October 11, 1989
TO: SEC RULES COMMITTEE NO. 61-89
BROKER/DEALER ADVISORY COMMITTEE NO. 47-89
RE: SEC PROPOSES AMENDMENTS TO NET CAPITAL RULE
__________________________________________________________
The Securities and Exchange Commission has proposed
amendments to the net capital rule under the Securities Exchange
Act of 1934. A copy of the proposal is attached.
Currently, the minimum net capital for broker-dealers that
limit their activities to transactions in shares of registered
investment companies is the greater of $2,500 or 6 2/3 percent of
their aggregate indebtedness. Under the proposal, the minimum
net capital requirement of certain mutual fund brokers and
dealers would be increased to $25,000. However, for mutual fund
firms which do not handle any customer funds or securities and
are not direct wire order firms, the SEC has proposed a $5,000
minimum net capital requirement.
Because of the impact of the proposed increased minimum
capital requirements on some broker-dealers, the SEC has proposed
that the minimums be staggered over a period of four years from
the effective date. Each year after the effective date, the
minimum requirements for affected broker-dealers would increase
by 25 percent of the increase. The timing of the increase for
mutual fund dealers that routinely receive customer funds would
be:
a. current Rule: $ 2,500
b. by 12/31/90: $ 8,125
c. by 12/31/91: $13,750
d. by 12/31/92: $19,375
e. by 12/31/93: $25,000
In order to qualify for the $25,000 minimum net capital
requirement, a broker or dealer must meet all of the following
conditions:
(A) Dealer transactions must be limited to the purchase,
sale and redemption of redeemable shares of registered investment
companies or interests or participations in insurance company
separate accounts, although it may also effect ten or fewer
transactions in other securities for its own account with or
through another registered broker or dealer;
(B) Transmittal of all funds must be done promptly and the
broker or dealer must not otherwise hold funds or securities for,
or owe money or securities to, customers; and
(C) Transactions as a broker are limited to the following:
(1) sales and redemptions of redeemable shares of
registered investment companies or of interests or
participations in insurance company separate accounts
whether or not registered as investment companies;
(2) the solicitation of share accounts for savings
and loan associations insured by an instrumentality of
the United States;
(3) the sale of securities for a customer account for
immediate reinvestment in redeemable shares of an
investment company; and
(4) ten or fewer transactions in securities per year
for its own account with or through another registered
broker or dealer.
The SEC proposal also contains an exclusion from the
aggregate indebtedness calculation for a broker-dealer whose
indebtedness to a mutual fund in connection with a purchase of
shares of that fund is offset by a receivable from another
broker-dealer related to that transaction. The current rule
requires that a broker-dealer must have a 6 2/3 percent cushion
to cover its liability the broker-dealer has to the fund. The
SEC believes that, to the extent that this liability is offset by
receivables from a second broker-dealer, the 6 2/3 percent
cushion is unnecessary. Rather than the 6 2/3 percent charge
that results under the current rule, the SEC proposes that this
requirement be lowered to 1 percent of the liability amount when
an offset receivable exists.
The Commission specifically requests commentators to focus
attention on the phase-in provisions and to indicate whether the
proposed timing and method of phase-in are appropriate. In
particular, the SEC is concerned that, given the significant
level of risk present in the system, a four-year phase-in may be
too long to achieve the maximum degree of customer and systemic
protection contemplated by these proposals. On the other hand,
the Commission recognizes the need for a smooth transition with
minimum disruption for both firms and customers.
The Commission also requests comment on alternative methods
that might be used to establish minimum net capital requirements.
More specifically, the Commission asks commentators to address
whether a minimum absolute dollar amount requirement could be
based on quantifiable measures of risk.
The deadline for comments to the SEC is December 18, 1989.
Therefore, please submit any comments to the undersigned by
Friday, December 1, 1989.
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment