[Federal Register Volume 59, Number 20 (Monday, January 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2015]
[[Page Unknown]]
[Federal Register: January 31, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33517; File No. SR-NASD-93-46]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval of Proposed Rule Change
Concerning the Imposition of Substantive and Procedural Requirements on
Members Entering Into Clearing Agreements
January 24, 1994.
On November 12, 1993, the National Association of Securities
Dealers, Inc. (``NASD'') 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\ and Rule
19b-4 thereunder.\2\ The rule change creates a new Section 47 under
Rules of Fair Practice, Article III, which will require members
entering into clearing or carrying agreements (collectively referred to
as ``clearing agreements'') to specify the obligations and supervisory
responsibilities of both the introducing and clearing firm. The new
rule will also contain procedural provisions requiring members to
submit to the NASD agreements for review or review and approval,
depending on the circumstances.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
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Notice of the proposed rule change, together with its terms of
substance, was provided by issuance of a Commission release and by
publication in the Federal Register.\3\ No comments were received in
response to the Commission release. This order approves the proposed
rule change.
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\3\Securities Exchange Act Release No. 33297 (Dec. 7, 1993), 58
FR 65210 (Dec. 13, 1993).
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I. Introduction
Currently, the NASD's rules do not regulate any of the terms of or
require submission to the NASD of clearing agreements entered into by
NASD members. The New York Stock Exchange (``NYSE'') and American Stock
Exchange (``Amex'') (collectively referred to as ``Exchanges''),
however, do regulate these agreements entered into by their members;\4\
the Exchange Rules concerning clearing agreements are identical. In
general, the Exchange Rules require that the terms of the clearing
agreements identify, at a minimum, the party responsible for seven
enumerated functions. In addition, members entering into carrying
agreements must submit the agreement to the applicable exchange for
approval prior to becoming effective; if a party to a clearing
agreement is a member of both the NYSE and the Amex, then it need only
submit the agreement to the NYSE.\5\
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\4\NYSE Rule 382(a) and Amex Rule 400(a) (collectively referred
to as ``Exchange Rules''). See also Securities Exchange Act Release
No. 18497 (Feb. 19, 1982), 47 FR 8284 (Feb. 25, 1982) (approval of
NYSE clearing agreement rule); Securities Exchange Act Release No.
18924 (July 26, 1982), 47 FR 33354 (Aug. 2, 1982) (clarification of
NYSE order approving NYSE clearing agreement rule); Securities
Exchange Act Release No. 18867 (July 2, 1982), 47 FR 30333 (July 13,
1982) (approval of Amex clearing agreement rule).
\5\Securities Exchange Act Release No. 18867 (July 2, 1982), 47
FR 30333 (July 13, 1982).
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II. Description of the NASD's New Rule Concerning Clearing
Agreements
With limited exception, the NASD's new rule will impose the same
requirements on NASD members as the Exchanges impose on their members.
As under the Exchange Rules, subsection (a) of the NASD rule requires
that clearing agreements entered into by NASD members designate which
party to the agreement is responsible for; Opening, approving and
monitoring customer accounts; extending credit; maintaining books and
records; receiving and delivering funds and securities; safeguarding
funds and securities; preparing confirmations and statements; and
accepting orders and executing transactions. In response to recent
Commission amendments to the net capital rule,\6\ the NASD rule imposes
an additional requirement beyond those imposed by the Exchanges.\7\
NASD members' clearing agreements must identify whether customers are
customers of the clearing member for purposes of the Commission's
financial responsibility rules and the Securities Investor Protection
Act (``SIPA''). In addition, upon the opening of a customer account
which will be introduced on a fully disclosed basis, the new rule
requires written notification to the customer of the existence of the
clearing agreement. Moreover, the new rule will require the clearing
agreement to identify the party responsible for providing the written
notification. Regardless of the procedural requirements concerning
submission of a clearing agreement to the NASD (discussed below), as of
the effective date of the new rule, all clearing agreements\8\ to which
a NASD member is a party must comply with the substantive provisions of
subsection (a). Thus, any agreement not currently in compliance with
subsection (a) must either be amended or terminated on or before the
effective date of the new rule.\9\
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\6\Securities Exchange Act Release No. 31511 (Nov. 24, 1992), 57
FR 56973 (Dec. 2, 1992) (amending Rule 15c3-3 under the Act).
\7\The NYSE has issued an Information Memo informing its members
of the new net capital requirements for introducing firms. NYSE
Information Memo, No. 93-35 (Aug. 24, 1993). This memo requires all
NYSE members to either file a notice of intent to meet the minimum
net capital requirement of $250,000 or submit an amended clearing
agreement reflecting the provisions required under the new capital
rule to qualify for alternative minimum net capital requirements
($5,000 or $50,000, depending on the circumstances).
\8\This Commission notes that this rule will apply to agreements
covering customer accounts carried on an omnibus basis and/or
customer accounts carried on a fully disclosed basis.
\9\The NASD has requested an effective date of April 15, 1994.
Conversation between Robert Smith, Attorney, NASD, and Michael Ryan,
Attorney, SEC (Jan. 24, 1994).
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Subsections (b) and (c) of the new rule outline the procedural
requirements for submitting clearing agreements to the NASD for review
or review and approval. If a clearing member designated to the NASD for
oversight amends a clearing agreement with respect to the items
enumerated in subsection (a) or enters into a clearing agreement, the
member must submit the agreement to the NASD for review and approval.
If, on the other hand, an introducing member designated to the NASD for
oversight amends a clearing agreement with respect to the items
enumerated in subsection (a) or enters into a clearing agreement where,
in either case, the other party to the agreement is designated to
another Self-Regulatory Organization (``SRO'') for oversight, then the
member must submit the agreement to the local NASD district office for
review.
III. Discussion
The Commission has determined to approve the NASD's proposal. The
commission finds that the rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the NASD, including the requirements of Section 15A(b)(6)
of the Act.\10\ Section 15A(b)(6) requires, in part, that the rules of
the NASD be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, and to
protect investors and the public interest.
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\10\15 U.S.C. 78 0-3(b)(6).
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The rule change will add a new section to the NASD's Rules of Fair
Practice requiring that all clearing agreements allocate between the
parties certain functions and responsibilities concerning the handling
of customer accounts. Furthermore, upon the opening of a customer
account, if the customer's account is to be introduced on a fully
disclosed basis, the new rule will require written disclosure to the
customer of the existence of a clearing agreement. Depending on the
circumstances, the rule will also require members to submit clearing
agreements to the NASD for review or review and approval.
Adoption of this rule will create uniformity among the NYSE, Amex
and the NASD in the regulation of clearing agreements and will reduce
confusion regarding the identity of the party to the agreement
responsible for certain introducing and clearing obligations.
Consistent with the Exchanges, the new rule will provide members the
flexibility to allocate functions and responsibilities between
themselves in accordance with the nature of their relationship and
business.
The Commission notes that no contractual arrangement for the
allocation of functions between an introducing and carrying
organization can operate to relieve either organization from their
respective responsibilities under the federal securities laws and
applicable SRO rules. SRO's may, however, under appropriate
circumstances, relieve an organization from certain responsibilities
which would accrue to that party absent agreement.\11\
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\11\One SRO, however, may not unilaterally exempt a member from
the rules of another SRO to which the member also belongs.
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As discussed above, the NASD's new rule, which differs from the
Exchange Rules in this respect, provides that clearing agreements must
specify whether customers are customers of the clearing member for
purposes of the Act and SIPA. The Commission notes, however, that
compliance with the NASD's new role does not necessarily result in
satisfying the requirements under Rule 15c3-1\12\ allowing $5,000 in
minimum net capital. To take advantage of the $5,000 minimum net
capital requirements, a fully disclosed introducing firm, among other
things, must be a party to a clearing agreement that provides that, for
purposes of the Act and SIPA, the introduced customer accounts are the
responsibility of the carrying firm.\13\ If the clearing agreement
fails to include this provision, the Commission considers the
introducing member as a firm in possession of customer funds or
securities subject to higher net capital requirements.
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\12\17 CFR 240.15c3-1(a)(2)(vi).
\13\Securities Exchange Act Release No. 31511 (Nov. 24, 1992),
57 FR 56973 (Dec. 2, 1992). See also Letter from Richard G. Ketchum,
Director, Division of Market Regulation to David Marcus, New York
Stock Exchange (Jan. 14, 1985).
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IV. Conclusion
In conclusion, for the reasons stated above, the Commission finds
that the proposed rule change is consistent with the requirements of
the Act. This rule change will provide greater uniformity within the
industry in the regulation of clearing agreements and, thus, will
reduce confusion regarding the identity of the party to an agreement
responsible for certain introducing and clearing obligations.
The Commission does not believe that the rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change, SR-NASD-93-46 be, and hereby is,
approved, effective April 15, 1994.\14\
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\14\See supra note 9.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2015 Filed 1-28-94; 8:45 am]
BILLING CODE 8010-01-M