[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2321]


[[Page Unknown]]

[Federal Register: February 2, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33525; File No. SR-NSCC-93-11]

 

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to Capital 
and Clearing Fund Requirements for Users of Mutual Fund Services

January 26, 1994.
    On August 20, 1993, the National Securities Clearing Corporation 
(``NSCC'') filed a proposed rule change (File No. SR-NSCC-93-11) with 
the Securities and Exchange Commission (``Commission'') pursuant to 
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
August 23, 1993, NSCC filed an amendment to the proposed rule change. 
Notice of the proposal was published in the Federal Register on 
November 12, 1993, to solicit comments from interested persons.\2\ Two 
comment letters were received; both of which were in support of the 
proposed rule change.\3\ As discussed below, this order approves the 
proposal.
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    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 33157 (November 4, 1993), 
58 FR 60077.
    \3\Letters from Donald J. Boteler, Vice President--Operations, 
Investment Company Institute, to Jonathan G. Katz, Secretary, 
Commission (November 16, 1993) and Steven J. Paggioli, Robert H. 
Wadsworth & Associates, Inc., to Jonathan G. Katz, Secretary, 
Commission (December 1, 1993).
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I. Description

    NSCC has revised its capital standards for broker-dealers and banks 
that desire to join NSCC to use only NSCC'S mutual fund services\4\ and 
for entities that desire to join NSCC to become Funds Members.\5\ NSCC 
also has revised its clearing fund requirements for members that limit 
their use of NSCC services to only NSCC's mutual fund services. The 
revisions are to better reflect the risks and nature of NSCC's mutual 
fund services, which are not guaranteed by NSCC.
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    \4\NSCC's mutual fund services are described in detail in NSCC 
Rule 52, ``Mutual Fund Services.''
    \5\Entities qualifying as Fund Members are governed primarily by 
NSCC Rule 51, ``Fund Member,'' and Addendum I, ``Standards of 
Financial Responsibility and Operational Capacity for Fund Members'' 
of NSCC Rules and Procedures. Fund Members are broker-dealer 
distributors of mutual fund shares that are not full clearing 
members of NSCC but utilize NSCC's mutual fund services.
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    Broker-dealer applicants for NSCC membership that wish to restrict 
their NSCC activities to the mutual fund services will be required to 
have $25,000 in excess net capital over the minimum net capital 
requirement imposed by the Commission or their designated examining 
authority, whichever is greater. Bank or trust company applicants will 
be required to have $100,000 in excess capital over the capital 
requirement imposed by their state or federal regulatory authority.\6\ 
Members who are accepted under these proposed alternative standards 
will be required, depending on their level of settlement debits with 
NSCC, to make deposits to the clearing funds for their mutual fund 
services activities of $10,000, $20,000, or $40,000 instead of the 
current $5,000, $10,000, or $20,000, respectively.\7\
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    \6\The proposed rule change also will change the definition of 
the term ``Mutual Fund Services Broker-Dealer'' to ``Mutual Fund 
Services Member'' in order to include broker-dealers, banks, trust 
companies, and other entities as members whose activities are 
limited to the mutual fund services at NSCC.
    \7\NSCC's clearing fund formula is set forth in Part XV of 
NSCC's Procedures. Pursuant to proposed Section A.I.(b)(ii) of Part 
(XV, a member accepted for membership under the proposed mutual fund 
services only standards will have a clearing fund requirement of 
$10,000 if its daily settlement debits are no more than $100,000, 
$20,000 if its daily settlement debits are no more than $500,000, 
and $40,000 if its daily settlement debits are more than $500,000.
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    Broker-dealer applicants for Fund Member status that distribute 
shares for investment companies with aggregate assets under management 
of $500,000 or more will be required to have $25,000 in excess net 
capital over the minimum net capital requirement imposed by the 
Commission or their designated examining authority, whichever is 
greater. Applicants that distribute shares for investment companies 
with aggregate assets under management of less than $500,000 will be 
required to have excess net capital of $50,000 over the minimum net 
capital requirements imposed by the Commission or their designated 
examining authority, whichever is greater. Investment company 
applicants will be permitted to become Fund Members provided that they 
have a minimum of $100,000 in assets under management.

II. Discussion

    The Commission believes the proposal is consistent with Section 17A 
of the Act.\8\ Specifically, Section 17A(b)(3)(B) requires a clearing 
agency's rules to provide for the participation of registered broker-
dealers, registered clearing agencies, registered investment companies, 
and banks deemed appropriate to the development of a national system 
for the clearance and settlement of securities transactions.\9\ NSCC's 
rule change expands the number of members eligible to clear and settle 
their mutual fund transactions through NSCC's facilities. Access to 
NSCC's mutual fund services is increasingly important to all entities 
in the mutual fund industry. Lower net capital requirements will enable 
smaller mutual funds, broker-dealers, banks, and trust companies to 
participate in NSCC's mutual fund services. Smaller entities thus 
achieve a parity with their larger competitors in terms of access to 
orderly, automated transaction processing systems, which are now the 
industry standard. A common automated means of communication among 
those entities involved in mutual fund transactions serves the public 
interest by eliminating the existence of inefficient, error-prone 
manual data interchanges.
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    \8\15 U.S.C. 78q-1 (1988).
    \9\15 U.S.C. 78q-1(b)(3)(B) (1988).
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    The Commission also believes that NSCC's rule change satisfies the 
requirements of Sections 17A(b)(3)(A) and (F) that a clearing agency be 
organized and that its rules be designed to safeguard securities and 
funds in its custody or control or for which it is responsible.\10\ 
Because NSCC does not guarantee the completion of mutual fund 
transactions under its mutual fund services program, the Commission 
does not believe that any additional risk to NSCC will result from the 
lower net capital requirements for those members that use only the 
mutual fund services of NSCC and does not believe that NSCC's ability 
to safeguard securities or funds will be impaired. Along with lower net 
capital requirements, NSCC is imposing increased clearing fund 
requirements for members who participate in NSCC's mutual fund services 
program under the alternative net capital requirements approved in this 
order. The Commission believes that the increased clearing funds 
requirements will help protect NSCC and its participants from the risk 
of default by members using NSCC's mutual fund services.
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    \10\15 U.S.C. 78q-1(b)(3)(A) and (F) (1988).
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III. Conclusion

    For the reasons stated above, the Commission finds that NSCC's 
proposal is consistent with section 17A of the Act.\11\
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    \11\15 U.S.C 78q-1 (1988).
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    It is therefore ordered, pursuant section 19(b)(2) of the Act,\12\ 
that the proposed rule change (File No. SR-NSCC-93-11) be, and hereby 
is, approved.

    \12\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2321 Filed 2-1-94; 8:45 am]
BILLING CODE 8010-01-M