SUBJECT: NEW STATEMENT OF POLICY AMENDMENT: STANDARDS RELATING TO REGULATORY HISTORY FOR NSCC APPLICANTS AND PARTICIPANTS

The Securities and Exchange Commission recently approved a rule change filed by National Securities Clearing Corporation ("NSCC" or the "Corporation") consisting of a Statement of Policy which relates to the regulatory history and competence for membership of NSCC applicants and participants. This policy is effective immediately

The Statement of Policy states that the Corporation may deny membership to any applicant or cease to act for any participant when a person (the "Person") with significant managerial responsibility or otherwise with significant ability to influence the policies and actions of the applicant or participant (through ownership interest, contract or otherwise), whether or not the Person or Persons currently act as a principal or registered representative, has a record that reflects:

(1) any felony conviction (or plea of guilty or nolo contendere) or pending felony indictment or information or other institution of felony proceedings, or any investment-related ⁽¹⁾ misdemeanor conviction (or plea of guilty or nolo contendere) or pending investment-related misdemeanor information or other institution of criminal proceedings with respect to an investment-related misdemeanor;

(2) permanent bar or temporary suspension of ability to act as a principal or registered representative or otherwise to be associated with or perform designated functions for a firm engaging in an investment-related business (other than any temporary suspension for minor or technical violations);

(3) other disciplinary or adverse regulatory or administrative actions (except for actions that are both isolated and minor) taken by any governmental, regulatory or self-regulatory body (a "Regulatory Authority");

(4) arbitrations, administrative proceedings, civil actions or other proceedings not resolved in favor of the Person (except for proceedings that are both minor and isolated), including, but not limited to, proceedings ending in settlements involving a payment and proceedings that have not yet been adjudicated ⁽²⁾ (collectively, "Adverse Civil Proceedings"); provided, however, that

(a) unadjudicated proceedings brought by someone other than a Regulatory Authority shall not, by themselves, constitute grounds for the Corporation to deny membership to an applicant or cease to act for a participant, and

(b) unadjudicated proceedings brought by a Regulatory Authority shall not, by themselves, constitute grounds to cease to act for a participant but may constitute grounds to deny membership to an applicant;

(5) multiple customer complaints;

(6) a termination or permitted resignation after an investigation or allegation of sales practice problems or of violation of investment-related statutes, regulations or rules or industry standards of conduct; or

(7) being subject to heightened supervision in accordance with guidelines or recommendations promulgated by a Regulatory Authority.

In addition to the above, it is specifically understood that:

Any action, complaint, or proceeding of a type referred to in the enumerated items above that is not taken against a particular Person shall nonetheless be deemed to be taken against that Person if that Person’s activities are cited in whole or in part as being a contributing cause to such action, complaint or proceeding.

Single instances under items (3) or (4) above may be considered as part of the adverse regulatory history of a Person under this statement of policy (despite the plural designation in such items) if there exist one or more other items of adverse regulatory history or if that single instance indicates that the Person has a propensity to act in a manner that could cause significant financial cost to the applicant or participant.

No Person shall be deemed to have a record that reflects an adverse regulatory history under items (4) or (5) above due to being named in customer complaints or Adverse Civil Proceedings merely because of the Person’s management or ownership position in the applicant or participant (as opposed to actually engaging in wrongful conduct, including failure to supervise) unless the number of customer complaints or Adverse Civil Proceedings are disproportionate to the size of the firm.

The Corporation may deny membership to an applicant or cease to act for a participant if a correspondent of the applicant or participant or any entity for which the applicant or participant is financially responsible would fail to meet the above membership Standards, but only if the size of the business of the correspondent or other entity is significant relative to the capital of the applicant or participant.

Finally, the Statement of Policy shall not be construed to limit the Corporation’s authority to deny membership to, cease to act for, or obtain further assurances from, any applicant or participant in accordance with the Corporation’s Rules and Procedures when the circumstances warrant even if such circumstances include (or consist solely of) items that are specifically not grounds for such action under this Statement of Policy. For example, any unadjudicated proceeding that could create significant financial difficulties for an applicant or participant may be grounds for such action even if it would not constitute adverse regulatory history under this Statement of Policy.

The text of the rule change may be obtained by contacting the NSCC Legal Department at (212) 412-8634.

Questions regarding the rule filing should be directed to Richard J. Paley, Associate Counsel, at (212) 412-8874. Questions regarding the new Statement of Policy should be directed to Peter J. Axilrod, Managing Director, at (212) 412-8567.

Robert J. Woldow
Managing Director and General Counsel

¹The term "investment-related" pertains, but is not limited, to securities, commodities, banking, insurance or real estate.

²The term "adjudicated" for purposes of this Statement of Policy shall be deemed to mean any arbitration, processing or action that has been resolved subject to appeal, whether or not the resolution has been stayed pending appeal.