[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43795-43797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20701]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41657; File No. SR-DTC-99-17]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change Relating to Arrangements To
Integrate The Depository Trust Company and the National Securities
Clearing Corporation
July 27, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 6, 1999, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-99-17) as described in Items I, II, and III below, which items
have been prepared primarily by DTC. The Commission is publishing this
notice to solicit comments from interested persons.
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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
The proposed rule change filed by DTC involves proposed
arrangements to integrate DTC and National Securities Clearing
Corporation (``NSCC''). The proposal provides for the following:
DTC and NSCC will form a New York corporation (``Holding
Company'') for the purpose of owning directly all of the outstanding
stock of NSCC and owning indirectly through a Delaware subsidiary of
the Holding Company all of the outstanding stock of DTC.
After receipt of all necessary regulatory approvals, the
Holding Company will conduct exchange offers in which current DC
stockholders will have the opportunity to exchange their DTC shares for
newly-issued Holding Company common stock on a one-for-one basis and
the two current stockholders of NSCC will be offered shares of Holding
Company preferred stock on a one-for-one basis in exchange for their
NSCC shares (``Exchange Offers'').
The Holding Company will elect as the Directors of DTC and
NSCC the persons elected by the stockholders of the Holding Company.
As subsidiaries of the Holding Company, DTC and NSCC will
continue to operate as they do currently, and each will offer its own
services to its own members pursuant to separate legal arrangements and
separate risk management procedures.
The Holding Company itself will not engage in clearing
agency activities. Certain support functions, including Human
Resources, Finance, Audit, General Administration, Corporate
Communications, and Legal will be centralized in the Holding Company,
and the Holding Company will provide those services to each of the two
subsidiary clearing agencies pursuant to service contracts.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
At their meetings in February 1999, the Boards of Directors of DTC
and NSCC voted to proceed with a plan for the integration of the two
clearing agencies. A principal goal of the plan is to facilitate the
development and timely execution of a strategy to harmonize the
processing streams at DTC and NSCC for the clearance and settlement of
both institutional and broker transactions. This strategy is intended
to accommodate shortened settlement cycles and increased volumes, to
improve risk management, and to lower transaction processing costs.
An initial step in the plan was the identification from among the
incumbent directors of both Boards of a single group of individual to
serve as the Board of Directors for each of the two companies. Since
simply adding the membership of DTC's Board of NSCC's Board would have
resulted in certain user and marketplace organizations having more than
one representative, each of these organizations was asked to select
only one representative. Through this process and with the inclusion of
DTC and NSCC management Directors, a group of twenty-seven persons was
identified. That group has been elected as NSCC Board of Directors by
NSCC's stockholders. Since federal banking law applicable to DTC limits
the maximum size of DTC's Board to twenty-five members, two of the
persons to NSCC's Board will participate in DTC Board meetings as non-
voting advisors. The remaining twenty-five persons have been elected as
DTC's Board of Directors by DTC stockholders.\3\ The next steps in the
integration plan, conducting the Exchange Offers and implementing
certain stock ownership and corporate governance arrangements for the
Holding Company, are the subjects of the proposed rule change.
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\3\ See Securities Exchange Act Release No. 41529 (June 15,
1999), 64 FR 33333 [File No. SR-DTC-99-08] (order approving proposed
rule change).
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The Holding Company will issue two classes of stock in connection
with the Exchange Offers: common stock to be owned initially by current
DTC stockholders and preferred stock to be owned in equal amounts by
the New York Stock Exchange (``NYSE'') and the National Association of
Securities Dealers, Inc. (``NASD''), the current stockholders of NSCC.
As explained in more detail below, DTC believes that DTC and NSCC will
satisfy the fair representation requirement of Section
[[Page 43796]]
17A(b)(3)(C) of the Act \4\ in the Holding Company structure by (1)
giving participants and members of DTC and NSCC the right to purchase
shares or Holding Company common stock on a basis that reflects their
use of the services and facilities of DTC and NSCC (based on a system
analogous to the system now employed by DTC for reallocating
entitlements to purchase shares of DTC stock) and (2) selecting
individuals to be directors of the Holding Company (who will also be
directors of DTC and NSCC) on a basis that will insure that all major
constituencies in the securities industry will have a voice in the
business and affairs of DTC and NSCC (based on a process analogous to
the process now employed by the two clearing agencies for selecting
their directors).
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\4\ 15 U.S.C. 78q-1(b)(3)(C).
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In connection with the exchange offer for shares of DTC stock, the
current DTC Stockholders Agreement will be amended to provide that if a
specified supermajority of DTC stockholders tender their shares of DTC
stock for shares of Holding Company common stock: (1) Any DTC
stockholders that fail to tender their shares of DTC stock will cease
to be qualified holders of DTC stock; (2) their shares of DTC stock
will automatically be transferred to NSCC; (3) NSCC will tender such
shares of DTC stock to the Holding Company in exchange for an
equivalent number of shares of Holding Company common stock; and (4)
the non-tendering DTC stockholders will be paid DTC book value for
their shares of DTC stock as when NSCC, in accordance with procedures
set forth in the Holding Company Shareholders Agreement, sells or
transfers its shares of Holding Company common stock to other
participants or members of DTC and NSCC.\5\
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\5\ DTC has informed the Commission that the procedures to be
used by NSCC to sell or transfer Holding Company common stock are in
all material respects the same as the procedures set forth in DTC's
Stockholders Agreement applicable to the sale by a stockholder of
DTC shares.
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The Holding Company's Articles of Incorporation, By-Laws, and
Shareholders Agreement (``Basic Documents'') \6\ contain provisions
designed to preserve the rights that the stockholders of DTC and NSCC
currently have and in particular to satisfy the fair representation
requirement of Section 17A of the Act. In this regard, the Basic
Documents provide for the following.
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\6\ DTC included the Basic Documents as exhibits to its filing,
which is available for inspection and copying in the Commission's
public reference room and through DTC.
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As owners of Holding Company preferred stock, the NYSE and
the NASD each will have the right to put one person on the Board of
Director of the Holding Company, and that person will also serve on the
Boards of DTC and NSCC. All other Directors will be elected annually by
the owners of Holding Company common stock.
As discussed above, the rights to purchase Holding Company
common stock will be reallocated to the users of both clearing agencies
based upon the users' usage. Under the Basic Documents, these rights
will be reallocated initially in 2000 and again in 2001. Thereafter,
depending upon whether there are significant changes in entitlements
and stock purchases, the Board of the Holding Company will be permitted
to schedule reallocations every other year or every third year rather
than annually.
The owners of Holding Company common stock will be able to
exercise cumulative voting in the election of Holding Company
directors.
With respect to the nomination process, each year the Holding
Company's Board of Directors will appoint a nominating committee that
may include both members and nonmembers of the Board. After soliciting
suggestions from all users of the clearing agencies of possible
nominees to fill vacancies on the Board, the nominating committee will
recommend a slate of nominees to the full Board. The Board may make
changes in that slate before submitting nominations to the holders of
Holding Company common stock for election. The election ballot included
in the proxy materials will provide an opportunity for stockholders to
vote for a person not listed as a nominee. Since the Basic Documents
provide for cumulative voting, one or more owners of Holding Company
common stock could arrange to elect a person not on the slate nominated
for election by the Board.
DTC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act because it is designed to
coordinate further the activities of DTC and NSCC in order to help
assure the continued prompt and accurate clearance and settlement of
securities transactions in the face of changing business and regulatory
requirements for the securities industry.
(B) Self-Regulatory Organization's Statement of burden on Competition
DTC does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act. DTC and NSCC are utilities created to serve
members of the securities industry by providing certain complementary
services that are ancillary to the businesses in which industry members
complete with one another.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
Written comments from DTC participants have not been solicited or
received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rules Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which DTC consents, the Commission will:
(A) By order approve such 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 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 Section, 450 Fifth Street, NW,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of DTC. All submission
should refer to File No. SR-DTC-99-17 and should be submitted by
September 1, 1999.
[[Page 43797]]
For the Commission by Division of Market Regulation, pursuant to
delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20701 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M
