Amendments to Regulations for the Government Securities Act of 1986

Federal RegisterApr 26, 1995

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DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

17 CFR Parts 404 and 405

RIN 1505-AA47

Amendments to Regulations for the Government Securities Act of

1986

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

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Department'' or

``Treasury'') is publishing, as a final rule, amendments to the

recordkeeping rules in part 404 and the reporting rules in part 405 of

the regulations issued under the Government Securities Act of 1986

(``GSA''). The recordkeeping amendment requires entities registered

with the Securities and Exchange Commission (``SEC'') as specialized

government securities brokers and dealers (``registered government

securities brokers and dealers'') under section 15C(a)(2) of the

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

5(a)(2)) to maintain and preserve records concerning the financial and

securities activities of affiliates whose business activities are

reasonably likely to have a material impact on the financial or

operational condition of the registered government securities brokers

and dealers. The reporting amendment requires registered government

securities brokers and dealers to file with the SEC quarterly summary

reports of the information required to be maintained and preserved by

the recordkeeping amendment. The amendments (``risk assessment rules'')

parallel the SEC's final temporary risk assessment rules applicable to

brokers and dealers that conduct general or municipal securities

businesses (``registered brokers and dealers''). The Department's risk

assessment rules are being promulgated pursuant to the authority

granted to the Department by the Market Reform Act of 1990 (the

``Reform Act'') and are intended to provide regulators with access to

information concerning the financial risk posed to registered

government securities brokers and dealers--and to the securities

markets as a whole--as a result of certain financial and securities

activities conducted by affiliates within holding company structures.

The Department is adopting the amendments essentially unchanged from

their proposed form.

DATES: The effective date is June 30, 1995. The rules are being

implemented in accordance with a phase-in schedule. See Section III of

this preamble for the entire schedule.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Government Securities

Specialist) or Lee Grandy (Government Securities Specialist) at 202-

219-3632. (TDD for hearing impaired: 202-219-3988.)

SUPPLEMENTARY INFORMATION:

I. Background

In response to the stock market disruption of October 1987, the

bankruptcy of Drexel Burnham Lambert Group, Inc. (``Drexel'') in

February 1990, and other developments in the securities markets,

Congress passed the Reform Act in September 1990.\1\ Among other

things, the Reform Act provided the SEC and Treasury separate but

parallel authority to promulgate risk assessment rules for certain

broker-dealer holding company structures. The Reform Act authorized

Treasury to require registered government securities brokers and

dealers to maintain and report information on the financial and

securities activities of certain affiliates that had the potential to

pose material amounts of risk to the brokers and dealers. The Reform

Act did not authorize Treasury to require financial institutions that

have filed notice (or are required to file notice) as government

securities brokers and dealers to maintain and report risk assessment

information, although registered government securities brokers and

dealers that are subject to the rules must maintain records and submit

reports pertaining to the financial and securities activities of

certain affiliates that are financial institutions.

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

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The Drexel failure demonstrated that financial difficulties or

liquidity problems of parent companies or affiliates of brokers and

dealers could have a material and adverse effect on brokers and dealers

themselves; risk assessment authority was therefore intended to help

regulators monitor such developments. The primary focus of the risk

assessment authority was the financial health of large holding

companies whose potential failures pose risks to their affiliated

brokers and dealers, as well as to the securities markets and the

financial system as a whole. The Department believes that these rules

will enhance the safety of the government securities market and provide

for more effective regulatory oversight.

The legislative history\2\ of the Reform Act indicated that risk

assessment rules would require information concerning several

particular types of potentially risky financial and securities

activities conducted by affiliates of brokers and dealers, including

bridge loans, interest rate swaps, foreign currency transactions, other

derivatives (e.g., forwards and futures), and real estate

[[Page 20397]] developments. Off-balance sheet derivatives such as

interest rate swaps and foreign currency transactions were identified

as particularly important categories for risk assessment rules given

their high growth rates and the limited public information available

regarding their magnitude and use.

\2\H.R. Rep. No. 101-524 and 101-477, 101st Cong., 2nd Sess.

(1990).

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Affiliates conducting these largely unregulated activities can

attain a degree of leverage and assume credit risks that brokers and

dealers, which are subject to the capital and customer protection rules

of the Treasury and the SEC, cannot attain. The business activities of

these affiliates could have significant and adverse effects on the

financial health of brokers and dealers. For example, large losses at

the parent company level might cause the credit rating of the parent to

decline, which could cause liquidity problems at the broker or dealer.

Thus, the Reform Act specifically provided the SEC with direct access

to information concerning the business activities of brokers' and

dealers' affiliates that are outside of SEC oversight.

In September 1991, the SEC published for comment proposed temporary

Rules 17h-1T and 17h-2T, which together with proposed Form 17-H, would

establish a risk assessment recordkeeping and reporting system for

registered brokers and dealers.\3\ After reviewing the 63 comment

letters it received and making modifications, the SEC issued in July

1992 final temporary risk assessment rules.\4\ Rule 17h-1T\5\ is a

recordkeeping rule identifying and describing the records that

registered brokers and dealers are required to maintain and preserve.

Rule 17h-2T\6\ sets forth requirements for registered brokers and

dealers to submit quarterly reports summarizing the information

required to be maintained under Rule 17h-1T. The preamble of the SEC's

final temporary rules stated that the SEC staff would issue for public

comment a study evaluating the effectiveness of the SEC's risk

assessment rules within 90 days after the rules have been fully

operative for two years. At that time, the SEC will consider what, if

any, modifications to its rules would be appropriate. Treasury will

consult with the SEC regarding the study and assessment of its rules to

determine whether any of the SEC's findings are germane to Treasury's

risk assessment rules.

\3\Securities Exchange Act Release No. 34-29635 (August 30,

1991), 56 FR 44014 (September 6, 1991).

\4\Securities Exchange Act Release No. 34-30929 (July 16, 1992),

57FR 32159 (July 21, 1992).

\5\17 CFR 240.17h-1T.

\6\17 CFR 240.17h-2T.

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The Commodity Futures Trading Commission (``CFTC'') was also

authorized to promulgate risk assessment rules applicable to registered

futures commission merchants (``FCMs'') pursuant to the Futures Trading

Practices Act of 1992.\7\ The CFTC published its proposed risk

assessment rules in March 1994.\8\ The CFTC extended its comment period

twice before promulgating the first part of its final risk assessment

rules in December 1994,\9\ which require certain FCMs to maintain and

file key information addressing the overall structure of holding

companies involving the FCMs. The CFTC deferred action on other

portions of its proposed rules pending further review and consultation

with other regulators.

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

\8\59 FR 9689 (March 1, 1994).

\9\59 FR 66674 (December 28, 1994).

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Treasury published its risk assessment amendments in proposed form

on November 15, 1994,\10\ and the comment period closed on January 17,

1995. The Department received no comments in response to the proposal.

\10\59 FR 58792 (November 15, 1994).

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II. Analysis

A. Reporting and Recordkeeping Requirements

The Department's risk assessment rules incorporate the SEC's final

temporary risk assessment Rules 17h-1T and 17h-2T, with minor

modifications that reflect both the specialized activities of

registered government securities brokers and dealers and the

Department's analysis of the SEC's interpretive letter to the

Securities Industry Association (``SIA'') in September 1993.\11\ Under

the Department's rules, two general categories of records will be

required: (1) Information concerning the holding company organization,

risk management policies, and material legal proceedings; and (2)

financial and securities information pertinent to assessing risk in the

holding company system (e.g., consolidating and consolidated financial

statements and positions in various financial instruments). The

information required to be maintained and preserved pursuant to the

recordkeeping rules will be subject to routine inspection by the SEC

and the self-regulatory organizations. Under the reporting rules,

registered government securities brokers and dealers will be required

to file with the SEC quarterly summaries of the information that must

be maintained under the recordkeeping rules. These quarterly summaries

will be required to be filed on the SEC's Form 17-H. A more detailed

discussion of the Department's specific risk assessment requirements is

included in the preamble to the proposed rules.

\11\See letter from Michael Macchiaroli, Associate Director,

Division of Market Regulation, Securities and Exchange Commission to

Douglas G. Preston, Esq., Securities Industry Association (September

20, 1993). (1993 Transfer Binder) Fed. Sec. L. Rep. (CCH) 76,696.

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The information required to be maintained and reported by the firms

pertains only to the firms' ``Material Associated Persons'' (``MAPs'').

The Reform Act did not define MAPs. However, the legislative history

accompanying the statute specified a number of factors that should be

considered when determining which affiliates (associated persons) might

have a ``material'' impact on the financial or operational condition of

brokers and dealers. These factors have been incorporated into

paragraph 17h-1T(a)(2), thereby providing guidelines for determining

which affiliates of the brokers and dealers are MAPs. The initial

designation of MAPs will be made by the affected registered government

securities brokers and dealers.

The term ``associated persons,'' as explained in the legislative

history, is based on the definition at 3(a)(18) of the Exchange Act (15

U.S.C. 78c(a)(18)), except that natural persons are excluded for the

purposes of the risk assessment rules (which automatically excludes

natural persons from the definition of MAPs). Consistent with the SEC

approach,12 partnerships will not be treated as natural persons

and, depending on the circumstances, may be deemed to be MAPs of the

registered government securities broker or dealer. Subchapter S

corporations may be treated as natural persons for purposes of the

amendments if the Subchapter S corporation is owned by one natural

person.

\12\Id.

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Note that, with respect to the Department's risk assessment rules,

the definition of ``associated persons'' differs from the definition of

that term as specified in Sec. 400.3 of the GSA regulations. The term

as used in Sec. 400.3 specifically applies to certain natural persons

who are associated with government securities brokers or dealers.

B. Exemptions and Special Provisions

The Department is incorporating, with modifications and

supplements, the SEC's exemptive provisions (17 CFR 240.17h-1T(d) and

240.17h-2T(b)). The Department's provisions will exempt registered

government securities brokers [[Page 20398]] and dealers from all of

Treasury's risk assessment rules if they: (1) Do not carry customer

accounts and maintain capital (equity capital plus subordinated debt)

of less than $20 million; (2) maintain capital of less than $250,000

(regardless of whether they carry customer accounts or not); or (3)

have an affiliated registered broker or dealer,13 provided that

the registered broker or dealer is subject to, and in compliance with,

the SEC's risk assessment rules, and provided that all of the MAPs of

the registered government securities broker or dealer are also MAPs of

the registered broker or dealer. A registered government securities

broker or dealer that has no affiliates or holding company would not be

subject to the Department's risk assessment rules. The Department's

rules also allow affiliated registered government securities brokers

and dealers to request in writing that the Department permit one of the

firms--a ``Reporting Registered Government Securities Broker or

Dealer''--to maintain and report risk assessment information on behalf

of the other affiliated firms. The Department will promptly advise the

SEC and the National Association of Securities Dealers of such a

request and consult with them in order to provide for an efficient

examination process.

\13\Similarly, the CFTC's final risk assessment rules permit

FCMs that are, or that have affiliates that are, registered broker-

dealers or registered government securities broker-dealers to file

Form 17-H in partial compliance with the CFTC's rules. See Supra

note 9.

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The Department is also adopting the SEC's special provisions for

affiliates that are already subject to supervision by certain U.S. or

foreign financial regulatory authorities. (See paragraphs (b) and (c)

of 17 CFR 240.17h-1T, and paragraphs (c) and (d) of 17 CFR 240.17h-2T,

as modified by Secs. 404.2(b) and 405.5, respectively). With respect to

such affiliates, registered government securities brokers and dealers

will be deemed in compliance with the financial and securities

recordkeeping requirements of the rule by maintaining copies of reports

that such affiliates already submit to certain domestic and foreign

regulators. The registered government securities brokers and dealers

will, however, remain responsible for maintaining organizational

charts, risk management policies, and records of legal proceedings in

which they are involved, and will have to submit such information on

Form 17-H (Items 1-3 of Part I of the form).

The Department believes that these types of special provisions and

exemptions will preclude duplicative and unnecessary recordkeeping and

reporting for various registered government securities brokers and

dealers without compromising regulators' need to capture information on

the potentially risky activities of entire holding company systems.

C. Scope of Proposed Risk Assessment Rules

In proposing its risk assessment rules, the SEC noted that it

believed the majority of registered brokers and dealers that conduct a

business with the public do not pose the types of risks the Reform Act

was designed to address.

Following this precept, the SEC exempted from its rules registered

brokers and dealers whose activities are not likely to pose a material

threat to the investing public or the marketplace (e.g., limited

purpose mutual fund brokers), whose operations are relatively small (as

measured by capital levels), or whose functions do not include carrying

customer accounts (unless they are large firms).

The SEC also adopted special provisions for registered brokers and

dealers that have certain regulated affiliates, such as banks,

insurance companies, futures commission merchants, and foreign

affiliates, recognizing the existence of certain regulatory reporting

by these entities and eliminating the need to create a new set of

records for such entities. In lieu of adhering to the bulk of the SEC's

risk assessment rules, registered brokers and dealers are, in certain

specified cases, able to maintain and submit copies of reports that

these affiliates already routinely submit to U.S. and foreign

regulators.

Of the approximately 5,600 registered brokers and dealers that

conduct a public business, SEC staff informs us that roughly 250 firms

are currently following the SEC's risk assessment rules. These are the

largest firms and the ones that potentially pose the most risk to the

markets. In contrast, of the 33 registered government securities firms

in existence at the time of this writing, approximately 11 are

potentially subject to the Department's risk assessment rules since we

estimate that 22 of the 33 firms will qualify for at least one of the

Treasury exemptions. It appears that five registered government

securities brokers and dealers will qualify for an exemption because

their capital levels are under $250,000. Fourteen firms will qualify

for an exemption because they do not carry customer accounts and have

capital of less than $20 million. Six firms will potentially qualify

for an exemption because their affiliated registered brokers and

dealers follow the SEC's risk assessment rules.14

\14\The total estimated number of firms qualifying for

exemptions exceeds 22 because we anticipate that some firms will

qualify for more than one exemption.

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Of the 11 firms potentially subject to the Department's rules,

three are affiliated within the same holding company structure. Thus,

any one of the firms will be able to request that the Department

authorize it to be the Reporting Registered Government Securities

Broker or Dealer on behalf of the other two firms. Of the remaining

eight firms that are potentially subject to the Department's rules,

three have foreign bank holding companies, which could ease their

recordkeeping and reporting requirements considerably. These firms

should be able to maintain and submit the same reports that their

holding companies submit to foreign financial regulatory authorities,

with a copy translated into English. The amount of information the

remaining five firms will be required to maintain and report will be

based on the number of MAPs designated and the types of activities the

MAPs conduct. The Department believes this approach meets the

objectives of the statute without imposing significant costs or burdens

on market participants. In order to provide affected firms time to make

personnel and systems adjustments required for compliance, the

Department has adopted a multi-month phase-in period.15 Refer to

Section III below for the Department's implementation schedule.

\15\Many of the commentators to the SEC's proposed risk

assessment rules stated that they would be required to make

personnel and systems adjustments to comply with the rules. To ease

the burden associated with meeting the requirements of its rules,

the SEC adopted a phased-in implementation schedule. The Department

is adopting a similar phased-in approach to implementation.

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In preparing the rules, the Department consulted with the staffs of

the SEC and the bank regulatory agencies; they concur with the

Department's approach.

The Department is also promulgating technical amendments to

Sec. 404.2 by redesignating paragraphs (b) and (c) as paragraphs (c)

and (d), respectively, and by revising newly redesignated paragraph

(c). The revisions to redesignated paragraph (c) will more accurately

define the terms ``registered government securities broker or dealer''

and ``the Secretary of the Treasury'' as they are used to modify 17 CFR

240.17a-7.

III. Implementation Schedule

Most of the Department's implementation dates have been

[[Page 20399]] modified from the dates in the proposed rules to provide

affected firms with sufficient time to make the necessary preparations

to comply with the rules. Effective June 30, 1995, affected firms will

be required to maintain records of an organizational chart, written

risk management procedures, and a description of material legal or

arbitration proceedings; the entire recordkeeping provisions will apply

as of September 30, 1995.

The Department's rules will require affected firms to file the

organizational chart, the written risk management procedures, and the

description of material legal or arbitration proceedings (Part I, Items

1-3 of Form 17-H) by July 31, 1995; the entire reporting provisions

(i.e., the remaining portions of Form 17-H, including documents

attached in accordance with the special provisions for entities subject

to certain domestic and foreign regulators) will apply for the period

ending September 30, 1995. The affected firms will have 60 calendar

days after September 30, 1995, and after each subsequent fiscal

quarter, to actually file the remaining portions of Form 17-H. The

cumulative year-end financial statements required pursuant to

Sec. 404.2(b)(4) must be filed within 105 calendar days of the end of

the fiscal year.

Note that following the first filing by July 31, 1995, of the

organizational chart, the written risk management procedures, and the

description of material legal or arbitration proceedings, this

information need be included in quarterly filings only when a material

change in the information has occurred. Additionally, the

organizational chart is required in each year-end filing.

IV. Special Analysis

It has been determined that these amendments are not a

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

12866. Therefore, a Regulatory Assessment is not required.

In the preamble to the proposed rules, pursuant to the Regulatory

Flexibility Act (5 U.S.C. 601, et seq.), the Department certified that

these amendments, if adopted, would not have a significant economic

impact on a substantial number of small entities. Accordingly, a

regulatory flexibility analysis was not prepared. In reviewing the

final rules being adopted herein and in light of the fact that no

comments were received, the Department has concluded that there is no

reason to alter the previous certification.

The collections of information contained in the final regulations

have been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))

under control number 1535-0089.

Estimated total annual reporting and recordkeeping burden: 264 hours

Estimated average annual burden per respondent and recordkeeper: 24

hours

Estimated number of respondents and recordkeepers: 11

Estimated annual frequency of response: Four

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be directed to the Forms

Management Branch, Bureau of the Public Debt, Department of the

Treasury, Parkersburg, West Virginia 26106-1328; and to the Office of

Management and Budget, Paperwork Reduction Project 1535-0089,

Attention: Desk Officer for Department of the Treasury, Washington, DC

20503.

List of Subjects

17 CFR Part 404

Banks, Banking, Brokers, Government securities, Reporting and

recordkeeping requirements.

17 CFR Part 405

Brokers, Government securities, Reporting and recordkeeping

requirements.

For the reasons set out in the Preamble, 17 CFR parts 404 and 405

are amended as follows:

PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS

1. The authority citation for part 404 is revised to read as

follows:

Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

2. Section 404.2 is amended by redesignating paragraphs (b) and (c)

as paragraphs (c) and (d), respectively; by revising newly redesignated

paragraph (c); and by adding new paragraph (b) to read as follows:

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.

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(b) Every registered government securities broker or dealer shall

comply with the requirements of Sec. 240.17h-1T of this title (SEC Rule

17h-1T), with the following modifications:

(1) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered with the Commission pursuant

to Section 15 of the Act'' mean registered government securities

brokers or dealers.

(2) For the purposes of this section, references to Secs. 240.17h-

1T and 240.17h-2T of this title mean those sections as modified by

Secs. 404.2(b) and 405.5, respectively.

(3) For the purposes of this section, ``associated person'' has the

meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),

except that natural persons are excluded.

(4) Paragraphs 240.17h-1T(a)(1)(iii) through (vi) of this title are

modified to read as follows:

``(iii) A description of all material pending legal or arbitration

proceedings involving a Material Associated Person or the registered

government securities broker or dealer that are required to be

disclosed, under generally accepted accounting principles on a

consolidated basis, by the highest level holding company that is a

Material Associated Person.

``(iv) Consolidated and consolidating balance sheets, prepared in

accordance with generally accepted accounting principles, which may be

unaudited and which shall include the notes to the financial

statements, as of quarter-end for the registered government securities

broker or dealer and its highest level holding company that is a

Material Associated Person;

``(v) Quarterly consolidated and consolidating income statements

and consolidated cash flow statements, prepared in accordance with

generally accepted accounting principles, which may be unaudited and

which shall include the notes to the financial statements, for the

registered government securities broker or dealer and its highest level

holding company that is a Material Associated Person;

``(vi) The amount as of quarter-end, and at month-end if greater

than quarter-end, of the aggregate long and short securities and

commodities positions held by each Material Associated Person,

including a separate listing of each single unhedged securities or

commodities position, other than U.S. Treasury securities, that exceeds

the Materiality Threshold at any month-end;''

(5) Paragraphs 240.17h-1T(a)(3) and (a)(4) of this title are

modified to read as follows:

``(3) The information, reports and records required by the

provisions of this section shall be maintained and preserved in

accordance with the provisions of Sec. 404.3 of this title and shall be

kept for a period of not less than three years in an easily accessible

place.

``(4) For the purposes of this section and Sec. 405.5 of this

title, the term [[Page 20400]] ``Materiality Threshold'' shall mean the

greater of:

``(i) $100 million; or

``(ii) 10 percent of the registered government securities broker's

or dealer's liquid capital based on the most recently filed Form G-405

(or, in the case of futures commission merchants and interdealer

brokers subject to the capital rules in Secs. 402.1(d) and 402.1(e),

respectively, tentative net capital based on the most recently filed

Form X-17A-5) or 10 percent of the Material Associated Person's

tangible net worth, whichever is greater.''

(6) Paragraph 240.17h-1T(b) of this title is modified to read as

follows:

``(b) Special provisions with respect to Material Associated

Persons subject to the supervision of certain domestic regulators. A

registered government securities broker or dealer shall be deemed to be

in compliance with the recordkeeping requirements of paragraph

(a)(1)(iii) through (x) of this section with respect to a Material

Associated Person if:''

* * * * *

(7) Paragraph 240.17h-1T(c) of this title is modified to read as

follows:

``(c) Special provisions with respect to Material Associated

Persons subject to the supervision of a foreign financial regulatory

authority. A registered government securities broker or dealer shall be

deemed to be in compliance with the recordkeeping requirements of

paragraph (a)(1)(iii) through (x) of this section with respect to a

Material Associated Person if such registered government securities

broker or dealer maintains in accordance with the provisions of this

section copies of the reports filed by such Material Associated Person

with a Foreign Financial Regulatory Authority. The registered

government securities broker or dealer shall maintain a copy of the

original report and a copy translated into the English language. For

the purposes of this section, the term Foreign Financial Regulatory

Authority shall have the meaning set forth in section 3(a)(52) of the

Act.''

(8) Paragraph 240.17h-1T(d) of this title is modified to read as

follows:

``(d) Exemptions. (1) The provisions of this section shall not

apply to any registered government securities broker or dealer:

``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of

this title, as made applicable by Sec. 403.4, pursuant to paragraph

(k)(2) of Sec. 240.15c3-3 of this title; or

``(ii) If the registered government securities broker or dealer

does not qualify for an exemption from the provisions of Sec. 240.15c3-

3 of this title, as made applicable by Sec. 403.4, and such registered

government securities broker or dealer does not hold funds or

securities for, or owe money or securities to, customers and does not

carry the accounts of, or for, customers; unless

``(iii) In the case of paragraphs (d)(1)(i) or (ii) of this

section, the registered government securities broker or dealer

maintains capital of at least $20,000,000, including debt subordinated

in accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2.

``(2) The provisions of this section shall not apply to any

registered government securities broker or dealer which maintains

capital of less than $250,000, including debt subordinated in

accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2, even if the registered government

securities broker or dealer holds funds or securities for, or owes

money or securities to, customers or carries the accounts of, or for,

customers.

``(3) The provisions of this section shall not apply to any

registered government securities broker or dealer which has an

associated person that is a registered broker or dealer, provided that:

``(i) The registered broker or dealer is subject to, and in

compliance with, the provisions of Sec. 240.17h-1T and Sec. 240.17h-2T

of this title, and

``(ii) All of the Material Associated Persons of the registered

government securities broker or dealer are Material Associated Persons

of the registered broker or dealer subject to Sec. 240.17h-1T and

Sec. 240.17h-2T of this title.

``(4) In calculating capital for the purposes of this paragraph, a

registered government securities broker or dealer shall include with

its equity capital and subordinated debt the equity capital and

subordinated debt of any other registered government securities brokers

or dealers or registered brokers or dealers that are associated persons

of such registered government securities broker or dealer, except that

the equity capital and subordinated debt of registered brokers and

dealers that are exempt from the provisions of Sec. 240.15c3-3 of this

title, pursuant to paragraph (k)(1) of Sec. 240.15c3-3, shall not be

included in the capital computation.

``(5) The Secretary may, upon written application by a Reporting

Registered Government Securities Broker or Dealer, exempt from the

provisions of this section, either unconditionally or on specified

terms and conditions, any registered government securities brokers or

dealers that are associated persons of such Reporting Registered

Government Securities Broker or Dealer. The term ``Reporting Registered

Government Securities Broker or Dealer'' shall mean any registered

government securities broker or dealer that submits such application to

the Secretary on behalf of its associated registered government

securities brokers or dealers.''

(9) Paragraph 240.17h-1T(g) of this title is modified to read as

follows:

``(g) Implementation schedule. Every registered government

securities broker or dealer subject to the requirements of this section

shall maintain and preserve the information required by paragraphs

(a)(1)(i), (ii), and (iii) of this section commencing June 30, 1995.

Commencing September 30, 1995, the provisions of this section shall

apply in their entirety.''

registered or applying for registration pursuant to Section 15C of the

Act shall comply with Sec. 240.17a-7 of this title, provided that:

(i) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered or applying for registration

pursuant to Section 15 of the Act'' mean registered government

securities brokers or dealers; and

(ii) For the purposes of this section, references to ``any rule or

regulation of the Commission'' and ``any rule or regulation of the

Securities and Exchange Commission'' mean any rule or regulation of the

Secretary.

(2) For the purposes of this section, the term ``non-resident

government securities broker or dealer'' means:

(i) In the case of an individual, one who resides in or has his

principal place of business in any place not subject to the

jurisdiction of the United States;

(ii) In the case of a corporation, one incorporated in or having

its principal place of business in any place not subject to the

jurisdiction of the United States; and

(iii) In the case of a partnership or other unincorporated

organization or association, one having its principal place of business

in any place not subject to the jurisdiction of the United States.

* * * * *

PART 405--REPORTS AND AUDIT

3. The authority citation for part 405 is revised to read as

follows:

Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

[[Page 20401]] 4. Section 405.5 is added to read as follows:

Sec. 405.5 Risk assessment reporting requirements for registered

government securities brokers and dealers.

(a) Every registered government securities broker or dealer shall

comply with the requirements of Sec. 240.17h-2T of this title (SEC Rule

17h-2T), with the following modifications:

(1) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered with the Commission pursuant

to Section 15 of the Act'' mean registered government securities

brokers or dealers.

(2) For the purposes of this section, references to Secs. 240.17h-

1T and 240.17h-2T of this title mean those sections as modified by

Secs. 404.2(b) and 405.5, respectively.

(3) For the purposes of this section, ``associated person'' has the

meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),

except that natural persons are excluded.

(4) Paragraph 240.17h-2T(b) of this title is modified to read as

follows:

``(b) Exemptions. (1) The provisions of this section shall not

apply to any registered government securities broker or dealer:

``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of

this title, as made applicable by Sec. 403.4, pursuant to paragraph

(k)(2) of Sec. 240.15c3-3 of this title; or

``(ii) If the registered government securities broker or dealer

does not qualify for exemption from the provisions of Sec. 240.15c3-3

of this title, as made applicable by Sec. 403.4, and such registered

government securities broker or dealer does not hold funds or

securities for, or owe money or securities to, customers and does not

carry the accounts of, or for, customers; unless

``(iii) In the case of paragraphs (b)(1) (i) or (ii) of this