CFTC Staff Letter 85-17: No-Action Relief for Prepayment of Subordinated Debt Without Commission Approval

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DIVISION OF
TRADING AND MARKETS
COMMODITY FUTURES TRADING COIIAMISSION
2033 K STREET. N.W., WASHINGTON, D.C. :10!>81 SeptemUer 10, 1985 ()f!> ... f\C.,tarv RE'. ~fe.fA~tMet\t o-f: Sub~rc)iN.,t~ 0<!..\ot TO ALL REGISTERED FO'IURES CCMvl.ISSICN MERCHANTS, INI'RODUCING BROKERS, AND SELF-REGUI.A'IDRY ORGANimriCNS:
Section 1.17 {h) (2) {vii) of the regulations pranulgated under the
Connodity Exchange Act {17 C.P.R. §1.17(h) {2) {vii) {1985)) requires a registered futures carrmission rrerchant {11F'CM11 ) or introducing broker ("IB") to obtain the written approval of its designated self-regulatory organization { 11DSRO") and the Carmission prior to nuking any prepaynent of subordinated debt. 'llie requirerrent for dual approval has been in effect for approximately seven years. During that tilre, the DSROs have gained greater familiarity regarding subordinatc.->d debt and the DSRQ; have also derronstrated, through various joint auditing arrangerrents, an ability to work together in the ar8a of financial surveillance. The Division of Trading and Markets therefore believes that it is appropriate for the DSROs to be pr.i.ma.rily responsible for the approval of prepayment of subordinated debt, subject to Commission oversight, principally through the Division's periodic reviews of DSRO financial audit programs. 'Ihat wuld make the trea'l::rrimt of prepayrrent of subordinated debt consistent with the treatrrent of approval of n£'W subordinated debt or a.rrendrrents to subordination agreecrents. The Division intends to recarrrend to the Cannission that Rule

1. 17 (h) (2) {vii) be changed to require only DSRO approval of prepayrrent of
   subordinated debt, 1/ and perhaps certain other procedural changes in Rule
   1.17 in areas such as extensions of time. The Division also recocjilizes,
   ha,...:ever, that there a.rto two current rulemaking proceedings involving prop::>sed substa.nti ve changes to an FCM' s and an IB' s minimum financial rE.quirerrents {50 Fed. Reg. 31612, August 5, 1985 and 50 Fed. Reg. 35247, August 30, 1985). The Division believes that those prOCL~1gs should be resolved before another rulemaking proceeding in the financial area is l:x...-"gllll. 'I'he Division further believes that the changes in the procedures for approval of prepayrrent of subordinatt.~ debt should be instituted as soon as r:ossilile, Accordingly, the Division will not recanrend that any enforcerrent action be taken against any F01 or IB if it prepays subordinated debt without the prior written approval of the Commission provided the firm has a DSRO and the prior written approval of the firm's DSRO is obtained and Rule 1.17 (h) (2) (vii) is otherwise carplied with. 1./ Those few remaining registered firms without a DSRO would still need Cannission approval. I /~

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This is the p.Jsition of the Division of Trading and Markets and is not necessarily the p.Jsition of the Ccm:n:i.ssion itself or any other unit within the Comnission. cc: Regional Aucli t Staffs AF25/2 ? truly yours, cdewt) Andrea M. Corcoran ;; ~~~ Director -I ) \ I '