[Federal Register: January 10, 2007 (Volume 72, Number 6)]
[Notices]
[Page 1252-1253]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja07-85]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55037; File No. SR-FICC-2006-10]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Amend the Rules of Its
Mortgage-Backed Securities Division Regarding Membership Requirements
for Unregistered Investment Pools
January 3, 2007.
I. Introduction
On June 9, 2006, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2006-10 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the
proposal was published in the Federal Register on November 24, 2006.\2\
No comment letters were received. 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. 54769 (November 16,
2006), 71 FR 67946.
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II. Description
FICC is proposing to amend the rules of its Mortgage-Backed
Securities Division (``MBSD'') regarding the membership requirements of
``Unregistered Investment Pools.'' \3\ Currently, unregistered
investment pools have essentially the same membership standards as
other MBSD non-broker clearing members.\4\ The size
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of the unregistered investment pool industry has grown, and
Unregistered Investment Pools and their advisers have become
significant participants in the industry. FICC reexamined its treatment
of participants that are Unregistered Investment Pools and has
determined it is necessary to enhance the clearing membership standards
applicable to these entities.
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\3\ As noted below, the term ``Unregistered Investment Pool'' is
a newly-defined term in the MBSD's Rules.
\4\ Currently, a clearing applicant or participant that is an
unregistered investment pool and whose financial statements are
prepared in accordance with U.S. generally accepted accounting
principles (``GAAP'') must satisfy a minimum financial requirement
of $10 million in net asset value. In this filing, FICC is making a
technical change to replace the term ``net asset value'' with the
term ``net assets'' to more accurately state the financial
requirement.
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FICC is proposing to adopt a definition for Unregistered Investment
Pool, which will identify the entities that would become subject to the
enhanced membership requirements for such entities. Under the new
membership requirements, an Unregistered Investment Pool is an entity
that holds a pool of securities and/or other assets that meets the
following criteria: (i) It is not registered as an investment company
under the Investment Company Act of 1940, (ii) it does not register its
securities offerings under the Securities Act of 1933, and (iii) it has
an investment advisor that is registered with the Commission under the
Investment Advisers Act of 1940, or if the investment adviser is not
registered, the Unregistered Investment Pool has a lock-up period of
two (2) years or greater.
Entities that meet the definition of Unregistered Investment Pool
will be eligible to apply to become MBSD clearing participants only if
they meet the new membership criteria set forth below.\5\ The MBSD's
current participants that fall within the definition of Unregistered
Investment Pool will have one year from the date of approval of this
rule filing in which to conform to the new minimum financial and
qualitative rating requirements.
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\5\ It is important to note that entities that meet the MBSD's
definition of Unregistered Investment Pool will be treated as such
by the MBSD regardless of whether the entity considers itself to be
an Unregistered Investment Pool.
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The new membership requirements for Unregistered Investment Pools
are as follows:
(1) SEC Registration: The investment advisor of the Unregistered
Investment Pool must: (i) be registered with the Commission under the
Investment Advisers Act of 1940 or (ii) if it is not registered with
the Commission, the Unregistered Investment Pool that the investment
adviser advises must have an initial lock-up period of two (2) years or
greater.
(2) Minimum Net Assets: The Unregistered Investment Pool will be
required to have and to maintain net assets of $250 million or
greater.\6\ If the Unregistered Investment Pool does not meet the $250
million net asset requirement but the Unregistered Investment Pool has
net assets of at least $50 million \7\ or greater, the Unregistered
Investment Pool will be eligible for MBSD clearing membership if its
investment advisor has assets under management of at least $1.5 billion
and advises an existing MBSD clearing participant.
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\6\ The $250 million net assets requirement is the requirement
that will be applicable to Unregistered Investment Pools whose
financial statements are prepared in accordance with U.S. GAAP.
Those Unregistered Investment Pools whose financial statements are
prepared using other types of GAAP will be subject to the higher
minimum requirements as determined by Article III, Rule 1, Section 2
of the MBSD's Rules.
\7\ The $50 million net assets requirement is the requirement
that will be applicable to Unregistered Investment Pools whose
financial statements are prepared in accordance with U.S. GAAP.
Those Unregistered Investment Pools whose financial statements are
prepared using other types of GAAP will be subject to the higher
minimum requirements as determined by Article III, Rule 1, Section 2
of the MBSD's Rules.
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(3) Qualitative Rating: The MBSD will require an Unregistered
Investment Pool to obtain a minimum required rating of ``above
average'' as a result of an FICC internal qualitative assessment. FICC
believes it is important to consider qualitative factors in order to
assess both Unregistered Investment Pool applicants and members.\8\
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\8\ Staff in the MBSD's Risk Division will determine a
qualitative rating for each Unregistered Investment Pool applicant
and will review qualitative ratings of Unregistered Investment Pool
members on an annual basis. The assessment will include
consideration of factors deemed relevant by the Risk Division,
including management, capital, strategy and risk profile, and
internal controls. (Because responsibility for these factors with
respect to a particular Unregistered Investment Pool may be with the
Unregistered Investment Pool, with the investment advisor, with some
other entity (i.e., a third party service provider), or with some
combination of these, Risk staff will perform the assessment for
each factor with the entity or entities it deems appropriate.) The
assessment will assess the strengths and weaknesses of these factors
and will assign a qualitative rating to the Unregistered Investment
Pool. In order to qualify for membership, Unregistered Investment
Pools must meet a qualitative rating of at least ``above average''
as determined by the Risk Division's staff.
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III. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in its custody or control.\9\ The Commission finds
that FICC's proposed rule change is consistent with this requirement
because by enhancing membership requirements for Unregistered
Investment Pools, FICC should be better able to mitigate financial risk
to itself and to its members and therefore should be better able to
assure the safeguarding of securities and funds that are in its custody
or control or for which it is responsible.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 \10\ and the
rules and regulations thereunder.
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\10\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-FICC-2006-10) be and hereby
is approved.\11\
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\11\ In approving the proposed rule change, the Commission
considered efficiency, competition and capital formation. 15 U.S.C.
78c(f).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-158 Filed 1-9-07; 8:45 am]
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