Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Provide Mechanism for Sub-Account Settlement With Respect to the Alternative Investment Product Services, 79368-79371 [2015-31923]
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79368
Federal Register / Vol. 80, No. 244 / Monday, December 21, 2015 / Notices
would rather remove complex
functionality and obsolete crossreferences, thereby reducing confusion
and making the Exchange’s rules easier
to understand and navigate.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to section
19(b)(3)(A)(iii) of the Act 15 and Rule
19b–4(f)(6) thereunder.16 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 17 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b4(f)(6)(iii),18 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under section 19(b)(2)(B) 19 of the Act to
determine whether the proposed rule
15 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
17 17 CFR 240.19b–4(f)(6).
18 17 CFR 240.19b–4(f)(6)(iii).
19 15 U.S.C. 78s(b)(2)(B).
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16 17
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change should be approved or
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:
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSE–2015–60 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–NYSE–2015–60. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–NYSE–
2015–60, and should be submitted on or
before January 11, 2016.
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[FR Doc. 2015–31920 Filed 12–18–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76652; File No. SR–NSCC–
2015–007]
Electronic Comments
PO 00000
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Robert W. Errett,
Deputy Secretary.
Sfmt 4703
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change To Provide
Mechanism for Sub-Account
Settlement With Respect to the
Alternative Investment Product
Services
December 15, 2015.
On October 30, 2015, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
proposed rule change SR–NSCC–2015–
007 pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
to amend NSCC’s Rules and Procedures
(‘‘Rules’’) 3 to allow certain users of
NSCC’s Alternative Investment Product
Services (‘‘AIP’’) to settle at the subaccount level and to make related
technical changes and corrections to the
Rules, as more fully described below.
The proposed rule change was
published for comment in the Federal
Register on November 10, 2015.4 The
Commission did not receive any
comment letters on the proposed rule
change. For the reasons discussed
below, the Commission is granting
approval of the proposed rule change.
I. Description of the Proposed Rule
Change
The following is a description of the
proposed rule change, as provided by
NSCC:
Background. In 2008, the Commission
approved NSCC’s proposed rule change
to establish AIP, a non-guaranteed
processing platform for alternative
investment products such as hedge
funds, funds of hedge funds,
commodities pools, managed futures,
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Available at https://www.dtcc.com/legal/rulesand-procedures.
4 See Securities Exchange Act Release No. 76348
(November 4, 2015), 80 FR 69728 (November 10,
2015) (SR–NSCC–2015–007).
1 15
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and real estate investment trusts.5 AIP
facilitates, among other things,
processing activities such as
subscriptions and redemptions,
distributions, position reporting, and
account maintenance relating to
alternative investment products and
settles related payments (‘‘AIP
Payments’’).
Settlement of AIP Payments is done
on a prefunded basis. On each date for
which settlement will occur
(‘‘Settlement Date’’), an AIP participant
(‘‘AIP Member’’) that is in a debit
position for such day must satisfy its
full debit balance before NSCC will
settle any contra-side credit positions
with respect to such AIP Member. NSCC
simply passes AIP Payments from one
AIP Member to the contra-side AIP
Member without netting and without
guaranteeing payment, and settlement of
AIP Payments is segregated from all
other money settlement at NSCC.
Participation in AIP is governed by
Rule 53 of NSCC’s Rules. A party
seeking to be an AIP Member is required
to enter into a separate AIP membership
agreement with NSCC, even if it is
otherwise a participant of other NSCC
services.
AIP Members are divided into two
categories—‘‘AIP Manufacturers’’ and
‘‘AIP Distributors’’. AIP Manufacturers
act on behalf of, or under authority of,
the sponsor, general partner, or other
party responsible for the creation or
manufacturing of an eligible alternative
investment product (‘‘Eligible AIP
Product’’). AIP Manufacturers are
generally the fund entities themselves
(‘‘Funds’’). AIP Distributors act on
behalf of, or under authority of, a
customer or other investor in an Eligible
AIP Product. AIP Distributors are
generally the broker/dealers whose
clients invest in Eligible AIP Products.
Fund Administrators. Within the
alternative investments industry, there
are parties on the creation/
manufacturing side of transactions
known as ‘‘fund administrators’’. Fund
administrators are not the Funds
themselves, but rather, agents for the
Funds. Where a Fund engages a fund
administrator to act on the Fund’s
behalf, it is typically the fund
administrator that handles all of the
transaction processing for that Fund.
Within AIP, a fund administrator is a
party engaged under contract to provide
administrative services with respect to
one or more Eligible AIP Products and
is eligible to be an AIP Member as an
AIP Manufacturer (‘‘AIP Fund
5 Securities Exchange Act Release No. 57813 (May
12, 2008), 73 FR 28539 (May 16, 2008) (SR–NSCC–
2007–12).
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Administrator’’). In general, AIP Fund
Administrators process AIP transactions
with respect to their various Fund
clients by creating separate subaccounts within AIP, each of which is
attributable to a specific Fund client. In
this structure, the Fund client generally
would not be an AIP Member.
Under the current AIP Rules, AIP
Fund Administrators are responsible for
all activities related to their subaccounts. These activities include, for
example, submitting, reviewing, and
confirming order instructions, reviewing
and confirming settlement statements,
and making AIP Payments. With respect
to making AIP Payments, the Rules
provide that on Settlement Date all subaccount obligations roll up to the AIP
Fund Administrator’s primary AIP
account. These obligations are then
presented to the AIP Fund
Administrator’s settlement bank for
gross debit settlement and gross credit
settlement.
Because AIP Fund Administrators are
responsible for settlement of AIP
Payments, an AIP Fund Administrator
in a debit position on Settlement Date
must assure that each applicable Fund
client has timely delivered payment to
such AIP Fund Administrator’s
settlement bank. To the extent that a
single Fund client fails to deliver its
payment on Settlement Date (and the
AIP Fund Administrator is not
otherwise able to cover such Fund’s
shortfall), NSCC is required to reverse
all of the AIP Fund Administrator’s
contra-side credit positions for the day,
including the contra-side credit
positions attributable to Funds that
actually did pay.
In recent months, NSCC has learned
from several fund administrators
interested in becoming AIP Members
that the responsibility to make AIP
Payments at NSCC is a responsibility
that fund administrators generally do
not undertake outside of AIP. In the
current processing environment outside
of AIP, fund administrators perform all
transaction processing functions for
their Funds, but they generally do not
control money settlement.
As explained by certain fund
administrators to NSCC, the current AIP
Payment structure as applied to AIP
Fund Administrators has slowed
adoption of AIP by the fund
administrator community.
Proposed Rule Change. To address
this matter, NSCC has proposed to
permit AIP Fund Administrators, at
their discretion, to create sub-accounts
that settle separately from their primary
AIP accounts, as well as from their other
AIP sub-accounts, (‘‘AIP Settling SubAccounts’’).
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An AIP Fund Administrator choosing
to create an AIP Settling Sub-Account
will designate to NSCC the applicable
Fund client with responsibility for
settlement of AIP Payments with respect
to such AIP Settling Sub-Account. Such
designated Fund will not be an AIP
Member (‘‘AIP Non-Member Fund’’).
Each such AIP Non-Member Fund will
enter into a standard agreement
pursuant to which an NSCC-approved
AIP Settling Bank will perform
settlement services directly for the AIP
Non-Member Fund (‘‘Appointment of
AIP Settling Bank and AIP Settling Bank
Agreement’’).
Under the proposal, AIP Fund
Administrators will remain responsible
for all activities with respect to their
AIP Settling Sub-Accounts, except that
AIP Fund Administrators will not be
responsible for settling AIP Payments.
For example, AIP Fund Administrators
will remain responsible for order
processing applicable to their AIP
Settling Sub-Accounts, including
submitting, reviewing, and confirming
order instructions. In addition, AIP
Fund Administrators will be responsible
for informing their AIP Non-Member
Funds of their respective daily AIP
Payment obligations. All reporting,
liability, and indemnification
obligations to NSCC under NSCC’s
Rules will remain with the AIP Fund
Administrator.
As is the case today, settlement of all
AIP Payments will be done on a
prefunded basis. NSCC will not net or
guarantee any AIP Payments with
respect to AIP Settling Sub-Accounts,
and all settlement of AIP Payments
(including those of AIP Non-Member
Funds) will continue to be segregated
from all other money settlement at
NSCC.
Prior to NSCC approving any AIP
Settling Sub-Account, NSCC will
require the applicable AIP Fund
Administrator to enter into
documentation and/or agreements, or
otherwise procure documentation and/
or agreements, in such form as required
by NSCC from time to time, which will
contain:
• The AIP Fund Administrator’s
acknowledgement and agreement that it
will be responsible for all matters,
activities, liabilities, and obligations
applicable to AIP Members under the
Rules with respect to such AIP Settling
Sub-Account, except for settlement of
AIP Payments;
• the AIP Fund Administrator’s
agreement to indemnify NSCC for any
loss, liability, or expense sustained by
NSCC in connection with, arising from,
or related to such AIP Settling SubAccount, including with respect to the
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Foreign Account Tax Compliance Act
(‘‘FATCA’’); 6
• the AIP Fund Administrator’s
agreement that it will be responsible for
(A) all charges incurred and payments
due under Rule 26 (Bills Rendered) for
the processing of AIP Settling SubAccount transactions through AIP and
(B) any other charges that may be
incurred with respect to such AIP
Settling Sub-Account under Rule 24
(Charges for Services Rendered);
• the AIP Fund Administrator’s
designation of the AIP Non-Member
Fund with responsibility for making AIP
Payments with respect to such AIP
Settling Sub-Account;
• the AIP Non-Member Fund’s
consent and approval with respect to
such designation;
• the AIP Fund Administrator’s
agreement of its obligation to notify
NSCC of changes in condition to the AIP
Non-Member Fund that would
otherwise require notice to NSCC under
Rule 2B (Ongoing Membership
Requirements and Monitoring) or Rule
20 (Insolvency);
• the AIP Fund Administrator’s
agreement of its obligation to notify the
applicable AIP Non-Member Fund of
such AIP Non-Member Fund’s daily AIP
Payment balance; and
• the AIP Non-Member Fund’s
appointment of an AIP Settling Bank,
and such AIP Settling Bank’s agreement
to act as AIP Settling Bank for such AIP
Non-Member Fund.
In addition, the applicable AIP Fund
Administrator will need to obtain from
the applicable AIP Non-Member Fund
tax documentation in such form as
required by NSCC from time to time,
and with respect to any AIP NonMember Fund that is treated as a nonU.S. entity for U.S. federal income tax
purposes, the AIP Fund Administrator
will need to provide NSCC with an
executed FATCA certification from such
AIP Non-Member Fund in the form
approved by NSCC.
On a going-forward basis with respect
to FATCA, AIP Fund Administrators
will need to obtain from their AIP NonMember Funds periodic tax
documentation, including FATCA
certifications to the extent applicable,
and provide such documentation to
NSCC. Failure to provide such tax
documentation, including FATCA
certifications, in the manner and
timeframes set forth by NSCC from time
to time will result in revocation of
NSCC’s approval, in NSCC’s sole and
absolute discretion, of such AIP Settling
Sub-Account.
6 26
U.S.C. 1471 et seq.
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Under the proposal, AIP Fund
Administrators will be required to
indemnify NSCC for any loss, liability,
or expense sustained by NSCC in
connection with, arising from, or related
to FATCA in respect of their AIP
Settling Sub-Accounts. The FATCArelated provisions in this proposed rule
change are substantially similar to the
current provisions in the Rules
governing how NSCC monitors and
treats its non-U.S. members with respect
to FATCA.
In connection with this proposal,
NSCC will amend the following Rules:
• Rule 1. Definitions
• The following new defined terms
will be created: ‘‘AIP Fund
Administrator’’, ‘‘AIP Non-Member
Fund’’, and ‘‘AIP Settling SubAccount’’, each of which will be defined
or further described in Rule 53
(Alternative Investment Product
Services and Members).
• The defined term ‘‘AIP Settling
Bank’’ will be amended to: Provide that
AIP Settling Banks undertake to perform
settlement services for AIP Members, as
well as for AIP Non-Member Funds; and
correct an incorrect Rule citation within
the defined term.
• Rule 2. Members and Limited
Members
The description of ‘‘AIP Settling Bank
Only Member’’ as a type of NSCC
Limited Member will be amended to
provide that AIP Settling Bank Only
Members undertake to perform
settlement services with respect to AIP
on behalf of AIP Members, as well as
AIP Non-Member Funds.
• Rule 53. Alternative Investment
Product Services and Members
The Rule will be amended to: Permit
AIP Fund Administrators to create AIP
Settling Sub-Accounts and address the
agreements and documents that NSCC
will require prior to approving any such
AIP Settling Sub-Account; describe the
tax and FATCA-related requirements in
connection with creating and
maintaining such AIP Settling SubAccounts; describe the settlement
process with respect to AIP Settling
Sub-Accounts; state that NSCC will not
notify any AIP Non-Member Fund of
any debit or credit balance and identify
that it is the AIP Fund Administrator’s
obligation to notify each such AIP NonMember Fund of its applicable debit or
credit balance; state that NSCC will not
guarantee AIP Payments to any AIP
Non-Member Fund; specify that NSCC
will not be liable for the acts, delays,
omissions, bankruptcy, or insolvency of
any AIP Non-Member Fund unless the
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Corporation was grossly negligent,
engaged in willful misconduct, or in
violation of federal securities laws for
which there is a private right of action;
and address applicable technical
changes in connection with the
foregoing.
• Rule 55. Settling Banks and AIP
Settling Banks
The Rule will be amended to provide
that AIP Settling Banks may undertake
to: Perform settlement services on behalf
of AIP Non-Member Funds; describe the
settlement process with respect to AIP
Settling Sub-Accounts; and make
certain technical corrections.
• Rule 58. Limitation on Liability
The Rule will be amended to specify
that NSCC will not be liable for the acts,
delays, omissions, bankruptcy, or
insolvency of any AIP Non-Member
Fund unless the Corporation was
grossly negligent, engaged in willful
misconduct, or in violation of federal
securities laws for which there is a
private right of action; and make clear
that NSCC will not be responsible for
the completeness or accuracy of any AIP
data received from or transmitted to an
AIP Member (including an AIP Fund
Administrator with respect to any AIP
Settling Sub-Account thereof), nor for
any errors, omissions, or delays which
may occur in the transmission of such
AIP data to or from an AIP Member
(including an AIP Fund Administrator
with respect to any AIP Settling SubAccount thereof).
• Addendum D (Statement of Policy;
Envelope Settlement Service, Mutual
Fund Services, Insurance and
Retirement Processing Services and
other Services Offered by the
Corporation)
The Rule will be amended to make
clear that settlement with respect to AIP
Settling Sub-Accounts is not guaranteed
and that NSCC will reverse any credit
previously given to any AIP Member
(including any AIP Settling SubAccount) that is the contra-side to an
AIP Member (including a contra-side
AIP Settling Sub-Account) whose
payment was not received by NSCC.
II. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 7 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 rules
and regulations thereunder applicable to
7 15
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U.S.C. 78s(b)(2)(C).
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such organization. The Commission
believes the proposal is consistent with
section 17A(b)(3)(F) of the Act 8 and
Rule 17Ad–22(d)(12),9 as described in
detail below.
Consistency with Section 17A(b)(3)(F)
of the Act. Section 17A(b)(3)(F) of the
Act requires, among other things, that
the rules of a clearing agency be
designed (i) to foster cooperation and
coordination with persons engaged in
the clearance and settlement of
securities transactions, and (ii) to
remove impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions.10
As described above, under NSCC’s
current Rules regarding AIP, settlement
of AIP Payments is the responsibility of
AIP Members, including AIP Fund
Administrators. However, NSCC has
learned from fund administrators
interested in becoming AIP Members
that fund administrators generally do
not control money settlement for their
Fund clients. This disconnect has
impeded the adoption of AIP by the
fund administrator community. To
address this issue, NSCC will now allow
AIP Fund Administrators to establish
AIP sub-accounts and permit AIP
Payments to settle at the sub-account
level. Doing so will redirect
responsibility for settlement of AIP
Payments from AIP Fund
Administrators to the AIP Fund
Administrator’s designated Fund
clients.
In allowing settlement at the subaccount level, NSCC (i) will be fostering
cooperation and coordination with fund
administrators and Funds that are
involved in the processing of alternative
investment securities transactions, and
(ii) will be removing an impediment to
the prompt and accurate clearance and
settlement of alternative investment
securities transactions at the subaccount level. As such, the Commission
believes that the proposal is consistent
with section 17A(b)(3)(F) of the Act.11
Consistency with Rule 17Ad–
22(d)(12). Rule 17Ad–22(d)(12) under
the Act requires a central counterparty,
such as NSCC, to ‘‘establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
. . . [e]nsure that final settlement
occurs no later than the end of the
settlement day . . . .’’ 12 As described
above, under the current Rules
regarding AIP, if just one of an AIP
8 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(d)(12).
10 15 U.S.C. 78q–1(b)(3)(F).
11 Id.
12 17 CFR 240.17Ad–22(d)(12).
9 17
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Fund Administrators’ designated Fund
clients fails to make its AIP Payment on
Settlement Date, and the AIP Fund
Administrator does not cover the
shortfall, NSCC is required to reverse all
of the AIP Fund Administrator’s contraside credit positions, including the
contra-side credit positions of Funds
that did pay. With this proposed rule
change, AIP Fund Administrators can
create AIP sub-accounts that settle
separately from their primary AIP
accounts, as well as from other AIP subaccounts. Allowing AIP settlement at
the sub-account level will enable
funded AIP sub-accounts to settle no
later than the end of the settlement day,
while unfunded sub-accounts can be
reversed, separately. As such, the
Commission believes that the proposal
is consistent with Rule 17Ad–
22(d)(12).13
III. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of section 17A of the
Act 14 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
section 19(b)(2) of the Act, that
proposed rule change SR–NSCC–2015–
007 be, and hereby is, approved.15
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–31923 Filed 12–18–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76646; File No. SR–
NYSEArca–2015–113)
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Relating to the Index
Underlying the WisdomTree Put Write
Strategy Fund
December 15, 2015.
Pursuant to section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
13 Id.
14 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).
16 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
15 In
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79371
notice is hereby given that, on December
2, 2015, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to change a
representation relating to the number of
components in the CBOE S&P 500 Put
Write Index, the index underlying the
WisdomTree Put Write Strategy Fund
(‘‘Fund’’). The Securities and Exchange
Commission (‘‘Commission’’) has
approved listing and trading of shares of
the Fund on the Exchange under
Commentary .01 to NYSE Arca Equities
Rule 5.2(j)(3) (‘‘Investment Company
Units’’).4 Shares of the Fund have not
commenced listing and trading on the
Exchange. The proposed rule change is
available on the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
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
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Commission has approved a
proposed rule change relating to listing
and trading on the Exchange of shares
(‘‘Shares’’) of the Fund on the Exchange
under Commentary .01 to NYSE Arca
Equities Rule 5.2(j)(3) 5 (‘‘Investment
4 See
note 6, infra.
Arca Equities Rule 5.2(j)(3)(A) provides
that an Investment Company Unit is a security that
represents an interest in a registered investment
5 NYSE
E:\FR\FM\21DEN1.SGM
Continued
21DEN1
]]>Agencies
[Federal Register Volume 80, Number 244 (Monday, December 21, 2015)]
[Notices]
[Pages 79368-79371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31923]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76652; File No. SR-NSCC-2015-007]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Provide Mechanism
for Sub-Account Settlement With Respect to the Alternative Investment
Product Services
December 15, 2015.
On October 30, 2015, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2015-007 pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ to amend NSCC's Rules and Procedures
(``Rules'') \3\ to allow certain users of NSCC's Alternative Investment
Product Services (``AIP'') to settle at the sub-account level and to
make related technical changes and corrections to the Rules, as more
fully described below. The proposed rule change was published for
comment in the Federal Register on November 10, 2015.\4\ The Commission
did not receive any comment letters on the proposed rule change. For
the reasons discussed below, the Commission is granting approval of the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Available at https://www.dtcc.com/legal/rules-and-procedures.
\4\ See Securities Exchange Act Release No. 76348 (November 4,
2015), 80 FR 69728 (November 10, 2015) (SR-NSCC-2015-007).
---------------------------------------------------------------------------
I. Description of the Proposed Rule Change
The following is a description of the proposed rule change, as
provided by NSCC:
Background. In 2008, the Commission approved NSCC's proposed rule
change to establish AIP, a non-guaranteed processing platform for
alternative investment products such as hedge funds, funds of hedge
funds, commodities pools, managed futures,
[[Page 79369]]
and real estate investment trusts.\5\ AIP facilitates, among other
things, processing activities such as subscriptions and redemptions,
distributions, position reporting, and account maintenance relating to
alternative investment products and settles related payments (``AIP
Payments'').
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 57813 (May 12, 2008), 73
FR 28539 (May 16, 2008) (SR-NSCC-2007-12).
---------------------------------------------------------------------------
Settlement of AIP Payments is done on a prefunded basis. On each
date for which settlement will occur (``Settlement Date''), an AIP
participant (``AIP Member'') that is in a debit position for such day
must satisfy its full debit balance before NSCC will settle any contra-
side credit positions with respect to such AIP Member. NSCC simply
passes AIP Payments from one AIP Member to the contra-side AIP Member
without netting and without guaranteeing payment, and settlement of AIP
Payments is segregated from all other money settlement at NSCC.
Participation in AIP is governed by Rule 53 of NSCC's Rules. A
party seeking to be an AIP Member is required to enter into a separate
AIP membership agreement with NSCC, even if it is otherwise a
participant of other NSCC services.
AIP Members are divided into two categories--``AIP Manufacturers''
and ``AIP Distributors''. AIP Manufacturers act on behalf of, or under
authority of, the sponsor, general partner, or other party responsible
for the creation or manufacturing of an eligible alternative investment
product (``Eligible AIP Product''). AIP Manufacturers are generally the
fund entities themselves (``Funds''). AIP Distributors act on behalf
of, or under authority of, a customer or other investor in an Eligible
AIP Product. AIP Distributors are generally the broker/dealers whose
clients invest in Eligible AIP Products.
Fund Administrators. Within the alternative investments industry,
there are parties on the creation/manufacturing side of transactions
known as ``fund administrators''. Fund administrators are not the Funds
themselves, but rather, agents for the Funds. Where a Fund engages a
fund administrator to act on the Fund's behalf, it is typically the
fund administrator that handles all of the transaction processing for
that Fund.
Within AIP, a fund administrator is a party engaged under contract
to provide administrative services with respect to one or more Eligible
AIP Products and is eligible to be an AIP Member as an AIP Manufacturer
(``AIP Fund Administrator''). In general, AIP Fund Administrators
process AIP transactions with respect to their various Fund clients by
creating separate sub-accounts within AIP, each of which is
attributable to a specific Fund client. In this structure, the Fund
client generally would not be an AIP Member.
Under the current AIP Rules, AIP Fund Administrators are
responsible for all activities related to their sub-accounts. These
activities include, for example, submitting, reviewing, and confirming
order instructions, reviewing and confirming settlement statements, and
making AIP Payments. With respect to making AIP Payments, the Rules
provide that on Settlement Date all sub-account obligations roll up to
the AIP Fund Administrator's primary AIP account. These obligations are
then presented to the AIP Fund Administrator's settlement bank for
gross debit settlement and gross credit settlement.
Because AIP Fund Administrators are responsible for settlement of
AIP Payments, an AIP Fund Administrator in a debit position on
Settlement Date must assure that each applicable Fund client has timely
delivered payment to such AIP Fund Administrator's settlement bank. To
the extent that a single Fund client fails to deliver its payment on
Settlement Date (and the AIP Fund Administrator is not otherwise able
to cover such Fund's shortfall), NSCC is required to reverse all of the
AIP Fund Administrator's contra-side credit positions for the day,
including the contra-side credit positions attributable to Funds that
actually did pay.
In recent months, NSCC has learned from several fund administrators
interested in becoming AIP Members that the responsibility to make AIP
Payments at NSCC is a responsibility that fund administrators generally
do not undertake outside of AIP. In the current processing environment
outside of AIP, fund administrators perform all transaction processing
functions for their Funds, but they generally do not control money
settlement.
As explained by certain fund administrators to NSCC, the current
AIP Payment structure as applied to AIP Fund Administrators has slowed
adoption of AIP by the fund administrator community.
Proposed Rule Change. To address this matter, NSCC has proposed to
permit AIP Fund Administrators, at their discretion, to create sub-
accounts that settle separately from their primary AIP accounts, as
well as from their other AIP sub-accounts, (``AIP Settling Sub-
Accounts'').
An AIP Fund Administrator choosing to create an AIP Settling Sub-
Account will designate to NSCC the applicable Fund client with
responsibility for settlement of AIP Payments with respect to such AIP
Settling Sub-Account. Such designated Fund will not be an AIP Member
(``AIP Non-Member Fund''). Each such AIP Non-Member Fund will enter
into a standard agreement pursuant to which an NSCC-approved AIP
Settling Bank will perform settlement services directly for the AIP
Non-Member Fund (``Appointment of AIP Settling Bank and AIP Settling
Bank Agreement'').
Under the proposal, AIP Fund Administrators will remain responsible
for all activities with respect to their AIP Settling Sub-Accounts,
except that AIP Fund Administrators will not be responsible for
settling AIP Payments. For example, AIP Fund Administrators will remain
responsible for order processing applicable to their AIP Settling Sub-
Accounts, including submitting, reviewing, and confirming order
instructions. In addition, AIP Fund Administrators will be responsible
for informing their AIP Non-Member Funds of their respective daily AIP
Payment obligations. All reporting, liability, and indemnification
obligations to NSCC under NSCC's Rules will remain with the AIP Fund
Administrator.
As is the case today, settlement of all AIP Payments will be done
on a prefunded basis. NSCC will not net or guarantee any AIP Payments
with respect to AIP Settling Sub-Accounts, and all settlement of AIP
Payments (including those of AIP Non-Member Funds) will continue to be
segregated from all other money settlement at NSCC.
Prior to NSCC approving any AIP Settling Sub-Account, NSCC will
require the applicable AIP Fund Administrator to enter into
documentation and/or agreements, or otherwise procure documentation
and/or agreements, in such form as required by NSCC from time to time,
which will contain:
The AIP Fund Administrator's acknowledgement and agreement
that it will be responsible for all matters, activities, liabilities,
and obligations applicable to AIP Members under the Rules with respect
to such AIP Settling Sub-Account, except for settlement of AIP
Payments;
the AIP Fund Administrator's agreement to indemnify NSCC
for any loss, liability, or expense sustained by NSCC in connection
with, arising from, or related to such AIP Settling Sub-Account,
including with respect to the
[[Page 79370]]
Foreign Account Tax Compliance Act (``FATCA''); \6\
---------------------------------------------------------------------------
\6\ 26 U.S.C. 1471 et seq.
---------------------------------------------------------------------------
the AIP Fund Administrator's agreement that it will be
responsible for (A) all charges incurred and payments due under Rule 26
(Bills Rendered) for the processing of AIP Settling Sub-Account
transactions through AIP and (B) any other charges that may be incurred
with respect to such AIP Settling Sub-Account under Rule 24 (Charges
for Services Rendered);
the AIP Fund Administrator's designation of the AIP Non-
Member Fund with responsibility for making AIP Payments with respect to
such AIP Settling Sub-Account;
the AIP Non-Member Fund's consent and approval with
respect to such designation;
the AIP Fund Administrator's agreement of its obligation
to notify NSCC of changes in condition to the AIP Non-Member Fund that
would otherwise require notice to NSCC under Rule 2B (Ongoing
Membership Requirements and Monitoring) or Rule 20 (Insolvency);
the AIP Fund Administrator's agreement of its obligation
to notify the applicable AIP Non-Member Fund of such AIP Non-Member
Fund's daily AIP Payment balance; and
the AIP Non-Member Fund's appointment of an AIP Settling
Bank, and such AIP Settling Bank's agreement to act as AIP Settling
Bank for such AIP Non-Member Fund.
In addition, the applicable AIP Fund Administrator will need to
obtain from the applicable AIP Non-Member Fund tax documentation in
such form as required by NSCC from time to time, and with respect to
any AIP Non-Member Fund that is treated as a non-U.S. entity for U.S.
federal income tax purposes, the AIP Fund Administrator will need to
provide NSCC with an executed FATCA certification from such AIP Non-
Member Fund in the form approved by NSCC.
On a going-forward basis with respect to FATCA, AIP Fund
Administrators will need to obtain from their AIP Non-Member Funds
periodic tax documentation, including FATCA certifications to the
extent applicable, and provide such documentation to NSCC. Failure to
provide such tax documentation, including FATCA certifications, in the
manner and timeframes set forth by NSCC from time to time will result
in revocation of NSCC's approval, in NSCC's sole and absolute
discretion, of such AIP Settling Sub-Account.
Under the proposal, AIP Fund Administrators will be required to
indemnify NSCC for any loss, liability, or expense sustained by NSCC in
connection with, arising from, or related to FATCA in respect of their
AIP Settling Sub-Accounts. The FATCA-related provisions in this
proposed rule change are substantially similar to the current
provisions in the Rules governing how NSCC monitors and treats its non-
U.S. members with respect to FATCA.
In connection with this proposal, NSCC will amend the following
Rules:
Rule 1. Definitions
The following new defined terms will be created: ``AIP
Fund Administrator'', ``AIP Non-Member Fund'', and ``AIP Settling Sub-
Account'', each of which will be defined or further described in Rule
53 (Alternative Investment Product Services and Members).
The defined term ``AIP Settling Bank'' will be amended to:
Provide that AIP Settling Banks undertake to perform settlement
services for AIP Members, as well as for AIP Non-Member Funds; and
correct an incorrect Rule citation within the defined term.
Rule 2. Members and Limited Members
The description of ``AIP Settling Bank Only Member'' as a type of
NSCC Limited Member will be amended to provide that AIP Settling Bank
Only Members undertake to perform settlement services with respect to
AIP on behalf of AIP Members, as well as AIP Non-Member Funds.
Rule 53. Alternative Investment Product Services and Members
The Rule will be amended to: Permit AIP Fund Administrators to
create AIP Settling Sub-Accounts and address the agreements and
documents that NSCC will require prior to approving any such AIP
Settling Sub-Account; describe the tax and FATCA-related requirements
in connection with creating and maintaining such AIP Settling Sub-
Accounts; describe the settlement process with respect to AIP Settling
Sub-Accounts; state that NSCC will not notify any AIP Non-Member Fund
of any debit or credit balance and identify that it is the AIP Fund
Administrator's obligation to notify each such AIP Non-Member Fund of
its applicable debit or credit balance; state that NSCC will not
guarantee AIP Payments to any AIP Non-Member Fund; specify that NSCC
will not be liable for the acts, delays, omissions, bankruptcy, or
insolvency of any AIP Non-Member Fund unless the Corporation was
grossly negligent, engaged in willful misconduct, or in violation of
federal securities laws for which there is a private right of action;
and address applicable technical changes in connection with the
foregoing.
Rule 55. Settling Banks and AIP Settling Banks
The Rule will be amended to provide that AIP Settling Banks may
undertake to: Perform settlement services on behalf of AIP Non-Member
Funds; describe the settlement process with respect to AIP Settling
Sub-Accounts; and make certain technical corrections.
Rule 58. Limitation on Liability
The Rule will be amended to specify that NSCC will not be liable
for the acts, delays, omissions, bankruptcy, or insolvency of any AIP
Non-Member Fund unless the Corporation was grossly negligent, engaged
in willful misconduct, or in violation of federal securities laws for
which there is a private right of action; and make clear that NSCC will
not be responsible for the completeness or accuracy of any AIP data
received from or transmitted to an AIP Member (including an AIP Fund
Administrator with respect to any AIP Settling Sub-Account thereof),
nor for any errors, omissions, or delays which may occur in the
transmission of such AIP data to or from an AIP Member (including an
AIP Fund Administrator with respect to any AIP Settling Sub-Account
thereof).
Addendum D (Statement of Policy; Envelope Settlement Service,
Mutual Fund Services, Insurance and Retirement Processing Services and
other Services Offered by the Corporation)
The Rule will be amended to make clear that settlement with respect
to AIP Settling Sub-Accounts is not guaranteed and that NSCC will
reverse any credit previously given to any AIP Member (including any
AIP Settling Sub-Account) that is the contra-side to an AIP Member
(including a contra-side AIP Settling Sub-Account) whose payment was
not received by NSCC.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \7\ 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 rules and regulations thereunder applicable
to
[[Page 79371]]
such organization. The Commission believes the proposal is consistent
with section 17A(b)(3)(F) of the Act \8\ and Rule 17Ad-22(d)(12),\9\ as
described in detail below.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(d)(12).
---------------------------------------------------------------------------
Consistency with Section 17A(b)(3)(F) of the Act. Section
17A(b)(3)(F) of the Act requires, among other things, that the rules of
a clearing agency be designed (i) to foster cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions, and (ii) to remove impediments to and perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions.\10\ As described
above, under NSCC's current Rules regarding AIP, settlement of AIP
Payments is the responsibility of AIP Members, including AIP Fund
Administrators. However, NSCC has learned from fund administrators
interested in becoming AIP Members that fund administrators generally
do not control money settlement for their Fund clients. This disconnect
has impeded the adoption of AIP by the fund administrator community. To
address this issue, NSCC will now allow AIP Fund Administrators to
establish AIP sub-accounts and permit AIP Payments to settle at the
sub-account level. Doing so will redirect responsibility for settlement
of AIP Payments from AIP Fund Administrators to the AIP Fund
Administrator's designated Fund clients.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In allowing settlement at the sub-account level, NSCC (i) will be
fostering cooperation and coordination with fund administrators and
Funds that are involved in the processing of alternative investment
securities transactions, and (ii) will be removing an impediment to the
prompt and accurate clearance and settlement of alternative investment
securities transactions at the sub-account level. As such, the
Commission believes that the proposal is consistent with section
17A(b)(3)(F) of the Act.\11\
---------------------------------------------------------------------------
\11\ Id.
---------------------------------------------------------------------------
Consistency with Rule 17Ad-22(d)(12). Rule 17Ad-22(d)(12) under the
Act requires a central counterparty, such as NSCC, to ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]nsure that final settlement occurs no
later than the end of the settlement day . . . .'' \12\ As described
above, under the current Rules regarding AIP, if just one of an AIP
Fund Administrators' designated Fund clients fails to make its AIP
Payment on Settlement Date, and the AIP Fund Administrator does not
cover the shortfall, NSCC is required to reverse all of the AIP Fund
Administrator's contra-side credit positions, including the contra-side
credit positions of Funds that did pay. With this proposed rule change,
AIP Fund Administrators can create AIP sub-accounts that settle
separately from their primary AIP accounts, as well as from other AIP
sub-accounts. Allowing AIP settlement at the sub-account level will
enable funded AIP sub-accounts to settle no later than the end of the
settlement day, while unfunded sub-accounts can be reversed,
separately. As such, the Commission believes that the proposal is
consistent with Rule 17Ad-22(d)(12).\13\
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\12\ 17 CFR 240.17Ad-22(d)(12).
\13\ Id.
---------------------------------------------------------------------------
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of section 17A of the Act \14\ and the
rules and regulations thereunder.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that proposed rule change SR-NSCC-2015-007 be, and hereby is,
approved.\15\
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\15\ 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).
\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-31923 Filed 12-18-15; 8:45 am]
BILLING CODE 8011-01-P
