
[Federal Register Volume 77, Number 65 (Wednesday, April 4, 2012)]
[Notices]
[Pages 20472-20474]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8035]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66676; File No. SR-OCC-2012-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change to More Closely Align OCC's 
By-Laws and Rules with Regulatory Requirements Related to ``Statutory 
Disqualifications''

March 29, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on March 15, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared primarily by OCC. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would 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'') while giving 
guidance to Clearing Members and Applicants as to OCC's policies with 
respect to statutory disqualifications.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC 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. OCC 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 OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to 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 Clearing Members and Applicants while 
giving guidance to Clearing Members and Applicants as to OCC's policies 
with respect to statutory disqualifications. OCC is also proposing to 
amend its ``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 SR-OCC-2011-12 and 
approved by the Commission on October 27, 2011.\4\
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    \4\ Securities Exchange Act Release No. 34-65648 (October 27, 
2011), 76 FR 68236 (November 3, 2011).
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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 Member or Applicant. A registered clearing 
agency is required to file such a notice only when the 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

[[Page 20473]]

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 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 Section 5b(c)(2)(O); 7 U.S.C. 7a-
1(c)(2)(O).
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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.
    OCC believes that the proposed changes to its By-Laws are 
consistent with the purposes and requirements of Section 17A of the Act 
\6\ and the rules and regulations thereunder applicable to OCC because 
they are designed to more closely align OCC's By-Laws and Rules with 
applicable regulatory requirements, establish standard notification and 
other procedures, provide Clearing Members with guidance as to OCC's 
policies regarding statutory disqualifications, 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 and are not designed to permit unfair 
discrimination in the admission of participants or among participants 
in the use of OCC. The proposed rule change is not inconsistent with 
any rules of OCC.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC believes that the proposed rule change will not 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

    Written comments relating to the proposed rule change have not been 
solicited or received. OCC will notify the Commission of any written 
comments received by OCC.

[[Page 20474]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) by order approve or disapprove the proposed rule change or (B) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

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-OCC-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-OCC-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 Section, 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 will also be available for 
inspection and copying at the principal office of OCC and on OCC's Web 
site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_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-OCC-2012-03 
and should be submitted on or before April 25, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-8035 Filed 4-3-12; 8:45 am]
BILLING CODE 8011-01-P


