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94-97 Treasury Proposes Risk Assessment Rules For Government Securities Broker/Dealers

Comment Period Expires January 17, 1995


Senior Management
Government Securities
Internal Audit
Legal & Compliance

Executive Summary

The Department of the Treasury (Treasury) is publishing for comment proposed amendments under the Government Securities Act of 1986 (GSA). The amendments would establish risk assessment rules for government securities broker/dealers registered under Section 15C (Section 15C broker/dealers) of the Securities Exchange Act of 1934 that parallel similar Securities and Exchange Commission (SEC) rules already in place for broker/dealers that conduct a general or municipal securities business. Comments are due on or before January 17, 1995.

Background And Description Of Proposed Amendments

The Market Reform Act of 1990 (the Reform Act) was passed by Congress in response to several developments in the securities markets, including the bankruptcy of Drexel Burnham Lambert Group, Inc. (Drexel) in February 1990. Among its provisions, the Reform Act authorized the SEC to promulgate risk assessment rules for broker/dealers holding company structures and authorized Treasury to promulgate risk assessment rules for registered government securities broker/dealers.

Risk assessment rules are intended to provide greater warning of situations, such as the Drexel failure, which could have a significant impact on the functioning of the markets and investors in general. The SEC adopted its risk assessment rules in July 1992. Treasury, whose rulemaking authority under the GSA expired on October 1, 1991, and was not renewed until December 17, 1993, was unable to issue proposed risk assessment rules until now.

Treasury's proposed risk assessment rules incorporate SEC Rules 17h-1T and 17h-2T, with minor modifications. In general, the recordkeeping amendments require Section 15C broker/dealers 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 Section 15C broker/dealers. The reporting amendments would require Section 15C broker/dealers to file with the SEC quarterly summary reports of this information.

The information required to be maintained and reported by the firms pertains only to the firms' "material associated persons" (MAPs). A number of factors that should be considered when determining which affiliates, or associated persons, might have a "material" impact on the broker/dealer's financial or operational conditions are incorporated as guidelines in SEC Rule 17h-1T. The initial designation of MAPs will be made by the Section 15C broker/dealers.

Information To Be Maintained And Reported

The proposed amendments would require the following general categories of information to be maintained and reported:

  • an organizational chart of the holding company structure, showing the registered government securities broker/dealer and all its associated persons, including a designation of which associated persons are MAPs;

  • written risk management policies and procedures;

  • information on material legal proceedings to which the registered government securities broker/dealer or a MAP is a party or to which any of its property is subject, as would be required to be disclosed by all firms under generally accepted accounting principles;

  • quarterly consolidated and consolidating balance sheets and income statements;

  • quarterly consolidated cash flow statements for the registered government securities broker/dealer and the highest level holding company that is a MAP;

  • aggregate, gross long and short securities and commodities positions held by each MAP at quarter-end (and month-end if greater than quarter-end);

  • a separate listing of each single unhedged securities or commodities position, other than U.S. Treasury securities, held by each MAP that exceeds the "materiality threshold" at any month-end;

  • data on certain financial instruments with off-balance sheet risk and concentration of credit risk, such as gross long and short positions in when-issued securities, written stock options, futures, forwards, interest rate swaps, other swaps, foreign exchange, commodities, loan commitments, commercial letters of credit, assets sold with recourse, and a summary of delta or similar analysis if available; and

  • data on bridge loans and other material unsecured extensions of credit by each MAP, funding sources for the registered government securities broker/dealer and each MAP, and real estate activities conducted by each MAP.


The proposed amendments would exempt a Section 15C broker/dealer if it:

  • does not carry customer accounts and maintains capital of less than $20 million;

  • maintains capital of less than $250,000 (regardless of whether it carries customer accounts or not); and

  • has an affiliated registered broker/ dealer that is subject to, and in compliance with, the SEC's risk assessment rules, and provided that all of the MAPs of the Section 15C broker/dealer are also MAPs of the registered broker/dealer.

A Section 15C broker/dealer that has no affiliates or holding company would not be subject to Treasury's risk assessment rules.

Special Provisions

The proposed amendments would allow affiliated Section 15C broker/dealers to request in writing that Treasury permit one of the firms (a "reporting registered government securities broker/dealer") to maintain and report risk assessment information on behalf of the other firms.

Treasury also is proposing to adopt the SEC's special provisions for affiliates that are already subject to supervision by certain U.S. or foreign financial regulatory authorities. With respect to such affiliates, Section 15C broker/dealers would be deemed in compliance with the financial and securities recordkeeping requirements by maintaining copies of reports mat such affiliates already submit to other regulators; however, they would be required to maintain organizational charts, risk management policies, and records of legal proceedings, and submit that information to the SEC.

* * *

Treasury's request for comments appeared in the November 15, 1994, Federal Register. Members wishing to comment on the proposed amendments have until January 17, 1995, to do so. Comment letters should be sent to:

Government Securities
Regulations Staff
Bureau of the Public Debt
Department of the Treasury
999 E Street, NW
Room 515
Washington, DC 20239-0001.

Members are requested to send copies of their comment letters to:

Ms. Joan Conley
Corporate Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1500.

Questions concerning this Notice may be directed to Erin Gilligan, NASD Compliance Department, at (202) 728-8946.

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