[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17316]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34337; File No. SR-MBSCC-94-3]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by MBS Clearing Corporation Relating to Corporate Governance 
Changes

July 8, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchanges Act of 
1934 (``Act''),\1\ notice is hereby given that on June 21, 1994, MBS 
Clearing Corporation (``MBSCC'') 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 MBSCC. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change 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

    MBSCC proposes to amend Article FOURTH of MBSCC's Certificate of 
Incorporation; Sections 2.2, 2.3, 2.4, 2.10, 3.1, 3.2, 3.9, 4A.1, 4A.2, 
5.2, and 10.4 of MBSCC's By-Laws; and Article V, Rule 6, Section 3 of 
MBSCC's Rules. MBSCC also proposes to enter into a shareholders 
agreement.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, MBSCC included statements 
concerning the purpose of the 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. MBSCC has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

Background
    MBSCC is currently a wholly owned subsidiary of the Chicago Stock 
Exchange, Incorporated (``CHX''). On March 31, 1994, certain 
participants of MBSCC entered into a letter of intent with the CHX 
pursuant to which the CHX will sell all of the issued and outstanding 
capital stock of MBSCC to Acquiror. Acquiror is a corporation that will 
be formed for the sole purpose of acquiring MBSCC stock. All current 
participants of MBSCC will be eligible to purchase stock of Acquiror if 
they agree to sign the shareholders agreement, as discussed more fully 
below. New participants will be eligible to purchase one share upon 
admission as a participant. In addition, the National Securities 
Clearing Corporation (``NSCC''), which also will be a signatory to the 
shareholders agreement, will purchase approximately 10% of the stock of 
Acquiror. Immediately after Acquiror's acquisition of the stock of 
MBSCC, Acquiror will be merged into MBSCC with MBSCC as the surviving 
corporation. Pursuant to the merger, participant shareholders of 
Acquiror will own 100% of the Class A common shares of MBSCC and NSCC 
will own 100% of the Class B common shares of MBSCC, as discussed 
below.
Description of Amendments
    The purpose of the proposed rule change is to adopt appropriate 
corporate governance changes for MBSCC in light of the proposed 
acquisition discussed above. It is anticipated that the proposed rule 
change will become effective concurrent with the closing of the CHX's 
sale of MBSCC's stock to Acquiror. In furtherance of this objective, 
MBSCC proposes to amend Article FOURTH of its Certificate of 
Incorporation, to amend various provisions of its By-Laws and Rules, 
and to enter into a shareholders agreement.
    With respect to its Certificate of Incorporation, MBSCC proposes to 
amend Article FOURTH both 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 
will permit MBSCC to sell shares to its participants in proportion to 
their usage of MBSCC without creating fractional shares. The division 
of the common stock into Class A and Class B shares will provide a 
mechanism whereby NSCC, the purchaser of 100% of Class B shares, will 
be assured one seat on the board of directors of MBSCC.
    The proposed amendments to the By-Laws and the proposed 
shareholders agreement set forth, among other things, the number of 
directors, their eligibility, and the manner in which directors will be 
elected. Specifically, the proposed changes to Article 3, Section 3.1 
of the By-Laws will increase the size of the MBSCC board to thirteen 
from its present size of eleven directors and will establish 
eligibility requirements for directors. Pursuant to the proposed 
changes 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 will be for NSCC's delegate to the board, and one slot will 
be for an additional representative of participants. In addition, 
Article 3, Section 3.1 of the By-Laws and Section 2 of the shareholders 
agreement will require that all directors, other than the NSCC director 
and one director that represents the management of MBSCC as designated 
by the board, be officers or general partners or hold similar 
management positions of participants of MBSCC (``Participant 
Directors'').
    The proposed rule change also will amend provisions of the By-Laws 
to lower the number of votes required to call a special meeting 
(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 are to be elected. As 
is currently the practice, the nominating committee will nominate 
candidates for Participant Directors and members of the following 
year's nominating committee. Section 2(A)(ii) of the shareholders 
agreement establishes the eligibility requirements for members of the 
nominating committee. Participants will be given the opportunity to 
petition for additional candidates. If no petitions are filed, the 
participant shareholders must elect the candidates nominated by the 
nominating committee. If there are competing candidates due to a 
petition or petitions being filed, a ballot will be mailed to all 
participants. Pursuant to Section 2(A)(iii) of the shareholders 
agreement, each participant of MBSCC will be entitled to the number of 
votes for each class of nominees determined as follows: the number of 
persons to be elected in each class multiplied 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 (such amount known as ``Voting 
Entitlement''). 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 that own 
Class A stock must vote their shares as determined by the vote of all 
of the participants, whether or not they are shareholders. In the event 
of a tie vote, the nominating committee will select the person who is 
to be elected director.
    The shareholders agreement also contains provisions relating to 
shareholder votes for other than the election of directors which direct 
shareholders to vote in a certain manner. For example, Section 2(C) 
limits removal of directors, Section 7(A) establishes a \2/3\ majority 
voting requirements, and Section 7(B) limits and restricts certain 
shareholders votes to the manner directed by board resolution.
    In addition, the shareholders agreement contains provisions 
relating to required transfers of MBSCC's stock (e.g. upon insolvency 
or the termination of the shareholders agreement) (Section 8), 
permitted transfers of MBSCC's Class A and Class B stock (Sections 9 
and 10), and MBSCC's option to repurchase the shares (Section 11). 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. Finally, MBSCC 
has proposed to amend Article V, Rule 6, Section 3 of its Rules to 
delete references to the CHX.
    The proposed rule change is consistent with Section 17A of the Act 
in that it promotes the prompt and accurate clearance and settlement of 
securities transactions and helps assure a fair representation of 
shareholders and participants in the selection of directors and 
administration of MBSCC's affairs.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MBSCC does not believe that the proposed rule change imposes 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    MBSCC has received no written comments. MBSCC will notify the 
Commission of any written comments it receives.

III. Date of Effectiveness of the Proposed Rule 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 the self-regulatory organization consents, 
the Commission will:
    A. by order approve the 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. 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 the above-mentioned 
self-regulatory organization.
    All submissions should refer to File No. SR-MBSCC-94-3 and should 
be submitted by August 8, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17316 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M