Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Establish a Comprehensive Standard of Care and Limitation of Liability to Its Members, 25634-25636 [E5-2374]
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Federal Register / Vol. 70, No. 92 / Friday, May 13, 2005 / Notices
and the Commission continues to
believe it is consistent with the Act.22
The BSE Letter also expressed
concern that the ISE’s Facilitation
Mechanism contains no prohibition on
the cancellation of a facilitation order,
which the BSE stated could leave a
customer order potentially unexecuted
and subject to market risk. The BSE
contends that BOX’s rules are better
because they prohibit cancellation of
facilitation orders. The Commission,
however, previously found this feature
of the ISE’s Facilitation Mechanism to
be consistent with the Act.23 Moreover,
the Commission notes that Paragraph
.01 to Supplementary Material to ISE
Rule 716 states, among other things:
It will be a violation of a Member’s duty
of best execution to its customer if it were to
cancel a facilitation order to avoid execution
of the order at a better price. The availability
of the Facilitation Mechanism does not alter
a Member’s best execution duty to get the
best price for its customer.
The BSE Letter also commented that
the ISE’s Facilitation Mechanism does
not provide for the dissemination to ISE
members of information regarding the
price and size of the orders competing
with the facilitation order, which the
BSE believes restricts potential price
improvement. Although the ISE’s rules
are different than those proposed by the
BSE and approved by the Commission,
the Commission nevertheless believes
the ISE’s rules in this regard are
consistent with the Act.24
In addition, the BSE Letter asked why
‘‘Public Customer Order’’ would be
replaced by ‘‘order’’ in ISE Rule
716(d)(1). The ISE explains in
Amendment No. 3 that the purpose of
the deletion of the phrase ‘‘Public
Customer’’ is to allow the use of the
Facilitation Mechanism for brokerdealer orders as well as Public Customer
orders.25
The BSE Letter questioned the
reference in the Supplementary Material
to ISE Rule 716 to ‘‘Solicited Order’’
Mechanism, which at the time the ISE
filed its proposal was not part of the
ISE’s rules. As noted above,
Amendment No. 2 addressed this
comment by removing the reference to
‘‘Solicited Order’’ Mechanism.26
Amendment No. 4, however, reinserted
this language following the
22 See Securities Exchange Act Release No. 42455
(February 24, 2000), 65 FR 11388 (March 2, 2000)
(File No. 10–127) (order approving the application
of the ISE for registration as a national securities
exchange) at 11397.
23 Id. at 11398.
24 Id. at 11397.
25 See supra note 8.
26 See supra note 7.
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15:59 May 12, 2005
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Commission’s approval of the ISE’s
Solicited Order Mechanism.27
The BSE Letter asked why the
proposed rule change would delete the
phrase ‘‘on the Exchange’’ from ISE Rule
716(d)(3)(i). The ISE represents that the
deletion of ‘‘on the Exchange,’’ is a
technical clarification that will not
affect the operation of Rule 716.28
The Commission finds good cause for
approving Amendment Nos. 2, 3, 4, and
5 to the proposed rule change prior to
the thirtieth day after the date of
publication of notice of filing thereof in
the Federal Register. The Commission
believes that accelerated approval of
Amendment Nos. 2, 3, 4, and 5 is
appropriate because it will immediately
allow broker-dealer and public customer
orders to be executed at Split Prices.
Accordingly, the Commission believes
that there is good cause, consistent with
Section 19(b) of the Act, to approve
Amendment Nos. 2, 3, 4, and 5 to the
proposed rule change on an accelerated
basis.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment Nos. 2,
3, 4, and 5 are consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2003–07 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–ISE–2003–07. 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
supra notes 9 and 10.
conversation between Katherine
Simmons, Vice President and Associate General
Counsel, ISE, and Theodore R. Lazo, Senior Special
Counsel, Division, Commission (March 22, 2004).
PO 00000
27 See
28 Telephone
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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 also will be available for
inspection and copying at the principal
office of the ISE. 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–ISE–
2003–07 and should be submitted on or
before June 3, 2005.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,29 that the
proposed rule change (SR–ISE–2003–07)
and Amendment No. 1 thereto are
hereby approved and that Amendment
Nos. 2, 3, 4, and 5 thereto are hereby
approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.30
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–2381 Filed 5–12–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51669; File No. SR–NSCC–
2004–09]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change To Establish a
Comprehensive Standard of Care and
Limitation of Liability to Its Members
May 9, 2005.
I. Introduction
On December 8, 2004, the National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
proposed rule change SR–NSCC–2004–
09 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’).1 Notice of the proposal was
29 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
30 17
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Federal Register / Vol. 70, No. 92 / Friday, May 13, 2005 / Notices
published in the Federal Register on
April 6, 2005.2 No comment letters were
received. For the reasons discussed
below, the Commission is approving the
proposed rule change.
II. Description
NSCC is establishing a comprehensive
standard of care and limitation of
liability with respect to its members.
Historically, the Commission has left to
user-governed clearing agencies the
question of how to allocate losses
associated with, among other things,
clearing agency functions.3 The
Commission has reviewed clearing
agency services on a case-by-case basis
and in determining the appropriate
standard of care has balanced the need
for a high degree of clearing agency care
with the effect the resulting liabilities
may have on clearing agency operations,
costs, and safekeeping of securities and
funds.4 Because standards of care
represent an allocation of rights and
liabilities between a clearing agency and
its members, which are generally
sophisticated financial entities, the
Commission has refrained from
establishing a unique federal standard of
care and generally has allowed clearing
agencies and other self-regulatory
organizations and their members to
establish their own standards of care.5
In addition, the Commission has
recognized that a gross negligence
standard of care is appropriate for
certain noncustodial functions where a
clearing agency, its board of directors,
and its members determine to allocate
risk to individual service users.6
NSCC believes that adopting a
uniform rule 7 limiting NSCC’s liability
2 Securities Exchange Act Release No. 51458
(March 31, 2005), 70 FR 17494.
3 Securities Exchange Act Release Nos. 20221
(September 23, 1983), 48 FR 45167 and 22940
(February 24, 1986), 51 FR 7169.
4 Id.
5 Id.
6 Securities Exchange Act Release No. 26154
(October 3, 1988), 53 FR 39556. NSCC’s services
provided to members are noncustodial in that, other
than clearing fund deposits, it does not hold its
members funds or securities.
7 New Section 2 of Rule 58 states:
SEC. 2. Notwithstanding any other provision in
the Rules:
(a) The Corporation will not be liable for any
action taken, or any delay or failure to take any
action, hereunder or otherwise to fulfill the
Corporation’s obligations to its Members including
Settling Members, Settling Bank Only Members,
Municipal Comparison Only Members, Insurance
Carrier Members, TPA Members, Mutual Fund/
Insurance Services Members, Non-Clearing
Members, Fund Members and Data Services Only
Members, other than for losses caused directly by
the Corporation’s gross negligence, willful
misconduct, or violation of Federal securities laws
for which there is a private right of action. Under
no circumstances will the Corporation be liable for
the acts, delays, omissions, bankruptcy, or
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to its members to direct losses caused by
NSCC’s gross negligence, willful
misconduct, or violation of Federal
securities laws for which there is a
private right of action will: (1)
Memorialize an appropriate commercial
standard of care that will protect NSCC
from undue liability; 8 (2) permit the
insolvency, of any third party, including, without
limitation, any depository, custodian, subcustodian, clearing or settlement system, transfer
agent, registrar, data communication service or
delivery service (‘‘Third Party’’), 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 in selecting such Third Party.
(b) Under no circumstances will the Corporation
be liable for any indirect, consequential, incidental,
special, punitive or exemplary loss or damage
(including, but not limited to, loss of business, loss
of profits, trading losses, loss of opportunity and
loss of use) howsoever suffered or incurred,
regardless of whether the Corporation has been
advised of the possibility of such damages or
whether such damages otherwise could have been
foreseen or prevented.
(c) With respect to instructions given to the
Corporation by a Special Representative/Index
Recipient Agent, the Corporation shall have no
responsibility or liability for any errors which may
occur in the course of transmissions or recording of
any transmissions or which may exist in any
magnetic tape, document or other media so
delivered to the Corporation.
(d) With respect to the Corporation’s distribution
facilities, the Corporation assumes no responsibility
whatever for the form or content of any tickets,
checks, papers, documents or other material (other
than items prepared by it) placed in the boxes in
its distribution facilities assigned to each Settling
Member, Municipal Comparison Only Member,
Insurance Carrier Member, TPA Member, Fund
Member and Data Services Only Member, or
otherwise handled by the Corporation; nor does the
Corporation assume any responsibility for any
improper or unauthorized removal from such boxes
or from the Corporation’s facilities of any such
tickets, checks, papers, documents or other
material, including items prepared by the
Corporation.
(e) With respect to Fund/Serv transactions, the
Corporation will not be responsible for the
completeness or accuracy of any transaction or
instruction received from or transmitted to a
Settling Member, Data Services Only Member, TPA
Member, TPA Settling Entity, Mutual Fund
Processor or Fund Member through Fund/Serv, nor
for any errors, omissions or delays which may occur
in the transmission of a transaction or instruction
to or from a Settling Member, Data Services Only
Member, TPA Member, TPA Settling Entity, Mutual
Fund Processor or Fund Member.
(f) The Corporation will not be responsible for the
completeness or accuracy of any IPS Data and
Repository Data received from or transmitted to an
Insurance Carrier Member, Member or Data Services
Only Member through IPS nor for any errors,
omissions or delays which may occur in the
transmission of such IPS Data and Repository Data
to or from an Insurance Carrier Member, or Data
Services Only Member.
8 NSCC has always operated under a gross
negligence standard of care and both internal and
external counsel have consistently advised
members that this is the case. NSCC is seeking to
eliminate any confusion due to the absence of a
clear standard set forth in its rules and to
memorialize its historical practice. In addition,
NSCC has in effect a service agreement with the
Fixed Income Clearing Corporation (‘‘FICC’’)
pursuant to which FICC provides services for
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
25635
resources of NSCC to be appropriately
utilized for promoting the accurate
clearance and settlement of securities;
and (3) will be consistent with similar
rules adopted by other self-regulatory
organizations and approved by the
Commission.9
III. Discussion
Section 19(b) of the Act directs the
Commission to approve a proposed rule
change of a self-regulatory organization
if it finds that such proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
such organization. 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 its custody or control.10
The Commission believes that NSCC’s
rule change is consistent with this
Section because it will permit the
resources of NSCC to be appropriately
utilized to protect funds and assets.
Although the Act does not specify the
standard of care that must be exercised
by registered clearing agencies, the
Commission has determined that a gross
negligence standard of care is acceptable
for noncustodial functions where a
clearing agency and its participants
contractually agree to limit the liability
of the clearing agency.11 NSCC’s
NSCC’s fixed income products. This service
agreement provides for a gross negligence standard
of care. In the absence of this new rule, NSCC could
be in the position of having to pay for losses caused
by FICC that are not recoverable under the
agreement.
9 See, e.g., Securities Exchange Act Release Nos.
37421 (July 11, 1996), 61 FR 37513 [File No. SR–
CBOE–96–02]; 37563 (August 14, 1996), 61 FR
43285 [File No. SR–PSE–96–21]; 48201 (July 21,
2003), 68 FR 44128 [File No. SR–GSCC–2002–10];
and 49373 (March 8, 2004), 69 FR 11921 [File No.
SR–FICC–2003–09].
10 15 U.S.C. 78q–1(b)(3)(F).
11 In the release setting forth standards that would
be used by the Division of Market Regulation in
evaluating clearing agency registration applications,
the Division of Market Regulation urged clearing
agencies to embrace a strict standard of care in
safeguarding participants’ funds and securities.
Securities Exchange Act Release No. 16900 (June
17, 1980), 45 FR 4192. In the release granting
permanent registration to The Depository Trust
Company, the National Securities Clearing
Corporation, and several other clearing agencies,
however, the Commission indicated that it did not
believe that sufficient justification existed at that
time to require a unique Federal standard of care
for registered clearing agencies. Securities Exchange
Act Release No. 20221 (October 3, 1983), 48 FR
45167. In a subsequent release, the Commission
stated that the clearing agency standard of care and
the allocation of rights and liabilities between a
clearing agency and its participants applicable to
clearing agency services generally may be set by the
clearing agency and its participants. In the same
release, the Commission stated that it should review
clearing agency proposed rule changes in this area
on a case-by-case basis and balance the need for a
E:\FR\FM\13MYN1.SGM
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13MYN1
25636
Federal Register / Vol. 70, No. 92 / Friday, May 13, 2005 / Notices
functions are noncustodial in that it
does not hold its members’ funds or
securities. It is reasonable for NSCC,
which is member-owned and governed,
and its members to agree through board
approval of the proposed rule change
and to contract with one another in a
cooperative arrangement as to how to
allocate NSCC’s liability among NSCC
and its members. Therefore, the
Commission has determined that given
the noncustodial nature of NSCC’s
services, a gross negligence standard of
care and limitation of liability is
allowable for NSCC.12
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 Section 17A of the Act and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (File No. SR–
NSCC–2004–09) be and hereby is
approved.
For the Commission by the Division of
Market Regulation, pursuant to delegated
authority.13
Jill Peterson,
Assistant Secretary.
[FR Doc. E5–2374 Filed 5–12–05; 8:45 am]
BILLING CODE 8010–01–P
high degree of clearing agency care with the effect
resulting liabilities may have on clearing agency
operations, costs, and safeguarding of securities and
funds. Securities Exchange Act Release No. 22940
(February 24, 1986), 51 FR 7169. Subsequently, in
a release granting temporary registration as a
clearing agency to The Intermarket Clearing
Corporation, the Commission stated that a gross
negligence standard of care may be appropriate for
certain noncustodial functions that, consistent with
minimizing risk mutualization, a clearing agency,
its board of directors, and its members determine
to allocate to individual service users. Securities
Exchange Act Release No. 26154 (October 3, 1988),
53 FR 39556. Finally, in a release granting the
approval of temporary registration as a clearing
agency to the International Securities Clearing
Corporation, the Commission indicated that
historically it has left to user-governed clearing
agencies the question of how to allocate losses
associated with noncustodial, data processing,
clearing agency functions and has approved
clearing agency services embodying a grossnegligence standard of care. Securities Exchange
Act Release No. 26812 (May 12, 1989), 54 FR 21691.
12 The Commission notes that the rule change
does not alleviate NSCC from liability for violation
of the Federal securities laws where there exists a
private right of action and therefore is not designed
to adversely affect NSCC’s compliance with the
Federal securities laws and private rights of action
that exist for violations of the Federal securities
laws.
13 17 CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51674; File No. SR–NSCC–
2005–03]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of a
Proposed Rule Change Relating to the
Collecting of Fees for Services
Provided by Other Entities
May 9, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
April 26, 2005, National Securities
Clearing Corporation (‘‘NSCC’’) 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 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
amend NSCC’s rules to allow NSCC to
collect fees for services provided by
unregulated subsidiaries of The
Depository Trust and Clearing
Corporation (‘‘DTCC’’) and by other
entities.
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.2
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
NSCC is a subsidiary of DTCC.
Members of NSCC and their affiliates
may from time to time utilize the
services of DTCC subsidiaries that are
not registered as clearing agencies with
the Commission. Such subsidiaries
U.S.C. 78s(b)(1).
Commission has modified parts of these
statements.
PO 00000
1 15
2 The
Frm 00116
Fmt 4703
Sfmt 4703
include Global Asset Solutions LLC and
DTCC Deriv/Serv LLC. In addition,
members of NSCC and their affiliates
may utilize the services of other third
parties. NSCC has determined that it
would be more efficient and less costly
if the fees that members agree to pay for
such services were collected by NSCC
rather than through independent billing
mechanisms that would otherwise have
to be established by each subsidiary of
DTCC and third party that is not a
registered clearing agency.
NSCC’s rules currently allow for fee
collection arrangements with respect to
collection of fees from members. The
proposed rule change would further
clarify this practice and facilitate
collection of fees with respect to
affiliates of members. NSCC will enter
into appropriate agreements with such
subsidiaries and others regarding the
collection of fees.
NSCC believes that the proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder because
NSCC will implement the service in a
manner whereby NSCC will be able to
assure the safeguarding of securities and
funds which are in its custody or
control or for which it is responsible.
(B) Self-Regulatory Organization’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.
(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.
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.
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]]>Agencies
[Federal Register Volume 70, Number 92 (Friday, May 13, 2005)]
[Notices]
[Pages 25634-25636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2374]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51669; File No. SR-NSCC-2004-09]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Establish a
Comprehensive Standard of Care and Limitation of Liability to Its
Members
May 9, 2005.
I. Introduction
On December 8, 2004, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2004-09 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\
Notice of the proposal was
[[Page 25635]]
published in the Federal Register on April 6, 2005.\2\ No comment
letters were received. For the reasons discussed below, the Commission
is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51458 (March 31, 2005),
70 FR 17494.
---------------------------------------------------------------------------
II. Description
NSCC is establishing a comprehensive standard of care and
limitation of liability with respect to its members. Historically, the
Commission has left to user-governed clearing agencies the question of
how to allocate losses associated with, among other things, clearing
agency functions.\3\ The Commission has reviewed clearing agency
services on a case-by-case basis and in determining the appropriate
standard of care has balanced the need for a high degree of clearing
agency care with the effect the resulting liabilities may have on
clearing agency operations, costs, and safekeeping of securities and
funds.\4\ Because standards of care represent an allocation of rights
and liabilities between a clearing agency and its members, which are
generally sophisticated financial entities, the Commission has
refrained from establishing a unique federal standard of care and
generally has allowed clearing agencies and other self-regulatory
organizations and their members to establish their own standards of
care.\5\ In addition, the Commission has recognized that a gross
negligence standard of care is appropriate for certain noncustodial
functions where a clearing agency, its board of directors, and its
members determine to allocate risk to individual service users.\6\
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release Nos. 20221 (September 23,
1983), 48 FR 45167 and 22940 (February 24, 1986), 51 FR 7169.
\4\ Id.
\5\ Id.
\6\ Securities Exchange Act Release No. 26154 (October 3, 1988),
53 FR 39556. NSCC's services provided to members are noncustodial in
that, other than clearing fund deposits, it does not hold its
members funds or securities.
---------------------------------------------------------------------------
NSCC believes that adopting a uniform rule \7\ limiting NSCC's
liability to its members to direct losses caused by NSCC's gross
negligence, willful misconduct, or violation of Federal securities laws
for which there is a private right of action will: (1) Memorialize an
appropriate commercial standard of care that will protect NSCC from
undue liability; \8\ (2) permit the resources of NSCC to be
appropriately utilized for promoting the accurate clearance and
settlement of securities; and (3) will be consistent with similar rules
adopted by other self-regulatory organizations and approved by the
Commission.\9\
---------------------------------------------------------------------------
\7\ New Section 2 of Rule 58 states:
SEC. 2. Notwithstanding any other provision in the Rules:
(a) The Corporation will not be liable for any action taken, or
any delay or failure to take any action, hereunder or otherwise to
fulfill the Corporation's obligations to its Members including
Settling Members, Settling Bank Only Members, Municipal Comparison
Only Members, Insurance Carrier Members, TPA Members, Mutual Fund/
Insurance Services Members, Non-Clearing Members, Fund Members and
Data Services Only Members, other than for losses caused directly by
the Corporation's gross negligence, willful misconduct, or violation
of Federal securities laws for which there is a private right of
action. Under no circumstances will the Corporation be liable for
the acts, delays, omissions, bankruptcy, or insolvency, of any third
party, including, without limitation, any depository, custodian,
sub-custodian, clearing or settlement system, transfer agent,
registrar, data communication service or delivery service (``Third
Party''), 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 in selecting such Third
Party.
(b) Under no circumstances will the Corporation be liable for
any indirect, consequential, incidental, special, punitive or
exemplary loss or damage (including, but not limited to, loss of
business, loss of profits, trading losses, loss of opportunity and
loss of use) howsoever suffered or incurred, regardless of whether
the Corporation has been advised of the possibility of such damages
or whether such damages otherwise could have been foreseen or
prevented.
(c) With respect to instructions given to the Corporation by a
Special Representative/Index Recipient Agent, the Corporation shall
have no responsibility or liability for any errors which may occur
in the course of transmissions or recording of any transmissions or
which may exist in any magnetic tape, document or other media so
delivered to the Corporation.
(d) With respect to the Corporation's distribution facilities,
the Corporation assumes no responsibility whatever for the form or
content of any tickets, checks, papers, documents or other material
(other than items prepared by it) placed in the boxes in its
distribution facilities assigned to each Settling Member, Municipal
Comparison Only Member, Insurance Carrier Member, TPA Member, Fund
Member and Data Services Only Member, or otherwise handled by the
Corporation; nor does the Corporation assume any responsibility for
any improper or unauthorized removal from such boxes or from the
Corporation's facilities of any such tickets, checks, papers,
documents or other material, including items prepared by the
Corporation.
(e) With respect to Fund/Serv transactions, the Corporation will
not be responsible for the completeness or accuracy of any
transaction or instruction received from or transmitted to a
Settling Member, Data Services Only Member, TPA Member, TPA Settling
Entity, Mutual Fund Processor or Fund Member through Fund/Serv, nor
for any errors, omissions or delays which may occur in the
transmission of a transaction or instruction to or from a Settling
Member, Data Services Only Member, TPA Member, TPA Settling Entity,
Mutual Fund Processor or Fund Member.
(f) The Corporation will not be responsible for the completeness
or accuracy of any IPS Data and Repository Data received from or
transmitted to an Insurance Carrier Member, Member or Data Services
Only Member through IPS nor for any errors, omissions or delays
which may occur in the transmission of such IPS Data and Repository
Data to or from an Insurance Carrier Member, or Data Services Only
Member.
\8\ NSCC has always operated under a gross negligence standard
of care and both internal and external counsel have consistently
advised members that this is the case. NSCC is seeking to eliminate
any confusion due to the absence of a clear standard set forth in
its rules and to memorialize its historical practice. In addition,
NSCC has in effect a service agreement with the Fixed Income
Clearing Corporation (``FICC'') pursuant to which FICC provides
services for NSCC's fixed income products. This service agreement
provides for a gross negligence standard of care. In the absence of
this new rule, NSCC could be in the position of having to pay for
losses caused by FICC that are not recoverable under the agreement.
\9\ See, e.g., Securities Exchange Act Release Nos. 37421 (July
11, 1996), 61 FR 37513 [File No. SR-CBOE-96-02]; 37563 (August 14,
1996), 61 FR 43285 [File No. SR-PSE-96-21]; 48201 (July 21, 2003),
68 FR 44128 [File No. SR-GSCC-2002-10]; and 49373 (March 8, 2004),
69 FR 11921 [File No. SR-FICC-2003-09].
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III. Discussion
Section 19(b) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization. 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 its custody or control.\10\ The
Commission believes that NSCC's rule change is consistent with this
Section because it will permit the resources of NSCC to be
appropriately utilized to protect funds and assets.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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Although the Act does not specify the standard of care that must be
exercised by registered clearing agencies, the Commission has
determined that a gross negligence standard of care is acceptable for
noncustodial functions where a clearing agency and its participants
contractually agree to limit the liability of the clearing agency.\11\
NSCC's
[[Page 25636]]
functions are noncustodial in that it does not hold its members' funds
or securities. It is reasonable for NSCC, which is member-owned and
governed, and its members to agree through board approval of the
proposed rule change and to contract with one another in a cooperative
arrangement as to how to allocate NSCC's liability among NSCC and its
members. Therefore, the Commission has determined that given the
noncustodial nature of NSCC's services, a gross negligence standard of
care and limitation of liability is allowable for NSCC.\12\
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\11\ In the release setting forth standards that would be used
by the Division of Market Regulation in evaluating clearing agency
registration applications, the Division of Market Regulation urged
clearing agencies to embrace a strict standard of care in
safeguarding participants' funds and securities. Securities Exchange
Act Release No. 16900 (June 17, 1980), 45 FR 4192. In the release
granting permanent registration to The Depository Trust Company, the
National Securities Clearing Corporation, and several other clearing
agencies, however, the Commission indicated that it did not believe
that sufficient justification existed at that time to require a
unique Federal standard of care for registered clearing agencies.
Securities Exchange Act Release No. 20221 (October 3, 1983), 48 FR
45167. In a subsequent release, the Commission stated that the
clearing agency standard of care and the allocation of rights and
liabilities between a clearing agency and its participants
applicable to clearing agency services generally may be set by the
clearing agency and its participants. In the same release, the
Commission stated that it should review clearing agency proposed
rule changes in this area on a case-by-case basis and balance the
need for a high degree of clearing agency care with the effect
resulting liabilities may have on clearing agency operations, costs,
and safeguarding of securities and funds. Securities Exchange Act
Release No. 22940 (February 24, 1986), 51 FR 7169. Subsequently, in
a release granting temporary registration as a clearing agency to
The Intermarket Clearing Corporation, the Commission stated that a
gross negligence standard of care may be appropriate for certain
noncustodial functions that, consistent with minimizing risk
mutualization, a clearing agency, its board of directors, and its
members determine to allocate to individual service users.
Securities Exchange Act Release No. 26154 (October 3, 1988), 53 FR
39556. Finally, in a release granting the approval of temporary
registration as a clearing agency to the International Securities
Clearing Corporation, the Commission indicated that historically it
has left to user-governed clearing agencies the question of how to
allocate losses associated with noncustodial, data processing,
clearing agency functions and has approved clearing agency services
embodying a gross-negligence standard of care. Securities Exchange
Act Release No. 26812 (May 12, 1989), 54 FR 21691.
\12\ The Commission notes that the rule change does not
alleviate NSCC from liability for violation of the Federal
securities laws where there exists a private right of action and
therefore is not designed to adversely affect NSCC's compliance with
the Federal securities laws and private rights of action that exist
for violations of the Federal securities laws.
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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 Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-NSCC-2004-09) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Jill Peterson,
Assistant Secretary.
[FR Doc. E5-2374 Filed 5-12-05; 8:45 am]
BILLING CODE 8010-01-P
