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tively subordinate any right of the principal amount of the secured lender to receive any payment with re- demand note, the applicant or regisspect thereto, together with accrued trant must immediately transmit writ. interest or compensation, to the prior ten notice to that effect to the lender. payment or provision for payment in The secured demand note agreement full of all claims of all present and shall also provide that if the borrower future creditors of the applicant or is an applicant, such notice must also registrant arising out of any matter be transmitted immediately to the Naoccurring prior to the date on which tional Futures Association, and if the the related payment obligation ma- borrower is a registrant, such notice tures, except for claims which are the must also be transmitted immediately subject of subordination agreements to the designated self-regulatory orgawhich rank on the same priority as or nization, if any, and the Commission. junior to the claim of the lender under The secured demand note agreement such subordination agreements.

shall also require that following such (iv) Proceeds of subordinated loan transmittal: agreements. The subordinated loan (A) The lender, prior to noon of the agreement shall provide that the cash business day next succeeding the proceeds thereof shall be used and transmittal of such notice, may pledge dealt with by the applicant or regis- as collateral additional cash or securitrant as part of its capital and shall be ties sufficient, after giving effect to subject to the risks of the business. such pledge, to bring the sum of the

(v) Certain rights of the borrower. amount of any cash plus the collateral The subordination agreement shall value of any securities, then pledged provide that the applicant or regis- as collateral to secure the secured trant shall have the right to:

demand note, up to an amount not less (A) Deposit any cash proceeds of a than the unpaid principal amount of subordinated loan agreement and any the secured demand note; and cash pledged as collateral to secure a (B) Unless additional cash or securi. secured demand note in an account or ties are pledged by the lender as proaccounts in its own name in any bank vided in paragraph (h)(2)(vi)(A) above, or trust company;

the applicant or registrant at noon on (B) Pledge, repledge, hypothecate the business day next succeeding the and rehypothecate, any or all of the transmittal of notice to the lender securities pledged collateral to must commence sale, for the account secure a secured demand note, without of the lender, of such of the securities notice, separately or in common with then pledged as collateral to secure other securities or property for the the secured demand note and apply so purpose of securing any indebtedness much of the net proceeds thereof, toof the applicant or registrant; and gether with such of the cash then

(C) Lend to itself or others any or all pledged as collateral to secure the seof the securities and cash pledged as cured demand note as may be necescollateral to secure a secured demand sary to eliminate the unpaid principal note.

amount of the secured demand note: (vi) Collateral for secured demand Provided, however, That the unpaid notes. Only cash and securities which principal amount of the secured are fully paid for and which may be demand note need not be reduced publicly offered or sold without regis- below the sum of the amount of any tration under the Securities Act of remaining cash, plus the collateral 1933, and the offer, sale, and transfer value of the remaining securities, then of which are not otherwise restricted, pledged as collateral to secure the semay be pledged as collateral to secure cured demand note. The applicant or a secured demand note. The secured registrant may not purchase for its demand note agreement shall provide own account any securities subject to that if at any time the sum of the such a sale; and amount of any cash, plus the collater- (C) The secured demand note agreeal value of any securities, then pledged ment may also provide that, in lieu of as collateral to secure the secured the procedures specified in the providemand note is less than the unpaid sions required by paragraph

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(h)(2)(vi)(B) of this section, the ordination agreements which comply lender, with the prior written consent with the provisions of paragraph of the applicant and the National Fu- (h)(3)(v) of this section nor shall it tures Association, or with the prior apply to “special prepayments” made written consent of the registrant and in accordance with the provisions of the designated self-regulatory organi- paragraph (h)(2)(vii)(B) of this seczation or, if the registrant is not a tion. No prepayment shall be made if, member of a designated self-regula- after giving effect thereto (and to all tory organization, the Commission, payments of payment obligations may reduce the unpaid principal under any other subordination agreeamount of the secured demand note: ments then outstanding, the maturity Provided, That after giving effect to or accelerated maturities of which are such reduction the adjusted net cap- scheduled to fall due within six ital of the applicant or registrant months after the date such prepaywould not be less than the greatest of: ment is to occur pursuant to this pro(1) 120 percent of the appropriate min- vision, or on or prior to the date on imum dollar amount required by para- which the payment obligation in regraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of spect to such prepayment is scheduled this section; (2) for a futures commis- to mature disregarding this provision, sion merchant or applicant therefor, whichever date is earlier) without refseven (7) percent of the following erence to any projected profit or loss amount: the customer funds required of the applicant or registrant, the adto be segregated pursuant to the Act justed net capital of the applicant or and these regulations less the market registrant is less than the greatest of: value of commodity options purchased (1) 120 percent of the appropriate minby option customers on or subject to imum dollar amount required by parathe rules of a contract market: Provid- graphs (a)(1)(i)(A) or (a)(1)(ii)(A) of ed, however, that the deduction for this section; (2) for a futures commiseach option customer shall be limited sion merchant or applicant therefor, to the amount of customer funds in seven (7) percent of the following such option customer's account; or (3) amount: the customer funds required for an applicant or registrant which is to be segregated pursuant to the Act also a securities broker or dealer, the and these regulations less the market amount of net capital specified in Rule value of commodity options purchased 1503-1d(b)(6)(iii) of the Securities and by option customers on or subject to Exchange Commission (17 CFR the rules of a contract market: Provid240.1503-1d(b)(6)(iii)); Provided, fur- ed, however, That the deduction for ther, That no single secured demand each option customer shall be limited note shall be permitted to be reduced to the amount of customer funds in by more than 15 percent of its original such option customer's account; or (3) principal amount and after such re- for an applicant or registrant which is duction no excess collateral may be also a securities broker or dealer, the withdrawn.

amount of net capital specified in Rule (vii) Permissive prepayments and 1503-1d(b)(7) of the Securities and Exspecial prepayments. (A) An applicant change Commission (17 CFR 240.15c3or registrant at its option, but not at 1d(b)(7)). Notwithstanding the above, the option of the lender, may, if the no prepayment shall occur without subordination agreement so provides, the prior written approval of the Namake a payment of all or any portion tional Futures Association, in the case of the payment obligation thereunder of an applicant, or without the prior prior to the scheduled maturity date written approval of the designated of such payment obligation (herein- self-regulatory organization, if any, after referred to as a “prepayment”), and the Commission, in the case of a but in no event may any prepayment registrant. be made before the expiration of one (B) An applicant or registrant at its year from the date such subordination option, but not at the option of the agreement became effective: Provided, lender, may, if the subordination however, That the foregoing restric- agreement so provides, makes a paytion shall not apply to temporary sub- ment at any time of all or any portion

of the payment obligation thereunder prior to the scheduled maturity date of such payment obligation (hereinafter referred to as a “special prepayment”). No special prepayment shall be made if, after giving effect thereto (and to all payments of payment obligations under any other subordination agreements then outstanding, the maturity or accelerated maturities of which are scheduled to fall due within six months after the date such special prepayment is to occur pursuant to this provision, or on or prior to the date on which the payment obligation to respect to such special prepayment 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: (1) 200 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section; (2) for a futures commission merchant or applicant therefor, 10 percent of the following amount: the customer funds required to be segregated pursuant to the Act and these regulations less the market value of commodity options purchased by option customers on or subject to the rules of a contract market: Provided, however, That the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account; or (3) for an applicant or registrant which is also securities broker or dealer, the amount of net capital specified in Rule 1503id(c)(5)(ii) of the Securities and Exchange Commission (17 CFR 240.15c31d(c)(5)(ii)); Provided, further, That no special prepayment shall be made if pre-tax losses during the latest three-month period were greater than 15 percent of current excess adjusted net capital. Notwithstanding the above, no special prepayment shall occur without the prior written approval of the National Futures Association, in the case of an applicant, or without the prior written approval of the designated self-regulatory organization, if any, and the Commission, in the case of a registrant.

(viii) Suspended repayment. (A) The payment obligation of the applicant or registrant in respect of any subordina. tion 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 applicant or registrant 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 applicant or registrant would be less than the greatest of: (1) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section; (2) for a futures commission merchant or applicant therefor, 6 percent of the following amount: The customer funds required to be segregated pursuant to the Act and these regulations less the market value of commodity options purchased by option customers on or subject to the rules of a contract market: Provided, however, The deduction for each option customer shall be limited to the amount of customer funds in such option customer's account; or (3) for an applicant or registrant which is also a securities broker or dealer, the amount of net capital specified in Rule 1503-1d(b)(8)(i) of the Securities and Exchange Commission (17 CFR 240.1503-1d(b)(8)()); Provided, That the subordination agreement may provide that if the payment obligation of the applicant or registrant thereunder does not mature and is suspended as a result of the requirement of this paragraph (h)(2)(viii) for a period of not less than six months, the applicant or registrant 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.

(ix) Accelerated maturity. Obligation to repay to remain subordinate:

(A) Subject to the provisions of paragraph (h)(2)(viii) of this section, a subordination agreement may provide that the lender may, upon prior writ. ten notice to the applicant and the Na. tional Futures Association, or upon prior written notice to the registrant

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and the designated self-regulatory organization or, if the registrant is not a member of a designated self-regulatory organization, the Commission, 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 the provisions of this paragraph (h)(2) of this section.

(B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this section, the payment obligation of the applicant or registrant 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 wh ther or not pursuant to the bankruptcy laws, or any other marshalling of the assets and liabilities of the applicant or registrant, but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of paragraph (h)(2) of this section.

(x) Accelerated maturity of subordination agreements on event of default and event of acceleration. Obligation to repay to remain subordinate:

(A) A subordination agreement may provide that the lender may, upon prior written notice to the applicant and the National Futures Association, or upon prior written notice to the registrant and the designated self-regulatory organization or, if the registrant is not a member of a designated self-regulatory organization, the Commission, 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 applicant or registrant, together with accrued interest

or compensation, is scheduled 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 applicant and by the National Futures Association, or by the registrant and the designated selfregulatory organization or, if the registrant is not a member of a designated self-regulatory organization, the Commission. Any subordination agreement containing such events of acceleration may also provide that, if upon such accelerated maturity date the payment obligation of the applicant or registrant is suspended as required by paragraph (h)(2)(viii) of this section and liquidation of the applicant or registrant has not commenced on or prior to such accelerated maturity date, notwithstanding paragraph (h)(2)(viii) of this section, the payment obligation of the applicant or registrant with respect to such subordination agreement shall mature on the day immediately following such accelerated maturity date and in any such event the payment obligations of the applicant or registrant with respect to all 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 the provisions of paragraph (h)(2) of this section. Events of acceleration which may be included in a subordination agreement complying with this paragraph (h)(2)(x) of this section shall be limited to:

(1) Failure to pay interest or any installment of 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 or warranty of the applicant or registrant 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 applicant or registrant agree, (a) is a significant indication that the financial position of the applicant or registrant has changed materially and adversely from agreed upon specified norms; or (b) could materially and

or

adversely affect the ability of the applicant applicant or registrant to obtain the dismisor registrant to conduct its business as con- sal of such application within 30 days; ducted on the date the subordination agree- (2) Failure to meet the minimum capital ment was made; or (c) is a significant requirements of the designated self-regulachange in the senior management of the ap- tory organization, or of the Commission, plicant or registrant or in the general busi- throughout a period of 15 consecutive business conducted by the applicant or regis- ness days, commencing on the day the bortrant from that which obtained on the date rower first determines and notifies the desthe subordination agreement became effec- ignated self-regulatory organization, if any, tive;

of which he is a member and the Commis(5) Any continued failure to perform sion, in the case of a registrant, or the Naagreed covenants included in the subordina

tional Futures Association, in the case of an tion agreement relating to the conduct of

applicant, or commencing on the day any the business of the applicant or registrant self-regulatory organization, the Commisor relating to the maintenance and report- sion or the National Futures Association ing of its financial position; and

first determines and notifies the applicant

or registrant of such fact; (B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this sec

(3) The Commission shall revoke the reg.

istration of the applicant or registrant; tion, a subordination agreement may

(4) The self-regulatory organization shall provide that, if liquidation of the busi

suspend (and not reinstate within 10 days) ness of the applicant or registrant has

revoke the applicant or registrant's not already commenced, the payment status as a member thereof; obligation of the applicant or regis- (5) Any receivership, insolvency, liquida. trant shall mature, together with ac- tion pursuant to the Securities Investor Procrued interest or compensation, upon tection Act of 1970 or otherwise, bankruptthe occurrence of an event of default cy, assignment for the benefit of creditors, (as hereinafter defined). Such agree

reorganization whether or not pursuant to ment may also provide that, if liquida

bankruptcy laws, or any other marshalling tion of the business of the applicant or

of the assets and liabilities of the applicant

or registrant. A subordination agreement registrant has not already commenced,

which contains any of the provisions perthe rapid and orderly liquidation of

mitted by this subparagraph (2)(x) shall not the business of the applicant or regis

contain the provision otherwise permitted trant shall then commence upon the by paragraph (h)(2)(ix)(A) of this section. happening of an event of default. Any

(3) subordination agreement which

Miscellaneous
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provisions-(i) provides for maturity of the payment

Prohibited cancellation. The subordi. obligation upon the occurrence of an

nation agreement shall not be subject event of default shall also provide that

to cancellation by either party; no the date on which such event of de

payment shall be made with respect fault occurs shall, if liquidation of the

thereto and the agreement shall not applicant or registrant has not already

be terminated, rescinded or modified commenced, be the date on which the

by mutual consent or otherwise if the payment obligation of the applicant or

effect thereof would be inconsistent registrant with respect to all other

with the requirements of paragraph subordination agreements then out

(h) of this section. standing shall mature but the rights (ii) Notice of maturity or accelerated of the respective lenders to receive maturity. An applicant shall immedipayment, together with accrued inter- ately notify the National Futures Asest or compensation, shall remain sub- sociation, and a registrant shall immeordinate as required by the provisions diately notify the designated self-reguof paragraph (h)(2) of this section. latory organization, if any, and the Events of default which may be in- Commission if, after giving effect to cluded in a subordination agreement all payments of payment obligations shall be limited to:

under subordination agreements then

outstanding which are then due or (1) The making of an application by the

mature within the following six Securities Investor Protection Corporation for a decree adjudicating that customers of

months without reference to any prothe applicant or registrant are in need of jected profit or loss of the applicant or protection under the Securities Investor registrant, its adjusted net capital Protection Act of 1970 and the failure of the would be less than:

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