Questions about the amendments may be directed to Harold L. Johnson, Deputy General Counsel.

On May 7, 1999, the Securities and Exchange Commission ("Commission") approved an amendment to rule G-15(d)(ii) on automated confirmation/acknowledgment of customer transactions.¹ As a result of these amendments, dealers now may comply with the confirmation/acknowledgment requirements of rule G-15(d) by using the services of "qualified vendors," in addition to using the services of clearing agencies registered with the Commission under section 17A of the Securities Exchange Act ("registered clearing agencies").

The clearance of institutional customer transactions is accomplished today in large part through the use of automated confirmation/acknowledgment systems operated by registered clearing agencies. These systems have provided substantial efficiencies and cost savings by ensuring timely settlement and eliminating some of the time consuming and expensive manual processing associated with paper confirmations. The Board views these systems as a critical part of the national system of clearance and settlement mandated by Section 17A of the Securities Exchange Act.

Board rule G-15(d)(ii) requires that customer transactions in municipal securities effected on Delivery versus Payment or Receipt versus Payment ("DVP/RVP") settlement basis must, if eligible for processing in an automated confirmation/acknowledgment system, be confirmed and acknowledged through such a system. Prior to the approval of the amendments, rule G-15(d)(ii) specified that any confirmation/acknowledgment system used by dealers to comply with rule G-15(d)(ii) must be operated by a registered clearing agency. The amendments allow brokers, dealers and municipal securities dealers to comply with rule G-15(d)(ii) through the use of confirmation/acknowledgment services operated by non-registered "qualified vendors."

To become a "qualified vendor" of confirmation/acknowledgment services, an entity would have to:

• For each transaction that it processes in its confirmation/acknowledgment system, deliver a trade record to a registered clearing agency, obtain a control number, cross reference the control number to the confirmation/acknowledgment, electronically deliver any acknowledgment received from a customer or a customer’s agent to the registered clearing agency and include such control number when delivering acknowledgments to the clearing agency.
• Certify to its customers the integrity and capacity of the electronic confirmation/acknowledgment system and that it will maintain monitoring and contingency procedures.
• On an annual basis, submit an independent auditor’s report to the Commission staff which is not deemed unacceptable by the Commission staff.
• Notify the Commission staff in writing of any material changes in the systems by which it offers electronic confirmation/acknowledgment services.
• Submit to the Board copies of any of the above filings with the Commission staff within ten business days.
• Supply supplemental information regarding its confirmation/acknowledgment services, as requested by the Board or the Commission staff.

The amendments to rule G-15(d) initially were filed with the Commission on April 1, 1998.² On April 16, 1999, the Board filed minor changes in the amendments pursuant to the Commission’s request.³ The revisions concerned two minor changes to the language of the proposed rule change designed to make the rule language more consistent with similar proposed rule changes on the same subject filed with the Commission by other Self-Regulatory Organizations.⁴

May 10, 1999

TEXT OF AMENDMENTS⁵

Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) - (c) No change

(d) Delivery/Receipt vs. Payment Transactions.

(i) No change.

(ii) Requirement for Confirmation/Acknowledgment.

(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a Cclearing Aagency registered with the Securities and Exchange Commission (registered clearing agency) or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a registered Cclearing Aagency or Qualified Vendor; (B) submit or cause to be submitted to a registered Cclearing Aagency or Qualified Vendor all information and instructions required by the registered Cclearing Aagency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer’s clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a registered Cclearing Aagency shall not be subject to this paragraph (ii).

(B) Definitions for Rule G-15(d)(ii).

(1) "Clearing Agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Act that is registered with the Commission pursuant to Section 17A(b)(2) of the Act or has obtained from the Commission an exemption from registration granted specifically to allow the clearing agency to provide confirmation/acknowledgment services.

(2) "Qualified Vendor" shall mean a vendor of electronic confirmation and acknowledgment services that:

(A) for each transaction subject to this rule: (i) delivers a trade record to a Clearing Agency in the Clearing Agency’s format; (ii) obtains a control number for the trade record from the Clearing Agency; (iii) cross-references the control number to the confirmation and subsequent acknowledgment of the trade; and (iv) electronically delivers any acknowledgment received on the trade to the Clearing Agency and includes the control number when delivering the acknowledgment of the trade to the Clearing Agency;
(B) certifies to its customers: (i) with respect to its electronic trade confirmation/acknowledgment system, that it has a capacity requirements evaluation and monitoring process that allows the vendor to formulate current and anticipated estimated capacity requirements; (ii) that its electronic trade confirmation/acknowledgment system has sufficient capacity to process the volume of data that it reasonably anticipates to be entered into its electronic trade confirmation/acknowledgment service during the upcoming year; (iii) that its electronic trade confirmation/acknowledgment system has formal contingency procedures, that the entity has followed a formal process for reviewing the likelihood of contingency occurrences, and that the contingency protocols are reviewed, tested, and updated on a regular basis; (iv) that its electronic confirmation/acknowledgment system has a process for preventing, detecting, and controlling any potential or actual systems or computer operations failures, including any failure to interface with a Clearing Agency as described in rule G-15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect against security breaches are followed; and (v) that its current assets exceed its current liabilities by at least five hundred thousand dollars;
(C) when it begins providing such services, and annually thereafter, submits an Auditor’s Report to the Commission staff which is not deemed unacceptable by the Commission staff. (An Auditor’s Report will be deemed unacceptable if it contains any findings of material weakness.);
(D) notifies the Commission staff immediately in writing of any material change to its confirmation/affirmation systems. (For purposes of this subparagraph (D) "material change" means any changes to the vendor’s systems that significantly affect or have the potential to significantly affect its electronic trade confirmation/acknowledgment systems, including: changes that: (i) affect or potentially affect the capacity or security of its electronic trade confirmation/acknowledgment system; (ii) rely on new or substantially different technology; (iii) provide a new service as part of the Qualified Vendor’s electronic trade confirmation/acknowledgment system; or (iv) affect or have the potential to adversely affect the vendor’s confirmation/acknowledgment system’s interface with a Clearing Agency.);
(E) notifies the Commission staff in writing if it intends to cease providing services;
(F) provides the Board with copies of any submissions to the Commission staff made pursuant to subparagraphs (C), (D), and (E) of this rule G-15(d)(ii)(B)(2) within ten business days.
(G) promptly supplies supplemental information regarding its confirmation/acknowledgment system when requested by the Commission staff or the Board.

(3) "Auditor’s Report" shall mean a written report which is prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association and which: (A) verifies the certifications described in subparagraph (d)(ii)(B)(2)(B) of this rule G-15; (B) contains a risk analysis of all aspects of the entity’s information technology systems including, computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing; and (C) contains the written response of the entity’s management to the information provided pursuant to (A) and (B) of this subparagraph (d)(ii)(B)(3) of rule G-15.

(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.

(iii) No change

(e) No change.

ENDNOTES

1. See Securities Exchange Act Release No. 41378 (May 7, 1999), 64 FR 25940 (May 13, 1999).

2. See Securities Exchange Act Release No. 39833 (April 6, 1998).

3. File No. SR-MSRB-98-6, Amendment No. 1. See "Proposed Rule Change on Automated Confirmation/Acknowledgment: Rule G-15(d)(ii)," MSRB Reports, Vol. 19, No. 2 (April 1999) at 31-33.

4. One revision concerned the requirement that, in order to maintain status as a qualified vendor, the vendor would have to file certain Auditor’s Reports annually with the Commission staff. The original requirement states that to remain qualified the vendor must obtain a statement from the Commission staff that "the Commission staff does not object to the Auditor’s report." The revision stated that the Auditor’s Report must be one "which is not deemed unacceptable" by the Commission staff. The second revision related to the requirement that a Qualified Vendor certify that its confirmation/acknowledgement system meets certain qualifications. The revision clarified that this certification is to be made to the customers of the Qualified Vendor and removed the requirement that the certification be done annually.

5. Underlining indicates additions; strikethrough denotes deletions.

 

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