would exceed the excess net capital threshold well before exceeding the
bank equity capital threshold.\908\ The bank equity capital threshold
is the more important metric since it relates directly to the financial
strength of the bank, which is the entity holding the account. In
particular, if the carrying broker-dealer's deposit constitutes a
substantial portion of the bank's total deposits, the bank may not have
the liquidity to quickly return the deposit to the broker-dealer. The
elimination of the excess net capital threshold should mitigate
concerns expressed by small broker-dealers that they would need to open
multiple bank accounts to make cash deposits or hire additional staff,
if they sought to deposit qualified securities in a reserve account in
order to avoid opening multiple accounts. This is because the excess
net capital threshold likely would have impacted smaller broker-
dealers, which--consistent with their size--maintain less net capital
than larger firms.
---------------------------------------------------------------------------

    \908\ See SIFMA 2 Letter; JP Morgan 2 Letter.
---------------------------------------------------------------------------

    Second, with respect to the bank equity capital threshold, in
response to comments, the Commission has increased the trigger level
from 10% to 15% of the bank's equity capital. The increase of the
threshold to 15% is designed to address concerns raised by commenters
that the proposed percentage tests were unduly restrictive in certain
respects and should be modified, particularly with respect to large
broker-dealers with large deposit requirements. Consequently, the
increase from 10% to 15% is designed to mitigate commenters concerns
that the 10% threshold would require broker-dealers to spread out
deposits over an excessive number of banks, while still providing
adequate protection against undue concentrations of deposits,
particularly where smaller banks are concerned.
    The elimination of the 50% of excess net capital threshold and
increase of the bank capital threshold from 10% to 15% is designed to
appropriately address concerns raised by commenters that they would
have to substantially alter their current cash deposit practices in
light of the goal of the rule to promote the broker-dealer's ability to
have quick access to the deposit.
    With the elimination of the broker-dealer excess net capital
threshold, and the increase in the bank equity capital threshold, it is
likely that very few broker-dealers (including small broker-dealers)
would be required to maintain reserve accounts at multiple banks,
unless they chose to do so for operational, business or other reasons.
Therefore for the reasons discussed above, as adopted, paragraph (e)(5)
of Rule 15c3-3, should not significantly impact a substantial number of
small entities.

3. Small Entities Subject to the Rule
    Paragraph (c)(1) of Rule 0-10 \909\ states that the term small
business or small organization, when referring to a broker-dealer,
means a broker or dealer that had 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); \910\ and is not affiliated with
any person (other than a natural person) that is not a small business
or small organization.
---------------------------------------------------------------------------

    \909\ 17 CFR 240.0-10(c)(1).
    \910\ 17 CFR 240.17a-5(d).
---------------------------------------------------------------------------

    Based on FOCUS Report data, as of December 31, 2011, the Commission
estimates there are approximately 5 broker-dealers that performed a
customer reserve computation pursuant to Rule 15c3-3 and were ``small''
for the purposes Rule 0-10.
4. Reporting, Recordkeeping, and Other Compliance Requirements
    The amendments (1) Require broker-dealers to perform a PAB reserve
computation, (2) limit the amount that a broker-dealer may deposit in a
reserve account at any individual bank in the form of cash, (3) require
broker-dealers to obtain possession and control of customers' fully
paid and excess margin securities allocated to a short position by
borrowing equivalent securities or through other means within a
specified period of time, and (4) require broker-dealers to obtain the
written affirmative consent of a new customer before including a
customer's free credit balances in a Sweep Program, as well as provide
certain disclosures and notices to all customers with regard to the
broker-dealer's Sweep Program.
5. Agency Action To Minimize Effect on Small Entities
    The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objectives, while minimizing any
significant adverse impact on small entities. In connection with
adopting the final rules, the Commission considered, as alternatives,
establishing different compliance or reporting requirements that take
into account the resources available to smaller entities, exempting
smaller entities from coverage of the disclosure requirements, and
clarifying, consolidating, or simplifying disclosure for small
entities.\911\
---------------------------------------------------------------------------

    \911\ 5 U.S.C. 604(a)(5).
---------------------------------------------------------------------------

    As discussed above, the impact on individual small broker-dealers,
as well as all small broker-dealers, should be minimal, and thus the
Commission is not establishing different compliance or reporting
requirements or timetables; clarifying, consolidating, or simplifying
compliance and reporting requirements under the rule for small
entities; or exempting small entities from coverage of the rule, or any
part thereof. The amendments impose performance standards and do not
dictate for entities of any size any particular design standards (e.g.,
technology) that must be employed to achieve the objectives of the
amendments.

C. Holding Futures Positions in a Securities Portfolio Margining
Account

1. Need for and Objectives of the Amendments
    The amendments to Rule 15c3-3 and 15c3-3a are designed to
accommodate futures positions in a securities account that is margined
on a portfolio basis.\912\ Under SRO portfolio margin rules, a broker-
dealer can combine securities and futures positions in a portfolio
margin securities account to compute margin requirements based on the
net market risk of all positions in the account. The amendments to Rule
15c3-3 and 15c3-3a complement the amendments to SIPA in the Dodd-Frank
Act, as well as provide additional protections to customers through the
strengthened reserve requirements of Rule 15c3-3. In particular, the
changes will apply the protections in Rules 15c3-3 and Rule 15c3-3a to
all positions in a portfolio margin account.
---------------------------------------------------------------------------

    \912\ See Amendments to Financial Responsibility Rules, 72 FR at
12868-12870.
---------------------------------------------------------------------------

    These additional protections should make portfolio margining more
attractive to investors. Portfolio margining can significantly reduce
customer margin requirements for offsetting positions involving
securities and futures products, which in turn reduces the costs of
trading such products.
2. Significant Issues Raised by Public Comments
    The Commission did not receive any specific comments with respect
to this portion of the IRFA.
3. Small Entities Subject to the Rules
    As discussed above in section V.D.2. of this release, based on
FOCUS Report data, as of December 31, 2011, the Commission estimates
that approximately 35 broker-dealers will elect to offer their
customers portfolio margin accounts that will include futures and
futures options. None of these broker-dealers are ``small'' for
purposes of Rule 0-10.
4. Reporting, Recordkeeping, and Other Compliance Requirements
    These amendments (1) revise the definition of free credit balances
and other credit balances in Rule 15c3-3 to include funds in a
portfolio margin account relating to certain futures and futures
options positions, and (2) add a debit line item to the customer
reserve formula in Rule 15c3-3a consisting of margin posted by a
broker-dealer to a derivatives clearing organization.
 5. Agency Action To Minimize Effect on Small Entities
    As stated above, the Commission does not believe that any of the
broker-dealers that will elect to offer portfolio margining are
``small'' for purposes of Rule 0-10. Further, the requirements imposed
by the portfolio margin amendments will be elective. Therefore, the
Commission does not believe it is necessary or appropriate to establish
different compliance or reporting requirements or timetables; clarify,
consolidate, or simplify compliance and reporting requirements under
the rule for small entities; or exempting small entities from coverage
of the rule, or any part thereof. The amendments also contain
performance standards and do not dictate for entities of any size any
particular design standards (e.g., technology) that must be employed to
achieve the objectives of the proposed amendments.

D. Securities Lending and Borrowing and Repurchase/Reverse Repurchase
Transactions

1. Need for and Objectives of the Amendments
    These rules amend subparagraph (c)(2)(iv)(B) of Rule 15c3-3 to
clarify that broker-dealers providing securities lending and borrowing
settlement services are deemed, for purposes of the rule, to be acting
as principals and are subject to applicable capital deductions, unless
the broker-dealer takes certain steps to disclaim principal
liability.\913\ In addition, the Commission is adopting paragraph
(c)(5) to Rule 17a-11 to require that a broker-dealer notify the
Commission whenever the total amount of money payable against all
securities loaned or subject to a repurchase agreement exceeds 2,500
percent of tentative net capital.\914\ The final rule also exempts a
broker-dealer from this 17a-11 notice requirement if it reports monthly
its securities lending and borrowing and repurchase and reverse

repurchase activity to its DEA in a form acceptable to its DEA.
    In 2001, MJK Clearing, a broker-dealer with a substantial number of
customer accounts, failed when it could not meet its securities lending
obligations. This failure has highlighted the risks associated with
securities lending and repurchase and reverse repurchase agreements and
the need to manage those risks. More specifically, two concerns arose
from the failure of MJK, namely, (1) that broker-dealers with principal
liability in a stock loan transaction may erroneously be considering
themselves as acting in an agency capacity and, consequently, not
taking appropriate capital charges; and (2) that broker-dealers that
have historically not been very active in stock loan transactions may
be rapidly expanding their balance sheets with such transactions, and
thereby, increase leverage to a level that poses significant financial
risk to the firm and its counterparties.
---------------------------------------------------------------------------

    \913\ See section II.C. of this release.
    \914\ Id.
---------------------------------------------------------------------------

    These amendments are intended to strengthen the documentation
controls broker-dealers employ to manage their securities lending and
borrowing and securities repurchase and reverse repurchase activities
and to enhance regulatory monitoring. The intended result of the
amendments is to avoid ambiguity regarding the applicability of the
stock loan charges in the net capital rule to a particular broker-
dealer. As the failure of MJK illustrated, disputes can arise over
whether a broker-dealer is acting as a principal or agent in a stock
loan transaction.\915\
---------------------------------------------------------------------------

    \915\ See, e.g., Nomura v. E*Trade, 280 F.Supp.2d 184 (S.D.N.Y.
2003).
---------------------------------------------------------------------------

    The amendments to paragraph (c)(5) to Rule 17a-11 will help
identify broker-dealers with highly leveraged non-government securities
lending and borrowing and repo operations and make it easier for
regulators to respond more quickly and protect customers in the event a
firm is approaching insolvency.\916\ This notice provision is designed
to alert regulators to a sudden increase in a broker-dealer's stock
loan and repo positions, which could indicate that the broker-dealer is
taking on new risk that it may have limited experience in managing, as
well as to help identify those broker-dealers highly active in
securities lending and repos. Finally, the objective of the exemption
from the notice provision of paragraph (c)(5) of Rule 17a-11 through
monthly reporting is designed to accommodate large broker-dealers that
are active in this business and regularly maintain stock loan and repo
balances that exceed the threshold.
---------------------------------------------------------------------------

    \916\ 17 CFR 240.17a-11(c)(5).
---------------------------------------------------------------------------

2. Significant Issues Raised by Public Comments
    The Commission did not receive any specific comments with respect
to this portion of the IRFA.
3. Small Entities Subject to the Rule
    Based on FOCUS Report data, as of December 31, 2011, the Commission
estimates that none of the broker-dealers that engage in securities
lending and borrowing or securities repurchase and reverse repurchase
activity are ``small'' for the purposes Rule 0-10. Therefore, the
amendments should not affect ``small'' broker-dealers.
4. Reporting, Recordkeeping, and Other Compliance Requirements
    These amendments require broker-dealers to (1) disclose the
principals and obtain certain agreements from the principals in a
transaction where they provide settlement services in order to be
considered an agent (as opposed to a principal) for the purposes of the
net capital rule, and (2) provide notice to the Commission and other
regulatory authorities if the broker-dealer's securities lending or
repo activity reaches a certain threshold or, alternatively, report
monthly the broker-dealer's securities lending and repo activity to the
broker-dealer's DEA, in a form acceptable to the DEA.
5. Agency Action To Minimize Effect on Small Entities
    As noted above, the Commission estimates that this amendment will
have no impact on small entities. Thus, the Commission does not believe
it is necessary or appropriate to establish different compliance or
reporting requirements or timetables, nor is it clarifying,
consolidating, or simplifying compliance and reporting requirements
under the rule for small entities; or exempt small entities from
coverage of the rule, or any part thereof. The amendments also use
performance standards and do not dictate for entities of any size any
particular design standards (e.g., technology) that must be employed to
achieve the objectives of the proposed amendments.

E. Documentation of Risk Management Procedures

1. Need for and Objectives of the Amendments
    Requiring certain large broker-dealers to document and preserve
their internal credit, market, and liquidity risk management controls
under paragraph (a)(23) to Rule 17a-3 and (e)(9) to Rule 17a-4 will
assist firms in evaluating and adhering to their established internal
risk management controls and regulators in reviewing such
controls.\917\
---------------------------------------------------------------------------

    \917\ See section II.D. of this release.
---------------------------------------------------------------------------

    These amendments are intended to strengthen the controls certain
large broker-dealers employ to manage risk. These amendments are
designed to lower systemic risk primarily in the securities markets by
enhancing risk management through reinforcement of documentation
practices and making it easier for regulators to access a broker-
dealer's procedures and controls, to ensure a broker-dealer is adhering
to such documented controls.
    Additionally, by making the documented controls a required record
under Rule 17a-3, a broker-dealer's regulator likely will have better
access to them, as this benefit will only be realized to the extent a
broker-dealer has existing market, credit and liquidity risk management
controls in place because the rule does not specify the type of
controls a broker-dealer must establish to manage these risks. It
simply requires the documentation of the procedures the broker-dealer
has established. The final rule amendment will require any such records
of the market, credit, and liquidity risk management controls be
available to the broker-dealer's regulators so they can review whether
the broker-dealer is adhering to these controls.
2. Significant Issues Raised by Public Comments
    The Commission did not receive any specific comments with respect
to this portion of the IRFA.
3. Small Entities Subject to the Rule
    These amendments apply to a limited number of broker-dealers,
namely, those firms with more than $1 million in customer credits or
$20 million in capital. Based on FOCUS Report data, as of December 31,
2011, the Commission estimates that none of the broker-dealers that
will be subject to this amendment will be ``small'' for the purposes
Rule 0-10.
4. Reporting, Recordkeeping, and Other Compliance Requirements
    These amendments will require broker-dealers to document any
credit, market, and liquidity risk management controls established and
maintained by the broker-dealer to assist it in analyzing and managing
the risks associated with its business activities. The Commission is
not mandating any specific controls, procedures, or policies that must
be established by a broker-dealer to manage

market, credit, or liquidity risk. Rather, the Commission is requiring
that a control, procedure, or policy be documented if it is in place.
5. Agency Action To Minimize Effect on Small Entities
    As noted above, these amendments will have no impact on ``small''
broker-dealers. Thus, the Commission is not establishing different
compliance or reporting requirements or timetables; clarifying,
consolidating, or simplifying compliance and reporting requirements
under the rule for small entities; nor exempting small entities from
coverage of the rule, or any part thereof.
    The amendments also use performance standards and do not dictate
for entities of any size any particular design standards (e.g.,
technology) that must be employed to achieve the objectives of the
amendments.

F. Amendments to the Net Capital Rule

1. Need for and Objectives of the Amendments
    The amendments to Rule 15c3-1 are designed to address several areas
of concern regarding the financial responsibility requirements for
broker-dealers. Some broker-dealers have excluded from their regulatory
financial reports certain liabilities that have been shifted to third
parties that lack the resources--independent of the assets and revenue
of the broker-dealer--to pay the liabilities, or have utilized
infusions of temporary capital. These practices may misrepresent the
true financial condition of the broker-dealer and, thereby, impede the
ability of regulators to take proactive steps to reduce the harm to
customers, counterparties and clearing agencies that may result from
the broker-dealer's failure. To address these issues, the Commission is
adopting an amendment to Rule 15c3-1 to add a new paragraph
(c)(2)(i)(F) requiring a broker-dealer to adjust its net worth when
calculating net capital by including any liability or expense for which
a third party has assumed the responsibility, unless the broker-dealer
can demonstrate that the third party has adequate resources,
independent of the broker-dealer to pay the liability or expense.\918\
In addition, the Commission is adopting amendments to paragraph
(c)(2)(i)(G)(2) of Rule 15c3-1, to require a broker-dealer to subtract
from net worth any contribution of capital to the broker-dealer: (1)
Under an agreement that provides the investor with the option to
withdraw the capital; or (2) that is intended to be withdrawn within a
period of one year of its contribution. Under the final rule, any
withdrawal of capital made within one year of its contribution is
deemed to have been intended to be withdrawn within a period of one
year, unless the withdrawal has been approved in writing by the broker-
dealer's DEA.\919\
---------------------------------------------------------------------------

    \918\ See section II.E.1. of this release.
    \919\ See section II.E.2. of this release.
---------------------------------------------------------------------------

    Further, currently, broker-dealers are required to take net capital
charges pursuant to SRO rules relating to fidelity bond deductibles,
but Rule 15c3-1 does not explicitly incorporate such charges for
purposes of computing net capital. To address this inconsistency, the
Commission is adopting paragraph (c)(2)(xiv) to Rule 15c3-1.\920\
---------------------------------------------------------------------------

    \920\ See section II.E.4. of this release.
---------------------------------------------------------------------------

    In addition, a number of broker-dealers have sought to obtain
protection under the bankruptcy laws while still engaging in a
securities business. Permitting an insolvent broker-dealer to continue
to transact a securities business endangers its customers and
counterparties and places securities clearing agencies at risk. To
address this concern, the Commission is adopting an amendment to
paragraph (a) of Rule 15c3-1 to require a broker-dealer to cease its
securities business activities if certain insolvency events were to
occur, as defined in new paragraph (c)(16) to Rule 15c3-1.\921\
---------------------------------------------------------------------------

    \921\ See section II.E.5. of this release.
---------------------------------------------------------------------------

    Finally, an important goal of the Commission is to protect the
financial integrity of the broker-dealer so that if the firm must
liquidate it may do so in an orderly fashion. Allowing a capital
withdrawal that may jeopardize the financial integrity of a broker-
dealer exposes customers and creditors of the broker-dealer to
unnecessary risk. Paragraph (e) of Rule 15c3-1, which places certain
conditions on a broker-dealer when withdrawing capital,\922\ allows the
Commission to issue an order temporarily restricting a broker-dealer
from withdrawing capital or making loans or advances to stockholders,
insiders, and affiliates under certain circumstances.\923\ The rule,
however, limits such orders to withdrawals, advances, or loans that,
when aggregated with all other withdrawals, advances, or loans on a net
basis during a thirty calendar day period, exceed 30% of the firm's
excess net capital. The Commission is amending paragraph (e) to remove
the 30% of excess net capital limitation because the Commission has
determined that the requirement is difficult to enforce, as it
generally would not be clear when the 30% threshold had been reached,
due to the inherent unreliability of a troubled broker-dealer's books
and records.\924\
---------------------------------------------------------------------------

    \922\ See 17 CFR 240.15c3-1(e).
    \923\ See 17 CFR 240.15c3-1(e)(3).
    \924\ See section II.E.6. of this release.
---------------------------------------------------------------------------

    Finally, the Commission is making permanent a temporary amendment
to Appendix A of Rule 15c3-1, which permits broker-dealers to employ
theoretical option pricing models to calculate haircuts for listed
options and related positions that hedge those options.\925\ The
temporary amendment decreased the range of pricing inputs to the
approved option pricing models, which effectively reduced the haircuts
applied by the carrying firm with respect to non-clearing option
specialist and market maker accounts.\926\ The amendment is intended to
better align the capital requirements with the risks these requirements
are designed to address.
---------------------------------------------------------------------------

    \925\ 17 CFR 240.15c3-1a; See Net Capital Rule, Exchange Act
Release No. 38248 (Feb. 6, 1997), 62 FR 6474 (Feb. 12, 1997). See
also Letter from Michael Macchiaroli, Associate Director, Division
of Market Regulation, Commission, to Richard Lewandowski, Vice
President, Regulatory Division, The Chicago Board Options Exchange,
Inc. (Jan. 13, 2000) (stating that the Division of Market Regulation
``will not recommend . . . enforcement action if non-clearing option
specialists and market-makers continue to rely on subparagraph
(b)(1)(iv) of Appendix A to Rule 15c3-1 under the Exchange Act until
such time as the Commission has determined whether it should be
extended''). The letter did not grant any other relief.
    \926\ See Net Capital Rule, Exchange Act Release No. 38248 (Feb.
6, 1997), 62 FR 6474 (Feb. 12, 1997).
---------------------------------------------------------------------------

2. Significant Issues Raised by Public Comments
    The Commission received three comments in response to requests for
comment related to the amendments to the net capital rule requiring
broker-dealers to add back to its net worth certain liabilities assumed
by third parties and treat certain temporary capital contributions as
liabilities.\927\
---------------------------------------------------------------------------

    \927\ See Beer Letter; Levene Letter; NIBA 2 Letter.
---------------------------------------------------------------------------

    One commenter noted that there should be no circumstance in which a
broker-dealer accepted a capital contribution for net capital purposes
that could be withdrawn at the option of the investor.\928\ This
commenter also noted that if small firms were required to raise over
$300,000 in capital each, there will be the largest dissolution of
small broker-dealers in the history of the regulated securities
industry.\929\ The commenter requested that the Commission state a
reasonable time period for broker-dealers to raise capital

to meet these new standards.\930\ This commenter also stated that the
Commission's estimate of a gross cost of capital of 7.5% (5% + 2.5%) is
a totally unrealistic cost of capital for small broker-dealers and that
these broker-dealers will categorically have costs significantly higher
than 7.5%.\931\
---------------------------------------------------------------------------

    \928\ See NIBA 2 Letter.
    \929\ Id.
    \930\ Id.
    \931\ Id.
---------------------------------------------------------------------------

    Further, the commenter stated that, until the Commission convenes a
small broker-dealer representative panel to assist it with establishing
such costs, the Commission is ``speculating'' on such costs, and is
therefore without adequate information to consider the effects of such
costs and changes on small firms.\932\ This commenter specifically
requested the Commission consider the needs of small firms that will
likely require additional net capital over the next decade.\933\
---------------------------------------------------------------------------

    \932\ Id.
    \933\ Id. The commenter stated that any rule that would
``restrict small broker-dealers from raising capital as a result of
uncertainty of investors or owner-operators related to the return of
their capital in a reasonable time frame will create a
disproportionate and impossible hurdle for small broker-dealers to
overcome.'' See NIBA 2 Letter.
---------------------------------------------------------------------------

    Additionally, this commenter believed that the rule is intended to
protect the capitalization of large firms while ignoring small firms.
The commenter also noted that it opposes regulation that arbitrarily
reduces the value of small broker-dealers and their competitive
position relative to larger broker-dealers.\934\ Finally, the commenter
expressed concern that the proposed amendments to Rule 15c3-1 would be
particularly burdensome on small broker-dealers, negatively impacting
capital formation for small issuers and increasing the cost of capital
for small broker-dealers.\935\
---------------------------------------------------------------------------

    \934\ See NIBA 2 Letter.
    \935\ Id. The commenter noted that broker-dealers ``are dealing
with a relatively static commission and fees matrix versus what they
may charge customers.'' Consequently, the commenter believes
``broker-dealers will be unable to pass any of these costs increases
directly to customers, irrespective of the type of customer or type
of business that they are conducting with small broker-dealers,
which further threatens the financial profit potential and return on
equity of small broker-dealers.'' Id. The commenter further believes
that the cost increases over a short period of time will threaten
the viability of all small broker-dealers. Id.
---------------------------------------------------------------------------

    Another commenter stated that this proposal will require the 702
mentioned debt-free introducing broker-dealers to needlessly take on
debt of approximately $280,354.\936\ Further, the commenter stated
that, if the proposed is approved, it would force the majority of small
firms out of business and ultimately deny investors the right and
opportunity to deal with smaller, more personalized and debt-free
member firms.\937\ One commenter stated that it also must be considered
that any implementation and enforcement of these proposed changes
should not be made retroactive, because to subject firms to a new set
of rules and guidelines will effectively penalize small firms that have
been in full compliance with the rules and regulations.\938\
---------------------------------------------------------------------------

    \936\ See Beer Letter.
    \937\ Id.
    \938\ See Levene Letter.
---------------------------------------------------------------------------

    The Commission considered all comments discussed above and the
potential impact on small broker-dealers.\939\ The Commission continues
to believe that the estimated cost of capital is not unrealistic for
small broker-dealers. However, as discussed above in section V. of this
release, in response to comments, the Commission increased the
estimated cost of capital for these amendments is 12%.
---------------------------------------------------------------------------

    \939\ See Beer Letter; Levene Letter; NIBA 2 Letter.
---------------------------------------------------------------------------

    Moreover, as discussed in section II.E.1 and 2. of this release,
the baseline of these rules is current Rule 15c3-1 and existing
guidance and interpretations. The Commission staff has provided
guidance with respect to the treatment and recording of certain broker-
dealer expenses and liabilities that is consistent with the rule
amendment.\940\ In addition, existing broker-dealer recordkeeping rules
require that a broker-dealer record its income and expenses.\941\ For
example, paragraph (a)(2) of Rule 17a-3, requires a broker-dealer to
make and keep current ledgers (or other records) reflecting all assets
and liabilities, income and expense and capital accounts.\942\
Therefore, the Commission does not expect small broker-dealers to incur
significant costs or burdens to comply with the amendment regarding
broker-dealers and payment of expenses by third parties.\943\
---------------------------------------------------------------------------

    \940\ See, e.g., Third Party Expense Letter; see also FINRA
Notice to Members 03-6, Expense Sharing Agreements.
    \941\ 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \942\ 17 CFR 240.17a-3(a)(2).
    \943\ See NIBA 2 Letter.
---------------------------------------------------------------------------

    At the same time, the purpose of the requirement in new paragraph
(c)(2)(i)(F) of Rule 15c3-1 is to address the practices of a broker-
dealer that raise concerns when a broker-dealer shifts liabilities to
an entity with no revenue or assets independent of the broker-dealer to
inappropriately increase its reported net capital, by excluding the
liability from the calculation of net worth. Therefore, the final rule,
as discussed above in section II.E.1. of this release, is designed to
prohibit a practice that could misrepresent a broker-dealer's actual
financial condition, deceive the firm's customers, and hamper the
ability of regulators to monitor the firm's financial condition.
    Moreover, in response to comments,\944\ the rule amendment, as
adopted, should not impose burdens or present serious implementation
difficulties to small broker-dealers \945\ that are appropriately
recording their assets and liabilities under current Commission rules
and interpretive guidance.\946\ These broker-dealers also should not be
required to obtain loans to increase their capital as a result of the
Rule 15c3-1 amendments. Therefore, the Commission does not believe a
longer time period for compliance or the formation of a small broker-
dealer advisory cost committee is necessary.\947\
---------------------------------------------------------------------------

    \944\ Id.
    \945\ See Beer Letter; Levene Letter; NIBA 2 Letter.
    \946\ See, e.g., Third Party Expense Letter.
    \947\ See NIBA 2 Letter.
---------------------------------------------------------------------------

    In response to the commenters' concerns about the negative impact
of the rule amendments on the capital of small broker-dealers,\948\ as
discussed above, the final rule amendment is a codification of existing
Commission staff guidance,\949\ and thus should not represent a change
for small broker-dealers with respect to capital withdrawals. Moreover,
with respect to commenters' concerns about obtaining capital,\950\ the
rule does not prohibit an investor from withdrawing capital at any
time. Rather, it prohibits a broker-dealer from treating temporary cash
infusions as capital for purposes of the net capital rule. Finally, the
final rule amendments provide a mechanism for a broker-dealer to apply
to its DEA to make a withdrawal within one year of the capital
contribution without triggering the deduction under certain
circumstances (e.g., de minimis withdrawals).
---------------------------------------------------------------------------

    \948\ See Beer Letter; Levene Letter; NIBA 2 Letter.
    \949\ See Temporary Capital Letter. See also section II.E.2. of
this release.
    \950\ See Beer Letter; NIBA 2 Letter.
---------------------------------------------------------------------------

3. Small Entities Subject to the Rule

    Based on FOCUS Report data, as of December 31, 2011, the Commission
estimates that there are approximately 2,506 introducing and carrying
broker-dealers that are ``small'' for the purposes Rule 0-10. The
amendments relating to certain subtractions from net worth and the
restrictions on the withdrawal of capital will apply to all ``small''
broker-dealers in that they will be subject to the requirements in the
amendments. The amendment to Appendix A of Rule 15c3-1 likely should
have no, or little, impact on ``small'' broker-dealers, because based
on staff experience, most,

if not all, of these firms do not carry non-clearing option specialist
or market maker accounts.
4. Reporting, Recordkeeping, and Other Compliance Requirements
    The amendments will require an ``insolvent'' broker-dealer to cease
conducting a securities business and provide the securities regulators
with notice of its insolvency. The amendments also will require broker-
dealers to deduct from net worth certain liabilities and certain
temporary capital contributions, as well as require broker-dealers to
deduct from net capital, certain specified amounts as required by SRO
fidelity bond rules. Finally, under the amendment to the rule on
Commission orders restricting withdrawals of capital, a broker-dealer
subject to an order will not be permitted to withdraw capital. Finally,
the amendments will make permanent a temporary rule that reduced the
haircut for non-clearing options specialist and market maker accounts
under Appendix A to Rule 15c3-1.
5. Agency Action To Minimize Effect on Small Entities
    As discussed in detail above, the Commission considered all
comments received and adopted the amendment substantially as
proposed.\951\ The Commission understands the concerns relating to
small broker-dealers raised by commenters \952\ and reiterates that the
rule is designed to address situations where there is no legitimate
reason to book liabilities to a separate legal entity that otherwise
would accrue to the broker-dealer. Moreover, the final rule is
consistent with current staff interpretations regarding third-party
expense sharing and thus should not represent a change for broker-
dealers. The Commission also notes that the final rule is designed to
prohibit a practice that could misrepresent a broker-dealer's actual
financial condition, deceive the firm's customers, and hamper the
ability of regulators to monitor the firm's financial condition.
Moreover, the rule change, as adopted, should not impose undue burdens
or present serious implementation difficulties for large or small
broker-dealers. As the Commission explained in the proposing release, a
broker-dealer can demonstrate the adequacy of the third party's
financial resources by maintaining records such as the third party's
most recent (i.e., as of a date within the previous twelve months)
audited financial statements, tax returns, or regulatory filings
containing financial reports.\953\ Given that the entity to which the
broker-dealer is seeking to shift one or more liabilities typically is
an affiliate, the staff's experience is that such records should be
available to the broker-dealer. Further, because the proposed rule
change is consistent with prior staff guidance regarding the need to be
able to demonstrate the third party's financial adequacy, the broker-
dealer seeking to shift a liability to a third party already would,
under existing staff interpretations, expect to be ready to provide
such evidence of the third party's financial resources. Taken together,
these realities should mitigate the implementation and burden concerns
raised by commenters as they relate to small broker-dealers.
---------------------------------------------------------------------------

    \951\ See section II.E.1. of this release.
    \952\ See Beer Letter; Beer 2 Letter; Levene Letter; Lowenstein
Letter; NIBA 2 Letter. See also discussion in section II.E.1. of
this release.
    \953\ Amendments to Financial Responsibility Rules, 72 FR at
12872. The Commission specifically requested comment regarding the
records by which a broker-dealer could demonstrate financial
resources. It received no comments in response to this request.
---------------------------------------------------------------------------

    One or more of these record types are generally readily available.
The general availability of a satisfactory measure of financial
resources should mitigate the implementation and burden concerns raised
by the commenters.
    As discussed above, given the minimal impact these amendments will
have on small entities, the Commission is not establishing different
compliance or reporting requirements or timetables; clarifying,
consolidating, or simplifying compliance and reporting requirements
under the rule for small entities; nor exempting small entities from
coverage of the rule, or any part thereof.
    The amendments use performance standards and do not dictate for
entities of any size any particular design standards (e.g., technology)
that must be employed to achieve the objectives of the amendments.

VII. Statutory Authority

    The Commission is adopting amendments to Rules 15c3-1, 15c3-3, 17a-
3, 17a-4 and 17a-11 under the Exchange Act pursuant to the authority
conferred by the Exchange Act, including Sections 15, 17, 23(a) and
36.\954\
---------------------------------------------------------------------------

    \954\ 15 U.S.C. 78o, 78q, 78w and 78mm.
---------------------------------------------------------------------------

Text of Final Rules

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.
    In accordance with the foregoing, the Commission hereby amends
Title 17, Chapter II of the Code of Federal Regulation as follows.

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

0
1. The general authority for Part 240 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et. seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010), unless otherwise
noted.
* * * * *

0
2. Section 240.15c3-1 is amended by:
0
a. Revising the first sentence of paragraph (a) introductory text;
0
b. Removing from paragraph (a)(6)(iii)(A) the phrase ``paragraph
(c)(2)(x)(A)(1) through (9) of this section'' and in its place adding
the phrase ``Appendix A (Sec.  240.15c3-1a)'';
0
c. Revising the paragraph (c)(2)(i) heading;
0
d. Adding paragraphs (c)(2)(i)(F) and (G);
0
e. Revising paragraphs (c)(2)(iv)(B), (c)(2)(iv)(E), and
(c)(2)(vi)(D)(1);
0
f. Adding paragraph (c)(2)(xiv);
0
g. Adding paragraph (c)(16) and an undesignated center heading;
0
h. Revising paragraph (e)(3)(i); and
0
i. Removing from the second sentence in paragraph (e)(3)(ii) the text
``The hearing'' and in its place adding the phrase ``A hearing on an
order temporarily prohibiting the withdrawal of capital''.
    The revisions and additions read as follows:

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

    (a) Every broker or dealer must at all times have and maintain net
capital no less than the greater of the highest minimum requirement
applicable to its ratio requirement under paragraph (a)(1) of this
section, or to any of its activities under paragraph (a)(2) of this
section, and must otherwise not be ``insolvent'' as that term is
defined in paragraph (c)(16) of this section. * * *
* * * * *
    (c) * * *
    (2) * * *
    (i) Adjustments to net worth related to unrealized profit or loss,
deferred tax provisions, and certain liabilities.* * *
* * * * *
    (F) Subtracting from net worth any liability or expense relating to
the

business of the broker or dealer for which a third party has assumed
the responsibility, unless the broker or dealer can demonstrate that
the third party has adequate resources independent of the broker or
dealer to pay the liability or expense.
    (G) Subtracting from net worth any contribution of capital to the
broker or dealer:
    (1) Under an agreement that provides the investor with the option
to withdraw the capital; or
    (2) That is intended to be withdrawn within a period of one year of
contribution. Any withdrawal of capital made within one year of its
contribution is deemed to have been intended to be withdrawn within a
period of one year, unless the withdrawal has been approved in writing
by the Examining Authority for the broker or dealer.
* * * * *
    (iv) * * *
    (B) All unsecured advances and loans; deficits in customers' and
non-customers' unsecured and partly secured notes; deficits in omnibus
credit accounts maintained in compliance with the requirements of 12
CFR 220.7(f) of Regulation T under the Act, or similar accounts carried
on behalf of another broker or dealer, after application of calls for
margin, marks to the market or other required deposits that are
outstanding 5 business days or less; deficits in customers' and non-
customers' unsecured and partly secured accounts after application of
calls for margin, marks to market or other required deposits that are
outstanding 5 business days or less, except deficits in cash accounts
as defined in 12 CFR 220.8 of Regulation T under the Act for which not
more than one extension respecting a specified securities transaction
has been requested and granted, and deducting for securities carried in
any of such accounts the percentages specified in paragraph (c)(2)(vi)
of this section or Appendix A, Sec.  240.15c3-1a; the market value of
stock loaned in excess of the value of any collateral received
therefor; receivables arising out of free shipments of securities
(other than mutual fund redemptions) in excess of $5,000 per shipment
and all free shipments (other than mutual fund redemptions) outstanding
more than 7 business days, and mutual fund redemptions outstanding more
than 16 business days; and any collateral deficiencies in secured
demand notes as defined in Appendix D, Sec.  240.15c3-1d; a broker or
dealer that participates in a loan of securities by one party to
another party will be deemed a principal for the purpose of the
deductions required under this section, unless the broker or dealer has
fully disclosed the identity of each party to the other and each party
has expressly agreed in writing that the obligations of the broker or
dealer do not include a guarantee of performance by the other party and
that such party's remedies in the event of a default by the other party
do not include a right of setoff against obligations, if any, of the
broker or dealer.
* * * * *
    (E) Other Deductions. All other unsecured receivables; all assets
doubtful of collection less any reserves established therefor; the
amount by which the market value of securities failed to receive
outstanding longer than thirty (30) calendar days exceeds the contract
value of such fails to receive; and the funds on deposit in a
``segregated trust account'' in accordance with 17 CFR 270.27d-1 under
the Investment Company Act of 1940, but only to the extent that the
amount on deposit in such segregated trust account exceeds the amount
of liability reserves established and maintained for refunds of charges
required by sections 27(d) and 27(f) of the Investment Company Act of
1940; Provided, That the following need not be deducted:
    (1) Any amounts deposited in a Customer Reserve Bank Account or PAB
Reserve Bank Account pursuant to Sec.  240.15c3-3(e),
    (2) Cash and securities held in a securities account at a carrying
broker or dealer (except where the account has been subordinated to the
claims of creditors of the carrying broker or dealer), and
    (3) Clearing deposits.
* * * * *
    (vi) * * *
    (D)(1) In the case of redeemable securities of an investment
company registered under the Investment Company Act of 1940, which
assets consist of cash or money market instruments and which is
described in Sec.  270.2a-7 of this chapter, the deduction will be 2%
of the market value of the greater of the long or short position.
* * * * *
    (xiv) Deduction from net worth for excess deductible amounts
related to fidelity bond coverage. Deducting the amount specified by
rule of the Examining Authority for the broker or dealer with respect
to a requirement to maintain fidelity bond coverage.
* * * * *

Insolvent

    (16) For the purposes of this section, a broker or dealer is
insolvent if the broker or dealer:
    (i) Is the subject of any bankruptcy, equity receivership
proceeding or any other proceeding to reorganize, conserve, or
liquidate such broker or dealer or its property or is applying for the
appointment or election of a receiver, trustee, or liquidator or
similar official for such broker or dealer or its property;
    (ii) Has made a general assignment for the benefit of creditors;
    (iii) Is insolvent within the meaning of section 101 of title 11 of
the United States Code, or is unable to meet its obligations as they
mature, and has made an admission to such effect in writing or in any
court or before any agency of the United States or any State; or
    (iv) Is unable to make such computations as may be necessary to
establish compliance with this section or with Sec.  240.15c3-3.
* * * * *
    (e) * * *
    (3)(i) Temporary restrictions on withdrawal of net capital. The
Commission may by order restrict, for a period of up to twenty business
days, any withdrawal by the broker or dealer of equity capital or
unsecured loan or advance to a stockholder, partner, sole proprietor,
member, employee or affiliate under such terms and conditions as the
Commission deems necessary or appropriate in the public interest or
consistent with the protection of investors if the Commission, based on
the information available, concludes that such withdrawal, advance or
loan may be detrimental to the financial integrity of the broker or
dealer, or may unduly jeopardize the broker or dealer's ability to
repay its customer claims or other liabilities which may cause a
significant impact on the markets or expose the customers or creditors
of the broker or dealer to loss without taking into account the
application of the Securities Investor Protection Act of 1970.
* * * * *

Sec.  240.15c3-1a  [Amended]

0
3. Section 240.15c3-1a is amended by:
0
a. Removing paragraph (b)(1)(iv)(B); and
0
b. Redesignating paragraphs (b)(1)(iv)(A) introductory text,
(b)(1)(iv)(A)(1), (b)(1)(iv)(A)(2), and (b)(1)(iv)(A)(3) as paragraphs
(b)(1)(iv) introductory text, (b)(1)(iv)(A),

(b)(1)(iv)(B), and (b)(1)(iv)(C) respectively.

Sec.  240.15c3-2  [Removed and Reserved]

0
4. Section 240.15c3-2 is removed and reserved.

0
5. Section 240.15c3-3 is amended by:
0
a. Removing from paragraph (a)(1) introductory text, third sentence,
the citation ``220.19'' and in its place adding the citation
``220.12'';
0
b. In paragraph (a)(1)(iii), after the phrase ``(15 U.S.C. 78aaa et
seq.)'' adding ``(SIPA)'';
0
c. Removing the ``;'' at the end of paragraph (a)(1)(iv) and adding a
period in its place;
0
d. Revising paragraphs (a)(3), (4), (7), (8), and (9);
0
e. Adding paragraphs (a)(16) and (17);
0
f. In paragraph (b)(2):
0
i. In the first sentence, removing the phrase ``his physical possession
or under his control'' and in its place adding ``the broker's or
dealer's physical possession or under its control'';
0
ii. In the second sentence, removing the word ``he'' and in its place
adding ``it''; and
0
iii. In the second sentence, removing the word ``his'' and in its place
adding ``its'';
0
g. Removing from paragraphs (b)(3)(iv) and (b)(4)(i)(C) the phrase
``the Securities Investor Protection Act of 1970'' and in its place
adding ``SIPA'';
0
h. At the end of paragraph (b)(4)(i)(C) adding the word ``and,'';
0
i. In paragraph (b)(4)(v), removing the word ``his'' and adding in its
place ``the person's'';
0
j. Adding paragraph (b)(5);
0
k. In paragraph (c)(2):
0
i. Removing ``a special omnibus'' and in its place adding ``an omnibus
credit'';
0
ii. Removing the text ``section 4(b) of Regulation T under the Act (12
CFR 220.4(b))'' and in its place adding ``section 7(f) of Regulation T
(12 CFR 220.7(f))''; and
0
iii. Removing the word ``he'' and in its place adding ``it'';
0
l. In paragraph (c)(3), removing the words ``him'' and ``he'' wherever
they appear and in their place adding ``the broker or dealer'';
0
m. In the first sentence of paragraph (d) introductory text, removing
the word ``his'' wherever it appears and in its place adding ``its'';
0
n. In paragraph (d)(2), removing the word ``his'' and in its place
adding ``the broker's or dealer's'';
0
o. Removing the period at the end of paragraph (d)(3) and in its place
adding ``; or'';
0
p. Redesignating paragraph (d)(4) as paragraph (d)(5);
0
q. Adding a new paragraph (d)(4);
0
r. Revising paragraphs (e) and (f);
0
s. Revising the first sentence of paragraph (g);
0
t. Removing from paragraph (i) the text ``his reserve bank account''
and in its place adding ``its Customer Reserve Bank Account, PAB
Reserve Bank Account'';
0
u. Adding paragraph (j);
0
v. In paragraph (k)(1)(i), removing the phrase ``His dealer
transactions'' and in its place adding ``The broker's or dealer's
transactions as dealer'', and removing the word ``his'' the second and
third time the word ``his'' appears and in its place adding ``its'';
0
w. In paragraph (k)(1)(ii), removing the word ``His'' and in its place
adding ``The broker's or dealer's'';
0
x. In paragraph (k)(1)(iii), removing the word ``He'' and in its place
adding ``The broker or dealer'' and removing the word ``his'' and in
its place adding ``its'';
0
y. In paragraph (k)(2)(i), removing the word ``his'' and in its place
adding ``its'' wherever it appears;
0
z. Revising paragraph (l)(2);
0
aa. Removing from the last sentence in paragraph (m) before the Note,
the text ``a special omnibus'' and in its place adding ``an omnibus
credit'' and removing the text ``section 4(b) of Regulation T [12 CFR
220.4(b)]'' and in its place adding ``section 7(f) of Regulation T (12
CFR 220.7(f))'';
0
bb. Redesignate the Note following paragraph (m) as ``Note to paragraph
(m).'';
0
cc. Removing from the first sentence in paragraph (n) the phrase
``paragraphs (d)(2) and (3)'' and in its place adding ``paragraphs
(d)(2) through (4)''; and
0
dd. Removing from paragraph (o)(2)(i)(A) the phrase ``the Securities
Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.)'' and in its
place adding ``SIPA'';
    The revisions and additions read as follows:

Sec.  240.15c3-3  Customer protection--reserves and custody of
securities.

    (a) * * *
    (3) The term fully paid securities means all securities carried for
the account of a customer in a cash account as defined in Regulation T
(12 CFR 220.1 et seq.), as well as securities carried for the account
of a customer in a margin account or any special account under
Regulation T that have no loan value for margin purposes, and all
margin equity securities in such accounts if they are fully paid:
Provided, however, that the term fully paid securities does not apply
to any securities purchased in transactions for which the customer has
not made full payment.
    (4) The term margin securities means those securities carried for
the account of a customer in a margin account as defined in section 4
of Regulation T (12 CFR 220.4), as well as securities carried in any
other account (such accounts hereinafter referred to as ``margin
accounts'') other than the securities referred to in paragraph (a)(3)
of this section.
* * * * *
    (7) The term bank means a bank as defined in section 3(a)(6) of the
Act and will also mean any building and loan, savings and loan or
similar banking institution subject to supervision by a Federal banking
authority. With respect to a broker or dealer that maintains its
principal place of business in Canada, the term ``bank'' also means a
Canadian bank subject to supervision by a Canadian authority.
    (8) The term free credit balances means liabilities of a broker or
dealer to customers which are subject to immediate cash payment to
customers on demand, whether resulting from sales of securities,
dividends, interest, deposits or otherwise, excluding, however, funds
in commodity accounts which are segregated in accordance with the
Commodity Exchange Act or in a similar manner, or which are funds
carried in a proprietary account as that term is defined in regulations
under the Commodity Exchange Act. The term ``free credit balances''
also includes, if subject to immediate cash payment to customers on
demand, funds carried in a securities account pursuant to a self-
regulatory organization portfolio margining rule approved by the
Commission under section 19(b) of the Act (15 U.S.C. 78s(b)) (``SRO
portfolio margining rule''), including variation margin or initial
margin, marks to market, and proceeds resulting from margin paid or
released in connection with closing out, settling or exercising futures
contracts and options thereon.
    (9) The term other credit balances means cash liabilities of a
broker or dealer to customers other than free credit balances and funds
in commodity accounts which are segregated in accordance with the
Commodity Exchange Act or in a similar manner, or funds carried in a
proprietary account as that term is defined in regulations under the
Commodity Exchange Act. The term ``other credit balances'' also
includes funds that are cash liabilities of a broker or dealer to
customers other than free credit balances and are carried in a
securities account pursuant to an SRO portfolio margining rule,
including

variation margin or initial margin, marks to market, and proceeds
resulting from margin paid or released in connection with closing out,
settling or exercising futures contracts and options thereon.
* * * * *
    (16) The term PAB account means a proprietary securities account of
a broker or dealer (which includes a foreign broker or dealer, or a
foreign bank acting as a broker or dealer) other than a delivery-
versus-payment account or a receipt-versus-payment account. The term
does not include an account that has been subordinated to the claims of
creditors of the carrying broker or dealer.
    (17) The term Sweep Program means a service provided by a broker or
dealer where it offers to its customer the option to automatically
transfer free credit balances in the securities account of the customer
to either a money market mutual fund product as described in Sec.
270.2a-7 of this chapter or an account at a bank whose deposits are
insured by the Federal Deposit Insurance Corporation.
    (b) * * *
    (5) A broker or dealer is required to obtain and thereafter
maintain the physical possession or control of securities carried for a
PAB account, unless the broker or dealer has provided written notice to
the account holder that the securities may be used in the ordinary
course of its securities business, and has provided an opportunity for
the account holder to object.
* * * * *
    (d) * * *
    (4) Securities included on the broker's or dealer's books or
records that allocate to a short position of the broker or dealer or a
short position for another person, excluding positions covered by
paragraph (m) of this section, for more than 30 calendar days, then the
broker or dealer must, not later than the business day following the
day on which the determination is made, take prompt steps to obtain
physical possession or control of such securities. For the purposes of
this paragraph (d)(4), the 30 day time period will not begin to run
with respect to a syndicate short position established in connection
with an offering of securities until the completion of the
underwriter's participation in the distribution as determined pursuant
to Sec.  242.100(b) of Regulation M of this chapter (17 CFR 242.100
through 242.105); or
* * * * *
    (e) Special reserve bank accounts for the exclusive benefit of
customers and PAB accounts. (1) Every broker or dealer must maintain
with a bank or banks at all times when deposits are required or
hereinafter specified a ``Special Reserve Bank Account for the
Exclusive Benefit of Customers'' (hereinafter referred to as the
Customer Reserve Bank Account) and a ``Special Reserve Bank Account for
Brokers and Dealers'' (hereinafter referred to as the PAB Reserve Bank
Account), each of which will be separate from the other and from any
other bank account of the broker or dealer. Such broker or dealer must
at all times maintain in the Customer Reserve Bank Account and the PAB
Reserve Bank Account, through deposits made therein, cash and/or
qualified securities in amounts computed in accordance with the formula
attached as Exhibit A (17 CFR 240.15c3-3a), as applied to customer and
PAB accounts respectively.
    (2) With respect to each computation required pursuant to paragraph
(e)(1) of this section, a broker or dealer must not accept or use any
of the amounts under items comprising Total Credits under the formula
referred to in paragraph (e)(1) of this section except for the
specified purposes indicated under items comprising Total Debits under
the formula, and, to the extent Total Credits exceed Total Debits, at
least the net amount thereof must be maintained in the Customer Reserve
Bank Account and PAB Reserve Bank Account pursuant to paragraph (e)(1)
of this section.
    (3) Reserve Bank Account computations. (i) Computations necessary
to determine the amount required to be deposited in the Customer
Reserve Bank Account and PAB Reserve Bank Account as specified in
paragraph (e)(1) of this section must be made weekly, as of the close
of the last business day of the week, and the deposit so computed must
be made no later than one hour after the opening of banking business on
the second following business day; provided, however, a broker or
dealer which has aggregate indebtedness not exceeding 800 percent of
net capital (as defined in Sec.  240.15c3-1) and which carries
aggregate customer funds (as defined in paragraph (a)(10) of this
section), as computed at the last required computation pursuant to this
section, not exceeding $1,000,000, may in the alternative make the
Customer Reserve Bank Account computation monthly, as of the close of
the last business day of the month, and, in such event, must deposit
not less than 105 percent of the amount so computed no later than one
hour after the opening of banking business on the second following
business day.
    (ii) If a broker or dealer, computing on a monthly basis, has, at
the time of any required computation, aggregate indebtedness in excess
of 800 percent of net capital, such broker or dealer must thereafter
compute weekly as aforesaid until four successive weekly Customer
Reserve Bank Account computations are made, none of which were made at
a time when its aggregate indebtedness exceeded 800 percent of its net
capital.
    (iii) A broker or dealer that does not carry the accounts of a
``customer'' as defined by this section or conduct a proprietary
trading business may make the computation to be performed with respect
to PAB accounts under paragraph (e)(1) of this section monthly rather
than weekly. If a broker or dealer performing the computation with
respect to PAB accounts under paragraph (e)(1) of this section on a
monthly basis is, at the time of any required computation, required to
deposit additional cash or qualified securities in the PAB Reserve Bank
Account, the broker or dealer must thereafter perform the computation
required with respect to PAB accounts under paragraph (e)(1) of this
section weekly until four successive weekly computations are made, none
of which is made at a time when the broker or dealer was required to
deposit additional cash or qualified securities in the PAB Reserve Bank
Account.
    (iv) Computations in addition to the computations required in this
paragraph (e)(3), may be made as of the close of any business day, and
the deposits so computed must be made no later than one hour after the
opening of banking business on the second following business day.
    (v) The broker or dealer must make and maintain a record of each
such computation made pursuant to this paragraph (e)(3) or otherwise
and preserve each such record in accordance with Sec.  240.17a-4.
    (4) If the computation performed under paragraph (e)(3) of this
section with respect to PAB accounts results in a deposit requirement,
the requirement may be satisfied to the extent of any excess debit in
the computation performed under paragraph (e)(3) of this section with
respect to customer accounts of the same date. However, a deposit
requirement resulting from the computation performed under paragraph
(e)(3) of this section with respect to customer accounts cannot be
satisfied with excess debits from the computation performed under
paragraph (e)(3) of this section with respect to PAB accounts.

    (5) In determining whether a broker or dealer maintains the minimum
deposits required under this section, the broker or dealer must exclude
the total amount of any cash deposited with an affiliated bank. The
broker or dealer also must exclude cash deposited with a non-affiliated
bank to the extent that the amount of the deposit exceeds 15% of the
bank's equity capital as reported by the bank in its most recent Call
Report or any successor form the bank is required to file by its
appropriate Federal banking agency (as defined by section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813)).
    (f) Notification of banks. A broker or dealer required to maintain
a Customer Reserve Bank Account and PAB Reserve Bank Account prescribed
by paragraph (e)(1) of this section or who maintains a Special Account
referred to in paragraph (k) of this section must obtain and preserve
in accordance with Sec.  240.17a-4 a written notification from each
bank with which it maintains a Customer Reserve Bank Account, a PAB
Reserve Bank Account, or a Special Account that the bank was informed
that all cash and/or qualified securities deposited therein are being
held by the bank for the exclusive benefit of the customers and account
holders of the broker or dealer in accordance with the regulations of
the Commission, and are being kept separate from any other accounts
maintained by the broker or dealer with the bank, and the broker or
dealer must have a written contract with the bank which provides that
the cash and/or qualified securities will at no time be used directly
or indirectly as security for a loan to the broker or dealer by the
bank and will not be subject to any right, charge, security interest,
lien, or claim of any kind in favor of the bank or any person claiming
through the bank.
    (g) Withdrawals from the reserve bank accounts. A broker or dealer
may make withdrawals from a Customer Reserve Bank Account and a PAB
Reserve Bank Account if and to the extent that at the time of the
withdrawal the amount remaining in the Customer Reserve Bank Account
and PAB Reserve Bank Account is not less than the amount then required
by paragraph (e) of this section. * * *
* * * * *
    (j) Treatment of free credit balances. (1) A broker or dealer must
not accept or use any free credit balance carried for the account of
any customer of the broker or dealer unless such broker or dealer has
established adequate procedures pursuant to which each customer for
whom a free credit balance is carried will be given or sent, together
with or as part of the customer's statement of account, whenever sent
but not less frequently than once every three months, a written
statement informing the customer of the amount due to the customer by
the broker or dealer on the date of the statement, and that the funds
are payable on demand of the customer.
    (2) A broker or dealer must not convert, invest, or transfer to
another account or institution, credit balances held in a customer's
account except as provided in paragraphs (j)(2)(i) and (ii) of this
section.
    (i) A broker or dealer is permitted to invest or transfer to
another account or institution, free credit balances in a customer's
account only upon a specific order, authorization, or draft from the
customer, and only in the manner, and under the terms and conditions,
specified in the order, authorization, or draft.
    (ii) A broker or dealer is permitted to transfer free credit
balances held in a customer's securities account to a product in its
Sweep Program or to transfer a customer's interest in one product in a
Sweep Program to another product in a Sweep Program, provided:
    (A) For an account opened on or after the effective date of this
paragraph (j)(2)(ii), the customer gives prior written affirmative
consent to having free credit balances in the customer's securities
account included in the Sweep Program after being notified:
    (1) Of the general terms and conditions of the products available
through the Sweep Program; and
    (2) That the broker or dealer may change the products available
under the Sweep Program.
    (B) For any account:
    (1) The broker or dealer provides the customer with the disclosures
and notices regarding the Sweep Program required by each self-
regulatory organization of which the broker or dealer is a member;
    (2) The broker or dealer provides notice to the customer, as part
of the customer's quarterly statement of account, that the balance in
the bank deposit account or shares of the money market mutual fund in
which the customer has a beneficial interest can be liquidated on the
customer's order and the proceeds returned to the securities account or
remitted to the customer; and
    (3)(i) The broker or dealer provides the customer with written
notice at least 30 calendar days before:
    (A) Making changes to the terms and conditions of the Sweep
Program;
    (B) Making changes to the terms and conditions of a product
currently available through the Sweep Program;
    (C) Changing, adding or deleting products available through the
Sweep Program; or
    (D) Changing the customer's investment through the Sweep Program
from one product to another.
    (ii) The notice must describe the new terms and conditions of the
Sweep Program or product or the new product, and the options available
to the customer if the customer does not accept the new terms and
conditions or product.
* * * * *
    (l) Delivery of securities. * * *
    (2) Margin securities upon full payment by such customer to the
broker or dealer of the customer's indebtedness to the broker or
dealer; and, subject to the right of the broker or dealer under
Regulation T (12 CFR 220) to retain collateral for its own protection
beyond the requirements of Regulation T, excess margin securities not
reasonably required to collateralize such customer's indebtedness to
the broker or dealer.
* * * * *

0
6. Section 240.15c3-3a is revised to read as follows:

Sec.  240.15c3-3a  Exhibit A--Formula for determination of customer and
PAB account reserve requirements of brokers and dealers under Sec.
240.15c3-3.

----------------------------------------------------------------------------------------------------------------
                                                                                Credits           Debits
----------------------------------------------------------------------------------------------------------------
1. Free credit balances and other credit balances in customers' security                   XXX   ...............
 accounts. (See Note A).......................................................
2. Monies borrowed collateralized by securities carried for the accounts of                XXX   ...............
 customers (See Note B).......................................................
3. Monies payable against customers' securities loaned (See Note C)...........             XXX   ...............
4. Customers' securities failed to receive (See Note D).......................             XXX   ...............
5. Credit balances in firm accounts which are attributable to principal sales              XXX   ...............
 to customers.................................................................
6. Market value of stock dividends, stock splits and similar distributions                 XXX   ...............
 receivable outstanding over 30 calendar days.................................
7. Market value of short security count differences over 30 calendar days old.             XXX   ...............

8. Market value of short securities and credits (not to be offset by longs or              XXX   ...............
 by debits) in all suspense accounts over 30 calendar days....................
9. Market value of securities which are in transfer in excess of 40 calendar               XXX   ...............
 days and have not been confirmed to be in transfer by the transfer agent or
 the issuer during the 40 days................................................
10. Debit balances in customers' cash and margin accounts excluding unsecured   ...............             XXX
 accounts and accounts doubtful of collection. (See Note E)...................
11. Securities borrowed to effectuate short sales by customers and securities   ...............             XXX
 borrowed to make delivery on customers' securities failed to deliver.........
12. Failed to deliver of customers' securities not older than 30 calendar days  ...............             XXX
13. Margin required and on deposit with the Options Clearing Corporation for    ...............             XXX
 all option contracts written or purchased in customer accounts. (See Note F).
14. Margin required and on deposit with a clearing agency registered with the   ...............             XXX
 Commission under section 17A of the Act (15 U.S.C. 78q-1) or a derivatives
 clearing organization registered with the Commodity Futures Trading
 Commission under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1)
 related to the following types of positions written, purchased or sold in
 customer accounts: (1) security futures products and (2) futures contracts
 (and options thereon) carried in a securities account pursuant to an SRO
 portfolio margining rule (See Note G)........................................
    Total credits.............................................................  ...............  ...............
    Total debits..............................................................  ...............  ...............
15. Excess of total credits (sum of items 1-9) over total debits (sum of items  ...............             XXX
 10-14) required to be on deposit in the ``Reserve Bank Account'' (Sec.
 240.15c3-3(e)). If the computation is made monthly as permitted by this
 section, the deposit must be not less than 105% of the excess of total
 credits over total debits....................................................
----------------------------------------------------------------------------------------------------------------

Notes Regarding the Customer Reserve Bank Account Computation

    Note A. Item 1 must include all outstanding drafts payable to
customers which have been applied against free credit balances or other
credit balances and must also include checks drawn in excess of bank
balances per the records of the broker or dealer.
    Note B. Item 2 must include the amount of options-related or
security futures product-related Letters of Credit obtained by a member
of a registered clearing agency or a derivatives clearing organization
which are collateralized by customers' securities, to the extent of the
member's margin requirement at the registered clearing agency or
derivatives clearing organization. Item 2 must also include the amount
of Letters of Credit which are collateralized by customers' securities
and related to other futures contracts (and options thereon) carried in
a securities account pursuant to an SRO portfolio margining rule.
    Note C. Item 3 must include in addition to monies payable against
customers' securities loaned the amount by which the market value of
securities loaned exceeds the collateral value received from the
lending of such securities.
    Note D. Item 4 must include in addition to customers' securities
failed to receive the amount by which the market value of securities
failed to receive and outstanding more than thirty (30) calendar days
exceeds their contract value.
    Note E. (1) Debit balances in margin accounts must be reduced by
the amount by which a specific security (other than an exempted
security) which is collateral for margin accounts exceeds in aggregate
value 15 percent of the aggregate value of all securities which
collateralize all margin accounts receivable; provided, however, the
required reduction must not be in excess of the amounts of the debit
balance required to be excluded because of this concentration rule. A
specified security is deemed to be collateral for a margin account only
to the extent it represents in value not more than 140 percent of the
customer debit balance in a margin account.
    (2) Debit balances in special omnibus accounts, maintained in
compliance with the requirements of Section 7(f) of Regulation T (12
CFR 220.7(f)) or similar accounts carried on behalf of another broker
or dealer, must be reduced by any deficits in such accounts (or if a
credit, such credit must be increased) less any calls for margin, mark
to the market, or other required deposits which are outstanding 5
business days or less.
    (3) Debit balances in customers' cash and margin accounts included
in the formula under Item 10 must be reduced by an amount equal to 1
percent of their aggregate value.
    (4) Debit balances in cash and margin accounts of household members
and other persons related to principals of a broker or dealer and debit
balances in cash and margin accounts of affiliated persons of a broker
or dealer must be excluded from the Reserve Formula, unless the broker
or dealer can demonstrate that such debit balances are directly related
to credit items in the formula.
    (5) Debit balances in margin accounts (other than omnibus accounts)
must be reduced by the amount by which any single customer's debit
balance exceeds 25% (to the extent such amount is greater than $50,000)
of the broker-dealer's tentative net capital (i.e., net capital prior
to securities haircuts) unless the broker or dealer can demonstrate
that the debit balance is directly related to credit items in the
Reserve Formula. Related accounts (e.g., the separate accounts of an
individual, accounts under common control or subject to cross
guarantees) will be deemed to be a single customer's accounts for
purposes of this provision.
    If the registered national securities exchange or the registered
national securities association having responsibility for examining the
broker or dealer (``designated examining authority'') is satisfied,
after taking into account the circumstances of the concentrated account
including the quality, diversity, and marketability of the collateral
securing the debit balances or margin accounts subject to this
provision, that the concentration of debit balances is appropriate,
then such designated examining authority may grant a partial or plenary
exception from this provision. The debit balance may be included in the
reserve formula computation for five business days from the day the
request is made.
    (6) Debit balances in joint accounts, custodian accounts,
participation in hedge funds or limited partnerships or similar type
accounts or arrangements that include both assets of a person or
persons who would be excluded from the definition of customer
(``noncustomer'') and assets of a person or persons who would be
included in the definition of customer must be included in the Reserve
Formula in the

following manner: If the percentage ownership of the non-customer is
less than 5 percent then the entire debit balance shall be included in
the formula; if such percentage ownership is between 5 percent and 50
percent then the portion of the debit balance attributable to the non-
customer must be excluded from the formula unless the broker or dealer
can demonstrate that the debit balance is directly related to credit
items in the formula; or if such percentage ownership is greater than
50 percent, then the entire debit balance must be excluded from the
formula unless the broker or dealer can demonstrate that the debit
balance is directly related to credit items in the formula.
    Note F. Item 13 must include the amount of margin required and on
deposit with the Options Clearing Corporation to the extent such margin
is represented by cash, proprietary qualified securities and letters of
credit collateralized by customers' securities.
    Note G. (a) Item 14 must include the amount of margin required and
on deposit with a clearing agency registered with the Commission under
section 17A of the Act (15 U.S.C. 78q-1) or a derivatives clearing
organization registered with the Commodity Futures Trading Commission
under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1) for
customer accounts to the extent that the margin is represented by cash,
proprietary qualified securities, and letters of credit collateralized
by customers' securities.
    (b) Item 14 will apply only if the broker or dealer has the margin
related to security futures products, or futures (and options thereon)
carried in a securities account pursuant to an approved SRO portfolio
margining program on deposit with:
    (1) A registered clearing agency or derivatives clearing
organization that:
    (i) Maintains the highest investment-grade rating from a nationally
recognized statistical rating organization; or
    (ii) 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. For the purposes of this Note G, the term ``security
deposits'' refers to a general fund, other than margin deposits or
their equivalent, that consists of cash or securities held by a
registered clearing agency or derivative clearing organization; or
    (iii) Maintains at least $3 billion in margin deposits; or
    (iv) Does not meet the requirements of paragraphs (b)(1)(i) through
(b)(1)(iii) of this Note G, if the Commission has determined, upon a
written request for exemption by or for the benefit of the broker or
dealer, that the broker or dealer may utilize such a registered
clearing agency or derivatives clearing organization. The Commission
may, in its sole discretion, grant such an exemption subject to such
conditions as are appropriate under the circumstances, if the
Commission determines that such conditional or unconditional exemption
is necessary or appropriate in the public interest, and is consistent
with the protection of investors; and
    (2) A registered clearing agency or derivatives clearing
organization that, if it holds funds or securities deposited as margin
for security futures products or futures in a portfolio margin account
in a bank, as defined in section 3(a)(6) of the Act (15 U.S.C.
78c(a)(6)), obtains and preserves written notification from the bank at
which it holds such funds and securities or at which such funds and
securities are held on its behalf. The written notification will state
that all funds and/or securities deposited with the bank as margin
(including customer security futures products and futures in a
portfolio margin account), or held by the bank and pledged to such
registered clearing agency or derivatives clearing agency as margin,
are being held by the bank for the exclusive benefit of clearing
members of the registered clearing agency or derivatives clearing
organization (subject to the interest of such registered clearing
agency or derivatives clearing organization therein), and are being
kept separate from any other accounts maintained by the registered
clearing agency or derivatives clearing organization with the bank. The
written notification also will provide that such funds and/or
securities will at no time be used directly or indirectly as security
for a loan to the registered clearing agency or derivatives clearing
organization by the bank, and will be subject to no right, charge,
security interest, lien, or claim of any kind in favor of the bank or
any person claiming through the bank. This provision, however, will not
prohibit a registered clearing agency or derivatives clearing
organization from pledging customer funds or securities as collateral
to a bank for any purpose that the rules of the Commission or the
registered clearing agency or derivatives clearing organization
otherwise permit; and
    (3) A registered clearing agency or derivatives clearing
organization establishes, documents, and maintains:
    (i) Safeguards in the handling, transfer, and delivery of cash and
securities;
    (ii) Fidelity bond coverage for its employees and agents who handle
customer funds or securities. In the case of agents of a registered
clearing agency or derivatives clearing organization, the agent may
provide the fidelity bond coverage; and
    (iii) Provisions for periodic examination by independent public
accountants; and
    (iv) A derivatives clearing organization that, if it is not
otherwise registered with the Commission, has provided the Commission
with a written undertaking, in a form acceptable to the Commission,
executed by a duly authorized person at the derivatives clearing
organization, to the effect that, with respect to the clearance and
settlement of the customer security futures products and futures in a
portfolio margin account of the broker or dealer, the derivatives
clearing organization will permit the Commission to examine the books
and records of the derivatives clearing organization for compliance
with the requirements set forth in Sec.  240.15c3-3a, Note G (b)(1)
through (3).
    (c) Item 14 will apply only if a broker or dealer determines, at
least annually, that the registered clearing agency or derivatives
clearing organization with which the broker or dealer has on deposit
margin related to securities future products or futures in a portfolio
margin account meets the conditions of this Note G.

Notes Regarding the PAB Reserve Bank Account Computation

    Note 1. Broker-dealers should use the formula in Exhibit A for the
purposes of computing the PAB reserve requirement, except that
references to ``accounts,'' ``customer accounts, or ``customers'' will
be treated as references to PAB accounts.
    Note 2. Any credit (including a credit applied to reduce a debit)
that is included in the computation required by Sec.  240.15c3-3 with
respect to customer accounts (the ``customer reserve computation'') may
not be included as a credit in the computation required by Sec.
240.15c3-3 with respect to PAB accounts (the ``PAB reserve
computation'').
    Note 3. Note E(1) to Sec.  240.15c3-3a does not apply to the PAB
reserve computation.
    Note 4. Note E(3) to Sec.  240.15c3-3a which reduces debit balances
by 1% does not apply to the PAB reserve computation.

    Note 5. Interest receivable, floor brokerage, and commissions
receivable of another broker or dealer from the broker or dealer
(excluding clearing deposits) that are otherwise allowable assets under
Sec.  240.15c3-1 need not be included in the PAB reserve computation,
provided the amounts have been clearly identified as payables on the
books of the broker or dealer. Commissions receivable and other
receivables of another broker or dealer from the broker or dealer that
are otherwise non-allowable assets under Sec.  240.15c3-1 and clearing
deposits of another broker or dealer may be included as ``credit
balances'' for purposes of the PAB reserve computation, provided the
commissions receivable and other receivables are subject to immediate
cash payment to the other broker or dealer and the clearing deposit is
subject to payment within 30 days.
    Note 6. Credits included in the PAB reserve computation that result
from the use of securities held for a PAB account (``PAB securities'')
that are pledged to meet intra-day margin calls in a cross-margin
account established between the Options Clearing Corporation and any
regulated derivatives clearing organization may be reduced to the
extent that the excess margin held by the other clearing corporation in
the cross-margin relationship is used the following business day to
replace the PAB securities that were previously pledged. In addition,
balances resulting from a portfolio margin account that are segregated
pursuant to Commodity Futures Trading Commission regulations need not
be included in the PAB Reserve Bank Account computation.
    Note 7. Deposits received prior to a transaction pending settlement
which are $5 million or greater for any single transaction or $10
million in aggregate may be excluded as credits from the PAB reserve
computation if such balances are placed and maintained in a separate
PAB Reserve Bank Account by 12 p.m. Eastern Time on the following
business day. Thereafter, the money representing any such deposits may
be withdrawn to complete the related transactions without performing a
new PAB reserve computation.
    Note 8. A credit balance resulting from a PAB reserve computation
may be reduced by the amount that items representing such credits are
swept into money market funds or mutual funds of an investment company
registered under the Investment Company Act of 1940 on or prior to 10
a.m. Eastern Time on the deposit date provided that the credits swept
into any such fund are not subject to any right, charge, security
interest, lien, or claim of any kind in favor of the investment company
or the broker or dealer. Any credits that have been swept into money
market funds or mutual funds must be maintained in the name of a
particular broker or for the benefit of another broker.
    Note 9. Clearing deposits required to be maintained at registered
clearing agencies may be included as debits in the PAB reserve
computation to the extent the percentage of the deposit, which is based
upon the clearing agency's aggregate deposit requirements (e.g., dollar
trading volume), that relates to the proprietary business of other
brokers and dealers can be identified.
    Note 10. A broker or dealer that clears PAB accounts through an
affiliate or third party clearing broker must include these PAB account
balances and the omnibus PAB account balance in its PAB reserve
computation.

0
7. Section 240.17a-3 is amended by adding paragraph (a)(23) to read as
follows:

Sec.  240.17a-3  Records to be made by certain exchange members,
brokers and dealers.

    (a) * * *
    (23) A record documenting the credit, market, and liquidity risk
management controls established and maintained by the broker or dealer
to assist it in analyzing and managing the risks associated with its
business activities, Provided, that the records required by this
paragraph (a)(23) need only be made if the broker or dealer has more
than:
    (i) $1,000,000 in aggregate credit items as computed under Sec.
240.15c3-3a; or
    (ii) $20,000,000 in capital, which includes debt subordinated in
accordance with Sec.  240.15c3-1d.
* * * * *

0
8. Section 240.17a-4 is amended by:
0
a. Removing from paragraph (b)(1) the citation ``Sec.  240.17a-3(f)''
and its place adding the citation ``Sec.  240.17a-3(g)'';
0
b. Removing from paragraph (b)(9) the citation ``Sec.  240.15c3-
3(d)(4)'' and in its place adding the citation ``Sec.  240.15c3-
3(d)(5)''; and
0
c. Adding paragraph (e)(9).
    The addition reads as follows:

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

* * * * *
    (e) * * *
    (9) All records required pursuant to Sec.  240.17a-3(a)(23) until
three years after the termination of the use of the risk management
controls documented therein.
* * * * *

0
9. Section 240.17a-11 is amended by:
0
a. Revising the first sentence of paragraph (b)(1);
0
b. Removing from paragraph (c) introductory text ``or (c)(4)'' and in
its place adding ``, (c)(4) or (c)(5)''; and
0
c. Adding paragraph (c)(5).
    The revision and addition read as follows:

Sec.  240.17a-11  Notification provisions for brokers and dealers

* * * * *
    (b)(1) Every broker or dealer whose net capital declines below the
minimum amount required pursuant to Sec.  240.15c3-1, or is insolvent
as that term is defined in Sec.  240.15c3-1(c)(16), must give notice of
such deficiency that same day in accordance with paragraph (g) of this
section. * * *
* * * * *
    (c) * * *
    (5) If a computation made by a broker or dealer pursuant to Sec.
240.15c3-1 shows that the total amount of money payable against all
securities loaned or subject to a repurchase agreement or the total
contract value of all securities borrowed or subject to a reverse
repurchase agreement is in excess of 2500 percent of its tentative net
capital; provided, however, that for purposes of this leverage test
transactions involving government securities, as defined in section
3(a)(42) of the Act (15 U.S.C. 78c(a)(42)), must be excluded from the
calculation; provided further, however, that a broker or dealer will
not be required to send the notice required by this paragraph (c)(5) if
it reports monthly its securities lending and borrowing and repurchase
and reverse repurchase activity (including the total amount of money
payable against securities loaned or subject to a repurchase agreement
and the total contract value of securities borrowed or subject to a
reverse repurchase agreement) to its designated examining authority in
a form acceptable to its designated examining authority.
* * * * *

    By the Commission.

     Dated: July 30, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-18734 Filed 8-20-13; 8:45 am]
BILLING CODE 8011-01-P