Federal Register: May 13, 2005 (Volume 70, Number 92)
DOCID: FR Doc E5-2374
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-51669; File No. SR-NSCC-2004-09]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Establish a Comprehensive Standard of Care and Limitation of Liability to Its Members
DOCUMENT SUMMARY:
May 9, 2005.
I. Introduction
On December 8, 2004, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SRNSCC200409 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal was
[[Page 25635]]
published in the Federal Register on April 6, 2005.\2\ No comment
letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51458 (March 31, 2005), 70 FR 17494.
II. Description
NSCC is establishing a comprehensive standard of care and
limitation of liability with respect to its members. Historically, the
Commission has left to usergoverned clearing agencies the question of
how to allocate losses associated with, among other things, clearing
agency functions.\3\ The Commission has reviewed clearing agency
services on a casebycase basis and in determining the appropriate
standard of care has balanced the need for a high degree of clearing
agency care with the effect the resulting liabilities may have on
clearing agency operations, costs, and safekeeping of securities and
funds.\4\ Because standards of care represent an allocation of rights
and liabilities between a clearing agency and its members, which are
generally sophisticated financial entities, the Commission has
refrained from establishing a unique federal standard of care and
generally has allowed clearing agencies and other selfregulatory
organizations and their members to establish their own standards of
care.\5\ In addition, the Commission has recognized that a gross
negligence standard of care is appropriate for certain noncustodial
functions where a clearing agency, its board of directors, and its
members determine to allocate risk to individual service users.\6\
\3\ Securities Exchange Act Release Nos. 20221 (September 23,
1983), 48 FR 45167 and 22940 (February 24, 1986), 51 FR 7169. \4\ Id.
\5\ Id.
\6\ Securities Exchange Act Release No. 26154 (October 3, 1988),
53 FR 39556. NSCC's services provided to members are noncustodial in
that, other than clearing fund deposits, it does not hold its members funds or securities.
NSCC believes that adopting a uniform rule \7\ limiting NSCC's liability to its members to direct losses caused by NSCC's gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action will: (1) Memorialize an appropriate commercial standard of care that will protect NSCC from undue liability; \8\ (2) permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities; and (3) will be consistent with similar rules adopted by other selfregulatory organizations and approved by the Commission.\9\
\7\ New Section 2 of Rule 58 states:
SEC. 2. Notwithstanding any other provision in the Rules:
(a) The Corporation will not be liable for any action taken, or
any delay or failure to take any action, hereunder or otherwise to
fulfill the Corporation's obligations to its Members including
Settling Members, Settling Bank Only Members, Municipal Comparison
Only Members, Insurance Carrier Members, TPA Members, Mutual Fund/
Insurance Services Members, NonClearing Members, Fund Members and
Data Services Only Members, other than for losses caused directly by
the Corporation's gross negligence, willful misconduct, or violation
of Federal securities laws for which there is a private right of
action. Under no circumstances will the Corporation be liable for
the acts, delays, omissions, bankruptcy, or insolvency, of any third
party, including, without limitation, any depository, custodian,
subcustodian, clearing or settlement system, transfer agent,
registrar, data communication service or delivery service (``Third
Party''), unless the Corporation was grossly negligent, engaged in
willful misconduct, or in violation of Federal securities laws for
which there is a private right of action in selecting such Third Party.
(b) Under no circumstances will the Corporation be liable for
any indirect, consequential, incidental, special, punitive or
exemplary loss or damage (including, but not limited to, loss of
business, loss of profits, trading losses, loss of opportunity and
loss of use) howsoever suffered or incurred, regardless of whether
the Corporation has been advised of the possibility of such damages
or whether such damages otherwise could have been foreseen or prevented.
(c) With respect to instructions given to the Corporation by a
Special Representative/Index Recipient Agent, the Corporation shall
have no responsibility or liability for any errors which may occur
in the course of transmissions or recording of any transmissions or
which may exist in any magnetic tape, document or other media so delivered to the Corporation.
(d) With respect to the Corporation's distribution facilities,
the Corporation assumes no responsibility whatever for the form or
content of any tickets, checks, papers, documents or other material
(other than items prepared by it) placed in the boxes in its
distribution facilities assigned to each Settling Member, Municipal
Comparison Only Member, Insurance Carrier Member, TPA Member, Fund
Member and Data Services Only Member, or otherwise handled by the
Corporation; nor does the Corporation assume any responsibility for
any improper or unauthorized removal from such boxes or from the
Corporation's facilities of any such tickets, checks, papers,
documents or other material, including items prepared by the Corporation.
(e) With respect to Fund/Serv transactions, the Corporation will
not be responsible for the completeness or accuracy of any
transaction or instruction received from or transmitted to a
Settling Member, Data Services Only Member, TPA Member, TPA Settling
Entity, Mutual Fund Processor or Fund Member through Fund/Serv, nor
for any errors, omissions or delays which may occur in the
transmission of a transaction or instruction to or from a Settling
Member, Data Services Only Member, TPA Member, TPA Settling Entity, Mutual Fund Processor or Fund Member.
(f) The Corporation will not be responsible for the completeness
or accuracy of any IPS Data and Repository Data received from or
transmitted to an Insurance Carrier Member, Member or Data Services
Only Member through IPS nor for any errors, omissions or delays
which may occur in the transmission of such IPS Data and Repository
Data to or from an Insurance Carrier Member, or Data Services Only Member.
\8\ NSCC has always operated under a gross negligence standard
of care and both internal and external counsel have consistently
advised members that this is the case. NSCC is seeking to eliminate
any confusion due to the absence of a clear standard set forth in
its rules and to memorialize its historical practice. In addition,
NSCC has in effect a service agreement with the Fixed Income
Clearing Corporation (``FICC'') pursuant to which FICC provides
services for NSCC's fixed income products. This service agreement
provides for a gross negligence standard of care. In the absence of
this new rule, NSCC could be in the position of having to pay for
losses caused by FICC that are not recoverable under the agreement.
\9\ See, e.g., Securities Exchange Act Release Nos. 37421 (July
11, 1996), 61 FR 37513 [File No. SRCBOE9602]; 37563 (August 14,
1996), 61 FR 43285 [File No. SRPSE9621]; 48201 (July 21, 2003),
68 FR 44128 [File No. SRGSCC200210]; and 49373 (March 8, 2004), 69 FR 11921 [File No. SRFICC200309].
III. Discussion
Section 19(b) of the Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control.\10\ The Commission believes that NSCC's rule change is consistent with this Section because it will permit the resources of NSCC to be appropriately utilized to protect funds and assets.
\10\ 15 U.S.C. 78q1(b)(3)(F).
Although the Act does not specify the standard of care that must be
exercised by registered clearing agencies, the Commission has
determined that a gross negligence standard of care is acceptable for
noncustodial functions where a clearing agency and its participants
contractually agree to limit the liability of the clearing agency.\11\ NSCC's
[[Page 25636]]
functions are noncustodial in that it does not hold its members' funds
or securities. It is reasonable for NSCC, which is memberowned and
governed, and its members to agree through board approval of the
proposed rule change and to contract with one another in a cooperative
arrangement as to how to allocate NSCC's liability among NSCC and its
members. Therefore, the Commission has determined that given the
noncustodial nature of NSCC's services, a gross negligence standard of
care and limitation of liability is allowable for NSCC.\12\
\11\ In the release setting forth standards that would be used
by the Division of Market Regulation in evaluating clearing agency
registration applications, the Division of Market Regulation urged clearing agencies to embrace a strict standard of care in
safeguarding participants' funds and securities. Securities Exchange
Act Release No. 16900 (June 17, 1980), 45 FR 4192. In the release
granting permanent registration to The Depository Trust Company, the
National Securities Clearing Corporation, and several other clearing
agencies, however, the Commission indicated that it did not believe
that sufficient justification existed at that time to require a
unique Federal standard of care for registered clearing agencies.
Securities Exchange Act Release No. 20221 (October 3, 1983), 48 FR
45167. In a subsequent release, the Commission stated that the
clearing agency standard of care and the allocation of rights and
liabilities between a clearing agency and its participants
applicable to clearing agency services generally may be set by the
clearing agency and its participants. In the same release, the
Commission stated that it should review clearing agency proposed
rule changes in this area on a casebycase basis and balance the
need for a high degree of clearing agency care with the effect
resulting liabilities may have on clearing agency operations, costs,
and safeguarding of securities and funds. Securities Exchange Act
Release No. 22940 (February 24, 1986), 51 FR 7169. Subsequently, in
a release granting temporary registration as a clearing agency to
The Intermarket Clearing Corporation, the Commission stated that a
gross negligence standard of care may be appropriate for certain
noncustodial functions that, consistent with minimizing risk
mutualization, a clearing agency, its board of directors, and its
members determine to allocate to individual service users.
Securities Exchange Act Release No. 26154 (October 3, 1988), 53 FR
39556. Finally, in a release granting the approval of temporary
registration as a clearing agency to the International Securities
Clearing Corporation, the Commission indicated that historically it
has left to usergoverned clearing agencies the question of how to
allocate losses associated with noncustodial, data processing,
clearing agency functions and has approved clearing agency services
embodying a grossnegligence standard of care. Securities Exchange Act Release No. 26812 (May 12, 1989), 54 FR 21691.
\12\ The Commission notes that the rule change does not
alleviate NSCC from liability for violation of the Federal
securities laws where there exists a private right of action and
therefore is not designed to adversely affect NSCC's compliance with
the Federal securities laws and private rights of action that exist for violations of the Federal securities laws.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SRNSCC200409) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.\13\
\13\ 17 CFR 200.303(a)(12).
Jill Peterson,
Assistant Secretary.
[FR Doc. E52374 Filed 51205; 8:45 am]
BILLING CODE 801001P
SUMMARY:
National Securities Clearing Corp.,
DOCUMENT BODY 2:
May 9, 2005.
I. Introduction
On December 8, 2004, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SRNSCC200409 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal was
[[Page 25635]]
published in the Federal Register on April 6, 2005.\2\ No comment
letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51458 (March 31, 2005), 70 FR 17494.
II. Description
NSCC is establishing a comprehensive standard of care and
limitation of liability with respect to its members. Historically, the
Commission has left to usergoverned clearing agencies the question of
how to allocate losses associated with, among other things, clearing
agency functions.\3\ The Commission has reviewed clearing agency
services on a casebycase basis and in determining the appropriate
standard of care has balanced the need for a high degree of clearing
agency care with the effect the resulting liabilities may have on
clearing agency operations, costs, and safekeeping of securities and
funds.\4\ Because standards of care represent an allocation of rights
and liabilities between a clearing agency and its members, which are
generally sophisticated financial entities, the Commission has
refrained from establishing a unique federal standard of care and
generally has allowed clearing agencies and other selfregulatory
organizations and their members to establish their own standards of
care.\5\ In addition, the Commission has recognized that a gross
negligence standard of care is appropriate for certain noncustodial
functions where a clearing agency, its board of directors, and its
members determine to allocate risk to individual service users.\6\
\3\ Securities Exchange Act Release Nos. 20221 (September 23,
1983), 48 FR 45167 and 22940 (February 24, 1986), 51 FR 7169. \4\ Id.
\5\ Id.
\6\ Securities Exchange Act Release No. 26154 (October 3, 1988),
53 FR 39556. NSCC's services provided to members are noncustodial in
that, other than clearing fund deposits, it does not hold its members funds or securities.
NSCC believes that adopting a uniform rule \7\ limiting NSCC's liability to its members to direct losses caused by NSCC's gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action will: (1) Memorialize an appropriate commercial standard of care that will protect NSCC from undue liability; \8\ (2) permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities; and (3) will be consistent with similar rules adopted by other selfregulatory organizations and approved by the Commission.\9\
\7\ New Section 2 of Rule 58 states:
SEC. 2. Notwithstanding any other provision in the Rules:
(a) The Corporation will not be liable for any action taken, or
any delay or failure to take any action, hereunder or otherwise to
fulfill the Corporation's obligations to its Members including
Settling Members, Settling Bank Only Members, Municipal Comparison
Only Members, Insurance Carrier Members, TPA Members, Mutual Fund/
Insurance Services Members, NonClearing Members, Fund Members and
Data Services Only Members, other than for losses caused directly by
the Corporation's gross negligence, willful misconduct, or violation
of Federal securities laws for which there is a private right of
action. Under no circumstances will the Corporation be liable for
the acts, delays, omissions, bankruptcy, or insolvency, of any third
party, including, without limitation, any depository, custodian,
subcustodian, clearing or settlement system, transfer agent,
registrar, data communication service or delivery service (``Third
Party''), unless the Corporation was grossly negligent, engaged in
willful misconduct, or in violation of Federal securities laws for
which there is a private right of action in selecting such Third Party.
(b) Under no circumstances will the Corporation be liable for
any indirect, consequential, incidental, special, punitive or
exemplary loss or damage (including, but not limited to, loss of
business, loss of profits, trading losses, loss of opportunity and
loss of use) howsoever suffered or incurred, regardless of whether
the Corporation has been advised of the possibility of such damages
or whether such damages otherwise could have been foreseen or prevented.
(c) With respect to instructions given to the Corporation by a
Special Representative/Index Recipient Agent, the Corporation shall
have no responsibility or liability for any errors which may occur
in the course of transmissions or recording of any transmissions or
which may exist in any magnetic tape, document or other media so delivered to the Corporation.
(d) With respect to the Corporation's distribution facilities,
the Corporation assumes no responsibility whatever for the form or
content of any tickets, checks, papers, documents or other material
(other than items prepared by it) placed in the boxes in its
distribution facilities assigned to each Settling Member, Municipal
Comparison Only Member, Insurance Carrier Member, TPA Member, Fund
Member and Data Services Only Member, or otherwise handled by the
Corporation; nor does the Corporation assume any responsibility for
any improper or unauthorized removal from such boxes or from the
Corporation's facilities of any such tickets, checks, papers,
documents or other material, including items prepared by the Corporation.
(e) With respect to Fund/Serv transactions, the Corporation will
not be responsible for the completeness or accuracy of any
transaction or instruction received from or transmitted to a
Settling Member, Data Services Only Member, TPA Member, TPA Settling
Entity, Mutual Fund Processor or Fund Member through Fund/Serv, nor
for any errors, omissions or delays which may occur in the
transmission of a transaction or instruction to or from a Settling
Member, Data Services Only Member, TPA Member, TPA Settling Entity, Mutual Fund Processor or Fund Member.
(f) The Corporation will not be responsible for the completeness
or accuracy of any IPS Data and Repository Data received from or
transmitted to an Insurance Carrier Member, Member or Data Services
Only Member through IPS nor for any errors, omissions or delays
which may occur in the transmission of such IPS Data and Repository
Data to or from an Insurance Carrier Member, or Data Services Only Member.
\8\ NSCC has always operated under a gross negligence standard
of care and both internal and external counsel have consistently
advised members that this is the case. NSCC is seeking to eliminate
any confusion due to the absence of a clear standard set forth in
its rules and to memorialize its historical practice. In addition,
NSCC has in effect a service agreement with the Fixed Income
Clearing Corporation (``FICC'') pursuant to which FICC provides
services for NSCC's fixed income products. This service agreement
provides for a gross negligence standard of care. In the absence of
this new rule, NSCC could be in the position of having to pay for
losses caused by FICC that are not recoverable under the agreement.
\9\ See, e.g., Securities Exchange Act Release Nos. 37421 (July
11, 1996), 61 FR 37513 [File No. SRCBOE9602]; 37563 (August 14,
1996), 61 FR 43285 [File No. SRPSE9621]; 48201 (July 21, 2003),
68 FR 44128 [File No. SRGSCC200210]; and 49373 (March 8, 2004), 69 FR 11921 [File No. SRFICC200309].
III. Discussion
Section 19(b) of the Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control.\10\ The Commission believes that NSCC's rule change is consistent with this Section because it will permit the resources of NSCC to be appropriately utilized to protect funds and assets.
\10\ 15 U.S.C. 78q1(b)(3)(F).
Although the Act does not specify the standard of care that must be
exercised by registered clearing agencies, the Commission has
determined that a gross negligence standard of care is acceptable for
noncustodial functions where a clearing agency and its participants
contractually agree to limit the liability of the clearing agency.\11\ NSCC's
[[Page 25636]]
functions are noncustodial in that it does not hold its members' funds
or securities. It is reasonable for NSCC, which is memberowned and
governed, and its members to agree through board approval of the
proposed rule change and to contract with one another in a cooperative
arrangement as to how to allocate NSCC's liability among NSCC and its
members. Therefore, the Commission has determined that given the
noncustodial nature of NSCC's services, a gross negligence standard of
care and limitation of liability is allowable for NSCC.\12\
\11\ In the release setting forth standards that would be used
by the Division of Market Regulation in evaluating clearing agency
registration applications, the Division of Market Regulation urged clearing agencies to embrace a strict standard of care in
safeguarding participants' funds and securities. Securities Exchange
Act Release No. 16900 (June 17, 1980), 45 FR 4192. In the release
granting permanent registration to The Depository Trust Company, the
National Securities Clearing Corporation, and several other clearing
agencies, however, the Commission indicated that it did not believe
that sufficient justification existed at that time to require a
unique Federal standard of care for registered clearing agencies.
Securities Exchange Act Release No. 20221 (October 3, 1983), 48 FR
45167. In a subsequent release, the Commission stated that the
clearing agency standard of care and the allocation of rights and
liabilities between a clearing agency and its participants
applicable to clearing agency services generally may be set by the
clearing agency and its participants. In the same release, the
Commission stated that it should review clearing agency proposed
rule changes in this area on a casebycase basis and balance the
need for a high degree of clearing agency care with the effect
resulting liabilities may have on clearing agency operations, costs,
and safeguarding of securities and funds. Securities Exchange Act
Release No. 22940 (February 24, 1986), 51 FR 7169. Subsequently, in
a release granting temporary registration as a clearing agency to
The Intermarket Clearing Corporation, the Commission stated that a
gross negligence standard of care may be appropriate for certain
noncustodial functions that, consistent with minimizing risk
mutualization, a clearing agency, its board of directors, and its
members determine to allocate to individual service users.
Securities Exchange Act Release No. 26154 (October 3, 1988), 53 FR
39556. Finally, in a release granting the approval of temporary
registration as a clearing agency to the International Securities
Clearing Corporation, the Commission indicated that historically it
has left to usergoverned clearing agencies the question of how to
allocate losses associated with noncustodial, data processing,
clearing agency functions and has approved clearing agency services
embodying a grossnegligence standard of care. Securities Exchange Act Release No. 26812 (May 12, 1989), 54 FR 21691.
\12\ The Commission notes that the rule change does not
alleviate NSCC from liability for violation of the Federal
securities laws where there exists a private right of action and
therefore is not designed to adversely affect NSCC's compliance with
the Federal securities laws and private rights of action that exist for violations of the Federal securities laws.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SRNSCC200409) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.\13\
\13\ 17 CFR 200.303(a)(12).
Jill Peterson,
Assistant Secretary.
[FR Doc. E52374 Filed 51205; 8:45 am]
BILLING CODE 801001P