[Federal Register Volume 65, Number 230 (Wednesday, November 29, 2000)]
[Notices]
[Pages 71182-71183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30373]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43606; File No. SR-NSCC-00-05]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Accelerated Approval of a Proposed Rule 
Change Relating to Processing Mutual Fund Services

November 21, 2000.
    On April 7, 2000, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-00-05) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and on April 19, 2000, and May 8, 2000, amended the 
proposed rule change to modify its rules to allow additional types of 
investment products to be processed through NSCC's Mutual Fund 
Services. Notice of the proposal was published in the Federal Register 
on October 23, 2000. \2\ Two comment letters were received from one 
commenter. \3\ For the reasons discussed below, the Commission is 
granting accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 43447 (October 16, 
2000), 65 FR 63278 (October 23, 2000).
    \3\ Letters from Harold H. Morley, Chairman and Chief Executive 
Officer, Morley Financial Services, Inc., to Jonathan G. Katz, 
Secretary, Commission (May 10, 2000); Joan K. Hall, Senior Vice 
President and Director, Morley Financial Services, Inc., to Jonathan 
G. Katz, Secretary, Commission (August 15, 2000).
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I. Description

    Several NSCC participants who utilize NSCC's Defined Contribution 
Clearance and Settlement Service of NSCC's Mutual Fund Services have 
requested that NSCC permit additional types of investment products 
regulated under state insurance laws or federal or state banking laws 
to be eligible for processing through NSCC's Mutual Fund Services. 
Examples of such investment products include stable value funds, 
separate account group guaranteed investment contracts (which are 
regulated as group annuities), and bank collective investment trusts.
    To accommodate their participants' request, NSCC will create a new 
class of securities defined as Investment Funds. Pursuant to the rule 
filing NSCC will: (1) Add Investment Funds as a class of securities 
eligible for processing through Mutual Fund Services; (2) make 
corresponding changes to the rules relating to the entities eligible to 
process Investment Funds transactions through the Mutual Fund Services; 
(3) establish standards of financial responsibility and operational 
capability for those participants wishing to process Investment Funds 
through NSCC's Mutual Fund Services; and (4) make conforming changes to 
the existing rules where necessary.
    Investment Funds will be defined as any fund or investment entity 
that is subject to regulation under applicable federal and state 
banking and/or insurance laws. Investment Funds will include such 
things as bank collective investment trusts, separate account 
guaranteed investment contracts, and other similar pooled investment 
vehicles. All Invested Fund products will be subject to regulation 
under federal or state banking laws or state insurance laws. Only 
Investment Funds that have been assigned a CUSIP number would be 
eligible for processing through NSCC's Mutual Fund Services.
    For the purpose of processing transactions in Investment Funds, 
NSCC also will expand the types of entities that may qualify as a Fund 
Member under Rule 51 of NSCC's Rules so that insurance companies, 
banks, and trust companies as packagers and sponsors of such funds may 
apply to become a Fund Member. As with other entities seeking to become 
Fund Members, any of these new eligible entities seeking to process 
Investment Fund transactions through NSCC's Mutual Fund Services will 
be required to enter into an agreement with NSCC that sets forth the 
entity's rights and obligations as a Fund Member, including that it 
will limit its use of NSCC's services to use of Mutual Fund Services 
(or Insurance Processing Services, as the case may be), it will comply 
with NSCC's rules and procedures, and will permit NSCC to inspect its 
books and records. Moreover, as with all other transactions in Mutual 
Fund Services, transactions involving Investment Funds will not be 
guaranteed by NSCC. As currently provided in NSCC's Rules, if one side 
fails to pay for a transaction, the contra side will be required to 
return to NSCC any funds received from NSCC. \4\
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    \4\ Addendum D of NSCC's Rules and Procedures.
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    Under the rule change, NSCC's Rule 2 will be amended to permit an 
insurance company to become a mutual fund member or insurance services 
member in order to transmit Investment Fund Purchases, exchanges, and 
redemption orders to a fund member and to engage in other customer-
related transactions with a funds member. In addition to the standards 
of financial responsibility and operational capability set forth in 
Addenda B and I of NSCC's Rules currently applicable to Mutual Fund 
Service members, insurance services members, and Fund Members, entities 
seeking to process Investment Fund transactions through Mutual Fund 
Services will be required to meet the rating and capital requirements 
set forth in new Addendum V, Financial Standards for Applicants and 
participants Processing investment Funds Transactions Through Mutual 
Fund Services.
    Since NSCC will make a new category of securities eligible for 
Mutual Fund Services processing, the rule change will also make 
conforming changes to certain existing rules in order to include a 
reference to Investment Funds as applicable.
    NSCC believes the proposed rule change is consistent with Section 
17A of the Act because it will make a new class of products eligible 
for processing through NSCC's Mutual Fund Services and thereby should 
facilitate the prompt and accurate clearance and settlement of these 
transactions in these products.

II. Discussion

    Section 17A(b)(3)(F) \5\ 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 and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
primary purpose of NSCC's rule change is to expand the types of 
products processed by and the types of entities processing through 
NSCC's Mutual Fund Services that should facilitate the prompt and 
accurate clearance and settlement of transactions in these instruments. 
Investment products such as Investment Funds are typically included in 
defined contribution retirement plans and thus their inclusion in 
Mutual Fund Services should benefit third party administrator (``TPA'') 
members and other participants by standardizing the processing of these 
Investment Funds in the same manner as mutual funds are now processed 
in NSCC's Mutual Fund

[[Page 71183]]

Services. Standardized processing should permit defined contribution 
plan administrators to provide Investment Fund products to defined 
contribution plan clients without the proprietary systems or manual 
processing infrastructure and related costs necessitated by the current 
processing methods.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition to the fact that transactions in Mutual Fund Services 
are not guaranteed, the rule change establishes standards of financial 
responsibility and operational capabilities for entities processing 
Investment Funds through NSCC's Mutual Fund Services. This should help 
NSCC assure the safeguarding of funds and securities which are in 
NSCC's control or for which it is responsible. Accordingly, the 
Commission finds that the rule change is consistent with NSCC's 
obligations under the Act.
    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing. The Commission finds good 
cause for approving the proposed rule change prior to the thirtieth day 
after publication because accelerated approval will permit NSCC to 
expand the types of products processed by and the types of entities 
processing through NSCC's Mutual Fund Services, thereby extending the 
benefits of the Mutual Fund Services as soon as practicable.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-00-05) be and hereby is 
approved. For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30373 Filed 11-28-00; 8:45 am]
BILLING CODE 8010-01-M