99-22692. Self-Regulatory Organizations; The Depository Trust Company; Order Granting Accelerated Approval of a Proposed Rule Change Relating to Arrangements To integrate The Depository Trust Company and the National Securities Clearing Corporation  

  • [Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
    [Notices]
    [Pages 47882-47883]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-22692]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-41786; File No. SR-DTC-99-17]
    
    
    Self-Regulatory Organizations; The Depository Trust Company; 
    Order Granting Accelerated Approval of a Proposed Rule Change Relating 
    to Arrangements To integrate The Depository Trust Company and the 
    National Securities Clearing Corporation
    
    August 24, 1999.
        On July 6, 1999, The Depository Trust Company (``DTC'') filed with 
    the Securities and Exchange Commission (``Commission'') a proposed rule 
    change (File No. SR-DTC-99-17) pursuant to Section 19(b)(1) of the 
    Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
    was published in the Federal Register on August 11, 1999.\2\ No comment 
    letters were received. For the reasons discussed below, the Commission 
    is approving the proposed rule change.
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        \1\ 15 U.S.C. 78s(b)(1).
        \2\ Securities Exchange Act Release No. 41657 (July 27, 1999), 
    64 FR 43795.
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    I. Description
    
        The rule change involves arrangements to integrate DTC and the 
    National Securities Clearing Corporation (``NSCC''). Under the rule 
    change, DTC and NSCC will form a New York corporation (``Holding 
    Company'') that will own directly all of the outstanding stock of NSCC 
    and will own indirectly through a Delaware subsidiary of the Holding 
    Company all of the outstanding stock of DTC.
        The Holding Company will issue two classes of stock: common and 
    preferred. The Holding Company will conduct two exchange offers in 
    which (1) current DTC stockholders will have the opportunity to 
    exchange their DTC shares for Holding Company common stock on a one-
    for-one basis and (2) the New York Stock Exchange (``NYSE'') and the 
    National Association of Securities Dealers, Inc. (``NASD''), 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.
        In connection with the exchange offer for shares of DTC stock, the 
    current DTC Stockholders Agreement has been 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 and 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.\3\
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        \3\ 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'') \4\ 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(b)(3)(C) of the Act.\5\ Specifically, the 
    Basic Documents provide for the following:
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        \4\ 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.
        \5\ 15 U.S.C. 78q-1(b)(3)(C).
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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 
    Directors of the Holding Company. All other directors will be elected 
    annually by the owners of holding Company common stock. The Holding 
    Company will elect as the Directors of DTC and NSCC the
    
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    persons that the stockholders of the Holding Company elect as the 
    directors of the Holding Company.
         The rights to purchase Holding Company common stock will 
    be reallocated to the users of DTC and NSCC based upon the users' usage 
    of the clearing agencies' services and facilities. 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.
        Each year the holding Company's Board of Directors will appoint a 
    nominating committee that may include both members and non-members 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. Because the Basic Documents provide for cumulative 
    voting, it will be possible one or more owners of Holding Company 
    common stock to arrange to elect a person not on the slate nominated 
    for election by the Board.
        DTC and NSCC will continue to operate as they do currently, and 
    each will offer its own services to its own participants and members 
    pursuant to separate legal arrangements and separate risk management 
    procedures. DTC has informed the Commission that the Holding Company 
    will not engage in any clearing agency activities but that it will 
    provide certain support functions, including human resources, finance, 
    audit, general administration, corporate communications, and legal, 
    which support functions will be centralized in the Holding Company, to 
    DTC and NSCC pursuant to service contracts.
    
    II. Discussion
    
        Section 17A(b)(3)(C) of the Act \6\ requires that the rules of a 
    clearing agency assure a fair representation of its shareholders (or 
    members) and participants in the selection of its directors and 
    administration of its affairs. The Commission believes that the 
    proposed rule change is consistent with DTC's obligations under Section 
    17A(b)(3)(C) because it should provide DTC's participants with a 
    reasonable opportunity to acquire common stock in the Holding Company 
    in proportion to their use of DTC and should provide DTC's participants 
    through their holding of Holding Company stock with adequate and fair 
    representation in the selection of DTC's directors and in the 
    administration of DTC's affairs.
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        \6\ 15 U.S.C. 78q-1(b)(3)(C).
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        The Commission finds good cause for approving the proposed rule 
    change prior to the thirtieth day after the publication of notice of 
    the filing. Approving prior to the thirtieth day after publication of 
    notice will allow DTC to proceed with the exchange offer to its 
    shareholders in which the shareholders may exchange their shares in DTC 
    for common stock in the Holding Company.
    
    III. Conclusion
    
        On the basis of the foregoing, the Commission finds that DTC's 
    proposal is consistent with the requirements of the Act and in 
    particular with the requirements of Section 17A of the Act and the 
    rules and regulations thereunder.
        It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
    that the proposed rule change (File No. SR-DTC-99-17) be and hereby is 
    approved.
    
        For the Commission by the 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. 99-22692 Filed 8-31-99; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
09/01/1999
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
99-22692
Pages:
47882-47883 (2 pages)
Docket Numbers:
Release No. 34-41786, File No. SR-DTC-99-17
PDF File:
99-22692.pdf