[Federal Register Volume 59, Number 171 (Tuesday, September 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21811]


[[Page Unknown]]

[Federal Register: September 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34608; File Nos. SR-MCC-94-07 and SR-MSTC-94-09]

 

Self-Regulatory Organizations; Midwest Clearing Corporation and 
Midwest Securities Trust Company; Order Approving Proposed Rule Changes 
Relating to Corporate Governance

August 26, 1994.
    On June 23, 1994, the Midwest Clearing Corporation (``MCC'') and 
the Midwest Securities Trust Company (``MSTC'') submitted proposed rule 
changes (File Nos. SR-MCC-94-07 and SR-MSTC-94-09) to the Securities 
and Exchange Commission (``Commission'') pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposals appeared in the Federal Register on July 29, 1994, to solicit 
comment from interested persons.\2\ No comments were received by the 
Commission. This order approves the proposals.
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    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 34427 (July 21, 1994), 59 
FR 38653.
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I. Description of the Proposal

    The purpose of the proposed rule changes is to change MCC's and 
MSTC's By-laws to correspond to changes that are being made 
simultaneously to the Constitution of the Chicago Stock Exchange, 
Incorporated (``CHX''), the parent corporation of MCC and MSTC.\3\ Once 
all the changes are approved and implemented, the boards of directors 
of MSTC and MCC and the board of governors of the CHX will consist of 
the same individuals. The changes are being made in order to achieve a 
governance structure where CHX, MCC, and MSTC will operate more as a 
single business entity.
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    \3\Securities Exchange Act Release No. 34563 (August 19, 1994) 
[File No. SR-CHX-94-15] (order approving proposed rule changes).
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    In order to ensure fair and meaningful representation of MCC's and 
MSTC's participants in the governance process, the size of the 
complex's board is being increased to thirty-one to accommodate, among 
other things, a new category of board member, called participant 
governors, to provide the board with expertise on issuances affecting 
MCC and MSTC.\4\ The four participant governor positions must be filled 
by general partners or officers of a participant in MCC or MSTC and 
must have securities clearance and settlement expertise, background, or 
responsibilities. In addition, there will be one position added to the 
board which must be filled by a person who is not a CHX member.
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    \4\Under the previous structure, CHX's board consisted of 
twenty-six members, MCC's board consisted of twenty-seven members, 
and MSTC's board consisted of eighteen members.
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    In order to implement the purpose of the rule changes, MCC is 
amending Article 3, Sections 3.1 and 3.3 of its By-laws to change the 
number of directors from twenty-six to thirty-one and to require the 
nominating committee to select candidates with a view towards providing 
fair representation not only for the interests of a cross-section of 
MCC's participations but also for the interests of the CHX. MCC is 
amending Article 4A.1 to provide that the composition of MCC's 
nominating committee will be the same as that of CHX's nominating 
committee. MCC is amending Article 5, Sections 5.1 and 5.3 to empower 
the chairman instead of the board of directors to appoint and remove 
all officers and agents.
    MSTC is amending Article II, Sections 1 and 2 of its By-laws to 
provide for more flexibility in the timing of the annual meeting and to 
add the chairman as one who can call special meetings of the 
shareholders. MSTC is amending Article III, Section 2 to change the 
number of directors from eighteen to thirty-one, to change from sixty 
to thirty-one the minimum number of days before each annual shareholder 
meeting that the nominating committee must submit nominations to the 
board, to require ten participants signatures instead of three to 
nominate persons for the board in addition to those nominated by the 
nominating committee, and to require the nominating committee to elect 
candidates with a view towards providing fair representation not only 
for the interests of a cross section of MSTC participants but also for 
the interests of CHX. MSTC is amending Section 8 to provide that any 
vacancy on the board shall be filled by a majority of the directors 
then in office instead of by election at the annual meeting or special 
meeting by shareholders. MSTC also is amending Article IV, Section 4 to 
provide that the nominating committee of MSTC will be composed of the 
same members as the CHX's nominating committee and is amending Article 
5, Sections 1, 2, and 5 to empower the chairman instead of the board of 
directors to appoint and dismiss all officers and agents.
    Furthermore, the changes to MCC's and MSTC's By-laws will make the 
president and chief executive officer (``CEO'') of CHX the chairman of 
the MCC and MSTC boards ex-officio and an ex-officio member of the 
boards with the right to vote. Also, the presidents of MSTC and MCC 
will be the CEOs of MSTC and MCC, respectively but will not be board 
members ex-officio. The vice-chairmen of MCC and MSTC will be ex-
officio members of the boards of MCC and MSTC, respectively, with the 
right to vote.

II. Discussion

    The Commission believes the proposals are consistent with the 
purposes and requirements of Section 17A of the Act.\5\ Sections 
17A(b)(3)(C) require that the rules of a clearing agency be designed to 
assure a fair representation of its members and participants in the 
selection of its directors and administration of its affairs.\6\
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    \5\15 U.S.C. 78q-1 (1988).
    \6\15 U.S.C. 78q-1(b)(3)(C) (1988).
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    The Commission states in the order granting MCC and MSTC 
registration as clearing agencies that at a minimum, fair 
representation requires that the entity responsible for nominating 
individuals for membership on a clearing agency's board of directors 
should be obligated by By-law or Rule to make nominations with a view 
toward assuring fair representation of the interests of shareholders 
and of a cross section of the community of participants.\7\ Under MCC's 
and MSTC's corporate governance structures, CHX, as the sole 
shareholder of MCC and MSTC, retained the sole vote for MCC's and 
MSTC's boards of directors. In order to satisfy the minimum fair 
representation requirement, MCC and MSTC established separate 
nominating committees comprised of their participants to nominate 
individuals for membership on their board of directors.
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    \7\Securities Exchange Act Release No. 20221 (October 3, 1983), 
48 FR 4518, [File No. 600-1] (order granting full registration as 
clearing agencies to MCC and MSTC).
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    Under the revised By-laws, CHX will continue to have the sole vote 
for members of the complex's board. To provide the necessary framework 
of fair representation for their participants, the combined CHX/MCC/
MSTC nominating committees are required to select candidates with a 
view towards providing fair representation for CHX, the sole 
shareholder of MCC and MSTC, and fair representation of a cross section 
of participants. To further ensure the fair representation of MCC and 
MSTC participants, CHX's rule change establishes four participant 
governor slots which must be filled by MCC and MSTC members and 
requires that individuals nominated to serve as participant governors 
have expertise on issues affecting MCC and MSTC.
    To assist the Commission in its assessment of any long term effects 
the corporate governance restructing might have on the fair 
representation of MCC and MSTC participants in the selection of the 
complex's board, MCC and MSTC will provide to the Commission after the 
first election under the new corporate governance structure a list of 
the governors of the complex's board. The list will set forth the board 
slot each governor is filling (e.g., participant governor, floor 
governor, upstairs governor) and a list of the complex entities (e.g., 
CHX, MCC, and MSTC) to which each governor is a member. MCC and MSTC 
will submit such a report after each annual shareholders meeting and 
after any change in the composition of the complex's board for the next 
five years.
    The rule changes also should facilitate the three entities ability 
to operate as a single business entity and thereby should promote 
efficiency in the management of the complex. As a result of the above 
restructuring, the clearance and settlement and depository processes 
should benefit from greater coordination among CHX, MCC, and MSTC. In 
addition to having a unified board and nominating committee, 
cooperation and coordination will be advanced by having, among other 
things, the president and CEO of CHX serve on the MCC and MSTC boards 
as the chairman ex-officio and as an ex-officio with the right to vote.

III. Conclusion

    For the reasons discussed above, the Commission believes that the 
proposal is consistent with the requirements of the Act, particularly 
with Section 17A of the Act, and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the above-mentioned proposed rule changes (File Nos. SR-
MCC-94-07 and SR-MSTC-94-09) be, and hereby are, approved.

    \8\15 U.S.C. 78s(b) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(30) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21811 Filed 9-2-94; 8:45 am]
BILLING CODE 8010-01-M