[Federal Register Volume 62, Number 86 (Monday, May 5, 1997)]
[Notices]
[Pages 24523-24525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38553; File No. SR-NSCC-96-22]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change Making Orders from Defined Contribution Plans 
Eligible For NSCC's Mutual Fund Service

April 28, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 26, 1996, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on March 18, 
1997, amended the proposed rule change as described in Items I and II 
below, which items have been prepared primarily by NSCC. The Commission 
is publishing this notice and order to solicit comments from interested 
persons and to grant accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change amends NSCC's rules to permit transactions 
involving defined contribution plans to be cleared and settled through 
NSCC's mutual fund service.

II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by N SCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend NSCC's rules to 
allow NSCC to offer clearance and settlement services to mutual fund 
orders from defined contribution plans that are authorized under 
Section 414(i) of the Internal Revenue Code. According to NSCC, the 
Investment Company Institute (``ICI'') on behalf of a committee of 
mutual fund companies, third party administrators (``TPAs''), and 
trustees of plans asked NSCC to provide clearance and settlement 
services to alleviate the processing and operational constraints that 
have occurred as a result of the rapid expansion of the defined 
contribution mutual fund business.
    TPAs serve as the administrators of Plans, acting as the contact 
person for all participants. To provide better services and more 
flexible investment options, TPAs allow participants in their plans to 
select among investments in multiple mutual fund complexes. 
Participants in plans submit all purchase or redemption orders to the 
TPA which transmits the orders to the appropriate mutual fund. The TPA 
must communicate separately with each mutual fund to place orders to 
buy or sell shares. The TPA also must forward the trade information to 
the plan trustee which handles the plan's assets (e.g., the 
participants' money contributions). The trustee also must maintain 
communications with several parties (e.g., TPAs and mutual funds) to 
monitor trade activity and to satisfy multiple settlement obligations.
    Under the proposed rule change, NSCC will permit TPAs to join NSCC 
as nonsettling members and to participate in the Fund/Serv, Networking, 
and the Mutual Fund Profile Service portions of NSCC Mutual Fund 
Services.\3\ TPA members will be able to initiate and to respond to 
orders and redemptions on behalf of their plans.\4\ Because settlement 
obligations for the TPA's orders and redemptions are the responsibility 
of the trustee,\5\ the proposed rule change will require the TPA to 
submit to NSCC a form designating the appropriate trustee responsible 
for the settlement of its orders, and the trustee will be required to 
acknowledge its settlement responsibilities with respect to each TPA.
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    \3\ As nonsettling members, TPAs may not participate in the 
Mutual Fund Commission Settlement portion of Mutual Fund Services.
    \4\ In addition to the changes described below, the following 
NSCC rules will be amended to apply to TPA members: Rule 5 (General 
Provisions relating to authorized representatives), Rule 6 
(Distribution Facilities), Rule 17 (Fine Payments), Rule 18 
(Procedures For When the Corporation Declines or Ceases to Act). 
Rule 20 (Insolvency), Rule 22 (Suspension of Rules), Rule 24 
(Changes for Services Rendered), Rule 26 (Bills Rendered), Rule 27 
(Admission to Premises of the Corporation), Rule 29 (Qualified 
Securities Depositories), Rule 32 (Facsimile Signatures), Rule 33 
(Procedures), Rules 34 (Insurance), Rule 35 (Financial Reports), 
Rule 36 (Rule Changes), Rule 37 (Hearing Procedures), Rule 39 
(Special Representative/Index Receipt Agent), Rule 45 (Notices), 
Rule 46 (Restrictions on Access to Services), and Rule 48 
(Disciplinary Proceedings).
    \5\ The Trustee must be a NSCC participant bank or broker-
dealer.
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    In order to become a TPA member and to maintain TPA membership, a 
TPA must demonstrate that its business and capabilities are such that 
it could reasonably expect material benefit from direct access to 
NSCC's services. In addition, NSCC must determine that the TPA: (1) Has 
a business history of a minimum of three years or has personnel with 
sufficient operational background and experience to ensure the ability 
of the TPA member to conduct such a business; (2) maintains adequate 
staff, physical facilities, books and records, and procedures so it is 
capable of handling mutual fund transactions with NSCC; and (3) is not 
subject to any statutory disqualification or an order of similar effect 
issued by court or agency.
    If the TPA does not meet the operational standards of (1) Or (2) 
above, NSCC may approve the application if the TPA applicant 
demonstrates an acceptable alternative operational standard. To approve 
an application based upon an alternative operational standard, NSCC 
must determine that: (1) The alternative operational standard will not 
require any extended manual intervention on behalf of NSCC; (2) the TPA 
will be able to submit data within the time parameters established by 
NSCC; and (3) the alternative operational standard does not expose NSCC 
to undue risk.
    In addition, NSCC will have the ability to examine the operational 
capability of TPA members on an ongoing basis. NSCC may also require 
the TPA member to provide adequate assurances of its operational 
capability, including: (1) Additional reporting by a TPA member of its 
operational condition at intervals and in detail as determined by NSCC 
and (2) assurances as may be required pursuant to NSCC's guidelines and 
procedures.

[[Page 24524]]

    Before becoming a member, the TPA must agree: (1) That the only 
NSCC service or system that it will utilize is NSCC's Mutual Fund 
Services; (2) that it will abide by NSCC's rules, provisions, and 
remedies; (3) that NSCC's rules will be a part of the terms and 
conditions of every transaction that it submits to NSCC; (4) that it 
will not submit any transaction to the Mutual Fund Services unless 
NSCC's rules are part of the terms and conditions of the transaction, 
and it will not submit or confirm any transaction to or through NSCC's 
Mutual Fund Services in contravention of the Investment Company Act of 
1940; \6\ (5) that it will pay to NSCC any compensation provided for by 
NSCC's rules for a Mutual Fund Services transaction and pay any fines 
that may be imposed under NSCC's rules; (6) that it will be bound by 
any amendments of NSCC's rules that relate to any transaction submitted 
through the Mutual Fund Services; and (7) that its agreement with NSCC 
will inure to the benefit of and be binding upon the parties respective 
successors and assigns.
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    \6\ 15 U.S.C. 80a-1 et seq.
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    Once an NSCC member, the TPA may submit a mutual fund order to NSCC 
on the trade date of the order or on any date thereafter.
    If the order does not contain the information required by NSCC, 
NSCC will reject the order and advise the TPA member of the rejection. 
If the TPA member desires to resubmit a rejected order, it must submit 
the order to NSCC as if it had never been submitted. Upon receipt of a 
TPA member's properly submitted mutual fund order, NSCC will transmit 
the information to the appropriate mutual fund member and to the 
trustee.\7\
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    \7\ The proposed rule change also will allow fund members to 
submit orders against TPA members instead of the TPA submitting the 
order. TPA members that do not agree with the terms of a fund 
originated order will be able to delete the order and then resubmit 
an adjusted order.
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    The fund member may accept or reject the TPA member's mutual fund 
order. A rejection by the fund member will result in the deletion of 
the mutual fund order. The trustee also will have the ability to cause 
orders to be deleted from Fund/Serv by submitting an exit 
instruction.\8\ If the trustee does not submit an exit instruction for 
an order submitted by a TPA member, NSCC's rules make it clear that the 
trustee will be responsible for such order. When an order is deleted, 
NSCC will notify the other parties, and the TPA member and fund member 
will have to adjust the order.\9\ If the TPA member's order is 
accepted, the fund member will confirm the order. TPA members that do 
not agree with the terms of a mutual fund order as confirmed by a fund 
member may submit a correction to NSCC.
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    \8\ The trustee may want to delete the order if for example the 
trustee no longer has the plan as a customer or the trustee does not 
have sufficient funds to pay for the order.
    \9\ In addition to deletions by the parties, NSCC may delete 
from Fund/Serv any uncompleted Fund/Serv items upon the withdrawal 
of a TPA member from participation in Fund/Serv but not earlier than 
five business days following notification to the trustee of the TPA 
member's intention to withdraw from Fund/Serv.
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    In addition to the ability to submit orders, the proposed rule 
change will provide TPA members with the ability to engage in the 
following activities. TPA members will be able to submit money only 
charges. A trustee who does not agree with the terms of a money related 
charge submitted by a TPA will be able to submit a deletion to NSCC. 
TPA members will submit exit orders when, for whatever reason, they do 
not want to settle through Fund/Serv. If a TPA member determines that 
data it transmitted to a fund member regarding a settled order is 
incorrect, it will be able to submit an extended correction instruction 
to NSCC. When this occurs, NSCC will notify both the fund member and 
the trustee. TPA members will have the option of submitting 
registration data for orders submitted through Fund/Serv. TPA members 
also will be entitled to participate in or process mutual fund orders 
that result from underwritings and tender offers.
    NSCC also will provide data concerning the status of all Fund/Serv 
transactions to TPA members each business day, and TPA members may 
receive information through the Mutual Fund Profile Service.\10\
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    \10\ NSCC will charge TPA members the standard fees for the 
Mutual Fund Services. NSCC will collect the fees through automated 
clearing house (``ACH'') debits. TPA members will be required to 
enter into an authorization agreement which will permit NSCC to 
initiate wire transfer debit entries through ACH.
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    In addition to the amendments described above, the proposed rule 
change amends the definition of an NSCC fund member and member to 
include limited liability corporations as a named category of eligible 
entity. The proposed rule change also amends NSCC's rules to allow a 
bank or trust company to become a mutual fund services member, which is 
a broker-dealer, bank, trust company, or other entity that has agreed 
to limit its use of NSCC's services to NSCC's Mutual Fund Services. 
According to NSCC, the purpose of these changes is to update NSCC's 
rules to be consistent with NSCC's current practice.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \11\ and the rules and 
regulations thereunder because it will facilitate the prompt and 
accurate clearance and settlement of securities transactions.
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    \11\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    The ICI, on behalf of a committee of mutual fund companies, TPAs 
and trustees of plans, asked NSCC to develop a solution to existing 
defined contribution processing operational constraints. No written 
comments have been solicited or received. NSCC will notify the 
Commission of any written comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\12\ The Commission 
believes that the rule change is consistent with this obligation 
because the proposal should enhance the clearance and settlement of 
plan orders by providing a centralized and automated facility for 
transmission of order data by TPAs. Currently, to process its customers 
orders, TPAs and trustees must communicate by various means with 
several parties, which may be a cumbersome process. Under the proposed 
rule change, TPA members will submit all plan orders to NSCC, and NSCC 
will automatically forward the information to the appropriate mutual 
fund and trustee. Because the orders will be sent through NSCC, the 
time and cost associated with processing should be reduced. Thus, the 
proposal promotes the prompt and accurate clearance and settlement of 
securities transactions.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of the notice of filing. Commission finds good cause for 
approving the proposed rule change

[[Page 24525]]

prior to the thirtieth day after publication of the notice of filing 
because accelerated approval will permit NSCC to begin making mutual 
fund orders from TPAs for their plans eligible for NSCC's mutual fund 
service immediately. Thus, NSCC will be able to respond promptly to the 
processing and operational constraints that are currently being 
experienced in this area.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
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 change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington DC 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of NSCC. All submissions 
should refer to the file number SR-NSCC-96-22 and should be submitted 
by May 27, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-96-22) be, and hereby, 
is, approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-11608 Filed 5-2-97; 8:45 am]
BILLING CODE 8010-01-M