[Federal Register Volume 80, Number 217 (Tuesday, November 10, 2015)]
[Notices]
[Pages 69728-69731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28512]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76348; File No. SR-NSCC-2015-007]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Provide 
Mechanism for Sub-Account Settlement With Respect to the Alternative 
Investment Product Services

November 4, 2015.
    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 October 30, 2015, National Securities Clearing Corporation (``NSCC'' 
or the ``Corporation'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by NSCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') \3\ in connection with creating a mechanism for 
certain users of the Alternative Investment Product Services (``AIP'') 
to settle at the sub-account level, and to make certain technical 
changes and corrections, as more fully described below. The text of the 
proposed rule change is available on NSCC's Web site at http://www.dtcc.com/legal/sec-rule-filings, at the principal office of NSCC, 
and at the Commission's Public Reference Room.
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    \3\ NSCC's Rules may be found at: http://www.dtcc.com/legal/rules-and-procedures.
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II. Clearing Agency'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 such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Statement of Purpose
    Background. In 2008, the Commission approved NSCC's proposed rule 
change to establish AIP, a non-guaranteed processing platform for 
alternative investment products such as hedge funds, funds of hedge 
funds, commodities pools, managed futures, and real estate investment 
trusts.\4\ AIP facilitates, among other things,

[[Page 69729]]

processing activities such as subscriptions and redemptions, 
distributions, position reporting, and account maintenance relating to 
alternative investment products and settles related payments (``AIP 
Payments'').
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    \4\ Securities Exchange Act Release No. 57813 (May 12, 2008), 73 
FR 28539 (May 16, 2008) (SR-NSCC-2007-12).
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    Settlement of AIP Payments is done on a prefunded basis. On each 
date for which settlement will occur (``Settlement Date''), an AIP 
participant (``AIP Member'') that is in a debit position for such day 
must satisfy its full debit balance before NSCC will settle any contra-
side credit positions with respect to such AIP Member. NSCC simply 
passes AIP Payments from one AIP Member to the contra-side AIP Member 
without netting and without guaranteeing payment, and settlement of AIP 
Payments is segregated from all other money settlement at NSCC.
    Participation in AIP is governed by Rule 53 of NSCC's Rules. A 
party seeking to be an AIP Member is required to enter into a separate 
AIP membership agreement with NSCC, even if it is otherwise a 
participant of other NSCC services.
    AIP Members are divided into two categories--``AIP Manufacturers'' 
and ``AIP Distributors''. AIP Manufacturers act on behalf of, or under 
authority of, the sponsor, general partner, or other party responsible 
for the creation or manufacturing of an eligible alternative investment 
product (``Eligible AIP Product''). AIP Manufacturers are generally the 
fund entities themselves (``Funds''). AIP Distributors act on behalf 
of, or under authority of, a customer or other investor in an Eligible 
AIP Product. AIP Distributors are generally the broker/dealers whose 
clients invest in Eligible AIP Products.
    Fund Administrators. Within the alternative investments industry, 
there are parties on the creation/manufacturing side of transactions 
known as ``fund administrators''. Fund administrators are not the Funds 
themselves, but rather, agents for the Funds. Where a Fund engages a 
fund administrator to act on the Fund's behalf, it is typically the 
fund administrator that handles all of the transaction processing for 
that Fund.
    Within AIP, a fund administrator is a party engaged under contract 
to provide administrative services with respect to one or more Eligible 
AIP Products and is eligible to be an AIP Member as an AIP Manufacturer 
(``AIP Fund Administrator''). In general, AIP Fund Administrators 
process AIP transactions with respect to their various Fund clients by 
creating separate sub-accounts within AIP, each of which is 
attributable to a specific Fund client. In this structure, the Fund 
client generally would not be an AIP Member.
    Under the current AIP Rules, AIP Fund Administrators are 
responsible for all activities related to their sub-accounts. These 
activities include, for example, submitting, reviewing, and confirming 
order instructions, reviewing and confirming settlement statements, and 
making AIP Payments. With respect to making AIP Payments, the Rules 
provide that on Settlement Date all sub-account obligations roll up to 
the AIP Fund Administrator's primary AIP account. These obligations are 
then presented to the AIP Fund Administrator's settlement bank for 
gross debit settlement and gross credit settlement.
    Because AIP Fund Administrators are responsible for settlement of 
AIP Payments, an AIP Fund Administrator in a debit position on 
Settlement Date must assure that each applicable Fund client has timely 
delivered payment to such AIP Fund Administrator's settlement bank. To 
the extent that a single Fund client fails to deliver its payment on 
Settlement Date (and the AIP Fund Administrator is not otherwise able 
to cover such Fund's shortfall), NSCC is required to reverse all of the 
AIP Fund Administrator's contra-side credit positions for the day, 
including the contra-side credit positions attributable to Funds that 
actually did pay.
    In recent months, NSCC has learned from several fund administrators 
interested in becoming AIP Members that the responsibility to make AIP 
Payments at NSCC is a responsibility that fund administrators generally 
do not undertake outside of AIP. In the current processing environment 
outside of AIP, fund administrators perform all transaction processing 
functions for their Funds, but they generally do not control money 
settlement.
    As explained by certain fund administrators to NSCC, the current 
AIP Payment structure as applied to AIP Fund Administrators has slowed 
adoption of AIP by the fund administrator community.
    Proposed Rule Change. To address this matter, NSCC is proposing to 
permit AIP Fund Administrators, at their discretion, to create sub-
accounts that settle separately from their primary AIP accounts, as 
well as from their other AIP sub-accounts, (``AIP Settling Sub-
Accounts'').
    An AIP Fund Administrator choosing to create an AIP Settling Sub-
Account would designate to NSCC the applicable Fund client with 
responsibility for settlement of AIP Payments with respect to such AIP 
Settling Sub-Account. Such designated Fund would not be an AIP Member 
(``AIP Non-Member Fund''). Each such AIP Non-Member Fund would enter 
into a standard agreement pursuant to which an NSCC-approved AIP 
Settling Bank would perform settlement services directly for the AIP 
Non-Member Fund (``Appointment of AIP Settling Bank and AIP Settling 
Bank Agreement'').
    Under the proposal, AIP Fund Administrators would remain 
responsible for all activities with respect to their AIP Settling Sub-
Accounts, except that AIP Fund Administrators would not be responsible 
for settling AIP Payments. For example, AIP Fund Administrators would 
remain responsible for order processing applicable to their AIP 
Settling Sub-Accounts, including submitting, reviewing, and confirming 
order instructions. In addition, AIP Fund Administrators would be 
responsible for informing their AIP Non-Member Funds of their 
respective daily AIP Payment obligations. All reporting, liability, and 
indemnification obligations to NSCC under NSCC's Rules would remain 
with the AIP Fund Administrator.
    As is the case today, settlement of all AIP Payments would be done 
on a prefunded basis. NSCC would not net or guarantee any AIP Payments 
with respect to AIP Settling Sub-Accounts, and all settlement of AIP 
Payments (including those of AIP Non-Member Funds) would continue to be 
segregated from all other money settlement at NSCC.
    Prior to NSCC approving any AIP Settling Sub-Account, NSCC would 
require the applicable AIP Fund Administrator to enter into 
documentation and/or agreements, or otherwise procure documentation 
and/or agreements, in such form as required by NSCC from time to time, 
which would contain:
     The AIP Fund Administrator's acknowledgement and agreement 
that it will be responsible for all matters, activities, liabilities, 
and obligations applicable to AIP Members under the Rules with respect 
to such AIP Settling Sub-Account, except for settlement of AIP 
Payments;
     the AIP Fund Administrator's agreement to indemnify NSCC 
for any loss, liability, or expense sustained by NSCC in connection 
with, arising from, or related to such AIP Settling Sub-Account, 
including with respect to the Foreign Account Tax Compliance Act 
(``FATCA''); \5\
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    \5\ 26 U.S.C. 1471 et seq.
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     the AIP Fund Administrator's agreement that it will be 
responsible for

[[Page 69730]]

(A) all charges incurred and payments due under Rule 26 (Bills 
Rendered) for the processing of AIP Settling Sub-Account transactions 
through AIP and (B) any other charges that may be incurred with respect 
to such AIP Settling Sub-Account under Rule 24 (Charges for Services 
Rendered);
     the AIP Fund Administrator's designation of the AIP Non-
Member Fund with responsibility for making AIP Payments with respect to 
such AIP Settling Sub-Account;
     the AIP Non-Member Fund's consent and approval with 
respect to such designation;
     the AIP Fund Administrator's agreement of its obligation 
to notify NSCC of changes in condition to the AIP Non-Member Fund that 
would otherwise require notice to NSCC under Rule 2B (Ongoing 
Membership Requirements and Monitoring) or Rule 20 (Insolvency);
     the AIP Fund Administrator's agreement of its obligation 
to notify the applicable AIP Non-Member Fund of such AIP Non-Member 
Fund's daily AIP Payment balance; and
     the AIP Non-Member Fund's appointment of an AIP Settling 
Bank, and such AIP Settling Bank's agreement to act as AIP Settling 
Bank for such AIP Non-Member Fund.
    In addition, the applicable AIP Fund Administrator would need to 
obtain from the applicable AIP Non-Member Fund tax documentation in 
such form as required by NSCC from time to time, and with respect to 
any AIP Non-Member Fund that is treated as a non-U.S. entity for U.S. 
federal income tax purposes, the AIP Fund Administrator would need to 
provide NSCC with an executed FATCA certification from such AIP Non-
Member Fund in the form approved by NSCC.
    On a going-forward basis with respect to FATCA, AIP Fund 
Administrators would need to obtain from their AIP Non-Member Funds 
periodic tax documentation, including FATCA certifications to the 
extent applicable, and provide such documentation to NSCC. Failure to 
provide such tax documentation, including FATCA certifications, in the 
manner and timeframes set forth by NSCC from time to time would result 
in revocation of NSCC's approval, in NSCC's sole and absolute 
discretion, of such AIP Settling Sub-Account.
    Under the proposal, AIP Fund Administrators would be required to 
indemnify NSCC for any loss, liability, or expense sustained by NSCC in 
connection with, arising from, or related to FATCA in respect of their 
AIP Settling Sub-Accounts. The proposed FATCA-related provisions in 
this proposed rule change are substantially similar to the current 
provisions in the Rules governing how NSCC monitors and treats its non-
U.S. members with respect to FATCA.
    In connection with this proposal, NSCC would amend the following 
Rules:
 Rule 1. Definitions
     The following new defined terms would be created: ``AIP 
Fund Administrator'', ``AIP Non-Member Fund'', and ``AIP Settling Sub-
Account'', each of which would be defined or further described in Rule 
53 (Alternative Investment Product Services and Members).
     The defined term ``AIP Settling Bank'' would be amended 
to: provide that AIP Settling Banks undertake to perform settlement 
services for AIP Members, as well as for AIP Non-Member Funds; and 
correct an incorrect Rule citation within the defined term.
 Rule 2. Members and Limited Members
    The description of ``AIP Settling Bank Only Member'' as a type of 
NSCC Limited Member would be amended to provide that AIP Settling Bank 
Only Members undertake to perform settlement services with respect to 
AIP on behalf of AIP Members, as well as AIP Non-Member Funds.
 Rule 53. Alternative Investment Product Services and Members
    The Rule would be amended to: permit AIP Fund Administrators to 
create AIP Settling Sub-Accounts and address the agreements and 
documents that NSCC would require prior to approving any such AIP 
Settling Sub-Account; describe the tax and FATCA-related requirements 
in connection with creating and maintaining such AIP Settling Sub-
Accounts; describe the settlement process with respect to AIP Settling 
Sub-Accounts; state that NSCC will not notify any AIP Non-Member Fund 
of any debit or credit balance and identify that it is the AIP Fund 
Administrator's obligation to notify each such AIP Non-Member Fund of 
its applicable debit or credit balance; state that NSCC will not 
guarantee AIP Payments to any AIP Non-Member Fund; specify that NSCC 
will not be liable for the acts, delays, omissions, bankruptcy, or 
insolvency of any AIP Non-Member Fund unless the Corporation was 
grossly negligent, engaged in willful misconduct, or in violation of 
federal securities laws for which there is a private right of action; 
and address applicable technical changes in connection with the 
foregoing.
 Rule 55. Settling Banks and AIP Settling Banks
    The Rule would be amended to provide that AIP Settling Banks may 
undertake to: perform settlement services on behalf of AIP Non-Member 
Funds; describe the settlement process with respect to AIP Settling 
Sub-Accounts; and make certain technical corrections.
 Rule 58. Limitation on Liability
    The Rule would be amended to specify that NSCC will not be liable 
for the acts, delays, omissions, bankruptcy, or insolvency of any AIP 
Non-Member Fund unless the Corporation was grossly negligent, engaged 
in willful misconduct, or in violation of federal securities laws for 
which there is a private right of action; and make clear that NSCC will 
not be responsible for the completeness or accuracy of any AIP data 
received from or transmitted to an AIP Member (including an AIP Fund 
Administrator with respect to any AIP Settling Sub-Account thereof), 
nor for any errors, omissions, or delays which may occur in the 
transmission of such AIP data to or from an AIP Member (including an 
AIP Fund Administrator with respect to any AIP Settling Sub-Account 
thereof).
 Addendum D (Statement of Policy; Envelope Settlement Service, 
Mutual Fund Services, Insurance and Retirement Processing Services and 
other Services Offered by the Corporation)
    The Rule would be amended to make clear that settlement with 
respect to AIP Settling Sub-Accounts is not guaranteed and that NSCC 
will reverse any credit previously given to any AIP Member (including 
any AIP Settling Sub-Account) that is the contra-side to an AIP Member 
(including a contra-side AIP Settling Sub-Account) whose payment was 
not received by NSCC.
2. Statutory Basis
    NSCC believes that the proposed rule change is consistent with the 
requirements of the Act, in particular Section 17A(b)(3)(F) of the 
Act.\6\ Section 17A(b)(3)(F) of the Act, among other items, requires 
that NSCC's Rules be designed (i) to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions and (ii) to remove impediments to and perfect 
the mechanism of a national system for the

[[Page 69731]]

prompt and accurate clearance and settlement of securities 
transactions. In recent months, NSCC has learned from fund 
administrators interested in becoming AIP Members that fund 
administrators generally do not control money settlement for their Fund 
clients. Within AIP, settlement of AIP Payments is the responsibility 
of AIP Members, including AIP Fund Administrators. This disconnect has 
impeded the adoption of AIP by the fund administrator community. The 
proposed rule change would allow AIP Payments to settle at the sub-
account level, which would redirect responsibility for settlement of 
AIP Payments to the AIP Fund Administrator's designated Fund clients. 
Under the proposal, if an AIP Non-Member Fund fails to make its AIP 
Payment on Settlement Date, only the credit positions on the contra-
side of the applicable AIP Settling Sub-Account would be reversed. The 
current AIP Rules require NSCC to reverse all of an AIP Fund 
Administrator's contra-side credit positions to the extent the AIP Fund 
Administrator fails to meet any portion of its daily AIP Payment 
balance. In allowing settlement at the sub-account level, NSCC would be 
fostering cooperation and coordination with fund administrators and 
Funds engaged in the clearance and settlement of alternative investment 
securities transactions and would be removing an impediment to the 
prompt and accurate clearance and settlement of alternative investment 
securities transactions. Therefore, NSCC believes that the proposed 
rule change is consistent with the Act, in particular, Section 
17A(b)(3)(F) \7\ of the Act.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change would have any 
impact, or impose any burden, on competition because the ability to 
settle at the sub-account level is optional and available to all AIP 
Fund Administrators.

(C) Clearing Agency'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. NSCC will notify the Commission of any 
written comments when received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 email to [email protected]. Please include 
File Number SR-NSCC-2015-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2015-007. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing 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/legal/sec-rule-filings. 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-2015-007 and should be 
submitted on or before December 1, 2015.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Brent J. Fields,
Secretary.
[FR Doc. 2015-28512 Filed 11-9-15; 8:45 am]
 BILLING CODE 8011-01-P