Comment Period Expires April 24, 1995
Legal & Compliance
The Department of the Treasury (Treasury) recently issued an Advance Notice of Proposed Rulemaking (ANPR) under the Government Securities Act of 1986 (GSA). Treasury intends to implement rules to require persons holding, maintaining, or controling large positions in to-be-issued or recently issued Treasury securities to keep records and file reports of these large positions. In its ANPR, Treasury is requesting comment on how these large-position rules should be structured. Comments are due on or before April 24, 1995.
Beginning in September 1991, Treasury, the Securities and Exchange Commission (SEC), and the Federal Reserve conducted a thorough examination and review of the government securities market. Their "Joint Report on the Government Securities Market" (Joint Report), published in January 1992, recommended several legislative and regulatory actions for strengthening oversight of the market. One recommendation was to expand Treasury's authority under the GSA to require reporting by all holders of large positions in Treasury securities.
The Government Securities Act Amendments of 1993 (GSAA) was signed into law on December 17, 1993. Section 104 of the GSAA, which amended Section 15C of the Securities Exchange Act of 1934, authorizes Treasury to adopt rules requiring specified persons holding, maintaining, or controling large positions in to-be-issued or recently issued Treasury securities to file reports regarding these positions. The legislation also authorizes Treasury to prescribe recordkeeping rules to ensure that holders of large positions can comply with the reporting requirements.
Unless otherwise specified by Treasury, the large position reports will be filed with the Federal Reserve Bank of New York (FRBNY), acting as Treasury's agent. The reports will be provided, in turn, to the SEC by the FRBNY. The legislation grants Treasury flexibility and discretion in determining the key requirements and features to be addressed in the rules, for example:
- defining which persons (individually or as a group) hold positions;
- the size and types of positions to be reported;
- the securities to be covered;
- the aggregation of positions and accounts; and
- the form, manner and timing of reporting.
Treasury is soliciting views and comments from market participants and other interested parties, and requesting answers to specific questions as to how large-position rules should be structured. Treasury suggests that commenters consider the following questions in developing their recommendations and suggestions.
Specific Questions For Consideration
A. Reporting Entities—Persons holding, maintaining, or controling large positions, as yet to be defined, are reporting entities. The questions in this section are directed toward determining which entities should be affected by the regulations. In particular, the questions focus on how affiliated entities are to be treated, what entities should be exempt, and whether classes of entities may warrant special treatment.
1. How should we define a "reporting entity?" Should it be similar to the definition of a bidder in Treasury's rules governing the sale and issue of Treasury bills, notes, and bonds (that is, Uniform Offering Circular at 31 CFR Part 356)?
2. What aggregation rules should apply for affiliated entities? Assuming there are aggregation rules, should there be an exception for affiliates that cannot or do not share information? For example, how should different funds within a mutual-fund family be treated? Should customer securities that are subject to a broker/ dealer's investment discretion be included? Should any exception be the same as the exception provided for in Appendix A to the Uniform Offering Circular?
3. Should reporting entities that are foreign based be treated differently than domestic entities, given the potential enforcement difficulty and geographic separation? Are any exemptions needed for foreign-based entities regarding items such as affiliation rules, location of records, form of reporting, or reporting time frames? What would be the complications of requiring foreign-based entities to comply with such rules as if they were U.S. domestic entities?
4. What exemptions should be considered beyond any for foreign central banks, foreign governments, and official international financial institutions holding positions at the FRBNY?
B. What constitutes "control?" For this ANPR, "control" includes the statutory terms "holding" and "maintaining." The following questions are designed to provide guidance on when these three statutory conditions may be met.
1. Is control evidenced by beneficial ownership, investment discretion, custody, or any combination of the three? Is there the possibility of extensive double counting? If so, is it a problem?
2. Should custodial accounts for which the custodian has no investment discretion be the reporting responsibility of the custodian, the customer, or both? If the custodian is responsible for reporting, should all custody holdings in a specific security be aggregated, or should the threshold amount established for reporting be applied individually to each customer?
C. What securities should be covered and what size is "large?" The questions in this section seek guidance on the securities to which the rule should apply and how to determine the reporting threshold.
1. How long should a security be outstanding before it is no longer considered recently issued? Should the reopening date of notes and bonds that are reopened by the Treasury be the date from which "recent" is measured?
2. Should any securities be excluded, such as Treasury bills, due to the cost/complexity of calculating a position in them versus the expected benefits of reporting?
3. How should the "large" threshold be determined—a percentage of the issue? A standard dollar amount? Should different classes of securities—notes versus bonds, short-term notes versus intermediate notes—have different definitions of "large?" Should there be a different reporting threshold for pre- and post-issuance? Should there be a different reporting threshold for securities reopened by the Treasury?
D. What transactions should be included in a "position?"
1. Should the definition of "position" developed for this rulemaking be consistent with the definition of "net long position" in the Uniform Offering Circular? If they are generally consistent, the following questions should be considered as possible exceptions.
2. How should when-issued positions in outstanding securities with the same CUSIP number be treated (that is, reopenings)?
3. How should financing transactions, such as repurchase and reverse repurchase agreements, dollar rolls, and bonds borrowed, be treated in defining a position? Should more than one counterparty to the transaction be required to include the transaction in its position? Should contract terms, such as maturity, right to substitute, tri-party relationships, and termination notice, be considered?
4. Should large short positions be included in "position?" What amount of netting should be permitted or should gross long (short) positions be reported?
5. Should forward contracts, options, futures, and open fails be included? Should some of these items only be included under certain circumstances? For example, only include written (sold) options or only include fails to deliver but not fails to receive. If so, what might these circumstances be?
6. Should the various components of a large position, such as outright holdings, repos, forward contracts, etc., be separately identified in any required reports?
1. What records should be kept by a reporting entity? Should the recordkeeping requirement depend on whether the reporting entity is regulated? Should the reporting entity keep copies only of any reports it has filed, or, in addition documents and other records sufficient to reconstruct the size of its position?
2. Should there be a requirement to maintain a calculation/worksheet supporting the determination of a large position by detailing the elements comprising any large positions?
3. How long should large-position calculations and supporting records be retained?
4. Should the records be kept in a standardized format? Would a requirement to maintain records in electronic form be feasible and practical?
5. Should unregulated entities be required to submit some form of independent verification, such as an accountant's letter?
1. Should the reporting requirement be automatic, whereby the reporting entity would file a report any time it has reached the threshold for a particular issue?
2. If reports are periodic at the request of the Treasury, what mechanism should be used to communicate a request to the market? How can it be assured that a potential "reporting entity" receives notice of the request for a report? How much lead time would be necessary to assure that everyone who needs to get the notice will receive it?
3. Would it be reasonable for a reporting entity to comply with a request for a large-position report on the business day immediately following receipt of the request? If not, what would be a reasonable time period?
4. Should requests for reports follow a sequential process whereby dealers and custodians would be asked to report initially followed, where appropriate, by a more targeted follow-up as to specific customers? For example, an initial report indicates that custodian A has 75 percent of an issue. A subsequent request is made only to the custodian's customers to determine if any of them have large positions.
5. Is there a need for the reports to be filed using a standardized format? If so, should they be made in machine readable form?
6. Is there a reason for the Secretary to specify that reports would be submitted to parties other than the FRBNY?
7. Should a request for reports on a specific security be: (i) a one-time request (snapshot as of a given date); (ii) an initial report with a continuing obligation to report subsequent significant changes until further notice; or (iii) an individually specified request (that is, report on any large positions in a specific security for the next six business days)?
8. Should there be a responsibility for a broker/dealer to report the name of any customer whose trading activity in the specific security may indicate that the customer could be a holder of a large position even if the customer does not hold such a position at the broker/dealer?
1. How much lead-time is necessary for market participants to be able to comply with such a new regulation?
* * *
NASD members that conduct a government securities business are urged to review Treasury's ANPR in its entirety. The ANPR was published in the January 24, 1995, Federal Register. Members that wish to comment on this ANPR should do so by April 24, 1995. Send comment letters to:
Bureau of the Public
Debt Kenneth R. Papaj, Director or
Donald Hammond, Assistant Director
Department of the Treasury
999 E Street, NW
Washington, DC 20239-0001
Members are requested to send copies of their comment letters to:
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1500.
Questions concerning this Notice may be directed to Erin Gilligan, Compliance Department, at (202) 728-8946.