Document ID: SEC-2015-2102-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.,
Posted Date: 2015-12-21T05:00Z

[Federal Register Volume 80, Number 244 (Monday, December 21, 2015)]
[Notices]
[Pages 79368-79371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31923]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76652; File No. SR-NSCC-2015-007]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Provide Mechanism 
for Sub-Account Settlement With Respect to the Alternative Investment 
Product Services

December 15, 2015.
    On October 30, 2015, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2015-007 pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ to amend NSCC's Rules and Procedures 
(``Rules'') \3\ to allow certain users of NSCC's Alternative Investment 
Product Services (``AIP'') to settle at the sub-account level and to 
make related technical changes and corrections to the Rules, as more 
fully described below. The proposed rule change was published for 
comment in the Federal Register on November 10, 2015.\4\ The Commission 
did not receive any comment letters on the proposed rule change. For 
the reasons discussed below, the Commission is granting approval of the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \4\ See Securities Exchange Act Release No. 76348 (November 4, 
2015), 80 FR 69728 (November 10, 2015) (SR-NSCC-2015-007).
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by NSCC:
    Background. In 2008, the Commission approved NSCC's proposed rule 
change to establish AIP, a non-guaranteed processing platform for 
alternative investment products such as hedge funds, funds of hedge 
funds, commodities pools, managed futures,

[[Page 79369]]

and real estate investment trusts.\5\ AIP facilitates, among other 
things, processing activities such as subscriptions and redemptions, 
distributions, position reporting, and account maintenance relating to 
alternative investment products and settles related payments (``AIP 
Payments'').
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 57813 (May 12, 2008), 73 
FR 28539 (May 16, 2008) (SR-NSCC-2007-12).
---------------------------------------------------------------------------

    Settlement of AIP Payments is done on a prefunded basis. On each 
date for which settlement will occur (``Settlement Date''), an AIP 
participant (``AIP Member'') that is in a debit position for such day 
must satisfy its full debit balance before NSCC will settle any contra-
side credit positions with respect to such AIP Member. NSCC simply 
passes AIP Payments from one AIP Member to the contra-side AIP Member 
without netting and without guaranteeing payment, and settlement of AIP 
Payments is segregated from all other money settlement at NSCC.
    Participation in AIP is governed by Rule 53 of NSCC's Rules. A 
party seeking to be an AIP Member is required to enter into a separate 
AIP membership agreement with NSCC, even if it is otherwise a 
participant of other NSCC services.
    AIP Members are divided into two categories--``AIP Manufacturers'' 
and ``AIP Distributors''. AIP Manufacturers act on behalf of, or under 
authority of, the sponsor, general partner, or other party responsible 
for the creation or manufacturing of an eligible alternative investment 
product (``Eligible AIP Product''). AIP Manufacturers are generally the 
fund entities themselves (``Funds''). AIP Distributors act on behalf 
of, or under authority of, a customer or other investor in an Eligible 
AIP Product. AIP Distributors are generally the broker/dealers whose 
clients invest in Eligible AIP Products.
    Fund Administrators. Within the alternative investments industry, 
there are parties on the creation/manufacturing side of transactions 
known as ``fund administrators''. Fund administrators are not the Funds 
themselves, but rather, agents for the Funds. Where a Fund engages a 
fund administrator to act on the Fund's behalf, it is typically the 
fund administrator that handles all of the transaction processing for 
that Fund.
    Within AIP, a fund administrator is a party engaged under contract 
to provide administrative services with respect to one or more Eligible 
AIP Products and is eligible to be an AIP Member as an AIP Manufacturer 
(``AIP Fund Administrator''). In general, AIP Fund Administrators 
process AIP transactions with respect to their various Fund clients by 
creating separate sub-accounts within AIP, each of which is 
attributable to a specific Fund client. In this structure, the Fund 
client generally would not be an AIP Member.
    Under the current AIP Rules, AIP Fund Administrators are 
responsible for all activities related to their sub-accounts. These 
activities include, for example, submitting, reviewing, and confirming 
order instructions, reviewing and confirming settlement statements, and 
making AIP Payments. With respect to making AIP Payments, the Rules 
provide that on Settlement Date all sub-account obligations roll up to 
the AIP Fund Administrator's primary AIP account. These obligations are 
then presented to the AIP Fund Administrator's settlement bank for 
gross debit settlement and gross credit settlement.
    Because AIP Fund Administrators are responsible for settlement of 
AIP Payments, an AIP Fund Administrator in a debit position on 
Settlement Date must assure that each applicable Fund client has timely 
delivered payment to such AIP Fund Administrator's settlement bank. To 
the extent that a single Fund client fails to deliver its payment on 
Settlement Date (and the AIP Fund Administrator is not otherwise able 
to cover such Fund's shortfall), NSCC is required to reverse all of the 
AIP Fund Administrator's contra-side credit positions for the day, 
including the contra-side credit positions attributable to Funds that 
actually did pay.
    In recent months, NSCC has learned from several fund administrators 
interested in becoming AIP Members that the responsibility to make AIP 
Payments at NSCC is a responsibility that fund administrators generally 
do not undertake outside of AIP. In the current processing environment 
outside of AIP, fund administrators perform all transaction processing 
functions for their Funds, but they generally do not control money 
settlement.
    As explained by certain fund administrators to NSCC, the current 
AIP Payment structure as applied to AIP Fund Administrators has slowed 
adoption of AIP by the fund administrator community.
    Proposed Rule Change. To address this matter, NSCC has proposed to 
permit AIP Fund Administrators, at their discretion, to create sub-
accounts that settle separately from their primary AIP accounts, as 
well as from their other AIP sub-accounts, (``AIP Settling Sub-
Accounts'').
    An AIP Fund Administrator choosing to create an AIP Settling Sub-
Account will designate to NSCC the applicable Fund client with 
responsibility for settlement of AIP Payments with respect to such AIP 
Settling Sub-Account. Such designated Fund will not be an AIP Member 
(``AIP Non-Member Fund''). Each such AIP Non-Member Fund will enter 
into a standard agreement pursuant to which an NSCC-approved AIP 
Settling Bank will perform settlement services directly for the AIP 
Non-Member Fund (``Appointment of AIP Settling Bank and AIP Settling 
Bank Agreement'').
    Under the proposal, AIP Fund Administrators will remain responsible 
for all activities with respect to their AIP Settling Sub-Accounts, 
except that AIP Fund Administrators will not be responsible for 
settling AIP Payments. For example, AIP Fund Administrators will remain 
responsible for order processing applicable to their AIP Settling Sub-
Accounts, including submitting, reviewing, and confirming order 
instructions. In addition, AIP Fund Administrators will be responsible 
for informing their AIP Non-Member Funds of their respective daily AIP 
Payment obligations. All reporting, liability, and indemnification 
obligations to NSCC under NSCC's Rules will remain with the AIP Fund 
Administrator.
    As is the case today, settlement of all AIP Payments will be done 
on a prefunded basis. NSCC will not net or guarantee any AIP Payments 
with respect to AIP Settling Sub-Accounts, and all settlement of AIP 
Payments (including those of AIP Non-Member Funds) will continue to be 
segregated from all other money settlement at NSCC.
    Prior to NSCC approving any AIP Settling Sub-Account, NSCC will 
require the applicable AIP Fund Administrator to enter into 
documentation and/or agreements, or otherwise procure documentation 
and/or agreements, in such form as required by NSCC from time to time, 
which will contain:
     The AIP Fund Administrator's acknowledgement and agreement 
that it will be responsible for all matters, activities, liabilities, 
and obligations applicable to AIP Members under the Rules with respect 
to such AIP Settling Sub-Account, except for settlement of AIP 
Payments;
     the AIP Fund Administrator's agreement to indemnify NSCC 
for any loss, liability, or expense sustained by NSCC in connection 
with, arising from, or related to such AIP Settling Sub-Account, 
including with respect to the

[[Page 79370]]

Foreign Account Tax Compliance Act (``FATCA''); \6\
---------------------------------------------------------------------------

    \6\ 26 U.S.C. 1471 et seq.
---------------------------------------------------------------------------

     the AIP Fund Administrator's agreement that it will be 
responsible for (A) all charges incurred and payments due under Rule 26 
(Bills Rendered) for the processing of AIP Settling Sub-Account 
transactions through AIP and (B) any other charges that may be incurred 
with respect to such AIP Settling Sub-Account under Rule 24 (Charges 
for Services Rendered);
     the AIP Fund Administrator's designation of the AIP Non-
Member Fund with responsibility for making AIP Payments with respect to 
such AIP Settling Sub-Account;
     the AIP Non-Member Fund's consent and approval with 
respect to such designation;
     the AIP Fund Administrator's agreement of its obligation 
to notify NSCC of changes in condition to the AIP Non-Member Fund that 
would otherwise require notice to NSCC under Rule 2B (Ongoing 
Membership Requirements and Monitoring) or Rule 20 (Insolvency);
     the AIP Fund Administrator's agreement of its obligation 
to notify the applicable AIP Non-Member Fund of such AIP Non-Member 
Fund's daily AIP Payment balance; and
     the AIP Non-Member Fund's appointment of an AIP Settling 
Bank, and such AIP Settling Bank's agreement to act as AIP Settling 
Bank for such AIP Non-Member Fund.
    In addition, the applicable AIP Fund Administrator will need to 
obtain from the applicable AIP Non-Member Fund tax documentation in 
such form as required by NSCC from time to time, and with respect to 
any AIP Non-Member Fund that is treated as a non-U.S. entity for U.S. 
federal income tax purposes, the AIP Fund Administrator will need to 
provide NSCC with an executed FATCA certification from such AIP Non-
Member Fund in the form approved by NSCC.
    On a going-forward basis with respect to FATCA, AIP Fund 
Administrators will need to obtain from their AIP Non-Member Funds 
periodic tax documentation, including FATCA certifications to the 
extent applicable, and provide such documentation to NSCC. Failure to 
provide such tax documentation, including FATCA certifications, in the 
manner and timeframes set forth by NSCC from time to time will result 
in revocation of NSCC's approval, in NSCC's sole and absolute 
discretion, of such AIP Settling Sub-Account.
    Under the proposal, AIP Fund Administrators will be required to 
indemnify NSCC for any loss, liability, or expense sustained by NSCC in 
connection with, arising from, or related to FATCA in respect of their 
AIP Settling Sub-Accounts. The FATCA-related provisions in this 
proposed rule change are substantially similar to the current 
provisions in the Rules governing how NSCC monitors and treats its non-
U.S. members with respect to FATCA.
    In connection with this proposal, NSCC will amend the following 
Rules:

 Rule 1. Definitions

     The following new defined terms will be created: ``AIP 
Fund Administrator'', ``AIP Non-Member Fund'', and ``AIP Settling Sub-
Account'', each of which will be defined or further described in Rule 
53 (Alternative Investment Product Services and Members).
     The defined term ``AIP Settling Bank'' will be amended to: 
Provide that AIP Settling Banks undertake to perform settlement 
services for AIP Members, as well as for AIP Non-Member Funds; and 
correct an incorrect Rule citation within the defined term.

 Rule 2. Members and Limited Members

    The description of ``AIP Settling Bank Only Member'' as a type of 
NSCC Limited Member will be amended to provide that AIP Settling Bank 
Only Members undertake to perform settlement services with respect to 
AIP on behalf of AIP Members, as well as AIP Non-Member Funds.

 Rule 53. Alternative Investment Product Services and Members

    The Rule will be amended to: Permit AIP Fund Administrators to 
create AIP Settling Sub-Accounts and address the agreements and 
documents that NSCC will require prior to approving any such AIP 
Settling Sub-Account; describe the tax and FATCA-related requirements 
in connection with creating and maintaining such AIP Settling Sub-
Accounts; describe the settlement process with respect to AIP Settling 
Sub-Accounts; state that NSCC will not notify any AIP Non-Member Fund 
of any debit or credit balance and identify that it is the AIP Fund 
Administrator's obligation to notify each such AIP Non-Member Fund of 
its applicable debit or credit balance; state that NSCC will not 
guarantee AIP Payments to any AIP Non-Member Fund; specify that NSCC 
will not be liable for the acts, delays, omissions, bankruptcy, or 
insolvency of any AIP Non-Member Fund 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; 
and address applicable technical changes in connection with the 
foregoing.

 Rule 55. Settling Banks and AIP Settling Banks

    The Rule will be amended to provide that AIP Settling Banks may 
undertake to: Perform settlement services on behalf of AIP Non-Member 
Funds; describe the settlement process with respect to AIP Settling 
Sub-Accounts; and make certain technical corrections.

 Rule 58. Limitation on Liability

    The Rule will be amended to specify that NSCC will not be liable 
for the acts, delays, omissions, bankruptcy, or insolvency of any AIP 
Non-Member Fund 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; and make clear that NSCC will 
not be responsible for the completeness or accuracy of any AIP data 
received from or transmitted to an AIP Member (including an AIP Fund 
Administrator with respect to any AIP Settling Sub-Account thereof), 
nor for any errors, omissions, or delays which may occur in the 
transmission of such AIP data to or from an AIP Member (including an 
AIP Fund Administrator with respect to any AIP Settling Sub-Account 
thereof).

 Addendum D (Statement of Policy; Envelope Settlement Service, 
Mutual Fund Services, Insurance and Retirement Processing Services and 
other Services Offered by the Corporation)

    The Rule will be amended to make clear that settlement with respect 
to AIP Settling Sub-Accounts is not guaranteed and that NSCC will 
reverse any credit previously given to any AIP Member (including any 
AIP Settling Sub-Account) that is the contra-side to an AIP Member 
(including a contra-side AIP Settling Sub-Account) whose payment was 
not received by NSCC.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \7\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to

[[Page 79371]]

such organization. The Commission believes the proposal is consistent 
with section 17A(b)(3)(F) of the Act \8\ and Rule 17Ad-22(d)(12),\9\ as 
described in detail below.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(d)(12).
---------------------------------------------------------------------------

    Consistency with Section 17A(b)(3)(F) of the Act. Section 
17A(b)(3)(F) of the Act requires, among other things, that the rules of 
a clearing agency be designed (i) to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, and (ii) to remove impediments to and perfect 
the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions.\10\ As described 
above, under NSCC's current Rules regarding AIP, settlement of AIP 
Payments is the responsibility of AIP Members, including AIP Fund 
Administrators. However, NSCC has learned from fund administrators 
interested in becoming AIP Members that fund administrators generally 
do not control money settlement for their Fund clients. This disconnect 
has impeded the adoption of AIP by the fund administrator community. To 
address this issue, NSCC will now allow AIP Fund Administrators to 
establish AIP sub-accounts and permit AIP Payments to settle at the 
sub-account level. Doing so will redirect responsibility for settlement 
of AIP Payments from AIP Fund Administrators to the AIP Fund 
Administrator's designated Fund clients.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In allowing settlement at the sub-account level, NSCC (i) will be 
fostering cooperation and coordination with fund administrators and 
Funds that are involved in the processing of alternative investment 
securities transactions, and (ii) will be removing an impediment to the 
prompt and accurate clearance and settlement of alternative investment 
securities transactions at the sub-account level. As such, the 
Commission believes that the proposal is consistent with section 
17A(b)(3)(F) of the Act.\11\
---------------------------------------------------------------------------

    \11\ Id.
---------------------------------------------------------------------------

    Consistency with Rule 17Ad-22(d)(12). Rule 17Ad-22(d)(12) under the 
Act requires a central counterparty, such as NSCC, to ``establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to . . . [e]nsure that final settlement occurs no 
later than the end of the settlement day . . . .'' \12\ As described 
above, under the current Rules regarding AIP, if just one of an AIP 
Fund Administrators' designated Fund clients fails to make its AIP 
Payment on Settlement Date, and the AIP Fund Administrator does not 
cover the shortfall, NSCC is required to reverse all of the AIP Fund 
Administrator's contra-side credit positions, including the contra-side 
credit positions of Funds that did pay. With this proposed rule change, 
AIP Fund Administrators can create AIP sub-accounts that settle 
separately from their primary AIP accounts, as well as from other AIP 
sub-accounts. Allowing AIP settlement at the sub-account level will 
enable funded AIP sub-accounts to settle no later than the end of the 
settlement day, while unfunded sub-accounts can be reversed, 
separately. As such, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(d)(12).\13\
---------------------------------------------------------------------------

    \12\ 17 CFR 240.17Ad-22(d)(12).
    \13\ Id.
---------------------------------------------------------------------------

III. 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 \14\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that proposed rule change SR-NSCC-2015-007 be, and hereby is, 
approved.\15\
---------------------------------------------------------------------------

    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-31923 Filed 12-18-15; 8:45 am]
BILLING CODE 8011-01-P