[Federal Register Volume 59, Number 20 (Monday, January 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2015]


[[Page Unknown]]

[Federal Register: January 31, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33517; File No. SR-NASD-93-46]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval of Proposed Rule Change 
Concerning the Imposition of Substantive and Procedural Requirements on 
Members Entering Into Clearing Agreements

January 24, 1994.
    On November 12, 1993, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 
19b-4 thereunder.\2\ The rule change creates a new Section 47 under 
Rules of Fair Practice, Article III, which will require members 
entering into clearing or carrying agreements (collectively referred to 
as ``clearing agreements'') to specify the obligations and supervisory 
responsibilities of both the introducing and clearing firm. The new 
rule will also contain procedural provisions requiring members to 
submit to the NASD agreements for review or review and approval, 
depending on the circumstances.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    Notice of the proposed rule change, together with its terms of 
substance, was provided by issuance of a Commission release and by 
publication in the Federal Register.\3\ No comments were received in 
response to the Commission release. This order approves the proposed 
rule change.
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    \3\Securities Exchange Act Release No. 33297 (Dec. 7, 1993), 58 
FR 65210 (Dec. 13, 1993).
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I. Introduction

    Currently, the NASD's rules do not regulate any of the terms of or 
require submission to the NASD of clearing agreements entered into by 
NASD members. The New York Stock Exchange (``NYSE'') and American Stock 
Exchange (``Amex'') (collectively referred to as ``Exchanges''), 
however, do regulate these agreements entered into by their members;\4\ 
the Exchange Rules concerning clearing agreements are identical. In 
general, the Exchange Rules require that the terms of the clearing 
agreements identify, at a minimum, the party responsible for seven 
enumerated functions. In addition, members entering into carrying 
agreements must submit the agreement to the applicable exchange for 
approval prior to becoming effective; if a party to a clearing 
agreement is a member of both the NYSE and the Amex, then it need only 
submit the agreement to the NYSE.\5\
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    \4\NYSE Rule 382(a) and Amex Rule 400(a) (collectively referred 
to as ``Exchange Rules''). See also Securities Exchange Act Release 
No. 18497 (Feb. 19, 1982), 47 FR 8284 (Feb. 25, 1982) (approval of 
NYSE clearing agreement rule); Securities Exchange Act Release No. 
18924 (July 26, 1982), 47 FR 33354 (Aug. 2, 1982) (clarification of 
NYSE order approving NYSE clearing agreement rule); Securities 
Exchange Act Release No. 18867 (July 2, 1982), 47 FR 30333 (July 13, 
1982) (approval of Amex clearing agreement rule).
    \5\Securities Exchange Act Release No. 18867 (July 2, 1982), 47 
FR 30333 (July 13, 1982).
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II. Description of the NASD's New Rule Concerning Clearing 
Agreements

    With limited exception, the NASD's new rule will impose the same 
requirements on NASD members as the Exchanges impose on their members. 
As under the Exchange Rules, subsection (a) of the NASD rule requires 
that clearing agreements entered into by NASD members designate which 
party to the agreement is responsible for; Opening, approving and 
monitoring customer accounts; extending credit; maintaining books and 
records; receiving and delivering funds and securities; safeguarding 
funds and securities; preparing confirmations and statements; and 
accepting orders and executing transactions. In response to recent 
Commission amendments to the net capital rule,\6\ the NASD rule imposes 
an additional requirement beyond those imposed by the Exchanges.\7\ 
NASD members' clearing agreements must identify whether customers are 
customers of the clearing member for purposes of the Commission's 
financial responsibility rules and the Securities Investor Protection 
Act (``SIPA''). In addition, upon the opening of a customer account 
which will be introduced on a fully disclosed basis, the new rule 
requires written notification to the customer of the existence of the 
clearing agreement. Moreover, the new rule will require the clearing 
agreement to identify the party responsible for providing the written 
notification. Regardless of the procedural requirements concerning 
submission of a clearing agreement to the NASD (discussed below), as of 
the effective date of the new rule, all clearing agreements\8\ to which 
a NASD member is a party must comply with the substantive provisions of 
subsection (a). Thus, any agreement not currently in compliance with 
subsection (a) must either be amended or terminated on or before the 
effective date of the new rule.\9\
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    \6\Securities Exchange Act Release No. 31511 (Nov. 24, 1992), 57 
FR 56973 (Dec. 2, 1992) (amending Rule 15c3-3 under the Act).
    \7\The NYSE has issued an Information Memo informing its members 
of the new net capital requirements for introducing firms. NYSE 
Information Memo, No. 93-35 (Aug. 24, 1993). This memo requires all 
NYSE members to either file a notice of intent to meet the minimum 
net capital requirement of $250,000 or submit an amended clearing 
agreement reflecting the provisions required under the new capital 
rule to qualify for alternative minimum net capital requirements 
($5,000 or $50,000, depending on the circumstances).
    \8\This Commission notes that this rule will apply to agreements 
covering customer accounts carried on an omnibus basis and/or 
customer accounts carried on a fully disclosed basis.
    \9\The NASD has requested an effective date of April 15, 1994. 
Conversation between Robert Smith, Attorney, NASD, and Michael Ryan, 
Attorney, SEC (Jan. 24, 1994).
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    Subsections (b) and (c) of the new rule outline the procedural 
requirements for submitting clearing agreements to the NASD for review 
or review and approval. If a clearing member designated to the NASD for 
oversight amends a clearing agreement with respect to the items 
enumerated in subsection (a) or enters into a clearing agreement, the 
member must submit the agreement to the NASD for review and approval. 
If, on the other hand, an introducing member designated to the NASD for 
oversight amends a clearing agreement with respect to the items 
enumerated in subsection (a) or enters into a clearing agreement where, 
in either case, the other party to the agreement is designated to 
another Self-Regulatory Organization (``SRO'') for oversight, then the 
member must submit the agreement to the local NASD district office for 
review.

III. Discussion

    The Commission has determined to approve the NASD's proposal. The 
commission finds that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements of Section 15A(b)(6) 
of the Act.\10\ Section 15A(b)(6) requires, in part, that the rules of 
the NASD be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, and to 
protect investors and the public interest.
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    \10\15 U.S.C. 78 0-3(b)(6).
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    The rule change will add a new section to the NASD's Rules of Fair 
Practice requiring that all clearing agreements allocate between the 
parties certain functions and responsibilities concerning the handling 
of customer accounts. Furthermore, upon the opening of a customer 
account, if the customer's account is to be introduced on a fully 
disclosed basis, the new rule will require written disclosure to the 
customer of the existence of a clearing agreement. Depending on the 
circumstances, the rule will also require members to submit clearing 
agreements to the NASD for review or review and approval.
    Adoption of this rule will create uniformity among the NYSE, Amex 
and the NASD in the regulation of clearing agreements and will reduce 
confusion regarding the identity of the party to the agreement 
responsible for certain introducing and clearing obligations. 
Consistent with the Exchanges, the new rule will provide members the 
flexibility to allocate functions and responsibilities between 
themselves in accordance with the nature of their relationship and 
business.
    The Commission notes that no contractual arrangement for the 
allocation of functions between an introducing and carrying 
organization can operate to relieve either organization from their 
respective responsibilities under the federal securities laws and 
applicable SRO rules. SRO's may, however, under appropriate 
circumstances, relieve an organization from certain responsibilities 
which would accrue to that party absent agreement.\11\
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    \11\One SRO, however, may not unilaterally exempt a member from 
the rules of another SRO to which the member also belongs.
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    As discussed above, the NASD's new rule, which differs from the 
Exchange Rules in this respect, provides that clearing agreements must 
specify whether customers are customers of the clearing member for 
purposes of the Act and SIPA. The Commission notes, however, that 
compliance with the NASD's new role does not necessarily result in 
satisfying the requirements under Rule 15c3-1\12\ allowing $5,000 in 
minimum net capital. To take advantage of the $5,000 minimum net 
capital requirements, a fully disclosed introducing firm, among other 
things, must be a party to a clearing agreement that provides that, for 
purposes of the Act and SIPA, the introduced customer accounts are the 
responsibility of the carrying firm.\13\ If the clearing agreement 
fails to include this provision, the Commission considers the 
introducing member as a firm in possession of customer funds or 
securities subject to higher net capital requirements.
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    \12\17 CFR 240.15c3-1(a)(2)(vi).
    \13\Securities Exchange Act Release No. 31511 (Nov. 24, 1992), 
57 FR 56973 (Dec. 2, 1992). See also Letter from Richard G. Ketchum, 
Director, Division of Market Regulation to David Marcus, New York 
Stock Exchange (Jan. 14, 1985).
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IV. Conclusion

    In conclusion, for the reasons stated above, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act. This rule change will provide greater uniformity within the 
industry in the regulation of clearing agreements and, thus, will 
reduce confusion regarding the identity of the party to an agreement 
responsible for certain introducing and clearing obligations.
    The Commission does not believe that the rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, SR-NASD-93-46 be, and hereby is, 
approved, effective April 15, 1994.\14\

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    \14\See supra note 9.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2015 Filed 1-28-94; 8:45 am]
BILLING CODE 8010-01-M