[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Notices]
[Pages 4167-4169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-316]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51066; File No. SR-FICC-2005-02]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Application and 
Continuing Membership Standards of the Government Securities Division 
and the Mortgage-Backed Securities Division

January 21, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 7, 2005, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on January 14, 2005, amended 
the proposed rule change described in Items I, II, and III below, which 
items have been prepared primarily by FICC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested parties.
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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

    FICC is seeking to amend the rules of the Government Securities 
Division (``GSD'') and the Mortgage-Backed Securities Division 
(``MBSD'') to: (1) Provide that when an applicant, member, or 
participant becomes subject to an order of statutory disqualification 
or order of similar effect, including an order issued by a non-U.S. 
regulator or examining authority, the FICC Membership and Risk 
Management Committee (``Committee'') shall determine whether such order 
shall be the basis for denial of the membership applicant or 
termination of membership rather than such denial or termination being 
automatic; (2) impose a fine on members and participants that fail to 
notify FICC within two business days of falling out of compliance with 
specified membership standards, including becoming subject to an order 
of statutory disqualification or order of similar effect; and (3) 
require applicants, members, and participants to notify FICC within two 
business days if they become aware of an investigation or similar 
proceeding against them that could lead them to violate a FICC 
membership standard.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    FICC is seeking to amend the application and continuing membership 
standards of the GSD and the MBSD to: (1) Provide that when an 
applicant, member, or participant becomes subject to an order of 
statutory disqualification or order of similar effect, including an 
order issued by a non-U.S. regulator or examining authority, the 
Committee shall determine whether this shall be the basis for denial of 
the membership applicant or termination of membership, rather than such 
denial or termination being automatic; (2) impose a fine on members and 
participants that fail to notify FICC within 2 business days of falling 
out of compliance with specified membership standards, including 
becoming subject to an order of statutory disqualification or order of 
similar effect; and (3) require applicants, members, and participants 
to notify FICC within two business days if they become aware of an 
investigation or similar proceeding against them that could lead them 
to violate a FICC membership standard.
1. Action in Cases of Statutory Disqualification or Orders of Similar 
Effect
    The GSD and MBSD rules currently provide that a membership 
applicant that is subject to an order of statutory disqualification 
under Section 3(a)(39) of the Act or an order of similar effect is not 
eligible for membership.\3\

[[Page 4168]]

Currently, a waiver of this requirement by the Committee is necessary 
in order for FICC to admit such applicant into membership. The 
admission requirements also serve as continuance standards for current 
members and participants. Therefore, if a member or participant becomes 
subject to a statutory disqualification, a waiver must be sought in 
order for membership in FICC to continue.
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    \3\ For example, GSD Rule 3, ``Financial Responsibility and 
Operational Capability Standards,'' Section 1, ``Admissions Criteria 
for Comparison-Only Members,'' provides that an applicant may not be 
subject to an order of statutory disqualification or ``an order of 
similar effect issued by a Federal or State banking authority, or 
other examining authority or regulator.'' Section 3(a)(39) of the 
Act, which sets forth the definition of ``statutory 
disqualification,'' specifically covers orders issued by foreign 
financial regulatory authorities that are the equivalent to 
Commission-issued orders covered by the definition. The statutory 
definition also includes specific references to entities being 
barred from the ``foreign equivalent of a self-regulatory 
organization [or a] foreign or international securities exchange'' 
under ``any substantially equivalent foreign statute or 
regulation.''
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    At the time it was organized as a clearing corporation, the 
Government Securities Clearing Corporation, the predecessor to FICC, 
modeled its rules provisions regarding statutory disqualifications on 
those of other clearing agencies which are now subsidiaries of The 
Depository Trust & Clearing Corporation. The understanding at the time 
was that instances of statutory disqualification were a rare occurrence 
and called into question the entity's ability to meet membership 
requirements or to remain a member in good standing. More recently, 
firms are increasingly becoming subject to statutory disqualification, 
but the reasons for a firm's statutory disqualification may have little 
or no bearing on its ability to become or remain a member in good 
standing.\4\ FICC would retain the ability to deny membership to or 
terminate as a member or participant a firm whose ability to meet 
applicable membership requirements is called into question. However, to 
the extent an order of statutory disqualification does not call this 
into question, FICC does not believe it appropriate for the Committee 
to issue a waiver in order to admit or retain the member.
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    \4\ Of note is that in those situations brought by management 
before the Committee recently, the Commission has permitted the 
entity to continue operating as a registered broker-dealer, and the 
relevant designated examining authority has retained the entity as a 
member. In addition, Rule 19h-1 promulgated pursuant to the Act, 
does not require that self-regulatory organizations automatically 
terminate the membership of entities subject to statutory 
disqualification.
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    The proposed rule change would eliminate the automatic need to 
obtain a waiver in cases where an entity is subject to an order of 
statutory disqualification or order of similar effect but would keep 
such orders as a criterion to be considered for membership or continued 
membership. FICC management would continue to present all instances of 
such orders to the Committee, and the Committee would make all final 
determinations with respect to these entities. In this manner, FICC 
management and the Committee would be able to thoroughly evaluate the 
risks presented by an applicant, member, or participant that becomes 
subject to an order. The proposed rule change would allow the Committee 
to permit FICC to admit or retain members or participants that pose no 
risk to FICC.\5\ In instances where waivers are still required under 
the rules and are granted by the Committee, FICC would promptly notify 
the Commission.
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    \5\ To the extent the Committee determines to admit or retain a 
member despite a statutory disqualification, the Committee will 
still retain all rights it currently has under FICC rules to impose 
limitations or restrictions on such member or participant.
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2. Fines for Failure To Notify FICC for Falling Out of Compliance With 
Membership Criteria
    In addition to the changes above, FICC is proposing to implement a 
fine for those members and participants that do not promptly notify 
FICC of their noncompliance with any membership standard.\6\ The 
membership standards are set forth in GSD Rules 2, ``Members,'' and 3, 
``Financial Responsibility and Operational Capability Standards,'' 
which apply to comparison-only and netting members as applicable, and 
in MBSD clearing rules Article III, ``Participants,'' which apply to 
MBSD clearing participants. For risk management purposes, it is 
important that FICC learn of a member or participant's failure to meet 
a membership standard as soon as possible in order to determine a 
course of action that will best protect FICC. In addition, in some 
instances, such as certain cases where a member or participant becomes 
subject to a statutory disqualification order,\7\ FICC is required to 
promptly notify the Commission. Given the importance of FICC's 
membership standards and the need for FICC to learn of noncompliance as 
soon as possible, FICC is proposing to fine members $1,000 per instance 
of a failure to notify FICC within two business days of the member or 
participant first having knowledge of its falling out of compliance 
with the particular membership standard.\8\ Members and participants 
would be afforded the same due process as is currently available under 
FICC's rules with respect to other types of fines. As with all fines, 
FICC will notify the Commission of all fines that are imposed pursuant 
to this rule change.
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    \6\ The rules of FICC currently require members and participants 
to promptly notify FICC in the event that they are not meeting their 
membership standards.
    \7\ Rule 19h-1 of the Act does not require a notification or 
notice to the Commission in all cases of statutory disqualification.
    \8\ Once FICC is notified of an applicant or member's statutory 
disqualification, it will follow the provisions of Rule 19h-1 of the 
Act.
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    In addition, members and participants that fail to timely notify 
FICC of falling out of compliance with any membership standard would 
automatically be placed on the Watch List and be subject to more 
frequent and thorough monitoring as provided for in GSD Rule 4, 
``Clearing Fund, Watch List, and Loss Allocation,'' Section 3, ``Watch 
List,'' and MBSD Article IV, ``Participants Fund,'' Rule 6, ``Watch 
List.''
3. Notification of Pending Investigations
    The proposed rule change also requires applicants, members, and 
participants to notify FICC within two business days of first having 
knowledge of a pending investigation or similar proceeding or condition 
that could lead them to violate a membership standard. The proposed 
rule change would provide an exception to this requirement in cases 
where disclosure to FICC would cause the applicant, member, or 
participant to violate an applicable law, rule, or regulation.
4. Definitions
    Finally, MBSD is proposing to add two definitions to Article I, 
``Definitions and General Provisions.'' The term ``Associated Person'' 
would be defined to mean, when applied to any ``person,'' any partner, 
officer, or director of such ``person'' or any ``person'' directly or 
indirectly controlling or controlled by such ``person,'' including an 
employee of such ``person.'' The term ``Person'' would mean a 
partnership, Corporation or other organization, entity or individual.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to FICC because it amends FICC's 
membership criteria in a prudent manner. It imposes fines that will 
encourage members and participants to notify FICC promptly of falling 
out of compliance with membership standards, which will

[[Page 4169]]

enable FICC to act quickly to protect itself and its members and 
participants and which will better enable FICC to safeguard the 
securities and funds in its custody or control or for which it is 
responsible.
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    \9\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an E-mail to [email protected]. Please include 
File Number SR-FICC-2005-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-FICC-2005-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be 
available for inspection and copying at the principal office of FICC 
and on FICC's Web site at http://www.ficc.com. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2005-02 and should be submitted on 
or before February 18, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-316 Filed 1-27-05; 8:45 am]
BILLING CODE 8010-01-P