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Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Imposition of Fines

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Start Preamble August 20, 2002.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] notice is hereby given that on July 26, 2002, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) and on August 19, 2002, amended the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by NSCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The proposed rule change would clarify NSCC's rules with regard to the imposition of fines upon its members and would more specifically identify the actions or inactions of members that would result in fines being imposed upon them.[2] In addition, a technical correction is proposed to be made to NSCC Rule 48, Disciplinary Proceedings, to conform the rule to other changes that were made effective by Release No. 34-36866.[3]

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 such statements.[4]

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

NSCC's Rule 48 allows NSCC to impose fines upon its members for any error, delay, or other conduct that is determined to be detrimental to the operations of NSCC. Historically, NSCC has imposed fines upon members for failures to settle in a timely manner end of day settlement balances, for late settlement acknowledgements, and for late payments of clearing fund deposits.

NSCC's Rule 15 permits NSCC to request that members furnish to NSCC such adequate assurances of their financial responsibility and operational capability as NSCC may at any time deem necessary. Pursuant to this rule and in furtherance of NSCC's responsibility, NSCC periodically requests that its members provide financial and operational information about their business. While many members comply with these requests, some do not. The lack of this information could create risk for NSCC. To address this concern, NSCC proposes to fine members who fail to timely respond to requests for information.

In connection with imposing fines for failure to timely provide requested financial and operational information, NSCC would notify all members that it requires certain information on an ongoing basis and that failure to provide the information would result in a fine being imposed with such fining commencing three months after the Commission approves the proposed rule change. For a period of one year from that date, members that fail to timely provide information would be issued one warning letter prior to the imposition of the fine. At the conclusion of the one-year period, NSCC would discontinue the warning letters prior to fining.

In addition to the above, members have an affirmative duty to notify NSCC on an ongoing basis of certain internal conditions that may cause NSCC to reevaluate the member's continued participation. NSCC is proposing to fine members that fail to meet these notification requirements. Upon learning of an event upon which the member failed to provide timely notification, NSCC would impose a fine. No reminder letter would be sent in this context.

Participants would continue to have the ability to contest fines, as currently provided for within NSCC's rules and procedures. Fines imposed against settling members would be collected through a miscellaneous charge in the member's monthly statement of charges. Fines imposed against settling bank members may be collected through an adjustment to the settling bank's end-of-day settlement balance, through a separate fed wire, or through checks made payable to NSCC. Alternatively, if the settling bank maintains additional memberships with NSCC, the fine may be collected through a settling account under its additional membership.

In conjunction with the above, NSCC proposes making a technical correction to Rule 48 Disciplinary Proceedings. In Release No. 34-36866, the Commission approved an NSCC rule change to accommodate same-day funds Start Printed Page 55052settlement (“SDFS”).[5] This rule change, in part, created Addendum P that set SDFS Failure to Settle fines in the range of $100 to $10,000. At that time, Section 1 of Rule 48 should have been modified to change the maximum fine for any single offense from $5,000 to $10,000, and a reference to settling bank only members should also have been included.

NSCC believes that the proposed rule change is consistent with Section 17A of the Act and the rules and regulations thereunder because it ensures that NSCC is able to safeguard securities and funds in NSCC's possession.

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

NSCC does not believe that the proposed rule change would have any impact on 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

No written comments relating to the proposed rule change have 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

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 the proposed rule change or

(b) institute proceedings to determine whether the proposed rule change should be disapproved.

VI. 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street NW, Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public Reference Section, 450 Fifth Street NW., Washington, DC 20549. Copies of such filing will also be available for inspection and copying at the principal office of NSCC. All submissions should refer to the File No. SR-NSCC-2002-06 and should be submitted by September 17, 2002.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[6]

Margaret H. McFarland,

Deputy Secretary.

End Signature

Exhibit 1: Text of Proposed Changes to NSCC's Rules and Procedures

Addendum P

Fine Schedule

(1) SDFS Failure-To-Settle and Late Acknowledgment Fines

Net DebitFirst occasionSecond occasionThird occasionFourth occasion


(a) In addition to the fine, interest is charged to the Member, or the Settling Bank Only Member, that failed to settle for the cost of borrowing to complete settlement.

(b) The number of occasions will be determined over a moving three-month period. A Member, or a Settling Bank Only Member, that exceeds four failure-to-settle occasions in a three-month period will be subject to further fees and/or other actions at the Corporation's discretion after consultation between the Member, or the Settling Bank Only Member, and the Corporation.

(c) If the Corporation determines that it had significantly affected a Member's, or a Settling Bank Only Member's, ability to settle (because of a Corporation system delay, for example), the Corporation may determine to waive failure-to-settle fines for that occurrence.

(2) Failure to notify and supply required data as provided for under these Rules & Procedures (other than as provided in items one, three and four of this addendum): Each single offense, $5,000.00 fine.

(3) Late Satisfaction of Clearing Fund Deficiency Call [1]

AmountFirst occasionSecond occasionThird occasionFourth occasion (or greater)
Up to $100 M*$100$200$500
$100 M to $900 M*3006001,500
$900 M to $1.7 MM*6001,2003,000
$1.7 MM to $2.5 MM*9001,8004,500
Greater than $2.5 MM*1,0002,0005,000
* First occasions result in a warning letter issued to the Member.
Start Printed Page 55053

(4) Requests For Information [2]

Request for information (Failure to timely provide)First occasionSecond occasionThird occasionFourth occasion
Financial Statements:
Audited Financial Statements for Member or Parent*$300$600$1,500
Monthly and/or Quarterly Regulatory Filings*3006001,500
Monthly and/or Quarterly Financial Statements*3006001,500
Proforma Financial Statements*3006001,500
Any Financial Computations, Consolidating Worksheets or Internal Statements, Upon Special Request*3006001,500
Risk Questionnaires/Profiles
Risk Management Policies and Procedures*150300750
Disaster Recovery Procedures*150300750
*First occasions result in a warning letter issued to the Member. Warning Letters for first occasion violations will be discontinued one year after implementation of this schedule, at which time each violation will be subject to imposition of a fine.
End Preamble


2.  Exhibit 1 to this notice sets forth NSCC's proposed revisions.

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3.  Securities Exchange Act Release No. 36866 (February 27, 1996), 61 FR 7288 [File No. NSCC-96-03] (order modifying NSCC's Rules and Procedures to accommodate same-day funds settlement).

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4.  The Commission has modified parts of these statements.

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5.  Supra note 3.

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1.  The number of occasions is determined over a moving three-month period beginning with the first occasion.

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2.  Fines to be levied for offenses within a moving twelve-month period beginning with the first occasion.

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[FR Doc. 02-21774 Filed 8-26-02; 8:45 am]