[Federal Register Volume 77, Number 59 (Tuesday, March 27, 2012)]
[Notices]
[Pages 18283-18287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7276]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66635; File No. SR-NSCC-2012-04]


Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend Rule 53 of Its Rules and Procedures Relating to 
the Alternative Investment Product Services To Standardize and Automate 
the Method by Which Registered AIP Broker-Dealer Members Meet Their 
Good Control Location Obligations for Uncertificated Securities

March 21, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 7, 2012, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change described in Items I and II below, which Items have been 
prepared primarily by NSCC. NSCC filed the proposal pursuant to Section 
19(b)(3)(A)(iii) \2\ of the Act, and Rule 19b-4(f)(4)(i) \3\ thereunder 
so that the proposal was effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the rule 
change from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4)(i).
---------------------------------------------------------------------------

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

    NSCC proposes to amend Rule 53 of its Rules and Procedures with 
respect to its Alternative Investment Product Services (``AIP''). The 
proposed rule change is intended to standardize and automate the method 
by which registered AIP broker-dealer members meet their possession or 
control obligations for uncertificated securities under Commission Rule 
15c3-3(b)(1) \4\ when they designate another AIP Member as a ``good 
control location.''
---------------------------------------------------------------------------

    \4\ 17 CFR 240.15c3-3(b)(1).
---------------------------------------------------------------------------

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

[[Page 18284]]

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

    NSCC proposes to amend Rule 53 of its Rules and Procedures. The 
purpose of the proposed rule change is to standardize and automate the 
method by which registered AIP broker-dealer members (collectively 
``AIP Distributors'') meet their possession or control obligations for 
uncertificated securities under Rule 15c3-3(b)(1) \6\ of the Act when 
they designate another AIP Member, which acts on behalf of or under 
authority of the sponsor, general partner, or any other party 
responsible for the creation or manufacturing of a participating AIP 
investment product (collectively ``AIP Manufacturers'') as a ``good 
control location,'' as more specifically provided below.
---------------------------------------------------------------------------

    \6\ 17 CFR 240.15c3-3(b)(1).
---------------------------------------------------------------------------

``Good Control Location'' Background
    Commission registered broker-dealers that hold securities for the 
accounts of their customers are required to maintain physical 
possession or control of all customer fully-paid and excess margin 
securities under Rule 15c3-3(b)(1) \7\ of the Act. The possession or 
control requirement means that registered broker-dealers must have 
securities in their physical possession or in their name for the 
benefit of their customers at one of the several ``control locations'' 
identified by Rule 15c3-3(c) \8\ of the Act. Because uncertificated 
securities cannot be physically held in a broker-dealer's possession, 
the broker-dealer must establish that the uncertificated securities are 
lodged in what are generally referred to as ``good control locations.'' 
Under the Commission's rule, good control locations include registered 
securities clearing agencies,\9\ U.S. banks,\10\ certain designated 
foreign financial institutions,\11\ and ``such other locations as the 
Commission shall upon application from a broker or dealer find and 
designate to be adequate for the protection of customer securities.'' 
\12\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.15c3-3(b)(1).
    \8\ 17 CFR 240.15c3-3(b)(1).
    \9\ 17 CFR 240.15c3-3(c)(1).
    \10\ 17 CFR 240.15c3-3(c)(5).
    \11\ 17 CFR 240.15c3-3(c)(4).
    \12\ 17 CFR 240.15c3-3(c)(7).
---------------------------------------------------------------------------

    The Commission staff has issued letters that allowed broker-dealers 
to use certain entities, which were obligated to create and maintain 
the ownership records with respect to such uncertificated securities as 
good control locations for uncertificated securities subject to certain 
conditions.\13\ The conditions outlined in these letters have generally 
included the broker-dealers' receipt of certain assurances and 
representations from the securities' record keeper, which assurances 
and representations have come to be known as the ``No Lien 
Assurances.'' \14\
---------------------------------------------------------------------------

    \13\ See, e.g.,Wayne Hummer & Co., SEC No-Action Letter, 1986 WL 
65387 (SEC) (publicly avail. Apr. 8, 1986); Letter from Marc J. 
Hertzberg, Division of Market Regulation, to Brandon Becker, Wilmer, 
Cutler & Pickering (July 30, 1997); Letter from Mark M. Attar, 
Division of Market Regulation, SEC, to Brandon Becker, Wilmer, 
Cutler & Pickering (Sept. 17, 1999); Letter from Bonnie L. Gauch, 
Division of Market Regulation, SEC, to Michael K. Rafter, Holland & 
Knight, LLP (Jan. 5, 2000); Letter from Joseph I. Levinson, Special 
Counsel, Division of Trading and Markets, SEC, to Mark D. Fitterman, 
Morgan, Lewis & Bockius LLP (June 9, 2009); FOLIO[fn] Investments, 
Inc., SEC No-Action Letter, 2009 WL 58414 (Jan 6, 2009).
    \14\ Broker-dealers generally receive the No Lien Assurances by 
obtaining a hard-copy letter from the issuer or its transfer agent 
or other record keeper of the securities.
---------------------------------------------------------------------------

    In a No-Action Letter dated February 3, 2012 (``2012 No-Action 
Letter''), the Commission's Division of Trading and Markets 
(``Division'') addressed the use of AIP as a means for establishing 
good control locations. \15\ In it, the Division stated that it would 
not recommend enforcement action against Charles Schwab & Co., Inc. 
(``Schwab'') if Schwab used AIP to establish good control locations for 
uncertificated securities of alternative investment products 
participating in AIP.
---------------------------------------------------------------------------

    \15\ Letter from Michael A. Macchiaroli, Division of Trading and 
Markets, SEC, to Peter J. Morgan III, Charles Schwab & Co., Inc. 
(February 3, 2012).
---------------------------------------------------------------------------

AIP Background
    NSCC's AIP Service is a communications and payments processing 
platform for eligible alternative investment products, including 
interests in commodity pools, REIT securities, managed futures and 
managed currency products, and securities issued by hedge funds, 
private equity funds and funds of funds (collectively ``Eligible AIP 
Products''). AIP provides for the processing of transactions in these 
products and for the settlement of related payments on a pre-funded 
basis without netting and without a guarantee of payment in the event 
of a contra-side default.\16\ Transactions processed through AIP 
include subscriptions and redemptions, distributions, position 
reporting, and account maintenance.
---------------------------------------------------------------------------

    \16\ Securities Exchange Act Release No. 34-57813 (May12, 2008), 
73 FR 28539 (May 16, 2008).
---------------------------------------------------------------------------

    Since its implementation, AIP has standardized the way the 
alternative investment industry communicates information between 
broker-dealers, fund managers, administrators, custodians, and issuers 
of alternative investment products. In the last several months, the 
alternative investment industry has asked NSCC to further standardize 
and automate communications among these parties by creating a uniform 
mechanism by which AIP Distributors may satisfy their Rule 15c3-3(c) 
possession or control obligations when using AIP Manufacturers as good 
control locations. NSCC believes it can offer a number of control 
improvements to the current manual, decentralized, and paper-based 
mechanisms that are used today for establishing good control locations 
for uncertificated securities of alternative investments.
AIP Membership Requirements
    Under NSCC Rule 53, the following types of entities are eligible to 
become AIP users (``AIP Members''):
    1. A broker-dealer registered under the Act or a non-U.S. broker-
dealer subject to oversight and regulation by the appropriate financial 
services regulator in its home jurisdiction;\17\
---------------------------------------------------------------------------

    \17\ But see fn. 14, infra.
---------------------------------------------------------------------------

    2. A bank or trust company that is a member of the U.S. federal 
reserve system or that is supervised and examined by U.S. federal or 
state banking authorities or a non-U.S. bank subject to oversight and 
regulation by the appropriate financial services regulator in its home 
jurisdiction;
    3. An investment company registered under the Investment Company 
Act of 1940 (``Advisers Act''), or an issuer (structured as a fund or 
other pooled investment vehicle) that is not required to register 
thereunder;
    4. An investment adviser as defined in the Advisers Act regardless 
of whether it is registered under the Advisers Act or is exempt from 
registration;
    5. A commodity pool operator or commodity trading advisor as 
defined in the Commodity Exchange Act (``CEA'') regardless of whether 
the commodity pool operator or commodity trading advisor is registered 
pursuant to the CEA or is exempt from registration thereunder;
    6. An insurance company subject to supervision or regulation under 
U.S. state insurance law or a non-U.S. insurance company subject to 
oversight and regulation by the appropriate

[[Page 18285]]

insurance regulator in its home jurisdiction; and
    7. An entity engaged under contract to provide administrative 
services to one or more alternative investment products that can be 
processed through AIP.
    Before acceptance as an AIP Member, each applicant must submit an 
executed AIP Membership Agreement to NSCC, agreeing that, among other 
things, it will:
    1. Only use the AIP Service; \18\
---------------------------------------------------------------------------

    \18\ An AIP Member may use another NSCC service but only if the 
AIP Member also executes a separate NSCC Membership Agreement.
---------------------------------------------------------------------------

    2. Abide by the rules of NSCC and be bound by all of the provisions 
thereof and that NSCC will have all of the rights and remedies 
contemplated by the rules of NSCC;
    3. Be bound by the rules of NSCC as to all matters and transactions 
occurring while the applicant is an AIP Member, notwithstanding that 
the applicant may subsequently cease to be an AIP Member;
    4. Not submit, clear, or settle through NSCC any contract or 
transaction unless the rules of NSCC are part of the terms and 
conditions of such contract or transaction;
    5. Pay to NSCC such charges as shall be established by NSCC by 
rule;
    6. Not submit or confirm any transaction, charge, request, 
instruction, or transmission through NSCC's services or otherwise 
utilize NSCC's services in contravention of any law, rule, regulation, 
or statute applicable to the AIP Member;
    7. Not submit any request, instruction, transaction, or other 
transmission through NSCC's services for which it is not directly or 
indirectly and whether acting on its own behalf or on behalf of any 
other entity, duly authorized;
    8. Pay such fines as may be imposed in accordance with NSCC's rules 
for the failure of the AIP Member while an AIP Member to comply 
therewith; and
    9. Be bound by any amendment to the rules of NSCC with respect to 
any use of NSCC's services subsequent to the time such amendment takes 
effect, as fully as though such amendment were now a part of the rules 
of NSCC; provided, however, that no such amendment shall affect an AIP 
Member's right to cease to be an AIP Member of NSCC unless before such 
amendment becomes effective, the AIP Member has opportunity to give 
written notice to NSCC of the AIP Member's election to discontinue 
being an AIP Member.
The Proposed Rule Changes
    Currently, AIP provides for two alternative customer account 
designations either ``broker-controlled'' or ``customer-controlled.'' 
The initial account designation for an AIP account is generally made by 
the AIP Distributor acting on behalf of its investor customer. However, 
the AIP Manufacturer may change the account designation at any time. 
For example, if an investor were to directly notify the AIP 
Manufacturer that its account should no longer be designated as broker-
controlled, the AIP Manufacturer could change the indication on the AIP 
system. The proposed rule changes to NSCC Rule 53 will apply solely 
with respect to ``broker-controlled'' AIP account designations.
    NSCC proposes to amend Rule 53 to specify that when an AIP 
Distributor submits an AIP order for its customer account and requests 
a broker-controlled designation as part of the order, the AIP 
Manufacturer accepting the order (and accordingly making and approving 
the broker-controlled designation as part of the order) \19\ will be 
making continual and ongoing representations and assurances to the 
controlling AIP Distributor that:
---------------------------------------------------------------------------

    \19\ As set forth above, broker-dealers are eligible to be AIP 
Members. However, a broker-dealer's authority to serve as a good 
control location is derived from Rule 15c3-3(c)(2) of the Act and 
applicable Commission and SRO guidance. Nothing in this proposed 
rule change is intended to contradict existing regulations 
pertaining to control locations under Rule 15c3-3 of the Act.
---------------------------------------------------------------------------

    1. The Eligible AIP Product securities held (or to be held) in the 
account are not subject to any right, charge, security interest, lien, 
or claim of any kind in favor of the AIP Manufacturer or any person 
claiming through such AIP Manufacturer;
    2. To the knowledge of the AIP Manufacturer, there are no 
substantial problems of an operational nature which the AIP 
Manufacturer is experiencing or which may endanger the interest of 
investors in the Eligible AIP Product;
    3. The Eligible AIP Product securities held (or to be held) in the 
account are registered with the Commission pursuant to the Securities 
Act of 1933, as amended, are exempt from such registration, or are not 
required to be so registered;
    4. The Eligible AIP Product securities in the account (or to be 
held in the account) are registered on the books and records of the AIP 
Manufacturer or its designee in the name of the controlling AIP 
Distributor on behalf of its customer;
    5. In the case of Eligible AIP Product securities issued outside of 
the United States, the AIP Manufacturer does not require the 
controlling AIP Distributor or any of its customers to pay any fees 
other than for safe custody or administration as a condition for the 
transfer of the securities; and
    6. The AIP Manufacturer understands and acknowledges that the 
controlling AIP Distributor may be relying on the above representations 
in order to establish custody in accordance with Rule 15c3-3 of the Act 
and that failure to comply with the above representations may require 
that the controlling AIP Distributor remove the Eligible AIP Product 
securities from the applicable customer's brokerage account.
    The AIP Manufacturer representations and assurances in 1-6 above 
are collectively referred to as the ``AIP Manufacturer Representations 
and Assurances.''
    The AIP Manufacturer Representations and Assurances will be 
obtained from each relevant AIP Manufacturer through an ``accept'' or 
``decline'' option within the record layouts that reside in AIP. The 
relevant AIP Distributors will be able to determine through AIP whether 
the AIP Manufacturer Representations and Assurances have been provided 
by reference to an indicator on a security profile that is included on 
a data file provided to the AIP Distributor. NSCC also proposes to 
amend the AIP Membership Agreement with regard to AIP Manufacturers to 
provide that each time the AIP Manufacturer accepts an AIP order and 
designates the securities with respect to that order as ``broker-
controlled,'' such AIP Manufacturer will be making the AIP 
Manufacturers Representations and Assurances on a continual and ongoing 
basis to the applicable AIP Distributor, so long as the ``broker-
controlled'' designation remains in place.
    Additionally, Rule 53, as amended, will provide that each AIP 
Distributor that is a registered broker-dealer and that is relying on a 
specified AIP Manufacturer's Representations and Assurances with 
respect to a customer account shall for so long as the applicable 
``broker-controlled'' designation remains in place be continually 
stating that such AIP Distributor:
    1. Carries those Eligible AIP Product securities ``long'' in each 
respective customer account;
    2. Reflects all share positions of the applicable Eligible AIP 
Product separately in its securities records or ledgers maintained 
pursuant to Rule 17a-3 of the Act;
    3. Maintains in a separate file a current list of all AIP 
Manufacturers of which Eligible AIP Product securities

[[Page 18286]]

are carried on that AIP Distributor's books and records, including the 
name, telephone number, and address of a contact person at each AIP 
Manufacturer; and
    4. Is not aware of any substantial problems of an operational 
nature which AIP or the applicable AIP Manufacturer or issuer (if 
different) may be experiencing and which may endanger the interests of 
the customer.
    The above AIP Distributor statements (collectively the ``AIP 
Distributor Statements'') would be recorded by way of an electronic 
indicator within AIP.
    NSCC proposes to amend the AIP Membership Agreement with regard to 
AIP Distributors to set forth that each AIP Distributor who shall be 
relying on an AIP Manufacturer's Representations and Assurances 
understands that such AIP Distributor will continually and on an 
ongoing basis be making the AIP Distributor Statements so long as the 
applicable ``broker-controlled'' designation remains in place.
    The above AIP Manufacturer Representations and Assurances and AIP 
Distributor Statements conform to the No-Action Letters developed by 
the Commission staff and described herein, including the 2012 No-Action 
Letter addressing the use AIP for establishing good control locations. 
As noted above, registered broker-dealers currently establish their 
Commission Rule 15c3-3(c)(7) obligations by way of manual processes. 
Automating this process through AIP will standardize and centralize the 
process will assist the parties in establishing compliance with legal 
requirements and will provide a better audit trail for AIP Members and 
their regulators to verify compliance after the fact.
    Further, if an AIP Manufacturer or AIP Distributor at any time 
elects to change the customer account designation from ``broker-
controlled'' to ``customer-controlled,'' the above AIP Manufacturer 
Representations and Assurances and AIP Distributor Statements from that 
point forward would no longer apply to the relevant AIP Members, and 
each relevant AIP Distributor and AIP Manufacturer, as the case may be, 
would be put on notice that the designation with regard to the customer 
account has changed. As a condition set forth in the 2012 No-Action 
Letter, each AIP Distributor relying on the AIP Manufacturer 
Representations and Assurances is required to monitor AIP on a regular 
basis for any changes to the ``broker-controlled'' account designations 
for which the AIP Distributor maintains custody.\20\
---------------------------------------------------------------------------

    \20\ See the 2012 No-Action Letter, Condition 7. Where 
an AIP Distributor learns that the designation for an Eligible AIP 
Product has been changed from ``broker-controlled'' to ``customer-
controlled,'' the AIP Distributor should contact the AIP 
Manufacturer to confirm whether the position was intended to be 
returned to the customer. If the Eligible AIP Product is not re-
designated as ``broker-controlled,'' the AIP Distributor should 
remove the position from the customer's brokerage account.
---------------------------------------------------------------------------

    The proposed rule change is consistent with the requirements of the 
Act and the rules and regulations issued thereunder because it promotes 
the prompt and accurate clearance and settlement of transactions in 
securities by automating, standardizing, and centralizing the 
communication of information between persons engaged in the clearance 
and settlement of securities transactions. In addition, the proposed 
rule change fosters cooperation and coordination between broker-dealers 
and issuers of securities and removes impediments to the prompt and 
accurate clearance and settlement of securities transactions.

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

    NSCC 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 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

    The foregoing proposed rule change has become effective upon filing 
pursuant to Section 19(b)(3)(A)(iii) \21\ of the Act and Rule 19b-4 
(f)(4)(i) \22\ thereunder because it effects a change in NSCC's 
existing AIP services that does not adversely affect the safeguarding 
of securities or funds in the custody or control of NSCC or for which 
it is responsible and does not significantly affect the respective 
rights or obligations of NSCC or the persons using the service. The 
proposed rule change affects a service of NSCC which is not guaranteed 
(i.e., to which NSCC is not a central counter-party) and which does not 
provide for the movement of securities or for the application of 
credits or debits to cash balances of members. Accordingly, the 
proposed rule change does not adversely affect the safeguarding of 
securities or funds in the custody or control of NSCC or for which NSCC 
is responsible. Additionally, designation of an account as ``broker-
controlled'' or ``customer-controlled'' within AIP is wholly voluntary 
meaning that an AIP Manufacturer may choose to decline an order request 
with a broker-controlled designation and therefore may not be required 
to make the above stated assurances and representations. This is 
effectively what happens in the market today outside of AIP when a 
registered broker-dealer attempts to designate an account as broker-
controlled but the applicable alternative investment product record 
keeper refuses to provide the requisite representations and assurances. 
A registered broker-dealers' failure to obtain such assurances and 
representations would preclude the registered broker-dealer from 
continuing to identify the customer account in such alternative 
investment product as ``broker-controlled.'' Under the proposed rule 
change, the rights and obligations of the parties would not change, but 
each relevant party would know the status of the customer account 
designation in a far less time-consuming manner. Further, if a 
``customer controlled'' designation is made with respect to an AIP 
order, the above rule changes would not apply to either the AIP 
Manufacturer making the designation or to the applicable AIP 
Distributor. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(4)(i).
---------------------------------------------------------------------------

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 email to [email protected]. Please include 
File Number SR-NSCC-2012-04 on the subject line.

[[Page 18287]]

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2012-04. This file 
number should be included on the subject line if email 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 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 filings also will 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/2012/nscc/2012-04.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-2012-04 
and should be submitted on or before April 17, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-7276 Filed 3-26-12; 8:45 am]
BILLING CODE 8011-01-P