TELEPHONE: (212) 421-1611 FACSIMILE: (212) 421-1119


February 4, 2004


Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Attention: Jonathan G. Katz, Secretary

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

Ladies and Gentlemen:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed alternative net capital rule (amending Rule 15c3-1) (the "Proposed Rule"), as set forth in Release No. 34-48690 (the "Release").1 The Institute of International Bankers (the "Institute") represents internationally headquartered financial institutions from over 40 countries. Many of the Institute's members have U.S. broker-dealer affiliates that are subject to the Commission's existing net capital rule.


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 not affiliated with a banking organization to fulfill European Union ("EU") requirements "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 deference to the equivalent consolidated supervision of international banks provided by their home country supervisors globally and the umbrella oversight of such organizations provided by the Federal Reserve Board ("Federal Reserve") in the United States. For the reasons discussed below, we believe that the Proposed Rule should be revised in two principal respects in order to provide appropriate deference and otherwise achieve its objectives:

  • The Commission should accord deference to home country supervisors that provide comprehensive consolidated supervision ("CCS"); broker-dealer affiliates of international banks that are subject to CCS should be eligible for the alternative capital treatment under the Proposed Rule without being subject to additional holding company level capital and risk supervision by the Commission.

  • The alternative capital standard for the broker-dealer should accept home country Basel capital methodologies.


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.4 Imposition of any such additional supervisory burdens on international banks operating in the United States would be inconsistent with application of the principles of comity and deference that the Commission is seeking from other countries in which U.S. non-bank-affiliated securities firms operate, and which the EU Financial Conglomerate Directive indicates would be applicable to U.S. non-bank-affiliated securities firms 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, for example, whether proposed subsection 240.15c3-1e(a)(1)(viii)(F) would make the other holding company requirements of the proposed rule inapplicable to an international bank. Assuming they would be inapplicable, it nevertheless would remain unclear under this proposal whether the international bank would still need to make additional information available to the Commission, based on a general reservation that could authorize a requirement of additional information. The preamble to the Proposed Rule is similarly unclear on these issues, but indicates a focus on information involving holding company level risks. See 68 Fed. Reg. at 62876.

In light of these ambiguities, the Institute met with Commission staff to discuss the Proposed Rule. The Institute very much appreciated the opportunity afforded by that meeting to obtain a better understanding as to the expected application of the Proposed Rule to international banks. While Commission staff indicated an intention to avoid undue burden on international banks, they also confirmed their intention to seek information concerning holding company level risks and financial and operating condition. As discussed below, we believe that deference should be accorded by the Commission to existing supervision of international banks.

The Commission's desire to provide U.S. securities firms that are not part of a banking organization with equivalent consolidated supervision certainly should not result in any imposition by the Commission of new consolidated supervisory requirements on international banks subject to CCS. The Commission's role as global consolidated supervisor of U.S. non-bank-affiliated securities firms should properly be far different and broader than its host country role as supervisor of an affiliated broker-dealer of an international bank.

International banks are already subject to CCS by their home countries under standards developed by the Basel Committee. The Federal Reserve makes CCS determinations for international banks operating in the United States in the context of certain regulatory applications.5 CCS, as implemented by home country supervisors, addresses all of the areas of concern covered by the Proposed Rule with respect to holding companies, including both internal risk management controls and capital adequacy. All of the U.S. broker-dealer affiliates of international banks are subsidiaries of international banks. As a result, home country CCS and Federal Reserve umbrella supervision directly cover the consolidated capital and risk considerations of the parent of the broker-dealer, and thus, are directly applicable to holding company level considerations of capital and risk that the Commission indicates would be relevant. The Commission should certainly defer, at a minimum, to those home countries for which a CCS determination has been made by the Federal Reserve, and require no additional assessments or information concerning consolidated capital or financial and operating risk within the affiliated group, since these matters are fully considered and supervised under CCS.6

In addition, principles of functional 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. At the same time, the Federal Reserve is recognized thereunder as the umbrella supervisor of the consolidated banking organization, and holding company level risk and capital oversight delegated to the Federal Reserve should not be duplicated by a functional regulator. The EU Financial Conglomerate Directive reflects a similar policy of streamlining the supervision of financial service organizations. The Directive avoids the burdens of duplicative supervision by calling for EU host country deference to U.S. home country consolidated supervision that is equivalent to EU consolidated supervision. Consistent application of this policy calls for deference by the Commission to the home country supervisor.

Accordingly, the Institute believes that the Proposed Rule should be amended to provide appropriate full deference to home country umbrella supervision for all entities within an international banking organization subject to such oversight, which includes its non-banking as well as banking affiliates, whether or not such affiliates are otherwise individually regulated.7 The Proposed Rule should therefore defer to CCS and exempt an international bank on a consolidated basis (including all of its affiliates) from all of the SEC's proposed holding company undertakings, requirements and conditions for application of the new broker-dealer capital standard. There should be no 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.8 Moreover, no application or further action should be required of an international bank subject to CCS to demonstrate that its oversight is sufficient to satisfy the Commission's supervisory purposes. While the Commission has supervisory responsibility over an international bank's broker-dealer affiliate,9 an international banking organization that is subject to CCS should have full deference accorded to its existing comprehensive supervision and no additional financial reporting, notification, recordkeeping or other regulatory obligations imposed on the international bank (or other members of its affiliated group) by the Commission.10

If the Commission nevertheless were to require such additional information in connection with its supervision of the broker-dealer that extends to the international bank or other affiliates, it should obtain such information from the Federal Reserve, since the Federal Reserve is the U.S. umbrella supervisor for the international bank. This will better ensure that examination and other supervisory information will remain protected as to its confidentiality under applicable law. It will also ensure, consistent with U.S. policy, that duplicative burdens on the institution are avoided.

As regards the proposed new broker-dealer capital standard, we agree with the Commission's objective of providing an alternative capital rule for broker-dealers, including those that are affiliates of international banks. In this connection, we believe that the Commission should permit home country Basel capital methodologies to be applicable to the broker-dealer to ensure consistency with the institution's global capital methodologies and calculations. We request greater clarity that the Commission will defer to consolidated capital calculations by an international bank under its home country implementation of Basel standards. Moreover, we believe that it would avoid excessive burden and complexity to apply such methodologies consistently to the broker-dealer as well.11 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.

We do not believe that it would be appropriate to limit the applicability of the proposed substantial reduction in the net capital required of a broker-dealer only to those very few broker-dealers of the largest size in the United States. Many international banks with U.S. broker-dealer affiliates have consolidated capital far in excess of the $1 billion tentative net capital requirement, even though the tentative net capital of their U.S. broker-dealer may be less than $1 billion. It would create conditions for competitive inequality between the major U.S. non-bank-affiliated securities firms and international banks to permit substantial reductions in net capital for such large U.S. non-bank-affiliated U.S. broker-dealers while withholding equivalent treatment for the U.S. broker-dealer affiliates of international banks (and U.S. bank holding companies).

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 the alternative test under the Proposed Rule. There are two important considerations in this regard. First, international banks would be denied equivalent access to the favorable alternative capital methodology provided by the Proposed Rule if they would be subject to the duplicative burdens of 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 may fail to assure competitive equity and to achieve its objective of wide application and acceptance. Second, the EU has indicated that it plans to defer to non-EU home country consolidated supervision that is equivalent to home country supervision in the EU without imposing any added holding company level requirements. The Commission has already indicated that its proposal is designed to be equivalent to EU consolidated supervision. If the Commission nevertheless were to impose duplicative reporting, recordkeeping, notification or other regulatory burdens on international banks, supervisors in the EU and elsewhere would be encouraged to take similar action to add additional requirements on U.S. non-bank-affiliated securities firms operating in their countries. We therefore believe that our proposed modification should be implemented to avoid duplicative burdens and competitive inequalities.

* * *

Please contact the Institute if we can provide additional information or assistance.


Lawrence R. Uhlick
Executive Director and
General Counsel

1 68 Fed. Reg. 62872 (November 6, 2003).
2 68 Fed. Reg. 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 Conglomerate Directive"), in which the EU would defer to equivalent consolidated supervision of the parent in a home country outside the EU.
4 The Federal Reserve has determined that the following countries provide CCS: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Finland, France, Germany, Greece, Hong Kong Special Administrative Region, Israel, Ireland, Italy, Japan, Mexico, the Netherlands, Norway, Portugal, South Korea, Spain, Switzerland, Taiwan, Turkey and the U.K.
5 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 and their proposed recognition by the Commission 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. 54590 (Sept. 17, 2003).
6 See the standard for a CCS determination by the Federal Reserve in 12 C.F.R. § 211.24(c)(B)(ii).
7 The proposed definition of an entity that has a principal regulator references the definition of "international bank" in the International Banking Act of 1978 ("IBA") and that definition has been interpreted to be inclusive of all of its affiliated entities. We suggest that the definition (or explanatory preamble) make clear that any international bank that has been determined to be subject to CCS would satisfy the definition as to itself and all of its affiliates.
8 The proposed definition of an entity that has a principal regulator would require that the person is primarily in the "insured depository institutions business." Deposits at international banks often are not "insured." It should be sufficient that the international bank meets the IBA definition of a foreign bank. If additional qualification were thought necessary, the Federal Reserve's definition of a qualifying foreign banking organization in section 2ll.23(a) of Regulation K could be referenced.
9 As supervisor of the broker-dealer, it would be appropriate for the Commission to have access to information concerning transactions the broker-dealer has with its affiliates, but not concerning holding company level risk since that is covered by CCS and umbrella supervision.
10 For example, consolidating financial statements for all material affiliates would be particularly burdensome for international banks since very few of them report their financial information under U.S. GAAP and many institutions do not prepare monthly and quarterly financials.
11 If the Commission believes that some additional capital is necessary at the broker-dealer level, then it might apply a multiplier to the methodology or otherwise provide for an appropriate addition.