[Federal Register: September 15, 2006 (Volume 71, Number 179)]
[Rules and Regulations]
[Page 54409-54411]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15se06-5]
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DEPARTMENT OF THE TREASURY
17 CFR Parts 400, 401 402, 403, 404 and 405
[Docket No. BPD GSRS 06-01]
RIN 1505-AB70
Government Securities Act Regulations: Applicability to Over-the-
Counter Derivatives Dealers
AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (``Treasury'' or ``We'') is
issuing this final rule to amend the regulations issued under the
Government Securities Act of 1986 (``GSA''), as amended. This technical
amendment makes no substantive changes, but adds language to state
explicitly that we deem over-the-counter (``OTC'') derivatives dealers
that are also government securities dealers to be in compliance with
the GSA regulations if they comply with the applicable Securities and
Exchange Commission (``SEC'') OTC derivatives dealer rules and other
SEC rules applicable to them.
DATES: Effective Date: September 15, 2006.
ADDRESSES: You may download this final rule from the Bureau of the
Public Debt's Web site at http://www.treasurydirect.gov or from the Electronic Code of Federal Regulations (e-CFR) Web site at http://
http://www.gpoaccess.gov/ecfr. It is also available for public inspection and
copying at the Treasury Department Library, Room 1428, Main Treasury
Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit
the library, call (202) 622-0990 for an appointment.
FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Executive Director)
or Chuck Andreatta (Associate Director), Bureau of the Public Debt,
Government Securities Regulations Staff, (202) 504-3632 or e-mail us at
govsecreg@bpd.treas.gov.
SUPPLEMENTARY INFORMATION:
Background
In 1998, the SEC adopted various rules and rule amendments (the
``OTCDD Rules'' \1\) under the Securities Exchange Act of 1934 (``the
Exchange Act'') that define and regulate ``OTC derivatives dealers
(OTCDDs),'' a
[[Page 54410]]
category of registered broker-dealers that engage in certain over-the-
counter derivatives activities, but not the full range of securities
activities traditionally associated with full-purpose broker-
dealers.\2\ The OTCDD Rules created a flexible regulatory framework
under which U.S. securities firms could establish separately
capitalized OTCDDs within the United States that will engage in dealer
activities in both securities and non-securities OTC-derivative
instruments and be able to ``compete more effectively with banks and
foreign dealers in global OTC derivatives markets, while also
maintaining standards necessary to ensure investor protection.'' \3\
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\1\ The OTCDD Rules are commonly referred to as the ``Broker-
Dealer Lite'' rules.
\2\ Exchange Act Release No. 40594 (October 23, 1998), 63 FR
59362 (November 3, 1998).
\3\ Id. at 59364.
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Certain securities derivatives transactions in which an OTCDD may
engage include options on particular government securities. Such
unlisted options constitute ``government securities'' for purposes of
Section 15C of the Exchange Act.\4\ If OTCDDs act as ``dealers'' in OTC
derivative instruments that are ``government securities,'' they are
also subject to regulation as ``government securities dealers'' under
Section 15C of the Exchange Act and the GSA regulations.\5\
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\4\ For purposes of section 78o-5, a ``government security''
includes an option on a government security other than an option (i)
that is traded on one or more national securities exchanges; or (ii)
for which quotations are disseminated through an automated quotation
system operated by a registered securities association. 15 U.S.C.
78c(42)(D).
\5\ 63 FR 59362. Under 15 U.S.C. 78o-5(a)(1)(B)(1), a broker or
dealer effecting, inducing, or attempting to induce the purchase or
sale of a government security must file with the appropriate
regulatory agency written notice that it is a government securities
broker or dealer. Thus, an OTC derivatives dealer that engages in
government securities transactions must also file notice of such
activities with the SEC on Form BD.
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The GSA required the Secretary of the Treasury to adopt rules with
respect to transactions in government securities effected by government
securities brokers and dealers in the areas of financial
responsibility, protection of investor securities and funds,
recordkeeping, reporting and audit. The regulatory framework
established by the GSA required the Secretary in promulgating these
rules to ``consider the sufficiency and appropriateness of then
existing law and rules applicable'' to government securities brokers
and dealers.\6\ In issuing the final GSA rules in 1987, Treasury
considered already existing regulation with a view toward preventing
overly burdensome and duplicative regulation.\7\ Treasury's GSA rules
therefore generally provide that compliance by registered brokers and
dealers with certain applicable SEC rules constitutes compliance with
the GSA rules.
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\6\ 15 U.S.C. 78o-5(b)(5)(C).
\7\ 52 FR 27910 (July 24, 1987).
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Moreover, Treasury has concluded and wishes to affirm that the SEC
rules issued in 1998 for registered brokers and dealers that are OTCDDs
are sufficient and appropriate for government securities brokers and
dealers. Thus, for OTCDDs that write options on government securities,
compliance with SEC rules constitutes compliance with the GSA rules.
This is the result under the current GSA rules. However, in response to
recent questions we have received, and recognizing that the current GSA
rules require the reader to refer to other, separate SEC rules, we are
amending the GSA rules to be more transparent and explicitly cover
OTCDDs. These amendments make no substantive change, but merely add
specific references to OTCDDs as a category of registered broker or
dealer so that it will be clearer that OTCDDs are treated the same way
as other registered brokers and dealers under the GSA rules. These
changes appear in one general provision and four specific provisions of
the GSA rules addressing financial responsibility, customer protection,
recordkeeping, and reporting, respectively.
We have consulted with the staff of the SEC in developing this
amendment.
Special Analysis
Because this rule makes no substantive change to the existing
rules, and imposes no additional requirements on OTCDDs that are
government securities brokers or dealers, we find under 5 U.S.C.
553(b)(B) and (d)(3) that there is good cause that notice and public
procedures are unnecessary, and that the rule can be issued in direct
final form and made effective immediately. The final rule is not a
``significant regulatory action'' for the purposes of Executive Order
12866.
Because no notice of proposed rulemaking is required, the
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do
not apply.
List of Subjects
17 CFR Part 400
Administrative practice and procedure, Banks, Banking, Brokers,
Government securities, Reporting and recordkeeping requirements.
17 CFR Part 401
Banks, Banking, Brokers, Government securities.
17 CFR Part 402
Brokers, Government securities.
17 CFR Part 403
Banks, Banking, Brokers, Government securities.
17 CFR Part 404
Banks, Banking, Brokers, Government securities, Reporting and
recordkeeping requirements.
17 CFR Part 405
Brokers, Government securities, Reporting and recordkeeping
requirements.
0
For the reasons set forth in the preamble, the Department of the
Treasury amends 17 CFR parts 400, 401, 402, 403, 404, and 405 as
follows:
PART 400--RULES OF GENERAL APPLICATION
0
1. The authority citation for part 400 continues to read as follows:
Authority: 15 U.S.C. 78o-5.
0
2. Section 400.1 is amended by revising paragraph (a) to read as
follows:
Sec. 400.1 Scope of regulations.
(a) Title I of the Government Securities Act of 1986 (Pub. L. 99-
571, 100 Stat. 3208) amends the Securities Exchange Act of 1934 (48
Stat. 881-905; 15 U.S.C. chapter 2B) (``Act'') by adding section 15C,
authorizing the Secretary of the Treasury to promulgate regulations
concerning the financial responsibility, protection of customer
securities and balances, recordkeeping and reporting of brokers and
dealers in government securities. Those regulations constitute
subchapter A of this chapter. Unless otherwise explicitly provided, all
regulations in this subchapter apply to all government securities
brokers or dealers, including registered brokers or dealers and
financial institutions. Registered brokers or dealers include OTC
derivatives dealers.
* * * * *
Sec. 400.2 [Amended]
0
3. Amend Sec. 400.2 as follows:
0
A. In paragraph (c)(3)(vi), remove the reference ``Room 553, 999 E
Street NW.,'' and add in its place ``9th Floor, 799 9th Street NW.,''.
0
B. In paragraph (c)(7)(i), remove the reference ``Room 5030,'' and add
it is place ``Room 1318,''.
0
4. Section 400.3 is amended by removing the alphabetical paragraph
[[Page 54411]]
designations and adding a new definition in alphabetical order for
``OTC derivatives dealer'' to read as follows:
Sec. 400.3 Definitions.
* * * * *
OTC derivatives dealer has the same meaning set out in 17 CFR
240.3b-12.
* * * * *
PART 401--EXEMPTIONS
0
5. The authority citation for part 401 continues to read as follows:
Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209 (15 U.S.C.
78o-5(a)(4)).
Sec. 401.3 [Amended]
0
6. In paragraphs (a)(2)(ii)(B) and (a)(2)(ii)(C), remove the reference
``Sec. 400.3(c)'' and add in its place ``Sec. 400.3''.
Sec. 401.9 [Amended]
0
7. Amend Sec. 401.9 as follows:
0
A. In paragraph (b), remove the reference ``Sec. 400.3(m)'' and add in
its place ``Sec. 400.3''.
0
B. In paragraph (i), remove the reference ``Sec. Sec. 400.3 (k) and
(l)'' and add in its place ``Sec. 400.3''.
0
C. In paragraph (n), remove the reference ``Sec. 400.3(o)'' and add in
its place ``Sec. 400.3''.
0
D. In paragraph (o), remove the reference ``Sec. 400.3(j)'' and add in
its place ``Sec. 400.3''.
0
E. In paragraph (p), remove the reference ``Sec. 400.3(b)'' and add in
its place ``Sec. 400.3''.
PART 402--FINANCIAL RESPONSIBILITY
0
8. The authority citation for part 402 continues to read as follows:
Authority: 15 U.S.C. 78o-5(b)(1)(A), (b)(4).
0
9. Section 402.1 is amended by revising paragraph (b) to read as
follows:
Sec. 402.1 Application of part to registered brokers and dealers and
financial institutions; special rules for futures commission merchants
and government securities interdealer brokers; effective date.
* * * * *
(b) Registered brokers or dealers. This part does not apply to a
registered broker or dealer (including an OTC derivatives dealer) that
is subject to Sec. 240.15c3-1 of this title (SEC Rule 15c3-1).
* * * * *
Sec. 402.2a [Amended]
0
10. In paragraph (c), under the heading for Schedule B, in paragraph
(1) under the ``Columns 3 and 4'' paragraph, remove the reference ``17
CFR 400.3(m)'' and add in its place ``17 CFR 400.3''.
PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES
0
11. The authority citation for part 403 continues 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(a)(5), (b)(1)(A), (b)(4).
0
12. Section 403.1 is revised to read as follows:
Sec. 403.1 Application of part to registered brokers and dealers.
With respect to their activities in government securities,
compliance by registered brokers or dealers with Sec. 240.8c-1 of this
title (SEC Rule 8c-1), as modified by Sec. 403.2 (a), (b) and (c),
with Sec. 240.15c2-1 of this title (SEC Rule 15c2-1), with Sec.
240.15c3-2 of this title (SEC Rule 15c3-2), as modified by Sec. 403.3,
and with Sec. 240.15c3-3 of this title (SEC Rule 15c3-3), as modified
by Sec. 403.4 (a) through (d), (f)(2) through (3), (g) through (j),
and (m), including provisions in those rules relating to OTC
derivatives dealers, constitutes compliance with this part.
PART 404-RECORDKEEPING AND PRESERVATION OF RECORDS
0
13. The authority citation for part 404 continues to read as follows:
Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2),
(b)(4).
0
14. Section 404.1 is revised to read as follows:
Sec. 404.1 Application of part to registered brokers and dealers.
Compliance by a registered broker or dealer with Sec. 240.17a-3 of
this title (pertaining to records to be made), Sec. 240.17a-4 of this
title (pertaining to preservation of records), Sec. 240.17a-13 of this
title (pertaining to quarterly securities counts) and Sec. 240.17a-7
of this title (pertaining to records of non-resident brokers or
dealers), including provisions in those rules relating to OTC
derivatives dealers, constitutes compliance with this part.
Sec. 404.4 [Amended]
0
15. In paragraph (a)(3)(i)(B), remove the reference ``Sec. 400.3(c)''
and add in its place ``Sec. 400.3''.
PART 405-REPORTS AND AUDITS
0
16. The authority citation for part 405 continues to read as follows:
Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).
0
17. Section 405.1 is amended by revising paragraph (a) to read as
follows:
Sec. 405.1 Application of part to registered brokers and dealers and
to financial institutions; transition rule.
(a) Compliance by registered brokers or dealers with Sec. Sec.
240.17a-5, 240.17a-8, and 240.17a-11 of this title (Commission Rules
17a-5, 17a-8 and 17a-11), including provisions of those rules relating
to OTC derivatives dealers, constitutes compliance with this part.
* * * * *
Dated: September 8, 2006.
Randal K. Quarles,
Under Secretary, Domestic Finance.
[FR Doc. E6-15231 Filed 9-14-06; 8:45 am]
BILLING CODE 4810-39-P