[Federal Register Volume 62, Number 151 (Wednesday, August 6, 1997)]
[Notices]
[Pages 42274-42277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20615]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38889; File No. SR-NSCC-96-21]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change to Establish
the Annuities Processing Service
July 30, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 26, 1996, the
National Securities Clearing Corporation (``NSCC'') filed with the
Securities and Exchange Commission (``Commission'') and on February 27,
1997, and May 12, 1997, amended the proposed rule change (File No. SR-
NSCC-96-21) as described in Items I, II, and III below, which items
have been prepared primarily by NSCC. The Commission is publishing this
notice to solicit
[[Page 42275]]
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change will amend NSCC's rules to establish the
Annuities Processing Service (``APS'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NSCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change will amend NSCC's rules to establish APS.
APS will be a centralized communication link that connects
participating insurance carriers with broker-dealers, banks, and the
broker-dealers' or banks' affiliated life insurance agencies where
appropriate. NSCC believes that APS will reduce the time and costs
associated with the processing of annuities by standardizing and
automating the processing. Only those annuity plans that are purchased
by individuals from insurance carriers through broker-dealers, banks,
or their affiliated insurance agencies will be eligible for processing
through APS. Initially, NSCC intended to only process variable rate
annuity products through APS. As a result of requests by its
participants, both variable rate and fixed rate annuity products will
be processed through APS.\3\
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\3\ Letter from Julie Beyers, Associate Counsel, NSCC (February
26, 1997).
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NSCC proposes to implement APS in phases. Phase I will provide
NSCC's participants with the ability to send and receive daily
information regarding annuity contract positions, the value of a
contract's underlying assets, and settlement of commission monies.\4\
This information will be transmitted through the Phase I ``position and
valuation,'' and ``commission and charge back'' components.
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\4\ NSCC intends to implement additional phases in the future to
include the processing of annuity contract applications and the
settlement of premium payments. In addition, the scope of
information included in APS may be expanded beyond position and
valuation information. NSCC will be required to make the appropriate
rule filings with the Commission at such times as NSCC is ready to
implement these additional components.
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The position and valuation component will permit insurance carriers
to transmit information regarding the value of individual annuity
contracts and the value of the assets underlying the contracts to
broker-dealers and insurance agencies. Insurance carriers will submit
position and valuation information to NSCC, which NSCC will forward to
the party designated as recipient by the insurance carrier.
The commission and charge back component will permit insurance
carriers and agencies to communicate concerning periodic trail or
asset-based compensation and transaction-based commission payments,
each paid by an insurance carrier to an agency, as well as charge backs
paid by an agency to an insurance carrier. Insurance carriers and
agencies will settle these payments through NSCC's money settlement
system.
Insurance carriers will be able to initiate commission and charge
back transactions by submitting instructions to NSCC. On any day prior
to settlement, an agency or carrier member may submit a cancel
instruction if the member does not recognize the transaction or an exit
instruction if the member recognizes the transaction but wants that
transaction to be processed outside of APS. A properly submitted exit
or cancellation will cause the payment transaction to which it relates
to be deleted from APS.
Unless NSCC receives a cancellation or exit instruction, the
commission and charge back transaction will settle in the three-day
settlement cycle following their completion unless the parties have
agreed that the transaction will settle on an extended basis. However,
no transaction will be allowed to settle more than five business days
after the day on which the last instruction pertaining to the
transaction was submitted to NSCC.
The proposed rule change provides that NSCC will not be responsible
for the completeness or accuracy of any APS data or for any errors,
omissions, or delays that may occur relating to the APS data. The
proposed rule change also states that the processing of any transaction
through APS will not relieve a party from its legal or regulatory
rights or its obligations relating to a transaction.
The proposed rule change will amend NSCC's Rule 2 to permit a
corporation, partnership, or agency, including a registered broker-
dealer, bank, or trust company, that is licensed to sell insurance
products and is subject to supervision or regulation pursuant to the
provisions of state insurance laws to become a member of the NSCC. If
the entity agrees to limit their activities to APS services only, the
entity would be classified as an ``annuities agency member.''
The proposed rule change would permit broker-dealers to join NSCC
as agency members regardless of whether they conduct their insurance
business in-house or through an affiliated or subsidiary insurance
agency. The proposed rule change provides that NSCC may restrict the
activities of the broker-dealers' insurance agency affiliates and
subsidiaries who become agency members and require them to enter into
agreements for operational support services with an entity that is
acceptable to NSCC. The entity can be, but is not required to be,
another agency member and cannot be replaced without the prior approval
of NSCC. In addition, broker-dealers and banks who are not currently
NSCC members that sell annuity products also will be permitted to join
NSCC for the purpose of using APS.
The proposed rule change amends NSCC's rules to establish the
``annuities carrier member'' category. As proposed, NSCC Rule 2 will
define carrier member as a company, partnership, limited liability
corporation, or other organization or entity that is not a member of
NSCC but is subject to the supervision or regulation pursuant to state
insurance laws. Carrier members will not be required to make a deposit
to the clearing fund.\5\
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\5\ Although no clearing fund deposit will be required from
agency members and carrier members, NSCC has amended Rule 4 of its
rules to state that an agency member or carrier member may be
required to make a deposit in the clearing fund in the event that in
the future NSCC determines that a clearing fund deposit should be
required.
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The proposed rule change also will create NSCC Rule 56 to establish
the financial and operational standards for carrier members. Carrier
members will be required to have an A.M. Best rating of ``A-'' if rated
by (i) Standard & Poor's, the carrier member must have a claims paying
ability rating of not less than ``AAA;'' (ii) Moody's, the carrier
member must have a long-term debt rating of not less than ``Aaa;'' or
(iii) Duff & Phelps, the carrier member must
[[Page 42276]]
have a long-term debt rating of not less than ``A-.''\6\
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\6\ It should be noted that applicants will not be required to
be rated by any rating agency other than A.M. Best in order to
qualify as carrier members. The standards set forth for the other
rating agencies apply only if a carrier member determines to utilize
a rating agency in addition to A.M. Best.
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Alternatiely, if the carrier member does not satisfy the above-
mentioned criteria, Rule 56 will require that the carrier member have
an A.M. Best rating of not less than ``B+'' and if rated by (i)
Standard & Poor's, the carrier member must have a claims-paying ability
rating of not less than ``BBB;'' (ii) Moody's, the carrier member must
have a long-term debt rating of not less than ``A;'' or (iii) Duff &
Phelps, the carrier member must have a long-term debt rating of not
less than ``BBB-.'' In this case, Rule 56 also will require that the
carrier member demonstrate to NSCC's Board of Directors that its
business and capabilities are such that it could reasonably expect
material benefit from access to APS, and NSCC must determine that the
financial condition of such carrier member does not pose an undue risk
to NSCC or its members.
The proposed rule change will amend NSCC Rule 15 to require that
all agency members and carrier members file certain financial
information with NSCC. In addition to some of the financial information
required of full NSCC members, Rule 15 as proposed will require agency
member's and carrier member's to file with NSCC reports filed with
relevant state insurance departments as may be determined by NSCC from
time to time.
The proposed rule change amends Addendum B of NSCC's rules
(``Standards of Financial Responsibility & Operational Capability'') to
include membership standards for applicants that will use only APS. The
proposed rule change will require a broker-dealer whose membership is
limited to the use of APS to have $25,000 in excess net capital over
the minimum net capital requirement imposed by the Commission or such
higher minimum capital requirement imposed by the broker-dealer's
designated examining authority. In addition, the broker-dealer must
have a capital ratio or percentage that would not require it to be
placed on immediate surveillance at NSCC and must not be on ``closer-
than-normal'' surveillance by its designated examining authority. If
the applicant is a bank or trust company, it must have $100,000 minimum
excess capital over the capital requirement imposed by its state or
federal regulatory authority. A bank or trust company must not be
operating at a loss at the time of its application and not have
operated at a loss in any of its previous three fiscal quarters. All
others which apply for use of APS only must have the operational
capability for membership or have an agreement concerning the provision
of operational support services to such applicant with an entity
acceptable to NSCC and which may not be replaced without prior approval
by NSCC and must agree to restrict its business activities as NSCC may
require.
Addendum B also will require that all agency members file certain
prescribed information annually. Such information includes, among other
things, general information concerning the member's corporate
organizational structure and licensing, the nature of its business,
bonding, pending investigations, and litigation.
The proposed rule change explicitly sets forth that, like NSCC's
Mutual Fund Services and New York Window Service, APS will not be a
guaranteed service. An additional paragraph has been added to Addendum
K (Interpretation of the Board of Directors--Application of Clearing
Fund) to make it clear that APS is a non-guaranteed service.
Furthermore, NSCC states that it has not yet determined the fees for
APS. NSCC will make the appropriate rule filing pursuant to Section
19(b)(3)(A) of the Act at such time as NSCC determines the fees to be
charged for APS services.
The proposed rule change amends NSCC's Rule 3 (Lists to be
Maintained) to indicate that NSCC will maintain a list of annuity plans
that may be the subject of orders processed through APS. The proposed
rule change amends NSCC's Rule 57 (Annuities Processing Service) to
clarify what governs these Phase I aspects of APS.
The proposed rule change also makes technical amendments to the
following NSCC rules to accommodate the APS service, agency members,
and carrier members: Rule 1 (Definitions and Descriptions), Rule 5
(General Provisions), Rule 6 (Distribution Facilities), Rule 12
(Settlement), Rule 17 (Fine Payments), Rule 18 (Procedures For When the
Corporation Declines or Ceases to Act), Rule 20 (Insolvency), Rule 22
(Suspension of Rules), Rule 24 (Charges for Services Rendered), Rule 26
(Bills Rendered), Rule 27 (Admission to Premises of the Corporation--
Powers of Attorney, Etc.), Rule 29 (Qualified Securities Depositories),
Rule 32 (Facsimile Signatures), Rule 33 (Procedures), Rule 34
(Insurance), Rule 35 (Financial Reports), Rule 36 (Rule Changes), Rule
37 (Hearing Procedures), Rule 39 (Special Representative/Index Receipt
Agent), Rule 45 (Notices), Rule 46 (Restrictions on Access to
Services), Rule 48 (Disciplinary Proceedings), Rule 55 (Settling
Banks), Procedure VIII (Money Settlement Service), Procedure XV
(Clearing Fund Formula and Other Matters), Addendum D (Statement of
Policy--Envelope Settlement Service), and Addendum F (Statement of
Policy--In Relation to Same Day Funds Settlement).\7\
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\7\ The full text of each of these technical rule changes is set
forth in Exhibit A of NSCC's filing and subsequent amendments
thereto, each of which is available for inspection and copying at
the Commission's Public Reference Room or through NSCC.
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NSCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \8\ and the rules and regulations
thereunder because it will facilitate the prompt and accurate clearance
and settlement of securities transactions and, in general, protect
investors and the public interest.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
NSCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have been
solicited or received. NSCC will notify the Commission of any written
comments received by NSCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which NSCC consents, the Commission will:
(A) By order approve such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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, N.W.,
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Washington, DC 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change 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. Sec. 552, will
be available for inspection and copying in the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, DC 20549. Copies of
such filing will also be available for inspection and copying at the
principal office of NSCC. All Submissions should refer to the file
number SR-NSCC-96-21 and should be submitted by August 27, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20615 Filed 8-5-97; 8:45 am]
BILLING CODE 8010-01-M
