[Federal Register Volume 67, Number 232 (Tuesday, December 3, 2002)]
[Notices]
[Pages 72012-72014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30533]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46903; File No. SR-NSCC-2002-06]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Relating 
to the Imposition of Fines

November 25, 2002.

I. Introduction

    On July 26, 2002, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change File No. SR-NSCC-2002-06 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and on August 21, 2002, amended the proposed rule change. Notice of 
the proposal was published in the Federal Register on August 27, 
2002.\2\ No comment letters were received. 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. 46385 (August 20, 2002), 
67 FR 55051.
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II. Description

    NSCC's rule change amends Addendum P of its Rules and Procedures to 
clarify existing fines and to impose new fines upon its members. The 
rule change specifically sets forth actions or inactions which will 
result in NSCC imposing fines.\3\
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    \3\ Exhibit 1 to this order sets forth NSCC's revised fine 
schedule.
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    NSCC's Rule 48 allows NSCC to impose fines upon its members for any 
error, delay, or other conduct that is determined to be detrimental to 
the operations of NSCC. Historically, NSCC has imposed fines upon 
members for failures to settle in a timely manner end of day settlement 
balances, for late settlement acknowledgements, and for late payments 
of clearing fund deposits.
    NSCC's Rule 15 permits NSCC to request that members furnish to NSCC 
such adequate assurances of their financial responsibility and 
operational capability as NSCC may at any time deem necessary. Pursuant 
to this rule

[[Page 72013]]

and in furtherance of NSCC's responsibility, NSCC periodically requests 
that its members provide financial and operational information about 
their business. While many members comply with these requests, some do 
not. The lack of this information could create risk for NSCC. To 
address this concern, NSCC will fine members who fail to timely respond 
to requests for such information.
    In connection with imposing fines for failure to timely provide 
requested financial and operational information, NSCC is establishing a 
list of information items, such as financial statements and disaster 
recovery procedures, that its members must submit on an ongoing basis 
so that its members will know exactly what information must be provided 
and that failure to provide the information will result in a fine being 
imposed. NSCC will begin assessing fines from the approval of this rule 
change. For a period of one year from that date, members that fail to 
timely provide information will be issued one warning letter prior to 
the imposition of a fine. At the conclusion of the one-year period, 
NSCC will discontinue the warning letters prior to fining.\4\
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    \4\ Addendum P, 4.
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    Under NSCC's Rules and Procedures, members have an affirmative duty 
to notify NSCC on an ongoing basis of changes in certain internal 
conditions that may cause NSCC to reevaluate the member's continued 
participation. Addendum T. NSCC will fine members that fail to meet 
these notification requirements. No reminder or warning letter will be 
sent in this context.\5\
    Members will continue to have the ability to contest fines, as 
currently provided for within NSCC's Rules and Procedures. Fines 
imposed against settling members will be collected through a 
miscellaneous charge in the member's monthly statement of charges. 
Fines imposed against settling bank members may be collected through an 
adjustment to the settling bank's end-of-day settlement balance, 
through a separate fed wire payment, or through a check made payable to 
NSCC. Alternatively, if the settling bank maintains additional 
memberships with NSCC, the fine may be collected through a settling 
account under its additional membership.
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    \5\ Addendum P, 2.
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    In conjunction with the above, NSCC is making a technical 
correction to Rule 48, Disciplinary Proceedings. In Release No. 34-
36866, the Commission approved an NSCC rule change to accommodate same-
day funds settlement (``SDFS'').\6\ That rule change, in part, created 
Addendum P that set SDFS Failure to Settle fines in the range of $100 
to $10,000. At that time, Section 1 of Rule 48 should have been 
modified to change the maximum fine for any single offense from $5,000 
to $10,000, and a reference to settling bank only members should also 
have been included. Accordingly, those changes are now being made.
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    \6\ Securities Exchange Act Release No. 36866 (February 27, 
1996), 61 FR 7288 [File No. NSCC-96-03] (order modifying NSCC's 
Rules and Procedures to accommodate same-day funds settlement).
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    NSCC believes that the proposed rule change is consistent with 
Section 17A of the Act and the rules and regulations thereunder because 
it ensures that NSCC is able to safeguard securities and funds in 
NSCC's possession.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed 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.\7\ The Commission finds that the proposed 
rule change allowing NSCC to fine members that fail to timely provide 
requested financial and operational information or who fail to notify 
NSCC of changes in conditions that may cause NSCC to reevaluate the 
member's continued participation should improve NSCC's ability to 
monitor its members. Accordingly, the Commission believes the proposed 
rule change is consistent with NSCC's obligation to assure the 
safeguarding of securities and funds that are in its custody or control 
or for which it is responsible.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 with the requirements of Section 17A of the Act and the 
rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-2002-06) 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.
Exhibit 1: Text of NSCC'S Revised Rules and Procedures

Addendum P

Fine Schedule

(1) SDFS Failure-to-Settle and Late Acknowledgment Fines

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                                                       First          Second                          Fourth
                    Net debit                        occasion        occasion     Third occasion     occasion
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$0-100,000......................................            $100            $200            $500          $1,000
$100,000-900,000................................             300             600           1,500           3,000
$900,000-1,700,000..............................             600           1,200           3,000           6,000
$1,700,000-2,500,000............................             900           1,800           4,500           9,000
$2,500,000-up...................................           1,000           2,000           5,000          10,000
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    Notes: (a) In addition to the fine, interest is charged to the 
Member, or the Settling Bank Only Member, that failed to settle for 
the cost of borrowing to complete settlement.
    (b) The number of occasions will be determined over a moving 
three-month period. A Member, or a Settling Bank Only Member, that 
exceeds four failure-to-settle occasions in a three-month period 
will be subject to further fees and/or other actions at the 
Corporation's discretion after consultation between the Member, or 
the Settling Bank Only Member, and the Corporation.
    (c) If the Corporation determines that it had significantly 
affected a Member's, or a Settling Bank Only Member's, ability to 
settle (because of a Corporation system delay, for example), the 
Corporation may determine to waive failure-to-settle fines for that 
occurrence.

    (2) Failure to notify and supply required data as provided for 
under these Rules & Procedures (other than as provided in items one, 
three and four of this addendum): Each single offense, $5,000.00 fine.

[[Page 72014]]

(3) Late Satisfaction of Clearing Fund Deficiency Call \1\
     
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    \1\ 1 The number of occasions is determined over a moving three-
month period beginning with the first occasion.

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                                                                                                      Fourth
                     Amount                       First occasion      Second      Third occasion   occasion (or
                                                                     occasion                        greater)
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Up to $100 M....................................             (*)            $100            $200            $500
$100 M to $900 M................................             (*)             300             600           1,500
$900 M to $1.7 MM...............................             (*)             600           1,200           3,000
$1.7 MM to $2.5 MM..............................             (*)             900           1,800           4,500
Greater than $2.5 MM............................             (*)           1,000           2,000          5,000
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*First occasions result in a warning letter issued to the Member.

(4) Requests for information \2\
     
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    \2\ Fines to be levied for offenses within a moving twelve-month 
period beginning with the first occasion.

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   Request for information (failure to timely                         Second                          Fourth
                    provide)                      First occasion     occasion     Third occasion     occasion
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Financial Statements:
    Audited Financial Statements for Member or               (*)            $300            $600          $1,500
     Parent.....................................
    Monthly and/or Quarterly Regulatory Filings.             (*)             300             600           1,500
    Monthly and/or Quarterly Financial                       (*)             300             600           1,500
     Statements.................................
    Proforma Financial Statements...............             (*)             300             600           1,500
    Any Financial Computations, Consolidating                (*)             300             600           1,500
     Worksheets or Internal Statements, Upon
     Special Request............................
Risk Questionnaires/Profiles:
    Questionnaires..............................             (*)             150             300             750
    Profiles....................................             (*)             150             300             750
    Risk Management Policies and Procedures.....             (*)             150             300             750
    Disaster Recovery Procedures................             (*)             150             300            750
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*First occasions result in a warning letter issued to the Member. Warning Letters for first occasion violations
  will be discontinued one year after implementation of this schedule, at which time each violation will be
  subject to imposition of a fine.

[FR Doc. 02-30533 Filed 12-2-02; 8:45 am]
BILLING CODE 8010-01-P