55438 Federal Register / Vol. 70, No. 182 / Wednesday, September 21, 2005 / Notices 

11 17 CFR 200.30–3(a)(12). 

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

2The Commission has modified the text of the 

summaries prepared by NSCC. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.11

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–18767 Filed 9–20–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52445; File No. SR–NSCC–

2005–08] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Codify, Consolidate, 

and Clarify Financial Responsibility 

and Operational Capability Rules 

September 15, 2005. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 notice is hereby given that on 

August 2, 2005, the National Securities 

Clearing Corporation (‘‘NSCC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change described in Items 

I, II, and III below, which items have 

been prepared primarily by NSCC. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested parties. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The purpose of the proposed rule 

change is to codify, consolidate, and 

clarify NSCC’s financial responsibility 

and operational capability rules into 

NSCC Rule 15 (‘‘Financial 

Responsibility and Operational 

Capability’’). 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NSCC included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NSCC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements.2

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Clarification of ‘‘Participants’’

Section 1 of Rule 15 sets forth NSCC’s 

general authority to establish standards 

of membership and guidelines for the 

application of such standards. Section 1 

is amended to make clear that it applies 

to a Member, Non-Clearing Member, 

Municipal Comparison Only Member, 

Fund Member, Insurance Carrier 

Member, TPA Member, or Data Services 

Only Member and that each such 

member is referred to as a ‘‘participant’’

in NSCC’s rules. 

2. Regular Reporting Required of 

Participants 

Section 2 of Rule 15 is amended to 

clearly set forth the list of reports and 

information, such as financial 

statements and copies of certain 

regulatory filings, which certain 

participants are routinely required to 

submit on a regular basis for NSCC’s 

risk management purposes. The explicit 

list of reports and information includes 

all such reports and information 

currently required by NSCC under its 

general authority to monitor compliance 

with membership standards. The 

submission requirements applicable to 

certain categories of NSCC participants 

previously had been set forth on NSCC’s 

Web site and were communicated to 

participants quarterly by NSCC 

Important Notice. Codifying the 

requirements in Section 2 of Rule 15 

will further facilitate compliance with 

these reporting requirements. 

The codification of the list of reports 

and information which are required on 

a routine basis does not restrict NSCC’s 

current general authority to require 

additional information in particular 

instances should NSCC’s risk 

management procedures so require 

pursuant to new Section 2 of Rule 15. 

The timeframes by which participants 

are required to submit particular 

information is deleted from Section 2 of 

Rule 15 because these timeframes may 

vary according to external parameters 

such as, for example, regulatory 

requirements applicable to a certain 

class of participants. Section 2 now 

makes reference to the submission of 

reports and information within the time 

periods prescribed by NSCC from time 

to time. Section 2 also directs 

participants to provide the information 

in the form and to the person or 

department specified by NSCC from 

time to time. NSCC communicates these 

submission deadlines and requirements 

to participants by Important Notices 

which are reissued quarterly. In 

addition, the current submission 

schedule is posted on NSCC’s Web site, 

and new participants are advised of the 

submission schedule in the NSCC 

acceptance letter. The reference to the 

timeframe by which reports are due is 

also deleted from Addendum B 

(including the version of Addendum B 

contained in Appendix 1) since it is 

now set forth clearly in Section 2 of 

Rule 15. 

Section 2 of Rule 15 is further revised 

to make specific reference to a 

participant’s obligation to provide 

amendments and addenda to all reports 

and to inform NSCC of any extensions 

granted by its regulator regarding 

submission of a regulatory report for 

which NSCC also requires submission. 

To the extent NSCC’s review includes 

copies of reports submitted by the 

participant to its regulator, this will 

facilitate NSCC’s review process by 

making each participant responsible for 

notifying NSCC of an extension rather 

than requiring NSCC to make inquiries 

of the participant after NSCC fails to 

receive a report by the date on which it 

is otherwise required to be provided to 

NSCC. 

In addition, Section 2 is amended to 

make specific reference to a 

participant’s obligation to provide 

annual financial statements of its 

guarantor consistent with NSCC’s 

current risk management review 

procedures. Currently, these procedures 

are communicated to participants on 

NSCC’s Web site, in Important Notices, 

and in correspondence. Codification of 

the requirement in Rule 15 will 

facilitate compliance. 

3. Participant Reporting on Certain 

Changes 

Rule 15 is further amended by new 

Section 3 which codifies a participant’s 

reporting obligations with respect to 

certain changes which could have a 

substantial impact on its business or 

financial condition, such as: (1) Material 

organizational changes including 

mergers, acquisitions, changes in 

corporate form, name changes, changes 

in the ownership of a participant or its 

affiliates, and material changes in 

management; (2) material changes in 

business lines, including new business 

lines undertaken; and (3) defendant 

status in litigation which could 

reasonably impact the participant’s 

financial condition or ability to conduct 

business. Timely notification of such 

changes and events enables NSCC to 

analyze the implications of the event 

and determine an appropriate course of 

action for risk management purposes. 

Federal Register / Vol. 70, No. 182 / Wednesday, September 21, 2005 / Notices 55439 

3 15 U.S.C. 78q–1. 

4 15 U.S.C. 78s(b)(3)(A)(i). 

5 17 CFR 240.19b–4(f)(1). 

These provisions are currently 

contained in Addendum T 

(‘‘Interpretation of the Board of 

Directors, Continuing Responsibility of 

the Corporation’’), which is being 

deleted. Including the Addendum T 

reporting obligations in Rule 15 will 

facilitate compliance by: (1) 

Consolidating the reporting 

requirements in one place; (2) clarifying 

the time by which notification is due; 

and (3) using language substantially 

similar to that used by the Government 

Securities Division and the Mortgage 

Backed Securities Divisions of the Fixed 

Income Clearing Corporation (‘‘FICC’’), 

an affiliated clearing agency to which 

some NSCC participants are also 

members. 

New Section 3 also clarifies that 

notice given in connection with such 

changes is not subject to the provisions 

in Rule 45 (‘‘Notices’’) that govern other 

types of participant notices. Instead, 

these notices must be given in the 

manner and to the persons specified by 

NSCC for this purpose. Currently, NSCC 

instructs its participants to 

communicate such notices to NSCC’s 

Risk Management staff because this area 

is responsible for evaluating the impact 

of the change in the member’s 

continued compliance with NSCC’s 

membership requirements. These notice 

requirements are set forth in NSCC’s 

Important Notices and on NSCC’s Web 

site. In addition, Section 3 includes the 

time by which such notification must be 

given, which is consistent with the 

analogous reporting requirements 

adopted by FICC. 

4. Authority To Further Examine 

Participants 

The provisions currently contained in 

Sections 2(a) and 2(c) of Rule 15 

regarding NSCC’s authority to further 

examine the financial condition and 

operational capability of a participant or 

applicant are consolidated in new 

Section 4. 

These provisions are essentially 

unchanged except that NSCC’s authority 

to receive reports and information 

regarding NSCC’s participants from 

other self-regulatory organizations is 

expanded to include other regulatory 

bodies having authority to examine, 

register, or license the participant. This 

change accommodates NSCC’s review of 

regulated entities, such as insurance 

companies and trust companies, whose 

regulators are not self-regulatory 

organizations. 

5. Additional Assurances From 

Participants 

The provisions regarding NSCC’s 

authority to require additional 

assurances from its participants are 

currently set forth in Section 2(b), 

Sections 3(a) and 3(b), and Sections 4(a) 

and 4(b) of NSCC’s Rules. Rule 15 is 

revised to consolidate these provisions 

in new Section 5(b). Specific references 

regarding NSCC’s authority to restrict 

the activities of Mutual Fund/Insurance 

Services Members and/or to require 

them to enter into specific agreements 

regarding operational support are 

deleted because such authority is 

included in NSCC’s general authority in 

Rule 15 to restrict activities of its 

participants or to impose specific 

conditions on their participation. 

6. Technical Changes 

A new Section 6 is added to Rule 15 

containing text that is currently 

contained in Section 2 of Rule 15. 

Section 6 clarifies that all information 

submitted to NSCC by a participant 

under any section of Rule 15 is subject 

to confidentiality requirements imposed 

by law or regulatory authority. 

A new Section 7 is added to Rule 15 

cross-referencing NSCC’s authority to 

take disciplinary action, impose fines, 

restrict access to services, or otherwise 

take action with respect to a 

participant’s failure to comply with 

Rule 15. This will facilitate NSCC’s 

enforcement of the requirements of Rule 

15. 

An identical technical change 

regarding the requirement that an 

applicant shall provide such other 

reports and information as NSCC 

determines appropriate is made to each 

of the following rule provisions: Rule 2 

(‘‘Members’’), Section 2; Rule 31 (‘‘Data 

Services Only Member’’), Section 2; 

Rule 51 (‘‘Fund Member’’), Section 2; 

Rule 56 (‘‘Insurance carrier Member’’), 

Section 2; and Rule 60 (‘‘TPA 

Member’’), Section 2. The terminology 

is made consistent among these 

analogous provisions. 

The proposed rule change is 

consistent with the requirements of 

Section 17A of the Act 3 and the rules 

and regulations thereunder applicable to 

NSCC because it assures the 

safeguarding of securities and funds in 

NSCC’s custody or control or for which 

it is responsible by clarifying rules for 

applicants and members. As a result, 

NSCC’s ability to maintain a financially 

and operationally sound participant 

base should be enhanced. 

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

NSCC does not believe that the 

proposed rule change will have any 

impact on or impose any burden on 

competition. 

(C) Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments relating to the 

proposed rule change have been 

solicited or received. NSCC will notify 

the Commission of any written 

comments received by NSCC. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective upon filing pursuant to Section 

19(b)(3)(A)(i) of the Act 4 and Rule 19b–

4(f)(1) 5 thereunder because the 

proposed rule change constitutes a 

stated policy, practice, or interpretation 

with respect to the meaning, 

administration, or enforcement of an 

existing rule. At any time within sixty 

days of the filing of such rule change, 

the Commission may summarily 

abrogate 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. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml) or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NSCC–2005–08 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–NSCC–2005–08. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

55440 Federal Register / Vol. 70, No. 182 / Wednesday, September 21, 2005 / Notices 

6 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

Internet Web site (http://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 inspection and copying in 

the Commission’s Public Reference 

Section, 100 F Street, NE., Washington, 

DC 20549. Copies of such filing also will 

be available for inspection and copying 

at the principal office of NSCC and on 

NSCC’s Web site at http:// 

www.nscc.com. 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–NSCC–

2005–08 and should be submitted on or 

before October 12, 2005. 

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.6

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–18765 Filed 9–20–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52435; File No. SR–NYSE–

2005–62] 

Self-Regulatory Organizations; New 

York Stock Exchange, Inc.; Notice of 

Filing of Proposed Rule Change To 

Add Exchange Rule 123G Prohibiting 

Trade Shredding 

September 14, 2005. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934, as 

amended, (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on September 9, 2005, the New York 

Stock Exchange, Inc. (‘‘NYSE’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. 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 Substance of 

the Proposed Rule Change 

The Exchange proposes to add NYSE 

Rule 123G to prohibit members, member 

organizations and associated persons 

from unbundling orders for execution 

for the primary purpose of maximizing 

a monetary or like payment to the 

member, member organization or 

associated person without regard for the 

best interests of the customer. 

The text of the proposed rule change 

appears below. Additions are in italics. 

* * * * * 

Order Entry Practices 

Rule 123G 

No member, member organization, 

allied member, approved person or 

registered or non-registered employee of 

a member or member organization may 

engage in conduct that has the intent or 

effect of unbundling orders for 

execution for the primary purpose of 

maximizing a monetary or in-kind 

amount received by the member, 

member organization, allied member, 

approved person or registered or nonregistered employee of a member or 

member organization as a result of the 

execution of such orders. For purposes 

of this section, ‘‘monetary or in-kind 

amounts’’ shall be defined to include 

commissions, gratuities, payments for or 

rebate of fees resulting from the entry of 

such orders, or any similar payments of 

value to the member, member 

organization, allied member, approved 

person or registered or non-registered 

employee of a member or member 

organization. 

* * * * * 

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 

NYSE included statements concerning 

the purpose of, and basis for, the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. The NYSE has 

prepared summaries, set forth in 

Sections A, B, and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

‘‘Trade shredding’’ is the practice of 

unbundling customer orders for 

securities into multiple smaller orders 

for the primary purpose of maximizing 

payments to the member or member 

organization, and thereby possibly 

disadvantaging the customer by, for 

example, charging excessive fees or 

commissions, or failing to obtain best 

execution of an order. Such payments 

may create a conflict of interest between 

the customer and the member or 

member organization. For example, as a 

result of the manner in which market 

data revenues are calculated, market 

centers can derive a greater share of 

market data revenue by increasing the 

number of trades that they report to the 

consolidated tape. At the same time, 

some markets have adopted a practice of 

sharing these increased revenues with 

market participants, including nonmembers, who send in orders. Thus, the 

Commission has expressed concern that 

an incentive exists for market 

participants receiving rebates to engage 

in distortive behavior, such as trade 

shredding, as a means to increase their 

share of market data revenues. Other 

economic arrangements between 

members or member organizations and 

their customers may create similar 

incentives to engage in similarly 

distortive behavior. 

The Commission has requested that 

all U.S. self-regulatory organizations 

implement rule changes to inhibit the 

practice of trade shredding. The NYSE 

does not rebate revenues from tape 

reporting to members or non-members. 

Thus, there is no incentive in this area 

for NYSE order providers to engage in 

trade shredding on orders sent to the 

Exchange. However, a member or 

member organization may engage in 

conduct that has an impact similar to 

trade shredding, in that it unbundles a 

customer’s order for the primary 

purpose of maximizing payments to the 

member or member organization at the 

customer’s expense and to the 

customer’s detriment. 

In response to the Commission’s 

request, the Exchange proposes to adopt 

a new Rule 123G prohibiting all such 

practices. Specifically, new Rule 123G 

would prohibit a member, member 

organization or any associated person 

from unbundling orders for execution 

for the primary purpose of maximizing 

a monetary or like payment of a type 

described in the rule.