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Self-Regulatory Organizations; National Securities Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to the Imposition of Fines

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Start Preamble November 25, 2002.

I. Introduction

On July 26, 2002, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change File No. SR-NSCC-2002-06 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and on August 21, 2002, amended the proposed rule change. Notice of the proposal was published in the Federal Register on August 27, 2002.[2] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

II. Description

NSCC's rule change amends Addendum P of its Rules and Procedures to clarify existing fines and to impose new fines upon its members. The rule change specifically sets forth actions or inactions which will result in NSCC imposing fines.[3]

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 Start Printed Page 72013and 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 will fine members who fail to timely respond to requests for such information.

In connection with imposing fines for failure to timely provide requested financial and operational information, NSCC is establishing a list of information items, such as financial statements and disaster recovery procedures, that its members must submit on an ongoing basis so that its members will know exactly what information must be provided and that failure to provide the information will result in a fine being imposed. NSCC will begin assessing fines from the approval of this rule change. For a period of one year from that date, members that fail to timely provide information will be issued one warning letter prior to the imposition of a fine. At the conclusion of the one-year period, NSCC will discontinue the warning letters prior to fining.[4]

Under NSCC's Rules and Procedures, members have an affirmative duty to notify NSCC on an ongoing basis of changes in certain internal conditions that may cause NSCC to reevaluate the member's continued participation. Addendum T. NSCC will fine members that fail to meet these notification requirements. No reminder or warning letter will be sent in this context.[5]

Members will continue to have the ability to contest fines, as currently provided for within NSCC's Rules and Procedures. Fines imposed against settling members will 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 payment, or through a check 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 is 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 settlement (“SDFS”).[6] That 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. Accordingly, those changes are now being made.

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.

III. Discussion

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.[7] The Commission finds that the proposed rule change allowing NSCC to fine members that fail to timely provide requested financial and operational information or who fail to notify NSCC of changes in conditions that may cause NSCC to reevaluate the member's continued participation should improve NSCC's ability to monitor its members. Accordingly, the Commission believes the proposed rule change is consistent with NSCC's obligation to assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible.

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 with the requirements of Section 17A of the Act and the rules and regulations thereunder applicable.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NSCC-2002-06) be, and hereby is, approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[8]

Margaret H. McFarland,

Deputy Secretary.

End Signature

Exhibit 1: Text of NSCC'S Revised 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.Start Printed Page 72014

(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.

(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.  Securities Exchange Act Release No. 46385 (August 20, 2002), 67 FR 55051.

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3.  Exhibit 1 to this order sets forth NSCC's revised fine schedule.

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4.  Addendum P, 4.

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5.  Addendum P, 2.

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6.  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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7.  15 U.S.C. 78q-1(b)(3)(F).

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1.  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. 02-30533 Filed 12-2-02; 8:45 am]