December 9, 1997
Charles H. Felker, Managing Director of Regulatory Affairs
First Empire Securities, Inc.
8000 Towers Crescent Dr., Suite 1350
Vienna, VA 22182
Dear Mr. Felker:
You have asked whether First Empire's safekeeping and settlement
procedures meet the requirements of Section 703.60 of the National
Credit Union Administration (NCUA) Rules and Regulations, effective
January 1, 1998. Yes.
First Empire, a broker-dealer that sells securities to federal
credit unions (FCUs), has delegated clearing and safekeeping functions
to another broker-dealer, Morgan Stanley. The clearing agreement
between First Empire and Morgan Stanley provides that Morgan Stanley
will clear securities transactions for First Empire and its clients,
maintain account records for each client, act as custodian for
the client's securities, if the client has elected to safekeep
with Morgan Stanley, and prepare and transmit statements of account
to the clients. Morgan Stanley maintains the documentation necessary
to establish that a client who has elected to safekeep with it
is the beneficial owner of the security. Further, Morgan Stanley
may not transfer securities from a client's account without the
prior written authorization of the client.
The NCUA Board amended Section 703.60(c) at its November 24, 1997
meeting. The amendment replaced the prohibition against a selling
broker-dealer from acting as a safekeeper contained in the final
amendments issued in June 1997 with the following: "Any
safekeeper you [an FCU] use must be regulated or supervised by
either the Securities and Exchange Commission or a federal or
state depository institution regulatory agency." 62 Fed.
Reg. 64146 (1997). The question you raised about whether Morgan
Stanley would be considered independent under the previous Section
703.60(c) is now moot.
You also note that in the arrangement between Morgan Stanley and
First Empire, securities transactions are settled by Morgan Stanley.
Securities purchased must be paid for on the settlement date,
when the securities are to be received by Morgan Stanley. While
Morgan Stanley may not receive the funds and the securities at
exactly the same moment, it does not release the client's funds
until it receives the securities. The client is always in possession
of either the securities or the funds.
Section 703.60(e) requires that all investment purchases and sales
be settled delivery versus payment, defined as payment for an
investment occurring simultaneously with its delivery. You ask
whether Morgan Stanley's clearing procedure meets the requirement
of Section 703.60(e). Morgan Stanley's practice of holding a
client's funds until it receives the security meets the delivery
versus payment requirement.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/LH:bhs
SSIC 4660
97-0904