[Federal Register: September 29, 2006 (Volume 71, Number 189)]
[Proposed Rules]
[Page 57451-57455]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se06-26]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038--AC27
Limitations on Withdrawals of Equity Capital
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend its regulations to provide that the
Commission may, by written order, temporarily prohibit a futures
commission merchant (``FCM'') from carrying out equity withdrawal
transactions that would reduce excess adjusted net capital by 30
percent or more. The proposed orders would be based on the Commission's
determination that such withdrawal transactions could be detrimental to
the financial integrity of FCMs or could adversely affect their ability
to meet customer obligations. The proposed amendments also would
provide that an FCM may file with the Commission a petition for
rescission of an order temporarily prohibiting equity withdrawals from
the FCM.
DATES: Comments must be received on or before November 28, 2006.
ADDRESSES: You may submit comments, identified by RIN 3038-AC27, by any
of the following methods:
• Federal eRulemaking Portal: href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov">http://www.regulations.gov.
Follow the instructions for submitting comments.
• E-mail: [email protected]. Include ``Proposed Amendment
to Rule 1.17'' in the subject line of the message.
• Fax: (202) 418-5521.
• Mail: Send to Eileen A. Donovan, Acting Secretary of the
Commission, Commodity Futures Trading Commission, 1155 21st Street,
NW., Washington, DC 20581.
• Courier: Same as Mail above.
All comments received will be posted without change to href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov">http://www.cftc.gov
, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418-5430, or Thelma Diaz, Special Counsel,
at (202) 418-5137, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Electronic mail: ([email protected])
or ([email protected]).
SUPPLEMENTARY INFORMATION:
I. Commission Oversight of Equity Withdrawals
Several Commission regulations place limitations on the ability of
owners and other insiders of FCMs and introducing brokers (``IBs'') to
withdraw equity from these regulated entities. In 1978 the Commission
adopted Regulation 1.17(e), which prohibits all equity withdrawal
transactions that would reduce the adjusted net capital of FCMs or IBs
beyond the amounts permitted by the regulation.\1\ In describing the
transactions affected by the regulation, the Commission included any
withdrawals made by the action of a stockholder or partner or
redemption or repurchase of shares of stock by ``consolidated
entities'',\2\ dividend payments or similar distributions, or through
unsecured advances or loans made to stockholders, partners, sole
proprietors, or employees. The regulation further clarifies that, when
determining the effect of the proposed equity withdrawal transaction on
the firm's capital, the firm also must take into account other pending
equity withdrawal transactions and scheduled liability payments that
will reduce its capital within six months after the subject equity
withdrawal transaction.\3\ The proposed equity withdrawal transaction
is prohibited if, when added together with such other planned capital
reductions, it would result in capital levels that are less than
required by Regulation 1.17(e).\4\
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\1\ Commission regulations cited in this release may be found at
17 CFR Ch. I (2006). Generally speaking, Regulation 1.17(e)
prohibits equity withdrawal transactions if such withdrawals would
reduce the firm's adjusted net capital to less than 120 percent of
its minimum adjusted net capital requirement under Regulation
1.17(a)(1). Such transactions also are prohibited if they would
result in less than the minimum amount of equity required under
Regulation 1.17(d), which provides that FCMs and IBs must maintain a
debt-equity ratio of at least 30 percent equity.
\2\ Commission Regulation 1.17(f) requires, and in other
circumstances permits, FCMs and IBs to consolidate the assets and
liabilities of their subsidiaries and/or affiliates in a single
computation of adjusted net capital for the FCM or IB and its
consolidated entities.
\3\ Regulation 1.17(e) specifically requires the firm to combine
the amount of the subject equity withdrawal transaction with any of
the following that are scheduled to occur within six months after
the subject withdrawal: Any other proposed equity withdrawal; any
payments under satisfactory subordination agreements under
Regulation 1.17(h); and any payments of the liabilities identified
in Regulation 1.17(c)(4)(vi).
\4\ Pursuant to a proviso included in the regulation, required
tax payments and the payment to partners of reasonable compensation
are not precluded. Also, Regulation 1.17(e) provides that, upon
application, the Commission may grant relief if it deems it to be in
the public interest or for the protection of nonproprietary
accounts.
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The purpose of these equity withdrawal restrictions is to help
preserve and enhance the required compliance by FCMs and IBs with the
minimum financial requirements set forth in the Commission's
regulations.\5\ As the Commission has explained elsewhere, the
Commission's minimum financial requirements protect customers and other
market participants by requiring FCMs and IBs to maintain minimum
levels of liquid assets in excess of their liabilities to finance their
business activities.\6\ Moreover, pursuant to Section 4d of the Act,\7\
FCMs are required to segregate from their own assets all money,
securities, and other property held for customers as margin for their
commodity futures and option contracts, as well as any gains accruing
to customers from their open futures and option positions. Part 30 of
the Commission's regulations also call for FCMs to set aside funds,
called the ``foreign futures and foreign options secured amount'', to
help protect the funds of U.S. customers trading on non-U.S. futures
markets.\8\ In the event of a shortfall in the Section 4d segregated
funds or the Part 30 secured funds that an FCM must hold, the
Commission's minimum net capital requirements provide protection to
customers by requiring each FCM to maintain a minimum level of assets
that are readily available to be contributed in the event of a
shortfall in the customer funds. The minimum capital requirements also
protect customers and market participants by ensuring that an FCM
remains solvent while waiting for margin calls to be met.
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\5\ Section 4f(b) of the Commodity Exchange Act (``Act'')
authorizes the Commission, by regulation, to impose minimum
financial and related reporting requirements on FCMs and IBs. The
Act is codified at 7 U.S.C. 1 et seq. (2000), and Section 4f(b) of
the Act is codified at 7 U.S.C. Sec. 6f(b).
\6\ 68 FR 40835, 40836 (July 9, 2003) (Minimum Financial and
Related Reporting Requirements for Futures Commission Merchants and
Introducing Brokers).
\7\ Section 4d of the Act is codified at 7 U.S.C. Sec. 6d
(2000).
\8\ The term ``foreign futures and foreign options secured
amount'' is defined in Regulation 1.3(rr).
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Because FCM capital requirements contribute to the security of
customer
[[Page 57452]]
funds and the overall financial integrity of the futures markets, the
Commission also adopted provisions in Commission Regulation 1.12(g)(2)
that require notice of certain equity withdrawal transactions by
FCMs.\9\ The provisions in Regulation 1.12(g)(2) originally were
included among several proposals made by the Commission in 1994 in
response to the financial difficulties experienced by certain FCMs
operating within holding company structures.\10\ These proposals were
intended to provide the Commission with access to information
concerning the activities of FCM affiliates whose activities were
reasonably likely to have a material impact on the financial or
operational condition of the FCM. The Commission subsequently
determined, in response to the recommendations of several commenters,
that the notice requirements in Regulation 1.12(g) should be applied
broadly to all FCMs, and not just to those subject to reporting
requirements with respect to their material affiliates.\11\
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\9\ The notification requirements in Regulation 1.12(g) were
made applicable to all FCMs effective May 31, 1996. 61 FR 19177 (May
1, 1996). Regulation 1.12(g) does not apply to IBs.
\10\ 59 FR 9689, 9690-9691 (March 1, 1994) (Risk Assessment for
Holding Company Systems). The preamble for this proposed rulemaking
identifies three FCMs within holding company structures that had
experienced financial difficulties.
\11\ 61 FR at 19179.
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In particular, Regulation 1.12(g)(2) requires that an FCM provide
notice at least two business days prior to an action to withdraw equity
from an FCM, or a subsidiary or affiliate consolidated pursuant to
Regulation 1.17(f), if the equity withdrawal transaction would cause,
on a net basis, a reduction in the FCM's excess adjusted net capital of
30 percent or more. In response to the receipt of such a notice,
Regulation 1.12(g)(3) provides that the Director of the Commission's
Division of Clearing and Intermediary Oversight, or the Director's
designee, may require that the FCM provide, within three business days
from the date of the request or such shorter period as the Division
Director or designee may specify, such other information as the
Division Director or designee determines to be necessary based upon
market conditions, reports provided by the FCM, or other available
information.\12\
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\12\ Regulation 1.12(g)(2) also provides that the Commission may
require the FCM to cause a Material Affiliated Person, as that term
is defined in Commission Regulation 1.14(a)(2), to respond to
requests for information from the Division Director.
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II. Equity Withdrawal Transactions That Could Be Temporarily Delayed
Under the Proposed Rule
When first proposing the notification provision eventually adopted
as Regulation 1.12(g)(2), the Commission noted that it could serve as
``early warning'' of impending financial difficulties at an FCM or at
its holding company.\13\ The only consequence that the regulation
expressly contemplates as a result of the warning is that the
Commission may require additional information from the FCM, with the
response to be provided in a period of three days or less, as directed
by the Commission. At the time that Regulation 1.2(g)(2) was adopted,
the Commission determined that it was not necessary to adopt additional
limitations within the Commission's regulations on equity withdrawal
transactions.\14\
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\13\ 59 FR at 9698-99.
\14\ 61 FR at 19180.
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However, the recent precipitous decline of a large FCM holding
company has confirmed that expedited action may be necessary to protect
FCM capital in the face of increasing financial pressures experienced
by its parent and/or affiliated entities. In this recent example, the
FCM registrant was part of a complex organizational group consisting of
several layers of holding companies and their subsidiaries. In October
of 2005, the parent company for the group announced that its chief
executive officer had been placed on leave, and that its financial
statements for the years 2002 through 2005 should not be relied upon.
The next day, Federal authorities charged the chief executive officer
with securities fraud, and on the following day the holding company
declared that certain liquidity difficulties were causing it to impose
a 15-day moratorium for the activities of a nonregulated subsidiary.
According to prior financial filings of the holding company, this
nonregulated subsidiary had been responsible for a material portion of
the holding company's business.
In response to these foregoing events, the Securities and Exchange
Commission (``SEC'') issued an order to temporarily restrict
withdrawals of capital from two other subsidiaries of the holding
company, which were registered as securities broker-dealers.\15\ In
issuing the order, the SEC cited to its regulation, 17 CFR Sec.
240.15c3-1(e)(3)(i), which provides that the SEC may by order restrict,
for a period up to twenty business days, any withdrawal by the broker
or dealer of equity capital or unsecured loan or advance to a
stockholder, partner, sole proprietor, employee or affiliate, if (1)
such withdrawal, advance or loan when aggregated with all other
withdrawals, advances or loans on a net basis during a 30 calendar day
period, exceeds 30 percent of the broker or dealer's excess net
capital; and (2) the SEC, based on the facts and information available,
concludes that the withdrawal, advance or loan may be detrimental to
the financial integrity of the broker or dealer, or may unduly
jeopardize the broker or dealer's ability to repay its customer claims
or other liabilities that may cause a significant impact on the markets
or expose the customers or creditors of the broker or dealer to loss
without taking into account the application of the Securities Investor
Protection Act.\16\ As described by the SEC, Sec. 240.15c3-1(e)(3)(i)
enables the SEC and its staff to examine further the financial
condition of the broker-dealer, so as to determine whether, and under
what circumstances, to permit the withdrawal, entirely or partially, or
to prohibit the withdrawal for additional periods by issuing subsequent
orders, with terms that are no longer than twenty business days.\17\
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\15\ A copy of the SEC order, dated October 13, 2005, may be
accessed electronically at href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.sec.gov/rules/other/34-52606.pdf">http://www.sec.gov/rules/other/34-52606.pdf
.
\16\ This SEC regulation also provides that an order temporarily
prohibiting the withdrawal of capital shall be rescinded if,
sometime after a hearing that is to be held within two business days
from the date of the request in writing by the broker or dealer, the
SEC determines that the restriction on capital withdrawal should not
remain in effect. 17 CFR 240.15c3-1(e)(3)(ii).
\17\ 55 FR 34027, 34030 (August 15, 1990) (proposing amendments
to SEC Regulation 15c3-1 regarding withdrawals of equity capital).
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The Commission is proposing rule amendments in this release that
share many aspects in common with the SEC's regulation for temporary
delays of equity withdrawals. The proposed amendments to its
regulations would provide the Commission with the ability to impose
further restrictions on the flow of capital from an FCM to its holding
company and other affiliated entities, as appropriate, in the face of
fast-developing events that pose potential threats to the capital of
FCMs. The Commission would impose such restrictions by way of an order
that would be effective for a twenty-day time period, and the
Commission could continue to make the restrictions effective against
the FCM by issuing subsequent orders, each with a term of no more than
twenty business days. During the periods when such orders would be
effective, Commission staff could evaluate the effect of the proposed
withdrawals on the continuing
[[Page 57453]]
adequacy of customer safeguards at the firm, including the continuing
adequacy of the firm's liquid assets, in light of the most current
information available from the FCM concerning its operations and those
of its holding company and affiliates. As such, the proposed regulation
would serve to further enhance the security of customer funds and the
overall financial integrity of the futures markets.\18\ It is
imperative that the Commission have the option to consider requiring
such temporary delays of equity withdrawals whenever urgent
circumstances so require.
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\18\ In the years since the Commission last adopted rule
amendments addressing equity withdrawal transactions, the amount of
funds that FCMs are required to hold as segregated funds has more
than doubled. As of August 31, 1995, FCMs were required to hold
approximately $25 billion as segregated funds, and $6 billion as
secured funds. As of December 31, 2005, the amount that FCMs were
required to hold as segregated funds had increased to over $95
billion, and the amount required to be held as secured funds had
grown to almost $25 billion.
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The Commission also has been advised by staff that Commission
Regulations 1.12 and 1.17, which include references to FCMs and IBs
that are organized as corporations, partnerships, or sole
proprietorships, currently lack a specific reference to firms organized
as ``limited liability companies.'' \19\ The Commission therefore is
proposing other amendments in this release that would modernize the
provisions of Regulations 1.12 and 1.17, by including references to
limited liability companies.
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\19\ The Commission recently has revised other regulations to
reflect the development of limited liability companies (``LLCs'').
See, e.g. 69 FR 49784, 49793-4 (August 12, 2004). The amendments
adopted in 2004 related to the management of LLCs, in order to
determine persons with appropriate signature authority to file
financial reports for the FCM or IB.
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III. Proposed Amendments to Regulations 1.12 and 1.17
In view of the foregoing considerations, the Commission is
proposing to add a new paragraph (g)(1) to Regulation 1.17, which would
provide that the Commission may by order restrict, for a period up to
twenty business days, any withdrawal by the FCM of equity capital or
any unsecured advance or loan to a stockholder, partner, limited
liability company member, sole proprietor, employee or affiliate, if:
(i) Such withdrawal, advance or loan, when aggregated with all
other withdrawals, advances or loans during a 30 calendar day period
from the FCM, or from a subsidiary or affiliate of the FCM consolidated
pursuant to Sec. 1.17(f), would cause a net reduction in the FCM's
excess adjusted net capital of 30 percent or more; and
(ii) The Commission has concluded, in light of available facts and
circumstances, that such withdrawal, advance or loan may be detrimental
to the financial integrity of the FCM, or may unduly jeopardize its
ability to meet customer obligations or other liabilities that may
cause a significant impact on the markets.\20\
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\20\ Paragraph (g) of Regulation 1.17 currently is reserved.
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Under a proposed paragraph (g)(2) for Regulation 1.17, the FCM
would be permitted to file with the Secretary of the Commission a
written petition to request that the Commission rescind the order
issued under paragraph (g)(1). The Commission would notify the FCM in
writing that its petition for rescission had been denied, or, if the
Commission determined that the order issued under paragraph (g)(1)
should not remain in effect, the order would be rescinded. The petition
filed by the FCM must specify the facts and circumstances supporting
its request for rescission.
Finally, the Commission also is proposing to add a reference to
``limited liability company members'' in Regulation 1.12(g), to reflect
the ownership of FCMs that are organized as limited liability
companies. The Commission also is proposing to add references to
limited liability company members in Regulation 1.17(d)(1) \21\ and
Regulation 1.17(e).\22\ Furthermore, the Commission proposes to add a
new subparagraph (D) to Rule 1.17(d)(1)(ii), in order to include as
equity, in the case of a limited liability company, the sum of the
``capital accounts of limited liability company members, and unrealized
profit and loss.''
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\21\ Funds received under ``satisfactory subordination
agreements'', as defined in Regulation 1.17(h), may be treated by
the FCM as equity if the agreement meets certain additional criteria
set forth in Regulation 1.17(d)(1), including that the lender under
the agreement be a partner or stockholder. As proposed, Regulation
1.17(d)(1) would provide that the lender also may be a ``limited
liability company member.''
\22\ The proposed amendment to Regulation 1.17(e) would include
unsecured advances or loans to limited liability company members as
equity withdrawal transactions that are prohibited if they would
exceed the amounts permitted by the regulation.
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The Commission requests comment on each of the proposed amendments
to Regulations 1.12 and 1.17 that have been described in this release.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission previously has
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\23\ The Commission has determined previously
that FCMs are not small entities for the purpose of the RFA.\24\ With
respect to IBs, the Commission has determined to evaluate within the
context of a particular rule proposal whether all or some IBs would be
considered ``small entities'' for purposes of the RFA and, if so, to
analyze at that time the economic impact on IBs of any such rule.\25\
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\23\ 47 FR 18618 (April 30, 1982).
\24\ 47 FR at 18619.
\25\ 47 FR at 18618, 18620.
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The proposed amendments to Regulation 1.17(g) would apply to FCMs
only and therefore would have no economic impact on IBs. The proposed
amendments to Regulation 1.17(d) and (e) and Regulation 1.12(g) solely
provide clarifying language to reflect new business organizations
structures that were not prevalent when these rules were first adopted.
Therefore, the Chairman, on behalf of the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the action proposed to be taken
herein will not have a significant economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \26\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The amendments being proposed would
not, if approved, require a new collection of information on the part
of the entities that would be subject to the proposed regulations.
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\26\ 44 U.S.C. 3507(d).
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C. Cost-Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its action before issuing a new regulation under
the Act. By its terms, Section 15(a) as amended does not require the
Commission to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the regulation outweigh its costs.
Rather, Section 15(a) simply requires the Commission to ``consider the
costs and benefits'' of its action.
Section 15(a) of the Act further specifies that costs and benefits
shall be
[[Page 57454]]
evaluated in light of five broad areas of market and public concern:
Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular regulation was necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the Act. The proposed amendments to Regulation
1.17(g) would permit the Commission to issue orders temporarily
restricting certain equity withdrawal transactions in circumstances
that pose significant concerns for the financial condition of FCMs. The
Commission is considering the costs and benefits of these proposed
amendments in light of the specific provisions of Section 15(a) of the
Act, as follows:
1. Protection of market participants and the public. Under the
proposed Regulation 1.17(g), the Commission would be able, in
exceptional circumstances, to temporarily delay certain withdrawals of
FCM equity by their owners and other insiders, which would contribute
to the benefit of ensuring that eligible FCMs can meet their financial
obligations to customers and other market participants.
2. Efficiency and competition. The proposed amendments should have
no effect, from the standpoint of imposing costs or creating benefits,
on the efficiency and competition of the futures markets.
3. Financial integrity of futures markets and price discovery. The
proposed regulation contributes to the financial integrity of futures
markets by helping to confirm and preserve the capital of FCM
registrants. The proposed amendments should have no effect, from the
standpoint of imposing costs or creating benefits, on the price
discovery function of such markets.
4. Sound risk management practices. In order to avoid application
of the proposed regulation, FCMs may enhance existing risk management
practices relating to the risks that practices of FCM affiliates may
pose to the ability of FCMs to meet their obligations to customers and
other participants in the futures markets.
5. Other public interest considerations. The proposed amendments to
Regulations 1.12(g), 1.17(d)(1) and 1.17(e), which would add references
to limited liability company members and their capital contributions,
help modernize the Commission's regulations by taking into
consideration new forms of business organizations used by FCMs and IBs.
After considering these factors, the Commission has determined to
propose the amendments discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
Accordingly, 17 CFR Chapter I is proposed to be amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub.L. 106-554, 114
Stat. 2763 (2000).
2. Section 1.12 is proposed to be amended by revising paragraph
(g)(2) to read as follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(g) * * *
(2) If equity capital of the futures commission merchant or a
subsidiary or affiliate of the futures commission merchant consolidated
pursuant to Sec. 1.17(f) (or 17 CFR Sec. 240.15c3-1e) would be
withdrawn by action of a stockholder or a partner or a limited
liability company member or by redemption or repurchase of shares of
stock by any of the consolidated entities or through the payment of
dividends or any similar distribution, or an unsecured advance or loan
would be made to a stockholder, partner, sole proprietor, limited
liability company member, employee or affiliate, such that the
withdrawal, advance or loan would cause, on a net basis, a reduction in
excess adjusted net capital (or, if the futures commission merchant is
qualified to use the filing option available under Sec. 1.10(h),
excess net capital as defined in the rules of the Securities and
Exchange Commission) of 30 percent or more, notice must be provided at
least two business days prior to the withdrawal, advance or loan that
would cause the reduction: Provided, however, That the provisions of
paragraphs (g)(1) and (g)(2) of this section do not apply to any
futures or securities transaction in the ordinary course of business
between a futures commission merchant and any affiliate where the
futures commission merchant makes payment to or on behalf of such
affiliate for such transaction and then receives payment from such
affiliate for such transaction within two business days from the date
of the transaction.
* * * * *
3. Section 1.17 is proposed to be amended by revising paragraph
(d)(1) introductory text; adding paragraph (d)(1)(ii)(D); revising
paragraph (e) introductory text; and adding paragraph (g), to read as
follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(d) * * *
(1) Equity capital means a satisfactory subordination agreement
entered into by a partner or stockholder or limited liability company
member which has an initial term of at least 3 years and has a
remaining term of not less than 12 months if:
* * * * *
(ii) * * *
(D) in the case of a limited liability company, the sum of its
capital accounts of limited liability company members, and unrealized
profit and loss.
* * * * *
(e) No equity capital of the applicant or registrant or a
subsidiary's or affiliate's equity capital consolidated pursuant to
paragraph (f) of this section, whether in the form of capital
contributions by partners (including amounts in the commodities,
options and securities trading accounts of partners which are treated
as equity capital but excluding amounts in such trading accounts which
are not equity capital and excluding balances in limited partners'
capital accounts in excess of their stated capital contributions), par
or stated value of capital stock, paid-in capital in excess of par or
stated value, retained earnings or other capital accounts, may be
withdrawn by action of a stockholder or partner or limited liability
company member or by redemption or repurchase of shares of stock by any
of the consolidated entities or through the payment of dividends or any
similar distribution, nor may any unsecured
[[Page 57455]]
advance or loan be made to a stockholder, partner, sole proprietor,
limited liability company member, or employee if, after giving effect
thereto and to any other such withdrawals, advances, or loans and any
payments of payment obligations (as defined in paragraph (h) of this
section) under satisfactory subordination agreements and any payments
of liabilities excluded pursuant to paragraph (c)(4)(vi) of this
section which are scheduled to occur within six months following such
withdrawal, advance or loan:
* * * * *
(g)(1) The Commission may by order restrict, for a period up to
twenty business days, any withdrawal by a futures commission merchant
of equity capital, or any unsecured advance or loan to a stockholder,
partner, limited liability company member, sole proprietor, employee or
affiliate, if:
(i) Such withdrawal, advance or loan would cause, when aggregated
with all other withdrawals, advances or loans during a 30 calendar day
period from the futures commission merchant or a subsidiary or
affiliate of the futures commission merchant consolidated pursuant to
Sec. 1.17(f) (or Sec. 17 CFR 240.15c3-1e), a net reduction in excess
adjusted net capital (or, if the futures commission merchant is
qualified to use the filing option available under Sec. 1.10(h),
excess net capital as defined in the rules of the Securities and
Exchange Commission) of 30 percent or more, and
(ii) The Commission, based on the facts and information available,
concludes that any such withdrawal, advance or loan may be detrimental
to the financial integrity of the futures commission merchant, or may
unduly jeopardize its ability to meet customer obligations or other
liabilities that may cause a significant impact on the markets.
(2) The futures commission merchant may file with the Secretary of
the Commission a written petition to request rescission of the order
issued under paragraph (g)(1) of this section. The petition filed by
the futures commission merchant must specify the reasons supporting its
request for rescission. The Commission shall respond in writing to deny
the futures commission merchant's petition for rescission, or, if the
Commission determines that the order issued under paragraph (g)(1) of
this section should not remain in effect, the order shall be rescinded.
* * * * *
Issued in Washington, DC, on September 25, 2006 by the
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-16035 Filed 9-28-06; 8:45 am]
BILLING CODE 6351-01-P