Document ID: SEC-2012-0409-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2012-03-14T04:00Z

[Federal Register Volume 77, Number 50 (Wednesday, March 14, 2012)]
[Notices]
[Pages 15171-15174]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66539; File No. SR-NSCC-2012-03]

Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Messaging and Settlement Enhancements to the In 
Force Transactions Product Service of NSCC's Insurance and Retirement 
Services and the Establishment of Fees Applicable Thereto

March 8, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 29, 2012, 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. NSCC filed the proposal pursuant to

[[Page 15172]]

Section 19(b)(3)(A)(ii) \2\ and (iii) \3\ of the Act, and Rule 19b-
4(f)(2) \4\ and Rule 19b-4(f)(4)(i) \5\ thereunder so that the proposal 
was effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the rule change from 
interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(ii)
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(2).
    \5\ 17 CFR 240.19b-4(f)(4)(i).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change applies to Rule 57 of NSCC's Rules and 
Procedures. The rule change consists of messaging and settlement 
enhancements to the In Force Transactions (``IFT'') product service of 
NSCC's Insurance and Retirement Services (``I&RS''). The proposed rule 
change also establishes the fees in connection therewith.

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.\6\
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    \6\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (i) Background. The I&RS provides a centralized communication link 
that connects participating insurance companies (``Carriers'') with 
participating intermediaries, such as broker-dealers, banks, and 
insurance agencies (``Distributors''), that distribute a participating 
Carriers' insurance products. In general, the IFT service automates the 
transmission of data with respect to in force policy transactions among 
participating I&RS members (``I&RS Members''). In force policy 
transactions, also known as post issue transactions, are transactions 
that take place after the underlying insurance contract has become 
effective. NSCC proposes to enhance IFT's messaging capabilities, as 
well as leverage NSCC's general settlement capability and apply it to 
the suite of IFT product services.
    The Proposed Messaging Enhancements. The proposed messaging 
enhancements will allow Distributors of insurance and retirement 
products (or other benefit plan or program products) processed within 
the I&RS to send and receive automated messages to and from Carriers 
relating to (i) money withdrawals and/or (ii) modified arrangement 
requests with regard to an underlying in force insurance policy.
    a. Withdrawal Messages. Withdrawal messages are requests from 
Distributors to process a one-time full or partial withdrawal of money 
with regard to an in force insurance policy.
    b. Arrangement Messages. Arrangement messages are requests from 
Distributors to add, modify, or delete service features of an in force 
insurance policy. A service feature may include, but is not limited to, 
the following contract features: systematic withdrawals (e.g., changing 
a currently established monthly withdrawal under an existing policy to 
a quarterly withdrawal), automatic investment plans (e.g., scheduling 
automatic additional periodic payments to an insurance policy), asset 
allocation programs (e.g., requesting a change in the asset to be 
invested), and asset rebalancing (e.g., requesting a change in the 
allocation of investment among the various assets).
    Any request for a withdrawal from or to add, modify, or delete a 
service feature in an existing policy would be initiated by the 
Distributor on behalf of the customer and transmitted to the Carrier 
through the I&RS network. Each such transaction request will require 
validation by both the Distributor and the Carrier, enabling each to 
review the transaction request against its own legal and other product 
and customer rules applicable to the transaction.
    Prior to initiating a withdrawal or arrangement request, the 
Distributor generally must access current contract information to 
determine if the request can be made with respect to a particular 
contract, including confirming fund balances held under the contract 
and applicable rules. Accordingly, the withdrawal and arrangement 
enhancements will include a real-time inquiry and response transaction 
functionality that will allow Distributors to inquire and the Carrier 
to provide a current ``snapshot'' of the contract. NSCC's Positions and 
Values service also may be used in conjunction with the request. 
Receipt of the current contract information from the Carrier permits 
the Distributor to review the request for suitability and compliance 
requirements. This preliminary request for and receipt of information 
is referred to as a ``values inquiry and response.''
    Following the values inquiry and response, the Distributor will 
initiate a withdrawal request or an arrangement request to be delivered 
to the Carrier. Upon receipt of the applicable request from the 
Distributor, NSCC will review the request for such information as NSCC 
determines from time to time to be necessary.\7\ If the request appears 
to contain the information required by NSCC, it will be forwarded by 
NSCC to the Carrier. The Carrier will then perform ``real time'' 
validation on the content of the request. This validation may involve 
consideration of transaction integrity that can be evaluated before 
fund prices are available and the actual transaction is processed by 
the Carrier's administration system in the overnight batch cycle. The 
validation that may occur includes edits such as: the policy exists, 
the Distributor was preauthorized by the owner for the transaction, the 
amount being requested can be withdrawn, and the destination account is 
valid. The level of validation that is performed during the day will be 
determined by each Carrier and possibly by a ``trading partner 
agreement.''
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    \7\ Note that Rule 57, Section 1(j) generally provides that NSCC 
will not be responsible for the completeness or accuracy of any data 
transmitted between I&RS Members through NSCC's I&RS, nor for any 
errors, omissions or delays which may occur in the absence of gross 
negligence on NSCC's part, in the transmission of such data between 
I&RS Members. The changes to Rule 57 being proposed hereby are 
subject to the limitations set forth in Rule 57, Section 1(j).
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    Regardless of the complexity of the Carrier's validation process, 
after receiving the original request the Carrier will create a response 
message to be sent back to the Distributor through NSCC's I&RS with 
acceptance or rejection of the withdrawal or arrangement request. NSCC 
will review the response message for such information as NSCC 
determines from time to time to be necessary. If the response message 
appears to contain the information required by NSCC, it will be 
forwarded by NSCC to the Distributor.
    When the withdrawal request or arrangement request is successfully 
processed by the Carrier, a ``success'' message will be sent through 
NSCC's I&RS to the Distributor. Alternatively, the Carrier may send a 
failure message to the Distributor if the requested transaction fails 
(for instance, if after the request is initiated a price change in an 
underlying fund results in a value that is outside of the amount 
allowed for a withdrawal), or the Carrier may send a pending message.

[[Page 15173]]

    The proposed IFT enhancements will also support a cancellation 
functionality to allow the Distributor to request the cancellation of a 
withdrawal or arrangement request. The Carrier may accept the 
cancellation request, or it may reject it (if, for example, the Carrier 
does not allow the cancellation under the reject reason code provided 
by the Distributor).
    Implementation of the withdrawal and arrangement messaging 
enhancements being proposed by this rule filing will be the third phase 
of NSCC's plan for the automation and standardization of a broad range 
of messaging enhancements to the IFT product service.\8\ The automation 
of in force transactions is consistent with the insurance industry's 
straight-through processing objectives and the continued efforts to 
mainstream insurance products with other financial products.
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    \8\ See, e.g., SR-NSCC-2005-02, Securities Exchange Act Release 
No. 34-51753 (May 27, 2005), 70 FR 32859 (June 6, 2005); SR-NSCC-
2005-09, Securities Exchange Act Release No. 34-52343 (August 26, 
2005), 70 FR 52461 (September 2, 2005); SR-NSCC-2008-03, Securities 
Exchange Act Release No. 34-58053 (June 26, 2008), 73 FR 38749 (July 
7, 2008).
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    The proposed IFT messaging enhancements are intended to replace the 
current varied processes used by Distributors to request withdrawals 
from or changed arrangements within an insurance contract. Current 
processes include using Carrier Web sites, telephone, fax, and email. 
Automation and standardization of the process will increase efficiency, 
create an automated record of the transaction, and facilitate 
monitoring compliance with regulatory requirements.\9\ By centralizing 
all withdrawal requests initiated by registered representatives through 
one application at NSCC, a broker-dealer firm will be better able to 
monitor the activity of its registered representatives to assure 
compliance with regulatory requirements. To facilitate compliance 
requirements under Rule 22c-1 of the Investment Company Act of 1940 
(``1940 Act''), the withdrawal request message from the Distributor to 
the Carrier has mandatory message fields for the transaction date and 
transaction time, these being the date and time the Distributor 
received the withdrawal request from its customer. Pursuant to 
arrangements between a Distributor and the Carrier that issued the 
variable contract, the Carrier may determine to accept the 
Distributor's receipt of the order from its customer as the time the 
order was received for purposes of Rule 22c-1.\10\
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    \9\ Variable insurance products are ``securities'' for purposes 
of federal securities law, the sale of which is subject to 
regulation by the Commission and the Financial Industry Regulatory 
Authority (``FINRA''). In addition, investment options (or 
``funds'') included within a variable insurance contract are 
typically separate accounts that are, absent an exemption, required 
to register as investment companies under the 1940 Act. Withdrawals 
must therefore also comply with relevant provisions of the 1940 Act 
and the regulations promulgated thereunder.
    \10\ Rule 22c-1 under the 1940 Act, often referred to as the 
``forward pricing'' rule, requires that orders in investment company 
shares be priced based upon the current net asset value (NAV) next 
computed after receipt of the order to buy or redeem shares (17 CFR 
270.22c-1(a)). The receipt of an order for the purchase or 
redemption of mutual fund shares by a distributing broker-dealer 
from its customer is generally deemed receipt of the order in 
investment company shares for purposes of Rule 22c-1. This practice 
is generally subject to the provisions of the distribution agreement 
between the fund and the distributing broker-dealer.
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    The Proposed Settlement Enhancement. The in force money settlement 
enhancement being proposed by this rule change will leverage NSCC's 
existing net daily money settlement process and apply it to in force 
policy withdrawal or premium payment transaction. Once implemented, the 
proposed money settlement functionality would be available for all in 
force transactions that include a money settlement component, as 
opposed to having to create the money settlement functionality on a 
product-by-product basis as is currently the practice. The in force 
money settlement enhancement would only be available to I&RS Members 
and would permit Carriers and Distributors to settle money transactions 
even if the underlying in force insurance transaction is, or was, 
processed outside of NSCC (e.g., an in force policy that contains a 
systematic withdrawal provision). Under the proposed enhancement, a 
money settlement transaction to be processed within NSCC's I&RS network 
would be in all cases initiated by the I&RS Member whose account is to 
be debited. The credit to be paid to the applicable contra side I&RS 
Member will be processed through NSCC's net daily money settlement 
process and, to the extent a net credit is due to such contra side I&RS 
Member under NSCC's settlement rules, payment shall be made in 
accordance with NSCC's standard settlement procedures.
    Automated money settlement for some of these currently non-
automated transactions would provide activity detail between I&RS 
Member Carriers and Distributors currently not existing today and would 
allow these I&RS Members to include such settlements within their daily 
NSCC net settlement obligations. As with all I&RS settlement, the 
proposed settlement enhancement would be a non-guaranteed service of 
NSCC.
    The Proposed Fees. NSCC proposes to update the Fee Schedule to 
incorporate the fees associated with the messaging and settlement 
enhancements proposed by this rule filing and to make certain technical 
and clarification changes. The fees associated with withdrawal message 
requests will be $1.25 per message request per side. The fees 
associated with arrangement message requests will be $1.25 per message 
request per side. The fees associated with settlement processing for 
withdrawals and premium payments will be $0.50 per transaction per 
side.
    (ii) The proposed rule change will promote processing efficiencies 
between Carriers and Distributors, thereby facilitating the prompt and 
accurate processing of securities transactions, consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to NSCC.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact 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

    Written comments relating to the proposed rule change have not 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 proposed rule change has become effective upon filing 
pursuant to Section 19(b)(3)(A)(ii) \11\ and (iii) \12\ of the Act and 
Rule 19b-4(f)(2) \13\ and (4)(i) \14\ thereunder because it establishes 
or changes a due, fee, or other charge applicable only to a member 
imposed by NSCC and because it effects a change in an existing service 
of NSCC that does not significantly affect the safeguarding of 
securities or funds in the custody or control of NSCC or for which it 
is responsible, and does not significantly affect the respective rights 
or obligations of NSCC or persons using this service. At any time 
within 60 days of the filing of the proposed rule change, the 
Commission summarily may

[[Page 15174]]

temporarily suspend 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.
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(2).
    \14\ 17 CFR 240.19b-4(f)(4)(i).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-NSCC-2012-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2012-03. This file 
number should be included on the subject line if email 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 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at the principal office of NSCC and on NSCC's 
Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/SR-NSCC-2012-03.pdf.
    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-2012-03 
and should be submitted on or before April 4, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-6106 Filed 3-13-12; 8:45 am]
BILLING CODE 8011-01-P