[Federal Register Volume 76, Number 190 (Friday, September 30, 2011)]
[Notices]
[Pages 60950-60952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-25195]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65401; File No. SR-NSCC-2011-07]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change To Amend Rules Relating to the Settlement 
Timing of Partial Transfers Which Include Mutual Fund Assets Through 
NSCC's Automated Customer Account Transfer Service

September 26, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on September 12, 2011, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared primarily by NSCC.\3\ The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The text of the proposed rule change is attached as Exhibit 
5 to NSCC's filing, which is available at http://www.dtcc.com/downloads/legal/rule_filings/2011/nscc/2011-07.pdf.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The purpose of this proposed rule change is to amend NSCC's rules 
regarding an adjustment to the settlement timing of partial transfers 
of mutual fund assets \4\ through NSCC's Automated Customer Account 
Transfer Service.
---------------------------------------------------------------------------

    \4\ For purposes of this rule filing, the term ``mutual fund 
assets'' means Fund/Serv Eligible Assets, as that term is defined 
under Rule 1 of NSCC's Rules and Procedures. Pursuant to Rule 3, 
Section 1(c) of NSCC's Rules, a Fund/Serv Eligible Fund must be 
assigned a CUSIP number, and may only be: (i) An investment company 
regulated under the Investment Company Act of 1940; (ii) a fund or 
other pooled investment entity that is subject to regulation under 
applicable federal and state banking and/or insurance law; or (iii) 
a fund or other pooled investment entity subject to regulation under 
other applicable law which meets criteria established by NSCC from 
time to time.
---------------------------------------------------------------------------

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 these 
statements.\5\
---------------------------------------------------------------------------

    \5\ The Commission has modified the text of the summaries 
prepared by NSCC.
---------------------------------------------------------------------------

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

    Since its inception in 1985, NSCC's Automated Account Transfer 
System (``ACATS'') \6\ has provided NSCC members with an efficient 
automated means for the prompt transfer of customer accounts between 
members. NSCC, in consultation with the industry,\7\ is proposing to 
adjust the processing schedule related to ACATS in order to reduce the 
risk associated with a partial transfer that includes mutual fund 
assets processed through NSCC's Fund/SERV service \8\ and ACATS. 
Specifically, the proposed rule change would revise NSCC rules so that 
the last day a ``Fund Member'' or ``Mutual Fund Processor,'' as 
applicable,\9\ would be permitted to respond to a mutual fund 
reregistration request submitted through Fund/SERV is aligned with the 
ACATS settlement date for the transfer. As more fully described below, 
the proposed rule change should reduce the likelihood that a 
transaction could be responded to by the applicable Fund Member or 
Mutual Fund Processor after settlement occurs, which might otherwise 
create risk and complicate the reversal of incentive charges in the 
event of the default of a party to the transaction.
---------------------------------------------------------------------------

    \6\ Through ACATS, an NSCC member to whom a customer's 
securities account is to be transferred (``Receiving Member'') 
initiates the account transfer process by submitting a Transfer 
Initiation Request (``TIF'') to NSCC. When an NSCC member currently 
holding the customer account accepts a customer account transfer 
(``Delivering Member'') and all other preconditions to the 
processing of an ACATS transfer pursuant to NSCC's Rules have been 
met, NSCC will enter CNS-eligible securities in that account into 
NSCC's CNS Accounting Operation (``CNS'') prior to the settlement 
cycle on the day before settlement date. ``Non-CNS ACATS'' 
transactions will be settled either through or away from NSCC 
depending on the asset type. See Rule 50 (Automated Customer Account 
Transfer Service).
    \7\ NSCC has engaged in extensive consultations with the 
Securities Industry and Financial Markets Association's (``SIFMA'') 
Customer Account Division and Securities Operations Division 
regarding this proposed rule change.
    \8\ NSCC processes and settles mutual fund transactions through 
Fund/SERV. NSCC members can utilize the automated, standardized 
formats and centralized platform of Fund/SERV to complete order 
entry (purchases, exchanges and redemptions) as well as 
confirmations, registrations and money settlement. NSCC's Rule 52 
(Mutual Fund Services).
    \9\ A ``Fund Member'' is an NSCC limited membership type defined 
in NSCC Rule 2 that participates in NSCC's mutual fund services 
acting as: (A) A mutual fund's: (1) Principal underwriter, (2) co-
distributor, (3) sub-distributor; or (B) an entity that is otherwise 
authorized to process transactions on behalf of a mutual fund. A 
``Mutual Fund Processor'' is a member authorized to act on behalf of 
a mutual fund in accordance with NSCC Rule 52.
---------------------------------------------------------------------------

(1) Current Non-CNS ACATS Process
    For non-CNS eligible securities transferred through ACATS (on 
broker-to-broker transfers only), on ACATS settlement date NSCC 
automatically debits the Delivering Member with the market value of the 
assets being transferred through ACATS and credits the Receiving Member 
with the same amount.\10\ The actual transfer of the assets occurs for 
value, so that the original debits and credits associated with the 
transfer are offset. This process provides incentive to the Delivering 
Member to complete delivery in a timely manner and also allows the 
Receiving Member to record the customer position on its records 
regardless of whether the security is actually delivered on settlement 
date. For non-CNS eligible securities transferred through ACATS, NSCC 
does

[[Page 60951]]

not guarantee the transfer debits and credits so if a member fails to 
meet its settlement obligation, reversals of the money incentive debits 
and credits in ACATS may be required as part of NSCC's close-out 
process.
---------------------------------------------------------------------------

    \10\ CNS-eligible securities or non-CNS eligible securities 
refers to securities that are eligible or not eligible, 
respectively, for processing through NSCC's Continuous Net 
Settlement system (``CNS''). CNS system is an automated book-entry 
accounting system for securities transactions that allows each 
security in CNS to be netted to one position per participant, with 
NSCC as its central counterparty. See Rule 11 of NSCC Rules and 
Procedures.
---------------------------------------------------------------------------

(2) ACATS and Fund/SERV Interface and Settlement Timing
    The combined use of ACATS and Fund/SERV for the transfer of 
customer mutual fund assets between brokers (referred to as the 
``ACATS-Fund/SERV Interface'') is a non-CNS, ACATS process where both 
the reregistration of mutual fund securities and associated money 
settlement of ACATS-Fund/SERV transactions are processed through NSCC's 
systems. Through this process, after both parties to the transfer have 
agreed to the transaction details ACATS creates a Fund/SERV record 
containing reregistration instructions and detailed information 
provided by the Delivering Member regarding how the asset is currently 
held. This record is sent to the applicable Fund Member or Mutual Fund 
Processor. On ACATS settlement date, the Delivering Member of the 
mutual fund asset is debited the market value of the asset and the 
Receiving Member is credited the market value of the asset. Any 
acceptance or rejection by the receiving Fund Member/Mutual Fund 
Processor is delivered through NSCC's Fund/SERV and is relayed to 
ACATS. In the case of an acceptance, NSCC offsets any incentive debits 
and credits with reverse entries. However, in the case of a rejection 
or a failure to respond to the transfer request, the incentive charges 
are carried into money settlement.\11\
---------------------------------------------------------------------------

    \11\ In the case of a rejection or no response by the receiving 
Fund Member/Mutual Fund Processor, it is the direct responsibility 
of the Receiving Member and Delivering Member to effect the 
reregistration of the asset outside of the ACATS-Fund/SERV interface 
and to reconcile any incentive charges that were applied.
---------------------------------------------------------------------------

    Currently in ACATS, full account transfers and partial account 
transfers have different settlement dates. A full account transfer has 
a two-day settlement cycle. A partial account transfer has a one-day 
settlement cycle; however, Fund/SERV always provides the receiving Fund 
Member/Mutual Fund Processor with a two-day response period to 
acknowledge or reject a transfer.\12\ Thus, for a full transfer, the 
last day for a Fund Member/Mutual Fund Processor to acknowledge or 
reject a fund reregistration is always on ACATS settlement date. 
However, for a partial transfer, the last day for a Fund Member/Mutual 
Fund Processor to acknowledge or reject a fund reregistration is on the 
business day after ACATS settlement date (unless the transfer contains 
option securities because options securities always require an 
additional day for settlement). In the case of a partial transfer where 
the reregistration occurs through the ACATS-Fund/SERV interface, the 
one-day delay presents a risk that the Delivering Member will not 
recover the incentive debit money that it would actually have paid 
through money settlement on settlement date in the event that the 
receiving Fund Member/Mutual Fund Processor provides no response (i.e., 
the transaction is pending) on settlement date, accepts the transfer on 
Settlement Date + 1, and member subsequently defaults on the same date 
(i.e., Settlement Date + 1).\13\ The proposed rule change would align 
the settlement date and Fund Member/Mutual Fund Processor response date 
thereby eliminating this risk and providing NSCC with greater 
transparency to track mutual fund transactions so that it can identify 
and reverse only the incomplete transactions (rejected transactions or 
transactions that were not responded to by the Fund Member/Mutual Fund 
Processor) on settlement date to avoid the need to reverse the payment 
of money in the event a member defaults.
---------------------------------------------------------------------------

    \12\ Please note that a previous rule filing (File No. SR-NSCC-
2007-13, SEC Release No. 56678 [October 19, 2007], 72 FR 60701 
[October 25, 2007]) made reference to adjusting the response period 
for the Fund Member/Mutual Fund Processor to one business day. The 
actual response period effected by that rule change was a two-day 
period as a result of cut-off times associated with internal 
processing. As described in this filing, the proposed rule change 
will ensure that the actual timing of the ACATS settlement cycle and 
the response period accorded to a Fund Member/Mutual Fund Processor 
with respect to this process will be aligned. The time frames 
proposed herein supersede any time frames previously in effect.
    \13\ In this instance, the Delivering Member would have been 
charged the market value of the asset but would not have retained 
possession of the asset. If the Receiving Member defaults, the 
Delivering Member would lack recourse to recover the amount debited 
from its account on settlement date other than through a claim 
against the insolvent Receiving Member's estate.
---------------------------------------------------------------------------

(3) Proposed Rule Change
    Pursuant to the rule change, NSCC proposes to modify: (A) Section 
12 of Rule 50 (Automated Customer Account Transfer Service) to provide 
one additional business day for the transfer of any member to member 
partial transfer that contains any Fund/SERV-eligible asset before it 
reaches settlement date, and (B) Section 13 of Rule 50 to make 
conforming changes that provide that the settlement date for transfers 
where Delivering Member submits detailed account asset data and the 
transfer is not rejected by the Receiving Member would be one business 
day after the Delivering Member has submitted the asset account data 
unless the transfer contains options assets or Fund/SERV eligible 
assets. In such a situation, the settlement date for all assets would 
be two business days. The text of Rule 52 (Mutual Fund Services) is 
unaffected by this proposal. The effective date of the proposed rule 
change will be announced by Important Notice.
(4) Statutory Basis
    The proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to NSCC because 
it provides enhanced customer protection and greater transparency with 
respect to the settlement status of transactions processed through the 
ACATS-Fund/SERV interface and reduces associated risks in the event of 
a party's default. As such, the proposed rule change would facilitate 
the prompt and accurate clearance and settlement of securities 
transactions. Furthermore, the proposed rule change is consistent with 
the CPSS/IOSCO Recommendations for Central Counterparties.

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

    NSCC does not believe that the proposed rule change would 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 been 
solicited NSCC.

III. 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-NSCC-2011-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission,

[[Page 60952]]

100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2011-07. 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of NSCC 
and on NSCC's Web site at http://www.dtcc.com/downloads/legal/rule 
filings/2011/nscc/2011-07.pdf. 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-NSCC-2011-07 and should be submitted on or before 
October 21, 2011.

IV. Commission's Finding and Order Granting Accelerated Approval of 
Proposed Rule Change

    For the reasons stated below, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to NSCC.\14\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act which requires, among 
other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, to assure the safeguarding of securities and funds of 
NSCC's participants which are in the custody or control of the clearing 
agency or for which it is responsible.\15\
---------------------------------------------------------------------------

    \14\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described in this filing, NSCC's proposal to move the settlement 
of partial transfers of mutual fund assets in ACATS from one day to two 
days should help mitigate the risk that in the event of a member 
defaulting between the time funds have been exchanged but delivery has 
not been made and should provide greater transparency with respect to 
the settlement status of transactions processed through the ACATS-Fund/
SERV interface. Accordingly, the Commission finds that the rule change 
is consistent with Section 17A(b)(3)(F) of the Act because it should 
allow NSCC to reduce risks associated with the transfer of mutual fund 
assets in ACATS, which should in turn better enable NSCC to assure the 
safeguarding of funds and securities in its possession or control or 
for which it is responsible.
    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice of filing thereof in the Federal Register. As 
discussed above, approval of the proposal will allow NSCC to 
immediately implement a procedure that should reduce risk for NSCC and 
its members, and other financial intermediaries associated with the 
transfer of mutual fund assets in ACATS. As such, the Commission finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice filing in the 
Federal Register.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NSCC-2011-07) is approved on an 
accelerated basis. For the Commission by the Division of Trading and 
Markets, pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).


Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25195 Filed 9-29-11; 8:45 am]
BILLING CODE 8011-01-P