File No. SR-NSCC-99-10
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 19b-4
Proposed Rule Change
By
NATIONAL SECURITIES CLEARING CORPORATION
Pursuant to Rule 19b-4 under the
Securities Exchange Act of 1934
Text of the Proposed Rule Change.
The proposed rule change filed by National Securities Clearing Corporation ("NSCC") involves proposed arrangements to integrate NSCC and The Depository Trust Company ("DTC"). The subject proposal provides for the following:
DTC and NSCC will form a New York corporation (the "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 DTC 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, in exchange for their NSCC shares, will be offered shares of Holding Company Preferred Stock on a one-for-one basis (the "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, each offering 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, with those services provided by the Holding Company to each of the two subsidiary clearing agencies pursuant to service contracts.
Not applicable.
Not applicable.
Procedures of the Self-Regulatory Organization.
NSCC’s Board of Directors has approved the proposals that are the subject of this filing.
The following persons at NSCC are prepared to respond to questions and comments on the proposed rule change: Karen L. Saperstein, General Counsel, at (212) 412-8638.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change.
(a) 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 (the "Plan"). 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, thereby accommodating shortened settlement cycles and increased volumes, improving risk management and lowering 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 individuals to serve as the Board of Directors for each of the two companies. Since simply adding the membership of NSCC’s Board to that of DTC would have resulted in certain user and marketplace organizations having more than one representative, each of these organizations was asked to select only one. 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 Directors by the NSCC stockholders. Since federal banking law applicable to DTC limits the maximum size of DTC’s Board to twenty-five members, two persons elected to NSCC’s Board will participate in DTC Board meetings as non-voting Advisors. The remaining twenty-five persons have been elected as DTC Directors by DTC stockholders.
The next steps in the 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.
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 (the "NYSE") and the National Association of Securities Dealers, Inc. (the "NASD"), the current stockholders of NSCC.
As explained in more detail below, in the Holding Company structure DTC and NSCC will satisfy the fair representation requirement (the "Fair Representation Requirement") of Section 17A of the Securities Exchange Act of 1934, as amended (the "Act"), by (1) giving Participants and members of DTC and NSCC the right to purchase shares of Holding Company Common Stock on a basis that reflects their use of the services and facilities of DTC and NSCC (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 (a process analogous to the process now employed by the two clearing agencies for selecting their Directors).
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 super-majority of DTC stockholders tender their shares of DTC stock for shares of Holding Company Common Stock, (1) any DTC stockholders who 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.
The Holding Company’s Articles of Incorporation, By-Laws and Shareholders Agreement (the "Basic Documents"), which are an exhibit hereto, 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 the Act. In this regard, the Basic Documents provide for the following:
As owners of Holding Company Preferred Stock, the NYSE and the NASD each will have a right to put one person on the Board of Directors of the Holding Company, that person also serving 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 their usage. Under the Basic Documents, these rights will be reallocated initially in 2000 and again in 2001. Thereafter, depending upon whether there were significant changes in entitlements and stock purchases, the Board of the Holding Company could decide 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 non-members of the Board. After soliciting suggestions from all users 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 cast their votes 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.
The proposed rule change is consistent with the requirements of Section 17A of the Act since 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.
Self-Regulatory Organization’s Statement on Burden on Competition
NSCC does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in the 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 compete with one another.
5. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants and Others
Written comments from NSCC Members have not been solicited or received on the proposed rule change.
Extension of Time Period for Commission Action
Not applicable.
7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable.
8. Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable.
9. Exhibits
Exhibit A - Form of notice of the proposed rule change for Federal Register.
Exhibit B - Holding Company Articles of Incorporation, By-Laws and Shareholders Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the self-regulatory organization has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
National Securities Clearing Corporation
By: ____________________________
Karen L. Saperstein
Managing Director,
General Counsel and Secretary
Exhibit A
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34- ; File No. SR-NSCC-99-10)
Proposed Rule Change By NATIONAL SECURITIES CLEARING CORPORATION ("NSCC" or the "Corporation"); involves proposed arrangements to integrate NSCC and The Depository Trust Company ("DTC"). Comments requested within days after the date of this publication.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. Section 78s(b)(1), notice is hereby given that on , NSCC filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II and III below, which Items have been prepared by NSCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change.
The proposed rule change involves proposed arrangements to integrate NSCC and The Depository Trust Company ("DTC").
Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change.
In its filing with the Commission, NSCC 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. Set forth in sections (A), (B) and (C) below, are the most significant aspects of such statements.
Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change.
(a) 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 (the "Plan"). 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, thereby accommodating shortened settlement cycles and increased volumes, improving risk management and lowering 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 individuals to serve as the Board of Directors for each of the two companies. Since simply adding the membership of NSCC’s Board to that of DTC would have resulted in certain user and marketplace organizations having more than one representative, each of these organizations was asked to select only one. 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 Directors by the NSCC stockholders.
1 Since federal banking law applicable to DTC limits the maximum size of DTC’s Board to twenty-five members, two persons elected to NSCC’s Board will participate in DTC Board meetings as non-voting Advisors. The remaining twenty-five persons have been elected as DTC Directors by DTC stockholders.The next steps in the 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.
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 (the "NYSE") and the National Association of Securities Dealers, Inc. (the "NASD"), the current stockholders of NSCC.
As explained in more detail below, in the Holding Company structure DTC and NSCC will satisfy the fair representation requirement (the "Fair Representation Requirement") of Section 17A of the Securities Exchange Act of 1934, as amended (the "Act"), by (1) giving Participants and members of DTC and NSCC the right to purchase shares of Holding Company Common Stock on a basis that reflects their use of the services and facilities of DTC and NSCC (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 (a process analogous to the process now employed by the two clearing agencies for selecting their Directors).
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 super-majority of DTC stockholders tender their shares of DTC stock for shares of Holding Company Common Stock, (1) any DTC stockholders who 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.
2The Holding Company’s Articles of Incorporation, By-Laws and Shareholders Agreement (the "Basic Documents"), which are an exhibit hereto, 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 the Act. In this regard, the Basic Documents provide for the following:
As owners of Holding Company Preferred Stock, the NYSE and the NASD each will have a right to put one person on the Board of Directors of the Holding Company, that person also serving 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 their usage. Under the Basic Documents, these rights will be reallocated initially in 2000 and again in 2001. Thereafter, depending upon whether there were significant changes in entitlements and stock purchases, the Board of the Holding Company could decide 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 non-members of the Board. After soliciting suggestions from all users 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 cast their votes 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.
(b) The proposed rule change is consistent with the requirements of Section 17A of the Act since 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 on Burden on Competition.
NSCC does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in the 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 compete 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 NSCC Members have not been solicited or received on the proposed rule change.
Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action.
Within 35 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 90 days of such date if it finds such longer period to be appropriate and publishes its reason for so finding or (ii) as to which the self-regulatory organization 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.
Solicitation of Comments.
Interested persons are invited to submit written data, views and arguments concerning the foregoing. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street N.W., Washington, D.C. 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 that are filed with 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 provisions of 5 U.S.C.
'552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street N.W., Washington, D.C. 20549. Copies of such filing will also be available for inspection and copying at the principal office of the NSCC. All submissions should refer to the file number in the caption above and should be submitted within days after the date of this publication.For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Jonathan G. Katz
Secretary
Dated: