[Federal Register Volume 62, Number 186 (Thursday, September 25, 1997)]
[Notices]
[Pages 50416-50418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39096; File No. SR-NSCC-96-21]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to the 
Establishment of the Annuities Processing Service

September 19, 1997.
    On December 26, 1996, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-96-21) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ On February 27, 1997, and May 12, 1997, NSCC amended the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on August 6, 1997.\2\ 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. 38889 (July 30, 1997), 
62 FR 42274.
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I. Description

    The proposed rule change amends NSCC's rules to establish the 
Annuities Processing Service (``APS''). APS will be a centralized 
communication link that connects participating insurance carriers with 
broker-dealers, banks, and the broker-dealers' or banks' affiliated 
life insurance agencies where appropriate. Only those annuity plans \3\ 
that are purchased by individuals from insurance carriers through 
broker-dealers, banks, or their affiliated insurance agencies will be 
eligible for processing through APS.
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    \3\ APS will process variable rate and fixed rate annuity 
products. Letter from Julie Beyers, Associate Counsel, NSCC 
(February 26, 1997).
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    NSCC will implement APS in phases. Phase I will provide NSCC's 
participants with the ability to send and receive daily information 
regarding annuity contract positions, the value of a contract's 
underlying assets, and settlement of commission monies.\4\ This 
information will be transmitted through the ``position and valuation,'' 
and ``commission and charge back'' components of Phase I.
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    \4\ NSCC intends to implement additional phases in the future to 
include the processing of annuity contract applications and the 
settlement of premium payments. In addition, the scope of 
information included in APS may be expanded beyond position and 
valuation information. NSCC will be required to make the appropriate 
rule filings with the Commission at such times as NSCC is ready to 
implement these additional components.
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    The position and valuation component will permit insurance carriers 
to transmit information regarding the value of individual annuity 
contracts and the value of the assets underlying the contracts to 
broker-dealers and insurance agencies. Insurance carriers will submit 
position and valuation information to NSCC, which NSCC will forward to 
the party designated as recipient by the insurance carrier.
    The commission and charge back component will permit insurance 
carriers and agencies to communicate concerning periodic trail or 
asset-based compensation and transaction-based commission payments, 
each paid by an insurance carrier to an agency, as well as charge backs 
paid by an agency to an insurance carrier. Insurance carriers and 
agencies will settle these payments through NSCC's money settlement 
system.
    Insurance carriers will be able to initiate commission and charge 
back transactions by submitting instructions to NSCC. On any day prior 
to settlement, an annuities agency or annuities carrier member may 
submit a cancel instruction if the member does not recognize the 
transaction or an exit instruction if the member recognizes the 
transaction but wants that transaction to be processed outside of 
APS.\5\ A

[[Page 50417]]

properly submitted exit or cancellation will cause the payment 
transaction to which it relates to be deleted from APS. Unless NSCC 
receives a cancellation or exit instruction, the commission and charge 
back transaction will settle in the three-day settlement cycle 
following their completion unless the parties have agreed that the 
transaction will settle on an extended basis. However, no transaction 
will be allowed to settle more than five business days after the day on 
which the last instruction pertaining to the transaction was submitted 
to NSCC.
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    \5\ According to NSCC, this feature will not be available when 
the APS becomes operational; it will be added at a later date. Until 
the exit and cancel features are added, an annuities agency or 
annuities carrier member must go outside of APS to arrange for the 
reversal of a commission and charge back transaction that was 
erroneously entered into APS. Telephone conversation between Julie 
Beyers, Associate Counsel, NSCC, and Jeffrey Mooney, Attorney, 
Division of Market Regulation, Commission (September 8, 1997).
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    NSCC will not be responsible for the completeness or accuracy of 
any APS data or for any errors, omissions, or delays that may occur 
relating to the APS data. The proposed rule change states that the 
processing of any transaction through APS will not relieve a party from 
its legal or regulatory rights or its obligations relating to a 
transaction.
    The proposed rule change will amend NSCC's Rule 2 to permit a 
corporation, partnership, or agency, including a registered broker-
dealer, bank, or trust company, that is licensed to sell insurance 
products and is subject to supervision or regulation pursuant to the 
provisions of state insurance laws to become a member of the NSCC. If 
the entity agrees to limit their activities to APS services only, the 
entity would be classified as an ``annuities agency member.''
    The proposed rule change permits broker-dealers to join NSCC as 
annuities agency members regardless of whether they conduct their 
insurance business in-house or through an affiliated or subsidiary 
insurance agency. The proposed rule change provides that NSCC may 
restrict the activities of the broker-dealers' insurance agency 
affiliates and subsidiaries that become annuities agency members and 
require them to enter into agreements for operational support services 
with an entity that is acceptable to NSCC. The entity can be, but is 
not required to be, another annuities agency member and cannot be 
replaced without the prior approval of NSCC. In addition, broker-
dealers and banks that are not currently NSCC members that sell annuity 
products also will be permitted to join NSCC for the purpose of using 
APS.
    The proposed rule change amends NSCC's rules to establish the 
annuities carrier member category. As proposed, NSCC Rule 2 will define 
annuities carrier member as a company, partnership, limited liability 
corporation, or other organization or entity that is not a member of 
NSCC but is subject to the supervision or regulation pursuant to state 
insurance laws. Annuities carrier members will not be required to make 
a deposit to the clearing fund.\6\
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    \6\ Although no clearing fund deposit will be required from 
annuities agency members and annuities carrier members, NSCC has 
amended Rule 4 of its rules to state that an annuities agency member 
or annuities carrier member may be required to make a deposit in the 
clearing fund in the event that in the future NSCC determines that a 
clearing fund deposit should be required.
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    The proposed rule change also will create NSCC Rule 56 to establish 
the financial and operational standards for annuities carrier members. 
Annuities carrier members will be required to have an A.M. Best rating 
of ``A-.'' If rated by (i) Standard & Poor's, the annuities carrier 
member must have a claims paying ability rating of not less than 
``AAA;'' (ii) Moody's the annuities carrier member must have a long-
term debt rating of not less than ``Aaa;'' or (iii) Duff & Phelps, the 
annuities carrier member must have a long-term debt rating of not less 
than ``A-.'' \7\
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    \7\ It should be noted that applicants will not be required to 
be rated by any rating agency other than A.M. Best in order to 
qualify as annuities carrier members. The standards set forth for 
the other rating agencies apply only if a annuities carrier member 
determines to utilize a rating agency in addition to A.M. Best.
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    Alternatively, if the annuities carrier member does not satisfy the 
above-mentioned criteria, Rule 56 will require that the annuities 
carrier member have an A.M. Best rating of not less than ``B+.'' If 
rated by (i) Standard & Poor's, the annuities carrier member must have 
a claims-paying ability rating of not less than ``BBB;'' (ii) Moody's, 
the annuities carrier member must have a long-term debt rating of not 
less than ``A;'' or (iii) Duff & Phelps, the annuities carrier member 
must have a long-term debt rating of not less than ``BBB-.'' In this 
case, Rule 56 also will require that the annuities carrier member 
demonstrate to NSCC's Board of Directors that its business and 
capabilities are such that it could reasonably expect material benefit 
from access to APS, and NSCC must determine that the financial 
condition of such annuities carrier member does not pose an undue risk 
to NSCC or its members.
    The proposed rule change will amend NSCC Rule 15 to require that 
all annuities agency members and annuities carrier members file certain 
financial information with NSCC. In addition to some of the financial 
information required of full NSCC members, Rule 15 will require 
annuities agency members and annuities carrier members to file with 
NSCC reports filed with relevant state insurance departments as may be 
determined by NSCC from time to time.
    The proposed rule change amends Addendum B of NSCC's rules 
(Standards of Financial Responsibility & Operational Capability) to 
include membership standards for applicants that will use only APS. The 
proposed rule change will require a broker-dealer whose membership is 
limited to the use of APS to have $25,000 in excess net capital over 
the minimum net capital requirement imposed by the Commission or such 
higher minimum capital requirement imposed by the broker-dealer's 
designated examining authority. In addition, the broker-dealer must 
have a capital ratio or percentage that would not require it to be 
placed on immediate surveillance at NSCC and must not be on ``closer-
than-normal'' surveillance by its designated examining authority. If 
the applicant is a bank or trust company, it must have $100,000 minimum 
excess capital over the capital requirement imposed by its state or 
federal regulatory authority. A bank or trust company must not be 
operating at a loss at the time of its application and must not have 
operated at a loss in any of its previous three fiscal quarters. All 
others which apply for use of APS must only have the operational 
capability for membership or have an agreement concerning the provision 
of operational support services to such applicant with an entity 
acceptable to NSCC and which may not be replaced without prior approval 
by NSCC and must agree to restrict its business activities as NSCC may 
require.
    Addendum B also will require that all annuities agency members file 
certain prescribed information annually. Such information includes, 
among other things, general information concerning the member's 
corporate organizational structure and licensing, the nature of its 
business, bonding, pending investigations, and litigation.
    The proposed rule change explicitly sets forth that, like NSCC's 
Mutual Fund Services and New York Window Service, APS will not be a 
guaranteed service. An additional paragraph has been added to Addendum 
K Interpretation of the Board of Directors--Application of Clearing 
Fund to make it clear that APS is not a guaranteed service.\8\
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    \8\ Furthermore, NSCC states that it has not yet determined the 
fees for APS. NSCC will make the appropriate rule filing pursuant to 
Section 19(b)(3)(A) of the Act at such time as NSCC determines the 
fees to be charged for APS services.

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[[Page 50418]]

    The proposed rule change amends NSCC's Rule 3 (Lists to be 
Maintained) to indicate that NSCC will maintain a list of annuity plans 
that may be the subject of orders processed through APS. The proposed 
rule change amends NSCC's Rule 57 (Annuities Processing Service) to 
clarify what governs these Phase I aspects of APS.
    The proposed rule change also makes technical amendments to the 
following NSCC rules to accommodate the APS service, annuities agency 
members, and annuities carrier members: Rule 1 (Definitions and 
Descriptions), Rule 5 (General Provisions), Rule 6 (Distribution 
Facilities), Rule 12 (Settlement), 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 (Charges for 
Services Rendered), Rule 26 (Bills Rendered), Rule 27 (Admission to 
Premises of the Corporation--Powers of Attorney, Etc.), Rule 29 
(Qualified Securities Depositories), Rule 32 (Facsimile Signatures), 
Rule 33 (Procedures), Rule 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), Rule 48 (Disciplinary 
Proceedings), Rule 55 (Settling Banks), Procedure VIII (Money 
Settlement Service), Procedure XV (Clearing Fund Formula and Others 
Matters), Addendum D (Statement of Policy--Envelope Settlement 
Service), and Addendum F (Statement of Policy--In Relation to Same Day 
Funds Settlement).\9\
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    \9\ The full text of each of these technical rule changes is set 
forth in Exhibit A of NSCC's filing and subsequent amendments 
thereto, each of which is available for inspection and copying at 
the Commission's Public Reference Room or through NSCC.
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II. Discussion

    Section 17A(b)(3)(F) \10\ of the Act requires that the rules of a 
clearing agency be designed to facilitate the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that NSCC's proposed rule change is consistent with its 
obligations under the Act because APS will provide centralized 
communication between insurance carriers and broker-dealers, banks, and 
their affiliated insurance agencies. APS also permits commission and 
charge back transactions to be processed in a standardized and 
automated environment. Because the activities will be handled 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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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of 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-NSCC-96-21) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25447 Filed 9-24-97; 8:45 am]
BILLING CODE 8010-01-M