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: [email protected] 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: ([email protected])

or ([email protected]).

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

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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

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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