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71fr57451

  • [Federal Register: September 29, 2006 (Volume 71, Number 189)]

    [Proposed Rules]

    [Page 57451-57455]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr29se06-26]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038--AC27

    Limitations on Withdrawals of Equity Capital

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing to amend 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 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: Comments must be received on or before November 28, 2006.

    ADDRESSES: You may submit comments, identified by RIN 3038-AC27, by any

    of the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    E-mail: secretary@cftc.gov. Include ``Proposed Amendment

    to Rule 1.17'' in the subject line of the message.

    Fax: (202) 418-5521.

    Mail: Send to Eileen A. Donovan, Acting Secretary of the

    Commission, Commodity Futures Trading Commission, 1155 21st Street,

    NW., Washington, DC 20581.

    Courier: Same as Mail above.

    All comments received will be posted without change to http://www.cftc.gov

    , including any personal information provided.

    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. Commission Oversight of Equity Withdrawals

    Several Commission regulations place limitations on the ability of

    owners and other insiders of FCMs and introducing brokers (``IBs'') to

    withdraw equity from these regulated entities. In 1978 the Commission

    adopted Regulation 1.17(e), which prohibits all equity withdrawal

    transactions that would reduce the adjusted net capital of FCMs or IBs

    beyond the amounts permitted by the regulation.\1\ In describing the

    transactions affected by the regulation, the Commission included any

    withdrawals made by the action of a stockholder or partner or

    redemption or repurchase of shares of stock by ``consolidated

    entities'',\2\ dividend payments or similar distributions, or through

    unsecured advances or loans made to stockholders, partners, sole

    proprietors, or employees. The regulation further clarifies that, 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.\3\ 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).\4\

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    \1\ 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.

    \2\ 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.

    \3\ 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).

    \4\ Pursuant to a proviso included in the regulation, required

    tax payments and the payment to partners of reasonable compensation

    are not precluded. Also, Regulation 1.17(e) provides that, upon

    application, the Commission may grant relief if it deems it to be in

    the public interest or for the protection of nonproprietary

    accounts.

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    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.\5\ 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.\6\ Moreover, pursuant to Section 4d of the Act,\7\

    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 call 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.\8\ 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.

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    \5\ 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. Sec. 6f(b).

    \6\ 68 FR 40835, 40836 (July 9, 2003) (Minimum Financial and

    Related Reporting Requirements for Futures Commission Merchants and

    Introducing Brokers).

    \7\ Section 4d of the Act is codified at 7 U.S.C. Sec. 6d

    (2000).

    \8\ The term ``foreign futures and foreign options secured

    amount'' is defined in Regulation 1.3(rr).

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    Because FCM capital requirements contribute to the security of

    customer

    [[Page 57452]]

    funds and the overall financial integrity of the futures markets, the

    Commission also adopted provisions in Commission Regulation 1.12(g)(2)

    that require notice of certain equity withdrawal transactions by

    FCMs.\9\ The provisions in Regulation 1.12(g)(2) 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.\10\ 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.\11\

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    \9\ The notification requirements in Regulation 1.12(g) were

    made applicable to all FCMs effective May 31, 1996. 61 FR 19177 (May

    1, 1996). Regulation 1.12(g) does not apply to IBs.

    \10\ 59 FR 9689, 9690-9691 (March 1, 1994) (Risk Assessment for

    Holding Company Systems). The preamble for this proposed rulemaking

    identifies three FCMs within holding company structures that had

    experienced financial difficulties.

    \11\ 61 FR at 19179.

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    In particular, Regulation 1.12(g)(2) requires that an FCM provide

    notice at least two business days prior to an action to withdraw equity

    from an 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, or the Director's

    designee, may require that the FCM provide, within three business days

    from the date of the request or such shorter period as the Division

    Director or designee may specify, such other information as the

    Division Director or designee determines to be necessary based upon

    market conditions, reports provided by the FCM, or other available

    information.\12\

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    \12\ 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.

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    II. Equity Withdrawal Transactions That Could Be Temporarily Delayed

    Under the Proposed Rule

    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.\13\ 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.\14\

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    \13\ 59 FR at 9698-99.

    \14\ 61 FR at 19180.

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    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.\15\ In

    issuing the order, the SEC cited to its regulation, 17 CFR Sec.

    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.\16\ 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.\17\

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    \15\ A copy of the SEC order, dated October 13, 2005, may be

    accessed electronically at http://www.sec.gov/rules/other/34-52606.pdf

    .

    \16\ 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. 17 CFR 240.15c3-1(e)(3)(ii).

    \17\ 55 FR 34027, 34030 (August 15, 1990) (proposing amendments

    to SEC Regulation 15c3-1 regarding withdrawals of equity capital).

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    The Commission is proposing rule amendments in this release that

    share many aspects in common with the SEC's regulation for temporary

    delays of equity withdrawals. The proposed amendments to its

    regulations would provide the Commission with the ability to impose

    further restrictions on the flow of capital from an FCM to its holding

    company and other affiliated entities, as appropriate, in the face of

    fast-developing events that pose potential threats to the capital of

    FCMs. The Commission would impose such restrictions by way of an order

    that would be effective for a twenty-day time period, and the

    Commission could continue to make the restrictions effective against

    the FCM by issuing subsequent orders, each with a term of no more than

    twenty business days. During the periods when such orders would be

    effective, Commission staff could evaluate the effect of the proposed

    withdrawals on the continuing

    [[Page 57453]]

    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. As such, the proposed regulation

    would serve to further enhance the security of customer funds and the

    overall financial integrity of the futures markets.\18\ It is

    imperative that the Commission have the option to consider requiring

    such temporary delays of equity withdrawals whenever urgent

    circumstances so require.

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    \18\ 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.

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    The Commission also has been advised by staff that Commission

    Regulations 1.12 and 1.17, which include references to FCMs and IBs

    that are organized as corporations, partnerships, or sole

    proprietorships, currently lack a specific reference to firms organized

    as ``limited liability companies.'' \19\ The Commission therefore is

    proposing other amendments in this release that would modernize the

    provisions of Regulations 1.12 and 1.17, by including references to

    limited liability companies.

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    \19\ The Commission recently 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.

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    III. Proposed Amendments to Regulations 1.12 and 1.17

    In view of the foregoing considerations, the Commission is

    proposing to add a new paragraph (g)(1) to Regulation 1.17, which would

    provide that the Commission may by order restrict, for a period up to

    twenty business days, 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 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.\20\

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    \20\ Paragraph (g) of Regulation 1.17 currently is reserved.

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    Under a proposed paragraph (g)(2) for Regulation 1.17, the FCM

    would be permitted to file with the Secretary of the Commission a

    written petition to request that the Commission rescind the order

    issued under paragraph (g)(1). The Commission would notify the FCM in

    writing that its petition for rescission had been denied, or, if the

    Commission determined that the order issued under paragraph (g)(1)

    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 also is proposing to add a reference to

    ``limited liability company members'' in Regulation 1.12(g), to reflect

    the ownership of FCMs that are organized as limited liability

    companies. The Commission also is proposing to add references to

    limited liability company members in Regulation 1.17(d)(1) \21\ and

    Regulation 1.17(e).\22\ Furthermore, the Commission proposes to add a

    new subparagraph (D) to Rule 1.17(d)(1)(ii), in order to include as

    equity, in the case of a limited liability company, the sum of the

    ``capital accounts of limited liability company members, and unrealized

    profit and loss.''

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    \21\ Funds received under ``satisfactory subordination

    agreements'', as defined in Regulation 1.17(h), may be treated by

    the FCM as equity if the agreement meets certain additional criteria

    set forth in Regulation 1.17(d)(1), including that the lender under

    the agreement be a partner or stockholder. As proposed, Regulation

    1.17(d)(1) would provide that the lender also may be a ``limited

    liability company member.''

    \22\ The proposed amendment to Regulation 1.17(e) would include

    unsecured advances or loans to limited liability company members as

    equity withdrawal transactions that are prohibited if they would

    exceed the amounts permitted by the regulation.

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    The Commission requests comment on each of the proposed amendments

    to Regulations 1.12 and 1.17 that have been described in this release.

    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,

    requires that agencies, in proposing rules, consider the impact of

    those rules on small businesses. The Commission previously has

    established certain definitions of ``small entities'' to be used by the

    Commission in evaluating the impact of its rules on such entities in

    accordance with the RFA.\23\ The Commission has determined previously

    that FCMs are not small entities for the purpose of the RFA.\24\ With

    respect to IBs, the Commission has determined to evaluate within the

    context of a particular rule proposal whether all or some IBs would be

    considered ``small entities'' for purposes of the RFA and, if so, to

    analyze at that time the economic impact on IBs of any such rule.\25\

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    \23\ 47 FR 18618 (April 30, 1982).

    \24\ 47 FR at 18619.

    \25\ 47 FR at 18618, 18620.

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    The proposed amendments to Regulation 1.17(g) would apply to FCMs

    only and therefore would have no economic impact on IBs. The proposed

    amendments to Regulation 1.17(d) and (e) and Regulation 1.12(g) solely

    provide clarifying language to reflect new business organizations

    structures that were not prevalent when these rules were first adopted.

    Therefore, the Chairman, on behalf of the Commission, hereby certifies,

    pursuant to 5 U.S.C. 605(b), that the action proposed to be taken

    herein will not have a significant economic impact on a substantial

    number of small entities.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \26\ 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. The amendments being proposed would

    not, if approved, require a new collection of information on the part

    of the entities that would be subject to the proposed regulations.

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    \26\ 44 U.S.C. 3507(d).

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    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

    [[Page 57454]]

    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 proposed amendments to Regulation

    1.17(g) would permit 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 is considering the costs and benefits of these proposed

    amendments 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

    proposed 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 proposed amendments 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. The

    proposed regulation contributes to the financial integrity of futures

    markets by helping to confirm and preserve the capital of FCM

    registrants. The proposed amendments 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 the proposed regulation, 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 proposed amendments to

    Regulations 1.12(g), 1.17(d)(1) and 1.17(e), which would 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.

    After considering these factors, the Commission has determined to

    propose the amendments discussed above. The Commission invites public

    comment on its application of the cost-benefit provision. Commenters

    also are invited to submit any data that they may have quantifying the

    costs and benefits of the proposal with their comment letters.

    List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    Accordingly, 17 CFR Chapter I is proposed to be amended as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    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. 106-554, 114

    Stat. 2763 (2000).

    2. Section 1.12 is proposed to be 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 Sec. 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 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.

    * * * * *

    3. Section 1.17 is proposed to be 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

    [[Page 57455]]

    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 Sec. 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 reasons 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 September 25, 2006 by the

    Commission.

    Eileen Donovan,

    Acting Secretary of the Commission.

    [FR Doc. E6-16035 Filed 9-28-06; 8:45 am]

    BILLING CODE 6351-01-P

    Updated September 29, 2006

    Last Updated: June 26, 2007



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