Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Relating to Applicant and Member Disqualification Criteria, 79528-79530 [E8-30786]

Download as PDF 79528 Federal Register / Vol. 73, No. 249 / Monday, December 29, 2008 / Notices negotiations and unilateral decisions regarding spreads). Because FINRA adopted IM–2110–5 to fulfill part of its 1996 settlement agreement with the SEC, the proposed rule change would transfer IM–2110–5 into the Consolidated FINRA Rulebook as FINRA Rule 5240. Although FINRA is not proposing material changes to the rule, one of the minor changes FINRA is proposing is to add the phrase ‘‘or other person’’ to paragraphs (a)(1) and (a)(3) of the rule to clarify that coordination with or intimidation of a non-FINRA member would be covered by the rule. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following Commission approval. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,11 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. In addition, FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(11) of the Act,12 which requires, among other things, that FINRA rules must be designed to produce fair and informative quotations, to prevent fictitious or misleading quotations, and to promote orderly procedures for collecting, distributing, and publishing quotations. FINRA believes that the rule properly emphasizes certain types of misconduct that can impair the fair and orderly functioning of the market and thus serves as an important provision to help ensure the integrity of information placed into the market. The rule being adopted as part of the Consolidated FINRA Rulebook previously has been found to meet the statutory requirements, and FINRA believes the rule has since proven effective in achieving the statutory mandates. dwashington3 on PROD1PC60 with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 11 15 12 15 U.S.C. 78o–3(b)(6). U.S.C. 78o–3(b)(11). VerDate Aug<31>2005 13:19 Dec 24, 2008 Jkt 217001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 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 90 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 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2008–061 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2008–061. 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 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 PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 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 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 filing also will be available for inspection and copying at the principal office of FINRA. 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–FINRA–2008–061 and should be submitted on or before January 20, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Florence E. Harmon, Acting Secretary. [FR Doc. E8–30790 Filed 12–24–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59111; File No. SR-FICC– 2007–04] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Relating to Applicant and Member Disqualification Criteria December 17, 2008. I. Introduction On April 30, 2007, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’).1 On February 7, 2008, and March 19, 2008, FICC amended the proposed rule change. On July 9, 2008, the Commission published notice of the proposed rule change to solicit comments from interested persons.2 The Commission received two comment letters in response to the proposed rule change.3 For the reasons discussed 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 58128, 73 FR 40893 (July 16, 2008). 3 Letters from Susanne Trimbath, Ph.D., STP Advisory Services, LLC (Aug. 27, 2008) and Nikki M. Poulos, Managing Director, General Counsel, FICC (Nov. 7, 2008). 1 15 E:\FR\FM\29DEN1.SGM 29DEN1 Federal Register / Vol. 73, No. 249 / Monday, December 29, 2008 / Notices below, the Commission is approving the proposed rule change, as amended. II. Description The proposed rule change will amend FICC’s Government Securities Division’s (‘‘GSD’’) and Mortgage Backed Securities Division’s (‘‘MBSD’’) (collectively, ‘‘Divisions’’) rules concerning applicant and member disqualification criteria by making the Divisions’ rules consistent with the rules of FICC’s affiliated clearing agencies, the National Securities Clearing Corporation (‘‘NSCC’’) and The Depository Trust Company (‘‘DTC’’). The proposed rule changes cover the following areas: 1. Management Consideration of Disqualification Criteria 4 Prior to this rule change, GSD’s membership qualification rules required FICC’s Board of Directors to determine whether the presence of certain negative factors affecting a membership application should constitute the basis for denying membership to such applicant. Information that might have disqualified an applicant (referred to in GSD’s rules as ‘‘disqualification criteria’’) include the applicant being subject to a statutory disqualification 5 or conviction of various crimes such as bribery. The disqualification criteria in GSD’s rules similarly apply as standards for continued membership. Under the rule change, FICC will amend GSD’s disqualification criteria to allow FICC’s management, instead of FICC’s Board, to determine whether the presence of a potential disqualifier should prevent an entity from obtaining or continuing membership in GSD. Such change would conform to the rules of MBSD, DTC, and NSCC, which allow such determinations to be made by management. dwashington3 on PROD1PC60 with NOTICES 2. Associated and Affiliated Persons GSD’s and MBSD’s rules also apply certain applicant and member disqualification criteria to persons ‘‘associated’’ (in GSD’s rules) or ‘‘affiliated’’ (in MBSD’s rules) with the applicant or member firm. FICC states that it is not always practical for it to ascertain which individuals are ‘‘associated’’ or ‘‘affiliated’’ with a particular entity and therefore proposes to amend these rules to conform them to its internal surveillance procedures and make them consistent across both Divisions. Accordingly, references to persons ‘‘associated’’ or ‘‘affiliated’’ 4 GSD Rule 2A, Section 3(d). definition of ‘‘statutory disqualification’’ is found at 15 U.S.C. 78c(a)(39). 5 The VerDate Aug<31>2005 13:19 Dec 24, 2008 Jkt 217001 with the member or applicant are being changed to references to ‘‘controlling management,’’ which include those officers of the applicant or member that are currently screened by FICC’s Risk Management department pursuant to internal procedures.6 In addition, FICC will add language to its rules to require applicants to inform FICC as to any member of its controlling management that is or becomes subject to statutory disqualification. 3. Monitoring of Objective Disqualification Criteria GSD’s disqualification criteria is being amended to reflect an approach that such criteria should be objectively and practically monitored. Specifically, FICC will delete one disqualification criterion that refers to an applicant being subject to ‘‘closer than normal’’ surveillance by a regulatory body. FICC states that this event might not be reported in a regulatory background check. In addition, prior to this rule change, MBSD’s rules contained only two criteria that could be the basis for denial of a membership application. These were: (i) An applicant’s subjection to a statutory disqualification or similar order by another examining authority and (ii) an applicant or an associated person of the applicant making a misstatement of a material fact in connection with its membership application or thereafter. Under this rule change, MBSD will add GSD’s remaining disqualification criteria relating to unlawful acts by the applicant’s or member’s Controlling Management or the applicant’s or member’s suspension or expulsion from a self-regulatory organization. These additions to MBSD’s rules will result in both Divisions having identical disqualification criteria. Finally, FICC will add a provision to both Divisions’ rules that clarifies FICC’s right to deny membership to an applicant or member if FICC learns of any factor or circumstance that might impact the suitability of that particular applicant or member as a participant. 4. Additional Changes FICC will make the following changes to provide additional uniformity among the rules of the Divisions, NSCC, and DTC: (i) Adding to both Divisions’ disqualification criteria violations of the Investment Company Act and 6 New GSD Rule 1 and MBSD Article I (‘‘The term ‘controlling management’ shall mean the Chief Executive Officer, the Chief Financial Officer, and the Chief Operations Officer, or their equivalents, of an applicant of Participant.’’). PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 79529 Investment Advisers Act,7 since those statutes apply to their current membership base. (ii) Amending GSD’s definition of ‘‘self-regulatory organization’’ to include those entities that are foreign equivalents. The same definition for ‘‘self-regulatory organization’’ would be added to MBSD’s rules. (iii) Removing the word ‘‘willful’’ from both Divisions’ disqualification criteria concerning an applicant’s or an applicant’s controlling management’s violation of the specified federal statutes or any rule or regulation promulgated thereunder. FICC believes that a violation of these provisions, whether or not willful, should be considered as a potential disqualification criterion. (iv) Deleting references in GSD’s rules to Section 153 of Chapters 25 and 47 of Title 18 of the United States Code (‘‘Code’’) because the crimes covered by these statutes (i.e., embezzlement, forgery, false statements, etc.) are captured by the current disqualification criteria. References to those portions of the Code that deal with mail and wire fraud (Sections 1341, 1342 and 1343) would remain. This provision will also be added to MBSD’s rules. Changes are being made to the cease to act provisions of GSD’s rules (Rule 21, ‘‘Restrictions on Access to Services’’) in order to ensure consistency within the rules and across the Divisions. III. Comment Letters 8 Susanne Trimbath, PhD., of STP Advisory Services, LLC, suggested that FICC should also consider an entity’s ability to deliver securities for settlement when determining an applicant’s or member’s suitability as a participant. Ms. Trimbath pointed out that this recommendation is consistent with the Section 17A(a)(5)(C) of the Act 9 and claimed thatthe cost of FICC members failing to deliver securities at settlement is significant and harms fellow FICC members and investors. Nikki Poulos, FICC’s General Counsel, responded to Ms. Trimbath’s comment. While Ms. Poulos acknowledged securities transactions fails as a serious issue for the securities industry, she argued that FICC has attempted to reduce the risks posed by fails.10 7 15 U.S.C. 80a–1 et seq. and 15 U.S.C. 80b–1 et seq., respectively. 8 See supra note 3. 9 15 U.S.C. 78q–1(a)(c)(5) (‘‘A registered clearing agency may summarily suspend and close the accounts of a participant who * * * is in default of any delivery of funds or securities to the clearing agency.’’). 10 See, e.g., Securities Exchange Act Release Nos. 52157 (July 28, 2005), 70 FR 44959 (Aug. 4, 2005) E:\FR\FM\29DEN1.SGM Continued 29DEN1 79530 Federal Register / Vol. 73, No. 249 / Monday, December 29, 2008 / Notices Moreover, Ms. Poulos believes that including a participant’s fails as a criterion by which FICC would have to assess participation ‘‘would only create more risks in that these open obligations would be processed (or not) outside of FICC, without the benefit of, i.e., renetting.’’ IV. Discussion Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible.11 The proposed rule change should enhance FICC’s surveillance and assessment of applicants’ and members’ regulatory conditions. In addition, the proposed rule change will harmonize both of FICC’s division’s application and membership requirements and will make clear to all applicants and members of the breadth of information that FICC will require and review in order to develop an accurate risk profile to evaluate an applicant’s or member’s condition. Accordingly, the proposed rule should strengthen FICC’s ability to mitigate financial risk to itself and to its members and therefore should enhanced FICC’s ability to assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible. The Commission also agrees that the issue of ‘‘fails’’ is a serious one for the securities industry. The Commission will continue to monitor developments in this area and will use its regulatory authority if needed to better ensure that appropriate safeguards are in place to facilitate the prompt and accurate clearance and settlement of securities transactions and to protect investors. In this regard, the Commission expects FICC, as a self-regulatory organization and registered clearing agency, to similarly continue to scrutinize its participants’ effectiveness in delivering funds and securities in fulfillment of their obligations when using FICC’s clearing facilities. V. 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 12 of the Act and the rules and regulations thereunder.13 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,14 that the proposed rule change (File No. SR– FICC–2007–04), as amended, be and hereby is approved. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.15 Florence E. Harmon, Acting Secretary. [FR Doc. E8–30786 Filed 12–24–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59105; File No. SR–NSCC– 2008–08] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change to Amend Rules to Add an Agreement from Fund Members that Submit Mutual Fund Profile Information December 16, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on September 30, 2008, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change File No. SR–NSCC–2008– 08. The Commission is publishing this notice to solicit comments from interested parties on the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by the NSCC.2 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NSCC is proposing to amend its rules to add an agreement that requires NSCC fund members to have taken reasonable steps to validate the accuracy of the data they submit to the Mutual Fund Profile Service database. 12 15 U.S.C. 78q–1. approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 14 15 U.S.C. 78s(b)(2). 15 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 The exact text of the NSCC’s proposed rule change can be found at https://www.dtcc.com/ downloads/legal/rule_filings/2008/nscc/200808.pdf. dwashington3 on PROD1PC60 with NOTICES 13 In [FICC–2005–11] (establishing a daily fail netting process basis allowing participants to net outstanding fail obligations with current settlement activity in order to reduce risk exposure among FICC participants) and 54487 (Sept. 22, 2006), 71 FR 58025 (Oct. 2, 2006) [FICC–2005–17] (FICC assumes certain fails of blind brokered repurchase transactions at GSD and obtains financing as necessary in connection with such assumptions). 11 15 U.S.C. 78q–1(b)(3)(F). VerDate Aug<31>2005 13:19 Dec 24, 2008 Jkt 217001 PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the 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 these statements.3 (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Mutual Fund Profile Service (‘‘Profile’’) is a central data source for comprehensive fund prospectus and operational information relating to mutual funds. The repository is a recognized industry standard for information critical to the distribution of mutual funds in the third-party market. Profile is organized into three databases: (1) Security Issue Database (containing information such as Security ID number, security name, fee structure, investment objectives, breakpoint schedule data, and blue sky eligibility); (2) Participant Database (containing contact information, NSCC processing capabilities and restrictions or requirements); and (3) Distribution Database (containing projected or actual distributions, capital gains and dividend amounts and details, and commission information). NSCC fund members input data regarding their mutual funds into the Security Issue and Participant Profile databases. Profile is then accessed by the NSCC members that are mutual fund distributors. NSCC has recently enhanced the Security Issue Database in Profile to include new data fields needed by distributors and to re-engineer the structure of the data hierarchy to be easier for fund members to populate their data. Some of the enhancements to the Profile database were initiated in response to a recommendation in the Report (‘‘Report’’) of The Joint NASD/ Industry Task Force on Breakpoints (‘‘Task Force’’).4 NSCC has also adopted 3 The Commission has modified portions of the text of the summaries prepared by the NSCC. 4 The Task Force was formed in 2003 by the National Association of Securities Dealers (‘‘NASD’’, now ‘‘FINRA’’) with the participation of major fund companies, broker-dealers, NSCC, the Securities Industries Association and the E:\FR\FM\29DEN1.SGM 29DEN1

Agencies

[Federal Register Volume 73, Number 249 (Monday, December 29, 2008)]
[Notices]
[Pages 79528-79530]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-30786]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59111; File No. SR-FICC-2007-04]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Applicant and Member 
Disqualification Criteria

December 17, 2008.

I. Introduction

    On April 30, 2007, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ On February 7, 2008, and March 19, 
2008, FICC amended the proposed rule change. On July 9, 2008, the 
Commission published notice of the proposed rule change to solicit 
comments from interested persons.\2\ The Commission received two 
comment letters in response to the proposed rule change.\3\ For the 
reasons discussed

[[Page 79529]]

below, the Commission is approving the proposed rule change, as 
amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58128, 73 FR 40893 (July 
16, 2008).
    \3\ Letters from Susanne Trimbath, Ph.D., STP Advisory Services, 
LLC (Aug. 27, 2008) and Nikki M. Poulos, Managing Director, General 
Counsel, FICC (Nov. 7, 2008).
---------------------------------------------------------------------------

II. Description

    The proposed rule change will amend FICC's Government Securities 
Division's (``GSD'') and Mortgage Backed Securities Division's 
(``MBSD'') (collectively, ``Divisions'') rules concerning applicant and 
member disqualification criteria by making the Divisions' rules 
consistent with the rules of FICC's affiliated clearing agencies, the 
National Securities Clearing Corporation (``NSCC'') and The Depository 
Trust Company (``DTC''). The proposed rule changes cover the following 
areas:

1. Management Consideration of Disqualification Criteria \4\

    Prior to this rule change, GSD's membership qualification rules 
required FICC's Board of Directors to determine whether the presence of 
certain negative factors affecting a membership application should 
constitute the basis for denying membership to such applicant. 
Information that might have disqualified an applicant (referred to in 
GSD's rules as ``disqualification criteria'') include the applicant 
being subject to a statutory disqualification \5\ or conviction of 
various crimes such as bribery. The disqualification criteria in GSD's 
rules similarly apply as standards for continued membership.
---------------------------------------------------------------------------

    \4\ GSD Rule 2A, Section 3(d).
    \5\ The definition of ``statutory disqualification'' is found at 
15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    Under the rule change, FICC will amend GSD's disqualification 
criteria to allow FICC's management, instead of FICC's Board, to 
determine whether the presence of a potential disqualifier should 
prevent an entity from obtaining or continuing membership in GSD. Such 
change would conform to the rules of MBSD, DTC, and NSCC, which allow 
such determinations to be made by management.

2. Associated and Affiliated Persons

    GSD's and MBSD's rules also apply certain applicant and member 
disqualification criteria to persons ``associated'' (in GSD's rules) or 
``affiliated'' (in MBSD's rules) with the applicant or member firm. 
FICC states that it is not always practical for it to ascertain which 
individuals are ``associated'' or ``affiliated'' with a particular 
entity and therefore proposes to amend these rules to conform them to 
its internal surveillance procedures and make them consistent across 
both Divisions. Accordingly, references to persons ``associated'' or 
``affiliated'' with the member or applicant are being changed to 
references to ``controlling management,'' which include those officers 
of the applicant or member that are currently screened by FICC's Risk 
Management department pursuant to internal procedures.\6\ In addition, 
FICC will add language to its rules to require applicants to inform 
FICC as to any member of its controlling management that is or becomes 
subject to statutory disqualification.
---------------------------------------------------------------------------

    \6\ New GSD Rule 1 and MBSD Article I (``The term `controlling 
management' shall mean the Chief Executive Officer, the Chief 
Financial Officer, and the Chief Operations Officer, or their 
equivalents, of an applicant of Participant.'').
---------------------------------------------------------------------------

3. Monitoring of Objective Disqualification Criteria

    GSD's disqualification criteria is being amended to reflect an 
approach that such criteria should be objectively and practically 
monitored. Specifically, FICC will delete one disqualification 
criterion that refers to an applicant being subject to ``closer than 
normal'' surveillance by a regulatory body. FICC states that this event 
might not be reported in a regulatory background check.
    In addition, prior to this rule change, MBSD's rules contained only 
two criteria that could be the basis for denial of a membership 
application. These were: (i) An applicant's subjection to a statutory 
disqualification or similar order by another examining authority and 
(ii) an applicant or an associated person of the applicant making a 
misstatement of a material fact in connection with its membership 
application or thereafter. Under this rule change, MBSD will add GSD's 
remaining disqualification criteria relating to unlawful acts by the 
applicant's or member's Controlling Management or the applicant's or 
member's suspension or expulsion from a self-regulatory organization. 
These additions to MBSD's rules will result in both Divisions having 
identical disqualification criteria.
    Finally, FICC will add a provision to both Divisions' rules that 
clarifies FICC's right to deny membership to an applicant or member if 
FICC learns of any factor or circumstance that might impact the 
suitability of that particular applicant or member as a participant.

4. Additional Changes

    FICC will make the following changes to provide additional 
uniformity among the rules of the Divisions, NSCC, and DTC:
    (i) Adding to both Divisions' disqualification criteria violations 
of the Investment Company Act and Investment Advisers Act,\7\ since 
those statutes apply to their current membership base.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 80a-1 et seq. and 15 U.S.C. 80b-1 et seq., 
respectively.
---------------------------------------------------------------------------

    (ii) Amending GSD's definition of ``self-regulatory organization'' 
to include those entities that are foreign equivalents. The same 
definition for ``self-regulatory organization'' would be added to 
MBSD's rules.
    (iii) Removing the word ``willful'' from both Divisions' 
disqualification criteria concerning an applicant's or an applicant's 
controlling management's violation of the specified federal statutes or 
any rule or regulation promulgated thereunder. FICC believes that a 
violation of these provisions, whether or not willful, should be 
considered as a potential disqualification criterion.
    (iv) Deleting references in GSD's rules to Section 153 of Chapters 
25 and 47 of Title 18 of the United States Code (``Code'') because the 
crimes covered by these statutes (i.e., embezzlement, forgery, false 
statements, etc.) are captured by the current disqualification 
criteria. References to those portions of the Code that deal with mail 
and wire fraud (Sections 1341, 1342 and 1343) would remain. This 
provision will also be added to MBSD's rules.
    Changes are being made to the cease to act provisions of GSD's 
rules (Rule 21, ``Restrictions on Access to Services'') in order to 
ensure consistency within the rules and across the Divisions.

III. Comment Letters \8\

    Susanne Trimbath, PhD., of STP Advisory Services, LLC, suggested 
that FICC should also consider an entity's ability to deliver 
securities for settlement when determining an applicant's or member's 
suitability as a participant. Ms. Trimbath pointed out that this 
recommendation is consistent with the Section 17A(a)(5)(C) of the Act 
\9\ and claimed thatthe cost of FICC members failing to deliver 
securities at settlement is significant and harms fellow FICC members 
and investors.
---------------------------------------------------------------------------

    \8\ See supra note 3.
    \9\ 15 U.S.C. 78q-1(a)(c)(5) (``A registered clearing agency may 
summarily suspend and close the accounts of a participant who * * * 
is in default of any delivery of funds or securities to the clearing 
agency.'').
---------------------------------------------------------------------------

    Nikki Poulos, FICC's General Counsel, responded to Ms. Trimbath's 
comment. While Ms. Poulos acknowledged securities transactions fails as 
a serious issue for the securities industry, she argued that FICC has 
attempted to reduce the risks posed by fails.\10\

[[Page 79530]]

Moreover, Ms. Poulos believes that including a participant's fails as a 
criterion by which FICC would have to assess participation ``would only 
create more risks in that these open obligations would be processed (or 
not) outside of FICC, without the benefit of, i.e., re-netting.''
---------------------------------------------------------------------------

    \10\ See, e.g., Securities Exchange Act Release Nos. 52157 (July 
28, 2005), 70 FR 44959 (Aug. 4, 2005) [FICC-2005-11] (establishing a 
daily fail netting process basis allowing participants to net 
outstanding fail obligations with current settlement activity in 
order to reduce risk exposure among FICC participants) and 54487 
(Sept. 22, 2006), 71 FR 58025 (Oct. 2, 2006) [FICC-2005-17] (FICC 
assumes certain fails of blind brokered repurchase transactions at 
GSD and obtains financing as necessary in connection with such 
assumptions).
---------------------------------------------------------------------------

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds which are in its custody or control or for 
which it is responsible.\11\ The proposed rule change should enhance 
FICC's surveillance and assessment of applicants' and members' 
regulatory conditions. In addition, the proposed rule change will 
harmonize both of FICC's division's application and membership 
requirements and will make clear to all applicants and members of the 
breadth of information that FICC will require and review in order to 
develop an accurate risk profile to evaluate an applicant's or member's 
condition. Accordingly, the proposed rule should strengthen FICC's 
ability to mitigate financial risk to itself and to its members and 
therefore should enhanced FICC's ability to assure the safeguarding of 
securities and funds that are in its custody or control or for which it 
is responsible.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission also agrees that the issue of ``fails'' is a serious 
one for the securities industry. The Commission will continue to 
monitor developments in this area and will use its regulatory authority 
if needed to better ensure that appropriate safeguards are in place to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions and to protect investors. In this regard, the 
Commission expects FICC, as a self-regulatory organization and 
registered clearing agency, to similarly continue to scrutinize its 
participants' effectiveness in delivering funds and securities in 
fulfillment of their obligations when using FICC's clearing facilities.

V. 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 \12\ of the Act and the rules and regulations 
thereunder.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1.
    \13\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-FICC-2007-04), as 
amended, be and hereby is approved. For the Commission by the Division 
of Trading and Markets, pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-30786 Filed 12-24-08; 8:45 am]
BILLING CODE 8011-01-P
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