[Federal Register: June 10, 2002 (Volume 67, Number 111)]
[Proposed Rules]
[Page 39642-39646]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jn02-16]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-46019, File No. S7-20-02]
RIN 3235-AI51
Customer Protection--Reserves and Custody of Securities
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Commission is publishing for comment a proposed rule
amendment that would allow for the expansion of the categories of
collateral broker-dealers may pledge when borrowing securities from
customers. Currently, broker-dealers are required to provide cash, U.S.
Treasury bills and notes, and irrevocable bank letters of credit. The
amendment would allow them also to pledge such other collateral as the
Commission, by order, designates.
DATES: The comment period will expire on July 25, 2002.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. Comments also may be submitted
electronically at the following E-mail address: rulecomments@sec.gov.
Comment letters should refer to File No. S7-20-02; this file number
should be included on the subject line if E-mail is used. All comments
received will be available for public inspection and copying at the
Commission's Public Reference Room, 450 Fifth Street, NW, Washington,
DC 20549-0102. Electronically submitted comment letters will be posted
on the Commission's Internet web site (http//www.sec.gov). Personal
identifying information, such as names or e-mail addresses, will not be
edited from electronic submissions. Submit only information you wish to
make publicly available.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, 202/942-0131; Thomas K. McGowan, Assistant Director, 202/942-
4886; or Randall W. Roy, Special Counsel, 202/942-0798, Division of
Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION: The Commission is publishing for comment a
proposed amendment to Rule 15c3-3 \1\ under the Securities Exchange Act
of 1934 (``Exchange Act'').
---------------------------------------------------------------------------
\1\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------
I. Discussion
A. Introduction
The Commission is proposing an amendment to its customer protection
rule, Rule 15c3-3, under which broker-dealers may pledge, when
borrowing fully paid or excess margin securities from customers, such
collateral as the Commission may designate by order. Proceeding by
Commission order would allow new categories of collateral to be
designated as permissible more expeditiously and, if necessary, with
conditions to account for differences among collateral types. The
flexibility to impose conditions on the use of certain additional
collateral would permit the establishment of safeguards designed to
ensure that the objective of Rule 15c3-3(b)(3) `` the full
collateralization of such loans `` is not compromised. In addition, the
amendment would allow for a wider range of broker-dealer assets to be
deemed permissible collateral, thereby adding liquidity to the
securities lending markets and lowering borrowing costs for broker-
dealers. For these reasons, we expect that the amendment will promote
two fundamental Commission goals: (1) The protection of broker-dealer
customers, and (2) the promotion of efficient securities markets.
B. Background
The Commission adopted Rule 15c3-3 in 1972 in response to a
congressional directive to create rules regarding, among other things,
the acceptance, custody, and use of customer securities.\2\ The rule
requires broker-dealers to take steps to protect the securities that
customers leave in their custody. These steps include the requirement
that broker-dealers promptly obtain and thereafter maintain possession
or control of all ``fully paid'' \3\ and ``excess-margin'' \4\
securities
[[Page 39643]]
carried for the accounts of customers \5\ (``customer securities'').
The possession or control requirement is designed to ensure that
broker-dealers do not put customers at risk by borrowing their
securities to expand or otherwise further the broker-dealer's
proprietary activities.\6\
---------------------------------------------------------------------------
\2\ Exchange Act Release No. 9856 (Nov. 10, 1972).
\3\ Subparagraph (a)(3) of Rule 15c3-3 defines ``fully paid
securities'' as securities carried in any type of account for which
the customer has made a full payment.
\4\ Subparagraph (a)(5) of Rule 15c3-3 defines ``excess margin
securities'' as securities having a market value in excess of 140%
of the amount the customer owes the broker-dealer and which the
broker-dealer has designated as not constituting margin securities.
\5\ Subparagraph (a)(1) of Rule 15c3-3 defines the term
``customer.'' Generally, a customer is any person from whom or on
whose behalf the broker-dealer has received or acquired securities
for such person's securities account. The definition does not
include general partners, directors, or principals of the broker-
dealer, or other broker-dealers to the extent of they have
proprietary accounts at the broker-dealer.
\6\ The Commission proposed amendments to Rule 15c3-3 to add
certain categories of collateral in 1989. See Exchange Act Release
No. 26608 (March 8, 1989), 54 FR 10680 (March 15, 1989). The
Commission did not adopt the proposed amendments.
---------------------------------------------------------------------------
Subparagraph (b)(3) of Rule 15c3-3 sets forth conditions under
which broker-dealers may borrow fully paid or excess margin securities
from customers for their own use without violating the rule's
possession or control requirement. These conditions include the
requirement that broker-dealers and their lending customers enter into
written agreements that (1) set forth the basis of compensation for the
loans as well as the rights and liabilities of the parties in the
borrowed securities, (2) require the broker-dealers to provide the
lenders with schedules of the securities actually borrowed, (3) require
the broker-dealers to provide the lenders with, at least, 100%
collateral consisting exclusively of cash, United States Treasury bills
and notes, or an irrevocable letter of credit issued by a bank, and (4)
contain a prominent notice that the provisions of the Securities
Investor Protection Act of 1970 \7\ may not protect the lenders with
respect to the securities loan transactions.\8\ Moreover, the loaned
securities and pledged collateral must be marked to market daily, and
additional collateral posted if necessary to maintain the 100%
collateralization requirement.\9\ These requirements are designed to
ensure that these borrowings remain fully collateralized for the term
of the loan.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78aaa et seq.
\8\ Rule 15c3-3(b)(3).
\9\ Rule 15c3-3(b)(3)(iii).
---------------------------------------------------------------------------
Generally, broker-dealers borrow securities in order to meet
obligations to deliver securities that they do not possess. This
situation frequently arises in the normal course of a broker-dealer's
business, such as when it sells securities that have been purchased but
not received, sells securities it does not own to open a ``short''
position, needs to deliver securities against the exercise of a
derivatives contract, or needs to cover a failed transaction in a
securities settlement system.\10\ Broker-dealers also borrow securities
as part of the services they provide their customers, and as
intermediaries in securities lending transactions. On the other hand,
customers generally lend securities to increase the rate of return
earned on their portfolios through compensation paid by the broker-
dealers for the loan of the securities. Typically, the customers that
lend securities are large institutions such as pension funds.
---------------------------------------------------------------------------
\10\ Regulation T promulgated by the Board of Governors of the
Federal Reserve System limits the purposes for which broker-dealers
can borrow customer securities to making delivery of securities in
the case of short sales, failure to receive securities required to
be delivered, or other similar situations. The purpose of this
limitation is to prevent customers from avoiding the initial margin
requirements of Regulation T by structuring securities transactions
as loans rather than purchases or sales.
---------------------------------------------------------------------------
Since the rule was adopted, the securities lending markets have
grown substantially, particularly in the last ten years. These markets
also have become more global in scope. In addition, market participants
now use a broad array of highly complex financial products. These
factors make it necessary for U.S. broker-dealers to borrow a wider
range and greater volume of domestic and foreign securities in order to
accommodate the trading activities of their customers. Market
participants believe that increasing the categories of permissible
collateral under Rule 15c3-3 would add liquidity to the securities
lending markets and help to lower borrowing costs. We preliminarily
agree with that assessment. Rather than expressly add new categories of
collateral into the rule, we propose amending Rule 15c3-3(b)(3) to
permit the use of other collateral designated as permissible through
Commission order as necessary or appropriate in the public interest and
consistent with the protection of investors after giving consideration
to the collateral's liquidity, volatility, market depth and location,
and the issuer's creditworthiness.
The relative weight given to these factors will vary on a case-by-
case basis. Moreover, orders permitting a type of collateral may impose
limitations and conditions on its use to account for the fact that some
permitted securities may not be appropriate as collateral in all
situations. Such conditions should further the rule's goal of
maintaining full collateralization of the customer's loan.
The Commission's aim is to increase liquidity and decrease costs,
while maintaining the customer protection objectives of Rule 15c3-3.
The Commission believes our proposal should achieve this goal because
it would allow the Commission to select collateral that has been shown
to be sufficiently liquid, and to tailor its orders to account for
liquidity and other differences among the categories of collateral
selected. The proposed amendment would require the Commission to
consider the quality and liquidity of a particular instrument before
designating it as permissible collateral. This would include a
consideration of the creditworthiness of the issuer of the instrument,
the depth of the instrument's market, the locations where the
instrument is traded, and the historical volatility of the instrument's
price.
Moreover, adding collateral through orders would provide the
Commission with the flexibility to place conditions on the use of less
liquid instruments. For example, in this release the Commission is
seeking comment on ten categories of collateral the Commission is
considering adding by order to the permissible categories of collateral
under Rule 15c3-3. Two of these categories consist of instruments that
may be pledged only when borrowing instruments with similar risk
characteristics. The ability to prescribe such conditions would allow
for a wider range of broker-dealer assets to be designated as
permissible collateral. In addition, should a designated category of
collateral become insufficiently liquid or should the conditions to use
the collateral need to be modified, the Commission could issue an order
withdrawing its designation, limiting its use as collateral, or
altering the conditions to use it as collateral.
The Commission anticipates that, if it were to issue orders
designating additional categories of permissible collateral pursuant to
the proposed amendment, the Commission would take into account several
considerations. The Commission likely would consider whether the risks
of customer losses associated with permitting a new category of
collateral would be sufficiently small relative to the benefits the
additional kinds of collateral are expected to provide to justify
permitting the new category of collateral. Those expected benefits
would include adding liquidity to the securities lending markets and
lowering borrowing costs for broker-dealers. The Commission also
expects it would draw on its experience in assessing the liquidity of
markets in a variety of contexts including, for
[[Page 39644]]
example, the net capital requirements for broker-dealers.
Should the Commission adopt the amendment, the Commission is
considering whether to delegate its authority to the Division of Market
Regulation to issue exemptive orders designating additional categories
of collateral permissible under the rule. The Commission preliminarily
believes this delegation would allow for flexibility in the
establishment of collateral requirements that are more responsive to
changes in the securities lending markets.
II. Proposed Order
If the Commission adopts the amendment, the Commission is
considering issuing an order that would permit the following categories
of collateral to be permissible under the rule. The Commission seeks
comment on these collateral types and the conditions specified,
including whether they would be appropriate to meet the rule's goal of
ensuring that borrowings of customer securities remain fully
collateralized. For example, the Commission seeks comment on whether
the one and five percent over-collateralization requirements for cross-
currency transactions are appropriate for addressing currency risk.\11\
---------------------------------------------------------------------------
\11\ The over-collateralization requirements are described below
in items 6, 7, 8 and 10.
---------------------------------------------------------------------------
1. ``Government securities'' as defined in Section 3(a)(42)(A) and
(B) of the Exchange Act may be pledged when borrowing any securities.
2. ``Government securities'' as defined in Section 3(a)(42)(C) of
the Exchange Act issued or guaranteed as to principal or interest by
the following corporations may be pledged when borrowing any
securities: (i) The Federal Home Loan Mortgage Corporation, (ii) the
Federal National Mortgage Association, (iii) the Student Loan Marketing
Association, and (iv) the Financing Corporation.
3. Securities issued by, or guaranteed as to principal and interest
by, the following Multilateral Development Banks--the obligations of
which are backed by the participating countries, including the U.S.--
may be pledged when borrowing any securities: (i) The International
Bank for Reconstruction and Development, (ii) the Inter-American
Development Bank, (iii) the Asian Development Bank, (iv) the African
Development Bank, (v) the European Bank for Reconstruction and
Development, and (vi) the International Finance Corporation.
4. Mortgage-backed securities meeting the definition of a
``mortgage related security'' set forth in Section 3(a)(41) of the
Exchange Act may be pledged when borrowing any securities.
5. Negotiable certificates of deposit and bankers acceptances
issued by a ``bank'' as that term is defined in Section 3(a)(6) of the
Exchange Act, and which are payable in the United States and deemed to
have a ``ready market'' as that term is defined in 17 CFR 240.15c3-1
(``Rule 15c3-1''),\12\ may be pledged when borrowing any securities.
---------------------------------------------------------------------------
\12\ Certificates of deposit and bankers acceptances are deemed
to have a ``ready market'' under Rule 15c3-1 if, among other things,
they are issued by a bank as defined in Section 3(a)(6) of the
Exchange Act that is (i) subject to supervision by a federal banking
authority, and (ii) rated investment grade by at least two
nationally recognized statistical rating organizations or, if not so
rated, has shareholders' equity of at least $400 million.
---------------------------------------------------------------------------
6. Foreign sovereign debt securities may be pledged when borrowing
any securities, provided that, (i) at least one nationally recognized
statistical rating organization (``NRSRO'') has rated in one of its two
highest rating categories \13\ either the issue, the issuer or
guarantor, or other outstanding unsecured long-term debt securities
issued or guaranteed by the issuer or guarantor; and (ii) if the
securities pledged are denominated in a different currency than those
borrowed,\14\ the broker-dealer shall provide collateral in an amount
that exceeds the minimum collateralization requirement in paragraph
(b)(3) of Rule 15c3-3 (100%) by 1% when the collateral is denominated
in the Euro, British pound, Swiss franc, Canadian dollar or Japanese
yen, or by 5% when it is denominated in another currency.\15\
---------------------------------------------------------------------------
\13\ The NRSROs use different symbols to designate credit
ratings. For the purposes of the examples in this release, the
ratings symbols used as examples are, in order of highest to lowest:
AAA, AA, A, BBB, BB, B, and C.
\14\ Equity securities would be deemed to be denominated in the
currency of the jurisdiction in which the issuer of such securities
has its principal place of business.
\15\ For example, a broker-dealer that needed to borrow equity
or debt securities of a U.S. company could pledge debt securities
issued by a foreign sovereign, provided the country is rated ``AAA''
or ``AA.'' Moreover, because the borrowed and pledged securities
would be denominated in different currencies, the broker-dealer
would have to provide excess collateral. Thus, if the borrowed
securities were worth $100,000, the broker-dealer would have to
pledge enough collateral to equal $101,000 (1% of the value of the
borrowed securities for collateral denominated in the Euro, British
pound, Swiss franc, Canadian dollar or Japanese yen) or $105,000 (5%
of the value for collateral denominated in another currency).
---------------------------------------------------------------------------
7. Foreign sovereign debt securities that do not meet the NRSRO
rating condition set forth in Item 6 above may be pledged only when
borrowing non-equity securities issued by a person organized or
incorporated in the same jurisdiction (including other debt securities
issued by the foreign sovereign); provided that, if such foreign
sovereign debt securities have been assigned a rating lower than the
securities borrowed, such foreign sovereign debt securities must be
rated in one of the four highest rating categories by at least one
NRSRO. If the securities pledged are denominated in a different
currency than those borrowed, the broker-dealer shall provide
collateral in an amount that exceeds the minimum collateralization
requirement in paragraph (b)(3) of Rule 15c3-3 by 1% when the
collateral is denominated in the Euro, British pound, Swiss franc,
Canadian dollar or Japanese yen, or by 5% when it is denominated in
another currency.\16\
---------------------------------------------------------------------------
\16\ For example, if a broker-dealer needed to borrow equity
securities of a U.S. company, it would not be permitted to pledge
debt securities issued by a foreign sovereign rated ``A'' or lower.
First, lower-rated sovereign debt can only be pledged when borrowing
non-equity securities. Second, it only can be used when borrowing
securities issued by a person from the same jurisdiction. However,
the broker-dealer could pledge the sovereign debt of a country rated
``A'' or lower if it was borrowing debt securities of a company
incorporated in that country, provided the country is rated ``A'' or
``BBB'' or the rating of the company is equal to or less than that
of the country. Thus, below investment grade sovereign debt only can
be pledged when borrowing securities with an equal or lower rating.
---------------------------------------------------------------------------
8. The Euro, British pound, Swiss franc, Canadian dollar or
Japanese yen may be pledged when borrowing any securities, provided
that, when the securities borrowed are denominated in a different
currency than that pledged, the broker-dealer shall provide collateral
in an amount that exceeds the minimum collateralization requirement in
paragraph (b)(3) of Rule 15c3-3 by 1%.
9. Foreign currency other than the Euro, British pound, Swiss
franc, Canadian dollar or Japanese yen may be pledged only when
borrowing non-equity securities denominated in the same currency.
10. Non-governmental debt securities may be pledged when borrowing
any securities, provided that, in the relevant cash market they are not
traded flat or in default as to principal or interest, and are rated in
one of the two highest rating categories by at least one NRSRO. If such
securities are not denominated in U.S. dollars or in the currency of
the securities being borrowed, the broker-dealer shall provide
collateral in an amount that exceeds the minimum collateralization
requirement in paragraph (b)(3) of Rule 15c3-3 by 1% when the
securities pledged are denominated in the Euro, British pound, Swiss
franc, Canadian dollar or Japanese
[[Page 39645]]
yen, or by 5% when they are denominated in any other currency.\17\
---------------------------------------------------------------------------
\17\ For example, a broker-dealer that needed to borrow equity
or debt securities of a U.S. company could pledge debt securities of
another company (U.S. or foreign), provided the company issuing the
securities being pledged is rated ``AAA'' or ``AA.''
---------------------------------------------------------------------------
The categories of potential permissible collateral identified above
do not include securities that (i) have no principal component, or (ii)
accrue interest at the time of the pledge at a stated rate equal to or
greater than 100% per annum (expressed as a percentage of the actual
principal amount of the security).
In issuing an order, the Commission may require broker-dealers
pledging new types of collateral to include in the written agreements
with the customers a notice that some of the securities being provided
by the borrower as collateral under the agreement may not be guaranteed
by the United States, in addition to satisfying the notice requirements
already contained in paragraph (b)(3) of Rule 15c3-3.
III. General Request for Comments
The Commission solicits comments on the above proposals. The
Commission specifically solicits comment on the types of collateral
that, if deemed permissible, would materially add liquidity to the
securities lending markets, and, at the same time, meet the customer
protection objectives of Rule 15c3-3. Further, the Commission solicits
comment on whether the correct factors for evaluating potentially
permissible collateral have been selected, or should additional factors
be considered or identified factors be eliminated. The Commission also
solicits comments on the appropriate methods for evaluating the
potentially permissible collateral.
The Commission also seeks comment generally on whether Rule 15c3-
3(b)(3)(iii) should limit the types of collateral that must be supplied
by a broker-dealer in borrowing from an institutional customer or
whether the collateral should be left to negotiation between a
particular institutional customer and broker-dealer after adequate
disclosure. If the latter, should the ability to negotiate collateral
be limited to a certain category of institutional customers? How should
we define this category? What disclosures would be necessary if the
collateral were left to negotiation? Should there be any required
minimum amount of collateral to protect the customer and the broker-
dealer?
IV. Paperwork Reduction Act
The proposal does not require a new collection of information. The
proposed amendment does not alter the range of collateral that a
broker-dealer can pledge when borrowing customer securities, but
instead amends the rule to establish criteria that the Commission will
consider when issuing an order. In connection with Rule 15c3-3, the
Commission submitted to the Office of Management and Budget, pursuant
to the Paperwork Reduction Act, a request for approval and received an
OMB control number for the rule, OMB control number 3235-0078.
V. Costs and Benefits of the Proposed Rule Amendments
The Commission is considering the costs and benefits of the
proposed amendment to Rule 15c3-1.
The primary benefits of the amendment should be lowered borrowing
costs and increased liquidity in the securities lending markets. The
current collateral requirements in Rule 15c3-3 make it more economical
for broker-dealers to borrow securities from other broker-dealers
(which are not customers) since customers must be provided with a
limited range of collateral. In such a case, the broker-dealer would be
limited to borrowing the securities from broker-dealers agreeable to
accepting another type of collateral. Expanding the categories of
collateral will increase the supply of eligible lenders, which should
decrease costs as a consequence of greater competition.
On the other side, customers will have the opportunity to enter
into more lending transactions with broker-dealers. This will allow
them to earn the fees associated with such transactions and thereby
realize greater returns on their securities portfolios. The increased
opportunities to borrow and lend securities should add liquidity to the
securities lending markets.
The Commission does not believe there are any direct costs
associated with the proposal, as it is deregulatory. The amendment will
have no impact on broker-dealers that do not borrow customer securities
or customers that do not lend securities. For those who participate in
such transactions, the amendment is not imposing any changes as to how
they must be structured. As described above, it will provide greater
opportunities; however, it also maintains the status quo, and
therefore, broker-dealers and customers do not have to avail themselves
of these new opportunities. Broker-dealers can continue to pledge the
types of collateral currently allowed under the rule and, while new
categories of collateral may have risk characteristics that differ from
those applicable to currently permitted collateral, customers could
choose not to accept new categories of collateral.
The Commission requests comment on this analysis of the costs and
benefits of the proposed rule amendments and invite commenters to
submit their own estimates of costs and benefits that would result from
the proposal. In order to evaluate fully the costs and benefits
associated with the proposed amendments, we request that commenters'
estimates of the costs and benefits of the proposed amendments be
accompanied by specific empirical data supporting their estimates.
VI. Effects on Competition, Efficiency, and Capital Formation
Section 3(f) of the Exchange Act requires the Commission, when
engaged in rulemaking where it is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider whether the action would promote efficiency, competition,
and capital formation. Section 23(a)(2) of the Exchange Act requires
the Commission to consider the impact on competition of any rule
proposed under that Act. In addition, the law requires that the
Commission not adopt any rule that would impose a burden on competition
not necessary or appropriate in the furtherance of the purposes of the
Exchange Act.
The Commission preliminarily believes the proposed amendment should
improve efficiency, competition, and capital formation by adding
liquidity to the securities lending markets, lowering the costs of
borrowing securities, and providing investors with the opportunity to
realize greater returns on their securities portfolios. In addition,
the proposed amendment should have no anticompetitive effects not
necessary or appropriate in furtherance of the purposes of the Act
because it would apply equally to all broker-dealers.
To evaluate more fully the effects on competition of the proposed
amendments, the Commission is requesting that commenters provide views
and specific empirical data as to any effects their adoption would have
on competition. The Commission also requests comments on what effect
the proposals, if adopted, would have on efficiency and capital
formation.
[[Page 39646]]
VII. Regulatory Flexibility Act Certification
Section 3(a) of the Regulatory Flexibility Act\18\ requires the
Commission to undertake an initial regulatory flexibility analysis of
the effects of proposed rules and rule amendments on small entities,
unless the Chairman certifies that the rules and rule amendments, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\19\
---------------------------------------------------------------------------
\18\ 5 U.S.C. 603(a).
\19\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The amendment is unlikely to have a significant economic impact on
a substantial number of small entities because it concerns an activity
that is only engaged in by entities that are not deemed ``small'' under
the Regulatory Flexibility Act. Under Rule 15c3-3, a broker-dealer must
pledge certain specified categories of collateral when borrowing fully
paid or excess margin securities from its customers. The proposed
amendment to Rule 15c3-3 would increase the range of permissible
collateral by allowing broker-dealers to pledge such other collateral
as the Commission designates by Order as being appropriate in the
public interest and consistent with the protection of investors after
giving consideration to the collateral's liquidity, volatility, market
depth and location, and the issuer's creditworthiness.
According to the Commission's Office of Economic Analysis, as of
December 31, 2000, there were approximately 409 broker-dealers that
carried customer securities, and therefore could conceivably borrow
fully paid or excess margin securities from their customers. Of these
409 broker-dealers, only sixteen firms met the definition of a ``small
business'' or ``small organization'' as those terms are defined in
Commission Rule 17 CFR 240.0-10. Moreover, not one of these sixteen
``small'' broker-dealers reported borrowed securities on their balance
sheets in their quarterly FOCUS filings during 1998, 1999 and 2000.
This would indicate that these broker-dealers do not borrow any
securities, let alone customer securities, as part of their business
activities. Accordingly, the proposed amendment--which relates to
broker-dealer borrowings of customer securities--should have no impact
on the few ``small'' entities that could conceivably engage in this
activity. The primary effect of the proposal would be on broker-dealers
that are not considered small entities under the Regulatory Flexibility
Act.
The Chairman has certified that the proposed amendments would not
have a significant economic impact on a substantial number of small
entities. A copy of the certification is attached as Appendix A.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed rules and rule amendments on the
economy on an annual basis. Commenters should provide empirical data to
support their views.
VIII. Statutory Authority
Pursuant to the Exchange Act and particularly Sections 15(c)(3),
23(a) and 36 thereof, 15 U.S.C. 78o(c)(3), 78w, and 78mm, the
Commission proposes to amend Sec. 240.15c3-3 of Title 17 of the Code of
Federal Regulation in the manner set forth below.
List of Subjects
17 CFR Part 240
Broker-dealers, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rule Amendments
In accordance with the foregoing, the Commission proposes to amend
Title 17, Chapter II of the Code of Federal Regulations as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The general authority citation for Part 240 is amended by adding
the following citation.
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, and 80b-11, unless otherwise noted.
* * * * *
Section 240.15c3-3 is also issued under secs. 15 U.S.C. 78o, 78q,
78w, 78fff.
* * * * *
2. Section 240.15c3-3 is revised by removing the authority
following Sec. 240.15c3-3 and revising paragraph (b)(3)(iii) to read as
follows:
Sec. 240.15c3-3 Customer protection--reserves and custody of
securities.
* * * * *
(b) Physical possession or control of securities. * * *
(3) * * *
(iii) Specifies that the broker or dealer:
(A) Must provide to the lender, upon the execution of the agreement
or by the close of the business day of the loan if the loan occurs
subsequent to the execution of the agreement, collateral, which fully
secures the loan of securities, consisting exclusively of cash or
United States Treasury bills and Treasury notes or an irrevocable
letter of credit issued by a bank as defined in Section 3(a)(6)(A)--(C)
of the Act (15 U.S.C. 78c(a)(6)(A)--(C)) or such other collateral as
the Commission designates as permissible by order as necessary or
appropriate in the public interest and consistent with the protection
of investors after giving consideration to the collateral's liquidity,
volatility, market depth and location, and the issuer's
creditworthiness; and
(B) Must mark the loan to the market not less than daily and, in
the event that the market value of all the outstanding securities
loaned at the close of trading at the end of the business day exceeds
100 percent of the collateral then held by the lender, the borrowing
broker or dealer must provide additional collateral of the type
described in paragraph (b)(3)(iii)(A) of this section to the lender by
the close of the next business day as necessary to equal, together with
the collateral then held by the lender, not less than 100 percent of
the market value of the securities loaned; and
* * * * *
By the Commission.
Dated: June 3, 2002.
Jill M. Peterson,
Assistant Secretary.
Note: Appendix A to the preamble will not appear in the Code of
Federal Regulations.
Appendix A
Securities and Exchange Commission Regulatory Flexibility Act
Certification
I, Harvey L. Pitt, Chairman of the Securities and Exchange
Commission (the ``Commission''), based on the representations of the
Division of Market Regulation, and the analysis of the Office of
Economic Analysis and the Office of the General Counsel provided to
me, hereby certify, pursuant to 5 U.S.C. 605(b), that the proposed
amendment to paragraph (b)(3) of Commission Rule 15c3-3 (17 CFR
240.15c3-3), would not, if adopted, have a significant economic
impact on a substantial number of small entities.
Dated: May 31, 2002.
Harvey L. Pitt,
Chairman.
[FR Doc. 02-14296 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P