SEC Proposes Rules Concerning Broker-Dealer and Affiliate Supervision on a Consolidated Basis

FOR IMMEDIATE RELEASE
2003-134

Washington, D.C., October 8, 2003 -- The Commission today voted to propose rule amendments and new rules under the Securities Exchange Act of 1934 that would establish two separate voluntary regulatory frameworks for the Commission to supervise broker-dealers and their affiliates on a consolidated basis.

One proposal would establish an alternative method to compute certain net capital charges for broker-dealers that are part of a holding company that manages risks on a group-wide basis and whose holding company consents to group-wide Commission supervision. The broker-dealer's holding company and its affiliates, if subject to Commission supervision, would be referred to as a "consolidated supervised entity" (CSE). The alternative method the broker-dealer would be allowed to use to compute certain market and credit risk capital charges would involve the use of internal mathematical models that the broker-dealer uses to measure its risk. The CSE would be required to comply with rules regarding its group-wide internal risk management control system and would have to periodically provide the Commission with consolidated computations of allowable capital and risk allowances consistent with the Basel Standards. Commission supervision of the CSE would include recordkeeping, reporting, and examination requirements. Special provisions have been included with respect to functionally regulated affiliates.

The other proposal would implement Section 17(i) of the Exchange Act, which created a new structure for consolidated supervision of holding companies of broker-dealers, or "investment bank holding companies" (IBHCs) and their affiliates. Pursuant to the Act, an IBHC that meets certain specified criteria may voluntarily register with the Commission as a supervised investment bank holding company (SIBHC) and be subject to supervision on a group-wide basis. Pursuant to the proposed rules, registration as an SIBHC is limited to IBHCs that are not affiliated with certain types of banks and that have a substantial presence in the securities markets. The proposed rules would provide an IBHC with an application process to become supervised by the Commission as an SIBHC, and would establish regulatory requirements for those SIBHCs. Commission supervision of an SIBHC would include recordkeeping, reporting and examination requirements. Further, the SIBHC also would be required to comply with rules regarding its group-wide internal risk management control system and would have to periodically provide the Commission with consolidated computations of allowable capital and risk allowances consistent with the Basel Standards.

The proposals would also include technical and conforming amendments to the risk assessment rules (Exchange Act Rules 17h-1T and 17h-2T). In addition, the SIBHC proposal would adjust the audit requirements for OTC derivative dealers to allow accountants to use agreed-upon procedures when conducting audits of risk management control systems.

The Commission will solicit comment from the public on the proposals for 90 days following publication in the Federal Register. The full text of the proposing release will be posted on the Commission's Web site as soon as possible.