[Federal Register Volume 63, Number 136 (Thursday, July 16, 1998)]
[Notices]
[Pages 38446-38447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18907]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40185; File No. SR-NSCC-97-13]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to Changes 
in Membership Standards

July 9, 1998.
    On October 30, 1997, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on December 31, 1998, amended a proposed rule 
change (File No. SR-NSCC-97-13) pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 38447]]

of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on February 27, 1998.\2\ One comment letter was 
received.\3\ 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. 39693 (February 23, 
1998), 63 FR 10058.
    \3\ Letter from William C. Alsover, President, Centennial 
Securities Company, to David F. Hoyt, NSCC (November 7, 1997).
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I. Description

    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. \4\ The 
purpose of the rule change is to establish specific standards under 
which NSCC may deny an applicant membership or to cease to act for a 
participant.\5\
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    \4\ Rule 15 of NSCC's Rules and Procedures.
    \5\ 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 if a person who has 
either significant managerial responsibility or significant ability to 
influence the policies and actions of the applicant or participant 
(through ownership interest, contract, or otherwise), whether or not 
the person currently acts as a principal or registered representative, 
has a record that reflects any adverse history as enumerated in the 
rule. The types of adverse history enumerated in the rule include 
felony and misdemeanor proceedings and convictions; certain 
disciplinary, regulatory, or administrative proceedings and actions; 
arbitration or civil actions; multiple customer complaints; termination 
or permitted resignation after investigation or allegation of sales 
practice problems, violation of rules, regulation, laws, or standards 
of conduct; or being subject to heightened supervision.
    Any action, complaint, or proceeding referred to in the rule 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. However, no person will be deemed 
to have an adverse regulatory history due to being named in customer 
complaints or adverse civil proceedings merely because of the persons's 
management or ownership position in the applicant or participant unless 
the number of complaints or proceedings are disproportionate to the 
size of the firm.
    The rule change 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. However this provision of the rule will apply 
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 has informed the Commission that it intends to construe the new 
rule in a manner which will not limit its authority under its rules to 
deny membership to, to cease to act for, or to obtain further 
assurances from any applicant or participant when the circumstances 
warrant even if the circumstances include or consist solely of items 
that are not specific grounds for such action under the rule change.

II. Comment Letters

    The Commission received one comment letter in response to the 
proposed rule change (supra note 3). The commenter supported the rule 
change but believed an applicant or participant should be able to 
appeal a decision to deny membership.

III. Discussion

    Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible. The Commission believes that the proposed rule 
change is consistent with NSCC's obligations under Section 17A(b)(3)(F) 
because it should enable NSCC to better manage its risk exposure by 
specifically authorizing NSCC to consider applicant's and participants' 
regulatory history. An adverse regulatory history can indicate that an 
applicant would or a participant does present an unacceptably high risk 
to NSCC and its participants.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(H) of the Act \7\ also requires that the rules of 
the clearing agency provide a fair procedure with respect to the denial 
of participation and the prohibition or limitation by the clearing 
agency of any person with respect to access to services offered by the 
clearing agency. The Commission believes that the proposed rule change 
is consistent with NSCC's obligations under Section 17A(b)(3)(H) 
because it defines the specific bases upon which NSCC may deny 
membership or cease to act for a participant.
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    \7\ 15 U.S.C. 78q-1(b)(3)(H).
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    In response to the issue of whether an applicant can appeal a 
denial of its membership application, the Commission notes that Rule 2 
of NSCC's Rules and Procedures currently provides a hearing process for 
any applicant that is deemed to not meet membership requirements before 
the applicant is denied membership.

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-97-13) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12)..
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18907 Filed 7-15-98; 8:45 am]
BILLING CODE 8010-01-M