[Federal Register Volume 63, Number 136 (Thursday, July 16, 1998)]
[Notices]
[Pages 38446-38447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18907]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40185; File No. SR-NSCC-97-13]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change Relating to Changes
in Membership Standards
July 9, 1998.
On October 30, 1997, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') and on December 31, 1998, amended a proposed rule
change (File No. SR-NSCC-97-13) pursuant to Section 19(b)(1) of the
Securities Exchange Act
[[Page 38447]]
of 1934 (``Act'').\1\ Notice of the proposal was published in the
Federal Register on February 27, 1998.\2\ One comment letter was
received.\3\ For the reasons discussed below, the Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 39693 (February 23,
1998), 63 FR 10058.
\3\ Letter from William C. Alsover, President, Centennial
Securities Company, to David F. Hoyt, NSCC (November 7, 1997).
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I. Description
Currently, NSCC's rules provide that it will establish, as deemed
necessary or appropriate, standards of financial responsibility,
operational capability, experience, and competence for membership, as
well as guidelines for the application of membership standards. \4\ The
purpose of the rule change is to establish specific standards under
which NSCC may deny an applicant membership or to cease to act for a
participant.\5\
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\4\ Rule 15 of NSCC's Rules and Procedures.
\5\ NSCC has taken note of the findings set forth in the April
15, 1997, memorandum entitled, ``The Joint Regulatory Sales Practice
Sweep; Heightened Supervisory Procedures,'' which was the product of
an initiative involving the National Association of Securities
Dealers, Inc., the New York Stock Exchange, Inc., the Securities and
Exchange Commission, and the North American Securities
Administrators Association, Inc.
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The revised rule will allow NSCC to deny membership to any
applicant or to cease to act for any participant if a person who has
either significant managerial responsibility or significant ability to
influence the policies and actions of the applicant or participant
(through ownership interest, contract, or otherwise), whether or not
the person currently acts as a principal or registered representative,
has a record that reflects any adverse history as enumerated in the
rule. The types of adverse history enumerated in the rule include
felony and misdemeanor proceedings and convictions; certain
disciplinary, regulatory, or administrative proceedings and actions;
arbitration or civil actions; multiple customer complaints; termination
or permitted resignation after investigation or allegation of sales
practice problems, violation of rules, regulation, laws, or standards
of conduct; or being subject to heightened supervision.
Any action, complaint, or proceeding referred to in the rule that
is not taken against a person will nonetheless be deemed to be taken
against that person if his or her activities are cited in whole or in
part as being a contributing cause. However, no person will be deemed
to have an adverse regulatory history due to being named in customer
complaints or adverse civil proceedings merely because of the persons's
management or ownership position in the applicant or participant unless
the number of complaints or proceedings are disproportionate to the
size of the firm.
The rule change will also allow NSCC to deny membership to an
applicant or to cease to act for a participant if a correspondent of
the applicant or participant or any entity for which the applicant or
participant is financially responsible would fail to meet the above
membership standards. However this provision of the rule will apply
only if the size of the business of the correspondent or other entity
is significant relative to the capital of the applicant or participant.
NSCC has informed the Commission that it intends to construe the new
rule in a manner which will not limit its authority under its rules to
deny membership to, to cease to act for, or to obtain further
assurances from any applicant or participant when the circumstances
warrant even if the circumstances include or consist solely of items
that are not specific grounds for such action under the rule change.
II. Comment Letters
The Commission received one comment letter in response to the
proposed rule change (supra note 3). The commenter supported the rule
change but believed an applicant or participant should be able to
appeal a decision to deny membership.
III. Discussion
Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds in the custody or control of the clearing agency or for which
it is responsible. The Commission believes that the proposed rule
change is consistent with NSCC's obligations under Section 17A(b)(3)(F)
because it should enable NSCC to better manage its risk exposure by
specifically authorizing NSCC to consider applicant's and participants'
regulatory history. An adverse regulatory history can indicate that an
applicant would or a participant does present an unacceptably high risk
to NSCC and its participants.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(H) of the Act \7\ also requires that the rules of
the clearing agency provide a fair procedure with respect to the denial
of participation and the prohibition or limitation by the clearing
agency of any person with respect to access to services offered by the
clearing agency. The Commission believes that the proposed rule change
is consistent with NSCC's obligations under Section 17A(b)(3)(H)
because it defines the specific bases upon which NSCC may deny
membership or cease to act for a participant.
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\7\ 15 U.S.C. 78q-1(b)(3)(H).
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In response to the issue of whether an applicant can appeal a
denial of its membership application, the Commission notes that Rule 2
of NSCC's Rules and Procedures currently provides a hearing process for
any applicant that is deemed to not meet membership requirements before
the applicant is denied membership.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of 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 proposed rule change (File No. SR-NSCC-97-13) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12)..
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18907 Filed 7-15-98; 8:45 am]
BILLING CODE 8010-01-M
