24990 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices

contravene the purposes of the proposed rule

change. Letter from Anthony H. Davidson,

Attorney, MBSCC, to Michele Bianco, Division,

Commission (November 1, 1995).

6MBSCC has received two requests for a waiver.

Letter from John J. Rioux, Vice President and

Assistant General Counsel, J.P. Morgan & Co.

Incorporated, to George Parasole, Director of

Member Services, MBSCC (February 1, 1996) and

letter from Edward K. McCarthy, General Counsel,

Liberty Brokerage Inc., to George Parasole, Director

of Member Services, MBSCC (February 7, 1996).

7Letter from Anthony H. Davidson, Attorney,

MBSCC, to Jerry Carpenter, Assistant Director,

Division, Commission (April 15, 1996).

8 15 U.S.C. 78q–1 (1988).

9 15 U.S.C. 78q–1(b)(3)(F) (1988).

10Such guidelines permit the over delivery or

under delivery of two percent of the par amount of

securities to be delivered. MBSCC’s cash

adjustment procedures pro rate the resulting

positive or negative balances to the MBSCC

participants with netted out positions.

11 15 U.S.C. 78s(b)(2) (1988).

12 17 CFR 200.30(a)(12) (1995).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 36150

(August 23, 1995), 60 FR 45197 (August 30, 1995).

4Securities Exchange Act Release No. 36492

(November 20, 1995), 60 FR 58422 (November 27,

1995).

5Under the proposal, the MSRB will bill only for

those trades for which the buy and sell sides

ultimately have agreed on trade details such as

price, transaction amount, and value.

6Rule G–14 requires that in each inter-dealer

transaction the clearing dealer identify the

executing dealer on whose half the transaction is

reported. Nevertheless, trades are reported lacking

the executing broker’s identifier. The fees due on

those trades will appear on the clearing dealer’s

invoice assigned to ‘‘blank’’.

result of being rejected, such trades

must settle on a trade-for-trade basis. A

participant may request a waiver of this

restriction by providing to MBSCC such

assurances as MBSCC may request.6

These assurances may include but are

not limited to (i) a letter describing the

reason for the request and the applicable

accounts for which relief is sought and

containing a representation that the use

of multiple accounts is not for the

purpose of influencing MBSCC’s

clearance and settlement process or (ii)

an opinion of counsel relating to the use

of multiple accounts that is satisfactory

to MBSCC.7

II. Discussion

The Commission believes the

proposal is consistent with the

requirements of Section 17A of the Act.8

Specifically, Section 17A(b)(3)(F) 9

states that the rules of a clearing agency

must be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

responsible and to protect investors.

Under the SBO processing, MBSCC

makes cash adjustments to account for

variances in the par amount of securities

delivered by participants as permitted

by the Public Securities Association

guidelines.10 MBSCC believes that the

ability to include trades among related

accounts could cause a perception that

participants might influence the amount

of their cash adjustments through

submissions of internal trades.

Specifically, MBSCC believes it could

be possible for a participants to create

and submit to MBSCC for SBO

settlement fictitious trades between

related accounts that would permit the

participant to share in a positive cash

balance adjustment. By reducing the

possibility that a participant can

manipulate SBO settlement in such a

manner, the proposed rule change

should further MBSCC’s ability to

safeguard the funds in its custody or

control and to protect investors.

III. Conclusion

For the reasons stated above, the

Commission finds that MBSCC’s

proposal is consistent with Section 17A

of the Act.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,11 that the

proposed rule change (File No. SR–

MBSCC–95–08) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12469 Filed 5–16–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37197; File No. SR–MSRB–

95–13]

Self-Regulatory Organizations; Order

Approving Proposed Rule Changes by

the Municipal Securities Rulemaking

Board Relating to Fee Assessments

and Reporting of Sales or Purchases

Pursuant to Rules A–13, A–14, and G–

14

May 10, 1996.

I. Introduction

On August 11, 1995 the Municipal

Securities Rulemaking Board (‘‘Board’’

or ‘‘MSRB) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

change the fees assessed under Rules A–

13 and A–14, as well as to change the

reporting requirements under Rule G–

14. The proposed rule change was

published for comment in the Federal

Register (‘‘Original Proposal’’).3 In

November 1995, the MSRB submitted

Amendment No. 1 to the proposed rule

change which was also published for

comment (‘‘Amended Proposal’’).4 The

Commission received twenty-three

comment letters in all. For the reasons

discussed below, the Commission is

approving the proposal.

II. Description and Scope of the

Proposed Rule Change

The proposal changes the MSRB’s

existing fee structure to impose,

effective March 1, 1996, transactionbased fees on inter-dealer transactions.

The proposal establishes a transaction

fee of $.005 per $1,000 par value of

bonds on all inter-dealer sales

transactions, and effective October 1,

1995, increases the annual fee,

applicable to each broker, dealer, and

municipal securities dealer who

conducts municipal securities business,

from $100 to $200. Effective March 1,

1996, the proposal permits the MSRB to

use reported transaction information for

the purpose of assessing transaction

fees.

Rule G–14 requires each inter-dealer

transaction that is eligible for automated

comparison to be reported to the MSRB

through National Securities Clearing

Corporation, the central facility provider

for the automated comparison process.

The corollary change to Rule G–14

under the proposal authorizes the MSRB

to use the reported transaction

information to assess inter-dealer

transaction fees. The MSRB will send

monthly invoices to dealers that report

inter-dealer sales transactions on their

own behalf, and/or on behalf of another

dealer.5 The dealer will be responsible

for the timely payment of the entire fee

amount to the MSRB, but the MSRB

expects that clearing dealers will pass

through the fees to executing dealers

based upon their transaction volume. To

assist the clearing dealer, the invoice

will separate out the fees due on the

transactions submitted by the clearing

dealer on behalf of identified executing

dealers.6 As improvements are made in

the timely and accurate reporting of

transactions under Rule G–14, including

the correct identification of executing

brokers, the MSRB will consider

revisions in the billing procedure to

accommodate direct billing of executing

brokers.

As explained in its filing, the proposal

is intended to increase revenue to the

MSRB to cover budgetary expenditures.

The MSRB anticipates its technology

expenditures to rise over the next few

years as it implements transparency
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices 24991

7 In recognition of this fact, and in response to

concerns of commenters and the Commission, the

MSRB amended the filing to reduce the originally

proposed transaction fee by 50% from $.01 to $.005

per $1,000 par value. The amendment left intact the

$.03 per $1,000 underwriting assessment.

8See letters from Peter C. Byram, Senior Vice

President, J.J. Kenny Drake, to Secretary, SEC, dated

September 7 1995 (‘‘J.J. Kenny letter 1’’); from

Richard G. McDermott, Jr., President, Chapdelaine

& Co., to Secretary, SEC, dated September 11, 1995

(‘‘Chapdelaine letter’’); from John J. Lynch, Jr.,

Executive Vice President, J.F. Hartfield & Co., Inc.,

to Secretary, SEC, dated September 12, 1995

(‘‘Hartfield letter’’); from Richard W. Smith,

President, RW Smith & Associates, Inc., to Jonathan

G. Katz, Secretary, SEC, dated September 13, 1995

(‘‘RW Smith letter 1’’); from Thomas G. Caffrey,

President, Titus and Donnelly, Inc., to Secretary,

SEC, dated September 14, 1995 (‘‘Titus letter’’);

from Patricia MacGeorge, Treasurer, EMR

Securities, Inc., to Jonathan G. Katz, Secretary, SEC,

dated September 15, 1995 (‘‘EMR letter’’); from

Robert J. Ellwood, President, R.W., Ellwood & Co.,

Inc., to Secretary, SEC, dated September 18, 1995

(‘‘R.W. Ellwood letter 1’’); from James J. Smith,

President, Smith Peters & Stark, to Jonathan G. Katz,

Secretary, SEC. dated September 18, 1995 (‘‘Smith

Peters letter’’); from Brian Kelly, President,

Municipal Partners, Inc., to Secretary, SEC, dated

September 19, 1995 (‘‘Municipal Partners letter’’);

from John V. Kick, Treasurer, Barr Brothers & Co.,

Inc., to Secretary, SEC, dated September 19, 1995

(‘‘Barr letter’’); from James Avena, President, Tullett

and Tokyo Securities, Inc., to Jonathan G. Katz,

Secretary, SEC, dated September 19, 1995 (‘‘Tullett

letter 1’’); from Glenn Grossman, Senior Managing

Director Cantor Fitzgerald, to Jonathan G. Katz,

Secretary, SEC, dated September 19, 1995 (‘‘Cantor

letter’’); and from George Brakatselos, Vice

President, Public Securities Association, to

Secretary, SEC, dated September 20, 1995 (‘‘PSA

letter 1’’). Letters were also submitted to the MSRB

and forwarded to the Commission. See letters from

John B. Licata, Chief Executive Officer, Sonoma

Securities Corp., dated October 10, 1995 (‘‘Sonoma

Letter’’), from George Brakatselos, Vice President,

Public Securities Association, to Mr. Christopher

Taylor, Executive Director, MSRB dated November

1, 1995 (‘‘PSA letter 2’’), and from Peter C. Byram,

Senior Vice President, J.J. Kenny Drake, Inc., to

Board of Directors, MSRB, dated September 19,

1995 (‘‘J.J. Kenny Drake letter 2’’).

9See letter from Richard W. Smith, President, RW

Smith & Associates, Inc. to Jonathan G. Katz,

Secretary, SEC. dated November 8, 1995 (‘‘RW

Smith letter 2’’); from Dominick F. Antonelli, Chief

Operating Officer, Roosevelt & Cross, Inc., to Robert

Colby, Deputy Director, SEC, dated November 9,

1995 (‘‘Roosevelt letter’’); from the employees of

RW Smith & Associates, Inc., to Jonathan G. Katz,

Secretary, SEC, dated December 5, 1995 (‘‘Smith

employees’ letter’’); from Richard W. Smith,

President, RW Smith & Associations, Inc., to

Jonathan G. Katz, Secretary, SEC, dated December

6, 1995 (‘‘RW Smith letter 3’’); from George

Brakatselos, Vice President, Public Securities

Association, to Secretary, SEC, dated December 8,

1995 (‘‘PSA letter 3’’); from Peter C. Byram, Senior

Vice President, J.J. Kenny Drake, to Jonathan G.

Katz, Secretary, SEC, dated December 6, 1995 (‘‘J.J.

Kenny letter 3’’); from O. Gene Hurst, President,

Wolfe & Hurst Bond Brokers, Inc., to Jonathan Katz,

Secretary, SEC, dated December 8, 1995 (‘‘Wolfe

letter’’); from Robert J. Ellwood, President, R.W.

Ellwood & Co., Inc., to Secretary, SEC, dated

December 12, 1995 (‘‘R.W. Ellwood letter 2’’); from

John J. Lynch, Jr., Executive Vice President, J.F.

Hartfield & Co., Inc., to Secretary, SEC, dated

December 15, 1995 (‘‘Hartfield letter 2’’); and from

James Avena, President, Tullett and Tokyo

Securities, Inc., to Jonathan G. Katz, Secretary, SEC.

dated December 15, 1995 (‘‘Tullett letter 2’’).

10These firms transact exclusively with other

dealers and not with issuers or public investors.

The two nonbroker’s broker comment letters

received by the Commission were from the Public

Securities Association (‘‘PSA’’). The PSA also sent

a comment letter to the MSRB recommending an

alternative fee structure. All three PSA letters

focused on the proposals’ impact on the brokers’

broker.

11The Sonoma letter opposed the increase in the

annual fee, arguing that the increase was not fair to

a small firm with little municipal securities

business.

12See letter from George Brakatselos, Vice

President, Public Securities Association, to Mr.

Christopher Taylor, Executive Director, MSRB,

dated November 1, 1995 (‘‘PSA letter 2’’).

13See letter from Peter C. Byram, Senior Vice

President, J.J. Kenny Drake, Inc. to Board of

Directors, MSRB, dated September 19, 1995 (‘‘J.J.

Kenny letter 2’’).

14Many commenters echoed the opinion that an

assessment based on revenues, similar to that used

by the National Association of Securities Dealers

and the New York Stock Exchange, would be a

more equitable method of determining a firm’s

participation in the municipal securities market.

See Hartfield letter, Titus letter, Municipal Partners

letter, Cantor letter, Barr letter, PSA letter 1, RW

Smith letter 2, and Hartfield letter 2.

15Securities Exchange Act Release No. 36492

(November 20, 1995), 60 FR 58422 (November 27,

1995).

improvements with its institutional and

retail transaction reporting system.

The MSRB’s rationale for

implementing inter-dealer transaction

fees is that dealers should be assessed

fees based upon their level of

participation in the market. The MSRB

understands that the transaction fee will

have a substantial effect on participants

whose transaction activity is primarily

or exclusively in the inter-dealer

market.7

III. Summary of Comments

The Commission received thirteen

comment letters on the rule change as

originally proposed 8 and an additional

ten comment letters on the amended

proposal.9 Of the twenty-three comment

letters received, twenty-one were from

municipal securities broker’s brokers

who opposed the aspect of the proposal

which would establish an inter-dealer

transaction fee.10

A. Comments on the Original Proposal

The comments focused almost

exclusively on the new transaction fee.

All but one of the broker’s brokers

commented that the proposed fee

generated an inequitable burden on the

broker’s broker and in effect amounted

to a double assessment on transactions

involving a broker’s broker.11

Two commenters suggested the MSRB

consider different fee structures that

might achieve the MSRB’s goals. The

PSA suggested that the MSRB eliminate

both the existing annual fee and

underwriting assessment and establish a

new annual fee.12 The PSA proposed an

annual fee based on a municipal

securities firm’s underwriting ranking.

Depending on the firm’s ranking, a firm

would pay between $1,000 and

$100,000 per year. The PSA believes

this proposal distributes the financial

burden more evenly and would simplify

the billing process.

Another commenter, a broker’s

broker, offered three alternatives to the

MSRB’s proposal to initiate an interdealer transaction assessment.13 This

brokers’ broker suggested moving to a

flat fee structure based on a firm’s

aggregate market activity. The

suggestion is similar to the PSA’s, but

would use both transaction data and

underwriting data to determine a firm’s

level of market participation. The

annual fee would range from $1,000 for

the smallest 1,700 firms to $20,000 for

the top 50 firms. As a second

alternative, Kenny suggested the MSRB

meet its funding needs by maintaining

the underwriting assessment at $.03 per

$1,000 par value and increasing the

annual fee for all members to $1,000.

Lastly, Kenny suggested that a logical

alternative would be for the MSRB to

initiate a revenue-based assessment,

thus capturing the true participation of

each firm in the municipal securities

market.14

In response to these comments, the

MSRB reduced the proposed transaction

fee by 50%, but determined to retain its

proposed structural changes.15 The

MSRB defended its decision to include

sales transactions reported by brokers’

brokers in the inter-dealer assessment,

noting that broker’s brokers represent

the sell side on 35% of the par value of

reported inter-dealer transactions. In

comparison, broker’s brokers do not

participate in underwriting and

consequently would pay no percentage

of the underwriting assessment. The

MSRB does not find the transaction fee

to be disproportionate or unduly

burdensome because the broker’s

brokers comprise a very significant

portion of the inter-dealer market. The

MSRB asserts that, for the purposes of

the transaction fee, transactions

involving a broker’s broker, although

executed at the direction of other

dealers, are to be viewed as separate

offsetting purchase and sale

transactions. Accordingly, the fee does

not amount to a double assessment for

the ‘‘same’’ transaction but amounts to

a fee assessed on any participant on the

sell side of any inter-dealer transaction.

The MSRB also believes its proposed

transaction fee is likely to be more

easily administered than the alternatives

offered by the PSA and other

commenters. The MSRB stated that it
24992 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices

16 15 U.S.C. 78s(b). The Commission’s statutory

role is limited to evaluating rules as proposed

against the statutory standards. See S. Rep. No. 75,

94th Cong., 1st Sess., at 13 (1975.)

17 15 U.S.C. 78o–4.

18The MSRB is projecting inter-dealer sales

volume of $400 million in fiscal year 1996, with

broker’s brokers accounting for $140 million of it.

Accordingly, broker’s brokers will pay

approximately $700,000 in inter-dealer transaction

fees while dealers will pay approximately $1.3

million in inter-dealer transaction fees. In addition,

many dealers may also incur an underwriting

assessment.

19See J.J. Kenny letter 1, Hartfield letter, Titus

letter, EMR letter, Ellwood letter 1, and PSA letter

1.

considered whether its fees could be

derived from the total municipal

securities revenues of dealers, and based

on the advice of their outside auditors,

concluded to not adopt such an

assessment. The MSRB stated that the

term ‘‘municipal securities revenue’’ is

neither clearly defined nor uniformly

computed by dealers. In addition, the

MSRB believes it could receive a

qualified opinion on its audited

financial statements unless each dealer

had its own ‘‘municipal securities

revenue’’ computations independently

audited prior to reporting them to the

MSRB. The MSRB noted that even if it

were, by rule, to define ‘‘municipal

securities revenue’’, establish

accounting rules for its computation,

and require each dealer to use the

accounting rules to compute ‘‘municipal

securities revenue’’. it would still be

necessary for each dealer to have the

computation independently audited.

The MSRB determined that the high

cost to the dealer community of

computing the ‘‘municipal securities

revenue’’ would make this method of

fee assessment impractical. The MSRB

also considered the suggestions for

raising the annual fee to $1,000 or

implementing a staggered schedule

based on the dealer’s underwriting and/

or transaction volume. The MSRB

asserted that a $1,000 or more annual

fee would constitute an inappropriate

barrier to participation in the municipal

securities market. The MSRB noted that

in 1995, only 850 of the approximately

2,700 municipal securities dealers

reported any inter-dealer transactions.

Therefore, the MSRB surmised that

approximately 1,850 dealers are merely

executing an occasional municipal

securities transaction as an

accommodation for a customer, or are

not active at all, but wish to remain

capable of executing municipal

securities transactions in the future. The

MSRB concluded that raising the annual

fee to $1,000 or more would likely result

in only 850 or so firms continuing to

pay the annual fee and participate in the

municipal securities market. If this were

to happen, the revenue projected would

not be sufficient to meet the

administrative needs of the MSRB.

B. Comments on the Amended Proposal

The Commission received ten

comment letters on the MSRB’s

amended proposal that reduced the

transaction fee from $.01 to $.005 per

$1,000 par value of inter-dealer sales

transactions. The commenters reiterated

their concerns that a fee on inter-dealer

transactions was an inappropriate

method of measuring a firm’s

participation in the municipal securities

market. The broker’s brokers continued

to opine that the MSRB did not fully

understand the role of a broker’s broker.

The broker’s brokers argued that any fee

assessed on their sale transactions was

in effect a double assessment on the

dealer’s sale transaction and thus

inequitable.

IV. Discussion

The Commission must approve a

proposed MSRB rule change if it finds

that the proposal is consistent with the

requirements of the Act and the rules

and regulations thereunder that govern

the MSRB.16 The Commission believes

that the approval of the proposal meets

the above standard. Specifically, Section

15B(b)(2)(J) of the Act provides that

each municipal securities broker and

each municipal securities dealer shall

pay to the Board such reasonable fees

and charges as may be necessary or

appropriate to defray the costs and

expenses of operating and administering

the Board.17

The MSRB and the broker’s brokers

both recognize broker’s brokers as

significant contributors to the municipal

securities market. The MSRB contends

that broker’s brokers should be subject

to the inter-dealer transaction fees in the

same proportion as they participate in

the inter-dealer transaction volume. In

contrast, the broker’s brokers believe

that their sale transactions should be

excluded from the inter-dealer

assessment because they are in effect a

part of the dealer’s sale transactions

which are already assessed a fee.

The Commission believes that as

participants in the municipal

marketplace, broker’s brokers, like other

dealers, should contribute to defraying

the administrative costs of the MSRB,

particularly as the MSRB undertakes

initiatives to improve transparency in

the municipal securities market.

Historically, broker’s brokers have paid

only the minimal $100 annual fee

despite their volume of transactions.

The Commission believes that interdealer transaction volume is a

reasonable indicator of a firm’s

participation in the municipal market.18

This measure will be improved with the

addition of institutional and retail

transaction volume as the MSRB’s

transparency program expands in the

coming years.

The Commission recognizes that

inter-dealer transactions involving

broker’s brokers also involve a sell

transaction by another dealer that is

itself subject to the transaction fee. This

is true however, not just for transactions

involving broker’s brokers, but for any

riskless principal trade between dealers.

Excluding broker’s brokers’ sales from

transaction fees would largely insulate

broker’s brokers from payment of fees,

not withstanding their significant role in

municipal securities markets. Although

the inter-dealer transaction fee adds a

new cost to inter-dealer transactions, for

the principal seller as well as the

broker’s broker, the Commission does

not believe that such fees will

significantly interfere with inter-dealer

transactions involving broker’s brokers,

given the fee’s relative small size and

the usefulness of broker’s brokers in

conducting inter-dealer transactions

efficiently and anonymously. While

assessing fees based on municipal

revenues might lead to fees that provide

a more accurate assessment of a firm’s

participation in the municipal market,

the Commission believes that such an

approach currently raises definitional

and reliability issues as discussed

above.

Many of the commenters were

troubled that a small community of the

municipal market would contribute a

large portion of the MSRB’s funding.19

Accordingly, the MSRB reduced the

inter-dealer transaction fee 50% to $.005

per $1000 par value.

The Commission does not view the

proposed fees as inconsistent with the

purposes of the Act. The Commission

believes the MSRB’s fees should be

based, to the extent possible, on

comprehensive measures of

participation in the municipal market.

To this end, the Commission encourages

the MSRB to continue to consider the

feasibility of a revenue-based fee

structure, based on the municipal

revenues of brokers, dealer, and

municipal securities dealers. The

Commission recognizes that such an

approach involves definitional and

reliability issues that would have to be

resolved before a revenue-based fee

could be adopted and therefore this fee

structure is not a viable option in light

of the MSRB’s immediate revenue

needs. The Commission urges the MSRB

to revisit the feasibility of a revenue-
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices 24993

20 15 U.S.C. § 78o–4.

1 15 U.S.C. 78s(b)(1) (1988).

2Securities Exchange Act Release No. 36930

(March 6, 1996), 61 FR 10051.

3When a market maker, either alone or acting in

concert with other market makers, takes net streetside trading positions (i.e., non-retail trading with

other broker-dealers) that constitute a

disproportionately large percentage of the total net

street-side buys or net street-side sells in any issue

(i.e., the market maker dominates one side of the

market in the issue), the risk of default by that

market maker can increase.

4However, to the extent that market makers’ net

street-side trading positions in dominated issues

result from legitimate customer orders, the potential

adverse impact on the financial viability of a

settling member and the potential for increased

exposure to NSCC could be mitigated. So long as

the customer orders are legitimate, the risks

associated with such positions are borne among the

individual accounts of the market maker’s

customers and not concentrated solely in the

proprietary accounts of the market maker.

5NSCC Rule 1 defines a ‘‘settling member’’ to

include any NSCC member, non-clearing member

and, except where a contrary intent is expressed in

NSCC’s rules, a special representative.

6Class A Surveillance permits NSCC, among

other things, to increase a settling members clearing

fund requirement by an amount equal to (i) up to

5% of the settling member’s CNS long fail positions,

plus (ii) up to 5% of the settling member’s short fail

positions, plus (iii) 2.5% or at NSCC’s discretion up

to 5% of the settling member’s average non-CNS

and non-mutual fund services debits, plus (iv) 2.5%

of the settling member’s average non-CNS and nonmutual fund services credits. NSCC Rules and

Procedures, Addendum B, IV(C).

7However, the mere fact that a market maker has

a large customer base may not necessarily constitute

the necessary mitigating circumstances especially if

the customers are retail and/or the market maker

has a history of customer complaints or other

adverse regulatory or disciplinary actions. Refer

also to note 4.

based fee structure and work with

market participants to address the issues

raised by this concept. In developing its

fees the Commission encourages the

MSRB to continue to build a consensus

among market participants on how best

to allocate the burden of funding the

MSRB operations.

V. Conclusion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to the Municipal Securities

Rulemaking Board and, in particular,

with the requirements of Section 15B of

the Act.20 Specifically, the Commission

believes the proposal is consistent with

the requirements of Section 15B(b)(2)(J)

that the MSRB’s rules be designed,

among other things, to provide that each

municipal securities broker and each

municipal securities dealer shall pay to

the MSRB such reasonable fees and

charges as may be necessary or

appropriate to defray the costs and

expenses of operating and

administrating the Board.

It is therefore ordered, pursuant to

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

proposed rule change (SR–MSRB–95–

13) is approved.

By the Commission.

Dated: May 10, 1996.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12384 Filed 5–16–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37202; File No. SR–NSCC–

95–17]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Order Temporarily

Approving a Proposed Rule Change to

Establish Additional Procedures for

Placing Settling Members on Class A

Surveillance and Collecting Clearing

Fund and Other Collateral Deposits

From Settling Members

May 10, 1996.

On December 20, 1995, the National

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

a proposed rule change (File No. SR–

NSCC–95–17) pursuant to Section

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

of 1934 (‘‘Act’’) to establish additional

procedures for placing settling members

on Class A Surveillance and collecting

clearing fund and other collateral

deposits from settling members.1 Notice

of the proposal was published in the

Federal Register on March 12, 1996.2

No comment letter were received. For

the reasons discussed below, the

Commission is temporarily approving

the proposed rule change through May

31, 1997.

I. Description of the Proposal

NSCC’s Board of Directors has

determined that under certain

circumstances settling members who

clear securities transactions for over-thecounter (‘‘OTC’’) market makers or who

themselves engage in OTC market

making can have their financial viability

materially impacted by such business.3

Furthermore, if these settling members

dominate one side of the market in their

street-side trading positions, either

directly by participating in OTC market

making or indirectly by clearing

transactions for OTC market makers,

NSCC believes that the risk of default by

the settling member increases.4 In turn,

this could potentially increase NSCC’s

exposure because NSCC is obligated to

complete defaulting settling members’

unsettled trades once NSCC’s trade

guarantee attaches.

The problem is magnified if one or

more additional risk factors are present.

These additional risk factors can

include, without limitation:

(1) Concentrated short selling in

dominated issues;

(2) Undue concentration of securities

held in inventory by market maker(s) for

dominated issues;

(3) Dominated issues also being IPOs

less than six months past initial

issuance particularly when the current

value of the issue is significantly

different from its initial sales price or

there is undue concentration of

inventory in the managing

underwriter(s); and

(4) Clearing positions of market

makers in dominated issues away from

their primary clearing brokers.

Rule 15, Section 3 of NSCC’s rules

currently provides that any settling

member 5 shall furnish to NSCC such

adequate assurances of its financial

responsibility and operational capability

as NSCC may at any time or from time

to time deem necessary or advisable in

order to protect NSCC. Section 4 of Rule

15 states that such adequate assurances

may include, but are not be limited to,

increased clearing fund deposits of

settling members. Furthermore, Section

III.B.1.o. of Addendum B to NSCC’s

rules sets forth the guidelines for

determining when NSCC may place a

broker-dealer settling member on Class

A surveillance status.6 Pursuant to these

guidelines, NSCC may place a brokerdealer settling member on Class A

surveillance if there is any condition

which could materially impact the

operational or financial viability of the

settling member which increases or

potentially may increase exposure to

NSCC.

In order for NSCC to reduce its

potential exposure from the OTC market

making activity described above, NSCC

is adding Addendum O to its rules and

procedures. Addendum O will permit

NSCC to place settling members on

Class A surveillance if they clear for or

are themselves OTC market makers and

(i) they do not have sufficient capital or

access to capital to support either

potential increases in market making

activity in dominated OTC issues or (ii)

there is the presence of the additional

risk factors described above. At its

discretion, NSCC may elect not to place

settling members on Class A

surveillance if it has obtained sufficient

assurances that a high degree of

mitigating circumstances exist.7

Furthermore, NSCC is adopting an

interim collateralization policy which

will allow NSCC in its discretion to

require settling members placed on

Class A surveillance that clear for or are

themselves OTC market makers to meet