[Federal Register Volume 63, Number 39 (Friday, February 27, 1998)]
[Notices]
[Pages 10058-10060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5067]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39693; File No. SR-NSCC-97-13]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to 
Changes in Membership Standards

February 23, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 30, 1997, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on December 31, 
1997, amended the proposed rule change as described in Items I, II, and 
III below, which items have been prepared primarily by NSCC. The 
Commission is publishing this notice to solicit comments from 
interested persons on 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 will amend NSCC's rules regarding 
membership standards to allow for consideration of applicants' and 
participants' regulatory history.

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 NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    NSCC believes that when a person with significant managerial 
responsibility for a firm or who otherwise has significant ability to 
influence the policies and actions of a firm has a record that fails to 
reflect a history of good character, citizenship, commercial honor, and 
a respect for the letter and intent of the legal and regulatory 
structure in which the firm operates, there is an increased likelihood 
that the firm will present additional risk to NSCC's participants. 
Currently NSCC's rules provide that it will establish, as deemed 
necessary or appropriate, standards of financial responsibility, 
operational capability, experience, and competence for membership, as 
well as guidelines for the application of membership standards.\3\ The 
purpose of the proposed rule change is to provide definition to the 
bases upon which NSCC may take action to deny an applicant membership 
or to cease to act for a participant by establishing specific 
membership standards for NSCC applicants and participants.\4\
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    \3\ Rule 15 of NSCC's Rules and Procedures.
    \4\ NSCC has taken note of the findings set forth in the April 
15, 1997, memorandum entitled, ``The Joint Regulatory Sales Practice 
Sweep; Heightened Supervisory Procedures,'' which was the product of 
an initiative involving the National Association of Securities 
Dealers, Inc., the New York Stock Exchange, Inc., the Securities and 
Exchange Commission, and the North American Securities 
Administrators Association, Inc.
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    The revised rule will allow NSCC to deny membership to any 
applicant or to cease to act for any participant when a person with 
significant managerial responsibility or with significant ability to 
influence the policies and actions of the applicant or participant 
(through ownership interest, contract, or otherwise), whether or not 
the person

[[Page 10059]]

currently acts as a principal or registered representative, has a 
record that reflects:
    (1) Any felony conviction or plea of guilty or nolo contendere, 
pending felony indictment, information of or other institution of 
felony proceedings, any investment-related \5\ misdemeanor conviction 
or plea of guilty or nolo contendere, or pending investment-related 
misdemeanor;
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    \5\ The term ``investment-related'' pertains but is not limited 
to securities, commodities, banking, insurance, or real estate.
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    (2) A permanent bar or temporary suspension from acting as a 
principal or registered representative or otherwise to be associated 
with or perform designated functions for a firm engaging in an 
investment-related business other than any temporary suspension for 
minor or technical violations;
    (3) Other disciplinary or adverse regulatory or administrative 
actions (except for actions that are both isolated and minor) taken by 
any governmental, regulatory, or self-regulatory body or authority;
    (4) Arbitrations, administrative proceedings, civil actions, or 
other proceedings not resolved in favor of the person except for 
proceedings that are both minor and isolated, including but not limited 
to proceedings ending in settlements involving a payment and 
proceedings that have not yet been adjudicated,\6\ provided however 
that (a) unadjudicated proceedings brought by someone other than a 
regulatory authority shall not by themselves constitute grounds for 
NSCC to deny membership to an applicant or to cease to act for a 
participant and (b) unadjudicated proceedings brought by a regulatory 
authority shall not by themselves constitute grounds to cease to act 
for a participant but may constitute grounds to deny membership to an 
applicant;
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    \6\ The term ``adjudicated'' for purposes of the rule means any 
arbitration, proceeding, or action that has been resolved subject to 
appeal, whether or not the resolution has been stayed pending 
appeal.
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    (5) Multiple customer complaints;
    (6) A termination or permitted resignation after an investigation 
or allegation of sales practice problems or violation of investment-
related statutes, regulations, rules, or industry standards of conduct; 
or
    (7) Being subject to heightened supervision in accordance with 
guidelines or recommendations promulgated by a regulatory authority.
    any action, complaint, or proceeding referred to in the enumerated 
items above that is not taken against a person will nonetheless be 
deemed to be taken against that person if his or her activities are 
cited in whole or in part as being a contributing cause.
    Single instances under items (3) or (4) above may also be 
considered as part of the adverse regulatory history if there exists 
other instances of actions constituting an adverse regulatory history 
or if that single instance indicates that the person has a propensity 
to act in a manner that could cause significant financial cost to the 
applicant or participant. However, no person will be deemed to have an 
adverse regulatory history under items (4) or (5) above due to being 
named in customer complaints or adverse civil proceedings merely 
because of the person's management or ownership position in the 
applicant or participant (as opposed to actually engaging in wrongful 
conduct, including failure to supervise) unless the number of 
complaints or proceedings are disproportionate to the size of the firm.
    The proposed rule will also allow NSCC to deny membership to an 
applicant or to cease to act for a participant if a correspondent of 
the applicant or participant or any entity for which the applicant or 
participant is financially responsible would fail to meet the above 
membership standards but only if the size of the business of the 
correspondent or other entity is significant relative to the capital of 
the applicant or participant.
    NSCC intends to construe the new rule so as to not limit its 
authority to deny membership to, to cease to act for, or to obtain 
further assurances from any applicant or participant in accordance with 
the NSCC's rules and procedures when the circumstances warrant even if 
such circumstances include or consist solely of items that are 
specifically not grounds for such action under the proposed rule. For 
example, any unadjudicated proceeding that could create significant 
financial difficulties for an applicant or participant may be grounds 
for such action even if it would not constitute adverse regulatory 
history as defined in the proposed rule.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \7\ and the rules and 
regulations thereunder because it will clarify the rules of NSCC 
relating to standards required for membership and thereby facilitate 
the prompt and accurate clearance and settlement of securities 
transactions.
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    \7\ 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 impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    NSCC received one comment letter on the proposed rule change.\8\ 
NSCC will notify the Commission of any other written comments it 
receives.
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    \8\ Letter from William C. Alsover, President, Centennial 
Securities Company, to David F. Hoyt, NSCC (November 7, 1997).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Acting

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of NSCC. All 
submissions should

[[Page 10060]]

refer to File No. SR-NSCC-97-13 and should be submitted by March 20, 
1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-5067 Filed 2-26-98; 8:45 am]
BILLING CODE 8010-01-M