II

106TH CONGRESS

1ST SESSION S. 1968

To amend the Federal securities laws to enhance oversight over certain

derivatives dealers and hedge funds, reduce the potential for such entities

to increase systemic risk in the financial markets, enhance investor

protections, and for other purposes.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 18, 1999

Mr. DORGAN introduced the following bill; which was read twice and referred

to the Committee on Banking, Housing, and Urban Affairs

A BILL

To amend the Federal securities laws to enhance oversight

over certain derivatives dealers and hedge funds, reduce

the potential for such entities to increase systemic risk

in the financial markets, enhance investor protections,

and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Derivatives Market

5 Reform Act of 1999’’.
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1 SEC. 2. DEFINITIONS.

2 Section 3(a) of the Securities Exchange Act of 1934

3 (15 U.S.C. 78c(a)) is amended by adding at the end the

4 following new paragraphs:

5 ‘‘(55) The term ‘derivative’ means any financial

6 contract or other instrument that derives its value

7 from the value or performance of any security, cur8 rency exchange rate, or interest rate (or group or

9 index thereof), but does not include—

10 ‘‘(A) any security that is traded on a na11 tional securities exchange or on an automated

12 interdealer quotation system sponsored by a se13 curities association registered under section

14 15A of this title;

15 ‘‘(B) any forward contract which has a

16 maturity at the time of issuance not exceeding

17 270 days;

18 ‘‘(C) any contract of sale of a commodity

19 for future delivery, or any option on such a con20 tract, traded or executed on a designated con21 tract market and subject to regulation under

22 the Commodity Exchange Act; or

23 ‘‘(D) any deposit held by a financial insti24 tution.

25 ‘‘(56) The term ‘derivatives dealer’ means any

26 person engaged in the business of buying, selling, or
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1 entering into derivatives for his own account, but

2 does not include—

3 ‘‘(A) any person insofar as such person

4 buys, sells, or enters into derivatives for his own

5 account, either individually or in a fiduciary ca6 pacity, but not as part of a regular business; or

7 ‘‘(B) any financial institution.

8 ‘‘(57) The term ‘material associated person’

9 means any associated person of a broker, dealer,

10 government securities broker, government securities

11 dealer, municipal securities dealer, or derivatives

12 dealer (other than a natural person) whose business

13 activities are reasonably likely to have a material im14 pact on the financial or operational condition of any

15 such broker, dealer, government securities broker,

16 government securities dealer, municipal securities

17 dealer, or derivatives dealer, including on its net

18 capital, its liquidity, or its ability to conduct or fi19 nance its operations.

20 ‘‘(58) The term ‘person associated with a de21 rivatives dealer’ or ‘associated person of a deriva22 tives dealer’ means any partner, officer, director, or

23 branch manager of such derivatives dealer (or any

24 person occupying a similar status or performing

25 similar functions), and any other employee of such
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1 derivatives dealer who is engaged in the manage2 ment, direction, supervision, or performance of any

3 activities relating to derivatives, and any person di4 rectly or indirectly controlling, controlled by, or

5 under common control with such derivatives dealer.

6 ‘‘(59) The term ‘designated examining author7 ity’ means the national securities exchange or reg8 istered securities association of which a registered

9 broker or dealer is a member, and if such broker or

10 dealer is a member of more than 1 such self-regu11 latory organization, the organization designated by

12 the Commission as the principal examining authority

13 for such broker or dealer.’’.

14 TITLE I—DERIVATIVES DEALERS

15 SEC. 101. DERIVATIVES DEALER REGISTRATION.

16 The Securities Exchange Act of 1934 is amended by

17 inserting after section 15C (15 U.S.C. 78o–5) the fol18 lowing new section:

19 ‘‘SEC. 15D. DERIVATIVES DEALERS.

20 ‘‘(a) REGISTRATION REQUIRED.—

21 ‘‘(1) REGISTRATION OF DERIVATIVES DEAL22 ERS.—

23 ‘‘(A) REGISTRATION REQUIREMENT.—It

24 shall be unlawful for any derivatives dealer

25 (other than a registered broker or dealer, or a
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1 material associated person of a registered

2 broker or dealer that has filed notice in accord3 ance with subparagraph (B) of this paragraph)

4 to make use of the mails or any means or in5 strumentality of interstate commerce to effect

6 any transaction in, or to induce or attempt to

7 induce the purchase or sale of, any derivative

8 unless such derivatives dealer is registered in

9 accordance with paragraph (2) of this sub10 section.

11 ‘‘(B) MATERIAL ASSOCIATED PERSONS OF

12 BROKERS AND DEALERS.—

13 ‘‘(i) NOTICE REQUIREMENT.—It shall

14 be unlawful for any derivatives dealer that

15 is a material associated person of a reg16 istered broker or dealer (other than a ma17 terial associated person of a registered

18 broker or dealer that is itself a registered

19 broker or dealer, or a derivatives dealer

20 that is registered in accordance with para21 graph (2) of this subsection) to make use

22 of the mails or any means or instrumen23 tality of interstate commerce to effect any

24 transaction in, or to induce or attempt to

25 induce the purchase or sale of, any deriva-
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1 tive unless such derivatives dealer has filed

2 with the Commission written notice that it

3 is a derivatives dealer. When such a de4 rivatives dealer ceases to act as such it

5 shall file with the Commission a written

6 notice that it is no longer acting as a de7 rivatives dealer.

8 ‘‘(ii) FORM OF NOTICE.—Such notices

9 shall be in such form and contain such in10 formation concerning a derivatives dealer

11 and any persons associated with such de12 rivatives dealer as the Commission shall,

13 by rule, prescribe as necessary or appro14 priate in the public interest or for the pro15 tection of investors.

16 ‘‘(2) REGISTRATION PROCEDURE.—

17 ‘‘(A) APPLICATION FOR REGISTRATION.—

18 A derivatives dealer subject to the registration

19 requirement of paragraph (1)(A) of this sub20 section may be registered by filing with the

21 Commission an application for registration in

22 such form and containing such information and

23 documents concerning such derivatives dealer

24 and any of its associated persons as the Com25 mission, by rule, may prescribe as necessary or
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1 appropriate in the public interest or for the pro2 tection of investors.

3 ‘‘(B) INITIAL ACTION.—Within 45 days of

4 the date of filing of such application (or within

5 such longer period as to which the applicant

6 consents), the Commission shall—

7 ‘‘(i) by order grant registration, or

8 ‘‘(ii) institute proceedings to deter9 mine whether registration should be de10 nied.

11 ‘‘(C) PROCEEDINGS ON APPLICATION.—

12 Such proceedings shall include notice of the

13 grounds for denial under consideration and op14 portunity for hearing and shall be concluded

15 within 120 days of the date of the filing of the

16 application for registration. At the conclusion of

17 such proceedings, the Commission, by order,

18 shall grant or deny such registration. The Com19 mission may extend the time for the conclusion

20 of such proceedings for up to 90 days if it finds

21 good cause for such extension and publishes its

22 reasons for so finding or for such longer period

23 as to which the applicant consents.

24 ‘‘(D) EFFECTIVE DATE OF REGISTRA25 TION.—The order granting registration shall
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1 not be effective until such derivatives dealer has

2 become a member of a securities association

3 registered under section 15A of this title, unless

4 the Commission has exempted such derivatives

5 dealer, by rule or order, from such membership.

6 ‘‘(E) GROUNDS FOR DECISION.—The Com7 mission shall grant the registration of a deriva8 tives dealer if the Commission finds that the re9 quirements of this section are satisfied. The

10 Commission shall deny such registration if it

11 does not make such a finding or if it finds that

12 if the applicant were so registered, its registra13 tion would be subject to suspension or revoca14 tion under subsection (c) of this section.

15 ‘‘(3) PROHIBITED CONDUCT.—Any provision of

16 this title (other than section 5 or paragraph (1) of

17 this subsection) which prohibits any act, practice, or

18 course of business if the mails or any means or in19 strumentality of interstate commerce is used in con20 nection therewith shall also prohibit any such act,

21 practice, or course of business by any derivatives

22 dealer registered or having filed notice under para23 graph (1) of this subsection or any person acting on

24 behalf of such derivatives dealer, irrespective of any
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1 use of the mails or any means or instrumentality of

2 interstate commerce in connection therewith.

3 ‘‘(4) EXEMPTIONS.—The Commission, by rule

4 or order, upon the Commission’s own motion or

5 upon application, may conditionally or uncondition6 ally exempt any derivatives dealer, or class of deriva7 tives dealers, from any provision of this section, or

8 the rules thereunder, if the Commission finds that

9 such exemption is consistent with the public interest,

10 the protection of investors, and the purposes of this

11 title.

12 ‘‘(b) RULES.—

13 ‘‘(1) AUTHORITY.—The Commission shall pro14 pose and adopt rules to effect the purposes of this

15 title with respect to transactions in derivatives ef16 fected by derivatives dealers registered or required to

17 register under subsection (a)(1)(A) of this section as

18 follows:

19 ‘‘(A) FINANCIAL RESPONSIBILITY.—Such

20 rules shall provide safeguards with respect to

21 the financial responsibility and related practices

22 of such derivatives dealers including, but not

23 limited to, capital adequacy standards and the

24 carrying and use of customers’ deposits or cred25 it balances.
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1 ‘‘(B) REPORTS.—Such rules shall require

2 every such derivatives dealer to make reports to

3 and furnish copies of records to the Commis4 sion, and to file with the Commission, annually

5 or more frequently, a balance sheet and income

6 statement certified by an independent public ac7 countant, prepared on a calendar or fiscal year

8 basis, and such other financial statements

9 (which shall, as the Commission specifies, be

10 certified) and information concerning its finan11 cial condition as required by such rules.

12 ‘‘(C) RECORDKEEPING.—Such rules shall

13 require records to be made and kept by such

14 derivatives dealers and shall specify the periods

15 for which such records shall be preserved.

16 ‘‘(2) AUTHORITY TO LIMIT DISCLOSURE OF IN17 FORMATION.—Notwithstanding any other provision

18 of law, the Commission shall not be compelled to

19 disclose any information required to be kept or re20 ported under rules adopted under paragraph (1) of

21 this subsection. Nothing in this paragraph shall au22 thorize the Commission to withhold information

23 from Congress, or prevent the Commission from

24 complying with a request for information from any

25 other Federal department or agency requesting the
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1 information for purposes within the scope of its ju2 risdiction, or complying with an order of a court of

3 the United States in an action brought by the

4 United States or the Commission. For purposes of

5 section 552 of title 5, United States Code, this para6 graph shall be considered a statute described in sub7 section (b)(3)(B) of such section 552.

8 ‘‘(3) FRAUDULENT ACTS AND PRACTICES.—

9 With respect to any derivatives dealer, the Commis10 sion may, by rule or regulation define, and prescribe

11 means reasonably designed to prevent, such acts and

12 practices as are fraudulent, deceptive, or manipula13 tive.

14 ‘‘(4) COMPLIANCE WITH RULES UNDER THIS

15 SECTION.—No derivatives dealer shall make use of

16 the mails or any means or instrumentality of inter17 state commerce to effect any transaction in, or to in18 duce or attempt to induce the purchase or sale of,

19 any derivative in contravention of any rule under

20 this section.

21 ‘‘(c) ENFORCEMENT BY THE COMMISSION.—

22 ‘‘(1) ADMINISTRATIVE POWERS TO IMPOSE

23 SANCTIONS.—With respect to any derivatives dealer

24 registered or required to register under subsection

25 (a)(1)(A) of this section:
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1 ‘‘(A) DERIVATIVES DEALERS.—The Com2 mission, by order, shall censure, place limita3 tions on the activities, functions, or operations

4 of, suspend for a period not exceeding 12

5 months, or revoke the registration of such de6 rivatives dealer, if it finds, on the record after

7 notice and opportunity for hearing, that such

8 censure, placing of limitations, suspension, or

9 revocation is in the public interest and that

10 such derivatives dealer, or any person associ11 ated with such derivatives dealer (whether prior

12 or subsequent to becoming so associated), has

13 committed or omitted any act or omission enu14 merated in subparagraph (A), (D), (E), or (G)

15 of paragraph (4) of section 15(b) of this title,

16 has been convicted of any offense specified in

17 subparagraph (B) of such paragraph (4) within

18 10 years of the commencement of the pro19 ceedings under this paragraph, or is enjoined

20 from any action, conduct, or practice specified

21 in subparagraph (C) of such paragraph (4).

22 ‘‘(B) SUSPENSION OR WITHDRAWAL PEND23 ING FINAL DETERMINATION.—Pending final de24 termination whether registration of any deriva25 tives dealer shall be revoked, the Commission,
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1 by order, may suspend such registration, if such

2 suspension appears to the Commission, after

3 notice and opportunity for hearing, to be nec4 essary or appropriate in the public interest or

5 for the protection of investors. Any registered

6 derivatives dealer may, upon such terms and

7 conditions as the Commission may deem nec8 essary in the public interest or for the protec9 tion of investors, withdraw from registration by

10 filing a written notice of withdrawal with the

11 Commission. If the Commission finds that any

12 registered derivatives dealer is no longer in ex13 istence or has ceased to do business as a deriva14 tives dealer, the Commission, by order, shall

15 cancel the registration of such derivatives deal16 er.

17 ‘‘(C) ASSOCIATED PERSONS.—The Com18 mission, by order, shall censure or place limita19 tions on the activities or functions of any per20 son associated, or seeking to become associated,

21 with a derivatives dealer registered or required

22 to register under subsection (a)(1)(A) of this

23 section or suspend for a period not exceeding

24 12 months or bar any such person from being

25 associated with such a derivatives dealer, if the
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1 Commission finds, on the record after notice

2 and opportunity for hearing, that such censure,

3 placing of limitations, suspension, or bar is in

4 the public interest and that such person has

5 committed or omitted any act or omission enu6 merated in subparagraph (A), (D), (E), or (G)

7 of paragraph (4) of section 15(b) of this title,

8 has been convicted of any offense specified in

9 subparagraph (B) of such paragraph (4) within

10 10 years of the commencement of the pro11 ceedings under this paragraph, or is enjoined

12 from any action, conduct, or practice specified

13 in subparagraph (C) of such paragraph (4).

14 ‘‘(2) PERSONS SUSPENDED OR BARRED FROM

15 ASSOCIATION.—It shall be unlawful for any person

16 as to whom an order entered pursuant to paragraph

17 (1) of this subsection suspending or barring him

18 from being associated with a derivatives dealer is in

19 effect willfully to become, or to be, associated with

20 a derivatives dealer without the consent of the Com21 mission, and it shall be unlawful for any derivatives

22 dealer to permit such a person to become, or remain,

23 a person associated with it without the consent of

24 the Commission, if such derivatives dealer knew, or,
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1 in the exercise of reasonable care should have

2 known, of such order.

3 ‘‘(d) EXAMINATION OF RECORDS.—All records of a

4 derivatives dealer registered or required to register under

5 subsection (a)(1)(A) of this section, or that has filed notice

6 or is required to file notice under subsection (a)(1)(B) of

7 this section, are subject at any time, or from time to time,

8 to such reasonable periodic, special, or other examinations

9 by representatives of the Commission as the Commission

10 deems necessary or appropriate in the public interest, for

11 the protection of investors, or otherwise in furtherance of

12 the purposes of this title.

13 ‘‘(e) SECURITIES ASSOCIATION MEMBERSHIP.—

14 ‘‘(1) MEMBERSHIP REQUIREMENT.—It shall be

15 unlawful for any derivatives dealer registered or re16 quired to register with the Commission under sub17 section (a)(1)(A) of this section to effect any trans18 action in, or induce or attempt to induce the pur19 chase or sale of, any derivative, unless such deriva20 tives dealer is a member of a securities association

21 registered under section 15A of this title.

22 ‘‘(2) EXEMPTION.—The Commission, by rule or

23 order, as it deems consistent with the public interest

24 and the protection of investors, may conditionally or

25 unconditionally exempt from paragraph (1) of this
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1 subsection any derivatives dealer or class of deriva2 tives dealers specified in such rule or order.’’.

3 TITLE II—BROKER-DEALER

4 OVERSIGHT REFORMS

5 SEC. 201. DERIVATIVES ON SECURITIES.

6 Section 3(a)(10) of the Securities Exchange Act of

7 1934 (15 U.S.C. 78c(a)(10)) is amended by inserting ‘‘de8 rivative,’’ after ‘‘any put, call, straddle, option,’’ the first

9 place it appears.

10 SEC. 202. NATIONAL SECURITIES EXCHANGES.

11 Section 6 of the Securities Exchange Act of 1934 (15

12 U.S.C. 78f) is amended by adding at the end the following

13 new subsection:

14 ‘‘(g) AUTHORITY TO ADOPT RULES RELATING TO

15 TRANSACTIONS IN DERIVATIVES.—A national securities

16 exchange may adopt and implement rules applicable to

17 members of such exchange, and material associated per18 sons that have filed notice or are required to file notice

19 under section 15D(a)(1)(B) of this title and that are asso20 ciated with members for which the exchange is the des21 ignated examining authority, who engage in transactions

22 in derivatives—

23 ‘‘(1) to enforce compliance with applicable pro24 visions of this title and the rules and regulations

25 thereunder;
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1 ‘‘(2) to provide that any such person shall be

2 appropriately disciplined for violations of applicable

3 provisions of this title and the rules and regulations

4 thereunder;

5 ‘‘(3) to provide for reasonable inspection and

6 examination of the books and records of any such

7 person;

8 ‘‘(4) to prevent fraudulent and manipulative

9 acts and practices;

10 ‘‘(5) to promote just and equitable principles of

11 trade; and

12 ‘‘(6) to require the establishment of, and adher13 ence to, appropriate internal controls structures.’’.

14 SEC. 203. FINANCIAL RESPONSIBILITY.

15 Section 15(c)(3) of the Securities Exchange Act of

16 1934 (15 U.S.C. 78o(c)(3)) is amended—

17 (1) by striking ‘‘and’’ at the end of clause (A);

18 and

19 (2) by inserting after ‘‘requirements for all bro20 kers and dealers’’ the following: ‘‘, and (C) require

21 the maintenance of sufficient capital levels taking

22 into account the financial activities conducted by,

23 the customary sources of capital and funding of, and

24 the credit risk and aggregate leverage of, any deriva25 tives dealer that is a material associated person of
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1 the broker or dealer and that has filed notice or is

2 required to file notice under section 15D(a)(1)(B) of

3 this title’’.

4 SEC. 204. REGISTERED SECURITIES ASSOCIATION.

5 Section 15A of the Securities Exchange Act of 1934

6 (15 U.S.C. 78o–3) is hereby amended by adding at the

7 end the following new subsection:

8 ‘‘(j) AUTHORITY TO ADOPT RULES RELATING TO

9 TRANSACTIONS IN DERIVATIVES.—A registered securities

10 association may adopt and implement rules applicable to

11 members of such association, and material associated per12 sons that have filed notice or are required to file notice

13 under section 15D(a)(1)(B) of this title and that are asso14 ciated with members for which the association is the des15 ignated examining authority, who engage in transactions

16 in derivatives—

17 ‘‘(1) to enforce compliance with applicable pro18 visions of this title and the rules and regulations

19 thereunder;

20 ‘‘(2) to provide that any such person shall be

21 appropriately disciplined, in accordance with sub22 sections (b)(7), (b)(8), and (h) of this section, for

23 violations of applicable provisions of this title and

24 the rules and regulations thereunder;
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1 ‘‘(3) to provide for reasonable inspection and

2 examination of the books and records of any such

3 person;

4 ‘‘(4) to prevent fraudulent and manipulative

5 acts and practices;

6 ‘‘(5) to promote just and equitable principles of

7 trade; and

8 ‘‘(6) to require the establishment of, and adher9 ence to, appropriate internal controls structures.’’.

10 SEC. 205. RISK ASSESSMENT FOR GOVERNMENT SECURI11 TIES BROKERS AND DEALERS.

12 Section 15C(b)(2) of the Securities Exchange Act of

13 1934 (15 U.S.C. 78o–5(b)(2)) is amended

14 (1) in subparagraph (A)—

15 (A) by striking ‘‘Such records shall de16 scribe, in the aggregate,’’ in the second sen17 tence and inserting ‘‘Such records may be re18 quired to describe’’;

19 (B) by striking ‘‘summary’’ in the third

20 sentence;

21 (2) by redesignating subparagraphs (C) through

22 (F) as subparagraphs (G) through (J), respectively;

23 (3) by inserting after subparagraph (B) the fol24 lowing new subparagraphs:
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1 ‘‘(C) REPORTING BY HOLDING COMPANIES

2 AND OTHER MATERIAL ASSOCIATED PER3 SONS.—Every person, other than a natural per4 son, who is associated with a government secu5 rities broker or government securities dealer for

6 which the Commission is the appropriate regu7 latory agency, and whose business activities are

8 reasonably likely to have a material impact on

9 the financial or operational condition of such

10 registered person, including its net capital, its

11 liquidity, or its ability to conduct or finance its

12 operations, shall make such reports concerning

13 the associated person’s policies, procedures, or

14 systems for monitoring and controlling the fi15 nancial and operational risks to the registered

16 person and its associated persons as the Sec17 retary, by rule, prescribes. Such reports may be

18 required to describe, without limitation, each of

19 the associated person’s financial and securities

20 activities, and customary sources of capital and

21 funding. The Secretary, by rule, may require

22 such reports to be filed with the Commission no

23 more frequently than quarterly.

24 ‘‘(D) RECORDKEEPING BY HOLDING COM25 PANIES AND OTHER MATERIAL ASSOCIATED
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1 PERSONS.—All persons subject to the reporting

2 requirements under subparagraph (C) of this

3 subsection shall keep and maintain such records

4 as are necessary to permit the Commission to

5 verify the information contained in reports filed

6 with the Commission pursuant to subparagraph

7 (C).

8 ‘‘(E) EXAMINATION OF HOLDING COMPA9 NIES AND OTHER MATERIAL ASSOCIATED PER10 SONS.—All records of persons subject to the re11 porting requirements contained in subpara12 graph (C) of this subsection are subject at any

13 time, or from time to time, to such reasonable

14 periodic, special, or other examinations by rep15 resentatives of the Commission as the Commis16 sion deems necessary or appropriate to verify

17 the information contained in reports filed with

18 the Commission pursuant to subparagraph (C).

19 ‘‘(F) USE OF ALTERNATIVE REPORTS BY

20 REGISTERED PERSONS AND THEIR HOLDING

21 COMPANIES AND OTHER MATERIAL ASSOCIATED

22 PERSONS.—(i) The Secretary, insofar as the

23 Secretary determines is consistent with the pur24 poses of this title, shall permit persons subject

25 to the reporting requirements of subparagraphs
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1 (A) and (C) of this paragraph, to use reports

2 otherwise created and maintained to meet the

3 reporting requirements of those subparagraphs.

4 ‘‘(ii) The appropriate regulatory agency,

5 insofar as such agency determines is consistent

6 with the purposes of this title, shall permit per7 sons, subject to the reporting requirements of

8 subparagraph (B) of this paragraph, to use re9 ports otherwise created and maintained to meet

10 the reporting requirement of that subpara11 graph.’’; and

12 (4) in subparagraphs (G) and (I) (as redesig13 nated by paragraph (2)), by striking ‘‘subparagraph

14 (A)’’ each place it appears and inserting ‘‘subpara15 graphs (A) and (C)’’.

16 SEC. 206. RISK ASSESSMENT FOR BROKERS AND DEALERS.

17 Section 17(h) of the Securities Exchange Act of 1934

18 (15 U.S.C. 78q(h)) is amended—

19 (1) in paragraph (1)—

20 (A) by striking ‘‘Such records shall de21 scribe, in the aggregate,’’ in the second sen22 tence and inserting ‘‘Such records may be re23 quired to describe’’;

24 (B) by striking ‘‘summary’’ in the third

25 sentence;
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1 (2) by redesignating paragraphs (3) through

2 (5) as paragraphs (7) through (9), respectively;

3 (3) by inserting after paragraph (2) the fol4 lowing new paragraphs:

5 ‘‘(3) REPORTING BY HOLDING COMPANIES AND

6 OTHER MATERIAL ASSOCIATED PERSONS.—Every

7 person, other than a natural person, who is associ8 ated with (A) a registered broker or dealer, or (B)

9 a registered municipal securities dealer for which the

10 Commission is the appropriate regulatory agency,

11 and whose business activities are reasonably likely to

12 have a material impact on the financial or oper13 ational condition of such registered person, including

14 its net capital, its liquidity, or its ability to conduct

15 or finance its operations, shall make such reports

16 concerning the associated person’s policies, proce17 dures, or systems for monitoring and controlling the

18 financial and operation risks to the registered person

19 and its associated persons as the Commission, by

20 rule, prescribes. Such reports may be required to de21 scribe, without limitation, each of the associated per22 son’s financial and securities activities, and cus23 tomary sources of capital and funding. The Commis24 sion, by rule, may require such reports to be filed
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1 with the Commission no more frequently than quar2 terly.

3 ‘‘(4) RECORDKEEPING BY HOLDING COMPANIES

4 AND OTHER MATERIAL ASSOCIATED PERSONS.—All

5 persons subject to the reporting requirements under

6 paragraph (3) of this subsection shall keep and

7 maintain such records as are necessary to permit the

8 Commission to verify the information contained in

9 reports filed with the Commission pursuant to para10 graph (3).

11 ‘‘(5) EXAMINATION OF HOLDING COMPANIES

12 AND OTHER MATERIAL ASSOCIATED PERSONS.—All

13 records of persons subject to the reporting require14 ments contained in paragraph (3) of this subsection

15 are subject at any time, or from time to time, to

16 such reasonable periodic, special, or other examina17 tions by representatives of the Commission as the

18 Commission deems necessary or appropriate to

19 verify the information contained in reports filed with

20 the Commission pursuant to paragraph (3).

21 ‘‘(6) USE OF ALTERNATIVE REPORTS BY REG22 ISTERED PERSONS AND THEIR HOLDING COMPANIES

23 AND OTHER MATERIAL ASSOCIATED PERSONS.—The

24 Commission, insofar as it determines is consistent

25 with the purposes of this title, shall permit persons
25

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1 subject to the reporting requirements of paragraphs

2 (1), (2), and (3) of this subsection, to use reports

3 otherwise created and maintained to meet the re4 porting requirements of those paragraphs.’’; and

5 (4) in paragraphs (7) and (9) (as redesignated

6 by paragraph (2)), by striking ‘‘paragraph (1)’’ each

7 place it appears and inserting ‘‘paragraphs (1) and

8 (3)’’.

9 SEC. 207. LARGE TRADER REPORTING: RULEMAKING DEAD10 LINE.

11 Within one year after the date of enactment of this

12 Act, the Securities and Exchange Commission shall take

13 all actions necessary to establish regulations pursuant to

14 section 13(h) of the Securities Exchange Act of 1934 (15

15 U.S.C. 78m(h)).

16 SEC. 208. RULES, REGULATIONS, AND ORDERS; ANNUAL RE17 PORTS.

18 (a) RULES, REGULATIONS, AND ORDERS.—Section

19 23(a)(1) of the Securities Exchange Act of 1934 (15

20 U.S.C. 78w(a)(1)) is amended by inserting ‘‘derivatives,’’

21 after ‘‘and may for such purposes classify persons, securi22 ties,’’.

23 (b) REPORTS.—Section 8(a) of the Market Reform

24 Act of 1990 is amended by striking ‘‘May 31, 1991, and
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1 annually thereafter until May 31, 1995,’’ and inserting

2 ‘‘May 31, 2000, and annually thereafter’’.

3 SEC. 209. CONFORMING AMENDMENTS.

4 Section 3(a)(48) of the Securities Exchange Act of

5 1934 (15 U.S.C. 78c(a)(48)) is amended to read as fol6 lows:

7 ‘‘(48) The term ‘registered broker or dealer’

8 means a broker or dealer registered or required to

9 register pursuant to section 15 or 15B of this title,

10 except that—

11 ‘‘(A) in paragraph (3)(A) of this sub12 section and in section 6, the term means such

13 a broker or dealer or a government securities

14 broker or government securities dealer reg15 istered or required to register pursuant to sec16 tion 15C(a)(1)(A) of this title; and

17 ‘‘(B) in paragraph (3)(B) of this sub18 section and in section 15A, the term means

19 such a broker or dealer, a government securities

20 broker or government securities dealer reg21 istered or required to register pursuant to sec22 tion 15C(a)(1)(A) of this title, or a derivatives

23 dealer registered or required to register pursu24 ant to section 15D(a)(1)(A) of this title.’’.
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•S 1968 IS

1 TITLE III—HEDGE FUND

2 REPORTING

3 SEC. 301. PUBLIC REPORTING BY UNREGISTERED HEDGE

4 FUNDS.

5 Section 30 of the Investment Company Act of 1940

6 (15 U.S.C. 80a–29) is amended by adding at the end the

7 following new subsection:

8 ‘‘(k) REPORTS OF UNREGISTERED HEDGE FUNDS.—

9 ‘‘(1) FILING OF REPORTS.—No later than 15

10 days after the end of each calendar or fiscal quarter,

11 every unregistered hedge fund shall submit to the

12 Commission a report prepared in accordance with

13 United States generally accepted accounting prin14 ciples that includes the following information for

15 each pooled investment vehicle that is part of the

16 unregistered hedge fund:

17 ‘‘(A) A statement of financial condition as

18 of the end of the quarter.

19 ‘‘(B) A statement of income (loss) for the

20 quarter ended.

21 ‘‘(C) A statement of cash flows.

22 ‘‘(D) A statement of changes in equity.

23 ‘‘(E) A description of the models and

24 methodologies that the pooled investment vehi-
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•S 1968 IS

1 cle uses to calculate, assess, and evaluate mar2 ket risk.

3 ‘‘(F) Such other information and within

4 such time period as the Commission, in con5 sultation with the Secretary of the Treasury,

6 the Chairman of the Federal Reserve Board,

7 the Commodity Futures Trading Commission,

8 and other appropriate regulatory agencies, may

9 require by rule or regulation, as may be nec10 essary or appropriate in the public interest or

11 for the protection of investors, including infor12 mation about sudden changes in net asset value

13 of a pooled investment vehicle within the quar14 ter, the leverage ratio of the pooled investment

15 vehicle, and the total notional amount of the

16 pooled investment vehicle’s exchange-traded and

17 over-the-counter derivatives positions.

18 ‘‘(2) RULEMAKING.—The Commission shall

19 have the authority to promulgate rules and regula20 tions, as may be necessary or appropriate in the

21 public interest or for the protection of investors, that

22 prescribe the form of the reports required by para23 graph (1) and define the terms used in this sub24 section.
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•S 1968 IS

1 ‘‘(3) AVAILABILITY OF REPORTS.—Upon receipt

2 of reports under paragraph (1), the Commission

3 shall—

4 ‘‘(A) immediately transmit complete copies

5 of the reports to the Secretary of the Treasury,

6 the Chairman of the Federal Reserve Board,

7 the Commodity Futures Trading Commission,

8 and other appropriate regulatory agencies; and

9 ‘‘(B) subject to paragraph (4), make the

10 reports widely available to the public.

11 ‘‘(4) CONFIDENTIALITY OF PROPRIETARY IN12 FORMATION.—Proprietary information contained in

13 reports shall be treated as follows:

14 ‘‘(A) If, in preparing a complete and accu15 rate report under paragraph (1), an unregis16 tered hedge fund includes in the report propri17 etary information concerning investment strate18 gies or positions, such proprietary information

19 may, consistent with the regulations prescribed

20 by the Commission, be segregated in a con21 fidential section of the report that shall not be

22 available to the public under paragraph (3)(B).

23 ‘‘(B) Nothing in this subsection shall au24 thorize the Commission to withhold information

25 from Congress, or prevent the Commission from
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•S 1968 IS

1 complying with a request for information from

2 any other Federal department or agency re3 questing the information for purposes within

4 the scope of its jurisdiction, or complying with

5 an order of a court of the United States in an

6 action brought by the United States or the

7 Board.

8 ‘‘(5) DEFINITIONS.—For purposes of this sub9 section:

10 ‘‘(A) UNREGISTERED HEDGE FUND.—The

11 term ‘unregistered hedge fund’—

12 ‘‘(i) means any pooled investment ve13 hicle, or group or family of pooled invest14 ment vehicles, that—

15 ‘‘(I) has total assets under man16 agement of $1,000,000,000 or more;

17 and

18 ‘‘(II) is excepted from the defini19 tion of investment company by section

20 3(c)(1) or 3(c)(7), or is a foreign com21 pany that would be required to obtain

22 an order of the Securities and Ex23 change Commission under section

24 7(d) if it made a public offering of its

25 securities by use of the mails and
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•S 1968 IS

1 means or instrumentalities of inter2 state commerce; but

3 ‘‘(ii) does not include a commodity

4 pool operator or futures commission mer5 chant (as such terms are defined under

6 section 1a of the Commodity Exchange Act

7 (7 U.S.C. 1a)).

8 ‘‘(B) APPROPRIATE REGULATORY AGEN9 CIES.—The term ‘appropriate regulatory agen10 cies’ means each of the agencies that is an ap11 propriate regulatory agency under section

12 3(a)(34) of the Securities Exchange Act of

13 1934.’’.

Æ