SEA Rule 15c3-1d Appendix D and Related Interpretations

15c3-1d(a)(1)/02 Filing
Two copies of any proposed subordination agreement (including non-conforming subordination agreements) shall be filed at least 10 days prior to the execution date of the agreement with the NYSE Coordinator Team, 20 Broad Street, New York, New York 10005. No SEC filing required; the NYSE has consented to file with the SEC periodic reports summarizing the subordination agreements it has approved.

(SEC Staff to NYSE) (NYSE Interpretation Memo 83-2, April 1983)

15c3-1d(a)(2)(v)(F)/01 Qualified Lenders For Revolving Subordinated Loan Agreements
At the time subparagraph (c)(5)(ii) of SEA Rule 15c3-1d (Appendix D) was adopted, the underlying assumption was that a lender would have the financial ability to fund a revolving subordinated loan agreement for its duration. Consequently, to approve a revolving subordinated loan agreement, a broker-dealer’s designated examining authority must determine that the lender has this ability. A lender will be deemed to have this ability and is referred herein as a “Qualified Lender” if it is any one of the following nine entities:

1. A bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934;
2. A bank holding company as defined in Section 2(a)(1) of the Bank Holding Company Act of 1956 or a financial holding company as defined in Section 2(p) of the Bank Holding Company Act of 1956;
3. A foreign banking institution or trust company that is regulated as such by the country’s government or an agency of the country’s government and that either (i) has investment grade ratings for senior unsecured long-term debt by at least two nationally recognized statistical rating organizations (“NRSROs”) or (ii) has shareholders’ equity of at least US$1.5 billion;
4. A savings association as defined in Section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation;
5. An insurance company as defined in Section 2(a)(17) of the Investment Company Act of 1940;
6. An entity that provides financing for other businesses in the ordinary course of its business provided that it issues commercial paper which is rated in one of the three highest categories by at least two NRSROs;
7. A broker-dealer holding company that issues commercial paper which is rated in one of the three highest categories by at least two NRSROs;
8. An investment bank holding company supervised by the Securities and Exchange Commission under Section 17(i) of the Securities Exchange Act of 1934; and
9. A broker-dealer if:
   • it takes a charge to net capital for the full amount of the loan commitment whether or not drawn down by the borrower, from the effective date of the revolving subordinated loan agreement through the maturity date of the loans thereunder; and
   • at the time it enters into the revolving subordinated loan agreement, after taking the charge to net capital set forth above, its aggregate indebtedness does not exceed 1000% of its net capital nor is its net capital less than 120% of the minimum dollar amount required by SEA Rule 15c3-1 or, in the case of a broker-dealer operating pursuant to paragraph (a)(1)(ii) of SEA Rule 15c3-1, its net capital would not be less than 5 percent of its aggregate debit items computed in accordance with SEA Rule 15c3-3a (Exhibit A), or if registered as a futures commission merchant, its net capital would not be less than 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, if greater.

A revolving subordinated loan agreement currently approved by a broker-dealer’s designated examining authority prior to this interpretation remains effective notwithstanding that the lender may not be a Qualified Lender. However, the term of the agreement may not be extended unless the lender is a Qualified Lender under this interpretation. See also interpretation 15c3-1(c)(2)/015.

(SEC Staff to NYSE) (NYSE Interpretation Memo 01-4, April 2001)

15c3-1d(a)(2)/01 Covered Calls
Listed calls may be sold by a secured demand note contributor on underlying securities in his collateral account. Where this has been done, the collateral value of the account is determined by including the sales proceeds of the call and by deducting from the market value of the underlying securities which are being used to cover calls, the greater of the normal haircut or the in the money amount. If the call is out of the money, the normal haircut is deducted. On all other collateral, normal haircuts are charged.

(SEC Staff to NYSE)

15c3-1d(a)(2)/011 Short Listed Puts
Listed puts may be sold in the collateral account by a secured demand note contributor versus cash or U.S. Treasury bills. The collateral account must contain cash, including the sales proceeds of the put and/or U.S. Treasury bills at market value at least equal to the exercise value of the short put. The capital requirements value of the cash or Treasury bill shall be determined as follows:

• If the put is out of the money, deduct 30% of the market value of the underlying security reduced by the out of the money amount.
• If the put is in the money, deduct 30% of the market value of the underlying security plus the in the money amount.

(SEC Staff to NYSE)

15c3-1d(a)(2)/02 Undue Concentration
Subject to the comments under interpretation 15c3-1d(a)(2)(iii)/021 (Appendix D), undue concentration charges are generally disregarded in determining the collateral value of securities pledged to secure a secured demand note. The securities necessary to properly collateralize the note are aggregated with all other positions subject to undue concentration charges (trading and investment accounts, and customers’ and non-customers’ partly secured accounts) and the charges are applied to the aggregate position in each security.

However, in instances where there is available collateral that would not be subject to undue concentration charges, such collateral may be selected for a lesser impact on the net capital computation as illustrated in the following set of facts and examples.

Facts

All securities used in example are subject to the haircut requirements of SEA Rule 15c3-1(c)(2)(vi)(J), which requires a 30% charge for SDN collateral.

Treatment No. 2 should be used since it is more favorable.

(SEC Staff to NYSE) (NYSE Interpretation Memo 76-4, April 1976)

15c3-1d(a)(2)/021 Undue Concentration - Allocation to SDN

Absent specific agreement to the contrary an undue concentration charge may be applied first against secured demand note collateral but only to the extent it is related to the value of the concentrated issue included in the secured demand note collateral (i.e.—under the Basic A. I. Method—concentrated security value x haircut percentage x 150% = total charges including undue concentration charges).

Example:

Charges Applied:

*Note that secured demand note is adequately collateralized.
All securities in example are subject to haircuts pursuant to paragraph (c)(2)(vi)(J).

This treatment is appropriate even though the SDN collateral agreement does not specifically provide for it. However, in the absence of such a provision, application of charges would be limited to the amount of excess collateral which could absorb the charge.

(SEC Staff to NYSE) (NYSE Interpretation Memo 77-44, December 1977)

15c3-1d(a)(2)/03 Foreign Currency – (Rescinded)

(FINRA Regulatory Notice 13-44)

15c3-1d(a)(2)/031 Haircut Deduction on Foreign Currency Contributed as Collateral to a Secured Demand Note
Foreign currency contributed as collateral to a Secured Demand Note is subject to a haircut deduction of 6% if it is in any of the five major foreign currencies (Euro, British pound, Swiss franc, Canadian dollar and Japanese yen). All other foreign currencies contributed as collateral to a Secured Demand Note are subject to a haircut deduction of 20%.

(SEC Staff to FINRA) (FINRA Regulatory Notice 13-44)

15c3-1d(a)(2)/04 Restricted Stock
Restricted stock, even though marginable under NYSE Rule 431, is not good collateral for a secured demand note.

(SEC Staff to NYSE) (NYSE Interpretation Memo 90-4, June 1990)

15c3-1d(b)(1)/01 Firm’s Assets Pledged as Collateral for Subordinated Loans
If lenders are given assets of a broker-dealer either directly or indirectly to collateralize subordinated loans, the loans do not qualify as satisfactory subordination agreements pursuant to SEA Rule 15c3-1d (Appendix D) and cannot be considered part of a firm’s capital.

(SEC Staff of DMR to NASD)

15c3-1d(b)(2)/01 Subordinated Loan Interest
Subordinated loan interest may be added to net worth in arriving at net capital without a new subordination agreement as to any accrued interest provided:

1. The total interest amount is ascertainable from the subordination agreement with an initial maturity of one year or longer;
2. The accrued amount cannot be paid until one year after the date that the payment is due, and
3. If this treatment is elected as to any accrued interest payments, it must be elected as to all interest payments, except for those which are accrued in the last year of the agreement.

The designated self-regulatory organization may determine a minimum amount of interest which may be accorded this treatment in determining net capital.

(SEC Letter to NYSE, January 15, 1986) (NYSE Interpretation Memo 90-4, June 1990)

15c3-1d(b)(2)/02 Funding a Subordinated Loan with Foreign Currency
Under (b)(2) of SEA Rule 15c3-1d (Appendix D), a subordinated loan may be funded with foreign currency provided the following conditions are met: 

1. The broker-dealer must continually mark-to-market the outstanding principal amount of the borrowing; and
2. In computing net capital, only the lesser of the U.S. dollar equivalent of the principal amount on the effective date of the borrowing, or the mark-to-market U.S. dollar equivalent at the time of the net capital computation, may be added back to net worth; and
3. The full amount of the subordinated borrowing may be excluded from aggregate indebtedness pursuant to subparagraph (c)(1)(xi) of SEA Rule 15c3-1.

(SEC Staff of DMR Letter to Grieveson, Grant International Limited, June 18, 1984)

15c3-1d(b)(6)(iii)/01 Gold and Silver
Gold and silver warehouse receipts and/or futures contracts are not good collateral. Only cash and securities which are fully paid and may be sold without restriction are acceptable under the rule.

(SEC Letter to Boettcher Company, May 23, 1978) (NYSE Interpretation Memo 79-4, March 1979)

15c3-1d(b)(6)(iii)/02 Limited Partnership Interests
While such partnerships have been registered as securities under the Securities Exchange Act of 1933, they are not good collateral because a ready market does not exist.

(SEC Staff to NYSE) (NYSE Interpretation Memo 83-2, April 1983)

15c3-1d(b)(6)(iii)/03 Reverse Repurchase Agreement Securities
Securities acquired under a reverse repurchase agreement may not be used as collateral for a Secured Demand Note.

(SEC Staff to NYSE) (NYSE Interpretation Memo 90-4, June 1990)

15c3-1d(b)(7)/01 Effective Date – Extensions
The one-year limitation on permissive prepayments runs from the original effective date of agreements modified in accordance with interpretation 15c3-1d(c)(1)/01 (Appendix D).

(SEC Letter to NYSE, November 11, 1976) (NYSE Interpretation Memo 77-2, June 1977)

15c3-1d(b)(7)/02 Effective Date - Principal Increases
With respect to incremental increases (see interpretation 15c3-1d(c)(1)/02) (Appendix D), the one-year limitation on permissive prepayments runs from the date of the increase.

(SEC Letter to NYSE, November 11, 1976) (NYSE Interpretation Memo 77-2, June 1977)

15c3-1d(b)(7)/03 Conversion from Debt to Equity
When a subordination agreement has been in effect for less than one year, the designated examining authority for a broker-dealer may approve a prepayment under conditions consistent with the objectives of the rule, provided:

1. The prepayment is for the purpose of converting debt to equity;
2. It results in no significant lessening of net capital;
3. The conversion to equity is simultaneous with the prepayment; and
4. The subordinated lender agrees before the prepayment that the prepaid funds (equity capital) will not be withdrawn from the firm for the entire period that the subordination agreement would have been in force.

The provisions of paragraph (e) of SEA Rule 15c3-1 (i.e., Limitation on Withdrawal of Equity Capital), will of course apply to this equity capital.

(SEC Staff to NYSE) (NYSE Interpretation Memo 90-4, June 1990)

15c3-1d(c)(1)/01 Maturity Date - Extensions
Existing satisfactory subordination agreements may be modified to extend their maturity dates by using either of the following methods:

Amend an existing agreement to postpone its scheduled maturity date until a time mutually agreeable to the parties thereto.

Bilaterally terminate the existing agreement and execute a new agreement embodying a later scheduled maturity date and terms otherwise identical to those of the former agreement. Under this method, the parties are to simultaneously execute a rider to the new agreement which recites:

• Their intent to merely reflect a renewal of the existing agreement, and
• That the new agreement involves no transfer of funds or securities between the parties.

Under either method, filing with the SEC under subparagraph (c)(6) of SEA Rule 15c3-1d (Appendix D) is not required; however, the modifications should be filed with the designated examining authority.

Note that any extension of a satisfactory subordination agreement grandfathered pursuant to SEA Rule 15c3-1(g)(1), must be conformed to SEA Rule 15c3-1d (Appendix D) no later than September 1, 1980.

See interpretation 15c3-1d(b)(7)/01 (Appendix D) for effective date of extended subordination.

(SEC Letter to NYSE, November 11, 1976) (NYSE Interpretation Memo 77-2, June 1977)

15c3-1d(c)(1)/011 Extensions - Minimum Time Period
Under either of the methods for extending the maturity date of satisfactory subordination agreements, it must be extended for a period of not less than one year.

(SEC Staff to NYSE) (NYSE Interpretation Memo 90-4, June 1990)

15c3-1d(c)(1)/02 Principal Amount Increases
Parties wishing to increase the principal amount of a subordination agreement should subject the incremental amount to a new agreement conforming in all respects to SEA Rule 15c3-1d (Appendix D). Filing under SEA Rule 15c3-1d(c)(6) (Appendix D) is required for the new subordination.

(SEC Letter to NYSE, November 11, 1976) (NYSE Interpretation Memo 77-2, June 1977)

15c3-1d(c)(4)/01 Registration of Collateral
A secured demand note contributor may not maintain control over the disposition of his securities held to collateralize his obligation to the broker-dealer. For this reason, title must not be in the lender’s name or his nominee's name even if the lender is a partner or officer. The collateral may be registered in the name of another broker-dealer, a bank, the borrowing broker-dealer or its custodian, or their nominees, as might be the case if the securities were in bank loan, stock loaned, fail to receive or various other locations.

(SEC Staff to NYSE) (NYSE Interpretation Memo 76-4, April 1976)

15c3-1d(c)(4)/02 Bearer Form
The phrase in bearer form as it applies to securities collateralizing a secured demand note (SEA Rule 15c3-1d(c)(4) (Appendix D)) possesses no specialized definition; a security is in bearer form for purposes of SEA Rule 15c3-1d (Appendix D) when it runs to bearer according to its terms and not by reason of any endorsement.

(SEC Release 34-13565, May 18, 1977) (NYSE Interpretation Memo 77-2, June 1977)

15c3-1d(c)(5)(i)/01 Underwriting Participation
Temporary subordinations are for the purpose of enabling a broker-dealer to participate in an underwriting or in other extraordinary activities. In this regard, the term “extraordinary activities” is defined narrowly.

(SEC Staff to NYSE)

15c3-1d(c)(5)(i)/02 Equity Requirement
A broker-dealer may enter into temporary subordinations even if it creates an excess of debt over equity requirements as specified in paragraph (d) of the rule so long as such condition did not already exist.

(SEC Staff to NYSE)

15c3-1d(c)(5)(ii)/01 Qualified Lenders for Revolving Subordinated Loan Agreements
See interpretations 15c3-1(c)(2)/015 and 15c3-1d(a)(2)(v)(F)/01 (Appendix D).

(SEC Staff to NYSE) (NYSE Interpretation Memo 01-4, April 2001)

15c3-1d(c)(5)(ii)(B)/01 Loan Agreement Conditions
May be activated or increased for any purpose.

Maturity for purposes of SEA Rule 15c3-1(e) will be the maturity date of the underlying agreement unless notice has been given or Exchange approval requested for an earlier prepayment date.

All subordination agreements entered into pursuant to this subsection (c)(5)(ii) shall be subject to all the other provisions of SEA Rule 15c3-1d (Appendix D). Any such subordination agreement shall not be considered equity for purposes of SEA Rule 15c3-1(d), despite the length of the initial term of the loan.

(SEC Staff to NYSE) (NYSE Interpretation Memo 83-2, April 1983)