[Federal Register: June 14, 2004 (Volume 69, Number 113)]
[Rules and Regulations]
[Page 33257-33259]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn04-22]
[[Page 33257]]
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Part V
Department of the Treasury
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17 CFR Part 403
Government Securities Act Regulations: Protection of Customer
Securities and Balances; Order Regarding the Collateral Registered
Government Securities Brokers and Dealers Must Pledge When Borrowing
Customer Securities; Final Rule and Notice
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DEPARTMENT OF THE TREASURY
17 CFR Part 403
RIN 1505-AA94
Government Securities Act Regulations: Protection of Customer
Securities and Balances
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,'' or
``Us'') is issuing in final form an amendment to the customer
protection rules in Sec. 403.4 of the regulations issued under the
Government Securities Act of 1986 (``GSA''), as amended.\1\ This
provision requires entities registered with the Securities and Exchange
Commission (``SEC'') as specialized government securities brokers and
dealers (``registered government securities brokers and dealers'')
under Sec. 15C(a)(2) of the Securities Exchange Act of 1934 (``the
Exchange Act'')\2\ to comply with the requirements of the SEC customer
protection rule (``SEC Rule 15c3-3'') with certain modifications. We
published a proposed rule on December 11, 2003, and received no
comments. We are therefore adopting the changes as proposed.
Specifically, this amendment makes certain conforming technical changes
to the GSA regulations that allow for the expansion of collateral that
registered government securities brokers and dealers may pledge when
borrowing fully paid or excess-margin securities from customers. This
final rule allows us to designate additional categories of collateral
pursuant to an order issued by Treasury.
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\1\ 15 U.S.C. 78o-5.
\2\ 15 U.S.C. 78o-5(a)(2).
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EFFECTIVE DATE: June 14, 2004.
ADDRESSES: This final rule is available for downloading from the Bureau
of the Public Debt's Web site at http://www.publicdebt.treas.gov. 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: Lee Grandy (Associate Director),
Deidere Brewer (Government Securities Specialist), or Kevin Hawkins
(Government Securities Specialist), Bureau of the Public Debt,
Government Securities Regulations Staff, (202) 691-3632 or e-mail us at
govsecreg@bpd.treas.gov.
SUPPLEMENTARY INFORMATION: The implementing regulations Treasury issued
in 1987 \3\ under the Government Securities Act of 1986 \4\ adopted the
SEC's customer protection rule at 17 CFR 240.15c3-3 with certain
modifications. Currently, Sec. 403.4 of the GSA regulations maintains
for registered government securities brokers and dealers the customer
protection standards set out in SEC Rule 15c3-3 for brokers and dealers
when borrowing fully paid or excess-margin securities from customers.
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\3\ The GSA regulations were published as a final rule on July
24, 1987 (52 FR 27910). The regulations, as amended, are codified at
17 CFR Chapter IV.
\4\ Pub. L. 99-571, 100 Stat. 3208 (1986).
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On March 17, 2003, the SEC published a final amendment \5\ to Rule
15c3-3 to allow, through the issuance of an SEC order, the expansion of
collateral that brokers and dealers may pledge when borrowing fully
paid or excess-margin securities from customers. Since an SEC order
cannot be incorporated by reference to apply to registered government
securities brokers and dealers, on December 11, 2003,\6\ we issued a
proposed rule with conforming technical changes to Sec. 403.1 \7\ and
Sec. 403.4 \8\ of the GSA regulations that will allow Treasury to
expand the categories of permissible collateral by issuing an exemptive
order. We received no comments on the proposed rule. As explained
below, we are adopting the rule as proposed. We believe this final
amendment will continue to protect customer securities and balances,
while potentially adding liquidity to the securities lending markets
and lowering borrowing costs for registered government securities
brokers and dealers.
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\5\ Securities and Exchange Act Release No. 34-47480 (March 11,
2003), 68 FR 12780 (March 17, 2003).
\6\ 68 FR 69059 (December 11, 2003).
\7\ 17 CFR 403.1.
\8\ 17 CFR 403.4.
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I. Background
A. SEC Rule 15c3-3
In 1972, the SEC adopted the customer protection rule, Rule 15c3-3,
to protect customer securities and funds held by brokers and
dealers.\9\ At that time, securities brokers and dealers were required
to pledge cash, U.S. Treasury bills and notes, or letters of credit as
collateral when borrowing customer securities. In 1989, the SEC issued
a no-action letter that expanded the categories of permissible
collateral.\10\
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\9\ 17 CFR 240.15c3-3.
\10\ See Letter from Michael A. Macchiaroli, Assistant Director,
Division of Market Regulation, SEC, to Frances R. Bermanzohn, Esq.,
Senior Vice President of the Public Securities Association (March 2,
1989). The SEC no-action letter provided that under certain facts
and circumstances, a broker or dealer could provide to a customer
lender as the collateral in a government securities borrowing
transaction any of the following: ``government securities'' as
defined in Sec. 3(a)(42)(A) and Sec. 3(a)(42)(B) of the Exchange
Act, and securities issued or guaranteed by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Student Loan Marketing Association, or the Financing Corporation.
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On March 17, 2003, the SEC issued a final amendment to Rule 15c3-3
that allows for the expansion of collateral that brokers and dealers
may pledge when borrowing fully paid or excess-margin securities from
customers pursuant to orders issued by the SEC.\11\ The preamble to the
SEC's final amendment stated that the amended rule provides flexibility
to ensure receipt of full collateral by customers while allowing for a
wider range of permissible collateral, thereby adding liquidity to the
securities lending markets and lowering borrowing costs for brokers and
dealers.
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\11\ See supra note 5.
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On April 22, 2003, the SEC issued by order \12\ the list of
permissible categories of collateral under Rule 15c3-3.\13\
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\12\ Securities and Exchange Act Release No. 47683 (April 16,
2003), 68 FR 19864 (April 22, 2003).
\13\ The SEC order expands permissible collateral for brokers
and dealers when borrowing a customer's securities to: ``government
securities'' as defined in sections 3(a)(42)(A) and (B) of the
Exchange Act; certain ``government securities'' meeting the
definition in section 3(a)(42)(C) of the Exchange Act; securities
issued or guaranteed by certain Multilateral Development banks;
``mortgage related securities'' as defined in section 3(a)(41) of
the Exchange Act; certain negotiable certificates of deposit and
bankers acceptances; foreign sovereign debt securities; foreign
currency; and certain corporate debt securities.
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B. Government Securities Act Regulations
When Treasury first issued the implementing regulations \14\ for
the GSA \15\ in 1987, we reviewed the existing regulations for brokers
and dealers registered with the SEC under Sec. 15(b) of the Exchange
Act in order to avoid overly burdensome or duplicative regulations. In
that regard, the GSA regulations at 17 CFR chapter IV incorporate by
reference many of the SEC's rules regulating brokers and dealers
including, with modifications, SEC Rule 15c3-3.
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\14\ See supra note 3.
\15\ See supra note 4.
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Since the SEC does not have the authority to grant exemptions from
Sec. 15C or the rules and regulations
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thereunder,\16\ on December 11, 2003, Treasury issued a proposed rule
that was similar to the SEC's final rule. The amended rule would allow
for the expansion of the categories of collateral designated as
permissible through the issuance of a Treasury exemptive order. We
identified in the preamble to the proposed amendment the categories of
collateral we were considering for an order should the amendment to
Sec. 403.4 of the GSA regulations be issued in final form.\17\ Since
registered government securities brokers and dealers may conduct a
business only in government and other exempted securities (except
municipal securities), the list of securities we identified was more
limited than the list the SEC provided in its order. Treasury did not
receive any comment letters in response to the proposed rule.
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\16\ 15 U.S.C. 78mm(b).
\17\ The categories of collateral we identified in the proposed
amendment were: ``Government securities'' as defined in Sec.
3(a)(42)(A) and (B) of the Exchange Act; ``Government securities''
as defined in Sec. 3(a)(42)(C) of the Exchange Act issued or
guaranteed as to principal or interest by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Student Loan Marketing Association, or the Financing Corporation;
and securities issued by, or guaranteed as to principal and interest
by certain Multilateral Development Banks.
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II. Analysis
We are now adopting, without change, the amendments to Sec. 403.1
and Sec. 403.4. The amendments add a new paragraph (e) to Sec. 403.4
and make a conforming change to Sec. 403.1. Paragraph (e) of Sec.
403.4 modifies paragraph (b)(3)(iii)(A) of SEC Rule 15c3-3, and now
provides that in addition to the categories of collateral currently
acceptable (cash, U.S. Treasury bills and notes, and bank letters of
credit), registered government securities brokers and dealers may
pledge ``such other collateral as the Secretary designates as
permissible by order as consistent with the public interest, the
protection of investors, and the purposes of the Act, after giving
consideration to the collateral's liquidity, volatility, market depth
and location, and the issuer's creditworthiness.'' Treasury is
publishing at the same time as this rule an order designating the
additional categories of collateral applicable to registered government
securities brokers and dealers.
We believe this amendment will provide us with the flexibility to
expand the categories of collateral that may be pledged by registered
government securities brokers and dealers, while maintaining the
customer protection objectives of Sec. 403.4. This amendment, and the
accompanying order, will potentially increase liquidity in the
securities lending markets and lower borrowing costs for registered
government securities brokers and dealers.
III. Special Analysis
This final rule makes only a technical change to the GSA
regulations to provide for a broader list of collateral that registered
government securities brokers and dealers may pledge. Therefore, this
amendment does not meet the criteria for a ``significant regulatory
action'' under Executive Order 12866. The purpose of the amendment is
to relieve a restriction on registered government securities brokers
and dealers; we are therefore making it effective immediately.
For the same reason, we certify under the Regulatory Flexibility
Act \18\ that the amendment, if adopted, would not have a significant
economic impact on a substantial number of small entities. As a result,
a regulatory flexibility analysis is not required.
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\18\ 5 U.S.C. 601.
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Although the amendment is technical in nature, it does not impose
any additional burdens on such firms. The amendment should increase
liquidity in the government securities market and lower borrowing costs
for registered government securities brokers and dealers. The
collections of information under the Government Securities Act
regulations have previously been reviewed and approved by the Office of
Management and Budget under control number 1535-0089.
List of Subjects in 17 CFR Part 403
Banks, Banking, Brokers, Government securities.
0
For the reasons set out in the preamble, 17 CFR part 403 is amended as
follows:
PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES
0
1. The authority citation for part 403 is revised 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
2. 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. 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. Sec. 403.4 (a)-(d), (f)(2)-(3), (g)-(j), and (m), constitutes
compliance with this part.
0
3. Section 403.4 is amended by re-designating paragraphs (e) through
(l) as paragraphs (f) through (m), respectively, and by adding new
paragraph (e) to read as follows:
Sec. 403.4 Customer Protection--reserves and custody of securities.
* * * * *
(e) For purposes of this section, Sec. 240.15c3-3(b)(3)(iii)(A) of
this title is modified to read as follows:
(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 that fully
secures the loan of securities, consisting exclusively of cash or
United States Treasury bills or Treasury notes or an irrevocable letter
of credit issued by a bank as defined in Sec. 3(a)(6)(A)-(C) of the
Act (15 U.S.C. 78c(a)(6)(A)-(C)) or such other collateral as the
Secretary designates as permissible by order as consistent with the
public interest, the protection of investors, and the purposes of the
Act, after giving consideration to the collateral's liquidity,
volatility, market depth and location, and the issuer's
creditworthiness; and
* * * * *
Dated: May 24, 2004.
Brian C. Roseboro,
Under Secretary, Domestic Finance.
[FR Doc. 04-13128 Filed 6-10-04; 8:45 am]
BILLING CODE 4810-39-P