[Federal Register Volume 68, Number 232 (Wednesday, December 3, 2003)]
[Notices]
[Pages 67714-67715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30050]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48846; File No. SR-NSCC-2003-21]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Relating to the 
New Separately Managed Accounts Service

November 26, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 16, 2003, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') 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 on the proposed rule change from interested 
persons.
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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 would add a new Rule 59 to NSCC's Rules to 
establish an information messaging system called the Separately Managed 
Accounts (``SMA'') Service.

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

    The SMA Service will provide a messaging hub for the communication 
of information among sponsors of separately managed accounts and the 
investment managers participating in their programs.\3\ At year-end 
2002, the managed account industry had approximately 2 million accounts 
with approximately $398 billion in assets under management. It is 
estimated to increase to 5.3 million accounts and $930 billion in 
assets under management by 2006.\4\
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    \3\ Separately managed accounts are generally described as 
professionally managed individual investment portfolios offered to 
investors such as high net worth individuals. The investor's assets 
are managed in separate accounts by a sponsor or its custodian that 
typically contracts with multiple investment managers to provide a 
diversified investment strategy for the investor. The investor is 
generally charged an asset-based fee in lieu of commissions and 
other fee arrangements. Information about the separately managed 
account industry is available on the Web site of The Money Market 
Institute (``MMI'') at http://www.moneyinstitute.com. The MMI is the 
national organization for the managed account industry, comprised 
mostly of portfolio management firms and sponsors of investment 
advisory and consulting services.
    \4\ The industry forecasts were developed by the Financial 
Research Corporation with the cooperation of the MMI through 
analysis of data provided by MMI members.
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    Currently, communication of information among sponsors and 
investment managers and other participants in the managed account 
industry is supported by a combination of methods such as multiple 
proprietary vendor and sponsor applications and platforms supplemented 
by faxes, emails, and telephone communication. It was the consensus of 
industry representatives through their participation in the MMI that 
this current operational infrastructure, which depends upon nonstandard 
and manual processing over multiple platforms, could not support the 
projected growth and even at the current levels has resulted in 
excessive processing costs, delays, and errors.
    Accordingly, the MMI commissioned a study of the operational 
interfaces in the separately managed account industry. This study noted 
the lack of standardized protocols and processes and centralized 
connectivity as the major areas of operational concern, and concluded 
that these inefficiencies could be expected to result in errors with an 
adverse economic impact. The authors of the study recommended to the 
MMI that the industry look beyond its current technology and operations 
platforms to seek an industry-wide approach that would allow the SMA 
industry to achieve the type of standardized and centralized processing 
accomplished by the mutual fund industry over the last twenty years.\5\
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    \5\ ``Operational Interfaces in the Separately Managed Account 
Industry,'' Deloitte & Touche, published by The Money Management 
Institute, August 2002. See also, ``2010: A Managed Account Odyssey: 
Projections in the Future of the Managed Account Industry.'' Leonard 
A. Reinhart and Jay N. Whipple III (copyright) 2002 Lockwood 
Financial Services, Inc., also equating the current operational 
infrastructure of the managed account industry to that of the mutual 
fund industry prior to the implementation of NSCC's mutual fund 
services.
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    In response to the operational issues facing the managed account 
industry and recognizing the benefits that NSCC's mutual fund services 
provide to the mutual fund industry, in early 2002 the MMI asked NSCC 
to explore whether NSCC could provide services with similar operational 
benefits to the separately managed accounts industry, with the view of 
increasing operational efficiency and decreasing operational risks 
inherent in the current processing structure. At the request of the 
MMI, NSCC was subsequently invited to work with the MMI's Technology/
Operations Committee and to work with industry representatives to 
create business communications standards for sponsor firms and 
investment managers and to develop a message processing utility that 
would support the standards when published. The initial standards, 
addressing new account set up, account termination, and account 
deposits and withdrawals, were delivered to the industry in late 2002. 
These standardized data elements are available to all vendors, 
sponsors, and managers to use in programming their various 
applications.\6\
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    \6\ The standardized data elements are available on the Web site 
of the MMI at http://www.moneyinstitute.com and NSCC at http://nscc.com.
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    At the invitation of the MMI, NSCC initiated the SMA Service 
project development work to assess the feasibility of offering the SMA 
Service. A prototype of the SMA Service system was made available for 
industry testing and feedback in January 2003. On May 21, 2003, DTCC 
presented the proposed service to MMI's Board of Governors and the 
presentation was well received. On September 4, 2003, NSCC's Board of 
Directors approved the proposed rule change.
    Pending approval of the Commission, the SMA Service will be 
available for use by members, fund members, and data services only 
members. As in the case with all NSCC products, NSCC will allow vendors 
to build interfaces to

[[Page 67715]]

NSCC's SMA Service on behalf of NSCC members.
    Messages transmitted through the SMA Service will consist of 
information such as account opening data (e.g. account profile 
notifications, verifications of funding amounts, and authorizations to 
trade) and account maintenance data (e.g., funding deposit amount 
notifications, funding withdrawals, and account termination 
notifications). NSCC will not be responsible for the content of the 
messages transmitted through the SMA Service nor will NSCC assume any 
liability for the completeness or accuracy of the information 
transmitted.
    The SMA Service will provide centralized platform for the 
communication of the basic account opening and maintenance data among 
sponsors and investment managers. Because the service does not involve 
money settlement or securities clearance or netting through the 
facilities of NSCC, it will be a nonguaranteed service of NSCC.\7\
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    \7\ NSCC offers certain guaranteed services through its CNS 
system, in which NSCC as a central counterparty provides settlement 
related guarantees regarding certain trades cleared and netted at 
NSCC. NSCC also offers nonguaranteed services, such as NSCC's Mutual 
Fund and Insurance Processing Services, in which members do not 
receive the protections of an NSCC guarantee. Some of NSCC's 
nonguaranteed services entail settlement of funds through NSCC (e.g. 
NSCC's FundSERVE[reg] service); other nonguaranteed 
services involve the communication of information only without 
settlement of transactions or funds through the facilities of NSCC 
(e.g., NSCC's Profile service in NSCC's Mutual Fund Services). The 
SMA Service a nonguaranteed service limited to the communication of 
information only and does not involve settlement of securities 
transactions or funds through the facilities of NSCC.
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    Fees for the use of the SMA Service will be the subject of a 
separate rule filing.
    Establishing the SMA Service at NSCC will facilitate the 
transmission of standardized information for separately managed 
accounts products on a centralized communications platform. 
Standardization and automation on these products can be expected to 
reduce processing errors and delays that are typically associated with 
manual processes or the use of multiple platforms and methods to 
transmit information. This fosters cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions and furthers the protections of investors and the public 
interest. The proposed rule change is therefore consistent with the 
provisions of the Act and the rules and regulations thereunder.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe the proposed rule change will have an impact 
on or impose a burden on competition.

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

    No written comments relating to the proposed rule change have been 
solicited or received. NSCC will notify the Commission of any written 
comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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 the 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 NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NSCC-2003-21. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street NW., Washington, DC 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of NSCC and on NSCC's Web site at http://www.nscc.com/legal/. All submissions should refer to the File No. SR-NSCC-2003-21 
and should be submitted by December 24, 2003.

    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. 03-30050 Filed 12-2-03; 8:45 am]
BILLING CODE 8010-01-M