Document ID: SEC-2012-0826-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2012-05-24T04:00Z

[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Notices]
[Pages 31048-31049]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12547]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67018; File No. SR-OCC-2012-03]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Approving Proposed Rule Change to More Closely Align OCC's By-
Laws and Rules With Regulatory Requirements Related to ``Statutory 
Disqualifications''

May 18, 2012.

I. Introduction

    On March 15, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2012-03 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
was published for comment in the Federal Register on April 4, 2012.\2\ 
On May 15, 2012, OCC filed an amendment to the proposed rule 
change.\3\The Commission received no comment letters. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-66676 (March 29, 
2012), 77 FR 20472 (April 4, 2012).
    \3\ The amendment made changes to OCC's ``Fitness Standard for 
Directors, Clearing Members and Others'' to conform it to the recent 
changes made to OCC's By-Laws pursuant to File No. SR-OCC-2012-01, 
which was approved by the Commission on March 9, 2012. As such, the 
amendment was technical in nature and did not require republication 
of notice.
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II. Description

    The proposed rule change will more closely align OCC's By-Laws and 
Rules with applicable regulatory requirements related to ``statutory 
disqualifications'' under the Act in order to reduce the overall 
administrative burden on OCC associated with addressing the statutory 
disqualification of OCC clearing members (``Clearing Members'') and 
applicants for clearing membership (``Applicants'') and will provide 
guidance to Clearing Members and Applicants as to OCC's policies with 
respect to statutory disqualifications. The proposed rule change will 
amend OCC's ``Fitness Standards for Directors, Clearing Members and 
Others'' (``Fitness Standards'') to bring such standards into 
conformity with the proposed amendments to OCC's By-Laws. The Fitness 
Standards were submitted to the Commission in proposed rule change SR-
OCC-2011-12 and were approved by the Commission on October 27, 2011.4

A. Background

    Persons who have engaged in certain types of misconduct are subject 
to ``statutory disqualification,'' as defined by Section 3(a)(39) of 
the Act, and must undergo a review by the Commission under Rule 19h-1 
of the Act in order to enter or continue in membership in a self-
regulatory organization (``SRO''). Section 17A(b)(4)(A) of the Act 
provides that a registered clearing agency may and in cases in which 
the Commission so orders must deny participation to any person subject 
to a statutory disqualification. This provision further requires a 
registered clearing agency to provide the Commission with 30-days' 
notice before admitting a statutorily disqualified person to clearing 
membership. Rule 19h-1 of the Act implements these statutory provisions 
by requiring notice to the Commission if a registered clearing agency 
proposes either to admit to membership or to continue as a member a 
person subject to a statutory disqualification. Notably, unlike in the 
case of a national securities exchange or registered securities 
association, the rule does not require a registered clearing agency to 
file such a notice with respect to statutory disqualifications of 
associated persons of a Clearing Member or Applicant. A registered 
clearing agency is required to file such a notice only when the 
Clearing Member or Applicant itself is subject to the disqualification.
    Article V of OCC's By-Laws establishes the qualifications required 
of Clearing Members and sets forth the procedures for admitting persons 
to clearing membership, including those that are or become subject to a 
statutory disqualification. Currently, Interpretation and Policy .03 of 
Article V, Section 1 of OCC's By-Laws provides that the Membership/Risk 
Committee (``Committee'') will not recommend the approval of an 
application for membership if the Applicant or an associated person is 
subject to a statutory disqualification unless the Committee makes a 
finding that ``special circumstances'' exist warranting a waiver of the 
statutory disqualification. The requirements of this By-Law are more 
stringent than those applied to registered clearing agencies by the Act 
or Commission rules because they require the Committee to (i) make 
specific findings of ``special circumstances'' before recommending 
membership approval and (ii) address statutory disqualifications of 
associated persons. The By-Laws therefore impose additional 
administrative burdens on OCC that are not required under any statute 
or rule administered by the Commission.
    Neither Article V of the By-Laws nor OCC's Rules currently contain 
procedures for notice to OCC that an Applicant or Clearing Member is 
subject to a statutory disqualification, which provides insufficient 
guidance to Applicants and Clearing Members and exposes OCC to the risk 
that such notice may be given on a delayed basis. OCC's By-Laws and 
Rules are also silent as to the procedures to be followed by a Clearing 
Member when it becomes subject to a statutory disqualification even 
though Rule 19h-1 requires a registered clearing agency to file a 
notice if it intends to permit such a firm to remain a Clearing Member.
    As a registered derivatives clearing organization (``DCO''), OCC is 
also subject to the jurisdiction of the Commodity Futures Trading 
Commission (``CFTC''). OCC's By-Laws also address statutory 
disqualification

[[Page 31049]]

under Section 8a(2)-(4) of the Commodity Exchange Act (``CEA''), which 
allows the CFTC to refuse to register or to suspend the registration of 
futures commission merchants and other entities required to register 
under the CEA. Neither the CEA nor the CFTC's regulations require DCOs 
to file a notice similar to that required by Rule 19h-1, and OCC 
therefore is not proposing to amend Article V or the Rules to 
specifically address statutory disqualifications under the CEA other 
than to clarify that if a principal of a futures commission merchant is 
subject to a statutory disqualification, the Membership/Risk Committee 
has discretion to not recommend the approval of such futures commission 
merchant's application for membership pursuant to Section 8a(2) of the 
CEA or to determine not to permit such a futures commission merchant to 
continue in Clearing Membership.
    In addition to being consistent with the Commission's regulations, 
OCC's Fitness Standards, as described above, were constructed in part 
to comply with core principles (``Core Principles'') applicable to DCOs 
as these core principles were amended by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act and as are set forth in the CEA. The 
Fitness Standards establish certain minimum fitness criteria for 
directors, Clearing Members, and their affiliates sufficient to comply 
with Core Principle O as set forth in the CEA.\5\ However, the Fitness 
Standards were also drafted to conform to OCC's existing qualification 
standards for Clearing Members, which standards OCC is now proposing to 
revise. Accordingly, OCC proposes to amend the Fitness Standards to 
conform them to the proposed amendments to the qualification standards 
for Applicants and Clearing Members in OCC's By-Laws.
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    \5\ Commodity Exchange Act Sec.  5b(c)(2)(O); 7 U.S.C. 7a-
1(c)(2)(O).
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B. Proposed By-Law Changes

    Article V (Clearing Members) sets forth the qualifications for 
Clearing Members. OCC proposes to amend the current Article V 
provisions addressing statutory disqualifications to eliminate 
provisions that require unnecessary Committee action and to add 
provisions designed to ensure that OCC receives appropriate notice of a 
statutory disqualification in order to discharge its obligations as an 
SRO. The proposed amendments are generally based on similar rules of 
the National Securities Clearing Corporation and the Chicago Board 
Options Exchange. OCC proposes to amend Article V, Section 1, 
Interpretation and Policy .03 (Experience and Competence) to:
    1. Eliminate the requirement that the Committee must find ``special 
circumstances'' warranting the waiver of a statutory disqualification 
in order to recommend an Applicant's approval for clearing membership 
providing instead that the Committee may in its discretion consider a 
statutory disqualification in determining whether or not to recommend 
approval.
    2. Eliminate the requirement that the Committee address the status 
of associated persons who are subject to statutory disqualifications.
    3. Establish procedures requiring Clearing Members and Applicants 
to provide notice of a statutory disqualification.
    4. Eliminate the second paragraph of subsection c. The definition 
of statutory disqualification in subsection a. includes the conduct 
covered by Section 15(b)(4)(B) of the Act, making the second paragraph 
of subsection c. redundant.
    OCC proposes to amend Chapter II and Chapter XII of its Rules to:
    1. Establish procedures applicable to Clearing Members who are or 
become subject to a statutory disqualification to provide that: (i) OCC 
has the discretion not to permit any such Clearing Member to continue 
in Clearing Membership, (ii) such Clearing Member must notify OCC of 
any statutory disqualification and may seek to continue in Clearing 
Membership, (iii) a failure to notify OCC of a statutory 
disqualification may be deemed a violation of OCC's rules, (iv) OCC may 
convene a Disciplinary Committee to conduct a hearing concerning a 
Clearing Member's statutory disqualification, (v) OCC has discretion to 
waive such provisions if another self-regulatory organization is 
conducting a proceeding addressing a Clearing Member's statutory 
disqualification with respect to the same matter, and (vi) OCC has 
discretion to waive the hearing provisions if OCC intends to grant the 
Clearing Member's application to continue in Clearing Membership in 
certain circumstances.
    2. Add Interpretation and Policy .01 to Rule 1201 in order to 
clarify that a decision to suspend or expel a Clearing Member after a 
disciplinary proceeding under Chapter XII of the Rules would be grounds 
for summary suspension under Chapter XI of the Rules.
    OCC also proposes to amend its Fitness Standards to conform them to 
the proposed amendments to OCC's By-Laws.

III. Discussion

    Section 19(b)(2)(C) of the Act \6\ 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 the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \7\ 
requires, among other things, that the rules of a clearing agency are 
not designed to permit unfair discrimination in the admission of 
participants or among participants in the use of the clearing agency.
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed changes to OCC's By-Laws are designed to more closely 
align OCC's By-Laws and Rules with applicable regulatory requirements, 
to establish standard notification and other procedures, to provide 
Clearing Members with guidance as to OCC's policies regarding statutory 
disqualifications, to facilitate the timely filing of notices pursuant 
to Rule 19h-1 should OCC determine to admit to membership or continue 
in membership any person subject to a statutory disqualification. The 
proposed changes are not designed to permit unfair discrimination in 
the admission of participants or among participants in the use of OCC. 
As a result, the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \8\ and the 
rules and regulations thereunder.
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    \8\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change, as amended, (File No. SR-OCC-
2012-03) be, and hereby is, approved.\10\
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 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).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-12547 Filed 5-23-12; 8:45 am]
BILLING CODE 8011-01-P