July 21, 2012 (i.e., two years after the Dodd-Frank Act was signed into
law).\95\ Thus, before that time, the Commission will need to establish
a new standard of creditworthiness for each Exchange Act definition. As
is discussed below, the Commission is requesting comment on potential
``standards of credit-worthiness'' for purposes of Sections 3(a)(41)
and 3(a)(53) as the Commission considers how to implement Section
939(e) of the Dodd-Frank Act.
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    \91\ See Public Law 111-203 Sec.  939(e).
    \92\ 15 U.S.C. 78a(3)(a)(41).
    \93\ 15 U.S.C. 78a(3)(a)(53).
    \94\ See Public Law 111-203 Sec.  939(e)(1) and (e)(2).
    \95\ See Public Law 111-203 Sec.  939(g).
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A. Exchange Act Section 3(a)(41)

    Congress defined the term ``mortgage related security'' in Section
3(a)(41) as part of the Secondary Mortgage Market Enhancement Act of
1984 (``SMMEA'').\96\ SMMEA was intended to encourage private sector
participation in the secondary mortgage market by, among other things,
relaxing certain regulatory burdens that affected the ability of
private-label issuers \97\ to sell their mortgage-backed
securities.\98\ For example, SMMEA removed obstacles for privately
sponsored mortgage-backed securities by, among other things, pre-
empting certain state investment laws so that state regulated
institutions might purchase privately sponsored mortgage-backed
securities to the same extent as agency securities, granting authority
for certain depository institutions to invest in these securities, and
requiring states to exempt privately sponsored mortgage-backed
securities from state registration to the same extent as agency
securities, unless the state specifically deemed otherwise.\99\ A
security that qualifies as a mortgage related security, as defined in
Section 3(a)(41), receives the benefits intended by SMMEA.\100\
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    \96\ Public Law 98-440, Sec.  101, 98 Stat. 1689 (1984).
    \97\ Most mortgage-backed securities are issued by the
Government National Mortgage Association (``Ginnie Mae''), a U.S.
government agency, or the Federal National Mortgage Association
(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation
(``Freddie Mac''), U.S. government-sponsored enterprises. Ginnie
Mae, backed by the full faith and credit of the U.S. government,
guarantees that investors receive timely payments. Fannie Mae and
Freddie Mac also provide certain guarantees and, while not backed by
the full faith and credit of the U.S. government, have special
authority to borrow from the U.S. Treasury. Some private
institutions, such as brokerage firms, banks, and homebuilders, also
securitize mortgages, known as ``private-label'' mortgage
securities.
    \98\ The legislation was aimed at encouraging participation in
the secondary mortgage market by investment banks, investment
entities, mortgage bankers, private mortgage insurance companies,
pension funds and other investors, depositary institutions and
federal credit unions. See Kenneth G. Lore & Cameron L. Cowan,
Mortgage-Backed Securities; Developments and Trends in the Secondary
Market 2-39 (2001), at 1-14. See also Edward L. Pittman, Economic
and Regulatory Developments Affecting Mortgage Related Securities,
64 Notre Dame L. Rev. 497, 499 (1989).
    \99\ See Protecting Investors: A Half Century of Investment
Company Regulation, Division of Investment Management (May 1992).
    \100\ See Pittman supra note 98, at 514.
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    Generally, Section 3(a)(41) defines the term ``mortgage related
security'' as a ``security that is rated in one of the two highest
rating categories by at least one [NRSRO],'' which (1) represents
ownership of one or more promissory notes, or interests therein, which
notes (a) are directly secured by a first lien on a single parcel of
real estate upon which is located a dwelling or mixed residential and
commercial structure, or on a residential manufactured home or one or
more parcels of real estate upon which is located one or more
commercial structures and (b) were originated by a savings or banking
institution approved for insurance by the Secretary of the U.S.
Department of Housing and Urban Development; or (2) is secured by one
or more promissory notes, or interests therein, and provides for
payments of principal in relation to payments, or reasonable
projections of payments, on notes, or interests therein, meeting the
requirements specified above.
    When Congress adopted SMMEA, it used NRSRO ratings to specify
mortgage related securities that qualify for benefits under the
legislation. As reflected in Section 939(e) of the Dodd-Frank Act,
Congress has chosen to no longer rely on credit ratings by NRSROs to
make this distinction, and instead has instructed the Commission to
establish a new standard of creditworthiness that does not rely on
credit ratings by NRSROs. Before acting on this authority, the
Commission invites interested persons to submit written comments on
potential alternatives the Commission should consider for purposes of
implementing Section 939(e) of the Dodd-Frank Act.
    One potential alternative the Commission is considering is a new
rule under the Exchange Act that would apply the ``minimal amount of
credit risk'' standard the Commission is proposing with respect to the
Net Capital Rule, as described above, to persons assessing whether a
security is a mortgage related security within the meaning of Section
3(a)(41). The Commission preliminarily believes that the proposed
minimal amount of credit risk standard for mortgage related securities
would be consistent with the intended objective in Section 3(a)(41) of
excluding from the definition mortgage related securities of lesser
credit quality. The Commission further believes that the factors set
forth above for facilitating determinations by broker-dealers as to
whether a security satisfies the minimal amount of credit risk standard
under the Net Capital Rule could facilitate determinations by others as
to when mortgage related securities are subject to a minimal amount of
credit risk under Section 3(a)(41). The Commission notes, however, that
nonconvertible debt and preferred stock are currently required to be
rated in one of the four highest credit rating categories by two NRSROs
to qualify for reduced haircuts under the Net Capital Rule, and that a
mortgage related security that qualifies as such under the current
definition of that term in Section 3(a)(41) is required to satisfy a
slightly more stringent level of credit quality (i.e., to be rated in
one of the two highest rating categories of one NRSRO).

B. Exchange Act Section 3(a)(53)

    Congress defined the term ``small business related security'' in
Section 3(a)(53) as part of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the ``CDRI'').\101\ Among other
things, the CDRI removed limitations on purchases by national banks of
certain small business-related securities. The stated intent of
Congress in the CDRI was to increase small business access to capital
by removing impediments in existing law to the securitizations of small
business loans.\102\ The CDRI built on the framework for
securitizations established by SMMEA to create a similar framework for
these securities with the goal of stimulating the flow of funds to
small businesses.
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    \101\ Public Law 103-325, Sec.  202, 108 Stat. 2198 (1994).
    \102\ See Conference Report on the CDRI, Vol. 140 Cong. Record,
pp. H6685, H6690 (Aug. 2, 1994). See also Remarks of Sen. Domenici,
Vol. 140 Cong. Record, p. S11039, S11043-43 (Aug. 2, 1994)
(discussing national banks' authority to purchase commercial
mortgage related securities under conditions established by the
Office of the Comptroller of the Currency).
---------------------------------------------------------------------------

    Generally, Section 3(a)(53) defines the term ``small business
related security'' as ``a security that is rated in one of the four
highest rating categories by at least

one [NRSRO]'' and either (i) represents an interest in promissory notes
or leases of personal property evidencing the obligation of a small
business concern and originated by an insured depository institution
supervised and examined by federal or state authority or certain other
regulated types of issuers, or (ii) is secured by promissory notes or
leases of personal property (with or without recourse to the issuer or
lessee) and provides for payments of principal in relation to payments,
or reasonable projections of payments, on notes or leases of the type
described in the preceding clause.
    When Congress adopted the term ``small business related security''
in the CDRI, it used NRSRO ratings to specify small business related
securities that would qualify for benefits under the legislation. As
reflected in Section 939(e) of the Dodd-Frank Act, Congress has chosen
to no longer rely on credit ratings by NRSROs to make this distinction,
and instead has instructed the Commission to establish a new standard
of creditworthiness that does not rely on credit ratings of NRSROs.
Before acting on this authority, the Commission invites interested
persons to submit written comments on potential alternatives the
Commission should consider for purposes of implementing Section 939(e)
of the Dodd-Frank Act.
    One potential alternative the Commission is considering is a new
rule under the Exchange Act that would apply the ``minimal amount of
credit risk'' standard the Commission is proposing with respect to the
Net Capital Rule, as described above, to persons assessing whether a
security is a small business related security within the meaning of
Section 3(a)(53). The level of credit quality Congress intended for a
small business related security to satisfy in Section 3(a)(53) to
qualify for benefits under the CDRI is the same level of credit quality
that nonconvertible debt and preferred stock must currently satisfy to
qualify for reduced haircuts under the Net Capital Rule (i.e., NRSRO
credit ratings in one of the four highest rating categories). The
Commission preliminarily believes that the minimal amount of credit
risk standard for small business related securities would be consistent
with the intended objective of Congress in Section 3(a)(53) by
excluding from the definition small business related securities of
lesser credit quality. The Commission further preliminarily believes
that the proposed factors set forth above for facilitating
determinations by broker-dealers as to whether a security satisfies the
minimal amount of credit risk standard under the Net Capital Rule could
facilitate determinations by others as to when a small business related
security is subject to a minimal amount of credit risk under Section
3(a)(53).

C. Requests for Comment

    The Commission requests comment on all aspects of how to implement
Section 939(e) with respect to the definitions of mortgage related
security and small business related security. In addition, the
Commission requests comment on the following specific questions. In
responding, commenters should distinguish between the two definitions
to the extent that they believe that the two definitions should be
treated differently for purposes of new rules.
     Is the minimal credit risk standard a practical and
workable alternative for purposes of Section 3(a)(41) and Section
3(a)(53)? If not, what creditworthiness standard would be more
appropriate?
     Who should be responsible for determining whether a
security is creditworthy for these purposes? For example, is the
sponsor, which is often involved in most, if not all, aspects of the
securitization process, the most appropriate person to make this
determination? Is the trustee a more appropriate person to make this
determination based on the fiduciary relationship between the trustee
and investors in the trust? Would an underwriter be an acceptable
person to make the determination? Who else would be appropriate to make
this determination?
     If the sponsor or another person makes the
creditworthiness determination, could imposing disclosure obligations
on that person with respect to its creditworthiness determination
mitigate potential conflicts of interest?
     Should two or more persons be able to make the
creditworthiness determination for the same security? If so, how could
potential inconsistencies in that determination be resolved?
     If a sponsor or other person makes the creditworthiness
determination, should that person be potentially liable to persons who
relied on the determination? If so, what standard of liability should
be applied?
     How often should creditworthiness determinations be made
under Section 3(a)(41) or Section 3(a)(53) in order to determine if a
security qualifies as a mortgage related security or small business
related security?
     What objective measures could be used to determine whether
securities qualify as mortgage related securities or small business
related securities? Please explain what measures or creditworthiness
standards the Commission should consider.
     Should the Commission adopt rules that are designed to
allow regulators or other persons to examine or verify that
creditworthiness determinations are consistent with the requirements of
the rules? Should creditworthiness determinations be subject to
regulatory review? Should the Commission require a person making the
determination to create, maintain, and make available for examination
certain records related to the determination?
     Should the Commission impose a more stringent
creditworthiness standard than the minimal credit risk standard that is
being proposed for purposes of the Net Capital Rule? If so, what
standard should apply, and how could it be distinguished from the
minimal credit risk standard?
     Would application of the minimal credit risk standard
proposed for purposes of the Net Capital Rule result in securities of
lesser credit quality qualifying as mortgage related securities or
small business related securities as compared to securities that
currently qualify as such under Section 3(a)(41) or Section 3(a)(53)?
If so, please explain why this would be the case and provide examples.
     An alternative to credit ratings, if too rigid, could
narrow the types of financial instruments that qualify under Section
3(a)(41) or Section 3(a)(53) and, if too flexible, could broaden the
types of financial instruments that qualify under Section 3(a)(41) or
Section 3(a)(53). In discussing potential alternatives to credit
ratings, please analyze their potential impacts on competition and
capital formation.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to the rules and form
contain ``collection of information requirements'' within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\103\ The hours and
costs associated with preparing and filing the disclosure, filing the
form and schedules and retaining records required by these regulations
constitute reporting and cost burdens imposed by each collection of
information. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number. The titles of the affected
information forms are Rule 15c3-1 (OMB Control Number 3235-0200),

Rule 15c3-3 (OMB Control Number 3235-0078), Rule 17a-4 (OMB Control
Number 3235-0279) and Form X-17A-5, Financial and Operational Combined
Uniform Single Report, Part IIB, OTC Derivatives Dealer (OMB Control
Number 3235-0498); Rule 101 (OMB Control Number 3235-0464) and Rule 102
(OMB Control Number 3235-0467) of Regulation M; and Rule 10b-10
Confirmation of Transactions,'' (OMB Control Number 3235-0444). For the
reasons discussed below, the Commission does not believe the proposed
amendments, if adopted, would result in a material or substantive
revision to these collections of information.\104\ The cost estimates
contained in this section do not include any other possible costs or
economic effects beyond the costs required to be calculated for PRA
purposes.\105\
---------------------------------------------------------------------------

    \103\ 44 U.S.C. 3501 et seq.
    \104\ 5 CFR 1320.5(g).
    \105\ See discussion below in Section V.C.2.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    As discussed above, the Commission is proposing amendments to Rule
15c3-1, Appendices A, E, F, and G to Rule 15c3-1, Exhibit A to Rule
15c3-3, Rule 17a-4, the General Instructions to Form X-17A-5, Part IIB,
Rules 101 and 102 of Regulation M, and Rule 10b-10. These amendments,
in part, are proposed to comply with Section 939A of the Dodd-Frank
Act, which requires the Commission to replace references to credit
ratings in all of its regulations with a standard of creditworthiness
that the Commission deems appropriate.
    The proposed amendments to the Net Capital Rule and Rule 17a-4
create a new standard of creditworthiness that will allow broker-
dealers to establish their own policies and procedures to determine
whether a security has only a minimal amount of credit risk. If a
broker-dealer chooses to establish these policies and procedures it
would create a new ``collection of information'' burden for those
broker-dealers, as explained below. In addition, the proposed
amendments to the Customer Protection Rule remove one method for
verifying the status of a registered clearing agency or derivatives
clearing organization under Note G to Exhibit A. Broker-dealers who may
have to use a new method for verifying the status of a registered
clearing agency or derivatives clearing organization may have a new
``collection of information'' within the meaning of the PRA.
    The proposed changes to Rules 101 and 102 of Regulation M would
amend the exceptions for nonconvertible debt, nonconvertible preferred,
and asset-backed securities in those rules. Under the proposed
amendments, distribution participants, issuers, selling shareholders,
and affiliated purchasers of such persons would need to assess
nonconvertible debt, nonconvertible preferred, and asset-backed
securities to determine whether that security is liquid relative to the
market for that asset class, trades in relation to general market
interest rates and yield spreads, and is relatively fungible with
securities of similar characteristics and interest rate yield spreads
in order to rely on the exception. Further, distribution participants,
issuers, selling shareholders, and affiliated purchasers of such
persons would need to obtain an independent third-party to verify their
analysis under the proposal. Persons seeking to rely on these proposed
revised exceptions would need to demonstrate compliance with the
proposed revised exceptions. These requirements would impose a new
``collection of information'' within the meaning of the PRA.
    The proposed amendment to Rule 10b-10 would eliminate a requirement
for transaction confirmations for debt securities (other than
government securities) to inform customers if a security is unrated by
an NRSRO. Although Section 939A of the Dodd-Frank Act requires the
Commission to replace references to NRSRO ratings in its rules with a
different standard of creditworthiness, the reference to NRSROs in Rule
10b-10 does not come strictly within Section 939A's requirements. The
Commission believes, however, that deleting paragraph (a)(8) would make
Rule 10b-10 consistent with how references to NRSROs and their ratings
are being dealt with in other Commission rules pursuant to the
requirements of the Dodd-Frank Act.

B. Proposed Use of Information

    The purpose of written policies and procedures, and the retention
of these policies and procedures, is to ensure that examination staff,
from either the Commission or an SRO, could review the policies and
procedures to determine if the broker-dealer has an acceptable process
for determining if a security has only a minimal amount of credit risk.
In addition, written policies and procedures would give the staff
consistent guidance on how to determine a minimal amount of credit
risk.
    As discussed above, the proposed changes to Rules 101 and 102 of
Regulation M would amend the exceptions for nonconvertible debt,
nonconvertible preferred, and asset-backed securities in those rules.
Under the proposed amendments, distribution participants, issuers,
selling shareholders, and affiliated purchasers of such persons would
need to assess nonconvertible debt, nonconvertible preferred, and
asset-backed securities to determine whether that security is liquid
relative to the market for that asset class, trades in relation to
general market interest rates and yield spreads, and is relatively
fungible with securities of similar characteristics and interest rate
yield spreads in order to rely on the exception. Further, distribution
participants, issuers, selling shareholders, and affiliated purchasers
of such persons would need to obtain an independent third-party to
verify their analysis under the proposal. Persons seeking to rely on
these proposed revised exceptions would need to demonstrate compliance
with the proposed revised exceptions. The information collected under
the proposal would be used to ensure that the nonconvertible debt,
nonconvertible preferred, and asset-backed securities less likely to be
subject to manipulation are excepted from Rules 101 and 102 of
Regulation M, at the same time meeting the mandates of Section 939A of
the Dodd-Frank Act.
    The proposed amendment to Rule 10b-10 would eliminate a requirement
for transaction confirmations for debt securities (other than
government securities) to inform customers if a security is unrated by
an NRSRO. This proposed amendment would alter neither the general
requirement that broker-dealers generate transaction confirmations and
send those confirmations to customers, nor the potential use of
information contained in confirmations by the Commission, self-
regulatory organizations, and other securities regulatory authorities
in the course of examinations, investigations and enforcement
proceedings. Moreover, the proposed amendment is not expected to change
the cost of generating and sending confirmations, and, the Commission
believes that broker-dealers may not need to incur significant costs if
they choose not to input information that a debt security is unrated
into their existing confirmation systems. Accordingly, the Commission
does not believe the proposed amendment would result in a material or
substantive revision to these collections of information if adopted.

C. Respondents

    The Commission estimates that the proposed collections of
information would apply to the following number of respondents:

     Proposed amendments to Rule 15c3-1 and Rule 17a-4: 480
broker-dealers.
     Proposed amendments to Appendices A, E, F, and G to Rule
15c3-1: 172 broker-dealers.
     Proposed amendments to Exhibit A to Rule 15c3-3: 90
broker-dealers.
     Proposed amendments to Form X-17A-5: 4 broker-dealers.
     Proposed amendments to Regulation M: 2533 respondents. The
Commission bases this estimate on the total number of respondents to
Rules 101 (1588) and 102 (945).
     Proposed amendments to Rule 10b-10: 530 broker-dealers.
    The Commission generally requests comment on all aspects of these
estimates for the number of broker-dealers. Commenters should provide
specific data and analysis to support any comments they submit with
respect to these estimates with respect to the number of respondents.

D. Total Initial and Annual Reporting and Recordkeeping Burden

1. Rule 15c3-1 and Rule 17a-4
    The proposed amendments to Rule 15c3-1 and Rule 17a-4 would modify
broker-dealers' existing practices to impose additional recordkeeping
burdens. The proposed amendments would replace NRSRO ratings-based
criteria for evaluating creditworthiness with an option for a broker-
dealer to apply new standards based on the broker-dealer's own
evaluation of creditworthiness. A broker-dealer that did not want to
make such an evaluation could instead take the higher haircuts. A
broker-dealer that chooses to evaluate the creditworthiness of
securities would have to explain how the haircuts used for net capital
purposes meet the standards set forth in the proposed amendments. As
such, the Commission believes that firms would be required to develop
(if they have not already) criteria for assessing creditworthiness and
apply those criteria to the securities included in the net capital
calculation. The Commission preliminarily believes, however, that most
firms that deduct haircuts for purposes of the Net Capital Rule when
evaluating debt securities already have such an assessment process in
place. The Commission preliminarily believes that broker-dealers that
do not have such a system in place do not normally hold debt securities
or, if they do, would choose to take the higher haircuts rather than
create such a process. In addition, the expectation that the broker-
dealer be able to explain how its haircuts meet the standards set forth
in the proposed amendments would result in the creation and maintenance
of records of those assessments.
    The Commission preliminarily believes that all broker-dealers
already have policies and procedures in place for evaluating the
overall risk and liquidity levels of the securities they use for the
purposes of the Net Capital Rule and that they retain these policies
and procedures; however, the proposed amendments, which specifically
address credit risk, could result in additional burdens for those
broker-dealers that choose to use them. The proposed amendments would
apply to the approximately 480 broker-dealers \106\ that hold debt
securities and take haircuts on these securities pursuant to paragraphs
(c)(2)(vi)(E), (c)(2)(vi)(F)(1), (c)(2)(vi)(F)(2) and (c)(2)(vi)(H) of
Rule 15c3-1. The Commission estimates that, on average, broker-dealers
will spend 25 hours developing policies and procedures or revising
their current policies and procedures for evaluating creditworthiness
for the purposes of the Net Capital Rule, resulting in an aggregate
initial burden of 12,000 hours.\107\ This estimate is based on the
Commission's belief that many of these broker-dealers already have
their own criteria in place for evaluating creditworthiness and,
therefore, most broker-dealers will only be revising their current
policies and procedures for evaluating creditworthiness.
---------------------------------------------------------------------------

    \106\ This number was obtained by reviewing all FOCUS 2009 year-
end submissions and then calculating how many firms report holding
proprietary debt positions. See supra note 32.
    \107\ 480 broker-dealers x 25 hours = 12,000 hours.
---------------------------------------------------------------------------

    The Commission further estimates that, on average, each broker-
dealer will spend an additional 10 hours a year reviewing and adjusting
its own standards for evaluating creditworthiness, for a total of 4,800
annual hours across the industry.\108\ This estimate does not reflect
the time it will take for each broker-dealer to apply and implement its
own standards for evaluating creditworthiness. This estimate reflects
the Commission's belief that these broker-dealers already have their
own criteria in place. The Commission also estimates that firms would
use a controller to review these standards, both initially and on an
annual basis. The Commission estimates the per-firm costs of the
controller to be $10,825 initially and $4,330 on an annual basis, for
an aggregate industry cost of $5,196,000 initially and $2,078,400 on an
annual basis.\109\ The Commission preliminarily believes that the
proposed requirement to retain the policies and procedures for three
years pursuant to Rule 17a-4 would result in de minimis costs. The
three year preservation requirement in Rule 17a-4 will only be
applicable once a broker-dealer changes its policies and procedures. In
addition, all broker-dealers are currently required to comply with the
three year preservation period in Rule 17a-4 for other records and
should have procedures to satisfy such preservation requirements in
place.
---------------------------------------------------------------------------

    \108\ 480 broker-dealers x 10 hours = 4,800 hours.
    \109\ For the purposes of this analysis, the Commission is using
salary data from the Securities Industry and Financial Markets
Association (``SIFMA'') Report on Management and Professional
Earnings in the Securities Industry 2010, which provides base salary
and bonus information for middle management and professional
positions within the securities industry, as modified by Commission
staff to account for an 1800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits and overhead.
Hereinafter, references to data derived from the report as modified
in the manner described above will be cited as SIFMA Report on
Management and Professional Earnings in the Securities Industry
2010. The Commission believes that the reviews required by the
proposed amendments would be performed by the controller at an
average rate $433 per hour. Furthermore, the Commission believes
that the review process will entail twenty-five hours initially and
ten hours on an annual basis. $433 x 25 = $10,825 x 480 =
$5,196,000; $433 x 10 = $4,330 x 480 = $2,078,400.
---------------------------------------------------------------------------

    The proposed amendments to the appendices to Rule 15c3-1 include
amendments to certain recordkeeping and disclosure requirements that
are subject to the PRA. The proposed amendment to Appendix A to Rule
15c3-1 removes the NRSRO reference from the definition of ``major
market foreign currency.'' The Commission preliminarily believes that
158 broker-dealers trade in foreign currency and, therefore, would be
affected by the proposed amendment.\110\ However, it is not the
intention of the Commission that the currencies meeting the definition
of ``major market foreign currency'' should change. If, however, a
broker-dealer wanted to request that a new currency meet the definition
of ``major market foreign currency'' it would have to submit such a
request to the Commission. The Commission preliminarily believes that
submitting such a request to the Commission would take approximately
ten hours for a total burden of 1,580 hours.\111\ Additionally, the
Commission believes that a broker-dealer would use an attorney to
prepare this request, for a cost of $3,540 per firm

and an aggregate industry cost of $559,320.\112\
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    \110\ To arrive at this number, the Commission requested from
the Options Clearing Corporation (``OCC'') the number of broker-
dealers that are authorized to clear foreign currency options. The
Commission was given the number of 158. Although 158 broker-dealers
are authorized to clear foreign currency options, the Commission
does not know if all of these broker-dealers are actually clearing
foreign currency options.
    \111\ 158 broker-dealers x 10 hours = 1,580.
    \112\ The Commission believes that the reviews required by the
proposed amendments would be performed by an attorney at an average
rate of $354 per hour. Furthermore, the Commission believes that the
review process will entail ten hours of initial work. 10 hours x
$354 = $3,540 per firm. 158 broker-dealers x $3,540 = $599,320
aggregate industry cost. SIFMA Report on Management and Professional
Earnings in the Securities Industry 2010.
---------------------------------------------------------------------------

    The proposed amendments to Appendices E and F to Rule 15c3-1 and
conforming amendments to Appendix G would remove the provisions
permitting reliance on NRSRO ratings for the purposes of determining
counterparty risk. As a result of these deletions, an entity that
wished to use the approach set forth in these appendices to determine
counterparty risks would be required, as part of its initial
application to use the alternative approach or in an amendment, to
request Commission approval to determine credit risk weights based on
internal calculations and make and keep current a record of the basis
for the credit risk weight of each counterparty.
    The Commission does not believe that the removal of the option
permitting reliance on NRSRO ratings would affect the small number of
entities that currently elect to compute their net capital deductions
pursuant to the alternative methods set forth in Appendix E or F.
Although the collection of information obligations imposed by the
proposed amendments are mandatory, applying for approval to use the
alternative capital calculation is voluntary. To date, a total of six
entities are using the methods set forth in Appendix E, while four are
using the methods set forth in Appendix F. All of the approved firms
already have developed models to calculate market and credit risk under
the alternative net capital calculation methods set forth in the
appendices as well as internal risk management control systems.\113\ As
such, each firm already employs the non-NRSRO ratings-based method that
would, under the proposed amendments, become the only option for
determining counterparty credit risk under Appendices E and F. Since
each entity already employs its own models to calculate market and
credit risk and keeps current a record of the basis for the credit risk
weight of each counterparty, the proposed amendments would not alter
the paperwork burden currently imposed by Appendices E and F.
---------------------------------------------------------------------------

    \113\ See, e.g., Alternative Net Capital Requirements for
Broker-Dealers That Are Part of Consolidated Supervised Entities,
Exchange Act Release No. 49830 (Jun. 8, 2004), 69 FR 34428 at 34456
(Jun. 21, 2004).
---------------------------------------------------------------------------

    The Commission currently anticipates that three additional firms
may apply for permission to use Appendix E and one additional firm may
apply to use Appendix F. However, the Commission preliminarily believes
that there should be no additional paperwork burden on these firms
based on the proposed amendments. Any firm that applies to use
Appendices E or F to Rule 15c3-1 must submit its internal models to the
Commission for approval as part of that process. These models will
calculate market risk and credit risk, as well as counterparty risk,
which is not a change from the previous approval process for a firm
that is applying to use Appendix E or Appendix F. In fact, the
Commission believes that the only change to this process will be that
the Commission will assign ratings scales to these models that can be
used to determine counterparty risk when approving the models. Thus,
the Commission does not believe the proposed amendments to Appendices E
and F will alter the paperwork burden for such firms.
    The instructions to Form X-17A-5 Part IIB currently include a
summary of the credit risk calculation in paragraph (d) of Rule 15c3-
1f. Paragraph (d) of Rule 15c3-1f is proposed to be amended to remove
that part of the credit risk calculation that is summarized in Form X-
17A-5 Part IIB. Accordingly, the Commission has proposed a conforming
amendment to the form that would remove the summary of the credit risk
calculation. The summary in the instructions provides additional
information for the benefit of the filer and is not related to the
information reported on the forms. Accordingly, the Commission does not
believe the proposed amendment would result in a substantive revision
to these collections of information if adopted.
    The Commission requests comment on all aspects of these proposed
estimates. In addition, the Commission requests specific comment on the
following items related to these estimates:
     Is the Commission correct in its hours estimates and
belief that many broker-dealers already have their own policies and
procedures in place for evaluating creditworthiness?
     Is the Commission correct in its belief that broker-
dealers would engage outside counsel to review their internally
generated standards for creditworthiness? If not, how would firms
review such standards and what would be the effect of such differing
approaches on our burden estimates?
     Is the Commission correct in its belief that new firms
that apply to use the standards in Appendices E and F to Rule 15c3-1
will not have an extra burden as a result of the proposed amendments?
     Is the Commission correct in its estimation of the number
of broker-dealers that trade foreign currency options?
     Is the Commission correct in its estimation on the number
of hours it would take for a firm to make a submission to the
Commission requesting that a currency be designated as a major market
foreign currency?
     Is the Commission correct in its belief that a firm would
engage outside counsel to make this submission? Or would a firm handle
this internally?
2. Exhibit A to Rule 15c3-3
    The proposed amendment to Note G to Exhibit A to Rule 15c3-3 would
potentially modify broker-dealers' existing practices to impose
additional recordkeeping burdens. Currently, Note G to Exhibit A to
Rule 15c3-3 allows a broker-dealer to include, as a debit in the
formula for determining its reserve requirements, the amount of
customer margin related to customers' positions in security futures
products posted to a registered clearing or derivatives organization
that meets one of four standards, including maintaining the highest
investment grade rating from an NRSRO.\114\ The proposed amendment
would remove the standard of a registered clearing or derivatives
organization that has the highest investment grade rating from an NRSRO
as one of the four options a broker-dealer can look at prior to keeping
customers' positions in security future products with such a firm. As
such, the Commission believes that firms that previously relied on
NRSRO ratings for the purposes of Note G would be required to use
another method for assessing the creditworthiness of registered
clearing or derivatives organizations. In addition, the expectation
that the broker-dealer be able to explain that any such clearing or
derivatives organizations it uses meet

the standard set forth in the proposed amendment would result in the
creation and maintenance of records of those assessments. The
Commission estimates that approximately 90 firms would be required to
comply with the provisions of Note G.\115\ In the final release adding
Note G to Exhibit A to Rule 15c3-3,\116\ the Commission estimated that
under subparagraph (c) to Note G, each broker-dealer would spend
approximately 0.25 hours to verify that the clearing organizations they
used met the conditions of Note G. Using that same hours estimate, the
Commission estimates an aggregate one-time total of 22.5 hours \117\
for broker-dealers to verify the status of a registered clearing or
derivatives organization under the proposed amendment. The Commission
believes that the proposed amendment would impose an additional one-
time burden for broker-dealers that need to change how they evaluate
the creditworthiness of a registered clearing or derivatives
organization. Given the additional options set forth in Note G, the
Commission estimates this would result in the broker-dealer spending,
on average, one hour determining whether a clearing organization meets
the remaining requirements of Note G,\118\ resulting in an aggregate
initial burden of 90 hours.\119\ The Commission also estimates that
firms would use a senior operations manager to review these standards.
The Commission estimates the one-time costs of senior operations
manager to be $331 per- firm, resulting in an aggregate industry cost
of $29,790.\120\
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    \114\ A broker-dealer may also include customer margin related
to customers' positions in security futures products posted to a
registered clearing or derivatives organization (1) that maintains
security deposits from clearing members in connection with regulated
options or futures transactions and assessment power over member
firms that equal a combined total of at least $2 billion, at least
$500 million of which must be in the form of security deposits; (2)
that maintains at least $3 billion in margin deposits; or (3) which
does not meet any of the other criteria but which the Commission has
agreed, upon a written request from the broker-dealer, that the
broker-dealer may utilize. 17 CFR 240.15c3-3a, Note G, (b)(1)(ii)-
(iv).
    \115\ The number 90 comes from reviewing the members of the OCC
listed in the member directory on the OCC's Web site (http://www.optionsclearing.com/membership/member-information/). Of the list
of 231 members, the Commission looked only at those who trade in
single stock futures. Of the list of members that trade in single
stock futures, the Commission deleted any members who had the exact
same firm name but different firm numbers.
    \116\ See Reserve Requirements for Margin Related to Security
Futures Products, Exchange Act Release No. 34-50295 (Aug. 31, 2004),
69 FR 54182 at 54188 (Sept. 7, 2004).
    \117\ 0.25 x 90 = 22.5.
    \118\ Currently the OCC is the only clearing agency registered
with the Commission. The OCC maintains far more than $3 billion in
margin deposits, which is another way for a broker-dealer to verify
a registered clearing agency or derivatives clearing organization
under Note G. Thus, the Commission believes that any broker-dealer
who is currently using NRSRO ratings to verify a registered clearing
agency or derivatives clearing organization will be able to quickly
verify the registered clearing agency or derivatives clearing
organization using a different method.
    \119\ 90 broker-dealers x 1 hour = 90 hours.
    \120\ The Commission believes that the reviews required by the
proposed amendments would be performed by a senior operations
manager at an average rate of $331 per hour. Furthermore, the
Commission believes that the review process will entail one hour of
initial work. $331 x 1 = $331 x 90 = $29,790. SIFMA Report on
Management and Professional Earnings in the Securities Industry
2010.
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    The Commission generally requests comment on all aspects of these
proposed estimates. In addition, the Commission requests specific
comment on the following items related to these estimates:
     Is the Commission correct in its estimate of the number of
broker-dealers that would be affected by the proposed amendment to Note
G?
     Is the Commission correct in its belief that broker-
dealers would engage a senior operations manager to review their
standards for verifying the status of a registered clearing agency or
derivatives clearing organization? If not, how would firms review such
standards and what would be the effect of such differing approaches on
its burden estimates?
3. Regulation M
    As discussed above, the proposed changes to Rules 101 and 102 of
Regulation M would amend the exceptions for nonconvertible debt
securities, nonconvertible preferred securities, and asset-backed
securities in those rules. Under the proposed amendments, distribution
participants, issuers, selling shareholders, and affiliated purchasers
of such persons would need to assess nonconvertible debt,
nonconvertible preferred, and asset-backed securities to determine
whether that security reasonably is liquid relative to the market for
that asset class, trade based on yield, and fungible with securities
with similar yields in order to rely on the exception. Further,
distribution participants, issuers, selling shareholders, and
affiliated purchasers of such persons would need to obtain an
independent third-party to verify their analysis under the proposal.
Persons seeking to rely on these proposed revised exceptions would need
to demonstrate compliance with the proposed revised exceptions.
    The Commission initially estimates that there are approximately 863
distributions of nonconvertible debt, nonconvertible preferred, and
asset-backed securities, on average, annually that would be subject to
the proposed revised exceptions. The Commission bases this estimate on
the average number of offerings of investment grade nonconvertible
debt, investment grade nonconvertible preferred, and investment grade
asset-backed securities over the last three years.\121\ The Commission
believes that this is a reasonable estimate since it expects that the
number of distributions eligible for the proposed revised exceptions
should be similar to the number of distributions currently excepted
under Rules 101(c)(2) and 102(d)(2).
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    \121\ Rules 101 and 102 only apply to distributions, not all
offerings of securities. As a result, the Commission discounted the
actual average number of offerings of nonconvertible debt,
investment grade nonconvertible preferred, and investment grade
asset-backed securities over the last three years (1,151) by 25%.
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    The Commission initially estimates that the proposed revised
exceptions would impose an average annual burden of 1 hour per
distribution.\122\ This accounts for the internal time to obtain the
information necessary to comply with the proposed revised exceptions
and conduct analysis based on this information. Further, the Commission
initially estimates that the proposed revised exceptions would impose
an outside cost burden to retain an independent third party to verify
the analysis by the person seeking to rely on the proposed revised
exceptions, resulting in an estimated average annual burden of $4,800
\123\ per distribution. Based on the total number of distributions
estimated to be subject to the proposed revised exceptions (863), the
Commission estimates that the total average annual burden is
approximately 863 hours and $4.1 million.
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    \122\ We anticipate that the 1 hour would be spent by business
analysts of the person seeking to rely on the proposed revised
exceptions.
    \123\ We estimate that an outside management consultant would
spend 8 hours and charge $600 per hour to verify the analysis. The
$600 per hour figure is from the 75th percentile figure for a
management consultant from http://www.payscale.com, adjusted for an
1800-hour work-year and multiplied by a 5.35 factor which is
normally used to include benefits but here is used as an
approximation to offset the fact that New York salaries are
typically higher than the rest of the country. The result is $596
per hour, which can be rounded to $600 per hour. We request comment
on this estimate.
---------------------------------------------------------------------------

    The collection of information would be necessary to obtain the
benefit of the proposed revised exceptions. The proposed revised
exceptions do not prescribe retention periods. All registered broker-
dealers engaged in underwriting that would be subject to the proposed
revised exceptions are currently required to retain records in
accordance with Rules 17a-2 through 17a-4. The collection of
information under the proposed revised exceptions would be provided to
Commission and SRO examiners but would not be subject to public
availability.
    We specifically request comment on all aspects of these proposed
estimates.
4. Rule 10b-10
    The proposed amendment to Rule 10b-10 is not expected to change the

cost of generating and sending confirmations, and, the Commission
believes that broker-dealers may not need to incur significant costs if
they choose not to input information that a debt security is unrated
into their existing confirmation systems. Accordingly, the Commission
does not believe the proposed amendment would result in any substantive
change in a broker-dealer's record-keeping or reporting burdens.
5. Request for Comment
    Pursuant to 44 U.S.C. 3306(c)(2)(B), the Commission requests
comment on the proposed collections of information in order to: (1)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information would have practical utility; (2)
evaluate the accuracy of the Commission's estimates of the burden of
the proposed collections of information; (3) determine whether there
are ways to enhance the quality, utility, and clarity of the
information to be collected; (4) evaluate whether there are ways to
minimize the burden of the collection of information on those who
respond, including through the use of automated collection techniques
or other forms of information technology; and (5) evaluate whether the
proposed rule amendments would have any effects on any other collection
of information not previously identified in this section.
    Persons who desire to submit comments on the collection of
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, and refer to File No. S7-15-11. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this document in the
Federal Register; therefore, comments to OMB are best assured of having
full effect if OMB receives them within 30 days of this publication.
Requests for the materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, refer
to File No. S7-15-11, and be submitted to the Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street,
NE., Washington, DC 20549-0213.

V. Economic Analysis

    As discussed above, the Dodd-Frank Act requires that the Commission
and other federal agencies replace references to credit ratings in all
of its regulations with a standard of creditworthiness that the
Commission deems appropriate. The proposed amendments to Rule 15c3-1,
Appendices A, E, F, and G to Rule 15c3-1, Exhibit A to Rule 15c3-3,
Rule 17a-4, the General Instructions to Form X-17A-5, Part IIB, Rules
101 and 102 of Regulation M, and Rule 10b-10 would accomplish this task
by eliminating the reference to and requirement for the use of NRSRO
ratings in these rules. The Commission recognizes that there are
additional external costs associated with the adoption of the proposed
amendments that are separate from the hour burdens discussed in the
Paperwork Reduction Act. Thus, the Commission has identified certain
costs and benefits of the proposed rule amendments and requests comment
on all aspects of this cost-benefit analysis, including identification
and assessment of any costs and benefits not discussed in the
analysis.\124\
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    \124\ SIFMA Report on Management and Professional Earnings in
the Securities Industry 2010.
---------------------------------------------------------------------------

    The Commission seeks comment and data on the value of the benefits
identified. The Commission also seeks comments on the accuracy of its
cost estimates in each section of this cost-benefit analysis, and
requests those commenters to provide data, including identification of
statistics relied on by commenters to reach conclusions on cost
estimates. Finally, the Commission seeks estimates and views regarding
these costs and benefits for particular types of market participants,
as well as any other costs or benefits that may result from these
proposed rule amendments.
    Under Section 3(f) of the Exchange Act,\125\ the Commission shall,
when engaging in rulemaking that requires the Commission to consider or
determine whether an action is necessary or appropriate in the public
interest, consider, in addition to the protection of investors, whether
the action will promote efficiency, competition, and capital formation.
Section 23(a)(2) of the Exchange Act \126\ requires the Commission to
consider the competitive effects of any rules the Commission adopts
under the Exchange Act. Section 23(a)(2) prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. The Commission's preliminary view, as discussed in greater detail
with respect to each proposed amendment below, is that any potential
burden on efficiency, competition, and capital formation resulting from
the proposed rules would be consistent with the intent of Congress as
expressed by the Dodd-Frank Act.
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    \125\ 15 U.S.C. 78c(f).
    \126\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Rule 15c3-1 and Rule 17a-4

1. Benefits
    The Commission anticipates that one of the primary benefits of the
proposed amendments, if adopted, would be the benefit to broker-dealers
of reducing their possible undue reliance on NRSRO ratings that could
be caused by references to NRSROs in its rules. The rule amendments
could encourage broker-dealers to examine more than a single source of
information, such as a rating, when analyzing the creditworthiness of a
financial instrument. Significantly, the Commission believes that
eliminating the reliance on NRSRO ratings in its rules would remove any
appearance that the Commission has placed its imprimatur on such
ratings. The Commission, however, also recognizes that credit ratings
may provide useful information to institutional and retail investors as
part of the process of making an investment decision.
    The Commission preliminarily believes that the proposed amendments
to the Net Capital Rule and its appendices, as well as the conforming
amendment to Rule 17a-4, could result in a better overall assessment of
the risks associated with securities held by broker-dealers for the
purposes of net capital calculations as well as of the long-term
financial strength and general creditworthiness of clearing
organizations to which customers' positions in security futures
products are posted. As the NRSROs themselves have stressed, the
ratings they generate focus solely on credit risk, that is, the
likelihood that an obligor or financial obligation will repay investors
in accordance with the terms on which they made their investment.\127\
Many broker-dealers already conduct their own risk evaluation. However,
for those broker-dealers that do not, developing

their own means of evaluating risk--including, as would be required by
the proposed amendments to the Net Capital Rule, an evaluation of the
degree of liquidity--should allow them to better incorporate the
overall levels of various categories of risk associated with the
securities they hold for their net capital calculations and lead to a
better understanding of the risks associated with those securities. The
Commission believes that for those broker-dealers that do not currently
have their own means of evaluating risk for purposes of the Net Capital
Rule, the approach outlined in this release is the best option, outside
of using NRSRO ratings, for a broker-dealer to evaluate the risks
associated with those securities.
---------------------------------------------------------------------------

    \127\ See, e.g., Inside the Ratings: What Credit Ratings Mean,
Fitch, Aug. 2007 (``Inside the Ratings''), p. 1; Testimony of
Michael Kanef, Group Managing Director, Moody's Investors Service,
Before the United States Senate Committee on Banking, Housing, and
Urban Affairs (Sep. 26, 2007), p. 2; Testimony of Vickie A. Tillman,
Executive Vice President, Standard & Poor's Credit Market Services,
Before the United States Senate Committee on Banking, Housing, and
Urban Affairs (Sep. 26, 2007), p. 3.
---------------------------------------------------------------------------

2. Costs
    The Commission anticipates that broker-dealers could incur
additional costs if the proposed amendments are adopted because of the
costs associated with performing a more detailed and comprehensive
analysis of the debt securities. These costs could include
establishing, reviewing, and adjusting the various policies and
procedures needed for a comprehensive analysis of the debt securities.
There also could be costs associated with applying and implementing
these adjusted procedures.
    The Commission believes that the costs of compliance with the
proposed amendments to the Net Capital Rule and its appendices, as well
as the conforming amendment to Rule 17a-4, would be minimal for those
entities that already employ their own criteria in determining credit
risk for net capital purposes. Of the approximately 480 broker-dealers
that hold proprietary debt positions, the Commission recognizes that
the level of sophistication varies widely. The institutions with less
sophisticated internal procedures for analyzing credit risk may incur
costs to establish and develop procedures that would be used to assess
financial instruments for the purposes of determining whether the lower
haircuts could appropriately be applied.
    In the event the broker-dealer inaccurately evaluates the
creditworthiness and liquidity of its positions, a potential cost could
be that the broker-dealer is required to take a larger haircut on its
proprietary positions, and, therefore, reserve additional capital. This
could affect its ability to hold its positions or to add to its
positions. In addition, the proposed rule could potentially affect the
ability of issuers of commercial paper, nonconvertible debt, and
preferred stock to raise capital if broker-dealers change their
investment decisions for their proprietary accounts as a result of
potential costs or other aspects of the proposed amendments.
    Some broker-dealers may determine a security qualifies for a
reduced haircut when it would not have qualified under the current
NRSRO standard. This could have a potential impact on the firm's
ability, if it experiences financial difficulties, to be in a position
to meet all obligations to customers, investors, and other
counterparties and generate resources to wind-down its operations in an
orderly manner without the need of a formal proceeding, with attendant
costs.
    In addition, those broker-dealers whose internal evaluations differ
from the ratings may have extra costs during examinations to prove to
the regulators the accuracy of their internal evaluations. Those
broker-dealers that do not have their own criteria for determining
credit risk for net capital purposes will have larger start up costs
than other broker-dealers. However, the Commission believes that firms
that hold a small number of securities for net capital purposes may do
an internal cost benefit analysis and decide to take the 15% haircut
instead of creating an internal credit risk evaluation process if the
costs of creating such an evaluation process are too high. To the
extent that broker-dealers decide to take the 15% haircut instead of
creating an internal credit risk evaluation process, it is possible
that those broker-dealers may maintain more net capital than would be
required by the Net Capital Rule.
    For firms that use Appendix A to Rule 15c3-1, the Commission
preliminarily believes there will be minimal costs associated with the
proposed amendments. The proposed amendments to the definition of
``major market foreign currency'' will not change what foreign
currencies meet the definition; it will only change the wording of the
definition. Therefore, the Commission does not believe there will be
any additional costs associated with the proposed amendments.
    As for the firms that use Appendix E and F to Rule 15c3-1, these
firms are already using internal ratings scales to determine credit
risks for each counterparty. Any new firms that apply to use either
Appendix E or Appendix F will not incur any additional costs as a
result of the proposed amendments. Currently, firms that apply to use
these appendices must have their internal models approved by the
Commission prior to using their selected appendix. Although the
Commission will have to assign a ratings scale to the output of the
internal models during the approval process, the Commission does not
believe this step will cause broker-dealers or OTC derivatives dealers
who are applying to use these appendices to incur any additional costs.
Furthermore, because these firms have traditionally used models, as
opposed to NRSRO ratings, to compute capital charges, the Commission
does not believe these firms will incur any additional costs by
complying with the proposed amendments.

B. Exhibit A to Rule 15c3-3

1. Benefits
    The Commission believes that eliminating the reliance on NRSRO
ratings in its rules would remove any appearance that the Commission
has placed its imprimatur on such ratings. The Commission preliminarily
believes that the proposed amendments to Note G to Exhibit A to Rule
15c3-3 would serve to promote efficiency and capital formation. As
noted above, the Commission believes that broker-dealers will develop
their own means of evaluating the long-term financial strength and
general creditworthiness of clearing organizations to which customers'
positions in security futures products are posted for purposes of Note
G to Exhibit A to Rule 15c3-3. These broker-dealers would be better
positioned to incorporate the overall levels of various categories of
risk associated with those organizations into their assessments,
creating a more efficient means of evaluating those organizations for
the sake of the Customer Protection Rule, rather than simply relying on
NRSRO credit ratings alone. As the NRSROs themselves have stressed, the
ratings they generate focus solely on credit risk, that is, the
likelihood that an obligor or financial obligation will repay investors
in accordance with the terms on which they made their investment.\128\
The Commission does not anticipate that the proposed amendments to Note
G to Exhibit A to Rule 15c3-3 would have any impact on competition.
---------------------------------------------------------------------------

    \128\ See, e.g., Inside the Ratings: What Credit Ratings Mean,
Fitch, Aug. 2007 (``Inside the Ratings''), p. 1; Testimony of
Michael Kanef, Group Managing Director, Moody's Investors Service,
Before the United States Senate Committee on Banking, Housing, and
Urban Affairs (Sep. 26, 2007), p. 2; Testimony of Vickie A. Tillman,
Executive Vice President, Standard & Poor's Credit Market Services,
Before the United States Senate Committee on Banking, Housing, and
Urban Affairs (Sep. 26, 2007), p. 3.

---------------------------------------------------------------------------

2. Costs
    The Commission believes that the costs of compliance with Note G to
Exhibit A to Rule 15c3-3 would be minimal because the amendment would
simply eliminate one factor a broker-dealer can use to evaluate a
clearing organization. The Commission believes that the removal of one
of these four means of complying with section (b)(1) of Note G will not
adversely affect the purpose of this section; namely to ensure that a
broker or dealer has the margin related to security futures products on
deposit only with qualified registered clearing agencies or derivatives
clearing organizations. As stated in the Paperwork Reduction Act
section, the Commission anticipates that a broker-dealer will incur a
one-time cost and an annual cost to verify that a clearing organization
or derivatives clearing organization meets the requirements of Note G.
If a broker-dealer is currently using a verification process other than
the use of NRSRO ratings, that broker-dealer will not incur any one-
time costs.

C. Rules 101 and 102 of Regulation M

    The purpose of the proposed revised exceptions from Rules 101 and
102 of Regulation M for nonconvertible debt, nonconvertible preferred,
and asset-backed securities is to address Section 939A of the Dodd-
Frank Act as well as place the emphasis of the exception on the trading
aspects of the securities by those bringing it to market, ensuring that
the exception is utilized in reference to securities that are less
likely to be subject to manipulation.
    The Commission preliminarily believes that the proposed amendments
to Rules 101 and 102 of Regulation M are intended to promote capital
formation. The proposed amendments should promote continued investor
trust in the offering process by proposing an exception from Regulation
M's Rule 101 and 102 prohibitions limited to those securities which are
less vulnerable to manipulation. Such investor trust in our markets
should promote continued capital formation. The Commission believes
that the proposals should foster continued market integrity which
should also translate into capital formation by only allowing for non-
manipulative buying activity during distributions. Issuers of
nonconvertible debt, nonconvertible preferred securities and asset-
backed securities who fall within the proposed exceptions may be
encouraged to engage in capital formation knowing that the proposed
exceptions are available for their buying activity as well as the
buying activity of distribution participants. For these reasons, the
Commission preliminarily believes that the proposed exceptions will
promote efficient capital formation and competition.
    The Commission has considered the proposed amendments to Rules 101
and 102 of Regulation M in light of the standards cited in Section
23(a)(2) and believes preliminarily that, if adopted, they would not
likely impose any significant burden on competition not necessary or
appropriate in furtherance of the Exchange Act. The proposals would
apply equally to all distribution participants, issuers, selling
shareholders, and affiliated purchasers. Thus, no person covered by
Regulation M should be put at a competitive disadvantage and the
proposal would not impose a significant burden on competition not
necessary or appropriate in furtherance of the Act.
1. Benefits
    The proposed revised exceptions should continue to promote investor
trust in the offering process and the market as a whole by excepting
only those nonconvertible debt, nonconvertible preferred, and asset-
backed securities that are less vulnerable to manipulation. Market
integrity would also continue to be promoted, which benefits the market
and all participants.
2. Costs
    The Commission expects the costs of the proposal to modify Rules
101 and 102 of Regulation M to be minimal to most persons subject to
those rules. The Commission expects the number of instances in which
the proposed revised exceptions would be triggered to be limited. The
proposed revised exceptions would only be triggered when there is an
offering of nonconvertible debt, nonconvertible preferred, or asset-
backed securities that qualifies as a distribution under Regulation M
where a distribution participant, issuer, selling shareholder, or
affiliated purchaser bids for, purchases, or attempts to induce another
person to bid for or purchase the covered security during the
applicable restricted period. As there may be offerings of
nonconvertible debt, nonconvertible preferred, and asset-backed
securities that do not constitute a distribution for purposes of
Regulation M, the prohibitions of Rules 101 and 102 of Regulation M
would not be triggered and, thus, the need for reliance upon either the
current or proposed revised exceptions would not be necessary.
Additionally, even if a distribution of the nonconvertible debt,
nonconvertible preferred, or asset-backed securities exists, a person
subject to the prohibitions of Rules 101 or 102 of Regulation M could
structure buying activity before or after the applicable restricted
period so as not to incur any costs, even if minimal, associated with
relying on the proposed revised exceptions.
    When the proposed revised exceptions would be used, however, the
Commission believes that there would be increased costs for
distribution participants, issuers, selling shareholders, and
affiliated purchasers under the proposed revised exceptions compared to
the expected costs under the current exceptions in Rules 101(c)(2) and
102(d)(2). Distribution participants, issuers, selling shareholders,
and affiliated purchasers would need to reasonably determine whether a
security is liquid relative to the market for that asset class, trades
in relation to general market interest rates and yield spreads, and is
relatively fungible with securities of similar characteristics and
interest rate yield spreads in order to rely on the exception. This
determination would require the distribution participant, issuer,
selling shareholder, or affiliated purchaser to train staff and devote
manpower and other resources towards making this assessment when
relying on the proposed revised exceptions. As detailed in the PRA
section above, the Commission preliminarily estimates total annual
ongoing internal costs of approximately $167,422 for distribution
participants, issuers, selling shareholders, and affiliated purchasers
seeking to rely on the exception.\129\
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    \129\ This figure was calculated as follows (1 business analyst
hours x $194) = $194 per response x 863 responses = $167,422 total
cost for all respondents. The Commission estimates that the average
hourly rate for an intermediate business analyst in the securities
industry is approximately $194 per hour. SIFMA Report on Management
and Professional Earnings in the Securities Industry 2010.
---------------------------------------------------------------------------

    Further, distribution participants, issuers, selling shareholders,
and affiliated purchasers would need to obtain an independent third
party to verify this initial assessment. This process would create new
costs to be borne by distribution participants, issuers, selling
shareholders, and affiliated purchasers when relying on the proposed
revised exceptions to hire such a party and review this verification.
Distribution participants, issuers, selling shareholders, and
affiliated purchasers seeking an independent third party verification
that the issue meets the criteria required to obtain the proposed
exceptions may find that the price of the independent

third party verification could potentially lead to other economic
effects. These effects could include, for instance, the potential for
the verifier to be liable for claims if the exception is disputed after
it has been relied upon. While difficult to quantify, the Commission
preliminarily estimates that it is possible for the verifier's
potential liability to be a significant multiple of the compliance-
hours-cost-estimate provided for PRA purposes, and will depend upon the
perceived risk in asserting that the security is liquid relative to the
market for that asset class, trades in relation to general market
interest rates and yield spreads, and is relatively fungible with
securities of similar characteristics and interest rate yield spreads.
These are new costs not currently borne by distribution participants,
issuers, selling shareholders, or their affiliated purchasers. If
potential liability leads to increased costs in obtaining an
independent third party, some persons who currently rely on the
exception may determine that it is no longer cost effective to qualify
for the exception. This may have the effect of limiting the instances
in which the exception is utilized, which in turn may expand the scope
of the restrictions of Rules 101 and 102 of Regulation M. Thus, the
increase in costs resulting from the third party verification may, in
effect, narrow the exceptions for those who currently rely on them.
    The Commission also expects that there could be a small number of
securities taken out of this exception as a result of the proposed
change. Costs for issuers, selling shareholders, underwriters, brokers,
dealers, any other distribution participants, or affiliated purchasers
of any of these persons affected by this change would be more
significant in that these persons may now be required to comply with
Rule 101 or 102 of Regulation M where they did not have to before. As a
result of this change, these affected parties and their affiliated
purchasers would be prohibited from bidding for, purchasing, or
attempting to induce any person to bid for or purchase the covered
security during the restricted period. However, the Commission does not
expect there to be a significant number of these persons. Further,
these persons may be able to rely on a different exception from Rule
101 or 102 depending on the circumstances.

D. Rule 10b-10

1. Benefits
    The proposed amendments to Rule 10b-10 eliminate a requirement for
transaction confirmations for debt securities (other than government
securities) to inform customers if a security is unrated by an NRSRO.
The other requirements of Rule 10b-10 would remain unchanged.
Eliminating this requirement would avoid giving credit ratings an
imprimatur that may inadvertently suggest to investors that an unrated
security is inherently riskier than a rated security. Accordingly, the
Commission anticipates that investors and the marketplace would benefit
from the elimination of this requirement, in light of concerns about
promoting over-reliance on securities ratings or creating confusion
about the significance of those ratings. More generally, eliminating
this requirement is consistent with the goal of promoting a dialogue
between broker-dealers and their customers--prior to purchase--
regarding the creditworthiness of issuers, and should help avoid
promoting the use of credit ratings as an oversimplified shorthand that
replaces a more complete discussion of credit quality issues.
2. Costs
    The Commission does not expect the proposed amendment to result in
any significant changes in the costs associated with Rule 10b-10.
Broker-dealers will continue to generate transaction confirmations and
send those confirmations to customers, and the proposed amendment, if
adopted, would not be expected to change the cost of generating and
sending confirmations. Moreover, the Commission believes that broker-
dealers may not need to incur significant costs if they choose not to
input information that a debt security is unrated into their existing
confirmation systems.

E. Request for Comment on Economic Analysis

    The Commission requests data to quantify the costs and the benefits
above. The Commission seeks estimates of these costs and benefits, as
well as any costs and benefits not already described, which could
result from the adoption of the proposed amendments.
     The Commission seeks specific comments on the economic
analysis outlined above with respect to Rule 15c3-1, its Appendices and
Rule 17a-4. Are there any additional costs associated with these
proposed amendments that were not factored into the above analysis?
Commenters should provide specific examples of cost estimates.
     The Commission seeks specific comments on the economic
analysis outlined above with regard to Exhibit A to Rule 15c3-3. Are
there any additional costs associated with the proposed amendment that
were not factored into the above analysis? Commenters should provide
specific examples of cost estimates.
     The Commission seeks specific comments on the economic
analysis outlined above with regard to the proposed revised exceptions
to Rules 101 and 102 of Regulation M. What new costs would the proposed
revised exceptions create for those seeking to rely on them? Are there
any costs not already accounted for in this proposal created by the
proposed revised exceptions?
     The Commission seeks specific comments on the economic
analysis outlined above with regard to the Rule 10b-10. Are there any
additional costs associated with this proposal that were not factored
into the above analysis? Commenters should provide specific examples of
cost estimates.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), the Commission must advise OMB as to whether
the proposed regulation constitutes a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in: (1) An annual effect on the economy of $100 million or
more (either in the form of an increase or decrease); (2) a major
increase in costs or prices for consumers or individual industries; or
(3) significant adverse effect on competition, investment or
innovation. If a rule is ``major,'' its effectiveness will generally be
delayed for 60 days pending Congressional review.
    The Commission requests comment on the potential impact of the
proposed rules and form on the economy on an annual basis, on the costs
or prices for consumers or individual industries, and on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their view to the extent
possible.

VII. Initial Regulatory Flexibility Analysis

    Section 3(a) of the Regulatory Flexibility Act of 1980 \130\
requires the Commission to undertake an initial regulatory flexibility
analysis of the proposed rule on small entities unless the Commission
certifies that the rule, if adopted, would not have a significant
economic impact on a substantial

number of small entities.\131\ Pursuant to Section 605(b) of the
Regulatory Flexibility Act (``RFA''), the Commission hereby certifies
that the proposed amendments to the rule, would not, if adopted, have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \130\ 5 U.S.C. 603(a).
    \131\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA,
small entities include broker-dealers with total capital (net worth
plus subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial statements were
prepared pursuant to Rule 17a-5(d) under the Exchange Act,\132\ or, if
not required to file such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the last day of the preceding fiscal year (or in the time that it
has been in business, if shorter); and is not affiliated with any
person (other than a natural person) that is not a small business or
small organization.\133\
---------------------------------------------------------------------------

    \132\ See 17 CFR 240.17a-5(d).
    \133\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The proposed amendments to the securities haircut provisions in
paragraphs (E), (F), and (H) of Rules 15c3-1(c)(2)(vi) and the
conforming amendment to Rule 17a-4, if adopted, would not have a
significant economic impact on a small number of entities. The
Commission preliminarily believes that a broker-dealer with less than
$500,000 in total capital holds very few positions and, in particular,
a small number of debt securities. Thus, the Commission preliminarily
believes that there are few small entities that will be subject to
these new rules. In addition, if there are small broker-dealers that
hold these debt positions, they are already required to examine the
risk associated with their debt securities when taking haircuts on
these securities. The proposed amendments could alter this process but
it would not be a new process that the small broker-dealer would have
to comply with. Accordingly, the rule would not have any significant
economic impact on small entities because even if they have to change
their current process, they are still required to examine the risk
associated with their debt securities.
    The proposed amendment to Appendix A to Rule 15c3-1 will not be a
burden to small entities. Although the definition of major market
foreign currency will change, the currencies that meet the definition
will not change.
    The proposed amendments to the Appendices E and F to Rule 15c3-1
(which include conforming amendments to Appendix G to Rule 15c3-1 and
the General Instructions to Form X-17A-5, Part IIB), if adopted, would
not apply to small entities. Appendices E and G apply to broker-dealers
that are part of a consolidated supervised entity and Appendix F and
Form X-17A-5, Part IIB apply to OTC Derivatives Dealers that have
applied to the Commission for authorization to compute capital charges
as set forth in Appendix F in lieu of computing securities haircuts
pursuant to Rule 15c3-1(c)(2)(vi). All of these brokers or dealers
would be larger than the definition of a small broker dealer in Rule 0-
10.
    The proposed amendments to Exhibit A to Rule 15c3-3, if adopted,
would not have a significant economic impact on a substantial number of
small entities. The proposed amendments to Exhibit A to Rule 15c3-3
would apply only to broker-dealers that clear and carry positions in
security futures products in securities accounts for the benefit of
customers. None of those broker-dealers affected by the rule is a small
entity as defined in Rule 0-10.\134\
---------------------------------------------------------------------------

    \134\ The main clearing organization, the OCC, requires its
members to have total capital of $2.5 million, far above the
$500,000 total capital threshold for a small business in Rule 0-10.
---------------------------------------------------------------------------

    With respect to the amendments to Rules 101 and 102 of Regulation
M, it is unlikely that any broker-dealer that is defined as a ``small
business'' or ``small organization'' as defined in Rule 0-10 could be
an underwriter or other distribution participant as they would not have
sufficient capital to participate in underwriting activities. Small
business or small organization for purposes of ``issuers'' or
``person'' other than an investment company is defined as a person who,
on the last day of its most recent fiscal year, had total assets of $5
million or less. The Commission believes that none of the various
persons that would be affected by this proposal would qualify as a
small entity under this definition as it is unlikely that any issuer of
that size had investment grade securities that could rely on the
existing exception. Therefore, the Commission believes that these
amendments would not impose a significant economic impact on a
substantial number of small entities.
    The Commission believes that the proposed amendment to Rule 10b-10
will not have a significant economic impact on a substantial number of
small entities. While some broker-dealers that effect transactions in
the debt securities currently subject to paragraph (a)(8) of that rule
may be small entities, the proposed amendment should not result in any
significant change to the cost of providing confirmations to customers
in connection with those transactions.
    The Commission encourages written comments regarding this
certification. The Commission solicits comment as to whether the
proposed amendments to Rule 15c3-1, Appendices A, E, F, and G to Rule
15c3-1, Exhibit A to Rule 15c3-3, Rule 17a-4, the General Instructions
to Form X-17A-5, Part IIB, Rules 101 and 102 of Regulation M, and Rule
10b-10, could have an effect on small entities that has not been
considered. The Commission requests that commenters describe the nature
of any impact on small entities and provide empirical data to support
the extent of such impact.

VIII. Statutory Basis and Text of the Proposed Amendments

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly, Sections 3(b), 15, 23(a), and 36 (15 U.S.C. 78c(b), 78o,
78w(a), and 78mm), thereof, and Sections 939 and 939A of the Dodd-Frank
Act, the Commission is proposing to amend Sec. Sec.  240.10b-10,
240.15c3-1, 240.15c3-1a, 240.15c3-1e, 240.15c3-1f, 240.15c3-1g,
240.15c3-3a, 240.17a-4, 242.101, 242.102, and Form X-17A-5 Part IIB
General Instructions under the Exchange Act.

List of Subjects in 17 CFR Parts 240, 242, and 249

    Brokers, Fraud, Reporting and recordkeeping requirements,
Securities.

Text of Amendment

    In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

    1. The authority citation for part 240 is amended by adding
sectional authorities for Sec. Sec.  240.15c3-1a, 240.15c3-1e,
240.15c3-1f, 240.15c3-1g and for Sec.  240.15c3-3a in numerical order,
and by revising the sectional authorities for Sec. Sec.  240.10b-10,
240.15c3-1, and 240.17a-4.

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350 and 12 U.S.C.
5221(e)(3), unless otherwise noted.
* * * * *

    Section 240.10b-10 is also issued under secs. 2, 3, 9, 10, 11,
11A, 15, 17, 23, 48 Stat. 891, 89 Stat. 97, 121, 137, 156, (15
U.S.C. 78b, 78c, 78i, 78j, 78k, 78k-1, 78o, 78q) and Pub. L. No.
111-203, secs. 939, 939A, 124. Stat. 1376 (2010) (15 U.S.C. 78c, 15
U.S.C. 78o-7 note).
* * * * *
    Section 240.15c3-1 is also issued under secs. 15(c)(3), 15
U.S.C. 78o(c)(3) and Pub. L. No. 111-203, secs. 939, 939A, 124.
Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7 note).
    Sections 240.15c3-1a, 240.15c3-1e, 240.15c3-1f, 240.15c3-1g are
also issued under Pub. L. No. 111-203, Sec. Sec.  939, 939A, 124.
Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7 note).
* * * * *
    Section 240.15c3-3a is also issued under Pub. L. No. 111-203,
Sec. Sec.  939, 939A, 124. Stat. 1376 (2010) (15 U.S.C. 78c, 15
U.S.C. 78o-7 note).
* * * * *
    Section 240.17a-4 also issued under secs. 2, 17, 23(a), 48 Stat.
897, as amended; 15 U.S.C. 78a, 78d-1, 78d-2; sec. 14, Pub. L. 94-
29, 89 Stat. 137 (15 U.S.C. 78a); sec. 18, Pub. L. 94-29, 89 Stat.
155 (15 U.S.C. 78w); and Pub. L. No. 111-203, secs. 939, 939A, 124.
Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7 note)

Sec.  240.10b-10  [Amended]

    2. Section 240.10b-10 is amended by removing paragraph (a)(8) and
redesignating paragraph (a)(9) as paragraph (a)(8).
    3. Section 240.15c3-1 is amended by revising paragraphs
(c)(2)(vi)(E) introductory text, (c)(2)(vi)(F)(1) introductory text,
(c)(2)(vi)(F)(2) introductory text, and (c)(2)(vi)(H).
    The revisions read as follows:

Sec.  240.15c3-1  Net capital requirements for brokers or dealers.

* * * * *
    (c) * * *
    (2) * * *
    (vi) * * *
    (E) Commercial paper, bankers acceptances and certificates of
deposit. In the case of any short term promissory note or evidence of
indebtedness which has a fixed rate of interest or is sold at a
discount, which has a maturity date at date of issuance not exceeding
nine months exclusive of days of grace, or any renewal thereof, the
maturity of which is likewise limited, and has only a minimal amount of
credit risk as determined by the broker or dealer pursuant to written
policies and procedures the broker or dealer establishes, maintains,
and enforces to assess creditworthiness, or in the case of any
negotiable certificates of deposit or bankers acceptance or similar
type of instrument issued or guaranteed by any bank as defined in
section 3(a)(6) of the Securities Exchange Act of 1934, the applicable
percentage of the market value of the greater of the long or short
position in each of the categories specified below are:
* * * * *
    (F)(1) Nonconvertible debt securities. In the case of
nonconvertible debt securities having a fixed interest rate and a fixed
maturity date, which are not traded flat or in default as to principal
or interest and which have only a minimal amount of credit risk as
determined by the broker or dealer pursuant to written policies and
procedures the broker or dealer establishes, maintains, and enforces to
assess creditworthiness, the applicable percentages of the market value
of the greater of the long or short position in each of the categories
specified below are:
* * * * *
    (2) A broker or dealer may elect to exclude from the above
categories long or short positions that are hedged with short or long
positions in securities issued by the United States or any agency
thereof or nonconvertible debt securities having a fixed interest rate
and a fixed maturity date and which are not traded flat or in default
as to principal or interest, and which have only a minimal amount of
credit risk as determined by the broker or dealer pursuant to written
policies and procedures the broker or dealer establishes, maintains,
and enforces to assess creditworthiness, if such securities have
maturity dates:
* * * * *
    (H) In the case of cumulative, non-convertible preferred stock
ranking prior to all other classes of stock of the same issuer, which
has only a minimal amount of credit risk as determined by the broker or
dealer pursuant to written policies and procedures the broker or dealer
establishes, maintains, and enforces to assess creditworthiness, and
which are not in arrears as to dividends, the deduction shall be 10% of
the market value of the greater of the long or short position.
* * * * *

Sec.  240.15c3-1a  [Amended]

    4. Section 240.15c3-1a is amended by removing the phrase ``whose
short term debt is rated in one of the two highest categories by at
least two nationally recognized statistical rating organizations and''
and removing the sentence ``For purposes of this section, the European
Currency Unit (ECU) shall be deemed a major market foreign currency.''
from paragraph (b)(1)(i)(C).
    5. Section 240.15c3-1e is amended by:
    a. Revising the introductory text in paragraph (c)(4)(vi);
    b. Removing paragraphs (c)(4)(vi)(A) through (c)(4)(iv)(D);
    c. Redesignating paragraphs (c)(4)(vi)(E), (F), and (G) as
paragraphs (c)(4)(vi)(A), (B), and (C), respectively; and
    d. Revising newly redesignated paragraph (c)(4)(vi)(A).
    The revisions read as follows:

Sec.  240.15c3-1e  Deductions for market and credit risk for certain
brokers or dealers (Appendix E to 17 CFR 240.15c3-1).

* * * * *
    (c) * * *
    (4) * * *
    (vi) Credit risk weights of counterparties. A broker or dealer that
computes its deductions for credit risk pursuant to this Appendix E
shall apply a credit risk weight for transactions with a counterparty
of either 20%, 50%, or 150% based on an internal credit rating the
broker or dealer determines for the counterparty.
    (A) As part of its initial application or in an amendment, the
broker or dealer may request Commission approval to apply a credit risk
weight of either 20%, 50%, or 150% based on internal calculations of
credit ratings, including internal estimates of the maturity
adjustment. Based on the strength of the broker's or dealer's internal
credit risk management system, the Commission may approve the
application. The broker or dealer must make and keep current a record
of the basis for the credit rating of each counterparty;
* * * * *
    6. Section 240.15c3-1f is amended by:
    a. Removing the phrase from paragraph (d)(2), ``the counterparty
factor. The counter party factors are:'' and adding in its place ``a
counterparty factor of 20%, 50%, or 100% based on an internal credit
rating the OTC derivatives dealer determines for the counterparty.'';
and
    b. Revising paragraphs (d)(3)(i), (d)(3)(ii), (d)(3)(iii), and
(d)(4).
    The revisions read as follows:

Sec.  240.15c3-1f  Optional market and credit risk requirements for OTC
derivatives dealers (Appendix F to 17 CFR 240.15c3-1).

* * * * *
    (d) * * *
    (3) * * *
    (i) For counterparties for which an OTC derivatives dealer assigns
an internal rating for senior unsecured long-term debt or commercial
paper that would apply a 20% counterparty factor under (d)(2)(i) of
this section, 5% of the amount of the net replacement value in excess
of 25% of the OTC derivatives dealer's tentative net capital;

    (ii) For counterparties for which an OTC derivatives dealer assigns
an internal rating for senior unsecured long-term debt that would apply
a 50% counterparty factor under (d)(2)(ii) of this section, 20% of the
amount of the net replacement value in excess of 25% of the OTC
derivatives dealer's tentative net capital;
    (iii) For counterparties for which an OTC derivatives dealer
assigns an internal rating for senior unsecured long-term debt that
would apply a 100% counterparty factor under (d)(2)(iii) of this
section, 50% of the amount of the net replacement value in excess of
25% of the OTC derivatives dealer's tentative net capital.
    (4) Counterparties may be rated by the OTC derivatives dealer, or
by an affiliated bank or affiliated broker-dealer of the OTC
derivatives dealer, upon approval by the Commission on application by
the OTC derivatives dealer. Based on the strength of the OTC
derivatives dealer's internal credit risk management system, the
Commission may approve the application. The OTC derivatives dealer must
make and keep current a record of the basis for the credit rating for
each counterparty.
* * * * *

Sec.  Section 240.15c3-1g  [Amended]

    7. Section 240.15c3-1g(a)(3)(i)(F) is amended by removing the
phrase ``paragraphs (c)(4)(vi)(D) and (c)(4)(vi)(E)'' and adding in its
place ``paragraph (c)(4)(vi)(A) and paragraph (c)(4)(vi)(B)''.

Sec.  240.15c3-3a  [Amended]

    8. Section 240.15c3-3a is amended by removing paragraph (b)(1)(i)
of Note G and redesignating paragraphs (b)(1)(ii), (iii), and (iv) as
paragraphs (b)(1)(i), (ii), and (iii), respectively.
    9. Section 240.17a-4 is amended by:
    a. Removing the phrase from paragraph (b)(12), ``Sec.  240.15c3-
1e(c)(4)(vi)(D) and (E)'' and adding in its place ``Sec.  240.15c3-
1e(c)(4)(vi) ''; and
    b. Adding paragraph (b)(13).
    The addition reads as follows:

Sec.  240.17a-4  Records to be preserved by certain exchange members,
brokers and dealers.

* * * * *
    (b) * * *
    (13) The written policies and procedures the broker-dealer
establishes, maintains, and enforces to assess creditworthiness for the
purpose of Sec.  240.15c3-1(c)(2)(vi)(E), (F)(1), (F)(2), and (H).
* * * * *

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN
REQUIREMENTS FOR SECURITY FUTURES

    10. The general authority citation for Part 242 is revised and the
following citations are added in numerical order to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, 80a-
37, unless otherwise noted.
* * * * *

    Sections 242.101 and 242.102 are also issued under Pub. L. No.
111-203, Sec. Sec.  939, 939A, 124. Stat. 1376 (2010) (15 U.S.C.
78c, 15 U.S.C. 78o-7 note).
* * * * *

    11. Section 242.101 is amended by revising paragraph (c)(2) to read
as follows:

Sec.  242.101  Activities by distribution participants.

* * * * *
    (c) * * *
    (2) Certain nonconvertible and asset-backed securities.
Nonconvertible debt securities, nonconvertible preferred securities,
and asset-backed securities, that are determined and demonstrated by
the distribution participant or affiliated purchaser, and verified by
an independent third party, utilizing reasonable factors of evaluation
to:
    (i) Be liquid relative to the market for that asset class;
    (ii) Trade in relation to general market interest rates and yield
spreads; and
    (iii) Be relatively fungible with securities of similar
characteristics and interest rate yield spreads; or
* * * * *
    12. Section 242.102 is amended by revising paragraph (d)(2) to read
as follows:

Sec.  242.102  Activities by issuers and selling security holders
during a distribution.

* * * * *
    (d) * * *
    (2) Certain nonconvertible and asset-backed securities.
Nonconvertible debt securities, nonconvertible preferred securities,
and asset-backed securities, that are determined and demonstrated by
the issuer, selling security holder, or affiliated purchaser, and
verified by an independent third party, utilizing reasonable factors of
evaluation to:
    (i) Be liquid relative to the market for that asset class;
    (ii) Trade in relation to general market interest rates and yield
spreads; and
    (iii) Be relatively fungible with securities of similar
characteristics and interest rate yield spreads; or
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    13. The authority citation for Part 249 is amended by adding the
following citation in numerical order to read as follows:

    Authority: 15 U.S.C. 78a et seq., 7201 et. seq., 18 U.S.C. 1350,
unless otherwise noted.

    Section 249.617 is also issued under Pub. L. 111-203, Sec. Sec.
939, 939A, 124. Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7
note).

* * * * *
    14. Amend Form X-17A-5 Part IIB General Instructions (referenced in
Sec.  249.617) by:
    a. Removing Schedule IV: Internal Credit Rating Conversion; and
    b. Removing all but the first sentence in the section ``Credit risk
exposure'' under the heading ``Computation of Net Capital and Required
Net Capital,'' and adding a second sentence that reads ``The counter-
party charge is computed using the credit risk weights assigned to the
OTC derivatives dealer's internal calculations by the Commission under
paragraph (d)(2) of Appendix F.''

    Note:  The text of Form X-17A-5 Part IIB does not, and this
amendment will not, appear in the Code of Federal Regulations

.* * * * *

    Dated: April 27, 2011.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-10619 Filed 5-5-11; 8:45 am]
BILLING CODE 8011-01-P