[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25040]


[[Page Unknown]]

[Federal Register: October 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34780; File Nos. SR-MCC-93-07 and SR-MSTC-93-14]

 

Self-Regulatory Organizations; Midwest Clearing Corporation and 
Midwest Securities Trust Company; Notice of Amendments and Order 
Approving on an Accelerated Basis Proposed Rule Changes Establishing a 
Risk Assessment Committee and Making Various Other Changes to MCC's and 
MSTC's By-Laws and Rules

    On November 17, 1993, and on December 23, 1993, the Midwest 
Clearing Corporation (``MCC'') and the Midwest Securities Trust Company 
(``MSTC'') respectively filed proposed rule changes (File Nos. SR-MCC-
93-07 and SR-MSTC-93-14) with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ MCC amended its proposal on December 
23, 1993, thereby making it virtually identical to that of MSTC. On 
January 3, 1994, MCC submitted a second amendment, a letter of 
clarification.\2\ Notice of the proposals was published in the Federal 
Register on March 3, 1994.\3\ On May 11, 1994, MCC submitted its third 
amendment, and MSTC submitted its first amendment.\4\ On July 8, 1994, 
MCC submitted its fourth amendment, and MSTC submitted its second 
amendment.\5\ On September 22, 1994, MCC submitted its fifth amendment, 
and MSTC submitted its third amendment.\6\ No comments on the proposals 
have been received by the Commission. This order approves the proposed 
rule changes as amended.\7\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letter from David T. Rusoff, Foley & Lardner, to Richard 
Strasser, Division of Market Regulation (``Division''), Commission 
(December 30, 1993).
    \3\Securities Exchange Act Release No. 33667 (February 23, 
1994), 59 FR 10187.
    \4\Letter from David T. Rusoff, Foley & Lardner, to Jerry 
Carpenter, Branch Chief, Division, Commission (May 10, 1994).
    \5\Letter from David T. Rusoff, Foley & Lardner, to Jerry 
Carpenter, Assistant Director, Division, Commission (July 7, 1994).
    \6\Letter from David T. Rusoff, Foley & Lardner, to Jerry 
Carpenter, Division, Commission (September 21, 1994).
    \7\The descriptions of the proposals as set forth in this order 
are descriptions of the proposals in their final, amended forms.
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I. Description of the Proposals

    MCC and MSTC are modifying their By-Laws and Rules to define their 
participants' rights and obligations more precisely and to give MCC and 
MSTC more flexibility and protection in dealing with violations of 
their rules.\8\ MCC and MSTC are adding new sections to their By-Laws 
to authorize MCC and MSTC to establish additional committees as may be 
provided for in the By-Laws or Rules or may be established by their 
boards of directors. Such committees shall have the duties and 
authority as prescribed for them by the By-Laws, the Rules, or the 
boards.
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    \8\The Commission recently approved the proposed rule filing of 
the Chicago Stock Exchange, the parent corporation of MCC and MSTC, 
which contained many of the same amendments proposed in the subject 
filings by MCC and MSTC. Securities Exchange Act Release No. 34505 
(August 9, 1994), 59 FR 42802.
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    MCC and MSTC are amending their Rules to provide for the 
establishment of risk assessment committees. Each risk assessment 
committee will consist of four members. The risk assessment committees 
shall have such duties as may be assigned to them by MCC's or MSTC's 
Rules or by their boards. Among other duties of the risk assessment 
committees, the amendments require MCC and MSTC to consult with at 
least one member of their respective risk assessment committee before 
ceasing to act for a participant.\9\ Three members of the risk 
assessment committees will hear all appeals of MCC and MSTC decisions 
to deny application for membership or to cease to act for a 
participant. Previously, MCC and MSTC Rules required the boards to 
appoint a panel to hear such appeals.\10\
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    \9\The purpose of the required consultation is to help ensure 
that the managements of MCC and MSTC have independent input to 
assist them in their decision making processes.
    \10\The amendments prohibit the member of the risk assessment 
committees who was consulted from participating in the hearing of 
any related appeal. MCC and MSTC By-Laws already provide that any 
member of one of the risk assessment committees (previously the 
board-appointed committees) that has any direct or indirect interest 
in a matter on appeal which might preclude such member from 
rendering an objective and impartial determination shall not hear 
such appeal.
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    MCC and MSTC are adding provisions to their Rules to adopt formal 
standards of review for the hearing of appeals beyond the risk 
assessment committees. The new standards provide that the decisions of 
the risk assessment committees cannot be reversed, modified, or 
remanded by the boards if the factual conclusions in the risk 
assessment committees' decisions are supported by substantial evidence 
and if such decisions are not arbitrary, capricious, or an abuse of 
discretion.
    The amendments bar MCC or MSTC participants from bringing legal 
proceedings, except for violations of federal securities laws, against 
any officer, director, employee, or agent of MCC, MSTC, or the Chicago 
Stock Exchange (``CHX'') if such officer, director, employee, or agent 
is acting on MCC, MSTC, or CHX business. These provisions do not 
prohibit MCC or MSTC participants from suing MCC or MSTC for actions 
taken by officers, directors, employees, or agents. The provisions only 
prohibit suits against such persons in their capacities as individuals.
    The proposed rule changes add provisions that limit the liability 
of MCC and MSTC to participants for losses arising from the 
nonperformance or misperformance of MCC's or MSTC's duties except (1) 
for losses attributable to MCC's or MSTC's negligence with respect to 
the safeguarding of securities or funds in MCC's or MSTC's custody or 
control and (2) for losses attributable to the willful misconduct, 
gross negligence, bad faith, or fraudulent or criminal acts of MCC, 
MSTC, their officers, directors, employees, or agents with respect to 
all other activities. The limitation of MCC and MSTC liability does not 
apply to violations of federal securities laws. The amendments also 
provided that any MCC or MSTC participant that fails to prevail in a 
legal proceeding brought by such participant against MCC or MSTC or any 
of their officers, directors, employees, or agents shall be required to 
pay MCC or MSTC all reasonable expenses, including legal fees, incurred 
by MCC or MSTC in such proceedings but only if such expenses exceed 
$50,000.

II. Discussion

    The Commission believes that the proposals are consistent with the 
Act and particularly with Section 17A of the Act.\11\ Section 
17A(b)(3)(H) requires that the rules of clearing agencies provide fair 
procedures with respect to disciplining participants and denying 
participation to any persons seeking participation in a clearing 
agency.\12\ By establishing standing risk assessment committees, by 
requiring that such committees hear all appeals of MCC and MSTC 
decisions to deny application for membership or to cease to act for a 
participant, and by setting forth specific standards of review for 
appeals of the risk assessment committees' decisions, the proposals 
appear to provide fair procedures as required by Section 17A(b)(3)(H). 
Furthermore, the proposals also should enhance certainty and 
consistency in the operations of MCC and MSTC by providing that the 
decisions of the risk assessment committees cannot be reversed, 
modified, or remanded by the boards if the conclusions are within the 
parameters discussed earlier.
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    \11\15 U.S.C. 78q-1 (1988).
    \12\15 U.S.C. 78q-1(b)(3)(H) (1988).
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    Finally, the proposed rule changes also contain several 
modifications to MCC's and MSTC's rules regarding MCC's and MSTC's 
standards of care and limitations of liability. By setting forth 
definite statements of MCC's and MSTC's standards of care and 
limitations of liability, the proposals should increase the general 
operating efficiency of MCC and MSTC.
    The Commission believes that the provisions that require 
participants who are unsuccessful in suits against MCC or MSTC must pay 
MCC's or MSTC's legal expenses under certain circumstances are 
consistent with the requirements of Section 17A(b)(3)(D) of the Act 
which requires that the rules of a clearing agency provide for the 
equitable allocation of reasonable dues, fees and other charges among 
its participants.\13\ Because the proposals allow MCC and MSTC to shift 
the financial burden of unsuccessful litigation to the responsible 
participant, the proposals appear to be consistent with this statutory 
objective. The Commission also believes that the rule changes should 
not provide an undue disincentive to litigation because MCC's and 
MSTC's expenses must be reasonable and must exceed $50,000 before a 
participant member will be obligated to compensate MCC or MSTC.
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    \13\15 U.S.C. 78q-(b)(3)(D) (1988).
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    The Commission finds good cause for approving the proposed rule 
changes prior to the thirtieth day after the date of publication of 
notice of the filing of the amendments. Because the Commission has not 
received any comments with regard to its notice of the proposals as 
originally filed and does not foresee receiving any adverse comments 
regarding the subsequent amendments and because the subsequent 
amendments generally narrowed the scope of the original proposals and 
made clarifying and technical changes, the Commission finds it 
appropriate to approve the proposals prior to the thirtieth day after 
the date of publication of notice of the filing of the amendments.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW,, Washington, DC 20549. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Section, 450 Fifth Street, 
NW, Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal offices of MCC and MSTC. 
All submissions should refer to File Nos. SR-MCC-93-07 and SR-MSTC-93-
14) and should be submitted by November, 1, 1994.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the above-mentioned proposed rule changes (File Nos. SR-
MCC-93-07 and SR-MSTC-93-14) be, and hereby, are, approved.

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    \14\15 U.S.C. 78s(b)(2) (1988).

    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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25040 Filed 1-7-94; 8:45 am]
BILLING CODE 8010-01-M