[Federal Register Volume 73, Number 140 (Monday, July 21, 2008)]
[Notices]
[Pages 42396-42397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-16604]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58157; File No. SR-DTC-2007-05]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to Harmonizing Fines 
With the National Securities Clearing Corporation and the Fixed Income 
Clearing Corporation

July 15, 2008.

I. Introduction

    On May 15, 2007, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') and on December 
10, 2007, amended the proposed rule change pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'').\1\ On April 15, 2008, 
the Commission published notice of the proposed rule change to solicit 
comments from interested parties.\2\ The Commission received no comment 
letters in response to the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 57665 (Apr. 15, 2008), 
73 FR 21675.
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II. Description

    This filing will conform DTC's fine structure relating to 
participants not providing financial information in a timely manner to 
similar fine structures of DTC's clearing agency affiliates, the 
National Securities Clearing Corporation (``NSCC'') and the Fixed 
Income Clearing Corporation (``FICC'').\3\
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    \3\ Securities Exchange Act Release Nos. 57666 (Apr. 15, 2008), 
73 FR 21675 [SR-FICC-2007-05] and 57667 (Apr. 15, 2008) [SR-NSCC-
2007-07].
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    DTC's rules (a) require participants to submit certain financial, 
regulatory, and other information within certain time frames and (b) 
enable DTC to levy fines against participants for violations of its 
rules. However, DTC's rules do not explicitly set forth the amount of 
the fine with respect to failure to submit this information. As part of 
the ongoing effort to harmonize its rules with those of its clearing 
agency affiliates, DTC is proposing to adopt FICC's fine schedule for 
such violations.\4\
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    \4\ The three clearing agencies do not view the proposed rule 
changes as fee reductions because they never intended to charge a 
common member two or three times for a single violation that trips 
another clearing agency's rules on the same matter.
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1. Fines for Late Submissions

    If the participant's late submission violates the rules of more 
than one DTC-affiliated clearing agency (which includes DTC, NSCC, and 
FICC), the fine amount will be divided equally among those clearing 
agencies.\5\ When the member is a DTC participant and a member of FICC 
or NSCC, DTC will collect the fine and allocate the amount equally 
among other clearing agencies, as appropriate. If the member is not a 
DTC participant but is a member of NSCC and FICC, NSCC will collect the 
fine and allocate the appropriate portion to FICC.
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    \5\ For example, assume that Firm A is a participant of DTC, 
FICC, and NSCC and is required to submit its annual audited 
financial statement within a certain time frame. If participant A is 
late in its submission of the statement (and this is Firm A's first 
violation), Firm A will be fined $300 total and would owe $100 to 
DTC, $100 to FICC, and $100 to NSCC.
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2. Fines Relating to Continuance Standards

    DTC Rule 2 sets forth the basic standards for the admission of DTC 
participants. The rule states that the admission of a participant is 
subject to an applicant's demonstration that it meets reasonable 
standards of financial responsibility, operational capability, and 
character. Rule 2 also requires DTC participants to demonstrate that 
these standards are met on an ongoing basis. Each applicant, upon 
approval of its application for DTC participation, signs a letter of 
representation that outlines the nature of the applicant's business, 
its DTC settlement projections, and its financial condition at the time 
of the approval and that requires the applicant to affirm that such 
representations are accurate. Moreover, the participant

[[Page 42397]]

letter acknowledges in the letter or representation its obligation to 
promptly notify DTC whenever there is any anticipated change in the 
representations given.
    Under Rule 10, if a participant fails to continue to adhere to 
these standards, then DTC, based on its judgment, may at any time cease 
to act for the participant with respect to a particular transaction, 
particular transactions, transactions generally, or a program and may 
terminate a participant's right to act as a Settling Bank. Both Rule 2 
and Rule 10 give DTC the discretion to admit participants or continue 
to act for them on a temporary or other conditional basis.
    In order to harmonize the rules of DTC with those of its clearing 
agency affiliates, DTC will add an additional consequence in this 
regard whereby a participant will be fined $1,000 if it fails to notify 
DTC of its non-compliance with any general continuance standard for DTC 
participation within two business days.
    In addition, DTC will add a provision to its fine schedule that 
would impose a fine in the amount of $5,000 if a participant fails to 
notify DTC of a ``material change.'' A ``material change'' would 
include events such as a merger or acquisition involving the 
participant, a change in corporate form, a name change, a material 
change in ownership, control or management, and participation as a 
defendant in litigation which could reasonably be anticipated to have a 
direct negative impact on the participant's financial condition or 
ability to conduct its business. The new provision provides that the 
notification must be provided 90 calendar days prior to the effective 
date of such event unless the participant demonstrates that it could 
not have reasonably have given notice within that timeframe.
    With respect to both $1,000 and $5,000 fines mentioned above, DTC 
will add an additional provision that if the participant's failure to 
provide notice of such material change applies to more than one DTC-
affiliate clearing agency, the fine amount will be divided equally 
among the clearing agencies. This is the same approach being adopted 
above with respect to fines for failure to timely provide requisite 
financial and other information. When the member is a DTC participant 
and a member of FICC or NSCC, DTC will collect the fine and allocate 
the amount equally among other clearing agencies, as appropriate. If 
the member is not a DTC participant but is a member of NSCC and FICC, 
NSCC will collect the fine and allocate the appropriate portion to 
FICC.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a registered clearing agency. In particular, 
the Commission believes the proposal is consistent with the 
requirements of Section 17A(b)(3)(F),\6\ which, among other things, 
requires that the rules of a clearing agency are designed to remove 
impediments to and perfect the mechanisms of a national system for the 
prompt and accurate clearance and settlement of securities transactions 
and with the requirements of Section 17A(b)(3)(H) \7\ which, among 
other things, requires that the rules of a clearing agency provide a 
fair procedure with respect to the disciplining of participants and the 
denial of participation to any person seeking to be a participant. The 
Commission finds that the proposed rule change, which restructures and 
harmonizes DTC's fines with those of NSCC and FICC, is consistent with 
those statutory obligations.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1(b)(3)(H).
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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 Section 17A of the Act \8\ and the rules and regulations 
thereunder. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and capital 
formation.\9\
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    \8\ 15 U.S.C. 78q-1.
    \9\ 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2007-05), as amended, be 
and hereby is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16604 Filed 7-18-08; 8:45 am]
BILLING CODE 8010-01-P