Document ID: SEC-2008-0903-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2008-07-07T04:00Z

[Federal Register: July 7, 2008 (Volume 73, Number 130)]
[Notices]               
[Page 38479-38481]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jy08-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58053; File No. SR-NSCC-2008-03]

 
Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Support the Processing of Instructions for the Transfer 
or Reallocation of Underlying Investment Options Within a Variable 
Insurance Contract

June 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 19, 2008, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NSCC proposes to amend its rule in order to enhance its insurance 
services to support the processing of instructions for the transfer or 
reallocation of underlying investment options within a variable 
insurance contract.\2\
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    \2\ Changes are to the rule text that appears in the electronic 
manual of NSCC found at http://www.nscc.com/legal/.
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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.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by the NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to enhance NSCC's 
insurance

[[Page 38480]]

service in order to support the processing of instructions for the 
transfer or reallocation of underlying investment options within a 
variable insurance contract. Under the proposed rule change, the new 
enhancement will be referred to as ``Fund Transfers'' and will be 
available within NSCC's current In-Force Transactions service of NSCC's 
Insurance and Retirement Processing Service (``IPS,'' formerly called 
the Insurance Processing Service). NSCC's current IPS provides a 
centralized communication link that connects participating insurance 
companies with intermediaries such as broker-dealers, banks and 
insurance agencies that distribute their insurance products. The 
current platform supports the exchange of information and settlement of 
monies at various points through the insurance contract initiation and 
servicing cycle, for both fixed and variable insurance products.\4\
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    \4\ IPS also supports processing of non-insurance retirement 
products that may be offered by a broker-dealer, in which case the 
funds transfer functionality would support the communication of 
changes in investment options offered within a retirement or other 
benefit program for which a broker-dealer is the plan administrator 
or custodian, supporting communications between this broker-dealer 
and with the distributing broker-dealer.
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    Development and implementation of the new Fund Transfer process is 
the second phase of automating and standardizing a broad range of in-
force policy transactions, starting in 2005 with ACATS for insurance 
and expanding later to the communication of changes in internally 
registered representatives and brokerage account numbers.\5\ The 
automation of in-force policy 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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    \5\ See Securities Exchange Act Release Nos. 51753 (May 27, 
2005), 70 FR 32859 (June 6, 2005) [File No. SR-NSCC-2005-02], and 
52343 (August 26, 2005), 70 FR 52461 (September 2, 2005) [File No. 
SR-NSCC-2005-09].
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    A request for a fund transfer is initiated by a distributor of the 
insurance contract, on behalf of the contract owner, and transmitted to 
the insurance company. The transaction requires validation by both the 
distributor and the insurance company, 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 fund transfer request, the distributor 
generally must access current contract information to determine if the 
fund transfer request can be made with respect to a particular 
contract, including fund balances held under the contract and 
applicable rules. Accordingly, the fund transfer functionality includes 
a real-time inquiry and response transaction from the distributor to 
the insurance company that allows the insurance company to provide a 
current ``snapshot'' of the contract. NSCC's Positions and Values 
(``POV'') service may also be used in conjunction with the fund 
transfer request. Receipt of the current contract information from the 
insurance company permits the distributor to review the transfer in 
light of suitability and compliance requirements.
    Following the values inquiry and response, the distributor 
initiates a fund transfer request transaction with the insurance 
company through NSCC's Fund Transfer functionality. NSCC performs 
industry-defined edits as to transaction format and, once the 
transaction passes NSCC edit process, it is forwarded to the insurance 
company. The insurance company has the opportunity to review the 
requested transfer against its rules and applicable suitability and 
compliance requirements and its arrangements with the transmitting 
distributor. The insurance company responds back to the distributor 
through NSCC with an acceptance or rejection of the fund transfer 
request. This message is checked against NSCC's edits as to transaction 
form and sent to the distributor.
    When the fund transfer is successfully processed by the insurance 
company, it sends a ``success'' message through the fund transfer 
functionality to the distributor. Alternatively, the insurance company 
may send a failure message to the distributor if the requested 
transaction fails (for instance, if a price change in an underlying 
fund results in a value that is outside of the amount allowed for a 
transfer, after the request is initiated) or send a pending message.
    The fund transfer functionality also supports a cancellation 
transaction to allow the distributor to request the cancellation of a 
funds transfer request. The insurance company can accept the 
cancellation request, or it can reject it (if, for example, the 
insurance company does not allow the cancellation under the reject 
reason code provided by the distributor). Additional fund transfer 
functionality may be developed as the system is enhanced to accommodate 
distributor and insurance company requirements.
    The fund transfer functionality is intended to replace current 
processes used by distributors today to request a transfer of assets 
within the insurance contract, such as on-line insurance company 
website requests, telephone, fax and e-mail. Automation of the process 
will increase efficiency, create an automated record of the 
transaction, and facilitate monitoring compliance with regulatory 
requirements.\6\ By centralizing all fund transfer requests initiated 
by registered representatives through one application at NSCC, a 
broker-dealer should be better able to monitor the activity of its 
registered representatives to assure compliance with regulatory 
requirements. For example, to facilitate compliance with requirements 
under Rule 22c-1 of the Investment Company Act of 1940 (``Investment 
Company Act''), the fund transfer request message from the distributor 
to the insurance company must contain mandatory message fields for the 
transaction date and transaction time, including the date and time the 
distributing broker-dealer received the funds transfer request from its 
customer. Pursuant to arrangements between a distributing broker-dealer 
and the insurance company that issued the variable contract, the 
insurance company may determine to accept the broker-dealer's receipt 
of the order from its customer as the time the order was received for 
purposes of Rule 22c-1.\7\
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    \6\ Variable insurance products are ``securities'' for purposes 
of federal securities law, the sale of which is subject to 
regulation by the Securities and Exchange Commission and the 
Financial Industry Regulatory Authority (``FINRA'', successor to the 
National Association of Securities Dealers, or NASD). 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 
Investment Company Act. Fund transfers must therefore also comply 
with relevant provisions of the Investment Company Act and the 
regulations promulgated thereunder.
    \7\ Rule 22c-1 under the Investment Company 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. The 
NSCC funds transfer working group has developed a model agreement 
provision that can be adopted by the insurance company and the 
broker-dealer, based on the analogous provisions relating to the 
receipt of orders contained in the distribution agreement between a 
mutual fund company and a distributing broker-dealer.
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2. Statutory Basis
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\

[[Page 38481]]

and the rules and regulations thereunder applicable to NSCC because the 
proposed rule change should promote processing efficiencies between 
insurance companies and distributors of variable insurance products, 
thereby facilitating the prompt and accurate processing of securities 
transactions.
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    \8\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(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)(iii) of the Act \9\ and Rule 19b-4(f)(6) \10\ 
thereunder in that it (1) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; (iii) by its terms, does not become 
operative for 30 days after the date from which it was filed (June 19, 
2008), or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
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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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NSCC-2008-03 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-SCC-2008-03. 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 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 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, http://www.nscc.com/legal/. 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-2008-03 and should be submitted on 
or before July 28, 2008. 

    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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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-15251 Filed 7-3-08; 8:45 am]

BILLING CODE 8010-01-P