Amendments to Regulations for the Government Securities Act of 1986

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

17 CFR Parts 402 and 404

RIN 1505-AA44

Amendments to Regulations for the Government Securities Act of

1986

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

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Department'') is publishing

for comment proposed amendments to the financial responsibility rules

in Part 402 and a conforming amendment to a recordkeeping requirement

in Part 404 of the regulations issued under the Government Securities

Act of 1986 (``GSA''). The proposed amendments would raise the minimum

capital requirements for all government securities brokers and dealers

subject to the requirements of Section 402.2 and establish a written

notification requirement for certain withdrawals of capital. The

proposed amendments parallel the Securities and Exchange Commission's

(``SEC'') final and proposed amendments to the minimum net capital

requirements for brokers and dealers subject to the requirements of 17

CFR 240.15c3-1 (Rule 15c3-1) and final rules regarding the withdrawal

of capital.

DATES: Comments must be submitted on or before August 22, 1994.

ADDRESSES: Comments should be sent to: Government Securities

Regulations Staff, Bureau of the Public Debt, Department of the

Treasury, 999 E Street N.W., Room 515, Washington, D.C. 20239-0001.

Comments received will be available for public inspection and copying

at the Treasury Department Library, Room 5030, Main Treasury Building,

1500 Pennsylvania Avenue N.W., Washington, D.C. 20220.

FOR FURTHER INFORMATION CONTACT: Don Hammond (Acting Director) or Kerry

Lanham (Government Securities Specialist) at 202-219-3632. (TDD for

hearing impaired: 202-219-9274.)

SUPPLEMENTARY INFORMATION:

1. Background

The Department is proposing amendments to its financial

responsibility rules in Part 402 that would raise the minimum capital

requirements and establish written notification requirements for

certain capital withdrawals for those government securities brokers and

dealers subject to the provisions of Sec. 402.2. Additionally, the

Department is proposing a conforming change to the recordkeeping

requirements of Part 404 which is necessitated by the proposals to

revise the minimum capital levels. The Department believes that these

proposed amendments will enhance the capital adequacy of government

securities brokers and dealers and provide for more effective

regulatory oversight. These proposed amendments parallel rule

amendments adopted or proposed by the SEC. The Department's amendments,

if adopted, will increase investor confidence in the financial

responsibility of government securities brokers and dealers without

creating any substantial new barriers to entry into the government

securities market.

The SEC published proposed revisions to its minimum capital levels

in October 1989\1\ and December 1992\2\ and to its capital withdrawal

rules in August 1990.\3\ The SEC published its final capital withdrawal

regulations on March 5, 1991,\4\ finalized its first change in minimum

capital levels on November 24, 1992,\5\ but has not yet finalized its

second proposal on minimum capital levels for certain introducing

firms. The Treasury capital rule\6\ uses the SEC capital standard (Rule

15c3-1)\7\ as a foundation and, accordingly, it is useful to strive to

minimize the differences between the two rules. Additionally, it is

Treasury's objective to maintain consistency with the SEC rule and,

ultimately, have a uniform capital rule for all government securities

brokers and dealers registered with the SEC. The Treasury would have

acted sooner to propose these amendments but its rulemaking authority

under the GSA expired on October 1, 1991, and was not reauthorized

until December 17, 1993. (107 Stat. 2344, Pub. L. 103-202).

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\1\Securities Exchange Act Release No. 27249 (September 15,

1989), 54 FR 40395 (October 2, 1989).

\2\Securities Exchange Act Release No. 31512 (November 24,

1992), 57 FR 57027 (December 2, 1992).

\3\Securities Exchange Act Release No. 28347 (August 15, 1990),

55 FR 34027 (August 21, 1990).

\4\Securities Exchange Act Release No. 28927 (February 20,

1991), 56 FR 9124 (March 5, 1991).

\5\Securities Exchange Act Release No. 31511 (November 24,

1992), 57 FR 56973 (December 2, 1992).

\6\17 CFR Sec. 402.2.

\7\Sec. 240.15c3-1.

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Having reviewed the SEC's actions, the Department has determined to

propose changes to its capital rule, which, for the most part, parallel

the SEC's modifications. The following text explains the Department's

rationale supporting its amendments, with particular emphasis on the

differences between the Department's and the SEC's changes.\8\

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\8\Explanations of the SEC's reasons for the changes to its

capital rule are found in the releases accompanying their proposed

and final rules. See Supra notes 1, 2, 3, 4 and 5.

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II. Analysis

A. Minimum Capital Requirements

The SEC has either increased or proposed increasing the minimum net

capital requirements for most brokers and dealers subject to Rule 15c3-

1 to an amount ranging up to $250,000, depending on the type of

business conducted by the broker or dealer. The previous minimum

requirements had been unchanged for at least 16 years, and, in the case

of the $5,000 level applicable to introducing brokers, for 26

years.9 Inflation over this period has reduced the level of

protection that the current minimum standards provide.

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\9\54 FR 40395, 40396 n. 14 (October 2, 1989).

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The Department, in developing its existing capital rule, modified

the SEC minimum capital levels prior to incorporating them into the

Treasury rule. The modifications reflected the different structure of

the Treasury capital requirement whereby securities haircuts are not

deducted but instead act as a benchmark with which liquid capital is

compared in determining capital adequacy. Nonetheless, the minimum

dollar capital levels are based on liquid capital after deducting

haircuts, which is comparable to the SEC's calculation of net capital.

The Treasury rule currently has a $5,000 minimum liquid capital

requirement for introducing brokers\10\ and a $25,000 minimum liquid

capital requirement for all other government securities brokers and

dealers\11\ subject to the rule.\12\ These levels are equivalent to SEC

requirements applicable to brokers and dealers operating under the

aggregate indebtedness capital computation prior to the amendments. The

Department believes that increasing the minimum levels is appropriate

in order to provide better protection to investors in the event of a

government securities broker's or dealer's insolvency and to reflect

the current realities of the government securities market. Accordingly,

the Department is proposing to increase the minimum capital

requirements for all government securities brokers and dealers subject

to the provisions of Sec. 402.2. The other capital requirement--that

liquid capital be at least equal to 120% of haircuts--would be

unaffected by this proposal.

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\10\17 CFR Sec. 402.2(c).

\11\17 CFR Sec. 402.2(b).

\12\The Treasury capital rule requires that a government

securities broker or dealer maintain a capital level of the greater

of (i) 120% of total haircuts; or (ii) the minimum dollar capital

amounts, computed by deducting total haircuts from liquid capital,

applicable to its business.

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The increases would be effected by creating four minimum capital

standards from the two current requirements, reflecting a better

differentiation of the risks related to a government securities

broker's or dealer's operations based on the type of government

securities business it conducts. The four proposed minimum capital

requirements would be as follows: (1) government securities brokers and

dealers that carry customer or broker-dealer accounts would be subject

to a minimum level of $250,000; (2) government securities brokers and

dealers that carry customer accounts but that operate under the

exemption provided by Rule 15c3-3(k)(2)(i)\13\ would have a minimum

requirement of $100,000; (3) government securities brokers that

introduce accounts on a fully disclosed basis and receive but do not

hold customer securities would be subject to a minimum requirement of

$50,000; and (4) introducing firms that never handle customer funds or

securities would be subject to a minimum requirement of $25,000.

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\13\17 CFR Sec. 240.15c3-3(k)(2)(i).

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These changes represent increases from the current minimum levels

of between $20,000 and $225,000, depending on the type of business

conducted by the government securities broker or dealer. The Department

is proposing fewer levels than the SEC has proposed since the

operations of government securities brokers and dealers do not

encompass all the activities available to diversified brokers or

dealers. The proposed Treasury minimum capital requirements adequately

reflect the different levels of custodial risk found in the various

types of government securities operations without creating significant

barriers to entry into the government securities market.

Any increase of capital requirements represents a potential burden

on regulated entities and on the market; this potential effect must be

weighed against the resulting benefits. Minimum capital levels provide

a cushion which is available to ease the liquidation or resolution of

troubled government securities brokers and dealers. This is a

fundamental element of customer protection. The increases that the

Department is proposing are modest relative to the size and complexity

of the government securities market and the operations of government

securities brokers and dealers.

When the SEC first proposed increasing broker's and dealer's

minimum capital levels, the SEC received comments opposing the

increased requirements. The SEC has also received additional negative

comments from introducing firms that would be affected by the

outstanding proposal to increase the minimum net capital level of such

brokers. However, the Department believes that its proposed increases

will have a very small impact on the firms, including introducing

brokers, subject to Sec. 402.2. An analysis of the government

securities brokers and dealers subject to the provisions of Sec. 402.2

indicates that, as of June 30, 1993, only seven, out of a total of 39,

would not be in compliance with the proposed, fully phased-in minimum

capital levels. Four of these firms would not be in compliance with the

new requirements for introducing firms, two would be out of compliance

with the $100,000 requirement and one would not meet the $250,000

level. The aggregate capital shortfall of these seven firms is less

than $200,000, with the largest individual deficit being less than

$50,000. To ease the compliance burden and to provide a period for the

affected government securities brokers and dealers to adjust, the

Department is proposing to add an Appendix E to Sec. 402.2 which would

phase in the increases over an 18-month time frame from the effective

date. This corresponds to the phase in time frames that were adopted

and proposed by the SEC.

B. Capital Withdrawal Requirements

The SEC promulgated final rules regarding the withdrawal of capital

by brokers and dealers.14 These rules require written notification

to the SEC and the broker's or dealer's designated examining authority

of certain capital withdrawals; add a restriction on the withdrawal of

capital based on the ratio of net capital to securities haircuts;

provide additional definitions; and permit the SEC, by order, to

prohibit the withdrawal of capital in certain described circumstances.

The Department is proposing to amend its capital withdrawal

provisions15 to include the notification requirements and certain

definitions but has determined not to propose the other two

requirements (as explained below).

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\1\4See Supra note 4.

\1\517 CFR 202.2(i).

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The notification provisions would require post-withdrawal

notification of certain significant capital withdrawals as well as

prior notification for larger withdrawals. Whether the notification

would be required prior to the withdrawal\16\ would be determined by

the aggregate size of total withdrawals relative to the government

securities broker's or dealer's excess liquid capital17 over a 30

calendar day period. Once aggregate withdrawals have exceeded 20

percent of a government securities broker's or dealer's excess liquid

capital in a 30 calendar day period, the government securities broker

or dealer will have two business days thereafter in which to file

notification of the withdrawals. Aggregate withdrawals in excess of 30

percent of excess liquid capital in any 30 calendar day period would

require notification two business days prior to such withdrawal. A

government securities broker or dealer may use the level of excess

liquid capital calculated in its most recent Form G-405, ``Report on

Finances and Operations of Government Securities Brokers and Dealers

(FOGS)'' filing,18 provided the firm assures itself that this

amount has not materially changed since that time. A government

securities broker or dealer is not required under the proposed rule to

provide notice to the Department, but instead notice would be sent to

the SEC and to the broker's or dealer's designated examining authority.

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\1\6If prior notification is required, the post-withdrawal

notification must also be filed.

\1\7Excess liquid capital is that amount of liquid capital which

exceeds the greater of the amount of capital required under (i)

Sec. 402.2(a); or Sec. 402.2(b) or (c) as applicable.

\18\17 CFR 405.2 requires certain government securities brokers

and dealers to file monthly and quarterly financial reports.

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The proposed rule would exclude the reporting of net withdrawals

that, in the aggregate, are less than $500,000 in any 30 calendar day

period or those that represent securities or commodities transactions

between affiliates. The exclusion for securities and commodities

transactions requires that the transactions be conducted in the

ordinary course of business and settled no later than two business days

after the date of the transaction. Discussions with SEC staff have

indicated that forward settling transactions between affiliates would

not be eligible for this exclusion.

Therefore, net losses on forward contracts or net payments on swap

agreements, if due an affiliate, could trigger the notice requirement.

The Department specifically requests comment as to whether this

exclusion should be broadened and if so how.

The only material difference between the notification rules as

promulgated by the SEC and as proposed by the Department is that the

SEC's rules use excess net capital, whereas the Department's rule uses

excess liquid capital. This variance conforms to the different

measurement standards used under each rule.

The Department believes that knowledge of significant capital

movements is an essential part of ensuring capital adequacy and

financial responsibility. The SEC's experience with the Drexel Burnham

Lambert Group, Inc.19 and the National Association of Securities

Dealer's experience with Drexel Burnham Lambert GSI making substantial

amounts of inadequately secured loans to its holding company indicate

the importance of prompt and accurate knowledge of the movement of

capital.

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\1\9See 56 FR 9124, 9125 (March 5, 1991).

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The Department does not plan to amend the current restrictions on

the withdrawal of capital to reflect the SEC's adoption of a new early

warning threshold derived from securities haircuts. It has been the

Department's belief, in establishing its capital standard, that a

capital cushion related to a firm's securities position risk is a

prudent approach to determining capital adequacy. The Treasury rule

currently places a restriction on any capital withdrawals that would

cause a government securities broker's or dealer's liquid capital to

fall below a level of 150% of haircuts. This standard is analogous to

the recently-adopted SEC requirement20 and, therefore, no further

action is required in order for the two rules to conform in this area.

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\2\0 17 CFR Sec. 240.15c3-1(e)(2)(iii).

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The third element of the SEC's capital withdrawal rule is a

provision giving the SEC authority to prohibit a withdrawal of capital

by a broker or dealer, for up to 20 business days, if the withdrawal

would exceed 30% of excess net capital and is deemed detrimental to the

financial integrity of the broker or dealer or may unduly jeopardize

the broker's or dealer's ability to repay its creditors.\21\ The SEC

intends that this provision be used in emergency situations and the

rule provides for an expeditious review of the SEC's action. For the

reasons that follow, the Department has determined that a similar

provision should not be incorporated in the Treasury capital rule.

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\2\117 CFR Sec. 240.15c3-1(e)(3).

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First, while the SEC has an existing process for holding hearings,

the Department has no comparable structure and therefore the

implementation of the post-order process would require the Department

to develop additional administrative regulations and procedures.

In addition, the Department's decision not to enact a corresponding

order provision is based on the fact that the SEC has existing

temporary cease and desist authority. The SEC was granted this

authority prusuant to the Securities Enforcement Remedies and Penny

Stock Reform Act of 1990 (Pub. L. 101-429), Section 203 of which added

Section 21C to the Securities Exchange Act of 1934.\22\ Paragraph (c)

of Section 21C provides the SEC with authority to issue a temporary

cease and desist order in the event ``that the alleged violation or

threatened violation specified in the notice * * * is likely to result

in significant dissipation or conversion of assets, significant harm to

investors, or substantial harm to the public interest,* * *.''23 A

temporary cease and desist order, while different from a capital

withdrawal order, serves a similar purpose. Both are emergency remedies

that can be expeditiously applied. Prior to issuing a temporary cease

and desist order, the SEC must provide notice and opportunity for a

hearing unless the SEC ``* * * determines that notice and hearing prior

to entry would be impracticable or contrary to the public

interest.''24

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\2\215 U.S.C. 78u-3.

\2\315 U.S.C. 78u-3(c)(1).

\2\4Id.

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The more limited scope of the temporary cease and desist order is

not problematic to the Department because the authority provides the

SEC with the ability to issue such an order not only if a rule

violation has occurred but also if one is threatened. Since the SEC is

the appropriate regulatory agency for government securities brokers or

dealers subject to Sec. 402.2, an impending violation of a Sec. 402.2

requirement would be cause for the issuance of a temporary cease and

desist order. The SEC would still be able to anticipate sizeable

capital withdrawals that might result in violations of Sec. 402.2,

since it would receive the notifications required by the proposed rule,

as described earlier. The SEC would only be prevented from issuing a

temporary cease and desist order in the circumstance where a government

securities broker or dealer would remain in capital compliance and

would not breach the rule's early warning levels as a result of the

withdrawal. Assuming the adequacy of the current capital standards and

withdrawal restrictions, it is difficult to foresee a circumstance in

which issuance of a capital withdrawal order would be desirable when a

government securities broker or dealer would continue to remain in

capital compliance. For these reasons, the Department believes that, in

lieu of developing a separate capital withdrawal order provision, it

should rely on the SEC's existing cease and desist order authority.

Consistent with this approach, the Department also is excluding

this provision of Rule 15c3-1 from the compliance requirements for

those government securities brokers and dealers registered under

Section 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o-5)

that are subject to the SEC capital rule (i.e., interdealer brokers

operating under Sec. 402.1(e) and futures commission merchants).

In amending the withdrawal provisions, the Department has

restructured certain related definitions of terms into a Miscellaneous

Provisions paragraph (i)(3) and has added a description of what

constitutes an advance or loan of liquid capital, which is one

component of the restricted activities.

C. Conforming Change

Due to the revisions of the minimum capital requirements under both

the SEC and Treasury capital rules, a conforming change is required in

the recordkeeping provisions of Part 404. Specifically, paragraph

404.2(a)(4) contains references to the minimum dollar capital amounts

required of government securities clearing brokers and dealers. The

Department is proposing to revise these references in accordance with

the proposed fully phased-in minimum capital level of $250,000 required

of clearing firms.

III. Special Analyses

Based on the very limited impact of the proposed amendments, it is

the Department's view that the proposed regulations are not a

``significant regulatory action'' for the purposes of Executive Order

12866.

In addition, pursuant to the Regulatory Flexibility Act (5 U.S.C.

601, et seq.), it is hereby certified that the proposed regulations, if

adopted, will not have a significant economic impact on a substantial

number of small entities. As of June 30, 1993, only 39 government

securities brokers and dealers were subject to the capital requirements

of Sec. 402.2. Of these, only 11 firms would be considered small

entities. Accordingly, the relatively low dollar value of the proposed

capital increase and the small number of firms affected indicates that

there is not a significant impact. As a result, a regulatory

flexibility analysis is not required.

The Paperwork Reduction Act (44 U.S.C. 3504(h)) requires that

collections of information prescribed in proposed rules be submitted to

the Office of Management and Budget for review and approval. In

accordance with this requirement, the Department has submitted the

collection of information contained in this notice of proposed

rulemaking for review. Comments on the collection of information should

be directed to the Office of Information and Regulatory Affairs, Office

of Management and Budget, Attention: Desk Officer for Department of the

Treasury, Washington, D.C. 20503; and to the Government Securities

Regulations Staff, Bureau of the Public Debt, at the address specified

at the beginning of this document.

The collections of information in this proposed rule are contained

in proposed Sec. 402.2(i)(1). This paragraph would require a government

securities broker or dealer, subject to the requirements of Sec. 402.2,

to provide written notification of certain specified withdrawals of

capital. This collection of information is intended to allow the SEC

and the designated examining authority of the firm to better monitor

the government securities broker's or dealer's operations and financial

condition. The rule applies primarily to larger government securities

brokers and dealers since aggregate withdrawals of less than $500,000

are excluded from the requirement.

Estimated total annual reporting burden: 5 hours

Estimated average annual burden per respondent: 1 hour

Estimated number of respondents: 5

Estimated annual frequency of response: Twice

List of Subjects

17 CFR Part 402

Brokers, Government securities.

17 CFR Part 404

Banks, banking, Brokers, Government securities, Reporting and

recordkeeping requirements.

For the reasons set out in the Preamble, it is proposed to amend 17

CFR Parts 402 and 404 as follows:

PART 402--FINANCIAL RESPONSIBILITY

1. The authority citation for Part 402 is amended to read as

follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),

Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,

107 Stat. 2344 (15 U.S.C. 78o-5(b)(1)(A), (b)(4)).

2. Section 402.1 is amended by revising paragraphs (d) and (e)(1)

to read as follows:

Sec. 402.1 Application of part to registered brokers and dealers and

financial institutions; special rules for futures commission merchants

and government securities interdealer brokers; effective date.

* * * * *

(d) Futures commission merchants. A futures commission merchant

subject to Sec. 1.17 of this title that is a government securities

broker or dealer but is not a registered broker or dealer shall not be

subject to the limitations of Sec. 402.2 but rather to the capital

requirement of Sec. 1.17 or Sec. 240.15c3-1, except paragraph (e)(3)

thereof, of this title, whichever is greater.

(e) Government securities interdealer broker. (1) A government

securities interdealer broker, as defined in paragraph (e)(2) of this

section, may, with the prior written consent of the Secretary, elect

not to be subject to the limitations of Sec. 402.2 but rather to be

subject to the requirements of Sec. 240.15c3-1 of this title (SEC Rule

15c3-1), except paragraphs (c)(2)(ix) and (e)(3) thereof, and

paragraphs (e) (3) through (8) of this section by filing such election

in writing with its designated examining authority. A government

securities interdealer broker may not revoke such election without the

written consent of its designated examining authority.

* * * * *

3. Section 402.2 is amended by revising paragraphs (b), (c) and (i)

to read as follows:

Sec. 402.2 Capital requirements for registered government securities

brokers or dealers.

* * * * *

(b)(1) Minimum liquid capital for brokers or dealers that carry

customer accounts. Notwithstanding the provisions of paragraph (a) of

this section, a government securities broker or dealer that carries

customer or broker or dealer accounts and receives or holds funds or

securities for those persons within the meaning of Sec. 240.15c3-

1(a)(2)(i) of this title, shall have and maintain liquid capital in an

amount not less than $250,000 (see paragraph (a) of Appendix E for

temporary minimum requirements), after deducting total haircuts as

defined in paragraph (g) of this section.

(2) Minimum liquid capital for brokers or dealers that carry

customer accounts, but do not generally hold customer funds or

securities. Notwithstanding the provisions of paragraphs (a) and (b)(1)

of this section, a government securities broker or dealer that carries

customer or broker or dealer accounts and is exempt from the provisions

of Sec. 240.15c3-3 of this title, as made applicable to government

securities brokers and dealers by Sec. 403.4 of this chapter, pursuant

to paragraph (k)(2)(i) thereof (17 CFR 240.15c3-3(k)(2)(i)), shall have

and maintain liquid capital in an amount not less than $100,000 (see

paragraph (b) of Appendix E for temporary minimum requirements), after

deducting total haircuts as defined in paragraph (g) of this section.

(c)(1) Minimum liquid capital for introducing brokers that receive

securities. Notwithstanding the provisions of paragraphs (a) and (b) of

this section, a government securities broker or dealer that introduces

on a fully disclosed basis transactions and accounts of customers to

another registered or noticed government securities broker or dealer

but does not receive, directly or indirectly, funds from or for, or owe

funds to, customers, and does not carry the accounts of, or for,

customers shall have and maintain liquid capital in an amount not less

than $50,000 (see paragraph (c) of Appendix E for temporary minimum

requirements), after deducting total haircuts as defined in paragraph

(g) of this section. A government securities broker or dealer operating

pursuant to this paragraph (c)(1) may receive, but shall not hold

customer or other broker or dealer securities.

(2) Minimum liquid capital for introducing brokers that do not

receive or handle customer funds or securities. Notwithstanding the

provisions of paragraphs (a), (b) and (c)(1) of this section, a

government securities broker or dealer that does not receive, directly

or indirectly, or hold funds or securities for, or owe funds or

securities to, customers, and does not carry accounts of, or for,

customers and that effects ten or fewer transactions in securities in

any one calendar year for its own investment account shall have and

maintain liquid capital in an amount not less than $25,000 (see

paragraph (d) of Appendix E for temporary minimum requirements), after

deducting total haircuts as defined in paragraph (g) of this section.

* * * * *

(i) Provisions relating to the withdrawal of equity capital.

(1) Notice Provisions. No equity capital of the government

securities broker or dealer or a subsidiary or affiliate consolidated

pursuant to Appendix C to this section, Sec. 402.2c, may be withdrawn

by action of a stockholder or partner, 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

advance or loan be made to a stockholder, partner, sole proprietor,

employee or affiliate without providing written notice, given in

accordance with paragraph (i)(1)(iv) of this section, when specified in

paragraphs (i)(1) (i) and (ii) of this section:

(i) Two business days prior to any withdrawals, advances or loans

if those withdrawals, advances or loans on a net basis exceed in the

aggregate in any 30 calendar day period, 30 percent of the government

securities broker's or dealer's excess liquid capital. A government

securities broker or dealer, in an emergency situation, may make

withdrawals, advances or loans that on a net basis exceed 30 percent of

the government securities broker's or dealer's excess liquid capital in

any 30 calendar day period without giving the advance notice required

by this paragraph, with the prior approval of its designated examining

authority. When a government securities broker or dealer makes a

withdrawal with the consent of its designated examining authority, it

shall in any event comply with paragraph (i)(1)(ii) of this section;

and

(ii) Two business days after any withdrawals, advances or loans if

those withdrawals, advances or loans on a net basis exceed in the

aggregate in any 30 calendar day period, 20 percent of the government

securities broker's or dealer's excess liquid capital.

(iii) This paragraph (i)(1) of this section does not apply to:

(A) Securities or commodities transactions in the ordinary course

of business between a government securities broker or dealer and an

affiliate where the government securities broker or dealer makes

payment to or on behalf of such affiliate for such transaction and then

receives payment from such affiliate for the securities or commodities

transaction within two business days from the date of the transaction;

or

(B) Withdrawals, advances or loans which in the aggregate in any

such 30 calendar day period, on a net basis, equal $500,000 or less.

(iv) Each required notice shall be effective when received by the

Commission in Washington, D.C., the regional or district office of the

Commission for the area in which the government securities broker or

dealer has its principal place of business, and the government

securities broker's or dealer's designated examining authority.

(2) Withdrawal Limitations. No equity capital of the government

securities broker or dealer or a subsidiary or affiliate consolidated

pursuant to Appendix C to this section, Sec. 402.2c, may be withdrawn

by action of a stockholder or a partner, 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

advance or loan be made to a stockholder, partner, sole proprietor,

employee or affiliate if, after giving effect thereto and to any other

such withdrawals, advances or loans and any Payments of Payment

Obligations (as defined in Sec. 240.15c3-1d of this title, Appendix D

to SEC Rule 15c3-1, modified as provided in Appendix D to this section,

Sec. 402.2d) under satisfactory subordination agreements which are

scheduled to occur within 180 calendar days following such withdrawal,

advance or loan, either:

(i) The ratio of liquid capital to total haircuts, determined as

provided in Sec. 402.2, would be less than 150 percent; or

(ii) Liquid capital minus total haircuts would be less than 120

percent of the minimum capital required by Sec. 402.2(b) or

Sec. 402.2(c) as applicable; or

(iii) In the case of any government securities broker or dealer

included in such consolidation, the total outstanding principal amounts

of satisfactory subordination agreements of the government securities

broker or dealer (other than such agreements which qualify as equity

under Sec. 240.15c3-1(d) of this title) would exceed 70% of the debt-

equity total as defined in such Sec. 240.15c3-1(d).

(3) Miscellaneous Provisions. (i) Excess liquid capital is that

amount in excess of the amount required by the greater of Sec. 402.2(a)

or, Secs. 402.2 (b) or (c), as applicable. For the purposes of

paragraphs (i)(1) and (i)(2) of this section, a government securities

broker or dealer may use the amount of excess liquid capital, liquid

capital and total haircuts reported in its most recently required filed

Form G-405 for the purposes of calculating the effect of a projected

withdrawal, advance or loan relative to excess liquid capital or total

haircuts. The government securities broker or dealer must assure itself

that the excess liquid capital, liquid capital or the total haircuts

reported on the most recently required filed Form G-405 have not

materially changed since the time such report was filed.

(ii) The term equity capital includes capital contributions by

partners, par or stated value of capital stock, paid-in capital in

excess of par, retained earnings or other capital accounts. The term

equity capital does not include securities in the securities accounts

of partners and balances in limited partners' capital accounts in

excess of their stated capital contributions.

(iii) Paragraphs (i)(1) and (i)(2) of this section shall not

preclude a government securities broker or dealer from making required

tax payments or preclude the payment to partners of reasonable

compensation, and such payments shall not be included in the

calculation of withdrawals, advances or loans for purposes of

paragraphs (i)(1) and (i)(2) of this section.

(iv) For the purposes of this subsection (i), any transaction

between a government securities broker or dealer and a stockholder,

partner, sole proprietor, employee or affiliate that results in a

diminution of the government securities broker's or dealer's liquid

capital shall be deemed to be an advance or loan of liquid capital.

* * * * *

4. By adding Sec. 402.2e (Appendix E) as follows:

Sec. 402.2e Appendix E--Temporary Minimum Requirements.

(a) A government securities broker or dealer that falls within the

provisions of paragraph (b)(1) of Sec. 402.2 shall maintain not less

than the greater of: (i) The amount of liquid capital required under

paragraph 402.2(a); or (ii) liquid capital, after deducting total

haircuts, of:

(1) $25,000 through June 30, 1994;

(2) $100,000 from July 1, 1994 through December 31, 1994;

(3) $175,000 from January 1, 1995 through June 30, 1995; and

(4) $250,000 from July 1, 1995 and thereafter.

(b) A government securities broker or dealer that falls within the

provisions of paragraph (b)(2) of Sec. 402.2 shall maintain not less

than the greater of: (i) The amount of liquid capital required under

paragraph 402.2(a); or (ii) liquid capital, after deducting total

haircuts, of:

(1) $25,000 through June 30, 1994;

(2) $50,000 from July 1, 1994 through December 31, 1994;

(3) $75,000 from January 1, 1995 through June 30, 1995; and

(4) $100,000 from July 1, 1995 and thereafter.

(c) A government securities broker or dealer that falls within the

provisions of paragraph (c)(1) of Sec. 402.2 shall maintain not less

than the greater of: (i) The amount of liquid capital required under

paragraph 402.2(a); or (ii) liquid capital, after deducting total

haircuts, of:

(1) $5,000 through June 30, 1994;

(2) $20,000 from July 1, 1994 through December 31, 1994;

(3) $35,000 from January 1, 1995 through June 30, 1995; and

(4) $50,000 from July 1, 1995 and thereafter.

(d) A government securities broker or dealer that falls within the

provisions of paragraph (c)(2) of Sec. 402.2 shall maintain not less

than the greater of: (i) The amount of liquid capital required under

paragraph 402.2(a); or (ii) liquid capital, after deducting total

haircuts, of:

(1) $5,000 through June 30, 1994;

(2) $11,666 from July 1, 1994 through December 31, 1994;

(3) $18,333 from January 1, 1995 through June 30, 1995; and

(4) $25,000 from July 1, 1995 and thereafter.

PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS

5. The authority citation for Part 404 is revised to read as

follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),

Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,

107 Stat. 2344 (15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(4)).

6. Section 404.2 is amended by revising paragraph (a)(4) to read as

follows:

Sec. 404.2 Records to be made and kept current by registered

government securities brokers and dealers; records of non-resident

registered government securities brokers and dealers.

(a) * * *

(4) Paragraph 240.17a-3(b)(1) is modified to read as follows:

``(1) This section shall not be deemed to require a government

securities broker or dealer registered pursuant to Section

15C(a)(1)(A) of the Act (15 U.S.C. 78o-5(a)(1)(A)) to make or keep

such records of transactions cleared for such government securities

broker or dealer as are customarily made and kept by a clearing

broker or dealer pursuant to the requirements of Secs. 240.17a-3 and

240.17a-4: Provided, that the clearing broker or dealer has and

maintains net capital of not less than $250,000 (or, in the case of

a clearing broker or dealer that is a registered government

securities broker or dealer, liquid capital less total haircuts,

determined as provided in Sec. 402.2 of this title, of not less than

$250,000) and is otherwise in compliance with Sec. 240.15c3-1,

Sec. 402.2 of this title, or the capital rules of the exchange of

which such clearing broker or dealer is a member if the members of

such exchange are exempt from Sec. 240.15c3-1 by paragraph (b)(2)

thereof.''.

* * * * *

Dated: May 27, 1994.

Frank N. Newman,

Under Secretary for Domestic Finance.

[FR Doc. 94-15099 Filed 6-21-94; 8:45 am]

BILLING CODE 4810-39-W