Proposed Rule

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Proposed Amendments
(Additions are underscored and deletions are stricken through)

SCHEDULE C
SUBORDINATED LOAN AGREEMENTS

SECTION C1. SUBORDINATED LOAN AGREEMENTS. The term satisfactory subordination agreement ("subordination agreement") means an agreement which contains the minimum and non-exclusive requirements set forth below:

C1-a. Definitions.

    (i) A subordination agreement may be either a subordinated loan agreement or a secured demand note agreement.

    (ii) The term "subordinated loan agreement" means the agreement or agreements evidencing or governing a subordinated borrowing of cash.

    (iii) The term "collateral value" of any securities pledged to secure a secured demand note means the market value of such securities after giving effect to the percentage deductions specified in Schedule A, Section A6.

    (iv) The term "payment obligation" means the obligation of a Member FCM in respect to any subordination agreement: (A) to repay cash loaned to the Member FCM pursuant to a subordinated loan agreement; or (B) to return a secured demand note contributed to the Member FCM or to reduce the unpaid principal amount thereof and to return cash or securities pledged as collateral to secure the secured demand note, and "payment" shall mean the performance by a Member FCM of a payment obligation.

    (v)

      (A) The term "secured demand note agreement" means an agreement (including the related secured demand note) evidencing or governing the contribution of a secured demand note to a Member FCM and the pledge of securities and/or cash with the Member FCM as collateral to secure payment of such secured demand note. The secured demand note agreement may provide that neither the lender, his heirs, executors, administrators, or assigns shall be personally liable on such note and that in the event of default the Member FCM shall look for payment of such note solely to the collateral then pledged to secure the same.

      (B) The secured demand note shall be a promissory note executed by the lender and shall be payable on the demand of the Member FCM to which it is contributed: Provided, however, that the making of such demand may be conditioned upon the occurrence of any of certain events which are acceptable to the DSRO.

      (C) If such note is not paid upon presentment and demand as provided for therein, the Member FCM shall have the right to liquidate all or any part of the securities then pledged as collateral to secure payment of the same and to apply the net proceeds of such liquidation, together with any cash then included in the collateral in payment of such note. Subject to the prior rights of the Member FCM as pledgee, the lender, as defined in C1-a(v)(F) below, may retain ownership of the collateral and have the benefit of any increases and bear the risks of any decreases in the value of the collateral and may retain the right to vote securities contained within the collateral and any right to income therefrom or distributions thereon, except the Member FCM shall have the right to receive and hold as pledgee all dividends payable in securities and all partial and complete liquidating dividends.

      (D) Subject to the prior rights of the Member FCM as pledgee, the lender may have the right to direct the sale of any securities included in the collateral, to direct the purchase of securities with any cash included therein, to withdraw excess collateral or to substitute cash or other securities as collateral: Provided however, that the net proceeds of any such sale and the cash so substituted and the securities so purchased or substituted are held by the Member FCM as pledgee, and are included within the collateral to secure payment of the secured demand note; and Provided further, that no such transaction shall be permitted, if after giving effect thereto, the sum of the amount of any cash, plus the collateral value of the securities then pledged as collateral to secure the secured demand note, would be less than the unpaid principal amount of the secured demand note.

      (E) Upon payment by the lender, as distinguished from a reduction by the lender which is provided for in C1-b(vi)C below or reduction by the Member FCM as provided for in C1-b(vii) below of all or any part of the unpaid principal amount of the secured demand note, the Member FCM shall issue to the lender a subordinated loan agreement in the amount of such payment (or in the case of a Member FCM that is a partnership, credit a capital account of the lender), or issue preferred or common stock of the Member FCM in the amount of such payment, or any combination of the foregoing, as provided for in the secured demand note agreement.

      (F) The term "lender" means the person who lends cash to a Member FCM pursuant to a subordination loan agreement and the person who contributes a secured demand note to a Member FCM pursuant to a secured demand note agreement.

C1-b. Minimum Requirements for Subordination Agreements.

    (i) General. Subject to C1-a above, a subordination agreement shall mean a written agreement between the Member FCM and the lender, which:

      (A) Has a minimum term of one year, except for temporary subordination agreements provided for in C2-e below; and

      (B) Is a valid and binding obligation enforceable in accordance with its terms (subject as to enforcement to applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws) against the Member FCM and the lender and their respective heirs, executors, administrators, successors, and assigns.

    (ii) Specific amount. All subordination agreements shall be for a specific dollar amount which shall not be reduced for the duration of the agreement except by installments as specifically provided for therein and except as otherwise provided in this Section C1-b.

    (iii) Effective subordination. The subordination agreement shall effectively subordinate any right of the lender to receive any payment with respect thereto, together with accrued interest or compensation, to the prior payment or provision for payment in full of all claims of all present and future creditors of the Member FCM arising out of any matter occurring prior to the date on which the related payment obligation matures, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the lender under such subordination agreements.

    (iv) Proceeds of subordinated loan agreements. The subordinated loan agreement shall provide that the cash proceeds thereof shall be used and dealt with by the Member FCM as part of its capital and shall be subject to the risks of the business.

    (v) Certain rights of the borrower. The subordination agreement shall provide that the Member FCM shall have the right to:

      (A) Deposit any cash proceeds of a subordinated loan agreement and any cash pledged as collateral to secure a secured demand note in an account or accounts in its own name in any bank or trust company;

      (B) Pledge, repledge, hypothecate and rehypothecate any or all of the securities pledged as collateral to secure a secured demand note, without notice, separately or in common with other securities or property for the purpose of securing any indebtedness of the Member FCM; and

      (C) Lend to itself or others any or all of the securities and cash pledged as collateral to secure a secured demand note.

    (vi) Collateral for secured demand notes. Only cash and securities which are fully paid for and which may be publicly offered or sold without registration under the Securities Act of 1933, and the offer, sale, and transfer of which are not otherwise restricted, may be pledged as collateral to secure a secured demand note. The secured demand note agreement shall provide that if at any time the sum of the amount of any cash, plus the collateral value of any securities then pledged as collateral to secure the secured demand note, is less than the unpaid principal amount of the secured demand note, the Member FCM must immediately transmit written notice to that effect to the lender and its DSRO. The secured demand note agreement shall also require that following such transmittal:

      (A) The lender, prior to noon of the business day next succeeding the transmittal of such notice, may pledge as collateral additional cash or securities sufficient, after giving effect to such pledge, to bring the sum of the amount of any cash, plus the collateral value of any securities then pledged as collateral to secure the secured demand note, up to an amount not less than the unpaid principal amount of the secured demand note; and

      (B) Unless additional cash or securities are pledged by the lender as provided in (A) above, the Member FCM at noon on the business day next succeeding the transmittal of notice to the lender must commence the sale, for the account of the lender, of such of the securities then pledged as collateral to secure the secured demand note and apply so much of the net proceeds thereof, together with such of the cash then pledged as collateral to secure the secured demand note, as may be necessary to eliminate the unpaid principal amount of the secured demand note: Provided, however, that the unpaid principal amount of the secured demand note need not be reduced below the sum of the amount of any remaining cash, plus the collateral value of the remaining securities then pledged as collateral to secure the secured demand note. The Member FCM may not purchase for its own account any securities subject to such a sale; and

      (C) The secured demand note agreement may also provide that, in lieu of the procedures specified in the provisions required by (B) above, the lender with the prior written consent of the Member FCM and the DSRO may reduce the unpaid principal amount of the secured demand note: Provided, however, that after giving effect to such reduction the Adjusted Net Capital of the Member FCM would not be less than the greater of seven percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or for securities brokers or dealers, the amount of net capital specified in Rule 15c3-1d(b)(6)(iii) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(6)(iii)); and Provided further, that no single secured demand note shall be permitted to be reduced by more than 15 percent of its original principal amount and after such reduction no excess collateral may be withdrawn. The DSRO shall not consent to a reduction of the principal amount of a secured demand note, if after giving effect to such reduction, Adjusted Net Capital would be less than 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements.

    (vii) Permissive prepayments and special prepayments. A Member FCM at its option, but not at the option of the lender, may, if the subordination agreement so provides, make a payment of all or any portion of the payment obligation thereunder prior to the scheduled maturity date of such payment obligation (hereinafter referred to as "prepayment"), but in no event may any prepayment be made before the expiration of one year from the date such subordination agreement became effective: Provided, however, that the foregoing restriction shall not apply to temporary subordination agreements which comply with the provisions of C2-e below, nor shall it apply to revolving agreements covered under Section C2-f. No prepayments shall be made, if after giving effect thereto (and to all payments of payment obligations under any other subordinated agreements then outstanding, the maturities or accelerated maturities of which are scheduled to fall due within six months after the date such prepayment is to occur pursuant to this provision, or on or prior to the date on which the payment obligation in respect to such prepayment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the Member FCM, either the Adjusted Net Capital of the Member FCM is less than the greatest of seven percent of the funds required to be segregated under the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(b)(7) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(7)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements. Notwithstanding the above, no prepayment shall occur without the prior written approval of the Member FCM's DSRO.

    (viii) Suspended repayment.

      (A) The payment obligation of the Member FCM with respect to any subordination agreement shall be suspended and shall not mature, if after giving effect to payment of such payment obligation (and to all payments of payment obligations of the Member FCM under any other subordination agreement(s) then outstanding which are scheduled to mature on or before such payment obligation), the Adjusted Net Capital of the Member FCM would be less than the greatest of six percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(b)(8)(i) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(8)(i)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; and Provided further, that the subordinated agreement may provide that if the payment obligation of the Member FCM thereunder does not mature and is suspended as a result of the requirement of this paragraph for a period of not less than six months, the Member FCM shall then commence the rapid and orderly liquidation of its business but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of this Section.

      (B) Whenever a subordinated agreement provides that a Member FCM shall commence a rapid and orderly liquidation as permitted in C1-b(ix)(A) below, the date on which the liquidation commences shall become the maturity date for each subordination agreement of the Member FCM then outstanding, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of this Section.

    (ix) Accelerated maturity. The obligation to repay to remain subordinate is as follows:

      (A) Subject to C1-b(viii) above, a subordination agreement may provide that the lender may, upon prior written notice to the Member FCM and its DSRO, given not earlier than six months after the effective date of such subordination agreement, accelerate the date on which the payment obligation of the borrower, together with accrued interest or compensation, is scheduled to mature, to a date not earlier than six months after giving of such notice, but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b.

      (B) Notwithstanding this Section C1-b, the payment obligation of the Member FCM with respect to a subordination agreement, together with accrued interest and compensation shall mature in the event of any receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to the bankruptcy laws, or any other marshalling of the assets and liabilities of the Member FCM, but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b.

    (x) Accelerated maturity of subordination agreement on event of default and acceleration. The obligation to repay to remain subordinate is as follows:

      (A) A subordination agreement may provide that the lender may, upon prior written notice to the Member FCM and its DSRO, of the occurrence of any event of acceleration (as hereinafter defined) given no sooner than six months after the effective date of such subordination agreement, accelerate the date on which the payment obligation of the Member FCM, together with accrued interest, or compensation, is scheduled to mature, to the last business day of a calendar month which is not less than six months after notice of acceleration is received by the Member FCM and its DSRO. Any subordination agreement containing such events of acceleration may also provide that, if upon such accelerated maturity date the payment obligation of the Member FCM is suspended as required by C1-b(viii) above and liquidation of the Member FCM has not commenced on or prior to such accelerated maturity date, notwithstanding C1-b(viii) above, the payment obligation of the Member FCM with respect to such subordination agreement shall mature on the date immediately following such accelerated maturity date and in any such event the payment obligations of the Member FCM with respect to all other subordination agreements then outstanding shall also mature at the same time, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b. Events of acceleration which may be included in a subordination agreement and comply with this Section C1-b(x) shall be limited to:

        (1) Failure to pay interest or any installment or principal on a subordination agreement as scheduled;

        (2) Failure to pay when due other money obligations of a specified material amount;

        (3) Discovery that any material specified representation of warranty of the Member FCM which is included in the subordination agreement and on which the subordination agreement was based or continued was inaccurate in a material respect at the time made;

        (4) Any specified and clearly measurable event which is included in the subordination agreement and which the lender and the Member FCM agree:(a) is a significant indication that the financial position of the Member FCM has changed materially and adversely from agreed upon specified norms; (b) could materially and adversely affect the ability of the Member FCM to conduct its business as conducted on the date the subordination agreement was made; or (c) is a significant change in the senior management of the Member FCM or in the general business conducted by the Member FCM from that which was obtained on the date the subordination agreement became effective; and

        (5) Any continued failure to perform agreed covenants included in the subordination agreement relating to the conduct of the business of the Member FCM or relating to the maintenance and reporting of its financial position.

      (B) Notwithstanding C1-b(viii) above, a subordination agreement may provide that, if liquidation of the business of the Member FCM has not already commenced, the payment obligation of the Member FCM shall mature, together with accrued interest or compensation, upon the occurrence of an event of default (as hereinafter defined). Such agreement may also provide that, if liquidation of the business of the Member FCM has not already commenced, the rapid and orderly liquidation of the business of the Member FCM shall then commence upon an event of default. Any subordination agreement which so provides for maturity of the payment obligation upon the occurrence of an event of default shall also provide that the date on which such event of default occurs shall, if liquidation of the Member FCM has not already commenced, be the date on which the payment obligation of the Member FCM with respect to all other subordination agreements then outstanding shall mature, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b. Events of default which may be included in a subordination agreement shall be limited to:

        (1) The making of an application by the Securities Investor Protection Corporation for a decree adjudicating that customers of the Member FCM are in need of protection under the Securities Investor Protection Act of 1970 and the failure of the Member FCM to obtain the dismissal of such application within 30 days;

        (2) Failure to meet the minimum capital requirements of the Member FCM's DSRO throughout a period of 15 consecutive business days (commencing on the day the borrower first determines and notifies the DSRO or if the DSRO first determines and so notifies the Member FCM of such non-compliance, on the day of such notice);

        (3) The CFTC shall revoke the registration of the Member FCM as an FCM;

        (4) The DSRO shall suspend (and not reinstate within 10 days) or revoke the Member FCM's status as a member firm; and

        (5) Any receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshalling of the assets and liabilities of the Member FCM.

      A subordination agreement which contains any of the provisions permitted by this Section C1-b(x) shall not contain the provision otherwise permitted by Section C1-b(ix)(A) above.

SECTION C2. MISCELLANEOUS PROVISIONS.

C2-a. Prohibited Cancellations. The subordination agreement shall not be subject to cancellation by either party; and no payment shall be made with respect thereto and the agreement shall not be terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be inconsistent with the requirements of C1 above.

C2-b. Notice of Maturity or Accelerated Maturity. Every Member FCM shall immediately notify its DSRO if, after giving effect to all payments of payment obligations under subordination agreements then outstanding which are then due or mature within the following six months without reference to any projection of profit or loss of the Member FCM, its Adjusted Net Capital would be less than 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; or its Adjusted Net Capital would be less than the greatest of six percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(2) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(2)).

C2-c. Certain Legends. If all the provisions of a satisfactory subordination agreement do not appear in a single instrument, then the debenture or other evidence of indebtedness shall bear on its face an appropriate legend stating that it is issued subject to the provisions of a satisfactory subordination agreement which shall be adequately referred to and incorporated by reference.

C2-d. Legal Title to Securities. All securities pledged as collateral to secure a secured demand note must be in bearer form, or registered in the name of the Member FCM or the name of its nominee or custodian.

C2-e. Temporary Subordinations. To enable a Member FCM to participate as an underwriter of securities or undertake other extraordinary activities and remain in compliance with the financial requirements, a Member FCM shall be permitted, on no more than three occasions in any 12-month period, to enter into a subordination agreement on a temporary basis which has a stated term of no more than 45 days from the date the subordination agreement became effective: Provided, however, that this temporary relief shall not apply to any Member FCM if the Adjusted Net Capital of the Member FCM is less than the greatest of seven percent of the funds required to be segregated under the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade; and Provided further, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(5)(1) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(1)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements, or if the amount of equity capital defined in Schedule B is less than the limits specified in Section 3. Such temporary subordination agreement shall be subject to all of the other provisions of Schedule C.

C2-f. Revolving Subordination-Special Payments. A Member FCM shall be allowed to enter into a revolving subordination agreement which, at the option of the Member FCM but not at the option of the lender, if the agreement so provides, allows a prepayment at anytime prior to the scheduled maturity date, subject to the prior written approval of the Member FCM's DSRO. However, no such prepayment shall be made if:

    (i) After giving effect thereto (and to all payments of payment obligations under any other subordinated agreements then outstanding, the maturities or accelerated maturities of which are scheduled to fall due within six months after the date such special payment is to occur pursuant to this provision, or on or prior to the date on which the payment obligation in respect to such special payment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the applicant or registrant, the Adjusted Net Capital of the applicant or registrant is less than the greatest of 10 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(5)(ii) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(ii)); or 200 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; or

    (ii) Pre-tax losses during the latest three-month period were greater than 15 percent of current excess Adjusted Net Capital.

C2-g. Filing. A signed copy of any proposed subordination agreement (including nonconforming subordination agreements) must be filed with the DSRO at least 10 days prior to the proposed effective date of the agreement, or at such other time as the DSRO for good cause shall find acceptable. The Member FCM shall also file with the DSRO a statement setting forth the name and address of the lender, the business relationship of the lender to the Member FCM, and whether the Member FCM carried funds or securities for the lender at or about the time the proposed agreement was so filed. All agreements shall be examined by the DSRO prior to their becoming effective. No proposed agreement shall be a satisfactory subordination agreement for the purpose of these capital requirements unless and until the DSRO finds the agreement acceptable and such agreement has become effective in the form found acceptable.

C2-h. Subordination Agreements in Effect Prior to December 20, 1978. Any subordination agreement which has been entered into prior to December 20, 1978, and which has been deemed to be a satisfactory subordinated agreement pursuant to the CFTC requirements then in effect or the rules of a contract market shall continue to be deemed a satisfactory subordination agreement until the maturity of such agreement: Provided, however, that no renewal of an agreement that provides for automatic or optional renewal by the Member shall be deemed a satisfactory subordination agreement unless it meets the requirements of this Schedule C.; and, Provided further, that all subordination agreements must meet the requirements of this Schedule C by December 20, 1983.

SECTION C3. EXCEPTIONS. The Member FCM's DSRO may allow debt with a maturity date of one year or more to be treated as meeting the requirements of this Schedule C: Provided, however,

C3-a. That such exemption shall only be given when the Member FCM's Adjusted Net Capital is less than the minimum required by Section 1;

C3-b. That such debt did not exist prior to its use under this Section C3;

C3-c. That such exemption shall be for a period of 30 days or such lesser period as the DSRO may determine;

C3-d. That such exemption shall not be allowed more than once in any 12 month period; and

C3-e. That at all times during such exemption the Member FCM shall make a good faith effort to comply with these minimum capital requirements exclusive of any benefits derived from this Section C3.

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