[Federal Register: March 15, 2005 (Volume 70, Number 49)]
[Notices]
[Page 12762-12763]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr05-160]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51340; File No. SR-FICC-2005-02]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Amend the Application and
Continuing Membership Standards of the Government Securities Division
and the Mortgage-Backed Securities Division
March 9, 2005.
I. Introduction
On January 7, 2005, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission'') and on January 14, 2005, amended proposed rule change
SR-FICC-2005-02 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 January 28, 2005.\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. 51066 (January 21,
2005), 70 FR 4167.
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II. Description
FICC is amending the application and continuing membership
standards of the Government Securities Division (``GSD'') and the
Mortgage-Backed Securities Division (``MBSD'') to: (1) Provide that
when an applicant, member, or participant \3\ becomes subject to an
order of statutory disqualification or order of similar effect,
including an order issued by a non-U.S. regulator or examining
authority, the FICC Membership and Risk Management Committee
(``Committee'') shall determine whether this shall be the basis for
denial of the membership applicant or termination of membership rather
than such denial or termination being automatic; (2) impose a fine on
members that fail to notify FICC within 2 business days of falling out
of compliance with specified membership standards, including becoming
subject to an order of statutory disqualification or order of similar
effect; and (3) require applicants and members to notify FICC within
two business days if they become aware of an investigation or similar
proceeding against them that could lead them to violate a FICC
membership standard.
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\3\ GSD members and MBSD participants are collectively referred
to as members for purposes of this order.
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1. Action in Cases of Statutory Disqualification or Orders of Similar
Effect
The GSD and MBSD rules currently provide that a membership
applicant that is subject to an order of statutory disqualification
under Section 3(a)(39) of the Act or an order of similar effect is not
eligible for membership.\4\ Currently, a waiver of this requirement by
the Committee is necessary in order for FICC to admit such applicant
into membership. The admission requirements also serve as continuance
standards for current members. Therefore, if a member becomes subject
to a statutory disqualification, a waiver must be sought in order for
it to continue as a member of FICC.
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\4\ For example, GSD Rule 3, ``Financial Responsibility and
Operational Capability Standards,'' Section 1, ``Admissions Criteria
for Comparison-Only Members,'' provides that an applicant may not be
subject to an order of statutory disqualification or ``an order of
similar effect issued by a Federal or State banking authority, or
other examining authority or regulator.'' Section 3(a) (39) of the
Act, which sets forth the definition of ``statutory
disqualification,'' specifically covers orders issued by foreign
financial regulatory authorities that are the equivalent to
Commission-issued orders covered by the definition. The statutory
definition also includes specific references to entities being
barred from the ``foreign equivalent of a self-regulatory
organization [or a] foreign or international securities exchange''
under ``any substantially equivalent foreign statute or
regulation.''
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At the time it was organized as a clearing agency, the Government
Securities Clearing Corporation, the predecessor to FICC, modeled its
rules provisions regarding statutory disqualifications on those of
other clearing agencies which are now subsidiaries of The Depository
Trust & Clearing Corporation. The understanding at the time was that
instances of statutory disqualification were a rare occurrence and
called into question the entity's ability to meet membership
requirements or to remain a member in good standing. More recently,
firms are increasingly becoming subject to statutory disqualification,
but the reasons for a firm's statutory disqualification may have little
bearing on its ability to become or remain a member in good standing.
FICC will retain the ability to deny or terminate membership where a
firm's ability to meet applicable membership requirements is called
into question. However, to the extent an order of statutory
disqualification does not call this into question, FICC does not
believe it appropriate for the Committee to have to issue a waiver in
order to admit or retain the member.
The proposed rule change eliminates the automatic need to obtain a
waiver in cases where an entity is subject to an order of statutory
disqualification or order of similar effect but will keep such orders
as a criterion to be considered for membership. FICC management will
continue to present all instances of such orders to the Committee, and
the Committee will make all final determinations with respect to these
entities. In this manner, FICC management and the Committee will be
able to thoroughly evaluate the risks presented by an applicant or
member that was or that becomes subject to such an order. The proposed
rule change allows FICC to admit and retain members that pose no risk
to FICC.\5\ In instances where waivers are still required under the
rules and are granted by the Committee, FICC will promptly notify the
Commission.
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\5\ To the extent the Committee determines to admit or retain a
member despite a statutory disqualification, the Committee will
still retain all rights it currently has under FICC rules to impose
limitations or restrictions on such member or participant.
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2. Fines for Failure To Notify FICC for Falling Out of Compliance With
Membership Criteria
FICC's rules currently require members to promptly notify FICC in
the event that they are not meeting membership standards. FICC is now
implementing a fine for those members that do not promptly notify FICC
of their noncompliance with any membership standard. The membership
standards are set forth in GSD Rule 2, ``Members,'' and Rule 3,
``Financial Responsibility and Operational Capability Standards,''
which apply to comparison-only and netting members as applicable and in
MBSD Clearing Rules Article III, ``Participants,'' which apply to MBSD
clearing participants. For risk management purposes, it is important
that FICC learn of a member's failure to meet a membership standard as
soon as possible in order that FICC can promptly determine a course of
action that will best protect FICC. In addition, in some instances,
such as certain cases where a member becomes subject to a statutory
disqualification order, FICC is required to promptly notify the
Commission.\6\ Given the importance of FICC's membership standards and
the need for FICC to learn of noncompliance as soon as possible, FICC
is proposing to fine members $1,000 per instance of a failure to notify
FICC within two business days of the
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member first having knowledge of its falling out of compliance with the
particular membership standard.\7\ Members would be afforded the same
due process as is currently available under FICC's rules with respect
to other types of fines. As with all fines, FICC will notify the
Commission of all fines that are imposed pursuant to this rule change.
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\6\ Rule 19h-1 of the Act does not require a notification or
notice to the Commission in all cases of statutory disqualification.
\7\ Once FICC is notified of an applicant or member's statutory
disqualification, it will follow the provisions of Rule 19h-1 of the
Act.
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In addition, members that fail to timely notify FICC of falling out
of compliance with any membership standard will automatically be placed
on the Watch List and will be subject to more frequent and thorough
monitoring as provided for in GSD Rule 4, Section 3 and MBSD Article
IV, Rule 6.
3. Notification of Pending Investigations
The proposed rule change also requires applicants and members to
notify FICC within two business days of first having knowledge of a
pending investigation or similar proceeding or condition that could
lead them to violate a membership standard. The proposed rule change
will provide an exception to this requirement in cases where disclosure
to FICC would cause the applicant or member to violate an applicable
law, rule, or regulation.
4. Definitions
Finally, MBSD is proposing to add two definitions to Article I,
``Definitions and General Provisions.'' The term ``Associated Person''
will be defined to mean, when applied to any ``person,'' any partner,
officer, or director of such ``person'' or any ``person'' directly or
indirectly controlling or controlled by such ``person,'' including an
employee of such ``person.'' The term ``Person'' will mean a
partnership, corporation, or other organization, entity or individual.
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 the custody or control of the clearing agency or
for which it is responsible.\8\ The Commission finds that FICC's
proposed rule change is consistent with this requirement because it
will help FICC monitor its members' compliance with membership
standards. This should better enable FICC to act quickly to protect
itself and its members and as a result will better enable FICC to
safeguard the securities and funds in its custody or control or for
which it is responsible. The Commission also finds that FICC's proposed
rule change is consistent with this requirement because while it will
make an action of statutory disqualification only a criteria to be
considered in membership matters and not an automatic bar, FICC has
designed the proposed rule change in a manner that will not compromise
its membership review process.
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\8\ 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
proposed rule change is consistent with the requirements of the Act and
in particular 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-FICC-2005-02) be and hereby
is approved.
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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1102 Filed 3-14-05; 8:45 am]
BILLING CODE 8010-01-P