In addition, the following changes have also been made: Question 6(d) now reads: Corporate Officer (Not an Allied Member or Approved Person). Question 11(b) is now to be checked Yes or No. Question 11(d) is a new Question which requests the first name of an applicant's spouse, if married. Question 12(c) is a new Question to be answered only if Question 29 is answered Yes. Questions 24 and 26 have been revised slightly so that their meaning is clearer and more specific. Under Question 29 a blank space is now provided. If any of the Questions from 25-29 are answered Yes, a complete explanation must be provided in this space. Additional sheets may be attached if necessary, and they should be submitted in duplicate. Any questions regarding the Fair Credit Reporting Act or the new RE-1 Form (copy enclosed) may be directed to Mr. Peter Kowalewski, Asst. Manager of Member Offices and Personnel at (212) 623-5206. Extra copies of the Form may be obtained from the Subscription and Distribution Services Division, 15th Floor, 11 Wall Street. DAVID D. HUNTOON, [M. F. Educational Circular No. 328] To: Managing Partners/Officers of Member Organizations. On May 4, 1971 the New York City Police, District Attorney and other governmental authorities succeeded in apprehending seven persons who were conspiring to remove certificates from the vault of the Central Certificate Service operated by the Stock Clearing Corporation. In this instance, all of the certificates were non-negotiable, all certificates were recovered, and no loss resulted to the Clearing Corporation or any Clearing member. This experience is another reminder that the safekeeping of securities requires constant vigilance. Senior management, particularly in the operations area, should seek to remain alert to the problem of stolen securities and the possibility of theft within the firm. Several tools are at the disposal of member firms to seek to know their employees. Fingerprinting is now required by law in New York State. Firms that are not fingerprinting all employees are certainly encouraged to use this very useful tool. Many firms have begun using polygraph tests in various ways. Reference of former employment has been a standard employment application question. These references should be checked closely. Comments of the previous employers, or inconsistencies in the record of employment (particularly unaccounted for periods) may alert management to security-risk situations. Currently, there are several efforts being made to help firms safeguard certificates, avoid stolen certificates, and achieve maximum personnel security. Several of these should be called to your attention: Sci-Tek is currently offering a Securities Validation Service to member firms. This service permits firms to quickly check a data-bank to determine if a security received is stolen and to record in a data-bank the relevant information on their own stolen securities. These data will then be communicated to other firms which may receive the certificates. Information about this service can be obtained by contacting Mr. John Bilella, of Sci-Tek, at (212) 962-1270. The Association of Stock Exchange Firms has published a handbook on securities protection, entitled Internal Security Handbook. It suggests practical procedures which may help you in your own securities protection planning. Copies may be obtained from the Publications Department, Association of Stock Exchange Firms, 120 Broadway, New York, N. Y. 10005, at a cost of $25 for members and $50 for non-members. Marsh & McLennan_Incorporated has published a pamphlet, entitled Some Suggestions for Reducing Securities Thefts From Stock Brokerage Firms. This pamphlet also contains recommendations for procedures which can be employed to safeguard securities, check on the background of employees, and other measures. This may be obtained, without cost, from Marsh & McLennan Incorporated, 70 Pine Street, New York, N. Y. 10005, Attention: Mr. V. Stahl. The New York Institute of Finance is currently offering a series of four seminars on securities protection. Speakers at these seminars have included law enforcement officials, computer specialists, and security officers of banks and brokerage firms. This series of four seminars was offered to member firm executives during April and May of this year and, if there is sufficient interest, the program may be offered again in the Fall. If you are interested in such a program, contact the New York Institute of Finance, 37 Wall Street, New York, N. Y. 10005. Their telephone number is (212) 422-9835. We urge all member firms to avail themselves of these opportunities to improve their internal securities protection. ROBERT M. BISHOP, Director. 67-228 0-71-14 M. F. Educational Circular No. 336 TO: SUBJECT: NEW YORK STOCK EXCHANGE, Department of Member Firms IN C. July 16, 1971 Managing Partner/Officer, Partner or Officer Responsible for Capital Revision of Exchange Rules 325, 313 and 320 and Adoption of Rule 326 At its meeting on July 15, 1971, the Board of Governors formally adopted the recommendations of the Industry Capital Committee to amend the net capital rule and related rules. In general terms, some of the changes as a result of the Board action are described in the following paragraphs: The changes in the rules impose greater haircuts on proprietary security positions under certain circumstances, including haircuts on commercial paper and increased haircuts where an undue concentration exists. These new haircuts are generally greater than those which existed prior to this amendment. The rules also impose a 100% charge to capital of the market value of short security differences on the 45th day following discovery or, if discovered during an audit which is filed in less than 45 days, on such earlier filing date. The rule also specifies that cash and security dividends and interest receivable outstanding 30 days or more are to be a 100% charge to capital. The maximum capital ratio is reduced from 2000% to 1500%. The minimum dollar capital requirement for member organizations which carry customer accounts, service customers from more than one office, effect principal transactions or have a corporate affiliate or corporate subsidiary, is raised from $50,000 to $100,000. The minimum dollar capital requirement for member organizations which introduce customer accounts on a fully disclosed basis and employ registered representatives is raised from $25,000 to $50,000. With respect to the form and permanency of capital, the rule requires that all capital must be contributed initially for a minimum of one year, and that it can be withdrawn only upon six months' prior written notice. All subordinated capital must be contributed through printed standard forms, which may be modified only as permitted by the Exchange to strengthen the permanence of capital. The rule provides that if the withdrawal of capital, after the required notice period, would cause the capital ratio to exceed 1200%, the repayment of the capital would be suspended indefinitely until the member organization was in such financial condition as to permit the withdrawal. In the event that the firm has been unable to permit the withdrawal of capital for the period of one year from the original date of notice (in other words withdrawal has been suspended for six months), the member organization will be required, by contractual agreement with the capital contributor, to liquidate its business. In addition, the rule requires that all securities contributed as capital be fully paid for securities and be collateral to secured demand notes with a stated face amount which must be maintained. If at any time the capital requirements value of the collateral is less than the unpaid balance of the secured demand note the member organization shall notify the lender. One of three things must happen after such notice: (1) The lender may, with the prior consent of the Exchange, reduce the principal amount of the secured demand note by 15%. Such approval would not be given if the reduction would cause the capital ratio to exceed 1000%. (2) The lender may contribute additional collateral. (3) Unless the unpaid principal amount of the note is reduced or additional collateral is pledged, the collateral securing the note shall be sold by noon on the day following the giving of the notice. The Exchange has filed with the Internal Revenue Service a request for a ruling that the interest and other payments made for subordinated capital contributed pursuant to the proposed new standard forms of agreement will be deductible as an ordinary business expense for the borrowing member organization. To date the Exchange has not received such a ruling and, as has been noted, certain provisions of the revised rule will not become effective until a favorable tax ruling is reached. The rules permit temporary infusion of capital for unusual underwriting commitments. Member organizations would be limited in their use of this type of temporary capital to three occasions per year. This form of capital can be contributed only by insiders, can be of cash or securities, including margin account equities, is to be documented on the standard forms prescribed by the Exchange and cannot be repaid if repayment would cause the capital ratio to exceed 1000%. The provisions of Rule 326 prohibit a member organization from expanding if its capital ratio exceeds 1000% or if its capital ratio will exceed 1000% as a result of withdrawals during the next six months. This rule further requires a reduction of business if the capital ratio is greater than 1200% or if withdrawals scheduled during the next six months would cause the ratio to exceed 1200%. The effective date of the various provisions of this proposal is August 1, 1971, with the exception of the following: (1) (2) (3) (4) (5) (6) Effective July 15, 1971, no new margin account subordinations are New capital contributions must meet the new requirements commencing All insider capital must conform to the new requirements within one All existing capital contributed by means of customer subordinations within 18 months of receipt of the tax ruling, and 100% must (7) Exceptions from the above effective dates can be granted only by the Board of Governors upon application filed within one year from receipt of a favorable tax ruling. (8) "Delayed Effect Election" clause in Rule 325 permits member organizations to use old haircut percentages for 90 days with respect to pre-acquired assets. Also, the concentration charge may be deferred for a limited period by the Board of Governors if a suitable plan for elimination is submitted and followed. Attached is the revised text of Rule 325 and the related rules, together with copies of the standard forms for subordinated capital. We realize that these changes are extremely complicated and cover a broad range of subjects. We encourage you to study the attached rules and forms carefully and to direct any questions to the Department of Member Firms, as follows: Haircuts, concentrations, short security differences and minimum 6924, 6925, 6926, 6927, 6931, or 6059. Standard Forms for contribution of subordinated debt - William G. Expansion or reduction of business requests for exceptions to subordinated loan requirements Supervising Coordinator assigned to your firm. Fred J. Stock, Jr. |