Federal Register / Vol. 63, No. 115 /Tuesday, June 16, 1998 / Notices 32905

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 39110

(September 22, 1997), 62 FR 50978.

3Letters from William C. Alsover, President,

Centennial Securities Company (October 29, 1997);

John G. Woodhead, President, Phelps & Woodhead,

Inc. (January 8, 1998); Ronald E. Berti, SecretaryTreasurer, Wall Street Equities, Inc. (January 15,

1998); and Robert P. VanderWal, President,

Peninsular Securities Company (March 2, 1998).

policies of the registered investment

company involved and the purposes of

the Act. PaineWebber requests an

exemption from sections 17(a)(1) and (2)

to permit the Trusts to purchase

Treasuries from PaineWebber.

3. PaineWebber states that the policy

rationale underlying section 17(a) is the

concern that an affiliated person of an

investment company, by virtue of this

relationship, could cause the investment

company to purchase securities of poor

quality from the affiliated person or to

overpay for securities. PaineWebber

argues that it is unlikely that it would

be able to exercise any adverse

influence over the Trusts with respect to

purchases of Treasuries because

Treasuries do not vary in quality and are

traded in one of the most liquid markets

in the world. Treasuries are available

through both primary and secondary

dealers, making the Treasury market

very competitive. In addition, market

prices on Treasuries can be confirmed

on a number of commercially available

information screens. PaineWebber

argues that because it is one of a limited

number of primary dealers in

Treasuries, it will be able to offer the

Trusts prompt execution of their

Treasury purchases at very competitive

prices.

4. PaineWebber states that it is only

seeking relief from section 17(a) with

respect to the initial purchase of the

Treasuries and not with respect to an

ongoing course of business.

Consequently, investors will know

before they purchase a Trust’s Securities

the Treasuries that will be owned by the

Trust and the amount of the cash

payments that will be provided

periodically by the Treasuries to the

Trust and distributed to Holders.

PaineWebber also asserts that whatever

risk there is of overpricing the

Treasuries will be borne by the

counterparties and not by the Holders

because the cost of the Treasuries will

be calculated into the amount paid on

the Contracts. PaineWebber argues that,

for this reason, the counterparties will

have a strong incentive to monitor the

price paid for the Treasuries, because

any overpayment could result in a

reduction in the amount that they

would be paid on the Contracts.

5. PaineWebber believes that the

terms of the proposed transaction are

reasonable and fair and do not involve

overreaching on the part of any person,

that the proposed transaction is

consistent with the policy of each of the

Trusts, and that the requested

exemption is appropriate in the public

interest and consistent with the

protection of investors and purposes

fairly intended by the policies and

provisions of the Act.

Applicant’s Conditions

PaineWebber agrees that the order

granting the requested relief will be

subject to the following conditions:

1. Any investment company owning

voting stock of any Trust in excess of

the limits imposed by section 12(d)(1) of

the Act will be required by the Trust’s

charter documents to vote its Trust

shares in proportion to the vote of all

other Holders.

2. The trustees of each Trust,

including majority of the trustees who

are not interested persons of the Trust,

(i) will adopt procedures that are

reasonably designed to provide that the

conditions set forth below have been

complied with; (ii) will make and

approve such changes as deemed

necessary; and (iii) will determine that

the transactions made pursuant to the

order were effected in compliance with

such procedures.

3. The Trusts (i) will maintain and

preserve in an easily accessible place a

written copy of the procedures (and any

modifications to such procedures), and

(ii) will maintain and preserve for the

longer of (a) the life of the Trusts and

(b) six years following the purchase of

any Treasuries, the first two years in an

easily accessible place, a written record

of all Treasuries purchased, whether or

not from PaineWebber, setting forth a

description of the Treasuries purchased,

the identity of the seller, the terms of

the purchase, and the information or

materials upon which the

determinations described below were

made.

4. The Treasuries to be purchased by

each Trust will be sufficient to provide

payments to Holders of Securities that

are consistent with the investment

objectives and policies of the Trust as

recited in the Trust’s registration

statement and will be consistent with

the interests of the Trust and the

Holders of its Securities.

5. The terms of the transactions will

be reasonable and fair to the Holders of

the Securities issued by each Trust and

will not involve overreaching of the

Trust or the Holders of Securities of the

Trust on the part of any person

concerned.

6. The fee, spread, or other

remuneration to be received by

PaineWebber will be reasonable and fair

compared to the fee, spread, or other

remuneration received by dealers in

connection with comparable

transactions at such time, and will

comply with section 17(e)(2)(C) of the

Act.

7. Before any Treasuries are

purchased by the Trust, the Trust must

obtain such available market

information as it deems necessary to

determine that the price to be paid for,

and the terms of, the transaction is at

least as favorable as that available from

other sources. This will include the

Trust obtaining and documenting the

competitive indications with respect to

the specific proposed transaction from

two other independent government

securities dealers. competitive quotation

information must include price and

settlement terms. These dealers must be

those who, in the experience of the

Trust’s trustees, have demonstrated the

consistent ability to provide

professional execution of Treasury

transactions at competitive market

prices. They also must be those who are

in a position to quote favorable prices.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–15891 Filed 6–15–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40081; File No. SR–NSCC–

97–07]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Order Approving a

Proposed Rule Change Relating to

Changes in Membership Standards

June 10, 1998.

On August 5, 1997, the National

Securities Clearing Corporation

(‘‘NSCC’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

a proposed rule change (File No. SR–

NSCC–97–07) pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’).1 Notice of the proposal

was published in the Federal Register

on September 29, 1997.2 Four comment

letters were received.3 For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The rule change revises NSCC’s

financial membership standards
32906 Federal Register / Vol. 63, No. 115 /Tuesday, June 16, 1998 / Notices

4 ‘‘Municipal securities brokers’ broker’’ is

defined in Rule 15c3–1(a)(8) under the Act. 17 CFR

240.15c3–1(a)(8).

5Excess net capital is the amount of net capital

a broker-dealer has in addition to that required by

the Commission’s uniform net capital rule. The

Commission’s uniform net capital rule is set forth

in Rule 15c3–1 under the Act. 17 CFR

240.15c3–1.

6 17 CFR 240.15c3–1(a)(2)(i).

7Telephone conversation between Peter J.

Axilrod, Managing Director, NSCC, and Theodore

R. Lazo, Attorney, Division of Market Regulation,

Commission (February 9, 1998).

8The $100,000 standard applicable to municipal

securities brokers’ brokers also will become

effective on September 29, 1998.

9Supra note 7.

10Conversation between Karen L. Saperstein,

Deputy General Counsel, NSCC, and Jerry W.

Carpenter, Assistant Director, Division of Market

Regulation, Commission (June 9, 1998). NSCC

originally intended to make the $1,000,000 standard

effective on the later of six months from the date

of publication in the Federal Register of the notice

of the filing or the date of Commission approval of

the rule change. 11 15 U.S.C. 78q–1(b)(3)(F).

12Securities Exchange Act Release No. 16900

(June 17, 1980), 45 FR 41920.

13 15 U.S.C. 78q–1(b)(3)(F).

14 17 CFR 200.30–3(a)(12).

imposed on its broker-dealer members.

Specifically, the rule change (1)

increases NSCC’s capital requirements

for full service members from $50,000 in

excess net capital to $500,000 in excess

net capital except for municipal

securities brokers’ brokers 4 for which

NSCC’s capital requirement will be

increased from $50,000 in excess net

capital to $100,000 in excess net capital

and (2) increases NSCC’s capital

requirements for members that clear for

other broker-dealers from $50,000 in

excess net capital to $1,000,000 in

excess net capital.5

NSCC’s current excess net capital

requirements were implemented in 1976

when NSCC was formed. Trading

volumes and the average value of

securities traded have increased

significantly since then. The

Commission also has changed its

minimum net capital requirements for

most NSCC members during this time

period from $25,000 to $250,000.6

As of the end of 1997, twenty-six out

of the approximately 350 NSCC

members would not have met a

$500,000 standard for full service

members.7 For this reason, the $500,000

standard will become effective on

September 29, 1998, which is one year

after the date of publication in the

Federal Register of the Commission’s

notice of this rule change.8

As of the end of 1997, two out of

approximately one hundred NSCC

members that clear for other brokerdealers would not have met a

$1,000,000 standard.9 For this reason,

NSCC has agreed that the effective date

of the $1,000,000 standard will be on

September 29, 1998, in order to coincide

with that of the $500,000 standard.10

II. Comment Letters

The Commission received four

comment letters. Three of the

commenters stated that they believe the

increase in the excess net capital

requirement from $50,000 to $500,000 is

unnecessarily high although one of

these commenters agreed that NSCC

should increase its excess net capital

requirement. In addition, these three

commenters stated that they settle their

trades in a timely fashion and that they

should not be placed in the same

category of risk with unreliable firms.

One of these commenters also stated

that it believed that each member of

NSCC should be evaluated on its own

merit. The fourth commenter stated that

it fully supports the increase to NSCC’s

excess net capital requirement and

objected, as discussed below, only to the

proposed effective dates.

Two of the four commenters (one that

opposed the increase and the one that

supported it) stated that they believe

that the increase in the excess net

capital requirement to $500,000 should

be implemented over a longer period of

time than NSCC proposed. One of these

two commenters stated that the increase

should take effect after twelve months

notice and then be phased in over an

additional twelve month period. The

other commenter (the one in favor of the

increase) stated that NSCC’s increase in

required excess net capital should be

implemented in three steps over a one

year period after Commission approval.

None of the commenters discussed the

implementation of the $1,000,000

standard for NSCC members that clear

for other broker-dealers.

III. Discussion

Section 17A(b)(3)(F) of the Act 11

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 or for

which it is responsible. The

Commission believes that NSCC’s

proposed rule change is consistent with

its obligations under Section

17A(b)(3)(F) because it will help to

ensure that only entities that are highly

capitalized will be allowed to be

members of NSCC. As a result, NSCC

should be able to reduce the paymentrelated risks associated with its clearing

operations.

In addition, under the standards that

the Commission’s Division of Market

Regulation has published regarding

registration of clearing agencies, a

clearing agency may impose on its

participants financial standards which

are higher than those already imposed

by applicable federal and state

regulations if it deems such higher

standards necessary to protect the

clearing agency and its participants

from unreasonable risks.12 Because the

Commission believes that NSCC’s

proposed rule change establishes

reasonable standards of financial

responsibility carefully designed to

protect NSCC and its participants from

unreasonable risk while still providing

for broad access to its services, the

Commission believes that the proposed

rule change is consistent with the

requirements of the Act.

Contrary to the commenters’

suggestions, the Commission believes

that the amount of the increase to

NSCC’s excess net capital requirement

is reasonable and appropriate.

Furthermore the Commission does not

believe that NSCC should be obligated

to evaluate excess net capital

requirements on a case by case basis

because such an evaluation could be

contrary to the requirement contained in

Section 17A(b)(3)(F) of the Act 13 that a

clearing agency’s rules not be designed

to permit unfair discrimination in the

admission of participants. The

Commission further believes that NSCC

should be permitted to institute the

increase to its excess net capital

requirements on a timely basis and that

the rule change is being phased in over

a sufficient period of time to allow

NSCC’s members to comply with the

increased excess net capital

requirements.

IV. 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

and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

NSCC–97–07) be, and hereby is,

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–15943 Filed 6–15–98; 8:45 am]

BILLING CODE 8010–01–M