[Federal Register Volume 73, Number 137 (Wednesday, July 16, 2008)]
[Notices]
[Pages 40893-40895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-16230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58128; File No. SR-FICC-2007-04]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Applicant and 
Member Disqualification Criteria

July 9, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 30, 2007, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change and on 
February 7, 2008, and March 19, 2008, amended the proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared substantially by FICC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 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 amend FICC's Government Securities 
Division's (``GSD'') and Mortgage Backed Securities Division's 
(``MBSD'') (collectively, ``Divisions'') rules concerning applicant and 
member disqualification criteria.

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 such statements.

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

    The purpose of this filing is for FICC to amend GSD's and MBSD's 
rules concerning applicant and member disqualification criteria in 
order to make the Divisions' rules consistent with the rules of FICC's 
affiliated clearing agencies, the National Securities Clearing 
Corporation (``NSCC'') and The Depository Trust Company (``DTC''). The 
proposed rule changes cover the following areas:
1. Management Consideration of Disqualification Criteria \2\
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    \2\ GSD Rule 2A, Section 3(d).
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    GSD's membership qualification rules currently require FICC's Board 
of Directors to determine whether the presence of certain negative 
factors affecting a membership application should constitute the basis 
for denying membership to such applicant. Information that might 
disqualify an applicant (referred to in GSD's rules as 
``disqualification criteria'') include the applicant being subject to a 
statutory disqualification \3\ or conviction of various crimes such as 
bribery. The disqualification criteria in GSD's rules similarly apply 
as standards for continued membership.
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    \3\ See 15 U.S.C. 78c(a)(39) (definition of ``statutory 
disqualification'').
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    FICC proposes to change GSD's disqualification criteria to allow 
FICC's management, instead of FICC's Board, to determine whether the 
presence of a potential disqualifier should prevent an entity from 
obtaining or continuing membership in GSD. Such change would conform to 
the rules of MBSD, DTC, and NSCC, which allow such determinations to be 
made by management.
2. Associated and Affiliated Persons
    GSD's and MBSD's respective rules also apply certain applicant and

[[Page 40894]]

member disqualification criteria to persons ``associated'' (in GSD's 
rules) or ``affiliated'' (in MBSD's rules) with the applicant or member 
firm. FICC states that it is not always practical for it to ascertain 
which individuals are ``associated'' or ``affiliated'' with a 
particular entity and therefore proposes to amend these rules to 
conform them to its internal surveillance procedures and make them 
consistent across both Divisions. Accordingly, references to persons 
``associated'' or ``affiliated'' with the member or applicant would be 
changed to references to ``controlling management,'' which will include 
those officers of the applicant or member that are currently screened 
by FICC's Risk Management department pursuant to internal 
procedures.\4\ In addition, FICC proposes to add language to its rules 
that would require applicants to inform FICC as to any member of its 
controlling management that is or becomes subject to statutory 
disqualification.
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    \4\ Proposed GSD Rule 1 and MBSD Article I (``The term 
`controlling management' shall mean the Chief Executive Officer, the 
Chief Financial Officer, and the Chief Operations Officer, or their 
equivalents, of an applicant of Participant.'').
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3. Monitoring of Objective Disqualification Criteria
    Under the proposal, GSD's disqualification criteria would be 
amended to reflect an approach that such criteria should be objectively 
and practically monitored. Specifically, FICC proposes to delete one 
disqualification criterion that refers to an applicant being subject to 
``closer than normal'' surveillance by a regulatory body. FICC states 
that this event might not be reported in a regulatory background check.
    In addition, MBSD's rules currently contain only two criteria that 
may be the basis for denial of a membership application, including: (i) 
An applicant's subjection to a statutory disqualification or similar 
order by another examining authority and (ii) an applicant or an 
associated person of the applicant making a misstatement of a material 
fact in connection with its membership application or thereafter. MBSD 
proposes to add GSD's remaining disqualification criteria, which would 
result in the Divisions' having identical disqualification criteria.
    Finally, FICC proposes adding a provision to both Divisions' rules 
that would clarify FICC's right to deny membership to an applicant or 
member if FICC learns of any factor or circumstance that might impact 
the suitability of that particular applicant or member as a 
participant.
4. Additional Changes
    FICC proposes to make the following changes to provide additional 
uniformity among the Divisions' rules, NSCC, and DTC:
     Adding to both Divisions' disqualification criteria 
violations of the Investment Company Act and Investment Advisers 
Act,\5\ since those statutes apply to their current membership base.
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    \5\ 15 U.S.C. 80a-1 et seq. and 15 U.S.C. 80b-1 et seq., 
respectively.
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     Amending GSD's definition of ``self-regulatory 
organization'' to include those entities that are foreign equivalents. 
The same definition for ``self-regulatory organization'' would be added 
to MBSD's rules.
     Removing the word ``willful'' from both Divisions' 
disqualification criteria concerning an applicant's or an applicant's 
controlling management's violation of the specified federal statutes or 
any rule or regulation promulgated thereunder. FICC believes that a 
violation of these provisions, whether or not willful, should be 
considered as a potential disqualification criterion.
     Deleting references in GSD's rules to Section 153 of 
Chapters 25 and 47 of Title 18 of the United States Code (``Code'') 
because the crimes covered by these statutes (i.e., embezzlement, 
forgery, false statements, etc.) are captured by the current 
disqualification criteria. References to those portions of the Code 
that deal with mail and wire fraud (Sections 1341, 1342 and 1343) would 
remain. This provision, as proposed, would also be added to MBSD's 
rules.
    Conforming changes would be made to the cease to act provisions of 
GSD's rules (Rule 21, ``Restrictions on Access to Services'') in order 
to ensure consistency within the rules and across the Divisions.
    FICC states that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder because they provide consistency and 
transparency with respect to the applicant and member disqualification 
criteria in the GSD and MBSD rules, thereby promoting the prompt and 
accurate clearance and settlement of securities transactions.
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    \6\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC believes that the proposed rule change does not 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

    FICC has not solicited or received written comments relating to the 
proposed rule change. FICC will notify the Commission of any written 
comments it receives.

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 No. SR-FICC-2007-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-FICC-2007-04. 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

[[Page 40895]]

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 Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at FICC's principal office and on FICC's Web 
site at <http://ficc.com/gov/gov.docs.jsp?NS-query=#rf>. 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 No. SR-FICC-2007-04 and should be 
submitted on or before August 6, 2008.

    For the Commission by the Division of Trading and Markets 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16230 Filed 7-15-08; 8:45 am]
BILLING CODE 8010-01-P