[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25040]
[[Page Unknown]]
[Federal Register: October 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34780; File Nos. SR-MCC-93-07 and SR-MSTC-93-14]
Self-Regulatory Organizations; Midwest Clearing Corporation and
Midwest Securities Trust Company; Notice of Amendments and Order
Approving on an Accelerated Basis Proposed Rule Changes Establishing a
Risk Assessment Committee and Making Various Other Changes to MCC's and
MSTC's By-Laws and Rules
On November 17, 1993, and on December 23, 1993, the Midwest
Clearing Corporation (``MCC'') and the Midwest Securities Trust Company
(``MSTC'') respectively filed proposed rule changes (File Nos. SR-MCC-
93-07 and SR-MSTC-93-14) with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'').\1\ MCC amended its proposal on December
23, 1993, thereby making it virtually identical to that of MSTC. On
January 3, 1994, MCC submitted a second amendment, a letter of
clarification.\2\ Notice of the proposals was published in the Federal
Register on March 3, 1994.\3\ On May 11, 1994, MCC submitted its third
amendment, and MSTC submitted its first amendment.\4\ On July 8, 1994,
MCC submitted its fourth amendment, and MSTC submitted its second
amendment.\5\ On September 22, 1994, MCC submitted its fifth amendment,
and MSTC submitted its third amendment.\6\ No comments on the proposals
have been received by the Commission. This order approves the proposed
rule changes as amended.\7\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Letter from David T. Rusoff, Foley & Lardner, to Richard
Strasser, Division of Market Regulation (``Division''), Commission
(December 30, 1993).
\3\Securities Exchange Act Release No. 33667 (February 23,
1994), 59 FR 10187.
\4\Letter from David T. Rusoff, Foley & Lardner, to Jerry
Carpenter, Branch Chief, Division, Commission (May 10, 1994).
\5\Letter from David T. Rusoff, Foley & Lardner, to Jerry
Carpenter, Assistant Director, Division, Commission (July 7, 1994).
\6\Letter from David T. Rusoff, Foley & Lardner, to Jerry
Carpenter, Division, Commission (September 21, 1994).
\7\The descriptions of the proposals as set forth in this order
are descriptions of the proposals in their final, amended forms.
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I. Description of the Proposals
MCC and MSTC are modifying their By-Laws and Rules to define their
participants' rights and obligations more precisely and to give MCC and
MSTC more flexibility and protection in dealing with violations of
their rules.\8\ MCC and MSTC are adding new sections to their By-Laws
to authorize MCC and MSTC to establish additional committees as may be
provided for in the By-Laws or Rules or may be established by their
boards of directors. Such committees shall have the duties and
authority as prescribed for them by the By-Laws, the Rules, or the
boards.
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\8\The Commission recently approved the proposed rule filing of
the Chicago Stock Exchange, the parent corporation of MCC and MSTC,
which contained many of the same amendments proposed in the subject
filings by MCC and MSTC. Securities Exchange Act Release No. 34505
(August 9, 1994), 59 FR 42802.
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MCC and MSTC are amending their Rules to provide for the
establishment of risk assessment committees. Each risk assessment
committee will consist of four members. The risk assessment committees
shall have such duties as may be assigned to them by MCC's or MSTC's
Rules or by their boards. Among other duties of the risk assessment
committees, the amendments require MCC and MSTC to consult with at
least one member of their respective risk assessment committee before
ceasing to act for a participant.\9\ Three members of the risk
assessment committees will hear all appeals of MCC and MSTC decisions
to deny application for membership or to cease to act for a
participant. Previously, MCC and MSTC Rules required the boards to
appoint a panel to hear such appeals.\10\
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\9\The purpose of the required consultation is to help ensure
that the managements of MCC and MSTC have independent input to
assist them in their decision making processes.
\10\The amendments prohibit the member of the risk assessment
committees who was consulted from participating in the hearing of
any related appeal. MCC and MSTC By-Laws already provide that any
member of one of the risk assessment committees (previously the
board-appointed committees) that has any direct or indirect interest
in a matter on appeal which might preclude such member from
rendering an objective and impartial determination shall not hear
such appeal.
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MCC and MSTC are adding provisions to their Rules to adopt formal
standards of review for the hearing of appeals beyond the risk
assessment committees. The new standards provide that the decisions of
the risk assessment committees cannot be reversed, modified, or
remanded by the boards if the factual conclusions in the risk
assessment committees' decisions are supported by substantial evidence
and if such decisions are not arbitrary, capricious, or an abuse of
discretion.
The amendments bar MCC or MSTC participants from bringing legal
proceedings, except for violations of federal securities laws, against
any officer, director, employee, or agent of MCC, MSTC, or the Chicago
Stock Exchange (``CHX'') if such officer, director, employee, or agent
is acting on MCC, MSTC, or CHX business. These provisions do not
prohibit MCC or MSTC participants from suing MCC or MSTC for actions
taken by officers, directors, employees, or agents. The provisions only
prohibit suits against such persons in their capacities as individuals.
The proposed rule changes add provisions that limit the liability
of MCC and MSTC to participants for losses arising from the
nonperformance or misperformance of MCC's or MSTC's duties except (1)
for losses attributable to MCC's or MSTC's negligence with respect to
the safeguarding of securities or funds in MCC's or MSTC's custody or
control and (2) for losses attributable to the willful misconduct,
gross negligence, bad faith, or fraudulent or criminal acts of MCC,
MSTC, their officers, directors, employees, or agents with respect to
all other activities. The limitation of MCC and MSTC liability does not
apply to violations of federal securities laws. The amendments also
provided that any MCC or MSTC participant that fails to prevail in a
legal proceeding brought by such participant against MCC or MSTC or any
of their officers, directors, employees, or agents shall be required to
pay MCC or MSTC all reasonable expenses, including legal fees, incurred
by MCC or MSTC in such proceedings but only if such expenses exceed
$50,000.
II. Discussion
The Commission believes that the proposals are consistent with the
Act and particularly with Section 17A of the Act.\11\ Section
17A(b)(3)(H) requires that the rules of clearing agencies provide fair
procedures with respect to disciplining participants and denying
participation to any persons seeking participation in a clearing
agency.\12\ By establishing standing risk assessment committees, by
requiring that such committees hear all appeals of MCC and MSTC
decisions to deny application for membership or to cease to act for a
participant, and by setting forth specific standards of review for
appeals of the risk assessment committees' decisions, the proposals
appear to provide fair procedures as required by Section 17A(b)(3)(H).
Furthermore, the proposals also should enhance certainty and
consistency in the operations of MCC and MSTC by providing that the
decisions of the risk assessment committees cannot be reversed,
modified, or remanded by the boards if the conclusions are within the
parameters discussed earlier.
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\11\15 U.S.C. 78q-1 (1988).
\12\15 U.S.C. 78q-1(b)(3)(H) (1988).
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Finally, the proposed rule changes also contain several
modifications to MCC's and MSTC's rules regarding MCC's and MSTC's
standards of care and limitations of liability. By setting forth
definite statements of MCC's and MSTC's standards of care and
limitations of liability, the proposals should increase the general
operating efficiency of MCC and MSTC.
The Commission believes that the provisions that require
participants who are unsuccessful in suits against MCC or MSTC must pay
MCC's or MSTC's legal expenses under certain circumstances are
consistent with the requirements of Section 17A(b)(3)(D) of the Act
which requires that the rules of a clearing agency provide for the
equitable allocation of reasonable dues, fees and other charges among
its participants.\13\ Because the proposals allow MCC and MSTC to shift
the financial burden of unsuccessful litigation to the responsible
participant, the proposals appear to be consistent with this statutory
objective. The Commission also believes that the rule changes should
not provide an undue disincentive to litigation because MCC's and
MSTC's expenses must be reasonable and must exceed $50,000 before a
participant member will be obligated to compensate MCC or MSTC.
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\13\15 U.S.C. 78q-(b)(3)(D) (1988).
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The Commission finds good cause for approving the proposed rule
changes prior to the thirtieth day after the date of publication of
notice of the filing of the amendments. Because the Commission has not
received any comments with regard to its notice of the proposals as
originally filed and does not foresee receiving any adverse comments
regarding the subsequent amendments and because the subsequent
amendments generally narrowed the scope of the original proposals and
made clarifying and technical changes, the Commission finds it
appropriate to approve the proposals prior to the thirtieth day after
the date of publication of notice of the filing of the amendments.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW,, Washington, DC 20549.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
NW, Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal offices of MCC and MSTC.
All submissions should refer to File Nos. SR-MCC-93-07 and SR-MSTC-93-
14) and should be submitted by November, 1, 1994.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the above-mentioned proposed rule changes (File Nos. SR-
MCC-93-07 and SR-MSTC-93-14) be, and hereby, are, approved.
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\14\15 U.S.C. 78s(b)(2) (1988).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25040 Filed 1-7-94; 8:45 am]
BILLING CODE 8010-01-M
