Treasury Approves Amendments To Capital Requirements Under The Government Securities Act Of 1986

Executive Summary

The Department of the Treasury (Treasury) recently approved amendments to the financial responsibility requirements established under the Government Securities Act of 1986. The amendments raise the minimum capital requirements for all government securities broker/dealers subject to the provisions of Section 402.2, and require written notification for certain withdrawals of capital. Treasury also approved a conforming change to its recordkeeping requirements. These amendments only affect sole government securities broker/dealers registered pursuant to Section 15C of the Securities Exchange Act of 1934. The amendments became effective March 31, 1995, with the capital increases phased-in over an 18-month period.

Background

In November 1992, the Securities and Exchange Commission (SEC) adopted changes to the minimum net capital requirements for most broker/ dealers subject to Rule 15c3-1. These changes, the first in almost 20 years, were made because inflation had reduced the level of protection provided by the minimum requirements. Since the Treasury capital rule uses the SEC net capital rule as a foundation, Treasury decided to change its rule to parallel the SEC's actions. Treasury's changes minimize the differences between the two rules, maintain consistency, and provide greater uniformity regarding capital requirements applicable to government securities broker/dealers.

Minimum Capital Requirements

The amendments increase the minimum capital requirements for all broker/dealers subject to the provisions of Section 402.2. The rule's other capital requirement—that liquid capital must at least equal 120 percent of haircuts—is unaffected by this change.

The amendments create four minimum capital categories:

• Government securities broker/dealers that carry customer or broker/dealer accounts are subject to a minimum level of $250,000.
  
  
• Government securities broker/dealers that carry customer accounts but operate under the exemption provided by SEC Rule 15c3-3(k)(2)(i) have a minimum requirement of $100,000.
  
  
• Government securities broker/dealers that introduce accounts on a fully disclosed basis and receive, but do not hold customer securities, are subject to a minimum requirement of $50,000.
  
  
• Introducing firms that never handle customer funds or securities are subject to a minimum requirement of $25,000.

To ease the compliance burden and provide time for adjustment, Treasury decided to phase in the increases over an 18-month period. A chart of the phase-in schedule, contained in Appendix E to Section 402.2, follows this Notice.

Capital Withdrawal Requirements

Treasury also is amending its capital withdrawal provisions to include notification requirements and certain definitions.

The notification provisions require post-withdrawal notification of certain significant capital withdrawals as well as prior notification for larger withdrawals. Whether notification is required prior to the withdrawal depends upon the aggregate size of total withdrawals relative to the government securities broker/dealer's excess liquid capital over a 30 calendar day period.

• Aggregate withdrawals that exceed20 percent of a government securities broker/dealer's excess liquid capital in a 30 calendar day period require notification within two business days after the withdrawal.
  
  
• Aggregate withdrawals that exceed30 percent of excess liquid capital in any 30 calendar day period require notification two business days prior to such withdrawal.

A government securities broker/dealer may use the level of excess liquid capital calculated in its most recent Form G-405, "Report on Finances and Operations of Government Securities Brokers and Dealers (FOGS)" filing, provided this amount has not materially changed since that time. A government securities broker/dealer is not required to provide this notice to Treasury, but instead notice is sent to the SEC and to the broker/dealer's designated examining authority.

The rule excludes the reporting of net withdrawals that, in the aggregate, are less than $500,000 in any 30 calendar day period or those that represent securities or commodities transactions between affiliates. Forward-settling transactions between affiliates are not eligible for this exclusion. The exclusion for securities and commodities transactions requires that the transactions be conducted in the ordinary course of business and settled no later than two business days after the date of the transaction.

Members should note that Treasury's changes do not include an early warning threshold like the SEC's rule. Treasury's current rule already places a restriction on withdrawals that would cause liquid capital to fall below a level of 150 percent of haircuts.

In addition, the amendments do not give Treasury the authority to prohibit the withdrawal of capital in certain circumstances. Consistent with this approach, Treasury also is excluding this provision of SEC Rule 15c3-1 from the compliance requirements for those government securities broker/dealers registered under Section 15C of the Securities Exchange Act of 1934 that are subject to the SEC net capital rule (i.e., inter-dealer brokers operating under Section 402.1 (e) and futures commission merchants).

Finally, in amending the withdrawal provisions, Treasury restructured certain related definitions into a Miscellaneous Provisions paragraph (i)(3) and added a description of what constitutes an advance or loan of liquid capital.

Recordkeeping Change

Treasury is adopting a conforming change to the recordkeeping provisions of Part 404, which contains references to the minimum dollar capital amounts required of government securities clearing broker/dealers. The amendments revise these references in accordance with the fully phased-in minimum capital level required of clearing firms.

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Members that are affected by these changes are urged to review Treasury's release in its entirety. It appeared in the March 1, 1995, Federal Register. Questions concerning this Notice may be addressed to Janet Marsh, District Coordinator, Compliance Department, at (202) 728-8228.

Government Securities Act Of 1986: Part 402-Financial Responsibility

Minimum Liquid Capital Requirements-18-Month Phase-In Schedule