[Federal Register Volume 59, Number 7 (Tuesday, January 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-562]
[[Page Unknown]]
[Federal Register: January 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33415; File No. SR-GSCC-93-06]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving Proposed Rule Change Relating to the
Disciplining of Members
January 4, 1994.
I. Introduction
On June 25, 1993, pursuant to section 19(b) of the Securities
Exchange Act of 1934 (``Act''),\1\ the Government Securities Clearing
Corporation (``GSCC'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change relating to the
disciplining of members. Notice of the proposed rule change was
published in the Federal Register on July 26, 1993.\2\ No comments were
received. This order approves the proposed rule change.
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\1\15 U.S.C. 78s(b) (1990).
\2\Securities Exchange Act Release No. 32644 (July 15, 1993), 58
FR 39842.
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II. Description
Currently, GSCC's general disciplinary rule\3\ authorizes GSCC to
discipline members for violations of GSCC's rules and other actions
that constitute an abuse or misuse of GSCC's processes and services or
otherwise reflect ``conduct detrimental to GSCC's operations.'' The
proposed rule change amends the general disciplinary rule to provide
language specific to GSCC's current operations and to allow it to
fulfill better its responsibilities as a self-regulatory organization.
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\3\GSCC Rule 48, Section 1.
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Under GSCC's proposal, the Membership and Standards Committee (of
GSCC's Board of Directors (``Board'')) (``Committee'')\4\ classifies
rules violations or incidents of detrimental conduct as either major or
minor offenses. Major offenses generally involve either misconduct
involving the funds or securities obligations of a member or deliberate
acts of fraud or misconduct by a member. Repeated offenses of a minor
nature by a member, however, may cause the member to be deemed to have
committed a major offense. A member committing a major offense is
subject to disciplinary action, including termination of its membership
in either or both the comparison and netting systems, having GSCC cease
to act for it, the imposition of a higher minimum Clearing Fund
requirement, and/or a fine of up to $5,000.\5\ Disciplinary actions
involving ceasing to act for or termination of membership in the
comparison or netting system require Board approval.
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\4\The Committee, which meets monthly (as necessary), acts as a
disciplinary committee to address violations of the disciplinary
rule. Management is responsible for presenting to the Committee
rules violations and actions that, in Management's opinion,
constitute detrimental conduct for the Committee's determination as
to what, if any, disciplinary action is appropriate.
\5\The maximum fine amount of $5,000 is defined so as to exclude
any amounts sought by GSCC to directly recompense it for costs and
expenses incurred as the result of a member's misconduct. All fines
must be paid within 90 days from notice of imposition of the fine.
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After the Committee has determined that a member committed a major
offense, a letter automatically is sent to senior management of the
offending member requiring that the member explain to GSCC in writing
why the offense occurred and the actions taken and/or to be taken to
ensure that it will not reoccur. If appropriate under the
circumstances, representatives of senior management of the member may
be required to appear in person before the Committee to provide such
explanation.
A member committing a minor offense is subject to a fine or other
disciplinary action, not to include GSCC ceasing to act for it or
termination of membership. While a minor offense may not result in the
imposition of a fine or other disciplinary action, for each such
offense, GSCC automatically will send a letter to the management of the
member that commits the offense informing it of its commission of the
offense.
If the Committee (with the Board's approval in certain cases)
determines that any type of disciplinary action should be taken against
a member, GSCC is obligated to notify the member of such determination.
In this notification, GSCC will state the reasons for the disciplinary
action and will inform the member of its right to a hearing to contest
the action. After receiving this notice, a member has ten business days
to file a written request for a hearing.
Hearings on disciplinary actions that, under GSCC's rules, require
approval by the Board,\6\ are before a panel of five directors selected
by the Board. Hearings on all other disciplinary actions are before a
panel of three Committee members selected by the Committee. Both panels
must be composed of a majority of directors who are not also GSCC
officers.
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\6\The imposition of any disciplinary action involving ceasing
to act or termination of membership in either or both the comparison
system or the netting system requires Board approval.
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A member is able to appear before the panel in person (with its
counsel, if it so chooses) to contest the planned disciplinary action.
Alternatively, in lieu of a personal appearance, the member can submit
to the panel documentary evidence in support of its claim that the
planned disciplinary action is inappropriate. GSCC will inform the
member of the panel's determination, as well as the member's right to
appeal further to the full Board. If the panel's decision is adverse to
the member, the sanction is effective immediately.
The Board will be presented with the record of any panel hearing at
its next regularly scheduled meeting. Its determination ordinarily will
be made based upon a review of that record. A member does not have the
right to appear in person before the Board to contest the determination
of the panel; however, the Board may permit such a personal appearance
in its discretion. Any appeal of the Board decision will have to be
made to the Commission.
III. Discussion
Section 17A(b)(3)(A) of the Act\7\ requires a clearing agency to be
organized so as to enable it to enforce compliance by its participants
with its rules. Section 17A(b)(3)(G) and section 17A(b)(3)(H) of the
Act\8\ require the rules of a clearing agency to provide that is
participants shall be appropriately disciplined for violations of any
provision of those rules and to provide fair procedures, consistent
with section 17A(b)(5) of the Act, for disciplining participants.\9\
Section 17A(b)(5) of the Act\10\ outlines the procedures to be followed
by a clearing agency in disciplining participants. A clearing agency
must bring specific charges, notify the participant of the charges,
provide the participant with an opportunity to defend against such
charges, and keep a record. GSCC's proposal is consistent with the Act,
and section 17A in particular, because it provides fair, efficient
procedures for disciplining participants and enforcing its decisions as
required by that section.
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\7\15 U.S.C. 78q-1(b)(3)(A) (1988).
\8\U.S.C. 78Q-1(b)(3)(G) & (H) (1988).
\9\See Securities Exchange Act Release No. 16900 (June 17,
1980), 45 FR 41920.
\10\15 U.S.C. 78q-1(b)(5) (1988).
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GSCC has specific rules governing the circumstances pursuant to
which it may take certain disciplinary actions against a member, such
as increasing a member's margin requirements, ceasing to act for a
member, terminating a member's membership in either or both the
comparison and netting systems, and/or liquidating a member's
positions. Pursuant to recent changes in membership standards, GSCC
also has rules governing the specific consequences of a failure of a
member to maintain an applicable membership standard.\11\
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\11\See Securities Exchange Act Release No. 32722 (August 5,
1993), 58 FR 42993 (order approving establishment of new categories
of membership in the GSCC netting system).
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By providing a more formal process, the proposed rule change allows
GSCC to more effectively discipline its members. Prior to imposing a
sanction, members will be informed of the Committee's determination
that a major or minor offense has occurred. This procedure may prevent
future violations by providing members with early notice of a
violation. In the case of a major offense, members must provide GSCC
with a written explanation. This explanation may give GSCC guidance in
determining the appropriate sanction to be imposed. The members are, in
turn, permitted a greater opportunity to participate in the internal
disciplinary process. By allowing the members to provide input, GSCC
may be able to resolve disputes prior to an appeal to the Commission.
The Commission believes that GSCC's proposal will enable it to
discipline its members for rule violations, consistent with sections
17A(b)(3)(A) and 17A(b)(3)(G) of the Act. The Commission also believes
that GSCC's proposed procedures are consistent with the fair
disciplinary procedures requirement of section 17A(b)(3)(H), and with
the mandatory procedures enumerated in section 17A(b)(5) of the Act.
The proposal permits GSCC's Board to address rule violations fairly and
efficiently. Members will be provided with notice of any disciplinary
action to be taken by the Committee or the Board, including the reasons
for the action. Members will be given two opportunities to have an
internal hearing on the proposed sanction--before a panel of the
Committee or Board, and before the full Board.
IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the requirements of the Act, and
particularly with section 17A of the Act, and the rules and regulations
thereunder.
It is therefore ordered, Pursuant to section 19(b)(2) of the Act,
that the above-mentioned proposed rule change (File No. SR-GSCC-93-06)
be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-562 Filed 1-10-94; 8:45 am]
BILLING CODE 8010-01-M
