[Federal Register: July 21, 2008 (Volume 73, Number 140)]
[Notices]
[Page 42396-42397]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy08-103]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58157; File No. SR-DTC-2007-05]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Relating to Harmonizing Fines
With the National Securities Clearing Corporation and the Fixed Income
Clearing Corporation
July 15, 2008.
I. Introduction
On May 15, 2007, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') and on December
10, 2007, amended the proposed rule change pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act'').\1\ On April 15, 2008,
the Commission published notice of the proposed rule change to solicit
comments from interested parties.\2\ The Commission received no comment
letters in response to the proposed rule change. For the reasons
discussed below, the Commission is approving the proposed rule change,
as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 57665 (Apr. 15, 2008),
73 FR 21675.
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II. Description
This filing will conform DTC's fine structure relating to
participants not providing financial information in a timely manner to
similar fine structures of DTC's clearing agency affiliates, the
National Securities Clearing Corporation (``NSCC'') and the Fixed
Income Clearing Corporation (``FICC'').\3\
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\3\ Securities Exchange Act Release Nos. 57666 (Apr. 15, 2008),
73 FR 21675 [SR-FICC-2007-05] and 57667 (Apr. 15, 2008) [SR-NSCC-
2007-07].
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DTC's rules (a) require participants to submit certain financial,
regulatory, and other information within certain time frames and (b)
enable DTC to levy fines against participants for violations of its
rules. However, DTC's rules do not explicitly set forth the amount of
the fine with respect to failure to submit this information. As part of
the ongoing effort to harmonize its rules with those of its clearing
agency affiliates, DTC is proposing to adopt FICC's fine schedule for
such violations.\4\
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\4\ The three clearing agencies do not view the proposed rule
changes as fee reductions because they never intended to charge a
common member two or three times for a single violation that trips
another clearing agency's rules on the same matter.
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1. Fines for Late Submissions
If the participant's late submission violates the rules of more
than one DTC-affiliated clearing agency (which includes DTC, NSCC, and
FICC), the fine amount will be divided equally among those clearing
agencies.\5\ When the member is a DTC participant and a member of FICC
or NSCC, DTC will collect the fine and allocate the amount equally
among other clearing agencies, as appropriate. If the member is not a
DTC participant but is a member of NSCC and FICC, NSCC will collect the
fine and allocate the appropriate portion to FICC.
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\5\ For example, assume that Firm A is a participant of DTC,
FICC, and NSCC and is required to submit its annual audited
financial statement within a certain time frame. If participant A is
late in its submission of the statement (and this is Firm A's first
violation), Firm A will be fined $300 total and would owe $100 to
DTC, $100 to FICC, and $100 to NSCC.
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2. Fines Relating to Continuance Standards
DTC Rule 2 sets forth the basic standards for the admission of DTC
participants. The rule states that the admission of a participant is
subject to an applicant's demonstration that it meets reasonable
standards of financial responsibility, operational capability, and
character. Rule 2 also requires DTC participants to demonstrate that
these standards are met on an ongoing basis. Each applicant, upon
approval of its application for DTC participation, signs a letter of
representation that outlines the nature of the applicant's business,
its DTC settlement projections, and its financial condition at the time
of the approval and that requires the applicant to affirm that such
representations are accurate. Moreover, the participant
[[Page 42397]]
letter acknowledges in the letter or representation its obligation to
promptly notify DTC whenever there is any anticipated change in the
representations given.
Under Rule 10, if a participant fails to continue to adhere to
these standards, then DTC, based on its judgment, may at any time cease
to act for the participant with respect to a particular transaction,
particular transactions, transactions generally, or a program and may
terminate a participant's right to act as a Settling Bank. Both Rule 2
and Rule 10 give DTC the discretion to admit participants or continue
to act for them on a temporary or other conditional basis.
In order to harmonize the rules of DTC with those of its clearing
agency affiliates, DTC will add an additional consequence in this
regard whereby a participant will be fined $1,000 if it fails to notify
DTC of its non-compliance with any general continuance standard for DTC
participation within two business days.
In addition, DTC will add a provision to its fine schedule that
would impose a fine in the amount of $5,000 if a participant fails to
notify DTC of a ``material change.'' A ``material change'' would
include events such as a merger or acquisition involving the
participant, a change in corporate form, a name change, a material
change in ownership, control or management, and participation as a
defendant in litigation which could reasonably be anticipated to have a
direct negative impact on the participant's financial condition or
ability to conduct its business. The new provision provides that the
notification must be provided 90 calendar days prior to the effective
date of such event unless the participant demonstrates that it could
not have reasonably have given notice within that timeframe.
With respect to both $1,000 and $5,000 fines mentioned above, DTC
will add an additional provision that if the participant's failure to
provide notice of such material change applies to more than one DTC-
affiliate clearing agency, the fine amount will be divided equally
among the clearing agencies. This is the same approach being adopted
above with respect to fines for failure to timely provide requisite
financial and other information. When the member is a DTC participant
and a member of FICC or NSCC, DTC will collect the fine and allocate
the amount equally among other clearing agencies, as appropriate. If
the member is not a DTC participant but is a member of NSCC and FICC,
NSCC will collect the fine and allocate the appropriate portion to
FICC.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a registered clearing agency. In particular,
the Commission believes the proposal is consistent with the
requirements of Section 17A(b)(3)(F),\6\ which, among other things,
requires that the rules of a clearing agency are designed to remove
impediments to and perfect the mechanisms of a national system for the
prompt and accurate clearance and settlement of securities transactions
and with the requirements of Section 17A(b)(3)(H) \7\ which, among
other things, requires that the rules of a clearing agency provide a
fair procedure with respect to the disciplining of participants and the
denial of participation to any person seeking to be a participant. The
Commission finds that the proposed rule change, which restructures and
harmonizes DTC's fines with those of NSCC and FICC, is consistent with
those statutory obligations.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 15 U.S.C. 78q-1(b)(3)(H).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act \8\ and the rules and regulations
thereunder. In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and capital
formation.\9\
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\8\ 15 U.S.C. 78q-1.
\9\ 15 U.S.C. 78c(f).
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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-DTC-2007-05), as amended, be
and hereby is approved.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16604 Filed 7-18-08; 8:45 am]
BILLING CODE 8010-01-P