[Federal Register Volume 62, Number 186 (Thursday, September 25, 1997)]
[Notices]
[Pages 50416-50418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25447]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39096; File No. SR-NSCC-96-21]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change Relating to the
Establishment of the Annuities Processing Service
September 19, 1997.
On December 26, 1996, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-NSCC-96-21)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ On February 27, 1997, and May 12, 1997, NSCC amended the
proposed rule change. Notice of the proposal was published in the
Federal Register on August 6, 1997.\2\ 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. 38889 (July 30, 1997),
62 FR 42274.
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I. Description
The proposed rule change amends NSCC's rules to establish the
Annuities Processing Service (``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. Only those annuity plans \3\
that are purchased by individuals from insurance carriers through
broker-dealers, banks, or their affiliated insurance agencies will be
eligible for processing through APS.
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\3\ APS will process variable rate and fixed rate annuity
products. Letter from Julie Beyers, Associate Counsel, NSCC
(February 26, 1997).
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NSCC will 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 ``position and valuation,''
and ``commission and charge back'' components of Phase I.
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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 annuities agency or annuities 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.\5\ A
[[Page 50417]]
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.
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\5\ According to NSCC, this feature will not be available when
the APS becomes operational; it will be added at a later date. Until
the exit and cancel features are added, an annuities agency or
annuities carrier member must go outside of APS to arrange for the
reversal of a commission and charge back transaction that was
erroneously entered into APS. Telephone conversation between Julie
Beyers, Associate Counsel, NSCC, and Jeffrey Mooney, Attorney,
Division of Market Regulation, Commission (September 8, 1997).
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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 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 permits broker-dealers to join NSCC as
annuities 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 that become annuities 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 annuities agency member and cannot be
replaced without the prior approval of NSCC. In addition, broker-
dealers and banks that 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
annuities 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. Annuities carrier members will not be required to make
a deposit to the clearing fund.\6\
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\6\ Although no clearing fund deposit will be required from
annuities agency members and annuities carrier members, NSCC has
amended Rule 4 of its rules to state that an annuities agency member
or annuities 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 annuities carrier members.
Annuities carrier members will be required to have an A.M. Best rating
of ``A-.'' If rated by (i) Standard & Poor's, the annuities carrier
member must have a claims paying ability rating of not less than
``AAA;'' (ii) Moody's the annuities carrier member must have a long-
term debt rating of not less than ``Aaa;'' or (iii) Duff & Phelps, the
annuities carrier member must have a long-term debt rating of not less
than ``A-.'' \7\
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\7\ 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 annuities carrier members. The standards set forth for
the other rating agencies apply only if a annuities carrier member
determines to utilize a rating agency in addition to A.M. Best.
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Alternatively, if the annuities carrier member does not satisfy the
above-mentioned criteria, Rule 56 will require that the annuities
carrier member have an A.M. Best rating of not less than ``B+.'' If
rated by (i) Standard & Poor's, the annuities carrier member must have
a claims-paying ability rating of not less than ``BBB;'' (ii) Moody's,
the annuities carrier member must have a long-term debt rating of not
less than ``A;'' or (iii) Duff & Phelps, the annuities carrier member
must have a long-term debt rating of not less than ``BBB-.'' In this
case, Rule 56 also will require that the annuities 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 annuities 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 annuities agency members and annuities carrier members file certain
financial information with NSCC. In addition to some of the financial
information required of full NSCC members, Rule 15 will require
annuities agency members and annuities carrier members 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 must not have
operated at a loss in any of its previous three fiscal quarters. All
others which apply for use of APS must only 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 annuities 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 not a guaranteed service.\8\
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\8\ 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.
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[[Page 50418]]
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, annuities agency
members, and annuities 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 Others
Matters), Addendum D (Statement of Policy--Envelope Settlement
Service), and Addendum F (Statement of Policy--In Relation to Same Day
Funds Settlement).\9\
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\9\ 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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II. Discussion
Section 17A(b)(3)(F) \10\ of the Act requires that the rules of a
clearing agency be designed to facilitate the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes that NSCC's proposed rule change is consistent with its
obligations under the Act because APS will provide centralized
communication between insurance carriers and broker-dealers, banks, and
their affiliated insurance agencies. APS also permits commission and
charge back transactions to be processed in a standardized and
automated environment. Because the activities will be handled through
NSCC, the time and cost associated with processing should be reduced.
Thus, the proposal promotes the prompt and accurate clearance and
settlement of securities transactions.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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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-96-21) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25447 Filed 9-24-97; 8:45 am]
BILLING CODE 8010-01-M
