Le Secrétaire Général

Brussels, 04 February 2004

By e-mail

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
e-mail: rule-comments@sec.gov

Re: Proposed Rule: Alternative Net Capital Requirements for Broker-Dealers that are Part of Consolidated Supervision Entities (File No. S7-21-03)

Dear Mr. Katz:

The European Banking Federation (the "FBE") is the united voice of the banks of the European Union and European Free Trade Association countries. It represents more than 4,000 individual banks, a number of which have U.S. broker-dealer affiliates that are subject to the Commission's existing net capital rule. We wish to thank the Securities and Exchange Commission (the "Commission") for the opportunity to comment on the Proposed Rule on Alternative Net Capital Requirements for Broker-Dealers that are Part of Consolidated Supervision Entities (the "Proposed Rule"), as set forth in Release No. 34-48690 (the "Release")1.


The Proposed Rule (together with the companion proposal with respect to supervised investment bank holding companies)2 indicates an intention to provide a basis for U.S. securities firms "to demonstrate that they have [equivalent] consolidated supervision at the holding company level" and thereby "minimize duplicative regulatory burdens" on these securities firms that are active in the EU.3 Similarly, we understand that the Proposed Rule is intended to provide national treatment to international banks and deference to the equivalent consolidated supervision provided by their home country supervisors globally and the umbrella oversight of such organizations provided by the Federal Reserve Board in the United States. For the reasons discussed below, we believe that the Proposed Rule needs to be revised in two main respects in order to provide appropriate deference and otherwise achieve its objectives:

  • Full deference to home country supervisors that provide comprehensive consolidated supervision (CCS), thereby qualifying such institutions for alternative capital treatment under the Proposed Rule; and

  • Application of home country Basel capital methodologies as the alternative capital standard for the broker-dealer.


The Proposed Rule would impose a new supervisory regime that if applied to international banks operating in the United States would add unnecessary duplicative burdens on institutions already comprehensively supervised on a consolidated basis by their home country regulators, as well as subject to umbrella supervision by the Federal Reserve. Any such burdens would be inconsistent with the principles of comity and deference that we believe the Commission would support being accorded to it as a U.S. supervisor in other countries, and which the EU Financial Conglomerates Directive indicates would be applicable to U.S. institutions subject to equivalent consolidated supervision.

The Proposed Rule appears ambiguous as to the scope of deference to be accorded to home country CCS of international banks (and related Federal Reserve umbrella supervision). It is unclear whether subsection 240.15c3-1e(a)(1)(viii)(F) would make the other holding company requirements inapplicable to an international bank and, assuming it would, whether the international bank would still need to make additional information available to the Commission thereunder. The preamble to the Proposed Rule is similarly unclear on this issue4.

European banks are already subject to comprehensive consolidated supervision (CCS) by their home countries under standards developed by the Basel Committee5. The Federal Reserve makes CCS determinations for international banks operating in the United States in the context of certain regulatory applications.6 CCS, as implemented by home country supervisors, addresses all the areas of prudential supervision covered by the Proposed Rule with respect to holding companies, including both internal risk management controls and capital adequacy.

In addition, principles of functional streamlined regulation adopted by the United States in similar contexts support deference here. Section 111 of the Gramm-Leach-Bliley Act implements a policy of streamlining the regulatory framework applicable to a banking organization subject to multiple regulators by precluding duplicative, overlapping or burdensome regulation of entities already subject to extensive regulation by their functional regulators. The EU Financial Conglomerates Directive provides similar streamlining to avoid such burdens. Consistent application of this policy calls for deference by the Commission to the home country supervisor.

Accordingly, the FBE believes that the Proposed Rule should be amended to provide appropriate full deference to home country consolidated supervision for all entities within an international banking organization subject to such oversight, which includes non-banking as well as banking affiliates, whether or not such affiliates are otherwise regulated. The Proposed Rule should therefore defer to CCS and exempt an international bank on a consolidated basis from all of the SEC's proposed requirements. There is no need for an additional requirement for an international banking organization to show that it is primarily in the insured deposit business since that is not a requirement for a banking institution to be subject to CCS and to umbrella supervision by the Federal Reserve. Moreover, an international banking organization that is subject to CCS should have full deference accorded to its existing supervision and no additional reporting or other regulatory obligations imposed on the international bank by the Commission.

We agree with the Commission's objective of providing a modernized alternative capital rule for broker-dealers and believe that the Commission should permit home country Basel capital standards to be applicable to the broker-dealer to ensure consistency with the institution's global capital methodologies and calculations. We agree with the indication in the Proposed Rule that it will defer to consolidated capital calculations by an international bank under its home country implementation of Basel standards and believe that it would avoid excessive burden and complexity to apply such methodologies consistently to the broker-dealer as well. We also believe that deference to home country Basel capital methodologies should apply without any lengthy transition period when the Proposed Rule is finalized, since they are already applicable to the international bank and can be implemented without any need for delay.

It would be inconsistent with the Commission's objective of seeking deference to its supervision of U.S. institutions under the Proposed Rule for the Commission to impose additional requirements on international banks as a condition for qualification to utilize for their U.S. broker-dealers the alternative test under the Proposed Rule. International banks could be discouraged from adopting the alternative provided by the Proposed Rule if they would be subject to an additional set of umbrella supervisory rules beyond those already applied by home country supervisors and the Federal Reserve. As a result, the Proposed Rule would fail to achieve its objective of wide application and acceptance. Moreover, supervisors in other countries would be encouraged to take similar action (i.e. require reciprocity for their banks operating in the U.S. before accepting consolidated supervision of U.S. institutions by the SEC as "comparable") that would add additional requirements on U.S. institutions operating in their countries.

We hope that the Commission will take the above comments into due consideration. Please do not hesitate to contact the undersigned if we can provide further information or assistance.

Very truly yours,

Nikolaus BÖMCKE

1 68 Fed. Reg. at 62872 (November 6, 2003).
2 68 Fed. Reg. at 62910 (November 6, 2003).
3 68 Fed. Reg. at 62874. See "Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002" (the "Financial Conglomerates Directive"), in which the EU would defer to equivalent consolidated supervision of the parent in a home country outside the EU.
4 See, 68 Fed. Reg. at 62876.
5 See Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (September 1997), available at: <http://www.bis.org/publ/bcbsc102.pdf>.
6 Since 1991, the Federal Reserve makes CCS determinations when an international bank applies to establish (or expand) U.S. banking operations. Under current regulations, the Federal Reserve generally also makes CCS determinations when an international bank seeks to become a financial holding company under the Gramm-Leach-Bliley Act. For a discussion of the Federal Reserve's CCS determinations in a different context, see the Commission's release relating to a proposed exemption for international banks under Section 402 of the Sarbanes-Oxley Act. See 68 Fed. Reg. at 54590 (Sept. 17, 2003).