capital and

subordinated debt of any other

registered government securities brokers

or dealers or registered brokers or

dealers that are associated persons of

such registered government securities

broker or dealer, except that the equity

capital and subordinated debt of

registered brokers and dealers that are

exempt from the provisions of

§ 240.15c3–3 of this title, pursuant to

paragraph (k)(1) of § 240.15c3–3, shall

not be included in the capital

computation.

‘‘(5) The Secretary may, upon written

application by a Reporting Registered

Government Securities Broker or Dealer,

exempt from the provisions of this

section, either unconditionally or on

specified terms and conditions, any

registered government securities brokers

or dealers that are associated persons of

such Reporting Registered Government

Securities Broker or Dealer. The term

‘‘Reporting Registered Government

Securities Broker or Dealer’’ shall mean

any registered government securities

broker or dealer that submits such

application to the Secretary on behalf of

its associated registered government

securities brokers or dealers.’’

(5) Paragraph 240.17h–2T(c) of this

title is modified to read as follows:

‘‘(c) Special provisions with respect to

Material Associated Persons subject to

the supervision of certain domestic

regulators. A registered government

securities broker or dealer shall be

deemed to be in compliance with the

reporting requirements of paragraph (a)

of this section with respect to a Material

Associated Person if such registered

government securities broker or dealer

files Items 1, 2, and 3 (in Part I) of Form

17–H in accordance with paragraph (a)

of this section, provided that:

‘‘(1) Such Material Associated Person

is subject to examination by or the

reporting requirements of a Federal

banking agency and the registered

government securities broker or dealer

or such Material Associated Person

furnishes in accordance with paragraph

(a) of this section copies of reports filed

by the Material Associated Person with

the Federal banking agency pursuant to

section 5211 of the Revised Statutes,

section 9 of the Federal Reserve Act,

section 7(a) of the Federal Deposit

Insurance Act, section 10(b) of the

Home Owners’ Loan Act, or section 5 of

the Bank Holding Company Act of 1956;

or’’

* * * * *

(6) Paragraph 240.17h–2T(d) of this

title is modified to read as follows:

‘‘(d) Special provisions with respect to

Material Associated Persons subject to

the supervision of a foreign financial

regulatory authority. A registered

government securities broker or dealer

shall be deemed to be in compliance

with the reporting requirements of

paragraph (a) of this section with

respect to a Material Associated Person

if such registered government securities

broker or dealer furnishes, in

accordance with the provisions of

paragraph (a) of this section, Items 1, 2,

and 3 (in Part I) of Form 17–H and

copies of the reports filed by such

Material Associated Person with a

Foreign Financial Regulatory Authority.

The registered government securities

broker or dealer shall file a copy of the

original Foreign Financial Regulatory

report and a copy translated into the

English language. For the purposes of

this section, the term Foreign Financial

Regulatory Authority shall have the

meaning set forth in section 3(a)(52) of

the Act.’’

(7) Paragraph 240.17h–2T(f) of this

title is modified to read as follows:

‘‘(f) Implementation schedule. Every

registered government securities broker

or dealer subject to the requirements of

this section shall file the information

required by Items 1, 2 and 3 (in Part I)

of Form 17–H by July 31, 1995.

Commencing September 30, 1995, the

provisions of this section shall apply in

their entirety.’’

(Approved by the Office of Management and

Budget under control number 1535–0089)

Dated: April 18, 1995.

Frank N. Newman,

Deputy Secretary.

[FR Doc. 95–10219 Filed 4–25–95; 8:45 am]

BILLING CODE 4810–39–W