[Federal Register Volume 59, Number 158 (Wednesday, August 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20121]
[[Page Unknown]]
[Federal Register: August 17, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 3434512; File No. SR-MBSCC-94-3]
Self-Regulatory Organizations; MBS Clearing Corporation; Notice
of Amendments and Order Granting Accelerated Approval of Proposed Rule
Change Relating to Corporate Governance Changes
August 10, 1994.
On June 21, 1994, MBS Clearing Corporation (``MBSCC'') filed with
the Securities and Exchange Commission (``Commission'') a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'').\1\ The Commission published notice of the proposed rule
change in the Federal Register on July 18, 1994.\2\ On July 15, July
22, August 4, and August 9, 1994, MBSCC filed amendments to the
proposed rule change.\3\ No comments have been received on the filing.
As discussed below, the Commission is approving the proposed rule
change, including the amendemnts, on an accelerated basis.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 34337 (July 8, 1994), 59
FR 36457.
\3\ Amendment No. 1 corrected a typographical error in the
filing. Letter from David T. Rusoff, Foley & Lardner, to Jerry
Carpenter, Division of Market Regulation (``Division''), Commission
(July 14, 1994). Amendment No. 2 clarified certain provisions of the
Shareholders Agreement. Letter from Daniel B. Silver, Cleary,
Gottlieb, Steen & Hamilton to Jerry Carpenter, Division, Commission
(July 21, 1994). Amendment No. 3 clarified the procedure for
shareholders to terminate the Shareholders Agreement. Letter from
David T. Rusoff, Foley & Lardner, to Jerry Carpenter, Division,
Commission (August 3, 1994). Amendment No. 4 provided for a
limitation on the voting entitlements of bank holding companies.
Letter from David T. Rusoff, Foley & Lardner, to Jerry Carpenter,
Division, Commission (August 9, 1994).
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I. Description
MBSCC is currently a wholly owned subsidiary of the Chicago Stock
Exchange, Incorporated (``CHX''). CHX has agreed to sell all of CHX's
ownership interest in MBSCC to MBSCC participants and the National
Securities Clearing Corporation (``NSCC'').\4\ After the transaction is
completed, participants of MBSCC will own 100% of Class A common shares
of MBSCC, and NSCC will own 100% of Class B common shares of MBSCC.\5\
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\4\CHX will sell all of its shares to a corporation formed for
the sole purpose of acquiring MBSCC stock (``MBSCC Acquisition
Corporation''). MBSCC participants will own 90% of MBSCC Acquisition
Corporation, and NSCC will own 10% of MBSCC Acquisition Corporation.
After the sale of MBSCC stock to MBSCC Acquisition Corporation,
MBSCC Acquisition Corporation will be merged into MBSCC with MBSCC
being the surviving corporation.
\5\All MBSCC participants will have the opportunity to purchase
shares in MBSCC in proposition to their usage of MBSCC. After the
initial sale to participants, participants who are not shareholders
will be entitled to purchase one share of Class A common stock. All
shareholders will be required to sign the Shareholders Agreement
described below.
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The proposed rule change adopts corporate governance changes for
MBSCC consistent with the transaction described above. The proposed
rule change amends Article FOURTH of MBSCC's Certificate of
Incorporation, amends various provisions of MBSCC's By-Laws and Rules,
and authorizes MBSCC to enter into a Shareholders Agreement.
Article FOURTH of MBSCC's Certificate of Incorporation is amended
to increase the number of shares of stock that MBSCC is authorized to
issue and to divide the common stock into Class A and Class B shares.
The increased number of authorized shares permits MBSCC participants to
hold MBSCC shares in proportion to their usage of MBSCC without
creating fractional shares. The division of the common stock into Class
A and Class B shares provides a mechanism whereby NSCC, which will
purchase 100% of Class B shares, is assured one seat on the board of
directors of MBSCC.
The amendments to the By-Laws and the Shareholders Agreement set
forth, among other things, the number of directors, their eligibility,
and the manner in which directors will be elected. Specifically, the
amendment to Article 3, Section 3.1 of the By-Laws increases the size
of the MBSCC board to thirteen from its present size of eleven
directors.\6\ In addition, Article 3, Section 3.1 of the By-Laws and
Section 2 of the Shareholders Agreement require that each director,
other than the NSCC director and one director that represents the
management of MBSCC, must be an officer or general partner of or hold a
similar management position with a participant of MBSCC (``Participant
Director'') and that no more than one officer, partner, director, or
employee of a participant may serve as director at any given time.
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\6\Pursuant to Article 3, Section 3.2 of the By-Laws and
pursuant to the proposed Shareholders Agreement, one of the newly
created slots on the MBSCC board is for NSCC's delegate to the
board, and one slot is for an additional representative of
participants. NSCC will elect one director of the Class III
directors for so long as NSCC owns Class B shares. Section 3.1 of
the By-Laws provides for a staggered board of directors with each of
the three classes elected once every three years.
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The proposed rule change also amends provisions of the By-Laws to
lower the number of votes required to call a special meeting from 75%
to 25% of the outstanding voting power (Article 2, Section 2.3), to
provide for waiver of notice of a stockholders' meeting (Article 2,
Section 2.4), and to authorize the board of directors to establish the
salaries of MBSCC's officers (Article 5, Section 5.2).
Section 2 of the Shareholders Agreement specifies how Participant
Directors and members of the nominating committee\7\ are elected. As is
currently the practice, the nominating committee will nominate
candidates for Participant Directors and members of the following
year's nominating committee.\8\ Participants are given the opportunity
to petition for additional candidates.\9\ If no petitions are filed,
the participant shareholders must elect the candidates nominated by the
nominating committee.
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\7\Under Section 2(A)(ii) of the Shareholders Agreement, no
person who is a current member of the board or who was a member of
the board or nominating committee for the prior year may be elected
to the nominating committee. Members of the nominating committee
must be officers or general partners of or hold similar management
positions with MBSCC participants.
\8\The nominating committee must submit its list of nominees to
the Secretary of MBSCC no later than sixty days before the annual
meeting.
\9\The petition must be signed by a least five participants and
filed with the Secretary of MBSCC at least thirty days prior to the
annual meeting.
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If there are competing candidates due to a petition or petitions
being filed, ballots will be mailed to all participants. Pursuant to
Section 2(A)(iii) of the Shareholders Agreement, each participant of
MBSCC is entitled to the number of votes determined by multiplying the
number of persons to be elected Participant Directors at the annual
meeting by one vote for each $1,000 of average monthly volume-related
fees (rounded down to the nearest one thousand dollars) payable or paid
by the participant to MBSCC during the preceding year (``Voting
Entitlement'').\10\ Every participant shall have at least one vote.
Each participant may cast all of its votes for a single nominee or
distribute its votes among several nominees. Participants Owners of
Class A stock must vote their shares as determined by the vote of all
of the participants whether or not the voting participants are
shareholders. In the event of a tie vote, the nominating committee
selects the person who is to be elected director.
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\10\The Shareholders Agreement contains special provisions for
participants that are bank holding companies (``BHC'') (as such term
is defined under the Bank Holding Company Act of 1956) and their
affiliates. The voting entitlement of a BHC participant and its
affiliates is limited to 4.9% of the total voting entitlements. The
voting entitlement of all BHC participants and their affiliates is
limited to 24.9% of the total voting entitlements. Should the sum of
the voting entitlements of all BHC participants exceed 24.9%, each
BHC participant's voting entitlement will be reduced pro rata to
comply with the 24.9% limitation. The 4.9% limitation will not apply
to a BHC participant if that BHC participant provides confirmation
from the appropriate bank regulatory agency that the limitation is
not applicable to that BHC participant. The 24.9% limitation will
not apply to BHC participants if any BHC participant provides
confirmation from the appropriate bank regulatory agency that the
total voting entitlements of all BHC participants can exceed 24.9%
of the total voting entitlements.
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The Shareholders Agreement also contains provisions relating to
shareholder votes for other than the election of directors.\11\ In
addition, the Shareholders Agreement contains provisions relating to
required transfers of MBSCC's stock\12\ and permitted transfers of
MBSCC's Class A and Class B stock.\13\ The Shareholders Agreement also
provides that the provisions governing the voting of shares shall
continue in force for ten years and shall be automatically renewed for
a subsequent ten year period.\14\ Finally, MBSCC is amending Article V,
Rule 6, Section 3 of its Rules to delete references to the CHX.
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\11\Participant shareholders may not remove a director of MBSCC,
with or without cause but must remove a director for cause if
directed to do so by a majority of the directors. A \2/3\
affirmative vote of the MBSCC shares is required to amend the
Certificate of Incorporation or the By-Laws of MBSCC, for MBSCC to
repurchase or issue any of its securities, or for MBSCC to purchase
securities not incident to MBSCC's normal business. In addition, the
shareholders must vote as directed by the board of directors for
amendments to the Certificate of Incorporation relating to (1)
Greater than majority requirements of quorum and voting at board
meetings; (2) cumulative voting for the election of directors; (3)
classification of directors; (4) shareholder rights to fix
consideration for shares, to determine the stated capital and
surplus upon issuance, and to authorize a reduction in capital in
respect of such shares; (5) shareholder rights to fix compensation
of directors; and (6) shareholder rights to elect and remove
directors. In addition, the board also has the authority to direct
shareholder voting for the amendment of any By-Laws except any By-
Law which the board is prohibited from amending by the provisions of
the By-Laws.
\12\Upon the insolvency of a participant shareholder, all MBSCC
shares held by it will be transferred automatically to all other
participant shareholders pro rata.
\13\A participant may sell its Class A shares only to another
participant but only after giving notice to MBSCC of the proposed
sale. NSCC, the sole owner of Class B stock, may sell its Class B
shares only to another participant (which shares will immediately
convert into Class A shares) or to a registered clearing agency but
only after giving notice to MBSCC of the proposed sale. MBSCC has
the option to purchase the Class A or Class B shares for the lower
of $100 per share or the offering price.
\14\The provisions in the Shareholders Agreement governing
voting include: (1) The obligation of the shareholders to elect
directors selected by all participants; (2) the prohibition against
shareholders removing directors with or without cause; (3) \2/3\
majority voting requirements; and (4) requirements that the
shareholders vote as directed by the board for certain matters (see
supra footnote 10). All other provisions of the Shareholders
Agreement remain in effect unless the agreement is terminated or
amended by the consent of all of the parties to the agreement. If at
the end of any calendar year there is no agreement governing the
voting of the shares in effect, the shares of MBSCC will be
redistributed in proportion to each participant's usage of MBSCC.
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II. Discussion
The Commission believes the proposed rule change is consistent with
Section 17A of the Act and, therefore, is approving the proposal.
Specifically, the Commission believes the proposal is consistent with
Section 17A(b)(3)(C)\15\ of the Act in that it assures the fair
representation of its shareholders and participants in the selection of
its directors and administration of its affairs.
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\15\15 U.S.C. 78q-1(b)(3)(C) (1988).
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The Act does not define fair representation or set up particular
standards of representation. Instead it provides that the Commission
must determine whether the rules of the clearing agency assure adequate
representation of participants and shareholders in the selection of the
board of directors and the administration of the clearing agency's
affairs. In its release setting forth the standards for registration of
clearing agencies (``Standards Release''), the Commission stated that
rather than prescribing a single method for providing fair
representation, the Commission would evaluate each clearing agency's
procedures on a case-by-case basis.\16\ With respect to providing
participants with a meaningful opportunity to be represented in the
selection of the board of directors and the administration of the
clearing agency's affairs, the Standards Release suggests a number of
methods can be used to comply with the fair representation standard.
Among others, these include the allocation of voting stock to all
participants based on their usage of the clearing agency or the
selection by participants of a slate of nominees for which the
stockholders of the clearing agency will be required to vote their
shares.\17\
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\16\Securities Exchange Act Release No. 16900 (July 1, 1980), 45
FR 41920.
\17\The other suggestions in the Standards Release are: (1)
Solicitation of board of director nominations from all participants;
(2) selection of candidates for election to the board of directors
by a nominating committee which would be composed of and selected by
the participants or representatives chosen by participants; or (3) a
number of directors chosen by and from the participants.
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MBSCC's proposal initially allows all participants to purchase
voting stock based on their usage of MBSCC. Rather than reallocating
the voting shares each year in proportion to participants' usage of
MBSCC, the Shareholders Agreement requires the participant shareholders
to elect directors selected by all participants. If the voting
provisions of the Shareholders Agreement expire, the participants'
voting stock will be reallocated each year in accordance with each
participant's usage of MBSCC. Both methods of electing directors appear
to be consistent with the methods outlined in the Standards Release.
The Shareholders Agreement should ensure that the candidates for
the board and the nominating committee represent the entire MBSCC
participant base. The nominating committee is directed to select
candidates with a view toward providing fair representation for the
interests of a cross section of the participants. Other candidates may
be nominated if the nominating committee is petitioned by participants.
Other aspects to the proposed rule change serve to enhance the
ability of small participants to have a voice in the administration of
MBSCC's affairs. By limiting each participant's representation on the
board to only one director, MBSCC's board should represent a cross-
section of MBSCC's participant base and should not be dominated by one
or two large participants. To counter the potential for a few large
participants to determine the outcome of a shareholder vote, certain
provisions of the Shareholders Agreement limit the shareholders'
authority in favor of board power. For example, the shareholders must
vote as directed by the board regarding removal of directors and the
amendment of certain provisions of the Certificate of Incorporation. In
addition, by requiring a \2/3\ vote to amend the Certificate of
Incorporation or the By-Laws, a greater consensus among shareholders
must be obtained before making substantial changes to MBSCC's
administration. The Commission believes that the provisions enhancing
the authority of the board of directors, who represent all the
participants, are consistent with a clearing agency's obligations of
fair representation.
The Commission also believes that the limitation on the voting
entitlement of BHC participants is permissible under the fair
representation requirements. During 1993, the BHCs' usage of MBSCC was
less than 20% of the total usage of MBSCC, and therefore, no reduction
in the BHCs' voting entitlement would have been required. MBSCC has
agreed to notify the Commission if the BHCs' usage of MBSCC exceeds
24%. However, the Commission believes that even if a reduction of the
BHCs' voting entitlement occurs, the fair representation requirements
are not violated because the provision was adopted at the request of
the BHCs, whose voting entitlements are being reduced, because of the
Bank Holding Company Act of 1956.
MBSCC has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of the notice of filing. The parties to the merger
have agreed to close the transaction during the first two weeks of
August 1994. To permit an efficient transfer of ownership from the CHX
to MBSCC participants, it is necessary that the appropriate governance
changes are in place. Therefore, the Commission finds sufficient cause
to accelerate approval of this proposal.
Interested persons are invited to submit written data, views, and
arguments concerning the amendments to the proposed rule change.
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 these amendments 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 the above-mentioned self-regulatory organization. All
submissions should refer to File No. SR-MBSCC-CC-94-3 and should be
submitted by September 7, 1994.
III. Conclusion
For the reasons stated above, the Commission finds that the
proposed rule change is consistent with Section 17A of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-MBSCC-94-03) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20121 Filed 8-16-94; 8:45 am]
BILLING CODE 8010-01-M
