Limitations on Withdrawals of Equity Capital, 1148-1152 [E7-173]
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Federal Register / Vol. 72, No. 6 / Wednesday, January 10, 2007 / Rules and Regulations
level of the Nassif Building at the DOT
street address stated in the ADDRESSES
section. Comments will be available in
the AD docket shortly after the Docket
Management System receives them.
the FAA amends 14 CFR part 39 as
follows:
Authority for This Rulemaking
I
Title 49 of the United States Code
specifies the FAA’s authority to issue
rules on aviation safety. Subtitle I,
section 106, describes the authority of
the FAA Administrator. Subtitle VII,
Aviation Programs, describes in more
detail the scope of the Agency’s
authority.
We are issuing this rulemaking under
the authority described in subtitle VII,
part A, subpart III, section 44701,
‘‘General requirements.’’ Under that
section, Congress charges the FAA with
promoting safe flight of civil aircraft in
air commerce by prescribing regulations
for practices, methods, and procedures
the Administrator finds necessary for
safety in air commerce. This regulation
is within the scope of that authority
because it addresses an unsafe condition
that is likely to exist or develop on
products identified in this rulemaking
action.
Regulatory Findings
We have determined that this AD will
not have federalism implications under
Executive Order 13132. This AD will
not have a substantial direct effect on
the States, on the relationship between
the national government and the States,
or on the distribution of power and
responsibilities among the various
levels of government.
The FAA has determined that this
regulation is an emergency regulation
that must be issued immediately to
correct an unsafe condition in aircraft,
and that it is not a ‘‘significant
regulatory action’’ under Executive
Order 12866. It has been determined
further that this action involves an
emergency regulation under DOT
Regulatory Policies and Procedures (44
FR 11034, February 26, 1979). If this
emergency regulation is later deemed
significant under DOT Regulatory
Policies and Procedures, we will
prepare a final regulatory evaluation
and place it in the AD Docket. See the
ADDRESSES section for a location to
examine the regulatory evaluation, if
filed.
List of Subjects in 14 CFR Part 39
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the removed flight deck door electronic
equipment to the manufacturer in paragraph
3.C., that action is not necessary.
Air transportation, Aircraft, Aviation
safety, Safety.
Adoption of the Amendment
Accordingly, under the authority
delegated to me by the Administrator,
I
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PART 39—AIRWORTHINESS
DIRECTIVES
TABLE 1.—SERVICE BULLETINS
1. The authority citation for part 39
continues to read as follows:
For model—
Authority: 49 U.S.C. 106(g), 40113, 44701.
§ 39.13
(1) ERJ 170 airplanes ........
[Amended]
2. The FAA amends § 39.13 by adding
the following new airworthiness
directive (AD):
I
2006–20–14 Empresa Brasileira de
Aeronautica S.A. (EMBRAER):
Amendment 39–14878. Docket No.
FAA–2007–26797; Directorate Identifier
2006–NM–195–AD.
Effective Date
(a) This AD becomes effective January 16,
2007, to all persons except those persons to
whom it was made immediately effective by
AD 2006–20–14, issued on October 10, 2006,
which contained the requirements of this
amendment.
Affected ADs
(b) None.
Applicability
(c) This AD applies to EMBRAER Model
ERJ 170–100 LR, –100 STD, –100 SE, –100
SU, –200 STD, –200 LR, and –200 SU
airplanes, and Model ERJ 190–100 STD, –100
LR, and –100 IGW airplanes; certificated in
any category; as identified in EMBRAER
Service Bulletins SB No. 170–52–0029 and
SB No. 190–52–0011, both dated August 21,
2006.
Unsafe Condition
(d) This AD results from a report indicating
that this equipment is defective. We are
issuing this AD to prevent failure of this
equipment, which could jeopardize flight
safety.
Compliance
(e) You are responsible for having the
actions required by this AD performed within
the compliance times specified, unless the
actions have already been done.
Transfer of Airplane and Requirement To
Inform New Operator of This AD
(f) When an operator of an affected airplane
sells or otherwise transfers the airplane to
another operator, the new operator must be
informed of this AD in a manner consistent
with the procedures found in 49 CFR part 15.
Replacement
(g) Within 60 days after the effective date
of this AD, modify the flight deck door
electronic equipment in accordance with a
method approved by the Manager,
International Branch, ANM–116, Transport
Airplane Directorate, FAA. Doing all actions
in the Accomplishment Instructions of the
applicable EMBRAER service bulletin
identified in Table 1 of this AD is one
approved method; except where the
applicable service bulletin specifies to send
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(2) ERJ 190 airplanes ........
EMBRAER
service
bulletin—
170–52–0029,
dated August
21, 2006.
190–52–0011,
dated August
21, 2006.
Parts Installation
(h) As of the effective date of this AD, no
person may install on any airplane any
cockpit door control panel identified in
paragraph 1.A. of the applicable service
bulletin in Table 1 of this AD.
Alternative Methods of Compliance
(AMOCs)
(i)(1) The Manager, International Branch,
ANM–116, Transport Airplane Directorate,
FAA, has the authority to approve AMOCs
for this AD, if requested in accordance with
the procedures found in 14 CFR 39.19.
(2) Before using any AMOC approved in
accordance with § 39.19 on any airplane to
which the AMOC applies, notify the
appropriate principal inspector in the FAA
Flight Standards Certificate Holding District
Office.
Issued in Renton, Washington, on
December 21, 2006.
Ali Bahrami,
Manager, Transport Airplane Directorate,
Aircraft Certification Service.
[FR Doc. E7–147 Filed 1–9–07; 8:45 am]
BILLING CODE 4910–13–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038—AC27
Limitations on Withdrawals of Equity
Capital
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
SUMMARY: The Commodity Futures
Trading Commission (‘‘Commission’’) is
amending its regulations to provide that
the Commission may, by written order,
temporarily prohibit a futures
commission merchant (‘‘FCM’’) from
carrying out equity withdrawal
transactions that would reduce excess
adjusted net capital by 30 percent or
more. The proposed orders would be
based on the Commission’s
determination that such withdrawal
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transactions could be detrimental to the
financial integrity of FCMs or could
adversely affect their ability to meet
customer obligations. The proposed
amendments also would provide that an
FCM may file with the Commission a
petition for rescission of an order
temporarily prohibiting equity
withdrawals from the FCM.
DATES: Effective March 12, 2007.
FOR FURTHER INFORMATION CONTACT:
Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418–5430, or
Thelma Diaz, Special Counsel, at (202)
418–5137, Division of Clearing and
Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. Electronic mail:
tsmith@cftc.gov or tdiaz@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission issued a release with
proposed amendments to Part 1 of the
Commission’s regulations in September
of 2006, as published for notice and
comment in the Federal Register (the
‘‘Proposing Release’’).1 The Commission
received comment letters from the Joint
Audit Committee (‘‘JAC’’) 2 and two
designated contracts markets, the
Chicago Mercantile Exchange, Inc. and
the Minneapolis Grain Exchange.3 All of
the commenters endorsed the proposed
amendments to Regulation 1.17(g),
which would provide for Commission
orders that temporarily restrict equity
capital withdrawals from FCMs if the
Commission finds that such
withdrawals may be detrimental to the
financial integrity of the FCM or may
unduly jeopardize its ability to meet
customer obligations or other liabilities
that may cause a significant impact on
the markets. The Proposing Release also
included other proposed amendments to
Regulations 1.12 and 1.17, which would
update these regulations by adding
references to ‘‘limited liability
companies’’ and ‘‘limited liability
company members.’’ 4 For the reasons
1 See
71 FR 57451 (September 29, 2006).
JAC is a committee formed by U.S.
commodity futures and options exchanges and the
National Futures Association to coordinate audit
and financial surveillance activities of FCMs.
3 The comment letters are available for inspection
and copying at the Commission’s Washington office
in its public reading room, Room 4072, Three
Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. The telephone number for
the public reading room is (202) 418–5025. The
comment letters are also available on the
Commission’s public Web site, at https://
www.cftc.gov/foia/comment06/foi06-007_1.htm.
4 The Commission has revised other regulations
to reflect the development of limited liability
companies (‘‘LLCs’’). See, e.g. 69 FR 49784, 49793–
4 (August 12, 2004). The amendments adopted in
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discussed below, the Commission is
adopting each of these amendments as
proposed in the Proposing Release.
II. Background
Commission Regulation 1.17(e)
prohibits all equity withdrawal
transactions that would reduce the
adjusted net capital of FCMs or
introducing brokers (‘‘IBs’’) beyond the
amounts permitted by the regulation.5
The transactions affected by the
regulation include any withdrawals
made by the action of a stockholder or
partner or by redemption or repurchase
of shares of stock by ‘‘consolidated
entities’’,6 dividend payments or similar
distributions, or through unsecured
advances or loans made to stockholders,
partners, sole proprietors, or employees.
When determining the effect of the
proposed equity withdrawal transaction
on the firm’s capital, the firm also must
take into account other pending equity
withdrawal transactions and scheduled
liability payments that will reduce its
capital within six months after the
subject equity withdrawal transaction.7
The proposed equity withdrawal
transaction is prohibited if, when added
together with such other planned capital
reductions, it would result in capital
levels that are less than required by
Regulation 1.17(e).
The purpose of these equity
withdrawal restrictions is to help
preserve and enhance the required
compliance by FCMs and IBs with the
minimum financial requirements set
forth in the Commission’s regulations.8
2004 related to the management of LLCs, in order
to determine persons with appropriate signature
authority to file financial reports for the FCM or IB.
5 Commission regulations cited in this release
may be found at 17 CFR Ch. I (2006). Generally
speaking, Regulation 1.17(e) prohibits equity
withdrawal transactions if such withdrawals would
reduce the firm’s adjusted net capital to less than
120 percent of its minimum adjusted net capital
requirement under Regulation 1.17(a)(1). Such
transactions also are prohibited if they would result
in less than the minimum amount of equity
required under Regulation 1.17(d), which provides
that FCMs and IBs must maintain a debt-equity
ratio of at least 30 percent equity.
6 Commission Regulation 1.17(f) requires, and in
other circumstances permits, FCMs and IBs to
consolidate the assets and liabilities of their
subsidiaries and/or affiliates in a single
computation of adjusted net capital for the FCM or
IB and its consolidated entities.
7 Regulation 1.17(e) specifically requires the firm
to combine the amount of the subject equity
withdrawal transaction with any of the following
that are scheduled to occur within six months after
the subject withdrawal: any other proposed equity
withdrawal; any payments under satisfactory
subordination agreements under Regulation 1.17(h);
and any payments of the liabilities identified in
Regulation 1.17(c)(4)(vi).
8 Section 4f(b) of the Commodity Exchange Act
(‘‘Act’’) authorizes the Commission, by regulation,
to impose minimum financial and related reporting
requirements on FCMs and IBs. The Act is codified
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As the Commission has explained
elsewhere, the Commission’s minimum
financial requirements protect
customers and other market participants
by requiring FCMs and IBs to maintain
minimum levels of liquid assets in
excess of their liabilities to finance their
business activities.9 Moreover, pursuant
to Section 4d of the Act,10 FCMs are
required to segregate from their own
assets all money, securities, and other
property held for customers as margin
for their commodity futures and option
contracts, as well as any gains accruing
to customers from their open futures
and option positions. Part 30 of the
Commission’s regulations also calls for
FCMs to set aside funds, called the
‘‘foreign futures and foreign options
secured amount’’, to help protect the
funds of U.S. customers trading on nonU.S. futures markets.11 In the event of a
shortfall in the Section 4d segregated
funds or the Part 30 secured funds that
an FCM must hold, the Commission’s
minimum net capital requirements
provide protection to customers by
requiring each FCM to maintain a
minimum level of assets that are readily
available to be contributed in the event
of a shortfall in the customer funds. The
minimum capital requirements also
protect customers and market
participants by ensuring that an FCM
remains solvent while waiting for
margin calls to be met.
As an additional measure to ensure
capital compliance by FCMs,
Commission Regulation 1.12(g)(2)
requires each FCM to provide notice to
the Commission of certain equity
withdrawal transactions.12 In particular,
Regulation 1.12(g)(2) requires each FCM
to provide notice at least two business
days prior to an action to withdraw
equity from the FCM, or a subsidiary or
affiliate consolidated pursuant to
Regulation 1.17(f), if the equity
withdrawal transaction would cause, on
a net basis, a reduction in the FCM’s
excess adjusted net capital of 30 percent
or more. In response to the receipt of
such a notice, Regulation 1.12(g)(3)
provides that the Director of the
Commission’s Division of Clearing and
Intermediary Oversight (‘‘Division’’), or
the Director’s designee, may require that
the FCM provide, within three business
at 7 U.S.C. 1 et seq. (2000), and Section 4f(b) of the
Act is codified at 7 U.S.C. 6f(b).
9 68 FR 40835, 40836 (July 9, 2003) (Minimum
Financial and Related Reporting Requirements for
Futures Commission Merchants and Introducing
Brokers).
10 Section 4d of the Act is codified at 7 U.S.C. 6d
(2000).
11 The term ‘‘foreign futures and foreign options
secured amount’’ is defined in Regulation 1.3(rr).
12 Regulation 1.12(g) applies only to FCMs and
not IBs.
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days from the date of the request or such
shorter period as the Director or
designee may specify, such other
information as the Director or designee
determines to be necessary based upon
market conditions, reports provided by
the FCM, or other available
information.13
When first proposing the notification
provision eventually adopted as
Regulation 1.12(g)(2), the Commission
noted that it could serve as ‘‘early
warning’’ of impending financial
difficulties at an FCM or at its holding
company.14 The only consequence that
the regulation expressly contemplates as
a result of the warning is that the
Commission may require additional
information from the FCM, with the
response to be provided in a period of
three days or less, as directed by the
Commission. At the time that
Regulation 1.2(g)(2) was adopted, the
Commission determined that it was not
necessary to adopt additional
limitations within the Commission’s
regulations on equity withdrawal
transactions.15
However, the recent precipitous
decline of a large FCM holding company
has confirmed that expedited action
may be necessary to protect FCM capital
in the face of increasing financial
pressures experienced by its parent and/
or affiliated entities. In this recent
example, the FCM registrant was part of
a complex organizational group
consisting of several layers of holding
companies and their subsidiaries. In
October of 2005, the parent company for
the group announced that its chief
executive officer had been placed on
leave, and that its financial statements
for the years 2002 through 2005 should
not be relied upon. The next day,
federal authorities charged the chief
executive officer with securities fraud,
and on the following day the holding
13 Regulation 1.12(g)(2) also provides that the
Commission may require the FCM to cause a
Material Affiliated Person, as that term is defined
in Commission Regulation 1.14(a)(2), to respond to
requests for information from the Division Director.
14 The provisions of this regulation originally
were included among several proposals made by
the Commission in 1994 in response to the financial
difficulties experienced by certain FCMs operating
within holding company structures. These
proposals were intended to provide the
Commission with access to information concerning
the activities of FCM affiliates whose activities were
reasonably likely to have a material impact on the
financial or operational condition of the FCM. The
Commission subsequently determined, in response
to the recommendations of several commenters, that
the notice requirements in Regulation 1.12(g)
should be applied broadly to all FCMs, and not just
to those subject to reporting requirements with
respect to their material affiliates. See, generally, 59
FR 9689, 9690–9691 (March 1, 1994) (Risk
Assessment for Holding Company Systems).
15 61 FR 19177, 19180 (May 1, 1996).
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company declared that certain liquidity
difficulties were causing it to impose a
15-day moratorium for the activities of
a nonregulated subsidiary. According to
prior financial filings of the holding
company, this nonregulated subsidiary
had been responsible for a material
portion of the holding company’s
business.
In response to these foregoing events,
the Securities and Exchange
Commission (‘‘SEC’’) issued an order to
temporarily restrict withdrawals of
capital from two other subsidiaries of
the holding company, which were
registered as securities broker-dealers.16
In issuing the order, the SEC cited to its
regulation, 17 CFR 240.15c3–1(e)(3)(i),
which provides that the SEC may by
order restrict, for a period up to twenty
business days, any withdrawal by the
broker or dealer of equity capital or
unsecured loan or advance to a
stockholder, partner, sole proprietor,
employee or affiliate, if (1) such
withdrawal, advance or loan when
aggregated with all other withdrawals,
advances or loans on a net basis during
a 30 calendar day period, exceeds 30
percent of the broker or dealer’s excess
net capital; and (2) the SEC, based on
the facts and information available,
concludes that the withdrawal, advance
or loan may be detrimental to the
financial integrity of the broker or
dealer, or may unduly jeopardize the
broker or dealer’s ability to repay its
customer claims or other liabilities that
may cause a significant impact on the
markets or expose the customers or
creditors of the broker or dealer to loss
without taking into account the
application of the Securities Investor
Protection Act.17 As described by the
SEC, § 240.15c3–1(e)(3)(i) enables the
SEC and its staff to examine further the
financial condition of the broker-dealer,
so as to determine whether, and under
what circumstances, to permit the
withdrawal, entirely or partially, or to
prohibit the withdrawal for additional
periods by issuing subsequent orders,
with terms that are no longer than
twenty business days.18
16 A copy of the SEC order, dated October 13,
2005, may be accessed electronically at https://
www.sec.gov/rules/other/34-52606.pdf.
17 This SEC regulation also provides that an order
temporarily prohibiting the withdrawal of capital
shall be rescinded if, sometime after a hearing that
is to be held within two business days from the date
of the request in writing by the broker or dealer, the
SEC determines that the restriction on capital
withdrawal should not remain in effect. See 17 CFR
240.15c3–1(e)(3)(ii).
18 55 FR 34027, 34030 (August 15, 1990)
(proposing amendments to SEC Regulation 15c3–1
regarding withdrawals of equity capital).
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III. Amendments to Regulations 1.12
and 1.17
As proposed in the Proposing Release,
the Commission is adding a new
paragraph (g) to Regulation 1.17, which
will enhance the Commission’s ability,
in the face of fast-developing events, to
impose temporary restrictions on the
flow of capital from an FCM to its
holding company and other affiliated
entities, as appropriate.19 It is
imperative that the Commission have
the option to consider requiring such
temporary delays of equity withdrawals
whenever urgent circumstances so
require. Under the amended regulation,
the Commission may issue a written
order to impose temporary restrictions
on equity withdrawals for a period of up
to twenty business days, and the
Commission may continue to make the
restrictions effective against the FCM by
issuing subsequent orders, each with a
term of no more than twenty business
days. The order would restrict any
withdrawal by the FCM of equity
capital, or any unsecured advance or
loan to a stockholder, partner, limited
liability company member, sole
proprietor, employee or affiliate, if:
(i) Such withdrawal, advance or loan,
when aggregated with all other
withdrawals, advances or loans during a
30 calendar day period from the FCM,
or from a subsidiary or affiliate of the
FCM consolidated pursuant to § 1.17(f),
would cause a net reduction in the
FCM’s excess adjusted net capital of 30
percent or more; and
(ii) The Commission has concluded,
in light of available facts and
circumstances, that such withdrawal,
advance or loan may be detrimental to
the financial integrity of the FCM, or
may unduly jeopardize its ability to
meet customer obligations or other
liabilities that may cause a significant
impact on the markets.
During the periods that such orders
are effective, Commission staff may
evaluate the effect of the proposed
withdrawals on the continuing
adequacy of customer safeguards at the
firm, including the continuing adequacy
of the firm’s liquid assets, in light of the
most current information available from
the FCM concerning its operations and
those of its holding company and
affiliates. These amendments to
Regulation 1.17 may therefore serve to
further enhance the security of customer
funds and the overall financial integrity
of the futures markets.20
19 Paragraph (g) of Regulation 1.17 currently is
reserved.
20 In the years since the Commission last adopted
rule amendments addressing equity withdrawal
transactions, the amount of funds that FCMs are
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The Commission also is amending
Regulation 1.17(g)(2) to provide that an
FCM may file a written petition with the
Commission to request rescission of an
order temporarily restricting equity
withdrawals from the FCM. The
Commission will notify the FCM in
writing that its petition for rescission
had been denied, or, if the Commission
determined that the order should not
remain in effect, the order would be
rescinded. The petition filed by the
FCM must specify the facts and
circumstances supporting its request for
rescission.
Finally, the Commission is also
amending Commission Regulations
1.12(g)(2), 1.17(d)(1), and 1.17(e), as
proposed in the Proposing Release.
These regulations include references to
FCMs and IBs that are organized as
corporations, partnerships, or sole
proprietorships, but currently lack a
specific reference to firms organized as
limited liability companies. By
including applicable references for
limited liability companies and their
members, the amended regulations
modernize the provisions of Regulations
1.12 and 1.17.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), 5 U.S.C. 601 et seq., requires
that agencies, when amending their
rules, consider the impact of those
amendments on small businesses. The
Commission included in the Proposing
Release a certification from the
Chairman that these rules would not
have a significant economic impact on
a substantial number of small entities.21
The Commission received no comments
on the certification.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 22 imposes certain
requirements on federal agencies
(including the Commission) in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA. As
noted in the Proposing Release,23 these
amended regulations do not require a
new collection of information on the
required to hold as segregated funds has more than
doubled. As of August 31, 1995, FCMs were
required to hold approximately $25 billion as
segregated funds, and $6 billion as secured funds.
As of December 31, 2005, the amount that FCMs
were required to hold as segregated funds had
increased to over $95 billion, and the amount
required to be held as secured funds had grown to
almost $25 billion.
21 71 FR at 57452.
22 44 U.S.C. 3507(d).
23 71 FR at 57453.
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part of the entities that are subject to the
amended regulations.
C. Cost-Benefit Analysis
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its action before issuing a
new regulation under the Act. By its
terms, Section 15(a) as amended does
not require the Commission to quantify
the costs and benefits of a new
regulation or to determine whether the
benefits of the regulation outweigh its
costs. Rather, Section 15(a) simply
requires the Commission to ‘‘consider
the costs and benefits’’ of its action.
Section 15(a) of the Act further
specifies that costs and benefits shall be
evaluated in light of five broad areas of
market and public concern: Protection
of market participants and the public;
efficiency, competitiveness, and
financial integrity of futures markets;
price discovery; sound risk management
practices; and other public interest
considerations. Accordingly, the
Commission could in its discretion give
greater weight to any one of the five
enumerated areas and could in its
discretion determine that,
notwithstanding its costs, a particular
regulation was necessary or appropriate
to protect the public interest or to
effectuate any of the provisions or to
accomplish any of the purposes of the
Act. The amended Regulation 1.17(g)
enables the Commission to issue orders
temporarily restricting certain equity
withdrawal transactions in
circumstances that pose significant
concerns for the financial condition of
FCMs. The Commission has considered
the costs and benefits of the amended
regulation in light of the specific
provisions of Section 15(a) of the Act, as
follows:
1. Protection of market participants
and the public. Under the amended
Regulation 1.17(g), the Commission
would be able, in exceptional
circumstances, to temporarily delay
certain withdrawals of FCM equity by
their owners and other insiders, which
would contribute to the benefit of
ensuring that eligible FCMs can meet
their financial obligations to customers
and other market participants.
2. Efficiency and competition. The
amended regulations should have no
effect, from the standpoint of imposing
costs or creating benefits, on the
efficiency and competition of the
futures markets.
3. Financial integrity of futures
markets and price discovery. Amended
Regulation 1.17(g) contributes to the
financial integrity of futures markets by
helping to confirm and preserve the
capital of FCM registrants. The amended
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regulations should have no effect, from
the standpoint of imposing costs or
creating benefits, on the price discovery
function of such markets.
4. Sound risk management practices.
In order to avoid application of
amended Regulation 1.17(g), FCMs may
enhance existing risk management
practices relating to the risks that
practices of FCM affiliates may pose to
the ability of FCMs to meet their
obligations to customers and other
participants in the futures markets.
5. Other public interest
considerations. The amendments to
Regulations 1.12(g), 1.17(d)(1) and
1.17(e), which add references to limited
liability company members and their
capital contributions, help modernize
the Commission’s regulations by taking
into consideration new forms of
business organizations used by FCMs
and IBs.
The Commission invited, but did not
receive, public comment on its
application of the cost-benefit
provision.24 After considering these
factors, the Commission has determined
to issue this final rule.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures,
Reporting and recordkeeping
requirements.
Accordingly, 17 CFR Chapter I is
hereby amended as follows:
I
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
I
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o,
6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1,
16, 16a, 19, 21, 23, and 24, as amended by
the Commodity Futures Modernization Act of
2000, Appendix E of Pub. L. No. 106–554,
114 Stat. 2763 (2000).
2. Section 1.12 is amended by revising
paragraph (g)(2) to read as follows:
I
§ 1.12 Maintenance of minimum financial
requirements by futures commission
merchants and introducing brokers.
*
*
*
*
*
(g) * * *
(2) If equity capital of the futures
commission merchant or a subsidiary or
affiliate of the futures commission
merchant consolidated pursuant to
§ 1.17(f) (or 17 CFR 240.15c3–1e) would
be withdrawn by action of a stockholder
or a partner or a limited liability
company member or by redemption or
repurchase of shares of stock by any of
24 71
E:\FR\FM\10JAR1.SGM
FR at 5745.
10JAR1
1152
Federal Register / Vol. 72, No. 6 / Wednesday, January 10, 2007 / Rules and Regulations
the consolidated entities or through the
payment of dividends or any similar
distribution, or an unsecured advance or
loan would be made to a stockholder,
partner, sole proprietor, limited liability
company member, employee or affiliate,
such that the withdrawal, advance or
loan would cause, on a net basis, a
reduction in excess adjusted net capital
(or, if the futures commission merchant
is qualified to use the filing option
available under § 1.10(h), excess net
capital as defined in the rules of the
Securities and Exchange Commission)
of 30 percent or more, notice must be
provided at least two business days
prior to the withdrawal, advance or loan
that would cause the reduction:
Provided, however, That the provisions
of paragraphs (g)(1) and (g)(2) of this
section do not apply to any futures or
securities transaction in the ordinary
course of business between a futures
commission merchant and any affiliate
where the futures commission merchant
makes payment to or on behalf of such
affiliate for such transaction and then
receives payment from such affiliate for
such transaction within two business
days from the date of the transaction.
*
*
*
*
*
I 3. Section 1.17 is amended by revising
paragraph (d)(1) introductory text;
adding paragraph (d)(1)(ii)(D); revising
paragraph (e) introductory text; and
adding paragraph (g), to read as follows:
§ 1.17 Minimum financial requirements for
futures commission merchants and
introducing brokers.
mstockstill on PROD1PC61 with RULES
*
*
*
*
*
(d) * * *
(1) Equity capital means a satisfactory
subordination agreement entered into by
a partner or stockholder or limited
liability company member which has an
initial term of at least 3 years and has
a remaining term of not less than 12
months if:
*
*
*
*
*
(ii) * * *
(D) In the case of a limited liability
company, the sum of its capital
accounts of limited liability company
members, and unrealized profit and
loss.
*
*
*
*
*
(e) No equity capital of the applicant
or registrant or a subsidiary’s or
affiliate’s equity capital consolidated
pursuant to paragraph (f) of this section,
whether in the form of capital
contributions by partners (including
amounts in the commodities, options
and securities trading accounts of
partners which are treated as equity
capital but excluding amounts in such
trading accounts which are not equity
VerDate Aug<31>2005
14:45 Jan 09, 2007
Jkt 211001
capital and excluding balances in
limited partners’ capital accounts in
excess of their stated capital
contributions), par or stated value of
capital stock, paid-in capital in excess of
par or stated value, retained earnings or
other capital accounts, may be
withdrawn by action of a stockholder or
partner or limited liability company
member or by redemption or repurchase
of shares of stock by any of the
consolidated entities or through the
payment of dividends or any similar
distribution, nor may any unsecured
advance or loan be made to a
stockholder, partner, sole proprietor,
limited liability company member, or
employee if, after giving effect thereto
and to any other such withdrawals,
advances, or loans and any payments of
payment obligations (as defined in
paragraph (h) of this section) under
satisfactory subordination agreements
and any payments of liabilities excluded
pursuant to paragraph (c)(4)(vi) of this
section which are scheduled to occur
within six months following such
withdrawal, advance or loan:
*
*
*
*
*
(g)(1) The Commission may by order
restrict, for a period up to twenty
business days, any withdrawal by a
futures commission merchant of equity
capital, or any unsecured advance or
loan to a stockholder, partner, limited
liability company member, sole
proprietor, employee or affiliate, if:
(i) Such withdrawal, advance or loan
would cause, when aggregated with all
other withdrawals, advances or loans
during a 30 calendar day period from
the futures commission merchant or a
subsidiary or affiliate of the futures
commission merchant consolidated
pursuant to § 1.17(f) (or 17 CFR
240.15c3–1e), a net reduction in excess
adjusted net capital (or, if the futures
commission merchant is qualified to use
the filing option available under
§ 1.10(h), excess net capital as defined
in the rules of the Securities and
Exchange Commission) of 30 percent or
more, and
(ii) The Commission, based on the
facts and information available,
concludes that any such withdrawal,
advance or loan may be detrimental to
the financial integrity of the futures
commission merchant, or may unduly
jeopardize its ability to meet customer
obligations or other liabilities that may
cause a significant impact on the
markets.
(2) The futures commission merchant
may file with the Secretary of the
Commission a written petition to
request rescission of the order issued
under paragraph (g)(1) of this section.
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
The petition filed by the futures
commission merchant must specify the
facts and circumstances supporting its
request for rescission. The Commission
shall respond in writing to deny the
futures commission merchant’s petition
for rescission, or, if the Commission
determines that the order issued under
paragraph (g)(1) of this section should
not remain in effect, the order shall be
rescinded.
*
*
*
*
*
Issued in Washington, DC, on January 5,
2007 by the Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E7–173 Filed 1–9–07; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
18 CFR Part 35
[Docket No. RM06–4–001; Order No. 679–
A]
Promoting Transmission Investment
Through Pricing Reform
Issued December 22, 2006.
Federal Energy Regulatory
Commission, DOE.
ACTION: Final rule; order on rehearing.
AGENCY:
SUMMARY: In this order on rehearing, the
Federal Energy Regulatory Commission
(Commission) reaffirms its
determinations in part and grants
rehearing in part of Promoting
Transmission Investment through
Pricing Reform, Order No. 679. Order
No. 679 amended Commission
regulations to establish incentive-based
(including performance-based) rate
treatments for the transmission of
electric energy in interstate commerce
by public utilities for the purpose of
benefiting consumers by ensuring
reliability and reducing the cost of
delivered power by reducing
transmission congestion.
DATES: Effective Date: This final rule
and order on rehearing will be effective
on February 9, 2007.
FOR FURTHER INFORMATION CONTACT:
Jeffrey Hitchings (Technical
Information), Office of Energy Markets
and Reliability, Federal Energy
Regulatory Commission, 888 First
Street, NE., Washington, DC 20426,
202–502–6042.
Andre Goodson (Legal Information),
Office of the General Counsel, Federal
Energy Regulatory Commission, 888
E:\FR\FM\10JAR1.SGM
10JAR1
]]>Agencies
[Federal Register Volume 72, Number 6 (Wednesday, January 10, 2007)]
[Rules and Regulations]
[Pages 1148-1152]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-173]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038--AC27
Limitations on Withdrawals of Equity Capital
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
amending its regulations to provide that the Commission may, by written
order, temporarily prohibit a futures commission merchant (``FCM'')
from carrying out equity withdrawal transactions that would reduce
excess adjusted net capital by 30 percent or more. The proposed orders
would be based on the Commission's determination that such withdrawal
[[Page 1149]]
transactions could be detrimental to the financial integrity of FCMs or
could adversely affect their ability to meet customer obligations. The
proposed amendments also would provide that an FCM may file with the
Commission a petition for rescission of an order temporarily
prohibiting equity withdrawals from the FCM.
DATES: Effective March 12, 2007.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418-5430, or Thelma Diaz, Special Counsel,
at (202) 418-5137, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Electronic mail: tsmith@cftc.gov or
tdiaz@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission issued a release with proposed amendments to Part 1
of the Commission's regulations in September of 2006, as published for
notice and comment in the Federal Register (the ``Proposing
Release'').\1\ The Commission received comment letters from the Joint
Audit Committee (``JAC'') \2\ and two designated contracts markets, the
Chicago Mercantile Exchange, Inc. and the Minneapolis Grain
Exchange.\3\ All of the commenters endorsed the proposed amendments to
Regulation 1.17(g), which would provide for Commission orders that
temporarily restrict equity capital withdrawals from FCMs if the
Commission finds that such withdrawals may be detrimental to the
financial integrity of the FCM or may unduly jeopardize its ability to
meet customer obligations or other liabilities that may cause a
significant impact on the markets. The Proposing Release also included
other proposed amendments to Regulations 1.12 and 1.17, which would
update these regulations by adding references to ``limited liability
companies'' and ``limited liability company members.'' \4\ For the
reasons discussed below, the Commission is adopting each of these
amendments as proposed in the Proposing Release.
---------------------------------------------------------------------------
\1\ See 71 FR 57451 (September 29, 2006).
\2\ The JAC is a committee formed by U.S. commodity futures and
options exchanges and the National Futures Association to coordinate
audit and financial surveillance activities of FCMs.
\3\ The comment letters are available for inspection and copying
at the Commission's Washington office in its public reading room,
Room 4072, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. The telephone number for the public reading
room is (202) 418-5025. The comment letters are also available on
the Commission's public Web site, at https://www.cftc.gov/
foia/comment06/foi06-007_1.htm.
\4\ The Commission has revised other regulations to reflect the
development of limited liability companies (``LLCs''). See, e.g. 69
FR 49784, 49793-4 (August 12, 2004). The amendments adopted in 2004
related to the management of LLCs, in order to determine persons
with appropriate signature authority to file financial reports for
the FCM or IB.
---------------------------------------------------------------------------
II. Background
Commission Regulation 1.17(e) prohibits all equity withdrawal
transactions that would reduce the adjusted net capital of FCMs or
introducing brokers (``IBs'') beyond the amounts permitted by the
regulation.\5\ The transactions affected by the regulation include any
withdrawals made by the action of a stockholder or partner or by
redemption or repurchase of shares of stock by ``consolidated
entities'',\6\ dividend payments or similar distributions, or through
unsecured advances or loans made to stockholders, partners, sole
proprietors, or employees. When determining the effect of the proposed
equity withdrawal transaction on the firm's capital, the firm also must
take into account other pending equity withdrawal transactions and
scheduled liability payments that will reduce its capital within six
months after the subject equity withdrawal transaction.\7\ The proposed
equity withdrawal transaction is prohibited if, when added together
with such other planned capital reductions, it would result in capital
levels that are less than required by Regulation 1.17(e).
---------------------------------------------------------------------------
\5\ Commission regulations cited in this release may be found at
17 CFR Ch. I (2006). Generally speaking, Regulation 1.17(e)
prohibits equity withdrawal transactions if such withdrawals would
reduce the firm's adjusted net capital to less than 120 percent of
its minimum adjusted net capital requirement under Regulation
1.17(a)(1). Such transactions also are prohibited if they would
result in less than the minimum amount of equity required under
Regulation 1.17(d), which provides that FCMs and IBs must maintain a
debt-equity ratio of at least 30 percent equity.
\6\ Commission Regulation 1.17(f) requires, and in other
circumstances permits, FCMs and IBs to consolidate the assets and
liabilities of their subsidiaries and/or affiliates in a single
computation of adjusted net capital for the FCM or IB and its
consolidated entities.
\7\ Regulation 1.17(e) specifically requires the firm to combine
the amount of the subject equity withdrawal transaction with any of
the following that are scheduled to occur within six months after
the subject withdrawal: any other proposed equity withdrawal; any
payments under satisfactory subordination agreements under
Regulation 1.17(h); and any payments of the liabilities identified
in Regulation 1.17(c)(4)(vi).
---------------------------------------------------------------------------
The purpose of these equity withdrawal restrictions is to help
preserve and enhance the required compliance by FCMs and IBs with the
minimum financial requirements set forth in the Commission's
regulations.\8\ As the Commission has explained elsewhere, the
Commission's minimum financial requirements protect customers and other
market participants by requiring FCMs and IBs to maintain minimum
levels of liquid assets in excess of their liabilities to finance their
business activities.\9\ Moreover, pursuant to Section 4d of the
Act,\10\ FCMs are required to segregate from their own assets all
money, securities, and other property held for customers as margin for
their commodity futures and option contracts, as well as any gains
accruing to customers from their open futures and option positions.
Part 30 of the Commission's regulations also calls for FCMs to set
aside funds, called the ``foreign futures and foreign options secured
amount'', to help protect the funds of U.S. customers trading on non-
U.S. futures markets.\11\ In the event of a shortfall in the Section 4d
segregated funds or the Part 30 secured funds that an FCM must hold,
the Commission's minimum net capital requirements provide protection to
customers by requiring each FCM to maintain a minimum level of assets
that are readily available to be contributed in the event of a
shortfall in the customer funds. The minimum capital requirements also
protect customers and market participants by ensuring that an FCM
remains solvent while waiting for margin calls to be met.
---------------------------------------------------------------------------
\8\ Section 4f(b) of the Commodity Exchange Act (``Act'')
authorizes the Commission, by regulation, to impose minimum
financial and related reporting requirements on FCMs and IBs. The
Act is codified at 7 U.S.C. 1 et seq. (2000), and Section 4f(b) of
the Act is codified at 7 U.S.C. 6f(b).
\9\ 68 FR 40835, 40836 (July 9, 2003) (Minimum Financial and
Related Reporting Requirements for Futures Commission Merchants and
Introducing Brokers).
\10\ Section 4d of the Act is codified at 7 U.S.C. 6d (2000).
\11\ The term ``foreign futures and foreign options secured
amount'' is defined in Regulation 1.3(rr).
---------------------------------------------------------------------------
As an additional measure to ensure capital compliance by FCMs,
Commission Regulation 1.12(g)(2) requires each FCM to provide notice to
the Commission of certain equity withdrawal transactions.\12\ In
particular, Regulation 1.12(g)(2) requires each FCM to provide notice
at least two business days prior to an action to withdraw equity from
the FCM, or a subsidiary or affiliate consolidated pursuant to
Regulation 1.17(f), if the equity withdrawal transaction would cause,
on a net basis, a reduction in the FCM's excess adjusted net capital of
30 percent or more. In response to the receipt of such a notice,
Regulation 1.12(g)(3) provides that the Director of the Commission's
Division of Clearing and Intermediary Oversight (``Division''), or the
Director's designee, may require that the FCM provide, within three
business
[[Page 1150]]
days from the date of the request or such shorter period as the
Director or designee may specify, such other information as the
Director or designee determines to be necessary based upon market
conditions, reports provided by the FCM, or other available
information.\13\
---------------------------------------------------------------------------
\12\ Regulation 1.12(g) applies only to FCMs and not IBs.
\13\ Regulation 1.12(g)(2) also provides that the Commission may
require the FCM to cause a Material Affiliated Person, as that term
is defined in Commission Regulation 1.14(a)(2), to respond to
requests for information from the Division Director.
---------------------------------------------------------------------------
When first proposing the notification provision eventually adopted
as Regulation 1.12(g)(2), the Commission noted that it could serve as
``early warning'' of impending financial difficulties at an FCM or at
its holding company.\14\ The only consequence that the regulation
expressly contemplates as a result of the warning is that the
Commission may require additional information from the FCM, with the
response to be provided in a period of three days or less, as directed
by the Commission. At the time that Regulation 1.2(g)(2) was adopted,
the Commission determined that it was not necessary to adopt additional
limitations within the Commission's regulations on equity withdrawal
transactions.\15\
---------------------------------------------------------------------------
\14\ The provisions of this regulation originally were included
among several proposals made by the Commission in 1994 in response
to the financial difficulties experienced by certain FCMs operating
within holding company structures. These proposals were intended to
provide the Commission with access to information concerning the
activities of FCM affiliates whose activities were reasonably likely
to have a material impact on the financial or operational condition
of the FCM. The Commission subsequently determined, in response to
the recommendations of several commenters, that the notice
requirements in Regulation 1.12(g) should be applied broadly to all
FCMs, and not just to those subject to reporting requirements with
respect to their material affiliates. See, generally, 59 FR 9689,
9690-9691 (March 1, 1994) (Risk Assessment for Holding Company
Systems).
\15\ 61 FR 19177, 19180 (May 1, 1996).
---------------------------------------------------------------------------
However, the recent precipitous decline of a large FCM holding
company has confirmed that expedited action may be necessary to protect
FCM capital in the face of increasing financial pressures experienced
by its parent and/or affiliated entities. In this recent example, the
FCM registrant was part of a complex organizational group consisting of
several layers of holding companies and their subsidiaries. In October
of 2005, the parent company for the group announced that its chief
executive officer had been placed on leave, and that its financial
statements for the years 2002 through 2005 should not be relied upon.
The next day, federal authorities charged the chief executive officer
with securities fraud, and on the following day the holding company
declared that certain liquidity difficulties were causing it to impose
a 15-day moratorium for the activities of a nonregulated subsidiary.
According to prior financial filings of the holding company, this
nonregulated subsidiary had been responsible for a material portion of
the holding company's business.
In response to these foregoing events, the Securities and Exchange
Commission (``SEC'') issued an order to temporarily restrict
withdrawals of capital from two other subsidiaries of the holding
company, which were registered as securities broker-dealers.\16\ In
issuing the order, the SEC cited to its regulation, 17 CFR 240.15c3-
1(e)(3)(i), which provides that the SEC may by order restrict, for a
period up to twenty business days, any withdrawal by the broker or
dealer of equity capital or unsecured loan or advance to a stockholder,
partner, sole proprietor, employee or affiliate, if (1) such
withdrawal, advance or loan when aggregated with all other withdrawals,
advances or loans on a net basis during a 30 calendar day period,
exceeds 30 percent of the broker or dealer's excess net capital; and
(2) the SEC, based on the facts and information available, concludes
that the withdrawal, advance or loan may be detrimental to the
financial integrity of the broker or dealer, or may unduly jeopardize
the broker or dealer's ability to repay its customer claims or other
liabilities that may cause a significant impact on the markets or
expose the customers or creditors of the broker or dealer to loss
without taking into account the application of the Securities Investor
Protection Act.\17\ As described by the SEC, Sec. 240.15c3-1(e)(3)(i)
enables the SEC and its staff to examine further the financial
condition of the broker-dealer, so as to determine whether, and under
what circumstances, to permit the withdrawal, entirely or partially, or
to prohibit the withdrawal for additional periods by issuing subsequent
orders, with terms that are no longer than twenty business days.\18\
---------------------------------------------------------------------------
\16\ A copy of the SEC order, dated October 13, 2005, may be
accessed electronically at https://www.sec.gov/rules/other/34-
52606.pdf.
\17\ This SEC regulation also provides that an order temporarily
prohibiting the withdrawal of capital shall be rescinded if,
sometime after a hearing that is to be held within two business days
from the date of the request in writing by the broker or dealer, the
SEC determines that the restriction on capital withdrawal should not
remain in effect. See 17 CFR 240.15c3-1(e)(3)(ii).
\18\ 55 FR 34027, 34030 (August 15, 1990) (proposing amendments
to SEC Regulation 15c3-1 regarding withdrawals of equity capital).
---------------------------------------------------------------------------
III. Amendments to Regulations 1.12 and 1.17
As proposed in the Proposing Release, the Commission is adding a
new paragraph (g) to Regulation 1.17, which will enhance the
Commission's ability, in the face of fast-developing events, to impose
temporary restrictions on the flow of capital from an FCM to its
holding company and other affiliated entities, as appropriate.\19\ It
is imperative that the Commission have the option to consider requiring
such temporary delays of equity withdrawals whenever urgent
circumstances so require. Under the amended regulation, the Commission
may issue a written order to impose temporary restrictions on equity
withdrawals for a period of up to twenty business days, and the
Commission may continue to make the restrictions effective against the
FCM by issuing subsequent orders, each with a term of no more than
twenty business days. The order would restrict any withdrawal by the
FCM of equity capital, or any unsecured advance or loan to a
stockholder, partner, limited liability company member, sole
proprietor, employee or affiliate, if:
---------------------------------------------------------------------------
\19\ Paragraph (g) of Regulation 1.17 currently is reserved.
---------------------------------------------------------------------------
(i) Such withdrawal, advance or loan, when aggregated with all
other withdrawals, advances or loans during a 30 calendar day period
from the FCM, or from a subsidiary or affiliate of the FCM consolidated
pursuant to Sec. 1.17(f), would cause a net reduction in the FCM's
excess adjusted net capital of 30 percent or more; and
(ii) The Commission has concluded, in light of available facts and
circumstances, that such withdrawal, advance or loan may be detrimental
to the financial integrity of the FCM, or may unduly jeopardize its
ability to meet customer obligations or other liabilities that may
cause a significant impact on the markets.
During the periods that such orders are effective, Commission staff
may evaluate the effect of the proposed withdrawals on the continuing
adequacy of customer safeguards at the firm, including the continuing
adequacy of the firm's liquid assets, in light of the most current
information available from the FCM concerning its operations and those
of its holding company and affiliates. These amendments to Regulation
1.17 may therefore serve to further enhance the security of customer
funds and the overall financial integrity of the futures markets.\20\
---------------------------------------------------------------------------
\20\ In the years since the Commission last adopted rule
amendments addressing equity withdrawal transactions, the amount of
funds that FCMs are required to hold as segregated funds has more
than doubled. As of August 31, 1995, FCMs were required to hold
approximately $25 billion as segregated funds, and $6 billion as
secured funds. As of December 31, 2005, the amount that FCMs were
required to hold as segregated funds had increased to over $95
billion, and the amount required to be held as secured funds had
grown to almost $25 billion.
---------------------------------------------------------------------------
[[Page 1151]]
The Commission also is amending Regulation 1.17(g)(2) to provide
that an FCM may file a written petition with the Commission to request
rescission of an order temporarily restricting equity withdrawals from
the FCM. The Commission will notify the FCM in writing that its
petition for rescission had been denied, or, if the Commission
determined that the order should not remain in effect, the order would
be rescinded. The petition filed by the FCM must specify the facts and
circumstances supporting its request for rescission.
Finally, the Commission is also amending Commission Regulations
1.12(g)(2), 1.17(d)(1), and 1.17(e), as proposed in the Proposing
Release. These regulations include references to FCMs and IBs that are
organized as corporations, partnerships, or sole proprietorships, but
currently lack a specific reference to firms organized as limited
liability companies. By including applicable references for limited
liability companies and their members, the amended regulations
modernize the provisions of Regulations 1.12 and 1.17.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, when amending their rules, consider the impact
of those amendments on small businesses. The Commission included in the
Proposing Release a certification from the Chairman that these rules
would not have a significant economic impact on a substantial number of
small entities.\21\ The Commission received no comments on the
certification.
---------------------------------------------------------------------------
\21\ 71 FR at 57452.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \22\ imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. As noted in the Proposing
Release,\23\ these amended regulations do not require a new collection
of information on the part of the entities that are subject to the
amended regulations.
---------------------------------------------------------------------------
\22\ 44 U.S.C. 3507(d).
\23\ 71 FR at 57453.
---------------------------------------------------------------------------
C. Cost-Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its action before issuing a new regulation under
the Act. By its terms, Section 15(a) as amended does not require the
Commission to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the regulation outweigh its costs.
Rather, Section 15(a) simply requires the Commission to ``consider the
costs and benefits'' of its action.
Section 15(a) of the Act further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular regulation was necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the Act. The amended Regulation 1.17(g) enables
the Commission to issue orders temporarily restricting certain equity
withdrawal transactions in circumstances that pose significant concerns
for the financial condition of FCMs. The Commission has considered the
costs and benefits of the amended regulation in light of the specific
provisions of Section 15(a) of the Act, as follows:
1. Protection of market participants and the public. Under the
amended Regulation 1.17(g), the Commission would be able, in
exceptional circumstances, to temporarily delay certain withdrawals of
FCM equity by their owners and other insiders, which would contribute
to the benefit of ensuring that eligible FCMs can meet their financial
obligations to customers and other market participants.
2. Efficiency and competition. The amended regulations should have
no effect, from the standpoint of imposing costs or creating benefits,
on the efficiency and competition of the futures markets.
3. Financial integrity of futures markets and price discovery.
Amended Regulation 1.17(g) contributes to the financial integrity of
futures markets by helping to confirm and preserve the capital of FCM
registrants. The amended regulations should have no effect, from the
standpoint of imposing costs or creating benefits, on the price
discovery function of such markets.
4. Sound risk management practices. In order to avoid application
of amended Regulation 1.17(g), FCMs may enhance existing risk
management practices relating to the risks that practices of FCM
affiliates may pose to the ability of FCMs to meet their obligations to
customers and other participants in the futures markets.
5. Other public interest considerations. The amendments to
Regulations 1.12(g), 1.17(d)(1) and 1.17(e), which add references to
limited liability company members and their capital contributions, help
modernize the Commission's regulations by taking into consideration new
forms of business organizations used by FCMs and IBs.
The Commission invited, but did not receive, public comment on its
application of the cost-benefit provision.\24\ After considering these
factors, the Commission has determined to issue this final rule.
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\24\ 71 FR at 5745.
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List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
0
Accordingly, 17 CFR Chapter I is hereby amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000).
0
2. Section 1.12 is amended by revising paragraph (g)(2) to read as
follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(g) * * *
(2) If equity capital of the futures commission merchant or a
subsidiary or affiliate of the futures commission merchant consolidated
pursuant to Sec. 1.17(f) (or 17 CFR 240.15c3-1e) would be withdrawn by
action of a stockholder or a partner or a limited liability company
member or by redemption or repurchase of shares of stock by any of
[[Page 1152]]
the consolidated entities or through the payment of dividends or any
similar distribution, or an unsecured advance or loan would be made to
a stockholder, partner, sole proprietor, limited liability company
member, employee or affiliate, such that the withdrawal, advance or
loan would cause, on a net basis, a reduction in excess adjusted net
capital (or, if the futures commission merchant is qualified to use the
filing option available under Sec. 1.10(h), excess net capital as
defined in the rules of the Securities and Exchange Commission) of 30
percent or more, notice must be provided at least two business days
prior to the withdrawal, advance or loan that would cause the
reduction: Provided, however, That the provisions of paragraphs (g)(1)
and (g)(2) of this section do not apply to any futures or securities
transaction in the ordinary course of business between a futures
commission merchant and any affiliate where the futures commission
merchant makes payment to or on behalf of such affiliate for such
transaction and then receives payment from such affiliate for such
transaction within two business days from the date of the transaction.
* * * * *
0
3. Section 1.17 is amended by revising paragraph (d)(1) introductory
text; adding paragraph (d)(1)(ii)(D); revising paragraph (e)
introductory text; and adding paragraph (g), to read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(d) * * *
(1) Equity capital means a satisfactory subordination agreement
entered into by a partner or stockholder or limited liability company
member which has an initial term of at least 3 years and has a
remaining term of not less than 12 months if:
* * * * *
(ii) * * *
(D) In the case of a limited liability company, the sum of its
capital accounts of limited liability company members, and unrealized
profit and loss.
* * * * *
(e) No equity capital of the applicant or registrant or a
subsidiary's or affiliate's equity capital consolidated pursuant to
paragraph (f) of this section, whether in the form of capital
contributions by partners (including amounts in the commodities,
options and securities trading accounts of partners which are treated
as equity capital but excluding amounts in such trading accounts which
are not equity capital and excluding balances in limited partners'
capital accounts in excess of their stated capital contributions), par
or stated value of capital stock, paid-in capital in excess of par or
stated value, retained earnings or other capital accounts, may be
withdrawn by action of a stockholder or partner or limited liability
company member or by redemption or repurchase of shares of stock by any
of the consolidated entities or through the payment of dividends or any
similar distribution, nor may any unsecured advance or loan be made to
a stockholder, partner, sole proprietor, limited liability company
member, or employee if, after giving effect thereto and to any other
such withdrawals, advances, or loans and any payments of payment
obligations (as defined in paragraph (h) of this section) under
satisfactory subordination agreements and any payments of liabilities
excluded pursuant to paragraph (c)(4)(vi) of this section which are
scheduled to occur within six months following such withdrawal, advance
or loan:
* * * * *
(g)(1) The Commission may by order restrict, for a period up to
twenty business days, any withdrawal by a futures commission merchant
of equity capital, or any unsecured advance or loan to a stockholder,
partner, limited liability company member, sole proprietor, employee or
affiliate, if:
(i) Such withdrawal, advance or loan would cause, when aggregated
with all other withdrawals, advances or loans during a 30 calendar day
period from the futures commission merchant or a subsidiary or
affiliate of the futures commission merchant consolidated pursuant to
Sec. 1.17(f) (or 17 CFR 240.15c3-1e), a net reduction in excess
adjusted net capital (or, if the futures commission merchant is
qualified to use the filing option available under Sec. 1.10(h),
excess net capital as defined in the rules of the Securities and
Exchange Commission) of 30 percent or more, and
(ii) The Commission, based on the facts and information available,
concludes that any such withdrawal, advance or loan may be detrimental
to the financial integrity of the futures commission merchant, or may
unduly jeopardize its ability to meet customer obligations or other
liabilities that may cause a significant impact on the markets.
(2) The futures commission merchant may file with the Secretary of
the Commission a written petition to request rescission of the order
issued under paragraph (g)(1) of this section. The petition filed by
the futures commission merchant must specify the facts and
circumstances supporting its request for rescission. The Commission
shall respond in writing to deny the futures commission merchant's
petition for rescission, or, if the Commission determines that the
order issued under paragraph (g)(1) of this section should not remain
in effect, the order shall be rescinded.
* * * * *
Issued in Washington, DC, on January 5, 2007 by the Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E7-173 Filed 1-9-07; 8:45 am]
BILLING CODE 6351-01-P
