Implementing 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 405

RIN 1505-AA48

Implementing Regulations for the Government Securities Act of

1986

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

ACTION: Final rule.

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

final form amendments to the regulations issued under the Government

Securities Act of 1986 (the ``Government Securities Act'' or

``GSA'').\1\ Section 405.3 of the GSA regulations requires registered

government securities brokers and dealers to comply with the

requirements of Securities and Exchange Commission (the ``Commission''

or ``SEC'') Rule 17a-11 under the Securities Exchange Act of 1934 (the

``Exchange Act''), with certain modifications. The SEC has amended Rule

17a-11 and the Department's amendments parallel the SEC's changes.

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\1\Pub. L. No. 99-571, 100 Stat. 3208 (1986).

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The amendments will, among other things, ease the regulatory and

reporting burdens on registered government securities brokers and

dealers by eliminating the requirement that they submit certain

supplemental financial reports previously required by Sec. 405.3 of the

GSA regulations. Registered government securities brokers and dealers

will remain obligated to transmit notice of a capital deficiency or

certain other events.

EFFECTIVE DATE: October 26, 1994.

FOR FURTHER INFORMATION CONTACT:

Ken Papaj (Director) or Ron Couch (Government Securities Specialist),

Bureau of the Public Debt, Government Securities Regulations Staff, 999

E Street NW., Room 515, Washington, DC 20239-0001. (202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

When the Department first adopted rules and regulations affecting

government securities brokers and dealers, it took into consideration

the already existing regulation of securities brokers and dealers

registered with the SEC under sections 15 or 15B of the Exchange Act,

with a view toward preventing overly burdensome or duplicative

regulations. In that regard, the GSA regulations incorporated, by

reference, many of the SEC's rules regulating brokers and dealers,

including, with modification, Rule 17a-11.

On July 7, 1993, the SEC adopted amendments to 17 CFR 240.17a-11

(Rule 17a-11), which became effective August 12, 1993.\2\ The primary

purpose of Rule 17a-11 is to provide the SEC and other regulatory

bodies with advance warning and information regarding brokers and

dealers that are experiencing financial or operational difficulty.

Prior to the SEC's amendments, Rule 17a-11 required a broker or dealer

to give notice and transmit supplemental reports to the Commission and

other regulatory bodies when its net capital declined below its

required minimum level or when its total outstanding principal amount

of satisfactory subordination agreements exceeded allowable levels for

more than 90 days. The SEC's amendments, among other things, eliminated

the requirement that brokers and dealers file Part II or Part IIA of

Form X-17A-5, Financial and Operational Combined Uniform Single Report

(``FOCUS Report'') after a net capital deficiency. Brokers and dealers,

however, remain obligated to transmit same-day notice of such a capital

deficiency. Additionally, prior to the amendments to Rule 17a-11,

brokers and dealers whose net capital fell below certain ``early

warning levels''\3\ were required to file monthly FOCUS Report for at

least three successive months. This requirement was eliminated by the

amendments and replaced with the requirement that brokers and dealers

promptly notify the Commission and their designated examining authority

(``DEA'') of the triggering event. However, the changes to SEC Rule

17a-11 did not apply to registered government securities brokers and

dealers because the Treasury is the rulemaker for these firms.

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\2\Securities Exchange Act Release No. 32586 (July 7, 1993), 58

FR 37655-58 (July 13, 1993).

\3\Early warning levels are capital levels set at amounts that

are higher than the minimum capital requirement. In situations where

the capital level of a broker or dealer is declining, the early

warning level serves the purpose of alerting regulatory agencies

that the firm may be experiencing financial or operational

difficulty. This early notification enables the regulatory agencies

to monitor the activities of a broker-dealer and assess its

financial condition while there is still time to take action to

prevent the broker-dealer from falling out of compliance with the

minimum capital requirement.

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Section 405.3 of the GSA regulations requires, with certain

modifications, every registered government securities broker or dealer

to comply with Rule 17a-11. Consistent with the SEC's pre-amendment

Rule 17a-11, Sec. 405.3 has required registered government securities

brokers and dealers, including interdealer brokers and futures

commission merchants (FCMs), to provide notice of capital deficiencies,

to submit financial reports within 24 hours of a capital deficiency,

and to file supplemental reports for three successive months when

capital falls below early warning levels. Since the SEC's amendments to

Rule 17a-11, without conforming amendments to Sec. 405.3 of the GSA

regulations, the rules applicable to government securities brokers and

dealers have been unclear. At the time of the amendments to SEC Rule

17a-11, Treasury was unable to revise the GSA regulations accordingly

because its rulemaking authority had expired in October 1991 and

reauthorization legislation was still being considered by the Congress.

The Treasury supported the SEC changes to Rule 17a-11 and took

action to relieve registered government securities brokers and dealers

of the requirement to file supplemental financial reports under

Sec. 405.3, pending the reauthorization of Treasury's rulemaking

authority and the issuance of conforming amendments. Accordingly, on

August 27, 1993, at the request of Department staff, the SEC staff

issued to no-action letter\4\ stating that no action would be

recommended to the Commission if a DEA waived the financial report

filing requirements of SEC Rule 17a-11, as modified and made applicable

to registered government securities brokers and dealers by Sec. 405.3,

provided that:

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\4\Letter from Michael A. Macchiaroli, Associate Director,

Division of Market Regulation, U.S. Securities and Exchange

Commission, to Raymond J. Hennessy, Vice President, New York Stock

Exchange, and to John F. Pinto, Executive Vice President, National

Association of Securities Dealers, dated August 27, 1993.

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(1) a registered government securities broker or dealer gives

notice the same day of the event in accordance with Rule 17a-11:

(a) if the liquid capital of a government securities broker-dealer

subject to the financial responsibility requirements of Sec. 402.2

under the GSA declines below the minimum amount required by Sec. 402.2,

or

(b) if the net capital of a government securities interdealer

broker subject to the financial responsibility requirements of

Sec. 402.1(e) of the GSA declines below the minimum amount required by

Sec. 402.1(e), or

(c) if the net capital of a registered government securities broker

or dealer that is also an FCM registered with the Commodity Futures

Trading Commission (``CFTC'') falls below the greater of (i) the

minimum amount required by Rule 15c3-1 (17 CFR 240.15c3-1) or (ii) the

minimum amount required by CFTC Rule 1.17 (17 CFR 1.17); or

(2) a registered government securities broker or dealer gives

notice promptly (within 24 hours) in accordance with Rule 17a-11 upon

the occurrence of an event that would require under Sec. 405.3 the

filing of a Report on Finances and Operations of Government Securities

Brokers and Dealers (``FOGS Report'') or FOCUS Report.

The no-action letter also noted that Treasury's rulemaking

authority had expired, but that Treasury staff intended, upon

reauthorization of its rulemaking authority, to amend its regulations

under the GSA to conform to the SEC's amendments to Rule 17a-11. The

Treasury's rulemaking authority was reauthorized on December 17, 1993,

with the enactment of the Government Securities Act Amendments of

1993,\5\ thus enabling the Department to make this rule change.

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\5\Pub. L. 103-202, 107 Stat. 2344 (1993).

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II. Amendments

A. Section 405.3

The new rule eliminates the prior requirement that registered

government securities brokers or dealers file financial reports within

24 hours after a liquid or net capital deficiency by adopting paragraph

(b) of SEC Rule 17a-11.\6\ Registered government securities brokers and

dealers will remain obligated to transmit notice of a liquid or net

capital deficiency on the same day of the occurrence. However, unlike

the previous rule, the amendments require the notice to specify the

registered government securities broker's or dealer's capital

requirement and its current amount of capital. This latter requirement

does not impose any additional burdens on registered government

securities brokers and dealers because they are required to continually

monitor their minimum capital requirement and their current amount of

capital to ensure compliance with the Department's capital rule.

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\6\17 CFR 240.17a-11(b).

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Section 405.3 also adopts the requirement of SEC Rule 17a-11(b)

that a broker or dealer must give notice of a capital deficiency when

it is informed by its DEA or the Commission that it is, or has been, in

violation of the capital requirements, even if it does not agree with

that determination. In the event of such a dispute, the broker or

dealer may state in its notice the arguments for its disagreement with

the capital deficiency determination.

The requirement that registered government securities brokers and

dealers file Part II or Part IIA of the FOGS Report, or in limited

cases the FOCUS Report, within 15 calendar days after the end of the

next three months if their capital falls below certain early warning

levels is also eliminated. In lieu of this requirement, and consistent

with the SEC's Rule, Sec. 405.3(a)(5) requires that, in the event a

registered government securities broker's or dealer's capital falls

below certain early warning levels, it is required to file notice of

such event promptly (within 24 hours).

Section 405.3(a)(5) also adds a new early warning level based on

minimum capital after haircuts for registered government securities

brokers or dealers other than government securities interdealer brokers

and government securities brokers and dealers that also are FCMs. In

addition to sending prompt notice any time their liquid capital is less

than 150 percent of haircuts, such government securities brokers and

dealers also have to send a notice when their liquid capital after

deducting total haircuts is less than 120 percent of their minimum

capital requirement. This is consistent with the SEC early warning

level for net capital and especially important for a registered

government securities broker or dealer that may have no haircuts.

These amendments to Sec. 405.3 of the GSA regulations conform the

notification provisions applicable to registered government securities

brokers and dealers to the requirements applicable to diversified

brokers and dealers registered with the SEC. The Department is

conforming the regulations under the GSA to SEC Rule 17a-11 to ensure

consistent regulatory treatment for all classes of government

securities brokers and dealers registered with the Commission and to

reduce the reporting burdens on registered government securities

brokers and dealers.

The Department believes that there is no reason for registered

government securities brokers or dealers to file reports in

circumstances where other brokers or dealers registered with the SEC

are not filing reports. Further, the same-day notice requirement

provides the Commission and the DEAs adequate warning of financial or

operational problems, thereby enabling them to increase the

surveillance of a registered government securities broker or dealer

experiencing difficulty and to obtain any additional information

necessary to assess the broker's or dealer's financial condition.

Due to the revisions of SEC Rule 17a-11, the Department is also

making minor housekeeping changes to Sec. 405.3(a) by deleting

paragraphs 405.3(a) (4) and (5), which are no longer applicable, and

redesignating the remaining paragraphs. To correct an oversight, the

Department is adding new paragraph 405.3(c)(7) that indicates that

references in SEC Rule 17a-11 to Sec. 240.17a-3, relating to records,

mean Sec. 404.2 of the GSA regulations. This provision, which appears

in paragraphs 405.3 (a) and (b), was inadvertently excluded from

paragraph 405.3(c) when the implementing GSA regulations were adopted

in July 1987.

B. Technical Amendments to Section 402.2d

The Department is also making a technical amendment to paragraph

(j) of Sec. 402.2d of the GSA regulations. Currently, paragraph (j) of

Sec. 402.2d, which modifies Sec. 240.15c3-1d(c)(5)(i), prohibits a

registered government securities broker or dealer from entering into a

temporary subordinated loan during any period in which the broker or

dealer is subject to ``any of the reporting provisions'' of Sec. 405.3.

Although the requirement in Sec. 405.3 to file supplemental financial

reports (i.e., FOGS or FOCUS Reports) in the event of a capital

deficiency or the breaching of early warning levels is being

eliminated, the Department is retaining the capital rule's prohibition

against a registered government securities broker or dealer obtaining a

temporary subordinated loan during a period of financial or operational

difficulty. Accordingly, paragraph (j) is being amended to prohibit a

registered government securities broker or dealer from obtaining a

temporary subordinated loan if it has given notice under Sec. 405.3

within the preceding thirty days. This amendment will enable the DEAs

to prevent a registered government securities broker or dealer from

obtaining temporary loans during periods in which the broker or dealer

may be experiencing financial or operational difficulties.

III. Special Analysis

Because this final rule is merely a conforming amendment, the

Department has determined that it is not a ``significant regulatory

action'' as defined in Executive Order 12866.

In addition, in accordance with the Administrative Procedure Act (5

U.S.C. 553(b)), the Department for good cause finds that issuing a

notice of proposed rulemaking and requesting comment are unnecessary.

This rulemaking merely makes corrections to the existing GSA rule to

conform it to the amendments to the SEC rule upon which it is based.

The rule makes no independent substantive changes in the treatment of

government securities brokers and dealers--they have previously been

subject to reporting requirements parallel to other registered brokers

and dealers, and they will continue to be subject to reporting

requirements parallel to other registered brokers and dealers. This

rule change imposes no additional burdens or requirements on government

securities brokers and dealers. For these reasons, the Department is

issuing the rule in final form, with an immediate effective date,

pursuant to 5 U.S.C. 553(d)(3).

Because no notice and public comment are required for this

rulemaking, the provisions of the Regulatory Flexibility Act (5 U.S.C

601, et seq.), do not apply. In addition, the information collections

concerning this rule have been previously reviewed and approved by the

Office of Management and Budget under the Paperwork Reduction Act (44

U.S.C. 3504(h)) and assigned control number 1535-0089. This rulemaking

makes no substantive change to the information collection requirements

except to delete the requirement that a registered government

securities broker or dealer file a FOGS or FOCUS Report after

experiencing a capital deficiency or triggering the early warning level

notice requirements.

List of Subjects

17 CFR Part 402

Brokers, Government securities.

17 CFR Part 405

Brokers, Government securities, Reporting and recordkeeping

requirements.

For the reasons set out in the Preamble, 17 CFR Parts 402 and 405

are amended as follows:

PART 402--FINANCIAL RESPONSIBILITY

1. The authority citation for Part 402 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)(A), (b)(4)).

2. Section 402.2d is amended by revising the second sentence of

paragraph (j) to read as follows:

Sec. 402.2(d) Appendix D--Modification of Sec. 240.15c3-1d of this

title, relating to satisfactory subordination agreements, for purposes

of Sec. 402.2.

* * * * *

(j) * * *

``(i) * * * This temporary relief shall not apply to a government

securities broker or dealer if, within the preceding thirty calendar

days, it has given notice pursuant to Sec. 405.3, or if immediately

prior to entering into such subordination agreement, the liquid

capital, as defined in Sec. 402.2(d) of this title, of such broker or

dealer would be less than 150% of total haircuts, as defined in

Sec. 402.2(g) of this title, or the amount of its then outstanding

subordination agreements exceeds the limits specified in Sec. 240.15c3-

1(d). * * *

* * * * *

PART 405--REPORTS AND AUDIT

3. The authority citation for Part 405 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)).

4. Section 405.3 is amended by revising the section title; by

deleting paragraphs (a)(4) and (a)(5); by redesignating paragraphs

(a)(6), (a)(7) and (a)(8) as (a)(4), (a)(5) and (a)(6), respectively;

by revising newly redesignated (a)(5); by redesignating and revising

paragraph (c)(5) as (c)(6); and adding new paragraphs (c)(5) and (c)(7)

to read as follows:

Sec. 405.3 Notification provisions for certain registered government

securities brokers and dealers.

(a) * * *

(5) Section 240.17a-11(c), for the purposes of this section, is

modified to read as follows:

``(c) Every registered government securities broker or dealer shall

send notice promptly (but within 24 hours) in accordance with paragraph

(g) of this section if a computation made pursuant to the requirements

of Sec. 402.2 of this title shows, at any time during the month, that

its liquid capital is less than 150 percent of total haircuts,

determined in accordance with Sec. 402.2 of this title, or that its

capital after deducting total haircuts from liquid capital is less than

120 percent of the registered government securities broker or dealer's

minimum capital requirement specified in Sec. 402.2 (b) or (c) of this

title as applicable.''

* * * * *

(c) * * *

(5) Sec. 240.17a-11(c) for the purposes of this section is modified

to read as follows:

``(c) Every broker or dealer shall send notice promptly (but within

24 hours) after the occurrence of the events specified in paragraphs

(c)(1), (c)(2), (c)(3), or (c)(4) of this section in accordance with

paragraph (g) of this section:''

(6) A new paragraph 240.17a-11(c)(4) is added to read as follows:

``(4) If a computation made by a government securities broker or

dealer that is not a registered broker or dealer but that is also a

futures commission merchant registered with the Commodity Futures

Trading Commission shows that:

``(i) The adjusted net capital of such entity is less than the

greater of:

``(A) 150 percent of the appropriate minimum dollar amount required

by Sec. 1.17(a)(1)(i), or

``(B) 6 percent of the following amount: The customer finds

required to be segregated pursuant to Sec. 4d(2) of the Commodity

Exchange Act and Sec. 1.17 of this title, less the market value of

commodity options purchased by option customers on or subject to the

rules of a contract market, provided, however, the deduction for each

option customer shall be limited to the amount of customer funds in

such option customer's account; or

``(ii) At any point during the month, aggregate indebtedness is in

excess of 1200 percent of net capital or total net capital is less than

120 percent of the minimum net capital required.''

(7) References to Sec. 240.17a-3, relating to records, mean

Sec. 404.2 of this chapter.

(Approved by the Office of Management and Budget under control

number 1535-0089.)

Date: October 11, 1994.

Frank N. Newman,

Under Secretary for Domestic Finance.

[FR Doc. 94-26545 Filed 10-25-94; 8:45 am]

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