[Federal Register Volume 62, Number 141 (Wednesday, July 23, 1997)]
[Pages 39562-39563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19348]



[Release No. 34-38846; International Series Release No. 1092; File No. 

Self-Regulatory Organizations; International Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to Election 
of Directors

July 17, 1997.
    On October 11, 1996, the International Securities Clearing 
Corporation (``ISCC'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and on October 17, 1996, 
December 11, 1996, March 21, 1997, and May 8, 1997, filed amendments to 
a proposed rule change (File No. SR-ISCC-96-05). Notice of the proposal 
was published in the Federal Register

[[Page 39563]]

on May 16, 1997.\2\ On June 27, 1997, ISCC filed a technical amendment 
to the proposed rule change.\3\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38615 (May 12, 1997), 62 
FR 27100.
    \3\ The amendment was a technical amendment that did not require 
republication of notice.

I. Description

    The proposed rule change modifies ISCC's by-laws and adopts an 
Amended and Restated Shareholders Agreement between ISCC and the 
National Securities Clearing Corporation (``NSCC''), ISCC's sole 
shareholder, in order to amend ISCC's current procedures for the 
election of directors. Pursuant to ISCC's temporary exemption from the 
fair representation requirements of the Act, NSCC currently appoints 
ISCC's board.\4\

    \4\ ISCC's current by-laws and shareholders agreement set forth 
provisions establishing the number and composition of ISCC's board 
as well as the procedures for the election of directors. Such 
provisions provide for a staggered board of twenty-two directors 
composed of management, shareholder, and participant directors 
divided into four classes. Each director is nominated by a 
nominating committee consisting of seven members. ISCC participants 
have the opportunity to nominate additional candidates for directors 
and the right to vote in the event that additional nominees are 
submitted by participants. In connection with its original 
application for registration as a clearing agency, ISCC obtained and 
continues to have a temporary exemption from Section 17A(b)(3)(C) of 
the Act (15 U.S.C. 78q-1(b)(3)(C)) pursuant to which the above 
described procedures have never been used.

    Under the proposed rule change, the size of the board of directors 
is reduced from twenty-two directors to seven directors. Of the seven 
directors, NSCC will select two directors. The NSCC directors will 
serve one year terms. The other five directors (``participant 
directors'') are divided into three classes, and their terms will 
expire on a staggered basis. The nominating committee is reduced from 
seven persons to three persons and is divided into two classes. The 
terms for the two classes will expire on a staggered basis every two 
    Beginning in 1998, at least fifteen business days prior to the 
regularly scheduled board meeting that is (i) closest in time to the 
upcoming annual meeting of shareholders and (ii) at least ninety days 
before such annual meeting, the nominating committee will submit to the 
Secretary by overnight mail or by telefax its list of nominees to fill 
the nominating committee positions whose terms are expiring immediately 
following the upcoming annual meeting (i.e., for the nominating 
committee that will make nominations for the next year's election).\5\ 
The Secretary will include such list in the materials sent to the 
directors in connection with the upcoming board meeting.

    \5\ The nominating committee that will select candidates for the 
1998 annual meeting of shareholders will be appointed by the board 
of directors.

    At the board meeting, the board may nominate individuals for one or 
more vacancies on the nominating committee. The board must notify the 
Secretary of any nominations within two business days of the meeting by 
overnight mail, telefax, or telephone. Within five business days of the 
meeting, the Secretary must mail a list of all nominating committee to 
each participant.
    At least ninety days before the annual meeting of shareholders, the 
nominating committee will submit to the Secretary its list of nominees 
for participant directors. Within five days of receipt of the list, the 
Secretary will mail a list of all nominees for the positions of 
participant director to each participant.
    Participants have the right to nominate candidates for the 
nominating committee and for participant directors by filing with the 
Secretary, not less than sixty days prior to the date of the annual 
meeting, a petition signed by the lesser of 5% of all participants or 
fifteen participants. If a participant petition is filed or if the 
board nominates additional candidates to the nominating committee, the 
Secretary will mail to each participant at least forty-five days prior 
to the date of the annual meeting a ballot setting forth all of the 
nominees. Each participant is entitled to one vote for each ten dollars 
of its average monthly fee payable or paid by the participant to ISCC 
during the previous twelve month period. Participants must return their 
ballots to the Secretary at least fifteen days prior to the annual 
meeting. NSCC will then vote its shares in favor of the nominees 
selected by the participants.

II. Discussion

    Section 17A(b)(3)(C) \6\ of the Act requires that the rules of a 
clearing agency assure the fair representation of its shareholders or 
member and participants in the selection of its directors. In the 
release announcing standards for the registration of clearing agencies 
(``Standards Release''), the Division of Market Regulation stated that 
rather than prescribing a single method for providing fair 
representation, the Division would evaluate each clearing agency's 
procedures on a case-by-case basis.\7\ The Standards Release provided 
several examples of procedures that could be used to satisfy the fair 
representation requirement, including solicitation of board of 
directors nominations from all participants and selection of director 
candidates by a nominating committee selected by the participants.

    \6\ 15 U.S.C. 78q-1(b)(3)(C).
    \7\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 30086.

    The Commission believes that ISCC's proposal is consistent with its 
obligations under the Act because it provides participants with a 
meaningful opportunity to participate in ISCC's election process. ISCC 
participants will have the opportunity to nominate candidates for both 
the board of directors and for the nominating committee. Furthermore, 
the board, which should be responsive to participant concerns, will 
also have the opportunity to nominate members of the nominating 
committee. When there is a contested election for either board or 
nominating committee positions, the participants will have the ability 
to select the candidates that will serve in such capacities. Thus, the 
Commission believes that ISCC's proposal is consistent with its 
obligations to assure the fair representation of participants.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
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-ISCC-96-5) be and hereby is 

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Duputy Secretary.
[FR Doc. 97-19348 Filed 7-22-97; 8:45 am]